Starbucks Corp (SBUX) — Q1 2015 Earnings Call Transcript

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 first quarter fiscal 2015 results, which will be led by Howard Schultz, Chairman, President and CEO; and Scott Maw, CFO. Also joining us for Q&A are Troy Alstead, COO; Cliff Burrows, Group President, U.S., Americas and Teavana; John Culver, Group President, China, Asia Pacific, Channel Development and Emerging Brands; Adam Brotman, Chief Digital Officer; and Matt Ryan, Global Chief Strategy Officer. This conference will include forward-looking statements, which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. Any such statements should be considered in conjunction with cautionary statements in our earnings release and risk factor discussions in our filings with the SEC, including our last annual report on Form 10-K. Starbucks assumes no obligation to update any of these forward-looking statements or information. Please refer to our website to find a reconciliation of non-GAAP financial measures referenced in today’s call with our corresponding GAAP measures. This conference call is being webcast and an archive of the webcast will be available on our website. Before I turn the call over to Howard, please note that our Annual Meeting of Shareholders will be held at 10 a.m. Pacific Time on Wednesday, March 18th here in Seattle. With that, let me turn the call over to Howard.

Thank you, JoAnn, and welcome to everyone on today’s call. Starbucks performance in Q1 was exceptional by any standard or metric. Financially, each of Starbucks’ principal business segments and each of the regions around the world in which we operate contributed meaningfully to record Q1 revenues of $4.8 billion, record Q1 operating income of $916 million, and record Q1 EPS of $1.30 on a GAAP basis and record $0.80 when excluding non-routine items, principally the gain on our acquisition of Starbucks Japan. Operationally, we delivered the best in-store holiday experience to customers in our history, with comparable sales accelerating through the quarter and December's performance reflecting the success of our holiday lineup. For the quarter, we drove nearly 9 million more customer transactions through our U.S. stores than we did in Q1 last year, almost 12 million more globally, and our global comparable store sales grew 5%, with 2% coming from increased traffic, representing our 20th consecutive quarter of comp growth of 5% or greater. Every geographic region contributed to our performance this quarter, with Americas delivering 5% comp growth, EMEA 4%, and CAP 8%. These results are nothing short of stunning, particularly when you consider that our comps were calculated off of the U.S. store base of almost 7,000 stores and our global store base of almost 10,000 stores. Our Channel Development segment grew sales 10% and delivered strong profitability. Simultaneously, we increased our share of premium single serve, premium packaged coffee, and premium packaged tea, and we delivered a record non-GAAP operating margin across the company of 19.5% for the quarter, an 80 basis points increase over Q1 last year. I will discuss a number of strategic initiatives and innovations that took shape in the quarter that will further extend our global coffee authority and leadership in retail and mobile technology and set us up to continue to lead and win around the world. Then I will turn the call over to Scott, who will take you through our Q1 financial and operating results in detail. I’ll start with our re-imagined in-store holiday experience that integrated and leveraged food and beverage innovation with all of Starbucks' digital, loyalty, card, mobile, store footprint, and partner assets to deliver the most successful holiday in our 40 plus year history. Our new holiday seasonal beverage, the Chestnut Praline Latte, was a huge hit with customers and one of our most successful limited time offers ever. Our food platform driven by new and innovative holiday offerings, as well as our new lunch program, continued to gain momentum during the quarter, contributing to incremental traffic and day part growth. Our collection of premium, highly styled merchandise performed very well as well. But the really big news is how powerfully the innovation of our card wall and vastly expanded selection of proprietary Starbucks gift cards enabled customers to give a Starbucks gift of choice throughout the season. To put the success of our holiday card program into perspective, consider these following metrics. This holiday, one in seven American adults received a Starbucks gift card, up from one in eight last year. Roughly 2.6 million Starbucks cards were activated on December 23rd alone, and $1.6 billion was loaded on cards in the U.S. and Canada in Q1, up 17% over last year. The strength and success of our Starbucks card program reflect both the power and the growing relevance of the Starbucks brand and further demonstrated by the fact that over a 31-day period more than 13 million customers entered into our first ever 'It's a Wonderful Card' sweepstakes for the chance to win Starbucks for Life. Going forward, we know that increased Starbucks card sales drive My Starbucks Rewards membership and in turn traffic in our stores. We added almost 900,000 new MSR members in Q1 alone, bringing our total membership to over 9 million, 23% above where we were at this time last year, and 5.5 million of our MSR members are gold members. We are already seeing and realizing the benefit of increased activity in our stores as gift cards received over the holiday are redeemed, and we have additional enhancements to the MSR program planned that we are confident will continue to drive even further acceleration in MSR membership in the future. It should be noted that MSR is one of the most important business drivers, as new members contribute not only short-term increases in revenue and profit, but also long-term loyalty for years to come. We continue to see broad customer acceptance and adoption of our mobile payment technologies. Today, in the U.S. alone, over 13 million customers are actively using our mobile apps, and we're now averaging over 7 million mobile transactions in our stores each week, representing roughly 16% of total tender, more than any other bricks-and-mortar retailer in the marketplace. In December, we introduced Mobile Order and Pay into 150 stores in Portland, Oregon. The Starbucks Mobile Order and Pay experience is a proprietary, fully integrated technology that allows customers to order their food and beverage selections through their mobile device ahead of time, go to their preferred store, pick up the completed order, and pay automatically through the same mobile device that they ordered with. Mobile Order and Pay saves our customers time by enabling them to avoid the lines and waiting for the orders to be filled, resulting in shorter lines, faster service, improved in-store execution, and an elevated Starbucks experience. Mobile Order and Pay has been extremely well-received by customers in the Portland market. We will be launching it now in over 600 stores in the Pacific Northwest in the months ahead and will be rolled out nationally later in calendar 2015. Our experience to date confirms that once fully rolled out, Mobile Order and Pay will drive a significant increase in mobile payment transactions in our stores overall and have a positive effect on our overall business, driving both increased MSR membership and app usage and creating significant additional one-to-one marketing opportunities. As previously discussed, we are also preparing for the introduction of delivery in the second half of 2015 and are finalizing plans for two distinct delivery models, one of which utilizes our own people, Green Apron baristas, and the other which leverages the capabilities of a third-party service. We will have more to share with you on our plans for delivery in the months ahead, but rest assured that delivery, like Mobile Order and Pay, will drive incrementality and increased customer loyalty. Global leadership in all things coffee will always remain at our core, as we continue to innovate and invest to enhance and elevate the premium, highly differentiated, yet locally relevant coffee experience we deliver to our customers around the world. This month, we successfully introduced Flat White, an espresso-forward handcrafted beverage that combines premium coffee quality with creative artistry to deliver a unique and elegantly delicious hot beverage. While it’s still early for Flat White, we have already seen great customer attachment and are exceeding early expectations. Many of you on the call today had the unique opportunity to experience the Starbucks Reserve Roastery and Tasting Room firsthand during our Investor Day, and I am delighted to report that the Roastery has received an overwhelming response from our customers and has been the strongest opening in our 40-plus-year history, well exceeding even our most optimistic projections. The Roastery is setting new records every week, attracting both repeat customers and visitors to Seattle at all hours of the day and evening. Personally, I feel the Roastery is the finest, most creative and immersive experiential retail environment of any in the world today. There should be no coincidence that the Roastery opened in the same year that we identified and shared with you the urgent need for retailers to elevate, deepen, and ultimately redefine how they connect emotionally with their customers. The Roastery represents both the premiumization of the coffee experience and a new chapter for Starbucks. The additional small batch coffee roasting capacity provided by the Roastery is enabling us to source, roast, blend, and market spectacular limited availability coffees around the world, elevate the coffee experience we deliver to our customers, and expand the availability of super-premium, micro-lot Starbucks Reserve Coffee to ultimately 1500 Starbucks locations. Customer response to the Roastery has been so strong that, in addition to the second Roastery planned to open in Asia in calendar 2016, we are actively looking at real estate in another major U.S. market as well. The Roastery is also supporting the launch of our new Starbucks Reserve brand, with plans to open 100 dedicated Starbucks Reserve stores over the years to come, devoted entirely to showcasing rare, limited premium small lot coffees as we continue to execute against our plan to elevate the consumer coffee experience globally. At the same time, we are continuing to invest in smaller alternative store footprints that respond to the continued urbanization of retail, and we will soon be launching a pilot project around express locations in New York that will offer a streamlined assortment of food and beverage offerings and integrate Starbucks' mobile payment and mobile order intake functionality to enhance customer convenience and provide even faster service in these locations. Turning to tea and Teavana, as we previously discussed, tea represents a massive strategic opportunity for Starbucks around the world. With the integration of Teavana complete, we are executing our plan to double our key business to $2 billion over the next five years. We will accomplish this goal by further elevating the Teavana in-store experience, expanding into targeted select global markets, with a focus on regions within our China and Asia-Pacific segment, entering multiple new channels of distribution for Teavana, and further developing Teavana’s e-commerce platform. We are already seeing lifts in revenue generated by the sale of handcrafted tea beverages in Starbucks retail stores, driven in large part by the very strong customer response to the launch of Teavana branded Shaken Iced Tea and Teavana Tea Lattes. This month, we launched Teavana Hot Brewed Teas in Starbucks stores in the U.S. and Canada to extremely favorable early results. We will be sharing additional specifics around our plans for Teavana in the months ahead. Our fast-growing China Asia-Pacific region delivered strong sales profits, leading the company with an 8% store count in Q1 and continues to be a focal point of our future growth. As we shared with you at the Investor Day, we have plans in place to double our CAP store count to roughly 10,000 locations and triple our revenue to over $3 billion and our operating income to over $1 billion by 2019. China, our largest market outside the United States, is a big part of our CAP story, and we are well on our way to achieving our goal of having 3,400 stores in China by fiscal 2019. We are now present in 86 cities in China and will be adding seven more cities in 2015. To give you a sense of the size of the China opportunity, last month we opened our 1,500th China store, and now have over 320 stores in Shanghai alone, making Shanghai the city with the most Starbucks locations in the world today, with plans to open many more. We expect to take full ownership of Starbucks Japan by the end of this quarter, providing us the opportunity to accelerate growth across all channels both in and out of our stores in ways not previously feasible. Our EMEA segment demonstrated continued progress against its transformation plan, delivering comp growth of 4% with the key U.K. markets outpacing the EMEA regional overall. I’m particularly delighted to share with you that the EMEA segment delivered its most profitable quarter in company history in Q1. Special recognition goes out to Chris Ainscough and all of our EMEA Starbucks partners for delivering these extraordinary results. Channel development: our relationship with Keurig Green Mountain continues to strengthen, while our K-Cup business continues to grow. Approximately 100 million Starbucks K-Cups were shipped in December 2014 alone, our largest single shipping month ever, up 20% over December 2013. Customers have made Starbucks the number one coffee K-Cup in the category, and we had another record share week during the key week before Christmas. Starbucks’ already industry-leading share of premium packaged roast and ground coffee continues to increase, together with accelerating sales combined with strong operating leverage, enabling our channel development segment to deliver 10% revenue growth and strong profit in Q1. Delivering the complete Starbucks experience for our customers and creating an authentic emotional connection between our customers and our partners has been and continues to be at the heart of everything we do. This month, we’re making the single largest new investment we have ever made in our partners, which will touch 135,000 partners across our U.S. stores. Changes include increases in barista and shift supervisor pay rates, enhanced recognition programs, a new food benefit, and updates to our dress code, among others. At the same time, we are investing in technologies that will help our partners deliver a consistently elevated Starbucks experience for our customers, including introducing technologies to ease and simplify required store tasks, improving access to core business tools and resources, and introducing partner apps with information and resources to facilitate viewing work schedules from a personal mobile device. We will continue to listen to our partners, and we will endeavor to continue delivering enhancements to the partner experience that exceed their expectations so that they, in turn, will continue to exceed the expectations of our customers. We are making similar investments in locally relevant ways to improve our partner experience elsewhere around the world as well. In closing, Starbucks is off to a fantastic start in fiscal 2015. Our record-shattering holiday quarter, financial and operating results, new store openings in the Roastery, and the undeniable success of our card, mobile, and digital strategies underscore the increasing strength of the Starbucks brand around the world and uniquely position us to thrive in the face of the seismic shift in consumer behavior that is underway. I cannot be more proud or appreciative of our partners and our teams around the world for delivering the record results we reported today, and I cannot be more optimistic about our future. I’ll now turn the call over to Scott Maw, who will take you through our Q1 financial and operating results in detail.

Thanks, Howard. Good afternoon everyone. Starbucks had a very strong start to fiscal 2015, with each of our reportable segments contributing to record consolidated revenues, operating income, and earnings per share. Revenues grew to $4.8 billion, a 30% increase over the prior year, primarily driven by incremental revenues from the acquisition of Starbucks Japan, 5% global comp growth, and incremental revenues from 1,641 net new Starbucks stores opened during the past four months. This was partially offset by unfavorable foreign currency translation. As Howard mentioned, we saw global traffic increase 2% during the quarter, reflecting the strength of our brand and progress in many of the areas we discussed during Investor Day. On a GAAP basis, operating income grew 13% over Q1 to $916 million, resulting in an operating margin of 19.1% for the quarter and earnings per share of $1.30. When excluding non-GAAP items, operating income was $935 million or 18% higher than the prior year first quarter. Non-GAAP operating margin was 19.5% compared to 18.7% in Q1 FY‘14, primarily due to sales leverage including meaningful cost leverage. After adjusting for certain items for comparability purposes, we also saw general and administrative leverage in Q1 as we continue to gain traction early in our efforts in both these areas. Non-GAAP EPS grew 16% to $0.80 per share over the prior year first quarter. Before going into specifics, I’d like to provide a quick update on the status of the Starbucks Japan acquisition. During Q1, with the closing of the first tender offer, Starbucks assumed majority ownership of Starbucks Japan, and a second tender offer to the public shareholders was commenced. We completed the second tender offer early in the fiscal second quarter, and the transaction is expected to close as planned during the first half of calendar 2015. As of today, we own approximately 94% of the outstanding shares of Starbucks Japan. Therefore, our Q1 2015 financials reflect the consolidation of Starbucks Japan into our financials for the last eight weeks of the quarter and pre-acquisition joint venture accounting treatment for the first five weeks. I also want to explain our non-GAAP adjustments for comparison purposes. For Q1 2015, we have excluded several items related to our acquisition of Starbucks Japan, including an acquisition-related gain of $391 million that was partially offset by certain expenses related to the transaction. Combined, these items increased first quarter earnings by a net $0.49 per share. For Q1 2014, we have excluded a litigation credit related to the Kraft arbitration. You can see the amounts, timing, and description of these items in the detailed reconciliation table provided at the end of the earnings release. In the Americas, the strong holiday season and excellent execution by our partners drove increases in revenue, operating income, and operating margin to record first quarter levels. Revenue grew by nearly 10% in the first quarter, driven by 5% growth in comps and revenues from the 766 net new stores opened this past year. Americas delivered its 20th consecutive quarter of comp growth of 5% or greater, and a notable 2% increase in transactions in Q1 is a testament to the success of the traffic-driving initiatives we discussed during our last earnings call and at our Investor Day. Increased operational focus helped drive transaction growth across all dayparts, including strong growth at peak and accelerated during the holiday. For the fourth consecutive quarter, food contributed 2% to comp growth, including the excellent performance by our breakfast sandwiches, with net sales growing 29% in Q1 versus the prior year and strong holiday limited-time food offers. Sales of our lunch offerings increased 15% over the prior year, driven by our warm sandwiches, which included three new items year-over-year. Moving on to beverages, our core and limited-time offerings contributed almost half of the U.S. comp growth during Q1. Holiday beverages delivered 9% year-over-year growth, and total tea sales in our U.S. stores increased 17% over Q1 2014. The significant momentum gained from Teavana’s handcrafted iced teas this summer continued in Q1. Operating income in the Americas grew 12% over the prior year to a new all-time high of $818 million, with operating margin expanding by 50 basis points to 24.3%, a new Q1 record, primarily due to sales leverage. Margin opportunity still exists in the established Americas business over the balance of the year, even when considering the additional investments in 2015 for our U.S. store partners. As you know, Target Corporation has made the decision to close all of their Canadian stores. We have a very good relationship with Target North America, and our 132 Canada-based licensed stores have been profitable and growing. However, given the impact on our operations and the customer experience from Target’s decisions, our stores will close tomorrow, January 23rd. We don’t expect these closures to impact our guidance for 2015, nor will they be material to our Americas business results. Moving on to EMEA, with the momentum and remarkable results from fiscal 2014 continuing into the first quarter, revenue grew by 3% after adjusting for $15 million of unfavorable foreign currency exchange impact. Revenue growth was driven by 4% comps in the first quarter, including 3% traffic. Among the most positive signs from EMEA is the record two-year comp of 9% achieved in the first quarter. EMEA operating income in Q1 grew 49% over the prior year to $50 million, a new all-time high, with operating margin expanding 510 basis points to 15%, as sales leverage and continued cost management, driven by the portfolio shift to higher-margin licensed stores and other operational improvements, drove the segment’s highest quarterly operating margin ever. We now expect EMEA operating margin to be at the high end of the 10% to 12% target range we provided last quarter. Momentum continues to build in EMEA, and we are very encouraged by the broad reach improvements in both our largest company-owned markets and our licensed stores. Across EMEA, Q1 licensed stores comps were in the high single digits, with comps in the Middle East in the double digits. Turning to China Asia-Pacific, CAP revenues grew 86% over the prior year in Q1 to $496 million, principally as a result of the Starbucks Japan acquisition. Revenue growth was also driven by 767 net new store openings over the last 12 months and strong comp growth of 8%, all of which resulted from increased traffic. China comps continue to trend higher than CAP comps as a whole. Adjusting out the net revenue increase of $172 million attributable to Starbucks Japan, CAP revenue grew over 20% for the 18th straight quarter. On a GAAP basis, CAP operating income grew 34% to $108 million in Q1, and operating margin declined 860 basis points to 21.8%, driven by the impact of the ownership change for Starbucks Japan. Noteworthy is that under the previous joint venture ownership structure, our Japan margin was over 100%, and our Japan store-level margin remains among the highest in our global portfolio. The acquisition of Starbucks Japan was immediately accretive on a non-GAAP basis. We continue to believe that the CAP margin for 2015 will be in the high teens. Excluding the amortization of intangibles associated with the Japan acquisition, CAP operating income on a non-GAAP basis increased by 43% over Q1 last year. Operating margin excluding the full 1,060 basis point impact of our ownership changes in Starbucks Japan increased by 200 basis points, driven principally by strong sales leverage and a continuing emphasis on improving operations in the region. Strong performance from China's new stores and overall revenue and margin expansion contributed significantly to CAP’s excellent performance in Q1. Starbucks China launched eight reserve stores in five cities during the quarter, including a world-class flagship store in Chengdu. Across the region, digital assets such as mobile apps, e-gifting Starbucks card, and My Starbucks Reward continue to gain significant momentum. In channel development, Q1 was very strong as we gained market share in our U.S. business despite significant competitive pressure. Robust sales of K-Cups and healthy growth in packaged coffee drove revenues to a new quarterly record of $443 million in Q1, a 10% increase over the prior year. Operating income for channel development grew 33% in Q1 over the prior year to $158 million, another quarterly record, with operating margin at 35.6%, a 600 basis point increase over last year. Coffee cost capability and efficiencies in the cost of goods sold were the primary drivers of this improvement. As we mentioned last quarter, we expect modest improvement from channel development margin for the full year compared to 2014. Starbucks K-cups gained the leadership position in the category in December with an 18% share during the last five weeks of Q1, our highest share since launch. Overall, we shipped $232 million cups in Q1, 70% greater than last year, driven by strong customer response to new flavors such as cinnamon dolce and mocha and limited-time offers such as Fall and Holiday Blend. A recently launched single-origin K-Cups, including Rwanda Rift Valley, also contributed to growth, demonstrating customer demand for these excellent varieties. Starbucks packaged coffee also gained share during the last five weeks of Q1, growing to 28% and exceeding 30% for the first time during the key merchandise week of the month. Our cross-channel loyalty program, Stars Down the Aisle, also played a role in these results, with 1.7 million MSR members entering codes into grocery in Q1. Almost 12 million codes have been entered since the launch of the program less than two years ago. Teavana’s performance, which is included in the All Other Segments, was relatively flat to the prior year. However, as Howard mentioned, sales of Teavana handcrafted beverages in our Starbucks stores in the Americas segments has driven exceptional growth in tea category revenue year-over-year. Regarding taxes, our Q1 tax rate was 24.2%, and the decrease in the rate was primarily due to the impact of the gain related to the Starbucks Japan acquisition, which is almost entirely non-taxable. As I mentioned at the outset, Starbucks had a very strong Q1, with both solid revenue growth and margin expansion. This performance gives us the confidence in now targeting non-GAAP EPS of $3.09 to $3.13, thus moving the bottom end of our range up slightly from our previous target range while retaining the top end. A higher gain on the Japan transaction results in our raising the 2015 GAAP EPS target up to $3.53 to $3.58. Revenue growth is also expected to remain within our previous target range of 16% to 18%. Noteworthy is that based upon where exchange rates are today, the stronger dollar will adversely impact revenue growth and operating income growth by about 1 point each. We are confident that we will be able to offset this foreign exchange impact, given the strength of our Q1 global operating results and the progress we will continue to make in leveraging constant G&A. It is also important to note that the vast majority of this currency impact represents only the effect of translating our foreign earnings into the U.S. dollar for reporting purposes. We actively hedge our largest economic cross-currency cash flow risks. We are now expecting Q2 GAAP EPS in the range of $0.63 to $0.64, and non-GAAP EPS in Q2 is expected to be in the range of $0.64 to $0.65. The second quarter is when the majority of our U.S. store partner investments begin in earnest, including our new food benefit and the changes in wages Howard mentioned earlier. This will have some impact on Q2 Americas margin. I also want to acknowledge that we see many external analysts' projections for Q2 EPS growth at about 20%, higher than the Q2 earnings range I just mentioned. I suspect that this difference is driven by our increased partner investments in Q2 and some seasonality that we always see in our second quarter. I want to reiterate that our fiscal 2015 non-GAAP EPS growth remains at the previously targeted 16% to 18%. We expect the first half of the year to be near the lower end of this range and the second half of the year to be closer to the upper end. Increasing revenues, strong global comp growth, new innovations, including Mobile Order and Pay, and the strong momentum we are seeing across our business gives us confidence in this slight acceleration despite additional foreign translation impact. In addition, we expect some acceleration in the benefit from our constant G&A leverage over the course of the year. Moving on to commodities, we have recently priced a significant amount of coffee, as prices have moved down within our target range over the past six weeks. As such, we now have 94% of our 2015 coffee needs priced, and therefore we expect commodity costs to be roughly flat to 2014. We will continue to provide updates as we price our coffee needs for fiscal 2016. We continue to expect to add approximately 1,650 net new stores globally. Of the 1,650, we expect 650 in the Americas, 150 in EMEA, and 850 in China, Asia-Pacific. The outlook for our effective tax rate continues to be around 31%, and we expect capital expenditures of $1.4 billion for fiscal 2015. In closing, Q1 represented another quarter of excellent global growth for Starbucks by any metric. Our strong results in the quarter and confident outlook for the year reflect many of the critical strategic growth initiatives we outlined during Investor Day. We expect EPS growth to accelerate as we move into the back half of the year and coffee costs remain well under control. Our financial forecast includes an appropriate level of investment in our store partners and food, beverage, and technology integration. We consider this an investment and not an expense, as it is integral to our continued growth in sales and profits over the long term. We look forward to updating you on our progress as we move through the year. With that, let me turn the call back to Howard.

Scott, thank you very much. I have one more important announcement to share before moving on to Q&A. Today, I am extremely pleased to announce that Kevin Johnson, former CEO of Juniper Networks and former President of Microsoft’s Platforms Division, and a 5-plus-year Starbucks Board member, will be joining the Starbucks senior leadership team as President and Chief Operating Officer effective March 1. Welcome, Kevin. Kevin has worked closely with the Starbucks senior leadership team and me as a Board member since 2009, collaborating and providing deep insights and wise counsel in connection with our transformation in 2009 and many of the strategies we’ve outlined at our Investor Conference last month, which we will be executing against over the next several years. Kevin and I have been discussing his coming to the company in order to contribute his insights and expertise and help us grow our business in North America and around the world for some time. These discussions were independent of Troy’s subsequent decision to take a sabbatical. Kevin will be reporting directly to me. Now, as I said at our Investor Day, I want to underscore here that my passion and personal commitment to Starbucks has never been greater. I also want to make it clear that Kevin’s addition is not part of some unannounced succession arrangement because it’s not. Instead, Kevin’s public company experience and his deep management, technology, global operating company supply chain, mobile and digital expertise will be a fantastic addition to our already strong and talented management team in our history. Please join me in congratulating Kevin, who is with us this afternoon, and I would ask him to say a few words of introduction.

Thank you, Howard. Greetings, everyone. For nearly six years now, I have had the great privilege of working closely with Howard and the SLT in my role as Starbucks Board member. Through this involvement, I have gained deep insight into Starbucks' business, values, culture, and the critical role that our 300,000 passionate partners play in delivering an elevated Starbucks experience to millions of customers around the world each day. In December, I attended the Starbucks Investor Day, at which time we outlined our strategies for the next several years. We are fully committed to working with Howard, the SLT, and our partners around the world to operationalize those strategies and to deliver results consistent with the expectations we share, our core values, and our culture. As always, performance is driven through the lens of humanity.

Kevin, thank you so much. On behalf of all of us today, this is a wonderful opportunity to welcome you to Starbucks. This also marks Troy’s last earnings call before he takes his sabbatical, a coffee break in Starbucks parlance. Troy has been a true friend, a great leader, and a passionate 23-year Starbucks partner who is beloved inside our building and around the world. I am going to miss Troy in my daily conversations and collaborations and look forward to the day when he is ready to return to the company. Troy wants to say a few words to all of you in the financial community before taking his leave.

Thank you, Howard. I have had the incredible opportunity to be part of Starbucks for 23 years, starting from the early days as a small, privately held coffee company with stores primarily just here in the Northwest. While it is very difficult to step away from this place that I know and love so deeply, I recently made the personal decision to dedicate the next year to my family with four school-age children. It gives me great comfort in stepping away right now as the incredible strength of the organization and momentum of the business. As demonstrated during the Investor Day here in Seattle in early December, the performance of the business around the world is stronger than ever, the opportunities ahead of us are greater than ever, and the aspirations of the company are higher than ever before. The holiday quarter we just reported underscores that strength and opportunity. We are fortunate to have a leader of Kevin's caliber and experience able to join Starbucks at this time. I've worked with Kevin in his role as a Board member for many years and have benefited from his experience and insights. His experience as a public company CEO, combined with his years on the Starbucks Board, positions him to hit the ground running. Kevin and I have already spent much time together during the transition, and we will engage further over the next month to ensure everything transitions smoothly. Most of you on the call today I have come to know very well over the years. Thank you for your engagement and support of Starbucks and of me. I assure you that the best days for Starbucks are still ahead. Finally, I'd like to say thank you to Howard for giving me incredible opportunities and support over the many years, and for supporting this personal family decision at this time.

Great. Thank you very much. Congratulations, Troy. A question on the mobile payment platform. I know you’ve gotten a lot of attention at the Analyst Day, and it seems like that's probably the biggest opportunity from a traffic-driving standpoint. It sounds like Portland must have gone reasonably well. It sounds like you’ve identified the next few markets for the rollout by the end of fiscal '15. Just wondering if you can give us some color on maybe early learnings over the past couple of months in terms of any challenges or nuances you’ve had to overcome, or whether there’s any insight into what kind of incremental sales or how it helps speed of service. I saw there were some quotes from Scott earlier in terms of the significant benefits that it provides. Just trying to get some insights regarding your early learnings and what we can expect in the year to come?

Hey, Jeff. This is Adam Brotman. I’ll answer that. First of all, we’re not breaking out specifics. But what I can tell you is we have completely hit the ground running in Portland, and the experience for both our customers using the app and the partners operationally has met and even exceeded our expectations. So we are full steam ahead in terms of rolling this out around the country as you mentioned over the course of the rest of this calendar year. What we’ve learned is that this is absolutely everything we thought it would do in terms of helping us add convenience for our customers, integrate it fully into not just our technologies but our operational flow. We are confident that this is going to help drive incremental transactions, improve throughput and capacity, and even help us accelerate MSR.

Thanks very much. Scott, you outlined $1 billion in cost savings over the next four years and there are several buckets. How much of that is in your thinking for '15 guidance? And specifically, you commented on your expectation for a second-half acceleration in earnings growth. Is that largely due to these cost savings coming in or do you believe there is a sales benefit or an uptick in sales in the back half to drive that?

Yeah. Thanks, John. Maybe I’ll answer the back part of that first. There are a number of things we see that will help to accelerate profit in the second half of the year, which include cost of goods sold leverage. We also believe we will see accelerated revenue opportunities through things like Mobile Order and Pay, innovations with beverages, and some things we see in our international operations. All of that is driving that slight acceleration in our earnings growth in the back half of the year. As for the COGS savings, we think it will be about $200 million this year. You may remember from Investor Day, in 2013 we booked a $100 million, in 2014 it was $140 million, and in 2015 it will get close to $200 million. Great work by the supply chain team and all the business units, and we’re well on our way to realizing most of that.

Hi. Congratulations on the quarter and Troy on what comes next. Kind of a little bit of a deep dive question. If you look in the Americas segment, we’ve now had a couple of quarters where licensed store revenue growth has been exceeding unit growth plus comp growth meaningfully. Is there something in store composition that we might be missing here?

Karen, hi. It’s Cliff. The significant difference is with our approach to food. For the first time ever, most of our licensees are now taking the incredible La Boulange range of food plus our breakfast sandwiches, allowing us to increase our revenue stream through our licensed stores. It's been extremely well received and helps us to improve our offers with greater consistency than we’ve ever had before. So food is the meaningful change.

And I would just add to that. We are seeing comp growth in our licensed stores that is equal to or greater than what we’re seeing in our company-owned stores. It’s the combination of those few things that’s driving revenue.

Hi. Thank you. I wanted to see about how much of a change there was in this enhanced partner experience and maybe what was driving that? Are you in a position of strength where you can just improve how you treat your employees and attract and retain the best talent out there? I wanted to understand a little more substantively how their day-to-day or year-to-year is going to be affected? Are you beginning to see tick-up in turnover or in execution consistency as the labor market for the better people is starting to get a little tighter?

Hi, John. This is Howard. You probably, better than almost anyone on the company, knows first-hand that the culture, values, and guiding principles of our company are directly linked to the equity of the brand. The brand's equity is defined purely by the relationship we have with our customers, which is defined by our people. There is no issue of increased turnover or anything like that. We are in the business of doing everything we can, not only to invest in customer-facing experiences and enhancements but we have to do everything we can for our people. Starbucks has a long history of equity in the form of stock options, healthcare, and now, college achievement where we provide free tuition for juniors and seniors. We want to demonstrate the amenity of the company and have felt since day one that investing over the long term in our people is the best investment we can make in the customer experience. We are taking these steps, not because we have a problem, we’re taking these steps because it’s the right thing to do.

Thank you very much, and my congratulations to both Kevin and Troy on these new stages. I actually wanted to sort of ask about this transition in the context of a couple of things. First of all, how Kevin’s responsibilities might be similar to or different from what Troy had, sensing that Kevin has a lot of experience but not in retail or restaurants per se. Is there any sense of what kind of initiatives he might undertake or where he might see the opportunities here?

Well, look, this is Howard. I’ll start it and let Kevin share his own thoughts. If we were hiring someone from the outside who did not have almost six years of experience with the company, I think this would be a different story. The transition would be longer, the learning curve would be longer. But Kevin has lived and worked in Seattle for many years at Microsoft. So he has been a customer of Starbucks for many years. As a board member, he has been deeply involved in the strategies of the company, specifically aligning himself and helping the digital side of the transformation of the company. His responsibilities will mirror Troy’s with the exception that he is picking up digital with Adam and he will have IT as well as supply chain, which Troy had. Scott Maw, who had been reporting to Troy, will be reporting to me. I have shared many hours with Kevin over the many years about the aspirations we have for the company. We are very fortunate to have a number one draft choice in Kevin Johnson.

Yeah. Well, thanks for your question. I think, clearly my professional experience has been in the tech industry, companies like IBM, Microsoft, and Juniper. In that experience, I’ve had the opportunity to work with many retail industry customers on technology-based solutions and ways to help them drive their business. As Howard mentioned, my experience on the Starbucks Board since 2009 has provided me a solid understanding of the strategy, culture, and leadership talent we have here at Starbucks. My focus will be on working with the SLT and our partners to operationalize that strategy.

Thanks. Congrats on the quarter and Troy, congrats on what comes next. Last year, Starbucks talked about a significant follow-up in results after Black Friday. How did the growth rate change through this last quarter and what did that tell you about your business? Scott, with regard to your COGS commentary, dairy and energy prices have come off lately, is that a factor in the back half?

David, I’ll take the holiday question, and then I’ll give it to Scott. You are exactly right. I think we were here a year ago at this time. As I said last year, the U.S. retail environment and the consumer are experiencing a seismic change in consumer behavior. As a result, brick-and-mortar retailers will have to redefine their relevance. We went to work at this time last year in completely redefining and transforming not only our holiday season but in many ways the calendar year at ‘15 by leveraging all the assets we have and specifically understanding how we could utilize MSR, our digital platform, to lower our cost of customer acquisition while emotionally building relationships that were not just based on driving traffic in our stores. The results we posted today manifest that and specifically the merchandise relationship we built around the Dot Collection, the Starbucks card, and our execution with the Chestnut Praline Latte has resonance with our customers. We are fortunate to hit bull's-eyes with customer favorite beverages, and we are going to position accordingly for the robust year ahead. We served millions of customers more than we did last year, which is an unbelievable number when considering the retail environment we are in, especially with a consumer turning away from traditional brick-and-mortar retailers.

On the commodity piece, the way that it shapes up for the year, David, is we saw some significant coffee favorability in the first quarter, and not much on dairy and diesel. You can see that coffee favorability in channel development margin improvement. That coffee favorability at that level is not going to continue in the back half, and so you’ll see channel margin growth come down. However, we do see some favorability in dairy and diesel. When you add that all up across the year, we think commodities will be roughly neutral year-over-year.

Thank you. And similar congratulations to everyone involved. I just want to circle back and ask one more question on the mobile order and payment since it’s such an exciting part of the story for this year. Scott, maybe you can help me think about this. When we think about that pace of rollout, knowing what the completion date is, but how does the pace of the rollout happen? Is it a slow build before we get a big boost right at the end? And similarly, how did the costs associated with this rollout come in a little early? Maybe is that part of what leads to some of the cadence of the year? If you could help me with those two pieces, it would be very helpful.

Adam, why don’t you start and then Scott could jump in.

Okay. Keith. In terms of the rollout pace, it’s going to be fairly evenly spread out throughout the year. So it’s neither front-loaded nor back-loaded, and we expect that to continue. Everything seems on track to that.

And as far as the cost goes because of the rollout, as I mentioned, the cost is pretty evenly spread as well. I’ll remind you that there is not a lot of cost. There are some incremental costs that will happen this year, but because of how integrated this is with our existing technology and how seamlessly it works with our existing systems, that cost is manageable.

There are lots of companies ringing the bell about mobile order and pay. But we are building a proprietary integrated relationship with our infrastructure and customer base. Adam, can you touch on that briefly?

Yeah. What's unique about what we are doing is we're not starting from a cold start. We already have 13 million active mobile users. We have the POS and payment capability. With MSR now up to over 9 million users, we are adding mobile ordering to that stack of proprietary technology that allows us to provide this offering for our customers. This integration sets us up for delivery as well. The pace of innovation and our ability to roll it out positively influences our overall business because we've effectively built this.

I also want to underscore that traditional advertising and marketing to overcome this seismic shift in consumer behavior may not work for most, while the relationships we have built with our customers through mobile payment and MSR will significantly lower our traditional customer acquisition costs.

Hi. Good afternoon, and congratulations again to everyone. My question is a follow-up on the Mobile Order & Pay experience you've seen in Portland. I wanted to focus on the operational side of it. I know there was some potential changes in how the back of the house or the baristas operate and some potential conflicts with customer timing and pickup. I was wondering if you could comment on your experience here and if operations are running as smoothly as you envisioned in this stage?

David, it’s Cliff here. It’s been incredibly smooth. We did a lot of work upfront. As Adam already mentioned, we built off existing platforms, integrated it with MSR. It is totally intuitive, and we built a printer into the register lineup, so it is an absolutely seamless experience for our baristas. It doesn’t change the routine for our baristas in the consolidation area, where our food and beverages come together. It has been seamless, and customers from day one have embraced this. We are confident we can meet this 2015 rollout.

And one quick follow-up. Have you run into issues with the timing of the order being prepared and the timing of the customer picking it up? Was that a potential watch out? Is there any issue with that you’re working through or is it working smoothly?

No, we have had incredible smoothness in this. There are individuals who will learn it; it’s a new technology. We didn’t go in with a narrow test or pilot. We went in replicating our final rollout plans. We're learning along the way, but it has been improving every day as adoption has grown, and we're confident about our capability with this offering.

Thank you. I just had a follow-up and then a question. I wanted to understand that you made a comment, Scott, regarding the investment in your partners, and how that's going to be a little bit more or comes into 2Q. That’s somewhat of the 16% or lower end of the full year guidance in 2Q, with the ramp-up in the back half? I'm curious if this is more a function of wages or if there’s some kind of one-time training or something that’s weighted in 2Q?

What I was referring to was if you look at analyst estimates for the second quarter, they are higher than our expectations. This investment in January, which continues in the year for our U.S. store partner wages and other benefits might explain the difference between the guidance range and what we’re seeing. The second half will accelerate from our topline revenue, the momentum, and initiatives we've mentioned.

We're seeing incremental MSR membership gains and app usage growing organically. That's exciting, and we’re just getting started.

Thanks. I had a question about lowering the cost of customer acquisition, specifically the success of holiday promotions, like Starbucks for Life, and other activities during the period. How do you plan to maintain that momentum for the rest of fiscal 2015?

The reason why customer acquisition costs will continue to decrease is because of several factors. As we add features that are meaningful to customers, such as Mobile Order and Pay and delivery, we’ll give customers added reasons to sign up for MSR. The second factor is that the more gift cards we sell, we naturally register customers to MSR. These drivers are key to our success.

Thank you. Congrats again on the great quarter. My question is on China Asia Pacific. We saw meaningful acceleration from last quarter, both on a one and three-year basis. Could you give us some color on the various drivers in China Asia Pacific? Is it market-by-market or driven by a specific product?

Yeah. Nick, this is John. Thanks for the question. We saw an 8% comp growth in the quarter driven entirely by traffic. We now have more customers than ever before coming into our stores across the 15 markets in which we operate. Our China comps outpaced the overall CAP comps, and we are opening stores and reserving brands successfully while building trust between our baristas and our customers. We are pleased with our capability to assist market conversion.

Thank you all for joining the call today. Please reach out with any further questions.

This concludes Starbucks Q1 fiscal 2015 earnings conference call. Thank you very much for joining us today.