Starbucks Q4 2010 Earnings Call Transcript

Starbucks (SBUX)

Q4 2010 Earnings Call

November 04, 2010 5:00 pm ET

Executives

Clifford Burrows - President of Starbucks Coffee US

Howard Schultz - Founder, Chairman, Chief Executive Officer and President

Troy Alstead - Chief Administrative Officer, Chief Financial Officer and Executive Vice President

John Culver - President of Starbucks Coffee International and Chief of International Division

JoAnn DeGrande - Director of Investor Relations

Jeff Hansberry - President of Starbucks Global Consumer Products Group & Foodservice

Analysts

Sharon Zackfia - William Blair & Company L.L.C.

Keith Siegner - Crédit Suisse AG

John Glass - Morgan Stanley

Matthew DiFrisco - Oppenheimer & Co. Inc.

Sara Senatore - Bernstein Research

John Ivankoe - JP Morgan Chase & Co

Jeffrey Bernstein - Barclays Capital

Joseph Buckley - BofA Merrill Lynch

David Palmer - UBS Investment Bank

Presentation

Operator

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Good afternoon. My name is Amanda, 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 Fiscal Year 2010 Earnings Conference Call. [Operator Instructions] Ms. DeGrande, you may begin your conference.

JoAnn DeGrande

Thank you, Amanda. Good afternoon, ladies and gentlemen. This is JoAnn DeGrande, Director of Investor Relations at Starbucks Coffee Company. On the call with me today are Howard Schultz, Chairman, President and CEO; and Troy Alstead, CFO. Also here joining us for Q&A are Cliff Burrows, President of our U.S. Business; John Culver, President of our International Business; Jeff Hansberry, President of our Consumer Products Group; and Annie Young-Scrivner, Global Chief Marketing Officer.

Before we get started, I'd like to remind you that this conference call will contain forward-looking statements. Forward-looking statements are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements and should be considered in conjunction with cautionary statements in our earnings release and risk factor discussions in our filings with the SEC, which are included in 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 Investor Relations section of Starbucks' website at starbucks.com and the financial statements accompanying the earnings release to find disclosures and reconciliations of non-GAAP financial measures mentioned on the call today along with their corresponding GAAP measures.

Before I turn the call over to Howard, I'd like to remind you of our fiscal 2011 biannual investor conference, which will be held in New York in December 1. So with that, Howard, I'd like to turn the call over to you.

Howard Schultz

Thank you, JoAnn, and welcome to everyone on the call. I am delighted to report the record fourth quarter and fiscal 2010 results we announced today. Before taking you through the highlights of the quarter and the year, I want to pause to thank our Starbucks partners around the world that have enabled us to deliver these great results to our shareholders. We did it by delivering a great experience to our customers, one cup at a time, every day of the week. The success we describe today belongs to you. I'm grateful for and humbled by your dedication, your passion and your determination, all of which have powered our transformation into the dynamic and growing company we are today. And to each of you, I say thank you.

I believe that fiscal 2010 will prove to be a defining year in Starbucks' history, topped off by record fourth quarter and full year financial and operating results. And the results we reported today are that much more significant when considering against the backdrop of the extraordinarily challenging economic and consumer environments in which they were accomplished. The hard work our Starbucks partners undertook around our transformational agenda over the last two years has enabled us to where we are today. More importantly, I am convinced that the work has provided us with solid and secure foundation we need to profitably grow both new and existing lines of business well into the future.

Today, I will share highlights of our Q4 and full year 2010 financial and operating results, discuss a number of important accomplishments that may not be evident from the figures alone and introduce some themes that we will discuss in greater detail at our December investor conference. And I'll turn things over to Troy who will take you through financials in greater detail.

As we reported today, our comparable store sales in Q4 were outstanding in both U.S. and international markets, resulting in an 8% increase overall that was driven by a 5% increase in traffic and a 2% increase in average ticket. Strong top line results, combined with a continued focus on operational excellence and cost management initiatives, drove our consolidated operating margin to 14.1% of sales, significantly ahead of the 8.2% we reported in Q4 of the prior year. Our EPS followed suit, increasing to a record $0.37 a share in the quarter and up from $0.20 a share in Q4 of 2009.

The positive trends we saw in Q4 capped the year of continuous, quantifiable improvement and progress in our business. Q4 represented our fourth consecutive quarter of positive comp growth and our fourth consecutive quarter of positive traffic growth. For the year, our revenues increased to $10.7 billion, and our operating income increased by $857 million to $1.4 billion, from $562 million in fiscal 2009. Our full year operating margin of 13.3% represented the highest consolidated operating margin in our almost 40-year history, surpassing the previous high of 12.3% we achieved in fiscal 2005.

Our record's results are a function of solid performance both in the U.S. and in our International business. Let me share a little about each of our business units performed in fiscal 2010 starting with our U.S. retail business.

Starbucks' ability to innovate and create excitement around new beverages and beverage combinations continues to drive traffic and generate incremental sales, and we are just beginning to benefit from the strategy of leveraging our brand, our retail footprint and our power to innovate to expand our range of coffee offerings and create new rituals, categories, occasions and formats both in our stores and other complementary channels of distribution. Sales of Starbucks VIA continue to accelerate, with our retail stores continuing to drive trial and acceptance and create positive momentum in all channels. VIA represents a broad and innovative coffee platform that generated about $135 million in global sales for Starbucks in retail and CPG channels in its first year, making it a runaway product success by any objective measure.

Sales of Iced VIA, introduced only this summer, have been more than 80% incremental to the original product line and the early results from Flavored VIA introduced in our North American retail stores in September are even more encouraging. VIA is playing a key role in the rapid expansion of the premium single cup category, which includes pods and sticks with a retail price point of $0.50 per serving or more. And with our ongoing commitment to innovation, we will continue to build the VIA platform and bring more new customers into our world of premium coffees.

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