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Starbucks 4Q Profit Rises 35 Percent

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ELIZABETH M. GILLESPIE | November 15, 2007 10:13 PM EST | AP

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SEATTLE — Starbucks Corp. said Thursday its fiscal fourth-quarter profit jumped 35 percent, though its first-ever drop in U.S. traffic sent shares plummeting.

The world's largest specialty coffee retailer said it plans to open 100 fewer stores in fiscal 2008 than originally forecast but it brushed aside suggestions that it has oversaturated some markets.

Executives promised to sharpen the company's focus on improving store operations in the U.S., where its rapid expansion, a sagging economy, higher dairy prices and competition from fast-food chains diving into the espresso business have posed challenges.

The company will offer more training to new baristas, give field managers more time in stores and introduce new drinks less frequently, Martin Coles, Starbucks' chief operating officer, said in a conference call with analysts.

The company also plans a television advertising campaign aimed at luring in new business.

For the 13 weeks ended Sept. 30, Starbucks posted net earnings of $158.5 million, or 21 cents a share, compared with $117.3 million, or 15 cents a share for the same period last year. Quarterly revenue was $2.44 billion, up from $2 billion last year.

Analysts surveyed by Thomson Financial were projecting earnings of 21 cents a share on $2.43 billion in revenue.

Starbucks shares closed down 15 cents at $24.10, then tumbled another $2.01 in extended trading. The stock has fallen more than 40 percent over the past year as the company faced challenges and economic woes appear to have forced customers to pare back on fancy drinks.

Same-store sales, a key measure of a retailer's health, increased 4 percent worldwide in the latest quarter, toward the low end of the company's guidance of 3 percent to 7 percent.

In the United States, sales at stores open at least 13 months rose on a 5 percent increase in transaction value, which partially offset a 1 percent drop in traffic _ the first time the company has seen such a decline, spokesman Brandon Borrman said.

Chief Executive Jim Donald dismissed the idea there were too many Starbucks stores in some markets. He noted that even in its hometown of Seattle, it's been experiencing steady success with new store openings.

Business in overseas stores was healthier, with traffic rising 5 percent and average transaction value increasing 1 percent. International revenue rose 31 percent to $472 million.

Starbucks has stores in 42 countries outside the U.S. and announced Thursday that it would open its first store in Argentina in the second half of fiscal 2008.

Starbucks lowered the upper end of its same-store sales guidance for 2008, saying it expects growth of 3 percent to 5 percent. For the first fiscal quarter 2008, it projects earnings of 28 cents per share and for full-year earnings to range from $1.02 to $1.05.

Starbucks opened 615 stores in the latest quarter and 2,571 in fiscal 2007, boosting its worldwide store count to 15,011. In fourth-quarter 2006, the company opened 656 stores. The company plans to open 2,500 stores in fiscal 2008, 1,600 of them in the United States.

For the full fiscal year, Starbucks earned $672.6 million, or 87 cents a share, compared with $564.3 million, or 71 cents a share in fiscal 2006. Revenue in fiscal 2007 was $9.4 billion, compared with $7.8 billion last year.

Chairman Howard Schultz said coffee drinkers who try cheaper competitors will upgrade to Starbucks.

"Those consumers over time are going to trade up. They're going to trade up because they are not going to be satisfied with the commoditized experience or the flavor," he said.