Starbucks Corporation
Q3 2017 Earnings Call Transcript

Published: 28 Jul 2017

[Operator:]

Good afternoon. My name is Julie and I will be your conference operator today. At this time, I'd like to welcome everyone to Starbucks Coffee Company's Third Quarter Fiscal Year 2017 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. Thank you. Mr. Shaw, you may begin your conference.

[Tom Shaw:]

Thanks. Good afternoon, everyone. This is Tom Shaw, Vice President, Investor Relations at Starbucks Corporation. Thank you for joining us today to discuss our third quarter 2017 results, which will be led by Kevin Johnson, President and CEO; Matt Ryan, Global Chief Strategy Officer; and Scott Maw, CFO. Joining us for Q&A are Howard Schultz, Executive Chairman; John Culver, Group President, Global Retail; Adam Brotman, EVP of Global Retail Ops; Kris Engskov, EVP, U.S. Operations; Belinda Wong, EVP and CEO, Starbucks China; and Tony Matta, President, Channel Development. 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 these forward-looking statements or information. Please refer to the tables at the end of our earnings release and on our website at investor.starbucks.com to find a reconciliation of non-GAAP financial measures referenced in today's call with their corresponding GAAP measures. Also on our website, please note that we will be posting our updated financial targets following the conclusion of our prepared remarks on the call. This conference call is being webcast and an archive of the webcast will be available on our website. With that, I'll turn the call over to Kevin Johnson. Kevin?

[Kevin R. Johnson:]

Thank you, Tom, and welcome to everyone on today's call. I'm pleased to comment on the record financial and operating results that Starbucks reported today. In Q3, Starbucks grew revenues by 9%, excluding one point of foreign exchange, expanded non-GAAP operating margin by 100 basis points, and grew non-GAAP earnings per share by 14% over Q3 last year, excluding two points of FX. We also delivered 5% comp growth in the U.S., including a transaction splitting adjusted 1% increase in traffic, our strongest comp growth in the U.S. in five quarters. Another quarter of 7% comp growth in China, largely attributed to increased traffic, and 4% comp growth globally. Noteworthy is that in addition to delivering record financial and operating performance in Q3, both our retail and CPG segments also gained meaningful increases in U.S. market share, despite the softness in both sectors. You will recall that our revenue growth in the first half of fiscal 2017 was roughly 6.5%, and our U.S. comp growth was about 3%. So, our Q3 performance reflects the back-half acceleration we've anticipated. I'm particularly pleased that our Q3 results were delivered in the face of today's rapidly unfolding retail industry disruption. Yet despite record industry-leading performance through three quarters of fiscal 2017 and a robust pipeline of food and beverage and digital innovation coming in Q4 and the quarters ahead, today's challenging retail and consumer environments, compounded by headwinds related to the retail disruption underway has us taking the slightly more cautious view as we enter Q4. On today's call, we will discuss the drivers of our Q3 performance and update you on the progress we've made against our operational priorities, including an update from Matt Ryan, our Chief Strategy Officer, on the ground-breaking new digital capabilities that we've contributed to our comp, revenue, and profit acceleration. We will explain how each of the strategic actions we announced today will further align Starbucks company-operated and licensed markets for maximum growth and shareholder value creation, and results in the exiting of certain non-core or slow-growth operations and assets. And we will demonstrate how together, these actions will support our growth strategy by strengthening our core, sharpening our focus, and increasing our efficiency. Then Scott will speak to the financial implications of these actions. He'll take you through our Q3 financial and operating results in detail and provide an update on Q4 guidance. Then we'll turn the call over to the operator for Q&A. Now, to set the backdrop for today's call, I refer the comments I made last quarter regarding the two critical, transformative elements required for any brick-and-mortar retailer to survive, let alone succeed in the future

[Matthew Ryan:]

Thank you, Kevin. Digital relationships are becoming increasingly important to Starbucks' growth, contributing both the majority of U.S. comp growth in Q3 and to our continued outperformance compared to our sector. U.S. Starbucks Rewards membership rose to 13.3 million active customers in Q3, up over 8% from last year and up 28% from two years ago. We have seen spend per member rise to record levels, up 8% over Q3 last year. Between new member acquisition and increases in spend per member, 36% of our U.S. revenues came from Starbucks Rewards members in Q3, driving the 41% of our revenues that are prepaid on our own proprietary payment platform, reflecting rapidly increasing customer adoption of our digital platforms. At Investor Day in December, we identified our digital flywheel's four key drivers of incrementality

[Kevin R. Johnson:]

Thank you, Matt. In addition to our digital agenda, we're also investing to elevate both our brand and our customer experience around coffee through our Roasteries and the Starbucks Reserve brand. Starbucks Roasteries are at the center of our innovation strategy around branded experiential retail customer destinations. Complementing our first Roastery in Seattle are additional Roasteries now under construction in Shanghai, New York, Milan, and Tokyo, and under development in Chicago. Our Roasteries will ultimately be complemented by Reserve bars in thousands of Starbucks locations and several hundred new Starbucks Reserve stores around the world. Roasteries and Reserve stores will delight our customers with delicious food offerings through our partnership with Italian artisanal baker, Princi. In Q3, we continued to solidify and extend our brand and market positions and our global leadership around all things coffee and tea. While our investment in Roasteries and Reserve stores enables a world-class, ultra-premium, coffee-forward experience in flagship locations around the globe, it also establishes a core innovation center second to none that will continue to fuel innovation across the Starbucks platform. The ongoing disruption and transformation of the retail industry is accelerating, with very few winners. With another quarter of solid global growth and record financial performance, Starbucks is a clear winner. And we will continue to win by playing the long game, all around the world. The strategic actions we announced today were developed and pressure-tested against the requirements that they strengthen our core, enable profitable growth, reduce costs and complexity, and facilitate a more tactical deployment of our capital and resources to areas where they will generate the highest returns. Each will achieve those objectives, and by doing so, contribute to our ability to continue delivering industry-leading increases in revenue and profits, and outsized returns to our shareholders. I'll now turn the call over to Scott for a deep dive into our operating performance and financial results in Q3. Scott?

[Scott Harlan Maw:]

Thank you, Kevin, and good afternoon, everyone. Starbucks once again reported record operating and financial performance in Q3, reflecting the back-half acceleration we've been anticipating. Nonetheless, as Kevin shared, despite posting record performance in Q3 and further extending our lead compared to the industry overall, the combination of trends in the quarter and ongoing macro pressures impacting the retail and restaurant sectors overall, has us a bit more cautious going into Q4. On today's call, I'll cover three topics. First, I will provide an overview of our Q3 operating and financial performance. Next, I'll provide additional context around the strategies under way to sharpen our focus and enable accelerated growth and further increases in return on capital, and finally, I will provide guidance for Q4. We will be providing our initial growth targets for fiscal 2018 on next quarter's earnings call, just as we did coming into this year. GAAP operating income was $1 billion and non-GAAP operating income was $1.2 billion, up 15% including one point of negative FX. Operating margin totaled 18.4% on a GAAP basis and 20.8% on a non-GAAP basis, up 100 basis points year-over-year, primarily driven by sales leverage partially offset by increased partner investments in the Americas. GAAP EPS was $0.47, inclusive of impairment charges primarily related to the closure of our principally mall-based Teavana stores, a development I will discuss shortly. Excluding these and other charges, non-GAAP EPS grew 12% to $0.55 in Q3 including two points of negative impact from FX. I'll now take you through our Q3 operating performance by segment. Americas revenue grew 10% year-over-year to $4 billion in Q3, primarily driven by 1,002 net new store openings over the past 12 months, and 5% comp growth, this segment's strongest comp performance in five quarters. Excluding the impact of order consolidation following last year's transition to the new Rewards program, America's segment transaction comp was a positive 1% in Q3. We expect Q3 of fiscal 2017 to be the last quarter reflecting any meaningful impact from order consolidation. While we are pleased that our Americas segment delivered top-line improvement in a difficult retail and consumer environment, we did experience a softening in transaction comps as we moved through the quarter. Momentum entering the quarter, beginning with April's wildly successful introduction of the Unicorn Frappuccino was strong, but comp trends softened in the back half of the quarter, and this softness has continued into July. The slowdown included a lower than expected lift in non-discounted Frappuccino beverages following Happy Hour, as well as somewhat lower than expected sales of other core beverages during the period. Lunch was our fastest growing daypart, driven by increased customer adoption of our food lineup and better-for-you beverage options. Peak showed sequential quarter improvement, albeit somewhat less than we had forecast, and the afternoon was pressured across several core beverage categories. Reversing this trend and increasing transactions in the U.S. remains a key priority for us and we have several initiatives supporting this priority underway, including strengthening and leverage our digital and marketing capabilities, driving food and beverage innovation, and further improving our operations and in-store execution. Matt covered digital innovation, so I'll take food and beverage innovation and our progress on improving throughput. As we move through summer, we have a full pipeline of food and beverage innovation, including hot and cold, better for you and indulgent offerings for all dayparts. On the beverage side, our recently introduced Teavana Shaken Iced Tea Infusions, an innovative approach to delivering robust flavor in a healthy way by combining our core iced teas with the unique, freshly-steeped blends of fruits and botanicals is performing very well. So, too, are our new Iced Cascara Coconutmilk Latte and returning favorite Iced Coconutmilk Mocha Macchiato. And within food, we have expanded our lineup of protein-forward offerings with improved Bistro Boxes and the introduction of a seared steak and egg wrap and two new varieties of lunch bowls. Clearly, our commitment to food innovation is delivering, as evidenced by the two points of comp growth from food we reported again this quarter. Let's now turn to our throughput initiatives. You will recall that our throughput improvement is slated to come in three waves. So first, targeted improvements in labor, resulted in our introducing dedicated Mobile Order & Pay rolls during certain hours in our busiest stores and has already contributed to both improved throughput at peak and improved customer service scores. Noteworthy is that our highest volume MOP stores experienced the greatest increases in customer experience scores this quarter. Second wave initiatives include deployment of the Digital Order Manager, a high-value, low-cost technology that is both further increasing throughput and providing us with an extremely valuable source of new data to further optimize store operations and further elevate our customer experience. The DOM contributes to an improved MOP customer experience by providing mobile notifications to customers when their order is ready and facilitating a smoother experience at the handoff point. And it improves the MOP partner experience by replacing the paper-based ticket consolidation process with a modern touch screen order consolidation tool. Additional wave two actions include further carefully targeted investments in labor and the introduction of a new approach to beverage production and deployment that we call channel production. By creating distinct production channels utilizing current equipment and labor allocations, this new order production and deployment capability is enabling a throughput unlock in the stores where we are testing the approach. Our third wave enhancements begin rolling in October 2017 and include improved spacing and production capacity in all new and remodeled stores, new production sequencing software, and an enhanced labor scheduling platform. In Q3, Americas operating income grew 8% and operating margin was roughly flat compared to last year. Increased investments in our U.S. store partners remained a headwind, though the Q3 impact was more muted than in prior quarters as the business lapped a significant one-time bonus paid to partners last year. In addition, the mix shift resulting from lower beverage comps combined with strong food sales put some additional pressure on gross margins again this quarter. Of our 5% U.S. comp growth in Q3, three points were driven by beverage with continued strong sales of iced beverages, including iced coffee growing 33% year-over-year, and Refreshers, including the highly successful Pink Drink, growing 57%. And for the second consecutive quarter, food delivered two points of comp, driven entirely by attach. Let's move on to China/Asia-Pacific. Starbucks China/Asia-Pacific region delivered another quarter of strong performance with year-over-year revenue and operating income growth of 9% and 22%, respectively. CAP revenue of $841 million was driven largely by net new stores and comp growth of 1%, driven by an acceleration in China comps to 7%, offset by softness in Japan. As we have previously noted, CAP comps are currently more heavily weighted towards Japan, where revenue, profitability, and new store performance remained very strong. Noteworthy is that over the nearly three years since we acquired the market in Japan, it's been delivering an average of 3% quarterly comp growth, profitable new store growth, and that has accelerated, and total revenue and profit growth in Japan are running in line with our initial deal assumptions. CAP has now reported five consecutive years of double-digit revenue and operating income growth through Q3. CAP's operating margin expanded 280 basis points to 26.6% on a GAAP basis and 270 basis points to 28.3% on a non-GAAP basis. Contributing to CAP's Q3 margin expansion was the final impact from the now fully-lapped transition to a value-added tax structure in China and a nearly 30% increase in income from our joint venture operations, including South Korea and East China. Turning to EMEA. Our EMEA segment delivered solid results, and at 2%, its strongest comp growth in seven quarters. In Q3, led by strong performance in the U.K. System comps in the region were even higher, increasing 5% and once again validating our decision to move certain EMEA markets to a licensed model. Revenues in EMEA totaled $250 million in Q3, a 9% decline versus prior year. However, when normalized for a 16% impact of portfolio shifts and FX, EMEA revenue actually grew 7%, driven by incremental revenues from over 311 net new stores added in the last 12 months. EMEA's GAAP operating margin totaled 4% with non-GAAP operating margin at 11% after adjusting for the impact of goodwill impairment in Switzerland, roughly flat to Q3 last year, despite 130 basis points impact from FX. We will continue to focus on improving operations and shifting the mix towards licensed stores in EMEA, efforts that have contributed to EMEA delivering solid mid-single digit system sales growth and double-digit non-GAAP operating margins for 12 consecutive quarters. Turning to Channel Development, Channel Development had a very solid Q3, delivering strong revenue growth of 9%. Starbucks K-Cup sales increased 10% in the quarter compared to 0.5% growth for the K-Cup category overall, driving our share of the K-Cup category up 1.4% to 16.6% overall and our roast and ground sales grew 8% in the quarter compared to 0.4% growth in roast and ground overall, resulting in a 1% category share gain to 13%. We will continue to focus on profitably growing share of both K-Cup and roast and ground, but expect somewhat lower top and bottom line growth in Q4 as deceleration in the categories overall has invited increased competition and discounting. Tea is a core focus of ours and, as Kevin mentioned, we're having great success with Teavana in both Starbucks retail stores and grocery. We have already shipped over 2.5 million bottles of Teavana ready-to-drink teas in just five months with all four flavors already ranking in the top ten in the premium single-serve RTD tea category in our active markets. And we plan to launch Teavana branded packaged tea in grocery channels by the end of the fiscal 2018. Channel Development's operating income grew 12% in Q3 and the segment delivered 130-basis-point improvement in operating margin to 43.9%, driven principally by lower coffee costs and higher income from our North American Coffee Partnership with Pepsi. Let's now shift to the strategic actions we announced today. Despite our size and scale, Starbucks remains very much a growth company. The opportunities that exist for us globally are significant and we are doubling down on our investments in key profitable growth areas, including Mainland China and digital, to further accelerate growth in the years ahead. This shift in capital deployment towards more profitable, higher returning assets will result in increased focus and be accretive to returns going forward. You could hear of additional actions as we move towards and into fiscal 2018, but let's start with details around the actions we announced today, beginning with tea. As Kevin mentioned, today, we announced the decision to close all of our Teavana stores. As a result of this decision, we took an asset impairment and goodwill charges of approximately $100 million in Q3. The charges are specifically called out in a separate line item on our income statement where we will also include various charges related to streamlining our operations over the coming quarters. Closure of the Teavana stores will occur over the next several quarters and additional related charges are likely to be incurred over the same periods. While resulting in near-term costs, removing the ongoing operating loss and associated overhead will result in a fairly rapid payback of our exit costs. We're also extremely excited about expanding our ownership of the Mainland China market. Funding for the estimated $1.3 billion purchase of our JV partner's remaining stake in Mainland China will come from existing offshore cash and result in no additional debt. Excluding the substantial gain we will recognize on the acquisition, amortization of acquired intangible assets, and other acquisition related expenses, we expect the transaction to be break-even to slightly accretive in the first year. We expect accretion to build over time, as we integrate the acquired operations into our existing Mainland China business. The acquisition will add approximately $1 billion in revenue in the first year following closing. The final sales price will not be determined until our fiscal Q2 of 2018. We will provide further detail around the financial impact of this transaction when we report our Q1 FY 2018 results in January and will likely schedule a separate modeling call related to the acquisition as we did in connection with the Japan transaction in 2014. Clearly with this acquisition, we are entering a new phase of our growth strategy in CAP and we look forward to sharing additional details about the opportunity and our progress in CAP in the quarters ahead. At the same time as we are consolidating our position in Mainland China, we are shifting our 50% JV ownership in Taiwan to a fully licensed structure in exchange for approximately $175 million. This represents the largest licensing transaction in our history and is in complete alignment with our strategy to license in markets that we have growth potential, but where returns are better served by a partner with deep local expertise. So, let's move on to 2017 targets. We said consistently that the back half of the year would show improvement compared to the front half. That continues to be our expectation, but we now expect results a bit lower than our previous guidance, given the choppiness we saw in Q3 and are seeing in early Q4. Specifically, we now expect revenue growth to come in at the low end of our previous guidance range of 8% to 10%, excluding one point of FX and two points of impact from the 53rd week in fiscal 2016. We are also projecting global comp growth for Q4 at 3% to 4%. As a result, our EPS guidance is revised as follows

[Operator:]

Your first question comes from John Ivankoe from JPMorgan. Your line is now open.

[John William Ivankoe:]

Hi, thank you. The question is just broadly on the Americas business. Your comps aren't quite what you hoped they were going to be, very well documented consumer and industry issues, yet 900 net new stores in the Americas, which is a big addition. You could potentially put pressure on comps, which is what I'd like you to talk about and also difficulty in attracting or retaining labor this far into an economic cycle. So, the question is really two different things. Does it make sense to begin to think about whether that 900 net new stores in the Americas should hit a plateau or even come down over time, given challenges that may even worsen in the out years? And then secondly, if you can update us in terms of your practices of attracting and retaining partners, at this point, both for existing and new stores.

[Scott Harlan Maw:]

Thanks, John, it's Scott. I'll take the first part and then I might have John Culver help me a bit with the second. The first thing I would say is our portfolio growth rate in the U.S. has stayed pretty constant over the last few years, so while the number of stores have come up, the percentage of portfolio growth has stayed pretty stable. And we're able to track quite accurately the cannibalization results that happened from those new stores, and what we've seen over many years is very, very little impact of net new cannibalization of those new stores. And I attribute that to a significant improvement in the analytics under Matt Ryan's team of where we place stores, the trade areas we place stores in, the type of stores that we're putting in those trade areas, and so we continue to see that kind of very, very small cannibalization and extensive store growth opportunities. And the only other thing I'll say before I hand it to John is remember that that 900 is split roughly evenly between company-owned stores and licensed stores, and those licensed stores are unique opportunities for us to get access to real estate. John, do you want to talk about labor?

[John Winchester Culver:]

Yeah, just real quick. One thing I would just add on the new stores and the performance, clearly, we believe that there's still a long runway for growth for new stores in the U.S. And there's a lot of opportunity to continue to infill. We are seeing strong performance, not only in our core stores in the new stores, but then also through drive-through. And we're going to continue to focus in this area. We have not seen cannibalization, as Scott highlighted, and we believe in the growth strategy we have in place. It's been 13 consecutive quarters that our new and non-comp stores have contributed at least 4% to our growth on a quarter-to-quarter basis, so I feel good about the trajectory that we're on. In terms of partner retention, obviously we continue to make investments in our people, both in terms of wage and in terms of benefits. We continue to see retention increase. In the most recent quarter, our retention sequentially increased versus the previous quarter as well as versus last year's same quarter. We feel good about the partner engagement that we have in our stores. When you look at how we measure partner engagement, those scores on a year-over-year basis exceeded last year. So, we feel good about the engagement that we're having from our partners, and then more importantly, how that translates into the customer experience. And we all know that our partners bring the experience to life for our customers, and, as part of that high level of engagement that they have, our customer experience scores are sitting at record highs right now, so we feel good about what we're seeing there.

[Operator:]

Your next question comes from the line of David Tarantino from Baird. Your line is now open.

[David E. Tarantino:]

Hi, good afternoon. I have another question on the Americas business. I guess, as we think about the trends you saw through the quarter softening after April, there's been a lot of talk on the call about sort of macro issues. I was just wondering how you determine that this is more of a macro issue and not a company-specific issue. And perhaps could you comment on whether you think April was just inflated by the Frappuccino launch, and maybe when you take that out, maybe the trend has been a little bit more stable or do you actually see a deceleration in the overall business? Thanks.

[Matthew Ryan:]

Thanks, David. Matt Ryan here. And I want to get to the short-term question. Well, let me frame first with a little bit of a long-term view here, which is that in the U.S. and just about any other market we've studied, there's been a decades-long trend for growth away from home, food and beverage consumption, driven by demographics and people just want more convenience. And we're strongly bullish on the long-term continuation of that trend. However, in the past year, we've seen some pullback from that trendline, as we have from time to time, with consumers in the U.S. shifting some discretionary spend to other categories. We look at all sorts of sources of data here, including corroborating credit and debit card spend data. But we think the best source of industry comp intelligence comes from the APT index, which is a metric developed by Applied Predictive Technologies, that's the name of the company, that aggregates and tracks actual comp data from a broad set of more than 100,000 retail restaurant and QSR competitor locations on a weekly basis, allowing us to understand just how well we're doing versus important benchmarks. And for Q3 overall, the APT index showed decelerating and negative comp for QSR and restaurant industries, while Starbucks' own metrics accelerated comp to 5%. In fact, the differential between Starbucks and the industry increased significantly in Q3 compared to the past several quarters, and that's just on the comp stores. It excludes the effect of any further market share gains we have as a result of our strong pace of new store openings. Within the quarter, we did see some deceleration in month-to-month comp performance for both industry benchmarks and Starbucks, but Starbucks steadily outpaced the competition. And I'll let someone else (51

[Operator:]

Your next question comes from the line of Sara Senatore from Bernstein. Your line is open.

[Sara Harkavy Senatore:]

Yes, thank you very much. I'd like to also just ask a few questions about the comp drivers going forward. On the core coffee, it sounds like it's been a bit softer for the last couple quarters. So, I'm just trying to understand what might be driving that. We know some of the QSRs have gone aggressively against coffee beverages and I was wondering if it might be competitive in nature. And then food, by contrast, is doing quite well. So, as we think about that going forward, is this largely going to be a kind of a ticket-driven comp with attach driving that food? And how do we think about food offsetting the core coffee? Thanks.

[Kevin R. Johnson:]

Yeah. Sarah, this is Kevin. I'll comment and then hand to John Culver. In our U.S. business, 2 points of our comps came from our core beverages, and that's across all dayparts. So, certainly, our core coffee and espresso and core beverages contributed 2 points of comp. Food contributed 2 points of comp and then innovation beverages contributed the other 1 point. So, there's 3 points of comp from beverage, 2 points from food. And that just highlights why it's important for us to continue to drive innovation, both in food and in beverage. So, when you think about the innovation on beverage side, we've got a number of new things we've been doing around both hot and cold. You take some of the iced espresso beverages that we've been launching and bringing to market, Iced Macchiato is an example, continued innovation and deployment of Nitro into more stores for Nitro Cold Brew, very popular. Certainly, this quarter, the Teavana Infusions is an example of that. And then in the last quarter the Refreshers; kind of evolved around the Pink Drink as an example, but the Refreshers also helped. So, we've seen good comp growth from not only our core beverages, but also the innovation that we've been doing around other beverages as well as food. John, I'll let you add other comments if you have any.

[John Winchester Culver:]

Yeah, just to add a few things to what Kevin expressed. First off, we're very pleased with the success food is having in our stores and the continued attach rate. And we talked about the success across all dayparts and the growth that we saw in the quarter across all dayparts. Lunch was the fastest growing daypart and it was driven by food attach, as well as our refreshment and iced beverages. And when you break down that beverage growth for the total quarter, we saw good growth in espresso, core espresso. We saw growth in brewed and we did see growth in blended as well as refreshment, all right? And to put a finer point on that, a couple of highlights there. First was Iced Coffee and Cold Brew. We actually grew Iced Coffee and Cold Brew 33% in the quarter. In addition, we also grew iced espresso, a core beverage, plus 27% in the quarter. And then refreshment, driven by Pink Drink, grew 57% in the quarter. So, we're seeing strong growth as it relates to core, as well as refreshment and in iced drinks. From a food standpoint, we saw innovation come into the quarter with the new protein boxes and the enhancements that they brought and the additional attach that they drove at lunch. We also saw growth in our core bakery and breakfast egg sandwiches in the morning daypart, which was great. And then we continue to see great success with the Sous Vide Egg Bites and we have plans to have that available nationally in the early part of August, which we're excited about. So, we feel good about the mix. Clearly, we want to continue to focus on transactions, and transactions is all about making sure that we're building those customer connections and that we are operating our stores at the level we expect and that our customers have come to expect.

[Operator:]

Your next question comes from the line of Jeffrey Bernstein from Barclays. Your line is now open.

[Jeffrey Bernstein:]

Great. Thank you very much. Just following up on the U.S. trends that you talked about kind of post-April, I'm just wondering whether you – as you read the data, whether you see a noticeable change in the actual consumer behavior, or perhaps the way they're using Starbucks products. Just wondering, kind of as you tie that in with maybe promotional activity, it seems like the industry is aggressive. I was just wondering whether you'd characterize Starbucks as being aggressive or what type of offers are more successful. Fearful that maybe people are getting too aggressive with the promotions where you can actually turn off customers, especially with the one-on-one offers. So, anything related to change in usage patterns and the aggressive nature in terms of your promotional activity.

[Scott Harlan Maw:]

Yeah, thanks, Jeffrey, it's Scott. What I would say is there was no real impact other than the normal positive lift we saw all quarter around Starbucks Rewards. So we're not seeing any fatigue at all on the offers or in personalization. If anything, as Matt discussed, that's accelerating. What I would say, and I think this is what John was talking about, we did see some softness in the afternoon. It grew, it just grew a little bit less than we had expected and that was partly Frappuccino, but not only Frappuccino. We saw some softness in some of our iced products, as well, again versus what we expected, they still grew, but just a bit lower as we moved through the quarter. And then Morning Peak, as I said in my prepared remarks, that accelerated linked quarter, which was great because we're starting to see real traction around some of the throughput things we're working. But again, the acceleration we saw as we moved through the quarter wasn't quite as much as we'd hoped. And so, that's how I would describe the slowdown. It wasn't really in that promotional afternoon period, and we didn't see any impact from what we do with Starbucks Rewards other than continued lift and acceleration.

[Operator:]

Your next question comes from the line of John Glass from Morgan Stanley. Your line is open.

[John Glass:]

Thanks very much. When you look at the last four or so quarters in the U.S., transactions have been roughly flat. So, it seems like you're not attracting new customers, you're getting a lot out of your existing customers, and that's been one of the benefits of My Starbucks Rewards. So, when you talk to the customers that either aren't going or lapsed, what do they want to see from Starbucks that would get them to come? In other words, is it a value issue that keeps them away? I mean, retail may be tough, but many QSRs are thriving in this environment. Maybe it's because you're emphasizing value and that's not the game that they play. But what is it that people who don't go to Starbucks want that you can try to provide them that would get them to come? It seems like the brand is well known, but it's narrowly used.

[Kevin R. Johnson:]

Yeah, John, this is Kevin. I'll comment and then hand it over to Matt to add to this. I think, as Scott said, there's no evidence that the discounting that's going on amongst the value players is affecting us. I think they serve a different market and we're very focused on the product innovation and the more premium experience that we think attracts a different customer type. And so, the things that we've got to continue to do are number one, we've got to ensure that operational excellence in our stores is maintained and constantly enhanced. Now, we saw growth in every daypart. A lot of the operational enhancements in our stores has been focused on peak to make sure that we're creating a great improved experience in those stores with high volumes with Mobile Order & Pay, great progress there. And then it's also product innovation. I think, as John mentioned, the product innovation we've had both around food and beverage has helped us in the lunch daypart, in the afternoon daypart. And then the third aspect, in addition to a great in-store experience in food and beverage innovation is as we bring new customers into Starbucks, one of the most important things we want to do is find ways to establish a digital mobile relationship with those customers, even if they're not at the point of joining the Rewards program. And so, that's a lot of what Matt talked about in his section on the digital agenda. We're going to now start opening the aperture of the reach that we can get with the digital mobile relationship and we're going to start by experimenting with things on this guest checkout and some other initiatives that we have on the digital side. But I think the key has got to be a great in-store experience and innovative new food and beverage offers that bring those customers in or perhaps, who are less frequent into the stores and then figure out how to translate that into a longer relationship. And I'll let Matt extend his thoughts.

[Matthew Ryan:]

Yeah. Not a lot more to add to that except for that when you're in a difficult periodic from time-to-time operating environment, what becomes very critical is your ability to talk to customers. And we saw that clearly in the results. It wasn't anything more than our ability to communicate that helped bring in our Starbucks Rewards customers at the level they were doing. So, for us it's important to extend the number of relationships we have so that we can continue to bring people into the franchise and we have plans to do that.

[Howard S. Schultz:]

This is Howard. I was just going to remind people, we seem to be focusing a great deal on the slowdown in the second half of the quarter, and potentially the early part of April, but let's re-establish the fact that we had a 5% comp in the quarter and a 1% increase in traffic. We have not seen any other retailer or QSR company this quarter report a 5% comp. So, while you are beating us up a bit for lowering comps for Q4, which is the better part of valor because we are only three weeks into July, which is linked to the last quarter, let's reestablish common language. We had a 5% comp, 1% increase in traffic, and a 6% increase in China, mostly on traffic, while we're doubling down on the growth and development in China, which we have said publicly will be as large or bigger than our U.S. business. But once again, 5% comp, your number, in the quarter.

[Operator:]

Your next question comes from the line of Matt DiFrisco from Guggenheim Securities. Your line is now open.

[Matthew DiFrisco:]

Thank you very much. My question is with respect to sort of looking at the earnings side related in the fourth quarter to that 2% to – 3% to 4% comp that 12% to 13% growth. How much of that earnings growth is reflective of that 3% to 4% environment versus some new investments that you started to begin to talk about that are going to take effect in yield in 2018? I wonder is the model supportive in a 3% to 4% comp environment, 12% to 13% EPS or is that diluted also from some ramped-up investment to return to mid-single digit comps for 2018?

[Kevin R. Johnson:]

Great. Thanks for the question, Matt. Just to remind you, what we guided last quarter for the fourth quarter, I think it's important for the question. So, last quarter, we adjusted our rest of year earnings guidance because of an impact we saw from the Teavana mall store performance. That will continue as we get ready to close those stores. We also significantly increased our investment, primarily in the fourth quarter around what we call Cyber Retail, so Reserved, Roastery and Princi, as well as digital. So, the short answer is indeed the fourth quarter reflects an acceleration in those investments, so that's important. And then the second thing is there is a little bit of slowdown in the earnings growth in the fourth quarter compared to what we guided last time from the lower comps, both in the U.S. and in Japan, but the last quarter, you'll remember, we adjusted fourth quarter because of those investments, so that is an increase as we move through the year.

[Operator:]

Your next question comes from the line of Karen Holthouse from Goldman Sachs. Your line is now open.

[Karen Holthouse:]

Hi. So, taking a step back, if, hypothetically speaking, some of these headwinds, whether it's retail traffic or food app, food away from homes don't go away, are there particular things that we should be looking at or initiatives layering on the horizon that you think would be able to be pretty proactive changes in the comp trajectory? Specifically, the digital management tool, is that so that you can go back to driving growth at peak in those stores? Maybe the Mercato lineup, just anything you can kind of think of layering in going out through fiscal 2018? Thanks.

[Kevin R. Johnson:]

Yeah, Karen. This is Kevin. I'll comment and then hand it over to Matt. Clearly, the initiatives that we're driving around food and innovation around food and beverage is driving lift today, and that's going to continue to help us in comp going forward, independent of what's happening in the industry and the initiatives that we have in digital. And sort of the outline that Matt took you through. I think the fundamental improvements we're making in throughput and the customer experience, especially at peak, those are three things that are giving us good results today and those results will continue. So, Matt maybe I'll let you comment a bit more on the digital.

[Matthew Ryan:]

Yeah. Just to re-summarize digital, you have to think about it as short-term and long-term things we can do to unlock value in digital. In the short term, we're going to continue to lean in hard to personalization and that spend per member metric (01

[Operator:]

Your next question comes from the line of David Palmer from RBC Capital Markets. Your line is now open.

[David Palmer:]

Thank you. Matt, Kevin, you both mentioned detailed plans to get after the digital customer and acquiring those customers has a powerful impact. That growth in that customer has slowed over the last few quarters and you're talking about the Chase collaboration. Is that the major way that you're going to get after getting new customers? And if so, do you have any sense of how meaningful that can be and what the runway would be? Thank you.

[Kevin R. Johnson:]

There are a few things here. First of all, just as a reminder that the lower 8% number that we reported in membership growth for Starbucks Rewards this quarter was a result of having had last year an unusual growth in Q3. So, if you look at our two-year growth, it's still at 26% year-on-year and it's fairly consistent. That said, we know that there's more for us to do and we're going to continue to lean in. Chase will become a reason why we'll engage more people down the road, but in the short term, we see some significant promotional and just old-fashioned block and tackle customer acquisition opportunities in the quarter ahead, as well as continued improvements to the user experience and the sign-up experience to reduce frictions that cause people to drop off in the activation funnel. So, we're leaning in hard in that in the short term and then we have a lot more plans in the longer term including Chase.

[Matthew Ryan:]

David, I'd just remind you that the increase from last year that was higher than normal was when we launched the new program. We had a lot of marketing and promotion against that.

[John Winchester Culver:]

And David, one of the things I would just add, this is John, we are also looking at ways that we can activate our customers in the stores. How can our stores become much more active to activate and bring new Rewards members into the program and that's something else we're looking at, as well.

[Operator:]

Your next question comes from the line of Jason West from Credit Suisse. Jason, your line is now open. Jason West - Credit Suisse Securities (USA) LLC Yeah, thanks. I guess it's along the lines of these investments, and you guys talked about some investments last quarter as well. Were these contemplated in the longer-term guidance that you had provided or are you sort of stepping up the level of investment here in the near term and we should expect that to put a bit more pressure on margins than usual, I guess, particularly in the Americas segment? Thanks.

[Kevin R. Johnson:]

Let's talk about this year and then the longer term. Jason, what I would say is last quarter we definitely stepped up the level of investments this year and that's part of the reason we adjusted guidance last quarter. And as I responded to Matt, that was a piece of the reason the fourth quarter earnings growth decelerates a little bit. Broadly, what I said about the three different investments in the profile, is for Siren Retail investments, so, Reserve Roastery and Princi. Those, as far as their impact on margin this year, I think it's at its peak this year. We will continue to grow those investments from a dollar basis, but because we have a significant number of Roasteries that are in pre-opening right now, the impact on March is pretty high. And as we get into next year, it will be lower. It will still increase in investment. When I look at partner investments, I think we're in the middle of that cycle, so, we'll continue to lean in on partner investments as we get into next year although again, we'll talk to you a little bit on what happens from a margin standpoint as it relates to those. On digital investments, we continue to grow that and it will continue to grow from a dollar spend year-on-year. Some of that is capitalized, so the impact on margin and P&L is a little bit less. But the reality is, all of those investments, particularly around digital and around partner investments, we need to continue to make those because they're driving the kind of returns that allowed us to do a 5% comp this year and take additional share.

[Operator:]

Your next question comes from the line of Andrew Charles from Cowen and Company. Your line is now open.

[Andrew Charles:]

Thank you. Kevin, switching gears a little bit, your discussion about the opportunity to partner with third-party digital firms reminds me of around five years ago when Starbucks discussed opportunities to partner with third-party technology or financial services companies and monetize the My Starbucks Rewards loyalty data. Just given your background and connections in the tech space, are these partnerships you're looking to enter involve revisiting these conversations?

[Kevin R. Johnson:]

Well, I think, Andrew, clearly, the entire retail sector is going through this massive disruption and it's clear that the winners coming out of this are going to be those companies who find elegant ways to bring an in-store experience together with a digital experience. And I highlighted the number of examples of companies and the work they're doing, you know, including the most recent discussion around Amazon's announcement to combine with Whole Foods. And so, we certainly have a lot of experience in different partnerships with digital tech companies that we've engaged in over the years. And I think we're continuing to have dialogue with a number of pure-play tech companies around are there things that we could do that create significant breakthroughs? And we're going to continue those discussions and see where it leads us. But it is about accelerating the pace of transformation that we're going through. Howard, you want to add to that, please?

[Howard S. Schultz:]

I would just add, as Kevin had in his prepared remarks, what we've seen over the last few months with Walmart and Jet.com and PetSmart and Chewy and most recently Amazon and Whole Foods, I think this is just, we're in the nascent stage of these kinds of commercial relationships that are going to elevate the experience of a brick-and-mortar retail company. And having said that, Starbucks is probably best positioned, given our national footprint, the demography of our customers, and where we're located to have those kinds of conversations. I think it would be premature to kind of get into who they are, but clearly, we are a very viable partner, given the change in the industry.

[Operator:]

Your next question comes from the line of Andy Barish from Jefferies. Your line is now open.

[Andrew Marc Barish:]

Hey, guys. One more, I guess, on the margin side of things. It seems like the focus on the mix in the Americas U.S. stores is shifting more to food and kind of hand-crafted beverages, which, I think, have lower gross margins, as you pointed out, more labor complexity to them. What is the offset to that over time, if in fact, that's going to continue to be the sort of main products that help drive comp right now?

[Kevin R. Johnson:]

Yeah, Andy, what I would say is hand-crafted beverages actually have some of the higher margins on a gross margin basis that we have in our stores. So, that includes iced teas and espresso beverages, very high gross margins and actually quite high operating margins, as well, even with the labor. But I take the spirit of your question. The way I would describe it is the challenge we have a bit with our mix is mostly versus what we had forecast in the quarter, where food is actually coming in a little bit stronger, which is a good thing because it's accretive to operating margin after leveraging all of the fixed cost and labor and rent, so that's the first thing. Where we've come up a bit short, and it's pressuring gross margins is, we just don't have quite as much beverage comp as we would like to see. So, adding more hand-crafted beverages, more iced teas, more core beverages, that will help with the mix challenge that we have. And I think as you see comps hopefully accelerate as we move through and into next year, that will help with the gross margin. So, it's really strong food growth and a little bit underweighted mix from beverage.

[Operator:]

Your next question comes from the line of Gregory Francfort from Bank of America. Your line is now open.

[Gregory R. Francfort:]

Hey, guys, just one quick one. Can you just help us on the China business provide any insight into just the recent margin profile and sort of rough margin breakdown? As we think about sort of over the longer-term China's contribution to the growth algorithm, is this something that's going to be additive to the longer-term algorithm or do you view it as replacing some of the U.S. contribution, just given the size and scale of that business? I guess, is it an additive piece or maybe more of a replacing, in terms of the longer-term thinking?

[Kevin R. Johnson:]

Yeah, Greg, let me start. This is Kevin and then I'll hand it over to Scott for some specifics. First of all, we have been in China now for 18 years. And as a company, we have worked very diligently to build our brand, build relationships with our partners, create beautiful stores, a connection to customers, and when you think about a consumer brand that has more reach and relevance across China, it's hard to think of anyone that is better positioned. Number two, the unification of Mainland China as a company operated model will enable us to accelerate the pace of growth, and do it in a way consistent with the values and the culture that we've created in China. We have a world-class leadership team with Belinda right here on the phone with us today. And so if you think about the next two decades, I think the growth opportunities before us are unparalleled by anyone. So, I think of this as we have two major growth engines for Starbucks

[Scott Harlan Maw:]

Yeah, I think the only thing I would add to that is when you look at the performance of China, we've got 20% revenue growth and operating income is growing quite a bit faster than that. So, operating margins in China have been expanding at a pretty rapid rate over the last handful of years. So, as we look at this acquisition, we see significant opportunity once we get through probably the first year or so, where we get a little investment done, some integration done to significantly accelerate the East China market and broaden the types of returns we've seen across the rest of Mainland China.

[Kevin R. Johnson:]

Belinda, do you want to add anything before we close the conversation on China?

[Belinda Wong:]

Sure. Thank you. What I would add is that the momentum for our business here has never been stronger, and it's really the early days of China. Yes, we have been investing heavily ahead of the curve, but we're really just in chapter one and I think this acquisition will really well position us to leverage our scale and the infrastructure we already built. But again, this is only at its very early stage and we have to continue to invest in our infrastructure, our system, and especially our people. And with the middle class rising, the coffee consumption rising, people picking up more and more drinking coffee, I see enormous opportunities ahead, and we're really just getting started. And one last thing I would add is that our job every day here is to make new friends and get new connections going and really being very good at getting new customers to understand Starbucks and to go through the Starbucks journey. That is what we have been doing the last 18 years, basically, and I see that as our focus and we'll stay laser-focused on bringing new customers into our business and continue on with our new store growth in China.

[Howard S. Schultz:]

The question that was asked earlier of Kevin regarding potential commercial partnerships with tech companies or pure-play digital companies, we've learned a great deal from the relationship we have with Tencent in China. In only six months we've had over 2 million social gift transactions, which is just an unbelievable level of acceleration and velocity in a very short period of time. We do not have social gifting at that level here in the U.S., but clearly, we've got sightline on what that could be in the U.S. and the relationship that we have built with Tencent. So, the other thing I'd say is when you asked the question, a lot of the answer is based on the fact that bricks-and-mortar retailers are in need of a pure-play digital partner. But what we're also seeing in these discussions is that the digital companies and tech companies realize more than ever that there's going to be one customer interface, and that interface is as important to a tech company to have a brick-and-mortar relationship as it is for a brick-and-mortar relationship company to have a digital relationship. And so, once again, I think you're going to see lots of these kinds of things take place, as well as what I've been saying for the last few years, and that is, a level of consolidation and store closures, which we've all seen. But Starbucks, despite the cyclical issue of the macro environment, we are in the mix not only in these conversations, but clearly, the level of store growth, the level of customer profile, and the continuation of the velocity of building the equity of the brand domestically and around the world, and as Kevin said, the power we have to grow two businesses at once, a more mature business that clearly is not saturated here in the U.S. with the number of stores we continue to open with great success, and as Belinda said, the very early, nascent stages of what we're going to have, which is thousands of retail stores in China, multiple points of distribution in terms of product, and a digital relationship with multiple companies, based on the fact that the consumer in China is well more advanced than the U.S. consumer in terms of being a digital native. And we are at the intersection of that in ways that no other brick-and-mortar company is in China, based on the fact that we're in 130 cities with 2,800 stores, but it's also the profile of the consumer in China, and with almost $1 million AUV in the morning ritual starting in China building almost every day, this business in China, I think, is significantly underestimated both by the people who analyze our business and, I think, candidly, in the market value of Starbucks.

[Operator:]

Your next question comes from the line of Nicole Miller from Piper Jaffray. Your line is now open.

[Nicole Miller Regan:]

Thank you. Good afternoon. I very much respect and understand the prudent nature of revising your guidance as you exit the year. The number one question I get asked from investors, so I'm hoping you'd be willing to address it, is why not just do so for the long-term guided range? I think the algorithm currently states 10% to 15%, and again, it's the number one question I get asked. So, do you want us to think about that differently going forward, either to the lower end or an actual restatement or removal of that as you go forward? Again, just to the nature of being as transparent and prudent as you can be. Thank you so much.

[Kevin R. Johnson:]

Nicole, this is Kevin. Thank you for the question. As we think about long-range guidance going forward, we certainly understand and acknowledge the question. People look and say, FY 2017 year-to-date performance has been slightly below that long-range guidance, and so it's a valid question. First of all, I think it's important to know that when we guide for fiscal year 2018 next quarter, we will also in that guide provide you with any updates to our long-range guidance. Now, you might say well, why do you wait until then? Well, look, we've got line of sight to what – these strategic announcements we made today. Scott commented on the fact that East China acquisition is neutral to accretive in year one. We've got some variability in the Teavana mall store in terms of the pace of closures that we've got to work through over this next quarter. And so, I think it's important for us to take the time to ensure that if there are any other strategic actions we take between now and Q4, that we factor those into long-range guidance, that we have the final results for FY 2017 as the basis for long-range guidance. And then, frankly, we're right in the middle of creating our annual operating plan for fiscal year 2018. And we think it's important that that annual operating plan is completed as part of any update we give in long-range guidance. And then you should expect that on our October call. And I appreciate that's a question and I know it's an important one and I just ask for your patience, but we are completing the process and the things to do it thoughtfully and responsibly and be transparent with you and our investors.

[Operator:]

Our next question comes from the line of Will Slabaugh from Stephens. Your line is now open.

[Will Slabaugh:]

Yeah, thank you. Wanted to shift back to China for a minute if we could. If we're able to look out one, two, three years down the road, will we be talking more about tea, coffee, or food growth in China? And how do you think that that might change versus what you're seeing today?

[John Winchester Culver:]

This is John. I know that you'll be talking about growth across all those categories. Clearly, the growth of espresso-based beverages and the way in which our customers in China have embraced that, we see a long runway for growth, and we have a strong innovation pipeline around that. In the comments we talk about tea and the growth of tea that we've seen since we've introduced Teavana being at nearly 60% in China and Japan, and so tea will continue to be a focused area as well. In food, we've just done a lot of work around transforming our food program in China and rolling that out to our stores and we're seeing traction. So, we're going to continue to grow across all categories. And when we open up the Shanghai Roastery, that will give us a whole other level of innovation that we are going to be able to bring into our stores, whether it's coffee-based beverages or tea-based beverages or our food items. So, Belinda, I don't know if you want to make any...

[Kevin R. Johnson:]

Yeah, Belinda, maybe you could give us some more color and share a little bit more of how you're driving both food and beverage innovation and what you see unfolding here over the next few years in China.

[Belinda Wong:]

Yes, well, thank you. When you look at our 7% comp, what's nice about it is it's mostly from transactions. So, we're getting new customers to come in and trial the experience. And also, what's nice about that is we see growth in all dayparts. That means we're serving different segments of customers. Some come in for our breakfast and we're seeing morning daypart increase as well as the afternoon and evening. So, we continue to open stores to serve different customers and their needs. Like what John said, we're heavy up on our investment on food. We're also seeing great results from our launch of Teavana from last year, especially summertime right now and the iced tea is doing very well. And this is only the beginning and we're going to double-down again on our investment for afternoon refreshment in the tea category, especially in the afternoon segment. So, I guess what I'll summarize it to be is that, we're going to laser-focus on making sure all dayparts will be relevant for different customers, depending on the location, the cities that we're in. We're also opening a lot of new stores and entering new cities as we meet our customer for the first time. So, we're doing all that at the same time, and I'm very certain that we'll see growth in all dayparts coming in the next few years.

[Operator:]

And our last question comes from the line of R.J. Hottovy from Morningstar Research. Your line is open.

[R.J. Hottovy:]

Thanks. Just one last question on U.S. and really around product innovation here. One of the things we're hearing from a lot of the QSR and other restaurant firms is more on the menu simplification part of the equation, and obviously, it seems like you're going against the grain on that with more products and more innovation. What's the right balance? What is your analysis showing in terms of the right balance with the right amount of products on the menu? Is it something that could streamline and speed up the throughput process? Just kind of curious to get your thoughts on that as you look at a number of the things within the restaurants?

[Kevin R. Johnson:]

R.J., this is Kevin, I'll start and then hand over to Scott to add to it. First of all, one of the things that we're always very thoughtful about, as we're doing innovation around food and beverage, is to be thoughtful about how that lands in the store and the experience it creates for our partners who prepare the food and beverage for customers and for customers. And so, if you think about much of the work we do is innovation around what we think of as platforms. And we are, in many ways in beverage, we have the capability to customize beverages for individual customers at scale. And the way we've been able to do that is be very thoughtful about the platforms that we launch and then the things that differentiate or allow a customer to differentiate and customize that platform. Example would be when you think about our espresso platform. Certainly, customers can substitute different types of milks, whether it's coconut milk or almond milk and the set of things we've done there. Flavor profiles. So, by being thoughtful about how we do that innovation, we actually do it in a way that simplifies that customization in our stores for our partners. That said, we always have to be cautious that we're not expanding the platforms or the complexity or the SKU counts too much. The final comment I'll make, and I'll hand over to Scott, is that I also think we're going through an exercise right now, really looking at the SKUs and doing some SKU rationalization. We're not at end of job on that, but I think that's one that we're constantly looking at the long tail of SKUs that are low volume in stores and figuring out how to constantly prune those and put more energy than in keeping things fresh and vibrant for customers. Scott?

[Scott Harlan Maw:]

I would only add I think Kevin nailed it on the beverage customization side. There is opportunity around food and around packaged coffee in our stores and we're in the process of looking at that, so we'll come back to you in future quarters as we work our way through that.

[Kevin R. Johnson:]

You said last thing...

[Howard S. Schultz:]

Yeah, just the last thing. I think one of the hallmarks of Starbucks, which continues to be highly relevant, is customization, and our ability to customize beverages is not about the number of SKUs we have. It's about the customer's demand and preference to customize their own beverage. And so, when it goes back to the question about our people and retention and the training, this is where we are at our best and this is where we do not have any other company in our space that is even second to us. So, I think you're going to see us play up customization at a higher level as we enter fiscal 2018, because we've always known how important that is, but it's becoming more and more important with this millennial consumer. So, just in closing, what I would say is we remain as optimistic as ever about the future of our company. We thought it was very prudent to really share with you what we experienced at the tail end of the quarter, and what we're experiencing the first few weeks, only three weeks into the 13-week quarter in Q4, but enough information to just be sensitive and be straight with you. We understand the question about long-term guidance, but as Kevin said, we have a lot to absorb and digest while we are in the AOP period, and like always, we'll be straight up and be very honest with you about where we stand. But our optimism for what we're doing inside the U.S. and what we announced today in China has never been stronger, so you should hang up this call, I hope, with realizing how bullish we are and how strong we feel about the future of our company. Thank you very much.

[Operator:]

And at this time, I'd like to turn it over to Tom for any closing remarks.

[Tom Shaw:]

Thanks again, everybody, for joining us and we look forward to speaking with you again on our fourth quarter earnings call, which we have tentatively scheduled for Thursday, November 2. Thanks.

[Operator:]

This concludes Starbucks Coffee Company's third quarter fiscal year 2017 earnings conference call. You may now disconnect.