Starbucks' (SBUX) CEO Howard Schultz on Q3 2015 Results - Earnings Call Transcript

| About: Starbucks Corporation (SBUX)

Starbucks Corporation (NASDAQ:SBUX)

Q3 2015 Results Earnings Conference Call

July 23, 2015, 05:00 PM ET


JoAnn DeGrande - Vice President, Investor Relations

Howard Schultz - Chairman, President and CEO

Scott Maw - Chief Financial Officer

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

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

Adam Brotman - Chief Digital Officer

Matt Ryan - Global Chief Strategy Officer

Kevin Johnson - President and COO


Keith Siegner - UBS

John Glass - Morgan Stanley

Joe Buckley - Bank of America

Sara Senatore - Bernstein

David Palmer - RBC

Karen Holthouse - Goldman Sachs

David Tarantino - Robert W Baird

John Ivankoe - JPMorgan


Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to Starbucks Coffee Company’s Third Quarter Fiscal Year 2015 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 today to discuss our third quarter fiscal 2015 results, which will be led by Howard Schultz, Chairman, President and CEO joining us from New York, and Kevin Johnson, President and COO, and Scott Maw, CFO, here with me in Seattle.

Also joining us for Q&A are Cliff Burrows, Group President US Americas; John Culver, Group President China and Asia-Pacific, Channel Development and Emerging Brands; Adam Brotman, Chief Digital Officer; and Matt Ryan, Global Chief Strategy Officer.

This conference call will include forward-looking statements, which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. Any such statements should be considered in conjunction with cautionary statements in our earnings release and the risk factor discussions in our filings with the SEC, including our last 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 on today's call with their corresponding GAAP measures.

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

So with that, let me now turn the call over to Howard.

Howard Schultz

Thank you, JoAnn, and welcome to everyone on today's call. Starbucks third quarter of fiscal 2015 stands as among the most remarkable quarters in our over 23 years as a public company. Our global comp store sales grew 7%, driven by a stunning 4% increase in global traffic.

Let me put that 4% traffic increase figure into perspective. A 4% increase in global traffic on a business of our scale translates into having served over 23 million more customer occasions in Q3 of 2015 than in Q3 of 2014 or an average of approximately 25 more customer occasions every day from every single store in our nearly 10,000 store global comp base.

Our fast-growing Americas segment posted 8% comp growth, also driven by 4% increase in traffic and a 12% increase in revenues. EMEA delivered 3% comp growth with over 2% from increased traffic and a 23% increase in operating income.

As we announced last week, our EMEA segment is preparing to open its first store in Johannesburg, South Africa during the first half of calendar 2016 in partnership with established food retail operator, Taste Holdings Limited. We believe that South Africa could ultimately support 150 or more Starbucks stores over time.

Starbucks fast growing China/Asia-Pacific segment now with over 5200 stores delivered company leading comp growth of 11% in Q3, virtually all of which coming from increased traffic.

Our now fully owned and controlled Japan market, our first international market outside of North America and a market in which we now operate over 1000 stores, delivered among its strongest quarterly comp sales increases in years. And I'm very pleased to report that we now have exceeded 1700 stores across 90 cities in mainland China.

Cap remains a focal point of our future growth plans, and we are on track to meet our goal of doubling our cap store count to roughly 10,000 locations, tripling our revenue to over $3 billion and tripling our operating income to over $1 billion over the next five years.

Strong global comp sales growth, combined with record performance from our new store class, drove an 18% increase in total company revenues to a Q3 record of $4.9 billion and a 24% increase in non-GAAP EPS to a Q3 record of $0.42 per share.

Noteworthy is that our Q3 results were achieved despite continued meaningful investment in food and beverage innovation, our mobile and digital platforms and our partner experience investments.

All of which these investments will continue in Q4 and despite formidable foreign exchange headwinds and difficult retail and consumer environments in many of the global markets in which we operate.

Starbucks Q3 of fiscal 2015 was a fantastic quarter across the board, clearly evidencing a continuation of the strong momentum we've seen across our business and around the world this fiscal year and solid in-store execution by our people who now deliver the Starbucks experience through nearly 80 million customer transactions from over 22,500 stores in 66 countries around the world every week.

In a moment, I will highlight a few of the innovations and strategic initiatives and digital partnerships that were announced or took shape in the quarter that will enable us to further extend Starbucks global coffee authority and leadership around all things coffee and tea, retail, mobile and digital and position us to continue to grow, lead and win around the world and into the future.

Then I'll turn the call over to Kevin who will take you through coffee and beverage innovation and total company and individual segment operating performance in the quarter. Finally, Scott will take you through our Q3 financial and operating results in detail, and we'll close the call out with Q&A.

Two years ago I reported on the seismic shift in consumer behavior that would significantly impact traditional bricks and mortar retailers. I was not clairvoyant. The coming change was apparent.

Since then, many traditional retailers and consumer brands have responded simply by substantially increasing their digital advertising budgets, significantly driving up their cost of customer acquisition and producing little to show for it. We on the other hand, took a very different approach.

By further enhancing our already world-class digital technologies through the introduction of capabilities like Mobile Order & Pay and soon to be delivery and expanding our loyalty program, we are driving traffic as reflected in the 4% growth in traffic in Q3.

Bringing in new customers and deepening our connection to our existing customers, elevating the Starbucks brand and our customer experience and streamlining our in-store operations.

At the same time today, you will hear about unique digital partnerships that we are forging with like minded businesses in a number of verticals that will further leverage the Starbucks brand and our digital assets in order to further reduce our already low cost of customer acquisition and drive additional incremental traffic.

Starbucks superior customer experience depends in part on delivering world class service and convenience, and we are pleased to report great progress on several game-changing initiatives that are only in their infancy.

We first introduced Mobile Order & Pay into 150 of our company operated stores in the Portland area last December and then quickly expanded it to the full 650 store Pacific Northwest region in March.

Given the powerful positive impact Mobile Order & Pay had on our business in Portland and Seattle, we accelerated the rollout of this offering and now offer this innovative mobile capability in over 4000 of our US company operated stores.

And we are now on track to offer Mobile Order & Pay capability across the entire US company operated store portfolio in time for the upcoming important holiday season.

Mobile Order & Pay is enabling us to serve more customers more quickly and efficiently and to significantly reduce attrition off the line. We are already seeing positive impact on operating results.

But keep in mind that the rollout to 4000 stores occurred only in the last couple of weeks of the third quarter. So the real impact for Mobile Order & Pay and increased convenience remains in the quarters and years to come.

That said, mobile order and pay is fueling both revenue and profit growth in every market in which it has been deployed with customer adoption starting faster and accelerating with each new phase we roll out.

By enabling our customers to order ahead and avoid waiting in line, Mobile Order & Pay is enabling us to capture more on the go customer occasions, and the data is clear.

In those stores where Mobile Order & Pay has been deployed, lines are shorter, service is faster and in-store operations are more efficient. The net result is increased traffic, incrementality that is exceeding expectations, improved throughput and an elevated Starbucks experience for our customers.

We will add the Mobile Order & Pay feature to our Android app in the US, as well as introduce Mobile Order & Pay technology into our international markets in the months ahead. Importantly, key features like suggested menu recommendations that will drive increased ticket have not yet been deployed, as we are still in the beta mode.

In another important initiative designed to improve Starbucks superior convenience, we have opened our first express store in New York City, and while it still very, very early in terms of how many days it's been open, initial results are nothing short of extraordinary.

In approximately 500 square feet of space, we are now handling volumes we would normally expect from a store 3 times its size and nearby stores less than a few hundred feet away have not seen any adverse impact or cannibalization.

This helps validate the assertion that we made at our investor conference last December that many places in the US we have far more demand than our current stores conserve, indicating opportunities to significantly grow our domestic store footprint in the years to come.

And the express store is only one of several innovative new formats that we are pursuing to take advantage of the different kinds of real estate opportunities we need to address in order to tap into the demand that exists for more Starbucks occasions.

The initial success of Mobile Order & Pay in the express store are testaments to the growth potential that remains for us in the US where our ability to serve demand rather than the need to create demand will be key to our achieving our growth.

In addition to more express stores, another will open in New York City later this summer. The next big initiative to satisfy customer demand and provide added convenience is delivery.

We remain convinced of the huge demand for Starbucks delivery to your home or office and are on plan to pilot delivery in Seattle and in the Empire State Building in New York City before the holiday.

We have no doubt that delivery like Mobile Order & Pay will drive further incrementality and increase profitability and enhance the equity of the Starbucks brand.

Just as digital technologies are enabling us to add convenience with features such as Mobile Order & Pay and delivery, digital technologies are enabling significant expansion of our My Starbucks Rewards loyalty program.

MSR continues to be our most important business drivers as new members contribute not only short term increases in revenue and profit, but also to long-term loyalty for years to come. We now have 10.4 million active MSR members, up 28% from Q3 of 2014 with 6.2 million being Gold members, up 32% from Q3 last year.

The significant increase in Gold level membership means that an increased number of our MSR customers are transacting in our stores more frequently than before with MSR members now accounting for approximately 30% of total tender in North America.

And our mobile commerce platform is literally stronger than ever. We have reached the milestone where mobile payments now represent 20% of all in-store transactions in our US stores, more than double the figure from only two years ago, and we are now processing nearly 9 million mobile transactions each week.

Now our plan all along has been to bring both our MSR membership and our digital capabilities to scale, and we are now there, and so then leverage the Starbucks brand, our deep engagement with customers, our global store footprint and our world leading mobile digital card and loyalty assets to create the foundation of a much broader external mobile digital and loyalty platform. One that would extend to purchases and experiences outside of the four walls of the Starbucks store.

This new digital external platform will enable businesses whose customer demographics are similar to our own and with whom we choose to partner. To purchase stars from Starbucks and then to distribute the stars in order for them to acquire, retain and reward their own customers with the gift of Starbucks. And what's really wonderful about this opportunity is that gift can only be redeemed at a Starbucks store.

Let me explain the enormity of this emerging digital and loyalty opportunity to you through the lens of the first three expanded loyalty partnerships that we've recently announced.

The first partnership we announced was with Spotify. Under the arrangements, Spotify will purchase Starbucks Stars from us and then distribute these Stars to drive premium subscriber acquisition.

It will allow Spotify to differentiate themselves from competitive music streaming services and reward customer loyalty. In addition and as an added benefit to our own employee partners, all Starbucks partners are being given a Spotify premium account

free of charge.

The second partnership we announced was with the New York Times. Under the Times arrangement, as with Spotify, the Times will purchase Starbucks Stars from us and distribute Stars to drive customer acquisition and to reward customer loyalty.

And as an added benefit, Starbucks customers will be provided with free, unique, curated New York Times content to the Starbucks digital network within our stores.

Our third digital and loyalty platform partner is Lyft, one of America's leading mobile transportation network companies. As part of our partnership, Lyft will purchase Stars from us and distribute the Stars to increase customer acquisition and loyalty, reward their drivers and distinguish Lyft from competitive services.

There are a number of innovative elements to this partnership, but a few that highlight the like-minded nature of our companies include that we will be making all Lyft drivers Gold members of our MSR program and that Lyft will be offering their writers the ability to thank their drivers with Starbucks e-gifts.

In addition, later this year we'll be testing the possibility of introducing a convenient and cost effective transportation benefit to Starbucks employee partners in conjunction with Lyft in order to gauge partner interest and to determine the long-term viability of this benefit.

What each of these partnerships affords is the opportunity for consumers to earn Starbucks Stars outside of Starbucks stores and then to redeem them for their favorite food and beverages within Starbucks stores, providing a unique opportunity for incrementality, increased profitability and the opportunity for us to serve, connect with and become part of the daily ritual of an even more larger based number of consumers, and adding further momentum to Starbucks unique increasingly global flywheel.

And since each and every Star has significant perceived value to our MSR customers, these digital platform partners will be conferring a meaningful benefit upon their new and existing customers and even their drivers in the case of Lyft.

We strongly believe that no other bricks and mortar retailer has the brand strength, digital and physical assets or connection to consumers to create, build and execute a program anything like this.

We have identified prospective partners in multiple attractive business verticals, and you may expect to hear about many more carefully curated, customized digital partnerships in the quarters ahead as we roll out this proprietary Starbucks Star-centric digital and loyalty ecosystem.

With that, I'll turn the call over to Kevin. Kevin?

Kevin Johnson

Thanks, Howard. Good afternoon, everyone. Before handing off to Scott to take you through the financials, I thought I'd build on Howard's comments about the quarter and share some personal observations.

As Howard made clear, Q3 was an exceptional quarter as measured by any standard or metric. Ongoing beverage innovation and global leadership around all things coffee and tea remain at Starbucks core.

In Q3 we continued to invest and elevate the premium, highly differentiated, locally relevant coffee and tea, beverage, food and in-store experience we deliver to our customers around the world.

We grew global revenues by 18% over prior year to a new quarterly revenue record of $4.9 billion with a 7% increase in global comparable store sales, representing our 22nd consecutive quarter of comps sales growth of 5% or greater and on the heels of global comp sales increases of 6% in Q3, 2014 and 8% in Q3, 2013.

These are truly extraordinary topline results given the size, breadth and complexity of our increasingly global operation. 4% of our comp growth came from increased traffic, a testament to the increasing strength of our business and the global relevancy of the Starbucks brand.

In addition to driving strong revenue growth, we also expanded operating margins 70 basis points to a Q3 record of 19.2%. We grew operating income by 22%. This reflects a Q3 record, $939 million of operating income and a non-GAAP EPS of $0.42 per share.

I think there are three core drivers of this momentum. Number one, we are delivering innovation that is relevant to both our customers and our employee partners. Two, we are driving operational execution on a global basis. And three, we are leveraging the scale, reach and breadth of our capabilities.

Our fast growing Americas segment is firing on all cylinders, opening 658 net new stores over the past 12 months and posting an 8% comp growth in Q3 with a 4% increase in traffic. This resulted in 12% revenue growth and 17% operating income growth.

Ongoing beverage innovation that resonated with our customers and increased food attached across all regions and dayparts contributed meaningfully to the Americas segment's outstanding performance.

Q3 was the 22nd consecutive quarter, and the Americas delivered comp growth of 5% or greater. More importantly, transaction growth for the quarter of 4%, the best in six quarters was an extraordinary accomplishment and reflects the success of our efforts to drive traffic and incrementality through ongoing beverage and food innovation and increased store throughput.

Core beverage offerings contributed half of the US comp growth in Q3 with blended and espresso platforms driving over two thirds of that growth. Beverage innovation such as flat white, Frappuccino minis and cold brew combined to contribute approximately 1 point of comp growth and continue to perform ahead of initial expectations.

S'mores Frappuccino, a new limited-time offering, became the highest selling LTO Frappuccino ever. Noteworthy is that Teavana branded shaken iced teas continue to resonate with our customers, helping drive a 10% increase in tea beverages in our US stores and again contributing 1 point of comp growth.

We continue to make progress, creating new locations and growing our lunch and afternoon dayparts. Food sales contributed over 2 points to US comp growth this quarter, once again representing double-digit revenue growth over the prior year.

Our expanded breakfast sandwich platform delivered 30% net revenue growth with half of that growth coming from increased attach. Our lunch platform continues to grow, delivering greater than 20% growth in Q3 with the noteworthy success of warm sandwiches, bistro boxes and wraps, reflecting the fact that Starbucks is increasingly being recognized by our customers as an attractive option for lunch.

In addition to growing new dayparts, we've also made significant progress growing transactions at our peak daypart through a combination of great in-store execution and positive early results around innovative new store formats.

We are especially pleased with the progress we're making in growing transactions at peak even before Mobile Order & Pay is fully rolled out across the US company operated store portfolio in time for the upcoming holiday season.

Our new class of stores are performing extremely well, generating record first year sales and unit economics. Noteworthy is that our new stores are delivering record performance without cannibalizing sales from established stores in the local trading area. The data suggests that we are creating deeper engagement with our existing customers, and we're attracting new customers to Starbucks.

US licensed stores are seeing similar patterns and delivered strong results with revenue increasing 27% year-over-year. Looking ahead to Q4, we're confident that our rich pipeline of innovation will deliver a strong finish to the year.

Starting with cold brewed and Teavana mango black tea lemonade, both launched just in time for the summer heat and are exceeding initial expectations. The carefully curated selection of innovative, delicious new snacks to enhance our afternoon daypart offerings.

Customer feedback and research has shown us that snacks represent 50% of all American eating occasions each day, with busy lifestyles on the rise, the demand for snacks both in the moment or planned is increasing.

Our new portfolio of snack offerings is available in more than 3,400 high traffic Starbucks stores in major metropolitan areas. We continue to innovate around all things food with positive response customers.

Let's now take a look at the EMEA segment. EMEA third quarter results continued the segment's steady, measured improvement in profitability, despite the impact of unfavorable foreign currency translation, the primary driver of the 9% decline in reported revenues over prior year.

Excluding approximately $44 million of FX, the impact of the closing and transfer of certain stores from company-owned to license, EMEA revenues actually increased 5% in the quarter.

Comparable store sales in EMEA grew 3% in Q3, despite the FX headwinds and macroeconomic challenges in several markets, with a 2% increase in traffic representing its ninth consecutive quarter of positive comp growth with every EMEA market posting positive comps. EMEA also delivered a 320 basis point increase in operating margin and a very strong 23% increase in operating income over Q3 last year.

Our EMEA license markets are performing exceptionally well with Turkey and the Middle East in particular continuing to outperform. EMEA's results support our license-focused growth strategy for the segment where 66% of our nearly 2300 stores in Q3 were licensed, as compared to only 54% three years ago. We will continue to accelerate growth in our EMEA license store portfolio as demonstrated by two very exciting new partnerships.

In June, we entered into an important partnership with Casino Restauration, one of France's largest and most respected grocery retailers to open Starbucks stores within a number of casino stores. We view partnerships in the grocery channel in Western Europe as an opportunity for Starbucks.

And just last week, we announced plans to enter South Africa in partnership with Taste Holdings, a leading South African restauranteur, and we'll be opening our first store in Johannesburg during the first half of 2016. We will look to extend into other markets in Central and Southern Africa over time.

As aggressively as we are growing our license business in EMEA, we are equally committed to improving the profitability of our company-owned store portfolio in the region, and we are making continued progress on that front. Scott will provide details on that progress in a moment.

Our China, Asia-Pacific segment delivered an amazing quarter with company leading comp growth of 11% and revenue growth of 127%, 20% excluding the $390 million incremental revenue from the acquisition of Starbucks Japan. Overall, cap operating income grew by 49%.

We've added 750 net new stores in cap over the past 12 months. Our new class of company operated stores in cap is even more profitable than the prior class, reflecting the increasing strength and relevance of the Starbucks brand in the region and improved operating leverage.

We remain on track to increase our cap store count to 5500 by fiscal year 2015 and roughly double our store count to over 10,000 stores over the next five years.

As Howard mentioned, we've now surpassed 1700 stores operating in over 90 cities in mainland China. The passion and commitment of our partners in China is enabling us to deliver a great customer experience that is driving strong comp growth throughout the region.

Our business in Japan delivered among the strongest quarterly comp sales increases in Japan in years. We are benefiting from solid execution against our plans to leverage our brand in connection with consumers to drive growth in all channels and across all dayparts in the key Japanese markets.

By way of reminder, Japan company-operated stores are not yet in our global comp base. We will include these stores in both the global and cap comp base beginning in Q1 of fiscal year 2016.

Limited-time offering Frappuccinos in particular are extremely popular in Japan. Our spring and summer promotions featured locally developed products that have successfully positioned Starbucks as a top of mind destination for summer beverages.

The increasing strength of the Starbucks brand in Japan gives us confidence that with full ownership we can accelerate growth in this market as we head towards our 20th anniversary in Japan in 2016.

At our recent store opening, in the Tottori prefecture, the last prefecture in Japan without a Starbucks store, 1000 customers queued up for the store opening, and more than 50 reporters showed up to cover the event.

Starbucks brand strength spans the entire cap region. It is not limited to China and Japan. In fact, Starbucks ranked 15th on Nielsen's annual regional list of Asia's top 1000 brands for 2015 and has been ranked as the number one restaurant brand in Asia for the fourth year in a row.

Let's now move on to the channel development segment. Channel development revenues of $404 million in Q3 were up a solid 8% over the prior year, despite the increased competitive pressure in the at-home coffee categories and the timing of the Easter holiday which impacted the comparison to Q2 of this year.

K-Cup portion pack sales continued to be a primary driver of the revenue growth for channel development, and we are very pleased that our total K-Cup portfolio continues to gain share, despite increasing price pressure and new market entrants.

Innovation has been a key driver in establishing our leadership position in the K-Cup category and will continue to drive our sales growth.

Cinnamon dolce and mocha performed very well in Q3 as our flavors platform increased its share of the total category, and Starbucks iced coffee K-Cups launched only three months ago gained strong momentum ahead of the peak summer season.

Looking ahead, we are excited for customers to experience our third K-Cup beverage, hot cocoa. A new platform we are launching with classic and salted caramel hot cocoa flavor profiles.

Ongoing innovation, combined with increased marketing activities in Q3, give us confidence that we will continue to extend our leadership position on the K-Cup platform.

Foodservice had a strong Q3 with 14% revenue growth year-over-year. We offer a very broad product portfolio to the foodservice trade that is becoming increasingly appealing to businesses seeking to differentiate themselves by providing employees and guests with premium amenities in these establishments.

Beyond the US, we're seeing strong growth in China Asia-Pacific ready-to-drink sales, underscoring the size of the opportunity presented by the strategic partnership we announced with Teeney [ph] where we are on track to launch ready-to-drink Frappuccino through a large number of outlets in 2016.

As part of our plan to accelerate growth of ready-to-drink products in international markets, I am pleased to announce our expansion throughout Latin America ready-to-drink with our long-term business partner, Pepsico. Starbucks has been operating in Latin America for 13 years and now has more than 870 stores in 14 markets with plans to add several hundred more stores in the years ahead.

The new agreement with Pepsi will bring the Starbucks ready-to-drink coffee and energy portfolio to this important region and will leverage the Starbucks brand and store footprint, along with Pepsico's marketing and distribution capabilities, in order to unlock the growing $4 billion Latin America ready-to-drink coffee and energy business.

Customers will see Starbucks ready-to-drink bottled beverages throughout the grocery and convenience store channel in 10 Latin America markets in calendar year 2016. Innovating in ways that amplify our leadership in coffee is a key strategic priority.

Starbucks immersive 15,000 square-foot Starbucks reserve roastery and tasting room continues to attract customers and tourists from all over the world and is exceeding our most optimistic expectations.

The roastery is also enabling us to build a new ultra premium coffee brand, Starbucks Reserve. With the additional small batch coffee roasting capacity provided by the roastery, we can outsource, roast, blend and market spectacular, limited availability, micro-lot coffees from around the world under the Starbucks Reserve brand.

This is elevating the super-premium coffee experience we deliver to our customers, and we're able to find many Starbucks reserve varietals sell out as soon as we bring them to market.

To facilitate the expansion of the Starbucks Reserve brand, we are leveraging some of the design elements from the roastery to create a new store format called Starbucks Reserve that will showcase both our super-premium Starbucks Reserve coffees from around the world and the newest coffee brewing methods.

Starbucks Reserve stores will also incorporate an integrated Teavana kiosk to increase customer awareness and interest in Teavana super-premium loose-leaf and packaged tees. We expect to launch new Starbucks Reserve stores in targeted global markets over the next year, laying the foundation for an exciting, highly differentiated, new global growth opportunity for us.

We're on plan to open our new Starbucks reserve flagship store sometime later this calendar year, and we are already opening Starbucks Reserve coffee bars within selected existing Starbucks locations across the US as part of normal Starbucks store renovation cycles.

I'm confident that the addition of Starbucks Reserve coffee bars will drive incrementality in existing Starbucks stores and build customer awareness around our new Starbucks Reserve brand.

After more than six years on the Starbucks board, combined with the past five months deeply engaged with the management team, I must say it's a privilege to be a part of the Starbucks journey.

I want to thank all my Starbucks partners for the great work they do to create that magical Starbucks experience for our customers each and every day.

I'll now hand the call over to Scott to take you through our Q3 financial results in detail. Scott?

Scott Maw

Thanks, Kevin. And good afternoon, everyone. The Starbucks business has performed exceptionally well in fiscal 2015, and our third quarter reflected the continuation of prior quarter's trends.

Strong global comps, record revenues, record operating margin and record operating income once again demonstrate the impact and the success of our laser focus on our customers and our customer experience and fantastic execution by our partners across the globe.

Our Q3 results are particularly meaningful in light of the size of our global system today and the increasing complexity of our business.

Our Q3 GAAP EPS came in at $0.41 and non-GAAP EPS at $0.42 per share, 24% over prior year and our strongest quarter in 2015 thus far, despite a meaningful ramp in the investments we are making in the business.

Non-GAAP operating margin expanded 100 basis points in Q3 to 19.5%, and excluding non-GAAP items, our operating income increased 24% over last year to $950 million. Sales leverage from the Americas and cap segments and an increase in COGS leverage drove this improvement.

Clearly, the supply chain initiatives we have previously discussed and are implementing are benefiting our operations in a significant way. In fact, we have seen 120 basis points of gross margin improvement to date in 2015.

In addition, we remain on track to eliminate $1 billion of supply chain costs over a four-year period. I would like to personally and publicly thank all of our supply chain partners across the globe for helping us deliver our Q3 results and our future supply chain savings while at the same time supporting the very significant growth in our business.

I'll now take you through individual segment performance in Q3. Our Americas segment grew revenues 12% in Q3, primarily driven by strong 8% comp growth with transactions and ticket contributing 4% each.

Americas operating income grew 17% over the prior quarter in Q3, reaching $855 million, a record high and a particularly excellent result, considering our US store partner investments continued to ramp during the quarter.

Operating margin expanded 120 basis points over Q3 last year to 25%, and importantly sales leverage was significant, more than offsetting the approximately 80 basis point impact from increased partner investments.

Our EMEA segment increased its operating income 23% over Q3 of last year to $36 million, a Q3 record. EMEA's record results are even more impressive in light of challenging macroeconomic conditions across the region, significant foreign exchange headwinds and the fact that only two short years ago EMEA was essentially operating at a breakeven operating margin.

Particularly noteworthy is that EMEA's operating margin expanded 320 basis points to 12.2%, also a Q3 record. Continued progress against our plan to improve operations and evolve our store portfolio from company operated to higher-margin license stores drove double-digit operating margin for the fourth consecutive quarter.

And our license store portfolio in EMEA continues to perform exceedingly well with high single-digit comps for the seventh quarter in a row.

Our China Asia-Pacific segment continues to perform extremely well in Q3, delivering company leading quarterly comp growth of 11%, a 49% increase in year-over-year operating income to $150 million and becoming our second most profitable business segment for the first time in our history.

GAAP operating margin and cap declined from 35% to 23% as a result of the impact of our acquisition of Starbucks Japan. As Howard and Kevin mentioned, we have a very long and opportunistic runway of growth ahead in cap with stores that continue to deliver among the highest profitability and strongest unit economics of any stores in the world.

Excluding the nearly 16 point financial impact from the ownership change in Starbucks Japan, cap's operating margin increased by 370 basis points. Strong revenue growth and margin expansion driven by the performance of company-operated stores, as well as sales and operating leverage, all contributed to cap's excellent results.

Channel development's operating income increased 3% to $143 million, while segment operating margins decline 160 basis points year over year to 35.5%, largely a result of increased marketing to support our ongoing product introductions and commodity copy costs.

Noteworthy is that our portfolio continues to increase its share of the K-Cup category despite competitive pricing pressure from new and existing market participants. Year-to-date performance in channel development remains strong with 11% revenue growth, margin expansion of 220 basis points and an 18% operating income growth.

I want to shift gears a bit and take a moment to discuss our balance sheet and capital deployment activities. Earlier this month we took advantage of the continued low interest rate environment to opportunistically refinance our $550 million 6.25% coupon senior notes that were due in 2017 with $850 million of lower coupon 7 and 30 year bonds. This transaction enabled us to both reduce our interest expense going forward and to significantly extend the maturity of our debt.

Upon redemption, we incurred a charge of approximately $63 million that will impact our P&L in Q4, namely for the premium related to the early redemption of the 2017 notes. This charge is included in our updated GAAP targets that excluded from our Q4 non-GAAP targets.

As we've previously shared, we will target share repurchases at least equal to the dilutive impact from our broad based stock compensation programs. We've also noted that we will modestly add to debt and may from time to time increase the pace of our buybacks.

Given the strength of the quarter and the favorable economics on our most recent debt offering, we increased our buybacks somewhat in the quarter. In Q3 we returned a record $874 million of cash to shareholders through share repurchases and dividends.

And today I am pleased to announce that the Board of Directors has authorized the repurchase of an additional 50 million shares under our ongoing share repurchase program. This is on top of the 11 million shares that remained available at the end of Q3.

Strong results during the first nine months of fiscal 2015 enabled us to deliver both earnings per share above our initial EPS target growth range and current quarter earnings above our updated range.

Our full-year GAAP EPS targets are now $1.77 to $1.78, and we are increasing our full-year non-GAAP EPS target range to $1.57 to $1.58. This relates to GAAP EPS growth of 31% to 32% and non-GAAP EPS growth of 18% to 19% for the full fiscal year.

Noteworthy is that this growth above our initial non-GAAP EPS growth range of 16% to 18% and that it will be accomplished despite 2 points of foreign exchange impact on both our revenue and earnings per share growth rates. For Q4, we now expect GAAP EPS in the range of $0.38 to $0.39 and non-GAAP EPS in the range of $0.42 to $0.43, consistent with our prior guidance.

A few comments on our Q4 guidance. We're expecting another excellent quarter in Q4, albeit with somewhat lower earnings growth rate than we delivered in Q3. This is consistent with what I had noted on last quarter's earnings call. And I want to again clearly caution against extrapolating Q3's extraordinary performance onto Q4.

Several factors support the Q4 guidance we have announced. First, we are continuing to ramp our partner in digital investments. They will reach their peak in Q4 and be up notably from Q3 levels.

Our results this quarter demonstrate that these targeted, carefully considered investments are beginning to bear meaningful fruit, and we will not hesitate to accelerate investment where we see opportunity. Second, we expect the impact of foreign exchange on our top and bottom line will be at its peak in Q4.

And finally, we are lapping over phenomenal results in Q4 of fiscal 2014 when we reported an operating margin above 20%, our highest operating margin ever, which was 280 basis points over prior year on a non-GAAP basis.

Breaking down Q4 operating margin by business unit, we expect Americas to deliver year-over-year margin improvement that is somewhat lower than the 90 basis point improvement year to date.

GAAP operating margin is expected to finish the year slightly above 20%, which is significantly higher than our initial guidance. The cap's Q4 margin will be roughly flat to Q3's very strong 23%.

Channel development's operating margin in Q4 is expected to be up nicely from Q3, but down slightly compared to last year Q4, reflecting the challenging and competitive retail environment, additional marketing investments and somewhat higher coffee costs.

Finally, EMEA operating margin is expected to show strong year-over-year expansion with the full year margin - operating margin at or slightly better than the high end of our 10% to 12% guidance range.

For the total company, we expect non-GAAP operating margin to be up from Q3, but down slightly from last year's fourth quarter, reflecting the impact of the Japan acquisition, offset somewhat by favorable operating and COGS leverage.

We continue to expect commodities to be roughly neutral in 2015 with coffee somewhat unfavorable and dairy offsetting this impact. We now expect revenue growth of approximately 16% for the year, including two points of FX impact. All other guidance for 2015 remains consistent with what I shared last quarter.

One final reminder before turning the call back to Howard and then on to Q&A. As I mentioned on our earnings call last quarter, we will be providing our initial growth targets for fiscal 2016 and all future years during our fourth quarter earnings call.

Given the size and the scale of our increasingly complex global business, we've been contemplating shifting the issuance of this guidance from Q3 to Q4 for some years now in order to have it coincide with the completion of our annual operating plan. The shift will allow us to thoroughly vet our AOP prior to providing targets. Finally, I would point out that we are now over 80% locked for coffee costs into 2016 at rates slightly lower than 2015.

Starbucks' strong year-over-year financial performance demonstrates our commitment to delivering best-in-class financial and operating results, while at the same time investing in our future growth, building new stores, renovating existing stores, deploying new technology and investing in our partners and delivering an elevated Starbucks experience to our customers.

We believe that by getting the balance right, we will be able to continue delivering best-in-class growth, profitability and increased capital returns to our shareholders.

Now, I'll turn the call back to Howard. Howard?

Howard Schultz

Scott, thank you so much. Before we head into q-and-a, I just wanted to make one comment as it relates to how you might be looking at comps and traffic going forward. I think I speak for everyone at Starbucks in saying how proud we are and how gratified we are that we've been able to put up the kinds of numbers that really are unprecedented given our scale.

But I've said in previous quarters and I think it's really worth repeating again, that we don't expect internally to maintain these kinds of very high level, high single digit comp numbers and the kind of traffic numbers that we provided with you today.

So I would hope that there is common language and common understanding that the guidance we've been giving for years now is mid single digit comps, and I would hope that you would hold us to that. And if we are in a position to surprise on the upside, that's wonderful, but not to count on it and certainly not to model it.

In our quarter, this quarter demonstrates a unique opportunity for many, many things that have come together. We're certainly going to work very hard to reproduce that. But I think going forward mid single digit comps numbers and a modest traffic number should be the kind of number you are putting in your model. And I hope that you would respect that as we go forward to Q4 and fiscal 2016. Thank you very much. JoAnn?

JoAnn DeGrande

All right. Thanks, Howard. Mike, go ahead and open up for Q&A today, please.

Question-and-Answer Session


[Operator Instructions] First question is from Keith Siegner with UBS.

Keith Siegner

Thank you and congratulations on such a record quarter. As exciting as the Mobile Order & Pay is and you all know how excited I am. A lot of others will eventually get somewhat close. What I think really is interesting about this is the ecosystem expansion, such a long-term competitive advantage.

So Howard, when you think about this expansion is there any limit to this? Is this a nice slow gradual pace? Is this something that can get really broad and pervasive? I mean there is no precedent for this, right. How do we think about this ecosystem expansion with other retailers evolving?

Howard Schultz

Well, let me try and answer this way. I think you have to go back to the 2 years when I did share with many of you the concern that I had about what is meant to be a bricks and mortar retailer today in terms of the challenging issue of mobile commerce in the web. And that has resulted, I think, in lots of activity that is not producing the kind of positive results across all of retail, especially those that are mall-based.

So, on the one hand, traditional retailers that are bricks and mortar based are longing for ways in which to accelerate and leverage their core assets and specifically drive traffic as opposed to waiting to intercept it.

I think we've established not only a very successful application in Mobile Order & Pay, but we've established Stars as a currency that is highly relevant to our customer base. And when you look at our customer base, at how broad it is and the demography of it.

When we start looking at verticals and like-minded companies, it's very easy for us to integrate our data against the way in which our customers are shopping and spending their free time and spending their money.

And as a result of that, we've identified a number of companies in unique verticals that we think sequentially can be part of this external ecosystem. However, like anything else, I think that we have to walk before we run, and I think we have a core responsibility to demonstrate to the initial partners that in fact, the proposition that we created is going to drive incrementality for them.

I can tell you that the phone has rung with many, many inquiries from both regional and national retailers in all types of business, who are very much interested and intrigued to be part of what it is we're building.

Now there is a company and you probably have seen it, and that’s what plenty is doing, and what they're doing is assembling an amalgamation of companies as part of that ecosystem, and you see many companies jumping into that.

What's different about what we're doing and why I think it's going to be better and more proprietary is that we are offering a single currency, and that currency has to come back to Starbucks, and we know that the value of a Starbucks store and the equity of our brand is very, very relevant to this kind of proposition.

So the short answer to your question is, I think this is a very big idea, but it's an idea that I think we have to prove internally and prove to these partners. And you are going to see sequentially more partners in the quarters to come. And I think it will be more than a domestic opportunity over time as we introduce Mobile Order & Pay and the features and benefits in the international markets.

But this strategy goes back 2 to 3 years when we started talking about leveraging this internal system once we got the scale and creating this external flywheel, and I think we're in a very unique position that will create incrementality and a very low-cost of customer acquisition.

So - and I think what we're trying to do here is recognize that we can't embrace the status quo. We have to keep pushing for innovation inside and outside of our stores, and we have to be as relevant for our customers on their phone as we are inside the Starbucks experience.

And I think this is exactly what we're doing. I think the first three partnerships represent a level of diversity in terms of New York Times, Spotify and Lyft, and you're going to see a lot more in the days ahead.


The next question is from John Glass with Morgan Stanley.

John Glass

Thanks very much. I wanted to ask about the Mobile Order & Pay rollout. My ultimate question is if you're willing at this point to talk more specifically about the kind of lifts you're experiencing in the older markets that when it's rolled out?

If you're not willing to talk about that more specifically, can you talk about to what extent these are new - when people are joining in, is it new members to through my Starbucks Rewards, the existing members?

How deep is the penetration, the usage in your existing user base of the My Starbucks Rewards? Any kind of qualitative comments around that would be helpful.

Howard Schultz

Go ahead, Adam.

Adam Brotman

Okay. Thanks, John. This is Adam. So, first of all, specifically to answer your question, we're seeing both our existing user base using order and pay, as well as bringing in some new members into the My Starbucks Rewards loyalty program, as well as them using the Mobile Order & Pay.

And while we can't breakout specifics as you mentioned, it's worth noting that obviously this program is gaining tremendous momentum. We've been exceeding our own internal expectations in terms of the number of mobile orders we are seeing, in terms of incrementality that we are measuring, and in terms of the qualitative factors like customer and partner satisfaction are all exceeding our expectations.

And that's even more true in our busiest stores, which bodes well as we continue to finish the US rollout in such cities as New York and San Francisco and Chicago. And I'd also add that we're seeing we are happy to be seen that the adoption rate is accelerating as Seattle actually started out faster than Portland, which we were quite happy with and then this last wave, the Sunbelt has succeeded even that in terms of its initial adoption rates.

So we have momentum, we're just getting started, and you can imagine we're pretty excited about this.


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

Joe Buckley

Thank you. A couple questions if I can. The deals with Spotify, Lyft, New York Times, do they all involve a commitment to buy certain number of Stars, and are there upfront payments for the Stars?

And just explain a little bit more how it works? And who is heading up that effort, Howard, is it you at this point, or is it Kevin or someone else within the organization?

Howard Schultz

Sure. Kevin, do you want to take that?

Kevin Johnson

Sure. I'm happy to Howard. Yes, Joe, thanks for the question. I think that without getting into the specifics of each of these deals, they all have a common element which is each of these partners is paying us for Stars that then will be used to reward MSR customers or in the case of Spotify or the New York Times for subscription, in the case of Lyft for rides, and in the case of Lyft for some benefits they have for their drivers as well.

In each there is a range of terms in each of those agreements, but there is a fundamental principle around how we're going to pivot and help them achieve their goals in terms of subscriptions, and rider ship, and in return they are going to buy Stars or pay us for Stars, they are going to reward MSR customers for those benefits, and that's where it becomes a win-win-win, if you will.

MSR customers win because it's another place for them to earn valuable Starbucks Stars that they can redeem at Starbucks. Starbucks will win because that will bring traffic into our stores, and our partners will win because we are going to help them bring MSR customer base and bring customers to their offerings, whether it is subscriptions or rides, and we're going to go from there. So certainly, that is the foundational concept behind the 3 deals that we've done in the vision that we have going forward.

I think, as Howard mentioned, we've got to walk before we run, and so right now I think the plans are to get to Spotify this fall, and we queued up New York Times and Lyft in January, early Q1 calendar year 2016.

And in the interim, we're going to continue to have dialogue with other interested partners. But I think the priority right now is we're going to make sure that we do a great job with these first three partners and that our customers have a great experience, our partners get benefit from that, and that's where we are going to put our energy.

In terms of your questions around who's managing this, I mean obviously a big part of this links into the digital experience we've created with our mobile app. And so Adam Brotman and his team are doing a lot of the software development that's enabling this. Certainly between Howard, Adam, Matt Ryan and myself, we've all been involved in these dialogues and helping shape these.

I think we're now at a point where we're going to now start formalizing organizationally where the accountability is to scale it. But now clearly the implementation of getting this done is the responsibility that I have along with Adam Brotman.

Joe Buckley

Okay. And then one more if I could, on the 4% transaction growth, that is obviously a very, very strong number. Can you talk about what you've done? You mentioned peak hour throughput transactions being up, but if you are doing 4%, I'm sure they have to be up.

But what have you done to kind of streamline that process. You know Mobile Order & Pay, I'm assuming wasn't in enough stores long enough in the quarter to have too much impact. So what else is going on to help drive those transactions?

Cliff Burrows

Thank you, Joe. It's Cliff here. The focus has been on all the basics in our stores, and really those peak hours in the mornings in our busiest stores, we have really focused on labor and making sure we have enough labor in the right place. That is helping us sell to more customers.

We're also seeing an increase in occasions with the work we're doing around dayparts, and that can be lunch, that can be our Frappuccino platform, right through to the evenings in stores. And all of those are helping us to grow all our stores across all dayparts, and it really is an absolute focus on the basics.

You're right in your assumption that Mobile Order & Pay is not yet a material part of that. As Adam said, it launched too late in the quarter. But we are really encouraged by the work we're doing investing in our partners, investing in labor and stores, and serving more customers.

Joe Buckley

Thank you.


The next question is from Sara Senatore with Bernstein.

Sara Senatore

Thank you very much. I wanted to actually ask about food and in particular in daypart expansion. In particular, when you talk about you have some very aggressive growth in some of the categories breakfast and then even lunch.

Could you maybe help me think about ultimately if you have an idea about where food could get to in terms of share of mix? Are there limits by not having a full kitchen?

And on that note, could you maybe update us on Starbucks Evenings, the rollout there, and how you would think about that daypart a bit more expansively?

Cliff Burrows

Thank you, Sara. And as was highlighted by Kevin, we've seen a real growth around that breakfast daypart, driven in part by the breakfast sandwiches seeing a 30% growth, lunch as we've expanded into that. We've seen a very healthy 20% growth in that daypart.

And it really is focused from the work we started with level large products, feels like almost 3 years ago now and great quality ingredients that are resonating with our customers. We keep refining and improving not only the choice of food, but the relevance of the different dayparts. As we expanded our offer of Teavana shake and teas, again the complement to lunchtime food gives us encouragement that we're in the right direction here.

We said in the analyst conference at the end of last year that we would see our food mix growing up to the mid 20s% in terms of percentage of mix, and I think that feels like a good place directionally. We are now up to 20%. We've seen a 1 point increase in the mix. So directionally heading that way and we have a good line of sight on it.

Evenings we have rolled out the Evenings program to stores across different parts of the country. We are still in the early phase. We will see the expansion of Evenings to hundreds of stores in the US over the next 12 months.

And that again gives another opportunity but only to introduce wine and beer, but to strengthen our food offering to be part of that Evenings software complemented by teas, coffees and a range of beverages.

We've also expanded many of those new food offerings, certainly breakfast sandwiches and lunch, and our pastries into our Canadian business and into many of our license store partners. And it is the first time we have had an aligned range across such a wide portfolio.

So that will also help us strengthen the relationship with our customers in terms of a consistent offer and also focus on delivering great quality food for our customers.

Kevin Johnson

I would just add and we commented on this last quarter, if you look at the ticket in the US business, the 4 points that you see there, there is a really healthy mix of ticket. There is a little bit of price in there, but by far the majority of that is a combination of premiumizations [ph] overseeing the customers trade up within categories or across categories and then attach. And so that 4% is as healthy as we have seen it over the past few years.

Sara Senatore

Thank you.


The next question is from David Palmer with RBC.

David Palmer

Thank. Good evening. What are you learning in the rollouts of mobile order intake from an operational execution standpoint, particularly as you get into the thousands of stores? How are you finding the customer satisfaction, especially with regard to having that beverage perfectly ready when the customer wants?

And if your partners or consumers are suggesting tweaks or opportunities for the app or execution, can you share any of those? Thanks.

Howard Schultz

Adam, why don't you start and then Cliff can talk about the in-store expenses.

Adam Brotman

Okay, David, this is Adam. First of all, the thing that we're learning are that we can continue to refine. In fact, my guess is we will do this for a long time and making sure that our estimated pickup time algorithm is always based on what we're trying to improve.

We are very happy with how it's working in beta mode and so happy that we're going to continue to accelerate our rollout. But that's something that we're continuing to work on.

We're also learning that our customers are requesting things like the ability to have very specific store by store menus being turned on. That's something that we plan on turning on before the end of this year in fact. So we're working on that, so that you can have a - you can order things like Clover and Visio and Evolution Fresh smoothies.

So those are examples of the kinds of things that our customers are asking for that we are in the process of improving as we speak. And then, of course, putting those capabilities onto our Android app and then starting to roll out in the UK, Canada and elsewhere around the globe. So those are kinds of examples, the things that our customers are asking for. Cliff?

Cliff Burrows

Yes, I would say, David, the acceptance and enthusiasm from our partners across the country has been incredible. They feel well trained. They feel ready for the rollout and customer adoption, and usage of the new app has just been fantastic.

And we keep learning and we keep tweaking, but the ramp-up rates and the adoption rate that Adam talked about earlier has just got stronger with each rollout. We now have some high volume stores, which has allowed us to pressure test what happens in those stores. And in fact, those are the ones where we are seeing the strongest adoption, and it does bode well for the future.

So far, all the learning’s are good. I think that piece Adam said about getting store-specific menus so that the customer can order just what they want in their store. And I think the other one is just the excitement and the pressure to get into all of our stores as a standard part of our offer.

Adam Brotman

And David, this is Adam again. Just to add on to what Cliff said, it's something that's worth noting that, if you look at our opportunity with Mobile Order & Pay and assumed delivery, we have an absolutely unique and differentiated capability because unlike any other consumer brand retail or restaurant company, we already have an industry leading integrated card loyalty and mobile assisted with massive momentum and usage of Stars that are relevant to our customers and fully integrated into the POS system into the operations of our stores.

So it gives us a unique and differentiated ability to roll something like this out in a seamless and elegant manner and one where our partners and our customers are adopting it. So we are very excited about our differentiation into Mobile Order & Pay.

David Palmer

Thank you.


The next question is from Karen Holthouse with Goldman Sachs.

Karen Holthouse

Hi. Thank you for taking the question. I actually have another question about food. And as you continue to see this platform grow across dayparts, is there anything you've noticed in terms of the mix of customers using it?

Is it something that seems to be skewing millennials, something that's skewing older, and then also usage patterns in urban versus suburban preferred the grab and go food?

And then in particular, is there any difference in how consumers are capitalizing on the drive thru for sort of Starbucks as a non-fast food drive thru option.

Cliff Burrows

Well, there's a lot there, Karen. I would say that we are seeing more similarities than differences across the country. Drive thru we focus primarily on a narrower range and opt in our bestsellers on new introductions or seasonal changes. But if somebody wants and is familiar with a wider range, they just order it.

We are seeing bestsellers the same across the country, and there's no particular SKU to millennials. I think the lunchtime offering tied with tea, ice-shaken teas is a new development for us. There is a strong drive towards the breakfast sandwich platform, and that really is across the country.

One of the things that has been extremely encouraging is our strongest food markets have gotten even stronger with this new food offering. And that is what is most encouraging. It's not everybody catching up the traditional markets for us.

We've had our biggest adoption, and people buying the food have gotten stronger. And we see that this will continue to grow. I think the other thing that we have with this frozen distribution model is our availability product has increased significantly. Mobile Order & Pay is helping us again to improve that availability by us knowing exactly what the customer wants.

So a lot of changes to the supply chain, a lot of refinements to the operational practices in stores. And at this stage, we are not tailoring to a particular group, but we are also taking the opportunity to bring in some locally relevant products.

BC with a diverse supplier there, and also in New York with an opportunity with a local supplier. And I see that plus the grab and go snacks as some of the curated offers that we can start to put in the stores to complement our base.

Karen Holthouse

Great. Thank you.


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

David Tarantino

Hi, good afternoon. I have a question about the China, Asia-Pacific segment and the strength that you're seeing and the traffic trends there. Just wondering if you could elaborate on we think is driving that strength and maybe comment in particular on China?

And we've heard a lot of macro concerns about China, but it seems like your business may be charging right through those. So perhaps could you elaborate on what's driving the strength in your mind?

John Culver

Yes. Hey, David, this is John. Clearly we continue to see very strong momentum across the region, and the 11% comp growth is indicative of that, 10% of that was transactions. We're tracking more customers now than ever before into our stores across all the markets we operate in.

And when you look at the comp growth in China, as our comp growth in China has outperformed the overall regional comp growth again this quarter, which is very encouraging.

A couple of things that are in play. First is the relevance of the brand and the fact that we are building this coffeehouse ritual and more and more customers are coming in. We're increasing the level of frequency of our existing customers, and then we're also attracting new customers into the brand each and every day.

In addition, what we're seeing is that as we've accelerated the store growth across the last several years is that our stores are more accessible. And with that, we're also seeing very strong performance from a financial standpoint in the first year stores, as well as in the second and third year age class stores as well.

Digital is becoming a bigger piece of our business across Asia to include China. We now account in several of our markets 40% of our transactions is done through the Starbucks card. And so digital is becoming a bigger piece of that.

And then the last piece I would say is, when you look at the store designs and the store environment that we're creating, we are truly creating a third place inviting environment for our customers to come with their family and friends, and this is resonating very strong.

Yesterday, I had the opportunity to hand out awards for the top store designs, and it just reminded me of the fact of both the beautiful stores and the beautiful spaces that we're creating across the region.

The big opportunity that we have going forward is this morning daypart and the development of the morning daypart. And increasingly we're seeing more and more relevance towards morning, but we do see this as an opportunity to continue to develop and grow that.

But we're highly encouraged by what we're seeing across the region and in particular in China. As Howard mentioned, 1700 stores now in over 90 cities, and we're well on our way to that 10,000 store goal across the region over the next five years.

David Tarantino

Great. Thank you.

John Culver



The next question is from John Ivankoe with JPMorgan.

John Ivankoe

Thank you. Howard, in your prepared remarks and I'm not going to call you exactly, but I'm going to try, but you said that Starbucks' opportunity was about serving existing demand as opposed to creating new demand. And that was just a very interesting comment just related to the latent demand that presumably exists within the United States.

And as you think about all the different things that you have that can bring additional customers, whether they are new customers or you are bringing in existing customers more often into existing Starbucks stores and into new Starbucks stores.

Can you compartmentalize really how big of a revenue opportunity that you see for Starbucks in the Americas that can be reached, or just to your existing store footprint, maybe how much is available over time through new store footprint and a bigger variety of different formats?

Howard Schultz

Let me try to answer that in a number of ways. First off, I think you would all agree that unequivocally we have proven and demonstrated that anyone who a year or two or even three thought that Starbucks might be achieving a level of saturation in the US or North America is clearly not the case.

I think the ability that we have from a design standpoint and real estate acquisition to create segmentation in our design and uniquely be able to position Starbucks has given us opportunities that perhaps very few people thought existed in terms of the size and scale of the market.

I can't give you the specific number, but I can tell you that we believe that we are a long way from the average unit volume of a Starbucks store achieving its ceiling. And I think one of the unique strengths that we've developed over the last couple of years is being able to identify need states and then to link that need state with the right product made for our customers in a customized fashion.

And so, you know, John, you've been covering the company for many, many years, and so you know perhaps better than anyone else that there was a time when Starbucks' entire business pretty much happened 70% to 80% of it before noon. Well, that's not the case today.

What's happening today is that we have identified, developed and executed against the strategy of leveraging the fixed asset we have throughout the daypart by creating need states products, and now we're going to extend that to evening.

So when you link the fact that we still think we're in the early stages of what the average unit volume could be, coupled with our ability, I think this is the third, maybe the fourth consecutive year of best-of-class new store performance, given our store base, its pretty unusual.

And what I was trying to say in my prepared remarks and don't take me literally is that, we are not in the business every single day of just trying to intercept traffic. We're in the business of creating demand through the experience, the trust in the brand, the social impact of what Starbucks is about, the trust the people have in who we are as a company, and obviously the value proposition and the unique experience that people are having.

I think it's over 20 years now that we have talked about the relevancy of the third place. We haven't talked about that in quite some time. The truth of the matter is that the third place that we have established all over the world has become as relevant as the product itself. And so when you couple all of these things together and you create the kind of position we now have in the marketplace and you can leverage that scale.

And I think the thing we have done really, really well and it's quite a challenge is, how do you get big and stay small? How do you maintain intimacy and trust with your customers and your brand when you are as ubiquitous as Starbucks has become?

And the way you do that is through local relevancy and the kind of product design and experience that we've now been able to create around the world.

Its one thing to talk about 23,000 stores in 67 countries, but the fact is if we transported ourselves to China or Spain or France or Malaysia or Singapore, today, you'd see and feel the kind of experience that you were enjoying in New York City.

Yet it's highly localized, highly relevant and most importantly the culture and values of the company continues to be the brand competitive difference of what we've been able to create around the world.

So I still believe these are early days for the company, not only in terms of the innovation that we've talked about digitally and through Mobile Order & Pay and other things that we have in the pipeline, but our core business. And our core business is reconfirming every single day our leadership position in all things coffee.

Kevin touched on the roastery, the roastery and Starbucks reserve is a big, big idea that is going to put a halo on the entire company, as we are not going to allow any small company or independent in any way to subordinate our position as a leader in all things coffee.

And the interesting thing about that and then I'll stop because it's pretty long winded, is not only are we able every single day to reaffirm our leadership position in all things coffee, but at the same time create the kind of beverages that are more impulsive like Frappuccino in ways that are accretive to the brand and not dilutive to the brand of coffee.

And so once again, I think we're doing things that are very difficult to do in terms of balancing scale, relevancy, the equity of the brand, product innovation and most importantly really taking the company from a typical bricks and mortar environment just 3 years ago to a new arena and kind of reinventing what it means to be a traditional bricks and mortar retailer whose relevancy has to be where people live, where they work and where they play and on every device that they are using in terms of the equity and the emotionality of the brand.

John Ivankoe

Thank you.


That was our last question at this time. I will now turn the call back over to JoAnn DeGrande.

JoAnn DeGrande

Thank you, Mike. Thank you all for joining us this afternoon. We appreciate your time. This concludes our Q3, 2015 earnings call. We'll speak with you again late October when we report fiscal year end 2015. Thank you and have a good evening.


This concludes today's Starbucks coffee company's third quarter fiscal year 2015 earnings conference call. You may now disconnect.

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