Starbucks hits the brakes on U.S. store growth

Starbucks slammed on the brakes Wednesday, saying it will slow U.S. growth to fewer than 400 stores annually beginning next year, down from 1,788 new U.S. stores last year.

The coffee-shop juggernaut will ramp up its international store growth, but overall Starbucks is easing off a breakneck pace of seven new stores a day in 2007 to fewer than four a day in 2009.

That was the highlight of a slew of changes the company unveiled on Wednesday as it said second-quarter profit fell 28 percent to $108.7 million, or 15 cents a share. Starbucks warned investors last week about the poor quarterly results and said the troubled economy will contribute to an earnings drop for the year.

"We're not using the economy as an excuse, but clearly the headwind of the economy has had an effect on our business," Chief Executive Howard Schultz said during a conference call with analysts on Wednesday.

Starbucks feels the pain most in areas that are hardest hit by the mortgage crisis, like California and Florida, which account for almost a third of Starbucks' U.S. retail revenues. In less-affected areas like the Northeast, Starbucks' customer traffic is up, Schultz said in a telephone interview.

The company has performed well during previous downturns, but this cycle is different, he said.

"When I talk to smarter people than me who are really studying the effects of the economy and how deep it is, they say things along the lines of, they've never seen something like this before," Schultz said.

Sharon Zackfia, an analyst at William Blair & Co. in Chicago, said other retailers are also having trouble in California and Florida while the Northeastern states remain strong. "To hear Starbucks say the same thing, I thought, was fairly reassuring."

Schultz is more interested in setting things right than second-guessing Starbucks' past decisions, including its dizzying growth.

"It's easy to say we overbuilt when you're in this economy, but a year and a half ago the story was different and that's not what everybody thought," he said.

A host of developments from Starbucks' conference call included:

• The company plans to roll out three new beverage lines, including an energy drink, a cold drink with whey and fruit, and a "frozen smooth drink" being made in partnership with an Italian company. The frozen drink will be less expensive than Starbucks' Frappuccino.

• New, healthful breakfast offerings will debut in September.

• International stores will grow by 975 stores this year, then ramp up to 1,050 additions next year, 1,150 in 2010 and 1,300 in 2011.

• Capital expenditures will fall from $1.1 billion last year to $800 million a year beginning in 2009.

• Earnings per share will climb beginning next year, ending with a range of $1.35 to $1.50 a share in 2011. The company said last week that this year's earnings are expected to be below last year's 87 cents a share.

• Starbucks will close some stores in an international market that it declined to disclose.

• Starbucks' U.K. business is softening, although executives said it is unclear whether the problem will become as serious as it is in the U.S.

• Higher coffee costs will shave a penny off Starbucks' earnings for 2008. Higher dairy costs will hurt earnings by about 3 cents a share.

The news came after the close of Wednesday's regular trading, in which shares climbed 3 cents to $16.23. They fell 11 cents to $16.12 in after-hours trading, when trading volume is lighter.

It's hard to know how investors will react on Thursday, Zackfia said.

"This is the kind of press release where you have to be neck-deep in company knowledge to even try to interpret the stock movement," she said.

Hindsight is an advantage in judging Starbucks' rapid growth over the past few years, Zackfia said. "If they had had perfect clarity on where the economic situation was going in the U.S., would they have doubled their rate of expansion between 2004-07? Maybe not. But that's asking for a crystal ball that no one had."

Dan Geiman, an analyst at McAdams Wright Ragen in Seattle, said the many changes are a lot to digest.

"They're throwing a lot of things out there, and it's kind of like, 'We'll see how they do.' I hate to say, 'We'll see what sticks,' but to some degree it seems like that," Geiman said.

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