Starbucks Corporation
Q1 2008 Earnings Call Transcript

Published: 31 Jan 2008

[Operator:]

Good afternoon. My name is Marcello and I will be your conference operator today. At this time, I would like to welcome everyone to Starbucks Coffee Company’s first quarter fiscal 2008 financial results conference call. (Operator Instructions) Ms. DeGrande, you may begin your conference.

[JoAnn DeGrande:]

Thank you. Good afternoon, ladies and gentlemen. This is JoAnn DeGrande, Director of Investor Relations at Starbucks Coffee Company. With me today are Howard Schultz, Chairman, President and CEO; Pete Bocian, Executive Vice President and CFO; and Martin Coles, Chief Operating Officer. Today’s call is scheduled for one hour, including Q&A. As a reminder to all listeners, this call is being broadcast live over the Internet. A replay will be available via telephone at 800-642-1687, reservation number 22248459 through 5

[Howard Schultz:]

Thank you, JoAnn and good afternoon, ladies and gentlemen. I hope you had an opportunity to read the release we issued within the past hour. During today’s call, I will give an overview of some of the progress we’ve made over the past several weeks to lay the foundation for the transformation of Starbucks, as well as our first quarter results. Pete will then take you through the financials in greater detail, and after that we’ll be happy to answer any questions you may have. First, I want to say how confident I am in what’s ahead for Starbucks. Over the past three weeks, I have received thousands of emails from customers and partners who share my enthusiasm. Our brand and business are truly special. People want us to succeed and we are looking forward to transforming Starbucks for the future. The past several weeks have also been notable for the noise about competition in the coffee space. Let me emphasize

[Peter J. Bocian:]

Thanks, Howard, and good afternoon, everyone. Revenues for the quarter were up 17% to $2.8 billion, from $2.4 billion a year ago. Operating income for the quarter increased to $333 million from $320 million in the prior year. Operating margins contracted 160 basis points to 12% from last year’s first-quarter margin of 13.6%, driven by the U.S. business. In the quarter, both international and CPG operating margins improved and favorable corporate G&A contributed positively as well. The decline in the consolidated margins was the result of higher cost of sales and occupancy, and an increase in store operating expenses, again driven by the U.S. business. I will provide more detail behind these drivers when I talk about the U.S. results. Earnings per share increased to $0.28 cents in the first quarter of this fiscal year, in line with our expectations, and compared to $0.26 cents per share in Q1 of ‘07. As expected, higher dairy costs resulted in a negative $0.02 impact to EPS in the quarter. That said, while the $0.28 cents was what we expected overall entering the quarter, results from international, our Consumer Products Group and back-end G&A exceeded our expectations, offsetting a much softer U.S. business. Non-operating factors impacting net earnings for the quarter included higher interest expense driven by an increased level of debt when compared to the first quarter of 2007. The debt was used to repurchase shares, resulting in a net neutral impact on earnings per share in the quarter. We also had a slightly better effective tax rate year over year. Comparable store sales growth was 1% for the quarter, all driven by the International business. I will talk more specifically about the business results later in my segment discussions, but it’s clear that our U.S. business continues to feel the negative impact of the macroeconomic environment, not dissimilar to what other retail brands are seeing. A bright spot in the quarter was International same store sales growth, where we continued to show strength with a 5% increase year over year. Let me now move to first-quarter results for our operating segments. U.S. total net revenues increased by 14% to $2.1 billion in the first quarter of fiscal ‘08. Company-operated retail revenues rose 14% to $1.9 billion for the quarter, driven by the opening of 1,077 new company-operated retail stores in the last 12 months. Comparable store sales declined 1% in the quarter, driven by a 3% decrease in transactions. We did have a 2% increase in the average value per transaction, mostly due to the price increase taken at the end of July 2007. And while it had a positive impact on the average value per transaction, we believe pricing had the opposite affect on transactions. While this performance was below our plan and expectation entering the quarter, we believe it is consistent with and reflects the pressure the consumer is experiencing in this difficult economic climate. For us, this has resulted in decreased frequency of visits by our customers to our U.S. stores. While we cannot directly impact the economic environment, we do believe that slowing the opening of new stores in the U.S., along with the closure of underperforming locations, will take some of the pressure off of existing stores, allowing us to make better decisions around how we deploy our capital. U.S. cost of sales including occupancy costs as a percentage of total revenues increased to 41.1%, compared to 39.3% in Q1 of last year, up 180 basis points. While this is a slight improvement from how we finished 2007, continued pressure from dairy, and to a lesser extent, the shift in sales mix to higher cost products combined with overall lower store transactions, continues to drive year over year increases. U.S. store operating expenses increased to 40.5% of related U.S. retail revenues compared with 39.1% a year ago. This increase was primarily due to wage increases driving higher payroll-related expenditures as a percentage of revenue and softer sales from our U.S. company-operated stores. U.S. other operating expenses improved 120 basis points to 25% of related specialty revenues from 26.2% in the prior year, primarily due to leverage gained from a growing revenue base in our U.S. Licensed stores and Foodservice channels. U.S. operating income declined to $311 million during the quarter from $325 million in Q1 of fiscal ‘07. Operating margins came in at 14.6% of total revenues for the first quarter of fiscal 2008, from 17.5% a year ago, primarily driven by higher cost of sales including occupancy and higher store operating expenses, partially offset by lower G&A as a percentage of total net revenues. Currently, the U.S. business represents a significant amount of the Company’s revenues and profit so softness in the U.S. business has a material impact on overall results. That said, we are encouraged by the improvement in performance of our International business in the quarter, and we continue to believe this represents a significant opportunity for growth and profitability for the company going forward. International total net revenues increased 33% to $541 million in the first quarter from $405 million in the first quarter of fiscal 2007. Company-operated retail revenues increased 33% to $461 million, mainly due to the opening of 285 new company-operated retail stores in the last 12 months, favorable foreign exchange movement in the Canadian dollar and the British pound sterling, and comparable store sales growth of 5% for the quarter. The comparable store sales increase resulted from a 3% increase in the number of customer transactions and a 2% increase in the average value per transaction. We believe the growth in international revenues continues to demonstrate the strong acceptance of our brand and the Starbucks experience globally. International operating income increased 63% to $54 million in the first quarter compared to $33 million a year ago. In the quarter, we delivered the first installment on our commitment to grow and improve operating margins, with a 180 basis point expansion, from 8.2% of revenues in the first quarter of last year, to 10% of revenues in this fiscal year’s first quarter. This improvement was due to lower occupancy costs year over year in the UK and lower store operating expenses overall. We are pleased with our Q1 operating margin expansion and will continue to drive for margin improvements going forward. Now let me turn to results from our Global Consumer Products Group. Total net revenues for CPG increased 11% to $101 million in the first quarter of fiscal 2008. Increased product sales and royalties from the International ready-to-drink business along with increased sales of packaged coffee and tea in our International and U.S. markets contributed to the increase. Operating income for CPG was $51 million in Q1 of ’08, compared to $42 million in the first quarter of fiscal 2007. The operating margin expanded to 50.3% of related revenues, from the 45.9% reported in Q1 of fiscal ‘07, primarily driven by a decrease in the cost of sales expense as a percent of revenues. Before I move on to a few comments related to our balance sheet, I want to note the 50 basis point improvement in G&A expenses as a percentage of total net revenues. This demonstrates progress we are making in leveraging our scale and infrastructure, while at the same time, we are also implementing systematic changes, which we expect will better position the company’s back-end infrastructure to deliver more efficient service and support to our retail network. As previously reported, the company issued $550 million of 6.25% 10-year notes in Q4 of ’07, a component of our strategy to reduce the overall weighted average cost of capital for the company. Proceeds from this offering were primarily used to repay short term borrowings and fund additional share repurchases. Our longer term outlook on the company’s capital structure is unchanged

[Howard Schultz:]

Thank you, Pete. Before I open the call up to your questions, I want to share one other encouraging result with you -- one that cannot be quantified and that many of you may discount but one that I believe is emblematic of the success that lies ahead for our company. Our connection with our customers begins with our partners who are so closely reflective of those we serve. We do not need to rely heavily on focus groups to develop new ideas; our relevance with our customers comes from the fact that we are among them, part of the same communities and part of their lives. That is why I am so excited by the overwhelmingly positive internal response and engagement by our partners. Their focus and commitment will help us realize our objectives with our customers, and our goals for creating long-term growth and shareholder value. This is a sentiment that is echoed in Fortune Magazine’s recently released “100 Best Companies to Work” where we ranked number 7. This is our debut in the top 10, and the highest ranking we have received in the 10 times that we have been included in the list. Having a strong group of dedicated partners at all levels of the company provides a critical boost to our efforts. We believe passionately that when we invest in our people, build an emotional connection with them and get them fully engaged with our strategy and agenda, we see the positive results in our performance. To help us achieve that, we are bringing back our annual Leadership Conference in the Fall of 2008. This is the most important and strategic event that we hold for store managers and above and it is a major internal signal that the transformation is not only occurring for customers, but for our people as well. Not only does it help us generate understanding and enthusiasm about our vision and strategy throughout our organization, but it ensures that we maintain the links between our field and corporate leadership. This year, we will also augment it with a series of open forums for all of our partners around the world. Everyone here at Starbucks knows that we have a lot of work ahead of us. Rest assured though, planning and in fact execution are well underway. We have shared with you a summary of what we have accomplished already in these past three weeks. In about six weeks from now, we look forward to showing you our innovative platforms which will begin to re-invent the customer experience. And then, six weeks from that time on April 30th, we will frame out in detail our strategic and financial plans. At that time we will also give you a date for later in the year when we intend to host an Analyst Conference to tell you more about where we are and what we have on tap, as well as introduce you to some of the leadership team who are so critical in making all this happen. We are all very excited about the future for Starbucks and confident the actions we are taking will deliver long-term shareholder value and maintain our position as one of the most recognized and respected brands in the world. Now I’d be happy to open up the questions. Operator.

[Operator:]

(Operator Instructions) Our first question is from the line of Steven Kron of Goldman Sachs.

[Steven Kron:]

A question on the guidance -- I’m just trying to reconcile what you guys are factoring in for the year. For the first quarter, it seems as though EPS grew around 6% to 7%. You are targeting low double-digits, so presumably you need to do something low to mid double-digits in the remaining part of the year, but it seems as though top line, the growth rate at least is going to slow from slower development, from less units and also eliminating the warm breakfast sandwiches, which I believe was around a 3% lift to comps in the past. So if I trickle down the P&L, are we expecting some meaningful margin expansion to come through and kind of act as a big of an offset?

[Peter J. Bocian:]

Steve, if you look at Q1, the 8% EPS expansion had the biggest dairy hit we expect, so there were $0.02 of EPS impact negative that we expect latter part of the year will trail down and then switch over in Q4. That’s what the experts are saying, so look at Q1 as the biggest dairy hit for the year. But we do need to improve from what we showed up, right, to get to the low double-digit EPS growth. What we factored in is our view of a tougher U.S. economic environment but with the innovation that Howard will talk about on March 19th and the impact, we believe it will happen for fiscal ’08. We have also factored in the performance, the good start for international and CPG and our ability to near-term impact the cost structure. We’ve also factored in the other announcements that we talked about today, whether it’s the de-emphasizing the warm breakfast sandwiches and getting to a new breakfast offering, or the store openings being less in the U.S. this year. So we factored all that into what we believe is the right guidance which, as I said before, balances a huge transformation year for us with still delivering good EPS expansion.

[Operator:]

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

[Nicole Miller:]

Good afternoon. I was just wondering if you could first help define or quantify underperforming stores? And then second, what G&A leverage is assumed for this year in guidance? It sounds like you are talking about the percentage going down. Can the actual dollar amount go down as well? Thank you.

[Peter J. Bocian:]

We’ve taken a multi-year view at the -- let’s call it the returns on a store and whether they can meet the business case or an acceptable return over the medium to long-term as we made these decisions, so we are looking at stores with that context. The second question, I’m sorry?

[Nicole Miller:]

It was what have you factored in G&A leverage to the --

[Peter J. Bocian:]

I think what’s factored into it, as I just explained, was that we have G&A leverage expected for the year. I think we will wait until April when we talk about the bigger cost take out opportunity going out from ’09 to 2011 to kind of quantify it. So you should look for baked into the guidance I gave you are the number of components I defined for Steven.

[Operator:]

Your next question is from the line of Joe Buckley of Bear Stearns.

[Joseph Buckley:]

Thank you. Just going back to the last question, can we get just a little bit more detail on the decision making process, not only on the store closures but on sort of what the right number of openings are on the licensed and the company side? And what do you expect for total CapEx now in ’08, and if you can share it for ’09?

[Peter J. Bocian:]

As I said, the decisions, medium to longer term around the viability of the stores, we believe having less openings at this point in time in addition to the economic environment gives us an opportunity to have less cannibalization and better use of capital. And then, you should expect from this discrete decision somewhat less capital than the previous $1.1 billion I talked about. That said, there may be use of capital in the innovation that we will define on March 19th. So some benefit from in-year less store count and that will certainly continue into ’09 in terms of the capital required for new stores. But there will probably also be an innovation price tag this year.

[Operator:]

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

[David Palmer:]

From 2005 to 2007, you almost doubled the pace of new opens and you’ve had some pretty ineffective innovation, and of course you’ve had the economic environment and the breakfast sandwiches. Arguably, there have been some things you are going to be reversing here. I’m wondering, how are you thinking about the positives and negatives of slowing down the unit growth? And in particular, how much is this going to help your AUVs, if you want to choose that? But importantly, I really would love to know why you think it would help your stock, the company, investors, or anybody to remove disclosure at a time like this.

[Howard Schultz:]

I don’t think we’re looking at it quite that way. If you look at the comp issue first, we are going to be taking out breakfast sandwiches as well as we are engaged in a comprehensive audit of every category and every SKU that we are engaged in on a daily basis with our customers and every product and every category has to pass the test on its own merit by adding value profitably and really providing the experience with the customers that we want. In view of this new lens of discipline and customer-centric focus, we need to make decisions that are not based on driving comps in the short-term. Comps are going to be very erratic and in view of that, we think there are better ways to measure the ongoing short and long term success of the company. We’re going to provide you, as Pete has outlined, on April 30th with new metrics that we feel really I think for the first time give us an opportunity not only to provide you insight about our retail business but the growing segments of the business. For example, we have hundreds and hundreds of stores that don’t -- that are not in the comp base because of the license arrangements or JVs. We have millions of dollars that we can’t report to you because we don’t get the credit for businesses like bottled Frappuccino. The total sales of Starbucks are much, much greater than the $9.4 billion that we recorded in ’07. So what we want to do is not take anything away but provide you with a broader level of insight and clarity about the overall business and as Pete said, the ongoing trajectory of international. And the last piece is this -- the decisions that we’ve made in the past, good or bad or indifferent, in many ways have been tied to the relationship that our managers and the leaders of the company have had to driving comps. And it hasn’t always been the right decision most importantly for the customer. And what we want to do once and for all is put the customer in the middle of every meeting that we are in and make decisions that are based on what is best for the customer experience. And we know that in the past and in the future, if we drive a mentality of exceeding the expectations of the customers on what is best for them, we will drive long-term value for the shareholder. And we need to transform the culture and the internal way we are making decisions as well as the customer experience.

[Operator:]

Your next question is from the line of David Tarantino from Robert W. Baird.

[David Tarantino:]

Howard, you mentioned that you were building a foundation to return to the growth that the investment community and you might expect. I know you are going to be giving more details in the coming months but could you give us a directional sense for what type of growth rate you might expect as you look out beyond ’09? Is it something that you would expect to accelerate in the future or how are you thinking about that?

[Howard Schultz:]

I think it’s a fair question. I think we’ll have to hold that until the 30th of April but I do want to state in the answer, as I did in the text, that we are committed to being a growth company, that we are built for growth. We think we have opportunities that we have not taken advantage of and that the entire culture and mentality of this company is linked to being a growth company. And that is not something that we are going to give up.

[Operator:]

Your next question is from the line of Glen Petraglia of Citigroup.

[Glen Petraglia:]

I guess the big question that I have is you are shifting to accelerating international growth where margins and presumably the returns on the investment that you are making there are lower than they’ve been in the U.S., and arguably accelerating unit growth in the U.S. has contributed to some of your problems and I think you’ll readily admit that. Can you help me understand why you are making that decision when in essence it might actually be dilutive for corporate return?

[Peter J. Bocian:]

I think a lot of these we will have a better clarity on April 30th, but as I said before, when we showed up in 2007 and we had 8% -- I think it was 8.1% of revenue in international, given the number of licensed content in there, it’s clearly under-performing. We had a pretty good Q1, though you could argue it was against a weak 2007 compare but our view is that we can take these international margins into the teens and we’ll wait for April 30th for the answer, but also the amount of capital we have to invest because of the license relationship is much less. And lastly, if you look at the absolute number compared to where the U.S. is and think about rest of globe non-U.S., there is still a huge opportunity for us. So all the above, we actually think international can contribute quite a lot towards the portfolio and therefore speeding up the investment somewhat.

[Operator:]

Your next question is from the line of Howard Penney of FBR Capital Markets.

[Howard Penney:]

This is just one person’s opinion but I don’t think there is anybody that doesn’t believe Starbucks can’t grow. I guess it’s the rate of growth the company has and is it maximizing the value to shareholders of that growth, balancing both growth and reinvestment in the business. Having said that, you talk about an innovation price tag when asked about capital spending, would suggest that there is maybe remodels or is part of the innovation, is it you are going to reinvest in the store base and go through a remodeling program? I don’t think I’ve heard you talk about that. I don’t know if that’s part of your program, but if you can address that, that would be great.

[Howard Schultz:]

Howard, thank you. I think you’ve been following the company perhaps as long as anybody and the thing about the growth, which I just want to clarify, is I think we all recognize the discipline and the thoughtfulness that we need to demonstrate in terms of the growth being profitable. And there is no one around this table or on our board that is interested in any kind of growth that is not skewed towards making sure that we provide long-term value for the shareholders and it has to be profitable and thoughtful and disciplined growth. Having said that, the issue of innovation and remodels, I think we need to separate that. We have an ongoing remodeling campaign that extends across the country and now across the globe that is not part of what Pete alluded to. We believe that we have unique opportunities to advance the premium position and the experience in our stores around innovation and I wouldn’t have anyone go off on this call and conclude that that’s going to dramatically change the balance sheet or how Pete has described it. Pete, do you want to add anything to that?

[Peter J. Bocian:]

No, I think what’s important is that in the ongoing CapEx that we’ve had let’s say the last couple of years, there’s always been a renovation component as well as a new store component. All I was answering in the previous question was there is some let’s call it room against the $1.1 billion of capital that we started the year based on the new store count. It’s not huge, first of all, and my only point was that there are some innovation ideas that may have some capital but neither one is huge in the scheme of things.

[Operator:]

Your next question is from the line of Jeffrey Bernstein of Lehman Brothers.

[Jeffrey Bernstein:]

Thank you. Just a question on international, which you’ve highlighted as obviously an area of strength and upside surprise. I’m actually surprised not to see an even greater acceleration on the international openings in ’09. Your guidance looks for 1,000-plus but now you are talking about ’08 being pushed up to 975, with the U.S. slowing down and your prior comments of international strength, I was just wondering if you could talk about the thought process behind the international growth targets, perhaps inhibitors to even faster growth, especially with the recent momentum. Thanks.

[Peter J. Bocian:]

I think the ’09 data points around U.S. and international was mostly to A, show that the U.S. would continue the momentum around less. The over 1,000 was a directional number to show the crossover point. We’ll come back with the actual number as we go through it. So yes, we absolutely believe there is a great opportunity in international. My point for this year was to prove the operating margin expansion, which they’ve started to do and we need to continue that through the year. And then we’ll come back with the absolute number, over 1,000 for sure, when we talk about the momentum moving out to 2011.

[Howard Schultz:]

Martin, do you want to add something?

[Martin Coles:]

Yeah. Hi, Jeffrey, thanks for the question. Internationally, we’re very confident in the long-term upside for the business. We have to be equally careful though that we expand at the rate that we have capacity for, so it’s less about the appetite of the market for our stores and our people, much more about carefully building our capabilities so that, as we’ve talked about on this call today, that we continue to deliver just the very best Starbucks experience we can in every store that we open. So we’ve been on a significant growth curve ourselves in international in virtually every one of the last for our five years and we continue to expand that, but as Pete says, we’ll come back with a better look at that number but a lot of it comes down to our capability to drive to the expansion that the market truly can support.

[Operator:]

Your next question is from the line of Matt Difrisco of Thomas Weisel Partners.

[Matt Difrisco:]

I have a question but also a couple of bookkeeping questions -- Pete, if you could just give us a little bit of a [guidance] with respect to the pace of openings for ’08 because it does seem like that is a major contributor to the margins. Having less absolute store openings and less dilution from them on a year-over-year basis. And then also, is it a correct assumption then to assume that it is a -- though you might be losing a comp by getting food out that in some cases, it’s going to be a margin enhancing experience, or it could be in some quarters? And then lastly, just on G&A, if I look at where you are cutting, is this taking away what you had built up, expecting to build on the 1,600 to 1,700 stores you were doing a year, so you are sort of taking away the growth? Does that do something to the ability for you to grow again in the future, or is that saying that your future growth might be license and not company-owned growth?

[Peter J. Bocian:]

I’ll try to catch up on those questions. The first is that on the pace of store openings, what we have seen in the first quarter and reported, and then you can extrapolate out to the year, there are basically none of the closures, is the easiest way to say it, exist in the net number that you are looking at for Q1, so expect that those are balance of the year and then your point about some dilution from a new store is true. We should see that balance of year. That said, there are some costs of getting out of the opportunity and the net of it is kind of a wash. So the closings coming in the future and it should be a net P&L kind of neutral. On the food comment, on the breakfast sandwiches, we are going to be out by year-end. They will still be available, call it de-emphasized, and we’ve been clear on the direction. Our goal is to have the food team come in with that right complementary breakfast food for our future to back-fill it as we get into ’09. Your point is valid that the margin percent between beverage and food is different but we want to have a lot more beverage and then complementary food, and then a breakfast menu that delivers what our customers are asking for. And lastly on the G&A, I think what we’ve done so far is more systematically leveraged what we have, which is -- you know, as opposed to let’s call it an across-the-board where travel and entertainment doesn’t happen for every group. We’ve been much more I think thoughtful in planning ahead around which G&A groups need to grow to support the stores. We still have, when I mentioned the word global platform earlier, we have the opportunity to get global owners thinking about how they deliver the most efficient and effective service to the enterprise and we’ll be talking more about that when we look at the targets going into the April 30th timeframe. And I think that’s important, back to the disclosure comment earlier, we believe by moving to the longer term targets, we are actually putting something out there A, that hasn’t been there, and we also think that long-term, the op-margin is the best link to shareholder value. Because we have a portfolio of businesses, whether it’s the consumer products group, food service. Howard mentioned the license stores and international, and a cost take-out opportunity. All those are going to feed the op-margin going forward and none of them directly link to same-store comps, as an example. So we believe getting a better view of the portfolio and with this cost takeout opportunity embedded, that’s what we are driving for and we’ve put a stake in the ground and said we are going to commit to fairly quickly turn out a long-term target. I would argue given the volatility in the U.S. business and all the things we are working on real-time, April 30th feels fairly aggressive.

[Operator:]

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

[Sharon Zackfia:]

I was kind of curious on the trends in U.S. ticket growth. For quite a while, you’ve been seeing trends there in excess of your actual price increase and it looks like that’s stopped. So I’m wondering whether or not you are seeing consumers trade down, if there might be a merchandise impact from this being a Christmas quarter or if there is a food impact here. But anything we could kind of glom on to to understand what is happening there.

[Howard Schultz:]

I think it’s -- you know, I’ve spent a lot of time over the last few weeks digging into our business and really trying to dissect the issues at every level, but clearly the consumer is facing a significant headwind that is affecting not only us but everyone in the retail and restaurant business. I think you’d have to agree that the consumer -- the consumer is in a recession. And in view of that, the trends that we see, either in terms of geography or across the board, are not isolated to any region or any product. I think that what we believe is that we have an opportunity to enhance the experience, create significant separation between us and everybody else, and drive an experience that people value and recognize as not only different but something superior. But we are facing a situation where the status quo no longer applies. We can’t continue on that path and we have to push for self-renewal and reinvention and embrace change.

[Operator:]

Your next question is from the line of John Ivankoe of J.P. Morgan.

[John Ivankoe:]

Thank you. I just want to make sure that the breakfast sandwich issue is being put into context. I don’t think it’s in even half of the U.S. store base. Could you clarify what percentage of the stores that it’s in? And I guess across the entire system, what percentage of sales it actually is? In other words, if it were to be pulled out, what that would actually mean to comps? And finally, on the breakfast side, was that product on a fully loaded basis in terms of looking at gross margin, you know, spoilage at the end of the day, incremental labor that you had against the product, which was clear going into the stores, whether that product in fact made money? And then secondly, you gave us a nice direction in terms of what could be possible in terms of breakfast, healthier products to replace the product. Is there any kind of innovation that might be significant around the lunch day part, which I think is more significant than the breakfast sandwiches?

[Howard Schultz:]

I think that you hit the nail right on the head there in terms of the impact and the issues that relate to the true net margin that we receive as a result of being in that business. I think, if I’m not mistaken, the breakfast sandwiches are in less than 4,000 stores across North America and there were more stores that were ongoing in terms of plan that we have stopped, that are not going to be engaging in that business in the near future. I think as we said in the past, I think on a revenue basis, we model those breakfast sandwiches at approximately $35,000 a store, with anomalies both at the bottom and the top end. And the margin, we’ve had margin compression in the overall unit economics as a result of being in that business because it is a lower margin product than the core beverage business. And there is incremental labor but perhaps more than that, there’s mine share and labor that takes us away from executing on our core business -- that being the ability to make the perfect shot of espresso, the ability to describe different coffees and really I think demonstrate our position. In terms of replacement, I’m not going to get into the specifics but our food team understands with great clarity what the task is. They are accountable. They are responsible and we are committed to delivering a replacement category product in that day part. With regard to lunch, I’m not going to go there, other than to say that we are going to be in the lunch business. We are going to modify it, as I’ve already said, and we are going to look at other alternatives as we are looking at this. But we understand the leverage that we have with our customer base and we understand that the things that we want to do have to relate to our core and have to be consistent in terms of quality and we have to measure that quality against the quality of our coffee.

[Operator:]

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. Ms. DeGrande, are there any closing remarks?

[JoAnn DeGrande:]

Yes, thank you. That does bring a close to our Q1 earnings conference call. Thank you for joining us today. We invite you to join the webcast of our annual meeting of shareholders on Wednesday, March 19th, as well as the webcast on Wednesday, April 30th, of our second quarter fiscal ’08 results. Thanks for joining us.

[Operator:]

This concludes today’s Starbucks Coffee Company conference call. You may now disconnect.