JoAnn DeGrande – IR
Howard Schultz – Chairman, President and CEO
Michelle Goss – President, Europe, Middle East and Africa
Troy Alstead – CFO and chief administrative officer
Clifford Burrows – President, Americas
John Culver – President, China and Asia Pacific
Jeff Hansberry – President, Channel Development and Emerging Brands
John Glass – Morgan Stanley
Matthew DiFrisco – Lazard
Jeffrey Bernstein – Barclays
Sara Senator – Sanford Bernstein
Diane Guysler – CLSA
Keith Siegner – Credit Suisse
Jason West – Deutsche Bank
Michael Kelter – Goldman Sachs
David Palmer – UBS
John Ivankoe – JP Morgan
Bonnie Herzog – Wells Fargo
Starbucks Corporation (SBUX) F4Q12 Earnings Call November 1, 2012 5:00 PM ET
Good afternoon, my name is Rachel and I will be your conference operator. At this time I would like to welcome everyone to Starbucks Coffee Company’s Fourth Quarter and Fiscal Yearend 2012 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After speakers’ remarks there will be a question-and-answer session. (Operator Instructions)
Thank you, Ms. DeGrande you may begin your conference.
Thank you, Rachel. Good afternoon, this is JoAnn DeGrande, Director of Investor Relations for Starbucks Coffee Company. Thank you for joining us today for our fourth quarter and fiscals yearend 2012 earnings call. Opening the call today will be Howard Schultz, Chairman, President and CEO, and he’ll be joined by Michelle Gass, President of our Europe, Middle East and Africa Business and Troy Alstead our Chief Financial Officer. The three presidents of our other segments Cliff, John and Jeff are also on hand for Q&A.
This conference will include forward-looking statements which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. Any such statements should be considered in conjunction with cautionary statements in our earnings release and risk factors 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. The earnings release can be found on our website at starbucks.com under ‘Investor Relations’. 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, let me cover a couple of additional items. First, given that this our yearend call we will extend it beyond 60 minutes as needed. And second, I’d like to remind you that our Biennial Investor Conference will be held on December 5th in New York. We hope you’ll join us in-person or participate via the webcast.
With that, let me turn the call over to you, Howard.
Thank you, JoAnn, and good afternoon to everyone on today’s call. Before we begin, as a lifelong New Yorker, I’d like to express my heartfelt concern for the many millions of people impacted by this week’s devastating hurricane. The images we have seen and stories we have heard are beyond heartbreaking. All of us at Starbucks are grateful to the thousands of first responders who are courageously and selflessly responding to this disaster, and our thoughts go out to those directly affected.
I will now turn to the record fourth quarter and fiscal 2012 financial results Starbucks reported today. Q4 was an extraordinary quarter for Starbucks on almost every level. Record fourth quarter revenue of $3.4 billion, strong fourth quarter EPS of $0.46 which includes charges of $0.02 per share related to our store portfolio optimization initiatives in Europe, an increase in our total company operating margin to 15.4% and significant relevant innovation across our business segments and around the world.
Starbucks solid Q4 performance has ideally positioned us to go into holiday with strong momentum supporting a powerful lineup of holiday beverages and product offerings and to further our commitment to continue growing sales and delivering increased profits to our shareholders in 2013 and in the future.
Q4 also caps off a record full year in which our sales rose 14% to a record $13.3 billion, and our earnings rose 18% to a record $1.79 per share. What makes our performance during the quarter and the year even more remarkable is that both were achieved in the face of profound, continued economic uncertainty and challenged consumer environments in markets all around the world in which we operate and compete.
Starbucks ability to deliver the results we did in Q4 and 2012 is a reflection of the strength of our business and brand, our deep connection to our growing universe of global customers and the correctness of our go-to-market strategies. As we were all reminded at our Leadership Conference last month in Houston, the key to our success are the 200,000 Starbucks partners around the world who proudly wear the green apron and deliver the Starbucks experience to our customers every day. To each of my partners, I want to say that I am humbled by your dedication and commitment, and that you have my deep personal gratitude and appreciation for all that you do.
In fiscal 2012, Starbucks served nearly 3 billion customers who visited our stores, a statistic that testifies to the reach and breadth of our increasingly global brand and local relevance. And while the 18,000 stores in 61 countries we have today may sound like a large number, the fact is that the opportunity of Starbucks to grow our business around the world in a profitable, disciplined and deliberate fashion has never been greater or more exciting.
Over the past 12 months, we added over 1,000 net new stores with two-thirds of those being outside the U.S. and we remodeled more than 2,000 stores globally. Our plans call for us to open an additional 1300 net new stores and to remodel roughly 2,000 more in fiscal 2013. We are well on our way to having more than 20,000 Starbucks stores on six continents by 2014. After more than 40 years Starbucks worldwide appeal remains undeniable.
Starbucks is seeing strong and sustained growth in our core retail business across both the Americas, and China and Asia-Pacific regions where comp store sales growth reached 7% and 10% respectively.
I’d like to personally recognize Cliff Burrows, President of our Americas segment and John Culver, President of China, Asia-Pacific for their leadership in delivering the tremendous results they did in Q4. Particularly noteworthy is that Starbucks U.S. business revenue grew 9% and U.S. comps grew 7% in Q4. Reflecting a level of execution and intensity that is nothing short of fantastic given the softer than expected performance we saw in Q3.
We accomplished our U.S. results by taking swift and decisive action to drive increased store traffic and improve operating efficiency, at the very first sign of the early summer slowing in traffic that we and many other retailers began to experience. And we continue to drive traffic in August by re-launching our popular and successful (inaudible) campaign and participating in a record-breaking, LivingSocial offer that was taken up by 1.5 million Starbucks customers, in believe it or not, in less than 24 hours. These initiatives also enabled us to generate incremental profitable sales, further communicate Starbucks’ powerful value proposition and attract more customers to our U.S. stores for the September rollout of our full beverage lineup than ever before.
As I mentioned earlier, the strong momentum we saw in Q4 has ideally positioned us as we head into Q1 of 2013 and the holiday season. Our traditional red cups and holiday beverages are beginning to appear in stores as a prelude to the official kickoff of holiday of our U.S. stores on November 13th. And I can tell you that we have the strongest and most exciting lineup of handcrafted holiday beverages and limited edition products in store for our customers than ever before.
Also new this year, is Starbucks Christmas Blend Blonde Roast, a specially selected blend of Latin American and aged Sumatra beans that delivers a noticeably light and cheerful note. Christmas Blend Blonde Roast is a perfect complement to our fall – to our full lineup of holiday season offerings that extends both our Blonde Roast offerings and our best-selling Christmas Blend portfolio.
But the big news for Starbucks this holiday season is the innovation and opportunity we have unleashed with Verismo. The only single-serve beverage system that delivers perfectly crafted Starbucks Caffè Lattes and espresso beverages as well as brewed coffee from a single machine. If you haven’t tried Verismo yet, I urge you to. The Verismo system produces the highest quality, best tasting, in-home, single-serve espresso and coffee beverages anywhere, bar none. And it’s the first and only single-serve machine that uses pods made from real milk to deliver beverage quality and versatility meeting Starbucks exacting standards.
In the eight months since we announced the Verismo system, we have successfully planned and executed the launch of Verismo in 6400 retail locations including premier specialty retailers like Williams-Sonoma in the U.S. where Verismo was chosen to be showcased on the cover of its holiday catalog. Harrods in the U.K., in Starbucks stores across the U.S. and Canada and through online e-commerce channels in 3 other countries.
We are supporting Verismo with only the third national TV campaign in our 41-year history, elegantly through the unique Starbucks lens and in a way that introduces and celebrates Verismo system and elevates the Starbucks brand. With more than 10,000 Verismo demonstrations and sampling events taking place over the next several weeks, we expect Verismo’s momentum to accelerate through the holiday season and continue into the feature.
In addition to launching Verismo, our Channel Development team has continued to innovate in the premium single-serve category with other new product introductions across the portfolio, including Blonde Roast and our new successful Refreshers platform.
As a result of these and other initiatives, our Channel Development business increased revenues by 50% in fiscal 2012 to $1.3 billion. We have expanded our global Channel Development presence now to 20 countries and we are targeting tens of thousands of new points of distribution, but I can assure you Jeff Hansberry and his team are just getting started.
This month marks the first anniversary of the Starbucks K-Cup launch. And I’m very pleased to report that in fiscal 2012, less than a full year of operation, we shipped nearly 500 million Starbucks K-Cups and have garnered a full 15.6% share of the premium single cup market, well above what people expected.
VIA also continued to grow sales in fiscal 2012. VIA is now available in 14 countries and 80,000 points of global distribution. It grew nearly 50% in FY12 and garnered a 7% share of the premium single cup category in U.S. grocery channels in Q4. Together, our complimentary and carefully planned and executed K-Cup, VIA and Verismo product and go-to-market strategies provide Starbucks with the strongest and most complete comprehensive lineup of products and the definitive winning hand in the premium single cup category, and there will be more innovation to come.
In 2012, we made significant headway against our ongoing plans to elevate and transform our food platform and bring authentic and delicious food to customers through the acquisition of La Boulange bakery. The fresh bakery products we are developing with the artists and bakers at La Boulange will rank among the very best bakery products you have ever tasted. We’ve been testing new La Boulange offerings to a fantastic customer response and significant sales lift and now plan to rollout La Boulange products in 2,500 company-operated Starbucks stores across the U.S. beginning in the spring of 2013.
Evolution Fresh, another of our emerging brands is also helping to expand and enhance our retail store and Channel Development operation and processes. Last month, we opened an Evolution Fresh store in San Francisco’s Fillmore district our third Evolution Fresh location in the first one outside of Greater Seattle. Our fourth location will be opening in Seattle’s University Village shopping center later this month.
At the same time our Channel Development segment is continuing to significantly expand the availability of bottled Evolution Fresh juices through premium grocery channels in Starbucks stores. Evolution Fresh bottled juices are now available over 1,500 grocery locations including Whole Foods and Safeway and approximately 2,200 West Coast Starbucks stores, where we have seen a 100% lift over the juice product get replaced in our stores and we are on track to continue extending distribution of Evolution Fresh into more of our major U.S. company-operated markets throughout fiscal 2013.
And Starbucks is making a big difference in the business in just a short time we have owned the company. Sales of Evolution Fresh bottled juice, through all channels in the latest quarter, were up 50% over sales in the same period of 2011 prior to our acquisition of the company. Our intention is to create another dynamic national brand with Evolution Fresh. And to meet the anticipated demand for Evolution Fresh products, we are adding a state-of-the-art juicery in Southern California in late 2013 that will have four to five times the production and packaging capability of the current Evolution Fresh facility.
As I have noted in the past, Starbucks is embracing the seismic shifts in consumer behavior that are well underway. Let me now take a moment to share our progress and the investments we’re making to continue our leadership in card, loyalty, social, digital and now mobile commerce, all of which will significantly enhance our customers experience with Starbucks.
Our card and loyalty initiatives are continuing to drive great convenience and value for many customers. This has been a record year with nearly $3 billion loaded onto Starbucks Cards, with Starbucks Card transactions accounting for over 25% of U.S. store tender.
The My Starbucks Rewards loyalty program has already amassed more than 10 million members, half of whom are active participants and have opted in to receive communications from us. As many of you know, we recently unveiled a number of enhancements to our loyalty program in the U.S. and Canada, including making rewards fully digital, making it easier for customers to earn free rewards, and including free food as part of the rewards option. As a result, we are already seeing record numbers of membership signups in the first few weeks of our new fiscal year, which really will bode well for fiscal and calendar 2013.
The depth and breadth of our digital assets continues to grow with leadership positions and engagement across Twitter, Facebook, Instagram, Pinterest and many other relevant medium. All this progress will now become even more relevant given the sea change in behavior and experience enabled by the ubiquity and personalization of mobile technologies.
Our mobile payment platform has become the leading number one program for any consumer brand or retailer in North America, with now more than 2 million mobile payment transactions occurring every week and more than 100 million mobile payment transactions logged since the launch of Starbucks mobile payment app in January of last year.
We believe the rapid adoption of mobile gives us an opportunity to create a unique and much deeper relationship with our customers directly and in the moment like no other consumer brand or retailer. We have the unprecedented ability to reach new customers, create awareness to new products, drive incremental transactions and explore new revenue streams in music and digital publishing.
Recently, we have evaluated dozens of mobile payment solutions in companies, with an eye towards trying to find a company with a similar vision and approach to creating a mobile payment platform, where the customer experience is paramount. And that led us to Jack Dorsey and his team at Square.
By partnering with Square and accepting their innovative Square Wallet mobile payment app in our stores, we are able to not only offer a complimentary mobile payment solution to our apps but we are also able to reduce our interchange fees for U.S. debit and credit card processing. We’re looking forward to Starbucks customers being to use able the Square Wallet app to pay for purchases with their mobile phones in U.S. – in U.S. stores later this month.
While we are proud of what we accomplished thus far in mobile, we plan to continue to push the envelope in the future by adding features and interactive activity in such areas as tipping, mobile ordering and personalization. And I can assure you, the best is yet to come in terms of the innovation that we are going to bring to the marketplace that creates separation, not only between us and other people in our space, but us and every other consumer and retail business.
While I touched on the enormity of the global expansion opportunity for Starbucks that lies ahead, I would like to take a few moments to update you on a few of our recent global initiatives. Two weeks ago, I was in India to participate in the extraordinary opening of our flagship store in bustling Horniman Circle area of Mumbai. Our Horniman Circle store, without question, the most elegant Starbucks store we have created anywhere in the world, is a stunning two level experience that celebrates sensibility and respect to the beautiful tapestry of India’s culture, while at the same time embracing Starbucks unique coffee heritage.
In the days following the opening of the Horniman Circle store, we opened our second and third store in Mumbai. All three stores are exceeding our loftiest expectations. I cannot be more proud to enter the Indian market with the Tata Group, a global organization that shares many of the same values that Starbucks was founded on over 40 years ago. Starbucks opportunity in India is tremendous, and I’m confident that India will evolve into one of Starbuck’s five largest markets over time.
We also continue to deepen our connection to consumers in China, where recently alongside Apple and Nike, Starbucks was named one of China’s top 10 foreign brands. And just last week Starbucks received best employer in China recognition. These acknowledgements are testament to the dedication of our 15,000 Starbucks partners in China who deliver the Starbucks experience to the millions of customers visiting our 700 stores in Mainland China each week.
Now despite recent economic reports pointing to a slowdown in China, it remains for us, one of the largest and fastest growing economies in the world, with rapidly increasing spending power of the fast-growing middleclass, and a market that continues to represent a major significant future retail growth opportunity for us. And Starbucks business remains extremely strong in China as evidenced by a 52% year-over-year increase in sales and double digit comps in China.
We’re building the China market deliberately and in a brand accretive way by making significant investments in our people, our systems and our operations. And the connection our partners are building with our customers in China gives me great confidence that we can ultimately bring the Starbucks experience to tens of millions of consumers through thousands of stores across the Mainland. In that regard I am pleased to report that we are on track to reach our near-term goal of having 1,500 stores in China by 2015, and that China will soon be our largest market outside of the U.S.
Our journey across the China and Asia-Pacific regions continues as we look forward to opening our first store in Vietnam in early 2013.
Finally, I recently attended the 10th anniversary celebration of Starbucks entry into Mexico meeting with inspiring partners and taking part in the opening of the market’s first lead store. With 350 stores in Mexico, it is Starbucks third largest market within the Americas region. Mexico is also a fast growing market in Latin America. Together with our JV partner Alsea, we plan to open 150 net new stores in Mexico over the next three years.
Before I introduce Michelle Gass, President of Starbucks EMEA, to share some of the developments and I’m happy to say progress we are making in Europe and in the U.K., I want to tell you about the most important investment we will make all year in investment in our people.
Last month 10,000 Starbucks partners gathered in Houston, Texas for our Leadership Conference. Just as with our transformational conference we held in New Orleans in 2008, Houston provided an extraordinary and inspiring three-day opportunity for us to connect our leaders to the heart of our company, enhance and refine their coffee expertise, inspire leadership skills and perfect the art exceeding customer expectations.
The power and impact of the three days we spent together in Houston will reverberate throughout Starbucks this year and beyond, and enable us take our record breaking fourth quarter and 2012 performance to a completely new level in the future.
It’s now my pleasure to turn the call over to Michelle Gass.
Thank you Howard and good afternoon everyone. I’m delighted to be with you on the call today to update you on our EMEA business and the progress over the last year as our three-region operating model has taken hold. And as the EMEA leadership team and I have embarked on our transformation strategy or as we call it our renaissance plan.
The region today operates across 36 countries in nearly 1,900 stores. Over the last year, we’ve opened 111 net new stores including 10 company-owned and 101 licensed. We’ve grown our geographic reach most notably with our recently announced partnership in Scandinavia with Umoe Group. We will open our first stores in the early part of 2013 in both Oslo and Stockholm with this terrific new partner.
As you know, the EMEA region historically operates at significantly lower margins than the Americas and China, Asia-Pacific regions. There are several reasons for this. In our company-owned markets of U.K., Germany, France, Switzerland and Austria, our portfolio is dominated by high street shopping areas with occupancy cost 2 to 2.5 times that of the average occupancy costs in the U.S. as a percent of sales.
This portfolio is also not as broad as in other Starbucks regions, where highly productive drive-throughs, small footprint stores and a strong presence of captive audience, licensors also diversify the retail footprint. All of these factors, coupled with the fragile state of the European economy and one of the fiercest competitive environments in the world makes for a robust exciting challenge.
But on a positive note, these issues are largely within our control and we are taking actions. In the last year we had focused on driving results against three key strategies which are laying the foundation for a long-term profitable growth; first, increasing the Starbucks brand presence, health and relevancy across the region; second, unlocking the profitability of the existing base through focusing on top line growth and on operating cost; and third, positioning the region for growth primarily through licensing opportunities. I have great confidence that the region will achieve meaningful revenue and profit growth over the next five years and will deliver against our goal of mid-teens margin over time.
Let me recap how we performed in the fourth quarter and later I will add some colors to the actions we are taking and the progress we are seeing. In Q4, revenues declined 2% versus the prior year driven by unfavorable currency exchange, but partially offset by 29% growth in revenue from licensed stores.
Same-store sales were down 1% for the quarter driven largely by continued softness in Germany. And even though, the U.K. market delivered a slightly positive same-store increase for both the quarter and the year, this was dampened by continued weakness in consumer confidence and disappointing traffic levels experienced by most high street retailers throughout the London Olympics.
Beyond our company-owned operations, our JV licensed business has shown continued strength with the Middle East, Turkey and Russia driving strong comp growth during the quarter and throughout the balance of FY 2012. The more encouraging news for the quarter and for the year is the progress in operating income. While EMEA has had an operating loss of $6.5 million and negative operating margin of 2.3% for the quarter, it included $11.5 million of charges related to the optimization of our store portfolio and $9.2 million of asset impairments for underperforming stores in the U.K., Germany and France.
Excluding these charges, operating margin improved over the same period last year, as well as the second and third quarters of this year. We achieved this improvement through the efforts we have made on labor management, G&A, waste and a broad emphasis on cost control across all aspects of the business.
The European portfolio optimization work involved in a number of factions, each focused on improving profitability and strengthening our P&L. These actions included a thorough review of the U.K. store portfolio, which resulted in negotiated lease termination charges as well as the transfer of airport stores in the U.K. to one of our existing channel licensing partners SSP. As a result, operating margin contracted by 410 basis points.
As I mentioned, we realized $9.2 million of asset impairments for underperforming stores in the U.K., Germany and France. These expenses are a part of our normal quarterly review of underperforming stores and are not included in the portfolio optimization charges. They are reported in store operating expenses in our EMEA P&L and equate to a negative 320 basis points of margin impact in Q4.
In the fourth quarter, we also transferred ownership of 17 stores in Ireland to an existing licensed partner Entertainment Enterprises. Ireland has always been a small market for us and it made more sense to leverage a partner with the local knowledge and capability in that country to drive profitability and growth. This resulted in a $4.9 million charge, which shows up in the other income line of the consolidated P&L outside of EMEA results.
Looking forward there may be additional charges in the coming quarters, though likely to a much lesser extent than the Q4 as we have a handful of leases in which we’re in the process of negotiating lease terminations. We know this is the right course of action to take and will leave us with a healthier, stronger portfolio upon which to build.
As I mentioned earlier, our blueprint for change the EMEA renaissance plan has incorporated many lessons from the successful U.S. transformation of 2008 and 2009, that I had the privilege to be part of, while applying the lens of unique business and consumer challenges of Europe. We’re leading the organization to deliver our goals, bring relevancy in margin expansion and unlocking the region’s growth potential through a disciplined set of actions addressing coffee expertise, our people, driving frequency and loyalty and boldly telling our story.
I’ll share briefly with you some of the actions of the past 12 months, my first year leading the regional team. Coffee and people is at the core of our business and our brand and is a central long-term focus of this plan. Given how critical the role espresso plays in the lives of European consumers, we must deliver the best latte on the high street.
In the last year we retrained all of our baristas, we introduced foam art and we made changes locally to respond to the needs of our customers, including changing the standard of our most popular drink in U.K. the Tall Latte to double the espresso. Response has been positive and we view this as a long-term investment to winning in the U.K. market.
Equally, we have placed a significant focus on inspiring our people across the region and on shoring up the strength of the Starbucks’ mission and culture. I have personally traveled now to more than two-thirds of the countries we operate in, conducting roundtables and open forums with our customers and our people, helping to shape our plans ahead. Driving our espresso focus through innovation, local relevancy and marketing will be the primary emphasis of the year ahead.
We have also applied great focus to enhancing the customer relationship and building loyalty and frequency. The biggest move we made this year was introducing customers’ names on cups, including Starbucks’ style chalk name badges on our partners, enabling greater customer connections. We are also placing a great deal of emphasis on the customer environment marrying the latest design ethos of Starbucks with local edge.
We renovated nearly 100 stores across the U.K. in-time for the Olympics. We opened now a globally acclaimed store in Amsterdam, two beautiful new stores in Madrid and Barcelona and are prepared to open an unbelievable flagship store in Kuwait with many more on the way.
We are also addressing value in relative ways. We launched Starbucks Card and My Starbucks Rewards across most of our company-owned markets and some of our JV and licensed operations. We are implementing value offers in markets across the region and we are dramatically increasing our presence in social media to connect with our customers through these important channels.
As I close out, I would be remiss not to acknowledge the recent media coverage surrounding our tax practices in the U.K. and across EMEA. For 14 years, Starbucks has been honored to serve our millions of customers across the region. We have never avoided paying taxes, and in fact adhere rigorously to the local accounting rules and tax laws everywhere we do business. And we have demonstrated our continued willingness to be open and transparent about our operations and their impact on taxable income.
We look forward to continuing to clarify our position about our European tax position in the days and weeks to come. And I’m so proud of our partners and how they have responded to customers and worked with one another throughout this period. They allowed us to stay close to the needs and the voice of our customers and helped to ensure that this is simply a point in time along the way that won’t affect our momentum nor our progress towards the objectives within the renaissance plan.
The work our partners are doing throughout the region, the passion they are bringing, the love they have for their customers and the Starbucks brand is at the core of the progress we are making. I have great confidence that, like the U.S. transformation, we are positioning this region for profitable long-term growth. Thank you.
Now let me turn the call over to Troy.
Thanks, Michelle, and good afternoon, everyone. As you heard from Howard and Michelle, we could not be more pleased with the trajectory of our business and the strong results we continue to deliver.
2012 was a record year for Starbucks producing new highs in revenues, earnings, operating margin and return on capital. The company is stronger financially today than at any time in our history. We have a healthier pipeline of profitable growth opportunities in front of us now than ever before and we’re deeper in terms of talent and capabilities to pursue those opportunities than we’ve ever been.
I will review the fourth quarter performance of our three other segments and the consolidated results for both the quarter and the year. Then I’ll update you on our guidance for what we anticipate will be another strong year in fiscal 2013.
In the Americas, the fourth quarter was an impressive demonstration of the capability of that team and of their focus and adaptability. Revenues grew 9% for the quarter to $2.5 billion with 7% comparable store sales growth. Especially noteworthy about this result is that it came on top of 10% comp growth last Q4, which was the best quarter we have had in more than five years.
As we discussed on our last call, June and July were soft months in the U.S. Cliff Burrows and his team took quick action throughout the U.S. stores to turn the direction of our transaction growth. Our store partners continue to provide outstanding experiences to our customers every day. We reintroduced Treat Receipt in August and the annual fall favorite Pumpkin Spice in September. We’ve provided customers value through the LivingSocial offer and we provided customers another reason to visit their Starbucks store with the launch of Refreshers. The result was a strong recovery of U.S. comp growth in the quarter to 7% with 5 percentage points of transaction growth.
Americas operating income for the fourth quarter grew to $536 million, nearly 21% above last Q4. Strong sales and a high level of operating efficiency again provided increased leverage as we expanded operating margin by an outstanding 210 basis points to 21.4%. Store operating expenses as a percentage of related revenues dropped 70 basis points to 37.4%.
Our experienced team of store managers adjusted labor schedules for the volatility we saw in the early summer period, which led to the right levels of store partners at the right time to deliver an outstanding Starbucks experience. Cost of sales and occupancy as a percent of revenues dropped 90 basis points over last Q4, due in part to increased sales leverage on our largely fixed occupancy costs.
Now, in the China and Asia Pacific region, significant revenue growth continues to drive high margin returns. Revenues of $198 million were 23% higher than last Q4, boosted by incremental revenues from the new stores that opened in fiscal 2012 along with comparable store sales growth of 10%. The 10% comp growth was broad-based as our four company-operated markets China, Thailand, Singapore, and Australia, all posted healthy increases. This marks the 11th consecutive quarter of double-digit comp growth in CAP and while some are lower than the growth rate for the past several quarters we’ve been expecting that the extremely high comp growth of recent quarters would moderate over time. However, even with this expected slight moderation of comp growth, our business model in China remains outstanding and our growth acceleration plans are on track.
In addition to the strength of comp growth in the region, new store performance remained strong. The CAP team opened 132 net new stores in Q4, the most ever in a single quarter for this region. Many of these were in China where we ended the year at 700 total stores. But the absolute number of new stores is not our primary focus in CAP. We remain acutely focused on and encouraged by the performance of those new stores.
Stores opened in both fiscal 2011 and fiscal 2012 are delivering first year sales of approximately three times their investment, that is significantly above our targeted sales to investment ratio and speaks both to the high quality real estate our teams are securing, as well as the premium store experience we are designing and building.
A higher pace of growth needs upfront investment to support it. This includes initial rent as we prepare the stores for business, higher labor for the stores first 8 to 10 weeks to set operational standards and understand the cadence of transactions and other growth-related expenses.
These expenses were the largest contributor to the 340 basis point reduction in CAP operating margin in Q4 to 32.9%. A shift on our store portfolio composition was another contributor to the margin decline. As we have discussed in the past, we expect that as we continue our very profitable and rapid growth in China, we will shift the mix of stores in the region from predominantly licensed today to somewhat less licensed in the future. That business makeshift will have the impact of moderately reducing CAP segment margins over time and the shift did impact margins in the fourth quarter.
In Channel Development, we completed a very active year with a strong fourth quarter. Revenues of $319 million grew by $76 million over last Q4. This increase of 32% was driven largely by sales of Starbucks and Tazo K-Cups, which have gained nearly a full point of market share in food, drug and mass channels since June. Channel Development achieved its significant milestone in Q4 as quarterly operating income exceeded $100 million for the first time ever. This represents an increase of 26% over last year’s fourth quarter.
Operating margin of 31.6% declined 155 basis points from last Q4. A shift in product mix as K-Cups grew their share of Channel Development revenue in the quarter combined with higher commodity costs totaled nearly 500 basis points of margin contractions. Partial offsetting by margin pressure was a shift in timing of marketing spend and increased sales leverage.
Now I will review our consolidated results for the quarter. It was clearly the best fourth quarter Starbucks has ever delivered especially given the persistent macroeconomic uncertainty and the softness in June and July. Consolidated fourth quarter revenues grew 11% to a record $3.4 billion. Net increase was driven by 6% global profitable store sales growth, the 32% Channel Development growth I just discussed, contributions from stores opened over the past 12 months and continued strong performance from our global licensed operations.
Our 6% global comp growth was driven by the strong results in the Americas and China/Asia-Pacific regions. Five percentage points of the growth came from transactions with one percentage point from average ticket. Two year comp growth of 15% in the quarter represents acceleration from both the second and third quarters. Consolidated operating income grew 16% to $520 million in the fourth quarter. Operating margin grew 60 basis points to 15.4% driven primarily by increased sales leverage. Commodity costs did not have a material impact on consolidated operating margin in the fourth quarter.
Earnings per share of $0.46 grew 24% when excluding the non-routine gains in last Q4. As a reminder those non-routine gains resulted from the acquisition of the remaining equity in our Switzerland and Austria markets and the sale of corporate real estate here in Seattle.
The $0.46 EPS of this Q4 includes the $0.02 impact of two items; the $11.5 million store portfolio optimization in the EMEA P&L and the $4.9 million related to the licensing of Ireland that hit our consolidated P&L. The store closures and ownership changes are a key element towards strengthening the EMEA business and represent an important step in achieving our longer-term goal in that region.
For the full fiscal year of 2012, the results were equally strong. Total net revenues grew 14% to a record $13.3 billion with 7% global comp growth and 50% growth in Channel Development. The 7% comps were driven by a 6% increase in transactions as we continue to see new customers in our stores while also serving the same customers more frequently. In fact, we are proud to deliver such meaningful growth without relying on significant price increases as by and large we absorbed this spike in coffee costs this year through disciplined cost management and a relentless focus on providing experiences in our stores that encourage frequent customer visits.
We also set records for both operating income and operating margin at $2.0 billion and 15.0%, respectively. The operating margin expansion of 50 basis points over 2011’s non-GAAP result was accomplished despite a negative 160 basis point impact or $214 million due to higher commodity costs in fiscal 2012.
Throughout the year, our operating teams did an extraordinary job of improving efficiency and tightening managing costs, which drove leverage on our strong sales and offset the impact of historically high coffee costs.
The result of the revenue growth and margin expansion was record earnings per share, which for the full year reached to $1.79 that equates to 18% growth over last year’s non-GAAP EPS of $1.52 per share, falling squarely within our stated long-term guidance of 15% to 20% annual EPS growth.
We opened 1,063 net new stores across the globe in fiscal 2012. 665 of those were licensed stores, which demonstrates the continued strength of the many valuable licensed partnerships we have around the world, and then nearly, 400 company-operated stores we opened in 2012 are exceeding our first year sales projections indicating another class of stores that will contribute to long-term sustainable growth.
The strength of our business results in significant cash generation, allowing us to invest in our existing portfolio of stores and in future multi-channel growth opportunities while also increasing the cash return to shareholders.
In the fourth quarter, we repurchased approximately 12 million shares of stock. Additionally, today, we announced that our Board has approved a 24% increase to our quarterly dividend from $0.17 per share to $0.21 per share. I will now give you an update to the initial fiscal 2013 outlook that I provided on last quarter’s call.
We continue to target revenue growth in the range of 10% to 13%, driven by mid-single digit comp growth of approximately 1,300 net new stores and continued strength in channel development. The 1,300 net new stores represent an increase over what I provided last quarter, driven by further acceleration in China and Asia Pacific. We now expect CAP to open 600 net new stores in fiscal 2013, with roughly 50% of those been licensed.
China will account for slightly more than one half of CAP new stores. Our America’s estimate of 600 net new stores and our EMEA estimate of 100 net new stores are unchanged.
Capital expenditures are now expected to be near $1.2 billion in fiscal 2013. This increase reflects the growth in new stores, continued focus on renovations as well as investment in additional manufacturing capacity.
Full year consolidated operating margin is now expected to grow by approximately 100 basis points over fiscal 2012, as we continue to drive leverage. I will provide operating segment margin targets at our Investor Conference in early December.
Given the strength of our global business, the momentum we carry into 2013 and the deep pipeline of profitable growth initiatives, we are raising our fiscal 2013 earnings per share target to a range of $2.06 to $2.15. This represents 15% to 20% growth of our fiscal 2012.
While we expect each quarter to fall within that 15% to 20% growth range, our first quarter EPS is expected to come in at the low end of that range. This is due to investments unique to the first quarter, including our leadership conference which was held in early October and cost approximately $30 million and the launch of Verismo.
We are positioning Verismo for a significant impact in the years ahead and are approaching that as a major platform launch with significant spend in marketing, sampling and store labor. As a result, we expect that Verismo will produce a net loss of approximately $30 million in the first quarter and a total net loss of $30 million for the full year. The launch of Verismo this quarter is just a beginning. We will build and expand the Verismo platform in order to pursue the multi-billion dollar global opportunity.
And finally, we continue to expect a net benefit of approximately $100 million of $0.09 per share in fiscal 2013 due to favorable commodity costs, which is included in our targets. We believe that impact will be spread evenly throughout the year at approximately $0.02 to $0.03 per quarter.
2012 was a phenomenal year for Starbucks by every measure. We strengthened our operational muscle with record productivity in the U.S. and enhanced capabilities around the world. We strengthened our tie to our loyal customers, with enhancements that provide significant rewards through our loyalty program. We strengthened our global portfolio by opening profitable new stores, by closing unprofitable stores and by filling the small markets to local licensees.
We strengthened our product line up with significant innovation around refreshment, health involvements, at home coffee, and a huge opportunity in food. We drove strong financial results reaching records for revenues, earnings, operating margin and return on capital and we increased cash returned to shareholders with prudent share repurchases and a growing dividend.
We are excited to leverage these strengths and momentum in 2013 in ways that greatly reward our customers, our partners and our shareholders. And we’re confident in our outlook of continued, strong, profitable global growth in the year ahead.
With that, I’d like to turn the call back over to the operator for Q&A. Rachel?
(Operator Instructions) Your first question comes from the line of John Glass from Morgan Stanley. Your line is open.
John Glass – Morgan Stanley
Thanks very much. I wanted to just go back to the U.S. and the same-store sales that you reported and what the turning point was? We all assumed you entered the quarter in July maybe comping 5%-ish, but you ended at 7%, so it implies there was a fairly dramatic acceleration. So, was that a consistent acceleration to the quarter, was there a bigger response say to the Treat Receipt?
And just – and just in general, what other elements do you think drove it, because what you did during the quarter was impressive from a promotional standpoint or from an execution standpoint, but I didn’t think any of those stood out my mind as being events that would drive comp acceleration to this magnitude, so maybe any other color around that would be helpful? Thanks.
Sure, John, thanks for your question. Let me start just briefly and then I’ll ask Cliff Burrows, the President of our Americas business to speak more specifically about the actions in the quarter and what the impact of some of those things were.
Yes, you’re right, the July, similar to June and as we discussed at our last earnings call in late July, was a soft month for us. Soft, still growing in traffic, still total comp growth growing, but softer than we had been trending earlier in the spring.
As we progressed through August and September, we saw a very, very significant recovery in our same-store sales and absolutely exited the quarter in a much healthier place than where we entered the quarter.
With that, I’ll have Cliff speak a little bit more specifically to some of the actions we took.
Thanks, Troy. Thanks, John. It really was an intense focus on the operations of our stores and our partners did an amazing job just getting about on daily work and that was focusing on the customers we had in front of us. Treat Receipt was well received by both our partners because they’re familiar with it and our customers because it was an all-favorite coming back. Between Treat Receipt and LivingSocial, I’d say that accounted for about 1% comp growth in the period where we run it and we also in this period launched our Refreshers platform, which was in there in handcrafted and in cans in our stores, and all of that gathered a momentum and gave us good pace for the future. So, it really was a great focus on the business and really closed with the way everybody responded.
John I’d just add one thing that the public doesn’t see directly and that is the use of all of the social media channels that we were able to leverage. Starbucks is at any given month a leading brand on Facebook and Twitter. As a result of that, we were able to leverage a level of engagement with a large number of customers, millions of Starbucks fans and customers and direct them to the store in ways that really reduced traditional marketing spend. And I think between that the operations that Cliff talked about, the effectiveness of Trade Receipt and LivingSocial, we were in a position and then towards the end of the quarter, we began to have a great result with Pumpkin Spice Latte, which got off to a fantastic start despite the fact that it’s been year-over-year. All of those things bode very well for the quarter; and as we said, a stunning turnaround from Q3.
John Glass – Morgan Stanley
Your next question comes from the line of Matthew DiFrisco from Lazard. Your line is now open.
Matt DiFrisco – Lazard
Thank you. I just wondered if you can give us a little color on sort of those remodels. I think you touched on about a little over 2,000. What you’re seeing as far as volumes afterwards and the key initiatives to those remodels, I guess, is it longer term for setting up for better products and more products to sell or is there also sort of a near term added benefit with any sort of improvement on throughput during those high peak times, because your traffic number looks extremely strong and I’m curious if that’s a reflection in part due to some throughput initiatives?
Matt, let me start to address it, but I’m also going to ask Cliff to get into a few more specifics. We have, as you said, a long list of major and minor and everything in between remodels over the past year. And as Howard mentioned, I think 2,000 remodels planned and we expect to be on a pace of level like that for some time.
Now I would point out that somewhere in the neighborhood of 2,000 remodels, a smaller number, somewhere in the mid-100s are more major significant type of things that might involve a very substantial change or the expansion of a store, the balance of them may involve more minor changes that aren’t just significant remodel of the store. So, it’s a varying degree of impact both on the store itself and on the results to come out of it.
Needless to say, Cliff will go into more specifics, but as we do particularly those major remodels on that individual store, we see a very, very, very significant increase in comp growth in that store when we opened.
The store in Spring Street in SOHO is the prime example of that – of a significant remodel and as a result of that significant return on investment and an enhanced customer experience. I just mentioned that because it’s in New York.
Matt, hi, it’s Cliff. The 2,000 you mentioned is obviously a global number approaching the 1,700 in the U.S. last year and then you fit into those categories that Troy said. And we are focusing on each refurbishment to make sure we treat it like a new store and equip it to deal with the changing customer base and changing demand around peak and at different times of the day. We’re looking at it to enhance not only the experience, the seating, the flow and introducing innovation like clover and each time we innovate we bring in clover and that really helps us in many ways, helps us to build the relevance with our customers build our coffee authority and that intimacy and just keep raising the conversation around coffee and the level of our execution.
And so there isn’t a sort of a general number I’d give you as the benefit, because each one of them is unique and each one of them we try and do the best thing for our partners in terms of the work environment and our customers in terms of the experience and we’ll do a similar number in the coming year in the U.S.
Matt DiFrisco – Lazard
Thank you. I just had one follow-up also. I guess you mentioned a little bit about the Evolution Fresh, the 2,200 West Coast stores, a 100% lift in that. Was that also – I’m not familiar, I haven’t gone to one of those stores – is that similar to how you did the Refreshers as far as have you combined that with putting the ready-to-drink product out with also any sort of assortment of handcrafted drinks with Evolution Fresh yet?
If I talk about Evolution Fresh in U.S. Starbucks stores, it is bottled beverages only. We have a range of six of cold-pressed beverages and it ranges from orange juice, which is the most familiar and the best-seller and it goes through to whether it’s sweet drinks or essential vegetables, it’s a wide range.
It supports our health and wellness platform and the increase that Howard refers to is a mixture of both ticket and volume, but it has been well-received in every single market. Future innovation will come from our learnings from Evolution Fresh stores, of which we opened the latest one in Fillmore Street last weekend down in San Francisco and as had a fantastic reception locally.
Matt DiFrisco – Lazard
Excellent. Thank you very much.
Your next question comes from the line of Jeffrey Bernstein from Barclays. Your line is now open.
Jeff Bernstein – Barclays
Thank you very much. Just I guess a two-part question as we look to CAP and I guess specifically to China. One, just from a unit perspective, it seems like there is obviously an acceleration in openings, I know it’s 300-plus in fiscal 2013, considering you only have 700 in total, obviously that’s a pretty sizable up tick. I’m just wondering, if you can give some color around real estate availability, whether you’re seeing increased competition? We’ve heard from others that perhaps the competitive environment to get these sites is going up and that’s where the cost is going up with it. So, I’m just wondering, if you could talk from a real estate perspective?
And then the other piece relates to the other driver of top line, which would be comp, and you mentioned I guess the 10% plus comp, which I guess, an impressive string of 11 straight quarters of that double-digit. I’m just wondering whether you view like you said the deceleration – like how do you decipher between the deceleration due to the compares versus the deceleration due to what you kind of acknowledge was a macro slowdown in China? Thanks.
Yeah. Hi, Jeffrey, this is John Culver. First off, the opportunity that we have in China is enormous and we continue to see very strong acceptance of the Starbucks brand and when we’re opening our new stores, we’re opening both in our existing cities as well as new cities. We now are in 52 cities across the country. We opened 12 new cities this past year. And as Troy touched on, we’re seeing a three times sales to investment ratio over the last two years.
So all indications for us is that China represents right now the most immediate and fastest retail growth opportunity that the company has in front of us, and with that what we’re doing are making significant investments around our people in terms of ramping up the investment and the hiring and training of people to staff the new stores as well as investment in infrastructure from a supply chain and IT perspective. We’ve also localized our design resource to help enable speed into the market of opening our new stores and then also invested heavily in research and development so that we can have locally relevant products that match the flavor profiles that our Chinese consumers want.
In terms of the real estate that we’re seeing, we are seeing an abundance of available real estate and we’ve invested in local teams in the major provinces in the major cities to go out and to capture that real estate opportunity and what we’re seeing is that we’ve been very well-received in the new cities that we’re in, we are going into. Consumer response, we’re seeing lines out the door and the new stores in these new cities are exceeding our expectations. So we’re very optimistic and very bullish on the opportunity. We’re going to stay very focused and very disciplined in the investments and monitoring the performance of our new stores and our existing stores and we’re going to continue to drive relevant innovation into the stores so that we can continue to sustain the growth.
And as Troy pointed out in his comments also, there is a rebalancing that’s taking place that as we continue to accelerate the new store growth, more of our sales growth is going to come from new stores versus comparable sales growth. So you’re going to see a rebalancing of the portfolio and as part of that more company-owned stores versus licensed stores which is going to have a slight impact on margin over time.
Jeff Bernstein – Barclays
Is it – just to follow up, are you seeing any sign just from the macro perspective versus the compares whether or not you think consumer shifting to lower-priced items or any kind of mix – anything concerning versus just compare driven slowdown in comp?
I haven’t seen anything that’s concerning to me at this point in time. I mean we monitor this very closely, obviously are aware of others – people’s challenges in China, but for us, we’re continuing to make the investments. We’re taking a long-term view and we’re pushing forward.
And Jeff, I would also just add to that that we are continuing to grow traffic in China, we’re continuing to grow ticket in China, we’re growing healthily across all day parts and the two-year comp growth is remaining very, very, very strong if you compare that over the last several quarters. I think that speaks to the fact that, yes, we’re up against tougher compares. It wasn’t all that long ago just a couple of years ago, where average unit volumes in our business in China were roughly a third U.S. levels. They are now well greater than half U.S. levels and catching up and by the way that comes at a point in time when average unit volumes in the U.S. have been growing and are at all-time record levels here in the U.S. and yet China has been growing quickly. So we don’t see any concerns about growing volumes whatsoever.
Hey, Jeff, just one other thing I’d like to also comment on in terms of real estate, one of the things that we did earlier this year is host the first ever landlord real estate conference in Summit where we brought in all the major owners of key developments across China. And Howard and I and Arthur Rubinfeld had the opportunity to sit and address them and talk about the investments we’re going to make in China from a growth perspective, talk to them and share new designs and really start to build the unique partnerships that we wanted to go after with these key landlords and that is paying huge dividends for us.
Jeff Bernstein – Barclays
Very helpful. Thank you.
Your next question comes from the line of Sara Senatore from Sanford Bernstein. Your line is now open.
Sara Senatore – Sanford Bernstein
Thank you. I wanted to follow up on the top-line in the U.S. obviously again very impressive. I just – I’m wondering as you look forward and it’s also equally encouraging that you’re sticking to the sort of mid-single digit comp guidance overall. If you could talk a little bit about
A, what your expectations are for the demand environment given that I don’t think the overall environment got better just you seem to reaccelerate? And, B, if you can talk a little bit about in terms of contributions, is it more from new products, is it from Verismo, is it from things like – more like the Treat Receipt more – being a little bit more aggressive on social media that kind of thing? Just so we have some comfort in the bottoms-up driver of the comps?
This is Howard. I’ll start, I think it’s very interesting and multidimensional question. If you look at the last few years, there is no question that the economic environment in the U.S. has been very challenging, fragile, and depending on the region, very difficult at times. I would – I’m not an economist, but I would say that the consumer environment is somewhat bifurcated and has been for a couple of years.
And I wouldn’t describe Starbucks literally as a luxury brand, but I think we occupy a very unique space that is the premium brand and luxury brand within our space. At the same time, we are still very much an affordable luxury by not only people who are at the high-end of luxury consumers, but people who can afford Starbucks in all walks of life.
In addition to that, I think we have been able as evidenced by Q4 and I think this is really important and highly relevant. We’ve been able to thread the needle to maintain and preserve and enhance our premium position as a premium brand, while at the same time, developing, offering and creating value propositions for our customers that in no way dilute the equity of the brand, but reward our customers by, in a sense, putting our feet in their shoes and developing value for them.
Having said all that, I think we are highly confident that despite any turn in the current economy that we can anticipate that we have the tools, the resources and most importantly, the power in the marketplace to navigate through this by what we’ve been able to learn and the muscle memory that is inside the DNA of the company since transforming the company in 2008.
I do think the burden of proof is on companies and consumer brands to recognize there is a seismic change in consumer behavior, as I alluded to in my remarks, as a result of social and digital media and the emergence of mobile commerce and mobile payments. But we are in the most desirable position because of the investments we’ve made over the last few years to not only be the leader in the space, but now have the tools, the resources and the capability to leverage those channels and means in a way that is almost unparallel in the marketplace.
So the short answer is, we are optimistic that we – and we’re confident that we can continue to navigate through changes in the economy and we’ve done it now year-over-year and I think turn in Q4 is not only stunning but gives us great confidence as we head into fall holiday in 2013.
Yeah, if I can answer, so the other piece I think is about our people. We have invested greatly in our managers and our leadership and giving the tools to our partners to do their work and I think that has really helped us in terms of the amount of time we have to connect with customers, to improve the quality of the customer experience and the relationships we form. I think there’s nothing better to support that than the fact we have 3 million Gold Card members as part of our My Starbucks Rewards and that just gives this dialogue and immediate feedback and such a richness.
And I think just to give you a little bit of additional (inaudible), we’ve seen strong growth across the whole of the U.S. in August and September, and if I look back on the year as a whole, I’d also say that. And the work we’ve been doing around day parts, whether that is building capacity at peak or enhancing the food offer around other day parts, we have seen growth on all day parts. So we continue to grow at peak in the morning, but also at lunch, afternoons and now into the evenings. And I think that is what gives us the confidence about both the opportunity to grow more stores in the U.S. and to continue to grow average unit volumes by spending on day parts and our ability to deal with peak capacity. Thank you.
Your next question comes from the line of Diane Geissler from CLSA. Your line is now open.
Diane Geissler – CLSA
Hello, can you hear me okay?
Diane Geissler – CLSA
I wanted to ask if you’ve seen any changes in the competitive dynamics within the CPG channel given the expiration of the patents on the K-Cups, have you seen any movement there from additional SKUs?
Diane, we’ll have to introduce Jeff Hansberry, who is on the call and as you know, President of our Channel Development business and he will take that question.
Hi, Diane, thanks for your question. Yes, we have. We have seen the introduction of some private label offerings in the K-Cup space that have been previously announced that I think we’re all aware of and we’re starting to see some of those begin to show up on retail shelves. We have not seen a significant impact though to retail pricing or the competitive space. And in fact, we continue to see strong demand for Starbucks K-Cups from our customers.
Your next question comes from the line of Keith Siegner from Credit Suisse. Your line is now open.
Keith Siegner – Credit Suisse
Thank you. I just wanted to ask a question, thinking about all the various initiatives that launched this quarter from Treat Receipt, LivingSocial a number of different loyalty based programs. There was a lot of product news, marketing news and other promotion news in general, some of which was really unique and kind of differentiated. As you enter a period of deflation in 2013 and maybe beyond, does this free you up to say do a little bit more of this activity than maybe you used to? Is Q4 somewhat of the new base level, I mean we’ve seen product in other news working very nicely across the sector and again does this deflation give you an opportunity to say, ramp that effort from maybe what we’ve seen historically? Thanks.
Thank you for the question. This is Howard. I respectfully say, no. I think all of us at Starbucks are deeply committed to preserving and enhancing the equity of the Starbucks brand. And as a result of that, we want to be extremely disciplined and thoughtful about how, when and with who we might do things that create an offer, whether it’s Treat Receipt that we did on our own or the relationship we developed with LivingSocial.
I don’t think that you’re going to see Starbucks go on sale or anything like that. I do think that we have to be ultra-sensitive to the economic issues and the pressure on the consumer, but I think we’ve demonstrated over 41 years that the best anecdote for us is the experience we create in our stores, the quality of the coffee and the level of innovation.
I think what we haven’t talked about today is because it isn’t appropriate is the pipeline of products categories and innovation that we have in the near and long-term future, which I think is the strongest pipeline in the history of the company. We’ve taken great steps to recognize that the status quo in our business or any business isn’t going to be good enough, but I don’t think we’re going to go down the road of discounting Starbucks. We’re doing things on an ongoing basis that was highly selective at the time and we’re not going to do that on a consistent basis.
Your next question comes from the line of Jason West from Deutsche Bank. Your line is now open.
Jason West – Deutsche Bank
You guys touched a little bit on the food program that you’re working to roll out with the upgrades there with the La Boulange product line. If you could talk a little bit about what you’ve seen in the West Coast markets where you’ve tested that, if you have any details or anecdotes or figures you could share on that and sort of what it looks like from a customer perspective when you make those changes?
Thank you, Jason, it’s Cliff. It is very early days and we have had 10 stores open in San Francisco where we have been developing and testing a specific line of pastries and muffins and the like for the morning business, we’re really encouraged by that, and that’s really been the very early steps.
This week and next week we launch in San Jose and that would be our first time outside of the San Francisco market and that will give us new learnings. The reaction from our partners in our stores about the quality of the food and the enhanced pride they’ve got to share those products with the customers, the taste is absolutely fantastic and the reaction from customers in the stores we have served it so far has been fantastic. I think we’ll be in a much better position after the San Jose launch to give a bit of color, a bit of a flavor and more detail of our rollout plans at the Analyst Conference in early December in New York. So, nothing specific to share, but we’ve seen a great reaction so far.
Your next question comes from the line of Michael Kelter from Goldman Sachs. Your line is now open.
Michael Kelter – Goldman Sachs
I had a few margin questions, I guess for Troy. The first is you raised your operating margin guidance for 2013 from 50 basis points to 100 basis points initially to a 100 basis points now. And I wanted to understand the puts and takes there and why you felt comfortable taking the guidance up before the year even started? And secondly, I hear you talk about your visibility into 2014 given coffee cost remain in the $1.60 range, which as I understand it is well below your lock cost for 2013?
Thanks Michael. Yeah, let me speak to the last part first. We have been doing some buying – early buying into fiscal 2014 on our coffee needs. We’re not very far into 2014 yet, but we’re going down that path a little bit and we’ll talk about that in a bit more detail at the conference in December. Suffice to say though, as we’ve talked about before, the early read and what we can see is that 2014 is likely to benefit from reduced coffee costs once again. The order of magnitude is too early to tell, but what I point out is that we will exit the year of 2013 with coffee costs significantly lower through our P&L than we entered the year of 2013 coming through our P&L. But again, that’s a comment given what we see today, with not very much of 2014 locked at this point in time.
Now, in terms of margins we’ve raised it today to the 100 basis points of improvement given the number of things that we’ve seen as we come through the fourth quarter, the momentum we have both on the top line as well as the completion of the operating plans that we put together annually in the summer, prior to the start of the new fiscal year.
And that’s given us confidence given again both the growth we see around the world, the investments that we know we need to make in new initiatives and the growth opportunities we have in the future and the margin improvement opportunities we have all throughout the P&L; in supply chain, in operations management, in leverage of G&A, an improvement in Europe, which we are expecting based on, as you heard from Michelle, some of the many changes that her and her team have been tackling over there. So, I would expect margin improvement really in a number of places in our business and it’s all of that I have visibility into, that’s given me the confidence in the improvement I talked about both in terms of operating margin as well as earnings growth in the year ahead.
Your next question comes from the line of David Palmer from UBS. Your line is now open.
David Palmer – UBS
Hi. Congrats on the quarter and the year. I know it’s early days on the Verismo, but what are some of the feedback you are getting from retailers and your own store managers on the machine? The strengths and weaknesses versus other products that are out there in the single-serve market?
Jeff, you want to start.
Sure. Hi David, it’s Jeff Hansberry. We’re very encouraged on the Verismo System. For us it’s a first in a number of ways. It’s the first system that makes Starbucks quality lattes, espresso and brewed coffee all from one machine. We get natural milk pods that are made from real milk, that deliver a great latte and for the first ever we’re able to have Starbucks partners, our baristas actually go out and meet with customers in specialty retail stores and tell the story of Verismo and tell the story of Starbucks.
So, we’re off to a very good start. Our shipments are in line with our expectations. But importantly, with a new system like this we are listening very closely to our customer feedback and the majority of feedback is very positive. We are listening for customer opportunities for improvement and we’ll continue to do so.
Jeff, you want to just address the attachment on pods that we’re seeing?
John Culver Well, it’s still very early. We’re only – we only got a months’ worth of data, but at purchase we’re seeing significant multiples of purchases of pods, actually well ahead of our expectations.
The other thing I would add and I think this is important and Troy alluded to this in his remarks. The launch of Verismo is the launch of a product, but behind the scenes it is the launch of a platform and a deep strategic commitment that we have to the single-serve category domestically and globally. If you look around the world at what Espresso has done building a multibillion dollar business, what Keurig and Green Mountain have done and then the nascent space that we believe exists in Asia and our brand position. This is a global long-term multibillion dollar business and we are just getting started. Verismo is just the beginning.
Your next question comes from the line of John Ivankoe from JPMorgan. Your line is now open.
John Ivankoe – JP Morgan
Thank you very much. A question on Europe, specifically if I may, there was a little bit of re-franchising activity I guess in Ireland, specifically you pointed out. Ad I just wanted to get the sense of how much of an opportunity that may exist for existing company store base, whether it is in Switzerland or France or the U.K. or Germany, but have you to perceive more of an asset-like model on those markets and whether they’d be any constrains to earning pure company store, as well as still maintaining your footprint in any of the major markets where you currently are?
Hi, John, it’s Michelle. Thanks for the question. U.K. is the central part of our strategy going forward, which is really a sea change in our opening plans. We see the licensing and franchising opportunity as tremendous. And it does a couple of things. First of all, it gives us access to places probably on the high street, which as I mentioned in the call earlier is largely where we are penetrated. And we have not only agreed with our existing great partners like SSP or Autogrill to have a more accelerated plan, but also bringing in new partners like for example in the U.K. Euro Garages, which is going to help us and compliment with us our plans to expand into hundreds of drive-thrus across the region over the next few years.
We see absolutely tremendous opportunity but it’s largely about the new growth and our new growth will be dominated by licensing. We also are actively looking at the franchising opportunity and we have put that strategy in place in the U.K. and we are looking to extend that strategy across Continental Europe. And then as it relates to our existing base, we’ll look at smart opportunities that make sense for the business then for our customers.
Your next question comes from the line of Greg Badishkanian from Citi. Your line is now open.
Greg Badishkanian – Citi
Great, thanks. Maybe if you could give us a little bit more color in terms of the coffee consumer, as well as the competitive landscape in Europe, and maybe any changes that you’ve seen over the last quarter or two?
Yes. Thank you for the question. As I said earlier we face tremendous competition not only with a, I’ll call them bigger chains but also with many small operators across the region. As I said I visited now many, many markets throughout my first year and what I will tell you consistently across both our customer and our partner feedback is what the customer is looking for is the Starbucks experience. And that – what we bring is unique product whether it’s our Espresso, our Frappuccino, importantly the environment, free WiFi all of which are assets and we’re also very focused on building like we’ve seen in the U.S. our digital platform, our service rewards platforms etcetera.
So I would say that there hasn’t been tremendous change for say over the year, but we are getting a lot closer to the customer and navigating in ways to bring local relevancy and that relates to, as I mentioned, focusing on espresso, bringing a new level of innovation in that category, and I’ll be speaking to that when we’re together in December and that’s not only with products but in delivery systems. It’s also around our food and importantly our environment. We’ve now built a local design team in Europe, like in Amsterdam and some in the U.K. to really bring that local design edge to the customer experience.
Your next question comes from the line of Bonnie Herzog from Wells Fargo. Your line is now open.
Bonnie Herzog – Wells Fargo
Hello. Hi Bonnie.
Bonnie Herzog – Wells Fargo
Hi. Just sticking on Europe, I just have a few questions. Could you provide more color on how you expect to improve your food offering in Germany and then in general what are some of the steps you are taking to develop a deeper consumer connection throughout Europe and then how long do you anticipate this will take? And finally, could you talk a little bit more about your action plan to fix some of your supply chain issues in the region?
Sure. Thank you, Bonnie for the question. I think there is few layers to that. First, let me address the customer experience. To build on what I said, really emphasizing what Starbucks has done so brilliantly over the last 40 years, is the first half get hand and we have done some things new in the region that we haven’t done anywhere else in the world at this scale, which is things like deepening the personal connection, names on cups, names on partners.
And I can tell you that on roundtable since we’ve put that in place the customers are really seeing this now as a unique thing that Starbucks does. And they are getting to know their customers in much deeper ways. We’re taking advantage of our social media channel. We are outpacing many of competitors in the region. We have more than doubled our presence in Facebook and Twitter. We have done new websites across the region, both in company-owned and in licensed stores, all of which are surrounding and enhancing the customer experience.
As it relates to food, we’ve made nice progress. I will tell you we’re just getting started. In the U.K. we re-launched our muffin platform; dramatic improvement in quality. We’re seeing that show up in customer response and in our sales. We’re also doing some testing on new distribution models for food. We’re working through and we stated this throughout the year. We had a major change in our logistics and we’re working through that. We’re very confident that as we move to the year ahead we’ve worked out some of the start-up challenges that any retailer would have with that scale of a change.
And then to your specific question around Germany. As we studied the food opportunity there, there is lots of regional opportunities that we can take advantage of. The core Starbucks and the customer of Germany they want the core offerings. They want the muffins and the cakes and we have an opportunity to do a better job there.
Thank you, Michelle. That concludes Starbucks’ fourth quarter and fiscal year-end 2012 conference call. We thank you all for joining us. We’ll talk to you again in early December at our Biennial Conference. Thank you and good day.
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