Starbucks Corporation
Q4 2011 Earnings Call Transcript

Published: 4 Nov 2011

[Operator:]

Good afternoon. My name is Christian, and I will be your conference operator today. At this time, I would like to welcome everyone to the Starbucks Coffee Company's Fourth Quarter and Fiscal Year End 2011 Earnings Conference Call. [Operator Instructions] Thank you. Ms. DeGrande, you may begin your conference.

[JoAnn DeGrande:]

Thank you. Good afternoon. This is JoAnn DeGrande, Director of Investor Relations for Starbucks Coffee Company. Thank you all for joining us today for a review of our fourth quarter and fiscal 2011 year end results. On the call with me today here in Seattle is Troy Alstead, Starbucks CFO; and joining us from New York is Howard Schultz, Chairman, President and CEO. Our discussion today will include forward-looking statements, which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. Any such statements should be considered in conjunction with cautionary statements in our earnings release as well as risk factor discussions in our filings with the SEC, including our last annual report on Form 10-K. Starbucks assumes no obligation to update any of these forward-looking statements or information. Please refer to the financial statement accompanying the earnings release to find disclosures and reconciliations of non-GAAP financial measures mentioned on today's call, along with their corresponding GAAP measures. This conference call is being webcast and an archive of the webcast will be available on our website at starbucks.com under Investor Relations. [Operator Instructions] Now let me turn the call over to Howard Schultz. Howard?

[Howard D. Schultz:]

Thank you, JoAnn, and welcome to everyone on the call. I am delighted to report the record Q4 and full year earnings Starbucks announced today. Fiscal 2011 was a remarkable year for Starbucks almost on every level. 2011 was a year in which we demonstrated our commitment and unique capabilities around food and beverage innovation, brought the Starbucks experience to new markets and consumers around the world, broadened and deepened our channels of distribution, deepened our relevancy and connection to customers, improved our customer experience and advanced our blueprint for profitable growth. It was a year in which we reported record earnings each quarter and for the full year, very strong comp growth all around the world, achieved the first $3 billion revenue quarter in Starbucks' history, powerfully asserted our coffee authority and further differentiated and distanced ourselves from competitors. It was a year in which we reaffirmed our commitment to the thousands of communities and tens of millions of consumers we serve each week around the world and we realigned our organization to best position us to go after the tremendous global opportunities that lie ahead in 2012 and beyond. What makes our fiscal 2011 performance even more remarkable is that each of these significant accomplishments was achieved despite pervasive global economic uncertainty, high global unemployment, difficult consumer environment, stubbornly high commodity costs and the formidable operating headwinds that continue to challenge global retailers. Yet once again, Starbucks' nearly 200,000 partners and leaders around the world joined together and met the challenge and delivered and extraordinary experience to our customers and exceptional operating performance, financial results and economic returns for our shareholders. Starbucks Coffee Company has never been stronger or better positioned for sustained profitable growth than it is today. I have never in my career been more excited or more optimistic about where Starbucks is and where we're going as a company or felt more strongly that we have the tools in the right places to get us there. Today I will present highlights of Q4 and full year 2011 financial and operating results and share a few accomplishments that will not be evident from the figures alone. Then I'll turn things over to Troy who will take you through the financials in detail and provide you with an update on fiscal 2012 outlook. Starbucks' total net revenues for the quarter of 2011 totaled a record $3 billion, representing a 15% increase over Q4 2010 net revenues on a comparable 13-week basis. This extraordinary year-over-year increase was driven primarily by a 9% increase in global comp store sales. For the full year, our net revenues reached a record $11.7 billion, representing an 11% increase over fiscal 2010 on a comparable 52-week basis, largely driven by an 8% increase in global comp store sales. Our full year consolidated operating margin reached a record 13.8%, excluding nonroutine items surpassing the 13.3% consolidated operating margin we achieved in fiscal 2010. And our EPS followed suit, increasing to a record $0.37 in Q4 and a record $1.52 for the year, excluding nonroutine items. Starbucks' record performance in 2011 was a direct result of the discipline, the operating leverage and excellence in the outstanding execution our leadership team is driving and our partners are delivering across all business segments and around the world. Now I'll touch on a few highlights and some plans for each of these segments with you. Under the leadership of Cliff Burrows, our U.S. retail segment delivered against all operating and performance metrics in fiscal 2011, despite persistently high unemployment, low consumer confidence and a very weak U.S. economy overall. Accelerating double-digit comp growth in Q4, solid operating margins throughout the year and record full year results all demonstrate our deepening connection with U.S. consumers and the increasing power and growing relevancy of the Starbucks brand. But we are just getting started. Going forward, innovation, operating excellence and our partners' passion will continue to drive our operating performance and elevate the Starbucks Experience for our customers. We have a full pipeline of exciting new products that will be introduced for holiday 2011 and throughout fiscal 2012, including Starbucks K-Cups available in our U.S. retail stores next year. And we couldn't be more excited about our pipeline for products and innovation for 2012. Strong sales momentum coming into Q4 accelerated in September in response to our annual fall promotions featuring our Pumpkin Spice Latte and Salted Caramel Mocha and Tazo Chai Tea beverage platforms, and our Anniversary Blend coffee. Pumpkin Spice Latte was a notable success, growing 44% over last year. Food sales in the quarter were boosted in part by the tremendous positive response we have had to our recent Bistro Box platform launch and to our breakfast sandwich promotion. Bistro Box is available in 2 portion sizes and centered around fruits, vegetables, lean proteins and whole grains were developed and introduced in response to research showing that over 2/3 of consumers want healthy food choices with wholesome ingredients, and our food development teams delivered a great tasting, nutritious line of quality products. We will continue to roll out and expand our Bistro Box platform and remain committed to making additional wholesome and innovative food and beverage choices available to our customers in the quarters and years ahead. We also connected more deeply, more frequently and with more of our customers than ever before in our history. Customer participation in our My Starbucks Rewards program is accelerating, reflecting increased customer awareness of the enhanced value proposition that membership provides and we now have over 3.6 million active members, nearly 2 million of whom are Gold-level members. We added 1 million new members to the program in Q4 alone. In fiscal 2011, over $1.1 billion in purchases was paid for by the use of the Starbucks Card. And today, a Starbucks Card is used in 1 in every 4 transactions. Our My Starbucks Rewards program continues to drive traffic, frequency and incrementality for our business and value for our customers, creating further separation between us and everyone else in our space. The Starbucks Card mobile app continued to gain popularity as the Android app launched in June gained adoption and the updated iPhone continued to attract and gain users. At the end of September there was almost 1 million smartphones with at least one registered Starbucks Card associated with it and both the number and value of mobile transactions is on the rise. Now coffee and coffee alone will continue to be our core and coffee innovation will continue to drive our business. Two weeks ago we introduced the introduction of Starbucks Blonde Roast, a light roast coffee that represents a new roast profile and another $1 billion market opportunity for Starbucks. Blonde Roast builds on our 4-year heritage of sourcing and roasting the world's finest coffees and was developed in response to unmet demand from the approximately 54 million U.S. consumers representing over 40% of U.S. coffee drinkers and over 70% of total premium coffee sales who want Starbucks quality in a lighter super premium roast coffee. Now just as we revolutionized and are taking our fair share of the global instant coffee category with Starbucks VIA, Starbucks Blonde Roast enables us to provide consumers with a premium light roast coffee alternative and greater choice and positions us to go after a greater share of the brewed coffee market both in our stores and down the coffee aisle in CPG channels, where the majority of packaged coffee sales are of the light and medium roast varieties. Blonde provides us with the unique opportunity to attract new hot and cold beverage drinkers to the coffee category. Blonde roast will be available in whole bean and ground starting in January in our retail stores and through our grocery channels. Blonde will also be brewed in our stores available in K-Cup portion packs in January and as a Starbucks VIA variety. Looking ahead we plan to open at least 200 net stores in the U.S. in 2012 and to remodel approximately 1,700 existing stores, that's the most stores we've ever remodeled in a year. Store remodels provide us with the unique opportunity to drive traffic, increase our in-store efficiency, provide a more comfortable environmentally sensitive third place for our customers, further differentiate Starbucks from competitors, provide jobs in and around local communities we serve and improve the Starbucks Experience for our customers overall. Now speaking of remodels, I would encourage each of you to visit our newly remodeled Times Square flagship store at 47th Street and Broadway, the next time you're in New York City. The Times Square store is an acclaimed showcase of retail innovation and green construction that we will be drawing upon as we build and remodel future stores across the country and around the world. The Times Square store is also a roaring financial success delivering over twice the revenue on a 70% increase in traffic compared to last year. Turning to international. I'm very pleased to report that our international business continues to accelerate. We now operate over 6,200 stores in 55 international markets and our brand has never been stronger nor our ambitions bolder. We saw accelerated transaction growth through 2011 while focused and disciplined execution enable us to leverage that growth into higher margins and profits. China remains a focal point of our international expansion efforts and last week, we opened our 500th store in China, marking an important milestone along our path toward having 1,500 stores in mainland China by 2015. In fiscal 2011, we opened on average 1 store every 4 days in China and we'll be accelerating that pace in 2012. In the fourth quarter, China delivered another very strong quarter of comp growth including a healthy increase in a number of transactions driven by the expansion of the Mooncake program and our wildly successful Frappuccino summer promotion. The broader Asia Pacific region delivered similarly strong results. 2011 marked the 15th anniversary of the opening of our first Starbucks store in Japan and our business in Japan continues to recover ahead of plan from the tragic earthquake and tsunami that struck earlier this year. A few weeks ago I personally visited our partners and customers in Sendai, an area that was utterly devastated by the dual tragedy. The resilience, energy and heart stirring compassion evidenced by our partners and customers that I observed during the trip was nothing short of inspirational and reaffirm my admiration for and commitment to the Japanese people, who continue to do so much to help and take care of one another in the wake of this extraordinary catastrophe. I went there specifically to help set up an emergency CUP Fund, Caring United Partners for Japan. The CUP Fund provides cash grants to help partners and their families who have been impacted by the disaster and is funded entirely by Starbucks partner donations. I want to personally extend my thanks and appreciation to the many partners around the world who have contributed to the fund. Looking ahead I am confident that our new 3 region organizational structure ideally positions us to pursue accelerated profitable international growth by having disciplined focus and experienced leadership at the helm of each of the China Asia Pacific Americas and EMEA regions. As president of China/Asia Pacific, John Culver brings strong leadership and deep knowledge to these markets and will ensure that we achieve our ambitions for this critical part of the world, including the opening of our first store in India in 2012 and our first store in Vietnam thereafter. As President of the Americas business, Cliff Burrows will extend the extraordinary leadership, management and operating excellence skills that he has brought to our core U.S. business to drive continued growth in Canada and Latin and South America with a strong emphasis on Brazil, Mexico, Argentina and Chile. Cliff is already demonstrating his skills and plans, having just last month strengthened and expanded Starbucks relationship with our Latin America joint venture partner enabling us to add more than 300 new stores in Mexico and Argentina by 2015. And I do know that Michelle Glass, the 15-year Starbucks leader who now serves as President of the EMEA will bring her leadership skills necessary to recalibrate certain markets that are currently not meeting our expectations and profitably grow our business in Europe, the Middle East and Africa into the future. Turning to CPG. Our Global Consumer Products and Foodservice teams operate on the extraordinary talent and leadership of Jeff Hansberry in a key area of strategic investment for Starbucks and a cornerstone of the blueprint for profitable growth that we outlined a year ago. I'm delighted to report that in both Q4 and throughout fiscal 2011, we made enormous strides in our channel development strategy of expanding the availability of our portfolio of branded products beyond Starbucks stores. In fact, as we speak today, Starbucks CPG products are available at more than 100,000 points of distribution around the world. In 2011, we successfully transitioned Starbucks' Packaged Coffee and Tea businesses in house and materially expanded our portfolio of coffee home products through an agreement with Green Mountain Coffee Roasters. We're very excited about our partnership with Green Mountain and are looking forward to expanding our presence in the fast-growing multibillion dollar single cup category in the quarters and years ahead. In fact, just a few days ago at 12

[Troy Alstead:]

Thanks, Howard. And good afternoon, everyone. Today we reported earnings that continue to reinforce the strength and resiliency of our business model, the global power of our brand and the talent and dedication of our partners. In the fourth quarter, the U.S. international and CPG business segments all reported record Q4 revenues. In addition, on a consolidated basis, records were also achieved for revenue, operating income, operating margin and earnings per share. This was all accomplished despite continued pressure from macroeconomic headwinds and significantly high commodity cost. Our performance reflects the strong connection that exists between Starbucks and the communities and customers we serve and highlights the fact that the Starbucks value proposition continues to resonate deeply with customers all around the world. Today, I will provide additional details on our fourth quarter and full year performance, then I'll provide an update to our outlook for 2012. Fourth quarter consolidated net revenues were $3.0 billion, the highest of any quarter in our history and up 7% from $2.8 billion a year ago. Excluding the 53rd week in 2010, revenue growth for the quarter was 15%. Global comparable store sales continue to accelerate, increasing 9% attributable to a 6% increase in traffic and a 3% increase in average ticket. Two year same-store sales growth was 17% globally, further highlighting the momentum we're building around the world. Higher CPG revenues also contributed to the increase. Consolidated operating income of $448 million in the fourth quarter increased by 12% over the $399 million reported in last year's fiscal fourth quarter, excluding the nonroutine gain in fiscal 2011, and the impact of restructuring and the extra week in fiscal 2010, we saw a 20% increase in non-GAAP operating income compared to the fourth quarter of last year. Consolidated operating margin finished the quarter at 14.8%, a 70 basis-point improvement over last year's fourth quarter on a GAAP basis. This improvement was primarily due to increased sales leverage and again on the sale of office buildings here in Seattle, partially offset by higher commodity cost and the impact of the extra week fiscal 2010. On a non-GAAP basis, operating margins increased 60 basis points to 13.8% from 13.2%, which excludes the nonroutine gain in the fourth quarter of fiscal 2011 and the impact of restructuring and the extra week in Q4 of fiscal 2010. The increase in commodity costs, largely coffee, negatively impacted operating margin in the quarter by approximately 290 basis points. Earnings per share was $0.47 for the fourth quarter, an increase of 27% over $0.37 in the prior year period. This included approximately $0.10 attributable to nonroutine gains resulting from the acquisition of the remaining equity in our Switzerland and Austria markets and the sale of office buildings here in Seattle. Excluding the nonroutine gains in Q4 of fiscal 2011, and the impact of restructuring and the extra week in Q4 of fiscal 2010, EPS increased 16% to a record $0.37 per share. We absorbed approximately $0.075 per share in the fourth quarter due to higher commodity costs. Today we are announcing a 31% increase to our quarterly cash dividend to $0.17 per share from $0.13 per share and the authorization of an additional 20 million shares of our share repurchase program, bringing our total number of shares available for repurchase to just over 24 million. These 2 actions reaffirm our confidence in the strength of the business and our commitment to returning excess cash to shareholders. I will now move to the results of our operating segments, which will be compared with last year's non-GAAP results that exclude the impact of restructuring and the extra week in Q4 of fiscal 2010. Please note that this will be the last quarter we report in the 3 segment structure. As we have transitioned to our new organizational model as of October 3. We will provide financial restatements including 3 years of historical data under the new segment structure along with our first quarter fiscal 2012 earnings report. Total U.S. net revenues for the quarter were $2.0 billion an 11% increase over the same period last year. Both company-operated and licensed stores saw impressive gains in Q4 with a company-operated growth driven by a 10% increase in comparable store sales. The comp increase was comprised of a healthy 7% increase in traffic and a 3% increase in average ticket. 2-year comps were 18% for the quarter, our highest mark in almost 6 years. Our same-store sales growth in Q4 was especially meaningful given the continued weakness in the U.S. economy and further validates that our commitment to a premium experience is resonating with our customers. Importantly, we saw strong transaction growth among all day parts in Q4 with the hours between 11

[Howard D. Schultz:]

Troy, thank you, before moving to the Q&A I'd like to share a few final thoughts. As I said at the outset, 2011 was an extraordinary year for Starbucks at every level. The Starbucks Experience has never been better, or profits have never been higher, our balance sheet has never been stronger and our brand has never been healthier and our connection to customers and their trust in us has never been greater. This week approximately 60 million customers will visit us and that's just an unbelievable number when you consider where we have come from 1987, 11 stores, 100 employees and today, 17,000 stores in 55 countries. We have purchased coffee and hundreds of products from vendors around the globe. Over 200,000 people who wear a green apron or support someone who does everyday. Starbucks is in every sense a global company. Today the world is our community and Starbucks will always give back to the communities we serve. 40 years ago we set out to build a new kind of company one that strikes a delicate balance between profit and a social conscience. Striking that delicate balance remains the cornerstone of company today. Today, the world is facing one of the most challenging issues of our time, chronic high unemployment, a demoralizing and unacceptable condition, unless reversed will scar generations to come. We're doing what we can by having added approximately 3,700 net new jobs in fiscal 2011. And we plan to add approximately 12,500 net new jobs around the world in 2012. We're also accelerating design and development of a new manufacturing plant here at home. But we have more to do. I've made no secret of my belief that American business leaders need to step up and address the jobs crisis head on before an entire generation is lost to hopelessness and despair. The lifeblood and engine for employment in our country has always been small entrepreneurial small businesses. Yet while small businesses have the greatest need for credit, for many reasons, today they're having greatest difficulty obtaining them. On November 1, Starbucks launched a program in partnership with the Opportunity Finance Network, in which concerned citizens could donate as little as $5 to help restart the jobs engine. Americans helping Americans get back to work. The Starbucks Foundation seeded the program with a $5 million donation and we hope other like-minded companies will do what they can to create and sustain as many jobs as possible. It's right for our business, it's right for our communities and it's right for country. Starbucks today is executing across all channels and around the world and we have never been better-positioned to go hard and go fast after the tremendous global opportunity that lies ahead in 2012 and beyond. In 40 years there has never been a more exciting or exhilarating time to be at Starbucks. Thank you.

[JoAnn DeGrande:]

Operator, we are ready to begin the Q&A please.

[Operator:]

[Operator Instructions] Our first question comes from John Ivankoe with JP Morgan.

[John W. Ivankoe:]

One question and maybe we can try it in a few different parts. Obviously the U.S. stores are doing a great job of meeting the demand that's out there, perhaps even creating demand for themselves based on what's being offered and how the stores are being run. So I just want to get a sense of things like the new point-of-sale and the labor scheduling, how much that might be driving comps and how much that might be adding to capacity in 2012, for example. And if I could, just as an extension of that, whether it's possible to start to apply some of those principles to Europe, especially given what I think I heard was a mid-single-digit margins in those regions, perhaps increasing your peak hour productivity or you're just throughput and when customers most want to the stores might be a possibility in the near term.

[Howard D. Schultz:]

What I would say is, first of all, in terms of the technology in our U.S. stores, we have, as you mentioned, made significant investments into the stores

[Operator:]

Our next question comes from Keith Siegner with Crédit Suisse.

[Keith Siegner:]

The update on how VIA was doing that last 4 weeks I thought was really interesting and maybe you can talk about this a little bit more broadly. The shelf resets that are happening in consumer products over the next couple of months, if you could give us an idea, say, how many more SKUs might you have now having taken that business back in and introducing some new products, including K-Cups and including Blonde. If you think about '12 versus '11, how many more SKUs might you have? How much more shelf space might you have? If you could put some rough parameters around, say, some of those metrics would be really helpful.

[Howard D. Schultz:]

I'm going to ask Jeff Hansberry, the President of our Consumer Products Group, also called our Channel Development team, to answer that question for you.

[Jeffery J. Hansberry:]

Keith as we look at the premium single cup space as both Troy and Howard mentioned, it's growing significantly. And so as we enter the K-Cups space and as we continue to expand the VIA space, we will, in rough terms, triple or more the number of SKUs that we have in that space. So in rough terms, in 2011, toward mid-2011 I want to say we have roughly 5 VIA SKUs. We've added several new VIA SKUs to include House Blend and Breakfast Blend. We've also launched as of November 1, 7 K-Cup SKUs, 5 in the Starbucks brand, 2 in the Tazo Tea brand. So we have seen a significant increase in our number of SKUs. But importantly, we have seen a significant increase in our space on the shelf as the retailer is dedicating more and more space towards premium single cup. And importantly, they see the trend and we're seeing premium single cup represent 2/3 of the growth in the total premium coffee space and we're seeing the space allocation begin to reflect that. Also importantly, we see tremendous upside in premium single cup. Today about 8% of households have premium single cup machine in their homes. We expect that to increase significantly over the next, call it, 5 years doubling maybe even tripling. So we think there's a tremendous amount of run rate and a tremendous amount of room for us to grow through road VIA and K-Cups and other platforms that we will add over time.

[Operator:]

Our next question comes from Jason West with Deutsche Bank.

[Jason West:]

I just wonder if you could provide a little more color on the comp outlook by region. You mentioned Europe a little bit soft in this summer. If you could talk about sort of your outlook there. Are you seeing things come back a bit now and within the mid-single digit guidance, do you expect certain regions to be above that? Obviously China may be above, but sort of how you see that guidance for the regional breakdown.

[Troy Alstead:]

I won't provide specific regional comp targets just yet. It's a bit early in the year for us to do that. But let me give you a little more texture on what we saw in Q4 because there's no question that'll help shape the thinking I think about how we enter 2012. So in the fourth quarter, obviously 10% same-store sales growth in the U.S. very, very strong. Asia Pacific growth was in the mid-20s, extremely strong. And growth in China, mainland China, same-store sales growth continues to be above that, in the 30s. So we clearly continue to have a business in China and Asia Pacific that is the tops in the world in terms of same-store sales growth. And we would expect that to some degree to continue. Now there's no question that 30-plus percent comp growth can't continue forever. I believe we firmly see very, very strong trends as we come through 2011 and enter 2012. I would make a comment about Canada specifically right now in the Americas. And that's because earlier in the year, we've spoken about Canada and U.K. together being a bit softer and averaging down our international same-store sales number. Canada in the fourth quarter really began to see an uptick for us. In fact, the fourth quarter comp growth for Canada was the strongest of the entire year for Canada. That's encouraging. We think that is a good sign of the efforts our Canadian team is making and what's ahead for us in 2012 there. But again, Europe continues to be a bit soft. I think that's reflective of the broader environment. We have a number of initiatives underway in terms of things that we brought to bear in other regions and markets in the world that are in progress of being put in place in Europe, new innovations. And that all gives us confidence that we have an opportunity to drive increased strength on both the top line and the bottom line in EMEA in the year ahead but no specific targets for you at this stage.

[Operator:]

Our next question comes from John Glass, Morgan Stanley.

[John S. Glass:]

What's the price point you plan to sell the K-Cups at? How quickly do you think you can reach full ACV penetration given what you said were some bottlenecks? And is any of your CapEx going toward K-Cup production or rather single-serve production, or is it left for the Bag business?

[Troy Alstead:]

John, first on that CapEx, I'll answer that question. The answer is no, there's no CapEx that we need to dedicate towards K-Cups. We produce the coffee but that leverages significantly off of our current coffee roasting manufacturing plant. So no incremental capital for us to spend. And now I'll turn it to Jeff to answer the first part of your question.

[Jeffery J. Hansberry:]

In terms of the price point, our frontline on K-Cups will be $1 per cup in grocery and mass outlets. With regard to going distribution, we expect to achieve 80% ACV distribution on K-Cups over time.

[Operator:]

Our next question comes from Greg Badishkanian with Citigroup.

[Gregory R. Badishkanian:]

Obviously outstanding same-store sales in the U.S. and that business is doing great. What do you think drove that just given the tough macro environment? And any type of color around how that quarter progressed particularly with the backdrop of the macro will be helpful too.

[Troy Alstead:]

Howard you want to make any comments about your thoughts about the quarter?

[Howard D. Schultz:]

Yes, I never think there's one thing that drives this kind of revenue and obviously comp store sales. When you look at the backdrop of the economy against our numbers or the other retailers that did not perform as well the last few months, it's really a stunning result. I think we demonstrated a number of things not the least of which is just operational excellence, speed of service. I wouldn't dismiss the loyalty program as well as mobile because it's attracted lots more customers. I think the value proposition of us being able to integrate value into our premium pricing with Starbucks rewards program is another example. And I think we've extended day parts in a number of areas, not the least of which is what's happened with food and lunch. And I think what was said about Health & Wellness with regard to the Bistro Box is just the beginning of I think the trust that people have in the Starbucks brand and our ability to extend Starbucks products beyond coffee. And I think what really surprised us during the quarter, was Pumpkin Spice Latte, which is a product we've had many years before, to have a 40% increase is just an unbelievable number. And I think all of the questions and perhaps the cynics of a couple of years ago that believed that when McDonald's and Dunkin' Donuts entered the space, they were going to have a destructive effect on Starbucks has proven to be not only not the case, but I think the more money that's been spent against the category has helped Starbucks create awareness, new customers and obviously distance between them and us. So it's not one thing. I give a lot of credit to Cliff and his field team. And I think it gives us great momentum going into the year and I think what we're most proud of is being able to put these numbers up against unbelievable significant headwinds not only about the economy but commodity costs.

[Clifford Burrows:]

It's Cliff Burrows here, President of the Americas. I think one of the other things that should be noted is we've had great results across the U.S., which is a testament to the quality and stability of our leadership teams. And we are really going about our work every day of delivering a great beverage to the customer, friendly service and speed. And those 3 attributes are really important to customers really across the globe for Starbucks. And we couldn't do that without our partners putting on a green apron and showing up each day and really being welcoming and being incredibly professional and proficient around what they do. So it is really 200,000 people either serving customers with their green apron on or supporting someone who does. And that's -- in one level, it's very simple. And it's hard work and we keep doing it every day and we'll continue to focus on that.

[Operator:]

Our next question comes from Matthew DiFrisco with Lazard Capital Markets.

[Matthew J. DiFrisco:]

Troy, I think you mentioned in the remarks in the International segment that you characterize China, despite the inflation, as still being strong. Could we infer at least that we're -- could you be a little bit more specific? Is it improving and expanding given the strong comp trends? And then just looking at international, the margin also there, I think you made a remark that commodities are about 120 basis points and looking at the relative cog year-over-year change was a couple of hundred basis points. I'm curious, can you give us some of the other headwinds that maybe were being dealt with in that line item. Was it rates of occupancy or something of that nature of the newer stores causing a little pressure on that?

[Troy Alstead:]

Matt, first of all, with respect to China what you can infer is that our margins continue very strong, we're holding them at the high levels that they are at previously despite what is inflationary pressures on our P&L just as everybody else in China is facing. And the fact that we're able to overcome that very high labor inflation and other input cost inflation on that P&L and still deliver very high store-level margins and country-level margins even after G&A, which are also extremely strong. And I would expect that someday in the future, with a bit more scale, will be among the strongest we have in the world. So yes, China continues to be very healthy for us, the expansion of our top line same-store sales as well as bringing the various efficiencies and the supply chain and operations of our stores are helping us really overcome those inflationary pressures, and I'd expect that trend to continue for some time.

[Howard D. Schultz:]

Let me add one more thing about China that I think is important that is not really seen in the numbers. It's 2 things. One, the success we're having in secondary and tertiary cities is equaling or surpassing the success we've had in Shanghai and Beijing. So that gives us great optimism. The second thing is that the customer base in China today is very different than it was 12 or 5 years ago when we first opened. And that is, the customers we have today are primarily Chinese nationals. It's no longer ex-pats or American tourists, which bodes so well for the future and opportunity we have in terms of how the brand is recognized and how the brand is trusted.

[Troy Alstead:]

And it's important to add to that point, Matt, that our very, very strong same-store sales growth in China is driven by transactions. These are increased frequency new customers coming in to our stores. It's not driven by pricing and that gives us extreme confidence in our ability to keep driving more volumes to those stores and continue to drive what is a great return on capital in this expanding business in the years ahead. Now overall, international far and away, the commodity cost impact is the most meaningful part which you see happening in cost of goods. There's modest pressures in a few other places that we invest in, supply chain and some occupancy cost. But not extremely meaningful nor any trends that concern us there. Clearly, commodity cost across all of our businesses the pressure we're seeing is in cost of goods.

[Operator:]

Our next question comes from Joe Buckley with Bank of America.

[Joseph T. Buckley:]

A question on the remodel program. The 1,700 stores, is that a number for the Americas or is that a number globally? And if it is globally, could you just talk geographically, where that will be split? And besides the look of the stores, the main functional focus of the remodels?

[Howard D. Schultz:]

It is U.S. stores, but Cliff you want to take that?

[Clifford Burrows:]

Joe, we have 1,700 stores. That is a mix of what we would call minor refreshes usually at the 5-year mark and then mostly about 500 of these are major refurbs which are at the 10-year mark. Each time we take a look at the flow, the assets of the store and say, "How can we improve the customer experience, the partner experience and increase capacity?" Now that can be improving the flow, it can be putting in new equipment, whether that's the clover machine, whether that's repositioning warming ovens, whether it's putting in an extra brewer. At the same time, we also look at the third place and say, "Can we increase seating so that we can get more people in there at peak times?" Drive-through lanes, the length of the stack, the equipment around effectiveness and efficiency of the order and just improved flow there. Sometimes it's outside the store and it can be visibility, it can be at the patio space. And it's really a holistic view and we try and do that to bring it up to the latest view. We also obviously are looking carefully at the sustainability of the materials and lead certify on new stores we both are bringing in a local relevance to the community where the store is present. So it's all of those, Joe, that are contributing to it.

[Troy Alstead:]

And to be clear, Joe, that 1,700 stores, as I think Howard mentioned, is in the U.S. We continue to put together our plan for how our learnings out of this U.S. renovation program and all the great things we've established from that in the past year or 2 as we accelerate the program, how that's applicable and how to more substantially apply some of that outside of the U.S. And so you'll see us develop those plans more meaningfully in the quarters ahead.

[Joseph T. Buckley:]

Can you talk about the relative sales which you get from the minor versus the major remodels?

[Troy Alstead:]

Well, the minor remodels are generally about maintaining a stream of excellence to the consumer. And so generally, when we initially justify the capital to invest in a store, we include life cycle capital over 10 years, including the minor refreshes that may happen. So we don't go into a minor refresh expecting an uplift. Now sometimes we see that, but that's not exactly what we aim for. The major remodels, particularly more recently where we've been more substantial in what we've done and some of the sites, Joe, that I think you've seen, do contribute. I'm not ready to extrapolate over a big portfolio of stores about what that could mean. We've seen very solid top line lift from some of these major remodels and renovations, and very good return on the incremental capital that we're spending to do that. So we're encouraged by it but I wouldn't yet say there's something there you can extrapolate across the whole system.

[Operator:]

Our next question comes from Sara Senatore with Sanford Bernstein.

[Sara H. Senatore:]

Looking through CPG and China sort of think through, you have all these great growth opportunities in single-serve, what are the implications for the core bagged coffee? I actually would have thought your CPG business might have been up a little bit more given bringing packaged coffee in house, what the annualized revenue number might have been. So how do you think about and how should I think about cannibalization or the trade-off between the new business you're doing and the existing very good core business?

[Troy Alstead:]

Sara, we'll have Jeff answer that.

[Jeffery J. Hansberry:]

Sara, so in terms of the base Packaged Coffee, we think the future is very bright for Packaged Coffee. We continue to see revenue growth on Packaged Coffee in the last quarter up 7%. As we move toward, the new Starbucks Blonde Roast, we are going to be serving a significant unmet segment where 40% of premium coffee consumers prefer a lighter roast and we're going to deliver a great product in a unique Starbucks way. In addition to that, we've got a fantastic package graphic upgrade that lands in January as well that will make it easier than ever for our customers to choose their preferred roast and blend of Starbucks coffee. As we go forward, we do expect some cannibalization as our K-Cup business continues to grow. But we expect that to be modest and we expect to continue to grow our Packaged Coffee business.

[Operator:]

Our next question comes from Michael Kelter with Goldman Sachs.

[Michael Kelter:]

I have the same kind of sentiment where I hate to ask a hard question, a negative question, given how the strong quarter is. I guess what strikes me is you have so many balls in the air at once now. You've got taking back the CPG business and launching K-Cups and rejiggering the divisions and reaccelerating the unit growth and launching new products like Blonde and others. I guess my question is, where are the organizational pressure points? How are you addressing it and ensuring that with all these balls in the air, one doesn't drop? And why not take maybe a more measured approach versus all these great ideas at once?

[Howard D. Schultz:]

Let me try and answer that. I think it's an appropriate question and one that I think we've asked ourselves. But I think in order to answer it I want to bring some texture. In 2008, 2009, when we were dealing with the cataclysmic financial crisis and navigating through our own self-induced mistakes that we had to own up to, I think the transformation of the company was twofold

[Operator:]

Our next question comes from Jeffrey Bernstein with Barclays Capital.

[Jeffrey Andrew Bernstein:]

Just I guess a 2-part question on International. I think we're still sticking with kind of mid to high teens long-term margin goal. Just to clarify, I believe in that mid-single digit right now in EMEA and 30% in Asia, so I'm just wondering obviously with that disparity, what you'd see to be the pace of growth in both those segments perhaps in 2012 within that I guess 50 to 100 basis points worldwide, and what the longer-term target is that's going to get you to that -- longer term by region, I should say, that was going to get you to mid- to high teens. And whether or not you're going to touch on the U.K. In the last time you mentioned, I guess the comps were still tracking positive although disappointing. I'm just wondering if you could give us some directional trends on the U.K. and the issues that are perhaps out of your control.

[Troy Alstead:]

There's a lot there so I'll try to go through it and remember it as I can. In terms of how we expect International to progress towards a mid- to upper teens. As I mentioned earlier in my comments, China and Asia Pacific is already very, very strong as a region. And we expect over time, as we grow rapidly, to be able to maintain the current margin structure of that region largely somewhere in the 20s. It's got very strong store-level profitability. We don't have yet scale in China, so we know over time the country level margins in China should grow further for us. I would just point out also that there's an important contributor right now to our margin structure in the China and Asia Pacific region. We haven't said much it, and that's Japan. And much of that has to do with how we operate in Japan, which is a joint venture that we own 40% of. We do not consolidate the top line revenue of that business but it is our largest market in China and Asia Pacific, produces very significant profitability that we pick up 40% of that JV income. And also growth out of that license business, which comes with it. As a result, a very, very strong licensed margin that adds into the China and Asia Pacific margin structure. So the margins for in Asia is both about strength in China as we grow and it's also about the very, very strong healthy business in Japan, that's a license market for us today. In EMEA, that is the place in the world where we would expect the biggest increase over time from where we are today and that's given that, that market, that region is not where it should be today. And we have plans in place to move it north from the mid-single-digit that it's at now. Sometime in our future, and I've said this before, we would expect EMEA, given what we can see in terms of the opportunity, the plans we have in place to drive margin improvement over time, to progress, again this is over time, toward the mid-teens. And we think we have a very healthy path to get there and we have some countries already operating at that place that gives us confidence that we can do that. Again China and Asia Pacific, I would expect to be north of that well into the 20s, higher than what we see in the Americas. And then in the Americas, largely about the U.S. but importantly, in the future increasing contributions out of Canada, places like Brazil as we grow rapidly. I would also expect very, very strong healthy margin contribution there. So that contribution over time across those regions is how I would still be confident in us progressing towards that mid- to upper teens.

[Jeffrey Andrew Bernstein:]

[indiscernible] in U.K. specifically or...

[Troy Alstead:]

Yes, I think what I'd tell you about the U.K. is that, and we've said this throughout this year, that the U.K. has been relatively softer for us, consistent with other parts of Europe to some extent, than say what we've seen in the Americas in China Asia Pacific. In the fourth quarter that continued. U.K. is positive, it is growing, we have positive same-store sales growth. But it is somewhat lower than what we see, for example, now in Canada and clearly lower than what we have in the U.S. And again I think that is reflective to a large degree of the environment there. We expect, as we move into 2012 given the number of innovations we have lined up for the U.K. and we're confident in our ability to capitalize on the prominence of the Olympics in London this coming summer that all those pieces together will help us drive a stronger same-store sales growth in the U.K. and continue to drive margin improvement in that region.

[Operator:]

Our final question comes from the line of David Palmer with UBS.

[David Palmer:]

You mentioned the lower earnings growth in the first half due to cost in the Green Coffee cost side I think specifically. Between your CPG division and your retail stores, your own stores, where are you accepting more margin impact as defined by inflation that is not being offset by pricing? And really related to that, I really wonder why Starbucks should ever accept dollar impact to profit from Green Coffee inflation when you have such a strong brand and relatively higher-income consumers? I sure see a lot of pricing going on out there.

[Troy Alstead:]

Let me speak, David, to the first part of it. And then I'll probably ask Jeff to speak a little bit to our pricing strategy and what we're doing there because I think that addresses the back part of your question. In terms of margin, the biggest margin hit, cost of goods hit from commodity cost, particularly coffee cost, is in our CPG segment. And that's largely because coffee cost are a bigger component of the cost structure in CPG than of course they are in our retail stores. And so our retail stores have more levers in the rest of the P&L to pull to help overcome that coffee cost and we've been able to do that as we -- despite the pressures we have faced over the past year, have improved margins in our stores. In the CPG channel however, we did see margin deterioration in the fourth quarter, very consistent with kind of margin deterioration we saw the third quarter, and that was completely due to coffee cost. Absent the coffee cost impact, we would have margins very consistent with previous year and very much on the pace of coffee costs [ph]. Now I would also just point out, even with the coffee costs that we're absorbing in CPG, it's an extremely healthy margin business, at plus 30% in the quarter we just ended and 25% or better in the year ahead that we see. So it's a very healthy margin business even with coffee costs where they are. I'll ask Jeff to speak a bit to pricing and your point about why we would accept any deterioration as a result of that.

[Jeffery J. Hansberry:]

We continually look at price and we have taken price of about 12% in 2011. At the same time however, we see tremendous upside and potential to grow the Starbucks brand. So we are working to maintain a price point that will continue to drive growth on the Starbucks brand. And again importantly, we're constantly looking at pricing. And we think we're in a very good spot right now.

[JoAnn DeGrande:]

That concludes today's call. Thank you for joining us. We'll talk to you again when we report first quarter earnings in January 2012. Thank you, and have a good day.

[Operator:]

Ladies and gentlemen, this does conclude today's Starbucks Coffee Company's Fourth Quarter and Fiscal Year End 2011 Earnings Conference Call. You may now disconnect.