Starbucks takes action as sales cool

After decades of eye-popping growth, Starbucks sbux suddenly finds itself contemplating something once viewed as unthinkable: cutbacks.

As rattled off by recently returned CEO Howard Schultz in an analysts conference call late Wednesday, the cuts will be many:

•Closing stores. Starbucks will shutter 100 underperforming U.S. stores over the next year, although it declined to say which U.S. stores in which markets will close.

•Cutting back growth. It will decrease the number of U.S. stores it opens in fiscal 2008 to 1,175 from 1,600. At the same time, however, it will increase planned international store openings by 75 to 975.

•Dumping breakfast sandwiches. It will stop selling its much-ballyhooed breakfast sandwiches by the end of fiscal 2008, which could be a short-term blow to its breakfast business. Customers complained that the smell of the warming sandwiches detracted from the coffee aroma, Schultz said.

The announcements followed a disconcerting report for investors: Same-store sales fell 1% for the first fiscal quarter of 2008 — the first time Starbucks has ever posted a quarterly decline in comparable-store sales. This was driven by a 3% drop in transactions, Schultz said. "Our performance shows that we have work to do. We need to make fundamental changes for the long term."

Starbucks is adapting to the new reality of a culture, reeling from big stock and housing-price losses, that is less enthusiastic about blowing four bucks on a coffee.

Meanwhile, Starbucks has been doing less to coax them, according to Ron Paul, president of Technomic, a restaurant research firm. "Starbucks has lost its way. It is not as special as it used to be."

These are difficult days for the coffee kingpin.

Earlier this month, Jim Donald was ousted as CEO and replaced by Schultz. Its top management team was reshuffled. Its store traffic declined last summer for the first time since the company went public. And its stock has been in free fall, down 42% in 2007. Meanwhile, McDonald's mcd plans to roll out premium coffee bars in its 14,000 U.S. locations over the next year.

Schultz was short on details about how he plans to turn the chain around. But he said five new initiatives that will be "major" catalysts for change will be unveiled at Starbucks' annual meeting on March 19.

A key initiative known now: more healthy foods.

Before the end of fiscal 2008, Starbucks will roll out a number of new breakfast products that are "healthier and more distinctive," said Denny Marie Post, senior vice president of beverage and food, in an interview with USA TODAY moments before the conference call.

She declined to name them, however.

But in the short term, Starbucks may be going the other direction. In April, it will, for the first time, roll out high-quality doughnuts nationally, she says. Starbucks has signed a deal with Top Pot doughnuts, a regional Seattle doughnut maker, to produce glazed, chocolate, vanilla caramel and apple fritter doughnuts.

"We'll finally have doughnuts that can stand up to our coffee," she says.

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