Starbucks: Higher dairy cost will persist in '08

NEW YORK (CNNMoney.com) -- Despite the housing, mortgage and credit threats, Starbucks' legions of loyal customers are still lapping up its pricey lattes, company executives said Wednesday. However, the coffee chain's business is proving to be less resilient to rising dairy costs.

"We're still doing fairly strong. The macroeconomic factors have had some impact but not a huge one on our sales," CFO designate Peter Bocian told an analysts' gathering Wednesday at the 14th annual Goldman Sachs retailing Conference in New York.

However, the world's largest seller of gourmet coffee drinks has taken a more direct hit from escalating commodity costs, he said.

"We have two major commodities, coffee and dairy," he said. "Coffee has a much bigger impact on our bottomline. We have done well to manage those costs."

But as dairy prices continue to rise, Starbucks (Charts, Fortune 500) responded by passing along some of the higher costs to its consumers by raising beverages last October and then again in July.

"We took a hit from dairy costs in 2007,' Bocian said. "We expect some mitigation in 2008 but not in the early part. So this remains a negative [for us]," he said.

Bocian didn't say whether the company was leaving the door open for more price hikes down the road.

Regarding the outlook for the rest of the year, Bocian said Starbucks expects to grow revenue by 20 percent and log full-year earnings-per-share of between 87 to 88 cents, in-line with analysts' estimates.

"Since July, given the dairy factors, we do expect the high-end of that range to be challenged," he said.

In a question-and-answer session with analysts, Bocian was asked about Starbucks' test sales of smoothies in some markets.

He said the company was conscious of the growing health and wellness trend among its consumers and was responding to it.

"Smoothies are an extension of what we do, which is to handcraft beverages in front of our customers," he said. "Innovation is what got us to where we are today."

Bocian also played down concerns that Starbucks was facing increased competition for market share as McDonald's and other fast-food chains enter the gourmet coffee arena.

"We provide a very different experience from our competition and that will continue to differentiate us," he said.

For 2008, he said Starbucks expects its earnings per share to grow 20 to 22 percent, revenue to grow 18 percent and same-store sales to rise from 3 percent to 7 percent.

Starbucks currently operates 14,000 locations in 42 countries, including more than 7,000 locations in the United States.

Bocian said the retailer thinks it can grow to about 20,000 stores in its core domestic market, which accounts for 80 percent of its revenue.