星巴克 (SBUX) 2012 Q4 法說會逐字稿

Good afternoon.

My name is Rachel, and I will be your operator.

At this time I would like to welcome everyone to Starbucks Coffee Company's fourth-quarter and fiscal year-end 2012 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)

Thank you.

Ms. DeGrande, you may begin your conference.

Thank you, Rachel.

Good afternoon.

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

Thank you for joining us today for our fourth-quarter and fiscal year-end 2012 earnings call.

Opening the call today will be Howard Schultz, Chairman, President, and CEO; and he will be joined by Michelle Gass, President of our Europe, Middle East and Africa business; and Troy Alstead, Starbucks' Chief Financial Officer.

The three presidents of our other segments, Cliff, John, and Jeff, are also on hand for Q&A.

This conference will include forward-looking statements which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements.

Any such statements 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 financial statements accompanying the earnings release to find disclosures and reconciliations of non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures.

The earnings release can be found on our website at Starbucks.com under Investor Relations.

This conference call is being webcast and an archive of the webcast will also be available on our website.

Before I turn the call over to Howard, let me cover a couple of additional items.

First, given that this is our year-end call, we will extend it beyond 60 minutes as needed.

And second, I would like to remind you that our biannual investor conference will be held on December 5 in New York.

We hope you will join us in person or participate via the webcast.

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

Thank you, Joann, and good afternoon to everyone on today's call.

Before we begin, as a lifelong New Yorker, I would like to express my heartfelt concern for the many millions of people impacted by this week's devastating hurricane.

The images we have seen and stories we have heard are beyond heartbreaking.

All of us at Starbucks are grateful to the thousands of first responders who are courageously and selflessly responding to this disaster, and our thoughts go out to those directly affected.

I will now turn to the record fourth-quarter and fiscal 2012 financial results Starbucks reported today.

Q4 was an extraordinary quarter for Starbucks on almost level.

Record fourth-quarter revenue of $3.4 billion, strong fourth-quarter EPS of $0.46, which includes charges of $0.02 per share related to our store portfolio optimization initiatives in Europe.

An increase in our total Company operating margin to 15.4%, and significant relevant innovation across our business segments and around the world.

Starbucks' solid Q4 performance has ideally positioned us to go into the holiday with strong momentum supporting a powerful lineup of holiday beverages and [progress conference] and to further our commitment to continue growing sales and delivering increased profits to our shareholders in 2013 and the future.

Q4 also caps off a record full-year in which our sales rose 14% to a record $13.3 billion, and our earnings rose 18% to a record $1.79 per share.

What makes our performance during the quarter and the year even more remarkable is that both were achieved in the face of profound, continued economic uncertainty, and challenged consumer environments in markets all around the world in which we operate and compete.

Starbucks' ability to deliver the results we did in Q4 and 2012 is a reflection of the strength of our business and brand, our deep connection to our growing universe of global customers, and the correctness of our go-to-market strategies.

As we were all reminded at our leadership conference last month in Houston, the key to our success are the 200,000 Starbucks partners around the world who proudly wear the green apron and deliver the Starbucks experience to our customers every day.

To each of my partners I want to say that I am humbled by your dedication and commitment, and that you have my deep personal gratitude and appreciation for all that you do.

In fiscal 2012 Starbucks served nearly 3 billion customers who visited our stores, a statistic that testifies to the reach and breadth of our increasingly global brand and local relevance.

And while the 18,000 stores in 61 countries we have today may sound like a large number, the fact is that the opportunity for Starbucks to grow our business around the world in a profitable, disciplined, and deliberate fashion has never been greater or more exciting.

Over the past 12 months we added over 1,000 net new stores, with two-thirds of those being outside the US, and we remodeled more than 2,000 stores globally.

Our plans call for us to open an additional 1,300 net new stores and to remodel roughly 2,000 more in fiscal 2013.

We are well on our way to having more than 20,000 Starbucks stores on six continents by 2014.

After more than 40 years, Starbucks' world-wide appeal remains undeniable.

Starbucks is seeing strong and sustained growth in our core retail business across both the Americas, and China and Asia Pacific regions, where our comp store sales growth reached 7% and 10%, respectively.

I would like to personally recognize Cliff Burrows, President of our Americas segment, and John Culver, President of China/Asia Pacific, for their leadership in delivering the tremendous results they did in Q4.

Particularly noteworthy is that Starbucks' US business revenue grew 9%, and US comps grew 7% in Q4, reflecting the level of execution and intensity that is nothing short of fantastic, given the softer-than-expected performance we saw in Q3.

We accomplished our US results by taking swift and decisive action to drive increased store traffic and improve operating efficiency at the very first sign of the early summer-slowing in traffic that we and many other retailers began to experience.

And we continued to drive traffic in August by re-launching our popular and successful [trecrecy] campaign, and participating in a record-breaking, Living Social offer that was taken up by 1.5 million Starbucks customers in, believe it or not, in less than 24 hours.

These initiatives also enabled us to generate incremental profitable sales, further communicate Starbucks' powerful value proposition, and attract more customers to our US stores for the September rollout of our full beverage lineup than ever before.

As I mentioned earlier, the strong momentum we saw in Q4 has ideally positioned us as we head into Q1 of 2013 and the holiday season.

Our traditional red cups and holiday beverages are beginning to appear in stores as a prelude to the official kickoff of holiday of our US stores on November 13.

And I can tell you that we have the strongest and most exciting lineup of hand-crafted holiday beverages and limited-edition products in-store for our customers than ever before.

Also new this year is Starbucks' Christmas Blend Blonde Roast, a specially selected blend of Latin-American and aged Sumatra beans that delivers a noticeably light and cheerful note.

Christmas Blend Blonde Roast is a perfect compliment to our full lineup of holiday season offerings that extends both our blonde roast offerings and our best-selling Christmas blend portfolio.

But the big news for Starbucks this holiday season is the innovation and opportunity we have unleashed with Verismo, the only single-serve beverage system that delivers perfectly crafted Starbucks Cafe Lattes and Espresso beverages, as well as brewed coffee from a single machine.

If you haven't tried Verismo yet, I urge you to.

The Verismo System produces the highest-quality, best-tasting, in-home single-serve expresso and coffee beverages anywhere, bar none.

And it's the first and only single-serve machine that uses parts made from real milk to deliver beverage quality and versatility, meeting Starbucks' exacting standards.

In the eight months since we announced the Verismo System, we have successfully planned and executed the launch of Verismo in 6,400 retail locations, including premier specialty retailers like Williams-Sonoma in the US, where Verismo was chosen to be showcased on the cover of its holiday catalog.

Herods in the UK, and Starbucks stores across the US and Canada, and through online e-commerce channels in three other countries.

We are supporting Verismo with only the third national TV campaign in our 41-year history, elegantly, through the unique Starbucks lens, and in a way that introduces and celebrates Verismo System and elevates the Starbucks brand.

With more than 10,000 Verismo demonstrations and sampling events taking place over the next several weeks, we expect Verismo's momentum to accelerate through the holiday season and continue into the future.

In addition to launching Verismo, our Channel Development team has continued to innovate in the premium single-serve category with other new product introductions across the portfolio, including blonde roast and our new successful refreshers platform.

As a result of these and other initiatives, our Channel Development business increased revenues by 50% in fiscal 2012 to $1.3 billion.

We have expanded our global Channel Development presence now to 20 countries and we are targeting tens of thousands of new points of distribution.

But I can assure you, Jeff Hansberry and his team are just getting started.

This month marks the first anniversary of the Starbucks K-Cup launch, and I'm very pleased to report that in fiscal 2012, less than a full year of operation, we shipped nearly 500 million Starbucks K-Cups, and have garnered a full 15.6% share of the premium single-cup market, well above what people expected.

VIA also continued to grow sales in fiscal 2012.

VIA is now available in 14 countries and 80,000 points of global distribution.

It grew nearly 50% in FY '12, and garnered a 7% share of the premium single-cup category in US growth through channels in Q4.

Together, our complimentary and carefully planned and executed K-Cup, VIA and Verismo go-to-market strategies provide Starbucks with the strongest and most complete, comprehensive lineup of products, and the definitive winning hand in the premium single-cup category.

And there will be more innovations to come.

In 2012 we made significant headway against our ongoing plans to elevate and transfer our food platform, and bring authentic and delicious food to customers through the acquisition of La Boulange Bakery.

The fresh bakery products we are developing with the artists and bakers at La Boulange will rank among the very best bakery products you have ever tasted.

We've been testing new La Boulange offerings to a fantastic customer response and significant sales lift, and now plan to roll out La Boulange products in 2,500 company-operated Starbucks stores across the US beginning in the spring of 2013.

Evolution Fresh, another of our emerging brands, is also helping to expand and enhance our retail store and channel development operations and presence.

Last month we opened an Evolution Fresh store in San Francisco's Fillmore district, our third Evolution Fresh location and the first one outside of greater Seattle.

Our fourth location will be opening in Seattle's University Village Shopping Center later this month.

At the same time, our Channel Development segment is continuing to significantly expand the availability of bottled Evolution Fresh juices through premium grocery channels and Starbucks stores.

Evolution Fresh bottled juices are now available at over 1,500 grocery locations, including Whole Foods and Safeway, and approximately 2,200 West Coast Starbucks stores, where we have seen a 100% lift over the juice product it replaced in our stores.

And we are on track to continue extending distribution of Evolution Fresh into more of our made-to-US company-operated markets throughout fiscal 2013.

And Starbucks is making a big difference in the business in just the short time we have owned the company.

Sales of Evolution Fresh bottled juice through all channels in the latest quarter were up 50% over sales in the same period in 2011, prior to our acquisition of the company.

Our intention is to create another dynamic national brand with Evolution Fresh.

And to meet the anticipated demand for Evolution Fresh products, we are adding a state-of-the-art juicery in southern California in late 2013 that will have four to five times the production and packaging capability of the current Evolution Fresh facility.

As I have noted in the past, Starbucks is embracing the seismic shifts in consumer behavior that are well underway.

Let me now take a moment to share our progress and the investments we are making to continue our leadership in card, loyalty, social, digital and now mobile commerce.

All of which will significantly enhance our customers' experience with Starbucks.

Our card and loyalty initiatives are continuing to drive great convenience and value for many customers.

This has been a record year, with nearly $3 billion loaded onto Starbucks cards, with Starbucks cards transactions accounting for over 25% of US store tender.

The My Starbucks Rewards loyalty program has already amassed more than 10 million members, half of whom are active participants and have opted in through a sea of communications fronts.

And as many of you know, we recently unveiled a number of enhancements to our loyalty program in the US and Canada, including making rewards fully digital, making it easier for customers to earn free rewards, and including free food as part of the rewards option.

As a result, we are already seeing record numbers of membership sign-ups in the first few weeks of our new fiscal year, which really will bode well for fiscal and calendar '13.

The depth and breadth of our digital assets continues to grow, with leadership positions and engagement across Twitter, Facebook, Instagram, Pinterest, and many other relevant mediums.

All this progress will now become even more relevant, given the sea change behavior and experience enabled by the ubiquity and personalization of mobile technologies.

Our mobile payment platform has become the leading number one program for any consumer brand or retailer in North America, with now more than 2 million mobile payment transactions occurring every week.

And more than 100 million mobile payment transactions logged since the launch of Starbucks mobile payment app in January of last year.

We believe the rapid adoption of mobile gives us an opportunity to create a unique and much deeper relationship with our customers directly and in-the-moment like no other consumer brand or retailer.

We have the unprecedented ability to reach new customers, create awareness to new products, drive incremental transactions and explore new revenue streams in digital publishing.

Recently we have evaluated dozens of mobile payment solutions and companies with an eye toward trying to find a company with a similar vision and approach to creating a mobile payment platform, where the customer experience is paramount.

And that led to us to Jack Dorsey and his team at Square.

By partnering with Square and accepting their innovative Square Wallet mobile payment app in our stores, we are able to not only offer a complimentary mobile payment solution to our own apps, but we are also able to reduce our interchange fees for US debit and credit card processing.

We are looking forward to Starbucks customers being able to use the Square Wallet app to pay for purchases with their mobile phones in US stores later this month.

While we are proud of what we have accomplished thus far in mobile, we plan to continue to push the envelope in the future by adding features and interactivity in such areas as tipping, mobile ordering, and personalization.

And I can assure you, the best is yet to come in terms of the innovation that we're going to bring to marketplace that creates separation not only between us and other people in our space, but us and every other consumer and retail business.

While I've touched on the enormity of the global expansion opportunity for Starbucks that lies ahead, I'd like to take a few moments to update you on a few of our recent global initiatives.

Two weeks ago I was in India to participate in the extraordinary opening of our flagship store in the bustling Horniman Circle area of Mumbai.

Our Horniman Circle store, without question the most elegant Starbucks store we have created anywhere in the world, is a stunning two-level experience that celebrates sensitivity and respect for the beautiful tapestry of India's culture.

While at the same time embracing Starbucks' unique coffee heritage.

In the days following the opening of the Horniman Circle store, we opened our second and third store in Mumbai.

All three stores are exceeding our loftiest expectations.

I could not be more proud to enter the India market with the Tata Group, a global organization that shares many of the same values that Starbucks was founded on over 40 years ago.

Starbucks' opportunity in India is tremendous.

And I am confident that India will evolve into one of Starbucks' five largest markets over time.

We also continue to deepen our connection to consumers in China, where recently alongside Apple and Nike, Starbucks was named one of China's top ten foreign brands.

And just last week, Starbucks received Best Employer in China recognition.

These acknowledgements are testament to the dedication of our 15,000 Starbucks partners in China, who deliver the Starbucks experience to the millions of customers visiting our 700 stores in mainland China each week.

Now, despite recent economic reports pointing to a slowdown in China, it remains for us one of the largest and fastest-growing economies in the world, with the rapidly increasing spending power of a fast-growing middle class.

And a market that continues to represent a major, significant future retail growth opportunity for us.

And Starbucks' business remains extremely strong in China, as evidenced by a 52% year-over-year increase in sales and double-digit comps in China.

We're building the China market deliberately and in a brand-accretive way by making significant investments in our people, our systems, and our operations.

And the connection our partners are building with our customers in China gives me great confidence that we can ultimately bring the Starbucks experience to tens of millions of consumers through thousands of stores across the mainland.

In that regard, I am pleased to report that we are on track to reach our near-term goal of having 1,500 stores in China by 2015, and that China will soon be our largest market outside of the US.

Our journey across the China and Asia Pacific regions continues as we look forward to opening our first store in Vietnam in early 2013.

Finally, I recently attended the 10th anniversary celebration of Starbucks' entry into Mexico, meeting with inspiring partners and taking part of the opening of the market's first lead store.

With 350 stores in Mexico, it is Starbucks' third largest market within the Americas region.

Mexico is also our fastest-growing market in Latin America.

Together with our JV partner Alsea, we plan to open 150 net new stores in Mexico over the next three years.

Before I introduce Michelle Gass, President of Starbucks EMEA to share some of the developments -- and I'm happy to say progress -- we are making in Europe and in the UK, I want to tell you about the most important investment we will make all year.

An investment in our people.

Last month, 10,000 Starbucks partners gathered in Houston, Texas, for our leadership conference.

Just as with our transformational conference we held in New Orleans in 2008, Houston provided an extraordinary and inspiring three-day opportunity for us to connect our leaders to the heart of our Company, enhance and refine their coffee expertise, inspire leadership skills, and perfect the art of exceeding customer expectations.

The power and impact of the three days we spent together in Houston will reverberate throughout Starbucks this year and beyond.

And enable us to take our record-breaking fourth quarter and 2012 performance to a completely new level in the future.

It is now my pleasure to turn the call over to Michelle Gass.

Thank you, Howard, and good afternoon, everyone.

I'm delighted to be with you on the call today to update you on our EMEA business and the progress over the last year as our three-region operating model has taken hold.

And as the EMEA leadership team and I have embarked on our transformation strategy, or as we call it, our renaissance plan.

The region today operates across 36 countries in nearly 1,900 stores.

Over the last year, we've opened 111 net new stores, including 10 Company-owned and 101 licensed.

We've grown our geographic reach, most notably with our recently announced partnership in Scandinavia with Umoe Group.

We will open our first stores in the early part of 2013 in both Oslo and Stockholm with this terrific new partner.

As you know, the EMEA region historically operates at significant lower margins than the Americas and China/Asia Pacific regions.

There are several reasons for this.

In our Company-owned markets of UK, Germany, France, Switzerland and Austria, our portfolio is dominated by high-street shopping areas with occupancy costs 2 to 2.5 times that of the average occupancy cost in the US as a percent of sales.

This portfolio is also not as broad as in other Starbucks regions, where highly productive drive-throughs, small footprint stores, and a strong presence of captive audience-licensed stores also diversify the retail footprint.

All of these factors, coupled with the fragile state of the European economy and one of the fiercest competitive environments in the world, make for a robust, exciting challenge.

But on a positive note, the issues are largely within our control.

And we are taking action.

In the last year, we have focused on driving results against three key strategies, which are laying the foundation for a long-term profitable growth.

First, increasing the Starbucks brand presence, health, and relevancy across the region.

Second, unlocking the profitability of the existing base through focusing on top-line growth and on operating costs.

And third, positioning the region for growth primarily through licensing opportunities.

I have great confidence that the region will achieve meaningful revenue and profit-growth over the next five years and will deliver against our goal of mid-teens margin over time.

Let me recap how we performed in the fourth quarter and later I will add some color to the actions we are taking and the progress we are seeing.

In Q4 revenues declined 2% versus the prior year, driven by unfavorable currency exchange, but partially offset by 29% growth in revenue from licensed stores.

Same-store sales were down 1% for the quarter, driven largely by continued softness in Germany.

And even though the UK market delivered a slightly positive same-store increase for both the quarter and the year, this was damped by continued weakness in consumer confidence and disappointing traffic levels experienced by most high-street retailers throughout the London Olympics.

Beyond our Company-owned operations, our JV-licensed business has shown continued strength, with the Middle East, Turkey and Russia driving strong comp growth during the quarter and throughout the balance of FY '12.

The more encouraging news for the quarter and for the year is the progress on operating income.

While EMEA has had an operating loss of $6.5 million and negative operating margin of 2.3% for the quarter, it included $11.5 million of charges related to the optimization of our store portfolio and $9.2 million of asset impairments for underperforming stores in the UK, Germany and France.

Excluding these charges, operating margin improved over the same period last year, as well as the second and third quarters of this year.

We achieved this improvement through the efforts we have made on labor management, G&A, weight, and a broad emphasis on cost-control across all aspects of the business.

The European portfolio optimization work involves a number of actions, each focused on improving profitability and strengthening our P&L.

The adaption included a thorough review of the UK store portfolio, which resulted in negotiated lease termination charges, as well as the transfer of airport stores in the UK to one of our existing channel licensing partners as a fee.

As a result, operating margin contracted by 410 basis points.

As I mentioned, we realized $9.2 million of asset impairment for underperforming stores in the UK, Germany and France.

These expenses are a part of our normal quarterly review of underperforming stores, and are not included in the portfolio optimization charges.

They reported in-store operating expenses in our EMEA P&L and equate to a negative 320 basis points of margin impact in Q4.

In the fourth quarter we also transferred ownership of 17 stores in Ireland to an existing licensed partner, Entertainment Enterprises.

Ireland has always been a small market for us, and it made more sense to leverage a partner with the local knowledge and capability in that country to drive profitability and growth.

This results in a $4.9 million charge, which shows up in the Other Income line of the consolidated P&L outside of EMEA results.

Looking forward, there may be additional charges in the coming quarters, that would likely to be much lesser expense into Q4, as we have a handful of leases in which we are in the process of negotiating lease terminations.

We know this is the right course of action to take and will leave us with a healthier, stronger portfolio upon which to build.

As I mentioned earlier, our blueprint for change, the EMEA Renaissance Plan, has incorporated many lessons from the successful US transformation of 2008 and 2009 that I had the privilege to be part of, while applying the lens of unique business and consumer challenges of Europe.

We are leading the organization to deliver our goals -- foreign relevancy, margin expansion, and unlocking the region's growth potential through a disciplined set of actions addressing coffee expertise, our people, driving frequency and loyalty, and boldly telling our story.

I will share briefly with you some of the actions of the past 12 months, my first year leading the regional team.

Coffee and people is at the core of our business, and our brand has made central long-term focus of this plan.

Given how critical the role espresso plays in the lives of European consumers, we must deliver the best latte on the high-street.

In the last year, we retrained all of our baristas, we introduced [full mart], and made changes locally to respond to the needs of our customers.

Including changing the standard of our most popular drink in the UK, the tall latte to double the espresso.

Response has been positive, and we view this as a long-term investment to winning in the UK markets.

Equally, we have placed a significant focus on inspiring our people across the region, and on shoring up the strength of the Starbucks mission and culture.

I have personally traveled now to more than two-thirds of the countries we operate in, conducting round-tables and open forums with our customers and our people, helping to shape our plans ahead.

Driving our espresso focus through innovation, local relevancy and marketing will be the primary emphasis of the year ahead.

We have also applied great focus to enhancing the customer relationship and building loyalty and frequency.

The biggest move we made this year was introducing customers' names on cups, and putting Starbucks-style chalk name badges on our partners, enabling greater customer connection.

We are also placing a great deal of emphasis on the customer environment, marrying the latest designs [equal to] Starbucks with a local edge.

We renovated nearly 100 stores across the UK in time for the Olympics.

We opened a now globally acclaimed store in Amsterdam, two beautiful new stores in Madrid and Barcelona, and are preparing an unbelievable flagship store in Kuwait, with many more on the way.

We are also addressing value in relevant ways.

We launched Starbucks Card and My Starbucks Rewards across most of our Company-owned markets and some of our JV and licensed operations.

We are implementing value offers in markets across the region.

And we are dramatically increasing our presence in social media and connect with our customers through these important channels.

As I close out, I would be remiss not to acknowledge the recent media coverage surrounding our tax practices in the UK and across EMEA.

For 14 years Starbucks has been honored to serve our millions of customers across the region.

We have never avoided paying taxes and in fact, adhere rigorously to the local and county rules and tax laws everywhere we do business.

And we have demonstrated our continued willingness to be open and transparent about our operations and their impact on taxable income.

We look forward to continuing to clarify our position about our European tax position in the days and weeks to come.

And I'm so proud of our partners and how they have responded to customers and worked with one another throughout this period.

They allowed us to get close to the needs and the voice of our customers, and helped to ensure that this is simply a point in time along the way that won't affect our momentum nor our progress towards the objectives within the Renaissance Plan.

The work our partners are doing throughout the region, the passion they are bringing, the love they have for their customers and Starbucks brand, is at the core of the progress we are making.

I have great confidence that, like the US transformation, we are positioning this region for profitable long-term growth.

Thank you.

Now let me turn the call over to Troy.

Thanks, Michelle, and good afternoon, everyone.

As you heard from Howard and Michelle, we could not be more pleased with the trajectory of our business and the strong results we continue to deliver.

2012 was a record year for Starbucks, producing new highs in revenues, earnings, operating margin and return on capital.

The Company is stronger financially today than at any time in our history.

We have a healthier pipeline of profitable growth opportunities in front of us now than ever before.

And we're deeper in terms of talent and capability to pursue those opportunities than we've ever been.

I will review the fourth quarter performance of our three other segments, and the consolidated results for the quarter and the year.

Then I will update you on guidance for what we anticipate will be another strong year in fiscal 2013.

In the Americas, the fourth quarter was an impressive demonstration of the capability of that team and of their focus and adaptability.

Revenues grew 9% through the quarter, to $2.5 billion, with 7% comparable store sales growth.

Especially noteworthy about this result is that it came on top of 10% comp growth last Q4, which was the best quarter we've had in more than five years.

As we discussed on our last call, June and July were soft months in the US.

Cliff Burrows and his team took action throughout the US stores to turn the direction of our transaction growth.

Our store partners continued to provide outstanding experiences to our customers every day, we reintroduced [tree-reseed] in August and the annual fall favorite, Pumpkin Spice, in September.

We provided customers value through the Living Social offer.

And we provided customers another reason to visit their Starbucks store with the launch of Refreshers.

The result of this strong recovery of US comp growth in the quarter was 7%, with five percentage points of transaction growth.

America's operating income for the fourth quarter grew to $536 million, nearly 21% above last Q4.

Strong sales and a high level of operating efficiency again provided increased leverage, as we expanded operating margin by an outstanding 210 basis points to 21.4%.

Store operating expenses as a percentage of related revenues dropped 70 basis points to 37.4%.

Our experienced team of store managers adjusted labor schedules for the volatility we saw in the early summer periods, which led to the right levels of store partners at the right time to deliver an outstanding Starbucks experience.

Cost of sales and occupancy as a percent of revenues dropped 90 basis points over last Q4, due in part to increased sales leverage on our large-expense occupancy costs.

Now, looking in the China and Asia/Pacific region.

Significant revenue growth continues to drive tight margin returns.

Revenues of $198 million were 23% higher than last Q4, boosted by incremental revenues from the new stores that opened in fiscal 2012, along with comparable store sales growth of 10%.

The 10% comp growth was broad-based, as our forward Company-operated markets, China, Thailand, Singapore and Australia, all posted healthy increases.

This marked the 11th consecutive quarter of double-digit comp growth in CAP.

And while some [unlower] in the growth rate to the past several quarters, we've been expecting that the extremely high comp growth rate of recent quarters would moderate over time.

However, even with this expected slight moderation in comp growth, our business model in China remains outstanding, and our growth acceleration plans are on track.

In addition to the strength of comp growth in the region, new store performance remains strong.

The CAP team opened 132 net new stores in Q4, the most ever in a single quarter for this region.

Many of these were in China, where we ended the year at 700 total stores.

But the absolute number of new stores is not our primary focus in CAP.

We remain acutely focused on and encouraged by the performance of those new stores.

Stores opened in both fiscal '11 and fiscal '12 are delivering first-year sales of approximately three times their investment.

That is significantly above our targeted sales-to-investment ratio, and speaks both to the high quality of real estate our teams are securing, as well as the premium store experience we are designing and building.

A higher pace of growth means up-front investments to support it.

This includes initial rent as we prepare the stores for business, hire labor for the stores' first 8 to 10 weeks to set operational standards and understand the cadence of transactions, and other growth-related expenses.

These expenses were the largest contributor to the 340 basis-point reduction in CAP operating margin in Q4, to 32.9%.

A shift on our store portfolio composition was another contributor to the margin decline.

As we have discussed in the past, we expect that as we continue our very profitable and rapid growth in China, we will shift the mix of stores in the region from predominantly licensed today to somewhat less licensed in the future.

That business may shift will have the impact of moderately reducing CAP segment margins over time.

And the shift did impact margins in the fourth quarter.

In Channel Development, we completed a very active year and a strong fourth quarter.

Revenues of $319 million grew by $76 million over last Q4.

This increase of 32% was driven largely by sales of Starbucks and Tazo K-Cups, which have gained nearly a full point of market share in food, drug and mass channeling since June.

Channel Development achieved a significant milestone in Q4, as quarterly operating income exceeded $100 million for the first time ever.

This represents an increase of 26% over last year's fourth quarter.

Operating margin of 31.6% declined 160 basis points from last Q4.

A shift in product mix, as K-Cups grew their share of Channel Development revenue in the quarter, combined with higher commodity costs, totaled nearly 500 basis points of margin contractions.

Partially offsetting that margin pressure was a shift in timing of marketing expense and increased sales leverage.

Now I will review our consolidated results for the quarter.

It was clearly the best fourth quarter Starbucks has ever delivered, especially given the persistent macroeconomic uncertainty and the softness in June and July.

Consolidated fourth quarter revenues grew 11% to a record $3.4 billion.

That increase was driven by a 6% global comparable store sales growth, the 32% Channel Development growth I just discussed, contributions from stores opened over the past 12 months, and continued strong performance from our global licensed operations.

Our 6% global comp growth was driven by the strong results in the Americas, and China Asia/Pacific regions.

Five percentage points of the growth came from transactions, with one percentage point from average ticket.

Two-year comp growth of 15% in the quarter represents acceleration from both the second and third quarters.

Consolidated operating income grew 16% to $520 million in the fourth quarter.

Operating margin grew 60 basis points to 15.4%, driven primarily by increased sales leverage.

Commodity costs did not have a material impact on consolidated operating margin in the fourth quarter.

Earnings per share of $0.46 grew 24% when excluding the non routine gains in last Q4.

As a reminder, those non routine gains resulted from the acquisition of the remaining equity in our Switzerland and Austria markets, and the sale of corporate real estate here in Seattle.

The $0.46 EPS of this Q4 includes the two [cennial packs] of two items, the $11.5 million store portfolio optimization in the EMEA P&L, and the $4.9 million related to the licensing of Ireland that hit our consolidated P&L's.

The store closures and ownership changes are a key element towards strengthening the EMEA business and represent an important step in achieving our longer-term goals in that region.

For the full fiscal year of 2012, the results were equally strong.

Total net revenues grew 14% to a record $13.3 billion, with 7% global comp growth and 50% growth in Channel Development.

The 7% comps were driven by a 6% increase in transactions.

As we continue to seek new customers in our stores, we're also serving the same customers more frequently.

In fact, we are proud to deliver such meaningful growth without relying on significant price increases, as by and large we absorb the spike in coffee costs this year through disciplined cost management and a relentless focus on providing experiences in our stores that encourage frequent customers visits.

We also set records for both operating income and operating margin at $2 billion and 15.0%, respectively.

The operating margin expansion of 50 basis points over 2011 non-GAAP results was accomplished despite a negative 160 basis-point impact, or $214 million, due to higher commodity costs in fiscal '12.

Throughout the year, our operating teams did an extraordinary job of improving efficiencies and tightly managing costs.

Which drove leverage on our strong sales and offset the impact of historically high coffee costs.

The result of the revenue growth and margin expansion was record earnings per share, which for the full year reached $1.79.

That equates to 18% growth over last year's non-GAAP EPS of $1.52 per share, falling squarely within our stated long-term guidance of 15% to 20% annual EPS growth.

We opened 1,063 net new stores across the globe in fiscal 2012.

665 of those were licensed stores, which demonstrate the continued strength of the many valuable licensed partnerships we have around the world.

And the nearly 400 Company-operated stores we opened in 2012 are exceeding our first-year sales projections, indicating another class of stores that will contribute to long-term, sustainable growth.

The strength of our business results in significant cash generation, allowing us to invest in our existing portfolio stores and in future multi-channel growth opportunities, while also increasing the cash return to shareholders.

In the fourth quarter, we repurchased approximately 12 million shares of stock.

Additionally, today we announced that our Board has approved a 24% increase to our quarterly dividend, from $0.17 per share to $0.21 per share.

I will now give you an update to the initial fiscal 2013 outlook that I provided on last quarter's call.

We continue to target revenue growth in the range of 10% to 13%, driven by mid single-digit comp growth, approximately 1,300 net new stores, and continued strength in Channel Development.

The 1,300 net new stores represent an increase over what I provided last quarter, driven by further acceleration in China and Asia/Pacific.

We now expect CAP to open 600 net new stores in fiscal 2013, with roughly 50% of those being licensed.

China will account for slightly more than one-half of the CAP new stores.

Our Americas estimate of 600 net new stores and our EMEA estimate of 100 net new stores are unchanged.

Capital expenditures are now expected to be near $1.2 billion in fiscal 2013.

This increase reflects the growth in new stores, continued focus on renovations, as well as investment in additional manufacturing capacity.

Full-year consolidated operating margin is now expected to grow by approximately 100 basis points over fiscal 2012 as we continue to drive leverage.

I will provide operating segment margin targets at our investor conference in early December.

Given the strength of our global business, the momentum we carry into 2013, and the deep pipeline of profitable growth initiatives, we are raising our fiscal '13 earnings per share target to a range of $2.06 to $2.15.

This represents 15% to 20% growth over fiscal 2012.

While we expect each quarter to fall within that 15% to 20% growth range, our first-quarter EPS is expected to come in at the low end of that range.

This is due to investments unique to the first quarter, including our leadership conference, which was held in early October and cost approximately $30 million, and the launch of Verismo.

We are positioning Verismo for significant impact in the years ahead and are approaching this as a major platform launch, with significant spend in marketing, sampling and store labor.

As a result, we expect that Verismo will produce a net loss of approximately $30 million in the first quarter, and a total net loss of $30 million for the full year.

The launch of Verismo this quarter is just the beginning.

We will build and expand the Verismo platform in order to pursue the multi-billion dollar global opportunity.

And finally, we continue to expect a net benefit of approximately $100 million or $0.09 per share in fiscal '13 due to favorable commodity costs, which is included in our targets.

We believe that impact will be spread evenly throughout the year at approximately $0.02 to $0.03 per quarter.

2012 was a phenomenal year for Starbucks by every measure.

We strengthened our operational muscle with record productivity in the US, and enhanced capabilities around the world.

We strengthened our ties to our loyal customers with enhancements that provide significant rewards through our loyalty program.

We strengthened our global portfolio by opening profitable new stores, by closing unprofitable stores, and by selling smaller markets to local licensees.

We strengthened our product lineup with significant innovation around refreshment, health and wellness, at-home coffee, and a huge opportunity in food.

We drove strong financial results, reaching records for revenue, earnings, operating margin and return on capital.

And we increased cash returned to shareholders with prudent share repurchases and a growing dividend.

We are excited to leverage these strengths and momentum in 2013 in ways that greatly reward our customers, our partners and our shareholders.

And we are confident in our outlook of continued strong, profitable global growth in the year ahead.

With that I would like to turn the call back over to the operator for Q&A.

Rachel?

(Operator Instructions)

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

John Glass from Morgan Stanley.

Thanks very much.

I wanted to just go back to the US and the same-store sales that you reported, what the turning point was.

We all assumed you entered the quarter in July maybe comping 5%-ish but you ended at 7%, so it implies there was a fairly dramatic acceleration.

So was that a consistent acceleration to the quarter?

Was there a bigger response say to the Treat Receipt?

And just in general, what other elements do you think drove it?

Because what you did during the quarter was impressive from a promotional standpoint or from an execution standpoint, but I didn't think any of those stood out in my mind as being events that would drive comp acceleration to this magnitude.

So maybe any other color around that would be helpful.

Thanks.

Sure, John.

Thanks for your question.

Let me start just briefly and then I will ask Cliff Burrows, the President of our Americas business, to speak more specifically about the actions in the quarter and what the impact of some of those things were.

Yes, you're right.

July, similar to June, and as we discussed at our last earnings call in late July, was a soft month for us.

Soft, still growing in traffic, still total comp growth growing, but softer than we had been trending earlier in the spring.

As we progressed through August and September, we saw very, very significant recovery in our same-store sales and absolutely exited the quarter in a much healthier place than where we entered the quarter.

With that I will ask Cliff to speak a little bit more specifically to some of the actions we took.

Thanks, Troy.

Thanks, John.

It really was an intense focus on the operations of our stores, and our partners did an amazing job just getting about our daily work.

And that was focusing on the customers we had in front of us.

Our Treat Receipt was well-received by both our partners, because they're familiar with it, and our customers because it was an old favorite coming back.

Between Treat Receipts and Living Social, I would say that accounted about 1% comp growth in the periods where we run it.

And we also in this period launched our Refreshers platform, which was in beer, in hand-craft beer and in cans in our stores.

And all of that [gathered emense] and gave us good pace for the future.

So it really was a great focus on the business, and really pleased with the way everybody responded.

John, I just had one thing that the public didn't see directly.

And that is the use of all of the social media channels that we were able to leverage.

Starbucks is at any given month the leading brand on Facebook and Twitter.

As a result of that, we were able to leverage the level of engagement with a large number of customers, millions of Starbucks fans and customers, and direct them to the store in ways that really reduced traditional marketing spend.

And I think between that and the operations that Cliff talked about, the effectiveness of Treat Receipt and Living Social, we were in a position -- And then towards the end of the quarter, we began to have a great result with Pumpkin Spice Latte, which got off to a fantastic start despite the fact that it's been year-over-year.

All those things bode very well for the quarter, and as we said, a stunning turnaround from Q3.

Thank you.

Matthew DiFrisco from Lazard.

Thank you.

I just wondered if you can give us a little color on sort of those remodels.

I think you touched on a little over 2,000.

What you are seeing as far as volumes afterwards and the key initiatives to those remodels.

I guess, is it longer-term for setting up for better products and more products to sell?

Or is there also sort of a near-term added benefit with any sort of improvement on throughput during those high-peak times?

Because your traffic number looks extremely strong.

And I'm curious if that's a reflection in part due to some throughput initiatives.

Matt, let me start to start to address it, but I'm also going ask Cliff to get into a few more specifics.

We have, as you said, a long list it of major and minor and everything in between remodels over the past year.

And as Howard mentioned, I think 2,000 remodels planned and that we expect to be on a pace of a level like that for some time.

Now I would point out that of somewhere in the neighborhood of 2,000 remodels, a smaller number, somewhere in the mid-hundreds, are more major, significant kinds of things that might involve a very substantial change or expansion of the store.

Balances that may involve more minor changes that aren't as significant to remodel the stores.

So it's a varying degree of impact both on the store itself and on the results that come out of it.

Needless to say, and Cliff will go into more specifics, but as we do, particularly those major remodels, on that individual store we see a very, very significant increase in comp growth in that store when we open.

The store on Spring Street in Soho is a prime example of that, of the significant remodel and as a result of that, significant return on investment, and an enhanced customer experience.

I just mention that because it's in New York.

Matt, hi, it's Cliff.

The 2,000 you mentioned is obviously a global number, approaching 1,700 in the US last year, and a few fit into that category that Troy said.

And we are focusing on each refurbishment to make sure we treat it like a new store, and equip it to deal with the changing customer base and the changing demand around peak and at different times of the day.

We're looking at it to enhance not only the experience, the seating, the flow, and introducing innovation like clover.

And each time we innovate, we bring in clover.

And that really helps us in many ways.

Helps to us build the relevance with our customers, build our coffee authority and that intimacy, and just keep raising the conversation around coffee and the level of our execution.

And so there isn't a sort of a general number I would give you as the benefit.

Because each one of them is unique and each one of them we try and do the best thing for our partners in terms of the work environment, and our customers in terms of the experience.

And we'll do a similar number in the coming year in the US.

Thank you.

I just had one follow-up, also.

I guess you mentioned a little bit about the Evolution Fresh, the 2,200 West Coast stores, a 100% lift in that.

Was that also -- I'm not familiar, I haven't gone to one of those stores.

Is that similar to how you did the Refreshers as far as -- have you combined that with putting the ready-to-drink product out with also any sort of assortment of hand-crafted drinks with Evolution Fresh yet?

If I talk about Evolution Fresh in US Starbucks stores, it is bottle beverages only.

We have a range of six, of cold-press beverages.

And it ranges from orange juice, which is the most familiar and the best seller, and goes through to whether it's sweet greens or essential vegetables.

It's a wide range which supports our health and wellness platform.

And the increase that Howard refers to is a mixture of both ticket and volume.

But it has been well-received in every single market.

Future innovation will come from our learnings from our Evolution Fresh stores.

Of which we opened the latest one in Fillmore Street last weekend in San Francisco, and it has had a fantastic reception locally.

Excellent, thanks very much.

Jeffrey Bernstein from Barclays.

Thank you very much.

Just a, I guess a two-part question as we look to CAP, and I guess specifically, China.

One, just from a unit perspective, seems like there's obviously an acceleration of openings.

I know it's 300-plus in fiscal '13.

Considering you only have 700 in total, obviously that's a pretty sizable uptick.

I'm just wondering if you can give some color around real estate availability, whether you're seeing increased competition.

We've heard from others that's perhaps the competitive environment to get these sites going, mixed with the cost of going up with it.

I'm just wondering if you could talk from a real estate perspective.

And then, the other piece relates to the other driver of top-line, which would be comp.

And you mentioned, I guess, the 10%-plus comp, which I guess is an impressive string of 11 straight quarters of that double-digit.

I'm just wondering whether you view, like you said, deceleration -- like, how do you decipher between the deceleration due to the compares versus due to what you kind of acknowledge was a macro slowdown in China?

Thanks.

John?

Yes.

Hi, Jeffrey, this is John Culver.

You know, first off, the opportunity that we have in China is enormous.

And we continue to see very strong acceptance of the Starbucks brand and when we're opening our new stores.

We're opening both in our existing cities as well as new cities.

We now are in 52 cities across the country.

We opened 12 new cities this past year.

And as Troy touched on, we're seeing a three-times sales-to-investment ratio over the last two years.

So all indications for us is that China represents right now the most immediate and fastest retail growth opportunity that the Company has in front of us.

And with that, what we're doing are making significant investments around our people in terms of ramping up the investment, and the hiring and training of people to staff the new stores.

As well as investment in infrastructure from a supply chain and IT perspective.

We've also localized our design resource to help enable speed into the market of opening our new stores.

And then also invested heavily in research and development so that we can have locally relevant products that match the flavor profiles that our Chinese consumers want.

In terms of the real estate that we're seeing, we are seeing an abundance of available real estate.

And you know, we've invested in local teams in the major provinces and the major cities to go out and to capture that real estate opportunity.

And what we're seeing is that we've been very well received in the new cities that we're in, or we're going into.

Consumer response, we're seeing lines out the door.

And the new stores in the these new cities are exceeding our expectations.

So we're very optimistic and very bullish on the opportunity.

We're going stay very focused and very disciplined in the investments and monitoring the performance of our new stores and existing stores.

And we're going continue to drive relevant innovation into the stores so that we can continue to sustain the growth.

And as Troy pointed out in his comments also, there's a rebalancing that's taking place, that as we continue to accelerate the new store growth, more of our sales growth is going to come from new stores versus comparable sales growth.

So you're going to see a rebalancing of the portfolio.

And as part of that, more Company-owned stores versus licensed stores, which is going to have a slight impact on margin over time.

But is it just the follow-up?

Are you seeing any sign just from the macro perspective, you know, versus the compares, whether or not you think consumer shifting to lower-priced items, or anything concerning just compare-driven slowdown in comp?

I haven't seen anything that's concerning to me at this point in time.

I mean, we monitor this very closely, obviously are aware of other people's challenges in China.

But for us, we're continuing to make the investments, we're taking a long-term view, and we're pushing forward.

And Jeff, I would also just add to that, that we are continuing to grow traffic in China.

We're continuing to grow ticket in China.

We're growing healthily across all day parts.

And the two-year comp growth is remaining very, very strong if you compare that over the last several quarters.

I think that speaks to the fact that, yes, we're up against tougher compares.

It wasn't all that long ago, just a couple years ago where averaging of volumes in our business in China were roughly a third of US levels.

They are now well greater than half US levels and catching up.

And by the way, that comes at a point in time when average unit volumes in the US have been growing and are at all-time record levels here in the US.

And yet China has been growing quickly.

So we don't see any concerns about growing volumes whatsoever.

Hey Jeff, just one other thing I would like to also comment on, you know, in terms of real estate.

One of the things that we did earlier this year is host the first-ever landlord real estate conference and summit, where we brought in all the major owners of key developments across China.

And Howard and I and Arthur Rubinfeld had the opportunity to sit and address them and talk about the investments we were going to make in China from a growth perspective, talk to them and share new designs.

And really start to build the unique partnerships that we wanted to go after with these key landlords.

And that is paying huge dividends for us.

Very helpful, thank you.

Sara Senatore from Sanford Bernstein.

Thank you.

I wanted to follow up on the top-line in the US.

Obviously, again, very impressive.

I'm wondering, you know, as you look forward -- and it's also equally encouraging that you're sticking to the sort of mid single-digit comp guidance overall.

If you could talk a little bit about, you know, A, what your expectations are for the demand environment, given that I don't think the overall environment got better, it's just you seem to reaccelerate.

And B, if you can talk a little bit about in terms of the contributions.

Is it more from new products?

Is it from Verismo, is it from things like, more like the Treat Receipt, being a little more aggressive on social media, that kind of thing?

Just so we have some comfort in the bottoms-up driver of the comps.

This is Howard.

I will start.

I think it's a very interesting and multi-dimensional question.

If you look at the last few years, there's no question that the economic environment in the US has been very challenging, fragile, and depending on the region, very difficult at times.

I'm not an economist but I would say that the consumer environment is somewhat bifurcated and has been for a couple of years.

And I wouldn't describe Starbucks literally as a luxury brand.

But I think we occupy a very unique space that is the premium brand and luxury brand within our space.

At the same time, we are still very much an affordable luxury by not only people who are at the high-end of luxury consumers, but people who can afford Starbucks in all walks of life.

In addition to that, I think we have been able, as evidenced by Q4 -- and I think this is really important and highly relevant.

We've been able to thread the needle, to maintain and preserve and enhance our premium position as a premium brand.

While at the same time developing, offering, and creating value propositions for our customers that in no way dilute the equity of the brand but reward our customers by, in a sense, putting our feet in their shoes and developing value for them.

Having said all that, I think we are highly confident that, despite any turn in the current economy that we can anticipate, that we have the tools to resources.

And most importantly, the power in the marketplace to navigate through this by what we've been able to learn and the muscle memory that is inside the DNA of the Company since transforming the Company in 2008.

I do think the burden of proof is on companies and consumer brands to recognize there is a seismic change in consumer behavior, as I alluded to in my remarks, as a result of social and digital media and the emergence of mobile commerce and mobile payments.

But we are in the most desirable position because of the investments we've made over the last few years to not only be the leader in the space, but now have the tools, the resources and the capability to leverage those channels and means in a way that is almost unparalleled in the marketplace.

So that the short answer is, we are optimistic that we -- we're confident that we can continue to navigate through changes in the economy.

And we've done it now year-over-year.

And I think the turn in Q4 is not only stunning, but gives us great confidence as we head into fall holiday and 2013.

Cliff?

Yes, if I could answer, sorry.

The other piece I think is about our people.

We have invested greatly in our managers, in our leadership, and giving tools to our partners to do their work.

And I think that has really helped those in terms of the amount of time we have to connect with customers to improve the quality of the customer experience and the relationships we form.

I think there's nothing better to support that than the fact we have 3 million gold card members as part of our My Starbucks Rewards.

And that just gives this dialogue an immediate feedback.

And such a richness.

I think just to give a little bit of additional [clavatis], we've seen strong growth across the whole of the US in August and September.

And if I look back on the year as a whole, I would also say that the work we've been doing around day parts, whether that is building capacity at peak or enhancing the food offer around other day parts, we have seen growth on all day parts.

So we continue to grow at peak in the morning, at lunch, afternoon, and now into the evenings.

I think that is what gives us the confidence about both the opportunity to grow more stores in the US, and to continue to grow average unit volumes by expanding our day parts and our ability to deal with peak capacity.

Thank you.

Diane Geissler from CLSA.

Hello.

Can you hear me okay?

Yes.

I wanted to ask if you have seen any changes in the competitive dynamics within the CPG channel, given the expiration of the patents on the K-Cups.

Have you seen any movements there from additional SKUs?

Diane, we'll have to introduce Jeff Hansberry, who's on the call and is, you know, President of our Channel Development business, and he will take that question.

Hi, Diane, thanks for your question.

Yes, we have.

We have seen the introduction of some private label offerings in the K-Cup space that have been previously announced that I think we're all aware of.

And we're starting to see some of those begin to show up on retail shelves.

We have not seen a significant impact, though, to retail pricing or the competitive space.

And in fact, we continue to see strong demand for Starbucks K-Cups from our customers.

Next question.

Keith Siegner from Credit Suisse.

Thank you.

I just wanted to ask a question, thinking about, you know, all the various initiatives that launched this quarter, from Treat Receipt, Living Social, a number of different loyalty programs.

There was a lot of product news, marketing news and other promotion news in general, some of which was really unique and you kind of differentiated it.

As you enter a period of deflation in 2013 and maybe beyond, does this free you up to, say, do a little bit more of this activity than maybe you used to?

Is Q4 somewhat the new base level?

I mean, we've seen product and other news working very nicely across the sector.

Again, does this deflation give you an opportunity to, say, ramp that effort from maybe what we've seen historically?

Thanks.

Thank you for the question.

This is Howard.

I'd respectfully say no.

I think all of us at Starbucks are deeply committed to preserving and enhancing the equity of the Starbucks brand.

And as a result of that, we want to be extremely disciplined and thoughtful about how, when and with who we might do things that create an offer, whether it's Treat Receipt that we did on our own, or the relationship we developed with Living Social.

I don't think that you are going see Starbucks go on sale or anything like that.

I do think that we have to be ultra sensitive to the economic issues and the pressure on the consumer.

But I think we've demonstrated over 41 years that the best anecdote for us is the experience we create in our stores, it's the quality of the coffee and the level of innovation.

I think what we haven't talked about today because it isn't appropriate, is the pipeline of products, categories, and innovation that we have in the near- and long-term future.

Which I think is the strongest pipeline in the history of the Company.

We've taken great steps to recognize that the status quo in our business or in any business isn't going to be good enough.

But I don't think we are going to go down the road of discounting Starbucks or doing things on an ongoing basis.

That was highly selective at the time.

And we're not going to do that on a consistent basis.

Jason West from Deutsche Bank.

You guys touched a little bit on the food program that you are working to roll out with the upgrades there with the La Boulange product line.

If you could talk a little bit about what you have seen in the West Coast markets where you've tested that.

If you have any details or anecdotes or figures you could share on that.

And sort of what it looks like from a customer perspective when you make those changes.

Thank you, Jason.

It's Cliff.

It is very early days, and we have had 10 stores open in San Francisco where we've been developing and testing a specific line of pastries and muffins and the like, for the morning business.

Really encouraged by that.

That's really been the very early steps.

This week and next week, we launch in San Jose.

And that will be our first time outside of the San Francisco market.

That will give us new learnings.

The reaction from our partners and our stores about the quality of the food and the enhanced pride they've got to share those products with the customers, the taste is absolutely fantastic and the reaction from customers in stores we've served it so far has been fantastic.

I think we'll be in a much better position after the San Jose launch to give a bit of color, a bit of flavor, and more detail of our rollout plans at the analyst conference in early December in New York.

So nothing specific just yet, but we've seen a great reaction so far.

Michael Kelter from Goldman Sachs.

Yes, I had a few margin questions, I guess, for Troy.

The first is, you know, you raised your operating margin guidance for 2013 from 50 to 100 basis points initially, to 100 now.

And I wanted to understand the puts and takes there, and why you felt comfortable taking the guidance up before the year even started.

And secondly, maybe talk about your visibility into 2014, given coffee costs remain in the 160 range, which as I understand it, is well below your lock cost for 2013.

Thanks.

Thanks, Michael.

Yes.

Let me speak to the last part first.

We have been doing some buying, early buying into fiscal '14 on our coffee needs.

And we're not very far into 2014 yet, but we're going down that path a little bit, and we'll talk about that in a bit more detail at the conference in December.

Suffice it to say, though, as we've talked about before, the early read and what we can see is that 2014 is likely to benefit from reduced coffee costs once again.

The order of magnitude is too early to tell.

But what I would point out is that we will exit the year of 2013 with coffee costs significantly lower through our P&L than we entered the year 2013 coming to our P&L.

But again, that's a comment given what we see today, with not very much of 2014 locked at this point in time.

Now, in terms of margins, we raised it today it to the 100 basis points of improvement, given a number of things that we've seen as we've come through the fourth quarter.

The momentum we have both on the top-line, as well as the completion of the operating plans that we put together annually in the summer, prior to the start of the new fiscal year.

And that's given us confidence given, again, both the growth we see around the world, the investments that we know we need to make, and new initiatives and growth opportunities we have in the future.

And the margin improvement opportunities we have all throughout the P&L in supply chain, in operations, management, leverage of G&A, in improvement in Europe, which we're expecting based on, as you heard from Michelle, some of the many changes that her and her team have been tackling over there.

So I would expect margin improvement really in a number of places in our business.

And it's all of that type of visibility that's given me the confidence in the improvement I've talked about both in terms of operating margin, as well as earnings growth in the year ahead.

David Palmer from UBS.

Hi, congrats on the quarter and the year.

I know it's early days on the Verismo, but what is some of the feedback you're getting from retailers and your own store managers on the machine, the strengths and weaknesses, versus other products that are out there in the single-serve market?

Jeff, you want to start?

Sure.

Hi, David, Jeff Hansberry.

You know, we are very encouraged on the Verismo system.

For us, it's a first in a number of ways.

It's the first system that makes Starbucks-quality lattes, expressos and brewed coffee, all from one machine.

We've got natural milk pods that are made from real milk that deliver a great latte.

And for the first time ever, we're able to have Starbucks partners, our baristas, actually go out and meet with customers in specialty retail stores, and tell the story of Verismo and tell the story of Starbucks.

So we're off to a very good start.

Our shipments are in line with our expectations.

But importantly, with a new system like this, we are listening very closely to our customer feedback.

And the majority of feedback is very positive.

We are listening for customer opportunities for improvement, and we'll continue to do so.

Jeff, you want to just address the attachment on pods that we're seeing?

Well, it's still very early.

We've only got a month's worth of data.

But at purchase we're seeing significant multiples of purchases of pods.

Actually well ahead of our expectations.

The other thing I would add, and I think this is important, and Troy alluded to this in his remarks.

The launch of Verismo is the launch of a product, but behind the scenes, it is the launch of a platform and a deep strategic commitment that we have to the single-serve category, domestically and globally.

If you look around the world at what an espresso has done building a multi-billion-dollar business, what a Keurig and Green Mountain have done.

And then the nascent space that we believe exists in Asia and our brand position, this is a global long-term, multi-billion-dollar business.

And we are just getting started.

Verismo is just the beginning.

John Ivankoe from JP Morgan.

Thank you very much.

A question on Europe specifically, if I may.

You know, I mean there was a little bit of defranchising activity, I guess.

And Ireland, specifically, you pointed out.

And I just wanted to get a sense of how much of an opportunity that may exist for your existing Company-store base.

I mean, whether it is in Switzerland or France or the UK or Germany.

But how do you pursue more of an asset-light model in those markets, and whether there would be any constraints to owning fewer Company stores while still maintaining your footprint in any of the major markets where you currently are.

Hi, John, it's Michelle.

Thanks for the question.

You have hit the central part of our strategy going forward, which is a -- really a sea change in our operating plan.

We see the licensing and franchising opportunity as tremendous.

And it does a couple things.

First of all, it gives us access to places far beyond the high-street which, as I mentioned in the call earlier, is largely where we are penetrated.

And we have not only agreed with our existing great partners like SSP, Tostada Grill, to have a more-accelerated plan, but also bringing in new partners.

Like for example in the UK, Euro Garage, which is going to help us and compliment with us our plans to expand into hundreds of drive-throughs across the region over the next few years.

It's an absolutely tremendous opportunity that's largely about the new growth, and our new growth will be dominated by licensing.

We also are actively looking at the franchising opportunity, and we have put that strategy in place in the UK.

And we're looking to expand that strategy across Continental Europe.

And then as it relates to our existing base, we will look at smart opportunities that make sense for the business and for our customers.

Greg Badishkanian from Citi.

Great, thanks.

Maybe if you could give us a little bit more color in terms of the coffee consumer, as well as the competitive landscape in Europe.

And maybe any changes that you've seen over the last quarter or two.

Yes, thank you for the question.

As I said earlier, we face tremendous competition not only with, I will call them bigger chains, but also with many small operators across the region.

As I said, I've visited now many, many markets throughout my first year.

And what I will tell you, consistently across both our customer and our partner feedback is, what the customer is looking for is the Starbucks experience.

And that what we bring is unique product, whether it's our expresso, our Frappuccino, importantly the environment, free Wi-Fi, all of which are assets.

And we're also very focused on building like we've seen in the US, our digital platform, our Starbucks rewards platform, et cetera.

So, you know, I would say that there hasn't been tremendous change per se over the year, but we are getting a lot closer to the customer and navigating in ways to bring local relevancy.

And that relates to, as I mentioned, focusing on expresso, bringing in a new level of innovation in that category.

And I'll be speaking to that when we're together in December.

That's not only with product but in delivery systems.

It's also around our food and, importantly, our environment.

And we have now built a local design team in Europe, Amsterdam and some in the UK, to really bring that local design edge to the customer experience.

Bonnie Herzog from Wells Fargo.

Hello.

Hi.

Just sticking on, you know, Europe, I just have a few questions.

Could you provide more color on how you expect to improve your food offering in Germany?

And then in general, what are some of the steps you are taking to develop a deeper consumer connection throughout Europe?

And then how long do you anticipate this will take?

And finally, could you talk a little bit more about your action plan to fix some of your supply chain issues in the region?

Sure.

Thank you, Bonnie, for the question.

I think there's a few layers to that.

First, let me address the customer experience.

To build on what I said, really emphasizing what Starbucks has done so brilliantly over the last four years is the first task at hand.

And we have done some things new in the region that we haven't done anywhere else in the world at this scale.

Which is things like deepening the personal connection, names on cups, names on partners.

And I can tell you as I've done roundtables since we've put that in place, the customers are really seeing this now as a unique thing that Starbucks does.

And they're getting to know their customers in much deeper ways.

We're taking advantage of our social media channel.

We're outpacing many of our competitors in the region.

We have more than doubled our presence on Facebook and Twitter.

We have done new websites across the region both in Company-owned and in licensed stores, all of which are surrounding and enhancing the customer experience.

As it relates to food, we've made nice progress.

I will tell you we are just getting started.

In the UK, we relaunched our muffin platform, dramatic improvement in quality.

We're seeing that show up in customer response and in our sales.

We're also doing some testing on new distribution models for food.

We're working through -- and we've stated this throughout the year -- we had a major change in our logistics, and we're working through that.

We're very confident that as we look to the year ahead, we've worked out some of the start-up challenges that any retailer would have with that scale of a change.

And then to your specific question around Germany, as we studied the food opportunity there, there's lots of regional opportunities that we can take advantage of.

At the core of Starbucks and the customer of Germany, they want the core offerings.

They want the muffins and the cakes, and we have an opportunity to do a better job there.

Thank you, Michelle.

That concludes Starbucks' fourth-quarter and fiscal year-end 2012 conference call.

We thank you all for joining us.

We'll talk to you again in early December at our biannual analyst conference.

Thank you, and good day.