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Originally published July 30, 2008 at 12:00 AM | Page modified July 30, 2008 at 2:08 PM

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Latest job cuts, store closures may be last jolt for Starbucks

Starbucks announces 1,000 job cuts, store closures in Australia and another management juggle as it tries to improve profits. Analysts say they're perplexed by last week's decision to keep the breakfast sandwiches.

Seattle Times business reporter

More belt-tightening at coffee giant

180 - Jobs cut in Seattle this week

1,000 - Jobs cut nationwide this week

13,700 - Job cuts announced this year

Lurching on the seas of a tough economy and its own rapid growth, Starbucks on Tuesday sent 1,000 more jobs, 61 Australian stores and a top executive overboard.

It was the latest turnaround move for the struggling Seattle coffee behemoth, which is sharply slowing its growth and trying to revive sluggish U.S. sales and profits.

Since Chairman Howard Schultz stepped back into the job of CEO in January, he has juggled top management a couple of times, including big shifts Tuesday. He's also begun closing unprofitable stores in the U.S. and announced a host of new initiatives, from an Italian-inspired smoothie to a drip coffee called Pike Place Roast.

Analysts said the store closures announced Tuesday should be the last, unless the economy gets much worse.

"Hopefully going forward, the type of announcements we'll get will be on the innovation front," said analyst John Owens, at the research firm Morningstar in Chicago.

David Palmer, an analyst at UBS Securities, said in a research report Tuesday that Starbucks is the biggest "under-earner" among the restaurants he covers.

"Innovation has deteriorated and the company hasn't developed a significant 'hit' since the January 2006 launch of the Cinnamon Dulce Latte," he wrote.

Palmer called for Starbucks to embrace "a traditional mature restaurant company business model — franchising."

If Starbucks can't do that, he said, Plan B might be a sale to McDonald's or Yum Brands, which owns such brands as KFC, Taco Bell and Pizza Hut.

Starbucks' management changes Tuesday and its decision last week not to eliminate breakfast sandwiches — a move Schultz said in January was necessary to get back to Starbucks' coffee roots — are causing a bit of whiplash among investors.

"Changing your mind and changing management does not inspire confidence among investors," said James Walsh, an analyst at Coldstream Capital Management in Bellevue, whose clients' portfolios include more than $1 million of Starbucks stock.

Tuesday's 1,000 job cuts come after 600 positions were slashed in February and 100 people were laid off in June.

People hit by the nation's mortgage crisis and economic downturn are not forking over $3 to $4 for a latte the way they used to, which has driven down Starbucks' U.S. sales and its overall profit.

The latest cuts include 180 positions in Seattle. About 550 people will be laid off, and about 450 positions will be eliminated through attrition.

The latest cuts span the company from human resources to finance, information technology, marketing, supply chain, global store development and non-store positions in retail operations.

Starbucks now has about 3,500 employees at its corporate headquarters. It had 172,000 employees worldwide at the end of September, about 12,000 of whom will be affected by the closure of 616 U.S. stores during the next few months.

About 685 people are losing their jobs in Australia, where Starbucks said Tuesday it will close 61 of its 84 stores.

They are the only international closures Starbucks has announced. Most of its financial woes, including declining traffic, appear to be in the U.S.

"There are no other international markets that need to be addressed in this manner," Schultz said in a memo to employees that was part of a news release Tuesday.

Starbucks also said that about 700 of the roughly 1,000 in-store workers affected by the closure of the first 50 U.S. stores have been reassigned to other stores.

In executive shifts, 11-year Starbucks veteran Jim Alling, who led Starbucks' blockbuster U.S. growth before becoming head of its international operations in September, is leaving. Replacing him is Martin Coles, who became chief operating officer in September but will drop that title and return to his former job as head of international.

Another shift moves Senior Vice President Michelle Gass from the post she took six months ago in the office of the CEO. She will lead marketing, food and beverage and be replaced in the office of the CEO by a new rising star, Executive Vice President Dorothy Kim.

Peter Gibbons was promoted to Kim's former position as executive vice president of global supply-chain operations.

Microsoft public-relations executive Vivek Varma will become senior vice president of Starbucks' public-affairs department Sept. 8.

Wall Street welcomed the news, sending Starbucks shares up 76 cents, or 5.3 percent, to $14.99. In after-hours trading, shares fell 6 cents to $14.93.

The stock has traded as low as $13.33 in recent weeks, touching levels it hadn't seen in almost five years.

Starbucks is struggling with falling profits and declining traffic at U.S. stores. Its second-quarter profit fell 28 percent, and Starbucks expects an earnings drop for the year. It releases its fiscal third-quarter financial report today.

Melissa Allison: 206-464-3312 or mallison@seattletimes.com

Copyright © 2008 The Seattle Times Company

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