星巴克 (SBUX) 2014 Q1 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 first-quarter fiscal year 2014 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.

Miss DeGrande, you may begin your conference.

Thanks Mike.

Good afternoon.

This is JoAnn DeGrande, Vice President of Investor Relations for Starbucks Coffee Company.

Joining me on the call today to discuss our Q1 results are Howard Schultz, Chairman, President, and CEO, and Troy Alstead, CFO.

And also with us today are John Culver, Group President China, Asia Pacific, and Channel Development and Emerging Brands; Adam Brotman, Chief Digital Officer; and Curt Garner, Chief Information Officer.

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 Secretary, including our last annual report on Form 10-K.

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

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

Starbucks.com.

Please also note that Starbucks' 2014 annual meeting of shareholders will be held in Seattle at 10:00 AM Pacific Time on Wednesday, March 19.

That meeting will also be available via webcast.

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

Howard?

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

I'm very pleased to discuss the record Q1 results that Starbucks announced today.

Strong operating and financial performance from all business segments around the world and increased operating leverage and store efficiency enables us to deliver record quarterly revenue of $4.2 billion, record quarterly operating margin of 19.2%, record quarterly operating income of $814 million, and record quarterly EPS of $0.71 per share.

Strong customer response to food and beverage innovation contributed to solid Q1 comp sales growth of 5%, consistent with our previous mid-single digit guidance and representing our 16th consecutive quarter of 5% comps or greater.

Noteworthy is that the 5% comp growth delivered by our important EMEA region with over 2,000 stores was the strongest growth in more than three years, demonstrating the success of our strategies to transform our EMEA business based on the learnings from our US transformation.

Also noteworthy is that our Q1 US comps were approximately twice the national retail sales average during holiday shopping period this season, and that our Q1 results do not reflect the significant future sales benefit from the year-over-year increase of $230 million in deferred revenue to over $1 billion, resulting from extremely strong new Starbucks gift card activations and Starbucks card reloads in Q1.

At the outset I want to take a moment to comment on two pronounced shifts in consumer shopping behavior that retail has experienced, but that we unlike many retailers or any competitor were prepared for this past holiday season and explain why and how Starbucks global business will increasingly benefit from the acceleration and convergence of these shifts going forward.

Then I will provide an overview of segment performance in Q1 and Troy will take you through Q1 financial and operating results in detail.

Holiday 2013 was the first in which many traditional bricks and mortar retailers experienced in-store foot traffic to give way to online shopping in a major way.

Customers researched, compared prices, and then bought the brands and items they wanted online, frequently using a mobile device to do so.

This was also the first holiday in which consumers embraced the convenience and flexibility afforded by physical and digital gift cards with a passion.

Instead of giving a particular item, many consumers instead chose to give the gift of choice.

Starbucks is prepared for both of these shifts, having invested over many years in the creation and development of proprietary, world-class digital and mobile payment and card technology and expertise.

This expertise and the assets that support it enable us to seamlessly process more than 40 million new Starbucks card activations, valued at over $610 million in US and Canada alone in Q1, including over 2 million new Starbucks card activations per day in the days immediately leading up to Christmas and the $1.4 billion in Starbucks card loads globally.

Each of these figures represented the significant increase over both last year, and candidly our most optimistic projections for this year, making Starbucks one of the very few small handful of retailers to benefit from the transference of brick-and-mortar store sales to online sales in the gifting of choice.

Even more than the sheer magnitude of the $1.4 billion loaded on the cards in Q1 is the opportunity presented by the millions of customers that will be visiting our stores to redeem these cards in the future.

Experience tells us that many gift card recipients are new customers for Starbucks and their businesses are providing us with a unique and powerful opportunity to introduce them to the Starbucks experience, invite them into My Starbucks Rewards Loyalty Program and inspire them to become part of the Starbucks daily ritual.

Today with nearly 10 million customers actively using our mobile payment app, over 7.3 active My Starbucks Rewards members in US alone, over 50% of whom are Gold status members, and the figure approaching 5 million mobile transactions taking place in our stores each week, Starbucks integrated mobile and Willow app technology is by far the undisputed leader in digital retail technology.

Together, mobile and Starbucks card payments represent over 30% of total US tender.

This powerful technological advantage combines with our robust pipeline of food and beverage innovation and Starbucks' recognition as one of the world's most respected and most trusted consumer brands will provide us with the winning hand as mobile, card, and online sales trends continue to converge and accelerate around the world and into the future.

Let me turn your attention to the Americas.

Starbucks Americas segment now comprising over 13,000 stores had another strong quarter with revenues up 8% and comp sales up 5%, including a solid 4% increase in traffic.

Contributing to America's performance was the success of our holiday beverage offerings, including both Pumpkin Spice Latte and our Holiday Beverage Trio, and strong food sales including increased customer acceptance, an additional benefit from the ongoing rollout of La Boulange bakery platform.

As we enter 2014, Starbucks Americas segment is benefiting from new store development and existing store renovation programs that are driving increased in-store efficiency and throughput, enabling us to deliver both an enhanced customer experience and increased profitability.

The success of these efforts are apparent with our newest class of stores on track to average over $1.2 million in year-one sales, exceeding our best-in-class investment ratio of 2 to 1. For example a new class of drive-through stores is providing Starbucks with the unique opportunity to connect with customers on the go and represent a tremendous growth opportunity for us both domestically and internationally.

In the US, highly profitable drive-throughs account for 40% of our Company-operated store portfolio and remain a focal point of our store development efforts.

And the more we broaden and expand our drive-through program, the more we see white space and opportunity for drive-throughs in the future.

Licensed stores, comprising 40% of our Americas store portfolio, representing roughly half of the 600 net new stores we plan to open in the Americas in fiscal 2014, also present a compelling growth opportunity for us.

We opened 50 licensed stores in Canada in Q1, including 30 in a single day.

In addition to facilitating rapid growth, licensed utilize less of our capital, provide strong returns and afford access to otherwise unavailable high-traffic retail venues, such as hotels, airports, rail stations, grocery stores, theme parks, and fast-growing international markets such as Mexico, a market that delivered extremely strong comp growth in Q1.

Overall, license store portfolio revenue increased 15% in Q1, the highest growth rate in six quarters.

And because of the value of our global brand, we are receiving more inquiries today from potential licensees than any other time in our history.

Let me turn your attention to new platforms and begin with Teavana.

A year after the acquisition of Teavana we are more convinced than ever that we have the opportunity to transform the tea category the way we have transformed coffee all around the world.

Recent research confirms that Teavana now enjoys the highest level of awareness of any super-premium tea brand, and like Starbucks, Teavana had a solid Q1.

Now one year into the integration of Teavana we are poised to begin the rollout of additional stores on the heels of the successful opening of our first two Teavana tea bars in New York City and Seattle.

These two beautiful new stores are already providing us with key insights that will help us achieve our goal of combining and leveraging Teavana's strength and authority around loose-leaf tea and tea merchandising and Starbucks' strength creating experiential consumer environments, innovative handcrafted beverages in a retail store development to create a new retail platform and a unique international premium teahouse experience.

I would add look for Teavana to bring breakthrough innovation to the tea category in the US and Canada this spring and summer, and to international markets in the years ahead.

Now beyond tea another important area of innovation and interest for us is premium, handcrafted cold carbonated beverages.

This category is by far the fastest growing segment of the over $140 billion global carbonation industry, and the results of tests we've conducted in stores in select US and Asian markets last summer exceeded our most optimistic expectations.

The excitement that was created as baristas carbonated our customers' favorite drinks, and the fantastic innovation and interaction that followed, cemented our interest in the category and the opportunity to elevate the cold carbonation category with a premium, handcrafted offering in our stores.

Look for handcrafted cold carbonated beverages in Starbucks stores that will drive food attachment, create an incremental need state for our customers, and create a new day part for us in the months and quarters ahead.

Turning to China and Asia Pacific, in Q1 our important rapidly expanding China Asia Pacific segment, currently comprising over 4,000 stores in 14 countries, including 209 net new stores in Q1, delivered strong revenue growth of 25% and exceptional strong comp growth of 8%.

These are best-of-class results for any retailer or restaurant operating at our scale in Asia.

This month, Starbucks celebrated its 15th anniversary in China, a market we opened with one store in Beijing in 1999.

We have more than 1,000 stores today, and China remains on track to become Starbucks' largest and most successful market outside of the US.

Just in time for the lunar new year we reached a major milestone with debut of Starbucks gift cards in China.

China customers responded to the Starbucks card overwhelmingly in a positive way with initial sales once again far in excess of our plan.

And in many ways mirroring our US experience.

We currently offer the Starbucks card in different aspects of our My Starbucks Rewards Loyalty program in 12 of the 14 China, Asia Pacific region markets in which we operate.

And in Japan and Hong Kong, we recently made it even faster and more convenient for customers to give the gift of Starbucks choice online with Starbucks eGift.

In India momentum continues, where in Q1 we opened a beautiful new flagship store in The Garden City of Bangalore, and we continue to accelerate that growth.

We now operate 34 stores in four cities, and customer demand for Starbucks stores throughout India literally is at a fever pitch.

We're delighted with the performance of our joint venture with Tata, among the most respected companies in India, and we are poised to grow a sizable portfolio of stores in India over the next years.

Overall, we plan to add a total of 750 new stores across China Asia Pac in 2014, including both our 100th store in Singapore next month, and continue to be driven by the exciting opportunity to introduce our elevated, differentiated, and locally relevant Starbucks experience to millions of new customers in this important, fast-growing part of the world in the years ahead.

Let me turn your attention to EMEA, which in many ways has really had a wonderful performance and I think is consistent with the guidance we gave you a year ago in terms of our confidence that we would turn EMEA around.

Starbucks' important EMEA segment comprising more than 2,000 stores had a potential noteworthy Q1, with revenues increasing 11%, and exceptionally strong comp sales growth of 5%.

We opened a total of 64 net new Company-operated licensed stores in EMEA in Q1, including our first store in Monaco, and believe it or not our first ever store aboard a train on the Swiss Rail Line running between Geneva Airport and St.

Gallen.

We're on plan to open a total of 150 net new stores in fiscal 2014.

EMEA's Q1 performance underscores continued execution against our transformational agenda in that region, and the success of the strategy that includes enhancing our in-store customer experience showcasing innovative, locally relevant food and beverage products and focusing on Company-operated licensed and franchised stores for our new store growth.

Licensed store revenue in the EMEA grew by 38% in Q1 due to the combination of new stores and strong performance in several key markets, including double-digit comp growth in the Middle East and North Africa, where we now have 335 stores.

While we continue to be very encouraged by the progress we have made in the EMEA, as I previously stated we are determined to see this progress continue for the region to reach its full potential.

Turning to Channel Development, our Channel Development segment posted total revenues of $401 million in Q1, representing solid 7% growth in Q1 over last year, and continues to grow market share and increased distribution through CPG channels outside of our retail stores.

The strong direct selling relationship we have built with retailers is enabling us to elevate and differentiate our brand, increase our presence, and enhance our product position.

And the deepening and strengthening of these retail relationships combined with new product offerings and initiatives currently underway gives us confidence that Channel Development growth will accelerate as the year progresses, and at the same it will deliver both double-digit top and bottom line growth in fiscal 2014 and beyond.

Premium single cup is the fastest-growing segment in at-home coffee.

We have grown our share to a current 18% of the segment over the last two years.

Since launch we have now sold way over 1 billion K-Cups and 200 million sticks of VIA, and we continue to build and expand both platforms.

In January, responding to strong customer demand, introduced a new innovative line of VIA Latte offerings, including flavor lattes, and over the course this year you'll see a significant expansion of our line of K-Cup offerings, including flavored Starbucks Coffee in the K-Cup format.

We continue to innovate and add to our leading market share of the premium packaged coffee segment as well, and we now really have a remarkable 26% share of that segment.

We continue to build the Starbucks Refreshers platform and are already seeing the early success on our Starbucks Signature Aisle merchandising initiative, just in time for the rollout of our new ready to drink packaging this spring.

Starbucks continues to offer the world's first and only cross-channel loyalty and rewards program with more than 2.2 million rewards stars earned by customers in the first seven months since My Starbucks Rewards Stars Down the Aisle Loyalty program was launched.

Starbucks' unique combination of value, rewards, and premium positioning will enable us to continue to add to our leading positions and market share in CPG channels.

A few final thoughts before I hand the call over to Troy.

I think this part of my remarks are very important.

Over the last month or so I've heard many traditional brick-and-mortar retailers attribute the downturn in their core business during holiday to factors such as a shortened holiday shopping season, a weakened consumer, the US government shutdown, and poor weather.

Respectfully those explanations ignore a larger fundamental truth, and that truth is that traditional brick-and-mortar retailing is at an inflection point.

No longer are many retailers only required to compete with stores on the other side of the street.

They are now required to compete with stores on the other side of the country.

Navigating the seismic shift will continue to be very, very difficult for many.

But I firmly believe and I submit that Starbucks' solid 4% increase in traffic in Q1 validates that we will be among the small group of retailers to gain from the macro-transference of brick-and-mortar retail sales to online sales.

Underpinning this belief are three dynamic, unique Starbucks advantages.

First, Starbucks offers an experience that cannot be replicated or copied.

The power of our brand, our heritage in coffee, beverage innovation, customization, and the deep emotional connection we have with our customers rooted in long-standing trust and respect that our 200,000 Starbucks partners share with our customers, provides us with an overwhelming competitive advantage, not only domestically but around the world.

Second, we invested and continue to invest well ahead of the curve, and today have world-leading, proprietary, digital, social, mobile payment and card technologies and assets.

These assets are enabling us to broaden and deepen our connection to customers, enhance overall Starbucks customer experience, and further differentiate and distance ourselves from competitors.

And we have a full pipeline of new technological innovations introduced in the quarters ahead that will fully leverage these assets and provide us with even greater benefits into the future.

And we're just beginning to appreciate the full magnitude and possibilities of the Starbucks mobile platform opportunity.

And third, as our strong traffic in Q1 demonstrates, the deep sense of community and human connection that our stores provide our customers as their third place is only going to become more important and more relevant around the world in the future.

Let me say in closing I could not be more confident that Starbucks' unique combination of physical and digital assets makes us one of the very few consumer brands with a national and global footprint to be in a position to build market share and benefit from the seismic retailer consumer shifts underway.

I will now turn the call over to Troy.

Thanks Howard and good afternoon everyone.

The strong start to fiscal 2014 across all of our operating segments led to consolidated results that eclipsed every meaningful record.

Revenues of $4.2 billion, or a 12% increase over last Q1, our 5% global comparable store sales growth was the largest driver, and particularly encouraging is the strength of sales growth around the world.

In fact, this was the first quarter since Q4 of 2010 that all regions posted comp growth of 5% or better.

And traffic continues to fuel that comp growth, growing 4% in the quarter with a 1% contribution from average ticket.

The strong performance from our more than 1,500 net new Starbucks stores opened over the past year also contributed to the revenue growth in Q1.

Consolidated operating income grew 29% to a record $814 million in the first quarter.

This includes a $20 million credit as a result of paying our obligation in the Kraft settlement earlier than anticipated.

Operating margin expanded 260 basis points to 19.2% in Q1, far above any quarter we've ever had, even when excluding litigation credit.

Operating margin expansion was due largely to the lapping of several non-routine expenses in the Americas segment in Q1 of last year.

Commodity cost improvement and sales leverage also contributed toward the expansion.

Earnings per share grew 25% to $0.71 per share in the first quarter, a record, even when excluding the $0.02 impact of the litigation credit.

Our tax rate of 34% was up significantly over last Q1, as we lapped an $18 million benefit recorded in Q1 of last year, primarily from state income tax expense adjustments for returns filed in prior years.

Our performance this quarter clearly demonstrates that comp growth in the heart of our target range results in significant gains in profitability and margin expansion, a testament to the efficient use of capital and strong financial discipline that's embedded throughout the organization.

Now let me take a few moments to briefly touch on results from each of our operating segments.

In the Americas, another solid holiday season and excellent operational executions for revenue, operating margin, and operating income to record levels.

Revenue grew by 8% in the first quarter as strong sales growth at existing stores and sales from 735 net new stores opened this past year, pushed Americas quarterly revenue over $3 billion for the first time ever.

Comp growth of 5% was driven by a 4% increase in transactions.

We did see some softening of traffic and comp growth in December; however our Q1 comp growth was an extraordinarily strong delivery, given the shifts in consumer behavior that retailers faced during holiday as Howard mentioned.

Howard also mentioned food on our comp growth drivers in Q1, which continues to be disproportionate driver to our comp and La Boulange is helping to propel those results.

There have been very significant successes thus far, including croissant sales that have doubled versus our prior offering.

Make no mistake however this is a very complex rollout.

We are significantly uplevering on core food offering across more than 10,000 US stores in two years time.

To accomplish that we're leveraging the learnings from the introduction in many market in fiscal '13 to quickly optimize implementation of stores launched this year.

This includes labor deployment strategies, product assortment choices, and marketing and display optimization.

Overall, we are as optimistic as ever about this opportunity.

In addition to the solid revenue growth in Q1, Americas operating income of $732 million was 24% higher than last Q1, an operating margin of 23.8% reflected an expansion of 300 basis points.

Included in the expansion was the lapping of non-routine items from last Q1, including our leadership conference, litigation charges, and the impacts from Super Storm Sandy.

However, even after factoring those items out, our largest and most mature business of the Americas continues to drive margin expansion while also making investments in labor and food to unlock new levels of growth.

Not only was our 23.8% operating margin a big improvement from last Q1, it was a full 150 basis points higher than any other quarter we've ever had.

An opportunity remains.

Waste, labor, and store maintenance are all under the microscope and we expect new technology, enhanced deployment schedules, and robust renovation program will all deliver improvements.

As we continue to invest in our people, including maintaining world-class health benefits that go above and beyond requirements of the Affordable Care Act, we see greater Management stability to more effectively run stores.

This means we can spend more time focusing on our customers, ensuring they receive the one-of-a-kind, personalized Starbucks experience that drove our solid flow-balanced results this quarter.

Let me move now to Europe, the Middle East, and Africa, or EMEA, where the first quarter represented a continuation of the great strides we are making in the region.

Revenues of $340 million in Q1 grew 11% over the prior year.

It is truly a great start to the year.

In fact, the $33 million in Q1 revenue growth was higher than what we delivered for the entirety of fiscal 2013.

There were several contributors to our topline progress, certainly the signs of a slow but positively trending economic recovery, including declining unemployment in the UK have been helpful.

Beyond that, there are strong signals that our strategy in EMEA consisting of licensed store growth along with a heightened focus on store experience is paying off.

Licensed stores were the largest contributor to the revenue growth, with Company-operated comp growth following closely behind.

The 5% comp growth in Q1 was generated by a 3% increase in transactions.

Perhaps our most positive sign out of EMEA is the fact that the improvements we're seeing are broad-based, all of our major markets have shown improvement and the momentum is building for a great year.

Our topline momentum and disciplined store expansion across EMEA translated into a strong bottom line, as well.

Q1 operating income in the region grew to $34 million, 50% higher than last Q1.

And operating margin expanded 260 basis points to 9.9% as the portfolio shift to higher margin licensed stores drove our highest quarterly operating margin ever.

We are encouraged with the progress we are making in EMEA and excited about what is to come.

Now to China and Asia Pacific, which continues to be our fastest growing and highest margin region.

In the first quarter, CAP revenues grew 25% to $267 million.

Our record number of store openings and their strong performance in Q1 were a key driving force behind our revenue growth.

Additionally, Company-operated comp growth, which at 8% represented the continuation of our strong consistent growth in the region, drove revenues higher.

7 percentage points of the comp growth were due to higher transactions, an acceleration over Q4.

Two year comp growth also accelerated to 19% in the first quarter.

Strong brand awareness, relevant core and promotional product offerings, and an increased usage of the Starbucks card and loyalty program all contributed.

CAP operating income grew 12% in Q1 to $81 million; operating margin of 30.4% represented a 330 basis point reduction over last Q1.

Margins were negatively impacted by a decline in profits from our joint venture in Japan.

This was driven primarily by the sharply weaker yen, but also the timing of investments made in labor and store upgrades, necessitated by the extended spike in traffic we experienced, as both our business expanded and the Japanese economy reinvigorated over with past several quarters.

Excluding Japan, our CAP operating margin expanded slightly over last Q1, despite continued margin pressure resulting from the ongoing strategic portfolio mix shift for Company-operated stores.

Our outstanding performance in mainland China is the major reason we were able to offset the impact of that shift in the portfolio composition as China's revenue and operating income growth easily outpaced the region.

Strong new store performance, effective labor management, and sales leverage are driving our success there.

In Channel Development, robust sales of single serve products and continued growth in food service combined to drive revenues higher by 7% to $401 million.

These revenue drivers were partially offset by the impact of the lower pricing on packed coffee.

While we are growing share in this category, until we lap the list price reduction we initiated last May, we won't see any meaningful impact on revenue growth.

This is one reason we anticipate higher Channel Development growth in the second half of fiscal 2014 than in the first half.

As far as single serve growth goes, Starbucks' K-Cup share of the premium single serve market in the US is now over 15%, our highest point since the launch two years ago.

Our new holiday blend K-Cups were extremely well received, helping propel sales in the US food, drug, and mass channels higher by 65% in the final four weeks of the quarter, which significantly outpaced the category over that same time period.

Additionally, we continue to gain traction on Verismo, which delivered solid holiday sales.

Units sold grew over last Q1 as we nearly doubled year-over-year door count with the addition of several key specialty retailers.

Verismo is an element of our strategy to capitalize in the highly competitive single cup space.

We will continue to invest in the single serve business, which we believe will be an important driver of our long-term growth.

Operating income in Channel Development grew a very healthy 23% to $119 million in Q1.

Operating margin expanded 370 basis points to 29.6%, due largely to 340 basis points of favorability from lower coffee COGS.

Lower pricing on packaged coffee and strong promotions in the quarter partially offset our coffee COGS favorability.

However that was offset by favorability in other operating expenses as a result of decreased marketing due to the launch of Verismo last Q1.

All other segments grew revenues to $159 million in Q1, up $101 million over the last Q1, and we delivered $14 million of operating income, up from the $4 million loss a year ago.

The growth in both revenue and operating income was due to the addition of Teavana, which was not in our prior-year Q1 results.

Please note that Q1 was the last quarter we will not have Teavana in the prior-period results as it was added at the beginning of Q2 of fiscal 2013.

Before I move onto our fiscal 2014 target, let me note that this quarter we corrected an immaterial error in our prior-period financial statements to allow for a more accurate comparison with current results.

Specific to Q1, the impact of last year is that both revenues and other operating expenses were lowered in Channel Development by $5.5 million, and in all other segments by $0.9 million.

There was no impact to operating income.

More details including a full explanation can be found on our investor relations website.

On the balance sheet we continue to maintain a conservative focus while ramping up leverage where appropriate.

During the first quarter we paid in full our obligation to Kraft as a result of the arbitration outcome.

This led to the issuance of $750 million of debt in December, which when coupled with the $750 million we issued in September and prior issuances, puts our total long-term debt at just over $2 billion.

The two most recent issuances result in a meaningful increase to our interest expense that is reflected in our Q1 results and that will continue.

The rapid pace of Starbucks card loads during the first quarter has pushed our quarter-ending deferred revenue balance to over $1 billion for the first time ever, and 29% higher than a year ago.

These loads also boost our already strong cash flow, which for the quarter saw an unusually decline due to the Kraft payment.

The Starbucks card strength, proceeds from our recent debt issuances, and strong quarterly results offset the Kraft payment, however, and we ended Q1 with $2.2 billion in cash, cash equivalents, and available-for-sale investment securities.

Our strong cash position and conservative balance sheets mean that we can continue to return cash to shareholders through dividends and share repurchases.

In the first quarter, we reinitiated our share repurchase program and we continue to target share repurchases to offset dilution of our broad-based stock equity program, that also include our part-time store partners.

With nearly 26 million shares currently authorized as available for repurchase, we will also from time to time be active in the markets to repurchase additional shares based on market conditions.

It was a very strong start for our fiscal year on many levels, and the operating results we delivered in the first quarter give us continued confidence in our full-year outlook.

With the over-delivery on EPS in Q1 we are now targeting full-year fiscal 2014 EPS in the range of $2.59 to $2.67, which includes $0.03 of additional interest expense as a result of the recent debt issuances.

That represents a strong 18% to 22% growth over fiscal 2013 when excluding last year's nonrecurring gains due to the sales of equity in Mexico, Chile, and Argentina in the fourth quarter recording of the Kraft litigation charge.

Specific to the second quarter we continue to expect EPS in the range $0.54 to $0.55.

Remember that traditionally the second quarter is our lowest in terms of earnings due largely to seasonality.

That means that fixed costs, like our interest expense and debt issued over the past six months, have a more dilutive impact on Q2 than the other quarters.

Additionally, last Q2 we had a $0.03 gain on our sale of equity in our Mexico business.

With respect to the second half of the year, we're targeting Q3 EPS in the range of $0.64 to $0.66, and Q4 EPS in the range of $0.70 to $0.75.

The second half of the year represents growth of approximately 20% when excluding non-routine gains and the Kraft litigation charge, and reflects the strong earnings momentum we continue to generate.

We continue to expect a $0.09 to $0.10 full-year EPS benefit from lower coffee costs in fiscal 2014.

This benefit is net of pricing changes taken last year at CPG, as well as investments back into our business.

With perspective fiscal 2015, we now have more than 25% of our Company's lock at rates stable till fiscal 2014.

Given where the market is trading at today, we expect the overall impact of coffee prices to be positive in fiscal 2015 but lower than the benefit in fiscal 2014.

All other previously announced guidance for fiscal '14 remains unchanged, including revenue growth of 10% or greater, global comparable store sales growth in the mid-single digits, consolidated operating margin expansion targeted at 150 to 200 basis points, including moderate improvement in the Americas and Channel Development, high single-digit margins in EMEA, and margins moving toward the low 30% range in CAP, 1,500 net new stores globally, capital expenditures totaling approximately $1.2 billion, and a tax rate of 34.5%.

The balanced, first-quarter strength of our global business sets us up extremely well for another remarkable year.

We have a number of significant growth drivers to continue the outstanding Americas performance.

We have considerable momentum brewing in CAP and EMEA.

Our Channel Development business is taking share from competitors and delivering more of the Company profitability than ever before.

And our fiscal discipline and conservative balance sheet continue to serve us well.

What we have built over the past few years is paying dividends now.

Our growth investment proposition is based on strong double-digit revenue fueled by consistent mid-single-digit comp growth.

And it is based on growing earnings at a rate much faster than the top line.

We achieved all of that in the first quarter.

And we're confident in our ability to continue that revenue growth, margin expansion, and strong earnings growth in the quarters ahead.

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

Mike?

(Operator Instructions)

Your first question is from Joe Buckley with Bank of America.

Your line is open.

Thank you.

Troy, for the current quarter for the second quarter part of the guidance was stepped up marketing, I believe around both La Boulange and the Starbucks card.

Are you still -- is that still the case?

Are you still executing that?

And could you give us an update on where La Boulange is now in terms of the store penetration?

Joe, thanks for the question.

Yes, we continue to expect the same guidance we've given you previously, which is something of a higher marketing spend as a percent is of sales in the second quarter.

And frankly in Q3 and Q4 also anticipating moderately higher marketing spend as we really continue to invest in driving our business, supporting La Boulange, supporting food broadly, and driving innovation throughout our stores.

So that will continue and that is also a fundamental part of our guidance for the second quarter.

La Boulange took a pause in terms of the rollout of the new stores in the first quarter to allow us really to focus on the big holiday period for us.

That will resume here in the beginning of the second quarter, and we continue to expect to be fully rolled out with the first wave of this bakery program full across the US by the end of the fiscal year.

You mentioned the complexity of the La Boulange rollout and I realize it's a huge undertaking and a major change, but has it been more complex than you expected or what are the intricacies of rolling out that you've discovered from your experiences?

No, it is nothing any more complex than we anticipated.

That's a big change like this across a huge store system like we have with the kind of transaction volumes we have through our stores is a big change.

It's a big operational change, it's a big supply change.

And all that we anticipated, and then of course a big rollout like this, like any other retailer experience like we would experience on other product innovations, we learn as we go.

We continue to fine tune labor deployment and the [warming] routines, and product assortment; fortunately customers want a broader product assortment, you'll see us respond and address that as we learn from last year's launches and proceed through the rest of this year.

But that's a normal part of the process.

Everything so far is right on track with what we would expect.

We're extremely pleased with the results we're seeing in terms of the uplift, the fact that food continues to be an incremental comp driver in our business, and we think this is as big an opportunity as we ever thought it was as we continue to build it out from here.

Okay.

Thank you.

Thank you.

Your next question is from John Ivankoe with JPMorgan.

Thank you very much.

Troy, you made a mention that there might have been some slowdown in comps in December.

I'm just hoping in the US, just hoping you could provide a little bit more color on that and whether it was related to core food and beverage or perhaps other items that you sell in the store, whether you think there may be any implications of that as we enter 2014.

Thanks John.

Yes, we did see some slowing in December, relative to previous quarters and relative to the early part of the quarter, relative to October and November.

And we really attribute that fundamentally to the discussion Howard had early on in the call.

Which is fundamentally that significant shift in consumer behavior, less retail traffic that we're all hearing about from other retailers that we're hearing about in the retail traffic reports that a been published.

All of that out there had some impact on our traffic growth in December particularly.

With that said, it's important to note we still served record numbers of customers, we had record traffic come into our stores in December, made record sales volumes in the month of December and for the quarter overall.

We continue to drive traffic, however just at a slightly slower clip than we had coming into that [quicker] month.

Now with that said, no comments about the quicker quarter or implications beyond that.

Just to point out and acknowledge what you already know, but it's worth underscoring, the advantage we have despite that significant change in consumer behavior is the fact that we ended Q1 with more than $1 billion of deferred revenue on our balance sheet.

Dollars that customers have loaded on the card that will become revenue in our stores as we proceed from here.

That's an important advantage that we have a leadership position in and we'll continue to further our leadership as we proceed from here.

But maybe there's some evidence in the comp if I may, that 1% lift in average ticket suggest that maybe you sold less than some of the higher ticket, maybe gift related items outside of the card in the quarter.

Is that the right comment?

Because obviously composition of the comp is not just traffic, it's also average ticket.

You just had very low average ticket growth in this most recent December quarter, and just a sense of what that might trend going forward, especially with the addition of things like La Boulange and Evolution, what have you.

No, there's no message there.

In fact, I think if you look at each quarter for the last two or three years you'd see our ticket growth average 1% many quarters, 2% some quarters, but more often than not within that 1% to 2% range.

We saw the first quarter come in with ticket that was not so distinct from most of our trends, it'll tend to be 1 point or 2 either way, but again that's been evidenced by most of our trends recently.

The slowdown we saw, the moderate slowdown we saw in the month of December in traffic was very broad based.

It wasn't unique to any particular region, it wasn't unique to any particular day part or product set or product line.

It clearly demonstrates and proves to us that there was just a fewer people out there shopping and so fewer people for us to capture and provide some great experiences in our stores.

Understood.

Thank you.

Next question comes from Sara Senatore with Sanford Bernstein.

Thank you very much.

I wanted to follow up on that again, and I guess a couple questions about the shift in the spending habits.

Kind of one big and one small.

In terms of the small, other restaurants have pointed to weather.

Can you disentangle when you look at your data something that says when weather was good your comps were better or worse?

Are there data that you can look at that say that's definitively not the case, it's much more about the shopping habits?

The second point is in bigger picture can you just talk about why you think we're seeing this inflection point now in terms of how people are spending?

And does this have any implications for Starbucks going forward?

I always think of Starbucks as a destination as opposed to a convenience.

But it sounds like there is some piece of the business that gets hurt if there are just fewer people shopping.

This is Howard.

Let me try and answer your questions.

It's not that easy to bifurcate what happened specifically in the quarter with regard to weather and other things, but there's no doubt that throughout the quarter there were unusual events -- don't forget we had the government shutdown, which certainly had an adverse effect on consumer confidence and consumer behavior, both before and after.

And then obviously there was a lot of weather, but in my prepared comments I spoke specifically that I don't think that was the driving issue here.

I strongly believe that the month of December and what Troy just described to John's earlier question will go down as a turning point in the overall way in which people are shopping.

I think clearly the month of December was a gift-giving time, and as a result of that people spent much more time on the web than ever before and we saw that in the online e-commerce sales.

As a result of that on the margin there were clearly less people out shopping, and as a result of that in certain day parts in the month of December there weren't as many people to capture.

Now what Troy just said in terms of the follow-up, your question in terms of going forward, I do believe that there will be a real sea change for many, many retailers, who are going to have a hard time navigating through what I believe will not be a December problem.

This is going to be an ongoing issue and it's going to happen faster than people think in terms of the way people are shopping and how they're spending their time, and the value you can get on the web.

When I mentioned in my closing comments, I believe very strongly that we have the inherent benefits built-in to be able not only to capture incremental traffic, but to drive traffic into our stores as a result of the things that we will be doing, and the combination of physical and digital assets that will get stronger over time.

I do believe that although John mentioned it in his comments that both traffic and average ticket, the 4% number in Q1 to me really is the number that we have looked at as really the sign of the strength and conviction that our customers have about Starbucks.

I don't know of any other retailer or restaurant that drove traffic into their stores at the time, and if you look at how much money we've spent on consumer advertising and trying to capture customers, it's very, very de minimis compared to others.

One thing Troy did leave out that I'll just mention in terms of the average ticket.

We were a little bit more promotional in-store during the month second half of December in terms of recognizing that there was a problem in the country with traffic, and as a result of that the average ticket probably went down a bit as a result of promotional activities.

And I would say with no defensiveness that we look at the 5% comp number and the 4% traffic number in Q1, literally a stunning success given our peer group and given the macro market conditions.

I do believe that there will be challenges for many, many other retailers in calendar '14, and Starbucks will be one of the companies that not only will be able to navigate through it, but will gain market share as a result of the combination of assets that we have.

Okay.

Thank you.

You next question comes from Jeff Bernstein with Barclays Capital.

Great.

Thank you.

Two questions.

Just one follow-up on the La Boulange, and wondering if you give some incremental color in terms of what you're seeing in the stores that already have it, whether it be mix, frequency, average check, or often you talk about what the contribution is to the comp, or any update on the lunch rollout?

And then I had one follow-up question.

Let me speak to that one Jeff.

First, I'd just say we will give you all the details you're probably hoping for, but we've just been very encouraged across all aspects of this food program.

It still is early.

We're only in parts of the stores across US, and (inaudible) part of our new elevated food program, which is the bakery category as you know.

But all indications are we have found something that resonates highly with customers and gives us a chance to dramatically exceed their expectations around food because it's a chance to continue to drive food as a faster growing part of our business, which it has been for some time and that continues to over time elevate food as a mix of the stores overall.

One part I should add to this that is connected with food is that while all day parts food for us had a healthy clip again in this first quarter, midday and afternoon outpaced growth of the other day parts and that's consistent with some recent trends and it's partially fueled by food.

Like people recognizing there is a fantastic food opportunity now at Starbucks in the middle of the day, in the afternoon, snack items, bakery choices for all day long.

They're much better than it used to be.

So every indication for us continues to be very positive, but we have got a ways to go to continue this rollout around the US.

The lunch program continues to be fine tuned and that's the stage it's at right now, and we're very excited as that will begin rolling out late this fiscal year or early next fiscal year more broadly, we're very excited about that next wave of food.

What you're seeing from us is a multiyear elevation of food that we think gives us a tailwind in comp growth and a tailwind in volumes to the stores over that entire span of time.

Got it.

Then just a follow-up on the earlier question being that you have if not 13,000 plus stores around the US.

You talk about the shift from brick-and-mortar to perhaps the online, which obviously you guys seem better positioned than most to deal with that.

But would you say that after the holiday timeframe where I guess that becomes pronounced, do you think there's been a change in the underlying health of the consumer or is it really just around shopping in the holidays and therefore there hasn't really been a change in the health of the consumer per se, just in the matter of how they spend or how they spend their time shopping?

I think we have a lens on consumer behavior and consumer spending perhaps unlike any other retailer with the national footprint we have.

I would say, this isn't quantitative, it's more qualitative and more personal, I think the health of the consumer today is better than it was a year ago.

But I do think it's still a fragile issue.

What we saw with the government shutdown in October is any isolated event of that magnitude can have a very drastic and dramatic effect on behavior and I think that speaks to the fragility.

Having said all that, I think one of the underlying benefits of Starbucks for many, many years is that we are an affordable luxury.

We have been.

We continue to be that.

And as a result of that, the demography and broad-based diversification of our customer base and our store base insulates us from some of the underlying problems that may exist in one geography versus another.

I also think what Troy said is that our ability to take the physical asset of Starbucks and our fixed costs, and if you look at the store today versus even three years ago, the ability with La Boulange, carbonation coming, and things we're going to do with tea are going to extend the day part, leverage our fixed costs, and give us incrementality not only on the introduction of certain products, but many of these things are linked to the opportunities to increase food attachment, not as a result only of La Boulange, but the beverage and the innovation that we're bringing, they're skewed towards food.

Helpful.

Thank you very much.

You next question comes from Michael Kelter with Goldman Sachs.

I wanted to follow-up on La Boulange a bit further, and there are two questions.

The first, are you able to rule out the possibility that any of the same-store sales slow down may have been associated with reduced throughput during the peak sales quarter as a result of the complexities in the store associated with La Boulange?

And the second is, can you talk to us about what to expect as it relates to hot breakfast and hot lunch that are coming next under the platform?

And how far are you able to go with respect to product offerings?

How it's going to be managed logistically at the stores, et cetera.

Let me speak to the first thing Michael, and Howard may want to jump in here too.

There is absolutely nothing, whatsoever to the idea that what's happening with our food program and the La Boulange rollout is impacting throughput or is impacting service in the stores or had anything to do with comp growth slow downs in the quarter.

Absolutely nothing.

We can completely rule that out.

We had an opportunity in our analysis to look at the stores with La Boulange and stores without La Boulange.

I appreciate you don't get to see that side-by-side set of analytics, but I do.

There is no change in our peak transaction day parts, there's no impact we can discern from that.

Now, perhaps, and I would appreciate this, I think sometimes there is a customer perception that things are different in store, there are foods being warmed now.

More people are ordering food, the case looks different.

That change requires some adoption over time.

And I think that it may have created some misperception, but we can fundamentally rule out that there's any meaningful impact on what's happening there.

And we at the same time will continue to deploy more labor and revise the labor routines against food as it grows in our stores.

We will make sure we invest in the right parts of our business to both drive volumes, to meet the customer needs, and to grow profitability in our stores as time goes on.

You kind of have to think about that.

Not only is there absolutely nothing to suggest that there's a throughput issue, but I would also remind you that because of the Starbucks card and the great adoption of mobile payments, that we are speeding up the level of service in our stores.

And when you look at the amount of people that are now paying with the card and the unbelievable rate of adoption, and how accretive mobile payment is, there is no issue whatsoever.

This is a myth that absolutely has no legs, and for all of you listening on the call you should just eradicate that thought.

It does not exist.

Michael, with respect to your second question, I want to leave some surprises out there, I'll tell you we've got some great, new innovations coming, both in that morning category around the savory items and the warm items, as well as at lunch.

Everything we've seen so far encourages us just beginning to go after the big, big food opportunity to open our busiest day parts to drive increased attached.

But also as I said before, it continues, food is (inaudible) into a lunch program at midday as an attach as we rollout the carbonated beverage platform later this summer.

All these things work together, of course.

We know that food has an elevated quality in our stores, not only drives our food sales, but by the way, it drives higher beverage sales, hence when people come in to buy food they'll also buy beverage.

So the whole shift right, the level of volume in the stores, and the whole product line tend to do increase as we find ourselves elevating through.

So more to come, no details, but I think you'll really like the food we have coming towards the balance of year.

Very helpful.

Thank you.

Your next question comes from Matt DiFrisco with Buckingham Research.

Thank you.

I just wanted a little clarification and had a question with respect to the promotion.

You mentioned that the promotional side of the business may have impacted the average check in the most recent quarter reported.

Should we read into that then that in an environment where you have $1.4 billion worth of pent-up demand call it that we would probably not see as much promotional activity?

And then I just wanted to clarify when you keep referring to the change in overall retail doing more online sales and the brick-and-mortar guys seeing the softness, historically shopping happens on the weekends.

So would be read into that then that you literally saw then tangible evidence that the business that might have been correlated with brick-and-mortar traffic associated with weekend business was your weakness in December?

Because you said pretty much that it wasn't day part positioned or timing of the day or timing of the week I read into that.

I think the latter.

There is just no evidence with specificity that there was a weekend issue.

So I think this was just spread across multiple days.

And one thing about the issue of whether was brought up earlier, clearly in the weather problem in a city where people are living during the Christmas holiday season, the initial reaction is not to go out, and so the weather played I think a positive role for the online e-commerce opportunities because it was so convenient.

But we did not see a weekend issue.

And I think one thing I want to go back to is we anticipated this level of change.

The investments we made in the card, the investments we made in mobile payment, all these things were in anticipation of what we saw in December.

It probably came at us and everybody else at a faster clip, but we were in a position to take advantage of, and the best evidence of that is not only the $1.4 billion, but the $200 million that's sitting in the reloads.

Matt, just to underscore part of Howard's point there.

In holiday periods in past years we would see elevated holiday traffic all week long.

Not binding just isolated to the weekends.

So I think that underscores the fact that because we didn't see it isolated to the weekends this time, that's not a message.

So anything else other than actually very closely matches how we would anticipate that traffic around the holiday period as well.

And then perhaps you could help me understand your first question.

Were you saying that related to the promotional discounting that we increased a bit in the first quarter because we have Starbucks card balances?

Are you asking if that means there will be less of that going forward?

Correct.

So I'm assuming you had -- you addressed the December slowdown with promotional activity, that given the pent-up demand, you're probably -- would it be correct to assume that you would not need to do as much promotional activity and if that adversely affects the check.

Let me be specific (inaudible) what we mean to promotions or not.

We tend to throughout the year various times at various offers, maybe around now driving to get these Starbucks card balances loaded and registered so that they become an integral part of our loyalty program.

So you'll see us very active in what we do.

It may not be as specific around merchandise promotions as we did in the holiday period.

That for us is true.

But you'll continue to see us with very active ways to engage the customer and keep traffic coming into our stores at each quarter as we go.

Thank you.

Your next question comes from John Glass with Morgan Stanley.

Thanks.

First thing follow-up to what are the metrics around card usage in January?

What portion of the cards are used in January?

And if you know this, what portion of those are actually used by first-time customers, people that haven't registered before?

That's the follow-up.

I also just wanted to ask about EMEA, we haven't talked about anyplace else around the world.

What was the inflection point and what country or what was the piece that really changed the complements and I think for the first time in a while in that segment?

John, to the first question, in years past most of that incremental new card load tends to come into the stores for not only in the second quarter, but also continuing into the third quarter.

So going into this quarter, now I won't make any specific comments about what we're seeing in the current quarter right now, we're in the current month of January.

We would anticipate that we would see that incremental load come into the business as we progressed through Q2 and even Q3.

That would match more the typical historical pattern.

Now EMEA there has been a very meaningful, steady progress.

I would say I think the first quarter was perhaps a bit of an inflection point as a number of great things came together all at once for us.

But to be clear, these are all the things we have been working on and our team over in EMEA has been working on for two years now, around dynamically changing the store experience, around beverage preparation, execution within stores, around the licensing activity.

All of that is really starting to show up both on the top line now and in the middle of the P&L driving that margin to the all-time high that we reported in Q1.

So it's a bit of an inflection point but it's one that comes after several quarters in a row of preparation and a lot of hard work.

We would absolutely anticipate that improvement to continue.

Not always at the pace that we experienced in the first quarter just to be clear.

But everything we been saying for the last two years is we believe we can continue to develop EMEA into a very, very healthy, strong contributor in our business, and I think Q1 is a fantastic evidence of that.

Suffice it to say is it the UK driven or is it from stronger performance around the peripheral and that market is not as strong as the average?

On the contrary.

UK was very strong for us, but it's also broad-based so all of our major markets in EMEA coming on -- UK, France, Germany, Switzerland, we saw nice improvement across that portfolio of markets.

But the UK looks perhaps leading to a very good quarter in the UK.

Thank you.

Your next question is from David Palmer with RBC Capital Markets.

Regarding Channel Development, you mentioned some coffee innovation in your remarks.

But you've built up a stable of brands outside of coffee, for instance I suspect internally you would have big dreams for brands like Evolution Fresh and where that can go.

I just wanted to get a sense of those dreams and maybe just the timing about will there be a big push beyond coffee with Channel Development.

One of these quarters we'll wake up and you'll be pushing harder and marketing more than you ever have before.

Thanks.

Thanks Dave.

The answer is yes.

We have big aspirations for what more we can do through our Channel Development business, particularly as we have acquired and brought into our stores and really begun to nurture and integrate these new brands and businesses we have.

I wouldn't have you expect any meaningful change in any immediate quarter right in front of us, but we are progressing with the rollout of Evolution Fresh across the country, both within Starbucks stores, but as we build building out that distribution into the CBG channel, that will continue.

We have big aspirations for what we can do with Teavana in the Channel Development business in time.

First priority for Teavana is our standalone Teavana business as well as bringing those teas into the Starbucks system.

But in time as we build the equities of Teavana, as we develop the following around Evolution Fresh, all of these products have great opportunity to then be extended into the Channel Development business.

And really leverage that on top of the infrastructure we have, the relationships and the trade we have, the distribution that we've built.

So you will absolutely see us build more over time in that space.

Thank you.

Your next question comes from Jason West with Deutsche Bank.

Yes, just going back to the discussion around the shift in the consumer over the holidays, just wondering if you guys have parsed through the store base, and if you have identified maybe a percentage of the store base that would be more exposed to that shift, if you could talk about what that number might be.

And are there different things that you are going to do in those stores that are little more retail oriented to kind of address this issue or is it really sort of a chainwide effort that's going to be addressing this?

I would say that any bricks and mortar company that is heavily skewed to malls will be more susceptible to this new change.

I think we are in a unique position in that our mall based business is a very small component of our overall national footprint.

So I don't think that you are going to see us be at a disadvantage because of our real estate portfolio.

I think we've introduced this subject to you not to create fear and trepidation, but really to share with you what we believe to be a new dynamic change in consumer behavior.

But linked to that once again is our strong belief that not only did we anticipate this, but we have the resources, the capabilities, and the assets unlike most traditional bricks and mortar retailers to be a beneficiary of this change.

And I think once again the Starbucks card platform and the Starbucks mobile transaction platform is still in its nascent stage.

And we believe there's an opportunity to extend that value to our customers in ways that we have not yet shared with you.

And we also think as an opportunity over time to take full advantage of what every other tech company is chasing with regard to mobile payments.

Just a quick follow-up on that.

Did mobile ordering you guys alluded to in the past -- something that would be sort of early-stage, or I guess earlier in the pipeline to be able to pre-order with their phone before you get to the store?

I'm just wondering if that's something that's coming soon.

I'm not going to comment with specificity when that is coming, but I can tell you that we understand the value that that will create for our customer base.

And also we believe in significant incrementality as a result of it.

And if you look at how quick we were and how early we were to adopt mobile payment in our stores, you can assume over time we will lead in this area.

Thank you.

Your next question comes from Andy Barish with Jefferies.

Hey guys.

On a margin question in the Americas, obviously the performance in the first quarter was fantastic, but regards to the rest of the year is sort of moderate increases, which implies a flattening of margins, maybe even some challenges in the 2Q to maintain margins with some of the investment marketing spend you spoke about Troy.

Can you give us a little help directionally there for the rest of the year on Americas margins?

Yes, Andy.

No, absolutely not.

We would anticipate for the balance of the year to be able to moderately expand margins in the Americas.

Now the first quarter was more than I would say is moderate.

Remember that was fueled by some unusual events from a year ago, like the leadership conference as an example.

Like Super Storm Sandy was certainly an impact on us as it did with all of the retailers.

So the degree of expansion likely won't be as high for the balance of the year as it was in that first quarter, but we have every expectation of it continuing to grow the top line and improve profitability for us for our system.

Thank you.

Your next question is from Keith Siegner with UBS.

Thanks.

I just want to follow-up on some of the comments related to the promotional activity in December.

If you think about this is a uniquely Starbucks capability to leverage the dramatic increases, the amount of customers and the social and mobile and digital, as that usage has picked up how has this advantage you have picked up?

In other words, how quickly can you respond to these things?

How customizable or personalized can you make initiatives?

And now that you have so many more customers on this program, has the uptick changed from what you would have seen in years past?

Some color around that would be very interesting.

Thank you.

Thanks Keith.

I'm going to ask Adam Brotman, our Chief Digital Officer, to respond to that.

Hi Keith.

It's a great question and the answer is absolutely, we've never been more nimble in terms of our ability to respond using our digital assets.

We saw that this Q1 in the holiday period where we were able to react on a very personalized level, even some geo-targeted aspects of what we were doing, and it's a significant improvement over where we were in the same quarter last year.

And it speaks to the number of customers participating not only in My Starbucks Rewards, but on the mobile platforms.

And puts us in a great position to be even more nimble as we go forward.

Thank you.

You next question comes from Will Slabaugh with Stephens.

Thanks guys.

Just a quick follow-up on Europe, a nice surprise there.

I was wondering if you could breakdown sort of where you feel like you're winning right now, where you turn that inflection point, where there's still an opportunity?

And then secondarily, are you seeing a difference in your Company-owned traditional stores versus performance in some of the licensed stores with a more captive audience?

Thanks Will.

Our license business has been a healthier component of our business in EMEA for quite some time.

We frankly struggled more over the last handful of years in our Company-operated business.

Now as a look at the fourth quarter -- I'm sorry first fiscal quarter and break it down for you a little bit, what's very encouraging to me is that the revenue growth we saw and the trajectory change we saw was almost evenly split between the license business and Company-operated comp growth driven.

The license business ticked a little bit stronger, but not much, both were very strong contributors to the increase in revenue and more pull-through on profitability.

That's two messages there.

One is the significant focus we've had on store execution, on operations, on management of the stores, on supply chains to the stores.

All of that has been a heavy focus of ours as you've been hearing us talk about for a couple of years now and that's [same now].

Absolutely fundamentally we are seeing top line respond, we're seeing customers respond, and bottom lines improving.

We also now as we've really began to mature and flesh out our license strategy to the region, we understand much better today what component of that region should be a licensed execution as we've accelerated that and even over the last 1.5 years converted and sold off some former Company-operated stores to licensees; as we've made that transition that has contributed nicely, and of course that's a higher margin execution and gives us access to customers' Tier point that we couldn't otherwise (inaudible).

In some cases that positions the licensee who is better able to operate a particular geography or venue than we are frankly.

So both of those things are progressing nicely, and I have to say I think we're winning right now both in Company-operated and in license part of our businesses.

Thank you.

The next question comes from David Tarantino with Robert W Baird.

Hi, good afternoon.

My question is on the new store development within the US, and it sounds like you are seeing some very good results from some of your -- the newer class of openings, and you mentioned there's opportunity or whitespace related to drive-through, so I'm just wondering if all of that is giving you more confidence and maybe stepping up the unit growth rate as you look out to maybe 2015 or '16 or beyond.

Is this maybe a precursor for accelerating the growth?

I'm glad you asked that.

I spoke about drive-throughs and I spoke about the $1.2 million for new stores.

But in addition to that we've had unusual success in very unique configurations and store types.

Many of you probably have read that we've opened about four or five stores that are literally old containers and they are drive-through only and walk up.

The volume on those stores against the cost to build them have given us great confidence that we have unusual opportunity in traditional stores, drive-throughs, and what I would just loosely describe as unique configurations both in size and location.

We've also done a lot of work on verticals, for example hospitals where we do not have a lot of penetration.

So I would say that you probably will see us go after a significant level of additional market share in the future with an acceleration of US stores that are highly targeted against the return on investment and the sales that we are currently achieving in the kinds of stores that we have not opened before.

And in addition to that you'll certainly see traditional Starbucks stores around the country.

But I think that despite the commentary on sea change in customer behavior that we have underestimated for the last two or three years the opportunity that we have across North America for additional stores, and specifically additional store types, meaning the drive-throughs.

There's no doubt the drive-throughs have surprised all of us in terms of its volume and return on investment, and the opportunity to build stores that we didn't think existed in the past.

And you'll see us do that in great numbers in the future coupled with what I just described.

Thank you.

You next question comes from Diane Geissler with CLSA.

Good afternoon.

Thanks for the question.

I wanted to ask on the mobile payments in China I think it's fair to say that smart phone technology is vastly improved from when you launched this program in the US.

But even if we look at the US as sort of an example the earlier years where you saw card loads certainly in the 70%, 80%, 90% range, and now they've sort of stabilized in the 30%, 40% range.

Can you talk a little bit about your expectations for China?

The China consumer has embraced smart phone technology, so I think the market is ripe for the launch, the type of platform, but maybe if you could give a little bit more detail about what you plan there, how it will differ from what we see in the US.

And then your expectations sort of how you're going to measure yourself and is it hitting your goals, or not.

If you could give us some details around that I would really appreciate it.

Thank you.

I think Adam's going to answer that question.

I must say that I think we're all sitting here surprised that we haven't got one question with regard to the biggest opportunity in front of us in terms of geography about China, in a market that we have over 1,000 stores in our best performing market outside the US.

If you talk about whitespace, it's unchartered with opportunity.

Diane, it's a great question.

And the answer is absolutely we believe the opportunity for mobile payments is something that we plan to do not only in China, but frankly to many markets around the globe.

We've already brought it to almost 10 markets, and China we believe will be no exception.

Highly technologically savvy, consumer-based, one who adopted our MSR offering in droves, and we believe that China will be a great opportunity to do the kinds of things there that we've done here in terms of mobile payment, global loyalty, and innovation in the store.

So yes, I can't get into specifics; that's coming soon.

Diane, this is John Culver.

With regards to just add on to what Adam is saying, two years ago we launched the Starbucks Rewards program in China.

And in that short period of time we now have nearly 4 million members on the platform.

And to Adams point we are laying the rails right now for a much more accelerated digital experience for our customers in China.

We just launched in concert with this Chinese New Year's the first-ever store value gift card in our stores in China.

And then obviously continue to roll out the opportunity as it relates to Starbucks app on both the iPhone as well as the Android application.

So big opportunity for us to take what we've done in the US, transfer that knowledge and capability into China.

And look at a whole new way of reinventing the experience for our customers.

Mike we have time for one last question today.

The last question comes from Karen Holthouse with Credit Suisse.

Hi.

Another quick question on the drive-throughs.

This is something that's been talked about more in the last couple of calls.

And I'm just curious for units that already had them, is there an opportunity to really go into those units and optimize throughput, find better ways to ensure order accuracy?

And if so, what's the opportunity for that, and what's the timeline for addressing it?

Thanks.

Thanks Karen.

The answer to that is absolutely yes.

One of the things we fundamentally know is that in our drive-throughs, not only do we have a huge opportunities for more drive-throughs around the US, the economics are strong; they have as we've said in past quarters comped higher than our full portfolio, including our non-drive-through stores.

So we see every great indication that drive-throughs -- including by the way to improve throughput, to up level the experience for the customer as they come through.

To change how our barista engages with customer in that line.

They'll move that stack of cards more quickly.

We have significant work underway to do exactly that.

And part of that by the way includes enhanced technology.

Some of the things you've heard us talk about and see us innovate around on payments and ordering in the cafe, inside the store will be very true and very beneficial in the drive-throughs.

So much more to come, but we will go back through all of our existing drive-throughs and make some enhancements that I am quite confident will be incremental drivers to our business.

Great.

Thank you

Thank you Karen.

That concludes our earnings conference for today.

Thank you all for joining us.

We'll talk to you again next quarter.

Good night.

This concludes today's Starbucks Coffee Company's first-quarter fiscal year 2014 earnings conference call.

You may now disconnect.