Good afternoon. My name is Latonia, and I will be your conference operator. At this time, I would like to welcome everyone to the Starbucks Coffee Company’s Third Quarter Fiscal Year 2012 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)
I will now hand the floor to JoAnn DeGrande, Director of Investor Relations. Thank you. Ms. DeGrande, you may begin the conference.
Thanks, Latonia. Good afternoon. Joining me on the call today is Howard Schultz, Chairman, President and CEO; Troy Alstead, CFO; and John Culver, President of our China and Asia Pacific business. This conference call will include forward-looking statements, which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. Any such statements should be considered in conjunction with cautionary statements in our earnings release and risk factor discussions in our filings with the SEC, including our last annual report on Form 10-K.
Starbucks assumes no obligation to update any of the forward-looking statements or information. Please refer to the financial statements accompanying the earnings release to find disclosures and reconciliations of non-GAAP financial measures mentioned on today’s call with their corresponding GAAP measures. Earnings release can be found on our website at www.starbucks.com under Investor Relations. As always, this conference call is being webcast, and an archive of the webcast will also be available on our website.
Before I turn the call over to Howard, I would like to take this opportunity to make you aware of our Biennial Investor Conference, which will held on December 5 in New York. more details will be coming soon, but we hope to see you there and preserve that date on your calendar and we look forward to seeing you in early December.
With that, let me turn the call over to Howard Schultz. Howard?
Howard D. Schultz
Thank you, JoAnn and good afternoon everyone. I’m pleased to report the record third quarter results that Starbucks announced today, reflecting 19% EPS growth, 13% revenue growth, 7% U.S. comp growth and 6% global comp growth. While these numbers reflect a very strong quarter and on their own merit will be viewed positively. The fact is they fell short of our expectations, while unacceptable for me personally, and I can assure you to all of us at Starbucks, the quarter does however demonstrate the strength of Starbucks business and brand around the world and provide insight into the enormity of the global opportunity that lies ahead for all of us.
With nearly 18,000 stores in 60 countries serving 60 million customers every week coupled with a rapidly growing, highly profitable, consumer packaged goods business. Starbucks today is a true multichannel global retailer that is both uniquely and ideally positioned to continue delivering solid, top, and bottom line performance to our shareholders into the future.
Our record Q3 EPS of $0.43 represented a 19% increase over last year’s then record $0.36 per share and reflected the success of multiple innovative Channel Development initiatives and the continued profitable growth in our business in the key Americas and China and Asia-Pacific regions where comp growth was 7% and 12% respectively.
I’m particularly pleased with the increasing operating leverage we are seeing, demonstrated by 120 basis point increase in our operating margin over last year and a 19% increase in EPS on a 13% increase in sales to a Q3 record of $3.3 billion in sales. All this translated into our 11th consecutive quarter of record operating results.
Noteworthy is that we achieved our Q3 results despite high legacy commodity costs, primarily coffee, in a challenging, economic, and consumer headwind in most of the markets in which we operate. We fully expect the operating leverage unique to our business model to enable us to continue driving EPS growth in excess of revenue growth over the long run.
While the record performance we reported today demonstrates our ability to continue driving significant consistent revenue and earnings growth, as with many leading restaurant retailers and consumer brands reporting earnings over the last few weeks, the fragile global economy, uncertainty in Europe, high unemployment in the U.S., a resumed decline in home sales and further diminished consumer confidence did have an impact on our business in Q3. Nonetheless, we are responsible for positively navigating through the uncertain economic climate we are operating in today and I assure you we are and will continue to do so.
In a few minutes, Troy will share more detail around our Q3 performance, discuss adjustments we have made to our Q4 targets in response to the current environment and share our FY 2013 outlook. But first I want to lay out a few of the steps we are taking to navigate through today’s headwinds, including redoubling our efforts to examine all facets of our business and make certain that we are operating and executing with maximum efficiency, maintaining a laser focus on cost, deepening our connection with consumers and delivering an enhanced experience to our customers around the world.
To best accomplish these key objectives, in Q1, we moved to a three-region global business model in which the Americas, China-Asia Pacific, and EMEA regions are each headed by seasoned Starbucks leaders; Cliff Burrows, John Culver and Michelle Gass respectively, each of whom has more than 10 years with the Company and reports directly to me.
Our new business model has enabled us to decentralize the operations, eliminate redundancies in support center and regional operations, become more locally relevant, and improve Starbucks’ execution on the ground in each of the markets around the world in which we compete and we are already beginning to see the tangible benefits of our ongoing decentralization initiatives with stabilization of both top line and bottom line performance in the EMEA region. as customer-facing initiatives and cost-control measures initiated by the team have taken effect, and as the team pursues opportunities to optimize our EMEA store portfolio.
I’m confident that our increasingly more responsive and nimble three-region global business structure positions Starbucks to operate with the clarity, the flexibility and the customer centricity required to respond to current and the future headwinds and to drive sustained long-term profitable growth across our business and around the world.
Now succeeding today and in the future however, it will take much more than laser-focused execution and cost discipline. It will require a bold and relevant innovation. As we prepare for the holiday season and accelerate its store growth in fiscal 2013, we do so with a robust pipeline of innovation, highlighted by the much anticipated introduction of Verismo and on the heels of exciting recent new product introductions.
Let me highlight a few examples for you. Leverage a proprietary breakthrough innovation that features natural green coffee extract. This month we will have Starbucks Refreshers through more than 10,800 Starbucks stores in the U.S. and in 15 international markets. Starbucks Refreshers represents Starbucks entry into the $8 billion energy drink category, the fastest growing category in measured CPG channels that was up 16% in last year alone. Besides representing a fantastic new product platform, Refreshers is the most recent example of our blueprint for profitable growth in action.
Let me explain. We simultaneously launched the product globally and multiple channels of distribution including handcrafted ready to drink and VIA versions in our stores and ready to drink in VIA versions through over 50,000 points of CPG distribution all supported by a national advertising campaign.
Earlier reports suggest that Refreshers are proving to be a big hit with our consumers through both in-store and CPG channel sales. As you know, earlier in this fiscal year, we acquired Evolution Fresh with a strategic intent to build the national health and wellness brand and revolutionalize the fresh juice business.
We have been very encouraged by customer response to our first Evolution Fresh retail store in Bellevue, Washington, and just last week, we opened our second of Evolution Fresh store this one in Downtown Seattle. We also announced plans to open an additional store in San Francisco later this year and now have plans to build a new juice manufacturing facility in Southern California that will have four to five times of production and packaging capability of the current Evolution Fresh facility.
We now offer Evolution Fresh ready-to-drink juices in over 800 stores in Seattle, Los Angeles, and San Diego and have plans to double that number in the coming months as sales are exceeding our own internal expectations. Starbucks’ $1.5 billion of food program in our U.S. company-owned stores is an important part of our core business that has grown at double-digit pace in each of the last two fiscal years and over the first two quarters of this year.
With roughly one-third of all transactions now having a food attachment, our food program represents a significant opportunity for us to continue growing our business across multiple channels into the future. and with the La Boulange transaction now completed, we have already begun the journey of bringing wholesome and delicious unique, fresh and French baked food to the U.S. marketplace in way similar to how Starbucks first brought romance of the Italian espresso bar to many North American coffee consumers.
Customers will first see the new bakery offerings in our San Francisco Bay Area stores with other markets following over time. We’ll be sharing more about our plans for La Boulange in the months ahead. As I said before, evolving, social and digital media platforms and highly innovative and relevant mobile payment capabilities are causing seismic changes in consumer behavior and creating equally seismic disruptive opportunities for business.
Starbucks identified the power of mobile payment capabilities earlier than most retailers, restaurants, and consumer brands, and now have processed over 55 million transactions since launching it in January 2011. and today, we operate one of the world’s largest mobile payment programs processing over 1 million mobile transactions per week in the U.S. alone.
Starbucks is committed to innovating and extending our leadership position in mobile payment technologies and in Q3, we launched the Starbucks mobile payment app for Android in Canada and the U.K. further extending the mobile payment experience to 14,000 Starbucks locations. But with smartphones representing less than 20% of the 6.1 billion mobile phone subscriptions worldwide, we know that the world is only in a very early nascent stages of the mobile payment revolution.
Starbucks digital team led by Adam Brotman has a clear line of sight on next-generation mobile payment technologies, and is deep into developing strategies to integrate next-generation capabilities into our global mobile payment program in ways that will materially enhance and deepen our connection to our customers around the world and give us a significant competitive advantage in the marketplace going forward.
In Q3, Starbucks opened 231 net new stores around the world, including our 600th store in mainland China and our first stores in each of Costa Rica and Finland. With these openings, Starbucks is well on its way to opening the 1,000 net new stores we committed to opening in 2012. I am pleased to announce today that Starbucks will open an additional 1,200 net new stores in fiscal 2013, primarily in the U.S. and the China and Asia-Pacific regions. John Culver, President of Starbucks China and Asia-Pacific will be speaking shortly about the continued momentum in China and provide you with an update on the progress of our very exciting plans to open our first stores in India later this year.
Coffee will remain at the core of everything we do as we grow our business around the world and into the future. I’m particularly proud of the fact that cumulative sales within our Channel Development, CPG segment, led by President, Jeff Hansberry, that primarily includes our consumer packaged and soluble coffee products has reached $1 billion earlier this month for the first time in our 41-year history. And at the premium coffee segment of the coffee industry, a segment Starbucks created, now accounts for over 50% of total coffee U.S. sales through grocery and drug and mass channels according to IRI.
This is a very important statistic in fact I want to share with you. With a 28.2% share of premium coffee in these channels, up from 25.6% last year, Starbucks is a definitive premium coffee category leader. We are continuing to distance and differentiate ourselves from competitors by driving relevant innovation across both the Starbucks and the Seattle’s Best brands including VIA, Blonde Roast, K-Cup and our new roasting architecture that makes it easier for customers to select their favorite coffee strength.
Starbucks will continue to play a leading role with the expansion of new forms and flavors in VIA and K-Cups. and we are already the second largest player in the premium single-cup market with Starbucks K-Cups continuing to make good progress against our volume distribution, and share growth plans and have already shipped more than 350 million K-Cups since last November’s launch. We are anticipating further growth of our premium single-cup business with the availability of Starbucks branded Vue packs for Green Mountain's new Keurig Vue brewer this fall.
Finally, I could not be more enthused and excited about the launch of the Verismo System by Starbucks, our premium single-cup category innovation that will be a game changer for the single-cup industry and available for sale in time for the holiday season, shopping season.
Verismo produces the highest quality, best tasting, and in-home or in-office single-serve espresso and coffee beverages anywhere bar none and is the first and only single-serve machine that uses pods made from real milk and delivers beverage quality and versatility meeting Starbucks exacting standards. Verismo machines and pods will initially be available in Starbucks retail stores as well as through select specialty and department stores in the U.S. and Canada through retail channels and targeted European markets and on starbucksstore.com. Commitments and initial orders from retailers for the holiday season have exceeded even our most optimistic expectations, and obviously bode well for the holiday seasons.
In closing, I’d like to thank our partners around the world for all they do to bring the Starbucks Experience to life for our customers. The record results we shared today would not be possible without their passion, dedication, and commitment to making the perfect beverage for every customer, everyday one cup at a time.
I want to ensure our partners and shareholders that our experience over the past four years has provided us with the muscle memory, the discipline, and the leadership to successfully navigate through any economic conditions that need come our way now or in the future.
With that, I’ll turn the call over to Troy.
Thanks, Howard, and good afternoon, every one. Our fiscal third quarter results extend or run of record earnings to 11 consecutive quarters, and more importantly reflect a steady profit progression as we continue to grow traffic domestically, expand our retail footprint internationally and innovate in our Channel Development business.
Howard spoke to the unprecedented external challenges that currently faced retailers, yet we continue to get consumers reasons for coming back to our stores and other reasons to try Starbucks for the first time. Whether its new offerings that resonate with customers in that service, our store partners provide or rewards that holds great value during fragile times like these. We continue to thoughtfully press forward on our blue print for profitable growth with great success.
Today, I’ll provide more contexts on our third quarter performance as well as update you on our full year projection, then I’ll provide our initial outlook for fiscal 2013. Third quarter revenues grew to $3.3 billion, 13% higher than a year ago. Our 6% global comps were the largest driver of the growth with continued progress in our Channel Development business also contributing.
Operating income of $492 million was 22% higher than last year, and 14% higher than last quarter. We’re seeing sales leverage continue to increase, while the high commodity cost that had been so impactful on our P&L over the past two years are easing.
Commodity, primarily coffee still had a negative impact on our Q3 operating income of $38 million and 110 basis points on margin. but as anticipated that is lower than the first and second quarters and we expect the impact to further lessen in fourth quarter.
Earnings per share grew 19% to a Q3 record of $0.43. This was $0.01 below the revised target range we provided in early June largely due to slowing in June in the U.S., which I’ll come back to in a moment. Despite that slowing in June, our Americas business continued to produce strong results in the third quarter.
Net revenues of $2.5 billion were 9% higher than the third quarter of last year driven by comparable store sales growth of 7% in our company-operated stores and 24% revenue growth in our licensed stores. The comp store sales growth was comprised of 5% growth in transaction and a 2% increase in average ticket.
Continuing the recent trend, transaction growth was driven by contributions from our still-growing warming program, incrementalities from Blonde Roast and increasing throughput efficiencies in the busy morning daypart. The 24% licensed store revenue growth was driven by new products, pricing, and same-store sales growth. The continued success of our licensed operations gives us confidence as we continue to expand our licensed store portfolio in our Americas segment and throughout the world.
Specific to the U.S., third quarter comparable store sales grew 7% driven by 5% growth in traffic. Our U.S. stores produced record transaction levels this quarter, including consistent growth across all dayparts demonstrating that the initiatives to grow mid-day and afternoon traffic are producing results, while the initiatives to expand our tea daypart continue to gain traction. But as mentioned a moment ago, we did see slowing in June amid a weakening consumer environment.
Traffic trends are noticeably down in many areas across the U.S. and the soft traffic trends have continued in July. Americas operating income grew by 14% in the quarter with operating margin expanding by 90 basis points to 20.7%, despite the negative 70 basis point impact of higher commodity cost. Sales leverage drove the improvement in the third quarter.
Despite the recent softening in the U.S., our Americas business continues to produce outstanding returns. The pipeline of innovation, as Howard took you through in his comments is a deep source of opportunity, and will be a key driver of our future results. Our partners are positioned to seamlessly execute on these initiatives just as they have done with Blonde Roast and with Refreshers, and we will continue to give our customers great products, great experiences, and great value.
Moving now to the Europe, Middle East and Africa region where the third quarter results reflect a beginning of stabilization in that region even in the face of difficult conditions. We’re starting to see the benefit of the consumer initiatives we put in place. Espresso sales are strengthening as we focused on proving to customers that we have the best latte on the high street. Our stores look better than ever as we’ve renovated 70 stores in London so far this year and are ready to show our progress to the world during the Olympics. While we recognize that this turnaround will not be a quick one, the early indicators are encouraging.
Revenues for the third quarter in EMEA grew 9%, largely driven by the consolidation of results from the acquisition of our Switzerland and Austria markets last August. Our same-store sales were flat to last year’s third quarter, despite a persistent underlying economic instability in those markets. We did see continued growth in our markets in Central and Eastern Europe and the Middle East, which have fared much better than those in Western Europe.
Operating income of $2.6 million was down from $4.9 million last year, and margin of 0.9% declined 100 basis points from last year’s Q3, due largely to transition costs related to the new distribution model we began rolling out in the UK earlier this fiscal year. That transition is now nearly complete, and we look forward to the efficiencies and improvements it will bring both to our stores and on our P&L in fiscal ‘13.
One of the many components of our Renaissance Plan, our plan to profitably transform the EMEA business, it is optimizing our portfolio, both through active management of store real estate and through optimum market equity positioning. This portfolio optimization is even more important given the continued economic uncertainty in the region and we are currently conducting a more thorough portfolio review with related actions planning for Europe. This is similar to the work we did several years ago in our U.S. business, which left us with a much healthier store portfolio. As a result, we may revise our equity position in certain geographies and potentially close more stores in Europe over the next few quarters beginning in the fourth quarter.
Depending on the outcome of the evaluation work we’re doing, it is possible that we might incur additional charges in the fourth quarter related to the store portfolio work. While we don’t yet have a final determination of numbers of stores to close, I anticipate any potential charges in Q4 related to the store closures and to the many other initiatives in place to transform EMEA will be less than $20 million with perhaps up to an additional $10 million during the first half of 2013. As in the U.S. several years ago, targeted closures of unprofitable stores and the resulting stronger portfolio will enhance our ability to deliver more consistent earnings growth in EMEA.
I’d like to now shift the discussion to China and Asia/Pacific, and the President of that region John Culver is here to take you through those results.
Thanks, Troy. Good afternoon everyone. I’m pleased to be joining the call today to discuss the record results for the China and Asia/Pacific regions. Our fastest growing regions made up of 12 markets more than 3,000 stores and nearly 50,000 partners who serve more than 9 million customers per week. As you can see from our results, the growth story in China and Asia/Pacific is becoming a meaningful component of the Starbucks growth story. The region continues to expand its contribution to total company profitability raising from 9% two years ago to nearly 13% this year-to-date.
Today, we have a balanced portfolio driven by four significant geographies within the region. Each of these is in their own stage of growth led by the rapid expansion of China, our future second home market and including our partnerships in Japan, Korea and throughout Southeast Asia. This region has produced strong double-digit comps for 10 consecutive quarters, and while these levels are moderating to a more sustainable pace. I continue to have great confidence about our future performance given the investment we’ve made in our strong new store returns.
Before I focus on our future, let me walk you through our third quarter results. Our financial performance met our high expectations as we delivered another strong quarter in the 30s. That is revenue growth of 31%, coupled with operating income growth of 37% and an operating profit margin of nearly 34%. These strong results were delivered while we continue to invest in a focused and disciplined way to further fuel the future growth for the region.
On the revenue side of the equation as expected, we are evolving to a more balanced revenue growth model as quarterly comps normalized to the low to mid teen levels in the near-term. This natural shift is occurring as the business moves from a heavy reliance upon comparable store sales growth to a balance of growth from comps and unit expansion in both our high-return company-owned markets and within our profitable well-capitalized partnership markets. Our 12% comps this quarter were driven by an 8% increase in transactions as well as expansion of our average ticket. Driving his outstanding performance is a growing brand awareness across all of our markets.
Now, there are few things we’re reinforcing relative to our business performance in the third quarter. Two year comps are at a phenomenal 38% actually rising from what we posted in the second quarter. Our company-operated average unit volumes across the region are expected to end the year at approximately $850,000, up 71% from just three years ago. In China, despite headlines centering around an economic slowdown, our same-store sales continued to grow by double-digits yet again in the third quarter. This was against the backdrop of a very difficult comparative last year.
Additionally, customer service scores in China and in fact throughout the region reached an all-time high in the quarter, and in the 15 months since the My Starbucks Rewards program was introduced in China, over 700,000 customers have embraced the program. That’s more than 1,200 members per store, roughly three times the level of the U.S. programs.
Given these highlights, and the acceptance we’re seeing everyday with consumers across the regions, we continue to be extremely confident in our ability to drive strong same-store sales growth, while at the same time continuing to grow our store base even more aggressively.
Operating income and GAAP was also strong increasing 37% to $61 million in the third quarter. Operating margin grew 140 basis points to 33.8% as we continue to gain leverage on sales. Partially offsetting the growth and income were costs associated with our rapid pace of growth in new stores and the investments in infrastructure we are making across the region.
Our local teams continue to do an excellent job, the flow in our growing revenue through to the bottom line to display inflationary pressure. And as a result, we now are expected to finish fiscal 2012 with operating margins at the high end of our previously stated range of 30% to 35%.
Let me now be more specific regarding the future prospects of a few key markets. In China, we’ve been aggressive about our plans to capture more of the massive potential of that market. With high-store margins and low-store penetration given the size of the country we are in the very early stages of what we think this market can ultimately reach.
We are targeting 1,500 stores on the mainland by 2015. That’s a compounded growth rate of 34% from today. I’m pleased to report that we are making excellent progress towards that target as we opened 42 new stores in Q3, nearly twice the amount we opened in Q3 a year-ago. We’ll ramp that number up significantly in the fourth quarter continuing to be on track to open 200 stores by the end of the year. As Howard mentioned earlier, I would like to congratulate the China team on the opening of the 600 store. This is yet another exciting milestone in our growth plans for the market.
To support our future growth ambition in China, we’ve established a solid talent acquisition and management pipeline. We’ve hired more than 1,400 new retail partners this quarter compared with 900 in Q2, and we continue to prioritize the development of our people, investing more than 41,000 hours in training in Q3 compared with 35,000 hours in Q2. We’ve also built local capabilities to lead important areas of our business, like store designs, product innovation, and research and development. We know that our 10,000 Chinese partners will continue to be a significant competitive differentiator for us in defining our long-term success.
Let me now turn for a moment to our single biggest contributor to the outstanding regional profitability reported today, Japan. Our first market outside of North America, Japan continued to provide a solid foundation upon which the region is built. Our business in Japan is extremely healthy and as we approach our 1,000 store in this market, we continue to remain confident about its future growth prospects.
Beyond China and Japan, we are profitable in every other single country in which we operate. I’m particularly encouraged by our strong results and aggressive growth plans in key geographies like Korea, Thailand, Singapore and Indonesia. India also represents a significant growth opportunity in the future for the company. Our plans to open our first store in India this year with our business partner Tata remains on track.
In closing, I’m incredibly proud and want to recognize all of our partners throughout the China and Asia/Pacific region for the significant contribution they have made to our success. Our record Q3 results demonstrate why we believe this region represents the largest and fastest retail growth opportunity for the company in the foreseeable future.
With that, I’ll turn the call back over Troy to discuss the results from Channel Development. Troy?
Thanks John. Channel Development had another stellar quarter and we’re beginning to see many of the complementary offerings within this business come together to drive growth. Revenue grew 45% in the third quarter to $316 million, up nearly $100 million over last Q3.
Starbucks K-Cups which continued to grow share and distribution were the largest driver of the year-over-year increase. As Howard mentioned premium coffee is now the largest segment of the coffee markets with premium single-cup making up nearly 20% of the market. Starbucks though our K-Cup and VIA offering commands a nearly 22% share of the premium single-cup space. In the coming months, we’ll add Verismo to our product line up and is quickly expanding market.
In the third quarter, we also saw meaningful growth in packaged coffee. Remember, we transitioned this business in-house more than a year-ago in March of 2011. So the increase in packaged coffee revenue this quarter was real year-over-year of sales growth. Including Seattle’s Best Coffee, nearly 32% of sales of premium packaged coffee in food, drug and mass channels in the third quarter belonged to Starbucks. That share is increasing and reflects the success we’ve had with the direct distribution model and the contribution from innovations such as Blonde Roast.
Operating income for Channel Development in the third quarter was $86 million, a 25% increase over the same quarter last year, resulting in operating margin of 27.3% despite higher commodity cost which added 500 basis points of pressure in the quarter.
We continue to be enthusiastic about the growth of our Channel Development business is driving, and how it’s contributing to our bottom line. In fact because of the results through the first three quarters of fiscal 2012, we are now targeting Channel Development margin slightly above our previous guidance of 25% for the full-year.
Before I move into the outlook for 2013, I want to provide an update on how we expect to finish fiscal 2012. Recognizing the continued deterioration in the macro environment that all retailers face along the trends from June and July, we now expect revenue growth from the fourth quarter of between 10% to 12%. We continue to expect mid single-digit comp growth, with continued strong growth in Channel Development also contributing to the revenue increase.
We’re also revising our earnings per share guidance in light of current trends. We now expect earnings per share of $0.44 to $0.45 in the fourth quarter that represents earnings growth of between 19% and 22% over the prior fourth quarter non-GAAP results, despite the fragile global economy, challenging consumer environment and still unfavorable commodity costs. Note that any potential charges that might become necessary related to the Europe’s store portfolio work I discussed earlier are not reflected in the Q4 earnings target.
Now, as we look ahead to fiscal 2013, we’re charting a path to another year of strong growth. We expect revenue growth in the range of 10% to 13% driven by mid single-digit comp growth, approximately at 1,200 net new stores and continued strength in Channel Development. The 1,200 net new stores represent 20% acceleration in new store developments. Roughly half of our net new stores will come from the Americas with majority of those in the U.S. where new stores continue to produce very solid returns.
Licensed stores represent half of the 600 openings. In China and Asia/Pacific we’re targeting approximately 500 net new stores in fiscal ‘13, a 25% increase over fiscal ‘12 with more than half in China. Roughly two-thirds of CAP’s 500 net new stores will be licensed. In EMEA, it consistent with fiscal 2012, we will open approximately 100 net new stores with roughly two-thirds have been licensed. The growth in new stores combined with additions in production capacity to support recently announced initiatives means an increase in capital expenditures, which we project at approximately $1 billion in fiscal ‘13. As a percentage of revenue that is consistent with our projected FY ‘12 spend.
Full-year consolidated operating margin is expected to grow by approximately 500 to 100 basis points over fiscal ‘12 as we continue to drive leverage. Earnings per share growth in fiscal ‘13 is expected in our target range of 15% to 20% or EPS of between $2.04 and $2.14. Given the uncertainty in the macro environment, we will update our estimate as we move on throughout the year.
With regard to coffee, we are virtually locked for fiscal ‘13 at prices favorable for 2012. We’ve also begun purchasing into fiscal ‘14 and we’ll continue to do so as prices dip to opportunistic levels as dictated by our internal analytics. Coffee cost will finally be a tailwind in 2013.
Dairy costs, however, are now expected to be meaningfully higher in fiscal ‘13. Dairy is a much smaller portion of our overall cost of goods than coffee, so while the impact will offset some of the coffee benefit, there will remain a net (inaudible) benefit to P&L of approximately $100 million in 2013.
Further as I’ve indicated before, we expect increased investments in a number of areas in 2013, totaling potentially up to $50 million. These investments include our Global Leadership Conference scheduled in October and expected to cost approximately $35 million and potential additional investments to accelerate growth in Brazil and China and did better position at EMEA business for future earnings growth and margin improvements.
We expect our recent acquisitions of La Boulange and Evolution Fresh to be modestly dilutive to earnings in fiscal ‘13 as we continue to invest in testing and rollout in our stores. These impacts are factored into the targets I’ve already discussed. And finally, our fiscal 2013 tax rate is expected to remain low at approximately 33%.
As we’ve laid out for you today, Starbucks has much in front of us in the coming quarter and year. Our focus is sharp, our growth ambition is high and the opportunity is vast. We’re actively making the right moves to improve our immediate economics, while building diverse sustainable growth channels that will drive long-term shareholder value.
As within a growth story, the path will not always be a straight one; economic slowdown, high expectations and many other challenges will arise along the way. But this is an entrepreneurial company and we’ve become very good at cutting through that noise and focusing on the end goals; the goal that sees our coffee as the undisputed, unmatched favor across the globe. The goal that sees us as a clear cut leader in innovation and customer experience, while building a growing and vital, social and digital realm, the goal that sees our customers as the most loyal, most enthusiastic and most satisfied in our space, and the goal that leads to a sustained long-term growth in earnings and in shareholder value.
We’ve discussed a great deal today and I’m sure there are many questions. With that, I’d like to turn the call back over to the operator for Q&A. Latonia?
Thank you. (Operator Instructions) Your first question comes from the line of Joe Buckley with Bank of America/Merrill Lynch.
Howard D. Schultz
Hello. Operator, I can’t hear the question?
Joseph Buckley – Bank of America/Merrill Lynch
Howard D. Schultz
Joseph Buckley – Bank of America/Merrill Lynch
Hi, can you hear me now?
Howard D. Schultz
Yes, we can hear you Joe, go ahead.
Joseph Buckley – Bank of America/Merrill Lynch
Okay, sorry about that. Troy, could you reconcile the comments about slowing U.S. growth and yet I think for the fourth quarter, you’re still focusing mid-single digit comps and that doesn’t seeing different from what you’re saying in terms of guidance for the third quarter, and the 7% number you just registered for the third quarter looked quite good, so I guess I’m little bit confused on the comment about the slowing U.S. numbers and then the mid-single digit comp growth forecast for the fourth quarter and for fiscal '13?
Thanks Joe. Here is how I would distinguish that is, we have been at the top end and even occasionally in quarters over the past couple of years above the mid-single digit range and comp growth as you know, and that continued with our 7% comp growth in the U.S. in the third quarter. As we moved into June, we continue to remain in that mid-single digit range, but not quite at the top end of it as or above it as we have been in recent quarter. So, as we move into the fourth quarter, it's important for me to just emphasize that we still expect to grow traffic in our stores. We still expect to expand margins in our business. We expect a very healthy improving AUV in our stores to record levels this year. All that will continue, now that's changed, but the growth trajectory is just slightly lower than that top end of that target range for that I’ve been talking about for quite some time.
Joseph Buckley – Bank of America/Merrill Lynch
Okay. And is that the principal driver then behind the slower overall revenue growth or are there other factors that we should think about?
That's all – the revenue growth that we’ve retargeted for Q4 really is driven by that uncertainty that we're seeing in the month of June and in July in our U.S. business, and that's really driving that change right now. We continue to expect very strong growth in our Channels Development business as we move into the fourth quarter. China, Asia Pacific, the freight train continues rolling, perhaps even accelerating as we saw in the two year comp growth numbers in the third quarter. We've begun to be encouraged by the turnaround we're starting to see early days up in Europe. So, things are firing quite nicely for us, and we just have seen a bit of a downturn in the U.S. and we're cautious about that.
Joseph Buckley – Bank of America/Merrill Lynch
Okay, thank you.
(Operator Instructions) Your next question comes from the line of Sharon Zackfia with William Blair.
Sharon Zackfia – William Blair
Hi, good afternoon. I just wanted to ask actually a two-pronged question. First on the slowdown you're seeing in the U.S., just wondering if that's pretty broad based, or if you've seen it more in the afternoon. It seemed like the last slowdown, you saw more discretionary spending in your afternoon day-part. And then secondarily on the new store development, it just seems like you're a little bit behind on company-owned development in the U.S. There’s a lot that has to open here in the fourth quarter, so could you talk to us about the pipeline and your comfort in accelerating that into 2013?
Sure, Sharon. First of all on the pipeline, we have very high expectations for the number of stores that we'll open in this fourth quarter. It is quite a lot have been coming here very shortly. We’re extremely confident in targets we’ve laid out for store growth targets this year in all our geographies. And in fact, over the last two to three years with outstanding new store economics we’ve been producing across our geographies in the Americas and in China/Asia-Pacific we’ve been deepening our capabilities, deepening our governance, deepening our analytics, all preparing for this acceleration that we’re in the midst of right now. So we have a very, very healthy new store pipeline as we begin to move through this fourth quarter and into fiscal 2013 and great confidence in our ability to meet or exceed that target next year.
In terms of the moderate, and I just want to emphasize the word moderate, traffic slowdown as we moved into June, it was really very broad-based. There's no individual part of the business or day-part that we can point to. There is no geography across the U.S. we can point to. There seem to have been just very broad-based overarching change in the consumer feel. Again, we continue to grow traffic very healthily in that June period. Just not quite at the – and as rapid a pace as we had in the periods prior to that.
Sharon Zackfia – William Blair
Thank you. Your next question comes from the line of Michael Kelter with Goldman Sachs.
Michael Kelter – Goldman Sachs
Thank you. I guess you are guiding to 15% to 20% EPS growth next year, and I guess my question is how can you have confidence, and how come we have confidence in that given it was hard to forecast this quarter with only three weeks left in the quarter when you last spoke publicly. I mean why not take a more conservative approach towards ‘13 or do you feel like 15% to 20% is being conservative for ’13, and if so, why?
Michael, I think that we believe strongly that 15% to 20% is achievable. I want to be careful not to say it’s conservative. I don’t think it is, but it takes a great deal of work across all our business to deliver that kind of consistent steady growth. What surprised us in Q3 was a very quick change in the month of June that even at the beginning of June had not really begun to be apparent to us. And so that did lead to us being surprised by how the quarter ended as we've said earlier.
But given everything we see today, even with these trends in place, given what we know is coming in terms of product innovation, given our confidence in the holiday period that we have coming up, giving the momentum we have in China/Asia Pacific, the improving turnaround that we are seeing the early signs of in Europe, all those things give us confidence at this early stage in that 15% to 20% earnings target for next year.
Thank you. Your next question comes from the line of David Palmer with UBS.
David Palmer – UBS
Thank you. My question is built upon those other questions. You’re talking about same-store sales having deteriorated lately, yet you're talking about us, the company holding mid-single digit type same-store sales over the next – not just the next quarter, but over the next year. Is there – I assume that the company is seeing a new level of stability at this new level of same-store sales, first, maybe you can address that. And also perhaps there are things that you see that you can do and that you have in your innovation pipeline that can really help assure that even if the environment does continue to deteriorate, that perhaps you can cause that same-store sales in the mid-single digits to be maintained in fiscal '13? Thanks.
Dave, this is Howard. I think in a conversation like this it's very easy to use some words that can be misinterpreted. So let's just rewind the last five minutes or so, so there's no misunderstanding. We had 7% U.S. comp growth and 6% global comp growth for the quarter. We would take that any quarter over the 41 year history of the company. It's stunning accomplishment given the backdrop of the economic issues.
What Troy said, and I think it's important to just to make sure there is no misunderstanding, we saw a moderate change in June, but the numbers that Starbucks now has are so big that a moderate change in transactions and comps can have a swift and acute change to the economics of our current quarter, and because it happened in June, we did not have the time or the nimbleness to really affect change. The pipeline for innovation that we have planned for fiscal '13 is probably a stronger pipeline as we ever had with center piece going to be Verismo for holiday, but that's just the beginning.
I think we took a very conservative approach by lowering the estimate for Q4. It's responsible and it's the right thing to do. But let me reiterate on behalf of Troy and I, that we are completely locked in the hip that we believe strongly in the guidance that we've given for 2013, and if you look at the last four years since 2008, we've had a 11 consecutive quarters of record results.
Thank you. Your next question comes from the line of John Ivankoe with JPMorgan.
John Ivankoe – JPMorgan
Hi, great, thank you. If I may Troy in the past you've kind of given us margins by segment or at least basis point increases on margin per segment in previous guidance and given various moving pieces in your business it would be great if we could have that and maybe just kind of again clarifying something that you've said earlier. The 4Q charges that you're contemplating if we're kind of transforming Europe in the fourth quarter and then in the first half of '13, are those numbers included in your guidance, and I know it's three things.
But finally this is really, a question maybe for Howard as well, but you haven't shown leverage on the labor side at the U.S. store level in the past couple of quarters including this one, but also in previous one despite what has been very good comps in any other operating expense side. And I do understand that there’s been some staffing up around the peak morning day-part, but might we have an opportunity for labor to begin to turn around the other direction as you begin to lap some of those initiatives. So, three parts, margin by segment whether the charges are included and then opportunity to leverage labor?
Okay. John, I'll take the first two, and then perhaps Howard and/or Cliff will jump into the last part of your question. First of all, through the margins by segment, we will provide our expectations to you as we get a little bit closer to fiscal '13. This is the time of year where [we haven’t had] the opportunity to give you our initial expectations given the many moving parts that we see, but I’ll just acknowledge we’re also deep in the mix of our own annual planning for this next fiscal year. So, it's a bit early for us to go much deeper than what we have for you.
Now, I would anticipate by the time we get into our November earnings release, we'll update our guidance at that point in time with everything we know, including how we finished out fiscal '12, and that point in time, I’ll also give you a better sense of what we expect to happen in the coming year by segment. Now in terms of the potential Europe charges, and I want to emphasize potential. I called these out today to give you transparency to some deeper work that we're doing. It's work that's enabled by the fact that we are just say number of months now into leadership in Europe and this regional operating model that we've discussed with you before, it is really empowering much deeper local management, analytics and decision-making.
We also now have several months into discontinuing economic climate in Europe that is just as the U.S. did several years ago, exposed our business to us in some different, more informative ways and helps us do this evaluation of the store portfolio. That work is underway. We don't know the answer yet. It's possible, possible that we could make some changes in equity and some changes in the store portfolio in this fourth quarter. The up to $20 million and that's an up to, it's not an estimate that it will be 20, but the up to $20 million that may occur in the fourth quarter is not included in my guidance for the fourth quarter.
The potential carry-on of charges into next fiscal year and in my prepared comments I said that possibly an additional $10 million, and these are all just very broad ranges at this point in time, but possibly up to $10 million in fiscal '13 is roughly captured in the very big target range we have right now. So, '13, we're confident in the 15% to 20% earnings delivery, the fourth quarter because we were so specific on an EPS guidance range of $0.44 to $0.45 that if there are store closures to be had and charges associated with them, those would not be captured in that guidance already.
Cliff, do you want to take the level question …
Yeah, I'll just talk about [level] question, and we saw leverage in our store operating expenses of about 70 basis points and really pleased with the progress we're making there. We are operating at record productivity levels in terms of sales labor. We continue to work hard using lean practices and all the work we've done over the last three years to bring this discipline around having labor at the right time and we'll continue our work and I see us having continued opportunity to leverage.
Thank you. (Operator Instructions) Your next question comes from the line of Keith Siegner with Credit Suisse.
Keith Siegner – Credit Suisse
I just want to follow-up on an answer from an earlier question, and Howard you had mentioned in talking about a swift and a key change at the end of June, and it happened quickly, you didn't have time to respond. I'm curious, in July we've had the launch of Refreshers. It’s been a big push, lots of media, there's lots of buzz around at least where we are here. With that push of product innovation and marketing, has that helped in terms of a response to that change? How has that been received and what has that done to trend, if you don't mind talking about it?
The answer to the question is somewhat bifurcated. Refreshers is off to a very good start, both in our stores and in the 50,000 points of distribution and CPG, and we're very pleased with it and I think it's a big idea today and in the future. I just bifurcated because the traffic slowdown, the moderate traffic slowdown that we saw in June has somewhat continued in July. The difference in this quarter versus the last is that we had no time to respond. I can assure you that a response is coming in Q4 that we believe we’ll address some of the issues and we have other levers that we can use. But the marketing that we've done for Refreshers has achieved its objective. I think the tactic to drive incremental traffic at multiple day-parts is a different approach than trying to build awareness and create trial and loyalty for Refreshers. That's why I said the answer is somewhat bifurcated.
But I think the reason we've taken the guidance down to Q4 is just to take a very conservative approach to ensure the fact that if this continues, we're in a position to meet the expectations that we’ve laid out today, but I want to assure everybody that there is a meeting going on every single morning at 7.00 AM in this building addressing yesterday's sales, diagnosing the issues, and then we're also, and I think this is important. You know I'm on the phone talking to many other heads of companies that are in the consumer retail space, and we're comparing notes about what's going on, and I think what we're all experiencing was very few exceptions Whole Foods being one of them, is that most – everyone one that we're talking to has almost a similar pattern that mirrors what we've just explained in June and July. So this is not a Starbucks issue. This is a macro problem. It's not an excuse we have to correct to quote on it, but we've got a fractured consumer confidence, and all of the things that you already know about, but we're confidence and we'll be able to navigate through it.
Thank you. Your next question comes from the line of Sara Senatore with Sanford Bernstein.
Sara Senatore – Sanford Bernstein
Thanks. I have one question and then a follow-up. The first is on your license businesses internationally, one of the things that I noticed is that you actually got – pretty nice leverage on that other operating expenses line, pretty much across the Board and in some cases much better this quarter than the other quarter. I think a big piece of your strategy at least internationally in terms of margins has been the leveraging of that line as your units growth. So, I was just wondering if this – if we finally kind of hit that inflection point where we should start to see that really happening. And then my follow-up actually was on what you had said about obviously the step down in June and we haven't heard that from others. Did you see any regional variation within the country like just trying to figure out if there is any sense that there was any weather involved or anything that might – beyond just kind of that consumer really retrenched?
We don't talk about weather at Starbucks, I can tell you that. So, there has not been any regional differences that we can identify and the people that we've talked to on the phone I have had the same response. I know Troy want to answer your question, I mean Troy made a comment that I just want to make sure everyone stood, and that is we're going to accelerate the licensing of stores in Europe, and if you look at the progress that Michelle and her team have made just in the last 90 days, it's fairly significant. We have our board meeting in the U.K. this year coming up in another month, and we're going to really I think focus our attention with great specificity on the learnings we head in the U.S. to help Michelle, but I think we’ve made great progress during the licensing acceleration is going to help that leverage line as well. Troy?
Yes Howard. Sara to your question and building-up on Howard's comments, licensing is a big part of our growth going forward, and as you know, we have historically built an infrastructure around the world ahead of the building of our store business. Very consciously often, occasionally, I would suggest that it's a little bit too far into that hurdle, but in the event as we have been addressing those issues, tightening up our capabilities, getting our model in the right places and are now prepared to accelerate that to us more meaningfully. We are beginning to see both – generally we would expect in the other operating expense line and also on our G&A line in the international segment to build and provide the leverage over time. It won't be the same leverage degree every single quarter, but certainly this trend line will be leveraged. It will begin to meaningfully see as we expand internationally and particularly focus on our licensed business.
Sara Senatore – Sanford Bernstein
Thank you. Your next question comes from the line of Jeffrey Bernstein with Barclays.
Jeffrey Bernstein – Barclays Capital
Great, thank you very much. Just following-up on the EMEA side as you talk about the portfolio reevaluation and potentially some closures in Western Europe. If you could just take a step back perhaps just wondering whether you view it more as Starbucks specific or macro driven? It would seem like there's potential for both. But if it's Starbucks specific, I'm just wondering perhaps what learnings you would apply to your other regions of the world that might be similar? If it is macro, I'm not sure why perhaps you wouldn’t fight through it and lead the charge in what seems like it would be a powerful long-term regional opportunity for you?
It's Howard again. Well first, I think we learned lots of lessons during the transformation of Starbucks in the U.S. business three, four years ago and those decisions looking back were based on making very tough choices about store closures and really rationalize the portfolio. And I think as we look today on the U.S. results, there is a direct correlation between closing those bad stores and taking your medicine. And looking back now, I think the strength and health of the U.S. portfolio is the strongest that it's been in decades.
I think we want to take a similar approach in Europe, and I think we have an advantage. Michelle Gass who is now the President of EMEA was literally at my side during the transformation agenda and co-authored that strategy with me. So she's there and understands the game plan as well as anyone in the Company. Like any decision, there's always some self-induced mistakes that we have to [hold up to] and I think we made a few, but these are macro issues that have so much to do with things that are beyond our control.
The austerity in Greece and Spain, the underlying issues outside of London and the U.K., the change in political leadership in France, all of these things have added to the lack of consumer confidence and we have to navigate through that and we're going to take advantage of it. I want to say something I think it is very important. We have great confidence that we are going to be able to turn Europe around. No one should doubt whatsoever that we're not going to be able to do this. It's not going to be a sprint. This is a long slog. The progress we made over the last 90 days is very encouraging, but we’re going to be sitting at this table and we're going to be announcing with you just as we did in the U.S. a significant turnaround in Europe over time.
Jeffrey Bernstein – Barclays Capital
Thank you. Your next question comes from the line of John Glass with Morgan Stanley.
John Glass – Morgan Stanley & Co. Inc.
Thanks. First, I just want to clarify that the source of the earnings miss in the third quarter potentially for us is mostly the U.S. It would seem to me not Asia, not the general development businesses. They all seem to have improved or at least relative to my expectations. Secondly, one of the hallmarks – if I could just, one of the hallmarks of Starbucks has been your ability to manage expenses over time and I understand maybe the slowdown happened quickly, but I would still think you would have that ability through fourth quarter, particularly in the next year to have some management of discretionary expenses that would give you greater degree of confidence.
So can you talk about what discretionary expenses are flexible? You've got a lot of growth initiatives going on. Are there some that you're maybe willing to sacrifice in the short-term if you believe that it would help you get through this more challenging times? Can you talk about flexibility over the next 12 months as well as the source of that earnings miss? Thanks.
Sure. John. You're right, in that the miss to our expectations in the third quarter was largely, but completely driven by surprising change in the growth trajectory in the month of June in the U.S. That was, as Howard mentioned earlier, happened quick enough that we just had the ability to respond very meaningfully.
Now, let me add on to that statement, so by saying that even with that slowing traffic, we leveraged our P&L very significantly in that month of June and in the third quarter. We picked up 120 basis points of margin improvement in the U.S. in the third quarter and adding despite the fact that the sales trajectory maintained growth throughout the quarter, but just not as rapid growth as we moved into June. So, it's very important to distinguish. We're talking about very moderate changes here that moved us off of our expectation. So, it still put us in a position to drive the top line and drive the bottom line even faster in that business.
Absolutely nothing to do in Q3 or Q4 of what we're seeing in China and Asia Pacific, which is a freight train for us, the key to rolling very powerfully, double-digit growth as we opened in new markets. The volumes are coming in as strong or in many cases higher than what they are in the Tier 1 cities. The profitability is very, very strong and maintaining our capabilities are deep, and we keep moving quite nicely.
In Channel Development, 45% of revenue growth in the third quarter, probably not much else I need to say. We are extremely confident of the portfolio of products we have there and our ability to continue that moment as we move. So, it's been a modern consumer environment in the U.S. that we are adjusting both in our third quarter results and as we think about this fourth quarter.
Now, to your point about expenses, and we've talked about this John in times past. One of the most important things we accomplished and learned and improved our abilities around coming out of the crisis of 2008 and 2009 was our ability to have visibility into and manage our P&L in a much, much more disciplined robust ways than ever before. Part of that through reporting and attention and focus, some of it through technology as we put in place things like new inventory management systems that gives us significantly more visibility into our inventory and enhanced all of that capability with our ability to manage that P&L, and we have every opportunity we believe to continue driving leverage, as Cliff said a short time ago, and manage appropriately our P&L as we build.
I also want to be clear though that, there is nothing in the trends we saw in June or even in early in July here that changed our belief that we should be investing into our future going forward. It has caused us to give you some different perspective on what we think in the short-term here in Q4, but there is no change in our long-term trajectory, nothing that’s leading us to think about anything other than the ability to continue to leverage our P&L as we move into 2013.
John Glass – Morgan Stanley & Co. Inc.
Thank you. Your next question comes from the line of Will Slabaugh with Stephens.
Will Slabaugh – Stephens Inc.
Just wanted to ask quickly about the guidance one more time for fiscal 2013, just considering the rate of bottom line growth we're seeing now and what you're expecting in 4Q, just wondering what the puts and takes are from a sales down to a cost standpoint and considering you will have the coffee cost tailwind for next year. So, I guess my question more is just wondering what the offset is to the improving input cost for next year or if you're just being prudent with your guidance there for next year?
Well, I would suggest it's July and our fiscal year doesn’t start until October. So some of this is just were well, well in advance of that new fiscal year beginning. We do expect, as you know, some commodity benefit coming our way next year. We also have some very conscious strategic, great return on investments coming in the next year, including our leadership conference. We're thinking our way through investments that might allow us to accelerate growth in our emerging markets, which are extremely valuable to us. We're thinking our way through investments perhaps in Europe that will help us accelerate the turnaround in that region, and move us towards a very, very healthy place in that part of the world over time. So, early in our planning and all those things are weighing through our thinking.
With that said, everything we see in our trends and in our plans leads us to have some confidence in a 15% to 20% range for next year, which is quite a broad range at this point in time, and allows us as we get into the year and into the analyst conference in December, which we hope we'll see you all at to fine-tune that estimate and manage it and report to you a little more as we go throughout the year.
Will Slabaugh – Stephens Inc.
Thank you. Your next question comes from the line of Jason West with Deutsche Bank.
Jason West – Deutsche Bank Securities
Just a quick clarification question. Troy, can you just clarify what you would define as a mid-single digit range of comps, just what that would entail? And then on the China comments, I'm just a little bit confused, I saw you guys made some comments that things had returned to more of a sustainable run rate, but then you're pointing to pretty healthy trends, double-digit sort of level continuing, if you could just clarify how we should be thinking about the China comps going forward?
Sure. Mid-single digit is consciously a bit of a range only because it's not unusual that it may move around a little bit. Certainly, I view the 7% we turned in this quarter in the U.S. in mid-single digit range, 6% which was our global number but if that were in 5% or 6% certainly in the mid single-digit range. So, I can't be much more precise than that, but that's how we think about it and that's what we would expect over the long-term.
Those aren’t necessarily exact predictions for what we think happens this quarter or next year, but we do believe we have a healthy capability around innovation in our stores. We have continued opportunities to drive day-parts in our stores. We have continued opportunities through efficiencies and improving productivity in that busy morning day-parts. They put more volumes through there. We see no one in the sight that drive average unit volumes in our stores higher than they are today and we’ll continue pursuing those opportunities, and we think we can do that steadily with a very healthy kind of mid-single digit comp growth over time.
In China, without getting to a specific comp growth prediction, I would just suggest that we think we are very, very early days in our development of China. We're very excited to have just passed the important milestone of 600 stores in China recently and yet that is just a small number in the big scheme of what this market will represent for us in terms of store count over time, in terms of the other store channels and consumer products and food service that we expect to be able to develop more meaningfully as time progresses and in terms of our ability to drive AUVs across Asia and in China through healthy comp growth over time. So no specific guidance for you beyond the kind of ranges that we’ve produced historically, but we think there's huge opportunity to keep driving that business forward.
One more question, please.
Thank you. Your last question comes from the line of Matthew DiFrisco with Lazard.
Matthew DiFrisco – Lazard Capital Markets
Thank you. Troy, my question I guess is a little bit more thinking about the business model going forward and during the last two years with all the coffee headwinds, you still put up 20% EPS and you had the high mid-single digit comps, and I guess the story was we're getting leaner and less comps and in a model where there's normalized commodities, we won't require as big of a comp to drive the earnings, especially when you see the high margin growth coming from the CPG business. I'm curious what is changing or how do we look at 2013 as far as you're giving guidance of mid-single digits whether that's four, five, six or seven?
I would have thought in prior quarters you were setting up for a business model that probably could support even 20% or so EPS type growth, especially when you have the commodity tailwinds into 2013 as a net benefit to the overall cost. I'm just wondering, is this an innovation way down, is this a couple of years of building and investing or – and we're going to get to leverage eventually or is this is a model that requires always mid to high single-digit comps to get to the 15% to 20% model?
Matt, let me be clear. Absolutely nothing is changing in how we have built the model and navigated it and what we see coming in the next year. We've always said that coming out of the recovery period of 2008 and 2009, the bite of the apple in terms our ability to pull cost out of our structure to drive efficiency, those bites were naturally bigger in that first year and two and three and of course we took bigger step-ups in margin improvement in 2009 and in 2010 and 2011 and we expect even doing in 2012 for example.
As we go forward from here, we have a long list of initiatives running efficiency around being leaner as we continue to go from here and better at what we do every day around driving the top line, about expanding day-parts. We have a longer list of things than we could ever get with any one particular quarter and it is that long list of efficiencies around the top line and managing the middle of P&L's that allow us to say with confidence that we have a long-term trajectory to drive leverage.
We feel very confident of that and feel very good about that and I think we can sustainably drive that number forward and we'll have some commodity benefit coming our way in fiscal 2013. I would anticipate early days some additional commodity benefit coming to us in 2014, given the current commodity cycle as well. So, we think the combination of everything we're doing in the business and driving north of 10% revenue growth and 15% to 20% earnings growth, this is very, very healthy leverage point, and very healthy earnings growth for a company our size.
Matthew DiFrisco – Lazard Capital Markets
Thank you very much.
This concludes our third quarter fiscal 2012 earnings call. Thank you very much for joining us today and we'll talk to you again in November.
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