Starbucks' Sales Chilled

Updated from 5:12 p.m. EST

SAN FRANCISCO -- Starbucks(SBUX) posted a slight increase in earnings in the first quarter, narrowly topping estimates, but a drop in U.S. same-store sales dragged on the company's overall performance.

The coffee giant also pared its profit forecast for the year and set into motion plans for slower store growth amid slumping sales.

For the 13-week period ending Dec. 30, the Seattle-based company earned $208.1 million, or 28 cents a share, compared with $205 million, or 26 cents a share a year earlier.

Sales climbed to $2.78 billion in the first quarter, up from $2.36 billion a year ago.

Analysts were expecting earnings of 27 cents a share on sales of $2.77 billion.

Same-store sales, or sales at stores open at least a year, grew 1% in the first quarter, below Starbucks' full-year target of 3% to 5% growth.

The slowdown was brought on by a 1% decline in U.S. same-store sales, where the average number of transactions fell. The value of those transactions grew, however, largely due to price hikes imposed by the company last July to offset higher dairy costs.

Internationally, Starbucks showed its greatest strength. Same-store sales abroad increased 5%, giving the company all the more reason to shift its attention from its domestic operations to overseas.

Howard Schultz, who earlier this month was reinstated as chief executive, pledged to introduce changes to Starbucks and bring it back to its previous success.

"We are absolutely not satisfied with our overall experience in this period," Schultz said in a conference call with analysts.

Schultz mentioned only a few specific changes he plans to make at Starbucks, including the elimination of breakfast sandwiches in about 4,000 stores by the end of the year, to be replaced with healthier options at a future date.

Schultz noted that the coffee chain has already scaled back its store growth in the U.S. to about 1,175 this year, down from its earlier target of 1,600. Starbucks has further identified 100 underperforming stores that it will close.

"By reducing the number of openings, we expect to optimize our resources and potentially reduce cannibalization of our existing stores," Schultz said.

At the same time, Starbucks will open 975 stores overseas. For 2009, it will open more than 1,000 stores internationally and less than 1,000 locations in the U.S., marking the first time growth in the domestic market has lagged behind growth abroad.

Schultz insisted that Starbucks is still a growth company and that there is still plenty of opportunity to expand in other markets.

"That is not something we are going to give up," he said.

He added that the company will stop reporting same-store sales until it can produce measurable results from the fixes it plans for its U.S. business. That drew criticism from analysts, who maintained that Starbucks should be offering more disclosure while undergoing a transformation, not less.

Schultz argued that posting same-store sales would only serve as a distraction to the company's long-term goals.

"In view of this new lens, we need to make decisions that are not based on driving comps in the short term," he said.

The company said it expects earnings this year to grow in the low double digits. That suggests a cut from its November forecast for fiscal 2008 earnings of $1.02 to $1.05 a share, which implied growth of 17% to 21% over fiscal 2007.

Analysts estimate full-year earnings of $1.01 a share.

Schultz said he will reveal more details to his transformation plan on March 19, during the company's annual shareholder meeting. He also told analysts he would offer new metrics by which to measure Starbucks' progress on April 30, when the company releases its second-quarter earnings.

Shares of Starbucks were slipping 47 cents, or 2.5%, to $18.75 in after-hours trading Wednesday. The stock lost 3.8% in the regular session.

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