Starbucks' CEO Discusses Q2 2011 Results - Earnings Call Transcript

 |  About: Starbucks Corporation (SBUX)
by: SA Transcripts


Good afternoon. My name is Luisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Starbucks Coffee Company's Second Quarter Fiscal Year 2011 Earnings Conference Call. [Operator Instructions] Ms. DeGrande, you may begin your conference.

JoAnn DeGrande

Thank you. Good afternoon, ladies and gentlemen. This is JoAnn DeGrande, Director of Investor Relations at Starbucks Coffee Company. Joining me on the call today from Seattle are Troy Alstead, CFO; and Jeff Hansberry, President of our Global CPG business. Also on the call joining us from Seoul, South Korea is Howard Schultz, Chairman, President and CEO.

Before we get started, I'd like to remind you that this conference call will contain forward-looking statements. Forward-looking statements are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements and 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 the Investor Relations section of Starbucks' website at and to the financial statements accompanying the earnings release, where you'll find disclosures and reconciliations of non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures.

Note that the non-GAAP amounts reported replace all major prior fiscal 2010 amount for costs related to the now completed restructuring work.

Now I would like to turn the call over to Howard Schultz. Howard?

Howard Schultz

Thank you, JoAnn, and welcome to everyone on the call. I am very pleased to announce the record quarterly results that Starbucks reported today and to do so from Seoul, South Korea, where it's 6 a.m. on Thursday morning, as we continue the International portion of our 40th Anniversary Tribute Tour. The energy and excitement among our partners and customers for Starbucks' 40th anniversary, solid growth in global traffic in Consumer Packaged Goods, CPG business; and the early benefits of our powerful new global retail store through CPG channel business model all contributed to the record top line results we reported today. Strong revenue growth, combined with ongoing efforts to improve operations and efficiency and control operating expenses, enabled us to deliver record Q2 operating income and earnings per share.

Today's results are particularly gratifying in the face of the formidable economic and operating headwinds that continue to confront global businesses, the investments we made in the quarter for marketing and to build world-class CPG operating capabilities and elevate our customer experience across the globe. Our Q2 results demonstrate that Starbucks is continuing the positive momentum that has characterized our business in recent quarters and that our business remains unmistakably strong all around the world.

I'll begin today's call by sharing a few financial and operating highlights of the quarter and noting a few developments that you may not see or be evident from the results themselves. Then I'll turn the call over to Jeff Hansberry, President of Starbucks Global CPG and Foodservice business, who'll provide you with greater detail on the many exciting initiatives and activities under way in our CPG segment. Then we'll turn the call over to Troy, who will take you through the second quarter financial results and provide an update and outlook for the balance of fiscal 2011.

Q2 of 2011 has proven to be a milestone quarter for Starbucks. In the quarter, we assumed full control of our Packaged Coffee business, announced 2 game-changing exclusive relationships in the single cup space, one with Keurig and Green Mountain and the other with Courtesy Products. Joining our customers and partners around the world in celebration of Starbucks' 40th anniversary, highlighted by the unprecedented success of Tribute Blend, a rare combination of 4 coffees, including Colombia, Aged Sumatra, sun-dried Ethiopia and Papua New Guinea, uniquely blended to create a coffee that our customers have embraced with a passion second only to Christmas blend; continued VIA's global expansion with entry into China, further growing its share of the global premium Single-Cup Coffee segment. And we delivered another quarter of record revenue operating income and earnings to our shareholders.

Consolidated revenues for the quarter totaled $2.8 billion, up 10% over last year, driven primarily by a 7% rise in global comparable store sales, while earnings per share grew 21% to $0.34 per share. Our core U.S. retail store business continues to benefit from multiple ongoing initiatives, including the early impact of the existing new retail store to CPG channel business model that I introduced at our Investor Conference in December. Our customer loyalty program now has several million members, more than 1.5 million of which are gold members, who now account for millions of transactions in our stores each month. We continue to deepen our connection to customers through digital and social media efforts. And our new mobile payment capability that allows customers to pay for purchases with their smartphones is resonating very well in the U.S. In fact, in just a few short months, Starbucks has become the country's leading mobile payment retailer.

Perhaps more than anything else, our U.S. retail business benefited in Q2 from key operational initiatives that have quantifiably improved product quality and speed of service and driven our highest customer satisfaction metrics in Q2, the highest levels in the history of our company. This is an extraordinary accomplishment given the tremendous amount of traffic and activity within our stores in the quarter. Once again, our partners deserve the credit and have the appreciation and respect of the entire Starbucks senior leadership team for their hard work, their dedication and their insistence on delivering an even better Starbucks experience to our customers. And to our partners, some of whom I have been able to thank personally at one of our many partner events held over the last 2 months, I again say thank you.

We have had a tremendous response to Starbucks' global month of service events all over the world, in which our partners and customers have contributed countless hours of community service and given all themselves to improve the communities in which they live and work. These efforts, in concert with the positive response and fantastic sales momentum around ONWARD, a book about the Starbucks transformation has generated tremendous energy and excitement in our stores, on social and digital networks and in communities around the world and has deepened our connection with our customers and contributed to the record sales and traffic results we are seeing across the business.

Now it's no accident that I'm participating in this call from Asia. With our U.S. business on solid footing and growing profitably, growth of Starbucks International business has become a priority for all of us at Starbucks, as I announced in our January 2010 earnings call from London. Starbucks International store portfolio has never been healthier nor have our International retail store growth and CPG channel opportunities ever been greater. And now with the insights and learnings from the transformation of our U.S. business fully woven into the fabric of our International operation, we are ready to drive profitable, disciplined expansion of our International business into a much higher gear.

Earlier this week, we had an opportunity to participate in the Starbucks China Leadership Conference in Shanghai, where we brought together every store manager within China, over 800 Starbucks partners, to share learnings, inspire coffee passion and solidify our strategy for the future. It was, for me, an emotional experience, reminiscent of the galvanizing moment we had in New Orleans for our U.S. partners in 2008. I'm extremely proud of the deep, enduring, authentic emotional connection we have built in China, and it bodes well for our disciplined growth plans ahead. Our 40th anniversary and ONWARD book events have provided us with a unique opportunity to express and communicate the humanity of the Starbucks brand. And the response we have seen around the world has, to the surprise of some, equaled the fantastic response we had to similar events across North America.

Asia, and now China in particular, hold tremendous promise for Starbucks. Today in Seoul, we will announce our intention to double the number of stores in Korea, from 339 stores today to more than 700 in the next 5 years. And our China growth story continues. In February, we successfully opened our newest city, Weizhou. Starbucks now operates in 35 cities in China, many of them second- and third-tier cities but with 1 million plus populations. Each store opening has been greeted with tremendous community pride, recognition and customer and community appreciation.

On an operating basis, China is performing ahead of plan and quickly becoming a more meaningful contributor to Starbucks' overall profit picture. Among the many encouraging aspects of the China opportunity is to while the book of transactions take place in the traditionally slower middle to late afternoon day part, we are now beginning to see the morning ritual develop. We saw this happen in Japan in the mid-'90s, and we believe that we will continue to see an increasing number of customers in the morning business as coffee consumption patterns evolve.

Also exciting is the very favorable early reaction to VIA, in which sales are exceeding our initial forecast by more than 20%. While still early days, the combination of accelerating coffee adoption and our deep connection with Chinese consumers is driving double-digit increases in daily transactions and comparable store sales, while our store operating margins are at levels that continue to exceed our U.S. business. These results represent remarkable achievements for a market that is still very much in its early stages of development and are a testimony to the size of the China prize for Starbucks, the correctness of the investments we continue to make in China and to the extraordinary quality of our partners and our local management team in that country.

We have bold plans for China. I remain convinced that China will eventually be our largest market outside the U.S., and my visit there this week confirm my view of how ideally positioned Starbucks is to profitably grow its store presence across dozens, if not hundreds, of cities throughout China in the quarters and years ahead. In the near term, we plan to more than triple our store base to over 1,500 stores on the Chinese mainland by 2015. With urbanization under way, the Chinese government is projecting that there will be over 500 cities with a population over 1 million people within the next 5 years. All of this suggests that these are very early days for Starbucks in China as we build trust while moving quickly but conscientiously with local relevance, and above all, with respect to the Chinese consumer and the Chinese culture.

Finally, we continue to make progress in our partnership with the Chinese government with regards to the Yunnan Province coffee project, in which we will be growing the highest quality arabica coffee in China. We believe strongly that our vertical integration strategy will demonstrate to the Chinese consumer and the Chinese government that we are committed to investing in China in an appropriate and respectful way for the long term.

I'd like to take a moment to speak to our close, long-standing partnership with SAZABY and to our partners at Starbucks Coffee Japan. With the support of our senior leadership team in Japan, our Starbucks Japan partners are working to support each other and resume normal operations. We honor their commitment and courage as they contend with the tragic events and loss following March 11. Starbucks and our partners globally will continue to support the needs of our partners in Japan and through our global store footprint continue to enable our customers around the world to show their support and contribute to relief efforts as well. Our thoughts, hearts and prayers remain with all of the people of Japan as they continue to recover and rebuild.

I'll now hand the call over to Jeff. Jeff?

Jeff Hansberry

Thank you, Howard. Q2 of 2011 was a seminal quarter for Starbucks CPG business, in which we advanced and solidified our leadership position in the premium Single-Cup Coffee segment, successfully transitioned our Packaged Coffee business in-house, expanded our Ready-To-Drink business in International markets and made major gains against our plans to build the leadership and capabilities of our CPG organization.

Before delving into specifics around Q2 performance, I'd like to take a few moments to provide some perspective and color around the enormity of Starbucks Global CPG opportunity. Today, Starbucks captures only a small portion of the $100 billion-plus coffee, tea and ready-to-drink beverage markets globally. All areas in which Starbucks currently has significant, if not market-leading shares in the U.S. taking an increasingly greater share of that global opportunity, is a top priority for Starbucks CPG and Foodservice business.

To accomplish this goal and to drive growth, we will leverage the power of the Starbucks brand to broaden the number of channels we serve, expand and deepen the number of products and product categories we offer and increase the number of countries around the world in which our products are sold. We will elevate and expand the Starbucks experience across each of our channels and categories. We will continue to strive to provide our customers and consumers with the Starbucks coffee products they want, whenever and wherever they are and in whatever form they wish. And we will continue to invest and transform what had been a small indirect CPG business into a powerful, fast-growing, best-in-class Global CPG organization. Each of these objectives were advanced in a meaningful way in the second quarter of 2011. Single-cup coffee continues to be the fastest-growing segment in the coffee category, and Starbucks will lead the way with consumers and retailers with 3 distinct single-cup platforms: Starbucks VIA Ready Brew, Starbucks K-Cups and Courtesy.

I'll start with VIA. VIA's dollar sales in the CPG channel in the U.S. in Q2 increased by 11% versus the first quarter with ACV distribution of 63% and climbing. Repeat rates for VIA remain high at 37% in Q2. That's amongst the highest of new coffee category entries. In Q2, we successfully launched Starbucks VIA flavors and iced VIA in the U.S. and International markets. And we further extended the VIA brand by offering Tribute Blend VIA in our stores as part of our 40th anniversary celebration. A companion product to our whole bean Tribute Blend offering, limited time-only Tribute Blend VIA became both a customer and partner favorite. VIA will continue to benefit from added distribution and line extensions.

In Q2, we also launched the Starbucks VIA Taste Promise promotion, a program that extends through August, in which any consumer who is not fully satisfied with the taste of VIA can have their purchase replaced with a free bag of Starbucks House Blend coffee. The Taste Promise reinforces our message that VIA will enable consumers to enjoy a great, premium, single-cup of coffee anytime, anywhere. Early results of the VIA Taste Promise promotion have been very positive. We've seen a 20% increase in sales in markets where the promotion ran and roughly 72% of all consumers participating are first-time VIA buyers. Each of these findings bodes extremely well for the VIA platform as a whole and reinforces our view that VIA will become another $1 billion Starbucks brand over time. Our growth plans for VIA include expanded distribution in the U.S. and in International markets, including China, which we launched on April 6, and continue to introduce innovative new products and line extensions.

Moving on to Keurig and K-Cups. Last month, we announced a strategic relationship with Green Mountain Coffee Roasters for Starbucks and Tazo Tea branded K-Cup portion packs for use in the Keurig single-cup brewing system, by far the current single-cup leader in the U.S. We are working closely with Green Mountain toward a fall launch of Starbucks branded K-Cups through CPG channels and a launch of Starbucks K-Cups through our Starbucks retail stores in 2012. We plan to build Starbucks system-wide sales of K-Cup into a $1 billion business over time.

In Q2, we also announced an agreement in principle with Courtesy Products, the nation's leading provider of interim coffee services to hotels to expand the Starbucks brand as an exclusive super premium coffee offered by Courtesy in 500,000 premium and luxury hotel rooms in the U.S. The Starbucks-Courtesy relationship provides us with yet another opportunity to provide consumers with great Starbucks coffee wherever they are, and we fully expect to see the partnership beginning to come to life this fall. Together VIA, Starbucks, K-Cups and Courtesy provide us with what is unquestionably the most powerful line up in the single-cup space today.

Today, Starbucks CPG segment is represented in only 10 of 55 countries around the world, in which we have a retail presence. That will change in the quarters ahead, as we expand our CPG channel presence in countries where we currently operate retail stores in order to fully benefit from our retail store to CPG growth model, which leverages Starbucks' unique portfolio of assets, including retail stores, digital and social media, loyalty and CPG. We accelerated expansion of our Starbucks discoveries, ready-to-drink coffee drinks, in Western Europe ahead of plan, and we'll continue the expansion in Q3. This includes the very successful introduction of Starbucks discoveries in convenience and grocery stores in Norway and Denmark with plans to launch in Finland in May. This represents the first Starbucks brand entry into those countries ahead of our retail stores. Early results have been promising, with Norway achieving sales of nearly 40% of expected annual volume in just the first 6 weeks. Consumers in the U.K. were the first in Europe to be offered Starbucks Bottled Frappuccino coffee drink, introduced this month, adding a third family of products to the Starbucks Ready-To-Drink business in that market. And we're just getting started. By 2012, we will be ready to accelerate the global expansion of our CPG business, so stay tuned.

During Q2, we also successfully transitioned to direct management of our Starbucks, Seattle's Best Coffee and Tazo Tea brands down the grocery aisle. Early results are positive with double-digit shipment growth of Packaged Coffee to customers in March versus prior year. Starbucks CPG team can now directly drive sales of Starbucks, Seattle's Best, VIA and Tazo, our complete family of Starbucks brands, through a one-voice marketing approach. We've had a positive reception from retailers around the transition, and we will continue to work closely with them to build joint plans that leverage the Starbucks brand, the full breadth of the Starbucks portfolio and our unique knowledge and authority across the coffee category. You will begin to see many of these exciting plans come to life this fall with the launch of Starbucks K-Cups.

To fully leverage our blueprint for growth and to profitably grow our CPG business, we need a world-class organization of strong, experienced leaders, and we're well on our way toward this goal with a hand-selected team of experienced professionals from academy companies like Procter & Gamble, PepsiCo and Nestle, with deep CPG experience in shopper and retail marketing, category management and customer business development. This is a great team that I am proud to be part of. We're also building a center of excellence around category management and shopper marketing in order to advance our goal of becoming a spot leader of the coffee category and fully understand the coffee consumer both inside and outside of our Starbucks stores. We are confident that these investments will translate into competitive advantage for Starbucks for years to come.

In closing, 2011 will continue to be a transitional year for Starbucks CPG with further investments in the business. And while we still have much work to do, I'm pleased to report the transition is in full swing. We are executing on plan, and the benefits of this step change are already beginning to accrue to our business and our shareholders.

I'll now turn the call over to Troy Alstead. Troy?

Troy Alstead

Thanks, Jeff, and good afternoon, everyone. The financial results this quarter speak to the power of our business model and the organization capabilities we now have that were not present only a few years ago. In the second quarter, we were able to invest for future growth and absorb significant cost pressures, all while maintaining momentum in growth and profitability throughout the business.

Before I go into the financials, I wanted to mention, there has been a change this quarter in how we categorize revenue, facilitated by the changes in our CPG business and the associated revenue streams. As noted in our press release, prior periods have been reclassified to reflect the change, and we will be posting financial statements for the prior 3 years on to reflect these changes. There was no impact to consolidated or segment net revenues from this change in presentation.

Second quarter consolidated revenues were $2.8 billion, up 10% from $2.5 billion a year ago. The revenue increase was primarily driven by a 7% increase in comparable store sales, attributable to a 6% increase in traffic and a 1% increase in average ticket. Higher CPG revenues and foreign currency translation also contributed to the revenue increase.

We reported consolidated operating income of $376 million in the second quarter, an 11% increase compared to second quarter of fiscal 2010 operating income of $340 million and an 8% increase compared to last year's non-GAAP operating income. Consolidated operating margin was 13.5%, a slight improvement compared to the 13.4% GAAP operating margin in the second quarter last year and about 20 basis points less than last year's non-GAAP margin of 13.7%.

Strong top line results drove increased sales leverage throughout much of the P&L. Those increases were offset by higher commodity costs, increased salaries and benefits in the U.S., higher marketing expenses to support future growth and charges related to asset write-downs in our Seattle's Best Coffee business due to the Borders bankruptcy. The charges related to Borders accounted for roughly $0.01 per share in earnings within the quarter in addition to the approximate $0.01 charge we took in our fiscal first quarter. Also of note, the transition of our Packaged Coffee business was roughly neutral to the bottom line this quarter, somewhat better than expected, driven in part by a shift of expenses into the third quarter.

Earnings per share was $0.34 for the second quarter compared to $0.28 per share on a GAAP basis and $0.29 per share on a non-GAAP basis in last year's fiscal second quarter. We absorbed $0.04 per share in the quarter equivalent to 200 basis points of operating margin due to higher commodity costs compared to last year. Most of the commodity pressures related to coffee, with dairy, cocoa and sugar and fuel accounting for the rest.

Our U.S. International store operations continue to perform well, driven by strong comparable store sales and operational leverage. Meanwhile, we continue to spend in support of future growth in our CPG business as we position ourselves to pursue the abundant growth opportunities that Jeff just laid out.

I will now move to the results of our operating segments, which will be compared to last year's non-GAAP results. Total U.S. net revenues for the quarter were $1.9 billion, a 6% increase over the same period last year. Company-operated store revenues increased 7% to $1.8 billion in the quarter, primarily due to a 7% increase in comparable store sales. The comp increase was composed of a 6% increase in customer traffic and a 1% increase in average ticket. Pricing and the expansion of our warming program contributed to the ticket increase this quarter, partially offset by increased discounts to support loyalty and other promotional activities. Also, the launch of our petit food platform resonated well with customers and helped drive better traffic in the afternoon and evening day parts. Of note, 2-year comps continued their steady improvement, reaching levels not seen in more than 4 years with traffic growth, the primary contributor.

We continued to make improvements to the customer experience, including faster speed of service as a result of our new point-of-sale system, additional quality improvements in beverage production routine and an improved training module focused on overall customer service. Another initiative, our new mobile payment platform, launched nationally in January, has helped drive faster transaction speed, which is another example of our focus on adding efficiency and utility to the Starbucks Experience for our customers. As a result of these customer-facing initiatives I just mentioned plus our popular rewards program and continued efforts around lean operations that improve the experience for both our customers and our partners, overall customer satisfaction scores continued to march higher this quarter, reaching an all-time record.

U.S. cost of sales, including occupancy, was 38.7% of total net revenues in Q2, an improvement of 10 basis points over the same period last year. Sales leverage on occupancy cost was mostly offset by higher commodity costs in the quarter, primarily from coffee, which had a roughly 150-basis-point impact on the U.S. segment operating margin.

Store operating expenses were 36.4% of total net revenues, in line with the same period last year. Sales leverage was offset by increased salaries and benefits. Investments in our partners is a key focus area this year, and one example of this is the overwhelmingly positive response we've had to an enhanced 401(k) program.

Operating income for the U.S. segment was $357 million, an increase of 10% compared to the same quarter of last year. Operating margin improved 60 basis points from last year to a second quarter record of 18.5%. The margin improvement was driven mostly by sales leverage, partially offset by higher commodity costs.

The U.S. business continues to set new highs despite the economic headwinds that we continue to face. Customers are enthusiastically embracing initiatives, such as loyalty, mobile payments and the new food items, while operationally, our partners have adopted lean processes and tools, allowing them to focus more time on customer service. With some key tools just recently rolled out and not yet fully optimized, such as our new point-of-sale system and our inventory management system, there is still an opportunity to further improve our store operations and bring an even higher level of service to our customers while also improving our store margins.

In addition, new stores are performing exceptionally well, and when combined with the work we're doing around store segmentation and new store design concepts, supports our belief that there remains significant, profitable new store growth opportunities ahead in the U.S. The U.S. business is healthy and thriving and provides a foundational road map to help influence and guide our International business while also serving as the core asset that will allow us to pursue our aspirations in the CPG space.

Moving now to results from our International segment. International total net revenues increased 15% to $610 million in the second quarter of fiscal 2011, primarily driven by foreign currency translation, comparable store sales growth of 4% and higher revenue from licensed stores. The comp growth was driven by an increase in traffic. Similar to last quarter, exceptionally strong performance in China contributed a significant portion of the overall comp growth.

Comps in China continue to trend in the mid-20s, driven largely by increased traffic as more and more Chinese consumers are adopting the Starbucks Third Place Experience. Comps in Canada, our largest company-operated market, softened a bit this quarter compared to recent trends, as that market dealt with significant weather issues and faced a difficult comparison in lapping over last year's Olympics.

International operating income was $72 million in the second quarter of fiscal 2011, a 52% increase from $47 million last year. Operating margin improved by 290 basis points to 11.8%, driven primarily by sales leverage, partially offset by higher commodity costs. Increased commodity costs in the quarter impacted International operating margin by approximately 150 basis points. This is the highest second quarter operating margin on record for the International segment and marks the fourth straight quarter of double-digit operating margin, further strengthening our confidence that International is now a consistent profit contributor and is poised to be one of the primary growth engines for the company.

I would like to take a moment to acknowledge the recent events in Japan and update you on our operations there. First, it's with great pride that I recognize the efforts of our partners in Japan and their ability to deal with an incredibly difficult situation. Of our more than 900 stores in Japan, over 200 stores were either closed or had limited hours for a period of time. Some stores are still operating on reduced hours, and we continue to experience rolling blackouts in parts of the country. Of the stores that were damaged, 9 stores will be permanently closed, and we did take a small charge this quarter related to those damages. As a reminder, we own roughly 40% of the Japan market, and it is one of our 3 largest markets currently outside of the U.S. The majority of the ongoing financial impact from the disruptions will be recognized in the third quarter and will be embedded in the balance of the year outlook I'll provide later.

The recent progress in the International business is extremely rewarding on many fronts. And while the rate of improvement has exceeded our expectations, we're not at all surprised to see International finally start to deliver on the vision that we have long had for this segment. We have a clear plan in place to strengthen and expand the business in the future by fueling innovation and local relevance; by expanding our store footprint and leveraging our support structure; and by driving operational efficiencies across the store portfolio. We are in the early days on our path to unlock the potential of this business, and I'm actually confident that we have the right plan and the right partners in place to achieve this vision.

I'll now move on to results from the Global Consumer Products Group building on Jeff's earlier comments. The second quarter provided solid evidence of the opportunity ahead for our Consumer Products business to become an even more significant contributor to the overall business. During the quarter, we successfully transitioned our Packaged Coffee and Tea businesses in-house, taking a direct control of our relationship with the trade, which will allow us to improve our brand's positioning within the grocery channel. Under this model, Starbucks now sells directly to the trade, taking in all the associated revenues from those sales compared to just a portion of the revenues under the previous outsourced model.

On an annualized basis, we expect to pick up roughly $150 million in incremental revenue and between $60 million and $70 million in incremental operating income. These numbers represent simply the structural change of bringing the business in-house and do not factor in any transition costs or additional growth, which we're confident we will be able to drive now that we are directly controlling the business. Most of this will be recorded in the CPG business unit as a result of the Starbucks-Branded Packaged Coffee and Tazo-Branded Tea businesses, with the remainder recorded in Seattle's Best Coffee segment with another.

In the fiscal second quarter, total net revenues for CPG were $205 million, an increase of 30% over last year. The increase was due to higher revenues resulting from the Packaged Coffee and Tea transition and to the expanded distribution of VIA into grocery. With the transition of Packaged Coffee taking effect on March 1, we only realize one month of the associated revenue impact in the quarter, while the transition of the Tea business was effected at the beginning of January and contributed to the full quarter.

Operating income for the quarter was $64 million and operating margin was 31.1%, a decline of 920 basis points compared to the same period last year. This expected year-over-year decline in operating margin was due to higher coffee costs, which were approximately 800 basis points of the decline, and marketing spend to support the continued expression of VIA. In regard to the arbitration proceedings of Kraft associated with our Packaged Coffee business, we have little to report at this time. As I previously disclosed, there will likely be a long time frame to reach resolution through the arbitration process.

This was a landmark quarter for the CPG business in terms of building for the future, the transition of our Packaged Coffee and Tea businesses in-house, the agreements we announced in the single-serve space and the continued expansion and adoption of our VIA platform now provide us with a suite of products that is unmatched down the coffee aisle. Combined with our deep coffee and beverage expertise, the over 3,000 licensed stores that we have in grocery that allow us to drive sampling and the exceptional affinity that people have to the Starbucks brand, we offer a unique value to the trade that we believe we can now optimize with these assets under our control. Fiscal 2011 is an investment year for the CPG business and will require time to fully take advantage of the opportunities that exist. But I do expect the CPG business to one day rival the size of our retail store business.

As we are now halfway through our fiscal 2011, I'd like to provide an updated outlook for the year as well as a few key related targets. We now expect high single-digit revenue growth for the year on a comparable 52-week basis, driven by mid- single-digit comp growth. Excluding the impact from the Borders store closures, we still plan to add approximately 500 net new stores globally with roughly 100 in the U.S. and roughly 400 in International markets. The majority of the new additions in both segments this year are expected to be licensed stores.

We now expect to absorb approximately $0.22 in additional commodity costs for fiscal 2011 compared to last year, a slight increase from the $0.20 communicated on last quarter's call. The $0.02 increase is primarily due to higher dairy and fuel prices. Of the full year $0.22 impact, roughly $0.07 has been absorbed year-to-date, leaving roughly $0.15 for the balance of the year, split evenly between Q3 and Q4.

Regarding coffee costs as I have indicated previously, we have fully locked our coffee costs for 2011 and are price protected for a couple of months into fiscal 2012. We watch the market very closely, and our buying office is deeply engaged in the industry. As we progress through the balance of 2011, we will progressively take actions to secure our coffee needs and lock coffee costs for additional months into 2012. While we expect that the cost we pay for coffee may be higher in '12 than they are in '11, we remain confident that we can offset those increased costs and preserve a long-term earnings growth targets.

Our outlook for operating margins and our tax rate remain unchanged from the guidance provided last quarter. We now expect fiscal 2011 earnings per share to be $1.46 to $1.48 or on the high end of our previously communicated 15% to 20% growth on fiscal 2010 non-GAAP earnings per share, excluding the benefits in 2010 from the 53rd week. We continue to expect earnings per share to be in the range of $0.32 to $0.33 for the third quarter and $0.35 to $0.36 for the fourth quarter. Embedded in this outlook is the impact of the Packaged Coffee transition. We now expect the impact of the transition to be roughly neutral to EPS for the year, including roughly 7 months of the operating income pick up I noted earlier, offset by increased investments this year to support the transition.

In closing, we faced stiff headwinds this quarter on several fronts, and some of those headwinds, such as commodity pricing pressure, are showing no signs of abating soon. However, our business has remained resilient in the face of these pressures, maintaining the momentum of the last 2 years and cementing a solid foundation from which to profitably grow. This resiliency is a testament to the hard work and dedication of our partners over the last few years in transforming Starbucks into a more disciplined company with deepened capabilities that allow us to be more agile and more effective in managing the business. As we progressed on our journey to build a different kind of company, leveraging our unique set of assets, I believe these attributes will play a key role in our long-term success. We understand the opportunity. We have clear and ambitious goals. And we now have the ability to effectively navigate the challenges that will undoubtedly arise as we pursue the vision that we've articulated. I firmly believe the future holds tremendous promise for Starbucks.

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

Question-and-Answer Session


[Operator Instructions] Your first question comes from the line of Michael Kelter with Goldman Sachs.

Michael Kelter - Goldman Sachs Group Inc.

I wanted to ask about coffee prices and how you think about things strategically. You mentioned that you thought even in 2012 with where we see prices today still maintain your long-term period. I guess, how would you approach pricing? Would you think that you'd want a price to maintain your profit percentage, maintain your profit dollars? Or would you not necessarily be willing to take the mid- singles or higher pricing you need to take because of the risk it might bring to the brand itself?

Troy Alstead

Michael, what I would say is our first and foremost goal is what I just mentioned a short time ago, which is we firmly believe we have every opportunity to maintain our long-term earnings growth, 15% to 20% earnings growth target. And I believe that to be true for some number of years to come, and I believe that to be true in fiscal '12 despite what may be, may well be higher coffee costs and commodity costs overall in that year. So fundamentally, that's how we're approaching it. It's possible that some of the lines on the P&L will feel more pressure than others, cost of goods, for example, that we may have opportunity to leverage in other places in the P&L and we'll certainly look at all those opportunities. I will tell you that we are extremely cautious about pricing. We recognize the consumer environment is still very fragile. We had a great success over the past year and, in fact, 18 months in building our customer traffic almost against the odds, against -- and despite what is a very difficult consumer environment still. And we're highly respectful of that consumer traffic and that customer base we have. So we used pricing where appropriate and in doses, small appropriate doses, but I absolutely will not use pricing as the only way to offset those commodity pressures. We have a number of other levers in the P&L that we have become very practiced with in the past year or two and much more disciplined about managing. We'll certainly leverage those things. And then I would just fundamentally say, the underlying strength in our business continues to grow and build, both in the U.S. with stronger margins, with a great momentum we're feeling internationally. That momentum on the top line and throughout the P&L was also an important hedge for us against the commodity pressures that we're feeling.

Michael Kelter - Goldman Sachs Group Inc.

And on U.S. traffic on a separate topic, yes, I guess, most everyone was impacted by weather in January and February. I would assume you guys were as well. Is it fair to assume that your -- the cadence of the quarter, that January and February was impacted and that March was much better than Jan-Feb as the weather became more accommodative?

Troy Alstead

Michael, I won't make any comments about our trends within the quarter. We usually resist that, and I'll resist that again this time. What I will tell you is the one place we really mentioned in the script feeling some weather impact this quarter was in Canada. It was a bit more pronounced there for us. With that said, that's a smaller market and so the impact of weather in some concentrated areas of Canada were more noticeable. Across our much larger U.S. business, of course in selected markets at different times, we feel weather impacts. But over the course of the big geographic dispersion that we have, it tends not to be a meaningful part of our business. And so that's why we tend not to talk about it.


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

John Ivankoe - JP Morgan Chase & Co

The question is on labor. I mean, one of the ways that you have done a great job over the last several years is through lean principles and other technology and just kind of rightsizing your business was growing sales well in excess of labor hours. So could you comment a little bit more on this quarter in terms of what you achieved with your employees, and how much of that may have been more onetime-ish in nature versus how much will be recurring and what you think the long-term direction of, I'd say, labor, meaning store operating expenses, I guess, in total might be over time, 2011, 2012, especially given the higher commodity environment?

Troy Alstead

Thanks for your questions. Let me introduce Cliff Burrows, President of our U.S. business. I'll ask him to talk about this question.

Clifford Burrows

John, it's Cliff. The journey with lean -- the journey with improving our productivity continues. We are looking at every new product we introduce. We're looking at stretching the day part, and I think we've done that in a small way this quarter with the introduction of the petit, which is an afternoon-focused product. And we continue to look at ways we can deploy our labor more effectively to increase throughputs at peak. And we are continuing the program of rigorous testing whether it's a new products introduction, whether it's with the way we deploy our teams or indeed just the way we handle products, and that continues to be very effective. So in this quarter, it was just, if I can say, lots of little things, and we'll continue that journey. And I do see lean being a part of our playbook for the month and years to come.

John Ivankoe - JP Morgan Chase & Co

And if I may, from still on, the leverage was a lot less in this quarter than one would have expected. I mean, how much of that lack of leverage was onetime related to the second quarter versus how much may recur?

Clifford Burrows

Well, in the quarter, a lot happened, which we're not breaking out. But our 40th activities around that, the training for our partners around the new logo, around our whole events around our 40th anniversary, so lots of it in it. But we will continue to seek ways to keep leveraging our labor and our productivity. At the same time, we're continuing to focus on the customer experience, and we have seen that customer experience has increased or helped us increase our transaction count across the country. I think that's an important balance.

Troy Alstead

And what I might add to that, John, add on to Cliff's comments is that investing in our partners and our store partners is a critical, critical priority for us. And so recognizing that they deliver the customer's experience, the customer satisfaction scores at record levels, as we mentioned earlier, making sure we're investing back in our partners to drive the business is an important tool for us in this quarter and going forward. So the long run, while we do expect to continue to leverage where we can parts of the P&L, at the same time we'll invest where we need to to drive the top line and to allow that overall U.S. margin to maintain and even grow from these high levels we've got today.


[Operator Instructions] Your next question comes from the line of Keith Siegner with Crédit Suisse.

Keith Siegner - Crédit Suisse AG

My question is actually for Jeff. Now that you have the Packaged Coffee business back in-house, I'm sure there's been plenty of frustrations over the years that now don't necessarily need to be there. Is there anything you want to do wholly differently or at least largely differently? Are there major changes to product, positioning, pricing or marketing that you've been waiting to put into place once you had this business back in? And then given that kind of backdrop, how do you think about the growth potential of this business? I mean, it sounds like traffic trends have improved dramatically with just a little bit of the cross-pollination of marketing. How do you think about long-term growth opportunity for this business under your control?

Jeff Hansberry

Sure. Hi, Keith. Thanks for the question. So as we look at it, the biggest difference that controlling our destiny down the aisle allows, it allows us to leverage our blueprint for growth, that ability to speak to both our customer and our consumer in one voice to really be able to fully leverage the portfolio of assets that Starbucks uniquely brings to bear from the 11,000 stores that we have in the U.S. to 50 million customer visits that we have every week, our Facebook presence, our Twitter following, our loyalty following. So this step change will allow us to bring that to life. And what's really powerful and worth reiterating is that 3,000 of those 11,000 stores actually sit within some of the very best grocery and mass stores in the U.S., some of the very best grocery and mass coffee stores in the U.S. So we have now, with direct control of this business, the ability to bring the power of the green neighbor and the power of the barista to our customer, whether he or she is at a Starbucks store or whether they're in the aisle purchasing coffee. And that allows us to really elevate and transform that shopping experience for the customer. So that's the big difference in what we're very excited about in building the capability to be able to deliver against. As we look to the future and what's possible, we're very excited, as we've shared previously, about the premium single-cup space. It is a significant contributor, the significant contributor to growth in the coffee category, and we're very well positioned today with the 3 platforms that we are going to leverage starting this fall between the VIA brand, K-Cups and also our Courtesy relationship. So we're looking to continue to drive growth on this business.


And your next question comes from the line of Joe Buckley with Bank of America.

Joseph Buckley - BofA Merrill Lynch

Troy, I'd like to go back to the pricing question again. Looks like the check on U.S., up 1% this quarter after being up 2% last quarter and no check increase on International results, traffic-driven on the comp. And I know you had some capping with this, but should we expect some pricing over the course of this year and into 2012?

Troy Alstead

What I would tell you is that we have, just as we've exercised over the past year or 2, some very strategic pricing programs in place now, which means fairly frequent routine adjustments from time to time. Often, those will be down; sometimes, they're net neutral; and sometimes, they'll be a little bit up. We are, again, reiterating what I said earlier, very, very cautious with what we do with pricing, still have no intention to do more of it today for any big impact on the pricing line. Of course, we'll watch the environment very closely and respond as we need to. But we've had great success so far taking very modest, occasional price changes where it's appropriate and where it fits and where the consumer allows us to. One of the points I would make going back to my prepared comments is that average ticket growth of 1% this quarter, pricing was a part of that growth. The continued expansion of our warming program was a part of that. And then offsetting those 2 things a little bit were some additional discounts that impact the average ticket line, those discounts coming in the form of our highly successful loyalty program, which you're familiar with, and also just some routine promotional activities in the quarter to help drive traffic. So there are a number of things in that line that offset a bit and brought ticket down just a little bit from previous quarter's trends.

Howard Schultz

And, Troy, if I add one thing -- this is Howard. Joe, let me just add one thing with regard to pricing and the coffee cost issue. I think in addition to looking at it through the lens of Starbucks, we want to look at it in terms of the landscape on a macro level in terms of all the people that are trying to sell coffee and the people that are in the coffee business. The flexibility, and the leverage and the ability to navigate through this, which we've now demonstrated for the first 2 quarters of the year, and the confidence that we have that we'll be able to do it for the balance of the year and in fiscal '12 is not what we really, I think, examining is that there's going to be a lot of pressure on small and large players in the marketplace. And our ability to use other methods within the business provides us with a competitive advantage in terms of making sure that our customers are seeing the fact that Starbucks is providing value for them at a time when perhaps others are going to have to raise prices in a significant way. The other thing, which I think I just want to amplify, is that we've been able to use a loyalty program and a rewards program to create a value proposition for our customers, especially our most loyal customers, which has been another opportunity that we've had to kind of navigate through this. So I think we want to make sure, as we go through this commodity problem, that we're looking at it, not only through the lens of Starbucks, but the competitive position and the competitive advantage that we're going to be in as a result of the pressure that's going to exist on other companies that won't have the flexibility that we now have.

Joseph Buckley - BofA Merrill Lynch

Just one more on the margins because you've reported higher margins despite all the coffee cost pressures, are we correct to think that most of that is on the labor line or selling coffee?

Troy Alstead

No, I don't think you should conclude that, Joe. The leverage points we saw early in several places throughout the P&L, for example, occupancy with our strong same-store sales growth we've had this quarter and for several quarters in a row now. We clearly can leverage the occupancy line. That's buried within the overall cost of sales in occupancy, so that becomes a little bit less visible to you. But there is certainly leverage there in some other fixed places around our P&L, where we're able to leverage as time goes on.


And your next question comes from the line of Greg Badishkanian with Citigroup.

Gregory Badishkanian - Citigroup Inc

Just to kind of build a more color on the really solid traffic growth that you had again in the U.S., do you think that's coming from more incremental customers versus maybe higher frequency of your core customers? And did you notice any differences or a change in trend of maybe day part versus maybe product mix at your stores this quarter that maybe drove that?

Clifford Burrows

Greg, it's Cliff here. What we have seen across the country, this increased traffic, which is good news. And it really is a mixture of improving our speed at peak times, which means we can improve capacity, where the customers are there and where they have a choice. We are giving them more reasons to come back by introducing afternoon offers, such as petit, which we've seen a little bit of growth in the early days there. And also, we are working very hard to make sure that we attract new customers, whether it's through their online strategy, and that with the occasional offers to a broader audience through a pastry day or a new food introduction or a breakfast sandwich promotion that is helping, and at the same time, our Drive-Through business, which is about 50% of our company-owned portfolio in the U.S. Again, we've been working very hard there around operational techniques to improve throughput at peak. So it is a whole number of things. We are focused on maintaining and building the loyalty and frequency of our existing customers while making ourselves available to new customers as they come along.

Howard Schultz

Cliff, let me add one more thing, and that is there obviously has been a seismic change in consumer behavior, not only because of social and digital media, but because of how customers are getting access to information and also the unbelievable pressure that people are feeling as the result of the economy, that people are making much more discretionary purchases that, I think, are deeply involved in how decisions have not been made in the past. In any event, the fact that we can integrate social and digital media into the way in which we're communicating with our customers has given us a competitive advantage over traditional companies of how those products are being marketed. And we see the fact that those digital channels are, not only lowering cost of acquisition, but driving traffic into our stores. So when we come out with a new category like petits, which is skewed towards the afternoon day part, we have leveraged social and digital media to create awareness and trial at a very low cost. And this is just the beginning of our ability to integrate these channels in a new way of marketing and communicating with our customers, both domestically and internationally, and that has resulted in Starbucks being the leading consumer brand on Facebook, Twitter and Foursquare. And the capability that we now have is becoming a significant competitive advantage to, not only driving traffic, but creating long-standing, emotional engagement with our customers.


Your next question comes from the line of Jeffrey Bernstein with Barclays Capital.

Jeffrey Bernstein - Barclays Capital

Jeff, I appreciate the little color you gave on the single-serve with the 3 platforms. Actually, just 2 related questions, one specific to the Green Mountain and the K-Cups. Wondering whether you could give any kind of directional color on your expectations, whether it be how the deal structured in terms of revenue or the cost component or whether there's anything in terms of the size of the contribution to CPG. Anything along those lines of the Green Mountain expectations going into next year with a couple of channels you have coming. And then separately, just with between VIA and those K-Cups, you mentioned both being a $1 billion sales opportunity over time. Just wondering whether you can kind of split the two of those up in terms of the trajectory or path of the two to achieve that. I mean, we don't need tremendous color on each one, but which one has better profit contribution, better margin, some color as to how each of the two would achieve that $1 billion.

Jeff Hansberry

Thanks for the question, Jeffrey. Unfortunately, I can't speak to the details of the arrangement with the Green Mountain. What I can say, though, is that you're exactly right. We do see both of those businesses as $1 billion opportunities for Starbucks, and they will both grow to $1 billion over time. I can't speak to when specifically, but what I can say is that for VIA, we're continuing to see very strong momentum on the brand. I spoke in my comments about how VIA promise is bringing more new users for the category. We're seeing repeat rates amongst triers at 37%, which is at the high end of the category. We've introduced some new SKUs, both flavored and iced during the second quarter, which have been met very favorably from the trade. And as we move forward, we expect that we're getting to a point now on VIA that we are getting to critical mass. And by that, I mean we have enough SKUs in the portfolio, that we're starting to see a step change in velocity and volume. So we're very encouraged about the future for VIA. And with regard to K-Cups, again, very, very encouraged. We're seeing, as you are seeing, significant and rapid growth within the K-Cup space, and our early conversations with trade have been extremely positive and we expect to get off to a very fast start on that business when we launch this fall.

Troy Alstead

What I would add to that, Jeffrey, adding to Jeff's comments is that, as we normally do each year, it's in our next earnings release, the July call, when we will provide our targets for 2012. And I wouldn't -- I would expect in that call, we'll give you a bit more texture around exactly your questions on what we expect to see to some extent out of both VIA and K-Cups and then the overall CPG business in 2012. You can expect a bit more from us on that in our next call.


Your next question comes from the line of David Palmer with UBS.

David Palmer - UBS Investment Bank

I would love to hear how compare your pricing power, and I guess this should involve more than just "just" because I'm asking you to compare the supermarket channel to perhaps your traditional, your own stores. How do you view these coffee price swings and the potential impact to your margins? For instance, do you see the Supermarket Bag Coffee business as a price pass-through business where you may not even -- you may not necessarily keep your margins the same but you keep your EBIT dollars roughly equal through these swings? And then compare that to what we would think, how you would think of your pricing power and maintaining margins during coffee prices in your own stores. And then separately, can we assume that single-serve brewing overseas is something that Starbucks is looking at and might be in the near future beyond what you're doing in VIA?

Troy Alstead

David, there's a lot there, so let me point to Jeff first and ask him to perhaps talk about single-serve a little bit more broadly and then about how he views pricing down the aisle. And then perhaps, we'll look to Cliff and others to talk about other pieces of your question.

Jeff Hansberry

So with regard to single, to premium single-cup, we think this segment is nascent. And we have established 3 platforms for growth in the U.S., but that's just the beginning for us. We are continuing to explore and will continue to explore and develop additional platforms both for the U.S. and abroad. So we think there is tremendous runway for growth in this space, and we intend be the leader in the premium single-cup space. So hopefully that answers your question regarding single-cup. With regard to pricing, we had previously announced pricing on March 18 for Starbucks Packaged Coffee in the CPG space. And since that announcement, we continue to see growth on the business. In fact, during March, we saw a share growth of nearly 70 basis points to 27.2% per Nielsen most recent 13 weeks. And we grew volumes, so we're continuing to grow both volume and share on the CPG business even as we move through a price increase that we announced on March 18.

Troy Alstead

Cliff, can I ask you to comment perhaps a little bit on stores, on David's questions in that area?

Clifford Burrows

Yes. David, the model we brought, I suppose, to bear over the last 18 months, we have been going on geographic region at a time. We have looked at the local ability to pay the upfront customers competitive set, and we've also looked at the total ticket because as we have introduced new food lines and our food attach starts to grow at different day parts. In the morning, it's attaching to beverage. In the afternoon, it helps us with occasion. We are looking at that total ticket and the customer. We're testing, we're seeing sensitivity and we're going to be very disciplined in that because the customers' ability to pay versus all the inflationary pressures, whether it's their own spend, where those or indeed everything else is going their lives from the fuel to other commodities, is a fine balance. And for us, the priority is maintaining their business, at the same time continuing to over the medium term and longer term growing our margin. The customer is very clear. The quality and consistency of the beverage, the speed of service and the friendliness, all adds up to the price they're willing to pay for Starbucks. They're equally saying to us we recognize and reward by loyalty and the rewards card is playing a big part in that. And we continue to see additional customers, increases in the amount they put on the card and the loyalty and frequencies growing. So we're trying to get that balance right, David, and we'll continue to work on that as we have over the last 18 months.


Your next question comes from the line of Sharon Zackfia with William Blair.

Sharon Zackfia - William Blair & Company L.L.C.

Howard, you mentioned some of the opportunities to expand in Korea and China. I was just curious, you could help frame for us how we'd expect the acceleration and internationally the development to really play out over the next five years in aggregate.

Howard Schultz

Sure. And is that growth to VIA? I didn't hear the question.

Sharon Zackfia - William Blair & Company L.L.C.

No, it's regards to licensed and/or company-operated stores internationally.

Howard Schultz

Okay. Sure. I think the headline is that International has crossed over in many ways the fundamental learnings that we've had in the U.S. over the last 2 years, and I was integrating that in all aspects of our business in every region that we operate. As a result of that, we're seeing record operating margins, which I think has given us great confidence that we can now take full advantage of the opportunities that we have to expand Starbucks International. I think can't get into the specifics today, but certainly as we look at the runway of growth and the opportunities that we have across the globe and China is just one market. We haven't talked about the fact that we're going to enter India, that we're looking at other markets as well, that we're under-stored in markets like Brazil and Russia. And even in a country like Mexico, which 5 years ago we thought was a market that had perhaps growth opportunities for a total of 200 or 250 stores, we're going to get to 500 before we know it, and there's no end in sight. So I think these are early days for us. We want to leverage the licensed opportunities so that we'd get a better return on capital for the company and our shareholders. And I think the good news is we just had an International summit in Seattle, and across the board, all of our International partners want to accelerate their growth rate and they want access to more territory. So these are all positive signs, and I think being here in Asia this week demonstrates to all of us the untapped opportunity we have both in our retail business and in CPG. I want to go back to one other question that was asked by David Palmer with regard to coffee. I think it's more than -- I think it's quite interesting that during the downturn of the economy and how commodity costs and coffee costs were on the mind of all consumers that we introduced Tribute Blend, which is part of the Reserve program of Starbucks because it's premium-priced. And we are selling out of that coffee at an accelerated rate, only second to Christmas Blend. And that is on the heels of introducing Starbucks Reserve consistently over the past year in which every Reserve coffee we've introduced has maintained or exceeded our expectations. So I think one of the opportunities we have, both in-store and in CPG, is to segment the market. And we think we can actually go up in terms of quality in a unique blend. And the plans we have building up Tribute and the Reserve in terms of innovation on the coffee side for fiscal '12 will be quite exciting as we begin to not only leverage in-store and CPG, but also taking advantage of the ongoing success of Clover.


And your next question comes from the line of John Glass with Morgan Stanley.

John Glass - Morgan Stanley

Understanding you don't want to get too far into 2012, there are some very significant forces at work whether it's green coffee prices being a drag or some of the positives in terms of single-serve. So my question is, do you think of the 15% to 20% goal that you put out there, Troy, and the willingness to try to manage around costs around that? So would it include both using the benefits of something like single-serve sending the detriment of a higher grain coffee to achieve that goal? Or should we still think of some of these new announcements as incremental to that longer-term goal? That's number one. And number two, just going back to single-serve, there's a number of brands that are coming on to that system in Green Mountain in the next several months. Is there a potential for a bottleneck production, bottlenecks such that maybe you can't get as many K-Cups made in the time that you want that may delay or phase in the rollout rather than having it start-up, say, in all points of channel at once?

Troy Alstead

I'll start with that question and have Jeff speak a little bit more to K-Cups specifically. But broadly speaking, our long-term earnings growth targets we've laid out a 15% to 20% is inclusive in our minds of a number of opportunities we're pursuing. So as we build out VIA, for example, as we grow internationally, as we expand on the single-serve platform, all those things I would expect to contribute to achieving that 15% to 20% earnings growth, recognizing that our targets for 2011 are at the very top end of that range of earnings growth that we've reiterated again today. So that's how we think about it as we're laying out and pursuing these many, many opportunities we have ahead of us, recognizing that commodity costs are a great unknown here but also acknowledging that one of the important levers we have in addition to just the unbelievable underlying health and strength of our business and customer traffic trends into our stores is the fact that we have really sharpened the pencil in the last couple of years, developed some new muscle, some new disciplines around managing the business, the supply chain, all the expense lines, and that has a cheat up for those opportunities to become much more effective and efficient. And that is and continues to be an important lever for us at all levels, in all geographies in the business to help offset some of these pressures that we face, whether they be normal cost pressures that are out there every year or, at a time like this, some extraordinary pressures that we face in terms of coffee prices. I'll ask Jeff now to speak more specifically to K-Cups in the coming year.

Jeff Hansberry

Thanks, Troy. Hi, John. With regard to supply for K-Cups, we've worked and continue to work closely with both Green Mountain and our customers as we prepare for the fall launch in Starbucks K-Cups in CPG channels and then sequence into Starbucks stores in 2012. So we're confident that we will have the product that we need to meet customer demand.

JoAnn DeGrande

This is JoAnn again. That is our last question for today. We thank you all for your thoughtful questions and your time, and we look forward to talking to you again in a few months on our Q3 2011 earnings call. Thank you for joining us today.

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