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Starbucks in new Net gambit

Coffee retailer Starbucks said it will tone down its foray onto the Internet but plans to plunk down a $20 million investment in Living.com, an online furniture store due to open its doors on Monday.

Shares in Starbucks jumped today after the coffee retailer scaled back its Internet plans and said it will invest $20 million in online furniture store Living.com.

The investment, announced as Starbucks reported quarterly earnings that met analysts' revised expectations, could represent a turnaround from the company's plan to open a "lifestyle portal," a strategy unveiled late last month. The company said at the time that the site would be open in time for this year's holiday shopping season.

Shares of Starbucks' stock were trading this afternoon at 25.87, up 9 percent, an apparent nod of approval for the company's latest news. The Seattle-based coffeemaker was also upgraded today by J.P. Morgan and Pacific Crest. The stock has traded as high as 41 and as low as 14.37 during the past 52 weeks.

Starbucks chief executive Howard Schultz positioned the Living.com investment as part of a more conservative approach to the Internet. The investment is part of a previously announced financing round of $41.5 million.

"We plan to take a more conservative approach in the near term, which involves building up on the resources we internally possess," Schultz said during a conference call with analysts.

Schultz told analysts that Starbucks will grow its Internet business conservatively, not through the big, bank-busting acquisitions that had many investors nervous. Last month, Starbucks shares fell 28 percent on its profit warning and more aggressive Net strategy which it said would be a drag to earnings.

"Our enthusiasm for the potential of the Internet and our confidence in the power of the Starbucks brand...remains strong," Schultz said in a conference call.

Shultz noted that the company's Internet soundings had been misinterpreted. "I want to put those concerns to rest and I'd like to reemphasize my commitment to our core business," said Schultz.

Analysts said Starbucks is retreating from its earlier lifestyle portal plan.

"This is back to the original Internet strategy," Hambrecht & Quist analyst Bonnie Kramer Tonnenson said, indicating that Starbucks may return to making minority investments in Internet companies. "This is the first e-commerce company that they've invested in, but others will follow."

Christopher Vroom, analyst with Thomas Weisel Partners in San Francisco, agreed the company has made "a more cautious assessment of the Internet opportunity," by reaffirming its commitment to its offline business. He expects Starbucks to pursue its Internet strategy with partners and thinks Starbucks' Web portal may slip into next year.

Tonnenson praised Starbucks management for emphasizing its core coffee business. She said yesterday's comments would rule out Starbucks buying home specialty retail chain Williams Sonoma, an idea it was rumored to be exploring last month.

Deutsche Banc Alex. Brown analyst John Glass, who rates Starbucks a "buy," told Bloomberg the change "should be a positive for the stock."

Schultz has also made several investments in online companies through his private investment company, Maveron. Maveron owns shares in online auctioneer eBay, on whose board Schultz serves.

Living.com, which launches Monday, will sell furniture and home furnishings. That fits with Starbucks' planned portal, which will include content and commerce for home furnishings, specialty foods, and home products, the company has said. Starbuck's own site also will encompass direct sales, an online magazine called Joe Magazine being published with Time Warner's Time magazine, and existing CD music operations.

Living.com isn't Starbucks' first investment. In May, Starbucks joined several media companies in a $20 million investment in Talk City, an Internet chat company that went public on Tuesday, raising $60 million. But Wall Street analysts are split over the coffee company's online strategy, which includes spinning off an online subsidiary dubbed Starbucks X.

Living.com's chief venture capital backer is Benchmark Capital. The online company will compete with Furniture.com, which is already up and selling, and HomePortfolio.com, a home furnishing site that seeks to work with bricks-and-mortar retailers, not put them out of business.

Starbucks said its fiscal third-quarter profit climbed 18 percent, slowed by spending. Excluding a charge related to the acquisition of the Seattle Coffee Company, net income grew to $24.6 million, or 13 cents a share, up from $20.9 million, or 11 cents, in the year-ago period.

Bloomberg and Reuters contributed to this report.