星巴克 (SBUX) 2009 Q1 法說會逐字稿

Good afternoon.

At this time, I would like to welcome everyone to the Starbucks Coffee Company's first quarter fiscal 2009 conference call.

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

After the speaker's remarks, there will be a question and answer session.

(Operator Instructions).

Please limit your questions to one question per person to ensure that management has had adequate time to speak to everyone.

Thank you.

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, Troy Alstead, CFO and Cliff Burrows our President of our US business, also is joining us today.

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 actual results to differ materially from these 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 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, to find disclosures and reconciliation of any non-GAAP financial measures mentioned on today's call, with their corresponding GAAP measures.

Now, I would like to turn the call over to Howard Schultz.

Howard.

Thank you Joe Ann.

Good afternoon ladies and gentlemen.

Before launching in to our overview of the quarter, I think it's important for me to provide some context.

When many of us met for the analyst conference in New York in early December, we announced that we were anticipating and preparing for for a challenging Holiday season and in fact a difficult fiscal 2009.

Yet, while only seven weeks have passed since then, new data shows that by virtually all statistical measures the pace of weakening in the business environment and global economy we were anticipating has been accelerating.

In the US unemployment risen to 7.2%, a 15 year high.

We are seeing unemployment in California approach 10%.

Jobless claims are at the highest levels since 1982 and climbing.

The rate of home foreclosures across the US has more than doubled in the last two years.

These are just a few of the factors contributed to an all time low in consumer confidence and the worst Holiday shopping season in the US since 1969.

Similar conditions and circumstances are being felt around the world, especially in western Europe, and in the UK, where retailers overall experienced their worst December in 14 years.

You know all this of course, but I remind you of the current environment at this moment not to distract from our results but to make an important point.

In today's environment, companies with solid fundamentals, strong cash flows, appropriate levels of liquidity to support current operations and future growth opportunities, a loyal customer base, and an enduring brand will have the strength to both ride out the storm, and make sound strategic business decisions for the long-term.

On these criteria I can assure you that Starbucks is a Company with solid sound fundamentals and most importantly a plan to win.

So while I'm far from pleased with our performance this quarter and I anticipate that our results could remain under pressure until the economy begins to recover, I believe we are navigating this storm affectively and that we will emerge from it leaner, stronger and better positioned.

As we outlined in early December, we had identified approximately $400 million in targeted cost savings that would positivity impact fiscal 2009 and we were continuing to scour the business for additional areas in which we could reduce cost, improve operating efficiencies or both.

Today, we will provide further detail on the previously announced savings and we will also share with you an additional $100 million in new cost savings initiatives that we have identified that we expect will bring in the total fiscal 2009 savings to approximately $500 million.

Today we will also provide insight to new consumer facing actions and initiatives we are undertaking to ensure we attain our core customers.

Customers who account for a good portion of the 50 million transactions at our stores every week while aggressively pursuing new customers through the Starbucks lens of quality and value.

You will hear more detail about some of these initiatives later, but our strategy includes continuing to offer the best coffee experience, aggressively pushing back on misperceptions about our affordability and introducing programs to design programs designed to bring consumers in to our stores during all day parts.

Troy will then take you through the financials in detail and finally I will talk to some of the things that we have planned to ensure that we are on the path to building the business for the long-term.

Earlier today we announced to our partners our plans for a global work force reduction that will result in approximately 700 nonstore partners being separated from the Company.

Approximately half of those in the Starbucks support center in Seattle.

We also announced that we are planning to close approximately 300 additional under performing Company operated stores.

Approximately 200 in the US and the remainder in international markets to further strengthen our store portfolio.

We anticipate that the closures combined with the reduced store openings for fiscal 2009 and other labor efficiency initiatives could result in an additional reduction as many as 6,000 store positions over the course of the fiscal year.

However, as before, we hope to be able to place impacted store partners elsewhere in the store organization.

And importantly, we've redeployed approximately 70% of displaced store partners from our original set of layoffs that we had this summer.

A list of the closures will be available one it has been finalized and once impacted partners have been notified.

For our existing Company owned stores we are reaching to all landlords globally to look for opportunities to renegotiate rents, under our leases.

This should allow our stores to become more profitable over time and we are eager to work with land lords to find solutions that are usually beneficial.

We have also been forced to take a hard look at partner benefits.

In doing so, we have focused on preserving those benefits that are core to the culture and values while trimming back others that have simply become unsustainable on a go forward basis.

Making the decision to trim benefits was extremely difficult for us as you might imagine, but it was for us just as it has been for many other companies, an important step take and we took it.

I am very pleased to report however, that in the end we were able to leave in tact, health care coverage for all eligible full and part-time partners for fiscal 2009, and equity in the form of stock options for all our partners - the people who are so critical to the success of Starbucks today and in to the future.

These extremely difficult decisions were made even more so by the fact they will have a significant impact on many members of the Starbucks family who have directly contributed to the success.

And for that reason, if these decisions were only about getting through a tough period we would likely have come out differently on them, but they were not.

These decisions were about the need and our management's intent to transform Starbucks into a leaner, more nimble and more aggressive Company that is prepared to act and react quickly to fast changing market conditions, and consumer behavior in the US and around the world.

You have heard us talk about redesigning our cost structure for the long-term.

The changes announced today are additional significant steps in that direction.

Our retail stores remain and we believe thrive will thrive in locations that are convenient to our core demographic base.

We will address other demographics and geographies in new innovative ways but more on that later.

There were 195 net new store openings for the quarter, significantly less than in the first quarter of fiscal 2008, we ended the quarter with more than 16,000 Starbucks stores globally.

Consolidated net revenues $2.6 billion in Q1, down 6% year-over-year.

Operating income was $118 million in Q1, which includes approximately $75 million in restructuring charges.

Most of these charges are associated with previously announced store closures in our US business.

Earnings per share for Q1 were $0.09 and were $0.15 non-GAAP including $0.06 relating to restructuring charges.

And Troy will provide more detail in his remarks.

Now I would like to touch on a few highlights from the three businesses beginning with our US business.

Despite the difficult economic environment and tough Holiday season, Starbucks sold more than 26 million new Starbucks cards, and cards overall were loaded with nearly $560 million, an 8% increase over last year.

This performance demonstrated for us the broad appeal of the Starbucks card as a gift, especially in contrast to the performance of the overall gift card business which has been forecasted to be down as much as 10%, heading into the final week of the Holiday shopping season.

We are confident that the Starbucks card brings incremental business into our stores and are also confident we can get a higher incrementality for cards sold in third party channels such as the success we had with Costco , which activated five million cards during the Holiday season.

We were extremely encourage by customer response to our new Starbucks gold card.

Program members, now more than 500,000 strong, averaged 15 visits per month and spend about 10% more per visit than nonmembers.

Even after the Holiday season we continue to see strong attachment adding more than 10,000 new gold card members a week.

All of this we believe should bode well for calendar 2009 and beyond, and under scores the powerful asset we have in our card programs.

Which affords us the opportunity to deepen customers connection with the brand, and drive our business even in tough times.

Because we anticipated a difficult Holiday season, our merchandise strategy enabled us to sell through a significant portion of our Holiday inventory with limited markdowns.

We focused on lower price gifts and added limited time sale.

Our Thanksgiving blend seasonal coffee was well received and we actually sold out of the coffee well before Thanksgiving.

Our partnership with Product Red enabled us to leverage media visibility in a cluttered consumer environment and reinforce the core values of our brand and our Company.

On balance customer shop late to get the benefit of additional discounts.

The US business began to implement targeted cost savings initiatives in the first quarter through labor optimization, waste reduction, and supply chain efficiencies.

Based on changing traffic trends we evaluated and actively managed hours of operation and labor targets on a store by store basis.

From a planning perspective this quarter we focused on implementing the fundamental changes we believe will set the US business up for success in the future.

This include a further simplified promotional calendar designed to both drive traffic and incrementality, and obviously improve service.

Internationally, we are maintaining a steady course in executing our business strategies learned from the US, which has influenced news taking a measured approach in our growth.

We are partnering with those who have values similar to ours, understanding local markets and able to deliver successful results through either joint venture or license stores, which constitutes approximately two-thirds of all Starbucks international stores.

We also continue to look for opportunities to provide the Starbucks experience through international channels such as our CPG and food service operations.

Looking at our first quarter the international business continues to be different based on which region we are discussing.

We had successful market entries in Portugal and Bulgaria and newer markets including Russia and Argentina are also performing well.

Russia continues to have one of the highest average ticket rates and Argentina is seeing some of the highest transaction volumes in our system.

In China where we celebrated our 10-year anniversary, we are still seeing good growth in spite of the slowing economy reflected in positive comp store sales.

We currently have approximately 350 locations in 26 cities in mainland China, and 700 locations in greater China, which includes Hong Kong and Taiwan.

The enthusiasm the Chinese people have for Starbucks, reinforces our confidence in the long-term potential for the market.

We are beginning to see margin improvement in China driven in part by initiatives to address labor optimization and waste.

We continued to see considerable weakness in certain international markets, especially the UK and Canada.

We have and will continue to put into place loyalty programs in these markets in response and within many markets we have implemented or will implement plans to drive additional traffic and gain efficiencies through the P&L including but not limited to; bringing additional value to customers, labor optimization, reduce waste, supply chain optimization and lease renegotiations and reduced support costs.

Let me turn to our consumer products group.

In the past, I haven't typically gone in to great detail of our CPG business though it has achieved steady profitable growth in recent years.

Increasingly though, we are viewing the CPG business as central to our overall business strategy.

Enabling our package coffee, tee and ready to drink businesses to leverage existing markets and brand awareness, providing us with channels and access to customers we have not otherwise been able to reach at retail, and specifically focused on the home market.

And allowing us to play on both sides of the value continuum.

Our CPG business operates very effectively with our joint venture in sales and distribution partners and able to benefit from the lessons we have learned on the retail side as it grows domestically and internationally.

In the first quarter we expanded package coffee in to Ireland and launched Starbucks Coffee in Switzerland through our expanded relationship with Kraft in Europe.

Switzerland is the first country in continental Europe to benefit from the expanded relationship and over the coming months you will see us broaden our European presence.

This compliments the packaged coffee business we have built in the US, Canada, and the UK.

In the ready-to-drink coffee category, where we have 90% share, which is currently about a $1.3billion market in US, Starbucks branded products accounted for $7 in every $10 spent in the ready-to-drink coffee category.

Through the North American coffee partnership, a joint venture between Starbucks and Pepsi, Starbucks Double Shot Energy Coffee drinks have become top performers in the ready-to-drink energy coffee sub category since launched in June of 2008.

Currently the line represents three of the segments five best selling SKUS.

In additional, we have Unilever and Pepsi in the PLP partnership and with them we are now expanding national distribution of Tazo Tea ready-to-drink beverages.

These ready-to-drink businesses will play an important role in our stores and our customers abroad as well, and today we hold leading positions in this category in Japan, Korea and China.

As mentioned during the analyst conference, we recently began exploring new ways we could leverage our Seattle's Best Coffee brand to work for us, starting with a food service test in more than 2,800 Subway restaurants in the US beginning this month.

I'm pleased to share with you today that we also are expanding our franchising program with Seattle's Best Coffee.

Our Seattle's Best Coffee brand is uniquely positioned to grow through franchising because of its national footprint, operational experience and the innovative retail [caffe] concepts it offers.

We will be working with qualified franchise sees to match them with site opportunities as part of the franchise development program.

Some of the real estate we will exit under the Starbucks brand, as mentioned earlier, may provide an attractive conversion opportunity to potential Seattle Best Coffee franchisees as well as cost savings for Starbucks Corporation.

We believe that the Seattle Best Coffee brand can play a unique role in helping capturing a larger share of the speciality coffee segment by providing options and a variety to a broader spectrum of customers.

Looking ahead our task is clear.

We must continue to work to retain and to strengthen our connection with our core customers while at the same time, devising new and innovative ways to attract customers to the stores and bring lapsed customers back.

And we will use all of the tools at our disposal; cross channel promotion, leveraging CPG, all brands, all products and new consumer loyalty programs to do this all while staying relevant in areas our customers care most about coffee, customer experience, innovation, differentiation and obviously in the environment that we are in, real value.

Over the past year we have been working diligently to make Starbucks a breakfast destination.

We've improved the quality and nutrition of our offerings and we are encouraged by the early success of oatmeal and other healthy options.

I'm pleased to share with you that beginning in March, we will combine our breakfast strengths with a value proposition that challenges misperceptions about our every day affordability.

Using uniform national pricing we will offer several breakfast pairings in Company operated stores at attractive price points.

The question of value often gets tied to the competition.

How are we competing with traditional QSR's who are offering cheap coffee and dollar menus?

How can a premium brand like Starbucks be competitive when customers are trading down at everything from houses and travel to clothing and lunches out?

I would like to try and separate value from competition.

And talk about the differentiating factors that ultimately Starbucks a competitive player and the leader in our category.

Starbucks has always been an experienced oriented brand and retailer and approach has been to connect with our customer in ways our competitors simply cannot.

This includes everything from Starbucks Shared Planet, the way we engage with our customers and communities to do business responsibility.

To our unique election day and inauguration day promotional initiatives, to our participation in the recent national call to service.

What all of these efforts have in common is their relevancy to the values and lives of our customers and that is what we believe will help us remain resilient both during challenging times and long into the future.

We absolutely believe that now is the time to safeguard and lock in those elements of the Starbucks brand which have been about doing the right thing in both good and tough times.

Finally we must and will continue to innovate deliberately, aggressively, with great consistency and do it in a responsible fashion.

With customer satisfaction as our guide.

We have an important pipeline of announcements that we will be making to highlight innovation, competition and value strategies that will enhance our business and lead us forward.

And with today's announcement we believe our organization will be align at all levels to achieve our objectives.

With that I will turn the call to Troy who will review with you our Q1 results.

Thanks Howard and good afternoon everyone.

Howard provided you with the high level of recap of our fiscal first quarter.

I will provide additional details on our first quarter performance by each of our three business segments as well as review the impact through the balance of the fiscal year from the cost reduction initiatives we are committed to achieving.

We entered fiscal 2009 in late September with initiatives underway to reduce our cost structure by $200 million.

Through portfolio rationization and reduction in a nonretail support structure.

Then in early December we announced an additional commitment to take out another $200 million in fiscal 2009, through efficiency enhancements in store and supply chain.

We began to see the results of these cost reduction efforts in the first quarter we believe it will accelerate throughout the year.

The additional steps announced today further store closures and reductions in field leadership in nonretail support positions, along with the early successes we have had on the previous actions against the initial $400 million, increase the savings opportunity in 2009 to $500 million.

These actions further demonstrate our commitment to do what is necessary to withstand the near term challenging operating environment.

Longer term, these efforts are specifically focused on driving to a healthier business model to better position Starbucks to deliver when the economy rebounds.

Let's first take a look at first quarter results and then I will provide additional details around the cost reduction initiatives.

Looking first at total company for the first quarter, we reported consolidated revenues $2.6 billion a 6% decline from $2.8 billion a year ago.

The primary driver behind this decrease was 9% decline in same store sales.

The decline in consolidated same store sales was composed of a 5% decrease in traffic, and a 4% in the average value per transaction.

I will provide more color on comps for both business segments in a few minutes.

But of note, international same stores sales went negative this quarter, reflecting further deterioration in the global economy, particularly our two largest Company operated markets, the UK and Canada.

We reported consolidated pretax operating income of $118 million in the first quarter, which included $75 million of restructuring charges.

This compared to $333 million of reported operating income in the prior year with no restructuring charges.

Consolidated operating margin was 4.5% compared to 12.0% for the same period a year ago.

Weaker sales had a deleveraging affect and was the primary driver behind the contraction.

In addition, 290 basis points of the margin decline were related to $75 million in restructuring charges I mentioned.

When excluding those charges, the operating margin would have been 7.4%.

Earnings per share was $0.09 for the first quarter, and non-GAAP EPS was $0.15.

Compared with EPS of $0.28 in the first quarter of fiscal 2008.

First quarter EPS was negatively impact bid approximately $0.06 of restructuring charges.

With a large majority related to charges associated with lease exit cost and asset write offs linked to the closure of under performing stores in the US.

I would also like to not two additional items impacting EPS for the quarter.

The October leadership conference which had an approximately $0.025 impact on EPS for the quarter.

And store impairment charges which totaled approximately $0.02.

Let me now review results for our operating segments beginning with our US business.

Total US net revenues for the quarter decreased by 6%, to $2.0 billion from $2.1 billion a year ago.

Company operated retail revenues declined 7% to $1.8 billion for the quarter, primarily due to a 10% decline in comparable store sales.

Looking at the components of comp sales, both traffic and ticket weakened with a 6% year-on-year decline in traffic and a nearly 5% drop in the average value per transaction.

As a percentage of total US revenues, US cost of sales including occupancy costs increased 43.9%, compared to 41.1% in the comparable period a year ago.

With higher cost of sales contributing nearly two-thirds of the increase.

The enhanced beverage quality standards in Q2 of last year and cost associated with the new product introduction, such as Pike Place Roast and [Bavano] were the primary drivers behind the year-over-year in cost of sales.

Occupancy cost also contributed to the higher costs primarily as a result of deleveraging due to softer sales.

US store operating expense as a percentage of related US retail revenues increased 300 basis points to 43.5%.

The majority of which can be attributed to loss sales leverage.

Also impacting store expenses was the October leadership conference, which I previously mentioned.

These two contributing factors masked the favorability we saw in reduced salaries and benefit expense associated with the reduction in head count, which we announced in the second half of fiscal 2008 as well as early progress from our store labor efficiency initiatives.

US operating income was $134 million for the quarter.

Down from $311 million during the same period in fiscal 2008.

The operating margin declined to 6.7% of related revenues, from 14.6% a year ago.

Sales deleverage was the leading contributor to the margin compression which is related primarily in store operating and occupancy expenses.

The $54 million in restructuring charges directly related to the US segment, contributed approximately one-third or 270 basis points of the margin decline.

Moving now to results for our international segment.

International total net revenues declined 8% to $496 million in the first quarter of fiscal 2009.

Reflecting the impact of further deterioration in the global economy as well as the weakening of many currencies against the US dollar year-over-year.

While we saw strength in a number of smaller international markets, the weakening economic environment in our two largest markets, Canada and UK, clearly dominated our international performance.

Company operated retail revenues decreased 10% to $414 million.

Primarily a result of unfavorable foreign currency exchange, due to the strengthening US dollar against the British pound and Canadian dollar.

Weak store sales also contributed to the year-over-year decline.

Comparable store sales were down 3%.

Primarily driven by further softness in sales in the UK and Canada which represented 77% of international same store sales in the first quarter.

Our UK business saw the steepest decline of the two markets in line with the broader retail sector results in the UK.

Of note, the British retail consortium recently reported that the December was the 7th consecutive month of same store sales decline in that country, as Britain slides in to recession.

This is consistent with the weakening trends we began seeing in Q2 fiscal 2008 in our UK stores.

We have been closely monitoring the UK along with other EMEA markets.

And in the first quarter, we found it necessary to record significant store impairment charges which was the driver behind 590 basis point increase in store operating expenses as a percentage of international retail revenues.

The continued deterioration in the UK and with no near term improvement in site, lead us more recently to take decisive action in managing our UK store portfolio.

We learned from our experience in the Australia market that removing underperforming stores from the mix can boost the health and profitability of the remaining portfolio.

And the decision to close the stores in the US, along with a few other international markets, is the right step toward bolstering the performance of our international business.

International operating income decreased to $12.9 million in the first quarter of fiscal 2009, compared to $54.1 million a year ago.

Operating margin was 2.6% compared to 10.0% a year ago with impairment charges I mentioned contributing 320 basis points of the decline.

While the global economic turbulence may continue to influence consumer spending and thus impact our international revenues we are very actively taking steps to manage what we can control, the middle of the P&L.

Particularly in the UK market which is experiencing the most noticeable change, the managing director appointed in October of last year is aggressively attacking cost and seeking efficiency improvements throughout the business.

Let me wrap up by business segment discussion with results from the global consumer products group or CPG.

CPG total net revenues rose 14% to $114.3 million in the first quarter of fiscal 2009, mainly due to increased sales in the US of packaged coffee to Kraft.

Operating income for CPG was $52 million in the first quarter, compared to $51 million in the same period a year ago.

The operating margin contracted 520 basis points to 45.1% of related revenues, primarily due to the impact of higher coffee commodity costs on higher sales volume of packaged coffee to Kraft.

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

Starbucks financial position and liquidity remains strong.

Despite the weakened economy the Company is still generating strong operating cash flow which provides was a flexibility to continue to pay down our short-term debt.

During the quarter, short-term borrowings under the combined credit facility and commercial paper program were reduced by $423 million to $290 million outstanding at the end of the quarter.

For the remainder of fiscal 2009, we expect our short-term debt to remain close to first quarter od 2009 levels including the expected restructuring costs related to store closures announced today.

As you know, Starbucks' credit facility required the Company to comply with the minimum fixed charge coverage ratio covenant.

The Company is currently in compliance with this covenant and excluding the lease termination cost, we expect to remain in compliance.

However, the technical ratio calculation includes lease termination costs as if those costs were the same as rent.

So as a result of our decision to improve our store portfolio by closing an additional 300 under performing stores we intend to pursue an amendment to our credit facility to address these lease termination costs.

By the way it was for the same reasons that we successfully amended the covenant last year.

During the quarter, the business generated $694 million in cash from operations and $521 million in free cash flow.

Let me move into a more detailed discussion on the$0.5 billion in cost savings we are aggressively going after in fiscal 2009.

In early December I laid out cost reduction opportunities expected to impact the FY '09 P&L by $400 million.

Today in response to the continued difficult operating environment as well as our increased confidence in the pace that which we can drive inefficiencies out of the business, and improve the cost structure of the Company, we increased that total to $500 million.

Which is expected to impact our P&L in fiscal 2009.

I will now provide more detail on components and expected timing by quarter throughout 2009 of these actions.

The first bucket of approximately $200 million relates to actions we took in fiscal 2008.

Comprised of store closures in the US and Australia and the reduction in support cost.

The expected P&L benefit in 2009 from these actions announced in July 2008 is currently estimated to be $65 million from closing approximately 600 US stores.

$15 million from closing 61 Australian stores, and $120 million from the reduction in force and related infrastructure costs announced in July 2008.

The next category totals $100 million and consists of initiatives underway within our supply chain, which we announced in early December.

Specifically in 2009, we currently expect a $75 million benefit in procurement spending related to rationization of SKU counts and the vendor base, sourcing changes for core materials and alignment of replenishment processes to better match demand.

And $25 million of improved manufacturing productivity in increased distribution efficiency.

The next category of cost reduction, also announced in early December, totals $100 million and consists of initiatives underway to increase efficiencies and reduce costs in store operations.

Our targeted improvement in fiscal 2009 includes $75 million benefit in store labor, as a direct result of initiatives to apply lean principles to the operation of our stores and $25 million reduction in store waste particularly in the areas of food, brewed coffee and dairy.

The additional $100 million of targeted cost takeout in 2009 which we announced today consists of a wide range of focused initiative across the business, including the impact of the reduction in nonstore positions in US and the international markets.

Of this aggregate $500 million approximately $75 million was realized in the first fiscal quarter.

Primarily resulting from store closures and reduction in support costs.

We were also encouraged in the first quarter by some early benefits of the store labor initiatives.

Over the balance of fiscal 2009 we currently expect the remaining approximately $425 million to ramp up throughout the year as follows.

$100 million in the second quarter, $150 million in the third quarter and $175 million in the fourth quarter.

As we move throughout the year we will continue to provide updates on our progress against this $500 million targeted cost savings in our quarterly calls.

Looking beyond fiscal 2009, not only do we expect these cost reductions to have a significant in year impact but they also create a sustainable change to our underlying cost structure on a go forward basis.

We fully expect these initiatives to drive additional savings as we analyze -- annualize the benefits in fiscal 2010 and beyond.

Before I move on to details around the store closures, let me talk about executive compensation in this difficult time.

First as we stated in our proxy statement none of our named executive officers received bonuses for fiscal 2008 nor did they receive base salary increases for fiscal 2009.

Additional last week Howard Schultz requested and the compensation committee of the Board approved a significant reduction to his annual salary from nearly $1.2 million to below $10,000 a year.

Finally we have made the decision to retain one corporate plane going forward and we will be doing all we can to sell our other aircraft despite the current very soft market for corporate planes.

Now let me provide more specific details around the additional planned closure for approximately 300 Company operated stores with approximately 200 in the US and the remainder in our international markets.

We approached this decision through a similar process as the one we under took last year.

Employing several criteria to classify stores for closure, which included the identification of locations not profitable at the store level and not projected to provide acceptable returns in the foreseeable future.

We also used site and market specific criteria and consideration was given to the impact of the current and anticipated economic trends within each respective market.

In The US the approximately 200 stores targeted to close are spread across all major US markets and account for only 3% of our current US Company operated store portfolio.

The approximately 100 international Company operated stores slated for closure represent only 5%of our current international Company operated store base.

The majority of both US and international store closures are expected to occur over the remainder of fiscal 2009.

As a result of these closures and the further reduction of new store openings, along with other labor efficiency initiatives which we have previously discussed, there could be as more as 6,000 additional retail positions eliminated over the course of the fiscal year.

As is our practice when possible impacted partners may be placed at nearby Starbucks stores.

As part of our announcement today, we included our plan to eliminate approximately 700 nonstore partners from the global work force of which around half are in our Seattle support center.

These are very difficult decisions but are necessary to ensure we have the appropriate infrastructure and cost structure to improve the Company's financial performance going forward.

The earnings release and the 8-K we filed today, provide detail around the pretax charges associated with the store closures and the reduction in head count.

As we indicated in the release, the current uncertainty of the global economy and respective operating environments in which we do business, preclude us from providing targets for fiscal 2009.

However I would like to share with you our current view on a few key metrics and cost inputs for the remainder of this fiscal year.

In addition to the store closures announced today, we are further reducing store opening targets in fiscal 2009.

We provided a table in the earnings release to help illustrate the expected composition of our global store portfolio at fiscal year end.

In summary we only expect to add around 95 net new stores to our global store base this fiscal year with the majority of openings coming through licensed stores.

In line with our decision to reduce store openings in fiscal 2009, we have accordingly further reduced our targeted capital expenditures from $700 million to around $600 million.

The outlook on our two primary commodities, green coffee and dairy is unchanged which we provided with Q4 fiscal year end 2008 results.

We expect unfavorable green coffee costs should be offset by favorable dairy.

And also unchanged from prior outlook we expect a $0.02 unfavorable impact to EPS from foreign currency exchange due to the strengthening US dollar against the dominant foreign currencies in which we do business.

To summarize our view of the remainder of this fiscal year, we are moving swiftly to adapt the business to the reality of the current operating environment and making fundamental changes in our operations and in our cost structure.

In response to the persistent pressure on traffic in our stores from weakened consumer spending, we have continued to work diligently to identify additional opportunities to further right size our cost structure.

We continue to evaluate our global store portfolio and are driving enhanced discipline toward store performance.

We will not allow under performing stores to weaken our store base, and if the analytics point to sustained under performance in any given store, we are moving aggressively to close that store and protect the overall health of the remaining portfolio.

Our focus is to further strengthen the store base and continue to seek opportunities to improve efficiencies and reduce costs, while keeping a keen eye on maintaining the Starbucks experience for our customers and creating value long-term for shareholders.

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

Howard?

Thank you Troy.

There are a few key points I would like to make in closing before we go to the Q&A

First, our cost containment efforts have been serious and our store portfolio is becoming healthier.

We feel good about the progress we are making in improving the basics of store operation and we are offering great value to our core customers through our card programs.

There are also encouraging signs of progress in various geographies around the globe.

Second, we have taken a long look at areas of value and competition.

In short, we have heard those of you who are calling for action in how we go to market in the two areas and we will be moving to correct misperceptions and drive stronger options into the market, all of this will play out over the coming months.

And finally our brand tracking data, which is internal, strongly indicates that perceptions to the Starbucks brand have improved significantly with measures of value, operational improvements, corporate responsibilities and loyalty initiatives back to the 2007 levels or even higher.

We have always relied on the research to predict future consumer behavior and we have no reason to believe that will change.

We believe all this bodes well for the Company over the long-term.

We are focused on foundational improvements that are difficult to see from quarter to quarter, especially in this unpredictable economy.

We believe all of the work we are doing will pay off in the long run.

I think as you can see from the remarks I made and Troy's made and the announcements that we shared with you today that there is in the acute understanding of the situation and we are making significant steps courageous steps to ensure the fact that Starbucks not only weathers the storm, but maintains our leadership position on a go forward basis.

Thank you.

We will open the line now for Q&A.

(Operator Instructions).

You may ask one question before being entered back in to the queue.

We will pause to compile the q-and-a roster.

Your first question will come from Joe Buckley with Banc of America.

Thank you, a question on the US same store sales performance through the quarter.

You had shared the October, November comps down nine, the final results came in down ten.

I'm wondering as you look at that December data if that additional softness was related to the Holiday merchandise?

You mentioned managed it well but perhaps it was still down year-over-year, or was it more the core beverage business?

I think I will let Cliff Burrows, the President of the US business answer that.

It really was just a general lack of acceleration in the final weeks of Holiday.

And indeed certainly the consumer was shopping for bargains and was waiting for reductions to go through and so we came out of it very clean, but there was margin impact.

Your next question comes from John Ivankoe with JPMorgan

Hi, thanks.

Howard, when you were talking about national price points of I guess bundled food at breakfast, food and beverage at breakfast, I mean it does elude to national advertising, I mean advertising a price point on television.

So could you kind of help us -- give us a little bit meat around since March is only a month away how you are planning on communicating that value and whether it's limited time only or permanent?

Thanks.

John I appreciate the question.

I think as noted but in my comments, we are making a significant strategic shift, in a number of ways.

One is we have never had really national pricing and so the markets have been very different from market to market.

So this is a change.

The pairings that we are talking about you eluded to bundling, this is a attempt that we think is a very strong sign of the things that we need to do around value.

And the research that we have done strongly indicates that the appetite from customers to respond positively is there.

For competitive purposes I'm not going to respond to what we may do or when we may do it, but we are making a commitment to this strategy and we think it's the right thing to do at this time.

And I think it is very very important to demonstrate a deep level of understanding and sensitivity about what our customers are feeling and our own research strongly suggests that.

Your next question comes from from Jeffrey Bernstein with Barclays Capital.

Great.

Thank you.

Can you just talk a little bit about the potential impact of the 800 US closures on the rest of the system?

I guess specifically related to comps.

I think in the release you said close to 400 have already closed.

Just wondering whether you done a study to look at the neighboring stores, kind of what the impact is for those stores that demonstrate the closings proven successful?

And just separately I don't know if you had made a comment regarding January and the flow through from December consumer weakness, whether that continued into January?

Thanks.

Geoffrey, thank you.

I will first mention that we won't make comments have not made comments about January and won't be doing that today at all.

And then with respect to closed stores and the impact of nearby stores.

Part of the benefit we expected going in to store closures the first time around last year the 600 plus stores was related to transfer of some of those sales as we closed those stores to nearby stores.

And I can tell you that we have seen that.

We have been very pleased that as we have unfortunately need to close underperforming stores a good percentage of the sales we have been able to pick up at nearby stores.

Now, we are only partway through the program, so we keep evaluating the results and I wouldn't be prepared to talk about the percentages that we have seen but it met our expectations.

And as we go in to this new round of store closures we are approaching it with better insight even than we did the first time around our ability to capture sales in nearby stores as we close the under performing stores.

Cliff, do want to add something to that.

I think the other thing gave us an opportunity to do as we closed neighboring stores we have been able to transfer some of the partners to match those increased sales and overall lessen the impact on the partners out there in stores and strengthen our knowledge base and our capability in ongoing stores.

Your next question comes from David Palmer with UBS.

Just a cost question, could you touch on perhaps some cost such as energy related costs including packaging and all the distribution, dairy costs and maybe even store lease costs?

Maybe -- any color quantification on how those commodities that are coming down might provide some earnings relief and also could leases perhaps be reset lower or renegotiated lower, could that be meaningful?

Thanks.

Well, many of the cost elements you talked about are part of this $0.5billion of cost savings that we are going after this year in terms of efficiencies in the distribution system as an example.

Commodities, things like fuel and, which we talked less about, but coffee and dairy were not part of that $0.5 billion.

What I've said about that and what I expect is that all the commodity impacts together, fuels moving certain directions, dairy we expect favorable this year, coffee somewhat unfavorable.

On balance these are reasonably offsetting each other and are flat to the prior year.

Now, I will go on to say that as I think Howard mentioned we are approaching leases where we can with existing stores to attempt to work with the landlords in a win-win way to get some appropriate reflection of the current environment on those go forward rental rates.

And that's on going discussions.

We do think it will benefit the business and it's something that is a part of our estimated projections going forward.

But we do thinks it's meaningful and it's an important activity that we are going after.

I will add one other thing that we did not talk about in the remarks, and that is that we are reaching out to our top suppliers in a way that we never done before and some of these relationships go back ten, 20 years.

People who have really been in business with us, people who's business has really grown as a result of our success, and I we believe that we will be able to engage in discussions and that will have a positive impact on the business on a go forward way.

Your next question comes from the line of Sharon Zackfia with William Blair.

Good afternoon, I apologize if someone already asked this, I was cut off momentarily.

Troy I was just wondering for you could give us a new break even comp given the new cost savings for you to grow earnings this year.?

Sharon, no we are not planning to do that at this point in time.

It's been a mix of very difficult for us to have visibility into consumer trends and comp growth on the one hand.

And as we are aggressively going after all of these cost initiatives and determining the timing of those as they play out throughout the year, we are not in a position to provide the break even at this point in time.

Next question operator?

Comes from the line of Steven Kron with Goldman Sachs.

Thanks.

I guess Howard or Cliff, question on the kind of retail store footprint in the US.

As you kind of look at your store closures that you have announced I guess maybe you could share a little bit, what beyond the financials, so non-financial commonalities of a lot of the store closures?

And what are you learning I guess about the brand and the density in certain geographies and what is this coupled with the slower unit development clearly, how does that change your thinking to where the brand can extend to?

If you can just kind of share a little bit of color around that?

I will start and the maybe Cliff can jump in.

So much of the issues surrounding the closures relate to the significant fracturing of the impact of the financial system by geography.

And so if you take the state of California and Florida, which for us has been the two most affected markets, those markets in previous years have been fantastic, not only growth markets but very profitable for the Company.

And I wouldn't make any I wouldn't draw a conclusion that as a result of those two geographies the equity of the Starbucks brand or the store opening schedule in the future is dismal because we are dealing with things that we never dealt with before.

When you have -- when you take a ZIP code and look at the foreclosures in that market, there was no opportunity that we ever could have forecasted when we opened up stores there that the market would be so dramatically impacted by the fact that people aren't living there anymore.

So I know the kind of answer you want.

But the truth of the matter is that there is such a direct correlation between the stores that we opened in anticipation of a normalized economic environment and the fact that that economic environment no longer exists.

So I think the steps that we are talking are for this moment in time and we are focused on that and I think to be able to forecast the future as it relates to new growth and new geography, we got to get through this time and really understand what the situation will be.

The flip side of that, though is just I know this is kind of a long winded answer, is that in many many areas of both California and Florida, where the economy is relatively strong, or the impact of foreclosures has not been as significant, our stores are thriving.

So there is such a common thread to the problem and I might add to the retailers and higher end restaurants that I talk to, you can almost mirror their situation with ours in both those two states.

I think the only other points I would add is that one we seen time and time again.

It's become more prevalent in the current climate which is the relevance of Starbucks as a place of community, a place for community and where people go to, to engage with others.

I think that is a good measure for us of success, and a indeed a good indicator of the future.

We have to grow with community where we play a part.

The interesting thing to follow up is I have been holding town hall meetings with customers and the concern that people have which is it's so emotional when they express it is please don't close my store.

And it's hard to capture the relevancy of Starbucks as a third place and the meaning that we have in people's lives across America.

Your next questions from John Glass with Morgan Stanley.

I had a question about international margins and they were weaker this quarter.

Comp deceleration in international hasn't been pronounced as in the US, although the margin decline has been greater there.

So couple of questions, one is why is that the case and how much of the savings that you're applying in the enterprise how of that will go to help the international margins in particular the closure, do you expect to improve margins or not get the transfer of sales?

And maybe just in answering that also could you just comment on how much of maybe not margin decline but maybe decline in profitability has to do with foreign exchange explicitly?

Thanks.

Yes.

Most specifically in the first quarter.

A few unusual items to remember.

We had a disproportionate amount from our previous history of impairment charges that hit that international segment, as we pointed out in my talking points.

So that had a more significant impact in the first quarter, and so deflates those margins.

And many of the stores that needed to be impaired are concurrently the stores that we are evaluating and looking at foreclosure that we have talked about today and announced in out store closure numbers.

The other comment I will make is that the fixed structure in many of our international markets particularly in Europe, the cost structure is somewhat more fixed just by virtue of the fact the occupancy costs as we have talked about with you in the past, are relatively higher on our European P&L's than they tend to be in our US and Asian P&L's.

So as a result of that, as we lose sales the that deleverage impact is even more significant where expected and are discovering than what we seen previously.

We did have some foreign exchange impact in the first quarter; it was not a significant number.

For the full year we think it's a little more than $0.02 impact as I mentioned.

But there was some modest amount of impact negative in our international segment in Q1.

I'm sorry your last question was a about store closures.

Yes, we do expect that by virtue of closing these approximately 100 stores in the international segment that similar to our experience when we closed stores in Australia and closing US under performing stores that will remove losses from the international segment on the one hand and then also we expect similar to our experience in the US that that will bolster the performance in the rest of the portfolio and as a result improve performance.

Australia is a perfect example.

We had negative comp store sales and significant losses after the store closures we have positive comps and profitable in Australia.

In fact double digit comp growth in Australia.

it's one of the strongest top lying growth markets we have in the world right now.

That's a good testimony and good learnings for us.

It has helped shape how we look at under performing stores now and it has helped push us towards the kind of actions that we are talking right now.

John just to repeat what Troy said earlier about the margin compression 320 basis points are related to the impairment charges in international.

Next question, please

Your next question comes from Matt DiFrisco with Oppenheimer.

Thank you very much.

Troy, just looking at the incremental $100 million that you are labeling for '09 associated with the 300 incremental store closures, can you give us a sense of more of an annual number.?

Because that does seem a little lwo for 300, considering 600 is generating much larger number it appears, I'm just curious of how much that might look on annual basis?

And then also just to as far as innovation I know initially when you started to talk about the cost savings and the closures, we were looking for a little bit more of savings and there was always an inference that there was going to be a reinvestment into innovation.

And a lot of the December conference was focused on [Sorbetta] and some other new products coming out in this deteriorating environment is there less of action towards innovation and maybe restraining some of that investment, is there greater savings in there or is there still a sense of reinvesting?

I will take the discussion about the $100 million and then perhaps Cliff and Howard can address the innovation question.

The $100 million of savings we announced today, which takes the total we expect in 2009 to $500 million, I will point out that the store closure come point of that is really a smaller piece of that $100 million.

That's because we expect over the balance of this year it will take time to close the stores.

And so we do not expect anywhere near the full benefit from closing the 300 stores to hit in '09.

It's a fairly small piece of the $100 million.

That $100 million is partially store closures, but it is also the reduction in force that we have announced today.

And as we noticed in the release, a broad range of other initiatives across the business, of a smaller element of things that we have continued to go after that we have actions and initiatives going against and we expect to see it play out over the year.

In an annualized basis, I'm not ready top see what I think annualized in 2010 these benefits will be.

But I will point that of all of the actions we are taking, they carry into 2010 and annualize more significantly than what we are benefiting from in 2009.

That's an important element of what we are doing.

And so those store closures will absolutely carry into and in fact have the most significant impact in 2010.

Far more than what we expect to see from them in 2009.

With regard to innovation, I think that's a very appropriate question.

In view of the environment we are in and the issues that almost every business is facing especially those that are in the retail business, I think it's very prudent to maintain a healthy outlook towards the need for innovation and balancing that out with the cost of it and when will we get returns.

Having said that, we have had a number of very important innovative initiatives that have been in the pipeline for quite sometime.

And we have gone back and looked at those, we have taken those out that we believe are not relevant now and kind of doubled down on those things we think are highly relevant for the environment and our ability to reignite the experience and reinvent what we do that is complimentary with the core of coffee.

I think in the coming days and weeks you will hear more about that.

But I think we want to balance out the lens we are operating on right now is an acute understanding of the cost containment with at the same time the need for consumer facing initiatives that customers are going to respond to in this environment.

And things that we can own that really relate to the core of coffee.

I think we will take one more question.

Your final question will come from the line of David Tarantino with Robert W.

Baird.

Hi, good afternoon.

Question on store level of cost savings, can you comment on how you and the employees at the store level are feeling about achieving those savings while also elevating the Starbucks experience at the same time?

It seems like those objectives may be at odds.

So anything you could offer there would be helpful.

Hi David it's Cliff here.

Just to say that we are very conscious of that balance between our financial objectives and indeed maintaining and improving experience for people in the stores and indeed our customers.

Some of what you heard about the slowing of the introduction of innovation, and simplifying of our promotional calendar, all goes to help our store partners in terms of focus on the day-to-day activities in the store.

We are through lean practices developing ways to be more efficient in our stores, and indeed reduce waste in the stores.

And we started the action in the final quarter, I'm sorry the final month of the year and we saw a good impact in terms of labor efficiencies and we continue to see that and will see that accelerate through quarter two and into the balance of the year.

What we have also seen is and something we announced in December was a new bonus scheme for partners where it is focused on sales and we saw an increase proportion of partners benefit from that.

Because the bonus scheme focused purely on sales; it kicked in more of our partners in the way it would not have done before.

And that really has helped to increase the focus on delivering both sales and increased experience, improved experience to our customers.

So we feel pretty good about it.

But we are very conscious that it is a very fine balance.

Thank you very much, that concludes the call for today.

Thank you for joining us.

We will speak with you again next quarter.

Have a good afternoon.

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

You may now disconnect.