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Originally published April 23, 2008 at 12:00 AM | Page modified April 23, 2008 at 7:02 PM

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Starbucks lowers quarterly outlook, stock slides 11.5%

Starbucks expects earnings to drop to 15 cents a share in its fiscal second quarter, down from 19 cents a year ago, the company said today...

Seattle Times business reporter

Starbucks expects earnings to drop to 15 cents a share in its fiscal second quarter, down from 19 cents a year ago, the company said today.

It also warned that full-year earnings per share will be "somewhat lower" than last year's 87 cents a share, blaming a "sharp weakening in the U.S. consumer environment."

Shares plunged more than $2 in after-hours trading following a 15 cent gain to $17.85 during regular trading. The news came after the close of regular trading.

Starbucks expects revenue to rise 12 percent for the quarter, it reported in an unusual release of preliminary results. Its second-quarter ended March 30 and actual results are scheduled for release on April 30.

About 3 cents of the second-quarter drop in earnings per share comes from the cost of changes Starbucks has made since Howard Schultz reclaimed the chief executive post in January, including charges related to closing some underperforming stores.

The softness in revenues is due largely to a mid-single-digit decline in U.S. comparable store sales, driven by decreased traffic, the company said.

California and Florida account for 32 percent of Starbucks' U.S. retail revenues and 31 percent of its U.S. company-operated retail stores, and Starbucks pointed out in the release that those states have been particularly hard hit by a rough housing market. Starbucks did not give its revenue information for those states.

The economy is having "a substantial impact on our performance," Schultz said in the release. Starbucks is in the early stages of executing a series of new initiatives, "and the benefits are therefore not yet reflected in our financial results."

Customer research shows that "while our customers are reducing the frequency of their visits to our stores — due to the economic pressures they are feeling — they are not substituting their Starbucks experience with coffee products from others," Schultz said.

Starbucks, which cut about 600 positions in February, is looking for more ways to reduce costs, he said.

The situation is far different from late 2002, when other retailers struggled through one of the slowest holiday seasons in years while Starbucks had its strongest holiday sales yet. Same-store sales rose 9 percent that quarter, in contrast to a 1 percent gain in the first quarter this year.

"These results demonstrate that despite what has been an extended period of economic uncertainty, we can deliver shareholder value," said then-CEO Orin Smith.

Rising sales suggested that specialty coffee was an "affordable luxury" consumers did not want to give up even in hard economic times, he said at the time.

Melissa Allison: 206-464-3312 or mallison@seattletimes.com

Copyright © 2008 The Seattle Times Company

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