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Originally published Thursday, January 31, 2008 at 12:00 AM

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Starbucks cooling its U.S. growth

Starbucks will close about 100 U.S. stores this year, scale back its U.S. expansion and begin focusing on faster growth overseas as it...

Seattle Times business reporter

Starbucks will close about 100 U.S. stores this year, scale back its U.S. expansion and begin focusing on faster growth overseas as it seeks to revive its cachet and rekindle sales growth that by one measure sagged to an all-time low last quarter.

The Seattle coffee-shop chain also will stop selling warmed sandwiches, which don't contribute much to profits but take employees' time and interfere with the smell of coffee in stores.

And it will revive a leadership conference canceled last year to help pay for raises to in-store employees.

Those are decisive moves for a company whose visionary, Howard Schultz, took back the reins less than a month ago.

But they're not enough to keep Wall Street from being anxious between now and March 19, when Schultz promised to announce more changes at Starbucks' annual meeting.

Some analysts had expected more details about a turnaround plan on Wednesday, when the company reported a rise in first-quarter earnings but a drop in U.S. traffic.

"They left us hanging a little bit," said Andy Cross, a senior analyst at The Motley Fool in Alexandria, Va.

He and others liked what they heard, including the decision to open more stores overseas than in the U.S. beginning next year.

Starbucks has over 15,750 stores worldwide, more than 11,000 of them in the U.S.

"Despite the issues we're facing, Starbucks is a growth company," Schultz said during an interview Wednesday. The company's chairman, Schultz reassumed the role of chief executive in early January, when the board ousted Jim Donald.

"We had the kind of quarter that demonstrated that even though traffic is down, we met expectations and most importantly, we're really seeing the international business begin to hit its stride," Schultz said.

He expects few of the 100 underperforming U.S. stores that will close will be in the Northwest.

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Starbucks began selling warm breakfast sandwiches in more than 3,000 U.S. and Canadian stores in recent years, which some viewed as a move toward the fast-food sector, an idea Schultz has always disliked.

"The breakfast sandwiches drive revenue and profit, but they are in conflict with everything we stand for in terms of the coffee and the romance of the coffee," he said.

They contribute only about $35,000 to a store's annual sales, and Starbucks is exploring more healthful options.

Starbucks is not as profitable in international markets, but during the first quarter it showed improvement in that area while U.S. stores stagnated.

Traffic dropped 3 percent at U.S. stores but rose 3 percent at international stores during the first quarter ended Dec. 30. Operating profit margins also rose internationally but fell in the U.S.

The company posted a meager 1 percent quarterly gain in sales at stores open at least 13 months, its lowest level ever. Still, it beat analysts' first-quarter earnings expectations by a penny a share, according to a Thomson Financial survey.

The company earned $208.1 million in the first quarter, up 1.5 percent from a year earlier. Net revenues were $2.77 billion, up 17.5 percent.

Eventually, Starbucks' international stores could match the U.S. in profitability, said Dan Geiman, an analyst at McAdams Wright Ragen in Seattle, although no one expects that to happen soon.

"It's going to be years, not quarters," he said.

The company said it expects growth in earnings per share to be in the low double digits this fiscal year. It will give more detailed financial guidance when it reports second-quarter earnings April 30.

Because of the changes it is making, Starbucks said it will stop providing same-store sales data at least in the short term.

Starbucks is the only one of 19 restaurant companies followed by Morningstar analyst John Owens that will not provide same-store sales data.

"After they go through the transition, I think it would be useful if they brought that back into the fold," he said.

Starbucks stock tumbled 75 cents to $19.22 during regular trading Wednesday. Its announcements came after the close of regular trading, and shares fell another 28 cents to $18.94.

Melissa Allison: 206-464-3312 or mallison@seattletimes.com

Copyright © 2008 The Seattle Times Company

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