星巴克 (SBUX) 2008 Q1 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to Starbucks Coffee Company's first-quarter and fiscal 2008 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).

Ms.

DeGrande, you may begin your conference.

Good afternoon, ladies and gentlemen.

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

With me today are Howard Schultz, Chairman, President and CEO; Pete Bocian, Executive Vice President and CFO; and Martin Coles, Chief Operating Officer.

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 22248459, through 5.30PM Pacific Time on Wednesday, February 6, 2008, and on the Investor Relations page at Starbucks.com through 5PM Pacific Time on Friday, February 29, 2008.

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 February 29, 2008.

This conference call includes forward-looking statements about Company plans and initiatives, including its transformation agenda, and trends in or expectations regarding earnings per share growth, net new store openings, the performance of the U.S.

economy, comparable store sales growth, shareholder value, recruiting new executives, capital expenditures, guidance and targets, and capital structure.

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 September 30, 2007.

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

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

Thank you, JoAnn, and good afternoon, ladies and gentlemen.

I hope you've had an opportunity to read the release we issued within the past hour.

During today's call, I will give an overview of some of the progress we've made over the past several weeks to lay the foundation for the transformation of Starbucks, as well as our first-quarter results.

Pete will then take you through the financials in greater detail, and after that, we will be happy to answer any questions you may have.

First, I want to say how confident I am in what's ahead for Starbucks.

Over the past three weeks, I have received thousands of e-mails from customers and partners who share my enthusiasm.

Our brand and business are truly special.

People want us to succeed, and we're looking forward to transforming Starbucks for the future.

The past several weeks have also been notable for the noise about competition in the coffee space.

Let me emphasize we don't see that as the issue.

What we have to do is simple -- differentiate our experience so that a customer walks into a Starbucks store, they get something that they can only get from us -- the highest-quality coffee in the world, served by the most passionate and knowledgeable people in the industry.

We created the experience, and we will re-create that differentiation and leadership position.

We strongly believe that we control our own destiny.

And when we do that, we grow our business.

We are a growth company.

Our past success was built on us striving to do better and be better, on connecting with customers and innovating, and on embracing change, not fearing it.

So our future growth at the levels that you and we expect from Starbucks will also be based on these same qualities.

Returning to the sort of growth we want to achieve requires us to sharpen our competitive advantages, our passion, curiosity, community, commitment and authenticity.

That's how we build our deep and enduring connection with our customers.

As important, today we have an excellent platform to which to build.

After all, this quarter, our results included operating income of $333 million, net cash from operating activities of $808 million, and solid international performance, with revenue growth of 33% and enhanced profitability of over 60% for the quarter.

At the same time, our Q1 performance clearly shows we have work to do to get the business back to where it should be.

We're absolutely not satisfied with our overall performance during this period, which Pete will discuss in more detail in a few minutes.

What do we have to do?

Transform the way we do business.

As I described earlier in the month, we need to improve the current state of the U.S.

business, reignite the emotional attachment with our people and our customers, and make fundamental changes for the long term.

In all of these areas going forward, we're going to make decisions based on what's right for our customers.

We are laser-focused on delivering what they want and expect and providing our partners with the tools that will help them exceed their expectations.

In doing that with passion, creativity and commitment, we expect to deliver increased growth in shareholder value in a way that is sustainable and in line with what you and we expect.

It has only been three weeks since the change in leadership, but we have made significant progress.

We have now put in place the organizational structure and the leadership team directly aligned to focus on customers and partners engaged in delivering on our high-impact strategies.

Martin Coles is now focusing with me on developing and effectively executing our strategy, and we expect to get additional leverage across the organization with Michelle Goss, who most recently led our Global Product and Brand Group in the new role of Senior Vice President, Global Strategy.

She will work closely with Martin and me to help implement all aspects of our transformational plan.

We promoted Terry Davenport to lead our Marketing and Brand Strategy Group.

We've also hired Harry Roberts, a former Starbucks executive, to assume the newly created role of Chief Creative Officer and be responsible for elevating the customer in-store experience.

We have moved Chris Bruzzo, a current partner, into the newly created position of Chief Technology Officer, a position he earned for the exceptional work he has done since joining us from Amazon a year ago.

With a keen focus on our people, we have promoted Chet Kuchinad, an experienced partner, to lead Partner Resources, our HR function.

In addition, we're in the process of recruiting senior executives for our newly established Global Real Estate Design and Architecture Group, as well as a new Chief Information Officer and a leader for our public affairs functions.

With this team, we're now positioned to free up Launi Skinner, President of our U.S.

business, and Jim Allen, President of International, to do what they do best -- operate their businesses.

Working together, we will return to what has always set us apart -- the unique Starbucks Experience, connecting with our customers by delivering the highest-quality coffee and handcrafted beverages in a warm and inviting store environment.

We have now assigned accountabilities to all our leadership team and their direct reports.

They will own everything about their business and have responsibility for specific projects to drive the transformation agenda forward.

We have also validated a number of programs that were already in the pipeline or underway that will support and further the vision.

For all of these, we have set timeframes for deliverables, with some coming in the very near future, especially in the U.S.

business.

And please make no mistake -- we will transform the business while strengthening our relationship with our customers and building on our premium and leadership position.

The first of these actions, as we told year earlier, is to slow the pace of U.S.

store openings.

We now plan to open a total of approximately 1175 net new stores in the U.S.

this year, down 34% from our fiscal 2007 openings.

That includes approximately 100 underperforming stores.

In addition, for 2009, we plan to open fewer than 1000 new stores in the U.S.

By reducing the number of openings, we expect to optimize our resources and potentially reduce cannibalization of existing stores.

We have also taken decisive action in other areas to enhance the Starbucks experience.

Let me give you a prime example.

We have decided that by the end of fiscal 2008, we will discontinue warm breakfast sandwiches in our North American stores.

The highest priority for our food team is to develop the right offerings so that we are the source of healthy breakfast on the go and also provide the best-in-class baked goods in the business to complement our superior coffee and espresso beverages.

Our customers have told us they want a healthy breakfast alternative.

No one in the market has responded to that need, and we believe that by being innovative, we have a unique opportunity to do so.

Now, some of you may be asking why we made this decision.

In short, the scent of the warm sandwiches interferes with the coffee aroma in our stores, which is the key to the coffee experience that forges our connection with customers.

Moreover, while our customers liked our sandwiches, they told us they missed the aroma and the romance of coffee.

We will continue warming pastries and selling lunch, with some modifications to the lineup.

We recognize that there could be a short-term revenue impact to this decision, but it is the right decision for the business.

If we execute flawlessly on our core, which we are committed to, our coffee, then we will drive customer engagement and longer-term top- and bottom-line growth.

This is just one example of some of the changes you'll see in the coming months that will substantially change the retail experience in the U.S.

At our annual meeting of our shareholders on March 19, we will lay out five specific, bold, consumer-facing initiatives that will be a major catalyst for change and transformation.

They will be innovations through which we will extend our coffee leadership, reinvest in making our stores the third place for the next decade, encourage a deeper dialogue with our customers, and further strengthen our partners' and customer relationships with one another.

That's just the beginning.

These actions will reaffirm for customers in the marketplace that, unlike others, we're not a reseller of commodity-based coffee roasted by a third party.

We have never been and never will be.

We will utilize all of our 35-plus years of ethically sourcing, buying and roasting the finest coffee in the world to reaffirm our coffee authority.

We're confident through our actions that we will get back on track in redefining the customer experience and expanding the differentiation in the market between us and the others in the coffee business.

At the same time, we have devoted considerable attention to the U.S.

strategy.

We're capitalizing on our substantial international opportunities.

This fiscal year, we will open approximately an additional 75 net new stores in international markets, increasing the international store opening target for the year to about 975 net new stores.

In fiscal 2009, that number will rise to over 1000 new stores internationally, and it will mark the first time that our international store openings will outpace those in the U.S.

As we continue to build our business around the world, we're encouraged by the strong ongoing customer response in existing markets and the tremendous reception our brand receives in new markets, such as the Czech Republic.

We opened our first store in Prague this month to near-record crowds and sales, and given the century-long cafe tradition there, it's a market that we view as a great opportunity to compete and succeed.

Further, the strong initial response is a great sign for our expansion in Central and Eastern Europe.

We plan for Poland and Hungary to be the next markets there.

I want to emphasize that the capital we're putting toward our international business is focused on profitable growth.

We will also leverage what we learn in different markets around the world to share best practices in all our stores, hopefully benefiting the U.S.

situation.

We're very excited about the opportunities that lie ahead not only in the U.S.

and international businesses, but also in our Consumer Products Group.

As you will hear from Pete, our CPG business had a solid quarter, and we view it as an important growth driver for our brand and our performance.

We're also mindful that as we take these actions to deliver improved topline performance in the future, we also intend to realize opportunities to leverage back-end costs.

Given all of the work underway, we view fiscal 2008 as a year of refocus and renewal.

But there are no quick-fix solutions.

It will take time.

We're confident our transformational changes will position us well for the long term.

Consequently, there will be moving pieces in the coming months that include funding for our innovations, and we also expect there will be continued weakness in the macroeconomic environment that affects our customers.

For these reasons, during this critical period of transition and transformation, we believe that you should expect low-double-digit EPS expansion for the fiscal year.

By the end of the fiscal year, however, we anticipate that Starbucks will have gone through the transition, be reinvigorated, and our customers will have a new experience in our stores.

In fiscal 2009, we will be well on the path of providing sustainable growth and long-term value for our shareholders.

Accordingly, we believe that you and we need ways to measure our progress as we build and then leverage our strong foundation to capture those long-term growth opportunities.

Therefore, we're committed to coming back to you quickly, in April, when we announce our second-quarter results, with quantifiable, longer-term metrics.

Pete will discuss what we are planning in some detail in a few minutes.

And with those longer-term metrics in place, we're discontinuing annual guidance for fiscal 2009 and beyond.

In addition, a number of our near-term changes will directly impact the retail stores.

Therefore, we will not report same-store sales comps, as they will not be an effective indicator of our performance.

Once our U.S.

performance normalizes following our actions, we will evaluate the value of reporting quarterly same-store comps in the future.

We believe these actions are the right thing for our Company and our investors.

They will assist our people and our management team in making the right business decisions, focus on the customer and in running the business to create long-term growth and long-term value for our shareholders.

Before I hand the call over to Pete, let me just make a comment on one particular subject that's gotten a lot of attention in the last few weeks -- the $1 brewed coffee 8-ounce short cup test.

With a brand like ours and stores all over the world, we conduct dozens of tests a year, and it's inevitable that people will get interested in a test like this.

We're running it in a limited number of stores in the Seattle area to respond to the economic pressures that our customers are under.

Right now, as a test, it makes sense to us.

Starbucks is built on a premium coffee and a premium experience, and similar to other leading global consumer brands, we believe there are opportunities to create segmentation, providing an entry point for new customers and generate trial in a way that will also maintain the value of our core brand proposition.

We intend to reaffirm our position as the coffee authority and maintain our leadership position at the high end, while broadening our appeal.

I would like to emphasize this offering is just a test.

We will be listening intently to our customer feedback, as well as evaluating whether such a product advances our business objectives and creates value while maintaining our super-premium leadership position.

Now let me invite Pete to take you through the quarter.

Pete?

Thanks, Howard, and good afternoon, everyone.

Revenues for the quarter were up 17% to $2.8 billion from $2.4 billion a year ago.

Operating income for the quarter increased to $333 million from $320 million in the prior year.

Operating margins contracted 160 basis points to 12% from last year's first-quarter margin of 13.6%, driven by the U.S.

business.

In the quarter, both international and CPG operating margins improved, and favorable corporate G&A contributed positively as well.

The decline in the consolidated margins was the result of higher cost of sales and occupancy and an increase in store operating expenses, again driven by the U.S.

business.

I'll provide more detail behind these drivers when I talk about the U.S.

results.

Earnings per share increased to $0.28 in the first quarter of this fiscal year, in line with our expectations and compared to $0.26 per share in Q1 of '07.

As expected, higher dairy costs resulted in a negative $0.02 impact to EPS in the quarter.

That said, while the $0.28 was what we expected overall entering the quarter, results from international, our Consumer Products Group and back-end G&A exceeded our expectations, offsetting a much softer U.S.

business.

Nonoperating factors impacting net earnings for the quarter included higher interest expense driven by an increased level of debt when compared to the first quarter of 2007.

The debt was used to repurchase shares, resulting in a net neutral impact on earnings per share in the quarter.

We also had a slightly better effective tax rate year over year.

Comparable store sales growth was 1% for the quarter, all driven by the international business.

I'll talk more specifically about the business results later in my segment discussions, but it's clear that our U.S.

business continues to feel the negative impact of the macroeconomic environment, not dissimilar to what other retail brands are seeing.

A bright spot in the quarter was international same-store sales growth, where we continue to show strength with a 5% increase year over year.

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

U.S.

total net revenues increased by 14% to $2.1 billion in the first quarter of fiscal '08.

Company-operated retail revenues rose 14% to $1.9 billion for the quarter, driven by the opening of 1077 new Company-operated retail stores in the last 12 months.

Comparable store sales declined 1% in the quarter, driven by a 3% decrease in transactions.

We did have a 2% increase in the average value per transaction, mostly due to the price increase taken at the end of July 2007.

While it had a positive impact on the average value per transaction, we believe pricing had the opposite effect on transactions.

While this performance was below our plan and expectation entering the quarter, we believe it is consistent with and reflects the pressure the consumer is experiencing in this difficult economic climate.

For us, this has resulted in decreased frequency of visits by our customers to our U.S.

stores.

While we cannot directly impact the economic environment, we do believe that slowing the opening of new stores in the U.S., along with the closure of underperforming locations, will take some of the pressure off of existing stores, allowing us to make better decisions around how we deploy our capital.

U.S.

cost of sales, including occupancy costs, as a percentage of total revenues increased to 41.1% compared to 39.3% in Q1 of last year, up 180 basis points.

While this is a slight improvement from how we finished 2007, continued pressure from dairy and, to a lesser extent, the shift in sales mix to higher-cost products, combined with overall lower store transactions, continues to drive year-over-year increases.

U.S.

store operating expenses increased to 40.5% of related U.S.

retail revenues compared with 39.1% a year ago.

This increase was primarily due to wage increases driving higher payroll-related expenditures as a percent of revenue, and softer sales from our U.S.

Company-operated stores.

U.S.

other operating expenses improved 120 basis points to 25% of related specialty revenues from 26.2% in the prior year, primarily due to leverage gained from a growing revenue base in our U.S.

licensed stores and foodservice channels.

U.S.

operating income declined to $311 million during the quarter from $325 million in Q1 of fiscal '07.

Operating margins came in at 14.6% of total revenues for the first quarter of fiscal 2008 from 17.5% a year ago, primarily driven by higher cost of sales, including occupancy, and higher store operating expenses, partially offset by lower G&A as a percentage of total net revenues.

Currently, the U.S.

business represents a significant amount of the Company's revenues and profit, so softness in the U.S.

business has a material impact on overall results.

That said, we're encouraged by the improvement in performance of our international business in the quarter, and we continue to believe this represents a significant opportunity for growth and profitability for the Company going forward.

International total net revenues increased 33% to $541 million in the first quarter from $405 million in the first quarter of fiscal 2007.

Company-operated retail revenues increased 33% to $461 million, mainly due to the opening of 285 new Company-operated retail stores in the last 12 months, favorable foreign exchange movement in the Canadian dollar and the British pound sterling and comparable store sales growth of 5% for the quarter.

The comparable-store sales increase resulted from a 3% increase in the number of customer transactions and a 2% increase in the average value per transaction.

We believe the growth in international revenues continues to demonstrate the strong acceptance of our brand and the Starbucks experience globally.

International operating income increased 63% to $54 million in the first quarter compared to $33 million a year ago.

In the quarter, we delivered the first installment on our commitment to grow and improve operating margins, with a 180-basis-point expansion, from 8.2% of revenues in the first quarter of last year to 10% of revenues in this fiscal year's first quarter.

This improvement was due to lower occupancy costs year over year in the UK and lower store operating expenses overall.

We're pleased with our Q1 operating margin expansion and will continue to drive for margin improvements going forward.

Now let me turn to results from our Global Consumer Products Group.

Total net revenues for CPG increased 11% to $101 million in the first quarter of fiscal '08.

Increased product sales and royalties from the international ready-to-drink business, along with increased sales of packaged coffee and tea in our international and U.S.

markets, contributed to the increase.

Operating income for CPG was $51 million in Q1 of '08 compared to $42 million in the first quarter of fiscal '07.

The operating margin expanded to 50.3% of related revenues from the 45.9% reported in Q1 of fiscal '07, primarily driven by a decrease in the cost of sales expense as a percent of revenue.

Before I move on to a few comments related to our balance sheet, I want to note the 50-basis-point improvement in G&A expenses as a percent of total net revenues.

This demonstrates progress we're making in leveraging our scale and infrastructure, while at the same time, we're also implementing systematic changes, which we expect will better position the Company's back-end infrastructure to deliver more efficient service and support to our retail network.

As previously reported, the Company issued $550 million of 6.25% 10-year notes in Q4 of '07, a component 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.

Our longer-term outlook on the Company's capital structure is unchanged.

Any additional funding would be consistent with management's strategy of targeting leverage and coverage ratios to be roughly in line with a high BBB rating over the medium term, which is where we are at today.

During the first quarter, the Company repurchased 12.2 million shares of common stock for a total cost of $295 million.

After the first-quarter share repurchase, there were only 1.3 million shares of remaining authorization.

As you saw today in our press release, we announced a new share repurchase authorization by our Board of Directors for up to an additional 5 million shares of our common stock.

Going forward, we will make use of this authorization in line with the parameters mentioned earlier.

To summarize the quarter, there were a number of positives.

We achieved revenue and EPS expansion in line with our expectations, in spite of a more negative U.S.

economic environment.

We delivered notable improvement in the international margin and will continue to drive for improvements going forward.

CPG and G&A leverage also provided positive contributions to overall results.

We will continue to focus on opportunities to leverage our scale and infrastructure, and we're encouraged by the energy and attention we are already seeing around a global platform approach.

On the other hand, the continued weakness in the U.S.

business was disappointing, although not entirely unexpected, given continued deterioration in this challenging economic and operating environment.

And as anticipated, higher dairy costs had a significant negative impact on our U.S.

margins.

So what are we doing to turn the U.S.

business around?

To begin with, earlier this month we committed to further slowing U.S.

store growth, including more aggressively closing underperforming locations.

We have made substantial progress over the past few weeks.

As Howard mentioned earlier, we have identified approximately 100 underperforming U.S.

Company-operated retail stores.

These anticipated closures for our U.S.

Company-operated retail stores follow an in-depth analysis of the portfolio and is nearly six times our prior three-year average for store closures.

These actions, coupled with a reduction in new store openings, brings us to our fiscal 2008 U.S.

Company-operated store openings target of approximately 650 net new Company-operated stores and 525 licensed stores.

In our international business, we will open about 75 additional net new stores this fiscal year, moving faster on the growth opportunity in international, where we are still in the early stages.

Looking out to fiscal 2009, we plan to open more than 1000 net new stores in international markets and less than 1000 new locations in the U.S., with approximately half of those to be Company-operated stores.

This marks a significant crossover point in our growth strategy as we plan to build out more new stores in international markets than in the U.S., beginning in fiscal 2009.

It also signals progress towards increasing the future contribution from our international business to the overall enterprise.

In a year of significant transformation for us in a very difficult macroeconomic environment, we're looking to deliver low-double-digit earnings growth, lower than expected, but a year that we believe balances the need for transformation and investment with delivering near-term results.

When we come back to you in late April with our Q2 results, we will be prepared then to deliver to you our three-year view through 2011.

At that time, we will provide you with our 2011 targets for revenue from a total Company view, as well as for our three business segments -- U.S., international and CPG; operating income for the Company and for each segment; earnings per share and capital deployed; and free cash flow.

We will also provide you with some color as to how the performance during that three-year period will sequence.

We do expect to make progress and start delivering in 2009.

With that, I'll turn the call back over to Howard for his closing remarks.

Thank you, Pete.

Before I open the call up to your questions, I want to share one other encouraging result with you, one that cannot be quantified and that many of you may discount, but one I believe is emblematic of the success that lies ahead for our Company.

Our connection with our customers begins with our partners, who are so closely reflective of those we serve.

We do not need to rely heavily on focus groups to develop new ideas.

Our relevance with our customers comes from the fact that we are among them, part of the same communities and part of their lives.

That's why I'm so excited by the overwhelmingly positive internal response and engagement by our partners.

Their focus and commitment will help us realize our objectives with our customers and our goals for creating long-term growth and shareholder value.

This is a sentiment that is echoed in Fortune magazine's recently released 100 Best Companies to Work For, where we ranked number 7.

This is our debut in the top 10 and the highest ranking we have received in the 10 times that we have been included in the list.

Having a strong group of dedicated partners at all levels of the Company provides a critical boost to our efforts.

We believe passionately that when we invest in our people, build an emotional connection with them and get them fully engaged with our strategy and agenda, we see positive results in our performance.

To help us achieve that, we're bringing back our annual leadership conference in the fall of 2008.

This is the most important and strategic event that we hold for store managers and above, and it is a major internal signal that the transformation is not only occurring for our customers, but for our people as well.

Not only does it help us generate understanding and enthusiasm about our vision and strategy throughout our organization, but it ensures that we will maintain the links between our field and corporate leadership.

This year, we will also augment it with a series of open forums for all our partners around the world.

Everyone here at Starbucks knows that we have a lot of work ahead of us.

Rest assured, though, planning and in fact execution are well underway.

We have shared with you a summary of what we have accomplished already in the past three weeks.

In about six weeks from now, we look forward to showing you our innovative platforms with which we will begin to reinvent the customer experience.

Then six weeks from that, on April 30, we will frame out in detail our strategic and financial plans.

At that time, we will also give you a date for later in the year, when we intend to host our analyst conference, to tell you more about where we are and what we have on tap, as well as introduce you to some of the leadership team who are so critical in making all this happen.

We are all very excited about the future for Starbucks and confident that the actions we're taking will deliver long-term shareholder value and maintain our position as one of the most recognized and respected brands in the world.

Now I'll be happy to open up the questions.

Operator?

(OPERATOR INSTRUCTIONS).

Steven Kron, Goldman Sachs.

A question on the guidance.

I'm just trying to reconcile what you guys are factoring in for the year.

For the first quarter, it seems as though EPS grew around 6% to 7%, and you are targeting low double digits, so presumably you need to do something low to mid-double digits in the remaining part of the year.

But it seems as though top line is -- the growth rate, at least, is going to slow from slower development, from less units and also eliminating the warm breakfast sandwiches, which I believe was around a 3% lift to comps in the past.

So I guess, if I trickle down the P&L, are we expecting some meaningful margin expansion to come through and act as a bit of an offset?

If you look at Q1, the 8% EPS expansion had the biggest dairy hit, we expect.

So there were $0.02 of EPS impact negative that we expect latter part of the year will trail down and then switch over in Q4.

That's what the experts are saying.

So look at Q1 as the biggest dairy hit for the year.

But we do need to improve from what we showed up, right, to get to the low-double-digit EPS growth.

What we factored in is our view of a tough -- tougher U.S.

economic environment, but with the innovation that Howard will talk about on March 19 and the impact, we believe it will happen for fiscal '08.

We have also factored in the performance, the good start for international and CPG, and our ability to, near term, impact the cost structure.

We've also factored in the other announcements that we talked about today, whether it's deemphasizing the warm breakfast sandwiches and getting to a new breakfast offering, or the store openings being less in the U.S.

this year.

So we factored all that in to what we believe is the right guidance, which, as I said before, balances a huge transformation year for us with still delivering good EPS expansion.

Nicole Miller, Piper Jaffray.

I was just wondering if you could first help define or quantify underperforming stores, and then, second, what G&A leverage is assumed for this year in guidance?

It sounds like you are talking about the percentage going down.

Can the actual dollar amount go down as well?

We've taken a multiyear view at the -- let's call it the returns on a store and whether they can meet the business case or an acceptable return over the medium to long term as we've made these decisions.

So we are looking at stores with that context.

The second question?

I'm sorry.

It was what have you factored in G&A leverage to the --

I think what's factored into it, as I just explained, was that we have G&A leverage expected for the year.

I think we'll wait until April, when we talk about the bigger cost takeout opportunity going out from '09 to 2011, to quantify it.

So you should look for -- baked into the guidance I gave you are the number of components I defined for Steven.

Joe Buckley, Bear Stearns.

Pete, just going back to the last question, can we get just a little more detail on the decision-making process, not only on the store closures, but on what the right number of openings are on the licensed and the Company side?

What do you expect for total CapEx now in '08 and if you can share it for '09?

As I said, the decisions are medium to longer term around the viability of the stores.

We believe having less openings at this point in time, in addition to the economic environment, gives us an opportunity to have less cannibalization and better use of capital.

Then you should expect from this discrete decision somewhat less capital than the previous $1.1 billion I talked about.

That said, there may be use of capital in the innovation that we will define on March 19.

So some benefit from in-year less store count, and that will certainly continue into '09 in terms of the capital required for new stores.

But there will probably also be an innovation price tag this year.

David Palmer, UBS.

From 2005 to 2007, you almost doubled the pace of new openings.

You've had some pretty ineffective innovation, and of course you've had the economic environment and the breakfast sandwiches.

Arguably, there have been some things you're going to be reversing here.

I'm wondering, how are you thinking about the positives and negatives of slowing down the unit growth?

And in particular, how much is this going to help your AUVs, if you want to choose that?

But importantly, I really would love to know why you think it would help your stock, the Company, investors or anybody to remove disclosure at a time like this.

I don't think we're looking at it quite that way.

If you look at the comp issue first, we are going to be taking out breakfast sandwiches, as well as we're engaged in a comprehensive audit of every category and every SKU that we're engaged in on a daily basis with our customers.

Every product in every category has to pass the test on its own merit by adding value profitably and really providing the experience with the customers that we want.

In view of this new lens of discipline and customer-centric focus, we need to make decisions that are not based on driving comps in the short term.

Comps are going to be very erratic, and in view of that, we think there are better ways to measure the ongoing short- and long-term success of the Company.

We're going to provide you, as Pete has outlined, on April 30 with new metrics that we feel really, I think, for the first time give us an opportunity not only to provide you insight about our retail business, but the growing segments of the business.

For example, we have hundreds and hundreds of stores that are not in the comp base because of the license arrangements or JVs.

We have millions of dollars that we can't report to you because we don't get the credit for businesses like bottled Frappuccino.

The total sales of Starbucks are much, much greater than the $9.4 billion that we recorded in '07.

So what we want to do is not take anything away, but provide you with a broader level of insight and clarity about the overall business and, as Pete said, the ongoing trajectory of international.

The last piece is this -- the decisions that we've made in the past, good or bad or indifferent, in many ways have been tied to the relationship that our managers and the leaders of the Company have had to driving comps.

It hasn't always been the right decision, most importantly for the customer.

And what we want to do, once and for all, is put the customer in the middle of every meeting that we are in and make decisions that are based on what's best for the customer experience.

We know that in the past and in the future, if we drive a mentality of exceeding the expectations of the customers on what's best for them, we will drive long-term value for the shareholder.

We need to transform the culture and the internal way we're making decisions as well as the customer experience.

David Tarantino, Robert W.

Baird.

Howard, you mentioned that you were building a foundation to return to the growth that the investment community and you might expect.

I know you're going to be giving more details in the coming months, but could you give us a directional sense for what type of growth rate you might expect as you look out beyond '09?

Is it something that you would expect to accelerate in the future, or how are you thinking about that?

I think it's a fair question.

I think we will have to hold that until the 30th of April.

But I do want to state in the answer, as I did in the text, that we are committed to being a growth company, that we're built for growth.

We think we have opportunities that we have not taken advantage of and that the entire culture and mentality of this Company is linked to being a growth company.

That is not something that we're going to give up.

Glen Petraglia, Citi Investment Research.

I guess the big question that I have is you're shifting to accelerating international growth, where margins and presumably the returns on the investment that you are making there are lower than they have been in the U.S., and arguably accelerating the unit growth in the U.S.

has contribute to some of your problems, I think you'll readily admit that.

I guess can you maybe help me understand why you're making that decision when, in essence, it might actually be dilutive for corporate return?

I think a lot of these we will have a better clarity on April 30 But as I've said before, when we showed up in 2007 and we had 8%, I think it was 8.1% of revenue in international, given the number of licensed content in there, it's clearly underperforming.

We had a pretty good Q1, though you could argue it was against a weak 2007 compare.

But our view is that we can take these international margins into the teens, and we'll wait for April 30 for the answer.

But also, the amount of capital we have to invest because of the licensed relationship is much less.

Lastly, if you look at the absolute number compared to where the U.S.

is and think about rest of globe, non-U.S., there's still a huge opportunity for us.

So all the above is we actually think international can contribute quite a lot towards the portfolio and therefore speeding up the investment somewhat.

Howard Penney, FBR Capital Markets.

This is just one person's opinion, but I don't think there's anybody that doesn't believe Starbucks can't grow.

I guess it's the rate of growth the Company has, and is it maximizing the value to shareholders of that growth, balancing both growth and reinvestment in the business.

Having said that, you talk about an innovation price tag, and when asked about capital spending would suggest that there is maybe remodels or is part of the innovation -- is it you're going to reinvest in the store base and go through a remodeling program?

I don't think I've heard you talk about that.

I don't know if that's part of your program, but if you can address that, that would be great.

I think you've been following the Company perhaps as long as anybody.

The thing about the growth which I just want to clarify is I think we all recognize the discipline and the thoughtfulness that we need to demonstrate in terms of the growth being profitable.

There's no one around this table or on our Board that is interested in any kind of growth that is not skewed towards making sure that we provide long-term value for the shareholders, and it has to be profitable and thoughtful and disciplined growth.

Having said that, the issue of innovation and remodels, I think we need to separate that.

We have an ongoing remodeling campaign that extends across the country and now across the globe that is not part of what Pete alluded to.

We believe that we have unique opportunities to advance the premium position and the experience in our stores around innovation, and I wouldn't have any one go off on this call and conclude that that's going to dramatically change the balance sheet or how Pete has described it.

Pete, do you want to add anything to that?

No.

I think that what's important is that in the ongoing CapEx that we've had, let's say, the last couple of years, there's always been a renovation component as well as a new store component.

All I was answering in the previous question was there is some let's call it room against the $1.1 billion of capital that we started the year based on the new store count.

It's not huge, first of all, and my only point was that there are some innovation ideas that may have some capital.

But neither one is huge in the scheme of things.

Jeffrey Bernstein, Lehman Brothers.

Just a question on international, which you've highlighted as, obviously, an area of strength and upside surprise.

I'm actually surprised not to see an even greater acceleration on the international openings in '09.

Your guidance was for 1000-plus, but now you're talking about '08 being pushed up to 975, with the U.S.

slowing down, and your prior comments of the international strength.

I'm just wondering if you could talk about the thought process behind the international growth targets, perhaps inhibitors to even faster growth, especially with the recent momentum.

I think the '09 data point or data points around U.S.

and international was mostly to, A., show that the U.S.

would continue the momentum around less.

The over 1000 was a directional number to show the crossover point.

We'll come back with the actual number as we go through it.

So yes, we absolutely believe there is a great opportunity in international.

My point for this year was to prove the operating margin expansion, which they've started to do, and we need to continue that through the year.

And then we'll come back with the absolute number, over 1000 for sure, when we talk about the momentum moving out to 2011.

Martin, do you want to add something?

Yes.

Hello, Jeffrey.

Thanks for the question.

This is Martin.

Internationally, we're very confident in the long-term upside for the business.

We have to be equally careful, though, that we expand at the rate that we have capacity for.

So it's less about the appetite of the market for our stores and our people and much more about carefully building our capabilities so that, as we've talked about on this call today, that we continue to deliver just the very best Starbucks experience we can in every store that we open.

So we've [marked] in on a significant growth curve ourselves in international in virtually every one of the last four or five years, and we continue to expand that.

But as Pete says, we'll come back with a better look at that number.

But a lot of it comes down to our capability to drive to the expansion that the market truly can support.

Matt DiFrisco, Thomas Weisel Partners.

I have a question, but also a couple of bookkeeping questions.

Pete, if you could just give us a little bit of guidance or clarity with respect to the pace of openings for '08, because it does seem like that is a major contributor to the margins, having less absolute store openings and less dilution from them on a year-over-year basis.

And also, is it a correct assumption, then, to assume that it is a -- though you might be losing a comp by getting food out, that in some cases it's going to be a margin-enhancing experience, or could be, in some quarters?

Then lastly, just on G&A, if I look at where you are cutting, is this taking away what you had built up, expecting to build on the 1600 to 1700 stores you were doing a year, so you're taking away the growth?

Does that do something to the ability for you to grow again in the future, or is that saying that your future growth might be license and not Company-owned growth?

Let me try to catch up on those questions.

The first is that on the pace of store openings, what we've seen in the first quarter and reported, and then you can extrapolate out to the year, there are basically none of the closures, is the easiest way to say it, exist in the net number that you're looking at for Q1.

So expect that those are balance of year, and then your point about some dilution from a new store is true.

We should see that balance of year.

That said, there are some costs of getting out of the opportunity, and the net of it is kind of a wash.

So the closings coming in in the future, and it should be a net P&L kind of neutral.

On the food comment, on the breakfast sandwiches, we are going to be out by year end.

They will still be available, call it deemphasized, and we've been clear on the direction.

Our goal is to have the food team come in with that right complementary breakfast food for our future to backfill it as we get into '09.

Your point is valid that the margin percent between beverage and food is different, but we want to have a lot more beverage and then complementary food and then a breakfast menu that delivers what our customers are asking for.

Lastly, on the G&A, I think what we have done so far is more systematically leveraged what we have, which is, as opposed to let's call it an across-the-board, where travel and entertainment doesn't happen for every group, we have been much more, I think, thoughtful in planning ahead around which G&A groups need to grow to support the stores.

We still have -- when I mentioned the word global platform earlier, we have the opportunity to get global owners thinking about how they deliver the most efficient and effective service to the enterprise, and we'll be talking more about that when we look at the targets going into the April 30 timeframe.

I think that's important.

Back to the disclosure comment earlier, we believe, by moving to the longer-term targets, we're actually putting something out there, A., that hasn't been there, and we also think that, long term, the op margin is the best link to shareholder value because we have a portfolio of businesses, whether it's the Consumer Products Group, foodservice, Howard mentioned the licensed stores and international, and a cost takeout opportunity.

All those are going to feed the op margin going forward, and none of them directly link to same-store comps, as an example.

So we believe getting a better view of the portfolio and with this cost takeout opportunity embedded, that's what we're driving for.

And we've put a stake in the ground and said we're going to commit to fairly quickly turn out a long-term target, because I would argue, given the volatility in the U.S.

business and all the things we're working on real-time, April 30 feels fairly aggressive.

Sharon Zackfia, William Blair.

I was kind of curious on the trends in U.S.

ticket growth.

For quite a while, you have been seeing trends there in excess of your actual price increase, and it looks like that has stopped.

So I'm wondering whether or not you're seeing consumers trade down, if there might be a merchandise impact from this being the Christmas quarter, or if it is a food impact here.

But anything we could glom onto to understand what's happening there?

I think, and I've spent a lot of time over the last few weeks digging into our business and really trying to dissect the issues at every level, but clearly, the consumer is facing a significant headwind that is affecting not only us, but everyone in the retail and restaurant business.

I think you have to agree that the consumer is in a recession.

In view of that, the trends that we see either in terms of geography or across the board are not isolated to any region or any product.

I think that what we believe is that we have an opportunity to enhance the experience, create significant separation between us and everybody else, and drive an experience that people value and recognize as not only different, but something superior.

But we're facing a situation where the status quo no longer applies.

We can't continue on that path, and we have to push for self-renewal and reinvention and embrace change.

John Ivankoe, JPMorgan.

I just want to make sure that your breakfast sandwich issue is being put into context.

I don't think it's in even half of the U.S.

store base.

Could you clarify what percentage of the stores that it's in, and I guess across the entire system, what percentage of sales that actually is -- in other words, if it were to be pulled out, what that would actually mean to comps?

And finally, on the breakfast side, was that product, on a fully loaded basis in terms of looking at gross margins, spoilage at the end of the day, incremental labor that you had against the product, which was clear going into the stores, whether that product in fact made money?

And then secondly, you gave us a nice direction in terms of what could be possible in terms of breakfast, healthier products to replace the product.

Is there any kind of innovation that might be significant around the lunch daypart, which I think is more significant than the breakfast sandwiches?

John, I think that you hit the nail right on the head there in terms of the impact and the issues that relate to the true net margin that we receive as a result of being in that business.

I think, if I'm not mistaken, the breakfast sandwiches are in less than 4000 stores across North America.

There were more stores that were ongoing in terms of plan that we have stocked that are not going to be engaging in that business in the near future.

I think, as we've said in the past, I think on a revenue basis, we model those breakfast sandwiches at approximately $35,000 a store, with anomalies both at the bottom and the top end.

The margin, we've had margin compression in the overall unit economics as a result of being in that business, because it is a lower-margin product than the core beverage business.

There is incremental labor, but perhaps more than that, there's mindshare and labor that takes us away from executing on our core business, that being the ability to make the perfect shot of espresso, the ability to describe different coffees, and really, I think, demonstrate our position.

In terms of replacement, I'm not going to get into the specifics, but our food team understands with great clarity what the task is.

They are accountable, they're responsible, and we are committed to delivering a replacement category product in that daypart.

With regard to lunch, I'm not going to go there other than to say that we're going to be in the lunch business, we're going to modify it, as I've already said, and we're going to look at other alternatives as we're looking at this.

But we understand the leverage that we have with our customer base, and we understand that the things that we want to do have to relate to our core and have to be consistent in terms of quality, and we have to measure that quality against the quality of our coffee.

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

Ms.

DeGrande, are there any closing remarks?

Yes, thank you.

That does bring a close to our Q1 earnings conference call.

Thank you for joining us today.

We invite you to join the webcast of our Annual Meeting of Shareholders on Wednesday, March 19, as well as the webcast on Wednesday, April 30 of our second-quarter fiscal '08 results.

Thanks for joining us.

This concludes today's Starbucks Coffee Company's conference call.

You may now disconnect.