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 2015 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.

Thank you, Mike. Good afternoon. This is JoAnn DeGrande, Vice President of Investor Relations for Starbucks Coffee Company. Thank you for joining us today to discuss our third quarter fiscal 2015 results, which will be led by Howard Schultz, Chairman, President and CEO joining us from New York, and Kevin Johnson, President and COO, and Scott Maw, CFO, here with me in Seattle. Also joining us for Q&A are Cliff Burrows, Group President US Americas; John Culver, Group President China and 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 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 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 on today's call with their corresponding GAAP measures. This conference call is being webcast, and an archive of the webcast will be available on our website at investor.starbucks.com. So with that, let me now turn the call over to Howard.

Thank you, JoAnn, and welcome to everyone on today's call. Starbucks third quarter of fiscal 2015 stands as among the most remarkable quarters in our over 23 years as a public company. Our global comp store sales grew 7%, driven by a stunning 4% increase in global traffic. Let me put that 4% traffic increase figure into perspective. A 4% increase in global traffic on a business of our scale translates into having served over 23 million more customer occasions in Q3 of 2015 than in Q3 of 2014 or an average of approximately 25 more customer occasions every day from every single store in our nearly 10,000 store global comp base. Our fast-growing Americas segment posted 8% comp growth, also driven by 4% increase in traffic and a 12% increase in revenues. EMEA delivered 3% comp growth with over 2% from increased traffic and a 23% increase in operating income. As we announced last week, our EMEA segment is preparing to open its first store in Johannesburg, South Africa during the first half of calendar 2016 in partnership with established food retail operator, Taste Holdings Limited. We believe that South Africa could ultimately support 150 or more Starbucks stores over time. Starbucks fast growing China/Asia-Pacific segment now with over 5200 stores delivered company leading comp growth of 11% in Q3, virtually all of which coming from increased traffic. Our now fully owned and controlled Japan market, our first international market outside of North America and a market in which we now operate over 1000 stores, delivered among its strongest quarterly comp sales increases in years. And I'm very pleased to report that we now have exceeded 1700 stores across 90 cities in mainland China. Cap remains a focal point of our future growth plans, and we are on track…

Thanks, Howard. Good afternoon, everyone. Before handing off to Scott to take you through the financials, I thought I'd build on Howard's comments about the quarter and share some personal observations. As Howard made clear, Q3 was an exceptional quarter as measured by any standard or metric. Ongoing beverage innovation and global leadership around all things coffee and tea remain at Starbucks core. In Q3 we continued to invest and elevate the premium, highly differentiated, locally relevant coffee and tea, beverage, food and in-store experience we deliver to our customers around the world. We grew global revenues by 18% over prior year to a new quarterly revenue record of $4.9 billion with a 7% increase in global comparable store sales, representing our 22nd consecutive quarter of comps sales growth of 5% or greater and on the heels of global comp sales increases of 6% in Q3, 2014 and 8% in Q3, 2013. These are truly extraordinary topline results given the size, breadth and complexity of our increasingly global operation. 4% of our comp growth came from increased traffic, a testament to the increasing strength of our business and the global relevancy of the Starbucks brand. In addition to driving strong revenue growth, we also expanded operating margins 70 basis points to a Q3 record of 19.2%. We grew operating income by 22%. This reflects a Q3 record, $939 million of operating income and a non-GAAP EPS of $0.42 per share. I think there are three core drivers of this momentum. Number one, we are delivering innovation that is relevant to both our customers and our employee partners. Two, we are driving operational execution on a global basis. And three, we are leveraging the scale, reach and breadth of our capabilities. Our fast growing Americas segment is firing on all cylinders,…

Thanks, Kevin. And good afternoon, everyone. The Starbucks business has performed exceptionally well in fiscal 2015, and our third quarter reflected the continuation of prior quarter's trends. Strong global comps, record revenues, record operating margin and record operating income once again demonstrate the impact and the success of our laser focus on our customers and our customer experience and fantastic execution by our partners across the globe. Our Q3 results are particularly meaningful in light of the size of our global system today and the increasing complexity of our business. Our Q3 GAAP EPS came in at $0.41 and non-GAAP EPS at $0.42 per share, 24% over prior year and our strongest quarter in 2015 thus far, despite a meaningful ramp in the investments we are making in the business. Non-GAAP operating margin expanded 100 basis points in Q3 to 19.5%, and excluding non-GAAP items, our operating income increased 24% over last year to $950 million. Sales leverage from the Americas and cap segments and an increase in COGS leverage drove this improvement. Clearly, the supply chain initiatives we have previously discussed and are implementing are benefiting our operations in a significant way. In fact, we have seen 120 basis points of gross margin improvement to date in 2015. In addition, we remain on track to eliminate $1 billion of supply chain costs over a four-year period. I would like to personally and publicly thank all of our supply chain partners across the globe for helping us deliver our Q3 results and our future supply chain savings while at the same time supporting the very significant growth in our business. I'll now take you through individual segment performance in Q3. Our Americas segment grew revenues 12% in Q3, primarily driven by strong 8% comp growth with transactions and ticket contributing…

Scott, thank you so much. Before we head into q-and-a, I just wanted to make one comment as it relates to how you might be looking at comps and traffic going forward. I think I speak for everyone at Starbucks in saying how proud we are and how gratified we are that we've been able to put up the kinds of numbers that really are unprecedented given our scale. But I've said in previous quarters and I think it's really worth repeating again, that we don't expect internally to maintain these kinds of very high level, high single digit comp numbers and the kind of traffic numbers that we provided with you today. So I would hope that there is common language and common understanding that the guidance we've been giving for years now is mid single digit comps, and I would hope that you would hold us to that. And if we are in a position to surprise on the upside, that's wonderful, but not to count on it and certainly not to model it. In our quarter, this quarter demonstrates a unique opportunity for many, many things that have come together. We're certainly going to work very hard to reproduce that. But I think going forward mid single digit comps numbers and a modest traffic number should be the kind of number you are putting in your model. And I hope that you would respect that as we go forward to Q4 and fiscal 2016. Thank you very much. JoAnn?

All right. Thanks, Howard. Mike, go ahead and open up for Q&A today, please.

[Operator Instructions] First question is from Keith Siegner with UBS.

Thank you and congratulations on such a record quarter. As exciting as the Mobile Order & Pay is and you all know how excited I am. A lot of others will eventually get somewhat close. What I think really is interesting about this is the ecosystem expansion, such a long-term competitive advantage. So Howard, when you think about this expansion is there any limit to this? Is this a nice slow gradual pace? Is this something that can get really broad and pervasive? I mean there is no precedent for this, right. How do we think about this ecosystem expansion with other retailers evolving?

Well, let me try and answer this way. I think you have to go back to the 2 years when I did share with many of you the concern that I had about what is meant to be a bricks and mortar retailer today in terms of the challenging issue of mobile commerce in the web. And that has resulted, I think, in lots of activity that is not producing the kind of positive results across all of retail, especially those that are mall-based. So, on the one hand, traditional retailers that are bricks and mortar based are longing for ways in which to accelerate and leverage their core assets and specifically drive traffic as opposed to waiting to intercept it. I think we've established not only a very successful application in Mobile Order & Pay, but we've established Stars as a currency that is highly relevant to our customer base. And when you look at our customer base, at how broad it is and the demography of it. When we start looking at verticals and like-minded companies, it's very easy for us to integrate our data against the way in which our customers are shopping and spending their free time and spending their money. And as a result of that, we've identified a number of companies in unique verticals that we think sequentially can be part of this external ecosystem. However, like anything else, I think that we have to walk before we run, and I think we have a core responsibility to demonstrate to the initial partners that in fact, the proposition that we created is going to drive incrementality for them. I can tell you that the phone has rung with many, many inquiries from both regional and national retailers in all types of business, who are…

The next question is from John Glass with Morgan Stanley.

Thanks very much. I wanted to ask about the Mobile Order & Pay rollout. My ultimate question is if you're willing at this point to talk more specifically about the kind of lifts you're experiencing in the older markets that when it's rolled out? If you're not willing to talk about that more specifically, can you talk about to what extent these are new - when people are joining in, is it new members to through my Starbucks Rewards, the existing members? How deep is the penetration, the usage in your existing user base of the My Starbucks Rewards? Any kind of qualitative comments around that would be helpful.

Go ahead, Adam.

Okay. Thanks, John. This is Adam. So, first of all, specifically to answer your question, we're seeing both our existing user base using order and pay, as well as bringing in some new members into the My Starbucks Rewards loyalty program, as well as them using the Mobile Order & Pay. And while we can't breakout specifics as you mentioned, it's worth noting that obviously this program is gaining tremendous momentum. We've been exceeding our own internal expectations in terms of the number of mobile orders we are seeing, in terms of incrementality that we are measuring, and in terms of the qualitative factors like customer and partner satisfaction are all exceeding our expectations. And that's even more true in our busiest stores, which bodes well as we continue to finish the US rollout in such cities as New York and San Francisco and Chicago. And I'd also add that we're seeing we are happy to be seen that the adoption rate is accelerating as Seattle actually started out faster than Portland, which we were quite happy with and then this last wave, the Sunbelt has succeeded even that in terms of its initial adoption rates. So we have momentum, we're just getting started, and you can imagine we're pretty excited about this.

The next question is from Joe Buckley with Bank of America.

Thank you. A couple questions if I can. The deals with Spotify, Lyft, New York Times, do they all involve a commitment to buy certain number of Stars, and are there upfront payments for the Stars? And just explain a little bit more how it works? And who is heading up that effort, Howard, is it you at this point, or is it Kevin or someone else within the organization?

Sure. Kevin, do you want to take that?

Sure. I'm happy to Howard. Yes, Joe, thanks for the question. I think that without getting into the specifics of each of these deals, they all have a common element which is each of these partners is paying us for Stars that then will be used to reward MSR customers or in the case of Spotify or the New York Times for subscription, in the case of Lyft for rides, and in the case of Lyft for some benefits they have for their drivers as well. In each there is a range of terms in each of those agreements, but there is a fundamental principle around how we're going to pivot and help them achieve their goals in terms of subscriptions, and rider ship, and in return they are going to buy Stars or pay us for Stars, they are going to reward MSR customers for those benefits, and that's where it becomes a win-win-win, if you will. MSR customers win because it's another place for them to earn valuable Starbucks Stars that they can redeem at Starbucks. Starbucks will win because that will bring traffic into our stores, and our partners will win because we are going to help them bring MSR customer base and bring customers to their offerings, whether it is subscriptions or rides, and we're going to go from there. So certainly, that is the foundational concept behind the 3 deals that we've done in the vision that we have going forward. I think, as Howard mentioned, we've got to walk before we run, and so right now I think the plans are to get to Spotify this fall, and we queued up New York Times and Lyft in January, early Q1 calendar year 2016. And in the interim, we're going to continue to have dialogue with other interested partners. But I think the priority right now is we're going to make sure that we do a great job with these first three partners and that our customers have a great experience, our partners get benefit from that, and that's where we are going to put our energy. In terms of your questions around who's managing this, I mean obviously a big part of this links into the digital experience we've created with our mobile app. And so Adam Brotman and his team are doing a lot of the software development that's enabling this. Certainly between Howard, Adam, Matt Ryan and myself, we've all been involved in these dialogues and helping shape these. I think we're now at a point where we're going to now start formalizing organizationally where the accountability is to scale it. But now clearly the implementation of getting this done is the responsibility that I have along with Adam Brotman.

Okay. And then one more if I could, on the 4% transaction growth, that is obviously a very, very strong number. Can you talk about what you've done? You mentioned peak hour throughput transactions being up, but if you are doing 4%, I'm sure they have to be up. But what have you done to kind of streamline that process. You know Mobile Order & Pay, I'm assuming wasn't in enough stores long enough in the quarter to have too much impact. So what else is going on to help drive those transactions?

Thank you, Joe. It's Cliff here. The focus has been on all the basics in our stores, and really those peak hours in the mornings in our busiest stores, we have really focused on labor and making sure we have enough labor in the right place. That is helping us sell to more customers. We're also seeing an increase in occasions with the work we're doing around dayparts, and that can be lunch, that can be our Frappuccino platform, right through to the evenings in stores. And all of those are helping us to grow all our stores across all dayparts, and it really is an absolute focus on the basics. You're right in your assumption that Mobile Order & Pay is not yet a material part of that. As Adam said, it launched too late in the quarter. But we are really encouraged by the work we're doing investing in our partners, investing in labor and stores, and serving more customers.

Thank you.

The next question is from Sara Senatore with Bernstein.

Thank you very much. I wanted to actually ask about food and in particular in daypart expansion. In particular, when you talk about you have some very aggressive growth in some of the categories breakfast and then even lunch. Could you maybe help me think about ultimately if you have an idea about where food could get to in terms of share of mix? Are there limits by not having a full kitchen? And on that note, could you maybe update us on Starbucks Evenings, the rollout there, and how you would think about that daypart a bit more expansively?

Thank you, Sara. And as was highlighted by Kevin, we've seen a real growth around that breakfast daypart, driven in part by the breakfast sandwiches seeing a 30% growth, lunch as we've expanded into that. We've seen a very healthy 20% growth in that daypart. And it really is focused from the work we started with level large products, feels like almost 3 years ago now and great quality ingredients that are resonating with our customers. We keep refining and improving not only the choice of food, but the relevance of the different dayparts. As we expanded our offer of Teavana shake and teas, again the complement to lunchtime food gives us encouragement that we're in the right direction here. We said in the analyst conference at the end of last year that we would see our food mix growing up to the mid 20s% in terms of percentage of mix, and I think that feels like a good place directionally. We are now up to 20%. We've seen a 1 point increase in the mix. So directionally heading that way and we have a good line of sight on it. Evenings we have rolled out the Evenings program to stores across different parts of the country. We are still in the early phase. We will see the expansion of Evenings to hundreds of stores in the US over the next 12 months. And that again gives another opportunity but only to introduce wine and beer, but to strengthen our food offering to be part of that Evenings software complemented by teas, coffees and a range of beverages. We've also expanded many of those new food offerings, certainly breakfast sandwiches and lunch, and our pastries into our Canadian business and into many of our license store partners. And it is the first time we have had an aligned range across such a wide portfolio. So that will also help us strengthen the relationship with our customers in terms of a consistent offer and also focus on delivering great quality food for our customers.

I would just add and we commented on this last quarter, if you look at the ticket in the US business, the 4 points that you see there, there is a really healthy mix of ticket. There is a little bit of price in there, but by far the majority of that is a combination of premiumizations [ph] overseeing the customers trade up within categories or across categories and then attach. And so that 4% is as healthy as we have seen it over the past few years.

Thank you.

The next question is from David Palmer with RBC.

Thank. Good evening. What are you learning in the rollouts of mobile order intake from an operational execution standpoint, particularly as you get into the thousands of stores? How are you finding the customer satisfaction, especially with regard to having that beverage perfectly ready when the customer wants? And if your partners or consumers are suggesting tweaks or opportunities for the app or execution, can you share any of those? Thanks.

Adam, why don't you start and then Cliff can talk about the in-store expenses.

Okay, David, this is Adam. First of all, the thing that we're learning are that we can continue to refine. In fact, my guess is we will do this for a long time and making sure that our estimated pickup time algorithm is always based on what we're trying to improve. We are very happy with how it's working in beta mode and so happy that we're going to continue to accelerate our rollout. But that's something that we're continuing to work on. We're also learning that our customers are requesting things like the ability to have very specific store by store menus being turned on. That's something that we plan on turning on before the end of this year in fact. So we're working on that, so that you can have a - you can order things like Clover and Visio and Evolution Fresh smoothies. So those are examples of the kinds of things that our customers are asking for that we are in the process of improving as we speak. And then, of course, putting those capabilities onto our Android app and then starting to roll out in the UK, Canada and elsewhere around the globe. So those are kinds of examples, the things that our customers are asking for. Cliff?

Yes, I would say, David, the acceptance and enthusiasm from our partners across the country has been incredible. They feel well trained. They feel ready for the rollout and customer adoption, and usage of the new app has just been fantastic. And we keep learning and we keep tweaking, but the ramp-up rates and the adoption rate that Adam talked about earlier has just got stronger with each rollout. We now have some high volume stores, which has allowed us to pressure test what happens in those stores. And in fact, those are the ones where we are seeing the strongest adoption, and it does bode well for the future. So far, all the learning’s are good. I think that piece Adam said about getting store-specific menus so that the customer can order just what they want in their store. And I think the other one is just the excitement and the pressure to get into all of our stores as a standard part of our offer.

And David, this is Adam again. Just to add on to what Cliff said, it's something that's worth noting that, if you look at our opportunity with Mobile Order & Pay and assumed delivery, we have an absolutely unique and differentiated capability because unlike any other consumer brand retail or restaurant company, we already have an industry leading integrated card loyalty and mobile assisted with massive momentum and usage of Stars that are relevant to our customers and fully integrated into the POS system into the operations of our stores. So it gives us a unique and differentiated ability to roll something like this out in a seamless and elegant manner and one where our partners and our customers are adopting it. So we are very excited about our differentiation into Mobile Order & Pay.

Thank you.

The next question is from Karen Holthouse with Goldman Sachs.

Hi. Thank you for taking the question. I actually have another question about food. And as you continue to see this platform grow across dayparts, is there anything you've noticed in terms of the mix of customers using it? Is it something that seems to be skewing millennials, something that's skewing older, and then also usage patterns in urban versus suburban preferred the grab and go food? And then in particular, is there any difference in how consumers are capitalizing on the drive thru for sort of Starbucks as a non-fast food drive thru option.

Well, there's a lot there, Karen. I would say that we are seeing more similarities than differences across the country. Drive thru we focus primarily on a narrower range and opt in our bestsellers on new introductions or seasonal changes. But if somebody wants and is familiar with a wider range, they just order it. We are seeing bestsellers the same across the country, and there's no particular SKU to millennials. I think the lunchtime offering tied with tea, ice-shaken teas is a new development for us. There is a strong drive towards the breakfast sandwich platform, and that really is across the country. One of the things that has been extremely encouraging is our strongest food markets have gotten even stronger with this new food offering. And that is what is most encouraging. It's not everybody catching up the traditional markets for us. We've had our biggest adoption, and people buying the food have gotten stronger. And we see that this will continue to grow. I think the other thing that we have with this frozen distribution model is our availability product has increased significantly. Mobile Order & Pay is helping us again to improve that availability by us knowing exactly what the customer wants. So a lot of changes to the supply chain, a lot of refinements to the operational practices in stores. And at this stage, we are not tailoring to a particular group, but we are also taking the opportunity to bring in some locally relevant products. BC with a diverse supplier there, and also in New York with an opportunity with a local supplier. And I see that plus the grab and go snacks as some of the curated offers that we can start to put in the stores to complement our base.

Great. Thank you.

The next question is from David Tarantino with Robert W Baird.

Hi, good afternoon. I have a question about the China, Asia-Pacific segment and the strength that you're seeing and the traffic trends there. Just wondering if you could elaborate on we think is driving that strength and maybe comment in particular on China? And we've heard a lot of macro concerns about China, but it seems like your business may be charging right through those. So perhaps could you elaborate on what's driving the strength in your mind?

Yes. Hey, David, this is John. Clearly we continue to see very strong momentum across the region, and the 11% comp growth is indicative of that, 10% of that was transactions. We're tracking more customers now than ever before into our stores across all the markets we operate in. And when you look at the comp growth in China, as our comp growth in China has outperformed the overall regional comp growth again this quarter, which is very encouraging. A couple of things that are in play. First is the relevance of the brand and the fact that we are building this coffeehouse ritual and more and more customers are coming in. We're increasing the level of frequency of our existing customers, and then we're also attracting new customers into the brand each and every day. In addition, what we're seeing is that as we've accelerated the store growth across the last several years is that our stores are more accessible. And with that, we're also seeing very strong performance from a financial standpoint in the first year stores, as well as in the second and third year age class stores as well. Digital is becoming a bigger piece of our business across Asia to include China. We now account in several of our markets 40% of our transactions is done through the Starbucks card. And so digital is becoming a bigger piece of that. And then the last piece I would say is, when you look at the store designs and the store environment that we're creating, we are truly creating a third place inviting environment for our customers to come with their family and friends, and this is resonating very strong. Yesterday, I had the opportunity to hand out awards for the top store designs, and it just reminded me of the fact of both the beautiful stores and the beautiful spaces that we're creating across the region. The big opportunity that we have going forward is this morning daypart and the development of the morning daypart. And increasingly we're seeing more and more relevance towards morning, but we do see this as an opportunity to continue to develop and grow that. But we're highly encouraged by what we're seeing across the region and in particular in China. As Howard mentioned, 1700 stores now in over 90 cities, and we're well on our way to that 10,000 store goal across the region over the next five years.

Great. Thank you.

Yes.

The next question is from John Ivankoe with JPMorgan.

Thank you. Howard, in your prepared remarks and I'm not going to call you exactly, but I'm going to try, but you said that Starbucks' opportunity was about serving existing demand as opposed to creating new demand. And that was just a very interesting comment just related to the latent demand that presumably exists within the United States. And as you think about all the different things that you have that can bring additional customers, whether they are new customers or you are bringing in existing customers more often into existing Starbucks stores and into new Starbucks stores. Can you compartmentalize really how big of a revenue opportunity that you see for Starbucks in the Americas that can be reached, or just to your existing store footprint, maybe how much is available over time through new store footprint and a bigger variety of different formats?

Let me try to answer that in a number of ways. First off, I think you would all agree that unequivocally we have proven and demonstrated that anyone who a year or two or even three thought that Starbucks might be achieving a level of saturation in the US or North America is clearly not the case. I think the ability that we have from a design standpoint and real estate acquisition to create segmentation in our design and uniquely be able to position Starbucks has given us opportunities that perhaps very few people thought existed in terms of the size and scale of the market. I can't give you the specific number, but I can tell you that we believe that we are a long way from the average unit volume of a Starbucks store achieving its ceiling. And I think one of the unique strengths that we've developed over the last couple of years is being able to identify need states and then to link that need state with the right product made for our customers in a customized fashion. And so, you know, John, you've been covering the company for many, many years, and so you know perhaps better than anyone else that there was a time when Starbucks' entire business pretty much happened 70% to 80% of it before noon. Well, that's not the case today. What's happening today is that we have identified, developed and executed against the strategy of leveraging the fixed asset we have throughout the daypart by creating need states products, and now we're going to extend that to evening. So when you link the fact that we still think we're in the early stages of what the average unit volume could be, coupled with our ability, I think this is the…

Thank you.

That was our last question at this time. I will now turn the call back over to JoAnn DeGrande.

Thank you, Mike. Thank you all for joining us this afternoon. We appreciate your time. This concludes our Q3, 2015 earnings call. We'll speak with you again late October when we report fiscal year end 2015. Thank you and have a good evening.

This concludes today's Starbucks coffee company's third quarter fiscal year 2015 earnings conference call. You may now disconnect.