Starbucks meets reduced expectations

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NEW YORK (CNNMoney.com) -- Coffeehouse chain Starbucks reported a 28% drop in fiscal second-quarter earnings Wednesday, saying charges resulting from CEO Howard Schultz's ongoing plan to transform the business hurt profits.

Schultz called 2008 a "transitional year" in a written statement and said improved growth will come in the long-term.

The Seattle, Wash.-based Starbucks said net income fell to $108.7 million, or 15 cents per share during the quarter, matching analysts' estimates. But the company had lowered its profit predictions just last week to 15 cents per share. Analysts had previously expected the company to earn 21 cents per-share, according to Thomson Financial.

Revenue rose 12% to $2.5 billion, slightly less than analysts' expectations of $2.55 billion. The company said lower-than-expected revenue was driven by a mid-single-digit decline in same-store sales, an industry measure of sales at locations open at least one year.

The company says its research shows it is not losing customers to competitors such as the privately-held Dunkin' Doughnuts, but that consumers are simply not spending as much in Starbucks stores as they used to. The downturn in customer traffic is tied to "a real reduction in consumers discretionary spending habits," said Schultz, in a conference call with analysts.

Starbucks also said that rising costs of dairy products and storefront space weighed on earnings, but the largest increases came from changes in the way it organizes its stores and other transformation-related costs.

The company reiterated its end-of-the-year earnings prediction of less than the 87 cents per share earned in fiscal 2007, and said it expects year-end revenue growth between 13% and 14%.

"We do have a headwind the likes of which we have never seen," added Schultz.

Analysts expect Starbucks to report a profit of 85 cents a share in fiscal 2008, which ends in September, and sales of $10.6 billion, an increase of 12.7%.

"In the near-term, investors may be skeptical," said Sharon Zackfia, analyst with William Blair & Company. However, the predictions for the next three years were based on "elements they can control," she added.

Shares of Starbucks (SBUX, Fortune 500) were flat after-hours following a slight increase in regular trading Wednesday. The stock has plunged more than 46% over the past year due to concerns about the weak economy and increased competition. That prompted Schultz to rein in spending at the company and cut back on the number of new store openings.

Starbucks said it plans to open only about 250 company-owned stores per year in the U.S. for the next three years but that it will continue to accelerate its expansion internationally. The company said it expected earnings-per-share growth to accelerate from 2009 through 2011.

In the statement, Schultz urged investors to look toward the future, pointing out that several new beverages will be introduced this summer. Starbucks plans to introduce a coffee-based energy drink, a fruit and protein health drink, and a cold Italian beverage designed to replicate the success of the company's Frappuccino.