Starbucks Corp posted quarterly profit that just topped expectations on cost cuts and is planning a multimillion dollar advertising campaign challenging the view that its coffee is an expensive luxury.

The Seattle company built an iconic global brand by introducing lattes and other espresso drinks -- along with higher drink prices -- to millions of people accustomed to cheap drip coffee. But as it pulls back from an expansion binge amid the worst economy in decades, Starbucks is also serving up a reality check.

Starbucks coffee does not cost $4, Chief Executive Howard Schultz said on a conference call, referring to a widely held opinion that its coffee is the most expensive.

The world's largest coffee chain, which some analysts fear is ceding market share to an aggressively expanding McDonald's, is selectively lowering prices with the global restaurant industry now relying on discounting to tide it through the recession.

The price of Starbucks drip coffee starts at around $1 and stays well below $4, while larger-sized specialty coffee drinks like mochas, lattes and Frappuccino blended drinks can top $4.

When it comes to coffee, companies like Peet's Coffee & Tea
, Caribou Coffee Co and privately held Dunkin Donuts tend to be more expensive while McDonald's Corp is lower priced, said William Blair & Co analyst Sharon Zackfia.

The pricing premium that Starbucks has at this point is the lowest it has probably ever been in the history of the company, Zackfia said.

Having already announced job cuts and nearly 1,000 store closures worldwide, the company is following the lead of other restaurant operators and taking a scalpel to prices.

Schultz said Starbucks will lower prices on popular items like small lattes and slightly increase prices on larger and more complex beverages in some important markets. It is also making reduced-priced pairings a permanent place in its value strategy.

As investors continue to wonder what impact McDonald's McCafe roll-out is having on Starbucks' sales, Schultz said speculation that Starbucks is losing retail market share to competitors has been grossly exaggerated.

Starbucks shares rose 1.2 percent to $13.85 in extended trade. Shares have gained about 45 percent so far this year.


During the second quarter, Starbucks said it cut costs by $120 million, better than its target of $100 million, and that sales at restaurants open at least 13 months declined at a slower pace than the 9 percent drop in the first quarter.

Folks might be a little disappointed that there wasn't more improvement in sales since comparisons from a year ago were easier, and the company has been closing poorly performing stores, said Edward Jones analyst Jack Russo.

Starbucks overall same-store sales fell 8 percent globally on an 8 percent drop in the United States and a 3 percent decline internationally.

Net income for its fiscal second quarter, ended March 29, fell 77 percent to $25 million, or 3 cents per share. A year earlier, the Seattle-based company reported a profit of $108.7 million, or 15 cents per share.

Excluding restructuring charges, Starbucks earned 16 cents a share in the most recent quarter, a penny better than analysts expected, according to Reuters Estimates.

Total revenue fell 7.6 percent to $2.3 billion.

Starbucks now expects to add about 20 net new stores globally in fiscal 2009. This revised target includes a net reduction of around 425 company-operated stores in the United States and the net addition of about 60 company-operated stores internationally.

The company expects to open about 65 net new licensed stores in the United States and about 320 net new licensed stores internationally.

(Reporting by Lisa Baertlein; Editing by Edwin Chan, Bernard Orr)