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Starbucks cuts outlook, cites housing meltdown

Starbucks Corp said on Wednesday it was the latest victim of the U.S. mortgage meltdown, blaming hard-hit housing markets of California and Florida for slowing sales.
/ Source: Reuters

Starbucks Corp said on Wednesday it was the latest victim of the U.S. mortgage meltdown.

Blaming hard-hit housing markets of California and Florida for slowing sales, the coffee shop chain slashed its quarterly and 2008 profit forecast below Wall Street targets and said it faced the “weakest economic environment” in its history.

The company’s shares tumbled 12 percent on the news, which came four months after company founder Howard Schultz returned as chief executive with a mandate to turn around the struggling U.S. business.

“The wheels have really come off of this train,” RBC Capital Markets analyst Larry Miller told Reuters, noting his surprise at the warning. “It’s amazing how fast business has derailed. If sales are down mid-single digits, that is a rapid erosion.”

Starbucks long considered itself virtually immune to economic swings, but has admitted in recent months that some consumers have avoided its premium coffee as the economy soured.

Schultz said in a statement that “the current economic environment is the weakest in our company’s history, marked by lower home values, and rising costs for energy, food and other products that are directly impacting our customers.”

Fewer customers at U.S. stores triggered a mid-single-digit decline in sales at established stores, called comparable store sales. California and Florida markets, which account for about one-third of its U.S. retail revenue, have been hard hit by the downturn in the U.S. housing market, it added.

As a result, Starbucks reported preliminary second-quarter earnings of 15 cents per share, behind Wall Street analysts’ average target of 21 cents per share, according to Reuters Estimates.

Starbucks estimated that costs associated with turnaround efforts and store closures lowered earnings by 3 cents per share in the second quarter, which ended March 30.

Given the continued weakness in the U.S. economy, Starbucks warned that fiscal 2008 earnings per share would be “somewhat lower” than the 87 cents it reported in fiscal 2007, while analysts were looking for a profit of 97 cents per share for the current fiscal year.

“At this time, the company is not providing a more precise expectation due to lack of visibility into near-term economic conditions,” Starbucks said in a statement.

Starbucks investors and analysts have been cautiously optimistic about the company’s prospects for boosting growth in the United States, where lower-priced competition has increased as the chain lost its cachet and cannibalized some markets by adding too many stores.

In his statement, Schultz said Starbucks’ research shows that cash-crunched consumers are cutting back on coffee purchases rather than buying elsewhere.

Wednesday’s warning came as a disappointment to John Langston, senior analyst at Dallas-based Hodges Capital Management, who was not surprised to see the company attribute some traffic decline to California and Florida, where home foreclosures are among the highest in the nation.

“The bottom line is people’s pocketbooks are hurting and one of the first things they can cut out is a $4 cup of coffee that they used to buy five times a week,” Langston said.

Analyst Bob Goldin of restaurant consulting firm Technomic said he is most concerned about Starbucks’ soft traffic numbers. “They have to get more bodies into the store. That is their biggest challenge,” he said.

The company is slated to report full quarterly results on April 30.