Starbucks Corporation
Q2 2007 Earnings Call Transcript

Published: 4 May 2007

[Operator:]

Good afternoon. My name is Celeste and I will be your conference operator today. At this time, I would like to welcome everyone to the Starbucks Coffee Company’s second quarter fiscal 2007 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, our Chairman; Jim Donald, President and CEO; and Michael Casey, Executive Vice President and CFO. During today’s call, Jim will review key results and accomplishments for the second quarter, and provide some highlights from our three business segments. Michael will discuss results and key drivers for the period. 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 800-641-1687, reservation number 4132464, through 5

[James L. Donald:]

Thanks, JoAnn. Good afternoon, everyone. Starbucks’ second quarter financial performance demonstrates our success in achieving a balance between driving solid top and bottom line growth while expanding globally and enhancing our brand with new offerings, which we feel are complementary to our core business and accretive to our bottom line. We are very pleased with our financial results for the second quarter, especially in light of the fact that we were up against last year’s exceptionally strong second quarter. Today, we reported

[Michael Casey:]

Thank you, Jim. Today I will begin by providing additional detail on some of the significant factors impacting our financial performance, followed by an outlook for the second half of the fiscal year. As reported, consolidated top line growth was 20%, with 4% comparable store sales growth for the second quarter, both consistent with our targets. Consolidated operating income increased 19% to $241 million for the 13 weeks ended April 1, 2007 from $202 million in the prior year. As a percentage of total net revenues, operating margin at 10.7% was equal to last year’s second-quarter margin, halting three consecutive quarters of year-over-year declining operating margins. Higher cost of sales, including occupancy, were offset by both lower store operating expenses and lower general and administrative expenses as a percentage of total revenues. The increase in consolidated cost of sales including occupancy costs as a percentage of total revenues was driven primarily by rising costs in the U.S. business. I will cover the main drivers behind these rising costs in my U.S. business segment remarks. Consolidated store operating expenses and general and administrative expenses as a percentage of total net revenues decreased, primarily due to higher provisions in the prior year for incentive compensation based on exceptionally strong performance. Consolidated earnings per share were a strong $0.19 in the second quarter of fiscal 2007, compared to $0.16 for the comparable period in fiscal 2006, an increase of 19%. I mentioned the strong $0.19 earnings per share because it caused the year-to-date earnings to round to $0.46, which is a penny more than the sum of the first and second quarters’ EPS results. Now let me move to second-quarter results from our operating segments. Beginning with the U.S. operating segment, total net revenues, which account for approximately 79% of consolidated total net revenues, increased by 19% to $1.8 billion in the second quarter of fiscal 2007. Company-operated retail revenues rose 18% to $1.6 billion for the quarter, driven by the opening of 1,042 new Company-operated retail stores in the last 12 months, and comparable store sales growth of 3% for the quarter. The increase in comparable store sales was due to a 3% increase in average value per transaction. U.S. specialty revenues grew by 23% to $194 million in the second quarter. Within specialty revenues, licensing revenues increased 29% to $105 million, primarily due to higher product sales and royalty revenues from the opening of 768 new licensed retail stores in the last 12 months. Foodservice and other revenues increased 17% to $89 million mainly due to the addition of new accounts and the growth in existing foodservice accounts. U.S. cost of sales, including occupancy costs, as a percentage of total revenues increased to 39.6% compared to 37.7% in the comparable period a year ago. This was primarily due to the following

[Operator:]

(Operator Instructions) Your first question comes from John Glass with CIBC.

[John Glass:]

Thanks. Your traffic in the U.S. was flat I think probably for the first time ever, or at least in a long time. I am wondering if you could address that. I understand tough comparisons but we have seen those before in the company’s history. I guess specifically, you’ve got this warming and breakfast program now which I would think would maybe offset some of those tough comparisons, drive more customers into the store. Can you talk about is that then your experience, or is that more of a substitution purchase? Maybe also could you talk about what else happens when they purchase a sandwich -- do they buy a smaller drink or the same size drink? Is it changing the dynamic of other purchases as well? Thanks.

[James L. Donald:]

John, we are seeing some incremental pick-up with the purchase of a warming sandwich, but by and large, we have seen a headwind in previous years, but as Michael stated, the headwind last year on 10% comps and the transaction growth that we experienced with that was a primary driver. It is not a weather issue. We had pockets of the stores throughout the U.S. that actually were shut down, but the primary driver of that was the headwind of the strong tropical sales growth last year.

[John Glass:]

And just your view on if breakfast sandwiches do actually add traffic to the store versus just the ticker?

[James L. Donald:]

Traffic, traffic to ticket, and we are seeing incremental beverage too, but we are seeing and one of the reasons that we continue to be very bullish on our warming sandwich is that, I think Michael and I can give you an example. In New York just last year, we are seeing customers that before we put warming in were coming to our store with a warming sandwich from another venue, and so we are seeing us capturing that customer all in one fell swoop, so we are seeing that continue to generate transaction.

[John Glass:]

Thank you.

[Michael Casey:]

John, just for a data point, we had 8% transaction growth in our U.S. retail stores in the second quarter of last year.

[John Glass:]

Thank you.

[Operator:]

Your next question comes from the line of Ashley Woodruff with FBR.

[Ashley Woodruff:]

Thanks. Actually, a follow-up on that question. You said the reason for the flat traffic is really the more difficult comparison. I guess as you look out over the rest of the year, comparisons do get easier. Are you optimistic that you can start to positive traffic growth again, or is this a trend that we should look for more growth coming from check rather than traffic?

[James L. Donald:]

The overall comparable guideline, we are very comfortable with the 3% to 7%, and there is nothing more to say other than that we think we will be in that 3% to 7% growth range. Michael, did you have anything to add to that?

[Michael Casey:]

I’ll just add that of the 3% average ticket increase that we have had, about 1.5% of that is from the price increase that we took, but the other 1.5% is from the attachment of things like music, food, et cetera, so it is contributing to the same-store sales and the growth of the business.

[Operator:]

Your next question comes from the line of Joseph Buckley with Bear Stearns.

[Joseph Buckley:]

A follow-up on that again; just on the breakfast sandwiches, and I realize it is not driving your whole system, but the markets where you have it, is your traffic up in that morning day part, or is this an add-on sale that to your point, Jim, customers are buying their food at Starbucks as opposed to somewhere else?

[James L. Donald:]

No, Joe, the traffic is up in those markets. We are seeing an increase in transaction count.

[Joseph Buckley:]

Okay, and just one more question on G&A. Obviously pretty well controlled, very well controlled again in the quarter. Tell us how we should think about it going forward. Is it plateau-ing here? Because in prior year investments, and -- is it likely to stay very well-controlled or is it plateau-ing here and likely to start ramping up again sometime soon as you grow?

[Michael Casey:]

I think you should reasonably expect that the G&A is going to continue to grow with the business, but it is going to grow at a slower rate, such that as a percentage of revenue, it will continue to decline, as it has over the last four or five years. I also think you can expect to see a shift in the G&A from -- in previous years, we’ve built G&A in the U.S. business unit and in our corporate headquarters. More recently, the growth has been in our international business as we develop those markets and it has been very tightly contained, as you can tell from the segment reporting in our U.S. business and in our headquarters operations.

[Joseph Buckley:]

Thank you.

[Operator:]

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

[Jeffrey Bernstein:]

Thank you. Just a follow-up, actually, on Michael’s comments earlier about the strong balance sheet. We have been hearing from a more mature restaurants concepts taking on leverage to generate value, especially if stock is sitting at more depressed valuations. Obviously Starbucks is still clearly in the growth stages and investing heavily across the globe, but I am just wondering if there is an opportunity to take on some leverage, perhaps a more aggressive share repurchase? Obviously it was aggressive this past quarter, but that or other means of returning capital. I’m just wondering if you could talk about the uses of cash and the opportunity for more aggressive use of the balance sheet. Thanks.

[Michael Casey:]

Our priorities are very clear, that our first priorities are to satisfy the operational requirements of our business, the maintenance of our existing storage, the growth of new storage, purchase of equity in our international licensees when those opportunities present themselves. And after that, we have -- and support operations like IT infrastructure and the new roasting plant that we will be building here in the next year or so. And then after that, we consider the possibility of share repurchase and we have done that quite aggressively over the last few years. We have a fairly extensive capital structure and financial framework review and concluded we are way too early in our growth cycle to consider any different kind of use of the balance sheet. We have no intentions to leverage up the balance sheet for more aggressive share repurchase.

[Jeffrey Bernstein:]

Thank you.

[Operator:]

Your next question comes from the line of Steven Kron with Goldman Sachs.

[Steven Kron:]

Great, thanks very much. A couple of questions, actually; first, on the margin line, it seems like on the store operating expense and on the G&A line year over year, you’ve had some benefit from just lapping higher incentive compensation. Just a question for you, Michael. As we get to the back half here and we are expecting margin expansion again and the comps are going to be a little bit easier on a year-over-year basis, might we expect that incentive compensation on a year-over-year basis will start to pick back up?

[Michael Casey:]

I don’t think so. Not to the level that it was last year. We continue to accrue incentive compensation through the first half of this year, just not at the elevated levels that were associated with the outstanding performance last year. But we expect to have a normal incentive compensation accrual through the remainder of this year.

[Steven Kron:]

Okay, and then if I can just ask a question on the international business, given certainly the increased international store growth and the impressive comps that you guys have been able to post there, I was wondering if you could just provide us a little bit more granularity on maybe regional strength -- what markets are really driving the 7% comp this period and the 8% in the prior period?

[Michael Casey:]

It is really overall, and we’ve made a point not to all out individual markets for comp store sales growth, but just to name two that are very significant due to their size, the U.K. has been very strong and Canada has been very strong. We have had strength in the rest of our business as well, but those have been the drivers because of the strength of the comp and the size of the market.

[Howard Schultz:]

Just a little color on the U.K., when we introduced the Starbucks Card in the U.K., and I think this bodes well for other international markets as well, we had a very similar response to the card from our U.K. customers that we had in the early stages of our U.S. business, and we saw a lift in business since that card has been launched. I think again it demonstrates that there is a very similar way in which customer behavior responds to the Starbucks experience outside of North America and that Starbucks Card continues to be a very important marketing tool, customer loyalty tool. And the more we learn about how to use that card effectively with our U.S. business, the more effective it is going to be in leveraging the learning outside, and the U.K. is a great example. I also want to mention we just are getting ready to open up our 700th store in Japan as well. If you look around the globe, despite the large numbers in Japan and the U.K., there isn’t any market in the world that we are approaching anything close to market saturation, so as we look around, despite the fact that we are getting ready to open up before the end of the calendar year, other new markets, there is just so much opportunity for us in the markets that we are in. As we mentioned in the prepared text, China with its 500th store continues to be a very, very large prize for the company and we are in literally the embryonic stages of what we believe is going to be an enormous opportunity for our company and long-term for our shareholders.

[Steven Kron:]

Thanks a lot.

[Operator:]

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

[Matt DiFrisco:]

I have a question, but first a bookkeeping request; can you give us the comp broken out by domestic and international from 2Q of ’06, and then just tell us what you have upcoming in 3Q?

[Michael Casey:]

In the second quarter -- in the third -- you want the second quarter of ’06?

[Matt DiFrisco:]

Yes, second quarter of ’06 and 3Q as well.

[Michael Casey:]

In the second quarter of ’06, the total company comp was 10%. The U.S. same-store sales growth was 10%, and the international same-store sales was 9%. That is Q2 of ’06.

[Matt DiFrisco:]

Okay, and then can you tell me what 3Q is, what we have coming up that we are going to be lapping now?

[Michael Casey:]

Yes, the total same-store sales growth was 6%, the U.S. was 9%, and international was 6%.

[Matt DiFrisco:]

Okay. My question is with respect to the margins on the domestic side of the business, if I look at the overall basket, is it more of I guess the decline in the last two quarters, is it reflective of selling more food that might be coming out to be lower margin, or your comp just being a lower margin comp, or is it more so, or is there a productivity thing where maybe the new stores, the higher rent and you are yet to get the full volume off of that rent? So maybe the new store productivity is falling off a little bit, which would be the bigger reason for the margin decline.

[Michael Casey:]

I think the biggest reason is cost pressures. It is cost pressures in the area of wages, where we have invested in the wages of both our hourly and our management partners, and external pressure such as fuel and distribution charges, more so than any of the three things that you mentioned.

[Matt DiFrisco:]

Can you give us what your wage rate increase was in the quarter?

[Michael Casey:]

It was between 4% and 5%.

[Matt DiFrisco:]

Thank you very much.

[Operator:]

Your next question comes from the line of Larry Miller with RBC Capital Markets.

[Larry Miller:]

Michael, just to back up, my records show that you had a 6% comp in the third quarter in the U.S. and a 7% international. I think you might have said 9% in the U.S. Is that correct, a year ago?

[Michael Casey:]

That’s what I said.

[Larry Miller:]

Okay, sorry, I thought you might have said 9%. I had a question around dairy. Obviously dairy prices are rising --

[James L. Donald:]

Hold on, hold on.

[Michael Casey:]

I did say 9%. I could be wrong but the sheet that I’m reading says it was 6% consolidated, 9% in the U.S., and 6% in international in the third quarter of last year. Okay, so maybe my sheet is wrong.

[Larry Miller:]

I don’t think that’s right, because you’d be closer to 9% then.

[Michael Casey:]

Yes.

[Larry Miller:]

I guess you can clarify that later.

[Michael Casey:]

In any case, it’s in last year’s press release, and we can all look at it.

[Larry Miller:]

I have 6 and 7, U.S. - international. I just want to ask about dairy costs. They are obviously rising right now. In the past, I think maybe in ’05 you hedged, you had a swap on dairy. Are there any thoughts of doing that if dairy prices were to keep rising?

[Michael Casey:]

We did a very small, very small hedging operation with regard to dairy about 18 months ago, but we couldn’t get sufficient interest from a counter party to make it be significant for us, and so that never amount to more than about 5% of our dairy usage, and it’s trailed off. We are looking at other alternatives but we don’t have one that I would say is likely in the immediate future.

[Larry Miller:]

Thanks very much.

[Operator:]

Your next question comes from the line of Glen Petraglia with Citigroup.

[Glen Petraglia:]

Thanks. Howard or Jim, I’m curious to know what you guys think is the greatest challenge as you try to continue to grow in the U.S., let’s call it high-teens to 20%. What are the greatest challenges that you face in trying to achieve that growth, and perhaps what sort of things might we see at the store level over the course of the next six to 12 months that might potentially reinvigorate transaction growth at the U.S.?

[Howard Schultz:]

First, I wouldn’t extrapolate one month of flat transaction growth as the endpoint or conclusion that anyone should reach on this. If you look at the long history of Starbucks, transaction growth has been high single digits and we’ve had low single digits, and so this is one quarter, one period. As we look forward, specifically at the U.S. market and the opportunities that we have, we maintain our optimism and our belief that we are still in the early stages of the growth in terms of units. Certainly we’ve said that by publicly saying that we believe that we can ultimately have close to 20,000 stores or more and we are not even close to that today, but in terms of the next six to 12 months specifically, I think we’ve done a fairly good job in preparing for the summer, given the issues we faced last year. I think operationally, we’ve really taken a step back and looked at all the things that we faced last year and we are well-prepared, from an operational focus, and I think our food and beverage team have done a marvelous job in getting ready for innovative ways in which we are going to expose the market to new flavors. So we are prepared for a good summer. And then, as we look to the fall and Christmas, those plans have been completely in place now for a while. We have some exciting things coming that I can’t share with you on the phone today, but we feel really kind of locked and loaded for the summer, the fall and Christmas, and feel like we are in a very good place. I think if you look at, if you take away from the quantitative issues just for a moment, the thing that strikes me about this quarter that I think is interesting that perhaps we are not discussing too much, is we get into the book business and we take a book that was going to have a printing of 9,000 copies before we get involved. It’s a story that is a very tough story about a child soldier, and that book goes to number one two out of the last three weeks at the New York Times specifically because Starbucks became a market maker. It is not unreasonable to really look at us as a market maker on products and services. I think it demonstrates the unique power that we have in the marketplace from a brand position when we get behind something. And perhaps most importantly, the unique level of trust and confidence that our customers have. I think specifically how that goes back to your question is we are examining lots of ways around coffee and our core business that we can leverage that trust around innovation and really build positions for the company that no other company can get close to because of the heritage and tradition. And then we are looking at day part more closely than ever before, unique products and services for those day parts that we feel in the past that we have not really focused on in terms of segmentation. In short, this is kind of a long-winded answer, in short we feel really poised for the second half of the year to take advantage of the things that the summer, fall and Christmas season should provide us.

[James L. Donald:]

The only thing I would add to that is that as we go through quarter by quarter, actually month by month, quarter by quarter, we take a step back from each of these areas and we see and put our diagnostics skills on things we do well and things we don’t do so well. I am sure one of the questions that are sitting out there is as we prepare for summer, what are we going to do different than we did last year? As we went through the summer selling season with cold-blended beverages, we talk about we had a bottleneck, if you will, in the a.m. due to an unusually large request of this product during that time period. In order to continue to grow our business each and every day, just like we did then, we took a step back as soon as the season ended, we took a look at all of our stores, small and large volume stores, got the best practices on the cold-blended side of what these stores were doing, both in deployment of hours as well as the ergonomics, the flow, if you will, of the line-up behind the counter, and then we look at increasing the number of the cold beverage stations as well. So that is just one example of the -- not difficulty, but the way we look at this business to continue to get and be in the range that we talk about each and every quarter.

[Glen Petraglia:]

Thanks.

[Operator:]

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

[David Palmer:]

Thanks. A question on international; you mentioned with regard to that segment that you are reinvesting in the infrastructure, which sounds a lot like building the pipeline. I wonder -- I know it’s early to be talking about fiscal ’08 and beyond, but this year you are I think 75% or so of your unit growth is domestic, and I’m wondering if you could characterize if that percentage is going to be somewhat more international weighted next year, particularly with company stores?

[Michael Casey:]

I think in the relatively near future, the weighting is going to shift toward international, but it is not going to be rapid, mainly because we expect to continue to grow at a very rapid rate in the U.S. and we have the organization to do that. International is a little bit like chasing a moving train. While those numbers are increasing, the U.S. business is going to continue to build stores and open new markets at a very rapid rate. So there will be a shift but it will be gradual.

[David Palmer:]

Just a separate question; on the breakfast sandwiches, I’m wondering how much of the drag on margins is really from the rollout and early adoption phases of these sandwiches, and how much of it is really just from the fact that you are selling more of these as a percentage of your overall sales? The reason I ask is because you are going to start to lap the initial rollout -- in the next one or two quarters, you started them rolling out last year, and I’m wondering if that might provide some margin relief, or if we are just going to continue to see margins on the cost of sales line go the wrong way through fiscal ’08 as you roll these out?

[Michael Casey:]

You raise a good point. The margin impact at the gross margin level, it will be fairly permanent. There is no question that the food and the merchandise, which we are building that business, has a lower gross margin than the handcrafted beverages, so there is a piece there that is somewhat structural, and a few tenths of a percent of revenue. On an overall basis, however, as we get more stores and get more skilled at running the warming program and continue the refinements of the lunch program, there should be some relief in operating margin as a result of those two programs becoming more mature and we’re more skilled at rolling them out.

[James L. Donald:]

We’ve lapped areas now.

[Michael Casey:]

Yes, that’s a good point, Jim. We’ve lapped several markets and in those markets, we can see a definite year-over-year improvement in the warming program. But we also measure warming individually and in each market and it is contributing and it is producing a very satisfactory store level margin.

[David Palmer:]

Thank you. That’s helpful.

[Operator:]

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

[John Ivankoe:]

Thanks, just a couple of quick ones; the first is actually on store pricing in the U.S. Many companies take pricing when they think their structural costs have gone up. Most of the world is in an inflationary commodity environment, inflationary labor environment. Could you make your comments on pricing as you begin to think about lapping over the current 1.5%-plus that you have in the stores now?

[Howard Schultz:]

We have no plans to increase prices at this time and don’t believe that would be appropriate.

[John Ivankoe:]

Okay. Second comment, we’ve been hearing a lot in the last two weeks about some geographic weakness, specifically in markets like California and Florida. I’ve seen you do very well in certain economies.

[Howard Schultz:]

Where did you hear that? Other Starbucks or other companies?

[John Ivankoe:]

Other companies.

[Howard Schultz:]

I’m sorry. I thought you said it was us.

[John Ivankoe:]

In the last couple of weeks, a number of restaurant companies have mentioned it on their calls. Are you seeing any type of geographic trend that is interesting in the last few months like that?

[James L. Donald:]

Not anything that’s interesting. Nothing to show a cause for concern. It’s pretty consistent around geographic region to geographic region.

[John Ivankoe:]

Okay, and the final question, Howard, maybe this will take more than a couple of seconds to answer, is on China. Certainly we look at the overall consolidated results and they do speak for themselves in terms of what your revenue growth is and what have you, but what can you provide us with, either qualitatively or quantitatively, in terms of how the China market is going for you and how rapidly perhaps you can grow it in the future and how meaningful you might think it could be to the global business in the next -- pick the number of years, three to five years.

[Howard Schultz:]

I’ll start and Jim can pick up because he just returned last week from China. We have said almost very consistently throughout the last year or so that as we look around the world, like many other western companies and consumer brands, that China ultimately could potentially be the second-largest market in the world for Starbucks. I think perhaps the main point that we can provide today is, which we couldn’t do three or four years ago, and maybe even 18 months ago for that matter, is just the level of acceptance and perhaps the right word would be the relevancy of the Starbucks experience in China. Depending on what number you believe, there is north of 200 million Chinese people and that number’s growing, who we believe are the core customer today for Starbucks. I think what we’ve been able to do is make sure that as we enter China and continue to do business there that we do not become a fad that becomes hot and then all of a sudden is out of favor, but most importantly that we integrate our company, the experience, and Starbucks’ values into the lifestyle of the Chinese consumer and the behavior of how our customers are using the place. I think what’s probably most important is that not only have we achieved relevancy and success in the two most important major cities in Beijing and China, but now in I think 17 provinces, we have demonstrated throughout China and South China that Starbucks is going to be successful throughout greater China, and that includes Hong Kong and Taiwan. And so the foundation we are building in terms of infrastructure, the investments we’ve made, both in a Chinese-centric team based on China, as well as people with five and 10 and 15 years tenure from Starbucks U.S. that have moved to China, that we believe that this is going to be a big pay-off for the company at some point, and we are positioned as well as or perhaps better than most U.S. and western consumer brands that will be accepted and build a major business in China. I can’t give you the numbers because I think over time, not unlike the mistake we made early on in America, we underestimated the size of the market. We are trying not to do that. We are dreaming very big in China. We are investing heavily ahead of the growth curve. I think from a shareholder perspective, this is really going to pay off because this is a very, very big prize and we think we are going to achieve it.

[John Ivankoe:]

How many stores are you opening a year now in China?

[Howard Schultz:]

I’m looking to Michael to see if he’s going to let me tell you the number. I think that the number that we have internally is about 100. If you look at the history of Starbucks, I think the one thing that you can really look at is that we have really under-promised and over-delivered when it’s come to store count.

[James L. Donald:]

To that point, as I sat and talked to the Mayor of Guangzhou, and this is in southern China, and looked at that whole quarter of Shenzhen, Guangdong, and Guangzhou, I told the mayor that there is the potential of doubling those stores over the next 18 months to two years, and he said that’s not fast enough, and he told me areas that quite frankly surprised me, and we look at it. And the only reason I bring that up from a shareholder perspective is that when we go to these countries, when the government is asking us to become more of a part of the communities, when the customers at this conference that I was at talk about the Starbucks experience and talk about the ability to customize a beverage, it’s the place to go. It tells me that we are well on our way. But its’ the combination of, as Howard said, investing ahead of the curve not only in infrastructure and people, but also in the communities that we are in because now we’ve become “please come in and help us and we’ll in turn give back to you”, so it’s really a great formula and it’s a combination that’s working.

[Michael Casey:]

Just one more point to make on that, in the last six months or so, we’ve gained operational control of the Beijing market, which will allow us to have greater influence over the growth rate in that market. And in the last 12 months, we’ve gained operational control in southern China and we have geared up both of those markets for more rapid growth than they’ve experienced just six or 12 months ago.

[Howard Schultz:]

Martin Coles, the President of Starbucks International, is in the room and I think he wanted to just add something to your question about China.

[Martin Coles:]

Just for perspective on the new store growth, in China currently we are opening for every, for all of our international store count, roughly 20% of that count is actually new stores being opened in China. We expect there to be around 200 stores open in China during fiscal 2008 and I think again, looking forward, roughly 20% of our new store count will be in China.

[JoAnn DeGrande:]

Operator, that concludes the call for today. Before we shut down, I would like to just clarify the comps from last third quarter of fiscal ’06, if I may please, back to an earlier question. The consolidated comp was 6%, the U.S. comp was 6%, and international was 7%, so I apologize for the error. Thank you all for joining us today. We hope you will join us again. Next quarter we have our third quarter fiscal ’07 financial results due to report on Wednesday, August 1st. Thank you very much.

[Operator:]

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