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Starbucks Reports 28% Drop in Profit and Trims Store Openings
Thursday May 1, 2008 11:36 pm ET
By LAURIE J. FLYNN

SAN FRANCISCO — Facing an increasingly stingy consumer, Starbucks is tightening its belt.

With profit down 28 percent, Starbucks said it would open fewer new stores in the United States, slash expenses and sell better-tasting coffee in the face of a troubled economy that is leaving some consumers with less discretionary income.

“This is a very tough operating environment for us, and we’re not alone,” Howard Schultz, the company’s chief executive, said in an interview. “We’re redirecting the growth of our U.S. stores to reflect the tough economy.”

Starbucks said second quarter profit fell 28 percent, to $108.7 million, from $150.8 million a year earlier, while earnings declined 21 percent, to 15 cents a share from 19 cents. The results included reorganization costs of about 3 cents a share. The company said revenue rose 12 percent, to $2.5 billion.

The report came just a week after Starbucks warned of lower-than-expected earnings and cut its full-year forecast, citing a decline in quarterly sales and describing the economic environment as the weakest in the company’s history. Wall Street analysts had forecast 19 cents a share for the quarter.

Most recently, Starbucks has suffered the effects of the crisis in the housing market, particularly in Southern California and south Florida.

What used to be an “affordable luxury” is no longer that for some customers, Mr. Schultz said, referring to Starbucks’ signature espresso drinks.

“Like most other retailers and restaurants, we are experiencing a downturn in customer traffic, demonstrated in reduced frequency of customer visits, that we believe ties to a real reduction in consumers’ discretionary spending habits,” Mr. Schultz said.

The report, released after the close of regular trading, had little impact on Starbucks shares. The stock, which fell 11 percent after the company’s warning last week, rose 3 cents, to $16.23 a share, in regular trading.

“This is certainly a positive step,” said Larry Miller, an analyst with RBC Capital Markets. “At least they’re on the road to recovery, but I think it’s going to be a long road.”

Mr. Schultz, who returned as chief executive in January in hopes of turning the company around, said the results were heavily influenced by operations in the United States, which accounted for 77 percent of revenue. Same store sales in the United States fell by about 5 percent.

“We are not satisfied with the downturn of traffic in our stores, and we are working diligently to reverse that,” Mr. Schultz said. “There are no sacred cows.”

Starbucks said that in the United States it planned to open 1,020 stores this year, down from its previous goal of 1,175, and to open fewer than 400 stores a year from 2009 to 2011. But internationally, the company plans to continue its expansion, with more than 1,000 new stores a year from 2009 to 2011. Starbucks’ store count will be about 21,500 stores by the end of 2011.

The company, based in Seattle, plans to cut capital expenses to $800 million, from about $1.1 billion, from 2009 to 2011. About 70 percent of that will be for stores.

Mr. Schultz said that while customers were not visiting Starbucks stores as often as they once did, he did not believe that meant they were abandoning Starbucks for its competitors.

Mr. Schultz said the company had begun to lure customers back with a new coffee called Pike Place Roast, a better brewing system and improved service. The company also announced three new cold beverages.

Starbucks expects profit this fiscal year to be lower than the 87 cents a share reported last year, but company officials declined to provide precise figures. The company expects revenue growth of 13 percent to 14 percent this year.

Looking ahead over the next three years, the company expects profit of 90 cents a share to $1 in 2009, $1.10 to $1.20 in 2010 and $1.35 to $1.50 in 2011.



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