Starbucks (SBUX)

Q1 2011 Earnings Call

January 26, 2011 5:00 pm ET

Executives

Clifford Burrows - President of Starbucks Coffee US

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

Troy Alstead - Chief Financial Officer of Starbucks Coffee Company and Chief Administrative Officer of Starbucks Coffee Company

Jeff Hansberry -

JoAnn DeGrande - Director of Investor Relations

John Culver - President of Starbucks Coffee International

Analysts

Keith Siegner - Crédit Suisse AG

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

Matthew DiFrisco - Oppenheimer & Co. Inc.

Michael Kelter - Goldman Sachs Group Inc.

John Glass - Morgan Stanley

Phillip Juhan - BMO Capital Markets U.S.

Sara Senatore - Bernstein Research

John Ivankoe - JP Morgan Chase & Co

Jeffrey Bernstein - Barclays Capital

David Palmer - UBS Investment Bank

Presentation

Operator

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 First Quarter 2011 Earnings Call. [Operator Instructions] Ms. 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. Joining me on the call today are Howard Schultz, Chairman, President and CEO; John Culver, President of our International business; and 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 our cautionary statements in our earnings release and the risk factors 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 Investor Relations section of Starbucks' website at starbucks.com and the financial statements accompanying the earnings release, where you'll find disclosures and reconciliations of non-GAAP financial measures mentioned on today's call along with their corresponding GAAP measure. You note that the non-GAAP amounts reported relate only to prior fiscal 2010 amounts for costs related to the now-completed restructuring work.

Before I turn the call over to Howard, let me highlight two upcoming events. First, we expect to file the company's proxy statements within the next week. And second, please note that Starbucks' 2011 Annual Meeting of Shareholders will be held in Seattle at 10:00 a.m., Pacific time, on Wednesday, March 23. The meeting will be available via webcast. With that, I'd now like to turn the call over to Howard Schultz. Howard?

Howard Schultz

Thank you, JoAnn, and welcome to everyone on the call. I am very pleased to announce the record quarterly results that Starbucks reported today. Solid increases in global traffic and the strongest holiday season in Starbucks' 40-year history drove our fifth consecutive quarter of positive comp store sales growth and enabled us to generate record revenues in Q1. Increased revenues, combined with the success of our ongoing efforts to improve our operations and efficiency and maintain tight control over operating expenses across the company, enabled us to deliver both record operating income and record operating margins.

Our performance in Q1 reflects the power of our new business model and the continuation, and in several areas, an acceleration, of the positive momentum and trends we began to see take hold in 2009. Notably in Q1, we saw a record operating performance from our U.S. retail store business, solid expansion of our Consumer Packaged Goods business, particularly around VIA, meaningful payoff on prior-period investments in our International business and a further deepening of our connection with millions of customers around the world. Each of these factors speaks to the relevancy and the health of the Starbucks brand and the strength of our global business.

Solid operating performance in Q1 also enabled us to offset some of the impact of both historically high coffee and other commodity costs and the new investments we're making in CPG to support our future growth. And this performance, in conjunction with the positive momentum we saw across all of our channels in Q1 and the financial discipline and rigor we continued to apply to all aspects of our global operations, positions us to perform well despite the continuing soft global economy, the fragile consumer environment and the increasing commodity costs, all of which we are prepared to address in the year ahead.

I will begin today's call by sharing financial and performance highlights of the quarter, discuss a number of important accomplishments and developments that may not be evident from the figures alone, and then turn the call over to John Culver, President of Starbucks International, who will provide you with deeper insight into Starbucks' record performance in markets outside the U.S. Then we'll turn the call over to Troy, who will take you through the quarterly financials in greater detail.

Starbucks global revenues reached a record $3 billion in Q1, up 8% over the same period last year. Our comparable store sales for the quarter rose 7% and our operating margin grew to 17%, reflecting the strength of our brand, the power of our business model, increasing operating leverage and our continued laser focus on controlling costs. Together, these factors enabled us to deliver record earnings of $0.45 per share, up from the $0.32 per share we reported last year.

Starbucks continues to execute throughout the company, and our Q1 results reflect very solid performance in both U.S. and international markets. I will share highlights from each of our business units, starting with our International business, where I'll simply make note of a few items and leave the more detailed presentation to John.

As we have reported on prior calls, among Starbucks' top priorities over the last 18 months, as we've been transforming the business, has been applying the learning and operational excellence gleaned from the work we did in the U.S. to our International business. The International segment results we reported today demonstrate, without question, the unequivocal success of those continuing efforts and the growing relevancy of the Starbucks brand around the world. And while there is much more work to do, a streamlined management organization and increased operating efficiencies throughout our international operation provide us with the solid foundation we know we need to fully pursue opportunities in new and existing international markets in the future.

Just a few weeks ago, John and I were in India together to sign and announce the entry into a Memorandum of Understanding with Tata Coffee, India's leading grower and roaster of coffee. The importance of this strategic relationship with a reputable values-based organization like Tata will become clear over time as we begin our journey in India. The Tata partnership will provide us with local sourcing and roasting capabilities and a partner with common values and a keen understanding and appreciation for the very high standards we maintain around delivering the Starbucks experience. We expect India to become an important market for us, and we will leverage the learning and experience from our more than 10 years in China to execute a profitable, disciplined growth plan in that country.

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