Starbucks Q4 Earnings Call Transcript

123jump.com Staff
12 Nov, 2008
New York City

Starbucks, the coffeehouse chain reported a 3% rise in fourth quarter revenues to $2.5 billion from a year ago. Net income declined 97% to $5.4 million and earnings per share fell to $0.01 compared to $0.21 per share in the prior year fourth quarter. Domestic comparable same store sales fell 5%

Starbucks Corporation ((SBUX))
Q4 2008 Earnings Call Transcript
November 10, 2008 5:00 p.m. ET

Executives

JoAnn DeGrande – Director of Investor Relations
Howard Schultz – Chairman, President & Chief Executive Officer
Peter Bocian – Outgoing Executive Vice President & Chief Financial Officer
Troy Alstead – Chief Financial Officer
Arthur I. Rubinfeld – President of Global Development

Analysts

Matthew DiFrisco – Oppenheimer & Co.
Steven Kron – Goldman, Sachs & Co.
Lawrence Miller – RBC Capital Markets
John Glass – Morgan Stanley
David Tarantino – Robert W. Baird & Co., Inc.
Joseph Buckley – Banc of America Securities
John Ivankoe – JPMorgan
Jeffrey Bernstein – Barclays Capital
David Palmer – UBS

Presentation

Operator

Good afternoon. My name is Christie 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 2008 conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. If you would like to ask a question during this time simply press “*” then the number “1” on your telephone keypad. If you would like to withdraw your question press the “#” key. Thank you Ms. DeGrande, you may begin your call.

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, Chairman, President and CEO, Pete Bocian, our Outgoing Executive Vice President and CFO, and Troy Alstead who will be assuming the CFO role at the end of this month. Also with us is Arthur Rubinfeld, President of Global Development. Q&A will follow today’s prepared remarks.

Before we get started I would like to remind you that this conference call will contain forward-looking statements that should be considered in conjunction with the cautionary statements contained in our earnings release and in the company’s most recent SEC filings. Forward-looking statements are subject to various risks and uncertainties that could cause our actual results to differ materially from those statements. Starbucks assumes no obligation to update any of these forward-looking statements or information. Please see our filings with the SEC including our last annual report on Form 10-K and subsequent reports on Form 10-Q for a discussion of specific risks that may affect our performance and financial conditions. Also, please refer to the Investor Relations section of Starbucks website at www.starbucks.com, you will find disclosures and reconciliations of any non-GAAP financial measures mentioned on today’s call with their corresponding GAAP measures.

With that I would now like to turn the call over to Howard Schultz. Howard.

Howard Schultz

Thank you JoAnn and good afternoon ladies and gentlemen. Before I provide an overview of the quarter in the fiscal 2008, I would like to take a step back for a moment. Ten months ago as we reported our first quarter results for fiscal 2008, I detailed an extensive and ambitious plan to transform the company. We were beginning to feel the headwind of the slowing economy but we were determined to take the necessary steps to position Starbucks for continued growth. Today, after taking those difficult, but necessary steps, I speak to you with a renewed sense of optimism about our ability to succeed in fiscal ’09 and beyond. We have re-architected our cost structure which will allow for operating margin expansion. We have a significantly healthier portfolio focused on geographies and locations with the best opportunity for growth. We are taking steps on value and loyalty to reward customers which is clearly a critical area in this difficult economy.

We have maintained an intense focus on strengthening our core business, particularly our coffee leadership and we have a leadership team and strong partners who are reenergized and galvanized toward a common purpose. This year of transition is over.

The steps we took in fiscal 2008 have given us a line of sight and the flexibility to drive EPS expansion even in this uncertain operating environment. As I speak to you today I am confident that we are on the correct course for these challenging times. We are doing what I believe to be right, retaining our core customers, providing value in a way that is meaningful to our customers, investing in our people and our culture and being relentlessly decisive on both consumer facing initiatives and on cost control.

With the foundation of a world class brand and continued customer loyalty, Starbucks can and will weather the current economic storm by staying the course. During today’s call I will give you an update on the progress we have made against our transformation initiatives in Q4 and for the fiscal year as well as a look at what we have planned or fiscal ’09. Pete will then take you through detailed fourth quarter and full-year results as well as the impact from the current macroeconomic environment on our business. And finally, Troy will provide an outlook for fiscal ’09 and then we will wrap up. With that overview what we would like to cover, let me emphasis that while are go to market strategy has positioned us well for fiscal ’09 we are continuing to make bold moves and tough decisions toward transforming our business for the long term.

We firmly believe that decisions we have made in the last 10 months and the strong management team we built during that time will deliver significant long-term opportunities for our business and our shareholders. Like the other retailers we continue to face a very difficult economic environment both in the US and abroad. We have a similar view to other companies in that it remains unclear how long and how deep this downturn will be. However, I feel confident about our position for three main reasons. First, we felt the effects of the downturn early and we have been preparing for this uncertainty for some time. The store closures and reductions in force have been tough but necessary. We continue to be very conscious of our spending and cost efficiency opportunities.

Second, recent retail results indicate that we may be faring better than many other high-end retailers suggesting the changes we have made to date are having some impact. Other premium retailers have seen double-digit declines in both comps and traffic in October.

Third, we have very clear visibility into the decisions we must make going forward to ensure that we are well positioned for continued difficult economy as well as for when the economy begins to improve. We are prepared to adjust expenses as needed as we move into fiscal ’09. We are particularly attuned to highly creative and relatively low cost quick turn opportunities to drive traffic in our stores, as you saw just last week on Election Day.

Incidentally, through a combination of a single paid broadcast spot on the second highest rated Saturday Night Live in over a decade and an aggressive viral marketing and PR campaign we were able to reach 150 million consumers with our offer. According to Brand Index last week, Starbucks positive buzz rating jumped from 25% on October 31st, to 51% on November 5th, a significant shift for a one-day promotion.

I would like to now provide a high-level overview of our fourth quarter and full fiscal year end results and Pete will fill in the details in his own remarks. There were 132 net new store openings for the quarter, 1,669 net openings for the full year, significantly less than a year ago. We ended fiscal 2008 with 16,680 stores globally. Consolidated net revenues were $2.5 billion for Q4, up 3% year-over-year, $10.4 billion for the full fiscal year up 10% year-over-year.

Operating income was $14.2 million in Q4, operating income for the quarter reflects $99 million in restructuring charges associated with decisions to close approximately 600 US and 61 Australian underperforming company-operated stores and reduce non-store headcount. Operating income was $504 million for fiscal ’08 including approximately $267 million dollars in restructuring charges.

Earnings per share for Q4 were $0.01 which included $0.09 related to restructuring charges and transformation strategy related actions for the full year. EPS was $0.43 including $0.28 relating to restructuring charges and transformation strategy related actions. Pete will provide more detail including a link to non-GAAP EPS in his remarks.

The company also generated $1.3 billion in operating cash flow in fiscal ’08. As I mentioned earlier, we began fiscal ’08 by developing a transformation plan to position us for long-term growth. Our focus was three-fold, strengthening the core business, elevating the customer experience and investing in and growing the business profitably. As we turn the page on fiscal ’08, a year of transition and transformation is over and we are well into the implementation phase of our strategy.

Pete will discuss the details around the decisions that have led to a healthier store portfolio. As I said over the last few months, we have made tough decisions in fiscal ’08 over store closures, streamlining our leadership structure and non-store organization as well as doing the work necessary to reduce our capital allocation for fiscal ’09. In addition, we took steps to improve efficiencies in our store operations.

We took on some cost in fiscal ’08 associated with our core renovations that will play out as efficiencies in ’09 and beyond. We also began some work, which will carry over into fiscal ’09 around improving efficiencies in our supply chain organization which will benefit our stores and our backend cost structure as well.

In fiscal ’08 we increased focus on coffee and our partners. Our root coffee efforts with pie plate roast have shown particular traction in both the Northeast and New England, which are strong brewed coffee markets. We reengineered our entire brewed coffee offering to improve freshness and quality by bringing back fresh grinding in the stores and shortening holding times. This has resulted in shared growth in the away from home brewed category as well as improvement in our customer taste satisfaction scores.

In addition, we trained our partners in espresso excellence pulling the perfect shot, steaming milk and customizing beverages to order. This too has resulted in improved quality satisfaction. Further, early customer reception to both Clover, now in 50 stores and Mastrena now in 1,500 stores have been encouraging. These investments have been extremely well received by our partners and coffee enthusiasts as we delivered a thoughtful deployment plan in fiscal ’08.

We made our first entry into the health and wellness product offerings by launching Vivanno nourishing blends and by introducing new healthy food platforms including perfect oatmeal. Amidst challenging difficult traffic realities you saw food attachment and ticket increase with the launch of this new healthy food platform and have seen it sustained as we move beyond the initial promotion.

We are encouraged by these results and health and wellness will continue to be a focus in ’09 and beyond. At the same time we fully understand that food and beverage innovation alone is not the sole path to traffic incrementality. The economy put increasing pressure on consumer spending over the course of the year. We tested and implemented a multi-tiered value strategy in fiscal ’08 with a plan to apply what we learned to develop a unique and brand appropriate value offering for Starbucks in fiscal ’09.

We launched a new core value platform entitled Starbucks Card Rewards and dramatically increased our base of registered card holders which is now over five million customers. As one of the top requests on MyStarbucksidea.com we believe we have tapped into a big customer need for Starbucks and are providing valuable benefits to these customers.

While we are still in the early days we are seeing encouraging results, the most compelling being that we have an incremental $70 million versus this time last year loaded onto cards and ready to be spent in the coming months ahead. This speaks volumes about the loyalty of our customers, the relevancy of the Starbuck’s experience and their commitment to us.

We also challenged ourselves to find meaningful and differentiated limited time offers to address soft spots in our business. This led to the treat receipt offer which produced incremental afternoon comp traffic during the summer months. As we entered the year we tested a new value platform, the Starbucks Gold Card, more on that in a few minutes.

The bottom line is that we’ve learned that we can provide more value for our customers in a way that still delivers the quintessential Starbucks experience and we will apply this learning in ways that build on our brand and customer engagement in fiscal ’09. Just as we did last week with our traffic driving, Election Day brewed coffee offering.

As you may know we brought our North American leadership team to New Orleans two weeks ago. This was a significant investment in what has differentiated Starbucks over these many years, our store partners. Given that approximately 85% of Starbucks revenues come from our retail stores, the leadership conference was a crucial investment in our partners, our customers and in our company. In New Orleans we asked our store managers and the broader leadership team to step up and to be accountable and personally be responsible or every aspect of their respective business. We are providing the tools and the technology to enable them to manage their stores in a way that optimizes resources, applies real-time data and supports effective planning, and we introduced a new incentive program to reward higher performing stores.

We also outlined commitments to deliver against a reinvigorated brand platform called Starbucks Shared Planet. We believe this socially responsible approach to our business will pay off with customers around the globe who want to do business with companies dedicated to doing the right thing and companies that they trust. Starbucks Shared Planet is a comprehensive long-term strategy of differentiation.

The renewed focus on global responsibility is critical to our brand and our core value to many of our customers in key markets like North America and the UK. Our recent announcement with Fair Trade and ongoing work with Conservation International and key coffee growing regions around the world will continue to build a defining industry position around our coffee buying and our sustainability efforts.

We plan to tell this story aggressively with our partners in the NGO community. By doubling our purchases of Fair Trade certified coffee and becoming the largest seller of Fair Trade coffee in the world we increase relevance with our partners and our customers. In addition to being the right thing to do, a significant body of research suggests that consumers care about socially conscious brands and support companies that are pursuing responsible business.

We left the conference galvanized, focused and determined as ever to enhance and preserve the culture and values of the company with the renewed focus on customer experience and personal accountability. I firmly believe that we have made the right investment to ensure the long-term health of our brand and that the investment will continue to pay off as our partners take specific actions to improve store performance.

Over the past few weeks, signs of improving comps have appeared episodically, though it is too early to call a trend particularly with the important holiday period still in front of us. That said, October did not show further deterioration to comps or traffic, a possible indicator that Q4 may have represented a bottoming-out milestone for our company.

A revised US growth strategy focuses less on adding stores and more on building the business within existing stores by prioritizing profitability and the customer experience. Store closures proceeded on pace with plan and as a store portfolio evolves we remain focused on the resulting efficiencies.

As we had projected, we have seen traffic increase in stores that are in near proximity to closed stores. We opened stores in the US during the quarter, but only in locations that are best positioned to deliver a strong return on capital and shareholder value.

Let me talk a little bit about international. As the US downturn has spread to Europe and beyond we have been seeing weakness in some overseas markets. That said we expect our international growth strategy which relies heavily on the licensed store model will continue to contribute to grow in fiscal ’09.

During fiscal ’09 we entered two new markets, the Czech Republic and Argentina and we recently opened our first store in Portugal. These openings have been wonderfully received in these countries; we continue to expand the global reach of our packaged coffee, tea and ready to drink products in international markets.

Asia in particular has exceeded expectations for our consumer packaged goods offerings. We have also gained strong support of our ready to drink products with key retailers in Mexico. In Switzerland we launched packaged coffee in 200 grocery stores, the first time our packaged coffee has been available outside of our retail stores in Continental Europe.

As I alluded to earlier, we began fiscal ’09 in a stronger position than we did in 2008. Our operational structure and store footprint along with a solid and well thought out product and promotional calendar will allow us to successfully navigate the economic crisis and emerge as a stronger more efficient company.

We are taking a different approach to the holidays this year and preserving our Christmas launch until we have had an opportunity to celebrate Thanksgiving. With that in mind we introduced our new Thanksgiving blend coffee created in conjunction with restaurateur and celebrity Chef Tom Douglas. This new blend gave us the opportunity to showcase the culinary aspects of coffee and once again differentiate Starbucks. The response to Thanksgiving blend is ahead of our projections. Our Election Day free coffee offer spurred significant sales of Thanksgiving blend and we are on track to sell out of our inventory prior to Thanksgiving.

Later this month we will launch what I believe to be the most relevant holiday lineup in our history. While all retailers are in for a tough holiday season we have competitive offerings at a variety of attractive price points with a view towards maintaining strong margins. We are also offering customers a new reason to buy our special holiday beverages beginning on Black Friday, the day following Thanksgiving, through our partnership with Product Red and its founder, Bono.

The Red partnership, part of Starbucks Shared Planet, will create awareness and we believe drive significant trial. This is yet another way in which we are connecting with our customers and differentiating ourselves at a time when values mean more than ever before. In these economic times we are keenly aware of the increasing importance of value to our customers. The work we did in fiscal ’08 to identify value options that resonate with our customers will continue to play out in fiscal ’09.

The enthusiastic response to our special Starbucks card offering through Costco bodes well for our holiday season and we expect the millions of cards sold to begin generating traffic even after the holidays are over. The Starbucks Gold Card which we officially launched this week was thoughtfully and carefully planned.

Gold Card holders receive a 10% discount on all store purchases, free Wi-Fi and exclusive offers and discounts. Annual Gold Card membership costs are $25. We saw promising results when the program soft launched in October and last week when we launched in stores we outperformed our initial ambitious projections by five-fold.

We believe this is the kind of value that customers expect from Starbucks and we are extremely optimistic about the program. We’re being disciplined in our approach to value to ensure that discounts do not erode our premium brand and the position that we occupy while remaining responsive to the uncertain consumer environment. We also remain focused on programs that we believe can increase sales while balancing any impact on margins.

In terms of competition, we are keenly aware of the competitive environment which is why we’re so focused on leveraging the heritage and differentiation of our brand as well as the opportunity to provide value in a way that is consistent with how we do business. We offer the finest ethically sourced and roasted coffee in the world as well as a unique experience that has defined the specialty coffee business.

So, when fast food companies try to compare their coffee to one of dozens of high quality coffee varieties we offer, we believe our customers know better. Our customer base is different and there is less overlap than people might believe. In any case, because of the actions we took in fiscal ’08 including our new cost structure, we are better positioned to win in a competitive market than ever before.

So, while we continue to face challenges in the current operating environment, we accomplished many things in fiscal ’08 which strengthened our business and our model and put us in a stronger position to help us weather these unprecedented times. Because we took action early we enter fiscal ’09 with a re-architected cost structure, a much healthier store portfolio, a firm grasp on how to deliver value in a brand appropriate way, a strengthened leadership team in our core, our product, our coffee and a team that at all levels is ready to deliver against this plan.

With that, I will now turn the call over to Pete who will review our Q4 and full-year results. Before I do that I want to just take a moment to thank Pete for his many contributions to Starbucks. Pete is leaving the company later this month to join HP. After Pete’s remarks we’ll hear from our new CFO, Troy Alstead. Troy started with Starbucks in 1992 prior to our IPO and has contributed greatly in a range of finance and operational roles. He was the finalist for the CFO role when Michael Casey retired and we’re lucky to have him ready to step in and continue the work that Pete and the leadership team have done over the past year. Troy has worked closely with me over the years and I look forward to his partnership. Both Troy and members of our management team look forward to seeing you at the analyst conference in New York in early December. Pete.

Peter Bocian

Thanks Howard and good afternoon everyone. Howard provided you with a recap of a number of the strategic initiatives and actions we took in 2008 to strengthen the business. In my time today I’ll provide additional details on our fourth quarter performance which included executing on a number of the strategic actions. I’ll then recap 2008 fiscal full year results and provide an overview of how we look as we enter 2009. Then Troy will provide you our more detailed view for fiscal 2009.

With the challenging operating environment as a backdrop, we continue to focus on implementing the transformation initiatives we laid out this past fiscal year. In the fourth quarter we closed about 200 of the 600 US company-operated stores that we had identified in Q3 as underperforming based on a detailed review. We also closed 61 company-operated stores in Australia and reduced our leadership and non-retail staff levels by about 1,000 positions.

I characterize these actions in two categories - first, we acknowledged that some real estate decisions made during the last few years were not good investments and took action; second, we saw a slower growth trajectory going forward and better aligned our cost structure.

Let me now provide you with a closer look at total company fourth quarter results. We reported a 3% increase in consolidated revenues for the quarter to $2.5 billion from $2.4 billion a year ago. This was short of our expectations entering the quarter and was driven by continued deterioration in same store comps. As a note, this miss also showed up in operating income and EPS for Q4, which I’ll discuss later.

Comparable store sales weakened further in Q4 driven both by declining traffic in our US business and a decline in average value per transaction. We also saw deterioration in international primarily in the UK.

For the quarter consolidated same store sales declined 7% of which 4% was due to less traffic and roughly 3% from a decline in average ticket. The US performance in Q4 was weaker than we had anticipated entering the quarter and what we had guided on the Q3 call. We believe the overall comp deterioration was directly linked to a worsening economic environment both in the US and in the UK.

We reported consolidated pre-tax operating income of $14 million in Q4, which included $105 million of restructuring charges and other transformation strategy costs. This compared to $248 million of reported operating income in the prior year. Consolidated operating margin was 0.6% compared to 10.2% for the same period a year ago. 390 basis points of margin compression were due to the restructuring charges with the balance primarily due to sales deleverage.

Earnings per share was $0.01 for the fourth quarter compared to $0.21 per share for prior year fourth quarter. Fourth quarter EPS was negatively impacted by roughly $0.09 of restructuring charges and other transformation costs. If we disaggregate the $0.09 nearly $0.05 is linked to charges associated with the announced closures of underperforming stores including asset write offs, lease exit costs and severance charges. Nearly all of the remaining $0.04 reflects actions taken to downsize our corporate support resources both in terms of facilities and staffing levels as part of the transformation initiatives designed to re-architect the cost structure of our business.

Let me now move to results for our operating segments beginning with our US business. Total net revenues for the quarter increased by 1% to $1.88 million from $1.86 billion a year ago. Company operated retail revenues declined slightly to $1.7 billion for the quarter primarily due to negative comparable store sales of 8% which offset the revenue growth from 445 net new company operated retail stores opened in the last 12 months. With respect to comparable store sales both traffic and ticket weakened sequentially from Q3 with Q4 showing a 5% year-on-year drop in traffic and a 3% decline in the average value per transaction. The year-over-year decrease in ticket was primarily the result of our de-emphasis in ’08 of merchandise and music inventory in our stores. US cost of sales including occupancy costs as a percentage of total revenues increased to 45.3% compared to 41.7% in the comparable period a year ago. Of this increase three quarters or 270 basis points came from cost of sales. The cost increase was due to three main factors - inventory adjustments related to the reduction of brewing equipment and other merchandise in our stores all consistent with returning our focus to coffee as our core; expenses associated with our enhanced espresso excellence standards; and new beverage innovation introduced in the quarter; and from higher distribution expenses from the expansion and migration of our distribution centers as well as higher fuel costs.

Increases in occupancy related expenses as a percent of revenue in Q4 were primarily due to loss sales leverage. As a note, the 205 store closures completed in the quarter did not yet have a material favorable impact on occupancy costs as many of the closings occurred late in the quarter. US store operating expenses as a percentage of related US retail revenues increased 390 basis points to 46.1%. About three quarters of the increase was the result of deleverage from softer sales. Also contributing to the rise in store operating expenses were increased marketing expenditures due primarily to new product launches. US operating income was $51 million during the quarter down from $225 million during the same period in fiscal ’07. The operating margin declined at 2.7% of related revenues from 12.1% a year ago. Sales deleverage was the leading contributor to the margin compression along with the cost items I just mentioned. Also included in the US segment results was about $43 million in restructuring charges which contributed one quarter of the margin decline.

Now, for a review of results from our international segment. International total net revenues increased 13% to $534 million in the fourth quarter of fiscal ’08. Company operated retail revenues increased 12% to $446 million mainly due to the opening of 236 new company operated retail stores in the last 12 months.

Comparable store sales were flat for the quarter reflecting further softening of the trends we talked about at the end of Q3. With the domestic financial crisis spreading globally as the quarter played out the effects were particularly notable in our two key markets - the UK; and Canada, which represent nearly 80% of our international same store sales.

International operating income decreased to $2.6 million in the fourth quarter of fiscal ’08 compared to $51 million a year ago. Operating margin for the fourth quarter was 0.5% compared to 10.8% a year ago. In addition to softer sales margin compression primarily resulted from higher cost of sales and occupancy resulting from costs associated with the expansion of our centralized distribution system and higher fuel costs and $19.2 million in restructuring charges we reported for the quarter related to the 61 store closures in Australia.

Now, let me move on to results from our third business segment, the global consumer products group or CPG. CPG total net revenues declined 4% to $105 million in the fourth quarter of fiscal 2008 namely due to lower revenues from packaged coffee sales in the US market. Operating income for CPG was $63 million in the fourth quarter compared to $62 million in the same period a year ago. The operating margin expanded 340 basis points to 60.3% of related revenues.

The different movement between revenue and income was primarily due to the mix of revenue being less weighted towards the initial sale of coffee and tea products to Starbucks distributor which have related costs of sales and more towards revenue profit sharing earned on the distributor sales to retailers which helped drive the margin expansion.

Now, for a few comments on Starbucks’ balance sheet and liquidity. Starbucks is in a good financial position with a strong business model to generate cash in excess of our investment needs. We also had the capacity for up to $1 billion in short-term borrowings either through our credit facility, through our commercial paper program or a combination of both. At fiscal year end the company had $271 million available for short-term borrowings.

A note on the recent amendment to our credit facility, this was directly related to adjusting for the near term accounting impact of lease termination costs associated with the 600 US company operated stores designated for closure. The closures helped put us on a path to stronger credit ratios in the medium term as we boost operating cash flow and reduce rent and the cost reduction initiatives we’ve completed around staffing and real estate along with a slower store expansion target will help offset the impact from the sales deleverage we’ve been experiencing putting Starbucks in a better position to generate higher free cash flow going forward.

As a final note on the amendment, even though lease exit costs are now expected to be higher, we see little risk of breaching our coverage covenant. The recent squeeze in the credit markets elicited a lot of questions from investors particularly near the end of the quarter related to our CP program and our ability to borrow, so I thought it might be beneficial to remind you of the $1 billion in aggregate credit capacity we have and in the event of the company has difficultly in placing CP we can elect to borrow against the credit facility.

We ended the year with $1.3 billion in cash from operations. Our capital investments for the year came in at $985 million which was below our target of $1 billion. Of our fiscal 2008 CapEx, approximately 80% was in support of our stores with two thirds of that allocated to new stores, more than 20% to renovating and remodeling existing stores and 10% represents investment in new equipment such as the Mastrena and warming ovens to name a few. The remaining 20% of the total $985 million spend was primarily investment in our supply chain and for IT systems projects. Overall, capital expenditures in 2008 represented about 9% of revenues which is slightly lower than the past few years.

Let me now recap our fiscal 2008 performance by looking at a few key metrics. Let me begin with store openings and net store counts. In August of 2007 when we initially provided our fiscal 2008 store opening target we were planning to open 2,600 net new stores globally. As the economic environment continued to weaken and as we entered 2008 we lowered our store opening target for the year and for 2009 through 2011. As the year progressed and the economic pressures mounted we conducted a thorough review and analysis of our entire US company-operated store portfolio. From that effort came the decision to close approximately 600 company-operated stores and significantly slow our store growth in to the near future.

We ended fiscal 2008 with 883 or less than half the net new US store openings compared to fiscal 2007 including 60% fewer company operated and nearly 40% fewer licensed net openings than prior year. We also evaluated our international company-operated store portfolio and one underperforming market stood out, Australia. We made the decision to significantly downsize our presence in that market by closing 61 stores while retaining 23 profitable stores in three key metro areas.

Total net new international store openings in fiscal 2008 were relatively flat with fiscal ’07 at 786 stores with more than two thirds of the growth coming from licensed stores. Now, shifting to comparable store sales, overall they were down 3% primarily driven by the US segments decline in traffic. The US business same store comps were a negative 5% for the year with slightly more than a 4% decline in traffic and less than 1% from lower average value per transaction and as the year progressed we began to feel the impact of a weaker global economy reflected in softer international comps. We finished the year with 2% international comparable store sales growth driven primarily by an increase in the average value per transaction. The slowdown in revenue growth for the year of 10% was the result of a combination of negative same store comps and fewer net new company-operated stores.

Fiscal 2008 earnings per share came in at $0.43. When we factor in the approximately $0.28 attributed to restructuring and transformation-related costs, non-GAAP EPS was $0.71 per share down from the $0.87 GAAP EPS we achieved in fiscal ’07. At negative 3% comps, non-GAAP EPS eroded by 18%. As Troy will talk about shortly the new costs architecture for 2009 is very different as we expect to get significant EPS expansion if comps in ’09 are similar to 2008.

The last point on EPS, to provide better clarity in to the $0.28 delta between reported GAAP and non-GAAP EPS, let me walk you through the specific P&L line items impacted by the roughly $339 million in restructuring charges and transformation-related expenses. Of that total $267 million or roughly $0.22 of EPS was directly attributed to restructuring charges and the remaining $72 million specifically to other transformation strategy initiatives.

The $267 million in restructuring charges break down as follows - about 80% represented charges related to the approximately 600 US store closures and 6% to the 61 Australia store closures. The majority of the remaining amounts related to reducing our corporate real estate footprint and was assigned to our unallocated corporate segment. The majority of the $72 million in transformation-related charges, about 90% was in store operating expenses with more than 80% of that in the US segment. These costs were primarily related to debt side costs and overhead write offs associated with the reduction in new store openings.

So to recap our view of the year, recognizing the difficult operating environment in its early stages we focused on restructuring our business to build a cost structure to support the business for the long term. We took action to close 600 underperforming stores in the US which should not only improve profits in the near term but also give nearby stores a boost in sales from transfers to existing stores.

After a number of efforts to improve the performance in our Australia market over the past few years, we made the decision to close 61 stores retaining 23 healthy stores in that market and we rationalized our leadership structure and non-store organization by eliminating approximately 1,000 open and filled positions, nearly 15% of non-store positions globally and better aligned around the global ownership of functions which should give us leverage and efficiency going forward.

We ended 2008 with a healthier store portfolio, a more aligned cost structure to allow for operating margin expansion at lower comp levels and with a solid business that generated $1.3 billion in operating cash flow. Now, let me turn the call over to Troy to talk about 2009.

Troy Alstead

Thanks Pete. As Howard mentioned earlier with the transitional year now behind us we are confident that Starbucks enters fiscal 2009 fundamentally stronger and better positioned to grow earnings and improve operating margins in the year ahead. Historically, our business model has been highly dependent on strong same stores sales growth to drive the kind of earnings growth that Starbucks has delivered.

This past year Pete has tried to more clearly illustrate for you the link between comparable stores sales results and our ability to achieve certain EPS targets. While we will continue our efforts to boost same store sales, we have the opportunity to take some of the pressure off that metric by prudently rationalizing our cost structure and the steps we took in fiscal ’08 have put us in a much better position to deliver solid EPS growth in fiscal ’09 even if same store sales are negative.

Clearly, our goal is to deliver positive comp growth but it’s important to note that the model is no longer as reliant on achieving that. If we began with fiscal 2008 non-GAAP EPS of $0.71 as our base line, we believe that’s the range of FY 2009 EPS growth we can deliver keeping in mind that we are comping over negative 3% in same store sales in ’08 if we have negative 2% comps in fiscal ’09 we believe that we can still drive more than 25% EPS growth and hit $0.90 non-GAAP earnings per share.

We believe that even a negative 5% comp can still deliver non-GAAP EPS of around $0.80 or greater than a healthy 10% growth year-over-year. If we look at how we started the first few weeks of this fiscal year and if average transaction volumes remained similar for the balance of the year we would still expect to deliver 20% EPS growth. So factored in to our fiscal ’09 EPS expectation is the $200 million to $210 million in the pre-tax positive benefit or $0.17 to $0.18 of EPS from the US company-operated store closures, restructuring of Australia and cost savings from the leadership and non-store organization changes we made this past year.

I want to remind you that fiscal ’09 EPS on a GAAP basis will still be impacted by the lease exit and severance cost from the US and Australia store closures that began in the fourth quarter of fiscal ’08 and will continue in to fiscal ’09. We now expect an impact of up to $0.12 per share in fiscal ’09 related to lease exit costs.

As we look to the start of fiscal 2009 the first quarter will also be impacted by the investment we made in our field organization through the leadership conference held in late October which we estimate will impact Q1 EPS by roughly $0.03. Keep in mind that our first fiscal quarter is also expected to be the toughest comparable period year-over-year.

Let me now provide a comment on anticipated cost inputs for ’09. We currently expect the impact from our higher green coffee costs to be offset by favorable dairy this fiscal year. Further, at our latest projection for foreign exchange rates we do expect an unfavorable impact to EPS of approximately $0.02. These commodities and fx impacts are already reflected in the comments we’ve made today regarding our expectations for delivering improved operating margins and earnings growth in 2009.

What I want to leave you with here is that there’s a better opportunity than there’s ever been in the past for our model to drive EPS growth without as much dependency on same store sales growth. That equates to a much healthier and sustainable model especially in challenging economic cycles. For store openings in the US we’re now targeting negative 20 net new stores in fiscal 2009 which include nearly 225 company-operated store decline and approximately $205 licensed net new stores.

In response to the global economic downturn and our cautious approach to expansion in this current environment, Starbucks is now planning to open approximately 700 net new stores in international markets during fiscal ’09, two thirds of which we expect to be licensed as we factor in the current global economic climate with a continued particularly cautious approach in the UK and Western Europe.

Total net revenues are expected to be relatively flat with fiscal 2008 with variations around that of course driven by the level of comps we deliver. We expect modest operating margin improvement for the total company as well as for both the US and international business segments for the full year. The company is further reducing its projected capital expenditures to $700 million, adjusting for the revised international store opening target. CapEx allocated specifically for our stores is targeted at around 70% of that total with more than half of that earmarked for renovations and remodels as well as new equipment to support our enhanced quality standards and expanded offerings. Capital expense towards new stores is a much smaller portion compared to previous years as we shift investment priorities towards enhancing the quality of our existing store base. The remaining 30% of the total $700 million is designated for investment in IT systems and in our supply chain. Our capital expenditure target for 2009 represents about 7% of revenues significantly lower than in previous years. We expect cash flow from operations to be essentially flat with the fiscal 2008 level of $1.3 billion. Improvements in operating income are expected to be offset by cash outflows related to lease exit costs.

With our healthy operating cash flow we expect to substantially pay down our short-term debt during the year and we do not anticipate any share repurchases.

In closing, we’ve taken the difficult and necessary actions to position Starbucks for the challenging environment we face. Our cost structure has been re-architected and is now more appropriately scaled to the size and growth of our business. We’ve taken actions on underperforming stores in the US and reduced new store growth resulting in a much healthier store portfolio.

Our most troubled international market has been significantly downsized removing sizeable operating losses from the P&L. We enter 2009 with a number of actions underway to drive greater efficiencies in our store operations and our supply chain. Our business continues to generate healthy operating cash flow at the same time we have been very careful on capital spending and continue to be in 2009 and we have refocused our efforts on the core of the Starbucks experience in our stores while driving profitable innovation and meaningful value to customers.

These efforts we believe will enable us to improve operating margins and grow EPS in 2009 despite the challenging global economic environment. Now, let me turn the call back to Howard for his closing comments.

Howard Schultz

Troy, thank you. Before we turn to Q&A I just thought I’d like to frame what you’ve heard today. So I think there are really two distinct stories, first a year of transition with the associated expenses required to transform a company and a quarter with higher than expected attrition and continued restructuring costs. That first story is complete.

The second story and the one I would like you to focus on is about the future. With the right cost structure, vastly improved consumer offerings tied to value and quality and a reenergized team Starbucks is poised to drive EPS growth for fiscal ’09. We know what we need to do, we spent a year rebuilding and we are faring well in view of these challenging economic times. Now is the time for us to execute and that is exactly what we plan to do. Thank you very much. JoAnn.

JoAnn DeGrande

With that Operator, let’s move to Q&A please.

Question-and-Answer Session

Operator

At this time, I would like to remind everyone if you would like to ask a question, press “*” then the number “1” on your telephone keypad. You may ask one question before being entered back into the queue. We’ll pause for just a moment to compile the Q&A roster. Our first question comes from Matthew DiFrisco from Oppenheimer. Your line is open.

Matthew DiFrisco – Oppenheimer & Co.

Thank you. I actually just have one bookkeeping question first on the same store sales. If you could just give us what the traffic was in 2Q and 3Q, I think you gave us a little bit more detail this time around in the fourth quarter. Then also there is some comment about the first quarter how it started, I missed that in my notes if you could just repeat that. And more towards Howard you said now is the time where --

Howard Schultz

We lost him.

Operator

I am sorry. We lost his line. The next question comes from Steven Kron with Goldman Sachs. Your line is open.

Steven Kron – Goldman, Sachs & Co.

Thanks. I don’t know if you guys wanted to answer Matt’s first couple of questions but I’ll ask mine. In the meantime I guess as it relates to the guidance, I guess just taking a step back for a second basically what you guys are implying here is despite a negative 2% comp and backing out the $0.18 that you’re going to get from these transformational strategies that you’re still not going to see deleverage in the model? And I guess you mentioned a couple of times in store efficiencies and supply chain efficiencies, is that where you’re going to get these benefits to offset the negative 2% comp deleverage? And maybe if so, please drill down and talk to us a little bit about what specifically is there.

Peter Bocian

This is Pete. Let me answer the previous question about Q3, Q4 sequential and then Troy will do the Q1 and then talk about the guidance for ’09. We had negative 8% comps in the US in Q4; we had negative 5% in Q3, so sequentially we were down a little more than three points, some of that in traffic but a big part of it in the average value of the ticket which I mentioned was around the merchandise and the music in the stores. So, we did have a deterioration Q3 to Q4. I had mentioned on the Q3 call that we would get to a mid-70s kind of EPS if comps stayed relatively flat; they didn’t. So, Q4 went down. Troy, maybe you could talk about what we’ve seen so far in Q1 and then kind of the guidance question from Steven.

Troy Alstead

Sure, this is Troy. What Howard had said about Q1 is encouraging to us is that we’ve not seen so far in these early weeks of the first quarter a deterioration of comps which is what we are think we’re hearing from any other premium brands and retailers. We’ve seen some optimistic movements from days to days, nothing to predict a trend yet but that’s been encouraging so far to us and we’ve not seen that deterioration so that’s our specific comment about Q1 comps so far.

And then with respect to how we’re going to do it in ’09, I’ll tell you it is a wide ranging set of things around efficiencies at our store level but not only there, all throughout our supply chain, procurement, our distribution networks. In the stores it’s a number of things from waste management to lean efforts within our stores to how we lay out the bar so the efforts are easier for partners. It’s an entire range of things that are underway today, some of which we’re already beginning to see the fruits of, some which will pay out as we continue to focus on them throughout the year.

I think the thing I’d expand on here is that Howard and Pete throughout the year and this leadership team have taken the actions around the transformation agenda, some of which were one time efforts to readjust our cost structure to where it needs to be, but one of the benefits coming in to ’09 that we continue to focus on is a relentless pursuit of doing everything we do better and that’s at the store level, it’s in our supply chain, it’s in the support center building here and I think you’ll see that in the leadership team highly focused and as we go through this year that’s the new spirit, the new process and the new set of systems we have in place.

Operator

Our next question comes from the line of Larry Miller with RBC. Your line is open.

Lawrence Miller – RBC Capital Markets

Yes, thank you very much. I wanted to ask a little bit about that ticket being down 3%. It sounded like you talked about music and equipment driving that and what might that mean as we head in to the holiday season? Can you give a little bit more color?

Howard Schultz

I think that’s an important question because personally I’ve been more focused on the transaction and the traffic number than the overall comp especially in Q4 it was somewhat artificial as it relates to comparing it to a year ago. The music business has been significantly downsized and we also had a fairly robust brewing sale in Q4 a year ago which we didn’t have this year. So, the traffic number is what I’ve been focusing on.

In terms of on a go forward basis, what we’ve done for holiday and I think we were very early to do it is we completely revamped all of the holiday merchandise to reflect price points that we thought would without question be perceived as tremendous value for our customers. So, the overall price points in holiday merchandise on the hard good side has a lower ticket price than a year ago with virtually the same margins. So, we feel like we’re in a good position to execute against holiday with the same level of retained gross margin and there could be some attrition on ticket. But then to offset that we are seeing a higher level of attachment on food to those people who have been buying beverages because of the success of oatmeal and the other healthy products.

Operator

Our next question comes from the line of Matthew DiFrisco from Oppenheimer. Your line is open sir.

Matthew DiFrisco – Oppenheimer & Co.

Thank you. I’ll actually get right to the point, the remodel campaign that you guys talked about are 20% of your CapEx going towards some remodels, it sounds like a larger number than I think you’ve done in the past. Can you talk about some of the things that are included in that? What type of test you may have done with respect to that and what type of comp lift you might see? Or, is that directed towards comps or cost reductions?

Troy Alstead

Well, there’s a routine remodel program that we have in our store base as stores reach the five-year mark and generally the 10-year mark and those remodels are about refreshing the stores. It’s actually for the most part built in to our initial pro forma for each store that we build is an assumption that we will spend capital roughly at the five-year mark and again at the 10-year mark to renovate the store, to refresh it, to bring it current with our current standards and so, what you see over the last year and in to ’09 is some increase of that which is just to a large extent a natural aging of our store population. Arthur Rubinfeld, our President of Global Investment might want to add a little bit to that.

Arthur I. Rubinfeld

That’s basically how we handle our pro formas and move forward in our renovation strategy, just like you were saying.

Peter Bocian

And the other thing I would kind of add is I think before we kind of have had two buckets around store CapEx. We said it’s either new or its renovation. What we tried to do is break out where we’re actually investing in equipment for the store and I broke that out on the $985 million of CapEx this year so the renovation piece – we actually talk about three buckets going forward because the warming and the Mastrena is actually a sizeable investment as well but you had the renovation piece right and it reflects just the natural ramp in the store portfolio and the respective age.

Operator

Our next question comes from the line of John Glass with Morgan Stanley. Your line is open.

John Glass – Morgan Stanley

Thanks. I wanted to go back to the question that I didn’t fully get the answer to on the margin improvement despite negative comps. Two quarters ago you thought you could earning $0.90 with let’s call a 2% or 3% positive comps. Now, you’re saying you can earn that amount with negative 2% or 3% comps. Can you maybe break it down in to what you think you save at the store level, what is coming out of the corporate expenses or are there other areas maybe we haven’t thought about in terms of benefits to deleveraging or tax rate benefits or something else that also contribute to that formula?

Howard Schultz

John, this is Howard. I’ll just start briefly with a brief comment and then I’ll go back to Pete and Troy. I think it’s important to just take a step back and understand that the entire year with regard to transforming the company, so much of that has been an assault and a focus on things that we have not looked at in the past and that was at the growth of the company and the success and double-digit comps in a sense covered up these things and gave us the air cover not to have to address or not to address it as intently with the discipline we’ve had now. The discipline, the focus and the relentless pursuit of efficiency and saving money at the backend, those things that are not consumer facing has given us the encouragement and the optimism to make the statements we’ve made today and then Pete can get in to the specificity of that.

Peter Bocian

Yeah, I think the two to three, if you remember the last call at Q3 we were talking about the $0.90 to $1 and needing two to three points of positive comps to get to that and so I say it wasn’t the $0.90 it was more the middle of the range. But, that said, it’s correct to recognize that we’ve gone after more costs than was there at Q3 and that covers in-store operations, supply chain, procurement, store development based on for example a new international store number, etc. So, I don’t know if you want to add anything but we have gone after more costs around re-architecting since we talked to you last at the end of Q3.

Howard Schultz

And, I think we did that with the anticipation that we began to believe that fiscal and calendar ’09 would be at least as bad in terms of the economic pressure and the consumer confidence and we had to do things before the year ended to put us in a position to win in ’09 and that’s what we’ve done.

Operator

Our next question comes from the line of David Tarantino with Robert W. Baird. Your line is open.

David Tarantino – Robert W. Baird & Co., Inc.

Hi, good afternoon. Howard, could you talk generally about the marketing and advertising opportunity and given the success of the recent Election Day promotion are you looking at becoming more aggressive on media advertising as a means to drive traffic going forward?

Howard Schultz

Well, I think as you know we have not been a traditional spender of classic marketing and consumer facing activities that have been associated with most consumer brands. I think as we look back on last week, we did something last week that I think is very interesting to try and get underneath and understand with the question of how do you leverage this on a go forward basis. But, I think what it showed was that we were able to make a very small relative investment in terms of buying a spot on national TV and running it once and leveraging new media, the digital world, the viral community the blogosphere and PR in a way that really very few brands can do but because of the cultural relevance of Starbucks, our national footprint, and the fact that we were part of the national dialog on Election Day gave us an opportunity to do that.

We drove significant, and I mean significant incremental traffic in to our stores with impressions on a day that was really valuable to us because of Thanksgiving coffee and the launch of Gold Card. We believe that there are other opportunities to do that. I don’t think we want to milk it but I think we want to be very disciplined and thoughtful about it. And then, at the same time I think in view of the economy and consumer confidence, we want to be extremely thoughtful about how we’re going to spend marketing dollars on a go forward basis. But, I think in this environment the rules of engagement no longer apply and what I mean by that specifically is I think our number one activity has to be to maintain our core customers and ignite our base and I think with Gold Card and with that kind of promotion and the things we’re doing around value we’ve been able to do that. And I think when you look at the way in which our brand sits today, the relevancy of the sense of community that we have in our stores, that really did resonate with our customers and the public at large and we’ll look at other opportunities to do that. It was very clever, very smart and very cost efficient.

Operator

Our next question comes from the line of Joe Buckley from Banc of America Securities. Your line is open.

Joseph Buckley – Banc of America Securities

Thank you. I have two questions, one is a follow up, again just to clarify the comments on October, Troy when you were running through the scenarios of minus 2% comp can give you 25% EPS growth or $0.90 and minus 5% comps gives you $0.80, did you say something to the effect that if the first few weeks of ’09 is sustained you would have 20% EPS growth? And if I heard right, what are you trying to imply by that.

And then a question on Starbucks Gold, the fact that you’re off to such a great start does it make you nervous that you’re selling it to your best customers and then in effect discounting to your best customers?

Howard Schultz

You want to take on the first one?

Troy Alstead

Yeah, this is Troy. I’ll start with the first question, you’re correct. What I was saying about the first several weeks of October and this is not a prediction by the way it’s an illustration, but if we take transaction volumes as we see them today, and this is after a year of the negative comps we’ve had and volumes lower than they’ve been historically and just flat laying those over the rest of the year again, not predicting that’s what would happen but to illustrate how the year goes, that would we believe give us the ability to drive 20% earnings growth still in 2009. And the point here is that 2008 deteriorated throughout the year so even at today’s lower volumes than we’ve had historically as we play that out over the course of ’09 comp growth doesn’t continue as negative in a percentage basis as it did in Q4 and that’s the point I was making for you.

Peter Bocian

Yeah just to add to that, if you look at the comps we saw in 2008 the first quarter was fairly flattish so that’s what the October comp number or Q1 will be against the - probably the last good quarter we had in 2008. Then, it was negative 5% to negative 8% in the US as it went through the year so it’s comping against a different number after Q1 it went down in Q2 through Q4, okay.

Howard Schultz

And Joe, in terms of your other question about the Starbucks Gold card, in many ways fiscal ’08 was a year of learning with regard to value and value testing and driving a number of regional tests in different markets and in those tests I think we came away with the conclusion that if we provide unique value to our customers that really resonates within we will see a higher degree of frequency and perhaps even a higher average ticket.

So, I think this is an opportunity for us to reward loyal customers. It’s a great opportunity between now and the first of the year for this to be a fantastic valued gift because the research strongly suggests that a gift card of Starbucks, whatever face value it has, has a much higher value in terms of the connotation of the recipient and I believe between that and the millions of cards that we’ve sold to Costco will drive traffic in to our stores at a time when the cost of acquiring a customer for others is much, much higher than the cost of acquiring a customer in this kind of thing that we’re doing with both the Gold Card and Costco for us.

And then lastly, what we’ve always seen as a result of the gift card and we believe we’ll see it in spades with both the Costco gift card and the Gold Card is an annuity that comes after the first of the year which will bode well for calendar ’09.

Operator

At this time, I would like to remind everyone if you would like to ask a question, you may press “*” and then the number “1” on your telephone keypad. You may ask one question and then re-enter the queue for any additional questions. Our next question comes from the line of John Ivankoe from JPMorgan. Your line is open.

John Ivankoe – JPMorgan

Great, thank you. Again, just a housekeeping question and then one other. Pete I think it was in your comments that you talked about the 270 basis point decline just on the COS side in the US and much of that due to inventory write down. Could you quantify that in both the fourth quarter and the full-year 2008 and whether you think any of that will recur in 2009? And that’s the first question and then I’ll ask another one if I may as well.

Peter Bocian

Yes, I think we tried to break out as much as possible the movements within the company, right. I think when you think of the inventory adjustments, would not expect to recur, okay. When you talk about the espresso excellence standards I would say that we learned in 2008 so we introduced it, we implemented it but I think we’re going to go back in store operations and find a more cost effective way to deliver the same standard, okay.

And the other point I mentioned, so that one I think is an opportunity for us because that would have been in the P&L for pretty much three quarters. And the last one was really around the introduction of the new platforms in the quarter. So, I think we will get also get better at some of the new platforms relative to procurement and cost of sales going forward on some of the beverage innovations we saw.

So it’s all baked in to what Troy described relative to let’s call it the sensitivities of EPS that we think we can achieve. So, probably the only unique one is the inventory adjustments. The other ones we’re working on as part of our improvement plan to deliver better operating margin in 2009.

Operator

Our next question comes from the line of Jeffrey Bernstein with Barclays Capital. Your line is open.

Jeffrey Bernstein – Barclays Capital

Great. Actually just one clarification and then a question as well, just on the clarification side Troy I just want to make sure on Joe’s question a little earlier I think you had said -- in your ranges you had said if comps were down like 5% you’d be looking at 10% plus EPS growth at around $0.80. I just want to clarify that you’re not saying if comps were to remain where they are right now which is probably running in the down 7% range that you could deliver greater earnings growth than that. I’m assuming there’s some sort of quarterly mix shift that you’re referring to?

And then in terms of my question, I think in your prepared remarks you talked ab