星巴克 (SBUX) 2013 Q4 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to Starbucks Coffee Company's fourth-quarter and FY13 earnings conference call.

(Operator Instructions)

Thank you.

Ms. DeGrande, you may begin your conference.

Thank you, Mike.

Good afternoon, this is JoAnn DeGrande, Vice President of Investor Relations for Starbucks Coffee Company.

Joining me on the call today are Howard Schultz, Chairman, President and CEO; John Culver, Group President of China/Asia Pacific, Channel Development, and Emerging Brands; and Troy Alstead, CFO.

This conference call 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.

This conference call is being webcast and an archive of the webcast will be available on our website at investor.starbucks.com.

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

Howard?

Thank you, JoAnn, and welcome to everyone on today's call.

I am very pleased to discuss the record Q4 and fiscal 2013 results that Starbucks reported today.

Q4 capped off what was, without question, the best year in Starbucks 42-year history, driven by robust innovation and disciplined operating and financial performance across each of our business segments and virtually around the world.

Continued strong comparable store sales growth of 8% in each of our Americas and China Asia/Pacific regions in Q4 combined with positive comps of 2% in EMEA to produce global comp store sales of 7%, marking our 15th consecutive quarter of comp growth in excess of 5%, despite continued challenging economic and consumer headwinds in many of the global markets we serve.

Starbucks' consolidated Q4 revenue rose 13% to a record $3.8 billion, while operating leverage and a continued focus on controlling expenses enabled us to expand our operating margin to a full 220 basis points over last year, to a quarterly record of 17.6%.

And outstanding execution across the Company enabled us to deliver record Q4 EPS of $0.63 a share to our shareholders, a full 37% over last year's Q4 and the highest EPS of any single quarter in the 42-year history of our Company.

For the full fiscal 2013, Starbucks increased revenues by 12% to a record $14.9 billion, expanded its operating margin 150 basis points to a record 16.5%, and drove a 26% increase in EPS to a record $2.26 per share.

Noteworthy and immensely gratifying is that each one of our business segments contributed to our remarkable performance in fiscal 2013.

Equally significant is that each segment contributed to growing the equity and trust of the Starbucks brand around the world.

With over 3 billion customer visits to our more than 19,000 stores in 62 countries around the world in fiscal 2013, Starbucks is literally firing on all cylinders like never before.

But let me tell you we're just getting started.

I believe that fiscal 2013 will prove to be an inflection point and a springboard to even greater opportunity and success in the future because of the strategic flywheel we introduced to you in July, through which we leverage our global store footprint, growing CPG presence in world-class digital and mobile assets, is driving performance and gaining increased momentum.

I'll provide a brief overview of segment performance in Q4 and then turn the call over to John Culver, Group President of Starbucks Coffee China Asia/Pacific and Channel Development and Emerging Brands to provide detail on those key businesses.

Then Troy will take you through the financials in detail and provide you with an update on our Fiscal 2014 outlook.

But let me pause and congratulate Troy, as I look to him, on his promotion to Group President, Global Business Services, in addition to his ongoing role and responsibility as CFO.

Thank you, Troy, for your leadership, our 20-year partnership, and for the tremendous contributions you have made to the Business as CFO over the last 5 years.

Now turning to the Americas.

The momentum we reported in Starbucks Americas segment in Q3 continued in Q4, with a stunning 8% comp growth driven by a 5% increase in traffic and a 3% lift in ticket.

Noteworthy is that the 8% comp growth we recorded in the US in Q4, an amazing accomplishment given the size and maturity of the store base we are comping against, representing our 15th consecutive quarter of US comp growth in excess of 7%, and that many of our over 2,000 new renovated or relocated US stores were the strongest performers.

Strong performance in both our US and rapidly growing Latin American businesses contributed to 11% increase in total Q4 Americas revenue to a record $2.8 billion.

Having just returned from a market visit to Canada, a great Starbucks market with over 1,300 stores, where I witnessed firsthand the deep passionate sense of mission that our partners are bringing to their customers and the communities they serve, and the strong leadership provided by Annie Young-Scrivner, President of Starbucks Canada, is bringing to the market.

In Q4, we recorded the strongest comp growth in Canada in 13 quarters, helping us exceed $1 billion of full-year revenues in that market for the first time ever.

Building on the strong summer sales in September, the Americas region kicked off for its fall promotional calendar, with what has become our most popular seasonal beverage ever, pumpkin spice latte.

2013 marks the 10th anniversary of PSL, with customers having purchased more than 200 million PSL beverages since launch.

Despite the proliferation of knock-offs and copycats, sales of Starbucks PSL beverages are as strong as ever and once again exceeding expectations as customers continue to embrace the quality of the original Starbucks PSL.

Also in September, we debuted a new single-origin coffee from Ethiopia, the birthplace of coffee.

And in recognition of our 42-year history of purchasing Colombian coffee and our plans to open our first store in Colombia next year, we introduced Colombia Caldas, a wonderful Starbucks Reserve.

Recently we launched a national marketing campaign around coffee, entitled Starbucks higher arabica standards, that will benefit both our retail and CPG businesses.

These initiatives underscore Starbucks' ongoing commitment to bring in the world's most rare and exotic coffees for our customers and to constantly reaffirming our coffee leadership and authority worldwide.

In Q4, we also made solid progress against our plans to expand our La Boulange baked goods platform.

La Boulange products are now available in more than 3,500 Starbucks stores in the US, and we are now on track to offer La Boulange it in all 7,000 Company-operated stores in the US by the end of fiscal 2014.

Food continues to be an important component of our growth strategy and we are extremely encouraged by both customer response to La Boulange and the sales lift we are seeing over the food products La Boulange replaced.

Building on this success, we have begun testing new La Boulange lunch concepts in a number of our San Francisco stores and targeting an initial rollout next fall as part of our plan to elevate and expand our lunchtime day part.

In the year since we acquired La Boulange, we have demonstrated the significant strategic benefits of the acquisition through the enhanced quality of our food platform and the corresponding sales incrementality it is driving.

You have also undoubtedly heard that we are exploring another exciting innovative concept -- Starbucks handcrafted carbonated beverages in Atlanta and Austin, as well as in Japan and Singapore.

These efforts are part of a larger plan to enter and innovate in the cold carbonation industry, an over $100 billion global category, by leveraging our unique, customized beverage retail platform expertise to deliver innovation and personalization to customers like no other industry participant ever has.

Customer response to our carbonation innovation has been encouraging and we look forward to sharing more details around our plans for cold carbonation in the months ahead.

Stay tuned.

Beginning this Friday, we will begin rolling out Starbucks holiday beverages in our iconic red cups.

A new gingerbread latte recipe and the savory La Boulange almond croissant will join a wide variety of other innovative and delicious offerings that promise to make this holiday and winter season our most exciting and successful yet.

Turning to the EMEA region, I'm very pleased to report that the early progress we began to see in our Europe, Middle East and Africa region in Q3 continued in Q4, with positive 2% comp growth to the second consecutive quarter.

As I have previously shared with you, the leverage and learning from our US transformation, combined with strong leadership in the region, are driving beverage and food innovation in efforts to elevate and enhance the customer experience across the region as we open our 2,000th EMEA store this quarter.

We are particularly encouraged by the solid performance we saw in the UK, our single largest market in the region, supporting our view that an early turnaround in EMEA may be underway and that we are moving down the correct path towards sustained profitability.

We also opened 34 new licensed and franchised stores in Q4, early progress against our plans to add more licensed and franchised store in our EMEA portfolio.

Let me now turn to Channel Development and emerging brands.

John will be providing an update on our fast-growing Channel Development and emerging brands business, but a few noteworthy highlights I'd like to share with you.

We have already exceeded the aggressive growth plans we laid out for Evolution Fresh upon acquiring the business and brand in November 2011.

A wide selection of fresh, healthy Evolution Fresh juices are now available in more than 8,000 Starbucks and grocery retailer cold cases and almost all Whole Foods locations nationwide.

Earlier this month, we reached a significant milestone with the opening of our new state-of-the-art juicery in California.

The new juicery will employ 190 Starbucks partners and quadruple our capacity to produce Evolution Fresh brand cold pressed juices, enable us to accelerate our plan to significantly increase our share of the $1.6 billion super-premium juice category.

As I said in the past, the category of tea, a $90 billion global industry that is ripe for innovation, is another major strategic opportunity for us that leverages all of our core capabilities and existing infrastructure.

We are making significant progress against our plans to integrate, develop, and expand the Teavana retail platform.

Last week, we were in New York City for the grand opening of a reimagined Teavana fine tea and tea bar store on the Upper East Side, to be followed by a second store in Seattle's University Village shortly.

The store in New York is stunning, but beyond the aesthetics, the reimagined Teavana store brings the romance and theatre of handcrafted beverages to the tea category like never before.

We are convinced that with Teavana, Starbucks can reinvent and do for tea just what we have done for coffee and that we can grow and expand the tea industry and the tea bar concept by introducing a wide, innovative array of handcrafted tea beverages, tea-inspired food, and world-class tea merchandise.

And with tea being a larger opportunity than coffee outside of the US and Canada, we see a future with Teavana stores across North America and around the world.

What first drew us to Teavana was the company's unmatched knowledge and authority around all things tea.

Then we learned about Teavana's extraordinary tea sourcing expertise and capabilities.

In the quarters ahead, you will see how we are expanding and deepening the presence of high-quality Teavana-branded teas within Starbucks stores in order to leverage tea as a driver of additional customer occasions, creating wide recognition for the Teavana brand, and adding another layer of growth within Starbucks stores.

The opportunity to innovate within the global tea category is significant and we are poised to bring an unparalleled retail experience to customers around the world.

Let me turn to mobile, digital, and loyalty.

Perhaps no single competency and capability is enabling us to elevate and amplify the Starbucks brand and to deliver and enhance Starbucks experience to our customers more than our global leadership position and continued investment in mobile, digital, and loyalty innovations and technologies.

And no single competency is more important to the success of our proprietary strategic flywheel that is adding so much value to the Starbucks brand and our financial performance.

Fiscal 2013 was another significant record year for our card program, with over $4 billion loaded globally, and nearly one-third of all North American store tender paid with a Starbucks card.

At the same time, our loyalty program expansion continued around the world including 11 significant new markets, including Germany, Hong Kong, and the Philippines.

We have also begun integrating our emerging brands and adding a number of exciting new features to the My Starbucks Rewards program.

Members can now earn and redeem My Starbucks Reward stars in Teavana stores and redeem stars for Evolution Fresh juices and other bottled Starbucks ready-to-drink beverages in Starbucks stores, all of which further leverage our world-class card and mobile payment programs, providing enhanced value to our customers.

Today, with 11% of our US and Canada in-store transactions being paid for with a mobile device, Starbucks is far away the clear leader in mobile payment.

We are encouraged by how our customers have fully embraced our mobile apps as the most convenient way to pay, reload, and keep track of their loyalty rewards.

And with a current average of over 4 million mobile transactions per week, and more than 8 million customers using our mobile app, Starbucks mobile platforms are fast-growing customer touch points.

Through them, we are communicating with and delivering innovation to our customers in a way that no other retailer can and on the horizon are enhancements to mobile apps that include mobile ordering and digital tipping are on its way.

As we enter the last 2 months of calendar 2013, we do so with exciting plans for Veterans Day, Thanksgiving, and the Christmas holiday shopping season that we know will delight our customers and further add to our operational and financial momentum.

There simply has never been a more exciting or more important time for our Company.

I'd like to conclude by congratulating and thanking my 200,000 fellow partners who proudly wear the green apron for the exemplary results we've achieved in 2013 and extending my heartfelt appreciation to them for all they do for our customers all around the world every day.

I want to close on a very personal note.

Fiscal 2013 was the year in which Starbucks recorded record financial and operating performance.

It was also a year in which we delivered record value to our shareholders, with over $20 billion increase in market cap [alone].

But a record of which I'm particularly proud of is that in fiscal 2013, our partners, our employees, realized also over $230 million in value as a result of the commitment we made over 20 years ago to link returns to our shareholders and rewards to our people as well, by providing equity in the Company to all of our full and part-time workers who work more than 20 hours a week.

It is evident that 25 years ago, when we set out to build a great enduring Company, we say we want to achieve the balance between profitability and a social conscience by sharing our success with our people, by providing a great opportunity for our customers, and doing everything we can to enhance the communities we are doing business with.

This has been a phenomenal year, a stunning year for our Company, and for all of us at Starbucks, it is with great pride that we present Q4 and year-end results to you.

John?

Thank you, Howard.

2013 was indeed an extraordinary year for Starbucks and I couldn't be more proud of the significant role the China and Asia/Pacific region and the Channel Development business is playing in our overall success.

I'll begin with the incredibly strong results for CAP, Starbucks' fastest growing region, with 13 countries, close to 4,000 stores, and nearly 70,000 partners serving 11 million customers every week.

As you can see from our results, the growth throughout the region continues to be a meaningful component of Starbucks' overall story.

For the quarter, I'm very pleased to share that the region is reporting record results in three key areas -- total revenue, total operating income, and new stores opened.

In the fourth quarter, revenue grew a very healthy 29%, reaching $256 million, which was driven by 8% comp growth, and the opening of 588 net new stores in the year.

This store growth represents a 31% increase over the prior year.

In the fourth quarter, we delivered $96 million in operating income, which represents a 46% increase over the prior year.

Operating margin increased to 37.5%, a 440 point basis point improvement over last year.

This was driven by a combination of strong sales leverage, lower operating costs, and a reduction to our estimated asset retirement obligations on certain store leases.

Today, we have a very well-balanced portfolio of Company-operated, joint venture, and licensed markets, led by China and Japan.

And these results demonstrate the strength of the Starbucks brand and the relevancy we are gaining with our customers across the region.

We continue to take a holistic approach to building the Starbucks brand in our markets, while making the necessary investments ahead of the curve that will fuel our future growth.

We now have localized capabilities in the region, not only in store operations, real estate, and marketing and category, but also in the critical areas of store design, R&D, supply chain, and IT.

Coupled with the recent announcement of Jeff Hansberry as president for the region, we are now in a position to integrate Channel Development into our markets and expand the Starbucks footprint beyond our retail stores.

In the quarter, we reached two significant milestones.

We opened our 1000th stores in both China and Japan.

The stores that we are building today across the region are some of the most unique and innovative store designs we have anywhere in the world.

This is highlighted by the most recent opening of our two newest flagship stores in Beijing.

These stores are designed to elevate the coffee experience for our customers and to further enhance and differentiate the third place experience from anything else that exists in the market.

Digital also continues to be a huge opportunity and focus for us in the region.

We have now introduced the Starbucks card and aspects of our loyalty program in 11 of the 13 countries we operate in.

We are seeing significant traction with the card program in all markets, as it now accounts for 23% of tender across the region.

From a customer perspective, our satisfaction and quality scores are achieving record levels.

The frequency of our customer visits continues to increase and we continue to attract new customers into our stores, reflected by a 6% increase in transactions for the quarter.

Turning to China, we have been humbled by the way in which our customers have embraced the Starbucks experience and recognize that we must continue to earn their trust and respect each and every day.

We have seen firsthand that Starbucks is increasingly becoming a daily ritual for local Chinese.

Key drivers for this have been our innovative store designs, local product innovations, and the My Starbucks Rewards program, where in just 2 short years we built a base of over 3 million members and it has now grown to account for 35% of transactions in our stores.

For the year, we opened 317 new stores in China, and the initial performance of those new stores is very strong.

The stores we opened in 2012 are currently averaging sales in excess of $700,000, while our 2013 class of stores are on track to annualize with a very similar result.

Not surprisingly, China will again be the largest driver of the approximately 750 new stores we plan to open across the region in 2014.

Beyond China, we are accelerating growth in every other market.

I'm particularly encouraged by our strong results and future growth opportunities in key geographies including Japan, Korea, Thailand, and Indonesia, and I'd like to also congratulate our India partners on the 1 year anniversary of the market.

From our relationship with Tata, we have opened 25 stores and the response of our customers has been nothing short of amazing, which gives us tremendous optimism for the future growth prospects for this market.

Finally, we have a very long runway for growth across the region, based on the foundation we have built for our brand and the investments we continue to make and I remain extremely confident in our ability to drive strong comparable store growth while balancing the rapid expansion of our new store footprint well into the future.

As optimistic as I am about the future growth opportunity we have in CAP, I'm just as excited about the long-term opportunity for our Channel Development business.

With fiscal 2013 revenue of $1.4 billion, operating income of more than $400 million, a very robust operating margin near 30%, and a portfolio of market-leading products, Channel Development has become a meaningful contributor to Starbucks' results and is directly benefiting from the strategic flywheel Howard mentioned earlier.

In the fourth quarter, Channel Development grew revenue by 13% to $361 million.

At the same time, operating income of $128 million grew more than 2 times faster than revenue in Q4, accelerating to 30% growth on the benefit of lower coffee costs and leverage from our strong top-line growth.

In Q4, we were able to stabilize and grow dollar and pound share in 11 of the 13 weeks for our premium roast and ground packaged coffee.

This was due in part to the list price reduction we took in May.

We're also encouraged by the synergy we are creating with the emerging growth drivers, such as linking the My Starbucks Reward program to our packaged coffee business, where our customers have earned more than 1.5 million stars since launch.

We also continue to work with key retailers to increase our presence through the Starbucks signature aisle.

Already in 100 grocery stores today and with plans to reach 400 by the end of the fiscal year, signature aisle quantitatively elevates our brand while enhancing the customer experience.

The combination of value, rewards, and our premium positioning will allow us to continue our leadership position in premium packaged coffee.

Additionally, premium single serve continues to drive accelerated growth for the Business with Starbucks K-cups growing sales 42% in the prior 13-week period.

We have a very diverse portfolio of K-cup offerings that gives us the premium leadership position down the aisle.

In the quarter, we added vanilla and caramel-flavored coffee to our K-cup line-up and we will continue to bring new flavors and varieties to the market through our expanded relationship with Green Mountain in 2014.

It has now been a year since we launched Verismo, and we're looking forward to another successful holiday season.

This year, we have significantly increased the number of doors we will be in for the holidays, introduced a new machine with a fresh design and functionality, and are offering several new SKUs to drive the success of this platform.

We remain very optimistic about the large and growing opportunity we have to expand Starbucks beyond our retail stores, given the performance of the Business throughout 2013.

Our competition down the aisle continues to increase, both in terms of the emergence of the value segment and increased promotional activity in the coffee category overall, we are in a position to win.

Although we may experience volatility quarter-to-quarter, we will continue to elevate our brand through market-leading innovation, strong cross-channel rewards, which leverages our MSR program, and meaningful value and differentiation.

Make no mistake, we are committed to delivering double-digit top- and bottom-line growth for this segment in 2014 and beyond.

In closing, I'm incredibly proud and want to thank and recognize all of our partners throughout China and Asia Pacific and within our Channel Development business for the significant contributions they have made to the overall success of the Company.

It is through their efforts that we have been able to deliver these record results and is why we believe we are poised and positioned to capture the tremendous opportunity we have in front of us.

With that, I'll turn the call over to Troy.

Troy?

Thanks, John.

Let's turn now to the Americas segment where the fourth quarter represented an impressive continuation of the strength delivered in Q3.

Revenue growth of 11% was driven by 8% comp growth, including a 5% lift in transactions.

And as the case has been for quite some time now, there were a diverse set of drivers behind the growth.

In the US, food continues to boost our sales, adding about 2 percentage points to the comp in the quarter.

That is a result of gains in both attach rate and favorable mix in both lunch and bakery items.

Food is a key driver behind our strength in the lunch hours of 11 am to 1 pm, our fastest growing day part, and the one with the highest incremental profit potential.

The pumpkin spice platform, now in its 10th year, once again, delivered strong growth.

Additionally, our focus on summer refreshment and iced beverages was a success.

Those promotions combined for 1 point of comp.

Treat Receipt was a hit again this year, with a 16% higher redemption rate than last year.

And as a result of the favorable mix shift in food, as well as recent pricing actions, ticket growth contributed 3 percentage points to comp in Q4, its highest contribution in 2 years.

While food was the single largest driver of US comp in Q4, La Boulange in just 15% of our stores for the entire quarter does not yet have the reach to contribute meaningfully.

It has, however, been very meaningful in stores that carry it, which is encouraging to us as we proceed with the rollout.

Profitability remains strong in the Americas, as operating income grew 16% to $606 million in Q4, with operating margin expanding 100 basis points to 21.8%.

Sales leverage continues to be the primary driver of margin expansion in the Americas.

In Europe, Middle East, and Africa, fourth-quarter results demonstrated the improvement that has been building over the past 2 years.

EMEA revenue grew 3%, driven by an increase in the number of licensed stores and sales growth within them.

Our largest licensed markets in EMEA are among the best performing, including the Middle East and Russia.

We were also able to sustain 2% comp growth in our Company-operated EMEA markets despite a still-challenging macro environment.

Profitability continues to improve in EMEA, as well, with Q4 operating income reaching $27 million, the highest level of quarterly income since we started reporting EMEA as a separate segment in 2010.

Our ongoing store portfolio optimization effort, which we embarked upon a year ago, has been critically important in several ways.

We've ramped up store development with licensees, adding stores that are delivering excellent sales, strong profitability, and high return on capital.

We have refocused our efforts in Company-operated stores to those with a strong combination of excellent real estate, a practical cost structure, and demographics that support sales levels that drive profitability.

This optimization program lead to the closure of 72 underperforming stores and the relicensing of 24 more in the past five quarters.

This program, coupled with a renewed focus on operations and the customer experience, has helped drive transaction comp growth higher by 5 and by 3 percentage points respectively the past two quarters.

[Work] of the past year has also enhanced margins in EMEA.

The 9.3% operating margin reported in Q4 is the highest we've achieved in 12 quarters and we continue to make progress on our target of improving profitability each year, finishing fiscal 2013 at 5.5%, up from 0.6% last year.

We are making real progress on our long-term path to mid-teens margins in this region.

Across all our other segments, which includes Teavana, Evolution Fresh, Seattle's Best Coffee, and our digital ventures business, revenue more than doubled to $105 million, driven largely by the inclusion of Teavana revenue beginning in Q2.

Growth in our digital ventures business and Evolution Fresh also contributed.

The net operating loss of our other segments was $17 million in Q4, as we continue to invest in our emerging brands.

The strong revenue and margin growth in all our businesses led to outstanding consolidated results in the fourth quarter.

Net revenue grew 13% to $3.8 billion.

Strong global comp growth of 7%, comprised of 5% transaction growth and 2% ticket growth, was the key driver.

The addition of 1,701 net new stores globally, including 366 Teavana stores, over the past year, and strengthened licensed stores and Channel Development also contributed to the revenue growth.

Consolidated operating income of $669 million grew 29% over last Q4, more than doubling the revenue growth rate.

This led to record operating margin of 17.6%, an expansion of 220 basis points over last year.

Strong sales leverage contributed 90 basis points of favorability, with the EMEA portfolio optimization adding 60 basis points and lower commodity costs adding 50 basis points.

Earnings per share of $0.63 grew 37% over last Q4.

As I indicated to you in July, the fourth quarter included a $0.03 gain on the sale of our equity in Argentina and Chile, which will enable further growth and enhanced profitability for both parties in these markets.

Even without this $0.03 gain, EPS growth accelerated in each quarter throughout fiscal 2013, demonstrating the momentum we have in translating our strong top line into significant bottom-line growth.

For the full FY13, our results were equally impressive.

Consolidated net revenue reached $14.9 billion, 12% higher than in 2012.

7% global comp growth in 2013 was the largest driver and was our fourth consecutive year at or above that mark.

Transactions grew by 5% for the year, while average ticket grew 2%.

Consolidated operating income grew to a record $2.5 billion in fiscal 2013, an increase of 23% over fiscal 2012.

We also delivered record operating margin in 2013 of 16.5%, a full 150 basis points higher than last year.

Leverage on our record sales and 50 basis points of commodity cost favorability were the key drivers.

The strong revenue growth, coupled with excellent margin improvement, led to record earnings per share of $2.26 in fiscal 2013.

This represents growth of 26% over the prior year and includes $0.03 each in the second and fourth quarters for gains on the sale of equity in Mexico, Chile, and Argentina.

Globally, we added 1,701 net new stores in fiscal 2013 and our growth is more geographically diverse than ever before.

For instance, in 2007, our largest year of store growth ever, the US accounted for 70% of new stores.

By contrast, in 2013, the US accounted for just over 20% of new stores.

This diversity is allowing us to be selective on real estate while accelerating growth, ultimately enhancing return on capital.

The strong business results we delivered in fiscal 2013 have culminated in healthy cash generation.

This has been critical in allowing us to reinvest in the Business while concurrently increasing cash returned to shareholders.

For the year, we returned a record $1.2 billion of cash to shareholders through dividends and share repurchases.

Additionally, today we announced that our Board has approved a 24% increase to our quarterly dividend to $0.26 per share.

This aligns with our commitment to increasing shareholder returns, which includes growing dividends.

And as part of that commitment, we have increased our targeted dividend payout ratio range, now at 35% to 45%.

Over the past several years, and again in 2013, we've demonstrated the innovative capabilities and operational excellence to drive strong and consistent comparable store sales growth.

We've demonstrated the ability to accelerate new store development while also increasing return on capital.

We've demonstrated the vision to plant the seeds of growth in the future in our Channel Development and emerging brands businesses.

We've demonstrated the ability to expand operating margins and consistently drive earnings growth faster than revenue growth.

And we've demonstrated the ability to deliver earnings above our targeted range, when performance warrants, while also investing for growth.

As we close 2013 and look ahead, the strength of our fiscal 2013 results further increases our confidence in our ability to deliver another strong year.

As I now provide you with an update to our 2014 outlook, and as you then subsequent establish your own expectations for our financial performance in the coming year, I would ask you to both recognize the strength and consistency of our historical performance, as well as recognize the challenge of the task ahead.

The challenge of again driving strong comp growth through this large system.

The challenge of again expanding margins after several years of driving margins higher.

The challenge of overcoming increased interest expense and a higher tax rate.

We are more optimistic about our future than ever before, and at the same time, we are realistic and practical in our expectations, and I would encourage you to be as well.

We're targeting revenue growth in 2014 of 10% or greater, driven by global comp growth in the mid-single-digits and continued growth in Channel Development.

Now let me clarify any misunderstanding about our revenue guidance.

That revenue growth target is no different from the guidance we provided last quarter.

The 10% or greater just recognizes that we have great confidence that we can consistently drive double-digit top-line growth in the short term as well as the long term.

As we said last quarter, and on the heels of phenomenal global comp growth in the third and again in the fourth quarter, that level of high-single-digit comp growth is a stunning accomplishment for a system as large and mature as Starbucks.

We strongly believe that we have the innovation pipeline, customer trust and loyalty, and operational capabilities to continue to sustainably drive same-store sales, and equally strongly believe that the mid-single-digit level is challenging yet achievable.

As we move into the new fiscal year, it would be unreasonable to plan for or set expectations any higher.

Also contributing to our revenue growth in fiscal 2014 will be our planned 1,500 net new stores.

China Asia/Pacific is now targeted to open 750 net new stores with approximately two-thirds being licensed.

EMEA is now targeted for 150 net new openings, essentially all licensed.

We continue to anticipate opening 600 net new stores in the Americas, with approximately half licensed.

Full-year consolidated operating margin is expected to expand by 150 to 200 basis points in fiscal 2014, as we continue to drive leverage on strong revenue growth, as well as recognize the benefit of lower coffee costs.

In the Americas, we expect moderate improvement in operating margin, driven by strong sales leverage.

In EMEA, we anticipate operating margin percents reach the high-single-digits, driven by the benefit of the portfolio actions taken in fiscal 2013, as well as continued performance improvements.

In CAP, we anticipate operating margin moving toward the low 30% range and our rapid growth continues to shift away from our historically licensed model.

And in Channel Development, lower coffee costs will provide modest operating margin expansion in fiscal 2014.

Our strong revenue growth and margin expansion targets gives us confidence in targeted earnings per share in the range of $2.55 to $2.65 in fiscal 2014.

We're targeting EPS in the range of $0.67 to $0.69 in the first quarter, with $0.54 to $0.55 targeted for quarter 2, a traditionally lower quarter due to seasonality.

Contributing to the EPS growth will be another year of tailwinds on coffee costs, still expected at an approximate $0.09 to $0.10 net benefit for the year.

This benefit is expected to be spread evenly throughout the year and reflects the gross coffee impact partially offset by the recent pricing reduction in CPG, as well as routine investments in the Business.

We now have the vast majority of our coffee needs locked for fiscal 2014 and have begun selective buying of certain varietals into fiscal 2015.

Perhaps one additional comment regarding coffee.

I sometimes hear speculation that Starbucks might benefit significantly more from favorable coffee costs in 2014.

Given that we are essentially fully price-protected now, our price reduction in CPG was executed earlier this year and our other offsetting investments throughout the Business are fully planned and in various stages of implementation, I would encourage all of you to play close attention to my coffee guidance just provided and not create expectations of anything more than the $0.09 to $0.10 net benefit.

Capital expenditures in fiscal 2014 are expected to remain flat to the previous year at approximately $1.2 billion.

Continued investment in store renovations, new stores, and other retail initiatives will continue to comprise the majority of the spend.

We anticipate resolution to the suit with Kraft before the end of this calendar year and believe we have adequate liquidity to cover any outcome.

And finally, our tax rate in fiscal 2014 is expected to increase to 34.5%.

This is meaningfully higher than fiscal 2013, which included non-routine benefits from prior-year audits and state tax true-ups.

At our investor conference last December, I summarized 2012 in one word -- execution.

For 2013, strong execution again led to outstanding financial performance, record revenues in all our segments, margin growth in all our segments, comp growth at the top of our peer set, more than $1 billion in cash returned to shareholders.

Across the board, 2013 was truly a year to remember.

Yet with all the success in 2013, the best is still in front of us.

Our stores are in excellent shape.

We've renovated nearly half of our stores in the US over the past 2 years.

Our product line up is deep, with premium coffee at the core and new high-quality food, juice, and tea to complement it.

Loyalty is on the rise and new technologies continue to enhance the customer experience.

Our growth appetite remains large and opportunity abounds in China, India, Latin America, and with licensed partners globally.

And our financial discipline remains strong, as we balance height, return, investments in our Business, while increasing returns to shareholders.

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

Mike?

(Operator Instructions)

Your first question comes from Sara Senatore with Sanford Bernstein.

Oh, great.

Thank you very much.

I actually had two quick questions on the Americas.

One is, with respect to Boulange, last time we heard for you, you said the response from customers has been phenomenal.

And I just wanted to see if you could give us either a quantification or qualitatively, east coast versus west coast in terms of contribution?

And then the other piece is on the margins.

I'm surprised the Americas margins guidance is for moderate expansion because I would think on strong comps and some coffee benefit and then mix shift towards licensed, we would see better expansion than just moderate.

Can you give a sense of what investments or offsets you might be making?

Thanks.

Sara, I'll take the margin question first and then I'll hand it over to Cliff to talk about La Boulange.

First, on the size and scale of the US business as big and profitable and as many stores as it is today, we are very pleased that we can commit to the kind of margin expansion, in fact deliver the kind of margin expansion we have over the years, again in fiscal 2013, again in Q4, and again promising it for fiscal 2014.

So we're quite pleased with our ability to deliver that comp growth and to stronger growth on the bottom line.

Recall that coffee benefit does not have meaningful impact on our store segments, so the Americas and the US does not get a significant benefit from the coffee tailwind.

That primarily lands in our Channel Development business so that's first to remember.

And then beyond that, as we have significantly elevated margins over the years, I would anticipate our ability to continue to slowly and moderately, over time, raise the profitability of that system, but just recognize how far it's come already in a short period of time.

Cliff?

Yes, thanks, Sara.

La Boulange, we are seeing incredible excitement around the new product.

It is showing up really well in the store and we've achieved over the last 9 months what we didn't achieve in the previous 20 years around food.

So the quality -- east coast, west coast, every market we're launching in -- we're getting a real passion around it from our teams in stores and the customer reaction is superb.

That said, we're still in the early days.

We've launched in 3,500 stores.

We'll complete that roll out in the next 12 months and we will be able then to see the meaningful contribution it's making.

But wherever we've launched it and particularly around the pastries, the croissant, the chocolate croissant, we are seeing a huge difference in experience the customer is getting.

We continue to refine the range, we continue to refine our operation in store, but it is elevating the whole experience, and it really is a testament to the investment we've made in La Boulange to help us grow a capability around food and we're really excited for the future.

Thank you.

Your next question comes from Jeff Bernstein with Barclays Capital.

Great.

Hello?

Hello.

Go ahead, Jeff.

Thanks, just two quick questions as well.

One just from a cash usage perspective.

Troy, you talked about the share repurchase and the dividend.

I'm just wondering how the Board evaluates or balances between the repurchase and the dividend in terms of your boost to the payout ratio?

And if you could just tie that in with the $750 million of leverage you guys just took on -- whether or not there's opportunity for more leverage or, better yet, what's the appropriate debt level that you guys think the system can handle?

Sure, let me speak to that, Jeff.

First of all, in terms of how we evaluate repurchases versus dividends, we're committed at the Company to return cash through both avenues.

Dividends, of course, will be much more sustainable and routine.

And we're very, very fortunate in our Business to have a healthy and consistent cash flow that has rapidly grown over time, and which we anticipate will continue growing as we go forward.

That's given us confidence both to grow our dividend rate faster than our rate of earnings, as I announced today, in terms of what our Board has approved, but also to give us flexibility over time to expand that payout ratio higher, which is also announced today.

Share repurchases are also important to us, but will always be a bit more opportunistic, as there are plenty of times when we as a Company are blacked out of the market or updating our plans, so I would expect repurchases to over the course of any three or four or five quarter period of time, to be a component of our cash return not unlike it's been over the past few years, but there will always be quarters where it's higher rather than lower and vice versa.

In terms of debt levels, it's -- I would suggest to you that in our history we have tended to be a bit underleveraged and we've recognized some opportunity, particularly given where the market conditions have been over the past year, to bring a little bit more debt on to the balance sheet and to enhance our liquidity, so we've done that.

That still leaves us, we believe, with a very strong credit rating, which we intend to maintain, and capacity within that credit rating over time, if opportunity warrants and [market] conditions warrant, to bring on more debt.

But let me be clear, we have no immediate plans to do anything more than the $750 million offering that we just placed.

If I could follow up, you mentioned just the coffee costs being 100% locked.

Just wondering whether you're seeing any unusual or irrational behavior from peers with the very favorable coffee costs -- or maybe better yet, internally, how you guys think about price to be taken or whether using value to drive traffic when coffee costs are so favorable?

Well at times, because many of our peers buy at shorter term than we do, and frankly are chasing us often, so are, I would suggest, trying to catch us with whatever pricing actions they can take.

Sometimes we see those actions down the aisle, frankly, and perhaps even in competing coffee stores around the country.

Frankly, that tends to be less of a driver of our own actions, particularly in the stores, as does [cost] pricing to meet customer need.

Now down the aisle, it is much more competitive and reacting to that marketplace, we took a price reduction earlier this year.

We believe that that positioned us very nicely and I would suggest that the Q4 results for our Channel Development business that we just released today underscore that we did the right thing with the pricing action, that we are now competing nicely again down the aisle, we're positioned well.

And we strongly believe not only by competing on price but on innovation, on packaging, about the leadership we can bring down the aisle, all those things will contribute to our ability to continue to hold and grow share over time in all forms of that home consumption.

Thank you.

The next question comes from Sharon Zackfia with William Blair.

Hi, good afternoon.

I was hoping to touch a little bit more on the food in the Americas.

If you could update us on where food ended as a percent of sales for fiscal 2013 versus 2012?

And then, Troy, if you could help us think through the impact of the increased food penetration as we think of the pushes and pulls in the Americas gross margin for 2014, I'm understanding the new food is higher margin than the old food, but probably still lower margin than coffee.

So just wondering if you can talk through that?

On margin, first, Sharon, what I would say is that over time there's a few dynamics that happen as we grow our food business, which we believe to continue to be a significant opportunity for us, and we've been experiencing that as food has been a disproportionate portion of driver of comp growth this year, as you've heard from us each quarter recently.

With that said, when you net out all the pushes and pulls of product margin and distribution, the efficiencies we get in the back office, the waste management initiatives that we've implemented in the stores, all those things in the long term, we believe, negate each other and we don't think that there will be meaningful movement whatsoever in gross margin.

Yes, food is a moderately lower product gross margin than is beverage but, remember, as we sell more food through an existing system, it is extremely accretive to percent margins, not just to mention dollar margins, at the bottom line of the store, and highly profitable in terms of store profitability and return on capital in that existing asset we have that's our store system.

So the economics, top to bottom, are very, very good for us.

In terms of food mix, food remains right around 19% of sales mix of our stores.

There is some upper movement over that over time, but given the huge base of business we have, we think it will be a slow and moderate progression reaching next toward 20% and we think ultimately a bit higher.

Okay, thank you.

The next question comes from Michael Kelter with Goldman Sachs.

Your line is open.

Yes, I wanted to ask about La Boulange, as well.

And the first was can you talk to any throughput constraints that may have developed in the stores that have rolled it out and whether you've come to the conclusion that you may need to flex up labor a bit to keep the stores [moving]?

And then also on La Boulange, you talked about expanding it to lunch for next fall and I was curious if you could talk us through what makes sense for lunch at Starbucks and what doesn't?

Yes, thanks, Michael, it's Cliff.

In terms of what we're seeing on the La Boulange operation, it's obviously new.

We're investing in labor around the launch times as we can share these fantastic new products with our customers and once we're through that launch phase, it becomes part of the normal operation.

It's not about adding labor, it's just being very deliberate in how we deploy our labor.

The customers are already there.

We're obviously trying to move the percentage of customers who buy our food on a regular basis and we're going to increase that.

The opportunity is significant.

We're already serving the customers.

So giving you an example, I was in New York, which is one of the most recent markets we've launched.

I was there last week.

I was extremely pleased with what I saw in terms of customer engagements -- the way the partners are embracing as the La Boulange routines and disciplines and the food and the beverage were being served with a great experience for the customer.

And if we can do it in New York, we can do it in all our markets.

So that's a great start for us.

If we look at lunch, we start from the same premise of great ingredients and building on the opportunity to serve existing customers who come into the stores.

The lunch side, Troy said, we're starting to see some growth in that area.

I think the investments we're making in [accommodation], investments in tea, will also further complement that lunch time occasion and give us over time a second peak.

The food again will be starting from fantastic ingredients, relevant for our customers, and will give them a fresh and healthy approach to food and really complement the beverages we've done.

The investments we've made in supply chain, suppliers, and the investments we've made in our stores so far will all help us with this food range.

We've invested in, or started should I say, with a small test in San Francisco and it's around paninis, it's around salads, it's around convenient food for our customers to either enjoy in the store or take back to their office.

And it's been, again, extremely well-received and we're extremely excited that we'll be able to follow on from the morning enhancement of our food with a lunch time offering, which we think will be the start of a significant business around lunch.

Thank you very much.

The next question comes from John Glass with Morgan Stanley.

Thanks.

Still two things on Boulange.

One is when will you feel comfortable in talking about the sales lift?

It's the question that's been posed a number of times and what point or how many stores do you need to feel comfortable that you've got a good baseline?

And then secondly, why wouldn't this be additive?

I know you noted a couple times mid-single-digit comps and I understand you want to be reasonable in terms of setting expectations but it doesn't seem like -- is there anything that's going to fall away from this that you lose?

Is there some anniversarying of some of the lunch items you've added recently that you have less confidence in or have you simply seen the business maybe be more moderate in the last few weeks or months and maybe that gives you rise for caution?

John, let me speak to comp growth and then I'm going to ask Cliff to come back to a bit more a La Boulange.

The first thing to remind you and everyone is, and of course you know this, John, but comp growth trends towards 0% every year, for everybody out there, every retailer, anybody who measures it.

Everything we did over the past year to drive the fantastic and amazing comp growth against this big system that we've done -- beverage innovation, food, contribution from loyalty -- all those things now are in the base line and as we move into this coming year, just doing those same things again would provide 0% additional comp lift.

What we need to do and what we have great confidence in, by the way, is our ability to come up with that next level of beverage innovation, the next fantastic food program, the elevation of food, the continued enhancements to consumer-facing technology, and to the loyalty program, but all those things need to be more and better than last year to give us any comp growth.

So comp growth can never be additive.

It starts over and we believe we have the ability to take what we've done in the past year and, yes, add to it in terms of traffic, volumes, in terms of dollar sales through our system, and by doing that we believe a mid-single-digit comp growth on a system that's the size of the Starbucks and the maturity of the Starbucks is nothing short of outstanding.

Troy, let me add one more thing.

It seems like we can't get through a conference call without somehow this tension between us and you, with regarding to comp growth guidance, so let's just try and establish common language so there's an understanding about what it is we're trying to do and what it is we're trying to guide.

Last quarter, we had a 9% comp in the US business and I said then, as I think we're trying to say now, is that we had an 8% comp this quarter and it would be just irresponsible of any of us at Starbucks to project to you or guide you to that level.

Now do we have aspirations to try and do it again as we did this year?

Absolutely.

Do we think we can?

Many of us think we can but we're not going to sit here and put a number out there that is such a stretch target and have you put it in your model and then we come up with a 6% or 7%, which against our peer group is stunning and incredible and then you write reports that says we've disappointed.

That's not going to happen.

So the guidance we're giving is the most responsible guidance we could possibly provide you, especially when you consider the maturation of our store base and the number of stores.

Now one other thing.

What La Boulange is providing us, well beyond the morning pastries and the lunch, is a significant platform to go after need states and day parts well into the future.

And what we've learned over the years is that our stores now provide a third place well beyond the morning day part, which was our core business just 5, 6 years ago.

The opportunity to expand Starbucks significantly in the future with the innovations that we've talked about in our prepared remarks and the food is well beyond where we are today.

But we've always tried not to provide aspirations and guidance that was so far afield from reality and provide you with an opportunity with real numbers.

And not to allow any of us to get so far ahead of ourselves, especially when we have a situation in the US where there's quite a bit of uncertainty in terms of consumer confidence, external behavior, that relates to the government shutdown and what could happen in February, with where we're once again we're looking at a possible default.

So this is the most responsible thing we can do on the heels of a record year in our 42-year history, a record quarter, and a comp number that no other Company in our peer group or no other Company that any of you analyze has put up against us.

This is a remarkable opportunity for us to have a year-end result, and once again, try and provide a comp number that we think is responsible and I think the most judicious thing we can possibly do.

John, just to say when we will be able to share the contribution La Boulange it's giving us, and quite frankly, it will be after we rolled out all markets and we've really seen what happens in the first year.

We are going very quickly with the roll out.

I'm absolutely delighted by the fact that we got to 3,500 stores by the end of the financial year.

We will complete the rest of the stores and we've already -- so the rest of the stores, Company-operated, will be completed in FY14.

We will also have the opportunity to bring a new food range to our Canadian business and to our licensed stores so we're busy working on that.

It is a new skill for us.

It is a new discipline.

We've been beverage-led for a very long time and we will continue to work on the operational detail.

The fantastic thing is we can respond very quickly on recipes, on customer feedback, and that is also part of this.

So we're in that learning phase but I really am excited by the way our partners and our customers are receiving the food.

We have some great success stories.

I really, again, I just want to go through with the operational disciplinal I've always brought to the Americas and make sure that when we share something with you, we can continue to build off it.

But it's definitely complementing the experience for the customer, it's complementing the beverage purchase, and our potential of the future is exceptionally strong with food.

Thanks, John.

Great.

Thanks.

The next question comes from Joe Buckley with Bank of America Merrill Lynch.

Thank you.

Want to ask two questions if I can.

I want to take advantage of Howard and John being on the call and just ask about the recent media coverage about pricing in China and just your perspective on it.

And then secondly, want to go back to an earlier question.

Not so much the staffing that's needed for La Boulange but a broader question, not just La Boulange-based.

Are you at a point, in terms of speed of service, where something else has to change to handle this tremendous level of traffic growth that you're driving?

I'll take the latter question.

Unlike others who have talked about speed of service or throughput issues, that is not a problem that we have or anticipate so you can take that off the table.

And in fact, what we've been able to do with mobile payment and the card has absolutely cracked the code in terms of convenience and speed of service and we're only going to get better at that because we will be introducing new levels of technology in calendar 2014.

We have no speed of service or throughput issue inside Starbucks.

Take that off the table.

John?

Thanks, Joe, for the question.

Regarding the recent media speculation on price issue in China, as you know, Joe, we've been in China now for 15 years and we have 1,000 stores, we operate in over 60 cities across the mainland.

As this issue became public, we acted very swiftly, and as we always have, communicated in very open, honest, transparent, and very factual way with our customers.

One thing I would say is that we've been able to build a level of trust, loyalty, respect with our customers, and key stakeholders across the country and we felt it was important that we respond very openly and transparently to them.

In terms of the speculation, there's a couple things I'd like to point out.

First is that the prices that we charge for our products in China, [the latte], are comparable to and in some cases lower than the competition, so that's number one.

Number two, the prices that we're charging in the market actually reflect the costs of doing business in that market, and at the same time, reflect a level of investment that we're making ahead of the curve so that we can fuel the future growth of the business.

So we will continue to be very transparent, very open, and very factual with any questions that come up around pricing.

But let me just add that, as a Company, building a large business in China well over 1,000 stores and beyond, that we're not immune to the challenges and complexities of building a large business in China, but at the same time, given the trust and loyalty that we've been able to build with our customer base there, as well as key stakeholders across the mainland, that we have tremendous confidence in our ability to continue to build a very strong business, not only in 2014, but well into the future.

Thank you.

The next question comes from Jason West with Deutsche Bank.

Yes, thanks.

Just one on the Channel Development side.

The revenue growth accelerated there.

It sounds like that was mainly driven by the better pricing positioning, but just wondering if you could talk a little bit more about what drove that revenue growth and is that the kind of number you guys are expecting going forward?

Well, we obviously had very strong growth in the quarter and finished the year very strong double-digit revenue growth for the year.

The results that you saw in the fourth quarter were the results of the momentum that the business is beginning to get around the LPR on packaged coffee.

But then also, the momentum that we're building on K-cups.

And as I said, K-cup growth during the quarter was 42%.

We've added two additional SKUs in the quarter and we've got aggressive plans to continue to expand and grow the K-cup offering in 2014 throughout the year.

It's also important to note that I talked a little bit about the My Starbucks Rewards down the aisle.

As we've talked in the past, this is our opportunity to leverage the strategic flywheel that Howard spoke about.

In a very short period of time, just over 3 months, we've been able to provide over 1.5 million stars to our most loyal customers down the aisle who are purchasing our packaged coffee, so we remain very optimistic that we can continue to accelerate stars down the aisle and leverage that flywheel.

Going forward, as I said, there is volatility that's happening down the aisle and in the grocery segment, particularly as it relates to packaged roast and ground coffee.

We feel we're very well-positioned to navigate that volatility.

We've got a lot of new innovation that's coming into the business this year, not only on the packaged coffee side, but also K-cups, VIA, and other items.

What you're going to see this year in 2014 is that our performance is going to build by quarter and with the back half being the stronger piece of the business due to the first half LPR rollover.

So again, my comments earlier, we're committed to sustain double-digit growth in this business, both on the top and bottom line in 2014, and we're looking forward to another very successful year in the channels.

Okay, thanks for the color.

The next question comes from John Ivankoe with JPMorgan.

Great, hi, thank you.

First, quickly, and then a longer question.

Troy, do you have the Starbucks card balance at the end of the quarter in front of you?

Yes, we do.

I'm going to have Adam Brotman actually make a couple of comments about that.

Adam is our Chief Digital Officer.

He's here with us.

Go ahead, Adam.

Hi, John.

At the end of the quarter, the balance in the US was $621 million, and reflective of the record year we just had, with $4 billion loaded across the US and Canada.

And do you have the corporate balance as well that we see on the balance sheet?

I don't have that with me at this time.

Yes, let me -- [tell me] your other question John and I'll try to get (multiple speakers).

Okay, all right, great, thank you.

Howard, maybe this question is for you.

A couple years ago, in 2009, at least part of the Starbucks revitalization, you included a refocus of excelling at your store level basics, which obviously you did in a fairly profound way.

When we listen to the call today, there's a number of initiatives that are coming into the stores in the next couple years -- Teavana, cold carbonated drinks, the continued expansion on La Boulange specifically and maybe food more generally -- that does add more complication to the stores perhaps than there is today.

So just a little bit of a broader question, just talk about how the system has been prepared maybe relative to 5 years ago to handle this increased complexity with the low-risk nature that you've demonstrated over the past couple of years?

Well John, that's a very important and appropriate question and if you were in many of our meetings during this year as we prepare for fiscal 2014, that was much of the conversation.

We want to do one thing and one thing well and that is whatever we bring into the store, we want it to be enhancing to the customer experience and complementary to our leadership position in coffee.

Having said that, the last 2 years of our stores that we've opened, coupled with the comp number, demonstrates the significant health and strength and I'd say, unequivocally, in the US, business has never been stronger or healthier than it is today in terms of financial results and the equity of the brand and the experience.

We feel very good that we have prepared our stores.

If you go through them, Evolution Juice, when we brought it into the stores, we replaced an existing juice product and enhanced the quality and enhanced the experience.

Teavana Tea that we are going to bring in at some point in calendar 2014 -- we're already in the tea business but tea represents less than 1% of our sales and we believe we can significantly expand that, and in doing so, create significant awareness in trial and use our flywheel to drive new traffic and incrementality to the Teavana stores.

When we get to La Boulange, we've been selling food for 30 years.

It just hasn't been as good as our coffee.

Now our food is as good as our coffee and we have story to tell and we want to tell that story in multiple day parts and fulfill multiple need states.

Carbonation, that is a new category for us.

The test results in Austin and Atlanta and in Japan and Singapore are very encouraging.

We think it's a significant opportunity, and again, we learned a lot over the last few years with our refreshment category, that we have other than coffee and the opportunity in coffee, we have an opportunity to provide a need state in the afternoon and the evening around refreshment.

And also we've learned in the carbonation test itself, that there's a significant food attachment to the carbonation beverages.

So this works hand-in-hand with our opportunity and I think we're going to create more incrementality.

Cliff and his team have done a wonderful job in not taking the entire country at once with any of these initiatives, but sequentially going from market to market and learning from it, and not leaving one market to go to the other until we have it right.

And that's why La Boulange has worked so successfully.

That's exactly what we're going to do with all of these initiatives, as we did with Evolution Juice.

So the short answer is, it's an appropriate question.

We learned valuable lessons in 2006 and 2007.

Those lessons have been learned and they will never ever be repeated and we're in a position right now where we're playing to our strength and we're going to continue to do that and leverage the fact that our stores are a meeting place and a gathering place for multiple day parts well beyond the core coffee business that we began 42 years ago, but we're always going to be the primary destination for the world's best coffee.

John, to your question about the Starbucks card, at the end of the fourth quarter, so at the end of the fiscal year, the deferred revenue balance on our balance sheet -- and that deferred revenue balance is essentially the Starbucks card balances -- was $654 million.

By the way, that's almost 30% growth over the same period a year ago, over the year-end 2012.

That almost 30% growth in that balance on the balance sheet just reflects the continued tremendous uptake of the Starbucks card, of the adoption of loyalty, of how mobile is contributing and how we're resonating with our customers in a way that is unique anyone else in the space and by pre-paying essentially a significant amount of transactions and having that sit on our balance sheet long before it turns into revenue.

It's probably the perfect litmus test for the future of the Company in the near term.

By having 30% greater loaded on the card versus a year ago, and that 30% is almost 3 times greater than the growth rate of the Company.

Great, thank you so much.

The next question comes from Brian Bittner with Oppenheimer.

Great, thank you very much.

Just two questions.

First one is on EPS guidance for Troy.

Particularly relating to the second quarter guidance, it looks like the first quarter guidance you're implying basically about 20% EPS growth and then dips down on a year-over-year basis to that 13%-ish range for the second quarter.

That's below where you're going to be at for the full year so what exactly is going on in that quarter?

Anything you can point out for us?

Well, yes, Brian I'm happy to do that.

First I'd make sure you -- when you look at the second quarter growth rate over prior year, back out that unusual non-routine gain on sale of our [Mexico] business from Q2 of a year ago.

So it's important you do that adjustment.

Now with that said--

But it's still 13% off that $0.48, right?

Actually, Brian, it's the range I gave you is 13% to 15%, so it will slip towards that mid-teens EPS growth rate and then -- give me a moment and I'll explain what's going on.

Our investment spending that we do throughout the year will vary significantly from quarter to quarter, and in the case of the second quarter, we are planning to spend a bit more in marketing, just timing of spend throughout the year, as we look at that quarter.

We have a number of other routine investments that come and go from quarter to quarter, the timing of which, every year, can move a little bit from here to there.

So we've put that guidance out there today so you'd have some more visibility and transparency into how we're planning the year and how we see the earnings progression.

With that said, there will be some quarters that are more like the mid-teens and there will be some quarters, as we have delivered over this past year, that will tip toward the higher part of that range and that's why we have an earnings range out there that I would have you think about as we go forward.

Okay, and just something about cash flow and balance sheet.

You guys did almost $2 billion of free cash flow this fiscal year.

I think you generated more free cash flow this year than you generated in operating cash flow last year.

I know you took on some debt this quarter, but it looks like you have over $3 billion of cash and short-term investments on the balance sheet.

Obviously, that looks to be more than enough liquidity to deal with any resolution with Kraft.

Is there any update on that arbitration that you guys can give us, any timing update or anything like that?

Brian, what we can say is that we expect resolution of that, to hear from the arbitrator before the end of the calendar year.

That's really our only news for today is that we expect that to be some time before the end of this calendar year.

Okay, thank you.

And you're right on your earlier points.

Our cash flow was phenomenally strong in the year and that's very, very reflective of our strong performance in the fourth quarter and for the full fiscal year.

And that consistency of strength of cash flow and the phenomenal strength of our balance sheet and the amount of cash we have sitting on the balance sheet both gives me tremendous comfort that we have adequate liquidity to cover whatever the answer may be coming out of that arbitration and also gives us tremendous flexibility as we look toward the future and we make investments into our Business and renovations and store development and gives us the ability to continue elevating cash return to shareholders.

Mike, we're available for one last question and we will follow up with those that are left in the queue.

The last question comes from Nicole Miller Regan with Piper Jaffrey.

You may ask your question.

Thank you.

Thanks for the time.

Of the loyalty, the 1.5 million, I believe it was, incremental stars earned through the Channel Development, can you talk to us about if anybody signed up new, so new users of the loyalty program?

And then also what was most surprising as you -- versus what you tested and expected as you started to launch this?

Thank you very much.

Sure, Nicole, I'll take this, it's Adam.

First of all, I would say that yes, we've seen a lot of new users coming through that channel.

We're not ready to quantify those publicly but it's been exceeding our expectations in terms of both new users.

It's been exceeding our expectations in terms of the velocity of take up of our loyalty members, as well as new loyalty members that have been participating.

And frankly we're just getting started in terms of how we're going to integrate loyalty with our CPG business.

So it's a great example of the strategic flywheel -- there's a mini version of it, there's a digital strategic flywheel.

We're integrating our loyalty, card, mobile, and now across channels and across brands and even across geographies, so this is just one example of how it's working well for us.

I would just add one thing and that is that, in a sense, what we're establishing is a Starbucks currency and that currency can be interchanged between Starbucks and Teavana stores and the currency of these stars can now be leveraged across consumer products that are unparalleled because there's no other consumer product that has a retail store that can provide our customers with a reward and an incentive to come back and forth.

This is just the beginning of us being able to thread these multiple channels of distributions and brands so that the customer has significant value in supporting and shopping at Starbucks, Teavana, and Starbucks consumer products.

Thank you.

Thank you, Howard.

That concludes our call for today.

Thank you for joining us and we will speak to you again on the next call for Q1 Fiscal 2014 earnings.

Thank you.

Have a good day.

This concludes today's Starbucks Coffee Company's fourth-quarter and FY13 earnings conference call.

You may now disconnect.