A grande decade for Starbucks; can the next 10 years be as profitable?

When Howard Schultz and Orin Smith hit the road to pitch Starbucks' initial public offering in 1992, many of the Wall Street investors they courted were incredulous.

"They'd say, 'You mean, you're going to sell coffee for a dollar in a paper cup, with Italian names that no one in America can say? At a time in America when no one's drinking coffee? And I can get coffee at the local coffee shop or doughnut shop for 50 cents? Are you kidding me?' " Schultz, company chairman, recalled recently.

"Some people would just dismiss us — it was over. We'd say, 'Can we finish?' And they'd say, 'You can finish, but we're not interested.' "

Eventually, of course, Schultz and Smith, now the company's chief executive, converted enough believers to pull off one of the decade's most heralded IPOs. Since going public on the Nasdaq Stock Market 10 years ago today, Starbucks has seen its shares swell by more than 2,200 percent and split four times as it turned lattes into a daily staple for millions.

Schultz has even grander expectations for the next decade, saying Starbucks is aiming for "Coke-like" status as a world brand and could grow to more than 20,000 stores. But as the company continues to spread across the globe, skeptics wonder whether its aggressive expansion will cut into profit.

It would be a double-tall order for Starbucks to duplicate the staggering returns of its first decade as a public company. Just before the IPO, the company had about 140 stores — mostly in the Northwest and Chicago — and was mentioned in the same breath as small-scale coffee chains such as Illinois-based Gloria Jean's Coffee Bean and Barnie's Coffee & Tea of Florida.

Starbucks raised more than $25 million in its public offering, helping it open more stores in the West and, a year later, on the East Coast. It quickly emerged as North America's dominant specialty-coffee brand, and today the company has more than 5,500 stores in 28 countries and is worth some $9.5 billion.

"When you look at what Starbucks did, they created this space," said Don Gher, managing director of Coldstream Capital Management in Bellevue, which owns more than 365,000 Starbucks shares. "You had the Gloria Jean's, the small stands and others around for years, but nobody else really was able to put something together like this."

Schultz credits Starbucks' prosperous run to the quality of its coffee, strong employee loyalty and "a little bit of luck."

"What we have built has universal appeal," he said. "It's based on the human spirit, it's based on a sense of community, the need for people to come together."

The company has had its share of misfires along the way, most recently with failed investments in Internet startups such as Living.com and Kozmo.com. Gher said those episodes "may have been the best thing that could have happened to the company, because it made them realize that they need to stick with their own knitting."

Many retailers and restaurants saw a dip in business over the past year as the nation struggled through a recession and a post-Sept. 11 malaise. But Starbucks' sales have continued to rise. Since December, monthly sales at stores open longer than a year have been up between 3 and 10 percent.

"I think we've demonstrated that we are close to a recession-proof product," Schultz said.

Emboldened by its recent foray into continental Europe, Starbucks is shooting to have 10,000 stores in 60 countries by the end of 2005.

And Schultz, who stepped down as CEO in June 2000 and assumed the title of chief global strategist, said that after two years in his new job, he's convinced Starbucks could grow to more than 20,000 stores.

"The next 10 years will demonstrate the fact that these are still the early days of the company."

But as Starbucks fans out across the globe, some fear its expansion could take a bite out of profit, at least in the near term.

Andrew Barish, an analyst for Banc of America Securities, recently wrote that Starbucks' profit growth could slow over the next few quarters, weighed down by higher costs to support its international partners and to take its technology and distribution global.

The company also was panned in a recent Barron's article that raised concerns about expansion costs, slowing U.S. specialty-coffee consumption and the specter of rising bean prices. The stock fell 75 cents on the next trading day but has rebounded, climbing more than $1.

Higher international spending is necessary to take full advantage of Starbucks' growth potential, Schultz said, and the company has acquired nearly two years' worth of green coffee supplies, reducing its exposure to sudden price swings.

Schultz has hinted for months that the company is brewing up some new partnerships with major companies, some involving the reloadable cards introduced in November.

Any new products or partnerships Starbucks takes on, Gher said, need to "make sense in the scheme of the brand," which centers around coffee. But as long as the company guards against over-reaching, Gher said he sees room for more growth and profit in the next 10 years.

"The market will take care of the stock price, if they take care of the earnings," Gher said. "This is a company that historically has always said they want to under-promise and over-deliver, and I think they're continuing to do that."

Jake Batsell can be reached at 206-464-2718 or jbatsell@seattletimes.com.