Starbucks Corporation (SBUX)

F3Q10 (Qtr End 06/30/10) Earnings Call

July 21, 2010 5:00 pm ET


JoAnn DeGrande – Investor Relations

Howard Schultz – Chairman of the Board, President & Chief Executive Officer

Troy Alstead – Chief Financial Officer, Executive Vice President & Chief Administrative Officer

John Culver – President Starbucks Coffee International

Jeff Hansberry – President of Consumer Products.

Clifford Burrows – President Starbucks Coffee US


John Glass – Morgan Stanley

David Palmer – UBS

Larry Miller – RBC

Sharon Zackfia – William Blair & Company, LLC

Keith Siegner – Credit Suisse

Michelle Gass - SBC

[Sarah Sinatory] – Sanford Bernstein

Joseph Buckley – Bank of America Merrill Lynch

John Ivankow – JP Morgan

Matthew Difrisco – Oppenheimer & Co.

Jeffery Bernstein – Barclays Capital



Good afternoon. My name is Steve, and I will be your conference operator today. At this time, I would like to welcome everyone to Starbucks Coffee Company’s Third Quarter Fiscal Year 2010 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) Mrs. DeGrande, you may begin your conference.

JoAnn DeGrande

Thank you, Steve. Good afternoon Ladies and Gentlemen. This is JoAnn DeGrande, Director of Investor Relations at Starbucks Coffee Company. Also on the call today from New York is Howard Schultz, Chairman, President and CEO. And with me here in Seattle is Troy Alstead, CFO.

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 files with the SEC, including our last Annual Report on Form 10K. Starbucks assumes no obligation to update any of these forward-looking statements or information. Please refer to the Investor Relations Section at Starbucks website at and in the Financial Statements of the Company and the Earnings Release were you’ll find disclosures and reconciliations of non-GAAP financial measures mentioned on the call today, along with our corresponding GAAP measures.

Now, before I turn the call over to Howard, I’d like to take this opportunity to make you aware of our Fiscal 2011 Biannual Analyst Conference, which will be held in December on the first, in New York. And more details will be coming soon, but we hope you’ll reserve that date on your calendar and join us there.

With that, Howard, I’m turning the call over to you.

Howard Schultz

Thank you, JoAnn. And welcome to all of you joining us today. I am very pleased with the strong Third Quarter Operating Performance and Financial Results that Starbucks announced today. Beyond simply reflecting a continuation of our past several quarter’s solid performance, the figures we released today are notable because they represent the highest Q3 operating margin and earnings per share in Starbucks history. And they demonstrate our ability to simultaneously drive and deliver solid growth, performance and profitability in our core business while investing in and bringing significant innovation to new and existing businesses.

The steady improvement in operating leverage inherent in our US and International Retail Busses are reflected in the record EPS and operating margins for the quarter. Our 9% increase in comp store sales driven by 6% growth in traffic in the US is our highest comp store growth since Q2 of 2006. And it represents the third consecutive quarter of positive comp sales growth in our US and International markets, reflective of both the health of our business and the relevancy and the importance to our customers.

Noteworthy is that the comp sales increase we saw in Q3 were accomplished in the face of continuing weakness and uncertainty in the global economy, and despite continuing very-soft consumer confidence metrics.

Our traffic growth takes on greater significance in the context of same-store-sales-trend data report by other domestic and multinational retailers.

In Q3, we invested heavily in new product innovation and in multiple significant brand in product launches. Troy will provide additional detail around these investments, but we designed and executed them in a way that we believe would enable us to simultaneously benefit and leverage both our retail and growing CPG business.

And while the investments did in fact provide tangible, quantifiable benefits to both businesses in Q3, a greater significance is that the Q3 investments will continue to pay dividends well into the future.

Consider however you want it, Customizable Frappuccino Campaign, for example. The campaign was an important contributor to our comp performance by driving retail traffic in the afternoon and evening day parts. And expanding the customer base by offering ingredient options such as soy milk and decaf coffee for customers wishing those options.

In fact, our Blended category contributed almost 2% to the overall 9% US comp this quarter. Beyond that, the campaign’s halo effect on the brand helped drive increased sales of Bottled Frappuccino across CPG channels for the first time in over two years. And beyond even that, it ignited significant consumer and retailer interest and excitement that continues to build around our $2 billion Frappunccino Brand platform overall; just as we had planned.

The success of our Customizable Frappuccino Campaign illustrates the power of Starbucks new business model. A unique model that will continue to enable us to innovate, cross promote, and leverage our global retail footprint on investment and prominence in social media and our growing global CPG business going forward.

Another major brand investment we made in Q3 was around the expansion of Starbucks VIA into grocery. In the Third Quarter, we launched VIA in grocery stores throughout the US to leverage the excitement and accelerating sales momentum from our retail launch. We also announced that VIA would be available in grocery in both the UK and Japan in Q4.

VIA is now projected to contribute over $100 million dollars to Starbucks’ top line in Fiscal 2010, a significant achievement by any measure.

To put VIA’s performance in perspective, consider that less than 3% of all new product generate over $50 million in the first year sales. VIA is performing like few consumer products ever have, and we are continuing to drive stead increases in VIA distribution, channel by channel, continent but continent, country by country.

On June 29 th, we introduced our next VIA innovation, Ice VIA into all US and Canada stores and just last week into Japan. The early indications are that we have another fantastic product on our hands generating excitement and response from our partners and customers alike.

Once again, credit for our overall performance belongs to our partners around the world who continue to deliver and improve experience to our customers. Despite the demands of increased store traffic, every single customer metric showed improvement in Q3, continuing a trend that began in 2008.

To say that I’m incredibly proud of our partners and appreciative of their efforts is really a profound understatement. What I am is humbled by their unwaivering commitment to our customers, our values, our company and our business. And to all of our partners, I give them a huge thank you.

The continuing improvement in traffic and transaction metrics increasingly improved customer’s satisfaction feedback in operating efficiency. And transformative muscle we’ve build in front and back of store operations over the past 2 ½ years gives us confidence that we can accelerate our investments in innovation and new and existing business and generate disciplined-profitable growth around the world while at the time increasing our dividend and building long-term value for our shareholders.

Now, I’ll provide a recap of key initiatives for Starbucks Global Retail Business, CPG and Seattle’s Best Coffee. Then I’ll turn the call over to Troy who will go into Q3 financials in greater detail and provide an initial outlook for 2011.

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