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Starbucks raises outlook as turnaround signs mount

LOS ANGELES (Reuters) - Starbucks Corp SBUX.O raised its financial forecasts for 2010 in the latest sign a year-long turnaround effort is boosting margins and putting it back on track for growth, sending shares up almost 4 percent.

People walk past a Starbucks coffeehouse in Warsaw April 14, 2009. REUTERS/Peter Andrews

The company, which posted an expectations-topping fourth-quarter profit on Thursday, increased its target for fiscal 2010 growth in earnings before items to 15 percent to 20 percent from 13 percent to 18 percent previously.

After shuttering more than 900 cafes -- mostly in the United States -- and slashing overhead costs, the Seattle-based chain is throwing off significant cash. That has growth-hungry investors and analysts pushing for expansion in China and Europe.

Accelerating international growth plans “would reinforce that this is still a growth company,” said Jesup & Lamont analyst Greg Schroeder, who added that the United States accounts for less than 20 percent of global coffee consumption.

While the company has yet to make a decision on cash allocation, Chief Executive Howard Schultz said he saw the potential for thousands of stores in China, the world’s No. 3 economy. Starbucks has nearly 700 cafes there now.

Starbucks current 2010 forecast calls for 100 net new stores in the United States and around 200 net new international cafes.

Starbucks also beat Wall Street’s profit target in the fiscal third quarter, sending up the first signal that performance was improving at a company that had expanded at a frenetic pace -- just before the U.S. economy turned.

Chief Financial Officer Troy Alstead told Reuters that more people are visiting Starbucks’ cafes and spending a bit more money when they do, a trend that started in the third quarter and gained momentum toward the end of the fourth.

Starbucks’ net income for its fiscal fourth quarter, ended September 27, was $150 million, or 20 cents per share. A year ago, its net income was $5.4 million, or 1 cent per share.

Excluding items, Starbucks earned 24 cents a share in the latest quarter, topping analysts’ average forecast of 21 cents, according to Thomson Reuters I/B/E/S.

SHIP TURNING

Total net revenue was $2.42 billion compared with $2.52 billion a year earlier. Sales at established restaurants fell 1 percent in the United States and were flat internationally.

“We ended the fourth quarter better than we started the fourth quarter. We are very encouraged by the trends we’re seeing,” CFO Alstead said in an interview. “Consumers are still in a tough place. I don’t know that they’re going to celebrate the end of the recession any time soon.”

Schultz retook the helm in early 2008 and began a restructuring effort that has reduced expenses and added new products and programs to the chain’s repertoire.

The company has tightened up operations, reformulated its food and rolled out new products such as Via instant coffee.

It also has boosted its direct-to-consumer marketing through rewards cards and social networking sites.

But as it shrank its store base, competitors like McDonald's Corp MCD.N and Dunkin' Donuts started selling lattes and other fancy coffee drinks previously found only at Starbucks and neighborhood coffee shops.

Starbucks executives, who say they have seen no impact from McDonald’s McCafe roll-out, are striking back by selling its Seattle’s Best Coffee in fast-food restaurants. Seattle’s Best specializes in flavored coffee and, among other things, will be served in 9,000 U.S. Subway sandwich shops in calendar 2009.

Last November, Starbucks shares fell to $7.06, their lowest since late 2001, as the United States and other countries scrambled to contain a meltdown of financial markets.

On Thursday, they rose to $20.46 in after-hours trading from their Nasdaq close of $19.70.

Editing by Edwin Chan, Phil Berlowitz

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