Starbucks Shares Down 8 Percent After Drop in Traffic

SEATTLE – Fewer coffee drinkers have been streaming into Starbucks Corp.'s U.S. stores — news that overshadowed an otherwise healthy fiscal fourth quarter for the world's largest chain of coffee houses.

The 1 percent drop in traffic at stores open at least 13 months marked the first time the company has seen such a decline, and it helped send Starbucks shares down nearly 8 percent in after-hours trading Thursday.

While sticking to its ambitious goal of having 40,000 stores worldwide, Starbucks plans to open 100 fewer U.S. stores in fiscal 2008 than originally forecast, one of several moves aimed at improving operations.

Starbucks shares fell 15 cents to close at $24.10, then tumbled another $1.88 in extended trading after the company's earnings report was released. The stock has fallen more than 40 percent over the past year, as the company has grappled with higher dairy costs, increased competition and economic woes that appear to have forced customers to pare back on their lattes and Frappuccinos.

Chief Executive Jim Donald dismissed suggestions that Starbucks might be oversaturating certain markets. He noted that even in its hometown of Seattle, it's been experiencing steady success with new store openings.

Slowing the pace of U.S. store openings will help the company choose the right markets, he said.

"It gives us a little bit of breathing time to make sure that — maybe we don't need that other store in Columbus, Ohio, but maybe there's one extra one in Vermont that we could put up," Donald told The Associated Press.

For the 13 weeks ended Sept. 30, Starbucks posted net earnings of $158.5 million, or 21 cents a share, a 35 percent jump from $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, on average, were projecting earnings of 21 cents a share on $2.43 billion in revenue.

Same-store sales, or sales at stores open at least 13 months, increased 4 percent worldwide in the latest quarter versus a year ago, toward the low end of the company's guidance of 3 percent to 7 percent.

In the United States, such sales, a key measure of a retailer's health, rose on a 5 percent increase in transaction value, which partially offset the 1 percent drop in traffic.

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.

Executives promised to sharpen the company's focus on improving store operations in the U.S., from offering more training to new baristas to give field managers more time in stores and introducing new drinks less frequently, Chief Operating Officer Martin Coles said in a conference call with analysts.

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

Chairman Howard Schultz said coffee drinkers who try out 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.

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

Analysts surveyed by Thomson Financial were expecting 31 cents per share for the first quarter and $1.05 for the year.

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

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

For the full fiscal year, Starbucks earned $672.6 million, or 87 cents per share, compared with $564.3 million, or 71 cents per share, in fiscal 2006. Revenue in fiscal 2007 was $9.41 billion, compared with $7.79 billion last year.