星巴克 (SBUX) 2007 Q4 法說會逐字稿

Good afternoon.

My name is Mark and I will be your conference operator today.

At this time, I would like to welcome everyone to Starbucks Coffee Company's fourth-quarter and fiscal year-end 2007 financial results 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.

Thank you.

Good afternoon, ladies and gentlemen.

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

With me today are Jim Donald, President and CEO; Martin Coles, Chief Operating Officer; and Pete Bocian, CFO.

Today's call is scheduled for 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 number 4132564.

That's through 5:30 PM Pacific time on Friday, November 23rd and on the Investor Relations page at Starbucks.com through 5 PM Pacific time on Friday, December 14th.

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

This conference call includes forward-looking statements about trends in or expectations regarding store openings, comparable store sales, net revenue, earnings per share, effective tax rate, operating margin, capital expenditures, and commodity costs.

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 in the forward-looking 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 1, 2006.

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

I would now like to turn the call over to Jim Donald.

Jim?

Thanks, JoAnne.

Good afternoon, ladies and gentlemen.

Starbucks' fourth quarter and full-year results reflect our ongoing commitment to deliver on our financial goals.

In a challenging operating environment, we have demonstrated resiliency and discipline.

With that said, there are areas of opportunity within our control to deliver better performance.

We end the fiscal year with encouraging trends and momentum in our international business, and we believe we are in a solid position to continue these trends into this new fiscal year.

We face challenges in our U.S.

business as do others, but we believe we are addressing them and strengthening our business.

Today, I will briefly walk you through our fourth-quarter and fiscal-year accomplishments, as well as challenges and opportunities for us as we move into 2008.

Let me begin with a summary of some of the key highlights of the fourth quarter and the fiscal year.

We reported net revenues of $2.4 billion for the quarter, up 22% from the same period in fiscal 2006.

Fiscal 2007 net revenues reached $9.4 billion, a 21% increase over last year.

Operating income for the fourth quarter was $248 million, up 25% from a year ago and $1.1 billion for the year, an 18% increase year over year.

We delivered earnings per share of $0.21 for the quarter compared with $0.15 per share a year ago, and for the full year, EPS was $0.87 compared to $0.71 in 2006.

And we delivered comparable store sales growth of 4% for the quarter, driven by a 4% increase in the average value per transaction.

For the full year, comparable store sales growth was 5% comprised of a 1% increase in transactions and a 4% growth in the average value per transaction.

New store openings continued at a good pace as we opened 615 stores in the fourth quarter to end the year with more than 15,000 stores in 43 countries.

As we enter fiscal 2008, we continue to examine the steps necessary to both capture the significant long-term opportunity that exists globally while we deliver on our financial targets for the year.

Early in the fourth quarter, we took a step in this direction with the realignment of our executive management team, which included the addition of a chief operating officer.

Our team is sharpening our focus on operational execution while supporting our long-term growth.

We have developed a strong bench of leaders, as evidenced by this realignment, which was accomplished entirely with internal candidates.

Martin Coles, who recently led our international business, is now our COO.

His proven expertise in global operational excellence is invaluable and we look for his lead in optimizing day-to-day operations as we continue our global expansion.

Launi Skinner, our new President of the U.S.

business, has been a Starbucks partner since 1993 and has served in a number of increasingly critical operations positions in the field.

Most recently, she held a leadership role in store development, guiding the U.S.

business through its significant store growth.

And Jim Alling, who led the rapid expansion of the U.S.

retail business, is now leading our international business, where he brings strong operational experience, not only in our retail business, but also in foodservice and licensed partnerships.

Turning to U.S.

retail, we will spend considerable time on today's call discussing the challenges and the opportunities in this business.

But before we do that, I want to quickly acknowledge some of the accomplishments for the fourth quarter and the year.

Of note, U.S.

retail delivered 19% revenue growth for both the fourth quarter and the full year.

During the year, we opened a total of 1,065 net new company-operated retail stores, and within that total, we continue to grow our drive-through presence to meet the convenient needs of our customers.

There remains significant opportunity for our drive-through mile in North America.

We like both the geographic expansion options and the attractive unit economics of this store format.

We ended the year with nearly 2200 drive-through locations, making up more than 30% of our U.S.

company-operated store base.

We ended the year with [one] in over 3,000 U.S.

locations, an increase of nearly 2400 stores during the year.

We also expanded our lunch program by more than 1,000 locations.

Lunch is now available in more than 70% of our U.S.

Company-operated retail store base.

During the fourth quarter, we entered into a strategic alliance with Apple, allowing our customers to digitally download music from the iTunes Wi-Fi music stores at participating Starbucks locations.

The Starbucks Card reached two key milestones during the year, driven by our activity in our U.S.

Company-operated locations.

For the first time, customers both loaded and redeemed more than $1 billion during a fiscal year.

To put that into context, it took three years from the time we launched the card for customers to load the first $1 billion.

Turning to comparable store sales for the U.S.

segment, in the fourth quarter, we saw transaction trends decelerate from those experienced in the second and third quarters.

The average value per transaction increased 5% in quarter four while traffic decreased by 1%, resulting in a 4% comparable store sales growth.

For the full fiscal year, U.S.

retail delivered 4% comparable store sales growth, nearly all driven by the average value per transaction.

While we did report U.S.

comparable store sales within our stated range for the consolidated business both for the quarter and the year, we did it through two price increases and we recognize that the flat to negative trends needs to be addressed.

The pressure we are seeing on the traffic isn't entirely unexpected, considering the challenging operating environment and similar trends reported across both the retail and the restaurant industry.

It is apparent that our customers are feeling the impact of the economic slowdown.

We believe the combination of this slowdown and the price increases we implemented in 2007 to help mitigate significant cost pressures within our business, such as dairy, have impacted the frequency of customer visits to our stores.

Despite that, we believe there are opportunities within our control to increase traffic into our stores.

And today, we will share with you specific initiatives underway to do just that.

I will outline the general areas we're working on and then Martin will expand upon these initiatives in his remarks.

First, the greatest opportunity for us is to sharpen our focus in our core business and be uncompromising when it comes to executing our standards.

We built this brand, and quite candidly, this industry, on the Starbucks Experience, connecting with our customers by delivering the highest quality coffee and handcrafted beverages in a warm and inviting store environment.

And while we have not been executing consistently to our standards, we are committed to getting back to those levels.

Second, we have a significant opportunity to attract more customers to our stores through avenues not tapped by us historically.

And third, we plan to drive beverage sales by recapturing the consistent quality our customers expect from our core beverage lineup and delivering meaningful innovation.

This focus will result in new products that reflect our core high-quality handcrafted beverages.

We remain committed to delivering high-impact innovations that surprise and delight our customers and increase traffic in our stores.

To help with this focus, we have also re-examined the velocity at which we are opening new stores in the U.S.

and decided to further revise our fiscal 2008 U.S.

Company-operated store opening target.

We now plan to open 900 Company-operated and 700 licensed locations in the U.S.

this year.

By reducing the pace, we expect to improve our ability to select both the location and the store format that are the best fit for our customers and the business.

Before I turn the call over to Martin, I want to address the growing level of interest of others to participate in the specialty coffee industry as well as the economic trends.

I think it's important to discuss these issues side by side to ensure appropriate weight is given to the challenging operating environment and to emphasize that we remain the clear leader in this industry.

Starbucks built this market and the customer awareness, which has resulted in a growing demand for specialty coffee in the U.S.

We are in the enviable position of having an incredibly loyal customer base, something that we work hard to preserve day in and day out.

We have delivered years of strong results because we have differentiated ourselves in a way that can't be duplicated.

Considering the challenging macro economic factors, our call to action at this time is to ensure that we are consistently executing against the unparalleled Starbucks Experience on which the brand and our customers' loyalty was built.

With our renewed focus, we believe we are poised to not only maintain our leadership position during these tough economic times, but to capture significant growth in this business for the years to come.

I want to emphasize that we believe we have a solid grasp on the opportunity for substantial growth, that we are in a position of strength to be able to execute our strategic plan and deliver long-term shareholder value.

We are keenly aware of the current economic conditions and have a great respect for the competitive landscape.

But we believe the opportunity is within our control.

We remain committed to our global growth strategy and continue to see significant potential to broaden our footprint, both domestically and outside the U.S.

We are also committed to executing on our growth thoughtfully, strategically, and with a disciplined approach to ensure we meet our profit and return targets.

I'm now going to turn the call over to Martin, who will walk you through more details on specific initiatives slated for fiscal 2008.

Martin?

Great.

Thank you, Jim, and good afternoon, everyone.

Let me start today by stressing that from an execution perspective, we are already working on many of the initiatives that Jim has just outlined for you, the first of which is a significantly enhanced focus on operational excellence and consistency.

Consistent execution of our standards means reducing complexity to free up time for our operators in the field to get closer to our customers.

This includes fewer and more powerful promotions, SKUs and new programs rolled out to our stores.

In other words, what we internally call focusing on the vital few, those areas of focus that truly make the difference in winning the loyalty of our customers.

We are also providing our field leadership the support necessary for them to spend significantly more time in their stores.

Specifically, our district managers, who typically manage eight to ten stores each, will now spend close to 80% of their time in the stores, helping with the execution.

By materially increasing the time our field leadership spends in their stores, connecting with our store partners, we believe we will have a much better opportunity to share the direction of the Company while developing stronger business skills and focusing our work as a team to improve the overall store environment and execution against our strategy.

From this, we expect to see enhanced partner engagements, which ties, we believe, directly to our customers' experience and therefore, traffic, in our stores.

We also have a significant opportunity to attract customers to our stores through a more robust and integrated marketing strategy.

We're in a very good position to tap into tools not used by Starbucks to date, with the launch of our first national television campaign, highlighting our holiday promotion.

This is an important season for us and we've created a compelling campaign that keeps our offerings top of mind with our customers with a TV component reaching our customers at a store and in their homes.

During the holiday season, customers look to Starbucks as a beacon of a very special celebration of community.

Our integrated campaign will increase customer awareness and engagement by highlighting those critical factors which differentiate us -- our connection with customers through the highest quality coffee and handcrafted beverages in our [surplus] environment that exists only at Starbucks.

We believe the overall campaign, coupled with targeted advertising, will capitalize on our brand awareness while driving both new and existing customers into our stores.

We will focus on driving beverage sales by recapturing the consistent quality that our customers expect from our core beverage lineup, while delivering meaningful innovation.

Ensuring consistent quality of every beverage we serve is absolutely core to creating the Starbucks Experience.

We are analyzing every aspect of what it takes to deliver that quality by implementing initiatives such as additional training for new baristas that specifically focuses on drink preparation and by collecting feedback directly from our customers on our performance with an enhanced customer survey tool.

Through this tool, customers are randomly invited through their register receipt to provide feedback on their store experience, which is then passed on to our store managers.

We believe that this tool provide us with additional insights to ensure that we are consistently delivering the Starbucks Experience.

In the arena of meaningful innovation, we are aggressively focusing our efforts on fewer, more powerful and differentiated beverage products.

You will continue to see beverage innovation, but the pace will reflect a renewed focus of relevancy to our core.

That is our coffee and the coffeehouse experience.

So turning now to our holiday promotion, which launched in stores last week, we are focusing on three key areas to drive sales in our stores -- beverages, the Starbucks Card, and Starbucks Christmas Blend.

We will be featuring the familiar holiday beverage trio of Peppermint Mocha, Gingerbread Latte and Eggnog Latte.

We believe these much-anticipated favorites will be sure to bring more customers into our stores during the busy holiday shopping season.

In addition to two new holiday card designs, we've also introduced a unique card innovation, called My Customized Starbucks Card for the holiday season.

For the first time, customers may purchase a voucher in our stores and then go online to our Web site to personally design their own distinctive Starbucks Card.

This will also work great as a gift, as the voucher can be purchased in a gift box and the recipient can redeem and design their personalized card online.

While this has only been in store for a few days, initial response to this new card has been very strong.

Starbucks' second quarter typically sees the highest level of quarterly Starbucks Card redemptions, and we believe this new twist on the card will provide yet another incentive to choose Starbucks.

On the merchandise side, our signature Holiday whole-bean coffee offering, Starbucks Christmas Blend, signifies the start of the holiday season, and it will be part of what we believe is a lineup of unique gifting items that customers have come to love and expect from Starbucks.

So all in all, the message I want a leave you with is that we are very focused on a number of initiatives that are dedicated to improve traffic in the United States.

So moving beyond the specific initiatives that I've outlined, we also have the opportunity to better leverage our growth across the back end of our operations.

Specifically, as we have analyzed opportunities to mitigate the recent trends in the United States business, we believe we can better align our support and size our infrastructure to handle changes in transaction volumes as we continue our global expansion.

Our goal is to take advantage of our enterprise scale while fueling innovation and driving operational excellence in our stores.

So turning now to international, we finished the year with strong momentum.

Revenue growth was 31% for the fourth quarter, the ninth consecutive quarter with revenue growth of 22% or higher and 30% growth overall for the year.

Also during the fourth quarter we posted double-digit operating margins, our second-highest in the last eight quarters.

This improvement demonstrates our focus and our commitment to growing revenue profitably, expanding our operating margins steadily, and leveraging our large core markets, while expanding into newer markets for future growth.

Pete will provide further color on the international operating margin and targets for 2008 later in this call.

By the end of the year, we had more than 4300 stores outside the United States.

Our Greater China market opened 126 locations during the fiscal year, second only to Canada in the number of stores added in an international market during the period, and ended the year with more than 560 stores.

We are in a good position leading up to the Summer Olympics in 2008 and we continue to have a great deal of enthusiasm about the opportunities that Greater China offers.

In addition to expanding in existing markets, we opened stores in several new markets during the year, and these included Brazil, Denmark, Egypt, Romania, the Netherlands, and most recently, Russia, with the opening of our first store in Moscow.

The Russian market is especially encouraging to us, having experienced a very strong reception to our market entry.

The average ticket of that first store is running at the high end of any of our new market opening, which bodes very well for us as we further build out our presence in this very large market.

Our efforts to expand our international footprint will continue into fiscal 2008, with a continued focus on extending the geographic reach of our existing joint venture business partners when and where the opportunity arises.

Our established successful partners provide for strong entries into new markets and provide greater efficiencies, allowing us to gain leverage by building larger regional businesses.

Examples of this include our entry into Argentina later this fiscal year with our experienced and successful partner in Mexico, Alsea, who is also a minority partner in our Brazilian market.

You will see a similar leverage of partnerships to expand our presence in our Europe and Middle East region.

Our recent example was our entry into Russia with our existing partner for the Middle East and Turkey, MH Alshaya.

By entering these diverse markets, we are further laying the groundwork for capturing a long-term international opportunity while leveraging the scale and expertise of existing partners.

So today, our international business spans 42 countries, but it is really the maturity and scale of our developed markets, in this case, Canada and the UK, that fuel a revenue growth, allowing the smaller countries to gain experience and gradually build out scale over time.

When we look at profit contribution, Japan's performance joins Canada and the UK with the three markets providing the financial flexibility to balance our investment and expansion with profitability.

Let me turn now to our consumer product goods business, or CPG, and the growth in both our packaged coffee and tea in our ready-to-drink businesses continues as we expand into new markets and further develop established channels.

Market share by volume for packaged coffee in the United States continues to grow for both the Starbucks and Seattle's Best Coffee brands.

And extending our relationship with Kraft during the year to include distribution in Canada and the UK has given us further leverage in the strength of this relationship.

We continue to maintain our significant presence in the U.S.

ready-to-drink market with an 85% market share in 2007.

Our opportunity now lies in building similarly strong customer acceptance and brand recognition in international markets.

Internationally, our ready-to-drink platform in the Asia-Pacific region reached several significant milestones during the quarter, which include selling over 100 million beverages in Japan and achieving 99% penetration in the all-important convenience store segment within that market.

Also, the expansion outside North America of our PepsiCo partnership with the establishment of a multi-country agreement.

We were excited to launch Starbucks bottled Frappuccino ready-to-drink beverages in China on November 1.

And we were in the unique position of being able to leverage our brand through products like bottled Frappuccino beverages.

Starbucks' reputation of delivering the highest quality beverages in our stores extends to our ready-to-drink business and allows us to introduce new customers to the Starbucks Experience outside of our retail locations.

The introduction of bottled Frappuccino beverages in China will help Starbucks' brand awareness in this important market, attracting new customers to our existing stores while also increasing the demand for new stores.

The expansion of ready-to-drink beverages and packaged coffee and tea into our international markets clearly demonstrates the vast opportunity we have to extend the Starbucks Experience beyond our stores.

So in closing, as I look ahead in my new role, I'm fully aware of both the opportunities and the challenges ahead of us.

I take very seriously the responsibility of leading our passionate, dedicated partners around the world to the next level of operational excellence.

And I can say with absolute confidence that we were up to the task.

We're well positioned to execute on the initiatives we have established and I look forward very much to updating you in late January on our progress.

So now let me turn things back over to Jim for his final remarks.

Jim?

I would now like to take a moment to recognize the tremendous contribution that Michael Casey has made to this organization in his 12 years as Starbucks' CFO.

During that period of time, our Company experienced spectacular growth.

With Michael in the critical role of Chief Financial Officer, we were able to aim higher and in many cases, exceed our goals.

His disciplined leadership and strong commitment to Starbucks' success have delivered value to our shareholders over the years, and his contribution has been recognized externally as well, as he has received several awards for his accomplishments, most recently, CFO of the Year from Institutional Investor magazine.

October 1st, Michael stepped aside as CFO in preparations for his retirement early next spring.

I can't think of many CFOs of FORTUNE 500 companies who have held their position for that length of time.

This speaks to his tenacity and commitment and his dedication to Starbucks' partners.

I would also like to thank Michael for his commitment to transitioning Pete Bocian into the CFO role.

We wish Michael the best of luck.

Before I turn the call over to Pete, let me just recap a few things.

We posted solid financial results for the fourth quarter and the fiscal year 2007, which is noteworthy, given the economic environment.

While there are clearly challenges in our U.S.

retail business, we believe there are significant opportunities within our control to improve our results.

Today we outlined for you some of the changes we are making to address these challenges and continue on the path towards building long-term shareholder value.

We ended the year with momentum in our international business that we believe will continue into fiscal 2008.

We have a strong leadership team that is appropriately aligned to execute our strategy.

I'm confident in our ability to deliver on the significant opportunities within our control.

We are a nimble and determined organization that has the passion, the discipline, the strategy, and the brand strength to capture the global growth opportunities ahead of us.

Now Pete will provide you with a review of the quarter and the year and our outlook for 2008.

Pete?

Thanks, Jim and good afternoon, everyone.

It's a pleasure to join you on my first earnings call as Starbucks' CFO.

Today I will provide some additional color on our reported financial results for the fiscal fourth quarter and the full year.

I'll also review our latest outlook for fiscal 2008.

Let me start first with a look at total Company fourth-quarter results.

Revenues for the fourth quarter of 2007 were up 22% to $2.4 billion from $2 billion a year ago.

Comparable store sales growth was 4% for the quarter, all driven by an increase in the average value per transaction.

While the U.S.

performance was weaker than we expected, specifically with respect to traffic, we are encouraged by the strength in our international comparable store sales growth.

Operating income increased to $248 million for the quarter from $198 million in the prior year.

As a percentage of total net revenues, operating margin increased to 10.2% from last year's fourth quarter margin of 9.9%.

The year-over-year improvement was the result of lower store operating expenses and general and administrative expenses as a percent of revenues, coupled with price increases taken in fiscal 2007.

Those factors helped offset the shift to higher cost products and the impact of higher dairy costs.

Earnings per share increased to $0.21 in the fourth quarter compared to $0.17 per share for the comparable period in fiscal 2006, excluding the $0.02 negative impact a year ago from the required accounting change related to asset retirement obligations.

Non-operating factors impacting net earnings for the quarter included a higher effective tax rate year over year and a higher interest expense, primarily related to an increased level of debt.

Let me now move to fourth-quarter results for our operating segments.

Beginning with the U.S.

business, total net revenues increased by 19% to $1.9 billion in the fourth quarter of fiscal '07.

Company operated retail revenues rose 19% to $1.7 billion for the quarter, driven by the opening of 1,065 new Company-operated retail stores in the last 12 months and comparable store sales growth of 4% for the quarter.

The growth in same-store sales was driven by a 5% increase in the average value per transaction, which resulted from the two price increases implemented in fiscal '07 and from increased food sales.

Partially offsetting the ticket increase was a 1% decrease in transactions.

U.S.

cost of sales, including occupancy costs, as a percent of total revenues increased to 41.7% compared to 39.4% in the comparable period a year ago.

This was due to higher dairy costs, which contributed nearly 100 basis points to the increase and a shift in sales mix to higher cost products, adding approximately 70 basis points of impact.

The shift in sales mix was primarily due to higher sales of food and merchandise.

U.S.

store operating expenses improved 90 basis points to 42.2% of related U.S.

retail revenues, resulting primarily from leverage gained within the business.

Partially offsetting these reductions were higher payroll-related expenditures in fiscal 2007 stemming from the Company's October 2006 wage increase for hourly store partners and the second-quarter salary increase for our store management partners.

U.S.

other operating expenses improved significantly to 24.3% of related specialty revenues in the fourth quarter of fiscal '07 from 27.4% in the prior year, primarily due to lower salaries and benefits as a percentage of related specialty revenues and due to lower discretionary spending.

U.S.

operating income increased to $225 million during the quarter from $201 million during the same period in fiscal 2006.

The operating margin declined to 12.1% of related revenues for the fourth quarter of fiscal '07 from 12.8% a year ago with cost of sales, including occupancy, as the largest contributor to the decline.

Now moving to the international segment, international total net revenues decreased -- I'm sorry, increased 31% to $472 million in the fourth quarter of fiscal '07.

Company-operated retail revenues increased 32% to $399 million in the fourth quarter of fiscal '07, mainly due to the opening of 277 new Company-operated retail stores in the last 12 months, favorable foreign exchange for the British pound sterling and Canadian dollar and comparable store sales growth of 6% for the quarter.

The comparable store sales increase resulted from a 5% increase in the number of customer transactions coupled with a 1% increase in the average value per transaction, reflecting another quarter of strong growth in our international retail business.

International operating income increased to $51 million in the fourth quarter of fiscal 2007 compared to $21 million in fiscal 2006.

Favorable foreign exchange was not a significant contributor to the increase.

We delivered strong operating margin improvement to 10.8% of revenues from 7.3% in fiscal 2006, primarily due to lower general and administrative expenses and store operating expenses as a percent of net revenues, as well as higher income from equity investees.

Over time, we expect further leverage from the investments in our international business and significant margin improvement in fiscal 2008, which I will comment on later in my remarks.

Our third business segment is our Global Consumer Products Group or CPG.

CPG total net revenues increased 44% to $110 million in the fourth quarter of fiscal 2007.

This was driven mainly by increased sales of packaged coffee and tea in the U.S.

along with increases in product sales and royalties from the international ready-to-drink business.

Operating income for CPG was $62 million in the fourth quarter of fiscal 2007 compared to $47 million in fiscal Q4 of 2006.

The operating margin decreased to 56.9% of related revenues from 61.8% in fiscal 2006.

This decline was due to slower growth in equity income from the North American coffee partnership due in part to higher dairy costs.

Now for a few comments on Starbucks' balance sheet.

In August, the Company issued $550 million of 6.25 10-year notes as part of our strategy to reduce the overall weighted average cost of capital for the Company.

Proceeds from this offering were primarily used to repay short-term borrowings and fund additional share repurchases.

As we take a longer-term outlook on the Company's capital structure, any additional funding would be consistent with the Company's strategy of targeting leverage and coverage levels to be roughly in line with a high BBB rating over the medium-term, which is where we are at today.

During the fourth quarter, the Company repurchased 12.6 million shares of common stock under the current authorized share repurchase program for a total cost of $342 million.

This brings total share repurchases for the fiscal year to 33 million shares at a cost of approximately $1 billion.

At the end of the fiscal year, approximately 13.5 million shares remained available for repurchase under our current share authorization.

Since the inception of our share repurchase program in 2001, Starbucks has returned nearly $3.4 billion to shareholders through the repurchase of 132 million shares through September 30th, 2007.

For the full year, we generated $1.3 billion in cash from operating activities compared to $1.1 billion in the prior year.

Capital investments for the year totaled $1.1 billion compared to $770 million in fiscal '06.

Our investments in 2007 equated to about 11% of revenue, which was slightly higher than the past few years.

Of our fiscal 2007 expenditures, approximately 80% was in support of store growth and maintenance.

To wrap up my discussion on fiscal 2007, let me recap how we performed against our four key financial targets.

Store openings, we targeted the opening of 2400 net new stores globally and we finished fiscal 2007 at 2,571 new stores, 1788 in the U.S.

and 783 in international markets.

Comparable store sales growth of 5% fell right in the midpoint of our stated range of 3 to 7% growth while the transaction comp for our U.S.

business was well below our expectations.

We achieved revenue growth of 21%, just about at our stated target of approximately 20% growth.

In fiscal 2007, earnings per share came in at $0.87, which was at the low end of our original target range as pressures from dairy costs and soft transaction comps in the U.S.

limited our ability to get to the upper end of the range.

In summary, we achieved solid performance despite headwinds from dairy in a challenging economic environment.

We also recognize that our performance did not meet our internal expectations, particularly the performance of our U.S.

business.

We have a renewed focus on this business, and we expect to make improvements beginning in this fiscal year.

Before I move on to discuss 2008, I wanted to share my own observations leaving 2007.

We are on track to open 10,000 stores between 2007 and 2010 and we believe in the long-term market opportunity for the 40,000 store count.

As I look at China and have had the opportunity recently to meet with our business partners and our own regional leadership in the international space, I see enormous opportunity there.

We increased revenues over 20% in 2007 and generated over $1 billion in operating income and $1.3 billion in cash from operating activities.

In other words, financially, we are very healthy.

That said, it's a more challenging environment from an economic, operational, and competitive standpoint.

While I believe we've managed through these factors and delivered in 2007, we also need to step up our focus in several key areas.

As Jim and Martin mentioned, we need to work on better operational excellence at the store level and better, more meaningful innovation to continue to differentiate our store experience.

Also, as Martin mentioned, we need to give the business model more room, get more efficient and effective in the back end and be more capable of navigating through some of these fluctuations in the external environment.

Now I would like to update you on our fiscal 2008 outlook and financial targets.

Throughout 2007, we saw consistent weakening in our U.S.

business with a negative trend in transactions exiting the year.

Our goal in setting targets for 2008 is to balance the long-term opportunity for store growth with the near-term reality.

We plan to execute on the key initiatives that Jim and Martin outlined and deliver improved operating margins with significant margin expansion in international.

Given an expected continuation of this challenging operating environment, we are updating our targets as follows -- as Jim mentioned, in the U.S., we are now targeting opening approximately 900 new Company-operated stores with the same 700 licensed store openings we previously stated.

International openings remain unchanged, at approximately 900 net new stores, comprised of 300 Company-operated and 600 licensed stores.

In light of the weaker transactions we experienced in 2007, a trend shared by many others in the consumer space, we now expect comparable store sales growth in the range of 3 to 5%.

Total net revenue growth is expected to be in the range of approximately 17 to 18% to over $11 billion.

We expect operating margin improvement in 2008 as follows -- total Company operating margin is expected to expand slightly year over year.

Given the continued pressure from dairy costs along with the other factors we previously discussed today, we expect the margin to contract in Q1 but to improve in the second half of the year to deliver margin expansion year over year.

This will be driven by our U.S.

initiatives and improvement in our international business.

We expect the U.S.

operating margin to remain relatively stable for the full year and we expect the international operating margin to expand by at least 100 basis points year over year to achieve over 9% for the full year.

We're targeting earnings per share in the range of $1.02 to $1.05, representing 17 to 21% growth.

Given the current economic and operating environment, we are also providing specific guidance around Q1 EPS.

With ongoing dairy cost pressure, which, in this first quarter alone is $0.02 of headwind to EPS, and expectations of continued softness in the U.S.

consumer and economic environment, we are currently expecting Q1 EPS of $0.28.

For the full fiscal year range, we factored in the impact of dairy costs, which are not expected to ease until the latter part of the year, along with the challenging environment.

All said, EPS expansion is expected to be greater in the second half of fiscal 2008.

For fiscal 2008, we expect an effective tax rate in line with the 2007 reported rate of approximately 36% and capital expenditures also to be in line with the $1.1 billion invested in 2007.

In summary, we believe these targets are balanced for 2008.

We will continue to build out stores to take advantage of the global opportunity.

We will better execute on our U.S.

business, we will grow and deliver significant margin expansion in international and overall, will deliver margin improvement for the Company.

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

(OPERATOR INSTRUCTIONS).

John Glass, CIBC.

Thanks.

A question maybe for Jim or Martin.

Negative traffic in the U.S.

could come from a lot of different things, cyclicality, competition, even your own overbuilding.

And you seem to believe that a lot of it has to do with your own execution.

And I'm wondering what you mean by that.

What feedback or metrics you've seen in your stores that make you believe that there is an opportunity there other than the usual opportunities to improve, if you could talk a little bit about that, please.

John, it's Jim.

I think that when we look at the softness in transactions, there's a couple things unfolding and I mentioned them in my remarks.

There are other operators in this specialty coffee business but that doesn't necessarily link in to this softness in comps.

I think what you have to look at is the -- just the pure and simple economic trends that we see.

However, having said all of that, the point that Martin was making on delivering the execution, reducing the priorities of our partners to focus in on the core of our business, which is coffee, which is taking care of the customer; and on the back side of this, reducing the priorities to continue to deliver on innovation by removing some of the say line extensions we've done in the past; I think that's what we're referring to in our ability to improve our execution.

The three points that Martin made, whether it has to do with the district managers starting to execute to those standards, it all plays in.

Martin, do you have anything to add to that?

yes, John, thanks for the question.

Our focus is going to continue to be laser like over the course of the next year and the basics of the customer experience, and let's be clear here.

The full customer experience comes to life every day over those individual transactions between our customers and our baristas 45 million times a week.

So for us the focus is on creating great products, great customized products, continued create great human connections and to continue again to focus on the food place environment as a space of sanctitude and in some cases sanctity for our customers.

So it's all about every store, every customer, every day and focusing on the consistency and excellence of that experience.

And we believe that there is -- there continues to be significant upside there.

Glen Petraglia, Citigroup.

Thanks.

Jim or Martin, in terms of the consumer weakness that you highlight, we've generally thought and I think we are not alone, that your products are generally considered an affordable luxury.

And you know, your comments suggest that perhaps you are even more discretionary than we thought, and I was hoping you might be able to help us think about.

And then is there a particular day part that you are seeing weakness?

Is it the late afternoon where it's generally more snacky versus the breakfast where it's perhaps more routine?

Thanks.

Yes, Glen, thanks for the question.

I'm not sure there's a particular day part that I would point to as seeing weakness.

In general, I think our customers across the United States are experiencing a very similar phenomenon, whether it's through the increasing gas prices, the overhang from the breakdown in the mortgage market, increasing dairy prices or cost of living for them in general.

For us here, the focus continues to be in making sure that we create the value proposition that is uniquely Starbucks by making sure that we deliver on that great tasting and great executed beverage, again, in the store environment they have come to expect and appreciate, but most importantly through the great relationships that exist between our partners, not just in the United States, but across the world.

So again, it comes back to one cup at a time, one transaction at a time and one relationship at a time.

Sharon Zackfia, William Blair.

Good afternoon.

I don't know if Howard is around, but I think historically he has been pretty anti the idea of doing television advertising.

So I guess just curious about how long this has been incubating.

And is this a onetime kind of seasonal campaign or should we expect ongoing campaigns?

And is it a reallocation of the marketing budget or is it incremental?

This is Howard.

I am here.

So thank you for the question.

I wouldn't read into the advertising initiatives too much.

I think it's a natural evolution of the maturity of the brand and the experience and the fact that we think we can get an enormous, leverage given the national footprint we have in major markets as a result of the TV campaign.

I also think that we need to recognize that the category is evolving.

And as the leader, we have an opportunity to make sure that our voice is heard through the all-important medium of television.

And I think we are excited about this.

I think it's the beginning of a new opportunity for us.

And we will review it and look at it and measure it.

And I think in the future you will probably see more of it, but I wouldn't read too much into it.

I do think it's the evolving nature of the equity of the brand.

And I think it's also important to note that we feel very strongly that the experience that we have created over a long period of time, three plus decades, gives us the opportunity to continue to differentiate our brand from everyone else that is entering this category because the experience is what has built the category and built our Company.

And as we do our own research and understand from our most loyal customers as well as those that come less frequently, it's that experience that has defined the differentiation between us and everyone else.

And we will continue, as Martin and Jim have said, to make sure that we create new separation in the marketplace between ourselves and everyone else.

Steven Kron, Goldman Sachs.

Thanks.

Three related questions on the traffic front.

First, can you just make a comment as to how the first-quarter traffic is trending?

Has that worsened since we exited the fourth quarter here or what you reported in the fourth quarter?

Second, you took down the consensus or where consensus is currently at in modeling for the first quarter by a few cents and the full year by the same, which implies to me that maybe the expectation is that traffic will improve in the second quarter and beyond.

Can you maybe comment on whether that's what you are baking in?

And if so, what's going to drive that.

And which leads me to the third question, which is you talk about meaningful beverage innovation, and I was hoping to get a little bit more color on that, because really, if I think about the competitors coming in and bringing products to market that are similar to what you have, the opportunities to really expand your reach to something and raise the bar a bit; I was hoping to get a little bit more as to what types of beverages and what things might be kind incubating at this point.

Steven, I will handle the first two and then Martin will handle the initiatives questions, the innovation question.

As Martin said, we just introduced holiday and a lot of the first quarter is back end loaded towards December.

So we won't know the quarter till we get through the next six weeks.

Our intent in providing the EPS estimate for Q1 was to give you a sense of how we thought we would start with both dairy.

And really what's baked into that is a similar transaction environment to what we saw in the U.S.

in Q4, okay?

So we think there's a couple of headwinds, but we have a lot of initiatives around improving that balance of year.

As I look at the EPS guidance, the $0.28 fits within the $1.02, $1.05 for the year.

And really I look at the $1.02, $1.05 to be consistent with our long-term goals, which we said we would build 10,000 stores in the next four years.

This would be 5,000 if you add the '08 number.

We said we would double the Company in four to five years, and we did 21% in '07.

We are looking at 17 to 18% in '08.

And then we've got to focus on growing EPS through operating margin faster than revenue.

And really that's what this outlook for the year reflects with EPS expected to be 17 to 21% while we grow revenue 17 to 18%.

So still uncertainty around the economic environment, but we do believe there's a lot in our control to drive to good improvement on our path towards our long-term objectives.

So Martin, on the third question?

Yes, thanks, Pete.

Steven, thanks for the question.

So what I want you to understand is that we are as committed to innovation as we ever have been.

And in fact, we are aggressively focusing our efforts on, as we said, more meaningful innovation, which means in my terms, at least, high impact innovation, reflecting our core.

It also means that the pace of introductions will reflect this new focus.

So going forward you should expect fewer but more powerful beverage introductions, focused around our core coffeehouse experience.

And in specific terms, this means that from the point of view of whether it's a latte-based beverage, an espresso drip or a Frappuccino item in our lineup, that our innovation focuses on making sure that we give the very best experience the customer can expect in any one of those formats on any particular day.

Let me just add to that.

When we examine the competitive landscape, I think one of the things that we have not done a very good job of because we haven't had to is just examine and leverage the assets that the Company has that's meaningful to our customers.

As an example, most people that are entering the space and creating lots of noise are not coffee roasters.

They don't have 35 years of history and heritage around sourcing, buying, blending, and providing the customer with a fully comprehended, vertically integrated experience.

That's an asset that is very, very important to our customers and speaks to the quality, the loyalty, and the trust they have in Starbucks.

We have not really had to tell that story for many, many years because we haven't been concerned about people trying to in any way create attrition for us.

The issue of competition I just want to address is that we take it extremely, extremely seriously.

We understand all too well that we have built a very attractive business for others to look at and try and take away, whether it's 1% on the margin or big companies that are trying to take more.

We are up for the defense and we are going to get on the offense.

I want to make it clear also that the size of the prize is so large and although I've said it so many times, I need to say it again.

We have less than 10% share of the total coffee consumption market in North America and less than 1% in the world.

As what has happened in many consumer products when there is new awareness it creates new trial among consumers who have not yet been in the category.

That is taking place as we speak.

Those consumers over time are going to trade up.

They're going to trade up because they are not going to be satisfied with the commoditized experience or the flavor.

We will do everything we can to ensure the fact that when they trade up, they are trading up to the Company that built the category and is the leader.

And that, ladies and gentlemen, is Starbucks.

And you can be assured that we are deeply, passionately committed to preserving our leadership position.

I'll also say too that this whole meaningful innovation has been given more structure around the Company as the head of our category sits at my table working with my team that I mentioned earlier and the investments that we are making on this innovation front continue to grow with the business.

Joe Buckley, Bear Stearns.

And then I want to ask a couple of questions on expansion.

I don't think the advertising campaign question was answered in terms of duration and spend.

But my question is really on units.

Would you cut the new U.S.

openings for '08 more aggressively if you had the flexibility to do so, if you weren't locked into leases already?

And would you anticipate opening fewer stores in 2009 in the U.S.?

And then maybe as an add-on to that, can you talk about the performance of the '07 openings and maybe the '06 openings?

We are looking at reducing the U.S.

openings by about 100 stores in order to just kind of take a breather and make sure that these locations that we looked at are the locations that we want in fiscal '08.

It will also prepare us, as we get ready to accelerate into '09, on this 10,000 growth trajectory that we had out there, to ensure that we hit those targets.

We had a 2400 store target in '06 and finished with -- '07 and finished with 2571.

So it's hard to say that we are taking 100 out, although we are.

We are still at that 10,000 store mark.

So the international will increase slightly as well to give us our store count for FY '08.

The question on the advertising, Joe, we're not going to talk about the cost of doing this.

It is part of our holiday campaign.

But as Howard said, this is just a start for us to reach a broader audience, in this case, reach out with some of our holiday offerings to customers that quite frankly continue to grow and we haven't reached quite yet.

So this is a campaign that we are putting in place now for the holiday season.

The answer to your question about if these leases were not signed, would we go?

And the answer is unequivocally yes.

We believe in the size of the market.

We don't believe that the issue around saturation is something that we see.

And long term we think our Company and most importantly our shareholders will be rewarded for the growth and the footprint that we're creating.

Martin, did you want to say one more thing to Joe on the --?

Yes, Joe, let me just add to your question on advertising to make sure that we are being very clear in our answers to you, which is the TV advertising campaign is really a small part of a much larger integrated campaign that you would normally expect from us around a major holiday period such as Christmastime.

So the components comprise in-store, out of house, that's product and transaction or significant product and transaction focus to the campaign itself.

And it's very much an invitation to visit Starbucks during the holidays.

And at the same time, going back to my commentary earlier on about focusing on the basics, it's also been incumbent on all of us as operators to make sure that we are showing up in our very best way for our customers when they arrive.

But I think it's important to understand that this is an integrated piece of a much larger campaign.

This is not going to be -- this is not a stand-alone TV campaign, which would be very, very different for us if it was.

And by the way, it starts tomorrow for those on the call.

Yes, Joe, I think you had at last question around store metrics.

A couple of things.

First of all, we are going to drive and set targets out there for the businesses and you saw that today in terms of the op margin expansion and what we expect in the total Company in U.S.

and international.

And then we also look at things like ROIC and return on equity for the Company in total and those are all trending positively.

Sub metrics to that, if you look at the total store metrics, we stayed relatively flat at about 1,050,000 per store in the U.S.

for the comp stores.

If you look at the new stores and you take the class of '06, which is done by now, we had about 870,000 for the first year on average for the '06 class.

And that represented about a 2.0 to 1 revenue to investment ratio.

If you look at the '07 class, it's still not done.

And I would say as we look at it, if you trend it out, it's a little -- it's slightly below the '06 class.

But when we look at it it's really, we believe, the result of the same economic factors we talked about through the call.

There's just more months sitting in the '07 class than there were in the '06 class in terms of the economic pressure.

And I would say that despite the downturn in comps, when you look at the return on investment and the unit economics that we continue to put up year after year after year, they are best of class.

Andrew Barish, Banc of America Securities.

I was wondering on the G&A number, and you guys have done a good job on basically keeping that flat on a dollar basis for two years now.

It sounds like there are some efforts obviously with the advertising and kind of reinvesting in some things that may drive that higher, but then I think Martin also mentioned some efficiencies.

Can you just give us a sense kind of on a dollar basis -- is this sort of a new run rate or do you expect that to kind of kick up a little bit in 2008?

Maybe?

Yes, I think the way I'd look at it is separate the, let's call it front end from back end.

So when we talk about support expenses, I don't put the advertising or the revenue generating investments in that space.

But I think over time, we've grown so fast that we have built a back end or a support structure that has an opportunity to be better aligned with the business going forward, take advantage of global scale.

And we can do that and leverage 17 to 18% growth for example in 2008.

So that will give us room in the model for op margin expansion even if transactions move around a little bit.

So that's what we were trying to say both in Martin and my comments.

Jeffrey Bernstein, Lehman Brothers.

Thank you.

Just actually two follow-up questions.

First, I think you had mentioned in your prepared remarks that fiscal '07 U.S.

traffic came in below plan, it decelerated through the year.

And I know you said first quarter fiscal '08 is probably running a similar level to how it ended in '07.

But it does seem like you have targets for that.

I'm just wondering what you are currently targeting in terms of traffic for all of fiscal '08 in terms of the back three quarters.

And then second, just kind of on the U.S.

unit growth topic and cannibalization, I think you've noted in the past some pockets of likely cannibalization across the U.S., but not the driver to further slowing the unit growth.

I'm just wondering if you could talk about the magnitude of potential cannibalization and perhaps to play the role of devil's advocate, what might be the pros and cons to slowing the unit growth in the U.S.

even further and perhaps accelerating international, where I know you've highlighted tremendous success, at least until the traffic trends reaccelerate?

Thanks.

Let me do the traffic question about '08.

We gave you comps for global of 3 to 5%.

Typically, and we expect the same thing in '08, that international is growing faster than U.S.

so the U.S.

numbers will be slightly below that.

We had the October '06 price increase drop off in the year.

We still have about 10 months of the July 31st that will be baked in, so there is -- the U.S.

is slightly below the 3 to 5.

There is a ticket component relative to the price as well as food that we expect, but we definitely need to have -- we expect to have transaction positive for the year embedded in the range we gave you for the U.S.

On the store count, we have reduced the U.S.

slightly this year, but when we look at this traffic softening, it's -- we're looking at it from a economic environment as we see it all across the retail industry.

And our perspective -- the saturation comments are overblown.

Our perspective hasn't changed.

We're still opening new stores knowing that the surrounding stores will experience some level of pressure, but also the understanding of the convenience that will drive the customer frequency.

And we've said it once, we've said it quite a few times that we just need to be where the customer is.

So again, we are balancing that and this little pause in '08 will give us a chance to just kind of a recalibrate, look at this and continue to grow towards the 10,000 stores.

I think your other question that you asked was about international and we just came off of a three-day meeting in Seattle of our global partners.

We all felt really positive after that meeting, given the health, the strength, and the conviction that we and our partners have.

And you can sense also one partner after another wanting more geography as a result of the success they are having in their home market, whether it's Mexico, whether it's our Middle East partner that took on Russia, our Spanish partner who wants Portugal and on and on and on.

So we are -- we clearly see the runway for international, the leverage that we hope to gain and the momentum that we think is on our back.

One thing about this call that we just touched on is China.

I just came back from a week in China and I can only tell you that we are winning there and not only in terms of unit economics, but most importantly, the attachment, the emotional attachment that the Chinese consumer has to the Starbucks Experience.

And what we have done there since 1999 perhaps is unparalleled compared to any other Western retailer.

So we know all full well what the opportunity is, but we have to be very careful and measured so that we expand the international business as thoughtful as possible, but the size of that prize is enormous.

Larry Miller, RBC Capital Markets.

I'm just looking at the guidance.

And Pete, maybe you can give me a hand here.

I can imagine where investors are looking at Q1 and it's only 6 to 7% growth and thinking that looks pretty conservative.

But that also implies a very substantial earnings acceleration from Q2 to Q4.

And that's probably a little bit hard to swallow given what you are saying about some traffic trends and some pressures on dairy.

I'm just hoping that maybe you can give me a couple of specific leverage points as you look at the second half.

Is it, and maybe related to that, is it -- you guys staffed up for a lot of growth for '07 and now there's going to be a little bit less, maybe a little bit less going forward, and you might save a little bit there.

Or is it just as simple as dairy eases in your plan in the second half or am I missing something?

Yes, well the first point is that we expect a $0.02 dairy hit for the year and there's $0.02 in the first quarter.

And by the way, we're dealing with numbers that you round -- $0.01 rounds a significant amount.

But look at it as the whole dairy impact is actually in Q1 and we're not the experts, but the experts are saying it will ease and we'll actually have a good guy in dairy in Q4, which will be dramatically different than what we just reported in Q4.

The last significant transaction comps in the U.S., 3% were in Q1 of '07.

So we've got the highest hurdle as well relative from a comparison standpoint.

And those are the two big drivers that we are communicating that the first quarter is going to not have the average let's call it EPS expansion that we expect for the year.

But we also, when you couple that compare with the initiatives we've talked about today, that's where we get to the $1.02, $1.05 for the year.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers today.

Ms.

DeGrande, are there any closing remarks?

Thank you, Mark.

That concludes Starbucks' fourth-quarter and fiscal year-end 2007 earnings call.

We hope you will join the webcast of our first quarter fiscal '08 financial results on Wednesday the 30th of January.

Thank you for joining us today.

This conclude today's Starbucks Coffee Company conference call.

You may now disconnect.