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Starbucks Seeks Overseas Jolt

Updated from 4:46 p.m. EDT

Starbucks (SBUX - Get Report) is ramping up its international presence after years of rapid growth in the U.S. that is finally starting to level off.

The coffee giant plans to slow down its domestic growth to eliminate the risk of cannibalization, an issue that came up repeatedly on the conference call after its third-quarter report.

Profits for the quarter ended July 1 jumped to $158.3 million, or 21 cents a share, compared with $145.5 million, or 18 cents a share, in the same period last year. That was in line with the average estimate from analysts polled by Thomson Financial.

The Seattle based-chain's revenue climbed to $2.36 billion from $1.96 billion a year earlier, but fell short of analysts' expectations of $2.39 billion. Same-store sales, or sales at stores open at least a year, grew 4% in the third quarter.

President and Chief Executive Jim Donald said that a record number of store openings helped drive the coffee chain's sales growth.

"Despite the difficult operating environment of rising expenses -- particularly higher dairy costs -- we continued to execute on our growth strategy," Donald said in a statement. "We will strive to mitigate the impact of these cost pressures, while remaining focused on delivering legendary service to our customers."

Starbucks plans to maintain its expansion level of 2,400 stores this year. It will open 2,600 stores next year, but the extra 200 will be added to the international market, where the company sees its greatest growth potential.

International sales surged 28% in the third quarter, to $432 million from $337 million last year in the same period. Domestic sales grew by 18% to $1.8 billion from $1.6 billion a year earlier.

"We're still in the very early stages of international growth," Donald said on the conference call, pointing out that Starbucks has less than 1% market share in the international coffee industry.

This week, Starbucks passed through a 9-cent increase on its beverages due to rising dairy costs. Chief Financial Officer Michael Casey said on the call that although historically such price increases have not hurt store traffic, this time it might hurt sales because it comes on the heels of another recent price hike. Still, he emphasized that the company isn't expecting a significant traffic decline.

Starbucks reiterated that it expects fiscal-year earnings of 87 cents to 89 cents a share, bracketing analysts' average target of 88 cents. It expects same-stores sales for the year to range between 3% and 7%, with total revenue rising 20%.

Looking ahead, the company forecast fiscal 2008 earnings-per-share growth of 20% to 22%. Based on its forecast for fiscal 2007, that suggests earnings of $1.04 to $1.09 a share for next year. Wall Street projects earnings of $1.06 a share.

Shares of Starbucks closed Wednesday at $27.20, up 52 cents, or almost 2%. The stock recently was up 57 cents, or 2.1%, in after-hours trading.

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