Starbucks gets a boost from Costco

Have you noticed that Starbucks' (SBUX) stock has popped up from its seven-year low? Last Monday the shares were trading below $10. Then they got a boost last Wednesday when CEO Howard Schultz noted that he saw a slight upturn in store traffic in October. The stock has outperformed the broader market rally and is now trading just below $13.

Another reason for the nascent recovery: A Starbucks promotion at Costco -- five $20 Starbucks cards for $79.95 -- is outperforming expectations. "We believe it's the best-selling product at Costco," Schultz told me when I sat down with him at Starbucks' Leadership conference for its managers in New Orleans last Wednesday.

Costco management won't confirm that the Starbucks five-pack is its No. 1 seller. But the two companies clearly have a winner on hand. A month ago, when Starbucks launched the promotion at Costco (COST), Schultz said, the first order of 250,000 five-packs was supposed to last through the holiday season. "It sold out in three and a half weeks," he said. Four weeks after launch, Starbucks shipped its second order. Schultz is hoping, of course, that those Costco discount shoppers will help reverse his own traffic downturn that recently contributed to Starbucks first-ever quarterly loss.

Given the steepest decline in U.S. consumer spending in 28 years (according to last Thursday's GDP report) and fiercer-than-ever competition from McDonald's (MCD) and Dunkin' Donuts, what's a premium-brand boss to do? "The key is to not make the short-term decision that would subordinate the equity of the brand," Schultz told me, noting that straight-out discounting is a no-no in his book. So you'll see a variety of creative traffic-building efforts at Starbucks through year-end. Tomorrow, for instance, if you walk into a Starbucks store and tell a barista that you voted in the Presidential election, you'll get a free tall coffee. (Go vote!)

Another supposed traffic driver will launch Nov. 28: A partnership with Bono's Product RED -- which raises money to combat AIDS in Africa -- will have Starbucks donating five cents for each holiday drink its sells. This Starbucks partnership with RED, as I mentioned last week, revved up the company's 10,000-plus managers so much that the announcement upstaged even Bono's surprise appearance at that confab in New Orleans. "In my history with Starbucks," Schultz told Bono and me backstage, "I've never witnessed our people respond in unison that way. It was electric, unprompted and long. It was extraordinary."

Indeed. Now, if only Schultz can get his customers as pumped as his employees seem to be.

P.S. Meanwhile, another upscale retailer is suffering. Monday's Wall Street Journal details the woes of Whole Foods (WFMI), which is due to report earnings on Wednesday. Investors should consider, though, that bad news is priced into many retail stocks. Despite dim prospects, retail stocks substantially outperformed the market last week. Staples (SPLS) was the big winner, rising 35%. Its weaker, smaller rival, OfficeMax (OMX), went up 140%.