Highlights From SBUX's Q4 Conference Call: Sees FY10 EPS Growth Up 15-20%, Continued Expansion in China,

November 6, 2009 12:20 PM EST

Starbucks (NASDAQ: SBUX) reports Q4 adjusted EPS of $0.24, 3 cents better than the analyst estimate of $0.21. Revenue for the quarter was $2.40 billion, which compares to the estimate of $2.39 billion. Shares are up 6.24% today.

Highlights From SBUX's Q4 Conference Call:

• Sees FY10 EPS growth in the range of 15 - 20% from 2009
  
• (CEO) Both one and two-year sequential quarter comparable store sales trends have improved. With same-store sales in both our U.S. and international businesses stronger as we exited Q4 than when we entered it.
  
• Consolidated same-store sales trends improved to negative 1% from negative 5% in the previous quarter. Non-GAAP operating margin expanded to 10.4%.
  
• Non-GAAP earnings per share for Q4 totaled $0.24 compared to EPS of $0.10 in the prior year, an increase of 140%.
  
• We're seeing outstanding results for our seasonal offerings, where we've been able to build on high levels of customer anticipation with an integrated go-to-market approach.
  
• We've brought Anniversary Blend whole bean coffee back to our stores every year since we first introduced it in 1996 in honor of our 25th anniversary. And during the quarter, it achieved the best sales results in its history and Pumpkin Spice Latte is on the same track.
  
• We launched the new program with a Free Food Day and drew 1.5 million customers into our stores to sample the new line up.
  
• It's important to note that VIA is not just a product introduction or promotion. It is a significant new global growth platform within our core business with strong margins, consistent with our other whole bean and ground coffees.
  
• Starbucks VIA is not only resonating with our core customers, but it has enabled us to tap into new and incremental use occasions and need states; office workers for late-night meetings, business travelers, teachers, healthcare professionals, the list goes on.
  
• More than 3.5 million customers are registered Starbucks cardholders.
  
• Our recently launched iPhone application exceeded 500,000 downloads in the first week and has consistently been in the top free downloads on iTunes since it was introduced.
  
• We continue to see significant opportunities for store growth in Greater China, which we believe will ultimately be our largest market outside of the U.S.
  
• The China market, which now has nearly 700 stores, holds the potential for thousands.
  
• In the UK, we are seeing a number of improvements in the overall performance of the business, including increased traffic as several of our customer-driven initiatives beginning to take hold.
  
• I'm pleased to report that by the end of 2009, more than 9000 Subway restaurants in the U.S. will feature Seattle's Best Coffee as well as our plans to expand into even more Subway restaurants during 2010. We also will bring Seattle's Best Coffee to a group of more than 800 Subway restaurants in Canada before the end of 2009.
  
• (CFO) Q4 revenues were $2.4 billion, down 4% from $2.5 billion a year ago. The revenue decline was primarily driven by foreign currency translation, fewer company operated stores and a 1% decline in comparable store sales, attributable to a 1% decrease in traffic.
  
• And importantly, consolidated comps as well as U.S and international comps ended the quarter higher than where they started the quarter.
  
• We reported consolidated operating income of $199 million in the fourth quarter, which includes $53 million of restructuring charges, nearly all related to lease exit and other costs associated with the store closures.
  
• Excluding those charges, non-GAAP operating income was $253 million. This compares to Q4 fiscal 2008 operating income of $14 million and non-GAAP operating income of $119 million.
  
• Consolidated operating margin was 8.2% on a GAAP basis and 10.4% on a non-GAAP basis, which represented a 570 basis point improvement from the 4.7% non-GAAP operating margin reported a year ago.
  
• Total U.S. net revenues for the quarter were $1.7 billion, a 4% decline from $1.8 billion a year ago.
  
• Company operated U.S. retail revenues declined 3% to $1.6 billion for the quarter, primarily due to 474 fewer company operated stores and a 1% decline in comparable store sales. The comp decline was driven by a 1% decrease in traffic, while the average value per transaction was flat.
  
• The operating margin improved 760 basis points to 12.0% of related revenues from 4.4% a year ago.
  
• International total net revenues declined 4% to $514 million in the fourth quarter of fiscal 2009, driven by foreign currency impact due to the stronger U.S. dollar compared with the British pound and Canadian dollar. Comparable store sales for the quarter were flat with the year ago period, comprised of a 1% increase in transactions offset by a 2% decrease in the average value per transaction.
  
• International operating income was $45 million in Q4 fiscal 2009, a significant increase from $22 million last year. Operating margin improved by 470 basis points to 8.8%, its highest level since the first quarter of fiscal 2008.
  
• I'll now move on to the results from the global consumer products group. CPG total net revenues decreased 2% to $188 million in the fourth quarter of fiscal 2009, primarily due to lower U.S. foodservice revenues partly offset by higher revenues from packaged coffee.
  
• We expect our effective tax rate to be in the range of 34 to 35%, which is close to its historical level. And this leads to our outlook for earnings per share. We expect fiscal 2010 non-GAAP EPS growth in the range of 15 to 20% including roughly two to $0.03 per share coming from the addition of a 53rd fiscal week. Not included in this estimate is the impact from the remaining international store closures, which we expect to be two to $0.03 in restructuring that will be spread throughout the year.
  
• We are preparing to launch VIA domestically in the CPG channel in the middle of fiscal 2010 through a recently signed broker agreement. While this avenue allows us to control what we believe is a great opportunity with our brand outside our stores, there are upfront investments in the business that we will need to make to support this model. Therefore, in line with our previous expectations, we expect VIA to be profit neutral to Starbucks for fiscal 2010.
  
• Finally, we expect cash flow from operations to again reach approximately $1.4 billion in fiscal 2010.
  
• And our expectation for capital spend next year is in the range of 500 to $550 million, a slight increase from fiscal 2009. Roughly half of this total is expected to go to renovations and store equipment upgrades.
  
• (Q&A) Troy, you highlighted the free cash in the business this year and what you expect to do next year, but you stopped short of talking about what you plan to do with that. So if you could talk about either what you plan to do about it or what's the timeframe in which you might make that decision. And then just a clarification. You stopped short of saying comps are actually positive now, but I assume just
  given the trend that they would have to be currently positive, is that true? (A)Well, let me - no, we don't report separate months. So I'm going to let you work on the arithmetic. All I'll let you know is that we had negative 1% comps for the quarter and I'll repeat what we said. We had improving trends and we ended the quarter stronger than how we began the quarter. And just to be consistent with our history, we don't talk about specific months. Now back to your first question. Our top priority for cash of course is investing back in our existing business, making sure we're maintaining the excellence of the asset that we have in place. And the next priority is to fund the growth opportunities that we have; VIA, new store growth around the world and so on. And we see abundant opportunities there. With that said, I think fiscal 2009 demonstrates the cash generating power that we have in this business. And I do expect that as we move again into 2010 we will have excess cash above and beyond those critical business needs that I've described in the business. Now with that said, I also remain a bit cautious about this economic environment that we're in. We are on the front end here of the first holiday quarter which is our strongest cash producing quarter of the year. So we're not going to make any conclusions on how best to deploy that excess cash until we come through this quarter. What I will say is that we are evaluating how to distribute excess cash and what's the appropriate distribution strategy. We're having those discussions with our Board. And I would expect as we get somewhere to the latter half of our second quarter then we'll conclude that work and be ready to talk about what the next step is for us. So more to come.
  
• Maybe just to add on to that question, Troy, just the guidance that you provided of 15 to 20% earnings growth, it would seem if my math is right that you could pretty much get there with the rolling forward of the cost saves that you have realized in the back half of this year and benefiting really the first part of the year, that alone. So simplistically are you guys thinking that the same stores sales that you're guiding to is enough to offset some of the natural inflation that we might see in the business? Or are you expecting G&A to be much higher next year? And to John's question, will potentially the use of cash flow for buybacks be upside to the guidance that you provided?(A)There's a lot there. Let me start with the cost saves. I think the important thing to mention, I'll just repeat what we've talked about earlier in the year. These cost save initiatives that have delivered $580 million in '09, as you know, came in throughout the year. That will annualize to a bigger number in fiscal '10. And I'll also point out that this muscle that we have built in '09 gives us opportunity to go after more in the years ahead. We have new capabilities here that we didn't have in the past around driving efficiencies through every corner of our business. And I would expect that beyond annualizing that number that we'll continue to seek out and find efficiencies throughout the business. With that said, and you made this point well, there are natural inflationary pressures that just are there every year in our business. Wage inflation, real estate, in perhaps different environments than now, but those cost increases are always there, commodities from time to time. Healthcare is a critical element of ours. Given that we have such a broad-based healthcare program, we are more exposed to cost increases there than many retailers are. So the sum of all that is that the cost saves that we'll get in '10 and that we will continue to seek are intended to at least give us a tool to offset natural inflation in the business. There was a day when the high comp growth we had was how we offset those cost increases. We've built a model this year that gives us one more way to do that. We will have, we expect, positive comparable store sales this year and the combination of that with increased cost saves are what we believe drives the margin improvement in the year ahead.
  
• Could you discuss the decline in, it seemed like there was a deceleration in the U.S. license store revenue. And I'm wondering if I'm seeing that right. Is there any change in - is this just the impact of certain types of locations like we were talking about airports, hospitality, perhaps not doing as well? Or is there a change in strategy by Starbucks on that? And then secondly, and with regard to Starbucks - I'm sorry, Seattle's Best licensing, how meaningful could that be to earnings? You mentioned the 9,000 stores with Subway. (A)We had a very good and robust year in licensing. Cliff, if you want to take the question with regard to his interpretation of the downturn in revenue, I think that'd be helpful. (A)Thank you, Howard, and David, thanks for the question. Our licensed business, as you know, feeds in part off the traffic volumes in the people who operate the units. And certainly most environments or a lot of the environments have had the same challenges over the last 12 months. We have certainly seen a very strong business model and we're really confident that some of the disciplines we've brought around our overhead costs will pass through and are passing through to the license business. It's been a good year, and we see good opportunities for future growth. (A)With regard to Seattle's Best Coffee. I think the fact first off that the organization was willing to have Michelle depart the core brand and go after Seattle's Best Coffee represents internally and now to this audience, how bullish we are ultimately on the future of Seattle's Best Coffee. I think the marketplace has changed to a large degree where the coffee consumer is going after multiple tastes and although their loyalty to Starbucks is significant, there are times when they want perhaps a different kind of coffee, whether it's flavored or a lighter roast. In view of that, we want to be able to take Seattle's Best Coffee out of the shadow of Starbucks, and really for the first time in its history have a lifeof its own. So the organization is beginning to take form and what I would say is that we've lifted the guard rails off Seattle's Best Coffee in terms of licensing opportunities, sales opportunities. And the Subway opportunity that we've outlined today is just one of many conversations that we're having. And I think candidly, given the fact that the fast food players have gone after the breakfast business, specifically McDonald's, in such a big way, and they've made such a big push in coffee, their core competitors want to compete directly in that space and we have a coffee that is not just a supplier but a national brand. And we've got training and competency that we believe we can help them. So the Subway situation I think is an interesting case study and there'll be more to come. But I think SBC is in its infant stages of what it could be domestically and internationally.

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