November 16, 2007 / 12:18 AM / in 10 years

Starbucks reports 1st traffic drop as shares fall

SAN FRANCISCO (Reuters) - Starbucks Corp on Thursday said that for the first quarter in its history, the number of visits to its established U.S. stores fell as economic worries and two recent price hikes spooked customers, sending shares nearly 9 percent lower.

A woman drinks coffee in a newly opened Starbucks in a mall in Khimki outside Moscow, September 6, 2007. Starbucks on Thursday said that for the first quarter in its history, the number of visits to its established U.S. stores fell as economic worries and two recent price hikes spooked customers, sending shares nearly 9 percent lower. REUTERS/Alexander Natruskin

Starbucks also reported a 35 percent rise in fourth-quarter earnings, helped by higher prices and its rapid store growth, but forecast 2008 earnings below many Wall Street estimates. In addition, it said 2008 sales at stores open at least 13 months would be at the low end of its long-term targeted range.

“We’re seeing this pushback that other retailers have described,” Chief Executive Jim Donald said in an interview, adding that a July price increase of about 9 cents a cup had hurt traffic. That move came less than a year after the company’s previous price hike.

Starbucks also said that next year it would open about 100 fewer stores in the United States than originally planned.

After years of saying its perpetually growing number of stores was resistant to blips in the U.S. economy, Starbucks in recent months has tempered that message as customers have cut back on visits to the chain.

The company has also been hit by soaring prices on milk and stepped-up competition from rivals such as McDonald’s Corp, which has been expanding its coffee offerings.

Donald, however, said he would not link the heightened competition to the weak store traffic.

Worldwide, same-store sales rose 4 percent during the quarter, helped by higher prices.

In the United States, Starbucks’ biggest market, same-store sales also rose 4 percent -- but traffic was down 1 percent.

“This frankly proves there are no sacred cows in the retail world right now,” William Blair restaurant analyst Sharon Zackfia said of the results.

TV CAMPAIGN

To help boost U.S. results during the important holiday shopping season, Starbucks said it would launch its first national television advertising campaign.

“We have an opportunity to make sure that our voice is heard through the all-important medium of television,” Chairman Howard Schultz said on a conference call with analysts. “We will continue to make sure that we create new separation in the marketplace between ourselves and everyone else.”

Net income for the fiscal fourth quarter rose to $158.5 million, or 21 cents per share, compared with $117.3 million, or 15 cents per share, a year ago.

The earnings met Wall Street analysts’ average expectation of 21 cents per share, according to Reuters Estimates.

In the fourth quarter, total revenue rose 22 percent to $2.44 billion, a little above analysts’ average expectation of revenue of $2.42 billion, according to Reuters Estimates.

For fiscal 2008, Starbucks said it would open 2,500 stores -- down from its previous target of 2,600. The company said it was still on track to open 10,000 stores in the next four years and backed its long-term goal of one day having 40,000 outlets worldwide. It currently has more than 15,000 locations.

The Seattle company said it expected 2008 same-store sales to rise between 3 percent and 5 percent. That marked a shift from Starbucks’ long-held same-store sales growth goal of 3 percent to 7 percent.

Donald said that because Starbucks has grown so large, it was appropriate to tweak its same-store sales targets.

“A company our size, plus the environment and the economic conditions that we’re in -- it’s a good number,” he said.

Earnings per share for the year are expected to be between $1.02 per share and $1.05 per share. Analysts were expecting earnings of $1.05 per share, according to Reuters Estimates.

For the first quarter, earnings are expected to be 28 cents a share, Chief Financial Officer Pete Bocian said on the call, adding that dairy cost pressures were expected to ease in the second half of the year. Analysts were expecting earnings of 31 cents a share.

Donald said the company’s 2008 sales and earnings forecasts did not factor in any price increase.

Starbucks shares fell below $22.00, or 8.8 percent, in extended trade after closing at $24.10 Thursday on Nasdaq. The stock has fallen more than 30 percent this year on investor fears about slowing same-store sales growth, increased U.S. competition and soaring dairy prices.

Additional reporting by Alexandria Sage in Los Angeles; Editing by Gary Hill

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