Is a Turnaround Brewing for Starbucks?

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Concerns About Cost-Cutting

Because revenue fell, improvements to Starbucks' profits were the result of cost-cutting. "What they've done so far is really just trim the fat," Langston says. "That's what needed to happen," he adds, but now the firm must actually grow sales, a tall order in a recession.

Macaluso worries Starbucks could be cutting costs too deeply, and ultimately could hurt the quality of products or the cleanliness of stores. "They have to be really careful how they cut costs," he says.

The true verdict on Schultz's improvements to Starbucks stores won't be clear until consumer confidence returns, Langston says.

Others disagree, seeing signs in Starbucks' results that consumers' mindsets have already started to shift.

Lately, Macaluso detects more willingness on consumers' part to spend on "affordable indulgences." That doesn't mean the economy has improved exactly, but, he says, "people are getting tired of depriving themselves."

"The consumer is not dead," says John Buckingham, chief investment officer of Al Frank Asset Management. "They're just rethinking how they spend their money."

Long-Term Outlook Unclear

But how long can Starbucks continue to benefit from an improvement in consumers' moods, absent a full-blown economic recovery?

Also, big questions remain about Starbucks' long-term growth prospects, the impact of competition, and the success of its international business, Morgan Stanley (MS) analyst John Glass noted.

"It looks like Schultz has reinvigorated the company," says Buckingham, whose firm owns shares. However, he admits the stock market may have overreacted to the chain's latest results.

Consumer stocks—including Starbucks—have already rallied strongly in the past few months on hopes of an economic recovery. Until that recovery actually arrives, Starbucks' future remains cloudy.

Steverman is a reporter for BusinessWeek's Investing channel.

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