Interview: G.E.
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>> cove giant starbucks reported first-quarter earnings today.% -ellen braitman is in new york talking with the company’s chairman.%
>> thanks, catherine. shares of starbucks fell as much as 3% in after-hours trading. the company reported first-quarter earnings of 35 cents a share. it was up from 27 cents a year earlier. analysts surveyed by thomson financial estimated earnings per shareearnings per share of 34 cents. starbucks saying 2005 full-year earnings will be between $1.17 and $1.17 a share, higher than the company’s earlier forecast but analysts forecasting $1.17 per share for the full fiscal year. joining us is howard schultz, chairman and chief executive of starbucks, joining us from seattle. howard, you beat analysts’ estimates and raised your forecast but some investors had higher expectations. what do you say to them?
>> i think in this environment it’s almost whatever you do or how well you do, it doesn’t seem to be enough. we can’t manage the company for that. what we have to manage the company to do is to do everything we can to exceed the expectations of our customers and as we have throughout our public life, in doing so, we believe we can hopefully meet and exceed expectations of our shareholders. we had a stunning quarter. when you look at the numbers compared to other retailers, starbucks is an an nomly in this market and i think it bodes well for the future, demonstrates the trust, confidence and loyalty of our customer base and the enduring way in which we’ll build our company around the world.
>> how are january sales looking so far?%
>> we’re in the middle of the month so i can’t comment on january. we gave guidance today consistent with the guidance we’ve given for many years and that is 3% to 7% comps and we expect to be at the high end of the range. the problem, i think, in many ways, is that we’re a function of the disappointment at times of the fact that we’ve been so successful, the comps for the quarter were at 10% and whenever you have double-digit comps and you post a number slightly lower, people are disappointed but you need to look at the backdrop of the rest of the environment where most of retail in america averages 1% to 2% and starbucks is well above.
>> that another issue investors seem to react to then the earnings release is the fact as expenses are rising as you open new stores and increase marketing . what effect is this having on profitability?
>> the profit for the quarter sup30%, which is outstanding. what we did say is that this year alone we will open up approximately 1500 stores, the most in our history. in the years ahead, we expect that number to increase. in order to sustain our level of growth and most important, execution, we have to invest ahead of the curve. in doing so, we gave guidance above the original range so, in a way, what we’re really trying do is invest ahead of the curve and at the same time sustain the level of shareholder value we have in the past and in a sense, we want to continue to under promise and over deliver and we’ve done that throughout our public life.
>> sales have been growing even with the price increasings -- increases in october. any plans to raise prices again?
>> we have no plans whatsoever to raise prices but the most encouraging aspect of that is that there are very few retailers and consumer brands that have the pricing power starbucks has had and the most encouraging thing for our investors today was that we demonstrated zero attrition in terms of the response we had to the price increase. so really, that demonstrates the relationship we have with our customers and the staying power to build a great, enduring company throughout the world.
>> briefly, but obviously an important story has been the tsunami. your company and you personally donated. on the business side, how is the tsunami affecting coffee supplies and pricing?
>> we said today we can’t see any short-term or long-term problem with coffee supplies. we did learn one store in phuket. but we’re more concerned about the families of our people and the company stated today that our contribution over the next couple of months will exceed $1 million and i thank you for mentioning the fact that my family did contribute a million dollars, as well.
>> howard, thank you very much are for your time. i appreciate it.
>> thank you very much for having us on.
>> howard schultz, chairman and chief global strategist at starbucks. have a great night.
>> thank you, ellen. tony blair says the u.s. must cooperate with the rest of the world on a number of issues if if it expects other countries to spread democracy. blair says he will push that theme during his presidency of the g-8 this year. he made those comments during his opening comments at the world economic forum in dav davos. guy collins is there and tells us what’s on the agenda.
>> growth is one of the biggest issues on discussion here in das avos, what kind of growth companies can. xpect in 2005 and the growth they’ll be able to deliver to investors. according to a survey of chief executive, more than 90% of chief executive are confident in revenue growth and the ones we have spoken with are saying broadly they expect growth in their businesses. morten sorrell of w.p.p., the advertising company, says he expect advertising industry growth of 2% to 3% during the course of this year, a touch slower than 2004, but still growth. others say they exclusive technology to help drive growth in terms of innovation. we spoke with the chief executive of sim been, the mobile phone software company. he said demand is driven essentially by new functionality on phones and rising consumer expectations of what technology companies can deliver and we’ll hear more about that from michael dell of dell and bill gates and software technology executives who will be in davos in the next couple of days. the constraints on growth are also an issue and oil prices are a major issue for chief executives here. the oil executives here, including the executive from shell, will be under scrutiny in terms of what they can say about where the oil market may be headed and more broadly, development an issue. tony blair, the ucprime minister u.k. prime minister, is in davos talking about what the g-8 countries can do for africa. i’m guy collins in davos for bloomberg news.
>> tokyo markets open in about two hours. we’re keeping an eye on shares of n.e.c. electronics. the country’s third largest chipmaker cut its full-year forecast yesterday. it expects net income of $179 million for this fiscal year, 34% lower than its previous forecast. for a closer look, we’ll speak with robert howe. n.e.c. electronics joins nintendo and sony in the list of japanese stocks that have cut forecasts. what does that tell you about the outlook for tech stocks?
>> tech stocks have rallied in december with―following on the tech rally and the fall in the united states. but it had been running into the headwinds of a stronger yen and price pressures in a lot of electronic products that they sell. n.e.c. electronics sells chips used in l.c.d. displays and pricing pressures that have been terrible is the diffusion of flat-panel tv’s have hit a pricing point coming down and the pressure throughout that chain is enormous. we’ll hear more from n.e.c. corp. after the market close in tokyo today along with advantest and kyocera, all those companies reporting earnings. are you expecting the numbers to disappoint or could they offer positive surprises?%
>> we’re not―we’re underweight in our new horizons fund and offshore fund and all of our domestic accounts here in the electronics sector. not terribly so. we see the pricing pressure and there isn’t a definitive cycle. there are a few hot products and at christmas, everyone knows about the ipod’s success. that actually, perdocksically, except for parts makers, would be a negative for sony which has seen its share of the walk-around music market fall. you see pressure in electronics products. we think there could be a bounce? in―in some of these stocks because the yen, after peaking at 102 yen to the dollar, is actually weakening or the dollar is strengthening again and a lot of analysts, if you saw the press coverage in magazines last december, they were talking about the dollar in free-fall and we could see the dollar recovering to, say, 106, in which case you get a bounce in these stocks so you wouldn’t want to be very underweight but stock by stock, we don’t hold sony or netcom electronics or -- n.e.c. electronics or nintendo.
>> but you hold matsushita electric and denso. what are your reasons?
>> we think matsushita is slowly restructuring, an osaka-based giant, slowly cutting back its work force and has products, with the digitalization of consumer electronics, its product cycle is more attractive than some of the others. it’s a very cheap stock. the other you mention side denso?
>> that’s right.
>> that’s actually an auto parts company and we’re permanent bulls on the japanese automakers and particularly the auto parts companies. that’s one of our largest overweights and has been a long timet. didn’t particularly help our performance last year. we just see the japanese in this sector continuing to gain share relentlessly. not just in the united states, but starting in europe and elsewhere in asia. toyota looks on track to be the largest automaker in the world in the next five to seven years.
>> let’s stick to autos. honda is releasing earnings tomorrow. what are you expecting from honda and how will that outlook change your weighting on automakers?%
>> we’re getting more bullish on honda. we hadn’t held it for a long time. we see it, after losing some share overseas, gaining back share. its sales in asia have been picking up and it’s very good at hedging its currency exposure. nevertheless, the stock’s move with the currency, if the yen strengthens, the stock tends to be weak and we feel the yen had peaked and dollar had bottomed at under 102. we like that stock, we like toyota and denso, a toyota group auto parts company that sells to other automakers.
>> what about those japanese stocks that have china placed in them, bob? do you favor them this year given government measures to slow growth and expectations of higher interest rates?
>> i’m going to try to move you a little bit. you keep talking about japanese stocks with external exposure -- electronics, automobiles, china plays. really, japan right now in this year is not about china and not about the united states. it’s about japan. and if you look at what’s moving in the market and when you’re in the market , like i am, you have to look at what’s actually moving. all the domestic stocks in japan are really moving. the banking sector. look at the regional banks in the past one one week with phenomenal moves, construction stocks. some of the old, boring companies that your viewers have probably tuned out of for 14 years, are in some interesting uptrends and have been for a year. we really see a lot of the action shifting to some of the domestic sectors and has been.
>> so, can i take it, then, that you’ll be increasing your domestic-related stocks in your portfolio this year and that would be the ongoing theme for 2005, domestic-related companies?
>> we continue to see the asset sector. there are four broad sectors in japan, the yen-sensitive, an area of almost obsessive interest by foreign investors, stocks that are family names, honda and sony. there is the other major sector is what i would call credit-sensitive or interest-rate-sensitive in japan. these would be the banks, construction companies, anyone with real estate exposure. and these were just in steady uptrends since the bottom of the market in april 2003 and, yes, we have grudgingly dragged ourselves to overweight there. it’s been hard after these stocks have been in a 14-year bear market .
>> good to talk to you. thanks for that, bob. robert howe of a.i.g. and global investment management in tokyo. mitsubishiui―mitsui trust holdings plans to lend to smaller risk companies. it says it will boost revenue from loans. it will lend to companies that have had a business history of more than three years in
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with a familiar strategy to fend off discount carriers, if you can’t beat them, join them. with the nearly dozen low-cost airlines out there, is the field getting too crowded? we’ll hear from the head of singapore airlines’ discount carriers, tiger airways. u.s. stocks advance for the second day. the dow, s&p and nasdaq all finish higher, lifted by stronger-than-expected earnings from companies, including texas instruments and eli lilly. the dollar falls against the euro and yen. rising german business confidence and speculation china may revalue its currency helped send the dollar lower. starbucks shares fall in extended trading. the coffee shop chain’s earnings jumped 31% and it boosted its full-year outlook. investors sold the stock after starbucks’s smallest profit gain in more than a yearr. we’ll speak with starbucks’ chairman live in 15 minutes. tiger airways says it aims toaur offer the lowest fares to all routes. its chief executive, tony davis, told shobi pereira the company is in no rush to raise funds.
>> there’s no media plans. the airline has only been operating three months now and are financed through existing shareholders.% but clearly as we grow and get bigger, we have to keep the options open for future investments so we’ll dress the―address the extra investment when we need to.
>> any time frame as to when you’ll revisit that issue?
>> the priority is to make sure the business model, the airline, proves to be the success we think it will be and really demonstrate that the model can work effectively here in asia and as soon as we can do that and with the shareholders’ consent, we would look at other funding opportunities but it’s premature. we’ve only been operating three months.
>> your competitors include value air as well as jetstar asia. how has the competition affected pricing and margins? i know you’ve also reduced prices to phuket as low as $998. tell us about your strategy right now.
> the market in asia is early in its development. aboutwe’re starting to see is perhaps a polarization and differentiation of product. we certainly believe that that the really successful low-cost airlines in asia are the ones that can really differentiate themselves from the traditional full-service airlines. that’s why we’ve taken a very aggressive pricing policy and we intend to offer consistently lower fares so we can differentiate ourselves from the legacy carriers. talking about being mid frills in the middle ground are the competitors that will struggle as the market develops.
>> for which routes do you want to be the lowest priced?
>> for all routes that we intend to operate we intend to be the lowest priced operator in the market . we have three routes operating into thailand at the moment and hope to operate into other countries in the near future such as indonesia. we’re looking around the region for new opportunities. in each market , the tiger airways’ policy will be to be the lowest cost.
>> the question arises, how low will you go down in price? there is a point where you have to stop and then what are the options that tiger will look at in terms―once you’ve hit that point?
>> that really explains why we have to have the lowest cost base. certainly in europe, people at ryanair have the lowest cost base and they can consistently offer the lowest fares and that’s the model we’re looking to emulate in asia, that we have the lowest cost base of any of our competitors and we can outprice anyone in any route we compete on and if we can do that successfully, we will emulate the success of ryanair in europe.
>> if price cuts are no longer an option, what other factors will you compete on?
>> consumers primarily are looking for low prices and we’ve seen with the phuket promotion, people will travel if the price is low enough. the, factor that we’ll concentrate on is making sure our punctuality is as good as we can make it rochester. we have brand new a-3 20’s which make it reliable and our flights are on time and also make sure that we offer a quality service without the frills and that would set us apart from our competitors, if we consistently offer low fares and meet people’s extensions, we will be successful.
>> are there new routes tiger airways is looking at?
>> we’ve taken delivery of two aircraft in the last two days so we have four aircraft in singapore and we will announce new routes shortly but we’re finalizing the paperwork and we’ll be ready to go in the next few days.
>> an indication of which country, which city?
>> we’ll announce that shortly.
>> that was tony davis of tiger airways. the company competes with local rivals like value air, jetstar asia and thai asia. stocks in australia start in about 20 minutes after yesterday’s national holiday . t’s return to david tweed in sydney. how is the stock market expected to hope?
>> -- expected to open?
>> futures indicate up .2s. record iron ore production, record coke and coal production and record manganese production reported by b.h.p. billiton. shares indicate that they will open higher. also might add that csfb came out with price forecasts for b.h.p. and rio tinte. they see b.h.p. shares rising 10% from here and rio tinto shares rising 8% from its last close. we have rinker coming up with its third-quarter report coming up before the market opens. we’re also waiting for woolworth’s to report its second-quarter sales. those sales are expected to slow. there has been a lot of discounting in the australian retail scene, certainly in the lead up to christmas. coles myer, a report in the “australian financial review” says it will review all of its retail brands, including the myer department stores and those results will be reported in the second week of march. we’ve also had a production report and expect newcrest mining, gold producer in australia, to put out a gold report. an analyst strategy report from david cassidy at u.b.s., a report saying they’re favoring stocks with low earnings risks. the areas which they’re favoring at the moment are general insurance, diversified resources and gaming and they’re underweight retail, media and small caps. these are the areas where they see uncertainty over earnings. that’s a strategy report, at least to have a look at today. back to you, cathy.
>> thank you, david. coming up, executives for major companies from around the world are getting together at the world economic fornum davos, switzerland. we’ll tell you what’s on their agenda.
