Starbucks Corporation (SBUX) Q4 2012 Earnings Report, Transcript and Summary

Good afternoon, my name is Rachel and I will be your conference operator. At this time I would like to welcome everyone to Starbucks Coffee Company’s Fourth Quarter and Fiscal Yearend 2012 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After speakers’ remarks there will be a question-and-answer session. (Operator Instructions) Thank you, Ms. DeGrande you may begin your conference.

Thank you, Rachel. Good afternoon, this is JoAnn DeGrande, Director of Investor Relations for Starbucks Coffee Company. Thank you for joining us today for our fourth quarter and fiscals yearend 2012 earnings call. Opening the call today will be Howard Schultz, Chairman, President and CEO, and he’ll be joined by Michelle Gass, President of our Europe, Middle East and Africa Business and Troy Alstead our Chief Financial Officer. The three presidents of our other segments Cliff, John and Jeff are also on hand for Q&A. 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 factors discussions in our filings with the SEC including our last Annual Report on Form 10-K. Starbucks assumes no obligation to update any of the forward-looking statements or information. Please refer to the financial statements accompanying the earnings release to find disclosures and reconciliations of non-GAAP financial measures mentioned on today’s call with their corresponding GAAP measures. The earnings release can be found on our website at starbucks.com under ‘Investor Relations’. This conference call is being webcast and an archive of the webcast will also be available on our website. Before I turn the call over to Howard, let me cover a couple of additional items. First, given that this our yearend call we will extend it beyond 60 minutes as needed. And second, I’d like to remind you that our Biennial Investor Conference will be held on December 5th in New York. We hope you’ll join us in-person or participate via the webcast. With that, let me turn the call over to you, Howard.

Thank you, JoAnn, and good afternoon to everyone on today’s call. Before we begin, as a lifelong New Yorker, I’d like to express my heartfelt concern for the many millions of people impacted by this week’s devastating hurricane. The images we have seen and stories we have heard are beyond heartbreaking. All of us at Starbucks are grateful to the thousands of first responders who are courageously and selflessly responding to this disaster, and our thoughts go out to those directly affected. I will now turn to the record fourth quarter and fiscal 2012 financial results Starbucks reported today. Q4 was an extraordinary quarter for Starbucks on almost every level. Record fourth quarter revenue of $3.4 billion, strong fourth quarter EPS of $0.46 which includes charges of $0.02 per share related to our store portfolio optimization initiatives in Europe, an increase in our total company operating margin to 15.4% and significant relevant innovation across our business segments and around the world. Starbucks solid Q4 performance has ideally positioned us to go into holiday with strong momentum supporting a powerful lineup of holiday beverages and product offerings and to further our commitment to continue growing sales and delivering increased profits to our shareholders in 2013 and in the future. Q4 also caps off a record full year in which our sales rose 14% to a record $13.3 billion, and our earnings rose 18% to a record $1.79 per share. What makes our performance during the quarter and the year even more remarkable is that both were achieved in the face of profound, continued economic uncertainty and challenged consumer environments in markets all around the world in which we operate and compete. Starbucks ability to deliver the results we did in Q4 and 2012 is a reflection of the strength of our…

Thank you Howard and good afternoon everyone. I’m delighted to be with you on the call today to update you on our EMEA business and the progress over the last year as our three-region operating model has taken hold. And as the EMEA leadership team and I have embarked on our transformation strategy or as we call it our renaissance plan. The region today operates across 36 countries in nearly 1,900 stores. Over the last year, we’ve opened 111 net new stores including 10 company-owned and 101 licensed. We’ve grown our geographic reach most notably with our recently announced partnership in Scandinavia with Umoe Group. We will open our first stores in the early part of 2013 in both Oslo and Stockholm with this terrific new partner. As you know, the EMEA region historically operates at significantly lower margins than the Americas and China, Asia-Pacific regions. There are several reasons for this. In our company-owned markets of U.K., Germany, France, Switzerland and Austria, our portfolio is dominated by high street shopping areas with occupancy cost 2 to 2.5 times that of the average occupancy costs in the U.S. as a percent of sales. This portfolio is also not as broad as in other Starbucks regions, where highly productive drive-throughs, small footprint stores and a strong presence of captive audience, licensors also diversify the retail footprint. All of these factors, coupled with the fragile state of the European economy and one of the fiercest competitive environments in the world makes for a robust exciting challenge. But on a positive note, these issues are largely within our control and we are taking actions. In the last year we had focused on driving results against three key strategies which are laying the foundation for a long-term profitable growth; first, increasing the Starbucks brand…

Thanks, Michelle, and good afternoon, everyone. As you heard from Howard and Michelle, we could not be more pleased with the trajectory of our business and the strong results we continue to deliver. 2012 was a record year for Starbucks producing new highs in revenues, earnings, operating margin and return on capital. The company is stronger financially today than at any time in our history. We have a healthier pipeline of profitable growth opportunities in front of us now than ever before and we’re deeper in terms of talent and capabilities to pursue those opportunities than we’ve ever been. I will review the fourth quarter performance of our three other segments and the consolidated results for both the quarter and the year. Then I’ll update you on our guidance for what we anticipate will be another strong year in fiscal 2013. In the Americas, the fourth quarter was an impressive demonstration of the capability of that team and of their focus and adaptability. Revenues grew 9% for the quarter to $2.5 billion with 7% comparable store sales growth. Especially noteworthy about this result is that it came on top of 10% comp growth last Q4, which was the best quarter we have had in more than five years. As we discussed on our last call, June and July were soft months in the U.S. Cliff Burrows and his team took quick action throughout the U.S. stores to turn the direction of our transaction growth. Our store partners continue to provide outstanding experiences to our customers every day. We reintroduced Treat Receipt in August and the annual fall favorite Pumpkin Spice in September. We’ve provided customers value through the LivingSocial offer and we provided customers another reason to visit their Starbucks store with the launch of Refreshers. The result was a…

(Operator Instructions) Your first question comes from the line of John Glass from Morgan Stanley. Your line is open. John Glass – Morgan Stanley: Thanks very much. I wanted to just go back to the U.S. and the same-store sales that you reported and what the turning point was? We all assumed you entered the quarter in July maybe comping 5%-ish, but you ended at 7%, so it implies there was a fairly dramatic acceleration. So, was that a consistent acceleration to the quarter, was there a bigger response say to the Treat Receipt? And just – and just in general, what other elements do you think drove it, because what you did during the quarter was impressive from a promotional standpoint or from an execution standpoint, but I didn’t think any of those stood out my mind as being events that would drive comp acceleration to this magnitude, so maybe any other color around that would be helpful? Thanks.

Sure, John, thanks for your question. Let me start just briefly and then I’ll ask Cliff Burrows, the President of our Americas business to speak more specifically about the actions in the quarter and what the impact of some of those things were. Yes, you’re right, the July, similar to June and as we discussed at our last earnings call in late July, was a soft month for us. Soft, still growing in traffic, still total comp growth growing, but softer than we had been trending earlier in the spring. As we progressed through August and September, we saw a very, very significant recovery in our same-store sales and absolutely exited the quarter in a much healthier place than where we entered the quarter. With that, I’ll have Cliff speak a little bit more specifically to some of the actions we took.

Thanks, Troy. Thanks, John. It really was an intense focus on the operations of our stores and our partners did an amazing job just getting about on daily work and that was focusing on the customers we had in front of us. Treat Receipt was well received by both our partners because they’re familiar with it and our customers because it was an all-favorite coming back. Between Treat Receipt and LivingSocial, I’d say that accounted for about 1% comp growth in the period where we run it and we also in this period launched our Refreshers platform, which was in there in handcrafted and in cans in our stores, and all of that gathered a momentum and gave us good pace for the future. So, it really was a great focus on the business and really closed with the way everybody responded.

John I’d just add one thing that the public doesn’t see directly and that is the use of all of the social media channels that we were able to leverage. Starbucks is at any given month a leading brand on Facebook and Twitter. As a result of that, we were able to leverage a level of engagement with a large number of customers, millions of Starbucks fans and customers and direct them to the store in ways that really reduced traditional marketing spend. And I think between that the operations that Cliff talked about, the effectiveness of Trade Receipt and LivingSocial, we were in a position and then towards the end of the quarter, we began to have a great result with Pumpkin Spice Latte, which got off to a fantastic start despite the fact that it’s been year-over-year. All of those things bode very well for the quarter; and as we said, a stunning turnaround from Q3. John Glass – Morgan Stanley: Thank you.

Your next question comes from the line of Matthew DiFrisco from Lazard. Your line is now open. Matt DiFrisco – Lazard: Thank you. I just wondered if you can give us a little color on sort of those remodels. I think you touched on about a little over 2,000. What you’re seeing as far as volumes afterwards and the key initiatives to those remodels, I guess, is it longer term for setting up for better products and more products to sell or is there also sort of a near term added benefit with any sort of improvement on throughput during those high peak times, because your traffic number looks extremely strong and I’m curious if that’s a reflection in part due to some throughput initiatives?

Matt, let me start to address it, but I’m also going to ask Cliff to get into a few more specifics. We have, as you said, a long list of major and minor and everything in between remodels over the past year. And as Howard mentioned, I think 2,000 remodels planned and we expect to be on a pace of level like that for some time. Now I would point out that somewhere in the neighborhood of 2,000 remodels, a smaller number, somewhere in the mid-100s are more major significant type of things that might involve a very substantial change or the expansion of a store, the balance of them may involve more minor changes that aren’t just significant remodel of the store. So, it’s a varying degree of impact both on the store itself and on the results to come out of it. Needless to say, Cliff will go into more specifics, but as we do particularly those major remodels on that individual store, we see a very, very, very significant increase in comp growth in that store when we opened.

The store in Spring Street in SOHO is the prime example of that – of a significant remodel and as a result of that significant return on investment and an enhanced customer experience. I just mentioned that because it’s in New York.

Yeah.

Matt, hi, it’s Cliff. The 2,000 you mentioned is obviously a global number approaching the 1,700 in the U.S. last year and then you fit into those categories that Troy said. And we are focusing on each refurbishment to make sure we treat it like a new store and equip it to deal with the changing customer base and changing demand around peak and at different times of the day. We’re looking at it to enhance not only the experience, the seating, the flow and introducing innovation like clover and each time we innovate we bring in clover and that really helps us in many ways, helps us to build the relevance with our customers build our coffee authority and that intimacy and just keep raising the conversation around coffee and the level of our execution. And so there isn’t a sort of a general number I’d give you as the benefit, because each one of them is unique and each one of them we try and do the best thing for our partners in terms of the work environment and our customers in terms of the experience and we’ll do a similar number in the coming year in the U.S. Matt DiFrisco – Lazard: Thank you. I just had one follow-up also. I guess you mentioned a little bit about the Evolution Fresh, the 2,200 West Coast stores, a 100% lift in that. Was that also – I’m not familiar, I haven’t gone to one of those stores – is that similar to how you did the Refreshers as far as have you combined that with putting the ready-to-drink product out with also any sort of assortment of handcrafted drinks with Evolution Fresh yet?

If I talk about Evolution Fresh in U.S. Starbucks stores, it is bottled beverages only. We have a range of six of cold-pressed beverages and it ranges from orange juice, which is the most familiar and the best-seller and it goes through to whether it’s sweet drinks or essential vegetables, it’s a wide range. It supports our health and wellness platform and the increase that Howard refers to is a mixture of both ticket and volume, but it has been well-received in every single market. Future innovation will come from our learnings from Evolution Fresh stores, of which we opened the latest one in Fillmore Street last weekend down in San Francisco and as had a fantastic reception locally. Matt DiFrisco – Lazard: Excellent. Thank you very much.

Your next question comes from the line of Jeffrey Bernstein from Barclays. Your line is now open. Jeff Bernstein – Barclays: Thank you very much. Just I guess a two-part question as we look to CAP and I guess specifically to China. One, just from a unit perspective, it seems like there is obviously an acceleration in openings, I know it’s 300-plus in fiscal 2013, considering you only have 700 in total, obviously that’s a pretty sizable up tick. I’m just wondering, if you can give some color around real estate availability, whether you’re seeing increased competition? We’ve heard from others that perhaps the competitive environment to get these sites is going up and that’s where the cost is going up with it. So, I’m just wondering, if you could talk from a real estate perspective? And then the other piece relates to the other driver of top line, which would be comp, and you mentioned I guess the 10% plus comp, which I guess, an impressive string of 11 straight quarters of that double-digit. I’m just wondering whether you view like you said the deceleration – like how do you decipher between the deceleration due to the compares versus the deceleration due to what you kind of acknowledge was a macro slowdown in China? Thanks.

John?

Yeah. Hi, Jeffrey, this is John Culver. First off, the opportunity that we have in China is enormous and we continue to see very strong acceptance of the Starbucks brand and when we’re opening our new stores, we’re opening both in our existing cities as well as new cities. We now are in 52 cities across the country. We opened 12 new cities this past year. And as Troy touched on, we’re seeing a three times sales to investment ratio over the last two years. So all indications for us is that China represents right now the most immediate and fastest retail growth opportunity that the company has in front of us, and with that what we’re doing are making significant investments around our people in terms of ramping up the investment and the hiring and training of people to staff the new stores as well as investment in infrastructure from a supply chain and IT perspective. We’ve also localized our design resource to help enable speed into the market of opening our new stores and then also invested heavily in research and development so that we can have locally relevant products that match the flavor profiles that our Chinese consumers want. In terms of the real estate that we’re seeing, we are seeing an abundance of available real estate and we’ve invested in local teams in the major provinces in the major cities to go out and to capture that real estate opportunity and what we’re seeing is that we’ve been very well-received in the new cities that we’re in, we are going into. Consumer response, we’re seeing lines out the door and the new stores in these new cities are exceeding our expectations. So we’re very optimistic and very bullish on the opportunity. We’re going to stay very focused and very disciplined in the investments and monitoring the performance of our new stores and our existing stores and we’re going to continue to drive relevant innovation into the stores so that we can continue to sustain the growth. And as Troy pointed out in his comments also, there is a rebalancing that’s taking place that as we continue to accelerate the new store growth, more of our sales growth is going to come from new stores versus comparable sales growth. So you’re going to see a rebalancing of the portfolio and as part of that more company-owned stores versus licensed stores which is going to have a slight impact on margin over time. Jeff Bernstein – Barclays: Is it – just to follow up, are you seeing any sign just from the macro perspective versus the compares whether or not you think consumer shifting to lower-priced items or any kind of mix – anything concerning versus just compare driven slowdown in comp?

I haven’t seen anything that’s concerning to me at this point in time. I mean we monitor this very closely, obviously are aware of others – people’s challenges in China, but for us, we’re continuing to make the investments. We’re taking a long-term view and we’re pushing forward.

And Jeff, I would also just add to that that we are continuing to grow traffic in China, we’re continuing to grow ticket in China, we’re growing healthily across all day parts and the two-year comp growth is remaining very, very, very strong if you compare that over the last several quarters. I think that speaks to the fact that, yes, we’re up against tougher compares. It wasn’t all that long ago just a couple of years ago, where average unit volumes in our business in China were roughly a third U.S. levels. They are now well greater than half U.S. levels and catching up and by the way that comes at a point in time when average unit volumes in the U.S. have been growing and are at all-time record levels here in the U.S. and yet China has been growing quickly. So we don’t see any concerns about growing volumes whatsoever.

John?

Hey, Jeff, just one other thing I’d like to also comment on in terms of real estate, one of the things that we did earlier this year is host the first ever landlord real estate conference in Summit where we brought in all the major owners of key developments across China. And Howard and I and Arthur Rubinfeld had the opportunity to sit and address them and talk about the investments we’re going to make in China from a growth perspective, talk to them and share new designs and really start to build the unique partnerships that we wanted to go after with these key landlords and that is paying huge dividends for us. Jeff Bernstein – Barclays: Very helpful. Thank you.

Your next question comes from the line of Sara Senatore from Sanford Bernstein. Your line is now open. Sara Senatore – Sanford Bernstein: talk a little bit about: A, what your expectations are for the demand environment given that I don’t think the overall environment got better just you seem to reaccelerate? And, B, if you can talk a little bit about in terms of contributions, is it more from new products, is it from Verismo, is it from things like – more like the Treat Receipt more – being a little bit more aggressive on social media that kind of thing? Just so we have some comfort in the bottoms-up driver of the comps?

This is Howard. I’ll start, I think it’s very interesting and multidimensional question. If you look at the last few years, there is no question that the economic environment in the U.S. has been very challenging, fragile, and depending on the region, very difficult at times. I would – I’m not an economist, but I would say that the consumer environment is somewhat bifurcated and has been for a couple of years. And I wouldn’t describe Starbucks literally as a luxury brand, but I think we occupy a very unique space that is the premium brand and luxury brand within our space. At the same time, we are still very much an affordable luxury by not only people who are at the high-end of luxury consumers, but people who can afford Starbucks in all walks of life. In addition to that, I think we have been able as evidenced by Q4 and I think this is really important and highly relevant. We’ve been able to thread the needle to maintain and preserve and enhance our premium position as a premium brand, while at the same time, developing, offering and creating value propositions for our customers that in no way dilute the equity of the brand, but reward our customers by, in a sense, putting our feet in their shoes and developing value for them. Having said all that, I think we are highly confident that despite any turn in the current economy that we can anticipate that we have the tools, the resources and most importantly, the power in the marketplace to navigate through this by what we’ve been able to learn and the muscle memory that is inside the DNA of the company since transforming the company in 2008. I do think the burden of proof is on companies and consumer brands to recognize there is a seismic change in consumer behavior, as I alluded to in my remarks, as a result of social and digital media and the emergence of mobile commerce and mobile payments. But we are in the most desirable position because of the investments we’ve made over the last few years to not only be the leader in the space, but now have the tools, the resources and the capability to leverage those channels and means in a way that is almost unparallel in the marketplace. So the short answer is, we are optimistic that we – and we’re confident that we can continue to navigate through changes in the economy and we’ve done it now year-over-year and I think turn in Q4 is not only stunning but gives us great confidence as we head into fall holiday in 2013.

Yeah, if I can answer, so the other piece I think is about our people. We have invested greatly in our managers and our leadership and giving the tools to our partners to do their work and I think that has really helped us in terms of the amount of time we have to connect with customers, to improve the quality of the customer experience and the relationships we form. I think there’s nothing better to support that than the fact we have 3 million Gold Card members as part of our My Starbucks Rewards and that just gives this dialogue and immediate feedback and such a richness. And I think just to give you a little bit of additional (inaudible), we’ve seen strong growth across the whole of the U.S. in August and September, and if I look back on the year as a whole, I’d also say that. And the work we’ve been doing around day parts, whether that is building capacity at peak or enhancing the food offer around other day parts, we have seen growth on all day parts. So we continue to grow at peak in the morning, but also at lunch, afternoons and now into the evenings. And I think that is what gives us the confidence about both the opportunity to grow more stores in the U.S. and to continue to grow average unit volumes by spending on day parts and our ability to deal with peak capacity. Thank you.

Your next question comes from the line of Diane Geissler from CLSA. Your line is now open. Diane Geissler – CLSA: Hello, can you hear me okay?

Yes.

Yes. Diane Geissler – CLSA: I wanted to ask if you’ve seen any changes in the competitive dynamics within the CPG channel given the expiration of the patents on the K-Cups, have you seen any movement there from additional SKUs?

Diane, we’ll have to introduce Jeff Hansberry, who is on the call and as you know, President of our Channel Development business and he will take that question.

Hi, Diane, thanks for your question. Yes, we have. We have seen the introduction of some private label offerings in the K-Cup space that have been previously announced that I think we’re all aware of and we’re starting to see some of those begin to show up on retail shelves. We have not seen a significant impact though to retail pricing or the competitive space. And in fact, we continue to see strong demand for Starbucks K-Cups from our customers.

Next question.

Your next question comes from the line of Keith Siegner from Credit Suisse. Your line is now open. Keith Siegner – Credit Suisse: Thank you. I just wanted to ask a question, thinking about all the various initiatives that launched this quarter from Treat Receipt, LivingSocial a number of different loyalty based programs. There was a lot of product news, marketing news and other promotion news in general, some of which was really unique and kind of differentiated. As you enter a period of deflation in 2013 and maybe beyond, does this free you up to say do a little bit more of this activity than maybe you used to? Is Q4 somewhat of the new base level, I mean we’ve seen product in other news working very nicely across the sector and again does this deflation give you an opportunity to say, ramp that effort from maybe what we’ve seen historically? Thanks.

Thank you for the question. This is Howard. I respectfully say, no. I think all of us at Starbucks are deeply committed to preserving and enhancing the equity of the Starbucks brand. And as a result of that, we want to be extremely disciplined and thoughtful about how, when and with who we might do things that create an offer, whether it’s Treat Receipt that we did on our own or the relationship we developed with LivingSocial. I don’t think that you’re going to see Starbucks go on sale or anything like that. I do think that we have to be ultra-sensitive to the economic issues and the pressure on the consumer, but I think we’ve demonstrated over 41 years that the best anecdote for us is the experience we create in our stores, the quality of the coffee and the level of innovation. I think what we haven’t talked about today is because it isn’t appropriate is the pipeline of products categories and innovation that we have in the near and long-term future, which I think is the strongest pipeline in the history of the company. We’ve taken great steps to recognize that the status quo in our business or any business isn’t going to be good enough, but I don’t think we’re going to go down the road of discounting Starbucks. We’re doing things on an ongoing basis that was highly selective at the time and we’re not going to do that on a consistent basis.

Your next question comes from the line of Jason West from Deutsche Bank. Your line is now open. Jason West – Deutsche Bank: You guys touched a little bit on the food program that you’re working to roll out with the upgrades there with the La Boulange product line. If you could talk a little bit about what you’ve seen in the West Coast markets where you’ve tested that, if you have any details or anecdotes or figures you could share on that and sort of what it looks like from a customer perspective when you make those changes?

Thank you, Jason, it’s Cliff. It is very early days and we have had 10 stores open in San Francisco where we have been developing and testing a specific line of pastries and muffins and the like for the morning business, we’re really encouraged by that, and that’s really been the very early steps. This week and next week we launch in San Jose and that would be our first time outside of the San Francisco market and that will give us new learnings. The reaction from our partners in our stores about the quality of the food and the enhanced pride they’ve got to share those products with the customers, the taste is absolutely fantastic and the reaction from customers in the stores we have served it so far has been fantastic. I think we’ll be in a much better position after the San Jose launch to give a bit of color, a bit of a flavor and more detail of our rollout plans at the Analyst Conference in early December in New York. So, nothing specific to share, but we’ve seen a great reaction so far.

Your next question comes from the line of Michael Kelter from Goldman Sachs. Your line is now open. Michael Kelter – Goldman Sachs: I had a few margin questions, I guess for Troy. The first is you raised your operating margin guidance for 2013 from 50 basis points to 100 basis points initially to a 100 basis points now. And I wanted to understand the puts and takes there and why you felt comfortable taking the guidance up before the year even started? And secondly, I hear you talk about your visibility into 2014 given coffee cost remain in the $1.60 range, which as I understand it is well below your lock cost for 2013?

Thanks Michael. Yeah, let me speak to the last part first. We have been doing some buying – early buying into fiscal 2014 on our coffee needs. We’re not very far into 2014 yet, but we’re going down that path a little bit and we’ll talk about that in a bit more detail at the conference in December. Suffice to say though, as we’ve talked about before, the early read and what we can see is that 2014 is likely to benefit from reduced coffee costs once again. The order of magnitude is too early to tell, but what I point out is that we will exit the year of 2013 with coffee costs significantly lower through our P&L than we entered the year of 2013 coming through our P&L. But again, that’s a comment given what we see today, with not very much of 2014 locked at this point in time. Now, in terms of margins we’ve raised it today to the 100 basis points of improvement given the number of things that we’ve seen as we come through the fourth quarter, the momentum we have both on the top line as well as the completion of the operating plans that we put together annually in the summer, prior to the start of the new fiscal year. And that’s given us confidence given again both the growth we see around the world, the investments that we know we need to make in new initiatives and the growth opportunities we have in the future and the margin improvement opportunities we have all throughout the P&L; in supply chain, in operations management, in leverage of G&A, an improvement in Europe, which we are expecting based on, as you heard from Michelle, some of the many changes that her and her team have been tackling over there. So, I would expect margin improvement really in a number of places in our business and it’s all of that I have visibility into, that’s given me the confidence in the improvement I talked about both in terms of operating margin as well as earnings growth in the year ahead.

Your next question comes from the line of David Palmer from UBS. Your line is now open. David Palmer – UBS: Hi. Congrats on the quarter and the year. I know it’s early days on the Verismo, but what are some of the feedback you are getting from retailers and your own store managers on the machine? The strengths and weaknesses versus other products that are out there in the single-serve market?

Jeff, you want to start.

Sure. Hi David, it’s Jeff Hansberry. We’re very encouraged on the Verismo System. For us it’s a first in a number of ways. It’s the first system that makes Starbucks quality lattes, espresso and brewed coffee all from one machine. We get natural milk pods that are made from real milk, that deliver a great latte and for the first ever we’re able to have Starbucks partners, our baristas actually go out and meet with customers in specialty retail stores and tell the story of Verismo and tell the story of Starbucks. So, we’re off to a very good start. Our shipments are in line with our expectations. But importantly, with a new system like this we are listening very closely to our customer feedback and the majority of feedback is very positive. We are listening for customer opportunities for improvement and we’ll continue to do so.

Jeff, you want to just address the attachment on pods that we’re seeing? John Culver Well, it’s still very early. We’re only – we only got a months’ worth of data, but at purchase we’re seeing significant multiples of purchases of pods, actually well ahead of our expectations.

The other thing I would add and I think this is important and Troy alluded to this in his remarks. The launch of Verismo is the launch of a product, but behind the scenes it is the launch of a platform and a deep strategic commitment that we have to the single-serve category domestically and globally. If you look around the world at what Espresso has done building a multibillion dollar business, what Keurig and Green Mountain have done and then the nascent space that we believe exists in Asia and our brand position. This is a global long-term multibillion dollar business and we are just getting started. Verismo is just the beginning.

Your next question comes from the line of John Ivankoe from JPMorgan. Your line is now open. John Ivankoe – JP Morgan: Thank you very much. A question on Europe, specifically if I may, there was a little bit of re-franchising activity I guess in Ireland, specifically you pointed out. Ad I just wanted to get the sense of how much of an opportunity that may exist for existing company store base, whether it is in Switzerland or France or the U.K. or Germany, but have you to perceive more of an asset-like model on those markets and whether they’d be any constrains to earning pure company store, as well as still maintaining your footprint in any of the major markets where you currently are?

Hi, John, it’s Michelle. Thanks for the question. U.K. is the central part of our strategy going forward, which is really a sea change in our opening plans. We see the licensing and franchising opportunity as tremendous. And it does a couple of things. First of all, it gives us access to places probably on the high street, which as I mentioned in the call earlier is largely where we are penetrated. And we have not only agreed with our existing great partners like SSP or Autogrill to have a more accelerated plan, but also bringing in new partners like for example in the U.K. Euro Garages, which is going to help us and compliment with us our plans to expand into hundreds of drive-thrus across the region over the next few years. We see absolutely tremendous opportunity but it’s largely about the new growth and our new growth will be dominated by licensing. We also are actively looking at the franchising opportunity and we have put that strategy in place in the U.K. and we are looking to extend that strategy across Continental Europe. And then as it relates to our existing base, we’ll look at smart opportunities that make sense for the business then for our customers.

Your next question comes from the line of Greg Badishkanian from Citi. Your line is now open. Greg Badishkanian – Citi: Great, thanks. Maybe if you could give us a little bit more color in terms of the coffee consumer, as well as the competitive landscape in Europe, and maybe any changes that you’ve seen over the last quarter or two?

Yes. Thank you for the question. As I said earlier we face tremendous competition not only with a, I’ll call them bigger chains but also with many small operators across the region. As I said I visited now many, many markets throughout my first year and what I will tell you consistently across both our customer and our partner feedback is what the customer is looking for is the Starbucks experience. And that – what we bring is unique product whether it’s our Espresso, our Frappuccino, importantly the environment, free WiFi all of which are assets and we’re also very focused on building like we’ve seen in the U.S. our digital platform, our service rewards platforms etcetera. So I would say that there hasn’t been tremendous change for say over the year, but we are getting a lot closer to the customer and navigating in ways to bring local relevancy and that relates to, as I mentioned, focusing on espresso, bringing a new level of innovation in that category, and I’ll be speaking to that when we’re together in December and that’s not only with products but in delivery systems. It’s also around our food and importantly our environment. We’ve now built a local design team in Europe, like in Amsterdam and some in the U.K. to really bring that local design edge to the customer experience.

Your next question comes from the line of Bonnie Herzog from Wells Fargo. Your line is now open. Bonnie Herzog – Wells Fargo: Hello.

Hello. Hi Bonnie. Bonnie Herzog – Wells Fargo: Hi. Just sticking on Europe, I just have a few questions. Could you provide more color on how you expect to improve your food offering in Germany and then in general what are some of the steps you are taking to develop a deeper consumer connection throughout Europe and then how long do you anticipate this will take? And finally, could you talk a little bit more about your action plan to fix some of your supply chain issues in the region?

Sure. Thank you, Bonnie for the question. I think there is few layers to that. First, let me address the customer experience. To build on what I said, really emphasizing what Starbucks has done so brilliantly over the last 40 years, is the first half get hand and we have done some things new in the region that we haven’t done anywhere else in the world at this scale, which is things like deepening the personal connection, names on cups, names on partners. And I can tell you that on roundtable since we’ve put that in place the customers are really seeing this now as a unique thing that Starbucks does. And they are getting to know their customers in much deeper ways. We’re taking advantage of our social media channel. We are outpacing many of competitors in the region. We have more than doubled our presence in Facebook and Twitter. We have done new websites across the region, both in company-owned and in licensed stores, all of which are surrounding and enhancing the customer experience. As it relates to food, we’ve made nice progress. I will tell you we’re just getting started. In the U.K. we re-launched our muffin platform; dramatic improvement in quality. We’re seeing that show up in customer response and in our sales. We’re also doing some testing on new distribution models for food. We’re working through and we stated this throughout the year. We had a major change in our logistics and we’re working through that. We’re very confident that as we move to the year ahead we’ve worked out some of the start-up challenges that any retailer would have with that scale of a change. And then to your specific question around Germany. As we studied the food opportunity there, there is lots of regional opportunities that we can take advantage of. The core Starbucks and the customer of Germany they want the core offerings. They want the muffins and the cakes and we have an opportunity to do a better job there.

Thank you, Michelle. That concludes Starbucks’ fourth quarter and fiscal year-end 2012 conference call. We thank you all for joining us. We’ll talk to you again in early December at our Biennial Conference. Thank you and good day.