Starbucks disappoints as costs rise

LOS ANGELES Thu Jul 22, 2010 6:03am EDT

Starbucks' new Via instant coffee product is seen on display at their corporate headquarters in Seattle, Washington July 15, 2010. REUTERS/Anthony Bolante

Starbucks' new Via instant coffee product is seen on display at their corporate headquarters in Seattle, Washington July 15, 2010.

Credit: Reuters/Anthony Bolante

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LOS ANGELES (Reuters) - Starbucks Corp's (SBUX.O) 2010 and 2011 earnings forecasts came in at the lower end of Wall Street's lofty expectations with commodity costs expected to rise next year, sending its shares down more than 2 percent.

The world's largest coffee chain, which is spending aggressively on marketing for new products such as Via while expanding geographically at a rapid clip, warned that the rising costs of coffee may drain 2011 profit by 4 cents.

Analysts said investors had high expectations for the company that had just completed a huge overhaul and revived growth.

The Seattle coffee chain's profit, which for five quarters in a row had topped analysts' expectations, disappointed by just matched Wall Street's view for the June quarter.

Sales at restaurants open at least 13 months -- a gauge of retail health -- jumped 9 percent, driven by a 6 percent increase in traffic and a 3 percent rise in spending per visit. That same-store sales result was the highest in more than four years and landed amid continuing weakness and uncertainty in the global economy, Starbucks Founder and Chief Executive Howard Schultz said on a call with analysts.

"This company has beaten expectations for so long. It becomes a game of how much more are they going to beat," Edward Jones analyst Jack Russo said.

RBC Capital Markets analyst Larry Miller agreed, saying in a note that the results were solid "but likely not enough versus expectations."

The chain raised its fiscal 2010 earnings target to $1.22 to $1.23 per share, from $1.19 to $1.22 per share previously. Analysts on average were looking for a profit of $1.23 for the fiscal year ending September 2010.

It now sees earnings of $1.36 to $1.41 per share in fiscal 2011, versus Wall Street's average projection of $1.41.

After slashing costs and closing flagging stores, Starbucks has returned to building. It now plans to add 250 new stores globally in 2010, down from 300 previously. For fiscal 2011 it plans to add 500 net new stores, mostly overseas.

The company also wants to turn Via instant brew and Seattle's Best Coffee into billion-dollar businesses. Those operations should help revenue, but margins will stay low for now as Starbucks spends money on Via advertising.

Via, which debuted in September 2009, is on track for $100 million in sales in its first year.

The company introduced "however-you-want-it" Frappuccinos in the United States and Canada in May, a move that contributed 2 percentage points to the company's 9 percent rise in U.S. same store sales, Chief Financial Officer Troy Alstead told Reuters.

That move came as fast-food giant McDonald's Corp (MCD.N) was expanding its successful new beverage program from espresso drinks to frappes -- both of which Starbucks popularized.

Net income for the fiscal third quarter ended June 27 was $207.9 million or 27 cents per share, versus $151.5 million, or 20 cents per share, a year ago.

Starbucks earned 29 cents per share excluding charges in the latest quarter, matching analysts' estimates, according to Thomson Reuters I/B/E/S.

Net revenue rose 9 percent to $2.61 billion.

Starbucks shares slipped to $24.59 in extended trade after closing down 2.3 percent at $25.17 on the Nasdaq. Shares in Starbucks are up just over 9 percent so far this year.

(Reporting by Lisa Baertlein. Editing by Robert MacMillan, Leslie Gevirtz)

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