Jan. 7 (Bloomberg) -- Starbucks Corp., the world's largest chain of coffee shops, ousted Chief Executive Officer Jim Donald and replaced him with former CEO and Chairman Howard Schultz after posting its worst annual performance in U.S. trading.

Starbucks, which rose 9 percent in trading after U.S. markets closed, said today in a statement it will slow the pace of U.S. store openings and close some underperforming cafes.

Donald, 53, is leaving Starbucks less than three years after becoming chief executive. Schultz, who took over the chain in 1987 and was CEO through 2000, brought the company public in 1992 and expanded overseas.

Schultz, 54, told executives in a February memo that the company's expansion was ``watering down'' its brand. Starbucks, which faces competition from McDonald's Corp.'s new specialty coffee counters, now plans to shift money that was earmarked for U.S. growth toward international expansion.

``You see the stock price get cut in half, something needs to change,'' said James Walsh, who helps manage $1.1 billion including Starbucks shares at Coldstream Capital Management in Bellevue, Washington. ``The buck does stop at the top.''

The coffee chain lowered its profit and sales forecasts in November. U.S. customer visits fell for the first time after the chain raised prices 9 cents a cup to offset higher food and labor expenses.

Starbucks rose $1.65 to $20.03 at 7:59 p.m. after the close of regular U.S. trading, adding $1.2 billion to its stock market value. Earlier, the shares gained 27 cents to close at $18.38 in Nasdaq Stock Market composite trading.

`Self-Induced' Problems

The chain lost 29 percent of its stock price since Donald took over in April 2005. The shares fell 42 percent last year amid investor concern that the company was adding new stores too quickly. Starbucks' long-term goal is to have 40,000 locations worldwide, which cannibalized older locations and hurt profit margins.

Schultz and Donald both declined to be interviewed, spokesman Brandon Borrman said. Attempts to reach Donald at home weren't successful.

Most of the company's problems were ``self-induced,'' Schultz said today on a conference call with analysts and investors. Starbucks added U.S. stores too quickly, focused too much on speeding up lines and reducing costs rather than keeping customers happy, and let competitors woo drinkers with cheaper coffee, he said.

``What we are dealing with here is something that we created,'' Schultz said on the call.

The company didn't give specifics on its plans for international growth. Starbucks had 10,684 locations in the U.S. as of Sept. 30, part of more than 15,000 worldwide in 43 countries.

Pike Place

Starbucks opened its first store in 1971 in Seattle's Pike Place Market as a place to sell beans and coffee-making equipment. The company was named for the coffee-drinking first mate in the novel ``Moby Dick.''

Schultz joined the company as director of retail operations and marketing in 1982, according to a timeline on the retailer's Web site. Inspired by the popularity of espresso bars in Italy, Schultz unsuccessfully tried to convince the owners to sell lattes.

In 1985, Schultz left to found Il Giornale, which sold brewed coffee and espresso from Starbucks' beans. Two years later, Il Giornale bought Starbucks assets and changed its name to Starbucks Corp. It sold its first shares to the public in 1992 for $17 apiece.

``Bringing Schultz back helps rally the troops,'' said Walter Todd, a principal at Greenwood Capital Associates LLC in Greenwood, South Carolina, which sold its shares last year. ``He's synonymous with Starbucks. Given the way the stock has performed, employees probably were disenchanted and Schultz may bolster enthusiasm.''

McDonald's plans to add counters to serve lattes and cappuccinos in almost 14,000 U.S. stores after U.S. coffee sales increased 39 percent during the first nine months of 2007.

To contact the reporter on this story: Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net.

Last Updated: January 7, 2008 21:57 EST