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Starbucks Third-Quarter Earnings Meet View, Shares Up

Starbucksreported a 9% rise in quarterly earnings on Wednesday, helped by more than 1,000 new stores, and stood by its full- year profit outlook, sending its shares up 2.2%.

Starbucks
Starbucks

Net income for the fiscal third quarter was $158 million, or 21 cents per share, in line with the average estimate of Wall Street analysts, according to Reuters Estimates. In the same period last year, Starbucks earned $145 million, or 18 cents per share.

"This is being viewed as a bit of relief given that we knew that there was some pressure on the top line," said McAdams Wright Ragen analyst Dan Geiman, who has a "buy" rating on Starbucks shares. "The fact that they reiterated their guidance for the fiscal year was a positive as well."

Starbucks warned in June it would be "very challenging" for the company to meet the high end of its 2007 earnings forecast due to rising dairy prices and slowing sales growth in its U.S. business. It repeated that warning on Wednesday, but stood by the outlook.

Third-quarter revenue rose 20% to $2.4 billion.

Analysts had been expecting revenue of $2.39 billion, according to Reuters Estimates.

Sales at coffee shops open at least 13 months, a key retail measure known as same-store sales, rose 4%. Customer transactions increased 1 percent, while the average value per transaction was up 3%.

Chief Executive Jim Donald said in an interview that "a lot of things" kept customer transaction growth small, including new stores taking business from older ones and weakened consumer spending.

"Maybe people aren't going four times a week," he said. "Maybe it's three times a week."

Standing Out From The Pack

Starbucks' shares have been battered this year due to investor concerns about slowing U.S. growth, higher costs and increased competition from fast-food rivals such as McDonald's and Dunkin' Donuts.

On a conference call with investors, executives said Starbucks would combat slowing traffic and increased competition with renewed efforts to differentiate its products and customers' experience.

"As long as we can differentiate ourselves from all others, we will continue to be the leader. We have no intention whatsoever of giving up that leadership position," Chairman Howard Schultz said.

Also in the quarter, Starbucks' operating margins fell to 10.4% of net revenue from 10.9% a year ago due to higher dairy and rent costs.

To help offset rising costs, Starbucks earlier this week raised prices on coffee and other drinks by an average of 9 cents a cup. Chief Financial Officer Michael Casey said that, while price increases have not historically affected customer traffic, this time could be different given the company last raised prices less than a year ago.

"We acknowledge the possibility that it might have a short-term negative impact on traffic," Casey said.

For the full year, Starbucks still expects to earn between 87 cents per share and 89 cents per share. Wall Street analysts, on average, are expecting earnings of 88 cents a share, according to Reuters Estimates.

The coffee chain also set a fiscal 2008 earnings per share growth target of 20% to 22% on net revenue growth of 18%. Those are lower than the company's goals in recent years of 20 to 25 percent EPS growth on revenue growth of about 20%.

"I don't expect that the bottom line growth rate, absent some transformation in the business, is going to re-accelerate up to the 25% level again," Casey said.

The company plans to open 2,600 stores in fiscal 2008, 200 more than in the current year. International expansion accounts for all of the increase.

Starbucks shares rose to $27.80 in after hours trading from a close of $27.20 on Nasdaq. The stock is down about 23 percent in 2007, compared with a 1.6% decline in the Dow Jones U.S. restaurants and bars index.

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