星巴克 (SBUX) 2015 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 2015 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.

Thank you for joining us today to discuss our first-quarter fiscal 2015 results, which will be led by Howard Schultz, Chairman, President, and CEO; and Scott Maw, CFO.

Also joining us for Q&A are Troy Alstead, COO; Cliff Burrows, Group President US, Americas, and Teavana; John Culver, Group President China Asia Pacific, Channel Development, and Emerging Brands; Adam Brotman, Chief Digital Officer; and Matt Ryan, Global Chief Strategy 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 SEC, including our last annual report on Form 10-K.

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

Please refer to our website at investor.starbucks.com to find the reconciliation of non-GAAP financial measures referenced in today's call with their corresponding GAAP measures.

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

Before I turn the call over to Howard, please note that our annual meeting of shareholders, which will be webcast, will be held at 10 AM Pacific Time on Wednesday, March 18 here in Seattle.

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

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

Starbucks' performance in Q1 was exceptional by any standard or metric.

Financially, each of Starbucks' principal business segments and each of the regions around the world in which we operate contributed meaningfully to record Q1 revenues of $4.8 billion, record Q1 operating income of $916 million, and record Q1 EPS of $1.30 on a GAAP basis, and record $0.80, when excluding non-routine items, principally the gain on our acquisition of Starbucks Japan.

Operationally, we delivered the best in-store holiday experience to customers in our history, bar none, with comp sales accelerating through the quarter and December's performance reflecting the success of our holiday lineup.

For the quarter, we drove nearly 9 million more customer transactions through our US stores than we did in Q1 last year, almost 12 million more globally.

And our global comp store sales grew 5%, with 2% coming from increased traffic, representing our 20th consecutive quarter of comp growth of 5% or greater.

And every geographic region contributed to our performance this quarter, with Americas delivering 5% comp growth, EMEA 4%, and CAP 8%.

These results are nothing short of stunning, particularly when you consider that our comps were calculated off of a US store base of almost 7,000 stores and a global store base of almost 10,000 stores.

Our channel development segment grew sales 10% and delivered strong profitability.

At the same time, we increased our share of premium single serve, premium packaged coffee, and premium packaged tea.

And we delivered record non-GAAP operating margin across the Company of 19.5% for the quarter, an 80 basis point increase over Q1 last year.

I will be discussing a number of strategic initiatives and innovations that took shape in the quarter that will further extend our global coffee authority and leadership in retail and mobile technology and set us up to continue to lead and win around the world into the future.

Then I will turn the call over to Scott, who will take you through our Q1 financial and operating results in detail.

I will start with our reimagined in-store holiday experience that integrated and leveraged food and beverage innovation with all of Starbucks' digital, loyalty, Card, mobile, store footprint, and partner assets to deliver the most successful holiday in our 40-plus year history.

Our new holiday seasonal beverage, chestnut praline latte, was a huge hit with customers and one of our most successful LTOs ever.

Our food platform, driven by new and innovative holiday offerings, as well as our new lunch program, continued to gain momentum during the quarter, contributing to incremental traffic and daypart growth.

And our Dot Collection of premium, highly styled merchandise performed very well as well.

But the really big news is how powerfully the innovation of our card wall and vastly expanded selection of proprietary Starbucks gift cards enabled customers to give a Starbucks gift of choice throughout the season.

To put the success of our holiday card program into perspective, consider these following metrics.

This holiday, 1 in 7 American adults received a Starbucks gift card, up from 1 in 8 last year.

Roughly 2.6 million Starbucks Cards were activated on December 23 alone and $1.6 billion was loaded on Cards in the US and Canada in Q1, up 17% over last year.

The strength and success of our Starbucks Card program reflects both the power and the growing relevancy of the Starbucks brand that is further demonstrated by the fact that over a 31 day period, more than 13 million customers entered into our first ever It's a Wonderful Card sweepstakes for the chance to win Starbucks for life.

Going forward, we know that increased Starbucks Card sales drives My Starbucks Rewards membership and in turn, traffic in our stores.

We added almost 900,000 new MSR members in Q1 alone, bringing our total membership to over 9 million, 23% over -- above where we were at this time last year.

And 5.5 million of our MSR members are Gold members.

We are already seeing and realizing the benefit of increased activity in our stores, as gift cards received over holiday are redeemed, and have additional enhancements to the MSR program planned that I am confident will continue to result in even further acceleration in MSR membership in the future.

It should be noted that MSR is one of the most important business drivers, as new members contribute not only short-term increases in revenue and profit, but also long-term loyalty for years to come.

We continue to see broad customer acceptance and adoption of our mobile payment technologies.

Today in the US alone, over 13 million customers are actively using our mobile apps.

And we are now averaging over 7 million mobile transactions in our stores each week, representing roughly 16% of total tender, more than any other bricks and mortar retailer in the marketplace.

In December, we introduced Mobile Order and Pay into 150 stores in Portland, Oregon.

The Starbucks Mobile Order and Pay experience is a proprietary, fully integrated technology that allows customers to order their food and beverage selections through their mobile device ahead of time, go to their preferred store to pick up the completed order, and pay automatically through the same mobile device that they ordered from.

Mobile Order and Pay saves our customers time by enabling them to avoid the lines in waiting for the orders to be filled, resulting in shorter lines, faster service, improved in-store execution, and an elevated Starbucks experience.

Mobile Order and Pay has been extremely well received by customers in the Portland market.

We will be launching it now in over 600 stores in the Pacific Northwest in the months ahead and will be rolled out nationally later in calendar 2015.

Our experienced to date confirms that once fully rolled out, Mobile Order and Pay will drive a significant increase in mobile payment transactions in our stores overall and have a flywheel positive effect on our overall business, driving both increased MSR membership and app usage and creating significant additional one-to-one marketing opportunities.

As previously discussed, we are also preparing for the introduction of Delivery in the second half of 2015 and are finalizing plans for two distinct delivery models, one of which utilizes our own people -- green apron baristas -- and the other of which leverages the capabilities of a third-party service.

We will have more to share with you on our plans for Delivery in the months ahead, but rest assured that Delivery, like Mobile Order and Pay, will drive incrementality and increased customer loyalty.

Global leadership around all things coffee is and will always remain at our core as we continue to innovate and invest to enhance and elevate the premium, highly differentiated but locally relevant coffee experience we deliver to our customers around the world.

This month, we successfully introduced Flat White, an espresso-forward handcrafted beverage that combines premium coffee quality with creative artistry to deliver a unique and elegantly delicious hot beverage.

While it's very early in its early days for Flat White, we have already seen great attachment for our customers and we are exceeding the early expectations.

Many of you on the call today had the unique opportunity to experience the Starbucks Reserve Roastery and Tasting Room firsthand when you were in Seattle for our investor day.

While I am delighted to report that the Roastery has received an overwhelming response from our customers and has been the strongest opening in the 40-plus history of our Company, well exceeding even our most optimistic projections.

The Roastery is setting new records every week at the same time as it draws both repeat customers and visitors to Seattle at all hours of the day and evening.

Personally, I feel that the Roastery is the finest, most creative, and immersive experiential retail environment of any in the world today.

It should be no coincidence that the Roastery opened in the same year that we identified and shared with you the urgent need for retailers to elevate, deepen, and ultimately redefine how they were emotionally connecting with their customers.

The Roastery represents both premiumization of the coffee experience and a new chapter for Starbucks.

The additional small batch coffee roasting capacity provided by the Roastery is enabling us to source, roast, blend, and market spectacular limited available coffees from around the world, elevate the coffee experience we deliver to our customers, and expand availability of super-premium micro-lot Starbucks Reserve coffees to ultimately 1,500 Starbucks locations.

Customer response to the Roastery has been so strong that in addition to the second Roastery we have planned to open in Asia in calendar 2016, we are now actively looking at real estate in another major US market as well.

The Roastery is also supporting the launch of our new Starbucks Reserve brand and the opening of 100 dedicated Starbucks Reserve stores over the years to come, devoted entirely to showcasing rare, limited, premium small lot coffees as we continue to execute against our plan to elevate the consumer coffee experience globally.

At the same time, we are continuing to invest in smaller alternative store footprints that respond to the continued urbanization of retail.

And we will soon be launching a pilot project around express locations in New York that will offer a streamlined assortment of food and beverage offerings and integrate Starbucks mobile payment and Mobile Order and Pay functionality in order to enhance customer convenience and provide even faster locations in these locations -- faster service in these locations.

Turning to tea and Teavana, as we previously discussed, tea represents a massive strategic opportunity for Starbucks around the world.

And with the integration of Teavana complete, we are now executing our plan to double our tea business to $2 billion over the next five years.

We will accomplish this goal by further elevating the Teavana in-store experience, expanding into targeted select global markets with a focus on regions within our China and Asia Pacific segment, entering multiple new channels of distribution for Teavana, and further developing Teavana's e-commerce platform.

We are already seeing lift in revenue generated by the sale of handcrafted tea beverages in Starbucks retail stores, driven in large part by the very strong customer response to the launch of Teavana-branded Shaken Iced Tea and Teavana tea lattes.

In this month, we launched Teavana hot brewed teas in Starbucks stores in US and Canada to extremely favorable early results.

We will be sharing additional specifics around our plans for Teavana in the months ahead.

Our fast-growing China Asia Pacific region delivered strong sales profits and a Company-leading 8% store comp in Q1 and continues to be a focal point of our future growth.

As we shared with you at the investor day, we have plans in place to double our CAP store count to roughly 10,000 locations and triple our revenue to over $3 billion and our operating income to over $1 billion by 2019.

China, our largest market outside the United States, is a big part of our CAP story and we are well on our way to achieving our goal of having 3,400 stores in China by fiscal 2019.

We now have a presence in 86 cities in China and we will be adding 7 more cities in 2015.

To give you a sense of the size of the China opportunity, last month, we opened our 1,500th China store and now have over 320 stores in Shanghai alone, making Shanghai the city with the most Starbucks locations in the world today.

And we have plans for opening many more.

We expect to take full ownership of Starbucks Japan by the end of this quarter, providing us with the opportunity to accelerate growth across all channels, both in and out of our stores, in ways not previously feasible.

Our EMEA segment demonstrated continued progress against its transformation plan, delivering comp growth of 4%, with key UK markets outpacing the EMEA region overall.

I'm particularly delighted to share with you that the EMEA segment delivered its most profitable quarter in Company history in Q1.

Special recognition goes out to Kris Engskov and all of our EMEA Starbucks partners for delivering these extraordinary results.

Channel development.

Our relationship with Keurig and Green Mountain continues to strengthen at the same time as our K-Cup business continues to grow.

Approximately 100 million Starbucks K-Cups were shipped in December 2014 alone, our largest single shipment month ever, up 20% over December 2013.

Customers have now made Starbucks the number one coffee K-Cup in the category and we had another record share week during the key week before Christmas.

Starbucks' already industry-leading share of premium packaged roast and ground coffee continues to increase as well.

Together, accelerating sales combined with strong operating leverage enabled our channel development segment to deliver 10% revenue growth and strong profit in Q1.

Delivering the complete Starbucks experience for our customers and creating an authentic emotional connection between our customers and our partners has been and continues to be at the heart of everything we do.

This month, we are making the single largest new investment we have ever made in our partner or employee experience.

And it will touch 135,000 partners across our US store base.

Changes include increases in barista and shift supervisor pay rates, enhanced recognition programs, a new food benefit, and updates to our dress code, among others.

At the same time, we are investing in technologies that will help our partners deliver a consistently elevated Starbucks experience for our customers, including introducing technologies to ease and simplify required store tasks, improving access to core business tools and resources, and introducing partner apps with information and resources to facilitate viewing work schedules from a personal mobile device.

We'll continue to listen to our partners and we will endeavor to continue delivering enhancements to the partner experience that exceed their expectations, so they in turn will continue to exceed the expectations of our customers.

And we are making similar investments in locally relevant ways to improve our partner experience elsewhere around the world as well.

In closing, Starbucks is off to a fantastic start in fiscal 2015.

Together, our record-shattering holiday quarter financial and operating results, the historic opening of the Roastery, and the undeniable success of our Card, mobile, and digital strategies underscore the increasing strength of the Starbucks brand around the world, and ideally and uniquely positions us to thrive in the face of this seismic shift in consumer behavior that is underway.

I cannot be more proud or appreciative of our partners and our teams around the world for delivering the record results we reported today and I cannot be more optimistic about our future.

I will now turn the call over to Scott Maw, who will take you through our Q1 financial and operating results in detail.

And then I will be back with Troy to share details on the transition.

Thank you.

Thanks, Howard, and good afternoon, everyone.

Starbucks had a very strong start to fiscal 2015, with each of our reportable segments contributing to record consolidated revenues, operating income, and earnings per share.

Revenues grew to $4.8 billion, a 13% increase over the prior year, driven primarily by incremental revenues from the acquisition of Starbucks Japan, 5% global comp growth, and incremental revenues from the 1,641 net new Starbucks stores opened during the past 12 months.

This was partially offset by unfavorable foreign currency translation.

As Howard mentioned, we saw global traffic increase 2% during the quarter, reflecting the strength of our brand and progress in many of the areas we discussed during investor day.

On a GAAP basis, operating income grew 13% over Q1 to $916 million, resulting in operating margin of 19.1% for the quarter and earnings per share of $1.30.

When excluding non-GAAP items, operating income was $935 million or 18% higher than the prior-year first quarter.

Non-GAAP operating margin was 19.5% compared to 18.7% in Q1 FY14, primarily due to sales leverage, including meaningful cost leverage.

After adjusting for certain items for comparability purposes, we also saw G&A leverage in Q1, as we continue to gain traction early in our efforts in both of these areas.

And non-GAAP EPS grew 16% to $0.80 per share over the prior-year first quarter.

Before going into specifics, I would like to provide a quick update on the status of the Starbucks Japan acquisition.

During Q1, with the closing of the first tender offer, Starbucks assumed majority ownership of Starbucks Japan and a second tender offer to the public shareholders was commenced.

We completed the second tender offer early in the fiscal second quarter and the transaction is expected to close as planned during the first half of calendar 2015.

As of today, we own approximately 94% of the outstanding shares of Starbucks Japan.

Therefore, our Q1 2015 financials reflect the consolidation of Starbucks Japan into our financials for the last eight weeks of the quarter and pre-acquisition JV accounting treatment for the first five weeks.

I also want to explain our non-GAAP adjustments for comparison purposes.

For Q1 2015, we have excluded several items related to our acquisition of Starbucks Japan, including an acquisition-related gain of $391 million that was partially offset by certain expenses related to the transaction.

Combined, these items increased first-quarter earnings by a net $0.41 per share.

And for Q1 2014, we have excluded the litigation credit related to the Kraft arbitration.

You can see the amounts, timing, and description of these items in the detailed reconciliation table provided at the end of the earnings release.

In the Americas, the strong holiday season and excellent execution by our partners drove increases in revenue, operating income, and operating margin to record first-quarter levels.

Revenue grew by nearly 10% in the first quarter, driven by a 5% growth in comps and revenues from 766 net new stores opened this past year.

Americas delivered its 20th consecutive quarter of comp growth of 5% or greater.

A notable 2% increase in transactions in Q1 was testament to the success of the traffic-driving initiatives we discussed during our last earnings call and at our investor day.

We increased operational focus to help drive transaction growth across all dayparts, including strong growth at peak and accelerated during holiday.

And for the fourth consecutive quarter, food contributed 2% to comp growth, including the excellent performance by our breakfast sandwiches, with net sales growing 29% in Q1 versus the prior year, and strong holiday limited time food offers.

Sales of our lunch offerings increased 15% over the prior year, driven by our warm sandwiches, which included three new items year over year.

Moving on to beverages, our core and limited time offerings contributed almost half of the US comp growth during Q1.

Holiday beverages delivered 9% year-over-year growth and total tea sales in our US stores increased 17% over Q1 2014.

The significant momentum gained from Teavana's handcrafted ice teas this summer continued in Q1.

In addition to the solid revenue growth in Q1, operating income in the Americas grew 12% over the prior year to a new all-time high of $818 million.

Operating margin expanded by 50 basis points to 24.3%, a new Q1 record, due primarily to sales leverage.

Margin opportunities still exist in the established Americas business over the balance of the year when considering -- even when considering the additional investments in 2015 for our US store partners.

As you know, Target Corporation has made the decision to close all of their Canadian stores.

We have a very good relationship with Target North America and our 132 Canada-based licensed stores have been profitable and growing.

However, given the impact on our operation and to the customer experience from Target's decision, our stores will close tomorrow, January 23.

We don't expect these closures to impact our guidance for 2015, nor will they be material to our Americas business results.

Moving on to EMEA, where the momentum and remarkable results from fiscal 2014 continued into the first quarter.

Revenue grew by 3% after adjusting for $15 million of unfavorable foreign currency exchange impact.

Revenue growth was driven by 4% comps in the first quarter, including 3% traffic.

Among the most positive signs from EMEA is the record two-year comp of 9% that was achieved in the first quarter.

EMEA operating income in Q1 grew 49% over the prior year to $50 million, a new all-time high.

Operating margin expanded 510 basis points to 15% as sales leverage and continued cost management, driven by the portfolio shift to higher margin licensed stores and other operational improvements, drove the segment's highest quarterly operating margin ever.

We now expect EMEA operating margin to be at the high-end of the 10% to 12% target range we gave to you last quarter.

Momentum continues to build in EMEA and we are very encouraged by the broad based improvements in both our largest Company-owned markets and our licensed stores.

Across EMEA, Q1 licensed store comps were in the high single digits, with comps in the Middle East in the double digits.

Turning to China Asia Pacific, CAP revenues grew 86% over prior year in Q1 to $496 million, principally the result of the Starbucks Japan acquisition.

Revenue growth was also driven by 767 net new store openings over the last 12 months and strong comp growth of 8%, all of which resulted from increased traffic.

China comps continue to trend higher than CAP comps as a whole.

Adjusting out the net revenue increase of $172 million attributable to Starbucks Japan, CAP revenue grew over 20% for the 18th straight quarter.

On a GAAP basis, CAP operating margin grew 34% to $108 million in Q1 and operating margin declined 860 basis points to 21.8%, driven by the impact of the ownership change for Starbucks Japan.

Noteworthy is that under the previous joint venture ownership structure, our Japan margin was over 100% and our Japan store level margin remains among the highest in our global portfolio.

The acquisition of Starbucks Japan was immediately accretive on a non-GAAP basis.

We continue to believe that the CAP margin for 2015 will be in the high teens.

Excluding the amortization of intangibles associated with the Japan acquisition, CAP operating income on a non-GAAP basis increased by 43% over Q1 last year.

Operating margin, excluding the full 1,060 basis point impact of our ownership change in Starbucks Japan, increased by 200 basis points, driven principally by strong sales leverage and a continuing emphasis on improving operations in the region.

Strong performance from China's new stores and overall revenue and margin expansion contributed significantly to CAP's excellent performance in Q1.

Starbucks China launched eight Reserve stores in five cities during the quarter, including a world-class flagship store in Chengdu.

Across the region, digital assets, such as mobile apps, e-gifting, Starbucks Card, and My Starbucks Reward continue to gain significant momentum.

In channel development, Q1 was very strong, as we gain market share in our US business, despite significant competitive pressure.

Robust sales of K-Cups and healthy growth in packaged coffee drove revenues to a new quarterly record of $443 million in Q1, a 10% increase over the prior year.

Operating income for channel development grew 33% in Q1 over the prior year to $158 million, another quarterly record.

And operating margin was 35.6%, a 600 basis point increase over last year.

Coffee cost favorability and efficiencies in cost of goods sold were the primary drivers of this improvement.

As we mentioned last quarter, we expect modest improvement in channel development margin for the full year compared to 2014, with commodities and COGS favorability lower in the latter quarters of 2015.

Starbucks K-Cups gained the leadership position in the category in December, with an 18% share during the last five weeks of Q1, our highest share since launch.

Overall, we shipped 232 million Cups in Q1, 17% greater than last year, driven by strong customer response to new flavors, such as cinnamon dolce and mocha, and limited time offers, such as fall and holiday blend.

Our recently launched single origin K-Cups, including Rwanda Rift Valley, also contributed to growth, demonstrating customer demand for these excellent varietals.

Starbucks' packaged coffee also gained share during the last 5 weeks of Q1, growing to 28% and exceeding 30% for the first time during the key merchandise week of the month.

Our cross-channel loyalty program, Stars Down the Aisle, also played a role in these results, with 1.7 million MSR members entering codes through grocery in Q1.

Almost 12 million codes have been entered since the launch of the program less than 2 years ago.

Teavana's performance, which is included in the all other segments, was relatively flat to the prior year.

However, as Howard mentioned, sales of Teavana handcrafted beverages through our Starbucks stores in the Americas segments has driven exceptional growth in tea category revenue year over year.

Regarding taxes, our Q1 tax rate was 24.2% and the decrease in the rate was primarily due to the impact of the gain related to the Starbucks Japan acquisition, which is almost entirely nontaxable.

As I mentioned at the outset, Starbucks had a very strong Q1, with both solid revenue growth and margin expansion.

This performance gives us the confidence in now targeting non-GAAP EPS of $3.09 to $3.13, thus moving the bottom end of our range up slightly from our previous target range while retaining the top end.

A higher gain on the Japan transaction results in our raising the 2015 GAAP EPS target up to $3.53 to $3.58.

Revenue growth is also expected to remain within our previous target range of 16% to 18%.

Noteworthy is that based upon where exchange rates are today, a stronger dollar will adversely impact revenue growth and operating income growth by about one point each.

We are confident that we will be able to offset this foreign exchange impact, given the strength of our Q1 global operating results and the progress we will continue to make in leveraging COGS and G&A.

It is also important to note that the vast majority of this currency impact represents only the effect of translating our foreign earnings into the US dollar for reporting purposes.

We actively hedge our largest real economic cross-currency cash flow risks.

We are now expecting Q2 GAAP EPS in the range of $0.63 to $0.64 and non-GAAP EPS in Q2 is expected to be in the range of $0.64 to $0.65.

The second quarter is when the majority of our US store partner investments begin in earnest, including our new food benefit and the changes in wages Howard mentioned earlier.

This will have some impact on Q2 Americas margin.

I also want to acknowledge that we see many external analysts' projections for Q2 EPS growth above 20%, higher than the Q2 earnings range I just mentioned.

I suspect that this difference is driven by our increased partner investments in Q2 and some seasonality that we always see in our second quarter.

I want to reiterate that our fiscal 2015 non-GAAP EPS growth remains the previously targeted 16% to 18%.

We expect the first half of the year to be near the lower end of this range and the second half of the year to be closer to the upper end.

Increasing revenues, strong global comp growth, new innovation, including Mobile Order and Pay, and the strong momentum we are seeing across our business gives us confidence in this slight acceleration, despite additional foreign translation impact.

In addition, we expect some acceleration in the benefit from our COGS and G&A leverage over the course of the year.

Moving on to commodities, we have recently priced a significant amount of coffee, as prices have moved down within our target range over the past six weeks.

As such, we now have 94% of our 2015 coffee needs priced and therefore, we expect commodity costs to be roughly flat to 2014.

We will continue to provide updates as we price our coffee needs for fiscal 2016.

We continue to expect to add approximately 1,650 net new stores globally.

Of the 1,650, we expect 650 in the Americas, 150 in EMEA, and 850 in China Asia Pacific.

The outlook for our effective tax rate continues to be around 31% and we expect capital expenditures of $1.4 billion for fiscal 2015.

In closing, Q1 represented another quarter of excellent global growth for Starbucks by any metric.

Our strong results in the quarter and confident outlook for the year reflect many of the critical strategic growth initiatives we outlined during investor day.

We expect EPS growth to accelerate as we move into the back half of the year and coffee costs remain well under control.

And our financial forecast includes an appropriate level of investment in our store partners and in food, beverage, and technology integration.

We consider this as an investment and not an expense, as it is integral to our continued growth in sales and profits over the long term.

We look forward to updating you on our progress as we move throughout the year.

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

Howard?

Scott, thank you very much.

I have one more important announcement to share before moving on to Q&A.

Today, I am extremely pleased to announce that Kevin Johnson, former CEO of Juniper Networks and former President of Microsoft's platforms division and a five-plus year Starbucks Board member, will be joining the Starbucks senior leadership team as President and Chief Operating Officer effective March 1. Welcome, Kevin.

Kevin has worked closely with the Starbucks senior leadership team and me as a Board member since 2009, collaborating and providing deep insights and wise counsel in connection with our transformation in 2009 and many of the strategies we've outlined at our investor conference last month and will be executing against for the next several years.

Kevin and I have been discussing his coming to the Company in order to contribute his insights and expertise and help us as we grow our business in North America and around the world for some time.

These discussions were independent of Troy's subsequent decision to take a sabbatical.

Kevin will be reporting directly to me.

Now as I said at our investor day and I want to underscore here, my passion and personal commitment to Starbucks has never been greater.

I also want to make it clear that Kevin's addition is not part of some unannounced succession arrangement, because it's not.

Instead, Kevin's public company experience and his deep management technology, global operating company supply chain, mobile, and digital expertise will be a fantastic addition to already the strongest and most talented management team in our history.

Please join me in congratulating Kevin, who is with us this afternoon, and welcoming him to Starbucks.

And I've asked him to say a few words of introduction.

Kevin?

Well, thank you, Howard, and greetings, everyone.

For nearly six years now, I've had the great privilege of working closely with Howard and the SLT in my role as a Starbucks Board member.

Through this involvement, I've gained a deep and unique insight into Starbucks' business, its values and culture, and the critical role that our 300,000 passionate partners play in delivering an elevated Starbucks experience to millions of customers around the world, each and every day.

In December, I attended the Starbucks investor day, at which time we outlined our strategies for the next several years.

I'm fully committed to working with Howard, the SLT, and our partners around the world to fully operationalize those strategies and to deliver results consistent with the expectations we shared, our core values, and our culture.

As always, performance driven through the lens of humanity.

Troy and I are already engaged to ensure a smooth handoff as he begins his sabbatical on March 1. My prior business experience leading global organizations, combined with my Starbucks Board experience, should enable me to quickly ramp-up in my new role.

I want our partners and shareholders to know the deep sense of responsibility and accountability I feel to fulfill our aspirations and deliver results.

Howard?

Kevin, thank you so much.

And on behalf of all of us today, this is a wonderful opportunity to welcome you to Starbucks.

This also marks Troy's last earnings call before he takes his sabbatical -- a coffee break, in Starbucks parlance.

Troy has been a true friend, a great leader, and a passionate 23-year Starbucks partner, who is beloved inside our building and around the world.

I'm going to miss Troy and my daily conversations and collaborations and look forward to the day when he is ready to return to the Company.

Troy wanted to say a few words to all of you in the financial community before taking his leave.

Troy?

Thank you, Howard.

I have had the incredible opportunity to be part of Starbucks for 23 years, starting from the early days as a small privately held coffee company, with stores primarily just here in the Northwest.

And while very difficult to step away from this place that I know and love so deeply, I recently made the personal decision to dedicate the next year to my family with four school-aged children.

What gives me great comfort in stepping away right now is the incredible strength of the organization and momentum of the business.

As we demonstrated during the investor day here in Seattle in early December, the performance of the business around the world is stronger than ever, the opportunities ahead of us are greater than ever, and the aspirations of the Company are higher than ever before.

The holiday quarter we just reported underscores that strength and opportunity.

We are fortunate to have a leader of Kevin's caliber and experience able to join Starbucks at this time.

I've worked with Kevin in his role as a Board member for many years and have benefited from his experience and insights.

His experience as a public company CEO, combined with his years on the Starbucks Board, positioned him to hit the ground running.

Kevin and I have already spent much time together in the transition and will engage further together over the next month to ensure everything transitions smoothly.

Most of you on the call today, I have come to know very well over the years.

Thank you for your engagement and your support of Starbucks and of me.

I assure you that the best days for Starbucks are still ahead.

And finally, I would like to say thank you to Howard for giving me incredible opportunities and support over many years and for supporting this personal family decision at this time.

Thank you, Howard.

With that, we will turn the call back to the operator for Q&A.

Mike?

(Operator Instructions) Jeff Bernstein, Barclays.

Great.

Thank you very much.

Congratulations, Troy.

A question on the mobile payment platform.

I know it got a lot of attention at the analyst day and it seems like that's probably the biggest opportunity from a traffic driving standpoint.

It sounds like Portland must've gone reasonably well.

It sounds like you have identified the next few markets in the rollout by the end of fiscal 2015.

Just wondering whether you can give us some color on maybe early learnings over the past couple of months in terms of any challenges or nuances you've had to overcome or whether there is any insight into what kind of incremental sales or how it helps speed of service.

I saw there was some quotes from Scott earlier this afternoon in terms of the significant benefits that it provides.

Trying to get some insight in terms of your early learnings and what we can expect in the years to come.

Thanks, Jeff.

This is Adam Brotman.

I will answer that.

First of all, we are not breaking out specifics, but what I can tell you is we have completely hit the ground running in Portland and the experience to both our customers using the app as well as the partners operationally has met and even exceeded our expectations.

So we are full steam ahead in terms of rolling this out around the country, as you mentioned, over the course of the rest of this calendar year.

And what we've learned is that this is absolutely every bit of what we thought it would do, in terms of helping us add convenience for our customers, integrate it fully into not just our technologies, but our operational flow, and we are as confident as the day we launched it, that this is going to help drive incremental transactions, improve throughput and capacity, and even help us accelerate MSR.

Great.

Thank you.

John Glass, Morgan Stanley.

Thanks very much.

Scott, you outlined $1 billion in cost savings over the next four years and there's several buckets.

How much of that is in your thinking for 2015 guidance?

And specifically, you commented on you're expecting a second half acceleration in earnings growth.

Is that largely due to these cost savings coming in or are you -- do you believe that there is a sales benefit -- an uptick in sales in the back half to drive that?

Yes, thanks, John.

Maybe I will answer the back part of that first.

There's a number of things as we look into the second half of the year that will help us accelerate profit.

It includes cost of goods sold leverage, which I'll get to in a second, but also some of the work we've done around support costs and then what we believe will be accelerated revenue opportunities through things like Mobile Order and Pay, some of the things we have around innovation with beverage and some of the things we see in our international operations.

So all of that is driving what is a slight acceleration in our earnings growth in the back half of the year and we are pretty confident we're going to see that.

As far as the COGS savings, we think it will be about $200 million this year.

You may remember from investor day in 2013, we had $100 million that we booked.

In 2014, it was $140 million.

And in 2015, it's getting up close to $200 million.

So great work by the supply chain team and all the business units.

And we are well on our way to recognizing most of that.

Most of that is already in the run rate.

Thank you.

Karen Holthouse, Goldman Sachs.

Hey.

Congratulations on the quarter and on Troy on what comes next.

Kind of a little bit of a deep dive question.

If you look in the Americas segment, we have now had a couple of quarters where licensed store revenue growth has been pretty meaningfully exceeding unit growth plus comp growth.

Is there something -- at the same time, coffee places are going down, so you would think that that would be the opposite.

Is there something in store composition or anything else in the model that we might be missing there?

Karen, hi.

It's Cliff.

The significant difference is with our approach to food.

And for the first time ever, most of our licensees are now taking the incredible La Boulange range of food plus our breakfast sandwiches and that has allowed us to increase our revenue stream through our licensed stores.

And it's been extremely well received.

It also helps us improve our offer to the customers, with greater consistency than we've ever had before.

So food is the meaningful change.

And I would just add to that we are seeing comp growth in our licensed stores that's equal to or greater than what we are seeing in our Company-owned stores.

So it is the combination of those two things that's driving revenue.

Great, thank you.

John Ivankoe, JP Morgan.

Hi, thank you.

I wanted to see how much of a change there was in this enhanced partner experience and maybe what was driving that.

And maybe what was driving that is just you are in a position of strength, where you can just improve how you treat your employees and how you attract and retain the absolute best talent that was out there.

But just wanted to understand a little bit more substantive.

How their day to day or their year to year is going to be affected?

And maybe if you were beginning to see some tick up in turnover or in execution consistency as the labor market for the better people is starting to get a little bit tighter?

Hey John, this is Howard.

You probably better than almost anyone on the call -- you've covered the Company since the IPO -- you know firsthand that the culture, values, and guiding principles of our Company are directly linked to the equity of the brand.

And the equity of the brand is defined purely by the relationship we have with our customers, which is defined by our people.

There's no issue of increased turnover or anything like that.

We are in the business of doing everything we can not only to invest in customer-facing experiences and enhancements, but we have to do everything we can to do the same thing with our people.

Starbucks has had a long history, as you know, of equity in the form of stock options, healthcare now, college achievement, in which we are providing free tuition for juniors and seniors.

We want to do everything we can to demonstrate the humanity of the Company.

And we have felt since day one that investing over the long term in our people is the best investment we can make in the customer experience.

So we are taking these steps not because we have a problem, we're taking these steps because it's the right thing to do.

Sara Senatore, Sanford Bernstein.

Thank you very much and my congratulations to both Kevin and to Troy on these new stages.

I actually wanted to ask about this transition in the context of a couple things.

First of all, how Kevin's responsibilities might be similar to or different from what Troy had, in the sense that it sounds like Kevin has a lot of experience, but not in retail or restaurants, per se.

And then I don't know if you can talk at all about this, but obviously, Kevin has been a Board member since 2009, so not really new to the story, but -- so I guess, is there any sense of what kind of initiatives he might undertake or where he might see the opportunities there?

Well, this is Howard.

I will start it out and give Kevin his initial opportunity to share his own thoughts with you.

If we were hiring someone from the outside who did not have almost six years of experience with the Company, I think this would be a different story.

The transition would be longer, the learning curve would be longer, but Kevin has lived and worked in Seattle for many years at Microsoft.

So he has been a customer at Starbucks for many years.

And as a Board member, he has been the kind of Board member that has been deeply involved in the strategies of the Company and specifically, aligning himself and helping the digital side of the transformation of the Company, which has been so successful with Adam.

His responsibilities in many ways will mirror Troy's, with the exception that he is picking up digital with Adam and he will have IT as well as supply chain, which Troy had.

Scott Maw, who had been reporting to Troy, will be reporting to me.

And Kevin will have the geographies, which are represented at this table with John and with Cliff.

And I spent many, many hours with Kevin over the many years, sharing with him the aspirations we have at the Company.

And he is very, very well versed in what we're trying to do and the opportunity that lies ahead and we are very, very fortunate in many ways.

I said to a reporter a couple hours ago having Troy leave the Company is in no doubt a significant loss, but we are so fortunate at the same time to, in a sense, have a number one draft choice in Kevin Johnson.

So Kevin, I will give you your own opportunity.

Well, thanks for your question.

Clearly, my professional experience has been in the tech industry, companies like IBM and Microsoft and Juniper.

But in that experience, I've had the opportunity to work with many retail industry customers on technology-based solutions and ways to help them drive their business.

Now certainly, as Howard mentioned, my experience on the Starbucks Board since 2009 has provided me a solid understanding of the strategy and the culture and the leadership talent that we have here at Starbucks.

And certainly, Troy and I are working closely together on the transition, just to ensure that this is a seamless smooth transition.

And in terms of what initiatives to undertake, I think at the Starbucks investor day in December, we outlined the strategy.

And -- so my focus is going to be working with the SLT and working with our partners to operationalize that strategy.

And that's going to be my priority.

Thank you, Kevin.

Thank you.

David Palmer, RBC.

Thanks.

Congrats on the quarter and Troy, congrats on your career.

Last year, Starbucks talked about a significant fall-off in results after Black Friday.

How did the growth rate change through this last quarter and perhaps what did that tell you about your business?

And then separately, Scott, with regard to your COGS commentary, dairy and energy prices, they've come off lately.

Is that a factor in the back half?

Thanks.

David, I will take the holiday question and then give it to Scott.

You are exactly right.

I think we were here last year at this time and I think I said for the first time that the US retail environment and the consumer we are in, we are experiencing a seismic change in consumer behavior.

And as a result of that, bricks-and-mortar retailers would have to redefine their relevance.

We went to work at this time last year in completely redefining and transforming not only our holiday season, but in many ways the calendar year 2015, with leveraging all the assets we have on specifically understanding how we could utilize MSR, our digital platform, to lower our cost of customer acquisition and emotionally build a relationship with them that was not only based on them being in our stores, but driving traffic in our stores.

And so the results that we posted today is a manifestation of all that and specifically, the merchandise relationship that we built around the Dot Collection, the Starbucks Card, and we got very fortunate in once again hitting a bull's-eye with chestnut praline latte.

And we may have another winner of that magnitude with Flat White.

Don't know yet.

But clearly, the beverage resonated with our customers and we were in a position like -- unlike many other retailers to demonstrate such relevancy in-store with a beverage that created demand, an experience that was spot on in terms of the Card and the gifts of choice, and Starbucks for Life just added to all of that in terms of the excitement.

And I would just add that our people were so proud of how we went to market for holiday.

And they rose to the challenge and were able to really develop that kind of relationship with our customers.

Serving millions of customers more than we did last year, we should not underscore -- we're talking about 9 million more customers.

It's an unbelievable number and that was US alone.

And we saw the same level of accretion worldwide, with 12 million more customers.

It's a stunning number in any environment, especially when you consider the environment we are in with a different type of consumer who is really turning away from traditional bricks-and-mortar retailers.

Scott?

On the commodity piece, the way that it shapes up for the year, David, is we saw some significant coffee favorability in the first quarter.

Not much on dairy and diesel.

And you can see that coffee favorability in the channel development margin improvement.

That coffee favorability at that level is not going to continue in the back half of the year.

And so you will see channels' margin growth come down.

However, we do see offsetting that some favorability in dairy and diesel.

So when you add that all up across the year, we think commodities will be roughly neutral year over year.

But that's kind of how it shapes up.

Thank you.

Keith Siegner, UBS.

Thank you and similar congratulations to everyone involved.

I just want to circle back and ask one more question on the XOP -- or the mobile order and payment, since it's such an exciting part of the story for this year.

Scott, maybe you can help me think about this.

When we think about that pace of rollout -- and we know what the completion date is -- but how does the pace of the rollout happen?

Is it a slow build?

And we get a big boost right at the end?

And then similarly, how do the costs associated with this role?

Do they come a little early?

Maybe is that part of what leads to some of the cadence of the year?

If you could help me with those two pieces, it would be very helpful.

Thanks.

Adam, why don't you start and then Scott can jump in.

Okay.

Keith, in terms of the rollout pace, it's going to be fairly evenly spread out throughout the year.

So it's neither frontloaded nor backloaded.

And so that's kind of how we are thinking about it.

And so far, everything seems on track for that.

And as far as the cost goes, because of the rollout, the cost is pretty evenly spread as well.

And I will just remind you, there's not a lot of cost.

There is some incremental costs that would happen this year that because of how integrated this is with our existing technology and how seamlessly it works with our existing system, that cost is manageable.

Can I do one thing, also?

There's lots of companies who are ringing the bell about Mobile Order and Pay, but in my prepared remarks, I specifically talked about this is a proprietary integrated relationship that we are building with our infrastructure and in turn with the customer.

Adam, can you just -- you or Matt just touch on that for one minute?

Yes.

I mentioned this at the investor day, but this is -- what's so unique about what we're doing is that we're not starting from a cold start.

We already have 13 million active mobile users.

We have the POS and payment capability.

We have MSR now up to 9 million-plus.

And so for us, we're simply adding on mobile ordering onto that stack of proprietary integrated technology that allow us to do something like that.

And it sets us up, frankly, for Delivery as well.

So the pace of innovation, our ability to roll it out, and positively influence our business overall is because we have built this and integrated it in the way I just mentioned.

And the other thing I just want to say one more time is that traditional advertising and marketing to try and overcome this seismic shift in consumer behavior is probably not going to work for most people.

The relationship that we have built with our customers through mobile payment, through MSR, through Gold members, and now Mobile Order and Pay and Delivery is a significant driver in not only elevating the relationship we have with our customers, but significantly lowering our traditional cost of customer acquisition, especially when you compare it to other national retailers.

Thank you much.

David Tarantino, Robert W Baird.

Hi, good afternoon, and congratulations again to everyone.

My question is a follow-up on the Mobile Order and Pay experience you've seen so far in Portland.

And really, I wanted to focus on the operation side of this.

And I know there was some potential changes in how the back of the house or the baristas operate and some potential conflicts with how customer timing and pickup might work.

So I was wondering if you could comment on your experience so far and if your operations are running as smoothly as you would have envisioned at this stage of the game.

David, it's Cliff here.

It's been incredibly smooth.

We did a lot of work up front.

As Adam has already said, we built off existing platforms, we integrated it with MSR, it is totally intuitive, and we took the existing flow in the store, have built a printer into the register line-up, so it is an absolutely seamless experience for our baristas.

And it doesn't change the routine for the bar as consolidation area for food and beverage to come together.

Quite frankly -- and I say it without fear of contradiction from any of my colleagues here -- it has been seamless.

And we are delighted by the way the customers from day one, when we were down in the market, and our partners have embraced this and that's why we are so confident we can meet this 2015 rollout.

And I guess one quick follow up.

Have you run into issues with the timing of the order being prepared and the timing of the customer picking it up?

Is that -- I know that was one potential watch out, but is there any issues like that that you are still working through or is it working pretty smoothly?

No.

We have had, David, an incredible smoothness in this.

There are obviously individuals who will learn it.

It's a new technology.

We didn't go in with a narrow test or pilot.

We went in replicating our final rollout plans.

We're learning along the way, but it has been -- it has improved every day.

Adoption has grown from day one and we are extremely confident about this.

Great.

That sounds great.

Thank you very much.

Matt DiFrisco, Buckingham Research.

I just had a follow-up and then a question.

I just wanted to understand.

You made a comment, Scott, regarding the investment in your partners and how that's going to be a little bit more -- or it comes into 2Q and that's somewhat of the 16% or the lower end of the full-year guidance in 2Q and then the somewhat ramp in the back half.

I'm just curious, isn't that, though, like wages?

So I don't know why -- is there a level of investment that is going on in 2Q or a conference of sorts or one-time training or something that is weighted in 2Q?

If you could give some color on that.

And then my question was with respect to Portland and the digital.

I'm curious on if you have had an early read in the first six weeks or so of the rollout or four weeks of the rollout, what you are seeing in winning over more people.

Has Portland outpaced bringing people into the mobile app versus other regions?

Obviously, everyone is moving over, but are they moving over faster because of the added benefit of Mobile Order and Pay?

Thank you.

I'll go first and then I will turn it over to Adam.

Matt, what I was referring to was if you look at analyst estimates for the second quarter, they are north of 20% on average.

And I was trying to speak to what might be missing in those forecasts.

And I think this investment that is starting really in January -- and you are right, continuing all year in our forecasts -- in partner wages and other benefits might be an explanation for that difference between what we're seeing and what you are seeing.

What is really driving the second half of acceleration in earnings -- and by the way it's a pretty slight acceleration, from 16% to 18% -- is all the things that we talked about on the topline and the momentum we see in the business and then the things we're doing in the middle of the P&L, both within the stores and within the supply chain and support costs.

We see that picking up a little bit in the back half of the year.

Adam?

Again, we are not -- well, I can't get into specifics.

The answer is yes, we are seeing incremental driving of MSR membership, usage of our app.

And what is so exciting about that is we have -- this is still in beta mode in terms of -- we haven't even put this on our Android platform yet, which is coming soon.

We have additional features to come, so we're just getting started.

And we like what we see early on in terms of all the drivers that we talked about at the analyst conference.

And Matt, while I am clarifying some comments that I made earlier, I want to make sure everyone is clear that Target stores that were closing in Canada are licensed stores.

And then I want to make sure the amount of non-GAAP EPS related to the Japan transaction is $0.49.

I may have said $0.41.

So I'll clean all that up.

Thank you.

RJ Hottovy, Morningstar.

Thanks.

Had a question about lowering the cost of customer acquisition.

Specifically, the success of the holiday promotions, like Starbucks for Life and other things you are running during the period.

Just wanted to get a sense of how you plan to keep this momentum going and other activities -- promotional activities that you might have planned for the rest of fiscal 2015?

Thanks.

Matt Ryan here.

The reason why customer acquisition will continue to come down in terms of cost is a confluence of a number of factors.

As we add more features that are meaningful to the customer, things like Mobile Order and Pay, down the road Delivery, we're going to be giving the customer added reasons to sign up for MSR.

That is an organic thing that happens.

The second thing that happens is as we sell more and more gift cards, we naturally get through the process of registration incremental MSR customers.

Those are probably the two most important things we see rolling out.

And that along with increased focus within our stores, which is a low-cost customer acquisition opportunity, builds out MSR as a platform.

And the acceleration in MSR growth you saw last quarter was the result of all three of those things.

Thanks.

Nick Setyan, Wedbush.

Thank you.

Congrats again on a great quarter.

My question is on China Asia Pacific.

We saw a very meaningful acceleration from last quarter, both on a one- and three-year basis.

And maybe -- there's a lot of folks on the US comp drivers.

Maybe you can maybe give us some color around the various drivers in China Asia Pacific and whether it's market by market or one product or another, that would be great.

Thank you.

Yes, Nick, this is John.

Thanks for the question.

I think really we saw obviously 8% comp growth in the quarter and it was all driven by traffic.

And what I would say is that we have more customers now coming in our stores than ever before in our history, across the 15 markets that we operate in.

That is being driven in large part as well in China.

And when you look at the China comp -- and I'm not going to quote any specific number -- but China comp actually outpaced the entire region.

We opened our 1,500th store there, we opened eight new Reserve stores there, and the relevance of the brand in China has never been stronger.

We did a consumer study in China and what we've seen is that we are looked at as the coffee leader in the market.

That our products, the localization of our products, are locally relevant, and we are building a strong trust between our baristas as well as with our customers.

And what we've been able to do is we've been able to take the awareness that we've built around Starbucks in China as well as in other markets and we've been able to translate that into traffic into our stores.

And we've done a very good job of converting that awareness to actual visits.

We had a very strong holiday season, our promotional beverages did very well, and we feel that we are in a position to continue the momentum.

When you look at our two-year comp across the region, it's at about 16%.

And Starbucks Card and mobile does very well in China.

We are at now over 40% of our transactions are done on the Starbucks Card in China as well as two other major markets.

Japan had a very strong quarter as well, given the tough economic environment that's going on in Japan.

The acquisition, as Scott said, was accretive in the quarter.

And we are in a good position in Japan to accelerate the growth through new stores, through channels outside of our stores, as well as aggressively going after the digital platform in Japan as well.

So we feel very good about the job our team is doing across the region.

Thank you.

John Ivankoe, JP Morgan.

John, you don't get two questions.

(laughter) Go ahead.

I know a lot of people will probably ask this, so I will just take the opportunity to ask it publicly.

It sounds like December was the high month of the quarter, if I'm listening to your comments in the right way.

And I think in your prepared remarks, you made some comments that you are already seeing and realizing the benefit of increased activity in the stores, which I assume is January.

So should I interpret the right way or are you saying that there was further acceleration in January relative to December?

Just trying to get a sense of what you're trying to communicate regarding March in general year over year and relative to the first quarter, if I can ask that?

Yes, thanks, John.

It's Scott.

We haven't said anything about January.

You are correct that within the quarter, we did see some acceleration.

And at the holiday period, our busiest period, we actually saw the highest transaction comps we had in the US.

And that is certainly encouraging as it relates to the first quarter.

Okay, thanks.

This concludes Starbucks' Q1 fiscal 2015 earnings conference call.

Thank you very much for joining us today.

This concludes the Starbucks Coffee Company's first-quarter fiscal year 2015 earnings conference call.

You may now disconnect.