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Economy brews some trouble for Starbucks

Starbucks warned Wall Street on Thursday that its profit would fall short of analysts' expectations this quarter.
/ Source: The Associated Press

Starbucks warned Wall Street on Thursday that its profit would fall short of analysts' expectations this quarter during a conference that began with Chief Executive Howard Schultz trying to assuage concerns about the recession's effect on the coffee retailer.

Chief financial officer Troy Alstead said same-store sales have deteriorated 9 percent in the U.S. since the company's fiscal first quarter began at the end of September.

Investors had hoped the 8 percent decline in U.S. sales that Starbucks reported for its fourth quarter compared with the same period a year earlier would be the company's worst drop.

Sales have been particularly dismal in those states that have been hardest hit by foreclosures, most notably California and Florida, which together make up about 30 percent of the company's store base.

"We were not immune to the deepening impact" of the economic crisis, said Alstead, who said it was too early to say how sales for the quarter would end.

The comments came during an analyst conference in which Schultz attempted to curb anxiety on Wall Street about the chain's recent sliding sales and profits.

Schultz had told analysts that the company would emerge a stronger, leaner and more socially conscious company, once it had endured an environment in which consumers are no longer as willing to spend on small luxuries like $4 lattes.

He said he is confident "when, not if, this environment does get better, that Starbucks is going to be a stronger company for having gone through it."

Schultz said Starbucks could not drastically change its identity or its brand to make its way through a period of falling consumer confidence.

"This is not the time, after 30-plus years, after building one of the most recognized brands in the world, to throw the baby out with the bath water," he said.

Although most consumers have been demanding value, Schultz said Starbucks cannot destroy its identity as a premium brand and must offer value through that "lens."

Not a fast food operator
"We are not a fast-food operator," he added. "We are not a discount business."

Several fast-food operators, most notably industry leader McDonald's Corp., have become more competitive with Starbucks by introducing their own latte-style drinks at lower prices.

Morningstar analyst John Owens said the company is following the right strategy in dealing with its competitors.

"Where they can beat McDonald's is the quality, the level of service, the decor of their stores," he said. "And I think that, as long as customers still perceive them as a premium brand, then they can charge a premium price."

To keep its premium positioning intact while still giving customers a deal, Starbucks has been offering loyalty cards that give registered customers discounts and giveaways. The newest rewards card, which costs $25 a year, has attracted about 350,000 users in its first four weeks in stores, said chief marketing officer Terry Davenport at the conference.

The company also has begun offering gift cards at a discount through Costco Wholesale Corp. Davenport said Starbucks expects to see $25 million in sales in January from the Costco deal as consumers redeem cards given as gifts during the holiday season.

As consumers focus on stretching their paychecks, today's economy is far different from the environment for the company's last analyst conference in 2006, when it unveiled a plan to open 40,000 stores around the globe.

Now, with sales at established locations declining and profit sliding, the company is in the midst of a cost-cutting campaign that has included the closure of more than 600 underperforming stores in the U.S and 61 in Australia and the elimination of more than 1,000 jobs.

Starbucks said it expects to see cost savings of about $200 million to $210 million in fiscal 2009 from initiatives already under way, and it has identified another estimated $200 million in savings that could come from cutting labor costs or streamlining distribution.

The company didn't rule out closing more stores, both in the U.S. and internationally. But any closures likely would not be on the same scale as the 600 announced this summer, executives said.

The company has also been introducing new products, from smoothies to oatmeal. More new products are on the way in 2009, including a line of drinks made with tea and either milk or juice. The drinks will be in stores beginning early next year.