Source: Seeking Alpha
Q3 2014 Results Earnings Call
July 24, 2014, 5:00 p.m. ET
JoAnn DeGrande – IR
Howard Schultz – Chairman, President and CEO
Troy Alstead – COO
Scott Maw – EVP and CFO
Adam Brotman – Chief Digital Officer
Cliff Burrows – Group President, U.S., Americas, and Teavana
John Culver – Group President, Starbucks Coffee China and Asia Pacific, Channel Development and Emerging Brands
Matt Ryan – Global Chief Strategy Officer
Matt DiFrisco – Buckingham Research
Keith Siegner – UBS
Jeffrey Bernstein – Barclays
Joseph Buckley – Bank of America Merrill Lynch
Sara Senatore – Sanford Bernstein
David Tarantino – Robert W. Baird
Sara Senatore – Sanford Bernstein
John Glass – Morgan Stanley
Bonnie Herzog – Wells Fargo
John Ivankoe – JPMorgan
Brian Bittner – Oppenheimer
Jason West – Deutsche Bank
At this time, I would like to welcome everyone to Starbucks Coffee Company’s third quarter fiscal year 2014 earnings conference call. [Operator instructions.] Ms. DeGrande, you may begin your conference call.
JoAnn DeGrande – IR
Thanks, operator. Good afternoon. This is JoAnn DeGrande, vice president of investor relations for Starbucks Coffee Company. Joining me on the call today to discuss our fiscal third quarter results are Howard Schultz, chairman, president, and CEO; Troy Alstead, COO; and Scott Maw, CFO. Also joining us for Q&A are Cliff Burrows, group president, US and Americas; John Culver, group president, China, Asia Pacific, and channel development; and Matt Ryan, global chief strategy officer, who is part of our digital team, along with Howard and Adam Brotman, our chief digital officer.
This conference 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 statements should be considered in conjunction with cautionary statements in our earnings release and risk factor 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 our website, at investor.starbucks.com to find a reconciliation of non-GAAP financial measures referenced in today’s call with our corresponding GAAP results.
This conference call is being webcast and an archive of the webcast will be available on our website later today.
Before I turn the call over to Howard, I would like to remind you again of our biennial investor day taking place the first week of December in Seattle. We’re in the early planning stages, and invitations will be sent in the fall. We hope you’ll be able to join us for the first conference in Seattle since 2006.
With that, I’d like to turn the call over to Howard.
Howard Schultz – Chairman, President and CEO
Thank you, JoAnn, and welcome to everyone on today’s call. Starbucks Q3 represents another quarter of outstanding operating and financial performance around the world, demonstrating once again the power and relevancy of the Starbucks brand and the success and scalability of our business model and go-to-market strategies.
Today, over 300,000 Starbucks partners are serving over 70 million customers from almost 21,000 stores in 65 countries every week. I’m particularly pleased to report that each of our reporting segments delivered solid performance in Q3 and contributed to our accelerated 11% increase in revenues to $4.2 billion.
Particularly noteworthy is that our U.S. retail store business delivered comp growth of 7%, ahead of our own expectations and a stunning achievement on a base of over 6,800 stores against 9% comps in Q3 last year and in the face of continuing challenging U.S. economic and consumer environments.
Over the last two years, our U.S. business has produced revenue growth of over 22%. Our business in China, now approaching 1,300 stores, has never been stronger, contributing to a strong comp growth of 7% in China Asia Pacific. And EMEA demonstrated continued progress against transformation plan, delivering comp growth of 3% with key U.K. market comps outpacing the EMEA regions overall.
Globally, store comps grew 6%, our 18th consecutive quarter of comp store sales gains of 5% or more. Innovation and share expansion also drove strong gains in our premium single-serve packaged coffee and tea portfolios, contributing to a solid 13% increase in channel development revenues.
Overall, our operating performance in Q3 resulted in a 200 basis point expansion in our consolidated operating margin to a Q3 record of 18.5%, and a 22% increase in earnings per share to a Q3 record of $0.67 per share.
The results we announced today reflect the success of our strategies to innovate, identify new consumer need states, and day part opportunities and create innovative, highly differentiated, relevant products to satisfy those need states, all while maintaining a laser focus on our core coffee business.
I’m convinced that the continuing effort to execute against these strategies will enable us to drive further incrementality and deliver even stronger unit economics and greater profitability into the future.
Innovation has also been a key driver of Starbucks business, and today, deep trust in the Starbucks brand, our emotional connection to consumers around the world, and our scale afford us the opportunity to innovate beyond our core coffee business.
I previously shared our intent to reinvent the tea category, just as we did the coffee category, and we are making meaningful progress against our plan to do so. In Q3, we introduced both Teavana Oprah Chai and Teavana Shaken Iced Tea to tremendous customer response. Just last week, we opened our fourth new Teavana tea bar on Third Avenue and 63rd Street in Manhattan, and in the fall, we’ll be opening another iconic Teavana tea bar on Broadway and Ninth Street in New York City’s Greenwich Village.
These innovations are emblematic of the future vision we have for Teavana, and have drawn attention to the tea category, elevated the Teavana brand, and these new, innovative beverages have driven incrementality in both Starbucks and Teavana stores.
In addition, last month we introduced Fizzio, Starbucks’ brand of preservative-free, hand crafted, cold carbonated beverages in approximately 3,000 of our stores in the U.S. Sun Belt. Consumer response to Fizzio has been strong and following the successful test in both Japan and Singapore, we plan to introduce Fizzio in select international markets in the quarters ahead.
Teavana Oprah Chai, Teavana Shaken Iced Tea, and Fizzio are providing us with highly differentiated, hand crafted beverages that attract customers during afternoon and evening day parts and drive increased food attachment.
But innovation for us is not limited to new opportunities. We continue to invest heavily against what we know drives our brand and our core business, day in and day out: leadership in all things coffee, unparalleled customer service enabled by our world-class partners, innovative locally relevant store design, and digital platforms that extend and deepen customer loyalty and the customer experience.
Global coffee industry leadership remains at Starbucks’ core, and we are committed to elevating both our range of coffee offerings and the experiences we offer our customers, through the introduction of innovative new customized espresso beverages and cold coffee drinks.
We are also expanding our offerings of micro lot rare and exclusive reserve coffees. No other coffee industry participant approaches Starbucks’ ability to evaluate, select, blend, roast, and deliver micro lot coffees around the world, 20 so far in fiscal 2014 alone.
And in September, we’ll be offering an extraordinary micro lot reserve coffee, the first coffee developed on our own farm in Costa Rica. Expect to see an expanding and evolving portfolio of proprietary coffees under the Reserve brand from our coffee farm in Costa Rica and around the world in the future.
At the same time, we are aggressively pursuing new store segmentation opportunities in order to showcase Clover, pour-over, and other unique brewing methods.
As Starbucks continues to deliver record revenues and profits, it’s becoming increasingly clear to others what we have known all along, that Starbucks’ most valuable asset is our store partners, our people.
The culture of our company has been curated in our stores and is on display every day as partners connect with customers and one another. Recognizing the respect that Chinese children have for their parents, two years ago I hosted the first family meeting of its kind in China, a coming together of partners, parents, and families, at which we shared Starbucks’ values, heritage, and culture and an aspiration to improve the lives of youth and the communities in which they live. And last month, we held two more extraordinary family meetings of this type in Guangzhou and Beijing.
This year, we’ve brought the concept to the U.S., holding family meetings in New York City; Washington, DC; and Seattle, and introducing the Starbucks College Achievement Plan, the unique benefit we are providing to our U.S. partners.
Just as millions of partners and their families have benefited from healthcare and stock equity over the last few years, the Starbucks College Achievement Plan will benefit our people by helping them earn a college degree, unlocking doors to life-changing opportunities, dreams, and their own aspirations. Investments such as these promote increased trust and loyalty, strengthen our bond with our people, and help us support them both professionally and personally.
We also continue to seek opportunities to develop our next generation of leaders. I have no doubt that the global leadership conferences we’ve held in New Orleans in 2008 and Houston in 2012 directly contributed to the record results we reported in 2013 and now are seeding in 2014. I’m looking forward to hosting over 2,000 district managers in Seattle this October and our next global leadership conferences in Orlando, Florida, in October 2015.
We continue to elevate the equity of the Starbucks brand through the introduction of flagship, unique stores all over the world that deliver strong unit economics and cast a bright halo over all things Starbucks. In Q3 alone, we opened 344 stores, including a technology forward company owned store at Walt Disney World in Florida, our ninth Disney store as part of that partnership.
I’m highlighting the new Disney store because Disney stores are among the highest-volume stores in our portfolio and we are actively pursuing further opportunities to partner with Disney and open additional Disney stores around the world.
But relevance and innovation are not limited to our U.S. store portfolio. We recently opened two stunning flagship stores in China that I saw for myself just a couple of months ago, including in Beijing, where we opened our first 24-hour store to a tremendous customer response, giving us confidence that we can introduce additional 24-hour store formats elsewhere in the world.