星巴克 (SBUX) 2008 Q3 法說會逐字稿

Good afternoon.

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

At this time I would like to welcome everyone to the Starbucks Coffee Company's third quarter of fiscal 2008 conference call.

All lines have been placed on mute to prevent any background noise.

(OPERATOR INSTRUCTIONS) Miss, DeGrande, you may begin your conference.

Thank you, 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; and Pete Bocian, Executive Vice President and CFO.

Q&A will follow today's prepared remarks.

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 22250961 through 9 PM Pacific time on Friday August 1, 2008 and on the investor relations page at Starbucks.com through 5 PM Pacific time on Friday August 29, 2008.

In addition, today's remarks will be available on the investor relations portion of Starbucks.com by the end of the day-to-day and will remain available through August 29.

This conference call includes forward-looking statements about Company plans and initiatives including its transformation agenda and trends in or expectations regarding revenue and earnings per share growth, store openings and closings, the performance of the US economy, same-store sales growth, operating margins, expense control, the Company's effective tax rate, shareholder value, capital expenditures, guidance and targets, and capital structure.

These forward-looking statements are all based on currently available operating and 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 and Starbucks quarterly report on Form 10-Q for the second quarter.

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

Lastly, during this call we will discuss certain non-GAAP financial measures.

Information related to these non-GAAP financial measures and the corresponding GAAP measures can be found in our press release on the Company's Web site at Starbucks.com.

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

Howard?

Thank you JoAnn and good afternoon ladies and gentlemen.

Today's earnings call is perhaps one of the most important in our 16 plus years as a public company.

We have taken significant steps to restructure the business for long-term and I want to be sure you will leave the call with a comprehensive understanding of these actions.

Equally, I want to share with you our unwavering confidence in the strength and resilience of the Starbucks brand and the leadership position we occupy within our industry.

During today's call, I will give you an update on the progress we've made against our transformation initiatives both in elevating the customer experience and the significant actions we've taken in fiscal '08 to structure the business for the long-term profitable growth.

Pete will then take you through our third-quarter results and provide an update for the full year.

These targets will reflect a rationalized US store portfolio and our international growth strategy as well as the current macroeconomic environment.

Finally, we will warp up by looking at what's ahead.

With that overview of what we will cover, let me start out by emphasizing that we are playing both offense and defense in our approach to the current business.

We're making bold moves towards transforming our business for the long-term and at the same time making the tough decisions to ride out this extremely challenging economic environment.

We feel good about the balance we have struck and firmly believe that the decisions we've made in the last six months will deliver significant long-term opportunities for our business.

We have been relentlessly focused on strengthening our core business by listening to our customers and delivering innovation and change to elevate the Starbucks experience.

We are also extremely encouraged by the customer reception to Pike Place Roast, Vivanno Nourishing Blends and Sorbetto.

As we continue to implement our transformation agenda, we also continue to battle the perfect storm of this economy.

The economic climate and its impact on consumer spending is a reality we are acutely aware of.

That being said, we have very clear visibility into the decisions we must make to ensure that we're well-positioned when the economy begins to improve.

I would like to first comment briefly on the actions we took earlier this week.

Following our July 1 announcement regarding our store closure program in the US, we announced a realignment of our nonstore organization that reflect what we believe to be an appropriately sized infrastructure to support the reduced number of stores.

As a result of this most recent realignment, we reduced our support organization by almost 1000 positions.

This total includes eliminating open positions as well as reducing our current employee base.

Most functions within our support organizations were streamlined, both at the Starbucks support center in Seattle and in the field across the US and internationally.

The realignment coupled with our recent decision to close approximately 600 underperforming US Company-operated stores also results in the geographic redrawing of our US retail operations organization enabling us to further streamline regional operations.

We also addressed our international nonstore organization with a focus on reducing infrastructure and building an efficient foundation for the next phase of international growth.

We specifically announced that we're restructuring our business in Australia by refocusing on three key cities and surrounding areas -- Brisbon, Milbourne and Sydney.

This restructuring includes the closure of 61 underperforming locations throughout the country.

We have tried for some time now to address the challenges that are unique to the Australian market.

After evaluating several options to help strengthen the business in Australia, we made this decision to concentrate our attention and resources on profitable growth, operational efficiencies and enhanced experience for customers and employees.

The 23 remaining locations represent high performing stores in these three key cities where we believe we can deliver financial performance and maintain a strong brand presence.

These actions in our US and Australian store base demonstrate our willingness to make tough timely decisions in areas that will improve our efficiency and cost structure.

With that said, these decisions were incredibly hard because of the personal and professional impact they have on all of our people.

We would not be the Company we are today without the tremendous commitment and contributions our partners make every day and we are committed as ever to preserving the culture and values of the Company and believe the decisions we've made will help to ensure the future success of Starbucks.

As we continue to implement our transformation strategy, a razor sharp focus on our operations is a nonnegotiable requirement.

As such, we have concluded that the CEO requires direct line of sight into our businesses and functions with a concentration on the US and international businesses in the consumer products group.

With this in mind, I have asked Martin Coles, Chief Operating Officer to once again assume the role of President, Starbucks Coffee International; a business that achieved great success under his previous leadership.

We're excited about Martin's return to our international business at a time of tremendous opportunity.

Given this change, we have eliminated the COO position.

In order to effectively manage our in-store and out of store customer experience, category innovation and go-to-market strategy, we are consolidating marketing and category leadership which includes food and beverage under Michelle Gass, currently Senior Vice President, Global Strategy, Office of the CEO.

Michelle brings unique experience at both marketing and strategy and will provide the organization with a clear voice and connection with our customers.

Dorothy Kim, currently Executive Vice President, Global Supply Chain Operations; has demonstrated an expert understanding of our supply chain operations process and strategic implementation which will be utilized extensively in her new role as EVP, Global Strategy, Office of the CEO.

Dorothy will be responsible for operationalizing our global business strategy to ensure that daily decisions and actions are consistent with long-term strategic success.

Peter Gibbons, Senior Vice President of Global Manufacturing Operations who has led manufacturing has been promoted to Executive Vice President, Global Supply Chain Operations.

Vivek Varma, General Manager of Communications and Public Relations for Microsoft Platform Service Division will join us as Senior Vice President for Starbucks Public Affairs and he will assume this position in September.

Moving on now to our work to improve the state of the US business while building for international growth, the US store closures have already begun and will continue through mid fiscal '09.

We expect these closures to increase customer traffic and sales at many stores primarily because nearly 75% of all closures are within three miles of an existing Company-operated store.

The customer response that we've received regarding the closures has been overwhelming.

We have seen everything from letter writing campaigns to phone calls to organize online petition movements.

We appreciate the loyalty and passion our stores and partners the engender in the community and we will do all that we can to channel this positive energy towards longer-term opportunities for our entire store portfolio.

We reduced our fiscal 2009 Company operated gross store opening target in the US to less than 200 stores.

We have amplified the level of scrutiny we place on future store openings based on what we have learned during our recent period of high growth and have sharpened our focus on opening only those locations that will deliver a strong return on capital.

And as I said previously, the realignment and reduction of our US support organization reflects what we believe to be an appropriately sized infrastructure to support the reduced number of stores.

We will continue to pursue growth in our international markets where we believe very strongly in the long-term opportunity.

During the quarter, we launched a promising new market in Argentina.

This was one of the strongest openings in the history of our Company and we're excited by the potential of this new market.

We also recently signed a strategic partnership agreement with the UK based SSP which will expand our presence by more than 150 stores over the next few years in airports and in train stations, a new channel for us in the UK, France and Germany.

We believe that Starbucks can play the role of the neighborhood coffee shop wherever our customers happen to be.

Our six stores in Russia are ramping up more quickly than we had anticipated and in fact these stores boast the highest average ticket in all of Starbucks.

This along with our successful launch in the Czech Republic is a promising indicator for our expansion in what will ultimately be as significant market for us.

With the world spotlight on China this summer, our 600 greater China stores will serve as a unique platform and opportunity to introduce thousands of people around the world to the Starbucks experience.

As I promised in January, we have renewed our focus on strengthening our core of great coffee and proud partners as well as elevating the experience one customer and one store at a time.

In a short time the customer reception has been decidedly positive.

Related to great coffee we had three major initiatives in this area to strengthen our core.

Pike Place Roast and was one of the first initiatives launched in response to what we heard from our customers.

We have experienced a lift in our brewed coffee business since its launch and it continues to do well.

We have also responded to customers' feedback by reintroducing bold options in the afternoon in some key markets.

This gives our customers a choice between Pike Place Roast and a bolder option throughout the day.

We began rolling out the state of the art Mastrena espresso machines and expect that nearly 30% of US company operated stores will have the Mastrena espresso machine by the end of the year with 75% getting it no later than 2010.

We will continue to expand the Clover program in the coming months and we believe our customers will be impressed as we have been with this unique best of class cup of coffee.

We have seen positive results from our stores in Seattle and Boston and building on what we've learned from our customers and partners over the past eight months, we will add the Clover to more locations in Seattle at the end of August and in Boston in September.

The Clover Brewer will debut in the San Francisco market shortly thereafter and we plan to have the Clover in 500 stores by the end of 2009.

We will market the Clover brand and brewer to differentiate and enhance the Starbucks experience allowing us we believe to drive incremental traffic into our stores.

To help elevate the experience we launched a new form that allows us to tap into the enthusiasm of our customers.

MyStarbucksidea.com continues to provide valuable insight into our customers' want and needs and we're monitoring and evaluating that feedback to inform our planning.

As of earlier this month, over 48,000 ideas have been submitted by Starbucks customers and more than 380,000 votes have been tallied on those ideas.

As I stated before, we believe our customers remain loyal to Starbucks.

They're just visiting us less frequently as a result of the economic pressures.

Recognizing these pressures on consumer spending and a continued desire to customers to enjoy the Starbucks experience, we have recently introduced a number of programs designed to provide value to our customers.

Since we relaunched our Starbucks cards rewards program in April, over one million customers have signed up.

These customers have reloaded $150 million on their cards, a rate 50% higher than a year ago and we reached $1 billion in Starbucks card sales or dollars loaded in Q3 this fiscal year more than two months earlier than fiscal year 2007.

Based on this response we will take the Starbucks card rewards program to a much higher level with significant enhancements to be introduced in time for the holiday season.

It's interesting to note that at a time when there's so much pressure on consumers, the Starbucks card is enjoying its strongest level of attachment and loyalty since it was launched with approximately one in seven customers now using the card to pay for their purchases.

I am also pleased to report that we have enhanced our strong relationship with Costco.

They have purchased one million $20 value Starbucks gift cards and we expect these cards to be a powerful catalyst for driving their members into our stores for the fall and holiday periods.

Additionally, as we introduce new products such as Vivanno Nourishing Blend and Sorbetto, our pricing strategy includes addressing consumer spending concerns.

Speaking of Vivanno, in all three markets where we launched -- US, UK and Canada -- we have seen customers embrace this new offering with a great deal of enthusiasm.

The Vivanno launch is the first in a new category of nutritious offerings under our health and wellness platform and is in direct response to customer feedback asking for healthier options.

Also on the innovation front, we recently did a limited launch of Sorbetto, an Italian inspired beverage in 300 stores in Southern California.

And this indulgent treat is getting rave reviews from customers and employees alike.

We are evaluating the potential for broader market expansion in the future.

While Vivanno and Sorbetto are in the introductory phases, early indicators demonstrate that they have the ability to drive traffic into our stores particularly in the challenging afternoon day part.

As we close fiscal 2008, we will continue to take further action of our goal of delivering long-term shareholder value and to position us to begin fiscal 2009 as a stronger more efficient Company.

We will be launching a new food platform this fall based on healthier, unique breakfast alternatives that perfectly complement our beverages.

Customers are looking for ways to add whole grains and more lean protein into their diets and the portfolio of products launching in the will meet this need.

Now you may have read in the media last week that we reversed our plans on breakfast sandwiches.

In fact, we did commit earlier this year to replacing the current breakfast sandwiches which while popular presented a number of issues.

And we're doing just that.

We've been working to adjust the recipe and are now satisfied that these sandwiches do not interfere with the coffee aroma in our stores and that the new recipe will meet the highest quality standards.

We have revamped our entire 2009 product and promotional calendar and I believe in my more than 25 years of being with Starbucks, it represents some of the best work we've done in years.

Our fall and holiday offerings will have a particular focus on value, innovation and on great coffee.

It's too early to talk specifically about these offerings but I'm confident that this will resonate with our customers.

As we move into fiscal 2009, we will continue to expand our health and wellness offering and of course we will continue to innovate around the Starbucks experience.

So while we've had to make some very tough decisions and continue to face challenges in the current operating environment, we are energized and we remain focused on our efforts to strengthen the business and build it for long-term shareholder value.

With that, I'll turn the call over to Pete.

Thanks Howard and good afternoon everyone.

Howard reviewed with you a number of the strategic initiatives we have implemented or announced over the past few months, all targeted to strengthen an our business model for the long-term and to better structure our business to weather the near-term, challenging economic environment.

We committed to you that we would take action in fiscal '08 in areas that we can control and we have.

On July 1, we announced the 600 US store closures and also recently restructured the entertainment business.

Yesterday we communicated actions in the headcount, cost and expense areas as well as the 61 store closures in Australia.

Combined, these actions are estimated to deliver a pretax benefit of approximately 200 to $210 million in fiscal 2009 which translates to approximately $0.17 to $0.18 of EPS.

Also we've continued to look at how we can more effectively use our capital and brought the dollars planned for '08 and '09 down, balancing our opportunities to invest with the currently tough economic environment.

Our goal is to enter fiscal '09 on a clear path to improving our financial performance as measured through operating income and earnings per share.

In my time today, my goal is to provide financial context around the actions we've taken, review the quarter and talk about where we stand for the balance of '08 and moving into '09.

We will plan on a more detailed look into 2009 on the Q4 call scheduled for November.

Now let's look at the third quarter.

At a high level, the quarter had a significant financial impact from the actions we took with $0.17 booked in the quarter around transformation activities, $0.14 cents from US store closures and $0.03 from canceling future store sites and restructuring the entertainment business.

From a revenue and traffic standpoint, we did see a left in brewed coffee from our Pike Place Roast launch.

But this was more than offset by our total same-store sales comps which were slightly down sequentially from Q2.

And you can see this reflected in only 9% revenue growth for the Company in the quarter.

From an operational EPS perspective, when factoring in slightly lower comps, the cost of the Pike Place Roast launch and other transformation initiatives, mainly our newest espresso and brewed standards, we were down sequentially from Q2 and from your expectations.

Now let's talk through the details of the quarter.

Consolidated revenues for the quarter were up 9% to $2.6 billion from $2.4 billion a year ago.

As just mentioned, revenues came in below our expectations driven mainly by continued slow traffic trends in the US resulting in a mid-single digit decline in total comps for the Company.

Based on the actions we announced on July 1 around the closing of approximately 600 stores over the next three quarters in the US Company-operated store portfolio, we recognize a pretax restructuring charge of $167.7 million in Q3 which represents the asset impairment for these underperforming stores.

This charge was below the estimated $200 million previously communicated due to our expected ability to redeploy some of the store assets.

Additional charges for lease terminations and related severance costs will be recognized in the periods in which they occur which we expect will take place over Q4 and into the first half of fiscal 2009.

Including the restructuring charges we reported a pretax property loss of $21.6 million compared to operating income of $245 million a year ago.

The restructuring charges WERE the largest driver behind this decline in operating income.

Consolidated operating margin was negative 0.8% for the quarter compared to 10.4% for the same period a year ago.

This margin compression was primarily due to the $168 million restructuring charges taken in the third quarter which accounted for 650 basis points of the decline.

Also contributing to margin pressure was higher cost of sales including occupancy in both the US and international businesses and higher store operating costs in the US.

Earnings per share was a loss of $0.01 for the third quarter compared to earnings of $0.21 per share in Q3 of last year.

Included in the third quarter loss was roughly a $0.17 negative impact related to transformation related costs of which approximately $0.14 can be attributed to restructuring charges and similar to the second quarter approximately $0.03 of costs were associated with the implementation of other transformation initiatives.

Let's now move onto our operating segments for the third quarter.

US total net revenues increased by 6% to $1.9 billion in the third quarter of fiscal 2008.

Company operated retail revenues rose 5% to $1.7 billion for the quarter.

In addition to the continued softness in existing store sales that I previously mentioned, the slower ramp of revenues from new stores was a contributor.

We believe that the combination of reducing new store openings and closing underperforming stores will provide our new and existing stores a better operating environment for revenue growth in the future.

Lower revenues driven by a mid-single digit decline in US comparable store sales negatively impacted nearly all of the P&L line items as a percentage of sales.

US cost of sales including occupancy costs as a percentage of total revenues increased 310 basis points to 43.4% compared to 40.3% in Q3 of last year.

Aside from the traffic, higher distribution costs were also a factor driven by the continued integration of stores into our centralized distribution model which we expect to provide efficiencies and cost savings over time.

In the quarter, we also saw higher fuel costs.

We did see a positive sign in the quarter as dairy prices started to stabilize year-over-year after five sequential quarters of significant pressure.

US store operating expenses increased 430 basis points to 45.8% of related US retail revenues compared to 41.5% a year ago.

The primary driver of increase the was softer revenues as well as costs associated with the termination of future site commitments and other in-store expenses related to transformation initiatives mainly espresso quality and brewed coffee reinvention.

US operating income declined to loss of $27.8 million for the quarter from income of $253.2 million in Q3 of fiscal '07.

The operating margin was a negative 1.4% of related revenues for the third quarter compared to 13.8% in the prior year corresponding period.

The margin decline was driven by the restructuring charges taken in the quarter which had an 860 basis point impact.

Lost sales leverage drove the remainder of the year-over-year decline along with higher store operating expenses and cost of sales including occupancy stemming from the US store portfolio rationalization and transformation initiatives.

The net takeaway for our US business is that we are in a difficult operating environment as a direct result of the current economic situation and its impact on our customers which is influencing the frequency of their visit store stores.

That said, we are taking actions in areas we can control to deliver improved financial performance in the future starting in fiscal 2009.

Let's now move onto results for international business.

International total net revenues increased 24% to $536 million in the third quarter from $432 million in the third quarter of fiscal 2007.

Company-operated retail revenues increased 23% to $450 million primarily due to the opening of 319 new Company-operated retail stores in the last 12 months and favorable foreign currency exchange primarily from the Canadian dollar.

As with the second quarter, we saw softness in traffic an our UK stores in Q3 and slower sales momentum in Canada as well as that market shows more sign of impact from the weak US economy.

International operating income increased 9% to $36 million in the third quarter compared to $33 million a year ago.

Operating margin for Q3 was 6.6% down 90 basis points from Q3 of 2007 with higher cost of sales and occupancy as the primary driver.

Unfavorable dairy costs year-over-year were also a significant driver primarily in the UK.

In our three-year targets, we projected operating margin expansion in our international business of 400 basis points over four years coming off of the 2007 baseline.

For fiscal 2009, the combination of the Australia closures and the cost expense takeout just announced, is expected to drive improvement of about 190 basis points as compared to 2007.

This excludes any charges in FY '09 related to the Australia closures.

Now moving onto results from our global consumer products group.

Total net revenues for CPG increased 4% to $91 million in the third quarter of fiscal '08 primarily driven by higher sales of our ready-to-drink products in the Asia-Pacific market.

As we've seen in prior quarters, there are fluctuations in the timing of Starbucks packaged coffee and tea product sales to craft.

In addition we saw overall softer sales from craft to the trade in US distribution channels.

Operating income for CPG rose 16% to $49 million in the third quarter compared to $42 million in the same period a year ago.

Operating margin expanded 560 basis points to 53.7% of related revenues from 48.1% reported in Q3 of fiscal '07 primarily due to the mix of revenue being less weighted toward the initial sale of coffee and tea products to Starbucks distributor and more toward profit-sharing revenues earned on the distributor sales to retailers.

As a final note on Q3, with the continued challenging operating environment, we remain conservative in our use of cash and did not repurchase any shares during the quarter.

Now moving on to our latest view of full-year fiscal 2008.

To date we've taken action on a number fronts to position us to deliver on our three-year targets starting with fiscal 2009.

Howard has talked through some of the actions we've taken and the innovations we've introduced including the introduction of Pike Place Roast, our new everyday brewed coffee offering; espresso excellence training; and the initial rollout of Mastrena; the nationwide launch of Vivanno; and in Southern California the launch of Sorbetto.

From a business model perspective we've also taken a number of actions to improve the economics of the store portfolio, get us better focused on our core and better align our cost structure to be able to grow operating income as a Company at much lower levels of same-store sales.

First, we announced the closure of approximately 600 unprofitable Company-operated stores in the US designed to both improve the direct profit contribution and also give neighboring stores a better opportunity to grow.

Second, we just announced the reduction of about 1000 open and filled positions in the nonstore part of the business.

This is an addition to reductions taken in February and June of this year.

As a reference point, our store headcount is about 95% of our entire employee or partner base.

The combined actions taken represent a significant reduction in nonstore positions.

Third, we took action on Australia, a market that I had talked about previously though indirectly.

With a smaller store base, we expect to significantly improve the financial results of that operation.

And there have been other actions including slowing future new store development and restructuring our entertainment business.

In total, we expect the the in-year fiscal '09 benefit of these actions as compared to fiscal '08 to be roughly 200 to $210 million pretax which excludes the related carryover of the lease termination and severance costs from store closures.

From an EPS perspective, we recognize that 2008 is a complicated story with a number of restructuring costs, onetime investments, and partial year impacts.

These include the $0.19 year-to-date impact from restructuring and other transformation costs identified to date along with Q4 costs associated with the store closures in the US and Australia and the severance impact of the Q4 headcount action.

The timing of restructuring charges will impact our GAAP reported EPS in both the fourth quarter of fiscal 2008 and the first half of fiscal 2009.

If we look at full-year fiscal 2008 non-GAAP EPS, we expect to be in the mid $0.70 range.

This is down from our previous directional guidance of being somewhat below 2007 EPS of $0.87 driven primarily by reduced levels of traffic versus our previous expectations and to some extent increased cost of brewed coffee and espresso quality.

With that starting point, as I stated earlier, we have taken action that we expect will deliver 200 to $210 million in pretax benefit or add $0.17 to $0.18 of EPS next year.

As mentioned previously, the goal here is to deliver on the 2009 profitability targets which are $0.90 to $1.00 in non-GAAP EPS.

To reach that target range, we need to deliver low-single digit same-store comp growth through increased traffic against a soft 2008 compare.

We also are driving for improved efficiencies in our US store operations as well as in our supply chain and procurement areas, all intended to deliver EPS expansion and cover the expected labor rate increases and commodity cost pressures.

Before I talk more about 2009 let me also talk through a couple of other changes for 2008.

Year-to-date we've reported revenue growth of about the 13% versus the first nine months of 2007.

Consistent with the EPS guidance, we now believe revenue growth for the full fiscal year will be around 11% compared to our prior expectations of 13 to 14% growth.

Looking at our store opening targets, including the US store closures estimated at approximately 200 for this year, we now expect net new store openings in the US of about 900 evenly balanced between Company-operated and licensed stores.

This compares to our original target of roughly 1700 net new stores in fiscal 2008 and represents about 50% reduction from actual FY '07 US store openings.

In our international markets, we along with our JV and license partners are taking a more conservative approach in light of the current global economic factors.

Including the just announced 61 stores closing in Australia, we're now targeting net new store openings during fiscal 2008 of approximately 825 against our previous target of roughly 975.

While we continue to believe in the long-term growth opportunity in our international business, we are taking the learnings from our US market experience and approaching our international growth with cautious optimism given the current economic Environments.We now expect capital expenditures to be about $1 billion lower than our previous expectation of $1.1 billion.

Now let's look ahead at some updates to 2009.

Today I'm going to give you a few comments on fiscal 2009 and then plan to provide more detail on our fiscal year-end 2008 earnings call scheduled in November.

Relative to the three-year targets, looking out to 2011, we plan to come back and discuss these at our biannual analyst conference scheduled for December 4 in New York.

We're maintaining our EPS target range for 2009 of $0.90 to $1.00 on a non-GAAP basis.

As mentioned above, building off the 2008 guidance, we've taken actions that put us on the path to achieving this goal.

What still remains is to drive increased traffic in the stores and improve efficiencies in our US store operations as well as in our supply chain and procurement areas.

You should look for updates on our progress as we move forward.

In looking at net new store growth, we continue to assess all our planned openings in light of this economic environment.

For 2009, we have lowered the number of planned openings in both the US and international markets.

Let me now break it down for you.

Earlier this month, we indicated that we would reduce the gross number of new Company-operated stores openings in the US to less than 200 stores in 2009.

When netting out the approximate 400 remaining announced store closures against the openings we have planned for fiscal '09, we expect a decline in total US store openings of around 60 net new stores.

This includes a reduction of approximately 225 Company-operated stores and an expansion of around 165 net new license stores.

Our international expansion plans now target 900 net new stores in fiscal 2009 with joint venture and license stores still representing about two-thirds of that activity as our business partners play an ever-increasing role in our growth strategy.

Our revised international store opening target factors in the current global economic climate with a cautious approach in the UK and Western Europe.

Turning to the use of capital, with the reduced store count targets for fiscal '09, we're now lowering our capital expenditure target to about $750 million.

So in closing, we have taken a series of actions to improve the long-term health of the business -- closing of unprofitable stores, slowing the ramp of store buildout, rightsizing our cost and expense structure and reducing the capital requirements of the business.

At the same time, this is a traffic driven business and we continue to invest in innovation and differentiating ourselves in the market.

With that, I will turn the call back over to Howard.

Thank you Pete.

I hope that you now have a comprehensive understanding of the current state of our business and of the decisive actions we're taking to position the Company for future growth.

It should be clear that we are doing everything within our control to ensure that the business is operating at peak efficiency, making prudent decisions and staying focused on innovation that has always been a hallmark of our Company.

As you know, there are no quick fixes but I can state with conviction that we are doing all the right things to exit this challenging period even stronger than before.

With that I'm happy to open up the call to your questions.

Thank you.

(OPERATOR INSTRUCTIONS) Jeffrey Bernstein, Lehman Brothers.

I think you mentioned something about assuming low-single digit positive comps for fiscal '09.

Just wondering within there if you could talk a little bit about the pricing assumptions.

I believe you're now lapping last year's increase in the next couple of days.

Just wondering how much pricing power you believe you have and are you willing to absorb for the margin pressure to potentially avoid further traffic loss.

And kind of as a follow-up to that if you could just talk a little bit about your commodity cost assumptions.

I know you made a quick comment on dairy but if you could just talk about as you're looking at the fiscal '09 what you're thinking about in terms of coffee and dairy products for the next year.

Thanks.

Yes, we have been consistent in driving for 2009 through 2011 to be able to improve operating income and make our EPS targets at -- let's call it relatively low same-store comps, investing in innovation to drive more traffic and comps but having a financial model that is healthy at call it 2 to 3%.

So we have been consistent on that when we established the targets three months ago and that is our current plan and in that really no assumption around taking pricing in '09.

On the commodities, let me just deal with '08 in that we still have about a $0.03 dairy assumption for the year for 2008.

We have done pretty well on the coffee side and relatively immaterial year on year for coffee for 2008.

And then what I will plan on doing on the Q4 call in November is really going through in more detail as we look ahead into 2009 how the commodity costs look at that point time.

But as I said, our goal is to drive the comps, needing about 2 to 3% to make our objective.

And then as we work US store operation efficiencies and supply chain and procurement efficiencies, they are intended to mitigate any labor rate pressure or commodity cost pressure in 2009.

John Ivankoe, JP Morgan.

Actually just a very quick housekeeping question if I may and then a little bit of a broader question.

Pete, in the guidance for fiscal '08 for mid 70's, what EPS are you assuming for the second quarter?

15 or 18?

In other words should we exclude that $0.03 in the second quarter?

What we have done in the non-GAAP EPS of mid 70's, we have excluded the $0.19 year-to-date which would include the (inaudible) $0.03.

So from the math you were doing it would put it from the 15 to the 18 and then excluded the $0.17 in Q3 and then there will be Q4 GAAP EPS impact from the store closures whether it is Australia or the two (inaudible) lease terminations and severance around the US.

So that is why you should look at the mid 70's as not including any of the year-to-date $0.19 nor what we expect to happen in Q4 around the closures.

Fair enough.

And secondly and a little bit of a follow-up on Jeff's question, he asked a question on pricing for 2009 and my -- what I would like Howard to address if possible is the comments on value promotions in the fiscal first quarter, a focus on value and exactly what that may entail whether it would be actually advertising price points or discounting or combos.

If you could just give us a sense of where the brand may be heading over the next couple of months.

We have no intention of doing things that would dilute the integrity of the premium position that Starbucks occupies.

What I mean by that specifically is we're not going to go down the fast food lane and do things that are what I believe not in the long-term interest of the value of the brand and the experience.

We have been testing a number of initiatives in many markets over the last I would say two months or so and some of those initiatives are proving to be interesting.

We're gaining as much insight as possible.

But you're not going to see us bundle product in a way that would be consistent with fast food.

I do believe that given the attachment and the asset of the Starbucks card and the plans that we have for the card in the fall that there is a big opportunity there and that is a hidden asset that I don't think we have exploited in the past.

And given the traction we have gotten in the last couple of months and how many people have signed up, it looks like something that is quite interesting and given the environment something that we really can use to our advantage.

So that's the place where we are going to go.

(OPERATOR INSTRUCTIONS) John Glass, Morgan Stanley.

Thanks very much.

Pete can you break out the $0.17 to $0.18 of benefits next year into the three major categories that you talked about [around contributions]?

And can you -- how do we -- do we think about this as actually dollars that you have saved or has some of this calculation avoided future costs?

And I know I'm not supposed to do this, but can you talk about the tax rate you're assuming for '08 as well?

Thanks.

Yes, let me just give you order of magnitude around the three areas that contribute to the $0.17 to $0.18 and you should look at that as an end year '08 vs.

'09.

So, for example there will be some partial impact benefit this year from the actions.

We have netted that out to look at a year-on-year comparison.

Australia is relatively small relative to the other two and then I would say more than half is around the headcount action with the rest being the US store closures.

Stephen Kron, Goldman Sachs.

If I could just ask a quick follow-up to that.

If you're thinking about the $0.17 to $0.18 does that also include a benefit as you guys describe the same-store sales that may ensue from the existing store base or is that separate?

It assumes some element of that but the majority is the direct impact of the profit from the underperforming stores.

And then the tax rate for next year we are expecting about a one point improvement consistent with our long-range targets which we talked about in April.

So yes -- so I would just go back to the targets.

We have some things moving around in Q3 that gave us benefit for the year.

But if you look back at the long-range targets, we said about one point a year starting from the '08 at that point in time.

One thing about the comps, I think we're having -- taking modest assumption with regard to the incrementality from the closed stores in '09.

I do think it's early and it's a small store base but the 50 stores we closed are showing incrementality in the stores that are in its proximity which is encouraging.

Larry Miller, RBC.

Yes, I wonder if I can follow-up sort of on the $0.17 to $0.18 and ask the question a different way.

Can you give us an idea what kind of US margin benefit you're thinking about in fiscal 2009 relative to a [clean] fiscal 2007?

Yes, what I would like to do is come back on the Q4 call in November and talk in more detail.

I did talk about international today around the 190 basis points from the '07 baseline.

We think we are on track relative to CPG in terms of the long-term targets which were around the 15% growth and 50 points of operating margin.

We also believe we are on track maybe slightly ahead in terms of the unallocated G&A.

I think by looking at those three components, you can somewhat back into the US operating margin that is required to deliver the $0.90 to $1.00.

I'll give you more detail in November but that is the way I would frame it in terms of we believe we are on track relative to unallocated G&A, CPG.

We have taken two significant actions relative to international and then there is an operating income with the tax rate that feeds the $0.90 to $1.00 and we will talk more about that in November.

Joe Buckley, Banc of America.

One follow-up and then a real question.

I think what John Glass was asking was the tax rate for '08 because it looks like $0.16 is the real number; it looks like a very low tax rate in the third quarter.

Am I correct in that?

Yes, the tax rate is heavily skewed in the third quarter by the restructuring.

We also did get a benefit around some audits.

So it would be slightly better.

I would just put slightly better in full year '08 excluding the restructuring than you had there before.

Okay and then on the international side, you took quite a few units out of the expansion plans and you mentioned Western Europe and the UK.

Are you cutting pretty broadly across those markets?

I think as we said in the prepared text, I think we want to be very cautious.

I think there are signs in the UK that are difficult to predict but there are signs that remind us of what happened here in the beginning of '08 and those kind of bode downward in terms of consumer spending (inaudible) want to be very careful and in markets like Spain and Greece, specifically in Spain, they are experiencing a very, very tough economy.

In view of that we want to be as cautious as possible and not overexpand at a time when the consumer may be under significant pressure.

But offsetting that, the openings in the last six months or so in Brazil and Argentina and the ongoing success we are enjoying in Mexico and although it's only six stores in Russia stores, there's a lot of places where we can make that up.

We'll just see how the year goes.

David Palmer, UBS.

Howard, I wanted to ask you about innovation.

You have discussed in the past how innovation has not been all that incremental in the last couple of years.

You had the Pike Place Roast and tat seemed to have big cost and it gave a boost but maybe not that big of a boost and you mentioned Vivanno has gotten positive reviews.

But your guidance for the fiscal fourth quarter has mid-single digit declines continuing.

So I'm wondering -- I want to get a sense of your confidence going into this fall innovation wave, when do you think that this will start to take root and really drive more incrementality in terms of improvement in the overall comp?

I don't want to be sarcastic in any way but can you tell me when the economy is going to improve?

Do you -- so you feel like (multiple speakers)

I think what we're seeing is two stories here.

Pike Place Roast, Vivanno, both national footprint launches and Sorbetto in California, all three introductions.

We have seen incremental take rate on all three products.

In a normalized environment, we would have seen an uptick in traffic and in comp store sales as a result of that in terms of past history.

But because of the ongoing pressure in our business, and for that matter almost every other premium retailer and brand that we talk to, we have been unable to move the needle upward because we still have a significant amount of headwind.

And so in some cases we are moving the customer from one beverage to another.

I think the encouraging factor though is in both Sorbetto and Vivanno for the first time we do see an uptick in the afternoon traffic and that has been the burden for the past six months or so or even more than that.

But clearly, we are facing a headwind in terms of the economy that's very, very difficult to kind of crack through.

It's very encouraging though that we launched a national platform with Pike Place Roast and Vivanno that are incremental.

And the Sorbetto products has been even better in Southern California but not enough to move the needle yet.

And we're going to continue with innovation in the fall and holiday and as I said in my remarks we have got a great calendar for calender '09.

But until the economy significantly improves, we are just trying to do what we can to get through this storm and be much stronger when it improves.

Sharon Zackfia, William Blair.

Pete, question for you on the comp guidance for next year.

You've got the $0.17 to $0.18 in benefit now that I don't think was fully anticipated when you talked to us last.

So why isn't the bar for comps a little bit lower for the same guidance reiteration for next year?

What's happening is that the '08 has gotten a little softer.

So the starting point has moved away from us a little.

We have continued to take actions and sized them for you in the $0.17, $0.18 but that is really the difference in communication is some movement in '08 lower than we expected which is in sync with the mid $0.70 EPS guidance is almost exclusively driven by lower same-store comps and then therefore we have got a little bit higher hurdle for next year relative to comps.

I would add one other thing and that is we have talked to many people who are trying to calibrate the economy in consumer spending in calendar '09 and their advice to us is in many cases to assume at best that the consumer is going to be at parity where they are now.

So I don't think this is any time to give guidance on comps that is more aggressive then we've already done.

Matthew DiFrisco, Oppenheimer.

Howard, I guess I want to -- you always get this question asked but I might as well ask it again.

Franchising -- has something -- are we going to look at this maybe as a potential opportunity in some of the markets when we look at not the 75% where you have a store within three miles but if you look at towns like Baton Rouge for instance, it seems like you have exited a -- large areas of the middle of the country and left sort of just maybe some iconic type location there for stores.

Could you ever entertain or do we think we're at the point maybe where it might be a strategy to do regional franchise development agreements within the United States?

I know you have asked that question before.

What I want to try and answer for you is just the way that we're looking at this.

You know if we thought that -- and perhaps there are people on the call who do feel that way -- that the best days of Starbucks were behind us and that the long-term opportunity that we have as a Company and the long-term opportunity of the unit economics of Starbucks are we're not going to be as strong as they have been in the past then perhaps we would be looking at different financial structure.

But when we look at the opportunities that we have coupled with some of the mistakes that have been made and the headwind of the economy, we believe strongly, unequivocally in the model, in the brand and have great confidence that we can return a much higher long-term value for the shareholders given the current structure of how we're organized.

The other pieces of that is that so much of what we do and what we've been able to do around the experience and the brand is based on the people side of Starbucks which has been the brand.

So at this time the answer is the same as it was when you asked it previously and that is what we are maintaining the current strategy we have and we think that is right one for the Company, our customers and for this audience most importantly our shareholders.

I recognize that was a US question, but just to reemphasize that as we move and grow internationally we're continuing to do two-thirds more or less with joint ventures and licenses where we don't have the scale and where they have an infrastructure and presence that can add value.

So we are expanding internationally with a heavy license content.

Operator, we have time for one more question today please.

Howard Penney, Research Edge.

I guess you have been at the process of restructuring and rightsizing the organization for seven or eight months now.

As we've moved over the seven or eight months the issues have gotten to where we have gotten more store closings, more people have been let go and now international is starting to see a little bit of a slowdown.

To the degree that you can, can you sort of take me inside the thought process of Starbucks as we've developed over these eight or nine months and how the incremental process is working and where we are from a timing standpoint?

I think I understand the question.

I will try and answer it as best I can.

I returned January 7 and the management team and I have been I think very, very focused on trying to answer and ask the toughest questions possible about the core business and the domestic issues.

And at the same time, I think we also tried to be very open-minded about the mistakes that were made, not point fingers, not blame anybody, but solve the problems.

I think we've demonstrated with this audience and with our people the ability to not only ask the tough questions but to make the tough decisions as evidenced by what we did this past week.

When you look at the power of the Starbucks brand, I think it is being overshadowed and in many ways overdone by the cloud that is hanging over the Company because of the performance over the past year or year and a half.

We have studied lots of companies that have been through this.

Some have not made it through, many have.

I think the companies that have made it through have embraced their core purpose, have had confidence in the equity of the brand and what they stand for, and have been able to answer the question about what is it that we really do well and what can we be proud of.

Aside from the performance and the stock price, what has not changed is the fact that ethically if you look at Starbucks, we are sourcing (inaudible) ethically the highest quality coffee in the world.

We're known for I think the culture and values and guiding principles of our Company and there is an unbelievable reservoir of trust that exists between our partners and our people.

The brand was built that way.

I think in times like this, it's very easy and I think you have a tendency to kind of grab for things for a quick fix or a silver bullet.

I know that this audience does not have as much patience perhaps as we need to at times but the fact is that we have made the right choices, we see the light at the end of the tunnel, we'll demonstrate that during fiscal '09, we have completely revamped the calendar of products and promotions and what we're going to do in '09 with I think a couple of surprises built in in the calendar year.

And I think it's going to be positive.

We can't predict the economy and I think the thing that is sometimes missed here is that the economy has gotten worse in terms of consumer spending, consumer confidence since January.

And who could have predicted would be paying close to $5 a gallon for gas?

No excuse but that is the reality.

So we have got to manage through that.

We've got to I think make sure that we demonstrate to you that the management team is up for this and the proof is not in the talking and not in this conference call but in the doing.

Now I've had a long history here.

It may not stand for anything other than the fact I have been here but I can tell you that we are in here every single day passionately committed to not only the process but winning.

And ladies and gentlemen, Starbucks is going to win.

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

Miss DeGrande, are there any closing remarks?

Yes thank you.

That does bring our third quarter earnings call to a close today.

We invite you to join the webcast of our 2008 fourth-quarter and fiscal year-end earnings results in November.

And as Pete noted, the biannual analyst conference is scheduled for December 4.

We will be sending details our shortly.

Thanks again for joining us today.

Ladies and gentlemen, this concludes today's Starbucks Coffee Company's conference call.

You may now disconnect.