Starbucks Burned Again

Shares tumble after the coffee giant cuts fiscal 2008 views.
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Updated from 5:33 p.m. EST

Starbucks

(SBUX) - Get Report

got too full of itself.

The java giant put together an epic streak over the last 20 years that is the envy of corporate America, but in the end, reality became unavoidable in 2007 -- a year in which its stock price has so far fallen 32%.

It was a tough fiscal year for Starbucks, and it was capped off on Thursday with news of its first quarterly decline in U.S. store traffic in at least three years. It also offered a disappointing earnings forecast for the current quarter, promising a rebound in the back half of 2008.

Translation: Things are getting worse, and if they're not going to get better, we'll tell you about it later.

For the first quarter of 2008, Starbucks anticipates earnings of 28 cents a share. That's about 3 cents below Wall Street's estimate, according to Thomson First Call.

Donald said the high cost of dairy products is the culprit for the disappointment, but while Starbucks operating margins will decline in the quarter, Donald expects them to improve in the second half of fiscal 2008, and end the year with a net gain.

But Starbucks' outlook for the full-year was disappointing as well. The company now expects earnings for 2008 in a range from $1.02 to $1.05 a share, allowing for downside to analysts' target of $1.05.

Based on Starbucks' fiscal 2007 earnings of 87 cents a share, the outlook implies 17% to 21% growth in EPS. Previously, the company projected 20% to 22% growth.

It expects net revenue to increase 17% to 18%, down from its prior projection of 19%. The company predicts same-store sales, or sales at stores open at least a year, to increase 3% to 5%.

Also, it now plans to add 2,500 net new stores on a global basis in 2008. The company sees adding 1,700 locations in the U.S., lower than its prior forecast of 1,600.

"Throughout 2007, we saw a consistent weakening in our U.S. business," said Donald. Now, he said the company wants to "take a breather" from its audacious expansion plans and "make sure the locations we looked at are the locations we want in 2008."

Shares of Starbucks were recently down $2.10, or 8.7%, to $22 in after-hours trading. It lost 0.6% in regular trading hours.

Shares of Starbucks have been hit by concerns that its growth plans got out of hand amid increasing competition while fears of a consumer spending slowdown are spreading on Wall Street. Also, higher dairy costs are eating into food and beverage company's profits.

In its fiscal fourth quarter, the Seattle-based coffee retailer earned $158.5 million, or 21 cents a share, for the quarter ended Sept. 30, compared with the $117.3 million, or 15 cents a share, it logged for the same quarter last year. Its net revenue rose 22% for the period to $2.4 billion.

Both figures met Wall Street's forecast, according Thomson.

The top-line increase was significantly boosted by Starbucks' expansion, with the company having added 1,342 new stores in the last 12 months.

Starbucks' same-store sales rose 4% for the quarter. In the U.S., same-store sales rose 5%, helped by a 4% jump in the average value per transaction. Customer traffic, however, declined 1% for the first time since the company began reporting that figure three years ago.

Starbucks Chief Financial Officer Peter Bocian told analysts that negative economic trends were mainly to blame for the sales softness, but the company intends to focus on improving the "customer experience" in its stores.

He said factors like "the increase in gas prices and the break-down in the mortgage market" are weighing on customers.