Starbucks Corporation (SBUX) CEO Discusses F3Q 2013 Results - Earnings Call Transcript

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Starbucks Corporation (SBUX) F3Q 2013 Results Earnings Call July 25, 2013 5:00 PM ET

Executives

JoAnn DeGrande - Vice President, Investor Relations

Howard Schultz - Chairman, President, and CEO

Adam Brotman - Chief Digital Officer

Troy Alstead - Chief Financial Officer

John Culver - President, China and Asia Pacific

Cliff Burrows - Group President, Americas and US, EMEA and Teavana

Analysts

Sharon Zackfia - William Blair

John Ivankoe - JPMorgan

Joe Buckley - Bank of America Merrill Lynch

Brian Bittner - Oppenheimer Company

Matthew DeFrisco - Lazard

Jeffrey Bernstein - Barclays

Keith Siegner - Credit Suisse

Michael Kelter - Goldman Sachs

John Glass - Morgan Stanley

Nicole Miller - Piper Jaffray

David Tarantino - Robert W. Baird

Andrew Barish - Jefferies & Company

Operator

Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to Starbucks Coffee Company’s Third Quarter Fiscal Year 2013 Earnings 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. (Operator Instructions)

Thank you. Ms. DeGrande, you may begin your conference call.

JoAnn DeGrande

Thank you, Mike. Good afternoon. This is JoAnn DeGrande, Vice President of Investor Relations for Starbucks Coffee Company. Joining me on the call today are Howard Schultz, Chairman, President and CEO; Adam Brotman, Chief Digital Officer; and Troy Alstead, Chief Financial 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 statements should be considered in conjunction with cautionary statements in our earnings release and the 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. This call is being webcast and an archive of the webcast will be available on our website at investor.starbucks.com later today.

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

Howard Schultz

Thank you, JoAnn, and welcome to everyone on today’s call. I’m very pleased to share with you the extraordinary third quarter result that Starbucks reported today. Starbucks global comparable store sales grew 8% in Q3, 9% in each of our Americas and China Asia-Pacific segments, driven by 7% increase in traffic and representing Starbucks 14th consecutive quarter of comp growth in excess of 5%.

Our revenue in Q3 increased the full 13% over last year to a record $3.7 billion. Operating leverage and our continuing emphasis on increasing efficiency and controlling costs drove operating margin up 150 basis points to a record, Q3 record of 16.4% and an operating income of up 25% to a Q3 record of $615 million.

Together, these factors contribute to a record Q3 EPS of $0.55 per share, 28% over last years’ third quarter and the second highest EPS of any quarter in Starbucks 42 year history.

Particularly noteworthy, these results were delivered in the phase of challenging economic and consumer environments in many of the 62 countries around the world in which we operate.

At our December 2010 Investor Day conference, I laid out a strategic vision that completed Starbucks leveraging all of our unique assets, our robust and growing pipeline of innovation, would grown into over 19,000 store global footprint, our fast growing CPG presence and our best-in-class digital card loyalty and mobile capabilities to create a flywheel effect whereby each asset would leverage and enhance our brands and customer experience elevating the relevancy of all things Starbucks and driving increase profitability. I left the conference recognizing that this would have to be executed in a way that would be fully appreciated after the conference.

The results we announced today, demonstrate the success of both our vision and our strategy for achieving it. Continued innovation in our core coffee and beverage portfolios, solid progress against the reinvention of our food platform and an increasing ability to leverage and translate Starbucks’ brands and strong U.S. revenue growth into revenue and profit growth in multiple markets and channels around the globe all contributed meaningfully to our record Q3 results.

No single Q3 metric exemplifies the success of our strategy more than a 7% increase in global traffic. For the first time in our history we are bringing customers into our stores all around the world and across all data parts with complete offerings of innovative beverages and both indulge and healthy foods to satisfy their evolving needs and tastes. Today Starbucks global footprint complimentary channels of distribution and unique and powerful digital assets puts us in a class by ourselves. And we're just getting started with further integration and expansion of our flywheel. And the introduction of disruptive and transformative food and beverage industry innovations and technologies around the world in the months and quarters ahead.

I’m going to provide a high level overview of segment performance in Q3 and then turn the call over to Adam Brotman, our chief digital officer who will discuss our world class digital and loyalty assets and share what is about to come in terms of digital. Then Troy will take you through our Q3 financials and fiscal ’14 targets in detail. And we’ll close with Q&A.

Let me begin with the Americas, Starbucks Americas segment is firing on all cylinders with 9% comp growth driven by continued beverage innovation and increased food attachment resulting from the success of our transformed and reinvented food program. Our strong summer refreshment line up including the new Valencia Orange Refresher and the limited time offering of Caramel Ribbon Crunch Frappuccino is being extremely well received by our customers and exceeding even our most optimistic expectations.

In Q3 we significantly expanded our La Boulange baked goods platform. Truly delicious and differentiated La Boulange branded products are now available in over 1,000 Starbucks stores across northern California and the Pacific Northwest. The La Boulange launch you will understand why we're seeing both an enthusiastic customer response and substantial lift in incrementally compared to the baked goods that La Boulange is replacing. And they're now on track to bring La Boulange Food to more than 2500 of our stores by the end of September, including stores in New York, Chicago, Boston and Los Angeles. We're also deep into the strategic development and integration of Teavana.

Tea as we’ve shared with you before is a $40 billion global category and we're leveraging all of our unique internal assets including our knowledge in creating best in class retail experiences and handcrafted beverages to create the premium tea experience for our customers just as we’ve done for coffee. You will see all of these strengths come together this fall as we open our first reimagined Teavana street front store on New York City’s Upper Eastside and evolve the Tazo tea concepts store in Seattle under the Teavana brand. Over time many in these handcrafted Teavana tea beverages will also find their way in Starbucks stores.

Turning to EMEA, I’m very pleased to share renewed optimism that we are on our way to delivering sustained profitable growth in our EMEA region. Our EMEA team is bringing markets specific food and beverage innovation across the region and working hard to enhance our customer experience in each of our nearly 2,000 EMEA stores. While early, we feel the results are beginning to show. With super cent comp stores increase that EMEA posted in Q3 was the segments first comp store increase in six quarters. In UK the largest individual market within our EMEA segment also reported positive comps in Q3.

Turning to China and Asia Pacific regions our China/ Asia Pacific region continue to be at the very forefront of Starbucks global expansion initiatives. And we're now on plan to surpass 4,000 stores in the region by the end of 2013. Noteworthy are that our strong 9% increase in China/ Asia Pacific comps store sales improved in Q3 included 8% traffic growth, a doubling of our Q2 traffic growth. And that increased operating leverage enabled China/ Asia Pacific to deliver some of the highest margins in the company. We will open, we will also open our 1,000 store in China by year end and remain on track for China to become Starbucks’ largest market outside of the U.S. in 2014.

We continue to invest ahead of the growth curve to build out our in market operational and management capabilities in China and to successfully execute against the plan calling for strong comp growth and further margin expansions well into the future.

Moving to Channel Development and Emerging Brands, Channel Development and Emerging Brands will be a significant contributor to our future growth as we continue to expand customer occasions outside Starbucks stores leveraging our flywheel strategy. I’ll touch on just a few particularly noteworthy developments and opportunities. We continue to strengthen our leadership position in the $8 billion premium single cup category, a segment that’s grown nine times faster than the overall coffee category during the past year and now it accounts for nearly 30% of total coffee sales and grocery.

In May, we announced an extension of our long-term strategic partnership with Green Mountain Coffee Roasters that will enable Starbucks to add many more K-Cup SKUs and gain additional share in the U.S. and abroad. And in Q3, we shipped 1 billion K-Cups, a significant milestone in 20 months since we had our first ship.

While packaged coffee competition down the grocery aisle remains fierce, the price decrease we took in the third quarter has allowed us to be more competitively positioned in our CPG coffee portfolio. And we believe that price decrease positions us to build share and maintain our leadership position in the months and quarters ahead.

Finally, on Tuesday, we announced a very exciting new agreement with Dannon, a world leader in fresh dairy products. In the past several years, we have been committed to evolving and enhancing our customer experience to the introduction of innovative wholesale and healthy products in our stores.

Our new multiyear relationship with Dannon will enable us to leverage our acquisition of evolution fresh business and brand, elevating our existing yogurt offerings and bring out our health enrollment strategy to life, not only at Starbucks stores but also down the grocery aisle, leveraging the evolution fresh branding on multiple product categories, including the initial acquisition of the juice business.

Our evolving portfolio include the exclusively formulated evolution fresh inspired by Dannon-branded ready-to-eat Greek yogurt in our retail stores and evolution fresh branded CPG products co-created by Starbucks and Dannon. These products will bring rolling out the Starbucks stores in North America in the spring of 2014, reach grocery channels in 2015 and reach global distribution over time.

In conclusion, Starbucks coffee company today exists within the universe of one. And our Q3 results demonstrate the increasing relevance and power of our brands, the strength of our management and operations around the world, success of our multiple go-to-market strategies and our increasingly deeper connection to our fast growing global customer base.

With our values in one-on-one direct emotional engagement we have with our customers and our Starbucks’ partners around the world remain at the core of our business and our brand. And because the level of innovation and expertise that we’re bringing to are already best-in-class digital and loyalty capabilities has never been greater and to worst, capabilities of any competitor.

I have invited Adam Brotman to join us on this call to discuss his team’s contribution to flywheel strategy and how we’re leveraging our success in U.S. to create a truly, global, unified, comprehensive digital royalty platform.

Before I hand it over to Adam, I just want to take a moment to recognize the world-class Starbucks’ leadership team. The strongest group of leaders this company has ever had that has made the results we reported today possible. And of course, we should have never delivered our remarkable Q3 results with the 13th consecutive quarters of record results before, without the daily contribution of over 200,000 Starbucks partners around the world. We’re grenade and deliver the unique Starbucks experience to nearly 70 million customers at over 19,000 stores in 62 countries around the world each week.

Half of the entire leadership team, I thank you all for you do every day. Adam?

Adam Brotman

Thanks Howard. As Howard said, there are number of factors that contributed to the strength of our U.S. business in Q3. From a digital perspective, these kind of past several years building an engine of digital touch points with our customers that not only allows us a deeper relationship with our customers but also pays off with incrementality for our business.

Let me talk for a moment about the growth we're seeing in a variety of key digital card loyalty and mobile programs. In our third quarter, we saw 3% year-over-year growth in total dollars loaded on Starbucks card in retail North America and nearly 100% year-over-year growth in dollars loaded on our cards via Starbucks mobile apps and web properties.

And the Starbucks card continues to represent nearly one-third of U.S. in-store transaction. We also saw over 30% year-over-year growth in total dollars spent in our stores from My Starbucks Rewards or MSR loyalty members in the U.S. And this momentum in loyalty is not just in volume. We’ve also expanded integration between MSR and our CPG channel as well as with our Teavana source.

Regarding mobile, our momentum as the leading retailer in the mobile payment space also continued its rapid growth in Q3. I’m pleased to report that now when 10% of all transactions in our U.S. stores are made with a phone mobile devices have become increasingly important part of the customer experience at Starbucks as the fastest and easiest way to pay in our stores. And we will continue to bring more innovation to this space.

As we’ve been building capabilities and customer enrollment in our card, loyalty and mobile initiatives we haven't taken our foot off of the pedal at all when it comes to Starbucks presence on the web and social media. We continue to see huge traffic for our Wi-Fi network and our web pages. And earlier this month we passed the 4 million Twitter following online. And we continue to leverage Instagram, Pinterest and our global Facebook following to engage with our customers every day around our brand and topics of interest to these customers.

Our internal measures tells us that these various digital initiatives have added demonstrative impact for our U.S. business in Q3 with the promise of even greater growth in the months and years to come. And we are not resting on any of our previous successes. We currently have a robust pipeline of development in each area of our digital ecosystem. And we expect to deliver a number of improvements and innovations to our existing programs throughout the last quarter of FY13 and well into FY14 as well as introducing new concepts and new platforms.

I’ll give you one example of that today. I’m pleased to announce Starbucks in partnership with Duracell Power Mac will stand the trial of wireless charging for our customers’ mobile devices in select Starbucks stores in Silicon Valley. This effort, especially initial test of this technology in certain Boston stores earlier this year, the installation of multiple wireless charging tarmac surfaces in our stores will allow our customers to recharge their Smart Phones quickly and effortlessly. This is the kind of improvement to the digital experience that our customers expect from Starbucks and the kind that we will deliver at scale moving forward.

Turning to the international front, we continue to be committed to leverage the success we’ve had in the U.S. in digital around the globe. Over the last month, my team and I spent time in China and Europe. And we’ll visit Latin America and Canada in the coming months. And the purpose of these trips is to determine how we can accelerate deployment of our foundational digital platforms in all of our key global markets. And by no means are we at a cold start in terms of accelerating our digital strategy globally. In China for example, we already have 2.5 million My Service Rewards members and that’s without a mobile payment platform of eGifting in place.

In Q3 we also made global payment available to apps on Android and IOS to Starbucks customers in our Hong Kong market and we're already seeing strong response from that. In fact these IOS and Android apps became the number one free application in the Hong Kong app store with less than a day of having launched them. Once the full breadth of our digital plan comes fully online in CAP and EMEA, the complement to what we're doing elsewhere, the potential for digital creates similar incremental impact to our business in those markets is as strong, if not stronger using digital than anywhere else in the world. I truly believe that no other retailer (inaudible) that’s as far as long as Starbucks in terms of building an end-to-end digital customer experience across a variety of digital touch points both in store and out of store, across channels and now across geographies. We are truly only just getting started.

I’m going to turn it over now to Troy to go through Q3 results in more detail. Troy?

Troy Alstead

Thanks, Adam and good afternoon everyone. The third quarter results we announced today are a testament to the continue efficiency, diversity and overall strength of our business. We grew revenues by 13% with every segment contributing to that growth. We grew global comparable store sales by 8% with each region accelerating compared to last quarter. We expanded operating margin by 150 basis points with margin expansion in every segment. Starbucks cards loads grew by 30% with 24 countries now contributing.

Our investment income grew 23% with both store and CBG partnership contributing. All of that together produced earnings per share of 55 cents. Our best third quarter ever, growing 28% over last Q3.

For the next few minutes I will provide more context on our outstanding third quarter performance as well as update you on our fourth quarter projections. Then I will provide our initial outlook for fiscal 2014. Consolidated net revenues in the third quarter grew to $3.7 billion, 13% higher than a year ago. The growth was largely driven by global comparable store sales growth of 8%, including 7% traffic growth and a 1% increase in average ticket, also contributing revenues from 1,558 net new stores in the past 12 months, including 355 Teavana stores.

Operating income grew 25% in the third quarter to $615 million. Operating margin expanded 150 basis points to 16.4%. Although coffee cost continue to be a benefit to us, contributing 60 basis points this quarter. Leverage on our strong sales was the biggest driver of the margin improvement.

As an illustration of strong operationally effectiveness of our teams across the globe, our store operating expenses as a percentage of related revenues continue to dip near all time lows.

As evidence of the deep cost discipline our partners have embraced, the continuous improvements we’ve made with labor scheduling and productivity, and the scale we are now achieving in many of our smaller growing markets.

The very strong operating performance in Q3 resulted in higher performance based compensation expense which along with a discretionary of $10 million donation to the Starbucks Foundation drove G&A expenses higher in the quarter across the operating segments and unallocated corporate expenses.

Now I will take a moment to speak to the results of each operating segment. First in the Americas, the performance delivered in the third quarter was broad based exceeding even our own expectations and was nothing short of phenomenal. Revenue was $2.8 billion grew 12%, driven by comparable store sales growth of 9%, with 7% coming from increased traffic and 2% from higher average ticket.

While we experienced moderate slowing in the month of June last year, comparable last Q3 was still a strong 7%. Despite the challenging comparison, the Americas regional leverage strength across all day parts and all geographies to grow at its highest rate in six quarters.

Like the Americas regional role, the U.S. grew cost by 9% in the third quarter, contributing to the comp growth was strength in beverage innovation and promotions with the combination of the Marciaro platform, Limited Time Frappuccino offerings and still new refreshers beverages adding a combined 4 percentage points of comp growth.

Operational improvements leading to continued growth in labor productivity also drove higher comp growth in Q3. Our peak hours of 7 to 9 a.m. in the U.S. again showed strong traffic trends as they drive through stores where our focus on enhancing the customer experience while improving speed of service is paying off.

Food again contributed towards the growth in the U.S. business, adding 2 points of comp growth in the quarter as our lunch offerings continue to expand in popularity. While Howard mentioned the enthusiastic response our La Boulange bakery items are receiving, it’s important to note that this quarter’s comp growth contribution from food is not impacted by La Boulange due to the still early stage of the rollout.

Operating income in the Americas region of $619 million grew 24% in the quarter as we continue to turn strong topline growth and even higher bottom-line growth. As a result, Americas operating margin expanded 210 basis points to 22.3%. Strong sales leverage combined with lower commodity cost of 30 basis points were the main drivers behind the improvement.

In addition to the strength in the U.S., Canada and Latin America each had great quarters as well. Canada also grew comparable store sales at the highest rate in the past year and half, and Latin America delivered significant topline growth and margin expansion in the third quarter.

And while I’m discussing Latin America, I want to point out the news of a week ago. So we’ve agreed to sell the remaining 18% of our equity in Argentina and 82% of our equity of Chile to our fantastic partner Alsea.

This will enable further growth in these vibrant markets. It will enhance profitability for both parties. This transaction will close in the fourth quarter and we anticipate realizing a $0.03 earnings per share gain in Q4 as a result.

Moving now to the Europe, Middle East and Africa region, where the third quarter results continue our measured steady progress towards long-term profitability. Revenue in EMEA grew 2% to $287 million in the third quarter as growth in license store revenue was nearly offset by lower company operated store revenue. The license store revenue growth was primarily the result of the addition of 117 license stores over the past year combined with strong growth in existing license stores.

The company operated revenue decline was a result of the declining company operated store base from closures, as well as the sale of a number of company operated stores to license partners as part of our store portfolio optimization last Q4.

Comparable store sales grew 2% in Q3 with 5% growth in traffic partially offset by a 3% decline in average ticket. We are encouraged by this for a number of reasons. It is our first quarter of positive comparables in EMEA in the past year and a half, and our highest score of traffic growth since early 2011. Comp growth improved in our largest company operated market in the EMEA compared to the last quarter reflecting a broad based contribution to seek acceleration.

In our largest EMEA market the UK, comp growth was positive in every month of Q3 with particular success coming from the launch of Origin Expresso, (inaudible) and salads in some stores and growth in the My Starbucks Rewards program. The ticket decline in the quarter was partially due to fewer items per transaction which we believe is a reflection of broader current spending patterns in Europe combined with modest discounting as a result of promotion and the rewards program. EMEA operating income grew from $1.6 million last Q3 to $9.3 million this year. Operating margin expanded in the quarter as it has in every quarter thus far in fiscal ’13 this time by 260 basis points to 3.2%. This was largely driven by the team’s continued focus on cost management as well as the impact of the mix of our store portfolio moving to more heavily licensed models.

In fact, 42 of the 43 net new stores opened in EMEA Q3 were licensed stores. We anticipate both the cost focus and proposed mix shift will be an ongoing driver of market expansion on a year-over-year basis.

In China/ Asia Pacific region the third quarter brought acceleration of top line growth to a significant translation to the bottom line. Revenues of $234 million were 29% higher than last Q3, driven by a combination of 523 net new stores over the past year and 9% comparable store sales growth. The 9% comp growth was entirely due to increased traffic driven by a combination of new locally relevant products and strong growth in the core offerings. And like in the Americas, the contribution of strong comp growth was broad based across the region.

There are so many great examples I'd like to give of the success we're seeing across Asia but Japan stands out this quarter as a real highlight. Sales growth in our joint venture market does not included in the reported comp, however, I want to call out the comparable store sales in Japan normally were a moderate steady grower, ruled by double-digits. We saw tremendous success with local innovation there while at the same time delivered strong execution in operations and the store experience. While emerging markets received many of the headlines, Japan represents around one third of CAP’s operating income, with China contributing a third and the rest of the Asia Pacific markets making up the remaining third.

Our partnership in Japan is critical to our performance in the region and we are delighted with the direction of this market. In the third quarter we opened 119 net new stores in CAP including 61 net new stores in China, 25 in South Korea and 5 in India where we now have 16 incredible stores. Our discipline around site selection and (inaudible) continue to make very impressive returns on our new stores and our pipeline for Q4 and beyond is strong. On 119 net new store this quarter, up slightly from last Q3 but down from the first and second quarters of this year. This is simply due to the timing of opening as we have a busy fourth quarter planned and we continue to target 600 net new stores in CAP for the full year.

Operating income for CAP in third quarter grew 38% to $85 million. Operating margin expanded 250 basis points to 36.2% with sales leverage strong performance from our joint venture operations and 50 basis points of favorable coffee costs contributing. Poor margins in CAP are significant impacted by the pace of new store openings in the particular quarter. In the margin expansion in Q3 also partially reflects the relatively fewer new stores in the quarter. However, given our acceleration of new stores expected in the fourth quarter and the resulting investment required Q4 margins in CAP will remain our best in the world but will likely decline compared to the third quarter.

Channel development also contributed to our consolidated revenue and operating margin growth this quarter albeit at a slower pace. Revenues up $336 million in this segment were up 6% over last Q3 with both the CPG and the Food Service businesses growing at a fast pace. Premium single cup including K-cups, Veva and (inaudible) continues to drive the revenue growth in CPG adding $29 million versus last Q3.

There were a few important milestones reached in the third quarter. Aside from the billionth K-cup shift and our extensions of partnership between Green Mountain that Howard mentioned we saw our share of K-cup dollar sales in U.S. food and drug matched channels hit an all-time high in the quarter at 14.9%. Now the overall premium single cup category grew by a very healthy 46% over last year. Starbucks sales growth of K-cups at 51% outpaced overall category growth. And we have a significant innovation right around the corner that we can continue to derive share gains in this rapidly growing category.

The growth in revenue of the premium single cup was partially offset by softness in package coffee, which was impacted by the significant broad based competitive price declines and by the list price reduction we took in May. Our price reduction was not fully reflected down the aisle from much of the third quarter, but has now made its way into most grocery shops.

Due to the price positioning, innovation in premium single cup and a growing international business, we expect revenue growth in channel development to be stronger in the quarters ahead. Channel development expanded operating margin in the quarter with operating income up 14% over last year. Lower coffee cost provided a gross benefit of 320 basis points this quarter partially offset by the margin impacted the list price reductions on package coffee.

Finally, let me address the results of other segments. All other segment is comprised of our emerging brands including Teavana, Evolution Fresh and Seattle Best Coffee as well as our digital ventures business. Revenue in these other businesses grew to $108 million, more than doubling over the last year.

Teavana, which was not in our base last year, contributed $51 million of the increase. Evolution Fresh while still small also contributed, growing 21% over the last Q3. We continue to increase share and velocity in grocery channels and our new state-of-the-art juiceries began production in June, which will enable us to meaningfully expand availability of Evolution Fresh Juice in both Starbucks stores and CPG channels. We have already gained a nearly 6% share of Western U.S. in super premium juice sales, and look forward to gains coming from both greater distribution and increasing events.

Turning now for our financial division. Our balance sheet has never been stronger and our financial discipline tighter than it is today. Given the current favorable market conditions, we anticipate issuing $750 million in additional long-term debt over the next quarter or so to provide us with financial flexibility for general corporate purposes.

We lost the benchmark interest rate on this issuance in their early part of Q3, when rates were approximately 80 basis points lower than they are today. As we move forward, we will continue to evaluate our capital needs and may increase our debt, if we needed a strong liquidity and to see the right returns from our leverage.

As we think about the target network range, I would know that we are comfortable with our current S&P rate of A minus. So our future leverage will likely be targeted around that rating.

Now, before I move into the outlook for 2014, I want to provide an update on how we expect to finish fiscal 2013. First, let me say again, the third quarter just completed really was a phenomenal quarter by heavy measures, particularly the 9% comp growth in the Americas.

For the fourth quarter, we expect very good results but we do not expect that 9% level of comp growth from our third quarter to continue into the fourth quarter. Q4 is likely to return at strong levels we reported in the first half of fiscal '13 in the range of 5% to 7% global comp growth.

We anticipate continued strong revenue growth of 10% to 13% in the fourth quarter driven by that strong global comp growth. We’re getting in approximately 180 basis points improvement in operating margin in the fourth quarter versus last year. With increased confidence in the strength of revenue growth and operating margin expansion, we expect fourth quarter earnings per share in a range of $0.59 to $0.60.

This includes the $0.03 gain, we will recognize in Q4 on the sales of our equity announced at Argentina and Chile that I mentioned earlier. For the full year, we are targeting earnings per share in the range of $222 to $223 which includes the combined $0.06 gain on the sale of equity in Mexico in Q2 and Argentina and Chile in Q4.

Commodities will continue to benefit as in the fourth quarter as we expect a gross $0.02 earnings per share benefit partially offset by our recent pricing actions down the grocery aisle. Conversely, we expect an unfavorable foreign exchange impact of approximately $6 million in Q4 driven by weaker Japanese Yen. And with regard to the Kraft arbitration, we’ve had no further update on anticipated timing of the resolution.

Looking ahead to fiscal 2014, we are anticipating another year of exceptional growth. We expect revenue growth of 10% to 15% driven by global comparable store sales growth in the mid single digits, 1400 net new stores globally and accelerated channel development growth. The acceleration in new store openings in fiscal '14 will come from the China, Asia Pacific region where we are anticipating a net 700 new stores.

We are targeting 600 net new stores in the Americas and 100 in the EMEA consistent of growth in fiscal '13. Full year consolidated operating margins is expected to improve by 150 to 200 basis points in fiscal '14 as we continue to drive leverage from strong revenue growth and operational efficiencies throughout the business. We will provide segment specific target when we report our fourth quarter results in late October. We are anticipating higher interest expense through the debt offering I mentioned and a moderately higher tax rate. And finally we're targeting earnings per share in the range of 255 to 265 in fiscal ’14. This represents growth at 18 to 22% over fiscal ’13 excluding the six-cent impact of equity sales in Latin America in 2013 contributing to the improvement will be another year of (inaudible) coffee costs shortly expected at a 9 to 10 cents net for the year.

We have a little more than 80% of our coffee beans locked for FY14 providing us with great visibility into this benefit. The 9 to 10 cents net benefit reflects the gross coffee impact partially offset by the recent price changes in CPG as well as routine investments in the business.

The results we presented today and the guidance we’ve laid out for next year are the products of our continued deep focus on operational estimates, enrolled innovation, and rigorous financial discipline. We're confident in the trajectory for many reasons, including a diverse set of significant growth drivers, a strong tenure management team, the best collection of store operators in the world, and a proven growth strategy that drives countless returns on capital and leverage the success in our stores for growth in other channels. Thank you.

I will now turn the call back over to the operator for Q&A. Mike?

Earnings Call Part 2:

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