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Starbucks Losing Its Buzz

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Profits drop 97% in the fourth quarter.

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Relax, the world isn't going to end just because Starbucks (SBUX) reported a 97% drop in fourth-quarter profits.

The company expects to make money in 2009 and plans to open new stores, though at a slower pace than in previous years.

Customers are cutting back on their morning java jolt in the downbeat economy, but closing costs for about 600 US stores are largely responsible for the company's dismal fourth-quarter performance.

Starbucks said fourth-quarter profits fell to $5.4 million, or $0.01 per share, from $158.5 million, or $0.21 per share, for the same period last year. The company earned $0.10 per share, excluding the cost of store closings. Still, analysts expected Starbucks to earn $0.13 per share.

Excluding one-time costs, Starbucks expects to earn between $0.71 and $0.90 per share in fiscal year 2009; analysts are looking for a profit of $0.87 per share. The great unknown: How sharply same-store sales will decline next year.

Starbucks plans to open about 700 new stores in fiscal year 2009, down from the original goal of 900. In the US, the company expects to close about 225 stores and open 205 new outlets at what it hopes will be stronger locations.

In July, Starbucks announced plans to close about 600 locations, or about 8.5% of those operated by the company in the US. Starbucks also closed 61 stores in Australia. The closures hit about 12,000 employees, or about 7% of Starbucks' global workforce. This assumes that each store employs about 20 full- and part-time workers.

The turnaround plan appears to be working. Starbucks said revenue rose to $2.52 billion from $2.44 billion, an increase of about 3.3%. However, same-store sales, or sales at locations open at least a year, fell 8% in the US. Overseas sales were flat. This suggests fewer customers overall and less expensive purchases by returning customers - just what you'd expect in an economic downturn.

CEO Howard Schultz says the fourth quarter may represent a "bottoming-out milestone for our company." We'll see. Higher revenue represents higher prices, not increased volume.

Starbucks, long the master of pricey lattes and other frou-frou drinks, now must scramble for customers in a weakening economy. It once raised prices with little resistance from customers, but now slugs it out with blue-collar Dunkin' Donuts in the $50-billion-a-year coffee market.

Espresso and other fancy beverages at Starbucks can cost $3 to $5 each. The company is fighting back with discounts and freebies, including free refills on drip coffee. A new "gold card" sells for $25 and gives customers a 10% discount on all purchases. What's next - a flashing blue light followed by a barista intoning, "Attention, Starbucks guzzlers"?

Thanks to Starbucks, expensive caffeine won't be hard to find. But those looking for a bargain will go downscale. Consumer Reports hired tasters to sample a medium cup of black coffee from McDonald's (MCD), Burger King (BKC), Dunkin' Donuts and Starbucks.

McDonalds "beat the rest," the magazine said. Coffee from the Golden Arches was "decent and moderately strong."

Right now, "decent" is good enough for bargain hunters looking for an alternative to Starbucks.

For more on Starbucks, check out Hoofy and Boo's always astute report.

No positions in stocks mentioned.
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