Starbucks (SBUX) Earnings Report: Q4 2014 Conference Call ...

Company Name: St arbucks Co rp Company Ticker: SBUX Sector: Services

Industry: Leisure Event Description: Q4 2014 Earnings Ca ll

Starbucks (SBUX) Earnings Report: Q4 2014 Conference Call Transcript

The following Starbucks conference call took place on October 30, 2014, 05:00 PM ET. This is a transcript of that earnings call:

Co mpany Part icipant s

JoAnn DeGrande; Starbucks; VP - IR Adam Brotman; Starbucks; Chief Digital Officer Howard Schultz; Starbucks; Chairman, President, CEO Scott Maw; Starbucks; EVP, CFO Matt Ryan; Starbucks; Global Chief Strategy Officer Troy Alstead; Starbucks; COO Cliff Burrows; Starbucks; Group President - US, Americas

Ot her Part icipant s

Andy Barish; Jefferies & Company; Analyst Matt DiFrisco; Buckingham Research; Analyst R.J. Hottovy; Morningstar; Analyst John Glass; Morgan Stanley; Analyst Joe Buckley; BofA Merrill Lynch; Analyst Keith Siegner; UBS; Analyst Sara Senatore; Sanford Bernstein; Analyst John Ivankoe; JPMorgan; Analyst David Palmer; RBC Capital Markets; Analyst Jeffrey Bernstein; Barclays; Analyst

MANAGEMENT DISCUSSION SECTION

Ope ra t o r:

At this time, I would like to welcome everyone to Starbucks Coffee Company's fourth-quarter and fiscal year 2014 earnings conference call. (Operator Instructions) Thank you. Ms. DeGrande, you may begin your c on feren c e.

Jo Ann DeGrande (VP - IR):

Thank you, Mike. Good afternoon. This is JoAnn DeGrande, Vice President of Investor Relations for Starbucks Coffee Company. Thank you for joining us to discuss our fourth-quarter and fiscal 2014 year-end results. Today on the call with prepared remarks are Howard Schultz, Chairman, President, and CEO; Troy Alstead, COO; and Scott Maw, CFO.

And joining us for Q&A are Cliff Burrows, Group President, US and Americas; John Culver, Group President, China Asia-Pacific, Channel Development, and Emerging Brands; Adam Brotman, Chief Digital Officer; and Matt Ryan, Global Chief Strategy Officer.

This conference call 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

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Company Name: St arbucks Co rp Company Ticker: SBUX Sector: Services

Industry: Leisure Event Description: Q4 2014 Earnings Ca ll

statements should be considered in conjunction with cautionary statements in our earnings release and the risk factor discussion 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 our website at investor. to find a reconciliation of non-GAAP financial measures referenced in today's call with the corresponding GAAP measures.

This conference call is being webcast, and an archive of the webcast will be available on our website at i n v es tor.Sta rbu c k s .c om.

Before I turn the call over to Howard, I want to once again extend an invitation for you to join us here in Seattle on December 4 for our biennial investor day. The event kicks off Wednesday evening with a reception at our new roastery, which we are very excited to unveil, followed on Thursday by presentations and on-site experiences here at our headquarters. Please contact investor relations if you need more information, and we hope to see you here in early December.

With that, let me turn the call over to Howard.

Ho ward Schult z (Chairman, President, CEO):

Thank you, JoAnne, and welcome to everyone on today's call. Starbucks' record Q4 and fiscal 2014 financial and operating results again demonstrate the power and relevancy of the Starbucks brand and the success and scalability of our operating strategies and global business model.

Meaningful contributions from each of our business units drove a better than 10% increase in Q4 revenues to a record $4.2 billion, while improved store operations enabled us to deliver an elevated experience for our customers and our 19th consecutive quarter of comp store sales growth at or above 5%. Sales leverage, increased operating efficiency, and disciplined expense management each contributed to a 280-basis-point increase in operating margin over last year to a record 20.5% and a 23% increase in non-GAAP earnings to a Q4 record of $0.74 per share.

For the full fiscal year, Starbucks grew revenues by 11% to a record $16.4 billion, posted global comp store sales growth of 6%, squarely in line with our targets, and grew non-GAAP EPS by 21% to a record $2.66 per s h a re.

Starbucks' performance in fiscal 2014 was extraordinary by any metric or comparison, and the results remain even more stunning by the fact that they were achieved in the face of continued challenging retail and consumer environments, the accelerating shift in consumer behavior from bricks and mortar to e-commerce purchasing, and on the heels of 7% comp growth in fiscal 2013.

I have spent many of these calls discussing the quarter or year ahead, but today I'm going to leave that to Troy and Scott and instead lay out for you a road map that demonstrates how Starbucks is positioned to benefit from the massive cultural shift in consumer behavior underway and how we will continue to lead, thrive, and win in fiscal 2015 and beyond. The most meaningful changes are long-term game changers, but I will begin with immediate plans that will drive results this holiday.

For this holiday season, officially starting for millions of consumers in the US and around the world this Saturday when Starbucks' cups turn red, we have completely reimagined our in-store experience. We have great seasonal operatings from La Boulange and are introducing an innovative new handcrafted beverage, chestnut praline latte, a beverage that resonated strongly with customers in test markets and will add incrementality as the next iconic holiday beverage.

And we have reoriented our approach to gifting. Last holiday, Starbucks benefited enormously from the consumer shift towards gift-giving cards instead of traditional physical goods. For us, that translated into a

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Company Name: St arbucks Co rp Company Ticker: SBUX Sector: Services

Industry: Leisure Event Description: Q4 2014 Earnings Ca ll

record card sales -- roughly one in eight Americans receiving a Starbucks gift card and $1.4 billion in Q1 carloads last fiscal year.

This holiday, we will create even more passion and excitement for Starbucks gift cards by offering 100 beautiful, unique, and proprietary new card designs, merchandise on an engaging freestanding card wall, and supported by social media to encourage engagement and peer-to-peer sharing. And we will have greatly expanded our e-commerce merchandising offerings as well.

But the big driver this year is our promotional overlay of Starbucks for Life. During the five-week period beginning December 2, at the heart of the Christmas shopping season, every customer who uses a gift card or their MSR account to pay can win one of almost 500,000 food and beverage prizes. And 13 lucky cardholders in North America will win Starbucks for Life.

Now, customers have been trying to buy Starbucks for Life for decades, but we have never offered it and you still can't buy it. But this holiday season, 13 Starbucks cardholders or MSR members will win it. Our Starbucks for Life promotion and external marketing plans will ignite social media channels through our customers into our stores and drive significant loyalty into the flywheel of Starbucks .

Today, Starbucks is approaching 1,400 stores in China, and customer engagement with our brand has never been stronger. We continue to expand and leverage our mobile, digital, and loyalty assets and become an increasingly relevant part of the daily ritual for a rapidly growing customer base. As a result, Starbucks' comp growth in China routinely outpaces segment comp growth in China overall.

And with passionate, world-class senior leaders and store partners drawn from local communities within China and demand for all things Starbucks in China so strong, we are now opening an average of one new store every day, a pace that would only accelerate for years to come. These are still the early days of Starbucks' growth and development in China despite the fact that is one of our strongest markets in the world.

Turning to Japan, last month we entered into an agreement to acquire the shares in Starbucks Japan we did not already own. Opened in 1996 in our first country market outside of North America, Japan today represents over 1,000 stores. Besides being EPS accretive in year one, when completed the transaction will enable us to increase the pace of new store openings that have benefited us in the US, China, and certainly in other markets around the world, and expand the availability of Starbucks products in multiple CPG channels. We will also be able to leverage more fully our loyalty, digital mobile, and new product development programs in J a pa n .

Turning to EMEA, I am pleased to report that our EMEA business has been transformed and turned around just as we had promised. And that Q4 represented EMEA's best quarter in years, with particularly strong performance in the UK. As good as Q4 was, you will continue to see the EMEA get even better in the quarters a h ea d .

Now let me turn to coffee. For years, we have dreamed of a single place where we would capture all the passion, all the ambition, all the magic of coffee in one extraordinary, dynamic space. Those of you who come to Seattle for our investment day -- investor day in December will see that vision come to life in the most unique and extraordinary consumer experience ever seen: the Starbucks roastery and tasting room.

The roastery will shine a bright light on everything Starbucks . It will seamlessly integrate coffee roasting and food, beverage and merchandise retailing into an immersive consumer experience that showcases Starbucks coffee heritage, the craft of small-batch roasting, and innovative new coffee brewing methods, culminating in each cup of coffee being handcrafted right from the roastery. We will combine the beauty and romance of super-premium, micro-lot coffees with moments of connection and discovery for our customers.

But perhaps the greatest value of the roastery is that it will anchor a new Starbucks super-premium coffee

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Company Name: St arbucks Co rp Company Ticker: SBUX Sector: Services

Industry: Leisure Event Description: Q4 2014 Earnings Ca ll

sub-brand, Starbucks Reserve. Identified not by the Starbucks brand itself, but by a capital R and a star that defines the upper limit of what is possible in coffee, just as other authentic super-premium brands have done in other industries and formed the foundation for an entirely new Starbucks Reserve retail store platform and business unit.

The first of 100 or more reserve stores we plan to open around the world will be opening in San Francisco very soon. And the roastery will be the first of several we plan to open in select markets around the world beginning in fiscal 2016.

Beyond the experience itself, the proprietary design, technology, and capacity we have built into the roastery will enable us to substantially increase production of rare and limited availability copies and to double the number of Starbucks stores offering packaged Starbucks Reserve coffees to 1,500 worldwide by the end of fiscal 2015.

And I can assure you that no other coffee company in the world will be able to offer a higher quality coffee than a coffee labeled Starbucks Reserve. With the roastery and with Starbucks Reserve, Starbucks will further elevate the premium end of the coffee industry, extend our coffee leadership and authority, and create further separation from every other coffee company in the world.

Let me turn to Teavana. The Teavana acquisition provided Starbucks with unique entree into the $90 billion global hot and iced tea category, a category we feel strongly is ripe for innovation and reinvention. Last year, we opened our first Teavana tea bar on Manhattan's Upper East Side, and we now have a total of six Teavana tea bars.

I was at the opening of our newest New York City Teavana tea bar on Ninth Street and Broadway just last week and was taken by the energy and customer excitement in the store. I urge you all to visit the store yourself and envision a national and global footprint of Teavana stores that Starbucks will create.

Sales of handcrafted Teavana beverages, such as Teavana Oprah Chai and Teavana shaken iced tea and sale of Teavana premium loose-leaf teas through Starbucks' global store base were always a core strategic focus of the acquisition. Today, we are already seeing Teavana products drive incrementality of Starbucks stores in North America, and at the same time they build brand awareness and add new customers for Teavana. In fact, Teavana shaken iced teas were the single most profitable addition to our menu last year.

Now let me comment on digital, card, mobile, loyalty, and payments. I want to talk to you about the intersection of three powerful consumer trends, the convergence of which bodes extremely well for Starbucks over the long term. The shift in consumer behavior that has people spending less time shopping in bricks-and-mortar stores and more time online that I first discussed with you after Q1.

The established, long-term trend of people consuming more and more food and beverage away from home. And the tremendous growth of online activity from mobile devices allowing consumers to conveniently conduct their lives, including commerce, from wherever they happen to be.

What is actually occurring is a cultural shift in time allocation away from retail experiences people have felt forced to undertake and towards retail experiences that people want to enjoy, with convenience as the key enabler. Starbucks is uniquely well positioned to benefit from this convergence as a destination experience.

Visiting a Starbucks has always been an elective choice, a place people choose to frequent, and as a result a place that is vastly less dependent on intercepting retail traffic for sales growth. The relevance of the Starbucks experience, the desirability of our coffee and food, and the ambience and feeling of community within our stores sets us apart from our competitors and are unique drivers that will continue to support our g rowth .

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Company Name: St arbucks Co rp Company Ticker: SBUX Sector: Services

Industry: Leisure Event Description: Q4 2014 Earnings Ca ll

On top of this, we continue to see consumers favor retailers who improve their customer experience through the integration of convenient mobile technology. And while Starbucks is today an uncontested leader in mobile, we will continue to innovate and lead around all things mobile in order to attract additional uses of our app and provide an enhanced and simplified experience for our customers. Innovations that will drive traffic and incrementality and create further attachment and customer engagement.

By way of example, in September we lost our new Starbucks app for Android with Shake to Pay functionality in the US, UK, and Canada, and also digital tipping in the US. And Starbucks' iOS app now has Uber integration, enabling customers to click on a ride to their local Starbucks .

But perhaps the single most important technology innovation we will introduce this year is Mobile Order and Pay, which debuts in Portland in December and will be rolled out nationwide in 2015. And while many people are talking about mobile and pay, what Starbucks is going to do and execute is quite different than anyone else in the marketplace.

Consumers today are no longer willing to accept convenience only around the purchase of readily available or commodity-based products. They want convenience around the purchase of premium products like Starbucks as well. One way we are addressing that need is through accelerated expansion of Starbucks' portfolio of high-profitable, drive-through stores. But our research confirms that we can drive even more traffic and incrementality and offer even more customers more convenience in more locations by allowing them to place orders ahead of time via their mobile devices and pick their orders up without waiting in line.

Starbucks' Mobile Order and Pay is a totally unique technology. It seamlessly integrates mobile ordering and our proprietary loyalty program with point-of-sale and store operations, enable us to enhance our customer experience, exceed our customers' expectations of convenience, and extend customer loyalty. And as we will see in a few weeks, no company in any industry offers any technology remotely like Starbucks' Mobile Order and Pay; plus, we get the added benefit of increased store throughput and speed of service for all our c u s tomers .

And we will drive a further step change in customer loyalty and engagement by extending express order and pay to include food and beverage delivery -- yes, food and beverage delivery -- in select markets during the second half of 2015. Imagine the ability to create a standing order that Starbucks delivered hot or iced to your desk daily. That's our version of e-commerce on steroids.

All of this will grow Starbucks Rewards, our loyalty program that now has 8 million active members, up 23% over Q4 last year and has been launched in 26 countries. And we will roll out an enhanced My Starbucks Rewards program providing even greater benefits to members in 2015, further accelerating MSR membership growth. And we have several initiatives underway that will grow membership in the short term and surprise and delight our customers.

Finally, while we have been investing in the development of our world-class mobile technologies for many years, and there has been a great deal of activity and speculations around the mobile payment space recently, mobile payment and consumer adoption of the technology overall is still in its infancy.

Please consider this metric. In 2013, payment for purchases by use of all mobile devices in the US totaled $1.3 billion. That was the entire market. Now listen to this. With over 90% of those purchases taking place in a Starbucks store, that means we had 90% share of mobile payments in 2013, while bricks-and-mortar commerce in 2013 totaled more than $4.2 trillion.

Now, what you're going to see in the years ahead will be a rapid acceleration in mobile device purchases and a continued significant migration away from bricks-and-mortar commerce. There's obviously a huge prize there, and that's why you are seeing so much activity around the payment space from all kinds of companies.

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