Starbucks Corporation (SBUX)

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Starbucks Corporation (SBUX)

F1Q 2014 Results Earnings Call

January 23, 2014 5:00 PM ET


JoAnn DeGrande - Vice President, Investor Relations

Howard Schultz - Chairman, President and CEO

Troy Alstead - Chief Financial Officer

John Culver - Group President, China, Asia Pacific and Channel Development and Emerging Brands

Adam Brotman - Chief Digital Officer

Curt Garner - Chief Information Officer


Joe Buckley - Bank of America Merrill Lynch

John Ivankoe – JPMorgan

Sara Senatore – Sanford Bernstein

Jeffrey Bernstein - Barclays Capital

Michael Kelter - Goldman Sachs

Matt DiFrisco - Buckingham Research

John Glass - Morgan Stanley

David Palmer - RBC Capital Markets

Jason West - Deutsche Bank

Andy Barish - Jefferies

Keith Siegner - UBS

Will Slabaugh - Stephens

David Tarantino - Robert W. Baird

Diane Geissler - CLSA

Karen Holthouse - Credit Suisse



Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to Starbucks Coffee Company’s First Quarter Fiscal Year 2014 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions)

Thank you. Ms. DeGrande, you may begin your conference.

JoAnn DeGrande

Thanks, Mike. Good afternoon. This is JoAnn DeGrande, Vice President of Investor Relations for Starbucks Coffee Company. Joining me on the call to discuss our Q1 results are Howard Schultz, Chairman, President and CEO; and Troy Alstead, CFO. And also with us today are John Culver, Group President, China, Asia Pacific and Channel Development and Emerging Brands; Adam Brotman, Chief Digital Officer; and Curt Garner, Chief Information Officer.

This conference call will include forward-looking statements, which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements.

Any such statements should be considered in conjunction with cautionary statements in our earnings release and the risk factor discussions in our filings with the SEC, including our last annual report on Form 10-K. Starbucks assumes no obligation to update any of these forward-looking statements or information.

This conference call is being webcast and an archive of the webcast will be available on our website at

Please also note that Starbucks 2014 Annual Meeting of Shareholders will be held in Seattle at 10 a.m. Pacific Time on Wednesday, March 19th, that meeting will also be available via webcast.

With that, I’d like to turn the call over to Howard Schultz. Howard?

Howard Schultz

Thank you, JoAnn, and welcome to everyone on today’s call. I’m very pleased to discuss the record Q1 results that Starbucks announced today. Strong operating and financial performance from all business segments around the world and increase operating leverage and store efficiency enables us to deliver record quarterly revenue of $4.2 billion, record quarterly operating margin of 19.2%, record quarterly operating income of $814 million and record quarterly EPS of $0.71 per share.

Strong customer response to food and beverage innovation contributed solid Q1 comp sales growth of 5%, consisting with our previous mid single-digit guidance representing our 16th consecutive quarter of 5% comps or greater.

Noteworthy is that the 5% comp growth driven by our important EMEA region with over 2,000 stores, was a strongest growth in more than three years, demonstrating the success of our strategy to transform our EMEA business based on the learnings from our U.S. transformation.

Also, noteworthy, is that our Q1 U.S. comps were approximately twice the national retail sales average during holiday shopping period this season. And that our Q1 results do not reflect the significant future sales benefit from the year-over-year increase of $230 million in deferred revenue over $1 billion resulting from extremely strong new Starbucks Gift Card activation and Starbucks Card reloads in Q1.

At the outset, I want to take a moment to comment on two pronounced shifts in consumer shopping behavior that retailers experienced, but that we unlike many retailers or any competitor were prepared for this past holiday season and explaining why and how Starbucks global business will increasingly benefit from the acceleration and convergence of these shifts going forward. Then I will provide an overview of segment performance in Q1 and Troy will take you though Q1 financial and operating results in detail.

Holiday 2013 was the first in which many traditional bricks and mortar retailers experienced in-store foot traffic give way to online shopping in a major way. Customers research, compare prices and then bought the brands and items they wanted online, frequently using a mobile device to do so.

This was also the first holiday in which consumers embraced the convenience and flexibility afforded by physical and digital gift cards with the passion. Instead of gifting a particular item, many consumers instead choose to give the gift of choice. Starbucks was prepared for both of these shifts having invested over many years in the creation and development of proprietary world class digital and mobile payment and card technology and expertise. This expertise and the assets that support it enabled us to seamlessly process more than 40 million new Starbucks card activation valued at over $610 million in the U.S. and Canada alone in Q1, including over 2 million new Starbucks card activations per day in the days immediately leading up to Christmas and $1.4 billion of Starbucks card loads globally.

Each of these figures represented a significant increase over both last year and candidly our most optimistic projections for this year making Starbucks one of the very few small handful of retailers to benefit from the transfers of reward [ph] store sales to online sales and the gifting of choice.

Even more, the sheer magnitude of the $1.4 billion loaded with deposit cards in Q1 is the opportunity presented by the millions of customers that will be visiting our stores to redeem these cards in the future. Experience tells us that many gift card recipients are new customers for Starbucks and their visits are providing us with the unique and power opportunity to introduce them to the Starbucks experience, invite them into my cover of rewards loyalty program and inspire them to become part of the Starbucks daily ritual.

Today with only 10 million customers actively using our mobile payment app, over 7.3 million active my cover of reward [ph] in U.S. alone, over a half of them at home are gold status members and a figure approaching 5 million mobile transactions taking place in our stores each week. Some [ph] integrated mobile and world app technology is by far the undisputed leader in digital retail technology.

Together mobile and Starbucks card payments represent over 30% of total U.S. payment. This powerful technological advantage combines with our robust pipeline of food and beverage innovations and Starbucks’ recognition as one of the world’s most respected and most trusted consumer brands will provide us with a winning hand as mobile, card and online sales trends continue to converge and accelerate around the world and into the future.

Let me turn your attention to the Americas. Starbucks Americas segment now comprising over 13,000 stores had another strong quarter with revenues up 8% and comp sales up 5%, including a solid 4% increase in traffic. Contributing to Americas performance was the success of our holiday beverage offerings, including both Pumpkin Spice Latte and our holiday beverage frio [ph] and strong food sales, including increased customer acceptance and additional benefits from the ongoing rollout of La Boulange.

As we entered 2014, Starbucks Americas segment is benefitting from new store development and existing store renovation programs that are driving increased store efficiency and throughput, enabling us to deliver both an enhanced customer experience and increased profitability. The success of these app efforts are apparent with our newest class of stores on track to average over $1.2 million in year one sales, exceeding our best in class investment ratio of 2 to 1.

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