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A bitter brew for Starbucks

As American consumers rein in spending on non-essentials, coffee-shop operator posts weaker-than-expected earnings.

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By Catherine Clifford, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- Starbucks reported weak quarterly earnings and slightly higher sales Monday, as American consumers cut back on the number of expensive coffee beverages they purchased.

In after-hours trading, shares of Starbucks fell 3%, after closing down 35 cents to $10.20. In the past year, the company's shares have plunged more than 50%.

The coffee-chain operator reported fiscal fourth-quarter operating earnings of $71 million, or 10 cents a share, down from $158.5 million, or 21 cents, a year earlier. Analysts surveyed by Briefing.com had expected the company to earn 13 cents per share in the latest quarter.

After restructuring and other charges, many of them associated with the closing of 600 stores announced in July, Starbucks posted net income of $5.4 million, or 1 cent a share, in the latest quarter ended Sept. 28.

Starbucks (SBUX, Fortune 500) reported sales of $2.5 billion for the quarter, up from $2.4 billion a year earlier. Analysts were looking for sales of $2.58 billion.

In addition to the store closings, Starbucks said in July that it would cut approximately 1,000 open and filled positions within its leadership and that it would close 61 stores in Australia.

In the quarter, Starbucks reported an 8% drop in sales at U.S. stores open a year or more, a measure known as same-store sales. Starbucks said that it has seen less consumer traffic in the United States, in addition to a decline in the average value per transaction.

For its entire fiscal year, the company posted sales of $10.4 billion, up 10% from $9.4 billion in fiscal 2007. Sales at stores open a year or more decreased by 3%.

Same-store sales in the United States were down 5% for the fiscal year, but international same-store sales ticked up 2%, which the company said partially offset U.S. weakness.

Year of change

On a conference call following the release of the company's financial report, Starbucks executives conceded that it has been a tough year.

"As we turn the page of fiscal 2008, the year of transition and transformation is over," said Starbucks Chief Executive Schultz. "We are well into the implementation phase of our strategy."

One analyst said that the changes Starbucks made in 2008 were necessary but would take a while to affect the company's bottom line.

"They have taken lots of appropriate steps in 2008 to reposition for the future and the current economic environment, and it is not going to happen overnight," said Greg Schroeder, senior analyst at Wisco Research, an independent research firm.

He also added that the company's transition in 2008 was slowed by the economic downturn. "It seems like things are unfolding a little slower, and to be fair to them, the economy has gotten a lot worse in the past three months, so the fact that things are turning around slower is probably reasonable," said Schroeder.

"Starbucks was in a high growth of its life cycle since its IPO [initial public offering] in 1992," explained Schroeder. "They have shifted their focus to existing operations."

The plan that Starbucks has undertaken has a long-term focus. "They have undertaken lot of actions that should produce benefits longer term," said Schroeder.

The company has seen tentative signs of improvement. "October did not show further deterioration to comps [comparable store sales] or traffic, a possible indicator that Q4 may have represented a 'bottoming out' milestone," said Schultz.

However, the company was vague in providing forward-looking guidance. Starbucks said that operating earnings per share in the 2009 fiscal year would be between 71 and 90 cents per share, depending on how severely sales decline.

Some have suggested that Starbucks lower the cost of their exclusive java, but Schroeder was cautious. "There has been talk about high price point and how Starbucks might consider lowering price points in this economy, but if you do that, there is risk that you deteriorate your premium brand."

The slowdown in consumer spending did hit the coffeehouse outside the U.S. "With the domestic financial crisis spreading as the quarter played out, the effect was felt in particular in the UK and Canada, with nearly 80% of our international same store sales," said Pete Bocian, Starbucks outgoing chief financial officer. To top of page

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