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The Honolulu Advertiser
Posted on: Thursday, July 31, 2008

Starbucks focuses on 2009 as it lowers outlook for year

By Lauren Shepherd
Associated Press

Hawaii news photo - The Honolulu Advertiser

Starbucks said yesterday that costs related to its closure of 600 underperforming stores led it to post a loss in its fiscal third quarter.

DON RYAN | Associated Press

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NEW YORK — Coffee chain Starbucks Corp., which is closing stores and cutting office jobs amid weak sales in the U.S., posted a loss for its third quarter yesterday, lowered its outlook for the year and said it would open fewer new locations.

But the company kept its profit guidance intact for fiscal 2009.

"I don't think anyone's really focused on the quarter," said Edward Jones analyst Jack Russo. "Everyone is thinking of next year."

Starbucks shares rose 70 cents, or 4.8 percent, to $15.37 in electronic after-hours trading. During regular trading they had fallen 2 percent.

The Seattle-based company reported a loss of $6.7 million, or 1 cent per share, compared to a profit of $158.3 million, or 21 cents per share, a year earlier. Starbucks said it earned 16 cents per share once the costs for restructuring and closing stores are excluded.

Analysts polled by Thomson Financial expected a profit of 18 cents per share on revenue of $2.61 billion.

Starbucks said revenue rose 9 percent to $2.57 billion from $2.36 billion, mainly from sales at international locations and new stores in the U.S. Same-store sales, or sales at stores open for at least a year, fell in the mid-single-digits in the United States.

That decline offset a lift in brewed coffee sales from the launch of its Pike Place roast, and was what Starbucks called a "slight deceleration" from the second quarter, when it also reported a "mid-single-digit" drop in U.S. same-store sales.

Starbucks, which said earlier this year that it would close 600 underperforming stores in the U.S., announced this week that it was also shutting 61 stores in Australia and cutting 1,000 office jobs — including 450 unfilled positions — to reduce costs.

The chain said yesterday that it will open fewer U.S. and international locations in 2008. For 2009, Starbucks said it will open 165 new stores in the U.S. but will also close 225 locations. Internationally, the company said it will open about 900 new stores in 2009.

With fewer stores open, Chief Executive Howard Schultz said the traffic and sales at existing stores should increase.

"The economic climate and its impact on consumer spending is a reality we are acutely aware of," he said. "That being said, we have very clear visibility into the decisions we must make to ensure that we're well-positioned when the economy begins to improve."

Sales jumped overall internationally, but growth slowed in Canada and traffic took a hit in Britain, where consumer confidence in the economy has waned.

The decision to close the U.S. and Australia stores and chop future growth has been seen by analysts to be a step in the right direction for the company, whose stock price has fallen by about 47 percent since the start of the year.

Russo said the company is "on the right track" but that "it's going to take time" for profits to get back to where they should be.

Starbucks cut its profit guidance for 2008 to the "mid-seventy-cent" per-share range, excluding costs. Previously, the company had warned that its profit may fall below the 87 cents per share it earned a year ago. Analysts are expecting 81 cents per share for the year.

For fiscal 2009, Starbucks still expects to earn between 90 cents and $1 per share, excluding one-time costs. Analysts see 92 cents per share for the year. That estimate includes a benefit of between 17 cents and 18 cents per share from the store closures and job cuts.

Schultz said sales of Starbucks' new Vivanno smoothie drinks, which were introduced earlier this month, have been strong, but that the effects of the economy will likely outweigh any benefit until consumer spending rebounds.

"We've been unable to move the needle upward because we still have significant headwinds," Schultz said on a conference call with investors and analysts.

He also said the company will offer new foods in the fall that speak to consumers' desire for whole grains and lean proteins. Starbucks will focus on "value" in its fall and holiday offerings, he said, possibly through deals for consumers who use Starbucks customer cards.