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Starbucks Corporation (NASDAQ:SBUX)

F3Q 2013 Results Earnings Call

July 25, 2013 5:00 PM ET

Executives

JoAnn DeGrande - Vice President, Investor Relations

Howard Schultz - Chairman, President, and CEO

Adam Brotman - Chief Digital Officer

Troy Alstead - Chief Financial Officer

John Culver - President, China and Asia Pacific

Cliff Burrows - Group President, Americas and US, EMEA and Teavana

Analysts

Sharon Zackfia - William Blair

John Ivankoe - JPMorgan

Joe Buckley - Bank of America Merrill Lynch

Brian Bittner - Oppenheimer Company

Matthew DeFrisco - Lazard

Jeffrey Bernstein - Barclays

Keith Siegner - Credit Suisse

Michael Kelter - Goldman Sachs

John Glass - Morgan Stanley

Nicole Miller - Piper Jaffray

David Tarantino - Robert W. Baird

Andrew Barish - Jefferies & Company

Operator

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 Third Quarter Fiscal Year 2013 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions)

Thank you. Ms. DeGrande, you may begin your conference call.

JoAnn DeGrande

Thank you, Mike. Good afternoon. This is JoAnn DeGrande, Vice President of Investor Relations for Starbucks Coffee Company. Joining me on the call today are Howard Schultz, Chairman, President and CEO; Adam Brotman, Chief Digital Officer; and Troy Alstead, Chief Financial 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 the risk factor discussions in our filings with the SEC, including our last annual report on Form 10-K.

Starbucks assumes no obligation to update any of these forward-looking statements or information. This call is being webcast and an archive of the webcast will be available on our website at investor.starbucks.com later today.

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

Howard Schultz

Thank you, JoAnn, and welcome to everyone on today’s call. I’m very pleased to share with you the extraordinary third quarter result that Starbucks reported today. Starbucks global comparable store sales grew 8% in Q3, 9% in each of our Americas and China Asia-Pacific segments, driven by 7% increase in traffic and representing Starbucks 14th consecutive quarter of comp growth in excess of 5%.

Our revenue in Q3 increased the full 13% over last year to a record $3.7 billion. Operating leverage and our continuing emphasis on increasing efficiency and controlling costs drove operating margin up 150 basis points to a record, Q3 record of 16.4% and an operating income of up 25% to a Q3 record of $615 million.

Together, these factors contribute to a record Q3 EPS of $0.55 per share, 28% over last years’ third quarter and the second highest EPS of any quarter in Starbucks 42 year history.

Particularly noteworthy, these results were delivered in the phase of challenging economic and consumer environments in many of the 62 countries around the world in which we operate.

At our December 2010 Investor Day conference, I laid out a strategic vision that completed Starbucks leveraging all of our unique assets, our robust and growing pipeline of innovation, would grown into over 19,000 store global footprint, our fast growing CPG presence and our best-in-class digital card loyalty and mobile capabilities to create a flywheel effect whereby each asset would leverage and enhance our brands and customer experience elevating the relevancy of all things Starbucks and driving increase profitability. I left the conference recognizing that this would have to be executed in a way that would be fully appreciated after the conference.

The results we announced today, demonstrate the success of both our vision and our strategy for achieving it. Continued innovation in our core coffee and beverage portfolios, solid progress against the reinvention of our food platform and an increasing ability to leverage and translate Starbucks’ brands and strong U.S. revenue growth into revenue and profit growth in multiple markets and channels around the globe all contributed meaningfully to our record Q3 results.

No single Q3 metric exemplifies the success of our strategy more than a 7% increase in global traffic. For the first time in our history we are bringing customers into our stores all around the world and across all data parts with complete offerings of innovative beverages and both indulge and healthy foods to satisfy their evolving needs and tastes. Today Starbucks global footprint complimentary channels of distribution and unique and powerful digital assets puts us in a class by ourselves. And we're just getting started with further integration and expansion of our flywheel. And the introduction of disruptive and transformative food and beverage industry innovations and technologies around the world in the months and quarters ahead.

I’m going to provide a high level overview of segment performance in Q3 and then turn the call over to Adam Brotman, our chief digital officer who will discuss our world class digital and loyalty assets and share what is about to come in terms of digital. Then Troy will take you through our Q3 financials and fiscal ’14 targets in detail. And we’ll close with Q&A.

Let me begin with the Americas, Starbucks Americas segment is firing on all cylinders with 9% comp growth driven by continued beverage innovation and increased food attachment resulting from the success of our transformed and reinvented food program. Our strong summer refreshment line up including the new Valencia Orange Refresher and the limited time offering of Caramel Ribbon Crunch Frappuccino is being extremely well received by our customers and exceeding even our most optimistic expectations.

In Q3 we significantly expanded our La Boulange baked goods platform. Truly delicious and differentiated La Boulange branded products are now available in over 1,000 Starbucks stores across northern California and the Pacific Northwest. The La Boulange launch you will understand why we're seeing both an enthusiastic customer response and substantial lift in incrementally compared to the baked goods that La Boulange is replacing. And they're now on track to bring La Boulange Food to more than 2500 of our stores by the end of September, including stores in New York, Chicago, Boston and Los Angeles. We're also deep into the strategic development and integration of Teavana.

Tea as we’ve shared with you before is a $40 billion global category and we're leveraging all of our unique internal assets including our knowledge in creating best in class retail experiences and handcrafted beverages to create the premium tea experience for our customers just as we’ve done for coffee. You will see all of these strengths come together this fall as we open our first reimagined Teavana street front store on New York City’s Upper Eastside and evolve the Tazo tea concepts store in Seattle under the Teavana brand. Over time many in these handcrafted Teavana tea beverages will also find their way in Starbucks stores.

Turning to EMEA, I’m very pleased to share renewed optimism that we are on our way to delivering sustained profitable growth in our EMEA region. Our EMEA team is bringing markets specific food and beverage innovation across the region and working hard to enhance our customer experience in each of our nearly 2,000 EMEA stores. While early, we feel the results are beginning to show. With super cent comp stores increase that EMEA posted in Q3 was the segments first comp store increase in six quarters. In UK the largest individual market within our EMEA segment also reported positive comps in Q3.

Turning to China and Asia Pacific regions our China/ Asia Pacific region continue to be at the very forefront of Starbucks global expansion initiatives. And we're now on plan to surpass 4,000 stores in the region by the end of 2013. Noteworthy are that our strong 9% increase in China/ Asia Pacific comps store sales improved in Q3 included 8% traffic growth, a doubling of our Q2 traffic growth. And that increased operating leverage enabled China/ Asia Pacific to deliver some of the highest margins in the company. We will open, we will also open our 1,000 store in China by year end and remain on track for China to become Starbucks’ largest market outside of the U.S. in 2014.

We continue to invest ahead of the growth curve to build out our in market operational and management capabilities in China and to successfully execute against the plan calling for strong comp growth and further margin expansions well into the future.

Moving to Channel Development and Emerging Brands, Channel Development and Emerging Brands will be a significant contributor to our future growth as we continue to expand customer occasions outside Starbucks stores leveraging our flywheel strategy. I’ll touch on just a few particularly noteworthy developments and opportunities. We continue to strengthen our leadership position in the $8 billion premium single cup category, a segment that’s grown nine times faster than the overall coffee category during the past year and now it accounts for nearly 30% of total coffee sales and grocery.

In May, we announced an extension of our long-term strategic partnership with Green Mountain Coffee Roasters that will enable Starbucks to add many more K-Cup SKUs and gain additional share in the U.S. and abroad. And in Q3, we shipped 1 billion K-Cups, a significant milestone in 20 months since we had our first ship.

While packaged coffee competition down the grocery aisle remains fierce, the price decrease we took in the third quarter has allowed us to be more competitively positioned in our CPG coffee portfolio. And we believe that price decrease positions us to build share and maintain our leadership position in the months and quarters ahead.

Finally, on Tuesday, we announced a very exciting new agreement with Dannon, a world leader in fresh dairy products. In the past several years, we have been committed to evolving and enhancing our customer experience to the introduction of innovative wholesale and healthy products in our stores.

Our new multiyear relationship with Dannon will enable us to leverage our acquisition of evolution fresh business and brand, elevating our existing yogurt offerings and bring out our health enrollment strategy to life, not only at Starbucks stores but also down the grocery aisle, leveraging the evolution fresh branding on multiple product categories, including the initial acquisition of the juice business.

Our evolving portfolio include the exclusively formulated evolution fresh inspired by Dannon-branded ready-to-eat Greek yogurt in our retail stores and evolution fresh branded CPG products co-created by Starbucks and Dannon. These products will bring rolling out the Starbucks stores in North America in the spring of 2014, reach grocery channels in 2015 and reach global distribution over time.

In conclusion, Starbucks coffee company today exists within the universe of one. And our Q3 results demonstrate the increasing relevance and power of our brands, the strength of our management and operations around the world, success of our multiple go-to-market strategies and our increasingly deeper connection to our fast growing global customer base.

With our values in one-on-one direct emotional engagement we have with our customers and our Starbucks’ partners around the world remain at the core of our business and our brand. And because the level of innovation and expertise that we’re bringing to are already best-in-class digital and loyalty capabilities has never been greater and to worst, capabilities of any competitor.

I have invited Adam Brotman to join us on this call to discuss his team’s contribution to flywheel strategy and how we’re leveraging our success in U.S. to create a truly, global, unified, comprehensive digital royalty platform.

Before I hand it over to Adam, I just want to take a moment to recognize the world-class Starbucks’ leadership team. The strongest group of leaders this company has ever had that has made the results we reported today possible. And of course, we should have never delivered our remarkable Q3 results with the 13th consecutive quarters of record results before, without the daily contribution of over 200,000 Starbucks partners around the world. We’re grenade and deliver the unique Starbucks experience to nearly 70 million customers at over 19,000 stores in 62 countries around the world each week.

Half of the entire leadership team, I thank you all for you do every day. Adam?

Adam Brotman

Thanks Howard. As Howard said, there are number of factors that contributed to the strength of our U.S. business in Q3. From a digital perspective, these kind of past several years building an engine of digital touch points with our customers that not only allows us a deeper relationship with our customers but also pays off with incrementality for our business.

Let me talk for a moment about the growth we're seeing in a variety of key digital card loyalty and mobile programs. In our third quarter, we saw 3% year-over-year growth in total dollars loaded on Starbucks card in retail North America and nearly 100% year-over-year growth in dollars loaded on our cards via Starbucks mobile apps and web properties.

And the Starbucks card continues to represent nearly one-third of U.S. in-store transaction. We also saw over 30% year-over-year growth in total dollars spent in our stores from My Starbucks Rewards or MSR loyalty members in the U.S. And this momentum in loyalty is not just in volume. We’ve also expanded integration between MSR and our CPG channel as well as with our Teavana source.

Regarding mobile, our momentum as the leading retailer in the mobile payment space also continued its rapid growth in Q3. I’m pleased to report that now when 10% of all transactions in our U.S. stores are made with a phone mobile devices have become increasingly important part of the customer experience at Starbucks as the fastest and easiest way to pay in our stores. And we will continue to bring more innovation to this space.

As we’ve been building capabilities and customer enrollment in our card, loyalty and mobile initiatives we haven't taken our foot off of the pedal at all when it comes to Starbucks presence on the web and social media. We continue to see huge traffic for our Wi-Fi network and our web pages. And earlier this month we passed the 4 million Twitter following online. And we continue to leverage Instagram, Pinterest and our global Facebook following to engage with our customers every day around our brand and topics of interest to these customers.

Our internal measures tells us that these various digital initiatives have added demonstrative impact for our U.S. business in Q3 with the promise of even greater growth in the months and years to come. And we are not resting on any of our previous successes. We currently have a robust pipeline of development in each area of our digital ecosystem. And we expect to deliver a number of improvements and innovations to our existing programs throughout the last quarter of FY13 and well into FY14 as well as introducing new concepts and new platforms.

I’ll give you one example of that today. I’m pleased to announce Starbucks in partnership with Duracell Power Mac will stand the trial of wireless charging for our customers’ mobile devices in select Starbucks stores in Silicon Valley. This effort, especially initial test of this technology in certain Boston stores earlier this year, the installation of multiple wireless charging tarmac surfaces in our stores will allow our customers to recharge their Smart Phones quickly and effortlessly. This is the kind of improvement to the digital experience that our customers expect from Starbucks and the kind that we will deliver at scale moving forward.

Turning to the international front, we continue to be committed to leverage the success we’ve had in the U.S. in digital around the globe. Over the last month, my team and I spent time in China and Europe. And we’ll visit Latin America and Canada in the coming months. And the purpose of these trips is to determine how we can accelerate deployment of our foundational digital platforms in all of our key global markets. And by no means are we at a cold start in terms of accelerating our digital strategy globally. In China for example, we already have 2.5 million My Service Rewards members and that’s without a mobile payment platform of eGifting in place.

In Q3 we also made global payment available to apps on Android and IOS to Starbucks customers in our Hong Kong market and we're already seeing strong response from that. In fact these IOS and Android apps became the number one free application in the Hong Kong app store with less than a day of having launched them. Once the full breadth of our digital plan comes fully online in CAP and EMEA, the complement to what we're doing elsewhere, the potential for digital creates similar incremental impact to our business in those markets is as strong, if not stronger using digital than anywhere else in the world. I truly believe that no other retailer (inaudible) that’s as far as long as Starbucks in terms of building an end-to-end digital customer experience across a variety of digital touch points both in store and out of store, across channels and now across geographies. We are truly only just getting started.

I’m going to turn it over now to Troy to go through Q3 results in more detail. Troy?

Troy Alstead

Thanks, Adam and good afternoon everyone. The third quarter results we announced today are a testament to the continue efficiency, diversity and overall strength of our business. We grew revenues by 13% with every segment contributing to that growth. We grew global comparable store sales by 8% with each region accelerating compared to last quarter. We expanded operating margin by 150 basis points with margin expansion in every segment. Starbucks cards loads grew by 30% with 24 countries now contributing.

Our investment income grew 23% with both store and CBG partnership contributing. All of that together produced earnings per share of 55 cents. Our best third quarter ever, growing 28% over last Q3.

For the next few minutes I will provide more context on our outstanding third quarter performance as well as update you on our fourth quarter projections. Then I will provide our initial outlook for fiscal 2014. Consolidated net revenues in the third quarter grew to $3.7 billion, 13% higher than a year ago. The growth was largely driven by global comparable store sales growth of 8%, including 7% traffic growth and a 1% increase in average ticket, also contributing revenues from 1,558 net new stores in the past 12 months, including 355 Teavana stores.

Operating income grew 25% in the third quarter to $615 million. Operating margin expanded 150 basis points to 16.4%. Although coffee cost continue to be a benefit to us, contributing 60 basis points this quarter. Leverage on our strong sales was the biggest driver of the margin improvement.

As an illustration of strong operationally effectiveness of our teams across the globe, our store operating expenses as a percentage of related revenues continue to dip near all time lows.

As evidence of the deep cost discipline our partners have embraced, the continuous improvements we’ve made with labor scheduling and productivity, and the scale we are now achieving in many of our smaller growing markets.

The very strong operating performance in Q3 resulted in higher performance based compensation expense which along with a discretionary of $10 million donation to the Starbucks Foundation drove G&A expenses higher in the quarter across the operating segments and unallocated corporate expenses.

Now I will take a moment to speak to the results of each operating segment. First in the Americas, the performance delivered in the third quarter was broad based exceeding even our own expectations and was nothing short of phenomenal. Revenue was $2.8 billion grew 12%, driven by comparable store sales growth of 9%, with 7% coming from increased traffic and 2% from higher average ticket.

While we experienced moderate slowing in the month of June last year, comparable last Q3 was still a strong 7%. Despite the challenging comparison, the Americas regional leverage strength across all day parts and all geographies to grow at its highest rate in six quarters.

Like the Americas regional role, the U.S. grew cost by 9% in the third quarter, contributing to the comp growth was strength in beverage innovation and promotions with the combination of the Marciaro platform, Limited Time Frappuccino offerings and still new refreshers beverages adding a combined 4 percentage points of comp growth.

Operational improvements leading to continued growth in labor productivity also drove higher comp growth in Q3. Our peak hours of 7 to 9 a.m. in the U.S. again showed strong traffic trends as they drive through stores where our focus on enhancing the customer experience while improving speed of service is paying off.

Food again contributed towards the growth in the U.S. business, adding 2 points of comp growth in the quarter as our lunch offerings continue to expand in popularity. While Howard mentioned the enthusiastic response our La Boulange bakery items are receiving, it’s important to note that this quarter’s comp growth contribution from food is not impacted by La Boulange due to the still early stage of the rollout.

Operating income in the Americas region of $619 million grew 24% in the quarter as we continue to turn strong topline growth and even higher bottom-line growth. As a result, Americas operating margin expanded 210 basis points to 22.3%. Strong sales leverage combined with lower commodity cost of 30 basis points were the main drivers behind the improvement.

In addition to the strength in the U.S., Canada and Latin America each had great quarters as well. Canada also grew comparable store sales at the highest rate in the past year and half, and Latin America delivered significant topline growth and margin expansion in the third quarter.

And while I’m discussing Latin America, I want to point out the news of a week ago. So we’ve agreed to sell the remaining 18% of our equity in Argentina and 82% of our equity of Chile to our fantastic partner Alsea.

This will enable further growth in these vibrant markets. It will enhance profitability for both parties. This transaction will close in the fourth quarter and we anticipate realizing a $0.03 earnings per share gain in Q4 as a result.

Moving now to the Europe, Middle East and Africa region, where the third quarter results continue our measured steady progress towards long-term profitability. Revenue in EMEA grew 2% to $287 million in the third quarter as growth in license store revenue was nearly offset by lower company operated store revenue. The license store revenue growth was primarily the result of the addition of 117 license stores over the past year combined with strong growth in existing license stores.

The company operated revenue decline was a result of the declining company operated store base from closures, as well as the sale of a number of company operated stores to license partners as part of our store portfolio optimization last Q4.

Comparable store sales grew 2% in Q3 with 5% growth in traffic partially offset by a 3% decline in average ticket. We are encouraged by this for a number of reasons. It is our first quarter of positive comparables in EMEA in the past year and a half, and our highest score of traffic growth since early 2011. Comp growth improved in our largest company operated market in the EMEA compared to the last quarter reflecting a broad based contribution to seek acceleration.

In our largest EMEA market the UK, comp growth was positive in every month of Q3 with particular success coming from the launch of Origin Expresso, (inaudible) and salads in some stores and growth in the My Starbucks Rewards program. The ticket decline in the quarter was partially due to fewer items per transaction which we believe is a reflection of broader current spending patterns in Europe combined with modest discounting as a result of promotion and the rewards program. EMEA operating income grew from $1.6 million last Q3 to $9.3 million this year. Operating margin expanded in the quarter as it has in every quarter thus far in fiscal ’13 this time by 260 basis points to 3.2%. This was largely driven by the team’s continued focus on cost management as well as the impact of the mix of our store portfolio moving to more heavily licensed models.

In fact, 42 of the 43 net new stores opened in EMEA Q3 were licensed stores. We anticipate both the cost focus and proposed mix shift will be an ongoing driver of market expansion on a year-over-year basis.

In China/ Asia Pacific region the third quarter brought acceleration of top line growth to a significant translation to the bottom line. Revenues of $234 million were 29% higher than last Q3, driven by a combination of 523 net new stores over the past year and 9% comparable store sales growth. The 9% comp growth was entirely due to increased traffic driven by a combination of new locally relevant products and strong growth in the core offerings. And like in the Americas, the contribution of strong comp growth was broad based across the region.

There are so many great examples I'd like to give of the success we're seeing across Asia but Japan stands out this quarter as a real highlight. Sales growth in our joint venture market does not included in the reported comp, however, I want to call out the comparable store sales in Japan normally were a moderate steady grower, ruled by double-digits. We saw tremendous success with local innovation there while at the same time delivered strong execution in operations and the store experience. While emerging markets received many of the headlines, Japan represents around one third of CAP’s operating income, with China contributing a third and the rest of the Asia Pacific markets making up the remaining third.

Our partnership in Japan is critical to our performance in the region and we are delighted with the direction of this market. In the third quarter we opened 119 net new stores in CAP including 61 net new stores in China, 25 in South Korea and 5 in India where we now have 16 incredible stores. Our discipline around site selection and (inaudible) continue to make very impressive returns on our new stores and our pipeline for Q4 and beyond is strong. On 119 net new store this quarter, up slightly from last Q3 but down from the first and second quarters of this year. This is simply due to the timing of opening as we have a busy fourth quarter planned and we continue to target 600 net new stores in CAP for the full year.

Operating income for CAP in third quarter grew 38% to $85 million. Operating margin expanded 250 basis points to 36.2% with sales leverage strong performance from our joint venture operations and 50 basis points of favorable coffee costs contributing. Poor margins in CAP are significant impacted by the pace of new store openings in the particular quarter. In the margin expansion in Q3 also partially reflects the relatively fewer new stores in the quarter. However, given our acceleration of new stores expected in the fourth quarter and the resulting investment required Q4 margins in CAP will remain our best in the world but will likely decline compared to the third quarter.

Channel development also contributed to our consolidated revenue and operating margin growth this quarter albeit at a slower pace. Revenues up $336 million in this segment were up 6% over last Q3 with both the CPG and the Food Service businesses growing at a fast pace. Premium single cup including K-cups, Veva and (inaudible) continues to drive the revenue growth in CPG adding $29 million versus last Q3.

There were a few important milestones reached in the third quarter. Aside from the billionth K-cup shift and our extensions of partnership between Green Mountain that Howard mentioned we saw our share of K-cup dollar sales in U.S. food and drug matched channels hit an all-time high in the quarter at 14.9%. Now the overall premium single cup category grew by a very healthy 46% over last year. Starbucks sales growth of K-cups at 51% outpaced overall category growth. And we have a significant innovation right around the corner that we can continue to derive share gains in this rapidly growing category.

The growth in revenue of the premium single cup was partially offset by softness in package coffee, which was impacted by the significant broad based competitive price declines and by the list price reduction we took in May. Our price reduction was not fully reflected down the aisle from much of the third quarter, but has now made its way into most grocery shops.

Due to the price positioning, innovation in premium single cup and a growing international business, we expect revenue growth in channel development to be stronger in the quarters ahead. Channel development expanded operating margin in the quarter with operating income up 14% over last year. Lower coffee cost provided a gross benefit of 320 basis points this quarter partially offset by the margin impacted the list price reductions on package coffee.

Finally, let me address the results of other segments. All other segment is comprised of our emerging brands including Teavana, Evolution Fresh and Seattle Best Coffee as well as our digital ventures business. Revenue in these other businesses grew to $108 million, more than doubling over the last year.

Teavana, which was not in our base last year, contributed $51 million of the increase. Evolution Fresh while still small also contributed, growing 21% over the last Q3. We continue to increase share and velocity in grocery channels and our new state-of-the-art juiceries began production in June, which will enable us to meaningfully expand availability of Evolution Fresh Juice in both Starbucks stores and CPG channels. We have already gained a nearly 6% share of Western U.S. in super premium juice sales, and look forward to gains coming from both greater distribution and increasing events.

Turning now for our financial division. Our balance sheet has never been stronger and our financial discipline tighter than it is today. Given the current favorable market conditions, we anticipate issuing $750 million in additional long-term debt over the next quarter or so to provide us with financial flexibility for general corporate purposes.

We lost the benchmark interest rate on this issuance in their early part of Q3, when rates were approximately 80 basis points lower than they are today. As we move forward, we will continue to evaluate our capital needs and may increase our debt, if we needed a strong liquidity and to see the right returns from our leverage.

As we think about the target network range, I would know that we are comfortable with our current S&P rate of A minus. So our future leverage will likely be targeted around that rating.

Now, before I move into the outlook for 2014, I want to provide an update on how we expect to finish fiscal 2013. First, let me say again, the third quarter just completed really was a phenomenal quarter by heavy measures, particularly the 9% comp growth in the Americas.

For the fourth quarter, we expect very good results but we do not expect that 9% level of comp growth from our third quarter to continue into the fourth quarter. Q4 is likely to return at strong levels we reported in the first half of fiscal '13 in the range of 5% to 7% global comp growth.

We anticipate continued strong revenue growth of 10% to 13% in the fourth quarter driven by that strong global comp growth. We’re getting in approximately 180 basis points improvement in operating margin in the fourth quarter versus last year. With increased confidence in the strength of revenue growth and operating margin expansion, we expect fourth quarter earnings per share in a range of $0.59 to $0.60.

This includes the $0.03 gain, we will recognize in Q4 on the sales of our equity announced at Argentina and Chile that I mentioned earlier. For the full year, we are targeting earnings per share in the range of $222 to $223 which includes the combined $0.06 gain on the sale of equity in Mexico in Q2 and Argentina and Chile in Q4.

Commodities will continue to benefit as in the fourth quarter as we expect a gross $0.02 earnings per share benefit partially offset by our recent pricing actions down the grocery aisle. Conversely, we expect an unfavorable foreign exchange impact of approximately $6 million in Q4 driven by weaker Japanese Yen. And with regard to the Kraft arbitration, we’ve had no further update on anticipated timing of the resolution.

Looking ahead to fiscal 2014, we are anticipating another year of exceptional growth. We expect revenue growth of 10% to 15% driven by global comparable store sales growth in the mid single digits, 1400 net new stores globally and accelerated channel development growth. The acceleration in new store openings in fiscal '14 will come from the China, Asia Pacific region where we are anticipating a net 700 new stores.

We are targeting 600 net new stores in the Americas and 100 in the EMEA consistent of growth in fiscal '13. Full year consolidated operating margins is expected to improve by 150 to 200 basis points in fiscal '14 as we continue to drive leverage from strong revenue growth and operational efficiencies throughout the business. We will provide segment specific target when we report our fourth quarter results in late October. We are anticipating higher interest expense through the debt offering I mentioned and a moderately higher tax rate. And finally we're targeting earnings per share in the range of 255 to 265 in fiscal ’14. This represents growth at 18 to 22% over fiscal ’13 excluding the six-cent impact of equity sales in Latin America in 2013 contributing to the improvement will be another year of (inaudible) coffee costs shortly expected at a 9 to 10 cents net for the year.

We have a little more than 80% of our coffee beans locked for FY14 providing us with great visibility into this benefit. The 9 to 10 cents net benefit reflects the gross coffee impact partially offset by the recent price changes in CPG as well as routine investments in the business.

The results we presented today and the guidance we’ve laid out for next year are the products of our continued deep focus on operational estimates, enrolled innovation, and rigorous financial discipline. We're confident in the trajectory for many reasons, including a diverse set of significant growth drivers, a strong tenure management team, the best collection of store operators in the world, and a proven growth strategy that drives countless returns on capital and leverage the success in our stores for growth in other channels. Thank you.

I will now turn the call back over to the operator for Q&A. Mike?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Sharon Zackfia of William Blair. Your line is open.

Sharon Zackfia - William Blair

Hi, good afternoon. I guess Troy I’m going to take the easy question. I guess the comment on the comp trend you know not continuing that you saw in the third quarter. Is there anything you're seeing specifically or anything you would like to comment on?

Troy Alstead

Thanks Sharon. No, that is not a message whatsoever about early trends in the portfolio at all. We’re not making any comments about current trends as usual. That is simply a message that 9% comp growth in the U.S. and the Americas in the third quarter was really a break through quarter. It’s phenomenonal as you know on a system the size of ours. A number of fantastic names all come together in that quarter to contribute to that kind of level of comp growth. So as we look at Q4, as we look at fiscal ’14 we expect very strong, very healthy, very consistent same store sales growth more in line with what we saw in the first half of the year. And that’s just recognition of product innovation, the loyalty program, the great experience for providing for our customers in the stores.

Sharon Zackfia - William Blair

Perfect. Thank you.

Operator

Your next question comes from the line John Ivankoe of JPMorgan. Your line is open.

John Ivankoe - JPMorgan

Hi, great, thank you. I mean you mentioned your foods impact you know to this quarter and you're cheating that without La Boulange. So I was just hoping you know to take this opportunity to talk about how significant you know La Boulange has been of you know in your early tests and you know what should we really expect to see you know from a customer (inaudible) point of view you know as far as the breakfast and the lunch products you know as we go forward in ’14 and ’15. And of course you know I asked this you know but in terms of your comp guidance into 2014 which is obviously lowered than what you just achieved, it seems like you know food at least is one thing that could be significantly more accretive you know for 2014 than it was for 2013.

John Culver

Let me have Cliff speak to in particular what we're seeing in La Boulange now and I’ll come back and talk with you about the comp side for next year.

Cliff Burrows

Thanks John. You know a strategy on this John is that we were going to acquire La Boulange to enhance the customer experience and leverage food as part of our future growth strategy. And I’m delighted to say in every market we’ve introduced La Boulange so far it’s been extremely well received. The product is fantastic and we're seeing really, really encouraging results. So the strategy is being justified and we are now through 1000 stores by the end of Q3 and every market we open we see a great reception, particularly around the pastries, the croissant which is the core product in this line of La Boulange. And it gives us every confidence that we're on the road to fantastic growth platform. We’ll start with breakfast. We’ll then enhance lunch. And the opportunity to enhance the current experience to the customers and gross sales is really strong. I’m looking forward to ’14 and ’15 that I’m extremely optimistic that this will be a platform to growth and as we realize the results in the coming months we’ll share more in the coming quarters.

Troy Alstead

And, John, specifically the guidance on ‘14, what I will tell you is we have very good confidence in our ability to very sustainable continue to drive healthy comp growth for our stores through innovation in our stores, productivity enhancements through loyalty program and yet through new things, such as the La Boulange which, as Cliff mentioned in our experience so far in our stores has just been nothing short of phenomenal and we are quiet confidence that as La Boulange rolls throughout the system, it will be a layer of comp growth for us in the system.

Now with that said, as you will know, comp growth doesn’t trend as a percentage. You've got to recreate it every single quarter and every single year with new innovation, with great experiences, with new frequency among our customers and so we firmly believe that innovation such as Evolution Fresh, such as Teavana coming into the stores, such as La Boulange and enhanced food program, all those things and any others are what allow us to stick with confidence about our ability to drive consistent healthy comp growth into the year ahead.

John Ivankoe - JPMorgan

Thank you.

Operator

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

Joe Buckley - Bank of America Merrill Lynch

Thank you. I’ll try to speak to because I like to ask Adam a question. Just whether it is possible to have a global Starbucks card and perhaps you well on the path to that it wasn’t clear from your comments?

Adam Brotman

Thanks, Joe. It’s a great question. And we are looking at ways that we can improve the ability for the cards to travel across regions. It’s not always possible in every case where it is, we are looking to do that and we already have some regions where the, the card can travel and where its not we’re continuing to look into ways so we can improve that.

Joe Buckley - Bank of America Merrill Lynch

Okay. And then, Troy, can I ask the question on the China, Asia-Pacific region. Just talk about the variables in the performance in the second quarter which look toward a little light on the operating income growth to this quarter which look terrific?

Troy Alstead

Joe, I'll address that specifically, and really so we did two or three things, but in particular in any one quarter in Chinese specific as we are experiencing the kind of returns and growth we are in that part of world and in China particular. We continue to make investments into the infrastructure, into supply chain, into our stores and in some quarters those investments will just be a little bit higher and what is proportionate that they are another quarters.

So for example in the second quarter we had a higher growth rate in new store openings in that quarter over the previous year then we did in the third quarter, and that just a timing of the pipeline and when it comes to bear, in the fourth quarter ahead of us as I mentioned in my comments, we will once again have an acceleration in the number of new stores in the quarter.

Those new stores in any one particular quarter put meaningful pressure on the margins just in the quarter, it become very profitable, very quickly and begin contributing, but there is margin pressure when you open that many stores in that particular quarter and we experienced that in the second quarter, and we experienced bit less of that in the third quarter, and that explains much of that differentiation that you are seeing.

I’d also remind you and we pointed this out on our second quarter call a quarter ago and that is the second quarter of the previous year, fiscal ’12 had some unusual entries in it that made the year-over-year comparison difficult. So I have to go all the way back to back to really get the comparison.

Joe Buckley - Bank of America, Merrill Lynch

Thank you.

Operator

Your next question is from Brian Bittner of Oppenheimer Company.

Brian Bittner - Oppenheimer Company

Troy you said in your comments that in 2014 you expect a nice acceleration in the CPG segment sales, I’m just wondering what would be the main driver of that? And also when are you going to possibly pull the lever on innings entering some international markets?

Troy Alstead

Brian, let me have John Culver speak to the first part of your question and then we’ll come back to the second part.

John Culver

Hi, Brian. This is John. Thanks to your question. Now really what we’ve done over the last quarters really laid the groundwork for sustainable growth going forward in packaged goods and I want you to be clear that we are very confident and committed to delivering aggressive revenue growth, double-digit growth in FY ‘14.

We believe that for a couple of reasons, first, obviously we’ve taken a less price reduction, Troy spoke about and with that we are seeing that show up in the stores down the isle. We’ve also introduced My Starbucks rewards, which better position us to continue to build customer acceptance and customer loyalty. And really we see tremendous opportunity to accelerate the premium single cup agreement that we have with Green Mountain and what we’ve seen in the past quarters is that that Starbucks share has grown faster than the overall, I’m sorry. Starbucks growth has grown faster than the overall premium single cup category. And with the recent announcement with Green Mountain, we're going to be able to increase the number of SKUs that we offer going into next year by three fold. So tremendous opportunity relating to premium single cup.

As it relates to international, we're just laying the foundation around international. In the quarter that just ended we opened four new markets. We now do business in 25 markets out of the 62 markets around the world. So tremendous opportunity to continue to expand there. We have many new products and innovations that we have planned yet to come and we continue to invest in building our capabilities from a people and from a infrastructure standpoint. And a great example of that is Jeff Hansberry who over the last three years has built the channel business for us here in the U.S., is now positioned in Hong Kong and squarely focused on the China/Asia Pacific region and the opportunities that exist in that part of the world for the channels outside our stores. So a great opportunity for us in the future.

Howard Schultz

Terrific. And just a quick capital structure follow up, what would the leverage range be to keep a triple or a A minus rating?

John Culver

Well, I’m not going to put Bryan a brick of range around that yet. I think as we go forward and we talk about a bit more about leverage we complete this debt offering I mentioned today. We’ll talk a bit more about that. But I think you could look at S&P ratings as guideline for front leverage that they publish and that will give you at least an initial viewpoint on where we might be targeting.

Operator

Your next question is from Matthew DeFrisco of Lazard.

Matthew DeFrisco - Lazard

Thank you. I just had one clarification and then a question. I think you said Troy you compared China/Asia Pacific segment margins to sequential, on a sequential basis. Can you just I guess confirm that in 4Q you expect similar year-over-year margin expansion for that region?

Troy Alstead

Now what I was actually saying was not that. That we expect the fourth quarter to not expand quite like the third quarter did. And that’s simply due to the timing of new store openings. We’ll open significantly more new stores in the fourth quarter in CAP than we did in the third quarter. So again to my response earlier I think to Joe, you know in regions like China is to say that we're making significant investments to accelerate growth. That includes infrastructure and people investment. It also includes the short term, very short-term margin pressure that comes from acceleration of new stores in any particular quarter. in Q3 the impact was quite low, a little bit higher in Q4 so my comment was simply to make you aware that our expectation for margins in the fourth quarter are a bit lower than they were in the third quarter.

Matthew DeFrisco - Lazard

Okay I just wanted to, I didn’t hear if you said you were implying expansion though but just less expansion on a year-over-year basis in the fourth quarter.

Troy Alstead

Yes, less expansions and the very strong 250 basis points expansions we experienced in Q3.

Matthew DeFrisco - Lazard

Thank you for walking me through that and then Adam I had a question with respect to digital. I was wondering where do we see or when do we think you’ll have the opportunity to potentially maybe even go across channels. It’s been a tremendous success obviously in making your traffic very stable and superior than your peers in the store, in your Starbucks stores. How about maybe even using that to try and drive trial traffic and new product trail traffic in the channel development or in the CPG channel specifically ranging as you have obviously a whole cupboard full of new products coming out Evolution Fresh, et cetera through the CPG channel. When do you think, how do you stage that? Do you put the products out there first or do you use that as sort of a launch pad as well using the digital?

Adam Brotman

Thanks, Matt. It’s a good question because we're actually have good news to deliver there. And we have already started doing that. For example, we have begun to roll out of integrating our digital loyalty program MSR with channel in the United States with the ability to earn stars when you buy packaged coffee down the grocery aisle. We just started that and you can, and we do plan on expanding on that in the future. Secondly, we have fully integrated My Service Reward, our mobile app and our card program with Teavana. And you can actually go in to Teavana stores and use your Starbucks card and earn loyalty points in that, those branded stores as well.

So those are two examples of where we’ve already started and those are good examples of what we plan more of in the future.

Howard Schultz

Adam, once again I would add one thing. This is Howard. Your question isn’t only about digital, it’s about leveraging the capability of our CPG business off of the tailwind of our core retail business once we build the brand and loyalty.

So a great example is the acquisition of Evolution Fresh. We placed Naked Juice in Starbucks retail store. We’ve seen a significant lift in terms of sales there and as a result of the [approved stores] of that brand inside our stores.

We are now shipping Evolution juice to across hundreds of Supermarkets across the country, including as we sit here today, we are shipping national Evolution Fresh juice to whole foods. And I don’t think we would get that opportunity if we didn’t have [approved stores] fruit source everyday validating Evolution Fresh brand inside Starbucks.

So when I spoke in my remarks, the flywheel effect is not only on the digital opportunity to leverage it across channels and concepts, as Adam mentioned with Teavana, but also product categories then we will be able to validate inside our stores and Evolution Fresh is the perfect example of that and we are really proud that whole foods is going to be listing Evolution Fresh nationally.

Matthew DeFrisco - Lazard

Excellent. Thank you very much for all that detail.

Operator

The next question comes from Jeffrey Bernstein with Barclays.

Jeffrey Bernstein - Barclays

Great. Thank you. Also just one clarification and then a separate question. In terms of the clarification, Troy, I think you, when you talked about the fourth quarter the comping more in the 5% to 7% range. Just wondering specific to the fiscal third quarter, you had brought up that, I guess, trends had slowed last June and into July, I think you will recall. Just wondering if you can size up the sequential maybe trend through this quarter just ended on, with on two basis to kind of flush out the noise from last year was it stable through the quarter, because we definitely hearing from other peers the things have slowed down June and into July, I’m just wondering how you read the two-year trend through your fiscal third quarter and I had a question on China?

Troy Alstead

Yeah. I’ll, to your first question, Jeff, I’ll -- I’m not going to make any comments about in quarter trends. I would remind you that despite what was slowing that did impact this last June that we spoken about previously. Q3 of last year was still was a very strong 7%. That’s a challenging comp growth that lasted any point in time. And so all the better reflection of the 9% we delivered in the third quarter.

Now as we are moving into fourth quarter, given what we expect in the market and our ability to continue drive innovation to the stores. We once again expecting there will be comp growth. But, again, I won’t speak any current quarter trends and I won’t speak any trends about the third quarter or the monthly results within that.

Howard Schultz

Troy, can I speak up on that. I’d say instead, perhaps some of you are taking away any concern we may have about comp growth. So let me just hit that straight on. We had 14 consecutive quarters in a row of 5% or greater. Our peer group or those people who reported before us you saw that they -- comp growth they reported was low single digits. For us to have a 9% comp growth in United States of America given what’s going on in this country. It is unparallel and unprecedented.

It would be irresponsible for anyone at Starbucks to share with you that we intend to express you today that we can repeat that at 9%. So the better part of our, is for all of us to say to you we are extraordinarily proud and stunt that we are able to achieve a 9% comp and would be irresponsible to share with you that we can do that again in Q4.

Now having said that, our expectations of ourselves that we are going to deliver a healthy comp growth in Q4 that our investors will be proud of. Let’s get off the comp number, because it’s not the issue, issue is we are building a great extraordinary endeavoring company and the comps are going to follow that.

Jeffrey Bernstein - Barclays

Understood. And then just simply on China, we are hearing from peers and just broader macro data kind of slowing whatever GDP growth and retail sales growth? Obviously you put up a strong 9% comp. I’m just wondering at least two-year basis if a modest slowdown? I don’t know if there is any whether you’d attribute that just lower large numbers were sustaining that kind of double-digit run rate would be somewhat impossible or whether you think there is some macro impact or whether maybe avian flu had any impact on your trends this quarter or just the system getting much larger and if were the double-digit pace difficult to sustain?

Howard Schultz

Yeah. We’ll have John Culver take that.

John Culver

Hi Jeff. This is John. First off, our Q3 results were very strong and on top of the numbers that we were able to deliver, as Troy mentioned, we were able to make investments in the business as we’ve been doing over the last several years to take a very long-term view on China and how we want to grow our business in a very focused and very disciplined way. The 9% comp for the quarter was driven mostly by traffic, 8% of that was traffic. So we continue to see new customers and existing customers coming into our stores and continuing to experience Starbucks in unique ways.

We also see that a lot of the innovation that we are bringing in to the stores, whether it's what Adam spoke about around My Starbucks Rewards and the Starbucks Card or whether it’s the local products that we're offering are resonating with the customers. For instance in the quarter, we ran a promotion around this dragon and -- around Dragon Dumplings for Dragon Boat festival. That was something that was new that we haven't done in previous years. And it drove the mentality into the business. So very pleased with what we're seeing in China. We continue to remain very focused and disciplined on how we want to grow this business. And again we are optimistic that we can continue to do it the right way and in a way that continues to elevate our brand.

Howard Schultz

And perhaps just to add a little bit to that, we're now approaching 1,000 stores in China. That market for us is progressing to a size and scale where we believe we have the opportunity just as we've done for many, many quarters now in the U.S. to deliver stable, consistent, healthy comp growth through great experiences in stores through product innovation as John mentioned. So, China is now becoming a large market for us, significantly more opportunity ahead. And we believe we can continue to drive averaging the volumes and comp growth within that market.

Operator

Your next question comes from Keith Siegner of Credit Suisse.

Keith Siegner - Credit Suisse

A question for Cliff actually, Troy gave us the details on the third quarter of Americas and U.S. comp, including the beverage innovation and especially as it relates to those (inaudible) and refreshers, can you give us a little detail, is this driving new customers? Is this bringing new folks in for different occasions? Or is this increased frequency of morning folks coming back in the afternoon? And then a subsector or a subpart question to this, are you also finding -- are you able to drive more packaged coffee whether that's kicked up you another packaged coffee sales in the store, it seemed like there were good promotions for that in-store purchases this quarter, did that also help contribute to the comp? Thanks.

Cliff Burrows

Thanks Keith. And really, really pleased with the way the beverage growth is contributing to overall comps. The good news is we are seeing increased comps on all day parts, and I think our innovation around beverages, particularly around refreshers gives us that opportunity to serve morning customers and the afternoon refresher really does complement an afternoon day parts. Our ice tea is complementing our lunch platform, so there is great innovation there. And I also think it makes us very relevant when you get the seasonal changes, the experience in the summer and the refreshment platform has shown really, really well. So it's not only providing additional occasions for existing customers but is making relevance to new customers in different day parts, and that is, as Troy said it's all parts of the country, it's all day parts. So it's extremely healthy.

With packaged coffee, that has not been a significant driver of our comp. It really has been beverage. It has been food and that has been the main drivers this year which for us is the healthy part of our business. It is a -- as with the CPG channel, we are seeing the customers really adopt single serve in a big way. And whether that's (inaudible) platform, whether that's our K-Cups, whether that's -- we are really well positioned to accommodate and serve our customers as they change their habits to adopt a much more single serve in that sector. So it is playing its part, but it's the beverage innovation and really our ability to increase the number of customers, we are serving at peak with our operational discipline and on customer service that is driving the -- the healthy comps in this quarter and going forward.

Keith Siegner - Credit Suisse

Thanks and very, very impressive performance folks.

Howard Schultz

Thanks, Keith.

Adam Brotman

Thanks Keith.

Operator

The next question comes from Michael Kelter with Goldman Sachs.

Michael Kelter - Goldman Sachs

Can you guys talk more broadly about your food plans in the coming years beyond, just upgrading the bakery case with La Boulange. What else should we expect from you on food at breakfast, lunch and dinner. And where is the limit with respect to what you can versus can’t do in food given your store operating model?

Howard Schultz

Michael, thanks for that. And thanks for the opportunity to talk about food. The acquisition of La Boulange was, there is opportunity to really enhance the experience and really get good quality food, which we needed to be relevant in the market price and also to develop food that matches our account and really plays with where we started La Boulange.

We are really growing our capability and we are showing that we can deliver world-class products in Starbucks stores. This is really early days for us because as you can imagine we are having to learn the way to operate food within our store environment and obviously it’s got to compliment the coffee but we make sure we do not slow down the speed of service.

And the first 1000 stores has been an amazing learning opportunity. We have also with La Boulange capability able to respond quickly to adapt recipes and to evolve our product offering. I just think we’re at the beginning we’ve got the capability but only around breakfast and we are able to start testing some lunch ideas.

We have an evenings and innovation we’re testing in our stores and all of these just build well in the future. And we over the last five years, we’ve developed a testing capability to make sure when we bring things into the stores, that is operationally a good feeling and good experience for our partners behind the bar. They are proud to deliver the products to the customers that it enhances his overall customer experience.

So we just see that we are in the early days but only here in the U.S. but I can imagine the recipes and ideas, we’ve started in license rules and it will go into other parts of the world. And this a global capability that we’re going to develop and it will be matching all beverage capabilities we’ve had for the last 30 years.

Michael Kelter - Goldman Sachs

And I have some really quick, the deck you are tacking on. You mentioned for general corporate purposes, are there any specific calls on cash which we think about other than repurchases?

Troy Alstead

No. Not at this point in time. There is still is the arbitration results yet to be announced. We have as I mentioned no new news on that whatsoever but that certainly is in our mind just the platform regardless of any answers. And then beyond that, no specific messages on use of capital at this point.

Michael Kelter - Goldman Sachs

Thank you.

Operator

Your next question comes from John Glass with Morgan Stanley.

John Glass - Morgan Stanley

Thanks. So historically you’ve made a bunch of investments every year that run through P&L. Can you or are there any numbers you can provide for preliminary in 2014 investments and what they relate to. You also didn’t, I think, address capital in the release which are capital spending budget for ‘14 and then finally, you said the net effect of green coffee left these things was $0.09 to $0.10. So what’s the gross benefit of coffee for 2014, Howard?

Howard Schultz

John, our planning cycle in our company is really beginning now and some of that work is done but much of it is in a couple of months ahead of yet. As we finish up this fiscal year, and just remember we’re not even in the new fiscal year yet. So our final capital spending plans, off course, learned away but they are going through the normal scrutiny and planning a discussion that we would always put them through as all of our investment plans for the year.

So no messages for you. At this point in time on any of those things, those are all things that I will detail for you in our call mid-October every year. But suffice to say the broad based targets I provided today in terms of margin expansion and in terms of earnings per share, our numbers that we feel quite confident in being able to deliver even with those investments that we have.

Now, when it comes to coffee, yeah, I spoke about the $0.09 to $0.10 as the net benefit. So you would all have clarity as to what we expect to deliver of that benefit to the bottom line. That’s primarily net of the CPG price actions we’ve taken recently. And then another normal course investments and again what that -- the size of those are influx to stage, I won’t provide detail on the gross coffee benefit particularly because we still have part of the fiscal '14 year as they open in terms of price locking at this stage. But the gross benefit is somewhat higher than that $0.09 to $0.10 net benefit that I spoke of.

Operator

Your next question comes from Nicole Miller with Piper Jaffray.

Nicole Miller - Piper Jaffray

Howard, I was wondering if you would talk to us about your vision of -- as these stores come together with the digital experience and food, beverage innovation on tea and innovation and evolution of the platform you have today, what does that translate to in terms of domestic growth opportunities and global growth opportunities? And then Adam, if I can do a follow up with you as well, I think it's been great color around technology and it is very disruptive in the fact that it’s channel agnostic. I looked into how you used it and it is a little bit manual. I am wondering if you ever envision that becoming more automatic?

Adam Brotman

Sure. Nicole, it's a good question, because one of the things that's allowed us to get such a big lead in mobile payments is that we did not try to, for example, go right to the cloud, go right to some sort of cap to pay although we do plan in the future on implementing whatever is state-of-the-art and most convenient to our customers. But where we have done a barcode, where we have done other things has given us an ability to be nimble, be fast and it's given us the lead in the space.

Howard Schultz

In terms of your question about the multiple formats and growth opportunities, let me begin with saying that the lens that we have used to decide whether or not to acquire these companies was first and foremost to try and check the box and answer the question in the affirmative, does this acquisition enhance the experience inside our retail stores? So obviously in listening to Cliff talk about La Boulange , we certainly have been able to do that in terms of what food is representing in the 1000 stores and what's going to come nationally.

Secondarily, the acquisition of Evolution has given us a health and wellness brand and a platform to build well beyond juice and take that into the CPG category. And thirdly, Teavana, a little bit different, we bought 300 plus stores in malls that we thought we could bring our creativity and our confidence into that category and do for tea what we did for coffee in a number of ways. Beginning as I said in my remarks it will open up a reimagined flagship store in every site of Manhattan in the fall and that will be the beginning of demonstrating the integration and our capability of theatre and romance and handcrafted tea beverages hot and cold inside at the Teavana store. And that will be the template to get mingle back into Teavana stores and do that in near stores and then over time, you'll begin to see Teavana handcrafted beverages inside Starbucks as well as a very high quality super premium loose teas. So the integration of Teavana into Starbucks, the integration of La Boulange into Starbucks, the integration of juice in our stores. But the Teavana opportunity I think is at least 1000 stores in North America and the opportunity that we saw during the acquisition due diligence for Teavana was much greater outside the North America given the propensity of people consuming tea in parts of the world where we are very strong specifically Asia Pacific.

So I think this is the early days of these growth channels for us but as I said in previous calls no one should lose sight of the fact that in the last two years, the Starbucks stores that we opened have been some of the best performing stores in almost a decade in terms of average unit volumes and sales to investment ratio. And we have no plans whatsoever to slow down on the U.S. opportunity, including the success that Cliff and his team have had in drive-throughs which has added a significant incrementality. So I think we're in a very unique position to offset any slowdown in the economic environment and continue with the pace we've had in both our core business and take advantage of the acquisitions we've made to leverage inside and outside of our stores.

Operator

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

David Tarantino - Robert W. Baird

Troy I just or maybe Howard, I just wanted to come back to the question on the debt placement. And the thought that you need additional liquidity given how much cash is already on the balance sheet and how much free cash flow you're generating. I’m just wondering is the big acquisition part of the near-term strategy or is that a possibility. I think you mentioned at the Analyst Day back in December that that you’re going to absorb but you already have. I’m just wondering if the thinking there might have changed over the last six months or so.

Howard Schultz

I would say -- it’s Howard. Just I would say candidly with the three acquisitions we’ve made over the last year and a half or so, and the opportunities we have to integrate those acquisitions inside our stores take advantage of globally.

I would say that we have enough to digest in the near-term and just nothing candidly in our guideline that would suggest that we’re involved and engaged in anything that we’re going to acquire. And Troy do you want to add?

Troy Alstead

David, I would just say really for my comments with respect to debt we have loan recognize that there is opportunity with extremely conservative balance sheet to bring a bit of debt on to the balance sheet and frankly, the market conditions have been very good for that in the last several months as you know.

So that combined with just as we look to the future and think about our cash around the world and how that continues to grow, we’ve made a determination this is the right time to get into the markets that would bring a little of debt on and that’s really what’s behind.

Howard Schultz

I would say also we work with our board and I think we’ve reached the consensus for the fairly opportunistic given the pricing of this kind of money.

David Palmer - UBS

Great and then maybe just a quick follow up, once you pass the [crest] I don’t know it would just be a signal then that you could become more aggressive with the dividend or buybacks, is that the idea?

Troy Alstead

David, that’s always a possibility. I’m not consciously signaling that today, but I’ll tell you as you know every year we go through an evaluation of our cash flow, of our capability, of our plans ahead and of our dividends and the pay of ratio and how active we are on repurchases. So that’s an ongoing evaluation, certainly something we’ll look at as we end this fiscal year and move into the next fiscal year. And then we’ll come back and I expect we’ll have more to tell you about that when we get into the October call.

Howard Schultz

JoAnn, we take one more call.

JoAnn DeGrande

Yeah. Thank you, Howard. We’ll take one more call and we’ll call those of you who left hanging on the line.

Howard Schultz

But, we’re looking for a good question in the last call.

JoAnn DeGrande

You don’t worry.

Operator

The last question comes from Andy Barish with Jefferies.

Howard Schultz

Lot of pressure, Andy.

Andrew Barish - Jefferies & Company

Howard, how about we can [hawking] back to another company in the industry this week that talks about some throughput issues as a bottleneck, love to hear your perspective as the operating side of the business has come such a long way, just in terms of kind of where do you stand in terms of labor investment or some examples of how you’re handling the increase volumes and comps and complexities in the U.S. store footprint?

Howard Schultz

I think Cliff and his team of operators deserve all the credit and I give it to Cliff to answer the question in specificity. But let me frame it for you. We’re serving more customers today in our U.S. stores than any other times in our history and that is happening for a number of reasons.

The peak periods will become much more effective and efficient being able to move our customers through in a satisfactory way. But the clear difference is the day part in these states that we are satisfying that really was not in existence five years ago. That’s a credit to the operators, the product innovation.

And specifically what’s happening on mobile because the mobile platform that Adam talked about earlier which is growing at rates that are just unbelievable and put us in a position where we’ve more transactions on mobile than any other retail in the world is also creating speed of service and efficiency and also satisfying our customers in ways that they have not been satisfied before. But the real credit in all this goes to Cliff and his operators. Cliff?

Cliff Burrows

Thanks, Howard. I thank you for giving me space to answer a question. Andy thank you. The work that we’re doing everyday in our stores is the work of serving our customers and we’re really focused on the product we develop and the way we bring them into store, the testing capability that we’ve never had before and we have an incredible team of people.

The team work that is out there today is far better everything we’re doing around the environment to set our partners for success is critical and I really just want to thank our partners for their hard work each and every day. They’re doing incredible job. They are more productive than they’ve ever been.

And that said, we still see opportunity to grow capacity and at the innovations around day parts whether it’s beverage, whether it’s food, whether it’s juice, whether it’s combinations in the future, all of those give us the real potential to continue growing and we will continue to do that work. Technology will support it whether it’s the digital (inaudible) and we have some exciting things in the pipeline. So thanks very much, Andy.

JoAnn DeGrande

That concludes our call and our fantastic third quarter results. Thank you for joining us. We will talk to you again in November. Thank you.

Operator

This concludes Starbucks Coffee Company’s third quarter fiscal year 2013 earnings conference call. You may now disconnect.

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