Profits fall as Starbucks tightens its belt

Starbucks, whose shares fell 2.5% after-hours, said it now aims to cut fiscal 2009 costs by $500m from a previously targeted $400m.

The coffee chain reported fewer customers and less spending, and was hit by a stronger dollar against the pound and the Canadian dollar. Total revenue slid 6%.

After cementing its global brand by selling $3 lattes, the company hit trouble when it built too many US outlets. It has been hard-hit by a US-led recession that has wiped out more than three million jobs, decimated home values and investments and battered consumer spending and confidence.

“The operating environment is terrible but they’re doing a lot of the right things here – slowing their growth and looking for cost savings,” said Larry Miller, an analyst with RBC Capital Markets. “They’re preparing themselves for the time in the future where sales come back. There are a lot of stores that haven’t been profitable. It’s a harsh reality but they need to right-size the organisation. Unfortunately, there are some casualties.”

Starbucks said 200 of the new-store closures will be in the US, where it had already targeted 600 stores for termination. The remaining 100 are in international markets. Last year, Starbucks also shut 61 cafes in Australia.

The coffee chain, which brought back Howard Schultz as chief executive in January 2008, has repeatedly jolted investors with bad news since its US traffic started slowing in late 2007.

Chief Executive Howard Schultz said in a recent conference call that Starbucks was able to find new positions for about 70% of the workers affected by the closure of the 600 domestic stores.

Starbucks said it now expects to open 140 new, company-operated stores in the US in fiscal 2009, 60 fewer than previously targeted. The company plans to open 170 new international company stores, down from 270.

“In the midst of the weakening global consumer environment, Starbucks is following a well-developed plan to strengthen our business through more efficient operations,” Schultz added.

[Source: Reuters]