星巴克 (SBUX) 2006 Q4 法說會逐字稿

Good afternoon, my name is Richard, and I will be your conference operator today.

At this time I would like to welcome everyone to the Starbucks fourth-quarter fiscal year end 2006 earnings conference call. (OPERATOR INSTRUCTIONS).

I would now like to turn the call over to Ms. JoAnn DeGrande.

Please go ahead, ma'am.

Thank you and good afternoon, ladies and gentlemen.

This is JoAnn DeGrande, Director of Investor Relations at Starbucks Coffee Company.

With me today are Howard Schultz, Chairman;

Jim Donald, President and CEO;

Michael Casey, Executive Vice President and CFO; and Mary Ekman, Vice President Corporate Development and Investor Relations.

During today's call, Jim will review key results and accomplishments for the fourth quarter and the full year as well as provide some highlights from our U.S. retail business;

Howard will provide an update on our international business and our Music Entertainment initiative; and Michael will highlight the key drivers behind our fourth-quarter and fiscal year 2006 results.

We will limit today's call to one hour including Q&A.

As a reminder to all listeners, this call is being broadcast live over the Internet.

A replay will be available via telephone at 800-642-1687, Reservation No. 3728606 through 5:30 PM Pacific time on Thursday, November 23 and on the Investor Relations page of Starbucks.com through 5 PM Pacific time on Thursday, December 14.

In addition, today's remarks will be available on the Investor Relations portion of Starbucks.com by the end of the day and will remain available through Thursday, December 14.

This conference call includes forward-looking statements such as trends in our expectations regarding store openings, comparable store sales, net revenue and earnings per share results.

These forward-looking statements are all based on currently available operating, financial, and competitive information and are subject to various risks and uncertainties.

Additional information concerning factors that could cause actual results to differ materially from those (indiscernible) statements are contained in the Company's filings with the Securities and Exchange Commission, including the risk factors section of Starbucks annual report on Form 10-K for the fiscal year ended October 2, 2005.

The Company assumes no obligation to update any of these forward-looking statements.

With that, I will turn the call over to Jim.

Thank you.

Good afternoon, ladies and gentlemen.

Fiscal 2006 was another strong year for Starbucks as we continue to do more of the very same, delivering solid, consistent performance by surprising delight in our customers every day with product innovations, retail locations and places where our customers want us and to the extension of the Starbucks brand outside our retail stores.

We have achieved a number of accomplishments this year so let me begin with a quick review of our store development endeavors followed by an overview of our fiscal year financial results and then a few highlights from the fourth quarter.

During fiscal 2006, we delivered a record number of store openings, 2199 to be exact.

This equates to an average of six new stores per day.

When you compare fiscal 2006 store openings to fiscal 2005, it is clear that we continued the momentum with consistent execution as we opened over 30% more stores this year than last.

Due to the strength in our store development capabilities, paired with strong demand for Starbucks locations, we surpassed our original store count target of 1800 stores by nearly 400.

We continue to see tremendous opportunity in store openings both in the U.S. and international markets.

This year, we are targeting the opening of at least 2400 locations worldwide.

Of note, we have grown our store base by a compound annual growth rate of more than 21% over the past five years.

Additionally, we believe we can ultimately have 40,000 locations worldwide with half of those locations outside the U.S.

For so much development and growth, the natural question might be, how have these investments impacted Starbucks financial health.

Let me reassure you, we have achieved robust store expansion, delivered strong financial performance, increased our equity ownership in international markets and continue to foster innovation throughout our business around the world.

Let me talk about some specifics.

In fiscal year 2006, we served our customers more than 40 million times per week in 12,440 Starbucks locations in 37 countries.

We delivered consolidated net revenues of $7.8 billion, an increase of 22%, which exceed our growth target, comprised of solid increases in both retail and specialty revenues.

We reported comparable store sales growth of 7% for the year, including 5% transaction growth and 2% ticket growth.

We delivered net earnings of $564 million compared to $494 million in fiscal 2005, and earnings per share for the year came in at $0.73 compared to $0.61 per share in fiscal 2005, excluding the impact of new accounting acquirement for asset retirement obligations, which Michael will review later in the call.

We exited 2006 in a solid position, have set aggressive growth targets for our current fiscal year, and we look forward to continuing our positive momentum in fiscal 2007.

It is important to note that these results and the aggressive financial targets we have set for fiscal 2007 are all driven by the same consistent strategy -- to remain focused on delivering value through our culture of product innovation, serving premium quality products and continually investing in our passionate partners who provide legendary customer service.

And the numbers speak for themselves.

Our average unit volumes continue to increase.

Fiscal 2006 average unit volumes for the U.S.

Company operated stores grew to over $1 million.

Additionally, first year's sales on our fiscal 2006 new stores in the U.S. have continued to perform well, delivering an estimated $920,000.

Now let me recap some of the highlights specific to the fourth quarter.

Consolidated net revenues grew by 21% to $2 million with net earnings of $117 million.

Comparable store sales grew 5% for the quarter, 4% by transaction growth, and 1% by higher ticket.

As we grow our business, the Starbucks experience continues to be universally relevant and accepted.

Let's review both the innovations and traditions Starbucks has and will deliver in order to continue this growth.

During the quarter, we continue to build on what makes Starbucks unique -- product innovation, legendary service, and execution, and the focus clearly paid off.

During the fourth quarter, Starbucks U.S.

Company operated retail locations delivered $1.4 billion in revenues.

Key drivers behind this quarter were innovations across our beverage menu as well as our food offerings.

Beverages introduced during the fourth quarter included our new Frappuccino juice blends, offered in two popular flavors, pomegranate and tangerine, and the return of one of our highly anticipated seasonal flavors, pumpkin spice.

The continued success of pumpkin spice provides an excellent prelude to the return of our popular holiday beverage trio, Peppermint Mocha, Gingerbread Latte, and Eggnog Latte.

Again during the fourth quarter and for the year, food was a strong contributor to sales in all three categories, bakery, lunch and warming.

Food continues to be a growing part of our business and fiscal 2006 demonstrated significant progress in capturing some of the potential opportunities we have identified.

We have enhanced our offerings introducing additional reduced fat options in bakery and our new yogurt parfait.

We've added new lunch items, we have expanded our grab and go lunches into new markets and to more stores.

And we saw substantial expansion of our warm breakfast sandwich program more than tripling the number of stores in which it is offered year-over-year.

Let me first bring you up to date on our expansion of lunch.

At the end of our fiscal 2006 we had offerings in 21 markets with the newest being Atlanta.

Our customers now have the option to purchase lunch along with their favorite beverage in more than 4150 locations within the U.S. and Canada.

This is in addition of nearly 1000 locations during the year, an increase of 32% when compared to this time last year.

Think about it this way, lunch is offered in 67% of our U.S.

Company operated locations and 70% of our Company-operated locations in Canada.

Now let's shift to one of our newest food innovations, the warm breakfast sandwiches.

More and more of our customers around the U.S. will be able to enjoy warm breakfast items as we aggressively expand the stores providing warming in fiscal 2007.

In fact, by this time next year, we estimate that approximately 3400 Starbucks stores will feature warmed breakfast items and that is compared to approximately 1000 locations today, which includes our latest market launch in New York in early October.

Not only does warming offer our customers a premium quality breakfast option, but also provides us a nice incremental revenue contribution, delivering approximately $35,000 in additional annual sales to those stores offering the products.

Looking at what is in our stores today, last week marked the return of our popular holiday favorites, including the peppermint, gingerbread and eggnog beverage trio;

Starbucks Christmas Blend whole bean coffee; returning seasonal food favorites; and fantastic gift ideas, which, we believe will strengthen our customer loyalty.

We also brought back the perfect food pairings to accompany our holiday beverages, the cranberry bliss bar and the gingerbread loaf, which offer a tasty indulgence.

Additionally, a favorite customer lunch offering will also be featured again this year, grandma's turkey sandwich, which is available in stores throughout the holidays.

Returning to merchandise, this year's holiday assortment is a wonderful mix of old favorites and new traditions, making Starbucks a convenient destination for our customers' holiday shopping.

Again this year we featured everything from stocking stuffers to holiday serveware to special holiday prices on our brewing equipment.

A few of our merchandise items includes new holiday Bearista Bears, Starbucks exclusive gift packs, two new seasonal Starbucks Card designs, new Hear Music holiday CDs and audio books, and a new ten-cup brewer that is exclusive to Starbucks.

Before I close, I would like spend a little time discussing our ongoing commitment to preserving the core of our company, and that is coffee.

In fiscal 2004, we formally introduced C.A.F.E.

Practices, which helps ensure Starbucks purchases coffee that is grown and processed in a sustainable manner.

Additionally, C.A.F.E.

Practices helps secure Starbucks coffee supply using environmental and social responsible practices.

During the fiscal 2006, we set a goal of purchasing 150 million pounds of coffee through C.A.F.E. Practices.

I'm very pleased to report that we surpassed that goal and will continue our work in this area.

Our new goal is to purchase 225 million pounds of C.A.F.E.

Practices verified coffee during fiscal 2007.

This commitment to preserving our core, coffee, also extends to ongoing education around sustainable coffee practices and our tireless support and efforts of our coffee farmers.

You may have recently seen Starbucks in the media with respect to Ethiopia and trademark issues.

We support the recognition of the source of our coffees and have a deep appreciation of the farmers that grow them.

In fact, between 2002 and 2006, Starbucks increased its Ethiopian coffee purchases by nearly 400%.

Starbucks has recently asked to support a licensing agreement and the trademarking of names used for growing coffee in a coffee area in Ethiopia.

Starbucks has never filed an opposition to the Ethiopian government to trademark an application and we have proposed certification as an alternative solution.

We're committed to working collaboratively with key stakeholders to find a solution that supports Ethiopian coffee farmers.

We stand true to our core and recognize that coffee is important to our continued growth.

With that I would like to turn the call over to Howard.

Thank you.

My remarks today will focus on two areas -- an overview of our international business and a look at recent developments in our Music and Entertainment strategy.

Our international business continues to be a key focal point for the Company.

We have and will remain focused on building upon our solid foundation with a goal to continue to expand our store base through our entry into new markets.

We also seek opportunities to further leverage the brand by introducing products outside Starbucks retail locations, something we have had great success with in the U.S.

During fiscal 2006, we continued to focus on hiring and building strong teams throughout our international business, making relevant connections with local communities, providing legendary service to our customers around the world and increasing our equity stake in several key markets.

Fiscal year 2006 results reflect the progress that we've made with total international net revenues increasing 32% to $1.4 billion and operating income growing 33% to $115 million.

Overall, we now have more than 3600 stores in 36 countries outside the U.S.

We have opened a record number of locations during the year, 665 to be exact.

And we achieved several significant milestones during the year.

Canada now has more than 680 locations.

Japan reached 650 stores.

The UK store count now exceeds 500 locations.

And there are more than 430 stores throughout our greater China region.

This is just the beginning.

We have tremendous opportunities to continue growing in existing markets and now have worked diligently over the past year to ready ourselves for entry into several new and key markets within the coming year.

Our solid financial performance during a time of rapid growth is truly exceptional, and further encourages us to capitalize on the immense growth opportunities that lie ahead for Starbucks.

Before I move on, I would like to highlight our recent launch of the Starbucks Card in the UK.

Beginning this week, our customers in United Kingdom are now able to purchase, reload and register Starbucks Cards at more than 500 Starbucks locations.

The initial response was very, very strong on the first day.

One enthusiastic customer purchased 30 cards in one transaction.

This response suggests that the Starbucks Card will be very popular gift item in the UK and just as successful and well accepted as it has been in North America.

In fact, we have already had to order more cards to supply for the strong demand in anticipation of the holiday season.

Now moving on to a discussion around the growth opportunities available to us.

Not only through entering new markets or opening new stores, but also through opportunistically increasing our equity ownership where and when appropriate.

During fiscal 2006, we took advantage of the opportunity to acquire the remaining 95% ownership of our operations in both Hawaii and Puerto Rico.

These acquisitions provide us with greater influence over the Starbucks brand and will allow us to focus on continued operational efficiencies and growth in these markets.

We began fiscal 2007 with the acquisition of a 90% interest in our Beijing operations.

This represents our continued commitment to invest in what we believe could be the single largest market outside of the United States.

This will allow us to leverage the infrastructure investments we've put in place over the last year, to lead the Greater China market in building a consistent operating platform and delivering the Starbucks Experience to our customers in Beijing.

Our increased equity ownership further demonstrates our commitment to China and through this transaction we hope to accelerate our expansion plans within this market.

As the second-largest city in China, boasting a population of more than 11 million people, Beijing is a key market for Starbucks.

Now let me highlight upcoming new market entries.

Later this month we will open our first Starbucks store in Sao Paulo, Brazil's Financial Industrial Center.

We recognize there is already a thriving coffee culture in Brazil and we look to introduce the local Brazilian communities to our unique coffee experience.

Brazil is an important market for Starbucks not only because it's a source for high-quality arabica coffee beans, but also because it is a market with many growth opportunities for the retail sector as a whole.

We will also open our first Starbucks store in Cairo, Egypt by the end of the calendar year, which is another notable milestone because this will be our first entry into Africa.

Not only is Cairo the capital of Egypt and the largest city in the Middle East, and in Africa, it also has a rich coffee history, coffee culture, with consumers interested in the right mix of ambiance and products.

We believe the Starbucks Experience will provide just that to the people of Cairo.

The Starbucks brand continues to attract more and more interest from communities around the world, which is a reflection of the power of the brand and its relevancy to so many different cultures.

It is the continued high level of community interest coupled with the strong financial performance we have delivered to-date that gave us the confidence to raise our long-term international store count total to at least 20,000 locations in markets outside of the U.S.

With more than 3600 locations today, we have a tremendous runway for growth in international markets in the years ahead.

Now let me provide you with an update on the results of our initial project in the movie segment of our Music and Entertainment business.

Then I will review more recent initiatives in the overall Entertainment category.

As you know, through unique marketing efforts in our retail stores, Starbucks was involved in the theatrical release of "Akeelah and the Bee".

And we were happy to report that following the film's release, we experienced great success with the sale of the DVD in our stores.

In fact, Starbucks ranked among the top four brick and mortar retailers of selling "Akeelah and the Bee".

Our combined four-week market share through the end of the fiscal year was approximately 9%.

Moving now to our entry into literature, you'll recall that during the fourth quarter, we announced the next phase of our Entertainment strategy -- the integration of books into our overall Entertainment offerings.

Our first selection was a novel by acclaimed author, Mitch Albom titled, "For One More Day."

We began the nationwide promotion of the novel on October 3, with in-store appearances by Mitch in eight markets.

Coinciding with that was the first ever Starbucks Book Break, where customers in 32 markets were able to share their thoughts and connect with one another through meaningful discussions of the universal themes of the book.

Our role in the promotion of "For One More Day" was truly successful.

Sales of the book in our stores has exceeded our expectations.

The book has been a New York Times bestseller as well, and as a result of the success and the continued demand on a national level for the book, we will continue to sell the book through the Christmas holiday.

Reflecting on that success with both the book and the film, one point I would like to highlight for you that you're probably not aware of -- and that is that Starbucks in both cases of the DVD and in the book, sold these products at full retail price at a time when these categories are being heavily discounted by other retailers.

Yet we were able to maintain full gross margin on these itemsI think once again, creating an opportunity for us, which our customers really do trust the editorial voice of our Company.

Now moving on to the music component of Starbucks Entertainment.

Last month, we released a new CD from Ray Charles.

That is right.

You heard me correctly, a new CD from Ray Charles appeared in our stores last month.

Starbucks Entertainment teamed up again with Concord Records to co-release and co-market "Ray Sings, Basie Swings," a new album that marries never before released Ray Charles recordings with brand-new performances by the Count Basie Orchestra.

After a strong first week of sales at Starbucks and traditional retailers, this album debuted at No. 23 on the Billboard Talk 200 Albums chart and it has remained there since its release.

Starbucks locations account for more than one-half of all copies of this album in America.

Our newest initiative partners Hear Music with iTunes, an innovative partnership providing online access to our popular Hear Music titles. iTunes users now have the ability to preview, buy and download a wide variety of tunes from Hear Music's library.

The Starbucks Entertainment area and iTunes marks the first time that Apple has allowed editorial guidance and content from another brand that has been developed by a partner to appear with the iTunes store.

Bridging the gap between product in our stores and the digital consumer, we are now looking forward to such opportunities as marketing programs that link physical CDs sales in our stores to unique content online.

This puts Starbucks in a great position to create true entertainment destinations with the next stop in our digital strategy.

We're excited to be working with Apple and iTunes on this innovative buying experience, which will provide our customers the ability to take Starbucks Hear Music tunes with them wherever they go.

The success we have had with music, film and literature, and more recently our iTunes collaboration, demonstrates that Starbucks has truly transformed the way our customers discover and acquire quality entertainment options providing an enriching experience to both them and our partners.

Starbucks has a unique place in the daily lives of our customers and we highly value the trust our customers have placed in us.

We embrace the opportunity to be part of their entertainment discovery and we are committed to selecting music, movie or literature projects that will represent the quality and substance reflective of the Starbucks brand and experience.

This is the same approach we apply throughout our business, seeking products, channels and opportunities that enrich the daily lives of our customers.

In closing, as I reflect on the ten years since we opened our first international store, we have worked diligently over that time, building a solid foundation for our international business, which will allow us to capitalize on the tremendous growth opportunities ahead of us.

Just look at what we have accomplished.

We have entered 36 countries outside the U.S.

We have more than 3600 stores in international markets at fiscal year end with nearly 50 more opened in the last month.

Over that decade, we acquired full equity ownership in six markets and increased our equity ownership position in seven JV markets.

While I am talking about expansion, let's not forget about store development.

It was not that long ago following a great deal of planning and thoughtful review that we began speaking to you about extending our store development strategy to opening drive-through locations in America.

Now just a short time later, we have also expanded drive-throughs to several of our international markets, again demonstrating the strength of the brand which allowed us to extend a relatively new Starbucks concept to our global customers.

We now have a approximately 100 international drive-through locations, including stores in Canada, Japan, Mexico, Saudi Arabia, Puerto Rico, Jordan, Australia, and Indonesia.

In fact, just last month, a near record number of customers joined us for the opening of our newest drive-through in Monterey, Mexico.

In a very short period of time, it has become the gathering place in the neighborhood.

It is often packed from noon to closing in the late evening.

It wasn't that long ago that we questioned whether or not we could extend the drive-through strategy to international markets.

Would drive-throughs appeal to customers outside of America?

Today, we are extremely encouraged by the strong customer adoption of these stores, so early on in the development of our international business.

Also of note, within this decade we have made significant inroads in extending the brand beyond our retail stores by introducing ready to drink beverages in several Asia-Pacific markets.

That is just one of the many opportunities to further leverage our strong brand equity and monetize the equity of the Starbucks brand outside of our stores.

Think about that.

Ten years ago, we had no presence outside of North America.

Today, Starbucks has established a worldwide appeal, not only for our coffee, but the physical environment we have created within our stores.

I believe one would be hard-pressed to find another U.S.-based retailer that has accomplished this much and achieved this much in such a short period time.

The level of global acceptance which Starbucks has achieved is really, really significant.

While this Company has come a long way in a very short period of time, I truly believe we're still in the early stages of growth.

We have a strong business model which has continued to deliver strong returns to our shareholders and we have great confidence in the long-term global potential for Starbucks.

With that, Michael Casey.

Thank you.

This afternoon, I will provide highlights of our financial performance for the fourth quarter and the full fiscal year.

However, before I get into the details, I think I should clarify and put into perspective what appears to be some confusion about the initial -- with the initial reading of our press release today.

There are several net income numbers reported and I would like to line each of them up with how we look at it.

The bottom line for the fourth quarter was earnings per share of $0.15.

But that included $0.02 per share of an accounting -- a new accounting principle, FIN 47 for asset retirement liability.

If you take that out or you back up above that, the earnings per share would have been $0.17 a share for about $134.5 million.

That is 8.7% growth over the previous year.

But when we look at our business on an apples to apples basis, we also exclude the impact of SFAS 123R or the accounting for equity-based compensation.

If you added back the $0.02 per share related to that, our earnings per share would have been $0.19 per share and the net income would be $152 million or 22.8% above the previous year, which is the way we look at the business from an operational point of view.

For both the fourth quarter and the full year of fiscal 2006, our revenue growth continued to be very robust.

Consolidated net revenues grew 21% for the quarter and 22% for the year.

Company-operated retail revenues increased 22% for both the quarter and the full year, driven by the opening of 1040 new Company-owned retail stores in the last 12 months, and comparable store sales growth of 5% for the quarter and 7% for the full year.

Specialty revenues grew 16% for the quarter and 23% for the year, primarily due to higher product sales and royalty revenues from the opening of 1159 new licensed retail stores in the last 12 months.

Before I move on to reviewing other financial highlights, let me mention three items that had an impact on our reported results in the fourth quarter.

Stock-based compensation expense, the adoption of new accounting guidance for asset retirement obligations, and the effect of certain tax items.

As we have discussed in previous quarters, the Company adopted the new expensing requirements for stock-based compensation at the beginning of 2006, with no restatement of prior period results.

The pre-taxed stock-based compensation expense recognized for the fourth quarter was $27 million or $17.5 million net of tax for an EPS impact of $0.02 per diluted share.

For the full year of 2006, stock-based compensation was $69 million net of tax or $0.09 per share.

Please refer to Page 7 of the press release for a breakout of how this expense is allocated in our consolidated statement of earnings.

Next, as we discussed last quarter, new accounting requirements from the FASB related to asset retirement obligations known as FIN 47 were adopted by the Company at the end of fiscal 2006.

For Starbucks as for other retailers with large numbers -- with a large number of leased store locations -- these costs are for the estimated future expense of remodeling leasehold improvements at the termination of the lease.

The cumulative effect of this accounting change was $17.2 million net of tax, or $0.02 per diluted share.

Beginning in fiscal 2007 this accounting requirement will be reflected in the Company's financial statements and will not have a material impact on the Company's results.

Now turning to the tax items.

As I have mentioned several times in the past, fluctuations in the effective tax rate are much more likely now than they use to be.

For the fourth quarter, our effective tax rate was 33.2% compared to 38.1% for the same period in fiscal 2005.

For the full year of 2006, the effective tax rate was 35.8% compared to 37.9% for 2005.

The decline in the fourth quarter was due to recognition of the full-year benefit of a shift in the mix of expected profitability to lower tax international markets and increased effectiveness of the Company's long-term tax planning strategies, as well as several favorable audit settlements, closures and adjustments.

In addition, there was a valuation allowance recorded in the fourth quarter of fiscal 2005, which resulted in a higher effective tax rate for that quarter.

For the full year, the decrease in the effective tax rate was due to the items mentioned above, as well as to the settlement reported in the third quarter of 2006 of a multiyear income tax audit in a foreign jurisdiction, for which Starbucks had established a contingent liability.

Now I would like to elaborate further on our operating results.

Operating income was $198 million in the fourth quarter compared to $197 million in the prior year.

As a percentage of net revenues, the operating margin declined to 9.9% from 11.8% in the prior period.

Excluding $27 million of stock-based compensation expense recognition in the fourth quarter of this year, operating income increased by 14.3% to $225 million, and the operating margin was 11.2%.

Beyond the impact of stock-based compensation is the accumulative impact of various rising costs that we incurred during the period, a significant portion of which related to higher labor costs in our U.S. retail business, which I will review later in the U.S. segment discussion.

For the full year 2006, operating income increased to $894 million from $781 million in fiscal 2006, and the operating margin was 11.5% compared to a record 12.3% in fiscal 2005.

For the full year, the Company's operating margin, excluding the impact of stock-based compensation, improved 0.5% of revenues to 12.8%.

Beginning in fiscal 2007, reported amounts for the current and prior period will be comparable with respect to stock-based compensation.

Fully diluted earnings per share were $0.17 for the fourth quarter of fiscal 2006 compared to $0.16 per share for the comparable period in fiscal 2005, excluding $0.02 cumulative effect of adopting FIN 47 in 2006.

For the full year diluted earnings per share were $0.73, excluding $0.02 for the accounting change compared to $0.61 per share for fiscal 2005.

In summary, in fiscal 2006 we once again delivered strong financial performance, exceeding our 20% revenue growth target, generating same-store sales growth at the high-end of our 3% to 7% range, and delivering EPS growth significantly above our original target of $0.63 to $0.65 per share.

Turning now to the operating segment's results for fourth quarter.

Total net revenues for our United States operating segment increased by 18% to $1.6 billion for the fourth quarter of fiscal 2006.

Company-operated retail revenues grew 18% to $1.4 billion, primarily due to the opening of 801 new Company-operated stores in the last 12 months, and comparable store sales growth of 5% for the quarter.

The increase in comparable store sales growth was comprised of a 4% increase in the number of customer transactions, combined with a 1% increase in the average value per transaction.

U.S. specialty revenues grew by 14% to $247 million in the fourth quarter.

Within specialty revenues, licensing revenues increased 20% to $168 million, primarily due to higher product sales and royalty revenues from the opening of 733 new licensed retail stores in the last 12 months, and to a lesser extent, growth in the licensed grocery and warehouse club businesses.

Foodservice and other revenues increased 3% to $78 million, due mainly to the addition of new accounts in the U.S., bringing our total foodservice reach to approximately 15,000 accounts.

The impact of the growth and foodservice revenues and other revenues was dampened by an unfavorable year-over-year comparison in other revenues, which included revenue from the sales of Ray Charles "Genius Loves Company" CD outside of Starbucks retail stores in the fourth quarter of 2005.

U.S. store operating expenses as a percentage of related retail revenue increased to 43.2% in the fourth quarter of fiscal 2006 from 41.5% in the prior year.

The increase was primarily related to higher payroll expenditures for our U.S. retail stores, due to higher than ideal store staffing levels, the addition of more assistant store managers, and regional support positions and an increase in training hours for store partners and future store leaders.

With our continued aggressive growth in retail stores, the investment in our future store leaders is absolutely paramount.

Accordingly, at the end of fiscal 2006 we had assistant store managers in 77% of our Company operated stores, compared to 68% at the end of fiscal 2005.

We have taken proactive steps to help mitigate rising store operating costs through the additional management focus on more effective store labor deployment, and with our recent beverage and whole bean price increase.

You should also note that the recognition of stock-based compensation expense increased payroll related expenditures in fiscal 2006 versus 2005.

U.S. operating income increased to $240 million during the quarter from $239 million during the same period in fiscal 2005.

The operating margin decreased to 15.2% of related revenues for the fourth quarter of fiscal 2006 from 17.3% for the fourth quarter of fiscal 2005.

The decrease was due primarily to the higher store operating expenses I just noted, and to an increase in cost of goods sold, including occupancy costs.

The cost of sales including occupancy costs increased primarily due to higher green coffee costs, our shift in retail sales mix to products with lower gross margins when compared with beverages, as well as to higher utility and distribution costs, offset in part by favorable dairy costs.

U.S. food revenues grew at a faster rate than overall revenue growth.

Now moving to the international segment.

International total revenues increased 36% to $381 million in the fourth quarter of fiscal 2006.

International Company operated retail revenues increased 39% to $319 million in fiscal 2006, mainly due to the opening of 239 new Company operated retail stores in the last 12 months; comparable store sales growth of 8% for the quarter; and the conversion of Hawaii from a licensed market to a Company-operated market.

The comparable store sales increase resulted from a 5% increase in the number of customer transactions, coupled with a 3% increase in average value per transaction.

International specialty revenues for the quarter increased 24% to $62 million, primarily due to higher product sales and royalty revenues from opening 426 licensed retail stores in the last 12 months and due to sales of ready to drink products in Japan, Taiwan and Korea.

Operating income for international operations decreased to $28 million in the fourth quarter of fiscal 2006 from $30 million in fiscal 2005.

The operating margin decreased to 7.4% of related revenues from a record fourth quarter of 10.9% in fiscal 2005.

This decrease was primarily due to lower reported income from the Company's equity investees, higher store operating expenses, as well as higher other operating expenses, offset in part by lower cost of sales including occupancy.

The decrease in equity investee income was primarily due to accounting corrections, totaling $4.1 million made in the fourth quarter of fiscal 2006 for two of our international joint venture markets.

The increase in store operating expenses and other operating expenses was due to higher payroll expenditures for additional employees to support global expansion, particularly in our Asia-Pacific, China and EMEA markets, and due to the recognition of stock-based compensation expense.

Lower cost of sales, including occupancy, were due primarily to leverage gains from fixed costs distributed over an expanded revenue base as well as favorable dairy costs, offset in part by higher green coffee costs.

It bears repeating past comments that our ongoing investment in our international infrastructure, including investments in emerging markets, will continue and can be expected to cause variability in future quarterly operating margins.

Our overall business model is based on strong revenue growth and moderate margin improvement over the long term, an approach that requires initial infrastructure buildout.

Returning now to the consolidated business, during the fourth quarter, the Company repurchased 14.6 million shares of Starbucks stock at a cost of approximately $474 million under authorized share repurchase programs.

For the full year, 25.6 million shares were repurchased for a cost of $828 million.

Since the inception of our share repurchase program in 2001, Starbucks has returned over $2.3 billion to shareholders through the repurchase of approximately 100 million shares through October 1, 2006.

Our strong balance sheet, continued strong operating cash flows, and the borrowing capacity under our $1 billion revolver provide the Company significant financial strength and flexibility.

This allows us to continue to build and maintain our expanding store base, reinvest into the brand through equity ownership stakes in new markets, and equity contributions to existing JV markets, selectively invest in new growth opportunities, such as China, Brazil, Russia and India, and to repurchase shares.

We also continue to improve our return equity, which reached 25% in fiscal 2006 from 20% in fiscal 2005, and 17% in fiscal 2004.

Let me wrap up by reminding you that Starbucks has a solid track record of delivering on its aggressive financial growth targets.

We have a strong business model that consistently drives approximately 20% top-line revenue growth, primarily through retail revenue growth in our Company-operated stores.

Our track record of 15 years of 5% or greater same-store sales growth is clearly among the best in class for retailers.

And our revenue growth is complemented by our specialty revenues, which are primarily driven by our licensed [stores].

We believe that our unique business model, global presence, and strong brand recognition are all key competitive advantages.

Those factors, as well as the immense opportunities that lie ahead of us, provide us the confidence to set our sites on aggressive targets for 2007.

These include opening 2400 new stores, approximately 20% top-line growth, same-store sales growth in the 3% to 7% range, and earnings per share growth of approximately 20% to 25%.

As you all know, the first half of fiscal 2006 resulted in particularly strong earnings growth, so it is important to keep in mind quarterly comparisons in the first half will be more challenging than the second half of fiscal 2007.

With that I would like to now ask the operator to queue up the first question.

Please ask one question at a time, and requeue for additional questions.

(OPERATOR INSTRUCTIONS).

John Glass, CIBC.

Michael, it sounded like maybe the higher store level labor in the U.S. was a surprise to you in the quarter.

Is there any way to quantify how much margin pressure came from the growth spending rather than maybe just ambient cost pressures?

Maybe you could just look forward, how much of the price increase will -- how much of that will be covered by the price increase as you go forward the next couple of quarters?

I would say that less than half of the margin pressure in the store operating expenses or approximately half, to be conservative, was due to issues within the store and the other half was growth related.

We believe that we're taking the steps both with regard to labor deployment and as a benefit -- and with the benefits of the price increase -- to offset that part of the margin pressure.

Thank you.

Jeffrey Bernstein, Lehman Brothers.

I have a question on margins.

I think you mentioned in your prepared remarks cost of sales negatively impacted by the shift in sales to products with lower gross margins.

Obviously, as you continue to grow your business in the areas other than coffee I would expect this trend to continue.

Just want to hear your thoughts on that and specifically how we should think about cost of sales as we look out to fiscal '07 for both U.S. and international.

Thanks.

I'll take that question.

I think the important thing to remember is that I was talking about the cost of sales including occupancy line when I made that comment.

So the nature of the non beverage products are that they have lower gross margin but they have much less labor activity associated with them.

So at the store level we are equally profitable, whether we sell an extra dollar of beverages or an extra dollar of either food or merchandise or entertainment products.

So the pressure is related to the gross margin line, not to the store contribution line.

I think that is the most important aspect of that.

In the U.S., for the total Company, we are expecting approximately flat gross margins year-over-year, 2007 versus 2006.

If you break it down by segment, we do expect to continue to see some improvement in the international segment as we get an increasing number of stores utilizing the infrastructure that has been built and is continuing to be built in the international market.

And to repeat, the plan for '07, the increase in warming and lunch is baked into our numbers that we are looking at going forward.

Joe Buckley, Bear Stearns.

First just a clarification on the last one.

Mike, did you say you expect the gross margins in the U.S. to be flat or the store-level margins?

We think -- we expect the gross margins year-over-year to be a approximately, in '07 versus '06.

And then just a question on G&A in the quarter and a question on the tax rate going forward, just a full year expectation.

The G&A in the quarter looked, particularly on the U.S. side, very well contained, very low.

There is a couple things mentioned in the release, but can you just talk a little bit about that and what your thoughts are going forward on that line?

And again as I said, just your full-year tax expectations for '07?

Over our three to five-year strategic planning horizon, we expect the primary driver of total Company margin improvement to be G&A leverage.

We expect to maintain our operating margins, perhaps make some improvement, not talking about on a particular quarter, but on a year-over-year basis, modest improvement in operating margins, but as the business grows, to get more significant improvement in the G&A line and to some extent in the depreciation and amortization line, so that we get growth in total Company operating margin.

Within the individual segments, we expect to continue to get operating margin improvement within international, but not to much so within our family of U.S. businesses.

The tax rate -- as I mentioned, the lead-in to that, the tax rate used to be a lot easier to predict when it was done on a longer-term basis.

The current requirements with regard to tax is that every specific event that happens triggers a specific change in that period.

There are going to be more fluctuations in the tax rate.

So we're still targeting the 38% effective tax rate that we have targeted in the past.

But we are encouraged that some of our long-term tax planning activities and the increasing contribution to profit made by our international business over the long term will give us an improvement in the effective tax rate.

But it won't be every quarter and it won't be dramatic in the short term.

Steven Kron, Goldman Sachs.

Can I just quickly ask a follow-up on that G&A question.

In the press release, Michael, it talks about the lower provision for incentive compensation.

Just wondering if you can just put a little bit more color around that.

And then my question is more balance sheet related.

I don't think in the release there was balance sheet information.

Can you tell us how much cash you had at year-end and did you tap into the revolver during the quarter?

Thanks.

To answer the cash question first.

We reduced our -- I believe we reduced our borrowings during the quarter, and we expect to further reduce our borrowings during the very strong operating first quarter.

In G&A -- if you look at the operating results of our business, they weren't as strong in the fourth quarter of this year as they were in the fourth quarter of last year, looking at strictly an operating point of view.

So we have a performance-based incentive comp program and because -- the business wasn't quite as strong, we had a lower accrual for incentive compensation related to the business in the fourth quarter.

Do you have that cash balance as of year-end?

We didn't issue the balance sheet because we are still finalizing the details of FIN 47 as it relates to the balance sheet.

But the cash and cash equivalents were about $313 million.

To correct what I said before, the borrowings at the end of the year were $700 million versus about $300 million at the end of last year.

We have paid that down subsequent to the end of the quarter and would expect to continue so during the very strong first fiscal quarter of the year.

David Palmer, UBS.

You mentioned 3500 stores I think by next year with breakfast versus about 1000 now.

I think that is what you said, and if that is true, that would maybe be 800 or more per quarter.

Is the ramp-up going to be smooth like that or is there going to be a ramp-up in deployment?

Could you perhaps give us a sense of the timetable?

And separately, could you give us a sense of maybe how breakfast is going in new markets where you deploy it?

Are you seeing the same sort of 30,000 per store lift that you were seeing in some markets early on or are you perhaps seeing a bit better performance these days?

On average it is around the 30,000, maybe a shade north of that.

If you take -- if you dive down into the markets --each market is done differently based upon the time it has been in the marketplace.

But when we look at the launch, we have to -- it's no different than we launched this from the inception.

We are taking a balanced approach on a quarter by quarter basis.

And putting again, it'sall into our '07 plan, the resources in place, that we don't affect the in-store experience or the speed of service that the sandwich that -- the warming sandwich that our customers get are up to our own and their expectations.

So this is something that we're doing over the course of the entire year on a balanced approach.

Sharon Zackfia, William Blair.

Can you talk about the reaction of customers to the price increase you took here in the U.S. and also in Japan, and where you think the effective price benefit will fall out for comp here in the U.S.?

This is Howard.

I will start with Japan.

I just came back from Japan.

Our business there is quite good.

It appeared that the price increase was relatively seamless in terms of the announcement.

Feel very comfortable on a go-forward basis.

In the U.S. as I look across all of our markets, all of our regions, we basically see -- are seeing the same thing, a seamless transition over to the small increase and customers continuing to frequent our stores on a same or a higher transaction count basis.

The impact of the price increase is included in our 3% to 7% same-store sales guidance.

Matt DiFrisco, Thomas Weisel Partners.

With respect to margins, and on the international side in the text of the release you say accounting corrections totaling $4.1 million were in part attributed to the margin contraction on the international side.

How should we look at that going forward as far as the direction of margins internationally, especially the first half, given the heady year-ago comparisons?

You should not expect the accounting corrections to reoccur.

That was a onetime event that we don't expect to happen again.

So that part of it would not be repeated.

I don't want to predict the international market -- margins on a quarter-by-quarter basis.

But I do want to reiterate that we expect over any sort of trailing 12-month period compared to a previous trailing 12-month period that there would be noticeable improvement.

But the rate at which we enter new markets, the activity within the various markets, can cause some quarters to be up and some quarters to be down over the next several years as we move forward.

Q1 last year was extraordinarily strong.

That might be one that I would not expect to surpass, but I don't want to get in the business of trying to predict segment margins on a quarter-by-quarter basis in a business that we know is going to be lumpy and it's going to be a challenge to balance the need to build the infrastructure for the tremendous opportunity that is ahead of us versus the also important need to continue to be increasingly profitable.

I just also had a clarification, wanted to make sure.

Did you say that the price increase is going to, in the U.S., meet and offset the cost pressures that are causing some of the margin pressures, and, therefore, hold restaurant level margins flat?

I didn't go that far.

I said that the price increase should have a beneficial effect on the labor pressure that we had in the fourth quarter.

There are all kinds of other things that are going on in the business.

I'm not prepared to predict what the margin is going to be in the first quarter.

Glen Petraglia, Citigroup.

Michael, if you could maybe give an outlook for green coffee prices as well as the Company's use of fixed-price versus price of the fixed contracts in 2007 and how that compares to 2006, that would be great.

Thanks.

Basically the last couple of years we have been seeing increasing green coffee prices and we have in the third quarter of this year and in the fourth quarter of this year, we had approximately a 10% higher green coffee cost in the current period than we did in the previous period.

The good news -- well, sort of the bad news is that the near-term and the futures contract prices in the marketplace have gone up in the last two or three weeks, fairly noticeably.

But the good news in that story is we are basically bought 18 months ahead and that we have done essentially -- the vast majority -- 90% of the purchasing that we need to do in this current 12-month period has been accomplished in the August, September, early October time frame.

So our purchases were ahead of the recent run-up.

So I don't expect any surprises whatsoever in green coffee.

And I expect our costs to level over the next -- absolute costs -- to level over the next twelve months and the comparisons will get better as the prior year green coffee costs come up underneath the fairly flat level that we're going to experience for the next 12 months.

Dan Geiman, McAdams Wright Ragen.

I guess excluding the green coffee, which you just talked about, what are your assumptions as far as commodity prices and other inputs heading into the coming year?

Where do you see the primary pressure points?

Where do you see some areas of opportunity as well?

We currently see favorability in the dairy complex and the milk products that we buy.

Although I have to caveat that with the fact that they can change rather rapidly, and we're not hedged with regard to dairy, but currently we're getting favorable comparisons in dairy.

I think the negative aspect will continue at least in the first half of this year related to energy.

As we compare against periods when the energy costs were not quite so high in the first half of last year and when a number of our vendors, landlords, other business partners, had not fully passed through energy cost increases to us.

That was our final question.

Do you have any closing remarks?

Yes, thank you.

Thank you all for joining us for the earnings call today and we hope you will be back with us for the webcast of our fiscal first quarter 2007 financial results on Wednesday, January 31, 2007.

Thank you.

That concludes today's Starbucks fourth-quarter fiscal year end 2006 earnings conference call.

You may now disconnect.