星巴克 (SBUX) 2009 Q4 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Starbucks Coffee Company fourth-quarter and fiscal year-end 2009 conference call.

(Operator Instructions).

Ms.

DeGrande, you may begin your conference.

Good afternoon, ladies and gentlemen.

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

With me here in Seattle today are Howard Schultz, Chairman, President and CEO, as well as Troy Alstead, CFO.

And joining us from New York and available for Q&A is Cliff Burrows, President of our US retail business.

Before we get started, let me remind you that this conference call will contain forward-looking statements.

Forward-looking statements are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements and should be considered in conjunction with cautionary statements in our earnings release and risks factors discussed in our filings with the SEC, including our last Annual Report on Form 10-K and subsequent Reports on Form 10-Q.

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

Please refer to the Investor Relations section of Starbucks' website at www.starbucks.com and to the financial statements accompanying the earnings release to find disclosures and reconciliations of non-GAAP financial measures mentioned on today's call and their corresponding GAAP measures.

With that, let me turn the call over to Howard Schultz.

Howard?

Thank you, Joanne, and good afternoon, everyone.

I'm pleased to report a very solid quarter and to close out an extremely challenging, but ultimately very rewarding, fiscal year.

While few could possibly have anticipated the extraordinary economic and operating challenges that have confronted us over the past year, it is with these same challenges that led us to some of our best work under a common purpose, and I know that Starbucks is a better and stronger company for having come through it.

A more disciplined focus on operations and the introduction of numerous initiatives to permanently improve our cost structure each contributed to the positive earnings momentum that we're seeing.

In addition, and even more important, are the outstanding performance of our partners and the many innovations we introduced to improve our in-store customer experience in the US and abroad.

All of these efforts have set the stage for what we believe will be long-term revenue and profit growth.

That said, we know that we have more work to do.

I'm pleased to report that both one- and two-year sequential-quarter comparable store sales trends have improved, with same-store sales in both our US and international businesses stronger as we exited the fourth quarter than when we entered it.

Our results also point to the success of the broad-based improvements that we have made globally in each of our beverage, food, Consumer Product Group and merchandise channels in the fourth quarter and throughout the year.

I will take you through the business highlights for the quarter and year end, make a few remarks about some of the trends we've observed in fiscal 2009, and then tell you what is on the horizon for fiscal 2010.

Then Troy will discuss financial results in more detail and to provide updated guidance for fiscal 2010.

Consolidated same-store sales trends improved to negative 1% from negative 5% in the previous quarter.

Non-GAAP operating margin expanded to 10.4%.

Non-GAAP earnings per share for Q4 totaled $0.24 compared to EPS of $0.10 in the prior year, an increase of 140%.

Turning to the full year, let me begin by highlighting some of the steps we took to improve our core business.

The tough decisions we made to right-size our cost structure are well known.

And at this point, Troy will provide a final review of the 2009 savings in a moment.

This important work has allowed us to build a permanent, sustainable model for future profitable growth.

I'm pleased to report that we were able to report the cost savings we did at the same time as we were able to materially improve our in-store customer experience.

On last quarter's call, I told you that we had been seeing gradual improvement in our customer satisfaction scores from the beginning of the fiscal year.

While this trend has continued and we saw further improvement in the fourth quarter, in fact, by the end of the year, our customer satisfaction scores were up a full 10 percentage points from where we began in January.

Our efforts to highlight our coffee differentiation and leadership position took a step forward during this quarter, building on the ongoing strength of Pike Place Roast, the sales success of (PRODUCT) RED whole-bean coffee and continued benefits of espresso excellence training.

We're seeing outstanding results for our seasonal offerings, where we've been able to build on high levels of customer anticipation with an integrated go-to-market approach.

We brought Anniversary Blend whole-bean coffee back to our stores every year since we first introduced it in 1996 in honor of our 25th anniversary, and during the quarter, it achieved the best sales results in its history, and Pumpkin Spice Latte is on the same track.

Complementing this improvement in the core business are several relevant consumer-driven innovations and initiatives.

Our extensive work to upgrade the quality of our food has been well received.

The reinvention of our bakery recipes with a focus on real and simple ingredients has improved taste, consistency and overall customer experience.

As we have simplified recipes, we have also driven greater efficiencies through consolidation of vendors, reduced waste and better on-time delivery to stores.

We launched the new program with a free food day and drew 1.5 million customers into our stores to sample the new lineup.

Importantly, we saw food contribute to ticket growth in the quarter.

We'll continue to make progress toward evolving our food business as we expand health and wellness options for our customers in the months ahead.

Momentum and excitement for our North American launch of Starbucks VIA, our 100% natural-roasted soluble coffee, built throughout the quarter.

VIA gives us a very strong play in both single-serve and instant coffee markets.

VIA wins on quality, portability and ease of use.

It produces less waste that other single-serve options.

And from a cost-effectiveness standpoint, it requires zero investment for the consumer in equipment.

Most importantly, it wins on taste.

In fact, VIA was recently recognized by Progressive Grocer as a 2009 Editor's Pick for best new consumer product.

It is important to note that VIA is not just a product introduction or promotion; it is a significant new global growth platform within our core business, with strong margins consistent with our other whole-bean and ground coffees.

The integrated launch brought together partners in stores, advertising, PR, and digital and social media to begin to go after the $21 billion global instant coffee category in a big way.

And we are encouraged by our research, which demonstrates that customers who tasted VIA during our VIA taste challenge were by a significant measure motivated to purchase.

Starbucks VIA is not only resonating with our core customers, but it has enabled us to tap into new and incremental use occasions and niche states -- office workers for late night meetings, business travelers, teachers, healthcare professionals -- the list goes on.

When we were planning to launch VIA, we were confident that its taste, quality and portability, combined with an increasingly on-the-go consumer, would create new use occasions for our Company and this product.

We now know through our research that we're not only creating new use occasions, we're also seeing a significant number of customers using VIA for their at-home occasions.

At the same time, we've seen a de minimis cannibalization of our whole-bean and ground coffee business.

As you know, we prelaunched VIA in Seattle, Chicago and a number of stores in London in March and expanded the offering through the US and Canada at the end of September.

I am delighted to report that in the initial weeks of the rollout, VIA has outperformed the initial test markets.

And VIA has already given us opportunities for sales and conversions where we've never had them before -- in the aisles of specialty retailers like REI, on airlines like United and EasyJet in the UK, and now in over 1500 major foodservice locations throughout the US.

We recently announced the launch of VIA Decaf, a top customer request, which will be coming out on November 17.

And we are now exploring ways to build on VIA's early success with multiple new varietals and blends and form factors.

We're planning to expand VIA internationally beyond Canada in 2010, including in the UK, where 80% of the coffee market is instant.

And we are actively exploring opportunities to lead with VIA in markets where Starbucks does not yet have a significant retail presence, but where instant coffee is dominant.

VIA is also providing an unexpected brand halo to Starbucks.

After sampling VIA, customers we survey told us that both the taste and the story enhanced their overall image of our Company.

We believe that VIA will create long-term incremental growth and profitability in our stores and beyond as we expand into new channels and new geographies.

Building on our ongoing efforts to provide value to customers, last week we announced the next evolution of our customer loyalty program, My Starbucks Rewards.

We based changes on customer feedback and learning over the past years, and we are confident that the new program will provide a simpler and more rewarding experience for customers, while at the same time driving increased traffic and frequency and ultimately increasing sales.

More than 3.5 million customers are registered Starbucks cardholders.

We've seen statistically significant increases in frequency and ticket from these loyal customers.

My Starbucks Rewards will launch on December 26, traditionally the start of our heaviest card redemption period.

The new streamlined program delivers value with no annual fee, allows members to use their favorite registered card -- a significant customer request -- and provides customized rewards that increased the more it is used, driving both acquisition and traffic.

The Starbucks Card has also been a strong performer even in the midst of last year's difficult holiday season, so we have every reason to believe and to expect that the latest evolution of the card with its expanded benefits and value and ease of use will perform well.

As you can see, innovation is playing a key strategic role in our go-to-market strategy.

And in an increasingly competitive environment, we've been able to tell our story using social media and other tools to increase share with our existing customers in both frequency and spend and to attract new customers as well.

Our recently launched iPhone application has exceeded 500,000 downloads in the first week and have consistently been in the top three downloads on iTunes since it was introduced.

We've now been recognized as the number one most engaged brand online, the biggest brand on Facebook with nearly 5 million fans, the biggest brand in our category on Twitter with 450,000 followers.

In 2009, we invested in a best-of-class digital team and capability, and we have a unique opportunity to connect with consumers in impactful ways.

We see our recent ranking in a proprietary study as the number one preferred restaurant brand for teens as strong evidence that social media innovation is resonating.

The combination of these new channels of communication and our retail store footprint has helped us deliver a consistent go-to-market approach, as evidenced in our recent campaigns for coffee and VIA, and you'll see more of this as we launch holiday this season.

With more than 16,000 stores globally, we also have a unique opportunity to tell the Starbucks story in our retail experience.

We are reinvigorating the physical environment of our stores through new store concepts and designs.

All newly constructed Company-operated stores worldwide will be LEED-certified beginning this calendar year, with projection, construction and cost parameters.

This initiative, coupled with locally relevant store designs and renovations, is helping us form deeper connections to customers in their own neighborhoods.

We've gained important insights on custom brewing from our new mercantile store, the 15th Avenue Coffee and Tea store, and we will be applying some of those as we move forward.

I would be remiss if I limited my comments on innovation to only the customer experience.

Behind the scenes, we have continued to build on our work to drive efficiency through lean processes, optimal scheduling and technology upgrades.

These innovations, though not always visible, continue to help drive margin growth and customer and partner satisfaction.

Our overall international business closed the year with strong momentum.

Margin expansion continued, and we are well positioned to begin our next phase of growth internationally.

Troy will discuss specific results, but I wanted to share just a few highlights.

We are particularly pleased with the ongoing strength of our business in China, which has continued to deliver positive same-store sales growth and improved profitability throughout this difficult economic period.

We continue to see significant opportunities for store growth in Greater China, which we believe will ultimately be our largest market outside of the US.

On a recent trip just this past quarter, I saw firsthand the ongoing emotional connection we've already created with customers.

I visited Shanghai, Shenzhen and Hangzhou and was reminded of our early days of growth and development in the US.

In each of these very diverse major cities, Starbucks has become part of the daily Chinese ritual.

The China market, which now has nearly 700 stores, holds the potential for thousands.

In the UK, we're seeing a number of improvements in the overall performance of the business, including increased traffic as several of our customer-driven initiatives beginning to take hold.

We also announced a set of initiatives with fair trade, a very important partnership for consumers in the UK and across Europe.

Starbucks has converted all of our espresso drinks and beverages to fair trade in the UK, and we will do the same across Europe beginning next year.

This is one of the many reasons why we've just been named the most ethical coffee company in Europe by Allegra Strategies.

We are making a further brand deposit in the UK with the launch of (PRODUCT) RED, and we hope that it resonates as much there as it has in the US.

We expect to continue to make steady gains in our international markets towards topline growth, not only by optimizing our retail portfolio, but by beginning to expand our CPG and other channels.

CPG remains a highly profitable segment of our business.

Packaged coffee has seen improved trends for the quarter, driven by aggressive pricing, new packaging graphics, new sizes and new distribution partners.

We have also launched VIA in some key CPG channels, and as I've mentioned earlier, including fantastic debuts and results in both Costco and Target.

We will be launching VIA in grocery, mass and drug accounts later this year under our recently signed distribution agreement with Acosta Sales & Marketing.

This new strategic partnership will not only provide us the ability to drive broad and deep distribution for VIA, but it also allows us to continue to expand and grow our packaged goods business at an accelerated rate while capturing more value for Starbucks in the long term.

We also made a significant leadership move in the fourth quarter by appointing one of our strongest executive talents, Michelle Gass, to oversee Seattle's Best Coffee as its new President.

We have a meaningful opportunity to significantly profitably grow Seattle's Best Coffee brand in the US and around the world as its own distinctive experience.

I'm pleased to report that by the end of 2009, more than 9000 Subway restaurants in the US will feature Seattle's Best Coffee, as well as our plans to expand into even more Subway restaurants during 2010.

We also will bring Seattle's Best Coffee to a group of more than 800 Subway restaurants in Canada before the end of 2009.

I am also very pleased to report that we recently made two key additions to our management team.

Annie Young-Scrivner is our new Global Chief Marketing Officer, and Kalen Holmes will be joining us as the Executive Vice President for Partner Resources.

Both of these executives have significant experience driving change and growth in large global organizations, and we are delighted to have them at Starbucks.

While we have made significant progress in fiscal '09, we know going forward we have much more to do.

And as I said in the last call, there is no one at Starbucks doing a victory lap.

We realize the opportunity, we realize the tough economic environment, but obviously we've made significant progress.

In fiscal '10, we will continue to aggressively manage expenses and incorporate the learning from our US business into international markets.

We will leverage our technology investments such as updated point-of-sale and scheduling systems to drive performance on a store-by-store basis.

We will continue to innovate and stay relevant to consumers.

I firmly believe that our innovation pipeline heading into 2010 and beyond is among the most robust and promising that we have ever had.

And as always, we will continue to connect with our customers by staying true to our values and our guiding principles around the environment, the communities we serve and the ethical way we do business.

Based on improving operating results and performance metrics over the last two quarters, the fact that we have a longer holiday period this year and the strength of our holiday products and promotions, we remain cautiously optimistic about the upcoming holiday season and the near term.

More important, I am confident that by staying focused on our business and relevant to our customers, integrating the learning from our ongoing transformational agenda and continuing to respond to the new calculus of today's consumer marketplace, Starbucks will achieve steady growth in sales and profits both over the immediate and the long term.

I will now give the call to Troy.

Thanks, Howard, and good afternoon, everyone.

As Howard indicated, our fourth-quarter results represent an extension of the momentum that started to build in our third quarter.

Today I'll provide additional details on our fourth-quarter performance, including the continued progress we've made in the area of cost savings and margin expansion, as well as the improvement we've realized in comparable store sales trends.

Additionally, I'll recap our 2009 full-year results and then provide an outlook for our fiscal 2010, including some key financial targets.

Fourth-quarter revenues were $2.4 billion, down 4% from $2.5 billion a year ago.

The revenue decline was primarily driven by foreign currency translation, fewer Company-operated stores and a 1% decline in comparable store sales attributable to a 1% decrease in traffic.

And importantly, consolidated comps, as well as US and international comps, ended the quarter higher than where they started the quarter.

We reported consolidated operating income of $199 million in the fourth quarter, which includes $53 million of restructuring charges, nearly all related to lease exit and other costs associated with the store closures.

Excluding those charges, non-GAAP operating income was $253 million.

This compares to Q4 fiscal 2008 operating income of $14 million and non-GAAP operating income of $119 million.

Consolidated operating margin was 8.2% on a GAAP basis and 10.4% on a non-GAAP basis, which represented a 570-basis-point improvement from the 4.7% non-GAAP operating margin reported a year ago.

In line with recent trends, we are realizing the benefits derived from the operational efficiencies we implemented in our business throughout the year.

I'll provide more detail around that shortly.

Slightly offsetting these benefits, G&A expenses increased as a percent of revenue compared to last year due to higher performance-based compensation.

Our effective tax rate for the fourth quarter was lower than normal due to an employment tax audit settlement.

As a result of the settlement, we've recorded approximately $17 million in additional payroll tax for the quarter, which shows up in our store operating expenses.

This additional payroll tax is fully offset by an income tax credit, resulting in no impact to net profit.

This tax audit settlement lowered our effective tax rate by roughly 4.5 percentage points in the quarter.

Otherwise, the effective tax rate would have been in line with our historical rate.

And I will point out again, this unusually low tax rate had no impact on EPS as it was completely offset by additional store operating expenses.

Earnings per share was $0.20 for the fourth quarter compared to $0.01 per share in last year's fiscal fourth quarter.

Non-GAAP EPS was $0.24 compared to non-GAAP EPS of $0.10 a year ago.

Let me now move on to fourth-quarter results from our operating segments, which I will review on a non-GAAP basis.

I'd like to point out that we have a segment reporting change this quarter, and my overview reflects that change.

Our US foodservice business, which has previously been reported under the US segment, was moved this quarter to the CPG segment in order to reflect the direct-line management reporting change to CPG leadership.

Historical restatements will be published on our website in the near future.

Total US net revenues for the quarter were $1.7 billion, a 4% decline from $1.8 billion a year ago.

Company-operated US retail revenues declined 3% to $1.6 billion for the quarter, primarily due to 474 fewer Company-operated stores and a 1% decline in comparable store sales.

The comp decline was driven by a 1% decrease in traffic, while the average value per transaction was flat.

With respect to comp trends, we continued to see sequential-quarter improvement on a one-year and a two-year basis.

One-year comps improved 5 percentage points compared to the third quarter, while two-year comps improved 2 percentage points.

The average value per transaction was favorably impacted by food, as well as a more focused and more effective merchandise assortment.

Offsetting this favorability was the impact from our value offerings, including the return this year of our Treat Receipt promotion, which ran four weeks longer than last year.

These offerings are part of a strategy designed to increase frequency with our loyal customer base and to drive new customers into our stores.

Reflecting back on Howard's comments earlier about VIA, while the fourth-quarter impact was minimal due to the timing of the launch, results from the two US test markets and early results from the late September rollout support our belief that VIA will have no impact on brewed sales volumes within our stores.

In fact, while we expected some cannibalization of our packaged coffee business within the stores, the actual cannibalization rate has been very modest to date.

The result is a largely incremental revenue stream with a product margin that is accretive to our existing store product margins.

US cost of sales, including occupancy, was 40.1% of revenues in the fourth quarter, a significant improvement of 520 basis points compared to the year-ago period.

Most of this progress was the result of operational efficiencies designed to minimize waste in coffee, food and dairy.

Favorable dairy costs also contributed to the improvement.

We also continued to gain traction in the US from our efforts to optimize in-store labor.

The evidence is reflected in US store operating expenses, where we finished the fourth quarter at 40.1% of total revenues, a 230-basis-point improvement compared to last year's fourth quarter.

The $17 million payroll expense related to the tax settlement I highlighted earlier negatively impacted US store operating expenses by 100 basis points.

US operating income was $207 million for the quarter, more than double last year's nearly $80 million in operating income.

The operating margin improved 760 basis points to 12.0% of related revenues from 4.4% a year ago.

The operational improvements we've talked about played a big role in the margin expansion as they directly impacted our Company-operated retail business.

Also noteworthy, operating margins have improved in our licensed store business as we had similar success in strengthening the store portfolio, enhancing the food program and reorganizing the licensed store support organization.

We are extremely pleased with the operating margin expansion that we've been able to generate in this difficult environment.

Equally satisfying and encouraging is that we've been able to accomplish this while at the same time improving the customer experience, which is the heart of our business and a key indicator of future growth.

Moving now to results from our international segment, international total net revenues declined 4% to $514 million in the fourth quarter of fiscal 2009, driven by foreign currency impact due to the stronger US dollar compared with the British pound and Canadian dollar.

Comparable store sales for the quarter were flat for the year-ago period, comprised of a 1% increase in transactions, offset by a 2% decrease in the average value per transaction.

The 2-percentage-point improvement from the third quarter was largely driven by the UK and Canada, our two largest Company-operated markets outside of the US.

Importantly, the UK market reported positive comparable store sales growth in the quarter.

Similar to the US, we've seen UK customer satisfaction scores increase as we refreshed a significant number of stores and improved the in-store experience through a relentless focus on operational excellence.

International operating income was $45 million in the fourth quarter of fiscal 2009, a significant increase from $22 million last year.

Operating margin improved by 470 basis points to 8.8%, its highest level since the first quarter of fiscal 2008.

Cost of sales in occupancy as a percent of revenue improved by 260 basis points, primarily driven by more efficient spending on store maintenance and in-store reduction of waste.

Margin gains in store operating expenses and other expenses were partially offset by an increase in G&A.

Of note, last year's G&A rate was unusually low due to performance-related compensation adjustments.

We are pleased by the improvement in our international segment, now clearly back on the path for becoming a profitable growth engine for the Company.

Canada, the UK, China and Japan are our largest international market and drive the majority of this segment's revenue and operating profits.

Each of these markets is profitable to Starbucks.

Each is a priority for future investment, and each is a key component of future growth.

Our focus on these important markets, along with the ability to leverage key strategic partnerships in other markets abroad, positions us well as we move into fiscal 2010.

I will now move on to the results from the Global Consumer Products Group.

CPG total net revenues decreased 2% to $188 million in the fourth quarter of fiscal 2009, primarily due to lower US foodservice revenues, partially offset by higher revenues from packaged coffee.

The foodservice revenue decline is primarily related to continued softness in the hospitality industry.

Packaged coffee is an increasingly competitive segment of the business, and were focused on retaining our share of the market by reinforcing our product differentiation through increased and sharpened consumer messaging.

Operating income for CPG was $93 million in the fourth quarter, a 10% increase from last year.

The operating margin improved by 530 basis points to 49.3%, driven by lower foodservice support costs and lower marketing expenses compared with last year, when we launched a new ready-to-drink product in Japan.

In addition, our income from equity investments increased year over year due to improved profitability from our North American coffee partnership.

I will now recap our fiscal 2009 performance in a few key metrics.

Earnings per share was $0.52 compared to $0.43 last year.

Excluding restructuring and transformation-related costs, non-GAAP EPS was $0.80 compared to $0.71 per share in fiscal '08.

We recognized $332 million in restructuring charges in fiscal 2009, the majority of which related to the previously announced store closures.

Consolidated revenues for fiscal '09 dropped 6% to $9.8 billion.

The decline was mostly due to a 6% drop in comparable store sales, comprised of a 4% decline in transactions and a 2% decline in the average value per transaction.

Foreign currency translation also contributed to the decline.

With respect to comparable store sales, the overall performance was largely driven by the US segment, where comps decreased by 6% overall, with a 4% decline in traffic and a 2% decline in the average value per transaction.

Internationally, we did not see as much deterioration, with overall comps finishing at minus 2%, comprised of a 1% drop each in transactions and the average value per transaction.

As we've discussed today and in past quarters, we are encouraged by the fact that comp trends improved both in the US and internationally as the year progressed.

Also encouraging this year was the performance of the fiscal 2009 age class of new stores.

While it is too early to evaluate the complete portfolio, the trends we are seeing support our belief that this age class will once again meet our historical hurdle rates and they will be the best-performing group of the last few years.

In terms of liquidity, Starbucks continues to enjoy a solid financial foundation.

Even during this challenging year, in the midst of the most difficult economic cycle in decades, Starbucks produced the highest operating cash flow and free cash flow in the history of the Company, underscoring the strength and resiliency of the brand and our business model.

Operating cash flow for the year was $1.4 billion, enabling us to generate free cash flow in excess of $900 million.

Short-term borrowings remained at a zero balance at year end, leaving essentially $1 billion borrowing capacity available to us under our existing credit facility.

We also reduced our capital expenditures for fiscal 2009 to just under $450 million, driven by a reduction in new store openings in response to the global economic slowdown.

As I mentioned earlier, through a dedicated effort across the organization, we delivered approximately $580 million in cost savings for fiscal 2009.

As you will recall from our previous discussions, this compared to a most recent target of $550 million and the original target of $400 million established less than a year ago.

The largest component of the savings comes from our efforts within the store to optimize labor and reduce waste.

This category is the primary reason why we exceeded the projected savings targets, as we were able to gain earlier and better traction on these initiatives as the year progressed.

We finished the year with roughly $190 million of savings in this area.

It is important that I mention again here that at the same time we made our stores more efficient, we drove significant improvements in our customer satisfaction scores.

The next-largest savings component was associated with nonretail support savings, including headcount reductions.

We delivered savings of about $180 million in this area.

Supply chain savings in procurement, manufacturing and logistics accounted for approximately $110 million in savings.

And finally, savings from the store closures totaled roughly $100 million for the year.

Fiscal 2009 was a year of significant change for the Company.

It was a year of renewed focus on the excellence of the customer experience.

It was a year of heightened financial rigor and discipline.

And it was a year of relevant profitable innovation, setting the stage for growth in 2010 and beyond.

With that foundation established, we are pleased to provide our outlook targets for fiscal 2010, reflecting a return to growth, generated from more diversified sources compared to the past and increasing profitability.

We expect fiscal 2010 revenue growth to be in the low to mid-single digits, driven by modestly positive comparable store sales, a 53rd fiscal week and approximately 300 planned net new stores.

Of the 300 net new stores, we expect approximately 100 to be in the US, primarily licensed, and approximately 200 to be in our international markets, also primarily licensed.

We recognize the difficult economic situation that many consumers still find themselves in, and we do not expect that to significantly change over the course of the year.

We will continue to approach new stores with caution, given the economic environment, and we will evaluate these growth plans as we progress throughout the year.

Overall, we expect little net impact to the bottom line from commodities.

We expect dairy costs to be unfavorable for the year.

As indicated in our third-quarter 10-Q, we recently implemented a dairy hedging program to mitigate roughly a quarter of this pricing risk.

Offsetting dairy, we expect coffee to be slightly favorable in 2010.

Lastly, at this point in time, we foresee little impact from foreign currency movements.

As I have said in the past, I expect operating margins for both the US business and the international business to reach the mid-teens.

While we won't get there in fiscal 2010, the work we've done over the last year provides the foundation for meaningful progress in that direction.

In both the US and international segments, full-year non-GAAP operating margin improvement is expected to be in a range of 200 to 250 basis points.

And our CPG segment margin is expected to remain in its current range of 35% to 40%.

Our expectation, based on the cumulative result of these margins, is a consolidated non-GAAP operating margin of 10% to 11%, crossing the meaningful full-year double-digit threshold for the first time since fiscal 2007.

As a reminder, the segment operating margins reflect the reporting change I highlighted earlier.

We expect our effective tax rate to be in a range of 34% to 35%, which is close to its historical level.

And this leads to our outlook for earnings per share.

We expect fiscal 2010 non-GAAP EPS growth in a range of 15% to 20%, including roughly $0.02 to $0.03 per share coming from the addition of the 53rd fiscal week.

Not included in this estimate is the impact from the remaining international store closures, which we expect to be $0.02 to $0.03 in restructuring that will be spread throughout the year.

We expect to see a very favorable first quarter based on improving business trends and factoring in the lapping of a difficult holiday period last year.

In addition, we will be realizing the full benefits of the cost savings work that gained much of its traction after the first quarter of fiscal 2009.

The non-GAAP EPS comparisons will be more difficult in the last three quarters of the fiscal year.

We are preparing to launch VIA domestically in the CPG channel in the middle of fiscal 2010 through a recently signed broker agreement.

While this avenue allows us to control what we believe is a great opportunity with our brand outside our stores, there are upfront investments in the business that we will need to make to support this model.

Therefore, in line with our previous expectations, we expect VIA to be profit-neutral for Starbucks for fiscal 2010.

Finally, we expect cash flow from operations to again reach approximately $1.4 billion in fiscal 2010.

And our expectation for capital spend next year is in the range of $500 million to $550 million, a slight increase from fiscal 2009.

Roughly half of this total is expected to go to renovations and store equipment upgrades, approximately one-quarter of the total is expected to be spent on systems and technology upgrades both in-store and back-office, and the remaining one-quarter is expected to be spread among new stores and other capital investments.

In closing, fiscal 2009 represented a year of unprecedented challenges and change for Starbucks.

As we enter the new fiscal year, we recognize that challenges remain and there is still a tremendous amount of work ahead.

However, it is important that we acknowledge the accomplishments of our partners this past year.

During that time, we shifted our culture and business model from one dependent on high topline growth to one that is more disciplined and operationally efficient, laying the foundation for profitable growth in the future.

We have improved the Starbucks experience for our customers through a rededicated focus on in-store operational excellence.

We have raised the bar on innovation, launching products and concepts that once again set the standard for the industry.

And we are an innovator in how we connect with our customers through nontraditional channels such as social media while leveraging the relationships we have in our CPG channel to advertise for the broader benefit of the brand.

Our balance sheet, cash flow and liquidity are all in excellent health, and our business mix continues to become more diversified as the international and CPG businesses grow.

We are confident that the best days for Starbucks still lie ahead as we look to capitalize on the strength of our global brand and the abundant opportunities that remain in markets and channels around the world.

With that, now let me turn the call back over to the operator to begin Q&A.

(Operator Instructions).

John Glass, Morgan Stanley.

Troy, you highlighted the free cash in the business this year and what you expect to do next year, but you stopped short of talking about what you plan to do with that.

So if you could talk about either what you plan to do about it or what is the timeframe in which you might make that decision.

And then just a clarification -- you stopped short of saying comps are actually positive now.

But I assume, just given the trend, that they would have to be currently positive.

Is that true?

Well, let me -- no, we don't report separate months.

So I'm going to let you work on the arithmetic.

All I'll let you know is that we had negative 1% comps for the quarter, and I'll repeat what we said.

We had improving trends, and we ended the quarter stronger than how we began the quarter.

And just to be consistent with our history, we don't talk about specific months.

Now, back to your first question, our top priority for cash of course is investing back in our existing business, making sure we're maintaining the excellence of the assets that we have in place.

And next priority is to fund the growth opportunities that we have, VIA, new store growth around the world and so on.

And we see abundant opportunities there.

With that said, I think fiscal 2009 demonstrates the cash-generating power that we have in this business.

And I do expect that as we move, again, into 2010, we will have excess cash above and beyond those critical business needs that I've described in the business.

Now, with that said, I also remain a bit cautious about this economic environment that we're in.

We are on the front end here of the first holiday quarter, which is our strongest cash-producing quarter of the year.

So we're not going to make any conclusions on how best to deploy that excess cash until we come through this quarter.

What I will say is that we are evaluating how to distribute excess cash and what is the appropriate distribution strategy.

We're having those discussions with our Board.

And I would expect as we get somewhere to the latter half of our second quarter, then we will conclude that work and be ready to talk about what the next step is for us.

So, more to come.

Steven Kron, Goldman Sachs.

Maybe just to add on to that question, Troy, just guidance that you provided of 15% to 20% earnings growth, it would seem, if my math is right, that you could pretty much get there with the rolling forward of the cost saves that you have kind of realized in the back half of this year and benefiting, really, the first part of the year, that alone.

So I guess simplistically, are you guys thinking that the same-store sales that you are guiding to is enough to offset some of the natural inflation that we might see in the business?

Or are you expecting G&A to be much higher next year?

And to John's question, will potentially the use of cash flow for buybacks be upside to the guidance that you provided?

There was a lot there.

Let me start with the cost saves.

I think the important thing to mention, and I'll just repeat what we've talked about early in the year, these cost-save initiatives that have delivered $580 million in '09, as you know, came in throughout the year.

That will annualize to a bigger number in fiscal '10.

I will also point out that this muscle that we have built in '09 gives us opportunity to go after more in the years ahead.

We have new capabilities here that we didn't have in the past around driving efficiencies through every corner of our business.

And I would expect that beyond annualizing that number that we will continue to seek out and find efficiencies throughout the business.

With that said, and you made this point well, there are natural inflationary pressures that just are there every year in our business -- wage inflation, real estate, in perhaps different environments than now, but those cost increases are always there -- commodities from time to time.

Healthcare is a critical element of ours.

Given that we have such a broad-based healthcare program, we are more exposed to cost increases there than many retailers are.

So the sum of all that is that the cost saves that we will get in '10 and that we will continue to seek are intended to at least give us a tool to offset natural inflation in the business.

There was a day when the high comp growth we had was how we offset those cost increases.

We've built a model this year that gives us one more way to do that.

We will have, we expect, positive comparable store sales this year.

And the combination of that with increased cost saves are what we believes drives the margin improvement in the year ahead.

David Palmer, UBS.

Could you discuss the decline in -- it seemed like there was a deceleration in US licensed store revenue, and I'm wondering if I'm seeing that right.

Is there any change in -- is this just the impact of certain types of locations, like we were talking about airports, hospitality perhaps not doing as well?

Or is there a change in strategy by Starbucks on that?

And then secondly, with regards to Seattle's Best licensing, how meaningful could that be to earnings?

You mentioned the 9000 stores with Subway.

Thanks.

This is Howard.

We had a very good and robust year in licensing.

Cliff, if you want to take the question with regard to his interpretation of the downturn in revenue, I think that would be helpful.

Thank you, Howard, and David, thanks for the question.

Our licensed business, as you know, feeds in part off the traffic volumes in people who operate the units.

And certainly, most environments, a lot of environments, have had the same challenges over the last 12 months.

We have certainly seen a very strong business model, and we're really confident that some of the disciplines we've brought around our overhead costs will pass through and are passing through to the licensed business.

It's been a good year, and we see good opportunities for future growth.

With regard to Seattle's Best Coffee, I think the fact, first off, that the organization was willing to have Michelle depart the core brand and go after Seattle's Best Coffee represents internally, and now to this audience, how bullish we are ultimately on the future of Seattle's Best Coffee.

I think the marketplace has changed to a large degree where the coffee consumer is going after multiple tastes, and although their loyalty to Starbucks is significant, there are times when they want perhaps a different kind of coffee, whether it's flavored or a lighter roast.

In view of that, we want to be able to take Seattle's Best Coffee out of the shadow of Starbucks and really for the first time in its history have a life of its own.

So the organization is beginning to take form.

And what I would say is that we have lifted the guardrails off of Seattle's Best Coffee in terms of licensing opportunities, sales opportunities, and the Subway opportunity that we've outlined today is just one of many conversations that we're having.

And I think, candidly, given the fact that the fast-food players have gone after the breakfast business, specifically McDonald's, in such a big way and they've made such a big push in coffee, their core competitors want to compete directly in that space.

And we have a coffee that is not just a supplier, but a national brand.

And we've got training and competency that we believe we can help them.

So the Subway situation I think is an interesting case study, and there will be more to come.

But I think SBC is in its infant stages of what it could be domestically and internationally.

Sarah Senatore, Sanford Bernstein.

I had a question about some of the news flow that we've seen recently in the international business.

And that was just sort of the -- it seems like you are changing some of the ownership, Spain and France, what piece is licensed, what piece you control.

Is there anything that we should read into that?

Is that could be a help in terms of managing G&A?

Is there now G&A that you can reduce because you're consolidating some of that ownership?

Just trying to get a sense of the profitability for the international business.

I think I'll try and answer the first piece of that question as it relates to France and Spain and then give it to Troy on the overall strategy.

France and Spain was somewhat of an outlier.

We've got a very strong and long-lasting partnership with the Arango family that operates a company called Grupo Vips in Spain, and they became our partner in France as well.

France has some of the highest level of transactions of any market internationally.

However, because of the economic downturn that was experienced in Spain this year, 20% unemployment, we felt that perhaps we were better positioned to invest in the growth and development of France, given what we believe to be a very strong future market for us.

And so we basically created a swap between Spain and Portugal and France.

And I think both partners are happy.

But more specifically, we see France as a long-term growth market, given how robust that business has been at the unit level in terms of transactions, some of the highest we have internationally.

And Troy can answer the macro question.

Sara, I think how I would expand on Howard's point is just to say that that transaction, for all the reasons Howard said, is really consistent with the strategy we have internationally.

We intend to own the biggest markets around the world where we can invest in infrastructure, where we can control our destiny and go after that big opportunity.

And that is consistent with China, Canada, the UK, France and Germany, markets that have huge growth opportunities in the years to come, and make it worthwhile for us to invest against them and control the earnings and returns that we think we'll get down the road.

We have a great model in place where we can leverage partners who bring existing infrastructures to place in smaller markets around the world.

And that transaction in Spain and France and Portugal really moves us clearly in that direction and creates accountability and clarity of ownership paths in those two places.

It leverages our ability to go deep in the big market of France and our great partner's ability to go deep where they have expertise and capability and infrastructure.

So while I don't expect you'll see significant ownership changes happening internationally in the future, we are always looking at our structure and making sure that we're lining ourselves up in the way to be most effective.

And from time to time, you may see more of that down the road.

Sharon Zackfia, William Blair.

Troy, I was wondering if you could talk about the customer reaction to the price adjustments that you did and whether or not you are seeing any incremental price stick or whether the transactions have picked up on some of the items where you adjusted the price downward.

Sharon, we've been moving through the new pricing architecture, as you know, throughout this year.

As of the end of the fiscal year, we were partway through that work.

We had more markets to go in something in the range of half of the US territory yet to go through those pricing adjustments.

We see no impact at all in terms of customer response to meaningfully talk about.

And I'll just remind everybody that the whole motivation behind that pricing work is to bring more analytics and more customer responsiveness to what we do with our pricing.

In every market where there's been some changes, prices have come down on certain products.

And in other cases, they've come down on those products where, based on what we're hearing from customers and seeing, we are going to put a strong value foot forward.

Other products go up, based on complexity and cost.

So prices are up, prices are down.

We think it's very successful.

We've got a long ways to go.

And I'll also say that even once we complete this initial round of work on the pricing architecture, this now is work that goes on forever.

Again, it's similar to I think something I described earlier as new muscle, new capability we have around analyzing our pricing, our margins, our customers and where they're at, and gives us, again, more tools in the toolbelt to just manage that going forward.

Joe Buckley, Banc of America-Merrill Lynch.

A question on the pending change with the Starbucks Gold Card and moving to My Starbucks Rewards.

Have you done tests or run analysis to see what the average check impact on those moves will be?

It seems to me like it should be a positive, but I'm curious what you're thinking going forward.

Cliff, did you hear the question about the --

Yes, indeed.

We also have Terry Davenport here as well.

So, Joe, in terms of the relationship with the consumer, we've been listening to consumer, and obviously, as you know, we tried two reward schemes this year.

We've brought them together, listening to our customers about what is most important.

And we believe this scheme both recognizes loyalty and rewards frequency.

And we know that our most loyal customers are the ones who spend more with us, and indeed the loyalty program that we've launched is recognized to reward the most loyal customers and encourage increased frequency.

Terry, anything to add?

Yes, Cliff, thanks.

I think one of the big things is the feedback from both our customers and our store-level partners is, while both of the loyalty card programs exceeded our expectations, it's complicated to have two separate programs.

And by combining them, we feel like we've got a program that is much simpler and actually will reward increased visits with higher levels of benefits.

So unlike the Gold program that was just a flat 10% across-the-board discount with no incentive to visit more often, the new program actually rewards customers for coming more frequently.

I would just add, just to close it up, is that before we made these changes, because of this being such an important customer base for Starbucks and such a visible application, this was based on a lot of not only consumer research that was both quantitative and qualitative, but really in-depth discussions with our own people as well, just to ensure the fact that we were all in alignment.

And we think we've got a winning formula here.

Matthew DiFrisco, Oppenheimer.

Troy, I just wanted to understand the numbers and make sure we're looking at it the right way.

I think you said the total number for all those numbers you gave as far as the savings from being more efficient, supply chain and the closure of the stores, it looks like they added up in 2009 to $580 million, which would imply you were running at about a $210 million fourth-quarter run rate, given the data you've given us in the past.

Is that a number that, if that is the right number on a quarterly basis, just multiply that by four and you get $840 million for 2010.

So I think someone asked prior that you could basically do a lot of your earnings growth just off of harvesting that incremental nearly $300 million in savings on the operating income line.

Obviously, you're going to reinvest some of that.

I just want to make sure that that was the number around the $210 million in the quarter.

And are those things that, again, will be sustainable fundamental changes to the model that will be saved?

And then I just had a question I wanted to ask Howard about VIA and longer term where that could go, and even maybe including something that might even make more sense would be Seattle's Best with a flavored coffee and some other packaging things with the holiday, or what is on the front for Seattle's Best and VIA possibly crossing paths?

Okay, Matt.

I'll tackle the first part and then I'll let Howard speak to VIA afterwards.

First, on the cost saves, your math is correct.

We ended the year at $580 million for the full year.

That essentially is $210 million in the fourth quarter.

And yes, consistent with what I've been saying all along, that annualizes into that bigger number for 2010.

Now, the caution I just want to remind everybody is, that cost save in '10, as well as new initiatives that we will put in place and bring to bear as we go forward, is about protecting our margins from natural cost increases that happen everywhere else, and importantly, giving us room to make critical investments that we need to make in the business.

The cost saves this year are permanent.

It has lowered our reset and lowered our cost structure at the Company, giving us a place to grow from far more efficiently going forward, and freeing up room for us to deliver the kind of earnings growth that we expect to and we've committed to, and to, again, fund critical investments in our people, in our systems, in new products and new platforms.

Just to build on your other question, also, I would just like to just say that given -- Troy mentioned the phrase, a new muscle.

And I think it's a fair assessment of what we've been able to accomplish, and on a go-forward basis, the discipline we now have in place.

But I think it's also important that you all understand that we recognize we can't, nor do we want to, cost our way to prosperity here.

We're going to grow the Company.

We're going to create the kind of innovation that significantly separates us from everyone else.

A great example is VIA and other things that are planned.

But we are going to create the kind of attachment and relationship with our customers in the marketplace domestically and around the world that is not going to be based on the foundation of just cost containment, but we're going to start growing and innovating our way that will be very complementary to the new muscle that Troy has talked about.

With regard to VIA and SBC, clearly we now have developed a patent-pending process that gives us a very significant competitive advantage.

But we are in the infant stages of what VIA is ultimately going to be.

We understand the capabilities of the Starbucks brand, and at times whether or not there's limitations in terms of whether or not there is a cost per pound, whether it is in VIA or in a packaged bag.

And as a result of that, there's opportunities for SBC to come underneath.

But we're too early to really kind of go after what ultimately we're going to do.

I will say that the VIA opportunity is multifaceted both in terms of the instant opportunity and the runaway success that Keurig has had with Green Mountain Coffee.

And we believe that we've got a single-serve opportunity that complements the instant coffee market very well because of the things I've already described.

So this is very, very early days for what VIA ultimately will be, and we will be back to you in subsequent calls about the attachment it is receiving in our stores and the innovation around new varietals, new blends, other form factors and other geographies.

Jeffrey Bernstein, Barclays Capital.

Just a two-part question on your existing units.

First, I think it was mentioned earlier that primarily the 300 units are going to be licensed in fiscal '10.

I'm just wondering whether that is maybe an early indication or a preface to some updated thoughts on refranchising some of the existing US units as you shift more towards the licensed-type model.

And then secondly, Troy, you mentioned 50% of the $500 million-plus CapEx, I think you said, was for renovations and upgrades.

I'm just wondering whether you can give a little more color on the system as it gets older now.

I'm just wondering, we don't hear it too often, but perhaps an update on the status of the system, the percentage that has been upgraded in recent years, when the entire system might be upgraded or what the sales comp lift returns are, just some metrics to support the reinvestment in the stores and where we are on that path.

Thank you.

Jeffrey, let me speak to that piece first, and then Howard or I will talk a little bit about the stores coming for the next year.

But with respect to innovation, what you see in that capital target that I laid out for next year is actually very consistent with the kind of reinvestment we've made back against our system in recent years and in the year just ended, 2009.

We have kept the portfolio maintained as it should be.

When we originally make a capital allocation decision to invest in a new store, we justify that capital investment by also including, down the road, reinvestment back into the store to keep it fresh, to upgrade equipment, to maintain the leaseholds the way they need to be.

So this is a part of an ongoing, routine program, not particularly a change.

Now, as stores age, they do require more investment.

But that is not a significant change to the program that we've had in the past.

That's a top-priority critical investment.

And I'll point out that this past year, in '09, when we significantly pulled back capital spending in our business, that was around new stores.

We did not cut back on the critical investments and renovations and upgrades into our existing stores.

That's a critical asset that we will maintain.

Now, in the years ahead, as we renovate the existing portfolio, in addition to refreshing and improving the site and the physical environment, we will also bring elements of our new designs into those remodeled stores.

So that will come through the portfolio over time as we do the normal remodel program.

In terms of your initial question, we have no plans to in any way change the ownership structure of our Company-owned stores in the US and in Canada.

Obviously, we've been more flexible and more willing to do that overseas, where we get local relevancy and local competency from international partners that we couldn't get on our own.

But I also would say that a great deal of what we've been able to accomplish this year, at the heart of that is the commitment, the passion and the operational excellence of our own people and the culture of Starbucks.

I don't believe we could have done any of that to the degree we have in a system that was franchised or licensed.

John Ivankoe, JPMorgan.

A question on the new point-of-sale system that includes, I guess, better fine-tuned labor scheduling.

Could you talk about the timing of that as you move throughout fiscal '10 and what you're seeing potential benefits from a cost perspective and employee perspective, from a customer perspective, and if any of that is in your numbers for fiscal '10?

And just a clarification, Troy, why there wouldn't be any Forex benefit in fiscal '10.

Are you hedged for the year?

Let me tackle the Forex real quickly, and then I will ask Cliff, John, to answer your question about point-of-sale.

On foreign exchange, just given where the rates stand today and the hedging program we have in place, we don't see any impact coming, based on, again, today's rates and how that compares to '09.

Now, that can change as we go throughout the year.

So that commentary in my prepared remarks is really based on just what we see today and how that compares to and what we have hedged and then how that compares to our experience in 2009.

Cliff, can you talk about point-of-sale?

Yes.

John, this is really quite an exciting year for the stores in terms of technology.

And both the EPOS system that is in test at the moment and the labor-scheduling model are all things that we will be deploying in 2010 in the coming year.

And really, it is a year of deployment.

But they will certainly provide benefits for us, which, as soon as we've been able to quantify those benefits, we will be able to share them.

But this year is primarily around deployment, and we plan for the US business and indeed North America to deploy during 2010 to all stores.

Cliff, can you just add what the benefits have been in the pilots?

Yes.

We've seen, I've think, two sides.

One, it's a lot easier to operate and it is, frankly, an intuitive EPOS system where it's much easier for the consumer to order their beverage, the customer to order their beverage the way they like.

They can change their mind.

And it's much faster to operate, much faster to learn.

And so it should improve accuracy and speed and ultimately capacity of a store at peak.

There are other benefits, like the speed of processing credit cards or, indeed, our Starbucks Reward Card.

So we see both partner benefits in terms of the time of training, the ease of use, and customer benefits in terms of speed, and benefits from the business in terms of accuracy and efficiency.

So it's an exciting year.

I think we will take one more question.

David Tarantino, Robert W.

Baird.

A question on the Company-operated growth outlook.

Given the trends we're seeing in development costs coming down and with your comps certainly getting better or stabilizing, why not start looking at capitalizing on the current cost environment and ramp up some unit growth, given some of the opportunities especially you have in international markets?

I think that's a very good question and a good way to end.

Troy mention before, we want to go through the holiday quarter and see how the environment is shaping up.

But on a parallel track, we've identified, both domestically and internationally, those key markets in key cities that we feel are very important strategically for the Company to both maintain and build on our share position, both in terms of number of stores and pure share of the market.

And we are and have been in discussions with key landlords and developers to really understand with great specificity what really is the economic real estate deal that we could secure at this time.

And as those opportunities unveil themselves, I can assure you that we will take advantage, but we want to go through the holiday quarter and really understand where the economy is going domestically and internationally and not just get too far ahead of ourselves.

I think the one thing that I think we're all encouraged by is that the class of stores in 2009 are extremely promising, coupled with the new designs that Arthur Rubinfeld and his team have put together.

I mentioned that last quarter that we have a store in Seattle called University Village, another one called First and Pike.

We've opened one in Paris Disney and one in Tokyo.

These four designs are very encouraging, very promising.

And we want to leverage that.

So I think what you're hearing is just a balanced approach to both caution and conservativism, as well as just making sure that we don't get too far ahead of ourselves, given where the environment has been.

But we are going to be opportunistic, but we want to get through the holiday quarter.

With that, we'll say goodbye.

We thank you for your time, and we'll talk to you after the holiday season.

Thank you.

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

You may now disconnect.