星巴克 (SBUX) 2008 Q4 法說會逐字稿

Good afternoon.

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

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

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

After the speakers' remarks there will be a question-and-answer session.

(OPERATOR INSTRUCTIONS) Thank you.

Ms.

DeGrande, you may begin your call.

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

With me today are Howard Schultz, Chairman, President, and CEO.

Pete Bocian, our outgoing Executive Vice President and CFO, and Troy Alstead, who will be assuming the CFO role at the end of this month.

Also with us is Arthur Rubinfeld, President of Global Development.

Q&A will follow today's prepared remarks.

Before we get started, I would like to remind you that this conference call will contain forward-looking statements, that should be considered in conjunction with the cautionary statements contained in our earnings release, and in the Company's most recent SEC filings.

Forward-looking statements are subject to various risks and uncertainties, that could cause our actual results to differ materially from those statements.

Starbucks assumes no obligation to update any of these forward-looking statements or information.

Please see our filings with the SEC including our last Annual Report on Form 10-K, and subsequent reports on Form 10-Q, for a discussion of specific risks that may affect our performance and financial conditions.

Also please refer to the Investor Relations section of Starbucks website at www.starbucks.com, you will find disclosures and reconciliations of any nonGAAP financial measures mentioned on today's call, with their corresponding GAAP measures.

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

Howard?

Thank you, JoAnn.

And good afternoon, ladies and gentlemen.

Before I provide an overview of the quarter and fiscal 2008, I would like to take a step back for a moment.

Ten months ago, as we reported our first quarter results for fiscal 2008, I detailed an extensive and ambitious plan to transform the Company.

We were beginning to feel the headwind of the slowing economy, but we were determined to take the necessary steps to position Starbucks for continued growth.

Today after taking those difficult but necessary steps, I speak to you with a renewed sense of optimism about our ability to succeed in fiscal '09 and beyond.

We have rearchitected our cost structure which will allow for operating margin expansion.

We have a significantly healthier portfolio, focused on geographies and locations with the best opportunity for growth.

We have taken steps on value and loyalty to reward customers, which is clearly a critical area in this difficult economy.

We have maintained an intense focus on strengthening our core business, particularly our coffee leadership.

And we have a leadership team and store partners who are reenergized and galvanized toward a common purpose.

This year of transition is over.

The steps we took in fiscal 2008 have given us a line of sight and the flexibility to drive EPS expansion, even in this uncertain operating environment.

As I speak to you today, I am confident that we are on the correct course for these challenging times.

We are doing what I believe to be right, retaining our core customers, providing value in a way that is meaningful to our customers, investing in our people and our culture, and being relentlessly decisive, on both consumer facing initiatives and on cost control.

With the foundation of a world class brand and continued customer loyalty, Starbucks can and will weather the current economic storm by staying the course.

During today's call, I will give you an update on the progress we have made against our transformation initiatives.

In Q4 and for the fiscal year, as well as a look at what we have planned for fiscal '09.

Pete will then take you through detailed fourth quarter and full year results, as well as the impact from the current macroeconomic environment on our business.

And finally, Troy will provide an outlook for fiscal '09, and then we will wrap up.

With that overview, what we would like to cover, let me emphasize that while our go to market strategy has positioned us well for fiscal '09, we are continuing to make bold moves and tough decisions towards transforming our business for the long-term.

We firmly believe that the decisions we have made in the last 10 months and the strong management team we built during that time, will deliver significant long-term opportunities for our business and our shareholders.

Like other retailers, we continue to face a very difficult economic environment, both in the US and abroad.

We have a similar view to other companies in that it remains unclear how long and how deep this downturn will be.

However, I feel confident about our position for three main reasons.

First, we felt the effects of the downturn early, and we have been preparing for it, this uncertainty for some time.

The store closures and reductions in force have been tough but necessary.

We continue to be very conscious of our spending and cost efficiency opportunities.

Second, recent retail results indicate that we may be faring better than many other high end retailers, suggesting the changes we have made to date are having some impact.

Other premium retailers have seen double-digit declines in both comps and traffic in October.

Third, we have very clear visibility into the decisions we must make going forward, to ensure that we are well-positioned for a continued economy, as well as for when the economy begins to improve.

We are prepared to adjust expenses as needed as we move into fiscal '09.

We are particularly attuned to highly creative and relatively low cost quick turn opportunities to drive traffic in our stores, as you saw just last week on Election Day.

Incidentally, through a combination of a single paid broadcast spot on the second highest rated 'Saturday Night Live' in over a decade, and an aggressive and viral marketing and PR campaign, we were able to reach 150 million consumers with our offer.

According to brand index last week, Starbucks' positive buzz rating jumped from 25% on October 31 to to 51% on November 5th, a significant shift for a one day promotion.

I would like to now provide a high level overview of our fourth quarter and full fiscal year end results, and Pete will fill in the details in his own remarks.

There were 132 net new store openings for the quarter, 1,669 net openings for the full year, significantly less than a year ago.

We ended fiscal 2008 with 16,680 stores globally.

Consolidated net revenues were $2.5 billion for Q4, up 3% year-over-year.

$10.4 billion for the full fiscal year, up 10% year-over-year.

Operating income was $14.2 million in Q4, operating income for the quarter reflects $99 million in restructuring charges, associated with decisions to close approximately 600 US and 61 Australian underperforming Company operated stores, and reduced non-store headcount.

Operating income was $504 million for fiscal '08 including approximately $267 million in restructuring charges.

Earnings per share for Q4 were $0.01, which included $0.09 related to restructuring charges and transformation strategy related actions for the full year.

EPS was $0.43 including $0.28 relating to restructuring charges and transformation strategy related actions.

Pete will provide more detail including a link to nonGAAP EPS in his remarks.

The Company also generated $1.3 billion in operating cash flow in fiscal '08.

As I mentioned earlier, we began fiscal '08 by developing a transformation plan to position us for long-term growth.

Our focus was three-fold.

Strengthening the core business, elevating the customer experience, and investing in and growing the business profitably.

As we turn the page on fiscal '08, a year of transition and transformation is over, and we are well into the implementation phase of our strategy.

Pete will discuss the details around the decisions that have led to a healthier store portfolio.

And as I said over the last few months, we have made tough decisions in fiscal '08 over store closures, streamlining our leadership structure, and non-store organization, as well as doing the work necessary to reduce our capital allocation for fiscal '09.

In addition, we took steps to improve efficiencies in our store operations.

We took on some costs in fiscal '08 associated with our core renovations, that will play out as efficiencies in '09 and beyond.

We also began some work which will carry over into fiscal '09 around improving efficiencies in our supply chain organizations, which will benefit our stores and our back end cost structure as well.

In fiscal '08, we increased focus on coffee and our partners.

Our brewed coffee efforts with Pike Place Roast have shown particular traction in both the Northeast and New England, which are strong brewed coffee markets.

We engineered our entire brewed coffee offering to improve freshness and quality, by bringing back fresh grinding in the stores, and shortening holding times.

This has resulted in shared growth in the away from home brewed category, as well as improvement in our customer taste satisfaction scores.

In addition, we trained our partners in espresso excellence, pulling the perfect shot, steaming milk, and customizing beverages to order.

This too has resulted in improved quality satisfaction, further early customer reception to both Clover, now in 50 stores, and Mastrena, now in 1,500 stores, have been encouraging.

These investments have been extremely well received by our partners and coffee enthusiasts, as we delivered a thoughtful deployment plan in fiscal '08.

We made our first entry into the health and wellness product offerings by launching Vivanno Nourishing Blends, and by introducing new healthy food platforms, including Perfect Oatmeal.

Amidst challenging difficult traffic realities, we saw food attachment and ticket increase with the launch of this new healthy food platform, and have seen this sustained as we have moved beyond the initial promotion.

We are encouraged by these results, and health and wellness will continue to be a focus in '09 and beyond.

At the same time, we fully understand that food and beverage innovation alone is not the sole path to traffic incrementality.

As the economy put increasing pressure on consumer spending over the course of the year, we tested and implemented a multi-tiered value strategy in fiscal '08, with a plan to apply what we learned, to develop a unique and brand appropriate value offering for Starbucks in fiscal '09.

We launched a new core value platform entitled Starbucks Card Rewards, and dramatically increased our base of registered card holders, which is now over 5 million customers.

As one of the top requests, on MyStarbucksidea.com, we believe we have tapped into a big customer need for Starbucks, and are providing valuable benefits to these customers.

While we are still in the early days, we are seeing encouraging results, the most compelling being that we have an incremental $70 million versus this time last year loaded onto cards, and ready to be spent in the coming months ahead.

This speaks volumes about the loyalty of our customers, the relevancy of the Starbucks experience, and their commitment to us.

We also challenged ourselves to find meaningful and differentiated limited time offers to address soft spots in our business.

This led to the Treat receipt offer, which produced incremental comp traffic during the summer months.

As we ended the year, we tested a new value platform, the Starbucks Gold Card.

More on that in a few minutes.

The bottom line is that we have learned that we can provide more value for our customers in a way that still delivers the quick essential Starbucks experience, and we will apply this learning in ways that build on our brand and customer engagement in fiscal '09, just as we did last week with our traffic driving Election Day brewed coffee offering.

As you may know, we brought our North American leadership team to New Orleans two weeks ago.

This was a significant investment in what has differentiated Starbucks over these many years, our store partners.

Given that approximately 85% of Starbucks revenues comes from our retail stores, the leadership conference was a crucial investment in our partners, our customers, and in our Company.

In New Orleans, we asked our store managers and the broader leadership team to step up, and to be accountable and personally responsible for every aspect of their respective business.

We are providing the tools and the technology to enable them to manage their stores in a way that optimizing resources, applies real-time data, and supports effective planning, and we introduced a new incentive program to reward higher performing stores.

We also outlined commitments to deliver against a reinvigorated brand platform called Starbucks Shared Planet.

We believe this socially responsible approach to our business will pay off with customers around the globe, who want to do business with companies dedicated to doing the right thing, and companies that they trust.

Starbucks Shared Planet is a comprehensive long-term strategy of differentiation.

The renewed focus on global responsibility is critical to our brand, and our core value to many of our customers, in key markets like North America and the UK.

Our recent announcement with Fair Trade, an ongoing work with Conservation International in key coffee growing regions around the world, will continue to build a defining industry position, around our coffee buying and our sustainability efforts.

We plan to tell this story aggressively with our partners in the NGO community.

By doubling our purchases of Fair Trade certified coffee, and becoming the largest seller of Fair Trade coffee in the world, we increase relevance with our partners and our customers.

In addition to being the right thing to do, a significant body of research, suggests that consumers care about socially conscious brands, and support companies that are pursuing responsible business.

We left the conference galvanized, focused and determined as ever to enhance and preserve the culture and values of the Company, with a renewed focus on customer experience and personal accountability.

I firmly believe that we made the right investment to ensure the long-term health of our brand, and that the investment will continue to pay off as our partners take specific actions to improve store performance.

Over the past few weeks, signs of improving comps have appeared episodically.

Though it is too early to call a trend, particularly with the important holiday period still in front of us.

That said, October did not show further deterioration to comps or traffic.

A possible indicator that Q4 may have represented a bottoming out milestone for our Company.

A revised US growth strategy focuses less on adding stores, and more on building the business within existing stores, by prioritizing profitability and the customer experience.

Store closures proceeded on pace with plan, and as the store portfolio evolved, we remain focused on the resulting efficiencies.

As we have projected we have seen traffic increase in stores that are in near proximity to closed stores.

We opened stores in the US during the quarter, but only in locations that are best positioned to deliver a strong return on capital and shareholder value.

Let me talk a little bit about international.

As the US downturn has spread to Europe and beyond, we have been seeing weakness in some overseas markets.

That said, we expect our international growth strategy, which relies heavily on the licensed store model, will continue to contribute to growth in fiscal '09.

During fiscal '09 we entered two new markets, the Czech Republic and Argentina, and we recently opened our first store in Portugal.

These openings have been wonderfully received in these countries, we continue to expand the global reach of our packaged coffee, tea, and ready to drink products in international markets.

Asia in particular has exceeded expectations for our consumer packaged goods offerings.

We have also gained strong support of our ready to drink products with key retailers in Mexico.

In Switzerland we launched packaged coffee in 200 grocery stores, the first time our packaged coffee has been available outside of our retail stores in Continental Europe.

As I alluded to earlier, we began fiscal '09 in a stronger position than we did in 2008.

Our operational structure and store footprint, along with a solid and well-thought out product and promotional calendar, will allow us to successfully navigate the economic crisis, and emerge as a stronger, more efficient company.

We are taking a different approach to the holidays this year, and preserving our Christmas launch until we have had an opportunity to celebrate Thanksgiving.

With that in mind, we introduced our new Thanksgiving blend coffee, created in conjunction with restaurateur and celebrity chef Tom Douglas.

This new blend gave us the opportunity to showcase the culinary aspects of coffee, and once again differentiate Starbucks.

The response to Thanksgiving blend is ahead of our projections.

Our Election Day free coffee offer spurred significant sales of Thanksgiving blend, and we are on track to sell out of our inventory prior to Thanksgiving.

Later this month, we will launch what I believe to be the most relevant holiday lineup in our history.

While all retailers are in for a tough holiday season, we have competitive offerings at a variety of attractive price points, with a view towards maintaining strong margins.

We are also offering customers a new reason to buy our special holiday beverages, beginning on Black Friday, the day following Thanksgiving, through our partnership with Product (RED), and it's founder Bono.

The (RED) partnership, part of Starbucks Shared Planet will create awareness, and we believe drive significant trial.

This is yet another way in which we are connecting with our customers and differentiating ourselves, at a time when values mean more than ever before.

In these economic times, we are keenly aware of the increasing importance of value to our customers.

The work we did in fiscal '08 to identify value options that resonated with our customers will continue to play out in fiscal '09.

The enthusiastic response to our special Starbucks card offering through Costco, bodes well for our holiday season.

And we expect the millions of cards sold to begin generating traffic, even after the holidays are over.

The Starbucks Gold Card which we officially launched this week, was thoughtfully and carefully planned.

Gold Card holders receive a 10% discount on all store purchases, free Wi-Fi, and exclusive offers and discounts.

Annual Gold Card membership costs are $25.

We saw promising results when the program soft launched in October.

And last week when we launched in stores, we outperformed our initial ambitious projections by five-fold.

We believe this is the kind of value that customers expect from Starbucks, and we are extremely optimistic about the program.

We are being disciplined in our approach to value, to ensure that discounts do not erode our premium brand, and the position that we occupy, while remaining responsive to the uncertain consumer environment.

We also remain focused on programs that we believe can increase sales, while balancing any impact on margins.

In terms of competition, we are keenly aware of the competitive environment, which is why we are so focused on leveraging the heritage and differentiation of our brand, as well as the opportunity to provide value in a way that is consistent with how we do business.

We offer the finest ethnically sourced and roasted coffee in the world, as well as a unique experience that has defined the specialty coffee business.

So when fast food companies try to compare their coffee to one of dozens of high quality coffees we offer, we believe our customers know better.

Our customer base is different and there is less overlap than people might believe, in any case because of the actions we took in fiscal '08, including our new cost structure, we are better positioned to win in a competitive market than ever before.

So while we continue to face challenges in the current operating environment, we accomplished many things in fiscal '08 which strengthened our business and our model, and put us in a stronger position to help us weather these unprecedented times.

Because we took action early, we enter fiscal '09 with a rearchitected cost structure, a much healthier store portfolio, a firm grasp on how to deliver value in a brand appropriate way, a strengthened leadership team in our core, our product, our coffee, and a team that at all levels is ready to deliver against this plan.

With that I will now turn the call over to Pete, who will review our Q4 and full year results.

Before I do that, I want to just take a moment to thank Pete for his many contributions to Starbucks.

Pete is leaving the Company later this month to join HP.

After Pete's remarks, we will hear from our new CFO, Troy Alstead.

Troy started with Starbucks in 1992, prior to our IPO, and has contributed greatly in a range of finance and operational roles.

He was a finalist for the CFO role when Michael Casey retired, and we are lucky to have him ready to step in and continue the work, that Pete and the leadership team have done over that past year.

Troy has worked closely with me over the years, and I look forward to his partnership.

Both Troy and members of his management team look forward to seeing you at the Analyst Conference in New York in early December.

Pete?

Thanks, Howard.

Good afternoon, everyone.

Howard provided you with a recap of a number of the strategic initiatives and actions we took in 2008 to strengthen the business.

In my time today, I will provide additional details on our fourth quarter performance, which included executing on a number of the strategic actions.

I will then recap 2008 fiscal full year results, and provide an overview of how we look as we enter 2009.

Then Troy will provide you our more detailed view for fiscal 2009.

With the challenging operating environment as a backdrop, we continue to focus on implementing the transformation initiatives we laid out this past fiscal year.

In the fourth quarter, we closed about 200 of the 600 US Company operated stores, that we had identified in Q3 as underperforming, based on a detailed review.

We also closed 61 Company operated stores in Australia, and reduced our leadership and non-retail staff levels by about 1,000 positions.

I characterized these actions in two categories.

First, we acknowledged that some real estate decisions made during the last few years were not good investments, and took action.

Second, we saw a slower growth trajectory going forward, and better aligned our cost structure.

Let me now provide you with a closer look at total Company fourth quarter results.

We reported a 3% increase in consolidated revenues for the quarter to $2.5 billion, from $2.4 billion a year ago.

This was short of our expectations entering the quarter, and was driven by continued deterioration in same store comps.

As a note, this miss also showed up in operating income and EPS for Q4, which I will discuss later.

Comparable store sales weakened further in Q4, driven both by declining traffic in our US business, and a decline in average value per transaction.

We also saw deterioration in international, primarily in the UK.

For the quarter, consolidated same store sales declined 7%, of which 4% was due to less traffic, and roughly 3% from a decline in average ticket.

The US performance in Q4 was weaker than we had anticipated entering the quarter, and what we had guided on the Q3 call.

We believe the overall comp deterioration was directly linked to a worsening economic environment, both in the US and in the UK.

We reported consolidated pretax operating income of $14 million in Q4, which included $105 million of restructuring charges, and other transformation strategy costs.

This compared to $248 million of reported operating income in the prior year.

Consolidated operating margin was 0.6%, compared to 10.2% for the same period a year ago.

390 basis points of margin compression were due the restructuring charges, with the balance primarily due to sales deleverage.

Earnings per share was $0.01 for the fourth quarter, compared to $0.21 per share for prior year fourth quarter.

Fourth quarter EPS was negatively impacted by roughly $0.09 of restructuring charges and other transformation costs.

If we disaggregate the $0.09, nearly $0.05 is linked to charges associated with the announced closures of underperforming stores, including asset write-offs, lease exit costs, and severance charges.

Nearly all of the remaining $0.04 reflects actions taken to down size our corporate support resources, both in terms of facilities and staffing levels, as part of the transformation initiatives designed to rearchitect the cost structure of our business.

Let me now move to results for our operating segment beginning with our US business.

Total net revenues for the quarter increased by 1% to $1.88 billion, from $1.86 billion a year ago.

Company operated retail revenues declined slightly, to $1.7 billion for the quarter, primarily due to negative comparable store sales of 8%, which offset the revenue growth from 445 net new Company operated retail stores opened in the last 12 months.

With respect to comparable store sales, both traffic and ticket weakened sequentially from Q3, with Q4 showing a 5% year-on-year drop in traffic, and a 3% decline in the average value per transaction.

The year-over-year decrease in ticket was primarily the result of our deemphasis in '08 of merchandise and music inventory in our stores.

US cost of sales including occupancy costs as a percentage of total revenues increased to 45.3%, compared to 41.7% in the comparable period a year ago.

Of this increase, three-quarters, or 270 basis points, came from cost of sales.

The cost increase was due to three main factors.

Inventory adjustments related to the reduction of brewing equipment and other merchandise in our stores, all consistent with returning our focus to coffee as our core, expenses associated with our enhanced espresso excellence standards, and new beverage innovation introduced in the quarter.

And from higher distribution expenses from the expansion and migration of our distribution centers, as well as higher fuel costs.

Increases in occupancy related expenses as a percent of revenue in Q4 were primarily due to lost sales leverage.

As a note, the 205 store closures completed in the quarter, did not yet have a material favorable impact on occupancy costs, as many of the closings occurred late in the quarter.

US store operating expenses as a percentage of related US retail revenues increased 390 basis points to 46.1%.

About three-quarters of the increase was the result of deleverage from softer sales.

Also contributing to the rise in store operating expenses were increased marketing expenditures, due primarily to new product launches.

US operating income was $51 million during the quarter, down from $225 million during the same period in fiscal '07.

The operating margin declined to 2.7% of related revenues from 12.1% a year ago.

Sales deleverage was the leading contributor to the margin compression, along with the cost items I just mentioned.

Also included in the US segment results was about $43 million in restructuring charges, which contributed one-quarter of the margin decline.

Now for a review of results from our international segment.

International total net revenues increased 13% to $534 million in the fourth quarter of fiscal '08.

Company operated retail revenues increased 12% to $446 million, mainly due to the opening of 236 new Company operated retail stores in the last 12 months.

Comparable store sales were flat for the quarter, reflecting further softening of the trends we talked about at the end of Q3.

With the domestic financial crisis spreading globally as the quarter played out, the effects were particularly notable in our two key markets, the UK and Canada, which represent nearly 80% of our international same store sales.

International operating income decreased to $2.6 million in the fourth quarter of fiscal '08, compared to $51 million a year ago.

Operating margin for the fourth quarter was 0.5%, compared to 10.8% a year ago.

In addition to softer sales, margin compression primarily resulted from higher cost of sales and occupancy, resulting from costs associated with the expansion of our centralized distribution system, and higher fuel costs, and $19.2 million in restructuring charges we reported for the quarter related to the 61 store closures in Australia.

Now let me move on to results from our third business segment, the global consumer products group, or CPG.

CPG total net revenues declined 4% to $105 million in the fourth quarter of fiscal 2008, mainly due to lower revenues from packaged coffee sales in the US market.

Operating income for CPG was $63 million in the fourth quarter, compared to $62 million in the same period a year ago.

The operating margin expanded 340 basis points to 60.3% of related revenues.

The different movement between revenue and income was primarily due to the mix of revenue being less weighted toward the initial sale of coffee and tea products to Starbuck's distributor, which have related cost of sales, and more towards revenue profit sharing earned on the distributor's sales to retailers, which helped drive the margin expansion.

Now for a few comments on Starbucks balance sheet and liquidity.

Starbucks is in a good financial position, with a strong business model to generate cash in excess of our investment needs.

We also have the capacity for up to $1 billion in short-term borrowings, either through our credit facility, through our commercial paper program, or a combination of both.

At fiscal year-end, the Company had $271 million available for short-term borrowings.

A note on the recent amendment to our credit facility.

This was directly related to adjusting for the near term accounting impact of lease termination costs, associated with the 600 US Company operated stores designated for closure.

The closures helped put us on a path to stronger credit ratios in the medium term, as we boost operating cash flow and reduce rent.

And the cost reduction initiatives we have completed around staffing and real estate, along with a slower store expansion target, will help offset the impact from the sales deleverage we have been experiencing, putting Starbucks in a better position to generate higher free cash flow going forward.

As a final note on the amendment, even though lease exit costs are now expected to be higher, we see little risk of breaching our coverage covenant.

The recent squeeze in the credit markets elicited a lot of questions from investors, particularly near the end of the quarter, related to our CP program and our ability to borrow.

So I thought it might be beneficial to remind you of $1 billion in aggregate credit capacity we have, and in the event that the Company has difficulty in placing CP, we can elect to borrow against the credit facility.

We ended the year with $1.3 billion in cash from operations.

Our capital investments for the year came in at $985 million, which was below our target of $1 billion.

Of our fiscal 2008 CapEx, approximately 80% was in support of our stores.

With two-thirds of that allocated to new stores, more than 20% to renovating and remodeling existing stores, and 10% represents investment in new equipment, such as the Mastrena and warming ovens, to name a few.

The remaining 20% of the total $985 million spend was primarily investment in our supply chain, and for IT systems projects.

Overall, capital expenditures in 2008 represented about 9% of revenues, which is slightly lower than the past few years.

Let me now recap our fiscal 2008 performance by looking at a few key metrics.

Let me begin with store openings and net store counts.

In August of 2007, when we initially provided our fiscal 2008 store opening target, we were planning to open 2,600 net new stores globally.

As the economic environment continued to weaken, and as we entered 2008, we lowered our store opening target for the year, and for 2009 through 2011.

As the year progressed, and the economic pressures mounted, we conducted a thorough review and analysis of our entire US Company operated store portfolio.

From that effort came the decision to close approximately 600 Company operated stores, and significantly slow our store growth into the near future.

We ended fiscal 2008 with 883, or less than half the net new US store openings compared to fiscal 2007.

Including 60% fewer Company operated, and nearly 40% fewer licensed net openings than prior year.

We also evaluated our international company-operated store portfolio and one underperforming market stood out, Australia.

We made the decision to significantly downsize our presence in that market by closing 61 stores, while retaining 23 profitable stores in three key metro areas.

Total net new international store openings in fiscal 2008 were relatively flat with fiscal '07 at 786 stores, with more than two-thirds of the growth coming from licensed stores.

Now shifting to comparable store sales, overall they were down 3%, primarily driven by the US segment's decline in traffic.

The US business same store comps were a negative 5% for the year, with slightly more than a 4% decline in traffic, and less than 1% from lower average value per transaction.

And as the year progressed, we began to feel the impact of a weaker global economy reflected in softer international comps.

We finished the year with 2% international comparable store sales growth, driven primarily by an increase in the average value per transaction.

The slowdown in revenue growth for the year of 10% was the result of a combination of negative same store comps, and fewer net new Company operated stores.

Fiscal 2008 earnings per share came in at $0.43.

When we factor in the approximately $0.28 attributed to restructuring and transformation-related costs, nonGAAP EPS was $0.71 per share, down from the $0.87 GAAP EPS we achieved in fiscal '07.

At negative 3% comps, nonGAAP EPS eroded by 18%.

As Troy will talk about shortly, the new cost architecture for 2009 is very different.

As we expect to get significant EPS expansion if comps in '09 are similar to 2008.

Last point on EPS.

To provide better clarity into the $0.28 delta between reported GAAP and nonGAAP EPS, let me walk you through the specific P&L line items impacted by the roughly $339 million in restructuring charges and transformation-related expenses.

Of that total, $267 million, or roughly $0.22 of EPS was directly attributed to restructuring charges, and the remaining $72 million specifically to other transformation strategy initiatives.

The $267 million in restructuring charges break down as follows.

About 80% represented charges relates to the approximately 600 US store closures, and 6% to the 61 Australia store closures.

The majority of the remaining amount, related to reducing our corporate real estate footprint, and was assigned to our unallocated corporate segment.

The majority of the $72 million in transformation-related charms, about 90% was in store operating expenses, with more than 80% of that in the US segment.

These costs were primarily related to debt side costs, and overhead write-offs associated with the reduction in new store openings.

So to recap our view of the year, recognizing the difficult operating environment in it's early stages, we focused on restructuring our business, to build a cost structure to support the business for the long-term.

We took action to close 600 underperforming stores in the US, which should not only improve profits in the near term, but also give nearby stores a boost in sales from transfers to existing stores.

After a number of efforts to improve the performance in our Australia market over the past few years, we made the decision to close 61 stores, retaining 23 healthy stores in that market.

And we rationalized our leadership structure and non-store organization, by eliminating approximately 1,000 open and filled positions, nearly 15% of non-store positions globally.

And better aligned around the global ownership of functions, which should give us leverage and efficiency going forward.

We ended 2008 with a healthier store portfolio, a more aligned cost structure to allow for operating margin expansion at lower comp levels, and with a solid business that generated $1.3 billion in operating cash flow.

Now let me turn the call over to Troy to talk about 2009.

Thanks, Pete.

As Howard mentioned earlier with the transitional year now behind us we are confident that Starbucks entered fiscal 2009 fundamentally stronger and better positioned to grow earnings, and improve operating margins in the year ahead.

Historically, our business model has been highly dependent on strong same store sales growth, to drive the kind of earnings growth that Starbucks has delivered.

This past year, Pete has tried to more clearly illustrate for you the link between comparable store sale results, and our ability to achieve certain EPS targets.

While we will continue our efforts to boost same store sales, we have the opportunity to take some of the pressure off that metric, by prudently rationalizing our cost structure, and the steps we took in fiscal '08 have put us in a much better position to deliver solid EPS growth in fiscal '09, even if same store sales are negative.

Clearly our goal is to deliver positive comp growth, but it is important to note that the model is no longer as reliant on achieving that.

If we begin with fiscal 2008 nonGAAP EPS of $0.71 as our baseline, we believe there is a range of FY 2009 EPS growth we can deliver.

Keeping in mind that we are comping over negative 3% same store sales in '08, if we have negative 2% comps in fiscal '09, we believe that we can still drive more than 25% EPS growth, and hit $0.90 nonGAAP earnings per share.

We believe that even a negative 5% comp could still deliver nonGAAP EPS of around $0.80, or greater than a healthy 10% growth year-over-year.

If we look at how we started the first few weeks of this fiscal year, and if average transaction volumes remain similar for the balance of the year, we would still expect to deliver 20% EPS growth.

Also factored into our fiscal '09 EPS expectation is the 200 to $210 million in pretax positive benefit, or $0.17 to $0.18 of EPS from the US Company operated store closures, restructuring of Australia, and cost savings from the leadership and non-store organization changes we made this past year.

I want to remind that you that fiscal '09 EPS on a GAAP basis will still be impacted by the lease exit and severance costs from the US and Australia store closures that began in the fourth quarter of fiscal '08, and will continue into fiscal '09.

We now expect an impact of up to $0.12 per share in fiscal '09 related to lease exit costs.

As we look to the start of fiscal 2009, the first quarter will also be impacted by the investment we made in our field organizations through the leadership conference held in late October, which we estimate will impact Q1 EPS by roughly $0.03.

Keep in mind that our first fiscal quarter is also expected to be the toughest comparable period year-over-year.

Let me now provide a comment on anticipated cost inputs for '09.

We currently expect the impact from our higher green coffee costs, to be offset by favorable dairy this fiscal year.

Further, at our latest projection for foreign exchange rates, we do expect an unfavorable impact to EPS of approximately $0.02.

These commodities and FX impacts are already reflected in the comments we have made today, regarding our expectations for delivering improved operating margins and earnings growth in 2009.

What I want to leave you with here is that there is a better opportunity than there has ever been in the past for our model to drive EPS growth, without as much dependency on same store sales growth.

That equates to a much healthier and sustainable model, especially in challenging economic cycles.

For store openings in the US we are now targeting negative 20 net new stores in fiscal 2009, which includes a nearly 225 Company operated store decline, and approximately 205 licensed net new stores.

In response to the global economic downturn and our cautious approach to expansion in this current environment, Starbucks is now planning to open approximately 700 net new stores in international markets during fiscal '09, two-thirds of which we expect to be licensed, as we factor in the current global economic climate, with a continued particularly cautious approach in the UK and Western Europe.

Total net revenues are expected to be relatively flat with fiscal 2008, with variations around that driven by the level of comps we deliver.

We expect modest operating margin improvement for the total Company, as well as for both the US and international business segments for the full year.

The Company is further reducing it's projected capital expenditures to $700 million, adjusting for the revised international store opening target.

CapEx allocated specifically for our stores is targeted at around 70% of that total.

With more than half of that earmarked for renovations and remodel, as well as new equipment to support our enhanced quality standards and expanded offerings.

Capital expense towards new stores is a much smaller portion compared to previous years, as we shift investment priorities towards enhancing the quality of our existing store base.

The remaining 30% of the total $700 million is designated for investment in IT systems and in our supply chain.

Our capital expenditure target for 2009 represents about 7% of revenue, significantly lower than in previous years.

We expect cash flow from operations to be essentially flat with the fiscal 2008 level of $1.3 billion.

Improvements in operating income are expected to be offset by cash outflows related to lease exit costs.

We expect to substantially pay down our short-term debt during the year, and we do not anticipate any share repurchases.

In closing, we have taken the difficult and necessary actions to position Starbucks for the challenging environment we face.

Our cost structure has been rearchitected, and is now more appropriately scaled to the size and growth of our business.

We have taken action on underperforming stores in the US, and reduced new store growth, resulting in a much healthier store portfolio.

Our most troubled international market has been significantly downsized, removing sizable operating losses from the P&L.

We enter 2009 with a number of actions under way, to drive greater efficiencies in our store operations and our supply chain.

Our business continues to generate healthy operating cash flow, at the same time we have been very careful on capital spending, and continue to be in 2009.

And we have refocused our efforts on the core of the Starbucks experience in our stores, while driving profitable innovation, and meaningful value to customers.

These efforts we believe will enable us to improve operating margins and grow EPS in 2009, despite the challenging global economic environment.

Now let me turn the call back to Howard for his closing comments.

Troy, thank you.

Before we turn to Q&A, I just thought I would like to frame what you have heard today, which I think are really two distinct stories.

First, a year of transition with the associated expenses required to transform a Company, in a quarter with higher than expected attrition and continued restructuring costs.

That first story is complete.

The second story, and the one I would like to you focus on is, about the future, with the right cost structure, vastly improved consumer offerings tied to value and quality, and a reenergized team, Starbucks is poised to drive EPS growth in fiscal '09.

We know what we need to do, we spent a year rebuilding, and we are faring well in view of these challenging economic times.

Now is time for us to execute, and that is exactly what we plan to do.

Thank you very much.

JoAnn.

With that Operator, let's move to Q&A please.

(OPERATOR INSTRUCTIONS) .

We will pause for just a moment to compile the Q&A roster.

Our first question comes from Matthew DiFrisco from Oppenheimer.

Your line

Thank you.

I actually just have one bookkeeping question, first on the same store sales, if you could just give us what the traffic was in 2Q and 3Q, I think you gave us a little more detail this time around than in the fourth quarter, and also there was some comment about the first quarter, how it started, I missed that in my notes, if you could just repeat that?

And then more towards Howard, you said now is the time where --

We lost you.

I am sorry, we lost his line.

The next question comes from Steven Kron with Goldman Sachs.

I don't know if you wanted to answer Matt's first couple of questions.

I will ask mine in the meantime.

As it relates to the guidance, I guess just taking a step back for a second, basically what you guys are implying here is, despite a negative 2% comp and backing out the $0.18 that you are going to get from these transformational strategies, that you are still not going to see deleverage in the model, and I guess you mentioned a couple of times in store efficiencies and supply chain efficiencies, is that where you are going to get these benefits to offset the negative 2% comp deleverage, and maybe if so, please drill down and talk to us a little bit about what specifically is there?

This is Pete.

Let me answer the previous question about Q3, Q4 sequential, and then Troy will do the Q1, and then talk about the guidance for '09.

We had negative 8% comps in the US in Q4.

We had negative 5 in Q3.

So sequentially, we were down a little more than 3 points.

Some of that in traffic, but a big part of it in the average value of the ticket, which I mentioned was around the merchandise and the music in the stores.

So we did have a deterioration Q3 to Q4, I had mentioned on the Q3 call that we would get to a mid-70s kind of EPS, if comps stayed relatively flat.

They didn't, so Q4 went down.

Troy, maybe you could talk about what we have seen so far in Q1, and maybe the guidance question from Steven.

Hi, this is Troy.

What Howard had said about Q1 is that encouraging to us is that we have not seen so far in these early weeks of the first quarter a deterioration of comps, which is what we are seeing and hearing from many other premium brands and retailers.

We have seen some optimistic movements from days to days, nothing to predict a trend yet, but that has been encouraging so far to us, and we have not seen deterioration.

So that is our specific comment about Q1 comps so far.

With respect to how we are going to do it in '09, I will tell you it is a wide-ranging set of things around efficiencies at our store level, but not only there, all throughout our supply chain, procurement, our distribution network.

In the stores it is a number of things from waste management, to Lean efforts within our stores, to how we lay out the bar, so the efforts are easier for partners.

It has been an entire range of things that are under way today, some of which we are already beginning to see the fruits of, some of which will pay out as we continue to focus on them throughout the year.

I think the thing I would expand on here is that Howard and Pete throughout the year, and this leadership team, have taken the actions around the transformation agenda.

Some of which were one-time efforts to readjust our cost structure to where it needs to be.

But one of the benefits coming into '09 that we continue to focus on is a relentless pursuit of doing everything we do better, and that is at the store level, it is in our supply chain, it is in the support center building here.

And I think you will see that in the leadership team highly focused and as we go through this year, that is the new spirit, the new process, the new set of systems we have in place.

Next question comes from the line of Larry Miller with RBC.

Your line is open.

Thank you very much.

I wanted to ask a little bit about that ticket being down 3%.

It sounded like it, you talked about music and equipment driving that, and what might that mean as we head into the holiday season?

Can you give a little more color about what --?

I think that is an important question, because personally I have been more focused on the transaction and the traffic number than the overall comp, because especially in Q4, it was somewhat artificial, as it relates to comparing it to a year ago.

The music business has been significantly down sized and we also had a fairly robust brewing sale in Q4 a year ago which we didn't have this year.

So the traffic number is what I have been focused on.

In terms of on a go forward basis, what we have done for holiday and I think we were very early to do it is we completely revamped all of the holiday merchandise, to reflect price points that we thought would without question be perceived as tremendous value for our customers.

So the overall price points in holiday merchandise on the hard goods side, has a lower ticket price than a year ago, with virtually the same margins.

So we feel like we are in a good position to execute against holiday with the same level of retained gross margin, and there could be some attrition on ticket, but then to offset that, we are seeing a higher level of attachment on food to those people who have been buying beverages because of the success of oatmeal, and the other healthy products.

Our next question comes from the line of Matthew DiFrisco from Oppenheimer.

Your line is open, sir.

Thank you.

I actually will just get right to the point.

The remodel campaign you talked about, 20% of your CapEx going towards some remodels, sounds like a larger number than I think you have done in the past.

Can you talk about some of the things that are included in that, what type of tests you may have done with respect to that, and what type of comp lift you might see, or is that directed towards comps or cost reduction?

Well, there is a routine remodel program that we have in our store base as stores reach the 5 year mark, and generally the 10 year mark.

And those remodels are about refreshing the stores.

It is actually for the most part built into our initial pro forma for each store that we build, is an assumption that we will spend capital at the 5 year mark and again at the 10 year mark.

To renovate the store, to refresh it, to bring it current with our current standards.

So what you see over the last year and into '09 is some increase of that, which is just a natural to a large extent, a natural aging of our store population.

Arthur Rubinfeld, our President of Global Development might want to add a little to that.

That is basically how we handle our pro formas and go forward in our renovation strategy just like you were saying.

The other thing I would add is I think before we kind of had two buckets around store CapEx, we said it is either new, or it is renovation.

What we tried to do is break out where we are actually investing in equipment for the store, and I broke that out on the $985 million of CapEx this year, so the renovation piece, we actually talk about three buckets going forward, because the warming and the Mastrena is actually a sizable investment as well, but you had the renovation piece right, and it reflects just the natural ramp in the store portfolio, and the respective age.

Our next question comes from the line of John Glass with Morgan Stanley.

Your line is open.

Thanks.

I wanted to go back to the question that I didn't fully get the answer to, on the margin improvement despite negative comps.

Two quarters ago you thought you could earn $0.90, with let's call it 2 or 3% positive comps.

Now you are saying you can earn that with negative 2 or 3% comps.

Can you maybe break it down into what you think you save at the store level, what is coming out of the corporate expenses, are there other areas we maybe haven't thought about, in terms of benefits of deleveraging or tax rate benefits, or something else that also contribute to that formula?

This is Howard.

I will just start briefly with a brief comment, then I will go back to Pete and Troy.

I think it is important to just take a step back and understand that the entire year, with regard to transforming the Company, so much of that has been an assault and a focus on things that we have not looked at in the past.

And that was at the growth of the Company and the success and double-digit comps in a sense covered up these things, and gave us the air cover not to have to address it.

Or not to address it as intently with the discipline we have had now.

The discipline, the focus and the relentless pursuit of efficiency and saving money at the back end, those things that are not consumer facing, has given us the encouragement, and the optimism to make the statements we have made today.

Pete can get into the specificity of that.

I think the 2 to 3, if you remember the last call at Q3, we were talking about the $0.90 to $1.00, and needing 2 to 3 points of positive comps to get into that.

I would say it wasn't the $0.90, it was more the middle of the range.

That said, it is correct to recognize that we have gone after more cost, than was there at Q3.

And that covers in store operations, supply chain procurement, store development based on, for example, a new international store number, et cetera.

So I don't know if you want to add anything, but we have gone after more cost around rearchitecting since we talked to you last at the end of Q3.

I think we did that with the anticipation that we began to believe that fiscal and calendar '09 would be at least as bad, in terms of the economic pressure and the consumer confidence, and we had to do things before the year ended, to put us in a position to win in '09 and that is what we have done.

Our next question comes from the line of David Tarantino with Robert W.

Baird.

Your line is open.

Hi, good afternoon.

Howard, could you talk generally about the marketing and advertising opportunity, and given the success of the recent Election Day promotion, are you looking at becoming more aggressive on media advertising as a means to drive traffic going forward?

Well, I think as you know, we have not been a traditional spender of classic marketing and consumer facing activities that have been associated with most consumer brands.

I think as we look back on last week, we did something last week that I think is very interesting to try and get underneath and understand, with the question is how do you leverage this on a go forward basis.

But I think what it showed was that we were able to make a very small relative investment, in terms of buying a spot on national TV and running it once, and leveraging new media, the digital world, the viral community, the blogosphere, and PR in a way that really very few brands can do, but because of the cultural relevance of Starbucks, a national footprint and because of the fact that we were part of the national dialogue on Election Day, gave us an opportunity to do that.

We drove significant, I mean significant, incremental traffic in our stores, with impressions on a day that was really valuable to us, because of Thanksgiving coffee, and the launch of Gold Card.

We believe that there are other opportunities to do that.

I don't think we want to milk it, but I think we want to be very disciplined and thoughtful about it.

And then at the same time I think in view of the economy and consumer confidence, want to be extremely thoughtful about how we are going to spend marketing dollars on a go forward basis.

But I think in this environment, the rules of engagement no longer apply, and what I mean by that specifically, I think our #1 activity has to be to maintain our core customers and ignite our base, and I think with Gold Card, and with that kind of promotion, and the things we are doing around value, we have been able to do that.

And I think when you look at the way in which our brand sits today, the relevancy of the sense of community that we have in our stores, that really did resonate with our customers and the public at large, and we will look at other opportunities to do that.

It was very clever, very smart, and very cost efficient.

Our next question comes from the line of Joe Buckley from Banc of America Securities.

Your line is open.

Thank you.

I have two questions.

One is a follow-up, again, just to clarify the comments in October.

Troy, when you were running through the scenarios of minus 2% comp can give you 25% EPS growth or $0.90, and minus 5% comps gives you $0.80, did you say something to the effect that if the first few weeks of '09 is sustained, you would have 20% EPS growth.

And if I heard right, what are you trying to imply by that?

And then a question on Starbucks Gold.

The fact that you are off to such a great start, does it make your nervous that you are selling it to your best customers, and in effect discounting to your best customers?

You want to take the first one.

This is Troy.

I will start with the first question.

You are correct, what I was saying about the first several weeks of October and this is not a prediction, by the way, it is an illustration, but if we take transaction volumes as we see them today, and this is after a year of the negative comps we have had, and volumes lower than they have been historically, and just flatline those over the rest of the year, not predicting that is what will happen, but to illustrate how the year goes, that would we believe give us the ability to drive 20% earnings growth still in 2009, and the point here is that 2008 deteriorated throughout the year.

So even at today's lower volumes than we have had historically, as we play that out over the course of '09, comp growth doesn't continue as negative on a percentage basis as it did in Q4.

That is the point I was making for you.

Just to add to that, if you looked at the comps we saw in 2008, the first quarter was fairly flattish, so that is what the October comp number, or Q1 will be, against the probably the last good quarter we had in 2008.

Then it was negative 5 to negative 8 in the US as it went through the year.

So it is comping against a different number after Q1, it went down in Q2 through Q4.

Okay?

In terms of your other question about the Starbucks Gold Card, in many ways, fiscal '08 was a year of learning, with regard to value and value testing, and driving a number of regional tests in different markets.

And in those tests, I think we came away with the conclusion that if we provide unique value to our customers that really resonates with them, we will see a higher degree of frequency.

And perhaps even a higher average ticket.

So I think this is an opportunity for us to reward loyal customers, it is a great opportunity between now and the first of the year for this to be a fantastic valued gift, because the research strongly suggests that a gift card of Starbucks, whatever face value it has, has a much higher value, in terms of the connotation of the recipient.

And I believe between that and the millions of cards that we have sold to Costco, will drive traffic into our stores, at a time when the cost of acquiring a customer for others is much, much higher than the cost of acquiring a customer in this kind of thing that we are doing with both the Gold Card and Costco for us.

And then lastly, what we have always seen as a result of the gift card, and we believe we will see it in spades with both the Costco gift card and the Gold Card, is an annuity that comes after the first of the year, which will bode well for calendar '09.

(OPERATOR INSTRUCTIONS).

Our next question comes from the line of John Ivankoe from JPMorgan.

Your line is open.

Great.

Thank you.

Again, just a housekeeping question, and then one other.

Pete, I think it was in your comments that you talked about the 270 basis point decline, just on the COGS side in the US, and much of that due to inventory write-down.

Could you quantify that in both the fourth quarter and the full year 2008, and whether you think any of that will recur in 2009?

And that is the first question.

I will ask another one if I may as well.

Yes.

I think we tried to break out as much as possible, the movements within the Company.

I think when you think of the inventory adjustments, would not expect to recur, okay?

When you talk about the espresso excellence standards, I would say that we learned in 2008, so we introduced it, we implemented it, but I think we are going to go in store operations and find a more cost effective way to deliver the same standard.

Okay?

And the other point I mentioned, so that one I think is an opportunity for us because that would have been in the P&L for pretty much three quarters.

And then the last one was really around the introduction of the new platforms in the quarter.

So I think we will get also get better at some of the new platforms, relative to procurement and cost of sales going forward, on some of the beverage innovations we saw.

So it is all baked into what Troy described relative to let's call it the sensitivities of EPS that we think we can achieve, so probably the only unique one is the inventory adjustments.

The other ones we are working on, as part of our improvement plan to deliver better operating margin in 2009.

Our next question comes from the line of Jeffrey Bernstein with Barclays Capital.

Your line is open.

Great.

Actually just one clarification, and then a question as well.

Just on the clarification side, Troy, I just want to make sure on Joe's question a little earlier, I think you had said, in your ranges you had said if comps were down like 5%, you would be looking at 10% plus EPS growth at around $0.80.

Want to clarify you are now saying if comps remain where they are right now, which is probably running in the down 7% range, that you could deliver greater earnings growth than that.

I am assuming there is some sort of quarterly mix shift that you are referring to.

In terms of my question, I think in your prepared remarks you talked about the international side having a greater benefit from being primarily licensed, and offering less volatility therefore.

Just wondering if you could perhaps could talk a little bit about the US business, I know going forward you are talking about opening a lot more licensed stores versus company operated.

If you could look back at your existing store base already, might you consider a shift of stores from company to licensed?

I think in the past you have kind of pushed that off a little bit.

Seems like growth is slowing in the US.

Now might be the time to at least consider shifting towards the licensed model for your existing stores in the US?

This is Troy.

I will take the first question first here, and I am going to read part of this over again.

I want to be very clear on what we are saying about what we expect could happen under various comp growth scenarios in 2009.

We believe that if we have negative 2% comps in fiscal '09, we can still drive more than 25% EPS growth, and hit the $0.90 nonGAAP EPS per share.

Further, we believe that even if comp growth ends up being negative 5%, we could still deliver nonGAAP EPS of around $0.80, which is greater than 10% growth.

Okay.

So those are the two sort of metrics that I spoke to.

I went further then to say, if you start with what we are seeing in transaction volumes in our stores right now in the first several weeks of the year, again much lower than we have had in the past, because of our negative comp growth over the course of 2008, and then as an illustration, extend that out so same volumes over the course of 2009, even under that scenario, we believe we would deliver roughly 20% earnings per share growth.

So that was attempting to give you a sense of the actions we have taken, and how we believe it protects us in this range of negative comp growth, to still produce operating margin improvement and earnings growth over the course of 2009.

On your second question, if you look at was we are planning to do for 2009, you can see that we have still got the 400 store closures to impact the net number.

We are planning probably about 175 very carefully picked net new stores in the US, and then the licensed store number in the US is a little over 200, which was in the release.

So there is at least in '09, more licensed coming out in the US than new company operated, and that will continue to be the case for international where we have kind of a two-thirds, one-third ratio.

We have time for one more question.

Our last question comes from the line of David Palmer with UBS.

Your line is open.

Thank you.

This question is on innovation.

Howard, you wanted to cut through the bureaucracy, and increase the effectiveness and turnaround time on the innovation end.

I am just curious, could you give us some examples of how your innovation process is perhaps changing, how involved are you involved in the product introduction choices, and what have you learned, or what has Starbucks learned about innovation year-to-date, the receptivity in this environment, what works and perhaps what doesn't work?

Thanks.

Thank you for the question.

I have said in the past that I thought that in the early entrepreneurial years of our Company, the creative spirit and how that related to innovation was one of our core strengths.

And with the specifics of the fact that we were able to be extremely nimble, and go to market very quickly.

As the Company has grown, and the scale of the operation, it becomes harder and harder to respond quickly to opportunities, and get it to market in a timely fashion.

Just because of the back room issues of SCO operations, product selections, and if you just take Vivanno as an example, we rushed Vivanno to market, but then we had to find regional suppliers for bananas for thousands of stores, and you would think that would be an easy thing to solve for, but when the banana supplier heard the order on a daily basis, he almost had a heart attack.

It is that kind of thing.

But to put it into precise terms, first and foremost, innovation, creativity, and our ability to create separation in the marketplace, with regard to differentiating products and platforms, is really key to the future, and I am intimately involved in all aspects of that, from the ground up.

I also think what I have learned is the following, is that in this environment, it is very, very important to be decisive, but you are not going to have perfect information.

And I think it is important in view of that to have the courage to go to market without perfect information, but realizing that there are going to be issues that perhaps you have to solve on the fly.

I also think it is really important to maintain your core customers, and do everything you can to ignite your base.

But please don't make any mistake about innovation.

The success of the Company in the past, and today and the future, is reliant on our ability to lead with regard to coffee.

The coffee experience, how we go to market with coffee, the aspect of sustainability, and what we talked about today with regard to Fair Trade, is that the innovation in terms of other platforms, are complementary to the experience.

I also think we have to innovate with our people, and provide them new ways to participate in the success of the Company, as we did in New Orleans.

I think this is a time at Starbucks, where nobody wants to go through something like this, but having gone through this year, we are a much, much stronger organization for having gone through it, with a galvanized common purpose, and the optimism and enthusiasm that we have as a Company has never been higher about the purpose that we have, the willingness to drive innovation, and most importantly, to exceed the expectations of the customers.

And we think we are better positioned to win today than we were a year ago, when we were just beginning to face the downturn in the economy, the strong headwinds, we got after it early, and I think we are in a position to win in fiscal '09, despite the economic conditions.

Thank you very much, Howard.

That brings our fourth quarter and year end earnings call to a close for today.

Thank you all for joining us.

We will speak with you in late January with our Q1 2009 results.

Thank you.

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

You may now disconnect your line.