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Lukewarm Brew at Starbucks

The coffee giant meets estimates, but rising costs spark a selloff.

Updated from 4:53 p.m. EST

The latest quarterly results served up by


(SBUX) - Get Starbucks Corporation Report

after Thursday's closing bell hit Wall Street's targets, but higher expense rates sparked a late-day selloff.

Shares of the java giant recently were down $2.42, or 6.2%, to $36.91 in after-hours trading. The stock gained 1.2% in Thursday's trading session.

Starbucks earned $117 million, or 15 cents a share, for the quarter ended Oct. 1, down from the $124 million, or 16 cents a share, it recorded for the same quarter last year. A change in the way the company accounts for asset retirement obligations lowered the results by 2 cents a share.

Excluding the change, the company said its earnings rose 9% to 17 cents a share, matching the Thomson First Call average analyst estimate.

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On its top line, Starbucks reported sales of $2 billion, up 21% from a year ago. Same-store sales, measuring sales at locations open at least one year, climbed 5%. The number of customer transactions during the quarter rose 4% and the average value of each transaction was up 1%.

Several Wall Street sources, who declined to be named, pointed to Starbucks' expense line as an issue in the report. Higher utility and distribution costs and a shift in its retail mix towards lower-margin items increased its overall costs.

The company said its cost of sales, including occupancy costs, rose to 41.7% of total net revenue for the quarter, compared with last year's 40.9%.

Meanwhile, store operating expenses rose to 42.1% of retail revenue from 40.6%, mostly due to higher payroll expenditures for U.S. retail stores, including an increase in the number of assistant store managers and support positions due to its retail store growth.

The rising expense rates cast doubt on Starbucks ability to maintain its blistering pace of growth around the world while also keep its business model intact.

"We demonstrated the strength of our business model as we opened a record number of new stores around the world, which contributed to strong top line growth, and we enhanced and expanded our product offerings through innovation and entry into new channels," said Starbucks in a press release.

Looking ahead, the company projected fiscal 2007 earnings of 87 cents to 89 cents a share, in line with its prior forecasts. The guidance allows for some downside to Wall Street's current estimate of 89 cents a share.

Starbucks expects revenue to rise 20% for the year, with same-store sales growth in the range of 3% to 7%.

It expects to open 2,400 net new stores on a global basis in its fiscal 2007. In 2006, it opened 2,199 new locations.