Starbucks Corp said it is closing 100 underperforming US stores and slowing domestic openings in the face of a likely consumer recession and "cannibalization" from overbuilding.

The coffee chain, whose shares dropped about 2 percent after the news, also said it was pulling much-hyped hot breakfast sandwiches from stores, despite the cost of reducing sales, because customers complained that the smell was overwhelming the aroma of coffee.

Starbucks, which posted a higher quarterly profit, is turning its focus to international markets and revamping US plans. It has been battered in recent months by slower consumer spending, higher milk and labor costs and concerns it may have saturated the US market.

"There's a macroeconomic headwind that we're all facing that strongly suggests that the (US) consumer is in a recession," Starbucks recently returned Chief Executive Howard Schultz said.

Starbucks cut its forecast for 2008 US store openings to 1,175 from 1,600. Meanwhile, it plans to increase international store openings by 75 outlets to 975. "We believe having less openings at this point in time, in addition to the economic environment, gives us an opportunity to have less cannibalization and better use of capital," Starbucks Chief Financial Officer Peter Bocian, said.

Executives said they will discontinue guidance for fiscal 2009 and beyond and cease to issue same-store sales results, saying those will not be effective indicators of the business during the turn-around period.

Seattle-based Starbucks said it now expects earnings per share in fiscal 2008 to grow in the low double-digits by percentage. Starbucks' previous forecast was for earnings per share of between $1.02 and $1.05 in fiscal 2008, which would mark a 17 to 21 percent increase in earnings per share.

Pessimistic outlook

"Their outlook is pessimistic for 2008. It's going to be a tough year," said James Walsh, an analyst at Coldstream Capital Management in Bellevue, Washington.

McAdams Wright Ragen analyst Dan Geiman said the guidance was predictably conservative.

Starbucks had fiscal first-quarter net income of $208.1 million, or 28 cents per share, compared with net income of $205.0 million, or 26 cents per share, in the year-ago quarter ended Dec 31. Consolidated net revenue rose 17 percent to $2.8 billion.

The result topped analysts' average call for a net profit of 27 cents per share and revenue of $2.76 billion, according to Reuters Estimates.

The company said total quarterly same-store sales grew 1 percent, while US same-store sales fell 1 percent, hurt by a decline in traffic. International same store sales were up 5 percent.

Executives said they would consider discontinuing other products. It will end breakfast sandwiches by the end of 2008. Starbucks announced major breakfast sandwich expansion plans in 2006 and until now has been rolling out the product, which is in somewhat under 4,000 stores and added about $35,000 in revenue each.

For 2009, Starbucks is targeting about 1,000 international store openings, a goal that would mark the first time that overseas openings outpaced those in the United States.

"They're focusing on international operations, which is what we really want to see with them. Their growth opportunity is really overseas," said Walsh, of Coldstream Capital Management.

Starbucks faces new competition from fast-food giant McDonald's Corp, which is expanding its selection of coffee-based drinks.

Starbucks brought back founder and Chairman Schultz as chief executive earlier last month and said it would pare aggressive domestic expansion plans, close underperforming US outlets, improve performance at existing stores and speed up international growth.

Schultz, who was chief executive from 1987 to 2000, bought Starbucks Coffee Company in 1987 and transformed the small Seattle outfit into one of the world's most recognized brands. It now has more than 15,000 locations worldwide, including 10,000 US locations. Shares in Starbucks have fallen more than 40 percent over the last 12 months, wiping out roughly $13 billion in market value. In after-hours trade, Starbucks shares fell to $18.90 after closing NASDAQ trade at $19.22.

Agencies

(China Daily 02/01/2008 page16)