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Starbucks profit plummets by 97 percent

Starbucks says its profit dropped 97 percent in its fourth quarter mainly because of the costs of closing underperforming stores and also falling sales in the U.S.
/ Source: The Associated Press

Despite optimism from Starbucks Corp. that it has felt the worst of the tough economy, analysts were divided Tuesday on whether there was more trouble brewing after the chain disappointed Wall Street with a steep drop in fourth-quarter profit and sales.

The company's Chairman and Chief Executive Howard Schultz tried to strike a cup half-full mentality with investors Monday night, saying he had "a renewed sense of optimism" and added that the fourth quarter "may have represented a bottoming-out milestone for our company."

"I am confident we are on the correct course for these challenging times," he said. "Starbucks can and will weather the current economic storm."

Many observers, though, don't see that storm letting up. With consumer confidence dismal, spending on discretionary items — like $4 lattes — has slowed and the prospect of a prolonged recession has sparked even more fear.

"We find nothing at all in results to suggest that a bottom is at hand," said Deutsche Bank North America analyst Marc Greenberg in a note to investors. "On all meaningful indicators, performance is only weakening further."

And if the economy worsens more than the company expects, "then Starbucks hasn't hit a bottom," said Morningstar analyst John Owens.

"I think the company has positioned itself to deliver better results in 2009 but they're still at the mercy of the macroeconomic environment," he said.

That could be tough to stomach for investors, who have already seen Starbucks shares drop more than 50 percent in the past year.

The company's fourth-quarter report didn't do much to bolster investors' confidence. Profit fell 97 percent, hurt by hefty charges for closing about 600 U.S. stores and 61 locations in Australia. Same-store sales, or sales at locations open at least a year, dropped 8 percent in the U.S. as fewer consumers came in and those that did bought less.

Starbucks has been trying to offer consumers more value without losing its premium brand status by using rewards programs and a new "gold card" that costs $25 a year and offers a 10 percent discount on all drinks.

The chain, though, has also been hurt by its own earlier success. After growing quickly in the 1990s and early 2000s, the company has spent the past year curtailing its growth plans, eliminating corporate positions and shutting underperforming stores.

But those changes have yet to reverse the downward trajectory of the company's profit and same-store sales, and Starbucks is expecting a same-store sales decline in 2009 — albeit not as steep.

Greenberg said investors should not be expected to "make a leap of faith" that earnings will grow in 2009 even as same-store sales in the U.S. fall.

Other analysts, meanwhile, trimmed their expectations for profit and sales for the upcoming year while either offering words of caution or encouragement.

Oppenheimer & Co. analyst Matthew DiFrisco said the company has taken the needed steps to improve its operating model to be able to increase profits, while RBC Capital Markets analyst Larry Miller called the company "a show-me story" in an analyst note Monday night.

David Morris, senior analyst at consumer research firm Mintel, said the chain should be "cut some slack" given the challenges the food service industry is facing as consumers cut back their spending.

Once the economy begins to stabilize, Morris said some of Starbucks' new products — like Vivanno smoothie drinks and healthier breakfast items — may help boost sales, particularly among female customers who typically look for more nutritious items.

"In 2009, we'll be able to tell how successful they've been," he said.

Investors may be waiting to judge until at least Starbucks reports its fiscal first-quarter results early next year. If same-store sales improve, that may offer investors hope that a turnaround is in the works, Owens said.

"I think they're making the right decisions," Owens said. But, he added, "there's an expectation that they should be making progress."

Starbucks shares fell 21 cents to $9.99 on Tuesday.