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Starbucks cautious on 2008, sees recession likely

LOS ANGELES (Reuters) - Starbucks Corp SBUX.O said on Wednesday it is closing 100 underperforming U.S. stores and slowing domestic openings in the face of a likely consumer recession and "cannibalization" from overbuilding.

The Starbucks logo is seen outside a coffee-shop in New York's Times Square March 15, 2007. Starbucks Corp on Wednesday posted higher quarterly profit as the premium coffee seller works to revive its historically swift growth as it grapples with slower U.S. consumer spending, high milk prices and increased competition. REUTERS/Shannon Stapleton

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 U.S. plans. It has been battered in recent months by slower consumer spending, higher milk and labor costs and concerns it may have saturated the U.S. market.

“There’s a macroeconomic headwind that we’re all facing that strongly suggests that the (U.S.) consumer is in a recession,” Starbucks recently-returned Chief Executive Howard Schultz said in a telephone interview.

Starbucks cut its forecast for 2008 U.S. 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 on a conference call.

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.

“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 December 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 U.S. 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 MCD.N, which is expanding its selection of coffee-based drinks.

Starbucks brought back founder and Chairman Schultz as chief executive earlier this month and said it would pare aggressive domestic expansion plans, close underperforming U.S. 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 U.S. 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.

Reporting by Lisa Baertlein; editing by Carol Bishopric

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