Starbucks Corporation
Q1 2007 Earnings Call Transcript

Published: 1 Feb 2007

[Operator:]

Good afternoon. My name is Carrie and I will be your conference operator today. At this time, I would like to welcome everyone to the Starbucks first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (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; Jim Donald, President and CEO; Michael Casey, Executive Vice President and CFO; and Kelly Hall, Vice President, Corporate Finance. During today’s call, Jim will review key results and accomplishments for the first quarter, and provide some highlights from our U.S. retail business as well as our global consumer products group. Howard will provide a brief update on our literary initiatives within our music and entertainment business and an overview of the performance of our international business. Michael will then highlight the key drivers behind our first quarter fiscal year 2000 [sic] results, and we will limit today’s call to 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 4132389, through 5

[James L. Donald:]

Thanks, JoAnn. Good afternoon, ladies and gentlemen. I am very pleased to review our results following another strong quarter for Starbucks. Let me recap some of the key financial highlights, which we reported today

[Howard Schultz:]

Thank you, Jim, nice job. Before I review our International business, I’d like to take a minute to update you on Starbucks literary initiatives in our U.S. retail stores. As you know, in early October, Starbucks announced the integration of books into our overall Entertainment offerings. Our first selection was a novel by best-selling author Mitch Albom entitled For One More Day. Starbucks stores alone sold more than 92,000 copies through the beginning of January, which demonstrates the significant role our stores now play as a nontraditional bookseller. This successful entry provided us encouragement to introduce another title, A Long Way Gone, to be featured in our retail stores. Beginning in early February, we will introduce first-time author Ishmael Beah who tells a powerful story of hope and redemption from the perspective of a child soldier’s rare first-hand account of fighting as a boy in the war-torn country of Sierra Leone. This is an inspirational memoir and we believe introduces millions of our customers to quality entertainment that not only supports new and emerging talent but also provides customers the opportunity to discover and discuss relevant new literary works. Additionally, for every copy of A Long Way Gone in Starbucks stores that we sell, we will donate $2 to the United States fund for UNICEF, with a minimum donation of $100,000. UNICEF helps children around the world overcome obstacles of poverty, violence, disease and discrimination. UNICEF played a key role in the rehabilitation of Mr. Beah, and their mission aligns with our commitment to support communities in which we operate. Now turning to our International business. Overall, International performance was driven by rapid retail store expansion and strong revenue and comparable store sales growth. International opened a record 223 stores during the quarter. Our international expansion has been driven by a focus on the core elements that create the Starbucks Experience for people around the world. We have been very mindful of launching into new markets, choosing business partners that provide significant business expertise and have similar values. As we’ve done numerous times in the past, we increase our equity ownership in markets where it makes good business sense. Our experience in some of our established international markets continues to show us there is more potential than we originally believed possible. For example, Mexico and the Philippines are two great examples of markets that have surprised us in their acceptance of the Starbucks brand and their capacity for more stores in more cities. We opened in Mexico only four years ago and today there are 116 Starbucks stores in that country, which means that we’ve opened an average of nearly 30 locations a year. As for the Philippines, this was a market whose capacity we initially estimated at approximately 25 stores, yet here we are providing the Third Place experience in more than 100 stores, and still expanding. Experiences like this make us highly confident that we will be able to meet our long-term goal of at least 20,000 locations in International markets. Our commitment to Starbucks growth around the world is evidenced by continued strong store openings and market expansion. During the first quarter of fiscal 2007, our International team continued their focus on respectfully building out existing markets, as well as opening locations in new markets and delivered a record number of new store openings, including two new countries

[Michael Casey:]

Thank you, Howard. During today’s call, I will provide additional detail on some of the significant factors impacting our financial performance for the first quarter and share with you my observations on the quarter as well as our outlook for the remainder of the year. Jim already recapped our 22% top line revenue growth and 6% comparable store sales results for the first quarter, so let me move directly to the consolidated operating income, which increased 14% to $320 million for the 13 weeks ended December 31, 2006, from $280 million in the prior year. As expected, operating margin decreased from a record 14.5% in the prior year to 13.6%, primarily due to higher cost of sales including occupancy costs and higher store operating expenses as a percentage of total net revenues. Partially offsetting those higher costs were lower general and administrative expenses. The increase in cost of sales including occupancy costs was driven by higher rent expense, a shift in sales to higher cost products and increased distribution costs. Store operating expenses increased primarily due to the investment in our U.S. and Canadian store partners through a wage increase. We are partially funding these wage increases through the October 2006 price increase and our decision not to hold a leadership conference this year, which was originally planned in the second quarter. Training and leadership development continue to be a priority for us, however we believe we can support those efforts through other initiatives in fiscal 2007. We carefully prioritize investments in our business to ensure we are optimizing the benefit to the business, and believe allocating funds to our valued store partners in the form of wage increases was the best investment to make. General and administrative expenses decreased primarily due to higher charitable contributions in the first quarter of fiscal 2006 and higher provisions for incentive compensation due to exceptional performance in the prior year. These items were partially offset by increased payroll-related expenditures and higher professional fees in support of our continued global growth and systems infrastructure development in the current year. Also of note, G&A expense as a percent of total revenue for the quarter was at a historical low level, a result of strong revenue growth and controlled spending during the period. And finally, earnings per share were $0.26 in the first quarter of fiscal 2007, compared to $0.22 per share for the comparable period in fiscal 2006, an increase of 18%. Turning now to our first quarter highlights from our operating segments. Beginning in the fiscal fourth quarter of 2006, as reported in our 10-K, we are now reporting a third segment, the Global Consumer Products Group, in addition to the United States and International segments. Segment information for the first-quarter of the prior year has been restated to reflect these changes. Please note that we will provide comparable segment information for fiscal years 2005 and 2006 in mid-February. Until then, keep in mind that all previously published quarterly financial results reflect the Company’s prior operating segment reporting structure. Let me begin with the U.S. operating segment. Total net revenues increased by 20% to $1.9 billion for the first quarter of fiscal 2007. The opening of 928 new company-operated retail stores in the last 12 months, and comparable store sales growth of 6% for the quarter, led to growth in Company-operated retail revenues of 21% to $1.7 billion for the quarter. The increase in comparable store sales was comprised of a 3% increase in the number of customer transactions combined with a 3% increase in the average value per transaction. U.S. specialty revenues grew by 13% to $200 million in the first quarter. Within specialty revenues, licensing revenues increased 18% to $113 million, primarily due to higher product sales and royalty revenues from the opening of 758 new licensed retail stores in the last 12 months. Food service and other revenues increased 7% to $86 million, due mainly to the addition of new accounts and growth in existing accounts. U.S. cost of sales including occupancy costs as a percentage of total revenues increased to 39.3% compared to 39.0% in the comparable period a year ago, primarily due to a shift in the sales mix to higher cost products, higher rent expense and increased distribution costs. The increase in rent expense was due to the acceleration in our new store development pipeline, as we have increased the number of stores under construction incurring rent expense, and to several less significant factors. The impact from a shift in sales reflects a growing percentage of sales from food in the past year, as we have expanded the number of stores offering lunch and, to a much lesser degree, expanded the Warming program. At the end of the first quarter, lunch was offered in 69% of our U.S. Company-operated retail stores compared to 59% a year ago. Finally, increased distribution costs were primarily the result of higher fuel costs as well as expense associated with additional consolidated distribution centers to support our growing store base. Store operating expenses grew primarily due to higher payroll expenditures as a result of a wage increase for the Company’s hourly store partners. Investment in our valuable store partners through a wage rate increase was a top priority for the Company as we entered the new fiscal year and, with our continued aggressive growth in retail stores, as evidenced by the record number of store openings in the quarter, the investment in our future store leaders is also critical. As I mentioned earlier in my comments on the consolidated results, we took proactive steps to help offset the rising store operating costs with our October 3, 2006 beverage and whole bean price increase in our retail stores. We also made the decision not to hold the leadership conference planned for 2007 to redirect those costs toward the wage increase. Additionally, we have sharpened management focus on more effective store labor deployment through closer adherence to our standards, and we started to see the benefits as the first quarter progressed. U.S. operating income increased to $325 million during the quarter from $298 million during the same period in fiscal 2006. The operating margin decreased to 17.5% of related revenues for the first quarter of fiscal 2007 from 19.3% for the first quarter of fiscal 2006, which was a record high for the U.S. operating margin. Now moving to the International segment. International total net revenues increased 32% to $405 million in the first quarter of fiscal 2007. International Company-operated retail revenues increased 35%, to $347 million in the first quarter of 2007, mainly due to the opening of 249 new Company-operated retail stores in the last 12 months, comparable store sales growth of 8% for the quarter, and favorable foreign currency exchange for the British pound sterling and Canadian dollar. The comparable store sales increase resulted from a 6% increase in the number of customer transactions coupled with a 2% increase in the average value per transaction. International specialty revenues for the quarter increased 20% to $59 million, primarily due to higher product sales and royalty revenues from opening 432 licensed retail stores in the last 12 months and growth in new and existing foodservice accounts. Operating income for International operations was $33 million in the first quarter of fiscal 2007 compared to $34 million in fiscal 2006. The operating margin decreased to 8.2% of related revenues from a record first quarter level of 10.9% in fiscal 2006. This decrease was primarily due to higher cost of sales including occupancy costs. Higher cost of sales including occupancy costs was primarily due to accounting corrections totaling $3.4 million, and to rising energy and fuel prices driving utilities rates and distribution costs higher. Now let’s move to our newest operating segment, the Global Consumer Products Group, or CPG as we commonly refer to it. Jim already provided an overview of the components of this business. However, before I review the results from this segment, let me briefly explain the unique economics of this business as compared to our U.S. and International segments. CPG is a very profitable business for Starbucks. As you can see from the segment financials, this operating unit has much lower revenues than our U.S. and International segments, yet it contributes strong profits to the enterprise. A significant portion of this business is leveraged through our business partnerships with great companies such as Kraft, Pepsi, and others. These relationships allow us to leverage our partners’ existing infrastructures and extend the Starbucks brand in an efficient way, resulting in a very modest cost structure within the Starbucks income statement. Additionally, our joint venture partnerships, such as with Pepsi, are included on a net basis within the income from equity investees line, with no related revenue. Now to review this segment’s results for the first quarter of fiscal 2007. CPG total net revenues increased 13% to $91 million in the first quarter of fiscal 2007. This increase was driven mainly by volume growth in the U.S. and International packaged coffee business through licensed grocery and warehouse club channels. I should point out that this 13% year-over-year revenue growth is compared with exceptionally strong sales for the first quarter of fiscal 2006, which benefited from production declines experienced by other coffee brands resulting from Hurricane Katrina. Operating income for CPG was $42 million in the first quarter of fiscal 2007 compared to $43 million in the first fiscal quarter of 2006. The operating margin decreased to 45.8% of related revenues from 52.9% in fiscal 2006, primarily due to higher cost of sales, lower income from equity investees and higher other operating expenses. Cost of sales increased primarily due to the mix of revenues in the quarter. Our sales into Kraft Foods’ distribution system does not directly align with their sales to the customer, which sometimes creates a timing shift between quarters in our recognition of associated revenue. Income from equity investees declined primarily as a result of lower sales volumes for the Starbucks Ice Cream Partnership as well as the North American Coffee Partnership, which produces Starbucks ready-to-drink beverages, as previously mentioned. In addition, other operating expenses increased primarily due to higher marketing expenditures in support of further development and expansion of ready-to-drink beverages in the Asia-Pacific region, where we first came to market in late fiscal 2005. During the first quarter of fiscal 2007, Starbucks repurchased 3.6 million shares of common stock for a total cost of $130 million, and reduced the outstanding balance on our credit revolver by $335 million to $365 million outstanding. Our solid balance sheet, continuing strong cash flows and borrowing capacity allow us to continue to fund the growth of our existing business, selectively invest in new growth opportunities, such as our recent acquisition of 90% ownership in our Beijing operations, and opportunistically repurchase shares. Before reviewing our full-year targets, I would like to point out four very positive indicators of ongoing strength coming out of the first quarter. Number one, record quarterly store openings demonstrates the strength of our store development capabilities and the continued customer demand for Starbucks locations, both domestically and in international markets. In the first quarter, we achieved 30% of our full-year store opening target. Number two, total net revenue growth of 22% and comparable store sales growth of 6% validates our ambitious targets. Number three, we continued to make strategic investments in our business while delivering 18% earnings per share growth over strong growth in the first quarter of last year. And four, for the consolidated business we controlled general and administrative expenses at a record low percent of revenue. On the other side of the ledger, we have two specific opportunities to improve our performance, which I would like to share with you. As our U.S. retail business evolves and our product offerings expand, we are experiencing a shift to a greater mix of food in our stores. This places some pressure on gross margins when compared to our highest margin products, beverages. Yet, the impact to the U.S. operating margin is mitigated by lower operating expenses associated with food than beverages. Historically, we have seen our food programs improve in the second year of operations and beyond as we better understand our customers’ needs and are able to adapt our product mix and offerings. The Warming program is no exception. We have mentioned numerous times that our International business is subject to unevenness in margin performance among periods, which is driven by investment opportunities that may arise during any given quarter. We continue to see strong customer demand internationally and we are investing to ensure we can meet that demand and appropriately support both new and expanding markets. Over time, we expect to get leverage from these investments. Finally, as you probably know, dairy prices took a dramatic rise as we entered the second fiscal quarter, and based on what we are seeing today, we believe they will continue to be volatile and unfavorable through the remainder of our fiscal year. We have taken this impact into account in our full-year targets. Looking ahead to the balance of fiscal 2007, we continue to be very confident in our ability to achieve our aggressive growth targets for the year. We are on track to hit our store opening targets for the year, entering the last three-quarters of fiscal 2007 at an accelerated pace. Average unit volumes in our retail stores continue to be strong. Investment in our future growth engine, the International business, will be ongoing since we are still in the early stages of growth for that business. As Howard noted earlier, our increase in equity ownership in Beijing is just one example of how we are opportunistically building out that market as part of our long-term growth strategy in International markets. And for our consolidated business, we expect favorable store operating expense comparisons starting in the second quarter, and we expect modest improvements in operating margin in the second half of the fiscal year. Turning now to our fiscal 2007 targets

[Operator:]

(Operator Instructions) Your first question comes from Larry Miller.

[Larry Miller:]

I just have a question about the cost of sales, Michael, if you could help me understand that better. It sounds like, if I’m hearing you correctly, that there are some inefficiencies as you are rolling out lunch, and that might be a bigger impact than say the mix shift from adding food. Could you help me dimensionalize what might actually be going on behind that line and what we could expect going forward, when you might lap the bulk of the lunch rollout? Thank you.

[Michael Casey:]

I think you’ve hit on a good point, in that in the beginning of our food program, and I think this was true of lunch here several years ago and warming today, we’re not as efficient as we are once we’ve lapped ourselves in various markets. But as far as cost of goods sold is concerned, I don’t think it’s a major influence. The major factor in the cost of goods sold is in the occupancy line and in the overall mix toward the food business, not particularly the lunch or warming is excessively inefficient. It’s just that there’s more food in the mix than there was before, and the food products have a lower gross margin than the hand-crafted beverages.

[Operator:]

Your next question comes from Glen Petraglia with Citigroup.

[Glen Petraglia:]

Good afternoon. Could you maybe comment on the increased wage rates that you’ve put in place? Should that in any way imply that you’re having a harder time finding qualified employees in this low unemployment environment? Thanks.

[James L. Donald:]

Not at all. We continually look at our wage rates throughout the world, I would say, and we are constantly using this to benchmark against other companies in the industry. We want to become, we want to remain ahead of what we consider to be our competition and actually look at paying a rate that retains and attracts. We didn’t see any of this happening to create this. We did this because of what we were hearing from some of our partners. What we do is when our partners are bringing up issues, we listen to what they say, we put down the effort and the time to get to the root of the problem, and we saw some opportunities. We in no way though did this as a reaction to what was happening in the market, but rather to be proactive in getting this out and, again, addressing the concerns of our partners. But our turnover and our attrition has remained constant for the most part for the last four to five years.

[Operator:]

Your next question comes from John Glass with CIBC.

[John Glass:]

Thanks. I wanted to ask about the wage increase as well. Could you compare the relative size of the manager wage increase, which I think you talked about in this quarter, the second quarter, versus the increase you did last quarter? Does the lack of the leadership conference, does that cover it for a quarter or does that cover the wage increase for the balance of this year? How long is that benefit, that offset take place? Thanks.

[James L. Donald:]

The wage increase for the managers is significantly less than the wage increase for the hourly, because there’s just so many more hourly employees than there are managers. With regard to the leadership conference, that helps offset the impact of the wage increase in the second quarter, but only in the second quarter. Going forward, we expect the benefit to, we expect the offset to come from the price increase, as it did in the first quarter, and as we continue to be more efficient with our labor force going forward.

[Howard Schultz:]

I want to add one thing. This historically, for those of you who have followed the company for many years, I think there has been a direct correlation and relationship to our ability to build long-term value for our shareholders while building long-term value for our people. I think one of the reasons why we’ve continued to do as well as we have is because the people who represent the company to our customers every day have a high degree of trust and confidence in the intent of Starbucks to do the right thing. As Jim said, it wasn’t the pressure of our inability to attract the right person. It’s being proactive and recognizing we’re asking our people to do more, the marketplace is getting more competitive in the future and we want to stay ahead of the curve. We also want to demonstrate to our people that we are in the business of taking care of them as well as our shareholders.

[Operator:]

Your next question comes from Jeffrey Bernstein with Lehman Brothers.

[Jeffrey Bernstein:]

Thank you. Just a question on the overall G&A expenses. Obviously you experienced tremendous savings on that line on an absolute dollar basis as well as a percentage basis, looking like it’s down below 5%. I know you mentioned benefiting from charitable contributions last year, incentive compensation last year. I’m just wondering if you could talk about your outlook for that line item going forward. Would you expect similar significant savings in coming quarters, or would this quarter be more of an anomaly and not sustainable going forward? Thanks.

[James L. Donald:]

The year-over-year absolute dollar decline was due primarily to the exceptional items that weren’t in that line item last year. But as a percentage of sales, we can expect it to be well-controlled and favorable through the remainder of the year as a percentage of sales. Remembering that the first quarter is always the lowest percentage. The subsequent quarters are a little bit higher, but on a year-over-year basis, we’re expecting leverage in the G&A line throughout the year.

[Jeffrey Bernstein:]

As we have seen over the last year.

[James L. Donald:]

Yes, as we have generally seen over the last several years.

[Operator:]

Your next question comes from Howard Penney with Prudential Equity Group.

[Howard Penney:]

Thanks very much. Howard, years ago you basically successfully killed the hopes of any potential competitor from becoming a national coffee company, and really it’s unlikely that there will ever be another company that’s as successful as Starbucks, has the brand awareness, financial resources that Starbucks has. Having witnessed other companies that run into troubles with continued aggressive growth targets, I would like to hear your response on two things

[Howard Schultz:]

That’s a lot of question, Howard. Let me try and answer that this way. First off, I think that we have been public since 1992, and I think no matter what year you examine the company, we have been an aggressive growth company going after unique opportunities. I think very few people early on believed that we could have 1,000 stores, let along 13,000 today and going to 40,000. But clearly the size of the prize is much bigger than we ever imagined. The reception that we have garnered around the world in country after country is more enthusiastic than we had originally planned. So we’re sitting with one of the world’s most recognized and respected brands, with a concept that is as relevant around the world as it is in Seattle or your hometown, and a demand for the product from customers that we believe it is our responsibility to take advantage of. I think candidly, one of the challenges that we have had over the years, which continues, which we’ve talked about both internally and externally is how do you get big and stay small? How do you maintain trust with your people, trust with the customer, and how do you provide a company in which the brand is not defined by size or scale but by one customer, one cup of coffee and one partner at a time? I think we’ve done that. Specifically to your question about -- this is not an either/or situation. I think we have managed to create a balance between significant growth and development, and at the same time, demonstrating profitability in multiple channels of distribution as well as now our international business. I don’t think we’re trading off one for the other. In fact, I think we’re doing things that demonstrate that we can do both and we’ve done both for over a decade now. But I think the short answer is the opportunity is larger than we originally thought. The acceptance we’ve gotten around the world is significant, and we’re continuing to take advantage of it and we think that’s our responsibility, both to our shareholders and our people. If there ever was a situation where we felt the growth was doing to dilute the integrity of the brand or prevent us from creating long-term value for our shareholders, we would slow it down or stop it. That has not been the case, so we’re in a unique position, domestically and around the world, and these are still the early days for the growth and development of Starbucks and we want to take advantage of it and we’re well-positioned to do it because we’ve made the investments over the years ahead of the growth curve.

[Operator:]

Your next question comes from Sharon Zackfia with William Blair.

[Sharon Zackfia:]

Good afternoon. I wanted to touch a little bit on the labor deployment. I’m curious, as you try to become more efficient with labor in the stores, how you balance the risk of slowing down customer through-put and how you monitor that?

[James L. Donald:]

Sharon, that’s exactly what that is, is the balance. When we look at labor deployment we, through out scheduling means as well as our own intuition, schedule for the business hours that are at their peak. In addition to that, we make sure that at those peak times, that the deployment occurs where the bottleneck is. So it’s not something that you just rubber-stamp out. It’s different by week, it’s different by month, it’s different by quarter, it’s different by store. So every store manager has the say and the authority to bring in or to possibly reduce at a certain hour or bring them back in in the evenings. It’s done on a store-by-store, market-by-market basis.

[Howard Schultz:]

Sharon, congratulations on becoming a partner of the firm.

[Operator:]

Your next question comes from Matt DiFrisco with Thomas Weisel Partners.

[Matt DiFrisco:]

Hi. Either Howard or Jim, if you could just answer this question, regarding as you’re getting larger and exposing yourself or trying to garner a greater demographic, how do you view now the price value equation and your ability to take price on, not only the beverage products but also things that might not be direct core items, such as food? Is there an opportunity there? If you need that, do you think that’s a lever that could be used greater in ’07 if there were a national minimum wage increase or greater labor pressure?

[James L. Donald:]

Regardless of our size, we’re mindful of what we want to do on taking price. We’ve only taken two price increases since I’ve been here in 2002, and in both cases, one was commodity driven back in 2004, and while we did see some slight commodity increases in ’06, we were also helping what the first question was about, take advantage of the ability to help offset some of the increases for our partners. But we don’t take price increases with a grain of salt and we want to make sure that when we do this, there is a reason to justify the means.

[Howard Schultz:]

I would just add that I think if you look at the landscape of consumer brands at retailers and restaurants, I think we’d all be hard-pressed to find many companies that have been able to take price and maintain the customer relationship and profile. So the pricing power of Starbucks has remained because the loyalty and trust that people have in the experience of the brand, we take the responsibility of price increases very carefully and judicially. We think there are other ways in which we can gain leverage in the future, and want to use price as a last resort. Having said that, we recognize that there are sometimes fewer opportunities, and in this case we took one this year basically to pay for the wages.

[Michael Casey:]

I would just add, there seems to be sort of an implication about profitability. I would just add that double-digit pre-tax profit, approximately 25% return on equity and a top-line growth in excess of 20% is a better formula than passing up some of the opportunities that are being presented to us on a daily basis in order to increase that pre-tax margin by a percentage point or so in the short-term.

[Operator:]

We have time for one more question. Your last question comes from Ashley Woodruff with FBR.

[Ashley Woodruff:]

Thanks. I have a question on the higher occupancy expense. Is that simply a function of pre-opening holiday rent that you have to expense, and so that should kind of taper off as you open more stores? Or is that a function of opening stores at a more accelerated rate and having to pay more for sites, or not being able to negotiate the same rent deals as in the past?

[James L. Donald:]

It’s not the latter, it’s the former. There have been a couple of changes in the situation versus let’s say a couple of years ago. One, we have accelerated our opening schedule, so we have more stores at any given time that are in the construction process. For example, at the current year, we have over 700 stores at one point in time or another in construction, or in the process of construction during the first quarter. Including as an example the fact that we acquired about 60 stores from Barney’s in Florida earlier in the year and we were carrying those stores during the process of construction as they were being converted to Starbucks stores. So there’s more regular stores, there’s the Barney’s acquisition, and then there’s the change in accounting that took place about a year or so ago where historically, if you had a 10-year lease and 10 years worth of rent, you’d expense it over the 10 years. Now, we’re required to expense rent from the date of possession, so when we take possession of a property, it may be two months before it opens, we’re now expensing the rent during that period in time when historically, we weren’t. So that makes a difference too, and it’s exacerbated by the fact that we’ve accelerated development and we’ve done some strategic, multi-unit acquisitions for conversion. Thank you all very much. We look forward to seeing you, talking to you next quarter.

[JoAnn DeGrande:]

We’ll talk to you again on our fiscal second quarter 2007 webcast on May 2, 2007. Thanks for joining us.

[Operator:]

This concludes today’s Starbucks first quarter earnings conference call. You may now disconnect.