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Starbucks posts loss on slow sales, closure costs

SEATTLE Slower customer traffic and costs associated with Starbucks’ “transformation agenda” swung the coffeehouse giant to its first loss as a public company and to again back off on planned openings this year for both U.S. and international stores.

For the third quarter ended June 29, Starbucks reported a net loss of $6.7 million, or 1 cent per share, compared with a profit of $158.3 million, or 21 cents per share, in the same quarter a year ago.

Same-store sales for the quarter fell by “mid-single digits” on slow traffic trends, which company officials described as a slight deterioration from the second quarter. Net revenue rose 9 percent to $2.6 billion.

The latest-quarter net loss included charges of $167.7 million, or 14 cents per share, related to the planned closures of more than 600 units across the country. Additional charges, including lease exit costs and severance expenses, will continue into the first half of fiscal 2009, which starts in October, Starbucks said.

Blaming the “perfect storm” economy, Starbucks chairman and chief executive, Howard Schultz, said customers remain loyal to the Starbucks brand but are visiting less frequently because of financial pressures.

“We are playing both offense and defense in our approach to current business,” Schultz said. “We’re doing all the right things to exit this challenging period even stronger than before.”

Schultz said that he was pleased with the reception of the company’s new Pike Place Roast coffee launched earlier this year and the new Vivanno and Sorbetto beverages, but that the new products have yet to significantly impact sales.

“In some ways we’re moving customers from one beverage to another,” he said. “In a normal environment we would have seen an uptick in sales and traffic, but we have been unable to move the needle upward because we still have significant headwinds.”

Company officials revised full-year, per-share earnings projections to the “mid-70 cent range,” from previous projections of between 90 cents and $1 per share. The estimates do not include the aggregate 19 cents per share charged through the third quarter from the company’s restructuring efforts.

Net revenue growth for the year is now expected to be about 11 percent, compared with earlier projections of an increase between 13 percent and 14 percent.

New openings planned for the remainder of the year were lowered by about 120 locations to a total of 900 stores. Last year, Starbucks opened 1,800 locations.

Company officials also backed off slightly on plans for international store expansion, which it previously had highlighted as a bright growth sector. The company now is planning 825 openings instead of earlier plans for 975 new locations. The reductions were sparked by concerns that parts of the United Kingdom and Western Europe were showing signs of economic distress similar to the United States.

For fiscal 2009, Starbucks said the store closures, including the 600 U.S.-based locations, 61 stores in Australia, and the elimination of 1,000 domestic non-store positions, is expected save between $200 million and $210 million.

Per-share earnings for that year are expected to hit between 90 cents and $1, officials said. Starbucks also said it planned to open fewer stores than it closes. In the United States, the number of corporate locations is expected to drop by 125 locations; and licensed locations will increase by 165 units. About 900 international stores are scheduled to open in fiscal 2009, a decline from earlier projections of 1,050 new international units. About two-thirds of the planned international openings will be licensed stores.

In other changes announced this week, Starbucks shifted top management with the departure of Jim Alling as president of the international division. He was replaced by Martin Coles, who is returning to that position. Coles was previously chief operating officer, a position that has been eliminated.

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