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Starbucks closing cafes; CEO calls performance 'not acceptable'

By Uday Sampath Kumar and Alana Wise
FILE PHOTO: A Starbucks store is seen inside the Tom Bradley terminal at LAX airport in Los Angeles, California, U.S. on October 27, 2015. REUTERS/Lucy Nicholson/File Photo

By Uday Sampath Kumar and Alana Wise

(Reuters) - Starbucks Corp <SBUX.O> forecast on Tuesday slower sales growth than Wall Street expected this quarter and plans to close about 150 U.S. cafes next fiscal year to boost performance, sending its shares down 2 percent after hours.

The world's largest coffee chain is facing competition both from upscale coffee houses and lower-priced fast-food chains like McDonald's Corp <MCD.N> and Dunkin' Donuts <DNKN.O>.

It has missed analysts' estimates for same-store sales in the U.S.-dominated Americas region in five of the last six quarters.

The company anticipates lower net new store growth in the United States for fiscal 2019 and said it would address rapidly changing consumer preferences by introducing new cold drinks like a mango dragon fruit beverage and focussing on growing health and wellness trends.

Starbucks' Executive Chairman and co-founder Howard Schultz said earlier this month that he is stepping away from the company on June 26, ending an era. In April, Schultz worked closely alongside Chief Executive Kevin Johnson to help limit damage to the company's image after a racial profiling incident involving the arrest of two black men in a Philadelphia store.

"It seems fairly clear that the low-hanging fruit on causing everybody to get addicted to their (Starbucks) fantastic products is kind of in the rear-view mirror," said Tony Scherrer, director of research at Smead Capital Management.

"At least in the Starbucks heavy markets, the people that are going to drink coffee are already drinking it."

Starbucks said it expects global comparable store sales to rise 1 percent in the third quarter, below the 3 percent increase estimated by analysts, according to Thomson Reuters I/B/E/S.

"While certain demand headwinds are transitory, and some of our cost increases are appropriate investments for the future, our recent performance does not reflect the potential of our exceptional brand and is not acceptable," Johnson said in a statement.

Historically, the Seattle-based company closes roughly 50 stores a year.

Starbucks said it would look to open more stores in under penetrated markets and explore strategic options to license company-operated stores. China is the company's biggest growth driver with same-store sales rising 4 percent in the last reported quarter.

The company also said it would look to cut general and administrative expenses with plans to partner with an external consultant to speed up the process.

In early May, Swiss-based Nestle <NESN.S> said it would pay Starbucks $7.15 billion for exclusive rights to sell Starbucks coffees and teas. That alliance frees Starbucks to focus on improving its mainstay U.S. cafe business, where traffic growth had stalled.


(Reporting by Uday Sampath in Bengaluru and Alana Wise in New York; Editing by Shailesh Kuber and Lisa Shumaker)