星巴克 (SBUX) 2011 Q3 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 third-quarter fiscal year 2011 earnings conference call.

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

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

(Operator Instructions).

I will now turn the call over to our host, Ms.

DeGrande.

Madam, you may begin.

Thank you.

Good afternoon ladies and gentlemen.

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

Joining me on the call today from New York is Howard Schultz, Chairman, President and CEO, and here with me in Seattle is Troy Alstead, CFO.

Before we get started, I'd 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 as well as 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 our Starbucks' website at Starbucks.com, and to the financial statements accompanying the earnings release to find disclosures and reconciliation of non-GAAP financial measures mentioned on the call today, along with their corresponding GAAP measures.

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

Howard?

Thank you JoAnn.

Good afternoon everyone.

I am delighted to report the record third-quarter results that Starbucks announced today.

Our third-quarter results reflect the underlying strength and continuing momentum Starbucks has been experiencing across all of our global business segments.

Never before in our 40-year history has Starbucks been healthier, more deeply connected to our customers and partners, or better positioned to go after the tremendous business opportunities around the world that lie ahead.

Our third-quarter results also reflect the success of our efforts and investments to innovate and deliver exciting new beverage and food products and formats to our customers around the world and to elevate the Starbucks experience everywhere we do business.

The results are just beginning to demonstrate the power and extraordinary global potential of the unique Blueprint for Growth business model we unveiled last December.

The very solid increase in global store traffic we experienced in Q3, despite significant economic uncertainty in many of the markets in which we operate, encourages us that our efforts and investments are resonating with our customers and will enable us to build long-term value for our shareholders.

Today, I will share highlights of our Q3 performance and discuss a few accomplishments and developments that will not be evident from the figures alone.

Then I'll turn the call over to Troy, who will take you through the financials and introduce our fiscal 2012 targets.

In Q3, Starbucks delivered another quarter of record revenue, operating income, and earnings per share.

Our consolidated revenues total $2.9 billion, up 12% over last year, driven largely by an 8% increase in global comp store sales.

We delivered earnings of $0.36 per share, up 33% over last year.

Our Q3 results were made possible by the passion, focus and energy of our nearly 200,000 Starbucks partners in 55 countries around the world and are particularly gratifying in that they were delivered in the face of formidable challenges and economic headwinds that continue to confront all global retailers today.

Strong topline growth, combined with continued discipline around controlling costs throughout the organization, helped mitigate commodity costs that, while having abated somewhat recently, remained stubbornly high during in much of the quarter.

Beyond our record financial performance in Q3, we made solid progress against several other initiatives, among which we were -- among which I'd like to share with you.

Making several important investments in China to advance our goal of having 1500 stores operating in China by 2015, including acquiring full ownership of the joint venture that operates our stores in central, south, and western China.

We now own and operate all Starbucks stores in mainland China with the exception of stores in the Shanghai market, where we continue to operate with a JV partner.

Announcing our intent to form a joint venture with one of China's most established coffee operators and agricultural companies to purchase and export high-quality Arabica beans from the Yunnan Province in addition to operating dry mills.

This will ultimately create significant local relevance with the Chinese consumer which we consider to be key to long-term success in China.

Acquiring full ownership of the JV that operates Starbucks stores in Switzerland and Austria in a transaction that will enable us to further leverage our existing Company-owned markets in the UK, Germany and France.

Extending personalized Frappuccino to our entire global store footprint, all over the world enabled us to build on the learning and tremendous success of last year's US and Canada launches.

Continuing to roll out existing new store designs around the world, including recent openings at Harvard Square in Boston, the Brewery Blocks in Portland, Oregon, Brompton Road across the street from Harrod's in central London, and our Opera store in Paris, to name a few, all of which have been met with fantastic customer and media response.

Further strengthening our industry-leading US mobile payment program by launching an Android app and expanding our iPhone app to include mobile e-gifting.

As we look to the future, I could not be more excited about the new organizational and leadership structure we announced on July 11.

We are significantly more confident than ever about the new structure that positions us to reach our goals.

The significant operating improvements we have implemented throughout the organization have contributed to our strong financial performance and positioning us to go hard, to go fast after the tremendous global growth opportunities that lie ahead.

The new structure will enable us to accelerate our global multi-brand, multi-channel strategy and to leverage the great talent and deep experience and expertise resident in our senior leadership team.

In moving to a new three-region global structure, we are matching our best talent to our biggest opportunities around the world.

In this new structure, one president will oversee all operations within each of the three distinct regions with responsibility for the performance of Company-operated stores as well as working with licensed and JV partners in each market with their respective region.

The region president will also be responsible for working with Starbucks Global Consumer Products Group and Foodservice teams to further develop those businesses and execute against our Blueprint for Growth within that region.

I am very confident that this new structure will enable us to maximize our speed, efficiency and ultimately our success as we move ahead all over the world.

I'm looking forward to continuing to work closely with the three new regional presidents, John Culver for China and Asia Pacific, Cliff Burrows for the Americas, and Michele Gass for the EMEA, all of whom will report in directly to me.

As President of Starbucks Coffee International over the past two years, John Culver and his team have delivered strong international growth, operating margins, and profitability while at the same time building a solid foundation from which we can pursue profitable growth.

Thanks to John and his team, our International business has never been healthier than it is today.

Our International leadership team has never been stronger, our relationships with our International JV partners have never been more collaborative and our store portfolio has never been healthier.

We are grateful to John for putting us on a fast track towards achieving our stated long-term goal of one day having our International business rival the size and profitability of our US business.

Turning to our US business, US Company-operated revenues in Q3 were strong, driven by continued momentum around our 40th Anniversary campaign, early summer promotions, including personalized Frappuccino beverages, our new line of Starbucks Petites, three region blend whole bean coffee and our wildly popular Frappuccino Happy Hour.

Our customers continue to embrace Starbucks Reserve and our offering of Jamaica Blue Mountain coffee has almost sold out at $30 a half pound.

Our exciting new store designs and remodels are driving both additional traffic and incremental sales.

At the same time, ongoing efforts to elevate our customer experience has customers reporting that we are delivering improved product quality, product taste, and speed of service.

Our Starbucks card and loyalty program had a record quarter in Q3, activating nearly 150,000 cards per day during the quarter and generating a 38% increase in dollars loaded onto cards over this period.

Starbucks continues to offer one of the largest mobile payment retailer networks in the US, and our network is growing.

We currently have a presence in nearly 8000 stores, including approximately 6800 Starbucks Company-operated stores, 1000 Target stores, and we expect to complete the rollout of over 1000 Safeway stores by the end of 2011.

In Q3, we responded to customer demand for increasingly faster ways to pay for Starbucks purchases by introducing a Starbucks app for Android devices, enabling Android users to load money on their devices, speed transactions and manage their Starbucks cards more effectively.

We also introduced mobile gifting on our new Starbucks for iPhone app, enabling iPhone customers to send a Starbucks card e-gift to anyone for the purchase of their favorite Starbucks product.

There are now 1 million mobile devices with more than $50 million loaded for use specifically at Starbucks, and reloads are tracking well ahead of plan.

Our research shows that mobile payment drives store traffic and also increases speed of service.

I'm pleased to report that our innovation pipeline is robust and we are seeing significant benefits from the investments we're making in mobile payment technology.

Looking ahead, the new Americas region, which will include the United States, Canada and Latin America, will continue to be a cornerstone of Starbucks' growth.

Brazil in particular is significantly under stored and presents a solid long-term growth opportunity.

I'm looking forward to the leadership and the discipline that Cliff will bring to the business as he accelerates the introduction of Starbucks experience to coffee-loving customers throughout the region just as he and his leadership team did in the United States.

Turning to international, with over 800 stores in greater China and over 450 on the mainland, China remains a focal point and key market in our international growth strategy.

I am pleased to report that our performance in China in Q3 continued the recent trend of very strong comp growth and probability.

I'm also pleased to report that we remain on track to open our first store in India in 2012 and our business in Japan continues to recover nicely ahead of plan.

Looking to Europe, as I mentioned earlier, we acquired full ownership of our retail store operations in Switzerland and Austria, and both are now Company-operated markets.

This investment will help us further leverage our existing Company-owned infrastructures in the UK, Germany and France.

We are grateful to the Marinopoulos Group, our JV partner in these markets, for their partnership in bringing the Starbucks experience to customers in Switzerland and Austria over the last eight years, and look forward to continuing our collaboration with them as our valued partner in operating stores in Greece, Cypress, Bulgaria and Romania.

Turning to our Consumer Products Group, we continue to invest and make major gains against our plans to build the leadership and capabilities of our CPG organization.

Going forward, our global multibrand, multichannel CPG strategy will build out a portfolio of branded business units beyond the Starbucks retail brand.

Jeff Hansberry and the CPG team have now successfully transitioned the Starbucks packaged coffee and tea business in-house, and the result has been strong product distribution of packaged coffee exceeding 90% ACV in the food-drug mass channel.

Jeff and his team have also been working on integrating our packaged coffee business with our other premium single-cup platform.

Our portfolio now includes Starbucks packaged coffee, the very successful introduction and now ongoing business with Starbucks VIA, and coming this fall in time for the holidays, Starbucks K-Cups.

Our K-Cups launch plans calls for us to initially focus our sales efforts on food, drug, and mass channels.

We plan to make K-Cups available in our retail stores starting in late 2012, reflecting our commitment to a targeted CPG launch focused on building awareness distribution and significant market share.

We are encouraged by the solid support and response we've received from our customers and expect to create both strong awareness and adoption of Starbucks K-Cups at the launch.

VIA continues to perform very well in key markets around the world with sales driven in part by strong summer sales of Starbucks Iced VIA.

VIA is now available in more than 70,000 locations, including Starbucks stores and CPG channels globally.

VIA continues to have both strong appeal and a strong repeat rate with trial driving sales activity.

This fall, we will extend the VIA brand with two new SKUs, Breakfast Blend and House Blend, two of our top-selling ground coffees which we are confident will extend the appeal of the platform to an even burden broader consumer audience.

With regard to SBC, Seattle's Best Coffee, over the past two years, Michelle Goss and her team have done an extraordinary job of laying the foundation and sparking Seattle's Best Coffee momentum.

There are now 50,000 places to find a brewed cup of Seattle's Best Coffee and the groundbreaking level system is seeing great success with consumers and top retailers.

In fact, the level system was recently recognized as an Editor's Pick by Progressive Grocer, one of the CPG industry's most respected trade publications.

The team continues to innovate around new retail store concepts, some of which are currently piloting in Canada.

Given the adjacency of our CPG food service and Seattle's Best business, Jeff Hansberry's new role as President of Seattle's Best, in addition to his role as President Global Consumer Product Groups and Foodservice, is a natural fit.

We remain as committed as ever to building Seattle's Best as an independent brand with $1 billion aspirations.

I'd now like to talk to you about Tazo tea.

Since acquiring Tazo tea in 1999, we have built a profitable tea business generating more than $1 billion in system-wide sales through sales of tea in our stores as well as in the CPG and Foodservice channels.

Tea is nearly a $90 billion global market opportunity, and after water the second most consumed beverage on earth.

We have exciting plans to leverage our global retail store footprint and growing CPG presence to go after the tea category in a way we've never gone after before.

We are fortunate to have the ideal professional to lead this business.

Annie Young-Scrivner, currently our Global Chief Marketing Officer, will be adding the title of President of Tazo, reflecting our commitment to transforming Tazo into a globally recognized, multibillion-dollar tea brand.

In closing, Starbucks' performance over the last two years has been extraordinary and speaks to the commitment, tenacity and dedication of our partners around the world who work hard taking care of our customers and bringing the Starbucks experience to life millions of times a day every day.

Our partners have put us in a position to go after the global multi-brand, multichannel opportunities that lie ahead.

Our leadership team and our new organizational structure puts us in a position to win and win big.

Thank you.

I'll now turn the call over to Troy.

Thanks Howard.

Good afternoon everyone.

The exceptional results that we reported today for our fiscal third quarter are a testament to the strength of the Starbucks brand, to the depth of the Company's organizational capabilities and to the dedication of our partners around the world.

Once again we set third-quarter records for several key metrics, including consolidated revenue, operating income, operating margin, and earnings per share.

All three reporting segments, the US, International, and CPG, posted strong revenue and operating income growth.

Our business has performed exceptionally well this year and the third quarter continued that trend despite significant headwinds from commodity costs and still challenging consumer environments in the US and many other markets in which we operate.

The foundation is in place to continue to aggressively pursue our aspiration to create a unique multichannel, multi-brand global consumer company.

Today, I'll provide additional details on our fiscal third-quarter performance.

Then I'll update you on our expectations for the fourth quarter as well as our initial outlook for fiscal 2012.

Third-quarter revenues totaled $2.9 billion, up 12% from $2.6 billion a year ago.

The revenue increase was primarily driven by an 8% increase in comparable store sales attributable to a 6% increase in traffic and a 2% increase in average ticket.

Foreign exchange rates and higher CPG revenues also contributed to the increase.

We reported consolidated operating income of $402 million in the third quarter, a 23% increase compared to third-quarter fiscal 2010 operating income of $328 million and a 16% increase compared to last year's non-GAAP operating income of $348 million.

Consolidated operating margin reached 13.7%, a 120 basis point improvement compared to last year's third quarter on a GAAP basis and 40 basis points on a non-GAAP basis.

Increased sales leverage in the absence of restructuring charges primarily drove the improvement, partially offset by higher commodity costs.

Earnings per share totaled $0.36 for the third quarter compared to $0.27 per share on a GAAP basis and $0.29 per share on a non-GAAP basis in last year's fiscal third quarter.

We absorbed $0.07 per share in the quarter, equivalent to 280 basis points of operating margin, due to higher commodity costs compared to last year.

Most of the commodity pressure was related to coffee, though dairy, cocoa, sugar and fuel also contributed.

Overall, our global retail business continues to gain momentum, generating broad-based sales and income growth while we continue to invest in our CPG business and execute on the strategy we've crafted for this important channel.

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

Total US net revenues for the quarter were $2 billion, a 9% increase over the same period last year.

Company-operated store revenues increased 8% to $1.9 billion in the quarter due to an 8% increase in comparable store sales.

The comp increase was composed of a 6% increase in transactions and a 2% increase in average ticket.

The increase in average ticket was driven by pricing and food as our Petites platform and the expansion of our warming program drove incremental attachment.

This increase was partially offset by increased discounts to support loyalty and other promotional activities.

Of note, the two-year comp sales growth of 17% is the highest in over five years.

This quarter marked the first time that average daily transactions per store eclipsed our 2006 levels, previously the highest year on record.

This achievement speaks to the incredible health of our US business and to the improvement in our operations when you consider that we are servicing this increased volume while holding customer satisfaction at consistently high levels.

Operating income for the US segment was $379 million, an increase of 22% compared to the same quarter of last year.

Operating margin improved 210 basis points from last year to a third-quarter record of 18.8%.

The margin improvement was primarily driven by sales leverage, partially offset by higher commodity costs, which negatively impacted US operating margin by roughly 200 basis points.

The US segment has been performing extraordinarily well following our transformation of the business over the past few years.

A variety of initiatives have contributed to this performance, including our extremely popular loyalty program, innovative products such as our Petites platform and personalized Frappuccino and improve supply-chain and store operations that are built on lean principles.

The consistently strong performance of the US business is even more impressive when considered in light of the still fragile consumer environment and the inflationary headwinds brought on by a spike in commodity prices.

We are encouraged by the broad-based momentum of the business and energized about the opportunities that still exist.

New stores are performing well ahead of expectations, signaling opportunities for deeper penetration in certain areas of the Company.

Operationally, we have yet to take full advantage of new technology such as our new point-of-sale system or our new inventory management system, as we're still coming up the learning curve with these tools.

From a marketing perspective, we're in the very early stages of leveraging our unique digital capabilities to engage with our very loyal customer base with programs such as e-gifting and personalized one-to-one marketing having the potential to drive additional traffic into our stores.

We are also doing a great deal of work in the areas of store design and store segmentation to understand how our customers use our stores and to optimize each store's particular real estate to enhance the overall experience.

While we are at or above peak levels in the US by many measures, these initiatives, as well as others, give us confidence that there is still significant untapped potential to grow revenues and profit in our core business while we pursue emerging opportunities internationally and in CPG.

Moving now to results from our International segment, International total net revenues increased 20% to $659 million in the third quarter of fiscal 2011, an all-time quarterly record.

The increase was driven by foreign exchange rates, comparable store sales growth of 5%, and new store growth.

The comp growth was driven by a 4% increase in traffic and a 1% increase in average ticket.

Continuing the trend we've seen throughout the year, China contributed a significant portion to the overall comp growth in the segment.

Comps in China accelerated this quarter to a level in the mid 30s% from an already impressive trend earlier this year in the mid 20s%.

Similar to the US and Canada launches last year, this quarter, we launched personalized Frappuccinos across the balance of the International store portfolio.

Initial response in many markets has been exceptionally strong, particularly in our warm-weather markets where our Frappuccino business tends to be a larger share of the retail product mix.

Overall, we saw strong comp growth in most of our emerging Company-operated markets, which bodes well for the future as these markets are key components to our long-term growth ambitions outside of the US.

International operating income was $80 million in the third quarter of fiscal 2011, a 35% increase compared to last year and a third-quarter record for International.

Operating margin improved by 140 basis points to 12.2%, primarily driven by sales leverage and lower impairment charges, partially offset by higher commodity costs.

Increased commodity costs in the quarter impacted the International operating margin by roughly 150 basis points.

This is the highest third-quarter operating margin on record for the International segment and continues the progression started last year toward a long-term target of mid to high teens operating margin outside the US.

Building on Howard's earlier comments, during the quarter, we announced the acquisition of the remaining equity in the central, south, and west regions of China where we previously had a minority partner.

With this acquisition, we now own 100% of our operations in mainland China with the exception of the Shanghai market, where we have a very strong joint venture partnership.

This ownership change aligns with our strategy to accelerate growth in China on the way to our stated goal of having more than 1500 stores by 2015.

The recent performance we've seen in this important market, extremely high comp growth, the most profitable stores of any market around the world and strong new store return on investment suggests that we're hitting a point where the brand is gaining critical mass and the consumer appetite for Starbucks presents huge potential.

In addition to the shift in ownership in mainland China, today we announced we increased our ownership in the Switzerland and Austria markets to 100%.

We will leverage our existing infrastructure to integrate these markets into our Western European Company-operated portfolio.

Collectively, our International portfolio has never been in better health, and our vision of a diverse mix of profit contributors across the globe is beginning to materialize.

We are starting to see a more balanced contribution from the entire portfolio.

In addition to China's rapid growth, our licensed markets, many of which are smaller emerging markets, collectively are growing revenues at a faster rate than our Company-owned markets as a result of both comp and new store growth.

The International team has done an incredible job in setting up the foundation for success outside the US.

As we move into the previously announced regional structure in fiscal 2012, I'm confident we will continue to build on the current momentum we have in our business outside of the US and capitalize on the tremendous opportunity that exists.

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

Our CPG segment continued its recent momentum in the third quarter, completing the first full quarter under our direct distribution model for packaged coffee and tea.

This model now gives us total control over the sell-in and distribution to retailers of these products, as well as VIA.

K-Cups will be added to the lineup beginning this fall which, along with our coffee authority and brand recognition, will create an unmatched proposition for our trade customers in the coffee category.

In the fiscal third quarter, total net revenues for CPG were $218 million, an increase of 25% over last year.

Slightly more than half of the increase was related to the packaged coffee and tea business as a result of the transition in-house as well as pricing.

The remainder of the increase was driven by our Foodservice business and the expanded distribution of VIA into grocery.

VIA continues to perform well.

Sales for the most recent four-week period were up 41% over last year and repeat rates continue to trend among the highest in the industry at roughly 38%.

CPG operating income for the quarter totaled $66 million, at 20% increase compared to the third quarter of last year.

The operating margin of 30.2% was 130 basis points lower than the same quarter last year.

Higher coffee costs had a significant impact this quarter, accounting for roughly 1000 basis points of margin deterioration.

This was partially offset by less marketing spend as we were lapping over last year's launch of VIA into the CPG channel.

Overall, we are extremely pleased with the transition of the packaged coffee and tea business and the financial impact has been in line with our expectations.

The minor share erosion we experienced early in the quarter, driven by less promotional and display activity as the previous distribution arrangement ended, has already given way to solid recovery.

Packaged coffee sales have recorded double-digit growth over the recent four-week period versus last year, despite some recent volume weakness in the overall category.

In the last several months, we've had a dedicated focus on the transition, ensuring that it was seamless to our trade customers.

With this work now behind us, anticipation is building within the trade around what we will now be able to bring to the coffee aisle.

With the planned launch of K-Cups in the fall adding to an already strong packaged coffee lineup and an ongoing buildout of the VIA platform, Starbucks has an unmatched coffee portfolio in CPG.

Our ambitions outside of our retail store channel are bold and will take time to fully capitalize on the opportunity, but I am confident that the assets we own and the teams we now have in place provide the foundation to achieve those goals.

Before I move on to our outlook for the reader of fiscal 2011 and a first look at fiscal 2012, I want to take a moment to recognize Starbucks' supply chain organization.

This group recently received a remarkable well-deserved achievement, ranking for the first time in the top 25 of global supply chains as rated by Gartner AMR, a well-known research firm in this field.

We are very proud of this achievement, given the significant transformation that team has gone through over the past few years, first retooling that organization to drive improved efficiency and accuracy and more recently bolstering its infrastructure and talent to support our Blueprint for Growth.

This ranking recognizes the tremendous progress we've made, noting Starbucks' focus on improving overall supply-chain performance, differentiating ourselves from our peers on accelerated commercialization of new products, our long-term programs to grow and acquire supply-chain talent and the approach and speed in which our supply-chain organization has improved its performance.

Congratulations to Peter Gibbons and his team on this well-deserved recognition.

We entered fiscal 2011 with strong momentum throughout our business and a cautious optimism that those trends would continue despite the uncertain economy and the gathering headwinds from commodities.

As the year progressed, our business performed beyond our expectations as the focused efforts of our partners helped drive additional traffic into our stores.

Now, with three quarters of the fiscal year behind us, I would like to provide you with an updated outlook on how we expect the year to close out.

Earnings per share for the fourth quarter is expected to be in the range of $0.35 to $0.36 and EPS for the full year 2011 is now expected to be in the range of $1.50 to $1.51, modestly above the previously communicated 15% to 20% growth over 2010 non-GAAP earnings per share, excluding the benefit in 2010 from the 53rd week.

In addition to the earnings outlook, we now expect approximately 10% revenue growth on a comparable 52-week basis, driven by comp growth at the high end of our target range of 3% to 7%.

Excluding the impact from the Borders store closures, we now plan to add approximately 600 net new stores globally with roughly 100 in the US and approximately 500 in international markets.

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

Through the end of the quarter, 228 Seattle's Best Coffee stores closed as a result of the Borders bankruptcy.

The 247 stores that remained are expected to close this week.

As previously communicated, we took charges related to the Borders portfolio in the first and second quarters, and we do not have any meaningful exposure remaining.

We still expect to absorb approximately $0.22 in additional commodity costs compared to fiscal 2010, primarily driven by coffee.

Roughly $0.08 of this amount is expected to be absorbed in the fourth quarter.

Full-year operating margins for both the US and International segments are now expected to finish near the high end of the previously communicated 150 to 200 basis point improvement compared to last year's non-GAAP results.

Operating margins for the CPG segment are also now expected to finish near the high end of the previously communicated range of 25% to 30%.

The expected result on a consolidated basis, after the impact from the Borders charges, remains at 50 to 100 basis point improvement compared to last year's non-GAAP operating margin.

I will now provide you with a high-level initial look at several fiscal 2012 targets.

These targets are presented under the current segment reporting structure, not yet reflecting the reorganization announced recently.

I plan to provide the fiscal 2012 targets under the new segment reporting structure during the November year-end conference call.

We expect approximately 10% revenue growth for the year, consistent with the rate of growth this fiscal year and driven by mid single-digit comp growth, approximately 800 net new stores and strong growth in the CPG business.

Of the approximately 800 net new stores we expect to add, roughly 200 are expected to be in the US and roughly 600 in International.

Approximately half of the new additions in the US will be licensed stores.

Internationally, roughly two-thirds of the new additions will be licensed, consistent with our current mix outside the US.

We expect China to account for approximately one-quarter of the international new store additions.

We expect capital expenditures to be approximately $700 million for fiscal 2012, reflecting the increase in new stores planned.

Full-year operating margin improvement is expected to be 50 to 100 basis points on a consolidated level with improvement expected in US and International retail operations, offset by moderately lower volumes -- margins, excuse me, in the CPG business.

Sales leverage and operational efficiencies will continue to drive the margin improvement in US and International, offsetting pressure from commodities.

Similar to this year, we expect CPG margins to be impacted more significantly by commodity increases since coffee is a larger share of the overall cost structure for this business.

Additionally, we'll continue to invest for future growth in CPG as we launch K-Cups and expand the VIA platform.

As a result, we expect CPG operating margin near 25% in fiscal 2012.

We expect fiscal 2012 earnings per share growth to be in the range of 15% to 20%, consistent with our long-term outlook range.

We expect pressure from commodity costs to continue into the next year.

As we had anticipated, in recent weeks, coffee prices have retreated significantly from a high of more than $3 per pound just a couple of months ago to levels now near $2.40 per pound.

As prices have been falling, we've continued locking up our needs for fiscal '12 and now have virtually the full-year price protected.

At these contracted levels, we expect the elevated coffee cost to negatively impact earnings by approximately $0.21 per share in fiscal '12 compared to fiscal '11.

That additional cost is already fully reflected in our 15% to 20% EPS growth target for next year.

Global demand for coffee continues to grow, which underscores the huge opportunity for Starbucks' expansion in the years ahead.

While that demand growth undoubtedly has pressured coffee commodity costs from the levels of a year or two ago, the recent significant decline supports the analysis we have available to us that, despite the $3, was fueled much more by speculation.

We now have very good visibility into our key input costs for the coming year and have continued great confidence in our ability to meet our growth targets.

Lastly, I'd like to highlight our expectations for the highly anticipated launch of Starbucks K-Cups.

K-Cups are expected to be available this fall in the US CPG channel, in time for the important holiday party.

Based on the extraordinarily strong early response and the anticipated demand from our trade customers, we expect to be able to ramp up distribution, awareness and adoption relatively quickly for a new product introduction.

We expect K-Cups to add approximately $0.03 to $0.05 in incremental earnings per share in fiscal 2012, already included in the 15% to 20% EPS growth target, reflecting significant investment planned to support the CPG launch.

Due to the manufacturing capacity that is needed to support the CPG demand, we now expect the launch K-Cups in our US retail stores to occur very late in 2012.

Therefore, we do not expect any financial benefit in fiscal '12 from the retail launch.

Our third-quarter results further demonstrate the unique strength of the Starbucks brand, our retail store portfolio, and our evolving multichannel growth model.

Despite stiff headwinds in the form of higher commodity costs and a fragile consumer environment, we were able to achieve record results while continuing to invest for the future.

We are still in the very early stages of our pursuit to build a one-of-a-kind company that reaches consumers throughout the world in multiple channels and formats while maintaining a deep connection to our customers.

As we continue to see more proof points, we are increasingly confident this decision will begin to play out in the coming quarters and years.

Our recently announced organizational changes will allow us to more clearly focus on the unique complexities inherent in each region around the globe as we expand our retail presence while driving growth in our emerging businesses.

The strategies to pursue the tremendous global opportunities are clearly defined.

Our management team is experienced and energized, and we are backed by a strong balance sheet and healthy cash flow.

We have an extremely solid foundation in place to pursue ambitious, profitable growth in fiscal 2012 and beyond.

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

(Operator Instructions).

John Glass, Morgan Stanley.

Troy, the question are related and they relate to the K-Cups.

First, could you talk about the $0.03 to $0.05?

That sounds like it's a net number of some launch costs -- if you're willing to talk about what you think those launch costs are so maybe we can back into where you can pick the run rate is without those costs.

Just clarify your decision I guess not to launch these into your stores until late in 2012.

That sounds like it's a capacity issue, or is there something else behind it strategically where you want to get it established?

It would seem like you'd want to -- if it was a choice you made, you'd want to bring it into your stores earlier to help that adoption faster for K-Cups and bring new people into that system.

So why are you choosing the opposite strategy?

First, on the $0.03 to $0.05, yes, you're right.

That's a net number.

It reflects our commitment to launch this new product and any new product in the right way, which will include meaningful spend against it over the first, second and likely third years, similar to what we're doing with VIA, to really ensure that we are capturing the consumer demand that's available to us and building the proposition for the long term.

So $0.03 to $0.05 is a nice contribution in the first year.

It is not at, by any means, a mature margin contribution level in 2012 because of the spend we'll put against it.

We won't quantify that spend quite yet but I think, as we move through 2012, we'll provide more visibility to what that looks like as we go.

Now, to the second part of your question, the launch in CPG is expected to consume really all of the available capacity we have for Starbucks K-Cups.

So in partnership with Green Mountain, we've agreed to put the launch of K-Cups into Starbucks stores late in the fiscal year.

That will ensure that we have all the volumes we need for what we think will be a very, very attractive and exciting launch into the CPG channel.

Perhaps distinct from VIA where we use our retail stores to build awareness of the product, what we know about K-Cups is that consumer awareness and that pent-up demand already exists because it's an existing platform that's out there.

So, we have the opportunity here to launch into CPG directly and first and really capture a huge opportunity during that very critical -- during that very, very critical holiday period.

So that's what's behind that decision.

Troy, let me add one more thing to that.

I think we're going to get the best of both worlds.

We're going to draft off the momentum that already exists on K-Cups in the channels that they're already in and the demand so far in terms of the response has been significant in terms of sell-in process.

But our calendar at retail is anywhere from 12 to 18 months forward and we have a very robust product and promotional plan already in place.

So I think on a parallel track, we're going to get all the benefits that exist from K-Cups in complementary channels, we're going to have a robust plan within our retail stores and then we're going to come right after that in late 2012 with K-Cups.

So we feel we're in a very unique and very positive position to take advantage of multiple channels of distribution that no one else has other than Starbucks.

Sara Senatore, Sanford Bernstein.

I wanted to ask another question about the CPG business.

I'm just thinking about the VIA, and you said 70,000 points of distribution.

Can you give some color on which markets it's doing the best, what kind of distribution you have?

I'm trying to think forward if the K-Cups were or a single-serve product were to be available kind of internationally, what is the receptivity of the customer base sort of broadly speaking to Starbucks and single-serve?

I appreciate your question.

I'm going to ask Jeff Hansberry, our President of Consumer Products, to take that question.

Thanks for your question.

Our strongest market and most mature market for VIA is the US market.

We've been in-market now for about one year.

Our distribution stands at about 71% ACV per IRI and in the last month, we grew at 41%.

What's really encouraging on VIA is we continue to see growth both in winter and summer, as Howard mentioned in his comments, on iced VIA.

It's really countercyclical to coffee, so we're seeing growth around iced VIA in summer.

Beyond that, we're seeing our repeat rates actually climb and they're now at 38%, which is very encouraging.

We're going to follow that with the launch of Breakfast Blend and House Blend in CPG this fall in the US.

So we are very encouraged by the progress we're seeing.

David Palmer, UBS.

Thanks guys.

Congrats.

Troy, a question on CapEx.

That $700 million guidance for fiscal '12 seemed just a little bit high to me given the fact that the new Company stores or the new store base in general will be heavy on China within the Company store base internationally and then licensed stores overall.

So could you perhaps give some color on the CapEx number?

How does that breakdown?

Yes, the breakout is similar to the mix of our spend in years past, where new stores are a piece of that component but not the majority and not even half actually.

Our ongoing commitment to remodel our store base at similar levels to this year, although perhaps slightly higher in the year ahead, contributes a bit to that CapEx.

But most meaningfully, the increase from 2011 to 2012 expected CapEx is driven by new stores as we are growing all around the world.

I will point out these are early targets and we'll fine-tune that number for you throughout the year as we go.

Thanks very much.

Sharon Zackfia, William Blair.

Good afternoon.

I guess a question on China where obviously those comps are kind of jaw-dropping that you're seeing there.

I guess just curious, having watched you for a long time as you've grown in China, are you seeing daypart utilization change the mix of food versus beverages, or just the general customer that's coming into this or is has that really been changing over the past year?

Troy, do you want me to take that?

Sure, go ahead Howard.

Is John in the room as well?

Yes, he's here.

He can follow on after you start the answer.

Let me begin by saying I think few people remember that we have been in China now over 12 years.

During that time, I think we did a very good job of building the brand in a way that would not be fad-ish but really trying to create the coffee ritual and demonstrate to Chinese local customers the relevancy of the Starbucks brand.

I think, early on, the stores were actually more popular than the coffee because our stores literally became the third place between home and work, and most Chinese people live in smaller dwellings and they use our stores as great meeting places.

Over the last couple of years, what really has taken place is that the traffic has been building in multiple dayparts and we're certainly beginning to see early stages of the morning ritual, although we have a long way to go.

I think that gives us even more opportunity and I think more excitement because these numbers are being generated really thus far without the morning daypart being as significant as they are in other parts of the world.

I think perhaps the most encouraging aspect of our Chinese business to date is the response that we're getting in secondary and tertiary markets in cities that most Americans have never heard of with populations ranging from 1 million to 6 million or 7 million people.

In these markets, the response and the unaided awareness of Starbucks lines out the door in terms of almost a rite of passage as a result of Starbucks opening up in these cities.

So when we look at the number of cities in China that are going to have 1 million people or more and the government officials are telling us it's going to be over 100 cities, the opportunity I think we have is very significant.

The challenge from the very beginning is to ensure the fact that we do not become something that is fad-ish.

The hardest part in building a new brand in Asia is to make sure you do not become white hot and then all of a sudden out of favor.

I think we've done a very good job in building really strong local relevancy and relationships with customers, vendors, and the government.

As a result of that, the local Chinese Starbucks team is off to a great start.

I've said for the last couple of years there's going to be lots of challenges in China.

We've learned a lot.

We've made some mistakes, but we're going to have thousands of stores there and build a very big significant business not only in our retail stores but the Blueprint of Growth in terms of complementary channels of distribution and other products are a significant part of the strategy.

This is John Culver on the call.

Just a couple of things I would add onto what Howard just said -- first off, in terms of the growth that we're seeing in China across all the markets to include the new cities that Howard talked about, it's being driven through transaction growth.

So it's attracting more customers in and continuing to increase the level of frequency of those customers coming into our stores.

In addition, we've had some new innovations that we introduced in the quarter with our customizable Frappuccino, which was a huge success in China.

Then also we introduced VIA in both the mainland China as well as Taiwan and Hong Kong in the quarter.

The early results on VIA in China are very, very impressive, so we're very excited about that.

Then also, as part of our integration into the Chinese culture and into the Chinese community is the relationship that we're building in the Yunnan Province around coffee.

Howard talked about that as part of the opening.

But we're very excited about the opportunity this presents for us long-term to continue to grow the business and increasing the level of dayparts through our stores as well.

So very good news in China.

Jeffrey Bernstein, Barclays Capital.

Great, thank you.

Just a question on cash -- you gave a lot of color on 2012.

We didn't talk that much about cash flow usage just yet.

But it seems like -- and I know you guys are running north of $1 billion in cash currently on hand.

My guess is you're running north of $1 billion in free cash likely next year.

I know you have significant available credit.

so I'm wondering -- I mean the dividend is in kind of the low 1% range.

Should we think about the excess from early (inaudible) purchase and how should we think about 2012?

I know you've alluded in the past to a potential acquisition above and beyond kind of returning cash to shareholders.

Whether you have any thoughts on whether an acquisition, it might be US or International or on beverages versus other areas such as food, any thoughts you have on the use of cash and potential for acquisition.

Thanks.

You're right on the early parts of that in the sense that we have well over $1 billion in cash on the balance sheet today, closer to $2 billion.

We have a business that's produced a very, very healthy $1 billion in free cash flow.

I would fully expect that or better as we look at fiscal 2012.

So we have the opportunity with a strong balance sheet and a healthy cash producing company to do a number of things.

Part of that is in returning cash to shareholders through share repurchases.

We are committed to a share repurchase program that is based on valuation, so we will at different times be in the market and will certainly return cash as appropriate through repurchases.

We also have an ongoing dividend program that's based on a targeted payout ratio, so as our earnings grow, I would expect dividends to grow over the years as well to match that, to say with stay within that range of the ratio.

So those elements will likely grow as time goes on and as our income grows.

Then further of course, we'll invest back in our business through CapEx, through growing the health of our infrastructure, to invest and our partners as fully appropriate.

With all that said, yes, we do expect that we'll be more active in M&A in the years ahead than we have been in years past as we see tremendous opportunities to leverage our capabilities and our speed to market in some areas and really further build out our Blueprint for Growth through selected, we think, smart and strategic acquisitions.

So that will be part of the equation and certainly shapes our thinking about cash as we look forward.

Is there any thought whether that be US or International or beverage versus food or kind of directionally which way you'd like to go?

Our interests are very much global.

So yes, we're looking at what opportunities there are in the US but very much with our increased focus outside of the US around development.

We are really looking at all our geographies, key geographies, existing geographies, some of the emerging markets and we are in, and evaluating what possibilities might be there.

So very much of a global answer.

I can't give you specific breakout because we're not targeting it that way.

But I can tell you their interests are very broad-based.

Keith Siegner, Credit Suisse.

Troy, a question for you around CPG and thinking about the margins from 2011 to 2012 and kind of going from let's say the guidance this year at the high end of the range around 30% to 25% next year.

When you think about that walk-through, clearly it sounds like we're going to have headwinds from commodities.

But how does the first full year without transition costs for packaged coffee -- is that a positive?

What about the K-Cup?

Is that positive to margins?

In other words are we going to have another 1000 basis points headwind from commodities and these other things, all said?

If you could walk through these moving pieces year-over-year, that'd be great.

Sure.

Let me speak to some of those pieces.

One is yes, commodities, as I mentioned earlier, are absolutely a headwind for us in the full business, and that's most acutely impactful on margins in CPG as it's a much more coffee-intensive cost structure, as you know.

I can tell you that the decline as I spoke about earlier from about 30% operating margin in CPG this year down to the targeted 25% next year is really all explained by commodities.

Absent commodity inflation, we'd be at or improving our margin in the coming year.

Now, with that said, there are a few other moving pieces as well.

K-Cups, in its initial year, will not be at the mature margin levels that we expect to grow to with that exciting product over time as we will spend against it, just as we have with VIA, so that's very accretive to earnings to the tune of $0.03 to $0.05 per share.

But it will be somewhat lower margin in its first year too as we spend against that development.

Similar with VIA, as we continue to grow and expand and invest behind VIA, that is profitable.

It will be more profitable in '12 that it was in '11 and yet the margin structure on VIA will continue to be somewhat lower than what we see in the rest of our Consumer Products business.

So those are some of the moving pieces but I would just come back to the fact that it's really -- the biggest mover there is coffee costs, and that's the biggest driver.

That's resulting in that lower end of the 25% to 30% range next year.

David Tarantino, Robert W.

Baird.

Good afternoon and congratulations on your great results.

Howard, just a question on the new organizational structure.

I was wondering if you could provide a little bit more context on how you envision that structure helping the business, maybe provide some specific examples of how you're thinking about using that structure to accelerate your international growth.

Then Troy, maybe as a quick follow-up, if you could talk about whether that structure is going to lead to any efficiencies on the financial side.

Okay.

I think there are a number of ways in which the Company is going to benefit as a result of this new structure and alignment.

But let me begin with what I said in my remarks, and that is John Culver and his team have done really a spectacular job over the last two years in bringing International to the operating margin that is as respectable as it is today.

But we think there's a long way to go.

John and I have been talking for the past year or so just how broad-based his geography was.

Just think about managing 50 countries, 50-plus countries and trying to be as present as possible in all of the geographies and the complexities of these organizations, as well as the fact that these markets are not all alike.

International is not one organization.

It's very different, diverse markets, different levels of maturity in terms of coffee and different levels of maturity just in terms of the Starbucks brand.

And so we began thinking about how can we leverage Starbucks' strongest operating talent against the biggest opportunity we have in terms of retail growth and the global opportunity where we really believe we are in the nascent stage with only 6000 stores?

I think given what Cliff has been able to do in the US since he came here from Europe in transforming the US business, if you divide the three territories with Michelle Gass, who has been with the Company 15 years and really knows every aspect of our business, and put her in Europe and the Middle East and put Cliff in the Americas and then leave John where he once lived in Hong Kong and took care of China and Asia-Pacific, we now have three very, very strong Starbucks leaders really going after growing the business in a different way.

A good example, to be specific, is let's take the country of Brazil.

Brazil is a market that we think we can have at least 1000 stores there, at least, and we're sitting with less than 100.

It's a market we know we're under-stored in and we have not been able to be as present in terms of our focus and attention.

I think, with Cliff's leadership, Brazil will become a significant growth driver for the Company.

If we look at Europe and the opportunities that we think we have to leverage the Blueprint of Growth with complementary channels of distribution with CPG and Foodservice, a background that Michelle has with the Company, she'll be able, I think, to leverage that insight and experience across Europe in ways that we haven't to date.

If we look at Asia-Pacific, the area where we think we have the greatest opportunity in terms of growth, John will be singular-focused with his entire organization on Asia-Pacific, specifically China and the opening of India, which is extremely complex with big upsides but lots of complexity to open India in 2012.

So I think this is the beginning of I think realigning the organization in ways that we haven't before and I think most importantly taking all of the learnings that we've applied to the North American business over the last 2.5 years that have literally transformed the economics and the results and bringing that to bear across the International markets with three very strong leaders.

So I think this is a great move for the Company.

I credit John for his leadership in this, and I think Cliff and Michelle will do a fantastic job.

David, to the second part of your question, as you just heard from Howard, the full, complete, entire motivation behind the three structure is about enabling growth.

It's about positioning us with strong talent and teams who can be focused on the uniqueness and the complexities of these individual regions around the world.

So this restructure is not about seeking efficiencies.

It is about completely about going after the huge opportunity we see around the world that's been really validated by the growth in the last couple of years, the margin improvement and now building on that great work of the last couple years.

This restructure allows us to accelerate and go after that more meaningfully.

Now, with that said, while there is no motivation around efficiencies here, as we drive growth and drive the topline in the years ahead as a result of this increased focus, I fully expect to drive margin improvement as a result of that.

Greg Badishkanian, Citigroup.

This is Jeff Hans speaking on behalf of Greg.

You guys have done another remarkable job growing traffic on a two-year trend in the US despite -- this past quarter, despite a still pretty fragile consumer environment.

Can you guys talk a little bit about that disconnect, what's sort of driving that momentum in your business, and then what type of initiatives do you have in place in the near-term to maybe sustain some of that?

I think we've said from day one beginning in 2008 when we were really dealing with the height of the cataclysmic financial crisis that, despite the challenges we were having at that time, we were not going to use the economy or the lack of consumer confidence as an excuse to grow our business.

I think nothing has changed.

We are not looking at the economic environment.

We're looking at what we can do to exceed the expectations of our customers and create a great experience in every aspect of our business for both our people and our customers.

That has not changed.

Over the next 12 to 18 months, we have a great, robust level of innovation, a pipeline of new products and new promotions.

As we head into the fall and holiday season, we're as enthused as we were the last couple of years.

I think when you look at the comp number overall at 8% globally or 9% for the US, these are stunning accomplishments, not only in spite of the economy but if you look at other retailers or restaurants, these are top of class.

Can we sustain those kinds of numbers over the next 12 months?

I can't answer the question in the affirmative.

I think Troy has given good guidance in terms of mid single-digit comps, but we are very confident that what we have put in place in terms of consumer-facing initiatives and the level of innovation not only in products and experience but through technology, that we're going to be able to create separation between us and everybody else.

Two years ago when the world was coming to an end, not only were we dealing with the economy but there was concern about McDonald's and others.

I think we've done a very good job in creating the kind of experience that really does differentiate Starbucks from everybody else, both in terms of the experience, the quality of the coffee and the relationship our customers have with our people.

That has not changed.

We're going to continue to invest in what is most important around the equity of the brand, and that is the experience that we create in our stores.

We think that's going to continue to drive a very strong comp store growth, domestically and internationally.

Joe Buckley, Bank of America.

I want to go back to China again for a moment.

First, on the transactions that gave you control of mainland China, are there any financial implications from an earnings standpoint to be aware of, (inaudible) transactions alone.

Then talk about changes that you'll execute now that it is completely Company controlled, particularly with the expansion, how quickly do you think that will ramp even higher than what you provided for 2012 for guidance?

I'll speak to the first part and then ask John Culver to jump in on the second piece of it.

There is some transaction accounting that comes to play with the purchase this quarter.

It's not a particularly meaningful number.

It shows up in Other Operating Income, so it's below the margin line.

But there is a modest gain that shows up there and is responsible for some of the increase in that Other Operating Expense or income line that you'll see in our financial statements.

Now in terms of what we'll do from here, I'll ask John to jump in.

Yes, Joe, in terms of the transaction itself and the integration of the business, really it's seamless.

We've had operating control of that business within the Partnership.

What this allows us to do is buy back the equity portion of our business partner that was there and take over full control and operations from a P&L perspective with the business.

So in terms of any changes, no changes other than the fact that it now allows us to go uninhibited in terms of pushing the accelerator on growth there.

That's what we have every intention of doing.

I'll add one thing.

It's more than a subtle coincidence that the alignment of Cliff, John and Michelle are also coming at a time when we are acquiring these businesses back.

I think there is a symmetry to the fact that we've got our best talent against a Company-operated operation across the globe, and I think it's going to add significant long-term value to our shareholders.

It's the right thing to do for our company and it's coming at a time when we really have the organization in place.

Michael Kelter, Goldman Sachs.

I just wanted to ask about the International traffic number which stayed the same even though China accelerated to the 30s%.

I guess I was curious what the negative offsets were in the International division and maybe a status update on what's going on in those markets.

Yes, I'll speak to that.

China, as I said, was extremely strong, even improving over previously.

All our other Company-owned markets remain positive and generally in good trends.

The softest market we had was our largest International market, and that's in Canada.

Again, positive same-store sales but a bit softer and that's due in part to some -- in Western Canada the harmonization of taxes impacted all retailers, including us, so there's a little bit of softness that we've seen as a result of that as well as some ongoing weather that contributed to our softness in Canada.

But that's really it, again very consistent traffic to a large degree in the UK and very, very strong and improving traffic as we have talked about in China.

John Ivankoe, JPMorgan.

Thank you.

Just I think two pretty quick ones.

Looking obviously at your average unit volumes for same-store sales in the United States and given what's obviously been a very high competency of opening units, why is the Company-operated unit -- and maybe Howard, talking about your previous point with some of your best talent being focused on Company-owned markets -- why isn't that number higher in 2012?

Why is 100 units?

I guess should we think about if trends continue, possibly 2013 is a breakout year to reopen a lot of the US is the first question.

Then secondly, how should we think about pricing for the remainder of '12?

Is it something you think you can do if you need it?

Could it be something that's kind of in your arsenal, if you will, if commodity costs don't stay where they are currently?

With regard to US growth, I think one thing I'd like to say is I think for anyone to conclude that the US market is reaching a level of saturation for us I think would be a wrong conclusion.

I think what is occurring though is that during the downturn in the economy, when we stopped searching and securing US retail sites and downsized the acquisition of real estate organizationally, we lost a lot of time.

So it takes an entire organization, it takes a long time to secure sites, design stores.

I think we lost probably a year and a half because of the downsize of the organization during the financial crisis.

So we're just building back that organization.

The leadtimes are great.

For me personally, we remain bullish and enthusiastic about our ability to grow the US business beyond the 100 store level per year.

But organizationally, we've got to be in a position to be able to do that.

What I do not want to do and we will not do is have an undisciplined approach to real estate acquisition.

We want to be extremely careful and highly disciplined to make sure that the return on investment -- I think what we are most proud of is the class of stores we've opened in the last year in terms of sales and return on investment and sales-to-investment ratio is of the highest we've had in many, many years.

Troy can speak to that specifically.

Our new store class, the last couple years have continued to strengthen.

We've always had very good unit economics.

Those suffered a bit during the difficult days of a couple years ago, but since then, with the discipline that Howard has mentioned around site selection, around close management of our new store costs, we have been able to improve those economics significantly to the point now where it is very, very attractive for us to invest in our US business and add stores.

To Howard's point though, we fully intend to do that in the right way and at the right pace.

I would expect that new store will, while it's doubling in 2012, I would expect it to grow further in 2013 as we ramp up our capabilities and position ourselves for growth.

Now, John, to the second part of your question around pricing, we've been, as you know, very judicious, very cautious in what we've done on pricing.

That comes out of a tremendous sensitivity to the consumer around value and around the place they're at right now.

We've taken less pricing than just about everybody else out there down in coffee.

The result of that I believe has been a couple of things.

One is our results and our ability to drive traffic and increase frequency speaks to a number of things we're doing around customer service and product innovation and loyalty program, but it also speaks I think to our value and consumers recognizing the extreme quality we're offering them at a good value, as we've very careful with what we've done with our strategic pricing in our stores, and we've been conservative with what we've done with pricing down the grocery aisle.

I think it's no coincidence that we are one of the rare companies down the aisle that's actually growing volumes right now in coffee.

While there is dollar share growth in some places driven by pricing, we've been cautious about that and like the idea of grabbing volume share and positioning ourselves much better for the future.

What that does I believe is it allows us to drive earnings and meet our growth targets.

It also allows us to preserve some pricing power for the future if it's needed.

So we'll be cautious about it.

We'll be careful about it.

But it gives us tremendous flexibility that perhaps others don't have as we approach the next year or two.

It appears we have time for one last question.

Mitch Speiser, Buckingham Research.

Thanks very much.

As we think about fiscal '12 and modeling on a quarterly basis, can you maybe give us a little color on just in the context it seems like you might be marketing heavily behind take-up, perhaps in the fall.

Then of course there's the coffee costs, which I would think would perhaps maybe decelerate on a year-over-year basis.

Is it safe to say that, if comps just, say, were to remain at the same level throughout the year, that we should expect the calendarization of earnings growth maybe to start off slower and end off stronger?

If you could maybe give us some light on the calendarization of earnings growth?

Thank you.

Sure, Mitch.

It's a bit early to be too specific about quarters.

I'll probably tell you a little bit more about that in November.

But what I'll say for now is yes, you're correct that coffee costs will likely be a bit more of an acute pain for us in the first half of the year year-over-year simply because, as we went through 2010, those coffee costs accelerated as we went.

And so in the early part of the year, we'll be lapping relatively lower costs from a year ago.

So that year-over-year differential is a little bit more costly to us in the first part of the year than it will be in the second half of the year.

Again more specifics to come as we see how things play out throughout the year.

Then beyond that, there's always lots of ups and downs.

We, as you pointed out, will be launching K-Cups in the fall, but I think that is an extreme positive for us and we're very much optimistic about it.

We'll be spending against it, but K-Cups will be profitable for us.

So I don't expect that to particularly drive calendarization.

So to a large degree coffee is the one thing I can point out to you right now and, again, when we get to November, we'll talk a little bit more about how the quarters look.

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

Ms.

DeGrande, are there any closing remarks?

Just briefly.

Thank you Christian.

Thank you all for joining us today.

That does conclude our third fiscal quarter call for 2011.

We will talk to you in November.

Ladies and gentlemen, this does conclude today's Starbucks Coffee Company third-quarter fiscal-year 2011 earnings conference call.

You may now disconnect.