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Starbucks puts the brakes on new stores

Growth pace slows even further as coffee chain struggles to compete with cheaper alternatives; company lowers guidance.

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By David Goldman, CNNMoney.com staff writer

Retired execs come back for more
Howard Schultz is the latest in a long line of CEOs and chief execs who just can't seem to stay away

NEW YORK (CNNMoney.com) -- Starbucks ratcheted down the number of new stores it plans to open this year and said it would close some U.S. locations as it reported a 2% rise in fiscal first-quarter earnings Wednesday.

The company said it's slowing the pace of store growth worldwide by 350 to 2,150 stores for fiscal 2008, down from a reduced target of 2,500 earlier in the month. That includes closing about 100 underperforming stores in the U.S. and opening about 75 new stores abroad.

Analysts said the moves will help increase revenue at other existing locations. "I expect that store closings will definitely correct slowing same-store sales" said, Matt Difrisco, an analyst at Thomas Weisel Partners.

Same-store sales, or sales at locations open at least one year, rose 1% during the quarter.

Starbucks opened 745 new stores worldwide in the quarter, bringing its total store count to 15,756. By next year, the company said that for the first time, it hopes to open more stores abroad than domestically.

The company also said it expects low double-digit earnings-per-share growth in fiscal 2008, which would be lower than its previous guidance of $1.02 to $1.08 per share, due to product changes, high dairy costs, and continued economic weakness.

Starbucks (SBUX, Fortune 500) also said net income climbed to $208 million, or 28 cents per share during its fiscal first quarter. Revenue rose 17% to $2.77 billion, from $2.36 billion in the same period last year.

Analysts polled by Thomson Financial had expected the Seattle, Wash.-based retailer to earn 27 cents per share on revenue of $2.77 billion.

The growth slowdown comes amid a transition period for the company. Howard Schultz, Starbucks' founder and chief executive from 1987 to 2000, returned to replaced Jim Donald as CEO in early January.

Though earnings beat expectations, Schultz acknowledged the company's shortcomings. "We are absolutely not satisfied with our performance during this period," he said in a conference call with analysts. "These results clearly show we have work to do."

Shares of Starbucks have fallen 44% from a 52-week high in February 2006 as the company faced cheaper competition from McDonald's (MCD, Fortune 500) and privately-held Dunkin' Donuts.

"Over the coming months, our management team will focus on building a long-term model to realize our transformation agenda, and drive long-term shareholder value," Schultz said in the earnings statement and added that he believes these changes will result in sustainable growth starting in 2009.

In the call, Schultz was hesitant to reveal many details about Starbucks' transformation plan until its annual shareholders meeting in mid-March, but he did mention a previously announced test-run of $1 "short" cups of coffee.

Shares of Starbucks fell almost 2% to $18.90 in after-hours trading. To top of page

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