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Starbucks Cools the Crowd

Traders look past a 50% growth in profit as fiscal 2005 guidance misses estimates.

Updated from Nov. 10


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reported a nearly 50% gain in fourth-quarter net income, but the company's mere reiteration of fiscal 2005 guidance seemed to cool investors after the bell.

The company's shares were recently down 93 cents, or 1.7%, to $54.36 in early Thursday trading.

In its quarter ended Oct. 3, the coffee chain earned $103.34 million, or 25 cents a share. In the year-ago period, the company earned $69.6 million, or 17 cents a share.

Sales jumped 34% from the year-ago period to $1.45 billion in the quarter.

Both Starbucks' sales and its earnings were boosted by an extra week in the quarter, compared with last year. The extra week added about $125 million in revenue and about 3 cents a share to the company's bottom line.

Analysts polled by Thomson First Call were expecting Starbucks to earn 25 cents a share. The company's previous guidance implied earnings of 24 cents to 25 cents a share in the just-completed quarter.

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For its current fiscal year, Starbucks reiterated its previous guidance of $1.12 to $1.15 a share in earnings on revenue growth of about 20%.

But that forecast is below Wall Street's expectations. Analysts have forecast that Starbucks will earn $1.16 a share in fiscal 2005, on $6.27 billion in sales.

Given the company's pricey multiple, investors may expect Starbucks to continually up its earnings outlook, company CFO Michael Casey acknowledged on a conference call with investors and analysts.

"Since we only have one month into the new fiscal year, we believe it is premature to raise our targets at this time," Casey said.

While the company had much to crow about in its just-completed quarter, investors might have found other trouble spots beyond the company's guidance.

The company's U.S. sales grew an impressive 33% in the fourth quarter over the same period last year, for instance. But operating profit at its U.S. stores narrowed as a portion of sales during the quarter. Though it still came in at 15.4% of sales, that result was down from the year-ago period, when U.S. operating profit stood at 16.6% of sales.

Casey blamed the decline on the rising cost of dairy products and coffee beans, and increased payroll expenses. In the coming year, the company expects to firm up its gross margin -- the difference between what customers pay for its goods and its direct costs of providing them -- thanks to a recent price increase and an expected stabilization of coffee prices, Casey said. But the company expects that coffee bean prices will continue to increase, and it plans to boost spending on maintaining and refurbishing its older stores, he said.

Meanwhile, on the international front, Starbucks sales were up 41% from the fourth quarter last year. But the value of those sales was boosted by the decline of the U.S. dollar vs. other major currencies. The company did not immediately say how much the changes in foreign exchange rates affected its international sales or profits.

Profits was a key word for the company, though. Starbucks' international stores posted an operating profit -- excluding its Canadian units -- for the first time in an at least three years.

Still, the company's international operating profits trailed far behind that of its U.S. operations. And even including the company's Canadian, Hawaiian and Puerto Rican stores (all of which are included in its "international" operations), the company's international stores posted an operation profit of just 8.8%, up from 7.1% a year ago.