星巴克 (SBUX) 2011 Q2 法說會逐字稿

Good afternoon.

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

At this time I would like to welcome everyone to the Starbucks Coffee Company's second-quarter fiscal year 2011 earnings conference call.

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

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

(Operator Instructions)

As a courtesy for others, please limit your questions to one and then reenter the queue.

Thank you.

Ms.

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.

Joining me on the call today from Seattle are Troy Alstead, CFO, and Jeff Hansberry, President of our Global CPG business.

Also on the call joining us from Seoul, South Korea, is Howard Schultz, Chairman, President and CEO.

Before we get started I would like to 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 risk factor discussions in our filings with the SEC, including our last annual report on Form 10-K.

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, where you will find disclosures and reconciliations of non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures.

Note that the non-GAAP amounts reported relate only to prior fiscal 2010 amounts for costs related to the now completed restructuring work.

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

Thank you, JoAnn, and welcome to everyone on the call.

I am very pleased to announce the record quarterly results that Starbucks reported today, and to do so from Seoul, South Korea, where it is 6 AM on Thursday morning, as we continue the international portion of our 40th Anniversary Tribute Tour.

The energy and excitement among our partners and customers for Starbucks' 40th anniversary, solid growth in global traffic in Consumer Packaged Goods, CPG business, and the early benefits of our powerful new global retail store to CPG channel business model all contributed to the record topline results we reported today.

Strong revenue growth combined with ongoing efforts to improve operations and efficiency and control operating expenses enabled us to deliver record Q2 operating income and earnings per share.

Today's results are particularly gratifying in the face of the formidable economic and operating headwinds that continue to confront global businesses, the investments we made in the quarter for marketing and to build world-class CPG operating capabilities and elevate our customer experience across the globe.

Our Q2 results demonstrate that Starbucks is continuing the positive momentum that has characterized our business in recent quarters, and that our business remains unmistakably strong all around the world.

I will begin today's call by sharing a few financial and operating highlights of the quarter, and noting a few developments that you may not be -- that you may not see or be evident from the results themselves.

Then I will turn the call over to Jeff Hansberry, President of Starbucks Global CPG and Foodservice business, who will provide you with greater detail on the many exciting initiatives and activities underway in our CPG segment.

Then we will turn the call over to Troy, who will take you through second-quarter financial results and provide an update and outlook for the balance of fiscal 2011.

Q2 of 2011 has proven to be a milestone quarter for Starbucks.

In the quarter we assumed full control of our packaged coffee business, announced two game-changing exclusive relationships in the single cup space, one with Keurig and Green Mountain and the other with Courtesy Products.

Joined our customers and partners around the world in celebration of Starbucks' 40th anniversary, highlighted by the unprecedented success of Tribute Blend, a rare combination of four coffees, including Colombia, aged Sumatra, sun-dried Ethiopia and Papua New Guinea, uniquely blended to create a coffee that our customers have embraced with a passion second only to Christmas Blend.

Continued VIA's global expansion with entry into China, further growing its share of the global premium single cup coffee segment.

And we delivered another quarter of record revenue, operating income and earnings to our shareholders.

Consolidated revenues for the quarter totaled $2.8 billion, up 10% over last year, driven primarily by a 7% rise in global comparable store sales, while earnings per share grew 21% to $0.34 per share.

Our core US retail store business continues to benefit from multiple ongoing initiatives, including the early impact of the existing new retail store to CPG channel business model that I introduced at our investor conference in December.

Our Customer loyalty program now has several million members, more than 1.5 million of which are Gold members, who now account for millions of transactions in our stores each month.

We continue to deepen our connection to customers through digital and social media efforts, and our new mobile payment capability that allows customers to pay for purchase with their smartphones is resonating very well in the US.

In fact, in just a few short months Starbucks has become the country's leading mobile payment retailer.

Perhaps more than anything else our US retail business benefited in Q2 from key operational initiatives that have quantifiably improved product quality and speed of service, and driven our highest customer satisfaction metrics in Q2 -- the highest levels in the history of our Company.

This is an extraordinary accomplishment, given the tremendous amount of traffic and activity within our stores in the quarter.

Once again, our partners deserve the credit and have the appreciation and respect of the entire Starbucks senior leadership team for their hard work, their dedication and their insistence on delivering an even better Starbucks experience to our customers.

And to all our partners, some of whom I have been able to thank personally at one of our many partner events held over the last two months, I again say -- thank you.

We have had a tremendous response to Starbucks Global Month of Service events all over the world in which our partners and customers have contributed countless hours of community service, and given of themselves to improve the communities in which they live and work.

These efforts, in concert with the positive response and fantastic sales momentum around Onward, my book about the Starbucks transformation, has generated tremendous energy and excitement in our stores, on social and digital networks, and in communities around the world, and has deepened our connection with our customers and contributed to the record sales and traffic results we are seeing across the business.

Now it is no accident that I am participating in this call from Asia.

With our US business on solid footing and growing profitably, growth of Starbucks' international business has become a priority for all of us at Starbucks, as I announced in our January 2010 earnings call from London.

Starbucks' international store portfolio has never been healthier, nor have our international retail store growth and CPG channel opportunities ever been greater.

And now with the insights and learnings from the transformation of our US business fully woven into the fabric of our international operation, we are ready to drive profitable, disciplined expansion of our international business into a much higher gear.

Early this week we had an opportunity to participate in the Starbucks China Leadership Conference in Shanghai, where we brought together every store manager within China, over 800 Starbucks partners, to share learnings, inspire coffee passion, and solidify our strategy for the future.

It was for me an emotional experience reminiscent of the galvanizing moment we had in New Orleans for our US partners in 2008.

I am extremely proud of the deep, enduring, authentic emotional connection we have built in China, and it bodes well for our disciplined growth plans ahead.

Our 40th anniversary and Onward book events have provided us with the unique opportunity to express and communicate the humanity of the Starbucks brand.

And the response we have seen around the world has, to the surprise of some, equaled the fantastic response we had to similar events across North America.

Asia, and now China, in particular, hold tremendous promise for Starbucks.

Today in Seoul we will announce our intention to double the number of stores in Korea from 339 stores today to more than 700 in the next five years.

And our China growth story continues.

In February we successfully opened our newest city, [Wajo].

Starbucks now operates in 35 cities in China, many of them second and third tier cities, but with 1 million plus populations.

Each store opening has been greeted with tremendous community pride, recognition, and customer and community appreciation.

On an operating basis, China is performing ahead of plan and quickly becoming a more meaningful contributor to Starbucks' overall profit picture.

Among the many encouraging aspects of the China opportunity is that while the bulk of transactions take place in the traditionally slower middle to late afternoon daypart, we are now beginning to see the morning ritual develop.

We saw this happen in Japan in the mid-nineties, and we believe that we will continue to see an increasing number of customers in the morning business as coffee consumption patterns evolve.

Also exciting is the very favorable early reaction to VIA, in which sales are exceeding our initial forecast by more than 20%.

While still early days, the combination of accelerating coffee adoption and our deep connection with Chinese consumers is driving double-digit increases in daily transactions and comparable store sales, while our store operating margins are at levels that continue to exceed our US business.

These results represent remarkable achievements for a market that is still very much in its early phases of development and are testimony to the size of the China prize for Starbucks, the correctness of the investments we continue to make in China, and to the extraordinary quality of our partners and our local management team in that country.

We have bold plans for China.

I remain convinced that China will eventually be our largest market outside the US.

And my visit there this week confirmed my view of how ideally positioned Starbucks is to profitably grow its store presence across dozens, if not hundreds, of cities throughout China in the quarters and years ahead.

In the near term we plan to more than triple our store base to over 1,500 stores on the Chinese mainland by 2015.

With urbanization underway, the Chinese government is projecting that there'll be over 500 cities with a population over 1 million people within the next five years.

All of this suggests that these are very early days for Starbucks in China as we build trust, while moving quickly but conscientiously with local relevance, and above all, with respect for the Chinese consumer and the Chinese culture.

Finally, we continue to make progress in our partnership with the Chinese government with regards to the Yunnan Province coffee project, in which we will be growing the highest quality arabica coffee in China.

We believe strongly that our vertical integration strategy will demonstrate to the Chinese consumer and the Chinese government that we are committed to investing in China in an appropriate and respectable way for the long term.

I would like to take a moment to speak to our close long-standing partnership with Sazaby and to our partners at Starbucks Coffee Japan.

With the support of our senior leadership team in Japan, our Starbucks Japan partners are working to support each other and resume normal operations.

We honor their commitment and courage as they contend with the tragic events and loss following March 11.

Starbucks and our partners globally will continue to support the needs of our partners in Japan, and through our global store footprint continue to enable our customers around the world to show their support and contribute to relief efforts as well.

Our thoughts, hearts and prayers remain with all of the people of Japan as they continue to recover and rebuild.

I will now hand the call over to Jeff.

Thank you, Howard.

Q2 of 2011 was a seminal quarter for Starbucks CPG business, in which we advanced and solidified our leadership position in the premium single cup coffee segment, successfully transitioned our packaged coffee business in-house, expanded our ready-to-drink business in international markets, and made major gains against our plans to build the leadership and capabilities of our CPG organization.

Before delving into specifics around Q2 performance, I would like to take a few moments to provide some perspective and color around the enormity of Starbucks' global CPG opportunity.

Today Starbucks captures only a small portion of the $100 billion plus coffee, tea and ready-to-drink beverage markets globally, all areas in which Starbucks currently has significant, if not market-leading shares, in the US.

Taking an increasingly greater share of that global opportunity is a top priority for Starbucks CPG and Foodservice business.

To accomplish this goal and to drive growth, we will leverage the power of the Starbucks brand to broaden the number of channels we serve, expand and deepen the number of products and product categories we offer, and increase the number of countries around the world in which our products are sold.

We will elevate and expand the Starbucks experience across each of our channels and categories.

We will continue to strive to provide our customers and consumers with the Starbucks coffee products they want whenever and wherever they are and in whatever form they wish.

And we will continue to invest and transform what had been a small, indirect CPG business into a powerful, fast-growing, best-in-class global CPG organization.

Each of these objectives were advanced in a meaningful way in the second quarter of 2011.

Single cup coffee continues to be the fastest-growing segment in the coffee category.

And Starbucks will lead the way with consumers and retailers with three distinct single cup platforms -- Starbucks VIA Ready Brew, Starbucks K-Cups, and Courtesy.

I will start with VIA.

VIA's dollar sales in the CPG channel in the US in Q2 increased by 11% versus the first quarter, with ACV distribution of 63% and climbing.

Repeat rates for VIA remain high at 37% in Q2.

That is amongst the highest of new coffee category entries.

In Q2 we successfully launched Starbucks VIA flavors and iced VIA in the US and international markets.

And we further extended the VIA brand by offering Tribute Blend VIA in our stores as part of our 40th anniversary celebration.

A companion product to our whole bean Tribute Blend offering, limited time only Tribute Blend VIA quickly became both a customer and partner favorite.

VIA will continue to benefit from added distribution and line extensions.

In Q2 we also launched the Starbucks VIA Taste Promise Promotion, a program that extends through August in which any consumer who is not fully satisfied with the taste of VIA can have their purchase replaced with a free bag of Starbucks House Blend coffee.

The Taste Promise reinforces our message that VIA will enable consumers to enjoy a great premium single cup of coffee anytime, anywhere.

Early results of the VIA Taste Promise Promotion have been very positive.

We have seen a 20% increase in sales in markets where the promotion ran, and roughly 72% of all consumers participating are first-time VIA buyers.

Each of these findings bodes extremely well for the VIA platform as a whole, and reinforces our view that VIA will become another billion-dollar Starbucks brand over time.

Our growth plans for VIA include expanding distribution in the US and in international markets, including China, which we launched on April 6, and continue to introduce innovative new products and line extensions.

Moving on to Keurig and K-Cups.

Last month we announced a strategic relationship with Green Mountain Coffee Roasters for Starbucks and Tazo tea branded K-Cup portion packs for use in the Keurig Single-Cup Brewing system, by far the current single cup leader in the US.

We are working closely with Green Mountain toward a fall launch of Starbucks branded K-Cups through CPG channels and a launch of Starbucks K-Cups through our Starbucks retail stores in 2012.

We plan to build Starbucks systemwide sales of K-Cups into a $1 billion business over time.

In Q2 we also announced an agreement in principle with Courtesy Products, the nation's leading provider of in-room coffee services to hotels, to extend the Starbucks brand as an exclusive super premium coffee offered by Courtesy in 500,000 premium and luxury hotel rooms in the US.

The Starbucks Courtesy relationship provides us with yet another opportunity to provide consumers with great Starbucks coffee wherever they are and we fully expect to see the partnership begin to come to life this fall.

Together VIA, Starbucks K-Cups, and Courtesy provide us with what is unquestionably the most powerful lineup in the single cup space today.

Today Starbucks' CPG segment is represented in only 10 of 55 countries around the world in which we have a retail presence.

That will change in the quarters ahead as we expand our CPG channel presence in countries where we currently operate retail stores in order to fully benefit from our retail store to CPG growth model, which leverages Starbucks' unique portfolio of assets, including retail stores, digital and social media, loyalty, and CPG.

We accelerated expansion of our Starbucks Discoveries ready-to-drink coffee drinks in Western Europe ahead of plan, and will continue the expansion in Q3.

This includes the very successful introduction of Starbucks Discoveries in convenience and grocery stores in Norway and Denmark, with plans to launch in Finland in May.

This represents the first Starbucks brand entry into those countries ahead of our retail stores.

Early results have been promising, with Norway achieving sales of nearly 40% of expected annual volume in just the first six weeks.

Consumers in the UK were the first in Europe to be offered Starbucks bottled Frappuccino coffee drinks introduced this month, adding a third family of products to the Starbucks ready-to-drink business in that market.

And we're just getting started.

By 2012 we will be ready to accelerate the global expansion of our CPG business, so stay tuned.

During Q2 we also successfully transitioned to direct management of our Starbucks, Seattle's Best Coffee and Tazo Tea brands down the grocery aisle.

Early results are positive with double-digit shipment growth of packaged coffee to customers in March versus prior year.

Starbucks CPG team can now directly drive sales of Starbucks, Seattle's Best, VIA and Tazo, our complete family of Starbucks brands, through a one-voice marketing approach.

We have had a positive reception from retailers around the transition, and we will continue to work closely with them to build joint plans that leverage the Starbucks brand, the full breadth of the Starbucks portfolio, and our unique knowledge and authority across the coffee category.

You'll begin to see many of these exciting plans come to life this fall with the launch of Starbucks K-Cups.

To fully leverage our blueprint for growth, and to profitably grow our CPG business, we need a world-class organization of strong, experienced leaders.

We are well on our way toward this goal, with a hand selected team of experienced professionals from academy companies like Procter & Gamble, PepsiCo and Nestle, with deep CPG experience in shopper and retail marketing, category management, and customer business development.

This is a great team that I am proud to be part of.

We are also building a Center of Excellence around category management and shopper marketing in order to advance our goal of becoming a thought leader of the coffee category, and fully understand the coffee consumer both inside and outside of our Starbucks stores.

We are confident that these investments will translate into competitive advantage for Starbucks for years to come.

In closing, 2011 will continue to be a transitional year for Starbucks' CPG with further investments in the business.

While we still have much work to do, I am pleased to report the transition is in full swing.

We are executing on plan, and the benefits of this step change are already beginning to accrue to our business and our shareholders.

I will now turn the call over to Troy Alstead.

Thanks, Jeff, and good afternoon everyone.

The financial results this quarter speak to the power of our business model and the organizational capabilities we now have that were not present only a few years ago.

In the second quarter we were able to invest for future growth and absorb significant cost pressures, all while maintaining momentum and growth and profitability throughout the business.

Before I go into the financials, I wanted to mention there has been a change this quarter in how we categorize revenue, facilitated by the changes in the our CPG business and the associated revenue streams.

As noted in our press release, prior periods have been reclassified to reflect the change and we will be posting financial statements for the prior three years on Starbucks.com to reflect these changes.

There was no impact to consolidated or segment net revenues from this change in presentation.

Second-quarter consolidated revenues were $2.8 billion, up 10% from $2.5 billion a year ago.

The revenue increase was primarily driven by a 7% increase in comparable store sales attributable to a 6% increase in traffic and a 1% increase in average ticket.

Higher CPG revenues and foreign currency translation also contributed to the revenue increase.

We reported consolidated operating income of $376 million in the second quarter, an 11% increase compared to second-quarter of fiscal 2010 operating income of $340 million, and an 8% increase compared to last year's non-GAAP operating income.

Consolidated operating margin was 13.5%, a slight improvement compared to the 13.4% GAAP operating margin in the second quarter last year, and about 20 basis points less than last year's non-GAAP margin of 13.7%.

Strong topline results drove increased sales leverage throughout much of the P&L.

Those increases were offset by higher commodity costs, increased salaries and benefits in the US, higher marketing expenses to support future growth, and charges related to asset write-downs in our Seattle's Best Coffee business due to the Borders' bankruptcy.

The charges related to Borders accounted for roughly $0.01 per share in earnings within the quarter, in addition to the approximate $0.01 charge we took in our fiscal first quarter.

Also of note, the transition of our packaged coffee business was roughly neutral to the bottom line this quarter, somewhat better than expected, driven in part by a shift of expenses into the third quarter.

Earnings per share was $0.34 for the second quarter compared to $0.28 per share on a GAAP basis, and $0.29 per share on a non-GAAP basis in last year's fiscal second quarter.

We absorbed $0.04 per share in the quarter, equivalent to 200 basis points of operating margin, due to higher commodity costs compared to last year.

Most of the commodity pressure is related to coffee, with dairy, cocoa, sugar and fuel accounting for the rest.

Our US and international store operations continued to perform well, driven by strong comparable store sales and operational leverage.

Meanwhile, we continue to spend in support of future growth in our CPG business, as we position ourselves to pursue the abundant growth opportunities that Jeff just laid out.

I will now move to the results of our operating segments, which will be compared to last year's non-GAAP results.

Total US net revenues for the quarter were $1.9 billion, a 6% increase over the same period last year.

Company-operated store revenues increased 7% to $1.8 billion in the quarter, primarily due to a 7% increase in comparable store sales.

The comp increase was composed of a 6% increase in customer traffic and a 1% increase in average ticket.

Pricing and the expansion of our warming program contributed to the ticket increase this quarter, partially offset by increased discounts to support loyalty and other promotional activities.

Also, the launch of our Petite food platform resonated well with customers, and helped drive better traffic in the afternoon and evening dayparts.

Of note, two-year comps continued their steady improvement, reaching levels not seen in more than four years, with traffic growth the primary contributor.

We continued to make improvements to the customer experience, including faster speed of service as a result of our new point-of-sale system, additional quality improvements in beverage production routines, and an improved training module focused on overall customer service.

Another initiative, our new mobile payment platform launched nationally in January, has helped drive faster transaction speed, which is another example of our focus on adding efficiency and utility to the Starbucks experience for our customers.

As a result of these customer-facing initiatives I just mentioned, plus our popular Rewards program and continued efforts around lean operations that improve the experience for both our customers and our partners, overall customer satisfaction scores continued to march higher this quarter, reaching an all-time record.

US cost of sales, including occupancy, was 38.7% of total net revenues in Q2, an improvement of 10 basis points over the same period last year.

Sales leverage on occupancy costs was mostly offset by higher commodity costs in the quarter, primarily from coffee, which had a roughly 150 basis point impact on the US segment operating margin.

Store operating expenses were 36.4% of total net revenues, in-line with the same period last year.

Sales leverage was offset by increased salaries and benefits.

Investments in our partners is a key focus area this year, and one example of this is the overwhelmingly positive response we have had to an enhanced 401(k) program.

Operating income for the US segment was $357 million, an increase of 10% compared to the same quarter of last year.

Operating margin improved 60 basis points from last year to a second-quarter record of 18.5%.

The margin improvement was driven mostly by sales leverage, partially offset by higher commodity costs.

The US business continues to set new highs despite the economic headwinds that we continue to face.

Customers are enthusiastically embracing initiatives such as loyalty, mobile payments and the new food items, while operationally our partners have adopted lean processes and tools allowing them to focus more time on customer service.

With some key tools just recently rolled out and not yet fully optimized, such as our new point-of-sale system and our inventory management system, there is still an opportunity to further improve our store operations and bring an even higher level of service to our customers while also improving our store margins.

In addition, new stores are performing exceptionally well.

And when combined with the work we are doing around store segmentation and new store design concepts, supports our belief that there remains significant profitable new store growth opportunities ahead in the US.

The US business is healthy and thriving, and provides the foundational roadmap to help influence and guide our international business, while also serving as the core asset that will allow us to pursue our aspirations in the CPG space.

Moving now to results from our international segment.

International total net revenues increased 15% to $610 million in the second quarter of fiscal 2011, primarily driven by foreign currency translation, comparable store sales growth of 4%, and higher revenue from licensed stores.

The comp growth was driven by an increase in traffic.

Similar to last quarter, exceptionally strong performance in China contributed a significant portion of the overall comp growth.

Comps in China continued to trend in the mid-20s, driven largely by increased traffic as more and more Chinese consumers are adopting the Starbucks third place experience.

Comps in Canada, our largest Company-operated market, softened a bit this quarter compared to recent trends, as that market dealt with significant weather issues, and faced a difficult comparison in lapping over last year's Olympics.

International operating income was $72 million in the second quarter of fiscal 2011, a 52% increase from $47 million last year.

Operating margin improved by 290 basis points to 11.8%, driven primarily by sales leverage, partially offset by higher commodity costs.

Increased commodity costs in the quarter impacted international operating margin by approximately 150 basis points.

This is the highest second-quarter operating margin on record for the international segment and marks the fourth straight quarter of double-digit operating margins, further strengthening our confidence that international is now a consistent profit contributor and is poised to be one of the primary growth engines for the Company.

I would like to take a moment to acknowledge the recent events in Japan and update you on our operations there.

First, it is with great pride that I recognize the efforts of our partners in Japan and their ability to deal with an incredibly difficult situation.

Of our more than 900 stores in Japan over 200 stores were either closed or had limited hours for a period of time.

Some stores are still operating on reduced hours and we continue to experience rolling blackouts in parts of the country.

Of the stores that were damaged, nine stores will be permanently closed and we did take a small charge this quarter related to those damages.

As a reminder, we own roughly 40% of the Japan market, and it is one of our three largest markets currently outside of the US.

The majority of the ongoing financial impact from the disruptions will be recognized in the third quarter and will be embedded in the balance of year outlook I provide later.

The recent progress in the international business is extremely rewarding on many fronts.

And while the rate of improvement has exceeded our expectations, we are not at all surprised to see international finally start to deliver on the vision that we have long had for this segment.

We have a clear plan in place to strengthen and expand the business in the future by fueling innovation and local relevance, by expanding our store footprint and leveraging our support structure, and by driving operational efficiencies across the store portfolio.

We are in the early days on our path to unlock the potential of this business.

And I'm extremely confident that we have the right plan and the right partners in place to achieve this vision.

I will now move on to results from the Global Consumer Products Group, building on Jeff's earlier comments.

The second quarter provided solid evidence of the opportunity ahead for our consumer products business to become an even more significant contributor to the overall business.

During the quarter we successfully transitioned our packaged coffee and tea businesses in-house, taking direct control of our relationship with the trade, which will allow us to improve our brands' positioning within the grocery channel.

Under this model Starbucks now sells directly to the trade, taking in all the associated revenues from those sales compared to just a portion of the revenues under the previous outsource model.

On an annualized basis we expect to pick up roughly $150 million in incremental revenue and between $60 million and $70 million in incremental operating income.

These numbers represent simply the structural change of bringing the business in-house and do not factor in any transition costs or additional growth, which we are confident we will be able to drive now that we are directly controlling the business.

Most of this will be recorded in the CPG business unit as a result of the Starbucks branded packaged coffee and Tazo branded tea businesses, with the remainder recorded in Seattle's Best Coffee segment within Other.

In the fiscal second quarter total net revenues for CPG were $205 million, an increase of 30% over last year.

The increase was due to higher revenues resulting from the packaged coffee and tea transition and to the expanded distribution of VIA into grocery.

With the transition of packaged coffee taking effect on March 1, we only realized one month of the associated revenue impact in the quarter, while the transition of the tea business was effective at the beginning of January and contributed to the full quarter.

Operating income for the quarter was $64 million and operating margin was 31.1%, a decline of 920 basis points compared to the same period last year.

This expected year-over-year decline in operating margin was due to higher coffee costs, which were approximately 800 basis points of the decline, and marketing spend to support the continued expansion of VIA.

In regard to the arbitration proceedings with Kraft associated with our packaged coffee business, we have little to report at this time.

As I have previously disclosed, it will likely be a long timeframe to reach resolution through the arbitration process.

This was a landmark quarter for the CPG business in terms of building for the future.

The transition of our packaged coffee and tea businesses in-house, the agreements we announced in the single serve space, and the continued expansion and adoption of our VIA platform now provide us with a suite of products that is unmatched down the coffee aisle.

Combined with our deep coffee and beverage expertise, the over 3,000 licensed stores that we have in grocery that allow us to drive sampling and the exceptional affinity that people have for the Starbucks brand, we offer a unique value to the trade that we believe we can now optimize with these assets under our control.

Fiscal 2011 is an investment year for the CPG business, and we require time to fully take advantage of the opportunities that exist.

But I do expect the CPG business to one day rival the size of our retail store business.

As we are now halfway through our fiscal 2011, I would like to provide an updated outlook for the year, as well as a few key related targets.

We now expect high single digit revenue growth for the year on a comparable 52-week basis, driven by mid single digit comp growth.

Excluding the impact from the Borders store closures, we still plan to add approximately 500 net new stores globally, with roughly 100 in the US and roughly 400 in the international markets.

The majority of the new additions in both segments this year are expected to be licensed stores.

We now expect to absorb approximately $0.22 in additional commodity costs for fiscal 2011 compared to last year, a slight increase from the $0.20 communicated on last quarter's call.

The $0.02 increase is primarily due to higher dairy and fuel prices.

Of the full-year $0.22 impact, roughly $0.07 has been absorbed year-to-date, leaving roughly $0.15 for the balance of the year split evenly between Q3 and Q4.

Regarding coffee costs, as I have indicated previously, we have fully locked our coffee costs for 2011 and are price protected for a couple of months into fiscal 2012.

We watch the market very closely and our buying office is deeply engaged in the industry.

As we progress through the balance of 2011 we will progressively take actions to secure our coffee needs and lock coffee costs for additional months into 2012.

While we expect that the costs we pay for coffee may be higher in '12 than they are in '11, we remain confident that we can offset those increased costs and preserve our long-term earnings growth targets.

Our outlook for operating margins and our tax rate remain unchanged from the guidance provided last quarter.

We now expect fiscal 2011 earnings per share to be $1.46 to $1.48, or on the high end of our previously communicated 15% to 20% growth on fiscal 2010 non-GAAP earnings per share, excluding the benefits in 2010 from the 53rd week.

We continue to expect earnings per share to be in the range of $0.32 to $0.33 for the third quarter and $0.35 to $0.36 for the fourth quarter.

Embedded in this outlook is the impact of the packaged coffee transition.

We now expect the impact of the transition to be roughly neutral to EPS for the year, including roughly 7 months of the operating income pick-up I noted earlier, offset by increased investments this year to support the transition.

In closing, we faced stiff headwinds this quarter on several fronts.

And some of those headwinds, such as commodity pricing pressure, are showing no signs of abating soon.

However, our business has remained resilient in the face of these pressures, maintaining the momentum of the last two years and cementing a solid foundation from which to profitably grow.

This resiliency is a testament to the hard work and dedication of our partners over the last few years in transforming Starbucks into a more disciplined company, with deepened capabilities that allow us to be more agile and more effective in managing the business.

As we progress on our journey to build a different kind of company, leveraging our unique set of assets, I believe these attributes will play a key role in our long-term success.

We understand the opportunity, we have clear and ambitious goals, and we now have the ability to effectively navigate the challenges that will undoubtedly arise as we pursue the vision that we have articulated.

I firmly believe the future holds tremendous promise for Starbucks.

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

(Operator Instructions) Michael Kelter, Goldman Sachs.

I wanted to ask about coffee prices and how you think about things strategically.

You mentioned that you thought even in 2012 with where the seed price is today you would still maintain your long-term targets.

I guess how would you approach pricing?

Would you think that you would want to price to maintain your profit percentage, maintain your profit dollars, or would you not necessarily be willing to take the mid-singles or higher pricing you would need to take because of the risk it might bring to the brand itself?

What I would say is our first and foremost goal is what I just mentioned a short time ago, which is we firmly believe we have every opportunity to maintain our long-term earnings growth, 15% to 20% earnings growth target.

I believe that to be true for some number of years to come and I believe that to be true in fiscal 2012 despite what may be -- may well be higher coffee costs and commodity costs overall in that year.

So fundamentally that is how we are approaching it.

It is possible that some of the lines on the P&L will feel more pressure than others -- cost of goods, for example -- that we may have opportunity to leverage in other places in the P&L.

And we will certainly look at all those opportunities.

I will tell you that we are extremely cautious about pricing.

We recognize the consumer environment is still very fragile.

We have had a great success over the past year, and in fact 18 months, in building our customer traffic almost against the odds, against and despite what is a very difficult consumer environment still.

We are highly respectful of that consumer traffic at that customer base we have.

So we use pricing where appropriate and in doses, small appropriate doses, but I absolutely will not use pricing as the only way to offset those commodity pressures.

We have a number of other levers in the P&L that we have become very practiced with in the past year or two, and much more disciplined about managing.

We will certainly leverage those things.

Then I would just fundamentally say the underlying strength in our business continues to go and build, both in the US with stronger margins, with the great momentum we are feeling internationally.

That momentum on the top line and throughout the P&L is also an important hedge for us against the commodity pressures that we are feeling.

On US traffic, on a separate topic, I guess -- most everyone was impacted by weather in January and February.

I would assume you guys were as well.

Is it fair to assume that the cadence of the quarter, that January and February was impacted and that March was much better than Jan, Feb as the weather became more accommodative?

I won't make any comments about our trends within the quarter.

We usually resist that, and I will resist that again this time.

What I will tell you is the one place we really mentioned in the script feeling some weather impacts this quarter was in Canada.

It was a bit more pronounced there for us.

With that said, that is a smaller market and so the impact of weather in some concentrated areas of Canada were more noticeable.

Across our much larger US business, of course, in selected markets at different times we feel weather impacts, but over the course of the big geographic dispersion that we have it tends not to be a meaningful part of our business.

And so that is why we tend not to talk about it.

Thank you very much.

John Ivankoe, JPMorgan.

The question is on labor.

One of the ways that you have done a great job over the last several years through lean principles and other technology and just rightsizing your business was growing sales well in excess of labor hours.

So could you comment a little bit more on this quarter in terms of what you achieved with your employees?

How much of that may have been more of one-time-ish is in nature versus how much will be recurring?

And what you think the long-term direction of -- I say labor, meaning store operating expenses, I guess in total, might be over time, 2011, 2012 especially given the higher commodity environment?

Thanks for your question.

Let me introduce Cliff Burrows, President of our US business.

I will ask him to talk about this question.

It is Cliff.

The journey with lean, the journey with improving our productivity continues.

We are looking at every new product we introduce.

We are looking at stretching the daypart and I think we have done that in a small way this quarter with the introduction of the Petites, which is an afternoon-focused product.

And we continue to look at ways we can deploy our labor more effectively to increase throughput at peak.

And we are continuing a program of rigorous testing, whether it is a new product introduction, whether it is with the way we deploy our teams, or indeed just the way we handle products.

And that continues to be very effective.

So in this quarter it was just, if I can say, just lots of little things, and we will continue that journey.

I do see lean being a part of our playbook for the months and years to come.

If I may, if I am still on, the leverage was a lot less in this quarter than one would have expected.

How much of that lack of leverage was one-time related to the second quarter versus how much may recur?

Well, in the quarter a lot happened, which we are not breaking out, but our 40th activities around that, the training for our partners around the new logo, around -- our whole events around our 40th anniversary.

So lots of bits in it.

But we will continue to seek ways to keep leveraging our labor and our productivity.

Same time, we are continuing to focus on the customer experience.

And we have seen that customer experience has increased, or helped us increase our transaction count across the country.

I think that is an important balance.

What I might add to that, add on to Cliff's comments, is that investing in our partners, in our store partners, is a critical, critical priority for us.

So recognizing that they deliver the customer's experience -- the customer satisfaction scores at record levels, as we mentioned earlier -- making sure we are investing back in our partners to drive the business is an important tool for us in this quarter and going forward.

So over the long run, while we do expect to continue to leverage, where we can, parts of the P&L, at the same time we will invest where we need to drive the top line and to allow that overall US margin to maintain and even grow from these high levels it is at today.

Okay, understood.

Thank you.

(Operator Instructions) Keith Siegner, Credit Suisse.

My question is actually for Jeff.

Now that you have the packaged coffee business back in-house, I am sure there has been plenty of frustrations over the years that now don't necessarily need to be there.

Is there anything you want to do wholly differently, or at least largely differently?

Are there major changes to products, positioning, pricing or marketing that you have been waiting to put into place once you had this business back in?

Then given that kind of back drop, how do you think about the growth potential of this business?

It sounds like traffic trends have improved dramatically with just a little bit of the cross-pollination of marketing.

How do you think about the long-term growth opportunity for this business under your control?

Thanks.

Sure.

Thanks for the question.

So as we look at it, the biggest difference that controlling our destiny down the aisle allows, it allows us to leverage our blueprint for growth.

That ability to speak to both our customer and our consumer in one voice, to really be able to fully leverage the portfolio of assets that Starbucks uniquely brings to bear from the 11,000 stores that we have in the US, the 50 million customer visits that we have every week, our Facebook presence, our Twitter following, our loyalty following.

So this step change will allow us to bring that to life.

What is really powerful and worth reiterating is that 3,000 of those 11,000 stores actually sit within some of the very best grocery and mass stores in the US, some of the very best grocery and mass coffee stores in the US.

So we have now with direct control of this business the ability to bring the power of the green apron, the power of the barista to our customer, whether he or she is at a Starbucks store or whether they are in the aisle purchasing coffee.

That allows us to really elevate and transform that shopping experience for the customer.

So that is the big difference and what we are very excited about and building the capability to be able to deliver against.

As we look to the future and what is possible, we are very excited, as we have shared previously, about the premium single cup space.

It is a significant contributor, the significant contributor, to growth in the coffee category.

And we are very well-positioned today with the three platforms that we are going to leverage starting this fall between the VIA brand, K-Cups and also our Courtesy relationship.

So we are looking to continue to drive growth on this business.

Joe Buckley, Bank of America.

Troy, I would like to go back to the pricing question again.

It looked like the check in the US up 1% this quarter after being up 2% last quarter, and no check increase on international.

It was all traffic driven on the comp.

I know you guys are [capping] with this, but should we expect some pricing over the course of this year and into 2012?

What I would tell you is that we have, just as we have exercised over the past year or two, some very strategic pricing programs in place now, which mean fairly frequent routine adjustments from time to time.

Often those will be down, sometimes net neutral, and sometimes they will be a little bit up.

We are, again, reiterating what I said earlier, very, very cautious with what we do with pricing.

So have no intention sitting where we are today for any big impact on the pricing line.

Of course, we will watch the environment very closely and respond as we need to.

But we have had great success so far taking very modest, occasional price changes where it is appropriate and where it fits and where the consumer allows us to.

One of the points I would make, going back to my prepared comments, is that average ticket growth of 1% this quarter, pricing was a part of that growth.

The continued expansion of our warming program was a part of that.

And then offsetting those two things a little bit were some additional discounts that impact the average ticket line.

Those discounts coming in the form of our highly successful loyalty program, which you are familiar with, and also just some routine promotional activities in the quarter to help drive traffic.

So there are a number of things in that line that offset a bit and brought ticket down just a little bit from previous quarters' trends.

Troy, can I add one thing?

This is Howard.

Let me just add one thing with regard to pricing and the coffee cost issue.

I think in addition to looking at it through the lens of Starbucks, we want to look at it in terms of the landscape on a macro level in terms of all the people that are trying to sell coffee and the people that are in the coffee business.

The flexibility and the leverage and the ability to navigate through this, which we have now demonstrated for the first two quarters of the year, and the confidence that we have that we will be able to do it for the balance of the year and in fiscal '12, is not -- what we are really, I think, examining is that there is going to be a lot of pressure on small and large players in the marketplace.

And our ability to use other methods within the business provides us with a competitive advantage in terms of making sure that our customers are seeing the fact that Starbucks is providing value for them at a time when perhaps others are going to have to raise prices in a significant way.

The other thing which I think I just want to amplify is that we have been able to use the loyalty program and the rewards program to create a value proposition for our customers, especially our most loyal customers, which has been another opportunity that we have had to navigate through this.

So I think we want to make sure as we go through this commodity problem that we are looking at it not only through the lens of Starbucks, but the competitive position and the competitive advantage that we are going to be in as a result of the pressure that is going to exist on other companies that won't have the flexibility that we now have.

Thank you.

That's helpful.

Just one more on the margins.

Because you have reported higher margins despite all the coffee cost pressures, are we correct to think that most of that is on the labor line offsetting coffee?

No, I don't think you should conclude that.

The leverage points we saw were really in several places throughout the P&L.

For example, occupancy with our strong same-store sales growth we have had this quarter and for several quarters in a row now.

We clearly can leverage the occupancy line.

That is buried within the overall cost of sales and occupancy, so that that becomes a little less visible to you, but there is certainly leverage there.

And some other fixed places around our P&L where we are able to leverage as time goes on.

Okay, thank you.

Greg Badishkanian, Citigroup.

Just to get a little bit more color on the really solid traffic growth that you had again in the US.

Do you think that is coming from more incremental customers versus maybe higher frequency of your core customers?

Did you notice any maybe differences or change in trend of maybe daypart versus maybe product mix at your stores this quarter that maybe drove that?

Greg, it is Cliff here.

We have seen across the country this increased traffic, which is good news.

And it really is a mixture of improving our speed at peak times, which means we can improve capacity where the customers are there and where they have a choice.

We are giving them more reasons to come back by introducing afternoon offers such as Petites, which we are seeing a little bit of growth in the early days there.

And, also, we are working very hard to make sure that we attract new customers, whether it is with our online strategy.

And that with the occasional offer to a broad audience through a pastry day or a new food introduction or a breakfast sandwich promotion, that is helping.

And at the same time, our drive-through business, which is about 50% of our Company-owned portfolio in the US, again, we have been working very hard there around operational techniques to improve throughput at peak.

So it is a whole number of things.

We are focused on maintaining and building the loyalty and frequency of our existing customers, while making ourselves available for new customers as they come along.

Let me add one more thing, and that is there obviously has been a seismic change in consumer behavior, not only because of social and digital media, but because of how customers are getting access to information, and also the unbelievable pressure that people are feeling as a result of the economy that people are making much more discretionary purchases that I think are deeply involved in how decisions have not been made in the past.

In any event, the fact that we can integrate social and digital media into the way in which we are communicating with our customers has given us a competitive advantage over traditional companies and how their products are being marketed.

We see the fact that those digital channels are not only lowering cost of acquisition, but driving traffic into our stores.

So when we come out with a new category like Petites, which is skewed towards the afternoon daypart, we have leveraged social and digital media to create awareness and trial at a very low cost.

This is just the beginning of our ability to integrate these channels in a new way of marketing and communicating with our customers, both domestically and internationally.

And that has resulted in Starbucks being the leading consumer brand on Facebook, Twitter and Foursquare.

And the capability that we now have is becoming a significant competitive advantage to not only driving traffic but creating long-standing emotional engagement with our customers.

Great, thank you.

Jeffrey Bernstein, Barclays Capital.

Jeff, I appreciate all the color you gave on the single serve with the three platforms.

Actually, just two related questions, one specific to the Green Mountain and the K-Cups.

Wondering whether we can get any kind of directional color on your expectations, whether it be how the deal is structured in terms of revenue or the cost component or whether there is anything in terms of the size of the contribution to CPG?

Anything along those lines of the Green Mountain expectations going into next year with a couple of channels you have coming.

Then separately just between VIA and those K-Cups, you mentioned both being a $1 billion sales opportunity over time.

I am just wondering whether you can set the two of those up in terms of the trajectory or path of the two to achieve that.

We don't need tremendous color on each one, but which one is better profit contribution, better margin, some color as to how each of the two would achieve that $1 billion?

Thank you.

Thanks for the question, Jeffery.

Unfortunately, I can't speak to the details of the arrangement with Green Mountain.

What I can say though is that you are exactly right.

We do see both of those businesses as billion-dollar opportunities for Starbucks.

And they will both grow to $1 billion over time.

I can't speak to when specifically, but what I can say is that for VIA we are continuing to see very strong momentum on the brand.

I spoke in my comments about how VIA Promise is bringing more new users to the category.

We are seeing repeat rates amongst tryers at 37%, which is at the high end of the category.

We have introduced some new SKUs, both flavored and iced, during the second quarter, which have been met very favorably from the trade.

And as we move forward, we expect that we're getting to the point now on VIA that we're getting to critical mass.

And by that, I mean we have enough SKUs in the portfolio that we are starting to see a step change in velocity and volume.

So we are very encouraged about the future for VIA.

And with regard to K-Cups, again, very, very encouraged.

We are seeing, as you are seeing, significant and rapid growth within the K-Cup space.

Our early conversations with trade have been extremely positive and we expect to get off to a very fast start on that business when we launch this fall.

What I would add to that, Jeffery, adding to Jeff's comments, is that, as we normally do each year, it is in our next earnings release, the July call, when we will provide our targets for 2012.

I would expect in that call we will give you a bit more texture around exactly your questions -- what we expect to see to some extent out of both VIA and K-Cups and then the overall CPG business in 2012.

You can expect a bit more from us on that in our next call.

David Palmer, UBS.

I would love to hear how you would compare your pricing power, and I guess this would involve more than just Jeff, because I'm asking you to compare the supermarket channel to perhaps your traditional -- your own stores.

How do you view these coffee price swings and the potential impact to your margins?

For instance, do you see the supermarket bag coffee business as a price pass-through business, where you may not even -- you may not necessarily keep your margins the same, but you keep your EBITDA dollars roughly equal through these swings?

And then compare that to what we would think -- how you think of your pricing power and maintaining margins during coffee prices in your own stores?

And then separately, can we assume that single serve brewing overseas is something that Starbucks is looking at and might be in the near future, beyond what you are doing in VIA?

Thanks.

There is a lot there, so let me point to Jeff first and ask him to perhaps talk about single serve a little bit more broadly, and then about how he views pricing down the aisle.

Then perhaps we will look to Cliff and others to talk about other pieces of your question.

Thank you.

So with regard to premium single cup, we think this segment is nascent.

We have established three platforms for growth in the US, but that is just the beginning for us.

We are continuing to explore and will continue to explore and develop additional platforms both for the US and abroad.

So we think there is tremendous runway for growth in this space.

And we intend to be the leader in the premium single cup space.

So, hopefully, that answers your question regarding single cup.

With regard to pricing, we had previously announced pricing on March 18 for Starbucks packaged coffee in the CPG space.

And since that announcement we continue to see growth on the business.

In fact, during March we saw share growth of nearly 70 basis points to 27.2% per Nielsen most recent 13 weeks.

And we grew volume.

So we are continuing to grow both volume and share on the CPG business, even as we moved through a price increase that we announced on March 18.

Cliff, can I ask you to comment perhaps a little bit on stores and David's questions in that area?

David, the model we brought, I suppose, to bear over the last 18 months, we have been going a geographic region at a time.

We have looked at the local ability to pay the affluence, the customers competitive set.

And we have also looked at the total ticket, because as we have introduced new food lines and our food attach starts to grow at different dayparts.

In the morning it is attaching to beverage.

In the afternoon it helps us with occasion.

We are looking at that total ticket.

And the customer -- we are testing.

We are seeing sensitivity.

And we're going to be very disciplined in that, because the customer's ability to pay versus all the inflationary pressures, whether it is their own spend with us, or indeed everything else that is going on in their lives from fuel to other commodities, is a fine balance.

For us the priority is maintaining their business, at the same time continuing to over the medium term and longer-term growing our margin.

The customer is very clear.

The quality and consistency of the beverage, the speed of service and the friendliness all adds up to the price they are willing to pay for Starbucks.

They are equally saying to us, recognize and reward my loyalty, and the Rewards Card is playing a big part in that.

We continue to see additional customers increases in the amount they put on the card and the loyalty and frequency is growing.

So we are going trying to get that balance right, David.

And we will continue to work on that, as we have over the last 18 months.

Thank you.

Sharon Zackfia, William Blair.

Howard, you mentioned some of the opportunities to expand in Korea and China.

I was just curious if you could help frame for us how we would expect the acceleration in international [unit] development to really play out over the next five years in aggregate?

Sharon, is that with regard to VIA?

I didn't hear the question.

No, it is regards to licensed and/or Company-operated stores internationally.

Okay, sure.

I think the headline is that international has crossed over in many ways the fundamental learnings that we have had in the US our last two years, and now is integrating that in all aspects of our business in every region that we operate.

As a result of that, we are seeing record operating margins, which I think has given us great confidence that we can now take full advantage of the opportunities that we have to expand Starbucks international.

I can't get into the specifics today, but certainly as we look at the runway of growth and the opportunities that we have across the globe -- and China is just one market, we haven't talked about the fact that we are going to enter India, that we are looking at other markets as well.

That we are under-stored in markets like Brazil and Russia.

And even in a country like Mexico, which five years ago we thought was a market that had perhaps growth opportunities for totally 200 or 250 stores, we are going to get to 500 before we know it, and there is no end in sight.

So I think these are early days for us.

We want to leverage the licensed opportunities so that we get a better return on capital for the Company and our shareholders.

I think the good news is we just had an international summit in Seattle, and across the board all of our international partners want to accelerate their growth rate and they want access to more territory.

So these are all positive signs.

And I think being here in Asia this week demonstrates to all of us the untapped opportunity we have both in our retail business and in CPG.

I want to go back to one other question that was asked by David Palmer with regard to coffee.

I think it is more than -- well, I think it is quite interesting that during the downturn of the economy and how commodity costs and coffee costs are on the mind of all consumers, that we introduced Tribute Blend, which is part of the Reserve program of Starbucks because it is premium priced.

And we are selling out of that coffee at an accelerated rate only second to Christmas Blend.

And that is on the heels of introducing Starbucks Reserve consistently over the past year in which every Reserve coffee we have introduced has maintained or exceeded our expectations.

So I think one of the opportunities we have both in-store and in CPG is to segment the market.

And we think we can actually go up in terms of quality and a unique blend.

The plans we have building off Tribute and the Reserve in terms of innovation on the coffee side for fiscal '12 will be quite exciting as we begin to not only leverage in-store and CPG, but also taking advantage of the ongoing success of Clover.

John Glass, Morgan Stanley.

Understanding you don't want to get too far into 2012, there are some very significant forces at work, whether it is green coffee prices being a drag, or some of the positives in terms of single serve.

So my question is, do you think of the 15% to 20% goal that you put out there, Troy, and the willingness to try to manage around costs around that, so would it include both using the benefits of something like single serve, offsetting the detriment of higher grain coffee to achieve that goal, or should we still think of some of these new announcements as incremental to that longer-term goal?

That is number one.

And number two, just going back to single serve, there is a number of brands that are coming onto that system in Green Mountain in the next several months.

Is there potential for a bottleneck -- production bottleneck such that maybe you can't get many K-Cups made in the time that you want, and that made delay or phase in the rollout rather than having it start up, say, in all points of channel at once?

I will start with that question and have Jeff speak a little bit more to K-Cup specifically.

But broadly speaking our long-term earnings growth targets we have laid out of 15% to 20% is inclusive in our minds of a number of opportunities we are pursuing.

So as we build out VIA, for example, as we grow internationally, as we expand on on the single serve platforms, all those things I would expect to contribute to achieving that 15% to 20% earnings growth.

Recognizing that are targets for 2011 are at the very top end of that range of earnings growth that we reiterated again today.

So that is how we think about it as we are laying out and pursuing these many, many opportunities we have ahead of us.

Recognizing that commodity costs are a great unknown here.

But also acknowledging that one of the important levers we have, in addition to just the unbelievable underlying health and strength of our business and customer traffic trends into our stores, is the fact that we have really sharpen the pencil in the last couple of years -- developed some new muscle, some new disciplines around managing the business, the supply chain, all the expense lines.

And that has teed up for us opportunities to become much more effective and efficient.

That is and continues to be an important lever for us at all levels and all geographies in the business to help offset some of these pressures that we face, whether they be normal cost pressures that are out there every year, or at a time like this some extraordinary pressures that we face in terms of coffee prices.

I will ask Jeff now to speak more specifically to K-Cups in the coming year.

With regard to supply for K-Cups, we have worked and continue to work closely with both Green Mountain and our customers as we prepare for the fall launch of Starbucks K-Cups in CPG channels and then the sequence into Starbucks stores in 2012.

So we are confident that we will have the product that we need to meet customer demand.

This is JoAnn again.

That is our last question for today.

We thank you all for your thoughtful questions and your time.

And we look forward to talking to you again in a few months on our Q3 2011 earnings call.

Thank you for joining us today.