Starbucks' (SBUX) CEO Howard Schultz on Q4 2014 Results - Earnings Call Transcript

| About: Starbucks Corporation (SBUX)

Starbucks Corporation (NASDAQ:SBUX)

Q4 2014 Results Earnings Conference Call

October 30, 2014 5:00 PM ET


JoAnn DeGrande - Vice President, Investor Relations

Howard Schultz - Chairman, President, and CEO

Troy Alstead - Chief Operating Officer

Scott Maw - Chief Financial Officer

Cliff Burrows - Group President, U.S. and Americas

John Culver - Group President, China, Asia Pacific, Channel Development and Emerging Brands

Adam Brotman - Chief Digital Officer

Matt Ryan - Global Chief Strategy Officer


Sara Senatore - Sanford Bernstein

John Ivankoe - JPMorgan

David Palmer - RBC Capital Markets

Keith Siegner - UBS

Joe Buckley - Bank of America

John Glass - Morgan Stanley

R.J. Hottovy - Morningstar

Jeffrey Bernstein - Barclays

Matt DiFrisco - Buckingham Research

Andy Barish - Jefferies


Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to Starbucks Coffee Company’s Fourth Quarter and Fiscal Year 2014 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions)

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

JoAnn DeGrande

Thank you, Mike. Good afternoon. This is JoAnn DeGrande, Vice President of Investor Relations for Starbucks Coffee Company. Thank you for joining us to discuss our fourth quarter and fiscal 2014 year end results.

Today on the call with prepared remarks are Howard Schultz, Chairman, President, and CEO; Troy Alstead, COO; and Scott Maw, CFO. And joining us for Q&A are Cliff Burrows, Group President, U.S. and Americas; 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 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 to find a reconciliation of non-GAAP financial measures referenced in today’s call with our corresponding GAAP measures.

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

Before I turn the call over to Howard, I want to once again extend an invitation for you to join us here in Seattle on December 4th for our biennial Investor Day. The event kicks off Wednesday evening with the reception at our new roastery, which we are very excited to unveil, followed on Thursday by presentations and onsite experiences here at our headquarter. Please contact Investor Relations if you need more information and we hope to see you here in early December.

With that, let me turn the call over Howard.

Howard Schultz

Thank you, JoAnn, and welcome to everyone on today’s call. Starbucks record Q4 and fiscal 2014 financial and operating results again demonstrate the power and relevancy of the Starbucks brand and the success and scalability of our operating strategies and global business model.

Meaningful contributions from each of our business units drove a better than 10% increase in Q4 revenues, to a record $4.2 billion, while improved store operations enabled us to deliver an elevated experience for our customers and our 19th consecutive quarter of comp store sales growth at or above 5%.

Sales leverage, increased operating efficiency and disciplined expense management, each contributed to 280 basis point increase in operating margin over last year, to a record 20.5% and a 23% increase in non-GAAP earnings to a Q4 record of $0.74 per share.

For the full fiscal year Starbucks grew revenues by 11% to a record $16.4 billion, posted global comp store sales growth of 6%, squarely in line with our targets and grew non-GAAP EPS by 21% to a record $2.66 per share.

Starbucks performance in fiscal 2014 was extraordinary by any metric or comparison and results remain even more stunning by the fact that they were achieved in the face of continued challenging retail and consumer environments, the accelerating shift in consumer behavior from bricks and mortar to ecommerce purchasing and on the heels of 7% comp growth in fiscal ’13.

I’ve spent many of these calls discussing the quarter or year ahead, but today I am going to leave that to Troy and Scott, and instead lay out for you a roadmap that demonstrates how Starbucks is positioned to benefit from the massive cultural shift in consumer behavior underway and how we will continue to lead, thrive and win in fiscal 2015 and beyond.

The most meaningful changes are long-term game changers, but I will begin with the immediate plans that will drive results this holiday. For this holiday season, officially starting for millions of consumers in the U.S. and around the world this Saturday, when Starbucks cups turn red. We have completely re-imagined our in-store experience.

We have great seasonal offerings from La Boulange and are introducing an innovative new handcrafted beverage, chestnut praline latte, a beverage that resonated strongly with customers in test markets and will add incrementality as the next iconic holiday beverage and we reoriented our approach to gifting.

Last holiday, Starbucks benefited enormously from the consumer shift towards gift, gift giving cards, instead of traditional physical goods. For us that translated into a record card sales, roughly one in eight Americans receiving a Starbucks gift card and 1.4 billion in Q1 card loads last fiscal year.

This holiday we will create even more passion and excitement for Starbucks gift cards by offering 100 beautiful unique and proprietary new card designs, merchandize on an engaging freestanding card wall and supported by social media to encourage engagement and peer-to-peer sharing, and we will have greatly expanded our ecommerce merchandizing offerings as well.

But the big driver this year is our promotional overlay of Starbucks for Life. During the five-week period beginning December 2nd at the heart of the Christmas shopping season, every customer who uses a gift card or their MSR account to pay can win one of almost 500,000 food and beverage prizes, and 13 lucky card folders in North America will win Starbucks for Life.

Now customers have been trying to buy Starbucks for Life for decades, but we have never offered it and you still can’t buy it. But this holiday season 13 Starbucks cardholders who are MSR members will win it.

Our Starbucks for Life promotion and external marketing plans will ignite social media channels through our customers into our stores and drive significant loyalty into the flywheel of Starbucks.

Today Starbucks is approaching 1,400 stores in China and customer engagement with our brand has never been stronger. We continue to expand and leverage our mobile, digital and loyalty assets, and become an increasing relevant part of the daily ritual for rapidly growing customer base.

As a result, Starbucks comp growth in China routinely outpaces segment comp growth in China overall and with passionate world-class senior leaders and store partners drawn from local communities within China and demand for all things Starbucks in China so strong, we are now opening an average of one new store everyday, a pace that will only accelerate for years to come. These are still the early days of Starbucks growth and development in China despite the fact that is one of our strongest markets in the world.

Turning to Japan, last month we entered into an agreement to acquire shares in Starbucks Japan we did not already owned. Opened in 1996 in our first country market outside of North America, Japan today represents over 1,000 stores.

Beside being EPS accretive in year one, when completed the transaction will enable us to increase the pace of new store openings that have benefited us in U.S., China and certainly other markets around the world, and expand the availability of Starbucks products in multiple CPG channels. We will also be able to leverage more fully our loyalty, digital, mobile and new product development programs in Japan.

Turning to EMEA, I’m pleased to report that our EMEA business has been transformed and turned around, just as we had promised, and that Q4 represented EMEA’s best quarter in years, with particularly strong performance in the U.K., as good as Q4 was you will continue to see the EMEA get even better in the quarters ahead.

Now, let me turn to coffee, for years we have dreamed of a single place where would capture all the passion, all the ambition, all the magic of coffee in one extraordinary dynamic space. Those of you who come to Seattle for our Investment Day -- Investor Day in December we will see that vision come to life in the most unique and extraordinary consumer experience ever seen, the Starbucks roastery and tasting room.

The roastery will shine a bright light on everything Starbucks, it will seamlessly integrate coffee roasting and food, beverage and merchandize retailing into an immersive consumer experience that showcases Starbucks coffee heritage, the craft of small batch roasting and innovative new coffee brewing methods, culminating in each cup of coffee being handcrafted right from the roasting.

We will combine the beauty and romance of super premium micro-lot coffees with moments of connection and discovery for our customers. But, perhaps, the greatest value of the roastery is that it will anchor a new Starbucks super premium coffee sub-brand Starbucks Reserve, identified not by the Starbucks brand itself but by a capital R and Star that defines the upper limit of what is possible in coffee just as other authentic super premium brands have done in other industries and formed the foundation for an entirely new Starbucks reserve retail store platform and business unit.

The first of hundred or more reserve stores we plan to open around the world, we will be opening in San Francisco very soon. And the roastery would be the first of several we plan to open in select markets around the world, beginning in fiscal 2016.

Beyond the experience itself, the proprietary design, technology and capacity we have built into the roastery will enable us to substantially increase production of rare and limited availability coffees and to double the number of Starbucks stores, offering packaged Starbucks reserve coffees to 1500 worldwide by the end of fiscal ‘15.

And I can assure you that no other coffee company in the world will be able to offer higher quality coffees in a coffee labeled Starbucks Reserve. With the roastery and with Starbucks Reserve, Starbucks will further elevate the premium end of the coffee industry, extend our coffee leadership and authority and create further separation from every other coffee company in the world.

Let me turn to Teavana. The Teavana acquisition provided Starbucks with unique entree into the $90 billion global hot and iced tea category, a category we feel strongly is ripe for innovation and reinvention. Last year, we opened our first Teavana Tea Bar on Manhattan’s Upper East Side and we now have a total of 60 Teavana tea bars.

I was at the opening of our newest New York City Teavana Tea Bar on 9th Street and Broadway just last week and was taken by the energy and customer excitement in the store. I urge you all to visit the store yourself and envision a national and global footprint of Teavana stores that Starbucks will create.

Sales of handcrafted Teavana beverages such as Teavana Oprah Chai and Teavana Shaken Iced Tea and sale of Teavana premium loose-leaf teas through Starbuck’s global store base were always a core strategic focus of the acquisition. Today we are already seeing Teavana products drive incrementality at Starbucks stores in North America. At the same time, they build brand awareness and add new customers for Teavana. In fact, Teavana Shaken Iced teas were the single most profitable addition to our menu last year.

Now let me comment on digital card, mobile, loyalty and payments. I want to talk to you about the intersection of three powerful consumer trends, the convergence of which bodes extremely well for Starbucks over the long term. The shift in consumer behavior that has people spending less time shopping in bricks-and-mortar stores and more time online that I first discussed with you after Q1.

The established long-term trend of people consuming more and more food and beverage away from home and the tremendous growth of online activity from mobile devices allowing consumers to conveniently conduct their lives including commerce from wherever they happen to be.

What’s actually occurring is the cultural shift in time allocation, away from retail experiences people have felt forced to undertake and towards retail experiences that people want to enjoy with convenience as the key enabler. Starbucks is uniquely well positioned to benefit from this convergence as the destination experience. Visiting Starbucks has always been an elective choice, a place people choose to freak with and as a result the place that is vastly less dependent on intercepting retail traffic for sales growth.

The relevance of the Starbucks’ experience, the desirability of our coffee and food and the ambience and feeling of community within our stores sets us apart from our competitors and our unique drivers that will continue to support our growth.

On top of this, we continue to see consumers favor retailers who improve their customer experience through the integration of convenient mobile technology. And while Starbucks is today an uncontested leader in mobile, we will continue to innovate and lead around all things mobile in order to attract additional users of our app and provide an enhance and simplified experience for our customers. Innovations that will drive traffic and incrementality and create further attachment and customer engagement.

By way of example in September, we launched our new Starbucks app for android with Shake to Pay functionality in the U.S., U.K. and Canada and also digital tipping in the U.S. as Starbucks iOS app now has Uber integration, enabling customers to click on a ride to their local servers.

But perhaps the single most important technology innovation, we will introduce this year is Mobile Order and Pay which debuts in Portland in December and will be rolled out nationwide in 2015. And while many people are talking about Mobile and Pay, what Starbucks is going to do and execute is quite different than anyone else in the market place.

Consumer’s today are no longer willing to accept convenience only around the purchase of readily available or commodity based products. They want convenience around the purchase of premium products like Starbucks as well. One way, we are addressing that need is to accelerate the expansion at Starbucks portfolio of high profitable drive-through source.

But our research confirms that we can drive even more traffic and incrementality and offer even more customers more convenience in more locations by allowing them to place orders ahead of time via their mobile devices and pick their orders up without waiting in line.

Starbucks’ Mobile Order and Pay is a totally unique technology. It seamlessly integrates mobile ordering and our proprietary loyalty program with point of sale and store operations enable us to enhance our customer experience, exceed our customer’s expectations or convenience and extend customer loyalty.

And as you will see in a few weeks, no company in any industry offers any technology remotely like Starbucks’ Mobile Order and Pay plus we get the added benefit of increased store throughput and speed of service for all our customers. And we will drive a further step change in customer loyalty and engagement by extending express order and pay to include food and beverage delivery, yes, food and beverage delivery in select markets during the second half of 2015.

Imagine the ability to create a standing order that Starbucks delivered hot or iced to your desk daily, that’s our version of ecommerce on steroids. All this will grow Starbucks Rewards, our loyalty program that now has 8 million active members up 23% over Q4 last year and has been launched in 26 countries. And we will roll out and enhance My Starbucks rewards program, providing even greater benefits to members in 2015, further accelerating MSR membership growth. And we have several initiatives underway that will grow membership in a short term and surprise and delight our customers.

Finally, while we have been investing in the development of our world class mobile technologies for many years and there has been a great deal of activity and speculation around the mobile payment base recently. Mobile payment and consumer adoption of the technology overall is still in its infancy.

Please consider this metric. In 2013, payment for purchases by use of all mobile devices in the U.S. totaled $1.3 billion that was the entire market. Now listen to this. With over 90% of those purchases taking place in a Starbucks store, that means we had 90% share of mobile payments in 2013 while bricks-and-mortar commerce in 2013 totaled more than $4.2 trillion.

Now what you’re going to see in the years ahead will be a rapid acceleration in mobile device purchases and a continued significant migration away from bricks-and-mortar commerce. There is obviously a huge prize there and that’s why we’re seeing so much activity around the payment space from all kinds of companies.

That’s why every tech in financial service company in the world is totally, is today chasing the mobile payment opportunity. Yet while these companies may have vast hardware and software development capabilities and this is the key point here. Starbucks is the only local, national or global business of any kind to succeed in crossing both the most difficult and the most critical CASM standing between success and failure in mobile payment, transforming consumer behavior. We’ve accomplished this by integrating the convenience of mobile payment to a compelling and enjoyable program that gives our customers rewards.

Already close to 7 million transactions per week, 16% of all transactions conducted in U.S. Starbucks stores occurs via customers use of a mobile device. No company and no retail store domestically or internationally even comes close. And while that figure has been growing by almost 50% per year, the real growth is yet to come.

Starbucks Coffee Company has cracked the code at tying mobile payments to loyalty and we are now receiving great interest in partnerships from mobile payment companies who see the value of our rewards program and the mobile payment behavior we established. But we will play our hand wisely with a long-term view, carefully choosing our partners and how we leverage our assets to take advantage of the revenue and profit opportunities in loyalty and mobile payment ahead. But I can assure you that Starbucks will have a major role to play, both inside and outside of our stores as the nascent mobile payment industry evolves.

On Veterans Day, November 11th, just two weeks from now, in keeping with Starbucks’ values and guiding principles and in conjunction with the publication next week of a book I coauthored with Rajiv Chandrasekaran, For Love of Country, where our Veterans can teach us about citizenships, heroism and sacrifice. Starbucks, HBO and Chase will be hosting a free, nationally televised concert on the Mall in Washington DC to honor our veterans of the wars in Iraq and Afghanistan, who have given so much so we may enjoy our freedom, our families and our lives.

Over 200,000 people are expected on the Mall, with an A-list performer list which includes, Bruce Springsteen, Rihanna, Eminem, Carrie Underwood and many others. Don't miss it.

Lastly, we are looking forward to welcoming many of you as JoAnn already shared with you to Seattle for our Biannual Investor Day on December 4th, our first conference in our hometown since 2006, and to sharing with you details around new food and beverage innovations, reimagined store designs and new store formats, Mobile Order and Pay, expansion of our evening programs to drive further incrementality, elevation of our partner and customer experiences and many other initiatives that will demonstrate how Starbucks will continue to grow and to win in fiscal 2015 and long into the future. And I’m beyond thrilled to share with you the spectacular new roaster.

I will now pass the call over to Troy and Scott to discuss our operating and financial performance in Q4 and fiscal 2014, and provide an update of our fiscal 2015 outlook. But before I do I just want to say one thing. When I look at the results, this is not on the script. When I look at the results of this year, the stunning accomplishments on so many levels, I hear somebody is disappointed with a 5% comp on a base of over 7,500 stores. I just got to ask myself, is there any company in your universe putting up these kinds of numbers? And the answer is no.

And I call tell you from my point of view and for everyone involved at Starbucks, we are just getting started. Troy?

Troy Alstead

Thanks, Howard and good afternoon everyone. 2014 was an incredibly strong and record year for Starbucks across the board. Each of our reportable segments set new fourth quarter records to revenue and operating income. The results we reported today are that much more significant when considered against the backdrop of the very soft global retail environment in which they were accomplished.

The hardwork and dedication of our Starbucks partners has enabled us to be where we are today and we have the solid foundation needed to continue to profitably grow both emerging and existing lines of business into the future. I will provide an overview of our fourth quarter and fiscal 2014 performance for each reporting business, and then turn the discussion over to Scott for additional details, along with an update on targets for fiscal 2015.

For the total company in the fourth quarter, we produce net revenue of $4.2 billion, up 10% from the same period in fiscal 2013. In a difficult consumer environment, we delivered comparable store sales growth of 5% for the quarter, driven by a 4% increase in average ticket and a 1% increase in traffic. And new store openings continued at a healthy pace, with 503 net new stores opened in the fourth quarter.

In terms of segment results, the Americas net revenue for the quarter was $3.0 billion, a 9% increase over the same period last year. The increase was primarily driven by a 5% increase in comparable store sales, comprised of a 1% increase in traffic and a 4% increase in average ticket. Incremental revenues from 698 net new store openings over the past 12 months also contributed to the growth in revenue.

While we delivered comparable store sales growth solidly within our stated target range for the consolidated business and all segments, both for the quarter and the year, like others in retail we are feeling the impact of consumer uncertainty in today’s economic environment.

We are not satisfied with 1% traffic growth in the Americas and are taking immediate steps to grow traffic. I’ll share with you some specific plans to do just that, including some exciting new initiatives launching in the next few weeks. I would like to underscore that we are very encouraged with several key performance indicators in our fourth quarter results that speak to the health of our business.

First, our new stores are driving incremental traffic, serving untapped demand and for second consecutive year, maintaining record levels of first year performance. These stores are increasingly contributing to traffic and revenue growth, a clear indication that we are opening stores in the right places and in the right formats, which provided for the solid foundation for future growth.

Second, similar to the third quarter, ticket growth was among the highest in the last several years, with the growth primarily driven by beverage and food mix and attach. Pricing once again contributed 1 point to total comp growth, consistent with the prior four quarters.

Third, all day parts grew over the prior year and not more than 45% of our traffic is in the morning before 11 a.m. We saw strong growth in the midday between 11 a.m. and 3 p.m. This is another encouraging sign that our food and beverage innovations are geared towards expanding the afternoon day part are gaining momentum with customers, which brings me to another key highlight of our fourth quarter performance.

Food, food again contributed 2 points to Americas comp growth this quarter, representing double-digit revenue growth over the prior year. Our expanded breakfast selling platform drove the majority of the increase in the food comp, bolstered by significantly higher attach rates.

We are very encouraged that our premium breakfast sandwich platform is performing extremely well. Our bakery and lunch platforms also delivered strong revenue growth. The introduction of two new lunch sandwiches at the end of last quarter has created new interest in all our warm sandwich offerings, which indicates that Starbucks is increasingly recognized by our customers as an attractive option for lunch.

In addition to sales growth, we achieved margin enhancement from a variety of supply chain improvements. The insights we gained from the rollout of La Boulange bakery and new lunch offerings have enabled us to refine our execution. The most significant impact we are seeing is a reduction in waste, which goes directly to the bottom line.

We’ve also simplified the work routines in our stores, with the implementation of a food management tool. Our partners have responded positively to the changes and we are seeing the benefit in margin improvement.

And finally, we continue to analyze our product offerings and make adjustments to ensure that the items we offer are those that will truly make a difference to our customers in terms of routine, relevance and loyalty.

Our Teavana hand-shaken iced tea helped drive more than 20% growth in our ice tea platform. Overall, we saw double-digit growth in the entire tea category over the fourth quarter last year, with the growth coming from across the entire platform from our base products to our limited-time offerings.

We are very pleased with the strong performance we’ve seen in the early days of Teavana and Starbucks stores, and we believe that we are at the very nascent stage of what promises to be a tremendous growth opportunity for tea in the future.

Moving on to our store formats, in the U.S., our high profitable drive-through stores, which account for 42% of our company-operated store portfolio, generated nearly 50% of sales and 55% of total company operated store profits in Q4.

Drive-throughs achieved comp growth in Q4 that outpaced the overall portfolio, with more than 60% coming from out-the-window sales, reinforcing the importance and relevance of convenience to our customers. We are very encouraged by these results and expect them to grow, as we continue to focus on improving productivity at peak and delivering enhanced customer experience.

Overall, I am very pleased with the results from our Americas segment. As Scott will discuss in further detail, operating margin for this segment increased a phenomenal 260 basis points over the prior year, a tremendous accomplishment considering the size of the Americas business.

Now turning to EMEA, where the momentum that has been building all year culminated in a remarkable finish in the fourth quarter. The region delivered strong 10% revenue growth in the quarter, attributable to favorable foreign currency exchange, 5% comp growth and incremental revenue from 171 net new stores opened in the last 12 months.

This represents the sixth consecutive quarter of positive comps, driven by a 2% lift in traffic and a 2% rise in average ticket. The two-year comp at 7% represents the highest two-year comp in the past three years.

For second consecutive quarter, the U.K. comp was slightly higher than the overall segment comp growth for the quarter. Major driver of this increase was food, once again driven primarily by up-leveling our breakfast and lunch platforms. Another major market in the EMEA business, Germany, also achieved comp growth that outpaced the regions for second consecutive quarter.

We are very pleased with these results because it was Germany’s sixth consecutive quarter of positive comp growth. As the store mix of the EMEA portfolio shifts, it’s important to look at how our license stores in that segment are doing. We are very pleased that several licensed markets comped above the segment results for our company operated stores, with two markets reaching double-digit comp growth.

This further demonstrates the strength of the Starbucks brand across the region where today 62% of our stores in EMEA are licensed. The turnaround in this region has been both remarkable and well-balanced from improving the customer experience to up-leveling product offerings to expanding margin through process and supply chain efficiencies and profitability for restructuring our store portfolio. I am very pleased with the ongoing levels of improvement from our EMEA business and the rapid pace at which the improvement is occurring.

Turning to the China Asia Pacific region, our fourth quarter results were strong once again. Total net revenue grew 21% to $310 million in Q4, a new all-time record and represents the 17th consecutive quarter with revenue growth in excess of 20%. The largest drivers of this growth were incremental revenue from 742 net new stores opened over the past 12 months and 5% comp growth for the quarter.

Comp growth was entirely attributable to increased traffic with ticket declining in the quarter partially due to lower sales of seasonal packaged food offerings in China. Most importantly, the region’s strong 6% traffic growth sustained the trend from the third quarter demonstrating the tremendous strength of the Starbucks brand in the CAP region.

We ended the year with 4,624 stores in the region, including 199 net new stores opened during the fourth quarter. 120 of these new openings were in China, a fourth quarter record. A particular significance is that our new stores in China are exceeding the year one pro forma sales we projected. These results and investments we made across the region including our pending acquisition of Starbucks Japan gives us great confidence and optimism about our future performance in the CAP segment.

Finally to channel development, the momentum we saw in the third quarter continued into the fourth quarter. This segment achieved a new record for quarterly revenue, almost $400 million resulting in 12% growth over the prior year. The increase was primarily driven by sales of K-Cups, which rose 26% in the fourth quarter, reflecting the strength of core product sales and success of the product innovation and limited-time offerings.

Our flavors platform grew with the introduction of two new flavors in July; cinnamon dolce and mocha. Our seasonal limited-time offering Fall Blend was also successful. We are pleased that our diverse portfolio of K-Cup offerings contribute to our leadership position down the aisle in premium at-home coffee.

We are confident we can maintain our market leading position in premium packaged roasting ground coffee as well despite the continuing shift in consumer preference towards single serve coffee and our strong position in that category. Continuing innovation combined with our unique unmatched cross-channel My Starbucks Rewards program are the keys driving that continued leadership position. In fiscal 2014, 1.5 million of the 8 million members of our loyalty program earned stars through the grocery channel.

And now to recap our full year 2014 results which were also very impressive. At the consolidated level, we achieved record revenue, operating income and operating margin. Consolidated revenue for fiscal 2014 increased 11% to $16.4 billion. The increase was primarily due to a 6% increase in comparable store sales comprised of a 3% increase in traffic and a 3% increase in average ticket.

Incremental revenues from 1,599 net new stores opened over the past 12 months also contributed to the growth in revenue. Of the new stores we opened, 1,029 were licensed demonstrating the strength of the Starbucks brand and the valuable licensed partnerships we have established around the world.

We achieved a number of major milestones in 2014. We completed the La Boulange Bakery rollout in all company-operated and licensed stores in the U.S. We announced the planned acquisition of Starbucks Japan, our first international market outside of North America and our channel development business delivered both double-digit top and bottomline growth for the year.

We shipped approximately 750 million K-Cups during 2014 giving us confidence that we can reach the 1 billion mark in 2015. As we move into 2015, our priorities for our food program will be to continue to lean in on the success of our breakfast sandwiches, evolve our lunch program by introducing new items and add several hundred evening stores as we move the program into the full launch phase that thoughtfully leverages the insights we gain during the test period.

On digital front, we will be intently focused on learning from the Mobile Order and Pay pilot we will be launching in December in anticipation of the full U.S. rollout later in calendar 2015. We will demonstrate our commitment to staying ahead of the ship to e-commerce through a completely reimagined in-store holiday experience. We will continue to grow our coffee leadership position in our stores and at-home through star formats and product innovation that is relevant for our customers, including the roastery and the forthcoming Starbucks reserve sub-brand and stores.

We will create new occasion through our T platform. We will roll the Starbucks with innovative store design and formats. We will complete the acquisition and the integration of Starbucks Japan and begin unleashing new growth opportunities in that market. And we will begin rolling out the first phase of a multi-year investment in the partners experience.

This will include higher start rates in all U.S. markets starting in January, a new performance recognition or award mechanism, improved shift schedules, the introduction of a food benefit and continued expansion of the Starbucks College Achievement Plan through Arizona State University. During our investor day in Seattle on December 4th we will provide additional debt on these initiatives and much, much more. (Indiscernible).

I will now turn the call over to Scott to provide more details on the fourth quarter and full year 2014, as well as our 2015 target.

Scott Maw

Thanks, Troy, and good afternoon, everyone. Our fourth quarter and full year 2014 saw strong financial growth and profitability for Starbucks. Our results were once again driven by the customer experience delivered by our partners around the world. Q4 revenue grew 10% and our strong comps store sales of 5% once again showed the strength of our brand in a difficult environment.

One of the most significant financial items to highlight is the 280 basis point increase in non-GAAP operating margin reflecting our ongoing ability to leverage operating cost and control cost of goods sold. This is the highest level of non-GAAP operating margin expansion we have driven in nearly four years.

Before I go into specifics, I want to ensure that everyone is clear on what we are including in our non-GAAP adjustments for comparison purposes. For both 2013 and 2014, we have excluded charges and adjustments related to the Kraft litigation. We have also excluded gains, losses and cost from certain transactions related to equity interest and retail operations in specific geographies. You can see the amounts, timing and description of these items in the detailed reconciliation table provided at the end of the earnings release. I recommend you review that in conjunction with our results.

Operating income from each of our reportable segments reached new all-time highs contributing up to margin expansion I mentioned earlier. Our fourth quarter results across the segments to have anther of strong growth with earnings per share of $0.77 on a GAAP basis. Our fourth quarter non-GAAP earnings per share was $0.74 which is the highest we have ever achieved in a single quarter. This represents 23% growth over the prior year non-GAAP EPS.

On the segment basis operating income in the Americas grew to 743 million up 23% over the prior fourth quarter. Operating margin expansion of 260 basis points reaching 24.4% was primarily driven by significant sales leverage. Effective inventory management and our scores primarily the result of reducing product waste and lower commodity costs also contributed to the margin improvement.

In EMEA, we continue to deliver strong results that demonstrate that the transformation work over the past few years is truly taking hold. Fourth quarter operating income for this segment was 30%, a 42% increase over the fourth quarter which translated into a 12.1% operating margin. This is EMEA’s first quarter ever of double-digit margins. This resulted in a 280 basis point expansion in operating margin over the prior year primarily driven by sales leverage and continued expense management.

Now let’s turn to China Asia Pacific. For a second consecutive quarter this segment delivered operating income in excess of $100 million. This was an 8% increase over last year, which translated into a 33.5% operating margin and was driven by balanced performance across the region. Operating margin declined 400 basis points primarily due to a 210 basis points favorable impact to last quarter’s fourth quarter margin from a reduction in the estimated asset retirement obligations for store leases. The ongoing shift in our store portfolio composition to more company-operated stores also contributed to the margin decline.

Operating profit for channel development grew 34% in Q4 over the prior year to a record $172 million and operating margin was 43%, a 690 basis point increase over last year. Significant topline growth due to strong sales of single serve products coupled with favorable coffee costs and other cost of goods sold efficiencies drove the operating income and margin improvement.

The effective tax rate for the fourth quarter was 36.4%. The combined impact of selling our ownership interest in Malaysia and Australia increased the rate by about 2%.

Our full year results for 2014 were equally impressive. Consolidated global net revenues reached a record $16 billion in fiscal 2014. The 11% revenue growth over fiscal 2013 coupled with our EPS growth this year represents the third straight year that we have grown revenues double-digit and non-GAAP EPS over 15%.

Our fiscal 2014 consolidated operating income of over $3 billion represents a 25% increase on a non-GAAP basis from last year, including over 15% operating income growth in all reportable segments. Relative to the prior year, operating margin increased 210 basis points for fiscal 2014 on a non-GAAP basis, primarily driven by sales leverage and lower commodity costs.

We added nearly 1,600 net new stores in 2014 with about 70% of those stores outside of the U.S., once again reflecting broad and balanced growth around the world. Cash flows from operations remain very strong and we’ve returned a record $1.6 billion of cash to shareholders through dividends and share repurchases, up 32% from 2013. This reflects our significant cash generation capability and balance sheet strength.

And today, we announced that our Board has approved a 23% increase to our quarterly dividend to $0.32 a share. Looking ahead to 2015, we will see significant continued revenue growth including the impact of Japan, our largest acquisition network. We expect this acquisition will move our consolidated revenues up over $19 billion as we take full control of the already successful Japanese market.

We will also increase investments in critical area such as store partner pay in benefits, coffee leadership and innovation such as the roastery and digital capabilities including Mobile Order and Pay. Finally, we will have a renewed focus on driving increased leverage in both cost of goods sold and G&A expenses. And all of this will be achieved while we continue to focus on product innovation and customer service that has driven our industry leading performance few times.

Before I discuss 2015 targets, I want to highlight certain non-GAAP adjustments related to fiscal 2015 for comparison purposes. In addition to the 2014 items I mentioned earlier, 2015 non-GAAP earnings numbers will exclude several adjustments related to the Japan acquisition. Specifically, we have excluded from our comparison the significant acquisition relating gain we will recognize in Q1 resulting from the fair value adjustment of our current ownership interest in Starbucks Japan.

We expect this gain will be approximately $325 million to $375 million after-tax and will increase first quarter earnings by $0.43 to $0.49 per share. Also, non-GAAP results will exclude the amortization from acquired intangible assets and yield related transaction and integration costs, which will flow through the P&L throughout 2015.

These are all estimates and we will firm up the final amounts related to the gain and the amortization of the intangible assets in Q1. Again, we have provided a summary of these adjustments in a table at the end of our earnings release. Also given the significant financial impact of the Japan acquisition on the CAP segment in consolidated results, we are holding a separate conference call to address questions related to this on November 5th at 9 A.M. eastern time. Given this please limit your questions today on the Starbucks Japan transaction to strategic and business related items as we will differ financial and modeling related questions to the call next week.

We expect fiscal 2015 revenue growth will be 16% to 18%, including over $1 billion in incremental revenue from the Japan acquisition. We expect Japan will contribute approximately 6 to 7 points to revenue growth. Excluding the Japan impact, revenue growth is consistent with our previous target of 10% plus.

Consolidated operating margin next year on a GAAP basis is expected to decrease slightly due to the impact of the Japan acquisition. On a non-GAAP basis, we expect operating margin to be flat to up slightly in 2015. This operating margin forecast reflects the impact of consolidating 100% of the Japan revenue from most of 2015 versus the joint venture accounting approach in 2014, which recognized much lower revenue from Japan of picking up about 40% of the earnings.

In our FY’15 targets last quarter, I mentioned 10% plus revenue growth and 15% to 20% EPS growth over 2014 non-GAAP EPS, which indicated that we would have solid operating margin expansion. The only significant change to that target is layering in the full impact of the Japan acquisition. We anticipate margin expansion will have returned in 2016, reflecting the full year impact of our 100% ownership Starbucks Japan and continued strong operating leverage.

So we expect one year of slightly lower margin followed by return to consistent annual margin expansion, including the growth opportunities we see in Japan within our stores and other channels, including CPG.

Regarding the CAP segment, we anticipate operating margin will be in the high-teens on a GAAP basis. This again reflects the change in ownership structure in Japan and the mix shift due to significant growth in China company owned stores. It also includes 2 to 3, 4 points of impact from the amortization of the intangible assets associated with the Japan acquisition. We expected this operating margin will move up into the low-20s over time. It is important to reiterate the both Japan and China have among the highest store level operating margins in our system. Also market level operating margins are expected to expand in both countries in 2015.

We remain very confident in the decision to acquire all of Japan, given the immediate accretion of this transaction on a non-GAAP basis, low funding, cost leveraging, offshore cash, significant growth opportunities in our stores and other channels, and an overall high IRR, reflecting strong yield economics.

In Americas, we expect operating margin to extend modestly from the excellent results posted in 2015, reflecting the ongoing investment and partners that Troy mentioned, offset by favorable sales leverage. In EMEA, we anticipate operating margin improving to 10% to 12% solidly into the double-digit range for the first time, driven by the benefit of mix shift as well as continued operating improvements across the region. And in channel development, sales leverage will provide modest operating margin expansion in fiscal 2015, improving upon our already outstanding operating results.

Our strong revenue growth and margin expansion give us the confidence in earnings per share in the range of $3.42 to $3.54 in fiscal ’15. On a non-GAAP basis, we expect EPS ranging from $3.08 to $3.13 towards the middle of our long-term range of 15% to 20%, an increase over our initial guidance provided in July.

We are expecting GAAP EPS in Q1 in the range of $1.20 to $1.28 reflecting the large gain on the Starbucks Japan transaction. Non-GAAP EPS is expected to be in the range of $0.79 to $0.81 in the first quarter, a bit lower growth in the full year target given the investments in marketing as we approach the important holiday season and in our partners, primarily related to the recent leadership conference earlier this month.

As we mentioned last quarter, commodities favorability added about 4 percentage points of EPS growth in 2014. And we continue to expect commodity costs to be roughly neutral in 2015. We have two-thirds of our coffee needs priced and despite the volatility in the coffee market, we do not expect coffee prices to impact our current EPS target for 2015.

As to recent market prices, we’ve seen nothing in current supply dynamics that indicates a fundamental market shortage, including origin-related concerns in Brazil. We have largely state out of the market year when coffee prices have spiked and we will continue to be patient as we walk in the final one-third of our needs in 2015.

As a reminder, coffee only represents about 10% of our total costs and we have managed through difficult and volatile markets before. Also, we have never reduced our EPS target range due to the impacted coffee cost. We now 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.

Our effective tax rate should be around 31%, including approximately four points of favorable impact in Q1 from the planned acquisition of Starbucks Japan. Finally, our expectation for capital expenditures is $1.4 billion for fiscal 2015. This is somewhat higher than prior years, primarily due to new store growth and the investments that will be needed as we launch Mobile Order and Pay, add more evening stores and make other important growth investments. We are confident that these investments will continue to feel the strong earnings growth that we have experienced over the past several years.

In closing, fiscal 2014 represented another year of strong results for Starbucks. All of our reportable segments delivered record revenues and operating profits, with significant margin expansion for the total company. Record cash returned to the shareholders and new store economics at an all-time high reflect financial discipline and a keen focus on return on capital.

As we enter the new fiscal year, our company remains position for growth, with specific investments and innovation digital capabilities and our partners. Funding this growth will come from operating efficiency and a renewed focus on better leveraging cost of good sold and overhead.

Our financial targets for next year appropriately balanced the need to grow and invest with a financial discipline that leads to long-term earnings growth and margin expansion. We are confident that the best days for Starbucks still lie ahead as we look to capitalize on the strength of our global brand and the abandoned opportunities that remain in markets and channels around the world.

With that, let me turn back the call back to operator to begin Q&A. Operator?

Question-and-Answer Session


(Operator Instructions) Your first question comes from Sara Senatore with Sanford Bernstein.

Sara Senatore - Sanford Bernstein

Hi. Thank you very much. I was interested to hear Howard talk about some of the product innovation like the Chestnut Praline Latte. And I guess I was wondering if you could put that in the context of maybe the competitive environment, it feels like a lot of companies have tried to replicate what Starbucks is doing, whether it's Pumpkin Spice Latte or digital and loyalty. I know that what you're doing is distinct and different, but is it possible that competition has had something to do with a little bit of the deceleration that we've seen in the traffic? I ask only because some other parts of the restaurant industry have actually seen a little bit of improvement recently and so I'm just trying to sort of understand the divergence there? Thank you.

Howard Schultz

Thank you. We see no indication whatsoever from any competitive threat in any region in the country. Specifically, even in those markets where companies were giving away coffee for weeks at a time. We saw no dilution whatsoever in our customer base.

With regard to product, it’s clear that over the last 10 years, we created a category that did not exist with Pumpkin Spice Latte. Having said that, PSL did very well for the season. One of the hallmarks of Starbucks is surprising and delighting our customers with proprietary beverages.

The interesting thing about the beverage we are introducing Chestnut Praline Latte, this is something we tested kind of under the radar last year. It surprised us at the high end and this is a product that’s coming into the system with as much enthusiasm internally as things -- anything we’ve done in the past during the holiday season and I put it in the same spirit as when we introduce Eggnog Latte many, many years ago. This is the beverage that’s going to do very well. But the short answer to your question, no competitive attrition whatsoever to our business. We do not see it.

Sara Senatore - Sanford Bernstein

Thank you.


The next question is from John Ivankoe with JPMorgan.

John Ivankoe - JPMorgan

Hi. Great. Thanks. A follow-up on that, if we are to kind of isolate competition that's not have -- being an issue in the 1% traffic that I think even in Troy's remarks, he said, he was not satisfied or you are not satisfied with 1% traffic, what do you think it would have been, I mean, if we were to identify what issue of -- that led to that 1% being disappointing relative to your own expectations? And I’d ask that in the context of, have you begun to hit a throughput wall maybe temporarily that can be at least partially solved through technology, is that an issue? And have you been able to isolate your own impact on comps through possible cannibalization as you have been recently taking up the store count, if it's not one of those two issues, what might it be? Thanks.

John Culver

Okay. I think, this is the central question of the day. So I really want to make sure we spend as much time as possible that everyone understands it and we’re transparent as we possibly can.

We do not have a throughput issue and Cliff will talk about that specifically. But a year ago today, we began talking about the macro shift in the amount of traffic that was going through malls and main streets in America.

And as a result of what happened last year and that is less people shopping with bricks and mortar stores and much more people shopping online in their mobile devices, as I talked about in my remarks. We began dramatically transforming the holiday season in anticipation of another holiday season that would even be more - greater than last year in terms of attrition of people shopping in physical stores.

What we did see though and we did not expect is that we saw it come earlier than last years holiday season. And so, we’re ready to go in terms of the fall and holiday season based of what we have re-imagine and Starbucks for Life is going to be a big holiday product and we believe is going to create incrementality in our stores.

But the short answer to the question is, there is nothing internal about what’s going on within the Starbucks store in terms of throughput. There is nothing external in terms of competitive issues. This is a micro issue and we’re addressing it with great a vengeance and as a result of that we are well-positioned.

As I said in my remarks to not only we believe have a kind of holiday season that will demonstrate the change but heading into calendar ‘15 with mobile order and pay and all the things we are going to do in terms of technology and delivering the second half of the year we are going to be the company that is positioned to overcome and navigate through the macro change in the cultural shift of consumer behavior.

So the net issue and this is so important, this is not a Starbucks issue. All the companies that you follow and all the retail companies that are reporting in other spaces are experiencing a downturn in traffic that is a result of a cultural macro shift that I spoke about in Q1 of last year.

We’re positioned and aggressive for holiday. We saw it a little earlier than we expected. But come holiday and Starbucks for Life and what we have done in the store to re-imagine what gift -- the gift of choice in term of card, we are well-positioned to take advantage of what we think the situation is all about. And Cliff just hit, specifically, the issue of throughput and productivity, so there is no misunderstanding.

Cliff Burrows

Yeah. Thank, John and thanks, Howard. In the quarter we’ve just finished, we saw our strongest productivity numbers for the year and it was the greatest improvement on the previous year. The volumes we are putting through our stores at the moment are in excess of anything we have ever seen.

I think the other thing that is significant, we opened in the final quarter over 200 stores in the U.S. and for the year 505 stores about half of them company-operated, half of them licensed. They are all performing at record levels and they continue to contribute significantly towards growth. So, it’s all good, very positive about possibility and the potential to continue to grow.

Troy Alstead

I’ll just add one point to that, John. Thanks, Cliff. We in the quarter are growing across all day parts, even the busiest morning day part is producing nice comp growth. So I think we are demonstrating increased throughput, as Cliff just said, highest productivity of fiscal ‘14 happened in the fourth quarter and it was a significant improvements over productivity in the fourth quarter of the prior year. It’s not a throughput issue whatsoever and we continue to invest in the ability to move lines more quickly, put more volumes through our stores, digital with mobile order pay is just one example of what’s yet to come.

John Ivankoe - JPMorgan

And if I'm still on, have you been able to isolate the impact, if any of cannibalization, you’ve given that store growth that accelerated through the fourth quarter?

Howard Schultz

We are seeing nothing in terms of cannibalization. The quality of the new stores and I think our discipline around opening these new stores while maintaining our operational excellence and focus on the customer in the existing stores, we have never had so much success and strength in this area.

Troy Alstead

And John you heard Howard comment in is prepared remarks about convenience. We know the convenience is a huge, very important driver of the customer experience and ultimate size of the opportunity in the business.

As we become increasingly disciplined around market mapping, around store location, around store formats, around performance of our dry fruits, about the ability to tap into new trade areas and demand like never before, as we are opening up accelerated numbers of new stores, basically opening them up almost at mature volume levels in year one, extremely high performance across all history, as we are able to do that, we are still performing with strong store results, strong comp growth and improve the untapped opportunity we have ahead for us in store growth in the U.S. and around the world.

John Ivankoe - JPMorgan

Thank you.


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

David Palmer - RBC Capital Markets

Hi. Good evening. We've seen Starbucks react several times in the last few years to patches of weakness with marketing pushes, sometimes in social media and it's worked. Is it safe to say that you might be teeing up corrective measures such as the ones you've done in the last few years?

Howard Schultz

David can you repeat the question, I am not clear exactly what you’re asking.

David Palmer - RBC Capital Markets

Back -- I remember back in the June quarter in 2012, the first quarter where you had a little bit of a soft patch and you did some stuff on social media? And in terms of discounts or incentives for people to come back and those measures worked then, you employed them later? I'm wondering if you had a soft patch late in this quarter, you've not had a chance to adjust and whether you might be thinking about making some pushes like that to help offset the bricks and mortar weakness you are talking about?

Howard Schultz

Yeah. David, thanks for the question. There is no doubt that the work that we’ve done in preparing for holiday on the specific promotional overlay of Starbucks for Life is going to have a comprehensive and significant social and digital media component, leveraging all of the learnings we’ve had in the past. And I think if you go back in history, we’ve been able to leverage that and in doing so lower our cost of customer acquisition versus traditional media.

And you are going to see that in spades, ones the holiday season kicks-off. Now, Starbucks for Life does not start until the first week in December but we’ve got a tremendous offering between that. But you are going to see a lot of promotional material and I think based on the people we talk to and the demand that’s already come from people who’ve heard about Starbucks for Life. This has the potential to be quite a frenzy with regard to being, perhaps a number one gift that only 13 people in America and Canada are going to get.

David Palmer - RBC Capital Markets

Thank you.


And the next question is from Keith Siegner with UBS.

Keith Siegner - UBS

Thank you. And congratulations on the record year. Scott, if I could ask you a question about the cost saves and efficiencies that you talked about clearly having an impact on the margins and good job on that. Could you talk a little bit about -- maybe put all of fiscal 2014 into a -- if you could quantify it maybe into some perspective. And then when we look at the guidance for fiscal 2015, how do the costs saves transition from this year to next year? In other words, what’s built into the guidance on that front? Thanks.

Scott Maw

The first thing I’ll say is I will be giving a significant more level of specificity in investor day including specific dollar amounts. But let me sort of frame it up what we are doing. If you look at cost of goods sold efficiencies, the challenge that we give our supply chain every year, last year, the number that we gave them was and I will give this in investor day with X.

Next year, the number we’re going to give them is two times of that. And so what we’ve done over the course of two years is double the amount of savings that’s going through the P&L. And that’s what’s in the forecast next year. And what’s important to note is last year with that initial target, we drove no cost of goods sold leverage in the P&L. This year, particularly in the fourth quarter, for the first time, we turn that to cost of goods sold leverage and next year that leverage become significant. So we will walk through all of that in investor day, but that will give you some rough sense of the numbers.

Keith Siegner - UBS



The next question is from Joe Buckley with Bank of America.

Joe Buckley - Bank of America

Hi. Thank you. Hey Howard, can I just clarify -- are you saying you are seeing this shift in retail that you noted last year starting earlier seasonally this year? Was that your observation?

Howard Schultz

Yes. Let me try and take a shot at that. If you remember last year, I spoke very specifically about the seismic change in consumer behaviors. And what I talk about specifically was a downturn in kind of traffic that we saw historically that I felt strongly was being displace be e-commerce and mobile shopping. As result of what happened last year, as soon as Christmas ended, we worked diligently to literally transform the entire Christmas holiday beginning in middle of November.

In anticipation of another year of the downturn in traffic that could be worst in the year before. And the work that I’ve outlined in terms of Starbucks for Life and all the plans we have around the 100 proprietary cards and leveraging the success we’ve had with card in the last couple of years. Most specifically last year, we sold over $1 billion of cards. All of that is in place, beginning for the holiday season. What we saw though was that downturn in traffic which literally, I think when you think about back-to-school. If you talk about all the national retailers, back-to-school this year was almost a non-event for most retailers, physical retailers.

And so once again, we saw the downturn in physical traffic. But we did not anticipate seeing it in the fall, we anticipated and we prepared for the holiday season that is what I’m saying. This is not a throughput issue and this is definitely not a competitive space issue. This is a shift, a cultural shift in consumer behavior. I also want to just reiterate one thing. We strongly believe that the opportunity around convenience. Leveraging will be around drive-throughs and creating convenient opportunities for customers to get access to Starbucks is going to be another way and which we are going to win.

Joe Buckley - Bank of America

Okay. Thank you for that clarification. Can I ask one more? Just on the transaction of growth, the composition of the same-store sales mix, I think there's no question you are executing at all-time record levels. Traffic was still up. But is the challenge creating the opportunity for that incremental traffic growth? Are the speed-of-service productivity measures up year over year, but is that gap year-over0year starting to narrow that perhaps just makes it more difficult to drive transactions -- incremental transactions?

Howard Schultz

Yeah. Just to be clear and I think Howard said this. This is not a productivity issue. Productivity in the fourth quarter was stronger than all year long and significantly stronger than it was in the fourth quarter. The year ago productivity as measured by transaction per labor hour. Our ability to put more traffic through those busiest day parts. So that really isn’t the issue.

The broader issue is about less traffic out there for us to capture and bring in, as Howards just described this. Fundamentally, it’s not a throughput issue whatsoever. And as we continue to drive in issue such as Mobile, Order and Pay and a larger percentage coming through the mobile app and payment technologies and whole digital experience, all that does is raise the lid on our ability to increase traffic for the stores and all day parts.

Cliff Burrows

I’d just add to that that the -- when you look at the 42% of our stores are drive-through and offering tremendous convenience to our customers, we are seeing some of our strongest performance there. What we are anticipating in this coming year is the same step change and convenience that was offered in those stores to drive-through, is going to begin to happen through Mobile, Order and Pay. So the urban customer and the metro customer can begin to have that same convenience that people have shown by staying seated in their cars and quickly grabbing Starbucks on the go. We think it’s a step change driver of our business.

Joe Buckley - Bank of America

Thank you. Appreciate the thought.


The next question is from John Glass with Morgan Stanley.

John Glass - Morgan Stanley

Thanks very much. I'm wondering as you think about the role a check will play in the next couple of quarters, particularly as you start to anniversary the first big markets you've rolled food out. So can you talk about how those early markets are performing as they comp? Specifically, could check continue to grow in a year or two and by the same magnitude? And at the same token, I don't think this is the direction you're heading, but if you talk about if it's a change in the consumer, what role does increased value play in driving greater transaction counts, if any?

Cliff Burrows

Yes, John. Hi. It’s Cliff here. With regard to food, obviously, we’ve rolled out now the La Boulange platform to all of our stores. We’ve got about 11,000 stores across the U.S. for company operated and license stores. And what we are seeing is all the learnings that we got from the early markets, we applied to more recent rollouts and we are seeing continued improvement in our operation around food, both on the sell side with another 2% contribution from food growth.

We’ve seen the learnings from bakery has really helped us, enhances strengthening our performance around breakfast sandwiches. We’ve started to rollout lunch, which is the next important day part was around food. So we are seeing our ability, our operation ability around food and also we’ve been able to refine and improve food, not only in the morning day part, we’ve had a record breakfast sandwich yet and that’s grown by about 30%, lunch has grown by 14%. And we’ve only just started that, so year-on-year food is growing and is definitely helping check as is beverage mix as well. Howard, do you want to answer?

Howard Schultz

Yeah. And I would just add in terms of, Mobile, Order and Pay, our research and our design indicates that we look to see an improvement in ticket as well through the way we are designing that program as well. So it’s not just traffic. It’s not just throughput. It’s not just convenience but we believe it will track. It will hit ticket as well

John Glass - Morgan Stanley

Just to clarify, in year two, the stores that have had food for 14, 15, 16 months, they are still selling an incremental 2% traffic check growth over the year ago period.

Howard Schultz

Yeah, I wouldn’t break it out as purely check. Some of it is growth of attach, but makes sure attach and mix -- yes, we are seeing that growth across the system.

John Glass - Morgan Stanley

Thank you.


The next question is from R.J. Hottovy with Morningstar.

R.J. Hottovy - Morningstar

Thanks. Just had a question about the logistics around the delivery plants. First, if you've had any test markets that you've had the delivery plans in place, what kind of learnings you've had there? And then secondly, will these be facilitated out of existing stores or will some of these alternative footprint stores you've talked about play a part in that? Just any color on the delivery plans would be helpful?

Matt Ryan

Matt Ryan here. Its very early days at this but we are moving ahead, full speed ahead. The pilots are coming soon. We are going to be looking at a number of different options. There will probably be a multiple number of solutions that we go with them in terms of how we operationalize this. And at this point, we are not ready to tip our hand on that but suffice it to say we have lots of different ways of doing this in front of us and you can expect to see things in 2015.


The next question is from Jeffrey Bernstein with Barclays.

Jeffrey Bernstein - Barclays

Great. Thank you very much. So question on the Americas -- on the operating margin. But -- it continues to push new highs, I think we are now in the mid-23% range. It was up close to 200 basis points this year. I know you mentioned we're going to go more modest improvement next year. Just wondering what you would attribute the greatest driver as perhaps where you think that could go without changes in the ownership towards more licensing.

But that does kind of lead to my other connected question, which is just it looks like fiscal ‘15 is going to be over roughly half licensed in terms of new openings. I'm just wondering why we wouldn't consider pushing more heavily licensed or relicensing existing stores. I think you're at 40% today. But why wouldn't the U.S. or the Americas be at 60%, 70%-plus licensed just to kind of effectively push that margin even higher and take some of the onus off of you from an operational standpoint?

Scott Maw

It’s Scott. I’ll take the margin question in the U.S. I think the short answer is we think we can continue to grow operating margin in the U.S. business. If you look at the strength of the comp growth and the number of drivers we have lined up next year. And you look at how we’ve been leveraging margin over the past couple of years through really all opened down the P&L store operating margin leverage, cost of goods sold leverage and G&A leverage. I think we can continue to drive more of that. I think we can continue to drive labor productivity as Troy talked about. So I don’t see a limit to the operating margin growth. I think this year was an extraordinary year but I think we see it continue to expand in the future.

Howard Schultz

Jeff, let me speak to your last question. We generate unlike many others in company operated retail extremely strong return of capital as we deploy capital into company-operated stores. That’s true all around the world. So our decision around when to license and when to company own are not surely driven by simply percentage margin because that’s one thing. But we very significantly look at the overall size of the P&L, our ability to deploy capital and generate very, very strong return on capital, which we can do, the ability to use company-operated formats but in some case license operations to get access to geographies where we are not able to operate specific sites in real estate where we are able to operate ourselves.

And so there is a wide range of board decisions that lead us to what we believe to be the awful mix of ownership, company operated and license in the U.S. and that’s same analysis, sometimes a different answer to that same set of analytics lead us to think about license versus JD versus company operated all around the world. So we’re very pleased with the direction we are going, both in terms of our company-operated development which will continue to accelerate and our license store development which will also continue to accelerate.

Troy Alstead

I think it’s also good to say that there has been some exciting developments in recent years in license which traditionally was transport and grocery which continues to grow. But we’ve also had the opportunity whether it is in Vegas, in hotels, in entertainment areas but more recently in Disney, which has just been incredible to offer Starbucks to a whole group of new customers in a captive space. And we see that continue to grow so we are pushing ahead on that as we push ahead on plans to expand our company-operated stores across the U.S., Canada and Brazil within the Americas.

Jeffrey Bernstein - Barclays Capital

Thank you.


The next question is from Matt DiFrisco with Buckingham Research.

Matt DiFrisco - Buckingham Research

Thank you. I had a couple -- just one question on the modeling side and a clarification. I just want to understand when you said the 31% tax rate for 2015, is that a number that you are applying or using for both earnings numbers or is there a normalized tax rate associated with the 308 to 313? And then my question was with respect to the marketing. There was a quick reference in 1Q, and I think David asked also about that, pulling forward or your reaction to the 1% traffic. Are you going to spend more on marketing? Could you quantify for us maybe how much of a wait on 1Q's earnings -- that marketing, as well as the partner conference is going to have on your growth rate? Thank you.

Howard Schultz

Let me clarify the marketing issue. There is no additional marketing spend for this quarter than we previously had in our operating budget. We anticipated how big Starbucks for life could and would be. And we’ve allocated marketing money against that that is in our AOP and in the guidance that we’ve already shared with you. So there is no additional market expense beyond the normal course of business.

Matt DiFrisco - Buckingham Research

But additional for last year? Additional relative to last year though, it is. Correct? Because you didn't hold it out.

Howard Schultz

No. Actually its -- we are not going to get into specifics of how much we exactly spend on marketing but we are not spending -- I can tell you we are spending more on marketing for this holiday than we did last year. We’re just reallocating the money against Starbucks for a while.

Matt DiFrisco - Buckingham Research

Okay, and then the partner conference?

Howard Schultz

Pretty even.

Troy Alstead

Well I’d say we did not go for any specifics to that. We have a number of investments that Scott spoke about including the partner conference as we travel through this quarter that lead to the guidance with the initiative to the quarter and no specifics attached to any one of those items specifically.

Scott Maw

And then on the tax rate, if you think about the guidance I gave on 31% which included 4 points related to the Japan transaction and the difference between GAAP and non GAAP, Matt, is all due to the Japan transaction and so you get back into what the non GAAP rate is?

Troy Alstead

And if I can just wrap up one point on that, not related to tax but related to the previous thing. Things such as the leadership conference which we have conducted in year’s past and conducted on just a couple week ago here in Seattle. Investments in our partner experience, those are critical investments that you should not view as cost or margin pressure.

On the contrary, those have consistently in our business lead to a sustained growth in the partner experience and the partner’s ability in our source to drive great customer experiences which is fundamentally what fuels the kind of comp growth in margin structure and volumes in Starbucks business that nobody else can replicate. These are investments in the current year and in the future that we are very proud of.

Matt DiFrisco - Buckingham Research

Right. I was just looking at within the prepared remarks, I think it was cited for 1Q's growth. I wasn't suggesting it; I thought it was cited in the prepared remarks that marketing and the partner were one of the reasons why the growth would be slower than the full year. Is there something else?

Howard Schultz

Understand. No, just a wide range of investments that we make in the business constantly, nothing more specific to provide there.

Matt DiFrisco - Buckingham Research

Great. Thanks.


The next question is from Andy Barish with Jefferies.

Andy Barish - Jefferies

Hey guys. I guess, I would like to just follow up on that on the two key investment areas for 2015 in terms of the partner pay and benefits and then digital. It does sound like those are very strategic step-ups, though. So I guess any help in terms of quantification in that regard would be useful?

Scott Maw

Yeah I think I mentioned those in my prepared remarks. I think the way to think about that is if you look at our long term EPS growth rate of 15% to 20%, we’ve guided right in the middle of that. What’s bringing us down a point or two of the top end of that is some of those investments. So we don’t have the commodities favorability this year. And we are going a little bit more forward into some benefits around partner paying benefits and around digital. So that’s what really brings us down from the upper end towards the middle. So we add all the things Troy referenced across the business together is a pointer to on the growth rate.

Troy Alstead

I’ll jump in, Andy, on other question and then Adam can add. Starbucks for life is the main core element of holiday. However how many giftings and the loyalty program MSR, the opportunity to begin launching XOP Mobile Order and Pay in Oregon. And then our mobile payment in app, all of these things are skewed towards the recognition of the cultural ship we saw last year and what we strongly believe will put us in a position to win over a long period of time.

And that is integrated into what Matt talked about earlier about taking a page out of our drive-through business which has been so strong and cracking the code on what the analog is of our urban stores and using Mobile Order and Pay and then the second half of the year delivery to accomplish that. And that -- these investments are going to pay off big time and we already know that Mobile Order and Pay is going to drive traffic in comp growth. Adam, you want to add anything about the specifies of that?

Adam Brotman

Yeah, what’s important to call out is both with regard to the Starbucks for life card program this holiday as well as the launch of Mobile Order and Pay that we have the significance competitive advantage. We’re not starting from scratch. We are rolling out Mobile Order and Pay. We are doing Starbucks For Life on the back of the leveraging already having built a world class mobile commerce and loyalty platform.

So we have $12 million customers that are highly active on our mobile app $8 million active unless our loyalty members. One of the successful is not the most successful gift program in the world. We are integrating everyone of these programs, Card For Life, Mobile Order and Pay and eventually delivery right into that seamlessly. That’s going to give us a huge competitive advantage going forward and give us the belief this is going to significantly drive throughput in incremental transactions.

Howard Schultz

Okay. Let me have the last word and just share with you that we are playing offence here. I mean, we understand that there is a macro issue in the consumership. We are playing offence and we began that last year right after holiday and come this holiday in calendar ‘15, we are going to be in a position to win. End of story. JoAnn, I think that’s it.

JoAnn DeGrande

Thank you, Howard. Thank you all for joining us today and sticking with us a little bit longer this afternoon. We will hopefully see you here in December and have a good evening, Thank you.


This concludes Starbucks Coffee Company’s fourth quarter fiscal year 2014 conference call. You may now disconnect.

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