Starbucks Corp SBUX
Q2 2013 Earnings Call Transcript
Transcript Call Date 04/25/2013

Operator: Good afternoon. My name is Mike and I will be your conference operator today. At this time, I would like to welcome everyone to the Starbucks Coffee Company's Second Quarter Fiscal Year 2013 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

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

JoAnn DeGrande - IR: Thank you, Mike. Good afternoon. This is JoAnn DeGrande, Vice President of Investor Relations for Starbucks Coffee Company. Joining me on the call today is Howard Schultz, Chairman, President and CEO; Cliff Burrows, President of our U.S. and Americas business; and Troy Alstead, our Chief Financial Officer. Also joining us here today for Q&A are John, Michelle and Jeff, the Presidents of our other three business segments.

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 risk factor discussions in our filings with the SEC, including our last Annual Report on Form 10-K. Starbucks assumes no obligation to update any of these forward-looking statements or information.

This conference call is being webcast and an archive of the webcast will also be available on our website.

This is the first quarter we're including results from the recently acquired Teavana business in our financial results, and you'll find them in the P&L for all other segments. We've also removed unallocated corporate expenses from Other. Full year results for typical 2010 through fiscal 2012 for all of the segments as well as our corporate unallocated expenses can be found on our website.

With that, I'd like to turn the call over to Howard Schultz. Howard?

Howard Schultz - Chairman, President and CEO: Thank you, JoAnn, and good afternoon to everyone on today's call. I am very pleased to report the record Q2 results that Starbucks announced today. Global comp store sales growth of 6%, marking the 13th consecutive quarter of comp growth greater than 5%, comp growth of 7% in the U.S. Total revenue growth of 11% to a 2Q record of $3.6 billion, 180 basis points increase in operating marign to a Q2 record of 15.3% and record Q2 EPS of $0.51 which after excluding a $0.03 gain on the sale of the company's minority equity stake in the JV that operates our stores in Mexico represents a 20% increase over last year's record Q2 results.

Starbucks is continuing to deliver strong consistent performance in the face of still challenged retail and consumer environments in many of the markets around the world in which we operate. While I'm very pleased with the record result we have been reporting and the value that we have been creating for our shareholders over the last several years, as I've mentioned at our Annual Meeting of Shareholders last month we remain laser-focused on our aspiration to become one of the world's most admired, respected and enduring brands.

I'm honored that the progress we are making on this journey has been recognized by Ethisphere Magazine who for the seventh straight year named Starbucks as one of the world's most ethical companies and Fortune Magazine who recently ranked us as the fifth most admired company in the world. Neither this humbling and inspiring recognition nor our Q2 results would have been possible without the hard work and dedication of our 200,000 Starbucks partners who don reading the green apron every day and deliver the unique Starbucks experience 70 million times from almost 19,000 stores in 62 countries around the world each week. From Starbucks leadership team to each of our partners we say thank you.

In a few minutes, Cliff Burrows President of our America segment will discuss Americas Q2 results in detail and provide a glimpse of what's ahead. Under Cliff's leadership Starbucks U.S. business today is as healthy as it ever has been. We continue to introduce new innovative ways to excite our customers around all things coffee. And clearly anyone suggesting in 2008 or 2009 the Starbucks U.S. retail store portfolio was approaching market saturation was just flat out wrong.

In fact stores we have opened in the last few years are among the best performing stores in the 42 year history of the company in terms of all key metrics including new economics, return on investment, profitability and the qualitative aspects of how well we deliver the Starbucks experience to our customers. This performance is due to a new discipline and rigor we have brought to all aspects of store development that is both underpinning and driving our U.S. retail expansion. We plan to add approximately 3,000 new stores in the Americas over the next five years with at least 1500 being in the U.S. and are now on-track to open over 300 new stores and to renovate 1400 stores in the U.S. this year alone.

Our China, Asia Pacific region continues to be at the forefront of Starbucks global expansion efforts and we are on course to have 4,000 stores in the region by the end of 2013, including more than 1,000 stores in Mainland, China and more than 500 stores in South Korea.

We will establish China as Starbucks single largest market outside of the U.S. in 2014 and have more than 1,500 stores by 2015. We are building and deepening our connection to customers in China by continuing to deliver locally relevant innovation including Chestnut Macchiato and Peach Blossom Tea Latte, two customer favorite seasonal beverages evocative of the flavors of the Chinese New Year season, and actively building My Starbucks Rewards membership.

We have now sold over 2 million My Starbucks Rewards cards in China, representing an average of 2,000 members per store and the highest per store average anywhere across our global retail system, with sales on (cars) now representing 35% of the total tender. This is a powerful endorsement of the emotional attachment and engagement we now have with Chinese customers in relationship to the Starbucks brand.

A few weeks ago, John Culver, President of our China and Asia Pacific segment, and I traveled to Indonesia and the Philippines, key growth markets as well being the sources of some of Starbucks best-tasting and best-selling coffees. John and I observed firsthand how powerfully the Starbucks culture and the Starbucks brand coupled with new store designs are resonating with our partners and customers. We now plan to open 100 new stores in Indonesia in the next three years and another 100 stores in the Philippines over the next four. And next month John and I will be in Tokyo to celebrate the opening of our 1,000th store in Japan, an historic achievement for the first Starbucks market that opened outside of North America and personally a rich reminder to me of how far we've come since I attended the opening of the first store in the Ginza district back in August of 1996.

In Q2 we also opened our first store in Vietnam to record crowds, another dynamic market with a rich cultural heritage and coffee tradition. Our flagship Ho Chi Minh's city store will be followed by stores in Hanoi and other key metropolitan cities across Vietnam in the future. Michelle Gass and her team are in the early stages of a transformative new economic business model for Europe that will further move us toward long-term profitability.

We are actively continuing to expand our new UK franchise program with a number of experienced and well-capitalized regional and national franchise operators as well as growing our captive licensed store footprint into important customer segments, such as rail stations, airports, universities and hospitals. We're also making considerable headway in the growth of our drive-thru operations, adding our first drive-thru store in Germany and adding through our drive-thru portfolio throughout the U.K. These and other strategic moves together with a robust set of brand initiative will provide competitive differentiation and make Starbucks more relevant to Europe's diverse consumer base.

Starbucks performance across our joint venture and licensed markets in Eastern Europe and the Middle East continue to be extremely strong with growing customer response in markets such as Turkey, Hungary, Russia and across the Middle East portfolio thanks in good measure to our partnership with the Alshaya Group that started with a single store in Kuwait City in 1999 and now comprises over 500 Starbucks stores throughout the Middle East.

Our Q2 results give me confidence that the strategies we have in place across Europe and the Middle East combined with an intense focus on execution and elevating our customer experience will enable us to make solid continuous progress in the EMEA region over time as we continue to leverage all of the learnings from the U.S. transformation.

Last quarter Jeff Hansberry, President of our Channel Development and Emerging Brand segment detailed the extraordinary multibillion dollar opportunity that exists for Starbucks in channels outside of our stores. Today Starbucks has over 100,000 points of distribution across grocery, drug, mass and club locations around the world and sales topping $1 billion, with nearly

25% of the $3.4 billion U.S. premium coffee market making us the number one premium packaged coffee brand in America.

Form this is strong position Starbucks Channel Development opportunities remains in its infancy. Premium Single-cup currently an $8 billion category is the fastest-growing segment in the coffee is, now accounting 27% of total coffee sales in grocery and premium single cup is a segment Starbucks intents to lead with a solid product line up and includes Starbucks VIA, Starbucks K-Cup Portion Packs and now Verismo.

We continue to build Verismo's install base to generate incremental pod sales with a successful promotion on cable home shopping channel QBC in March. In Q3, 23 will gear up for a robust fall and holiday by further extending Verismo distribution to include additional specialty retailers and expand Verismo portfolio to include both machine and pod innovations including tea. All of which will culminate in our stores, but we anticipate to be a very strong Christmas holiday shopping season.

Starbucks K-Cup Portion Packs sales in U.S. food drug and mass channels outpaced the industry at large increasing more than 75% versus the prior year. And maintain a leading share in the premium single cup category. This last week Starbucks K-Cup's were named one of the top product launches of the year by IRI's Pacesetter. I'm pleased to report that we have now shift over 850 million Starbucks Tazo cups since launch.

Q2 marked our first quarter since completion of the Teavana acquisition, an important move into the $40 billion global tea category. The tea category we believe is ripe for innovation, and we now intend to do for tea what we have done for coffee. Beyond representing a very exciting retail store platform with strong unit economics, Teavana enables us to add super-premium estate teas to our tea line and introduce and leverage a multi-brand tea strategy to complement our existing billion dollar plus Tazo tea business.

In Q2 we opened 8 Teavana stores and have plans to add additional more stores in fiscal 2013 and to add a complete line of handcrafted beverages to the Teavana menu overtime. We also expanded Starbucks loyalty program to include Teavana purchases, giving Starbucks customers the convenience and benefit of using their Starbucks Card and mobile app to pay for purchases in Teavana retail stores. To further leverage this, the best capabilities of Starbucks retail, including real estate, design and store operations, I've asked Cliff Burrows to lead the Teavana retail business as part of our U.S. and Americas business with Andy Mack, Teavana's founder, reporting to Cliff.

Our Evolution Fresh premium cold-pressed juice platform continues to grow nicely and is now in more than 4,000 Starbucks stores and other retail locations, including 300 Starbucks stores in the New York and Boston markets. We continue to see healthy sales lift in juice as customers increasingly make Evolution Fresh fruit and vegetable juices a part of their daily ritual.

And we are working hard to increase production capacity to meet the growing consumer demand and our plan to have Evolution Fresh juices available in approximately 8,000 U.S. locations by the end of 2013. It's now been more than three years since we unveiled and began to execute against our unique blueprint for profitable growth strategy in the U.S. and the time is now ripe to begin taking our tested and vetted blueprint on the road to China.

Our success at retail in China is providing us with confidence to both continue building our retail store portfolio and to leverage our brand, growing retail store footprint and deepening connection to Chinese consumers into a future overall business that will also include Starbucks products and categories marketed through CPG channels to the rapidly growing Chinese middle-class. Stay tuned for updates on this exciting initiative in the quarters ahead.

I want to turn now to mobile payment, loyalty and social and digital media as I've shared with you before we are witnessing a seismic change in consumer behavior due to the emergence of social and digital platforms and the significance and ubiquity of mobile as a consumer plateau and Starbucks remains on the very leading edge of all of these developments.

In Q2 we introduced new innovations and initiatives that further demonstrate Starbucks leadership in Consumer Card, loyalty and mobile payments experiences as more and more of our customers choose the Starbucks Card as their preferred method payment. Consider the following statistics.

Today nearly one quarter of all U.S. transactions are made by My Starbucks Rewards loyalty members and nearly one-third of all U.S. in-store transactions are prepaid. Our mobile apps now have more than 10 million active customers and we're approaching 4 million U.S. mobile payment transactions per week accounting for roughly 10% of total U.S. tender. To put this in perspective Starbucks card tender now exceeds $3 billion annually in the U.S. and Canada, a scale that rivals many premier U.S. banks.

In Q2 we significantly accelerated My Starbucks Rewards membership by offering a$5 credit for U.S. Starbucks cardholders who became a program member resulting in nearly 1 million new registered members and nearly 500,000 mobile app downloads during the two-week offer period alone.

Through this and other initiatives we are adding approximately 80,000 new My Starbucks Rewards customers each week and expect to double the number of active members enrolled in Starbucks rewards program from 4.5 million at the end of fiscal 2012 to 9 million in 2013. Even more encouraging is that accelerating adoption is not just a U.S. phenomenon. We are now seeing usage of My Starbucks Rewards at the same or even higher rate than the U.S. in countries like China, Korea and Canada, providing us with a significant sustainable competitive advantage over competitors in these markets.

And beginning in May, we will unveil the markets first cross plan, cross channel rewards program, a capability only made possible by the unique combination of Starbucks national retail store footprint. Broad consumer packaged goods presence and industry leading digital capabilities. Our customers will be able to earn My Starbucks Rewards stars for purchases of Starbucks packaged coffee in grocery channels. The Starbucks can them be redeemed for free food or beverages in Starbucks retail stores an exciting new example of our blueprint for profitable growth being brought to life.

It's very hard I think to actually explain this in the kind of detail or the attachment that we think this is going to do. And this gives us a significant competitive advantage over other like coffee products that are sold in grocery and we are going to see incrementality as a result of that in our retail stores.

The revenue and operating leverage provided by the scale and synergies among our digital card loyalty mobile and social platforms provides us with strong core muscle in our U.S. business and increasingly in multiple channels and markets across the globe. And as Adam Brotman, Starbucks Chief Digital Officer and I'd like to tell the digital team, we are just getting started literally in the nascent stage.

Today, Starbucks ability to touch people in and beyond our stores is greater than any time in our history. And as a reality that gives me great confidence that we can attain the high aspirations of becoming one of the world's most respected, admired, and enduring companies. We're very fortunate to have added Mike Conway, our new Executive Vice President for Channel Development as well as start Sharon Rothstein and Matthew Ryan a Chief Marketing Officer and Chief Strategy Officer, respectively, to help us achieve these ambitions goals tuning an already experience and talented leadership team. I'd like to personally take this opportunity to publicly Mike, Sharon and Matt to Starbucks.

I am convinced that the next 2 to 3 years for Starbucks will be among the most dynamic and exciting periods in the history of our company. The results we announced today demonstrate that Starbucks Coffee Company has the strength, the health and the talent to continue profitably building our business in multiple channels around the world, at the same time as we continue delivering value to our shareholders.

I'll now turn the call over to Cliff who will take you through the Q2 results of the Americas segment.

Cliff Burrows - President, Americas: Thank you, Howard, and good afternoon everyone. Very pleased to join you today to discuss the strong second quarter results of our Americas business and to share with you several exciting initiatives we have ahead of us. Americas revenue grew by 10% in the second quarter to $2.6 billion, fueled by 6% same-store sales growth with 5% coming off increased transactions and 2% from higher average ticket.

In the U.S. comp sales grew by very healthy 7% and number of drivers were behind this. We had great success with our food and beverages, including Vanilla Spice Latte and Hazelnut Macchiato, which combined to nearly 2 percentage points of comp growth in the quarter. Food sales also lifted our comp with strong growth in the afternoon from food offerings aided by expanded Panini availability and strong Bistro Box performance.

On our first quarter call we talked about the strength of Starbucks Card sales during the holiday and how that gave us great confidence in our ability to deliver strong Q2, that absolutely played out this quarter and what is particularly encouraging is we're seeing lift in both afternoon daypart and in our higher priced indulgent beverages by Card users. There are significant number of new customers and new occasions being introduced via Starbucks Card leading to new day routines and greater loyalty all which bodes well for our future growth.

While Americas' segment revenue grew 10%, operating income grew 22% to $550 million. We delivered strong flow through on our exceptional sales growth with margins in the Americas growing by 220 basis points to 21.1% in the second quarter that is the highest Q2 margin we've ever reported for the Americas segment and there is several things contributing to this improvement.

Firstly, we are intensely focused on store operations, including labor, waste and utilities management. We're improving productivity as well and this is allowing us to increase customer visits without adding costs. For example, our new labor playbooks are leading to simplified operations which in turn allows us to bring in new products while minimizing additional complexity to the system. We're also benefiting from lower coffee prices. This alone provided 40 basis points to favorability in our COGS and occupancy line in Q2. Today Starbucks stores are busier than ever but we remain very conscious that outstanding service is what brings back customers again and again.

That is why I'm so proud of our -- the focus of our store partner – the focus of store partners continue to plays on delivering Starbucks experience. We can see from customer voice metrics that in the U.S. taste of beverage and speed of service scores are among the highest levels in recent years. Friendliness and order accuracy also were meaningfully high in second quarter. All of these combined led to the highest quarterly increase and our overall satisfaction scores in two years.

We continue to grow strongly outside the U.S. with Latin America delivering double-digit revenue growth. The success we are seeing in our license markets across the region together with the potential of Brazil give me confidence that Starbucks future growth across Latin America.

Our performance in Mexico is particularly exceptional which is why we are so excited to build on the strong foundation already in place and announce our intent to open 250 new stores over the next five years as part of the sale of our equity here. That sale is consistent with our strategy to simplify equity structure.

Looking ahead, there are number of value that would be critical to our growth. One begins next week, as we signal the return of Somerset Starbucks by launching a new Caramel Ribbon Crunch Frappuccino and this will be to accompany the full line up of signature handcrafted Frappuccino beverages that have been in our stores for nearly 20 years. This will be a strong complement in the returning line up of chilled summer beverages including Iced Coffee, Iced Tea and our handcrafted refreshers.

Food is also near a long-term growth driver for the Americas. Our overall food program continues to perform well. I'm very excited about what’s to come in the U.S. with level ownership.

At the end of the second quarter, we had 150 Starbucks stores carrying La Boulange products. As of today we are in 439 store having rollout to the entire San Francisco bay area. On the left we have seen thus far, what is still early has been encouraging. I look forward to sharing more detail with you as our insights become even more meaningful.

What I can tell you is that La Boulange pastries will roll out in the Pacific Northwest, including Seattle in June; then we'll expand to cities including Los Angeles and Chicago; followed later in the year by New York and Boston. We remain on track to have La Boulange products in all of our U.S. company operated stores by the end of 2014.

Another area of focus for the team is unleashing the real potential we have in drive-thru. As Howard mentioned in the last quarter, the majority of U.S. new store growth over the next few years will come from drive-thru. The business case is very compelling. Our drive-thru stores have healthy profit margins as we are able to better leverage fixed occupancy costs and depreciation with sales coming from both out-of-the-window and in the cafe. We are not only focused on opening new drive-thru stores, over the past two years we've conducted a deep analysis on how best to enhance the efficiency and the customer experience through the drive-thru window.

As a result, we've already improved our menu boards, optimized operational standards, and upgraded our equipment. These improvements are driving faster speed of service, higher order accuracy, and improved customer satisfaction. We're still in the early days of our overall drive-thru innovation, and we know our relationship with customers is just as important with drive-thru window as inside the cafe and our priority as well as our financial results over the coming years will reflect this.

In the meanwhile we're focused on maintaining the high quality of our existing portfolio, updating stores through approximately 1,600 renovations across the Americas segment this year. While we don’t expect meaningful overall sales lift due to routine renovations, we do see immediate results when we add new programs or increase capacity as part of the work.

As Howard mentioned, our integration with Teavana business is well underway and I'm extremely proud to now be leading this premium, innovative concept and I know the expertise we have gained over 40 years of coffee merchandising and our leadership in handcrafted beverage preparation will translate tremendously well to the high level of product quality and innovation already associated to the Teavana.

We're excited in the coming quarters to share more about the ideas and plans that are emerging. All that we have accomplished and all that we have yet to accomplish would be impossible without what is far and away Starbucks most important asset our people. I can say with certainty that my Americas leadership team has never been stronger than it is today. We have great stability and rich diversity resulting in a deep talented bench.

While I get the fortune of discussing our record results and tremendous growth with you all, it's important to remember that the partners in the 13,000 stores in the Americas region really make this all happen. So to them I would like to say thank you.

With that I'll turn the call over to Troy Alstead. Troy?

Troy Alstead - CFO and Chief Administrative Officer: Thanks Cliff, and good afternoon everyone. We are extremely fortunate that the Americas business produces results that consistently exceed way we normally expect from a business so large and mature. Chris sited many of the reasons behind that success, innovation consistent delivery of outstanding customer service and a deep entrepreneurial spirit. It's the consistent strength of the Americas performance that allows us to nurture the seeds of growth outside of the Americas. I'll now talk to the second quarter results of those businesses.

In China and Asia Pacific we continue to (grow) rapidly while delivering strong results. Net revenues of $214 million represented 22% growth in the second quarter and were (indiscernible) by a mixture of 15 net new store openings over the past year along with same-store sales growth of 8%. Considering the difficulties that others are experiencing in this part of the world, coupled with the fact that we're lacking extremely strong comps of 18% in last Q are very pleased with this performance. Half of our Q2 comp growth was due to increased transactions as customers were receptive to our seasonal offerings with continued strength from the My Starbucks Rewards program in China also contributing. Ticket growth was due to a combination of pricing as well as sales mix.

Operating income of $68.3 million plus operating margin of 32.0% down 710 basis points. We have grown our company operated store base by 35% in the past year double the pace of growth in the region overall. And as I have indicated for some time now, that portfolio of mix shift is strategically and financially very valuable, but it does currently have a negative mix shift impact in operating margin in new region.

We added 56 new company operated stores in (cap) in the second quarter, the highest number of company operated stores we've ever opened in a single quarter in this region. We are solidly on-track with our previously communicated growth trajectory in China and across the region. Just as was last quarter and as we expect to continue this higher pace of growth carries with it investment spending to open and operate these new stores, that also led to a portion of the margin decline we reported this quarter.

Finally, we reported a year-over-year decline of $2.1 million in income from equity investees in the second quarter, this is entirely the result of favorable non-routine income of $6.7 million in the second quarter of last year. Our partnerships across (cap) are thriving including in Japan where comps and new store growth are both higher this quarter and in the prior year.

In EMEA the difficult economic climate and continued weakness in retail football continue to impact our business. Total revenue is up $273 million were flat to last Q2, where licensed store revenue growth of 48% offset by a 6% decline in company operated revenue.

Our licensed store revenue growth was primarily the result of the addition of 117 licensed stores over the past year combined with strong comp growth. The company operated revenue decline was a result of a declining company operated store base, which is the outcome of the store closures we've previously spoken about as well as the sale of a number of company operated stores to licensed partners. Also contributing was a 2% decline in comparable store sales.

Profitability in EMEA remains challenged, but we are making progress on a number of fronts. Operating income for the quarter rose to a positive $5.2 million, up from a loss of $7 million in Q2 of last year. Our continued disciplined focus on cost management is one of the items contributing to the improvement. Additionally we're beginning to see the benefit of our portfolio mix shift to a more heavily licensed model. EMEA net new store growth in Q2 was entirely comprised of license stores. Also contributing to the Q2 profitability was a $5.7 million reduction to the asset retirement obligations of our store leases in the region. We are in this for the long run in Europe. It will take time to grow our license business in the region and it will take time to drive increased profitability through our existing company-operated store base. The opportunity in Europe and the Middle East is meaningful, though, and the eventual payout will be well worth it.

Let me now move to Channel Development where revenues of $344 million grew 7% over the prior year. The second quarter, as is the case for all of fiscal 2013 for Channel Development reflects slower growth as we continue to develop and invest in the products and businesses that will drive more rapid growth in future years. The Channel Development business consists of the larger highly profitable but slower growing roasted brown coffee and the food service business, which account for approximately two-thirds of current Channel Development revenue and the smaller faster-growing single-serve ready-to-drink in international businesses. While these newer business account for only one-third of our Channel Development revenue today, we are building for the future with new capability, distribution, and innovation across VIA, K-Cups, Verismo, Iced Coffee, Refreshers and Tea. The investments we're going to make now will help fuel solid long-term growth in this segment in the coming years.

During the quarter dollar sales in the Roast and Ground Coffee category declined 3.5% versus prior year in U.S. food, drug and mass channels. While we are pleased that we are outperforming the industry we are not pleased that our Roast and Ground dollar sales did not grow over that same period. Nearly all of our competitors have reduced pricing over the past several quarters and as announced earlier this month we responded with a list price reduction effective in May. We believe our move reflects the right pricing in this environment along with other unique loyalty and value drivers such as My Starbucks Rewards will provide value and relevance in the category to grow share.

K-Cups continue to be an outstanding contributor to our Channel Development business and were the primary driver of revenue growth in the quarter. Starbucks K-Cups share of the premium single-cup space in U.S. food, drug and mass channels grew 2.3 percentage points to 14% in the quarter reflecting the continued momentum of the still young platform. Bottom line growth in Channel Development in the second quarter outpaced top line growth. Operating income of $94 million grew 18% over last year. Operating margin expanded 270 basis points to 27.4% as lower coffee related costs provided year-over-year favorability.

Finally, let me briefly touch on our other segments. John briefly mentioned at the beginning of the call that we have included results for Teavana along with Seattle's Best Coffee Evolution Fresh, the Tazo retail store and our digital ventures business, are reporting under all other segments. For the second quarter the year-over-year growth in revenue and operating income of these other segments was primarily due to the inclusion of Teavana results this quarter for the first time (till) the other businesses also contributed to the revenue growth. We are working to integrate and align Teavana reporting and this becomes a more meaningful portion of our consolidated results, I expect that we will enhance our disclosure.

Now I will wrap up the second quarter on a consolidated basis before moving to targets for the remainder of the year. Consolidated net revenues grew to a Q2 record $3.6 billion representing growth of 11% over last Q2. This increase was due to comparable store sales growth of 6% including 4% coming from higher transaction and 2% from higher average ticket.

Beverage and food innovation, outstanding customer service and growing base of highly loyal customers all were key contributors to this quarter's growth. Consolidated operating income grew 26% to $544 million in the second quarter. Consolidated operating margin expanded 180 basis points to 15.3%, the highest Q2 margin we ever reported. Leverage on our strong sales coupled with 50 basis points of lower coffee cost drove the improvement.

The combination of strong sales growth in our core business, operational efficiencies in our retail stores and favorable commodity tailwinds led to record earnings per share of $0.51. This includes a $0.03 gain on the sale of our equity in our Mexico joint venture which is reported in the interest income and other line. Excluding this gain EPS grew by 20% at the high end of our targeted range. Also of note, Starbucks repurchased approximately 3 million shares of stock during the second quarter, this leaves approximately 26 million shares authorized as available for repurchase. The combination of these repurchases along with the $0.21 per share dividend resulted in $309 million return to shareholders in the second quarter and brings our first half of fiscal 2013 total to more than $850 million.

Now that we are half way through fiscal 2013, now we will provide an updated outlook for the year. Given our strong first half results and the momentum we are carrying into the second half of the year, we are raising our full-year earnings per share target for a range of $2.12 to $2.18. For the third quarter we are targeting EPS in the range of $0.50 to $0.53. For the fourth quarter we are targeting EPS in the range of $0.54 to $0.57.

We now expect to add (1,600 Starbucks stores) globally reflecting the previously targeted 1,300 Starbucks stores in addition to 350 Teavana stores that were acquired or will open this year. We remain on track to deliver on all other previously communicated targets, including 10% to 13% consolidated revenue growth, mid-single digit global comparable store sales growth, approximately 100 basis points of consolidated operating margin improvement, a tax rate of 33%, and capital expenditures of $1.2 billion. Finally, we now anticipate resolution of the dispute with Kraft sometime in the second half of fiscal 2013.

As we now progress into the second half of the fiscal year, we are extremely pleased that we were able to deliver yet another record set of results in Q2. Our Americas business continued it's remarkable top and bottom line performance and we continue to demonstrate solid growth across our entire portfolio. We recently wrapped up our strategic planning for the next five years and I can tell you that I've never been as optimistic at what lies ahead as I am today. The future growth potential of this company is as clear as it is diverse.

Our opportunities to deliver industry-leading shareholder returns are as great as our opportunity to enhance the communities in which we serve. And the rigor and discipline with which we make decisions and proceed along this path will only be matched by the focus on the outstanding experience we deliver to each and every customer. I am excited for what lies ahead in the second half of this year and even more excited for what lies ahead in the coming year.

With that I'd like to turn the call back over to the operator for Q&A. Mike?

Transcript Call Date 04/25/2013

Operator: Michael Kelter, Goldman Sachs.

Michael Kelter - Goldman Sachs: Can you guys talk a little more about your early experience rolling out La Boulange in the stores and that where do you use, because the lift was encouraging. I was hoping you could help us with what exactly encouraging then and then maybe in your answer you could touch upon the impact to traffic versus ticket and whether you are getting a lift in coffee or just food?

Cliff Burrows - President, Americas: Thanks for the question. It's Cliff here. The reason I said encouraging we are in 150 stores with any track record and we've been working live with this in refining the products as we've gone along. We are now in a meaningful 439 stores, so it will be much more meaningful when we report the next quarter and the coming quarters. I am firstly encouraged by the pride our partners in the stores have in sharing and serving and enjoying this food, the reaction of the customers, especially to the (lemon and sage) croissant, (indiscernible) and almond croissant which are the signature products of La Boulange. With any change, it takes (mindful) people customers to get used to new products, ourselves to get confident with those products and obviously we've got a new routine with warming in stores. I am encouraged by the progress we're making, encouraged by the reaction. And again, as I said I look forward to sharing more of that in the coming quarters.

Operator: John Glass, Morgan Stanley.

John Glass - Morgan Stanley: On the earnings guidance I guess just a couple of questions. One is why are you raising it now, with suggested an acceleration of earnings growth from 20% range in the first half to 25%. So what are the components that drive that first? Secondly does it include that $0.03 and where is that $0.03, I can’t find it, what segment is that in?

Troy Alstead - CFO and Chief Administrative Officer: We are raising because, first of all, we are halfway through the year. So we now have half the year in the bank. We have been able to see two quarters worth of great top line growth and great earnings growth and that gives us increased confidence in our expectations for the balance of the year. I will also point out that we are just that much closer now to new product launch as we move through the balance of the year, how the seasons are trending, our ability to drive flow-through on incremental sales, all of that now halfway through the year has just increased in confidence and allows us to increase our guidance for the balance of the year and for the full year. Specifically to your second part of your question, yes, all the year-to-date results are reflected in that full year guidance so the $0.03 of the Mexico gain is included into that new $2.12 to $2.18 range that we put out there today. That is reported in interest income and other expense. So you need to look at the consolidated P&L and you will see a year-over-year change there. There is a number of things going on in that category but there is a big driver of this Mexico gain that shows up in that line.

Operator: Keith Siegner, Credit Suisse.

Keith Siegner - Credit Suisse AG: Just a question about the new multichannel loyalty program rolling next month. I mean this is – it definitely is unprecedented and I am sure that at least to some extent there is going to be some education required but that's kind of the big opportunity where you get to bring in a lot of the non-current loyalty users as they realize this opportunity. If you could talk a little bit about that marketing program, maybe how you plan to message this, do you roll it out first just to existing users? How do you get the broad-based awareness of this new opportunity?

Jeff Hansberry - President, Starbucks Channel Development, Seattle’s Best Coffee: We are very excited about bringing My Starbucks Rewards down the aisle, and to your very point, today we've got about 6 million My Starbucks Rewards customers. As we extend the program into channels, we'll be able to reach an audience and make My Starbucks Rewards available and create awareness of the program to an audience that is 10 times larger than our current My Starbucks Rewards audience. The way we'll bring that to life is in the store there will be point-of-sale material and there will be material on each and every package of roast and ground coffee to create rapid awareness with both our loyal customers and with new customers as they become aware of the program. We will thread MSR through everything we do in channel, so it will become an integral part of every promotion that we run going forward. So we have great expectations in how it will transform the way our customers experience the brand and build loyalty to the brand.

Howard Schultz - Chairman, President and CEO: And Jeff, maybe if you can also say the benefit we have about the stores within all of these stores, the thousands of licensed stores.

Jeff Hansberry - President, Starbucks Channel Development, Seattle’s Best Coffee: So we've got over 3,000 licensed stores that sit within some of the best grocery and mass merchant real estate in the U.S. What that allows us to do is create an ecosystem within the store where our customers have the opportunity to buy handcrafted Starbucks beverages and also their packaged coffee needs down the aisle. And as Howard mentioned in his comments, every time you buy Starbucks roasted and ground coffee you'll earn My Starbucks Rewards stars that can be redeemed for Starbucks food or Starbucks drinks. And now with those 3,000 in the best grocery stores around the U.S. that makes it more relevant and helps to thread it through our blueprint for growth more easily.

Operator: Sara Senatore, Sanford Bernstein.

Sara Senatore - Sanford Bernstein: I wanted to just talk about the Channel Development business briefly, obviously you said that you're pleased with the share gains but, you would've liked to have seen a little bit more growth in the biggest part of your business. I'm just trying to reconcile sort of the slower top line growth with I think what is continued confidence that there will be – that ultimately this business will be as big or bigger than retail, and if you could just talk about the cadence, you see and maybe when some of these other initiatives will start to look a little bit or be a little bit more present to offset what appears to be sort of a slower growth core package business?

Jeff Hansberry - President, Starbucks Channel Development, Seattle’s Best Coffee: Sara, it's Jeff Hansberry again. We remain very confident in the future of Channel Development. Q2 was a challenging quarter. In that, we saw both a slowing in the roast and ground business overall combined with a lot of competitive activity on our largest segment, roast and ground. That said, we feel strongly that we have the right mix of value and promotion and merchandising and loyalty activity to reignite growth in our roast and ground business with the list price reduction that we announced this month that will take effect in May with the activation of the My Starbucks Rewards program with some new additional innovation that will be hitting the market in Q3 and Q4 to include a 40% increase in the number of SKUs of K-Cups across the Tazo Tea brand as well as the Starbucks Coffee brand, additional innovation hitting the market in VIA as well as our ready-to-drink portfolio with Starbucks Iced Coffee and some other new innovations that will come later this year. So, we remain very optimistic. And later on top of what we're seeing in the U.S. business, we continue to be in the nascent stages of our international expansion. I think I've shared previously that today the channel business only operates in about 20 of the 62 countries where Starbucks has retail operations and we're working aggressively towards expanding beyond the U.S. with our CPG portfolio.

Operator: Greg Badishkanian, Citigroup.

Gregory Badishkanian - Citigroup: In the press release, you mentioned that you had considerable momentum in business as you answered the second half, which is very encouraging. I'm just wondering, what's the read through of that comment to April same-store sales?

Cliff Burrows - President, Americas: Greg, we won't specific about April at all. What we can say with confidence is the great strength that we came through the first quarter, the holiday period that we've reported on previously as you know and then as we progressed through this quarter with a backdrop of, as you know, very choppy and mixed results, broadly in the retail environment and with many other retail companies, we produced very steady healthy strong growth and traffic growth and same-store sales growth in the U.S. and consistent ability to leverage that strong top line into profit growth at the bottom. So, no specific comments about April, but we exited Q2 in a very healthy place and that's given us confidence in terms of the low momentum, combined with the pipeline of what's to come in the third quarter and the fourth quarter, the lineup of innovation across all channels encourages us that leads to our confidence in the momentum and that leads to in our ability to speak with such confidence about the back half of the year.

Howard Schultz - Chairman, President and CEO: I'll add one other thing. I think it's hard to perhaps really get underneath what's going on with social and digital media, the loyalty card and mobile, what I can tell you though is that we as a company have cracked the code on being able to leverage those platforms in a number of ways. To create awareness in trial of new customers who are not in the Starbucks franchise, to lower our cost of customer acquisitions as a result of the fact that we are using these channels as opposed to conventional advertising. And then thirdly we can analyze with great specificity that the loyalty and the stars that now will be leverage on to the CPG channel is significantly relevant to our core customers. When you combine that with what we have been able to do during the peak periods in terms of efficiency and productivity plus creating new need stakes for customers in dayparts that in the previous years we have not been as busy as far as it gives us great confidence that the 7% comps that we saw in first quarter and second quarter are just stunning accomplishments when you look at the backdrop of the economy what other people are reporting especially given the environment we are in. So I would say that the ecosystem that Jeff talked about what we are going to be able to do with these programs going forward gives us the optimism that we are in good shape for the balance of the year.

Operator: Jeffrey Bernstein, Barclays Capital.

Jeffrey Bernstein - Barclays Capital: Just a question on balance sheet in terms of cash or even looking at the cash flow statement after your CapEx spend obviously there is no shortage of cash. I am just wondering if you can give us kind of an update in terms of board discussions as it relates to how you determine the right balance. First of all, just a share repurchase and dividend, what is the right level there, because, obviously you could be doing a lot of both? Then the potential whether it's considered around an increase in leverage, obviously right now leverage is not your priority but rates are fairly compelling. So I'm wondering whether you consider boosting leverage or how you even think about the right leverage level perhaps once the settlement is complete, any thoughts on that front would be great.

Howard Schultz - Chairman, President and CEO: Sure, Jeff. I think the first thing I would mention is where you ended, which is awaiting resolution of our dispute with Kraft and as we come through that, which we now expect it will sometime be in the second half of this fiscal year. That will bring clarity, that will allow us to then formulate little bit more specifically our go-forward plans. But I will say is that we are very committed to sustainable dividends and growing the dividends through two methods, one is by as earnings grow over time, the payout ratio where we've been paying since initiation at 35% to 40% payout ratio I would expect to grow dividends just as earnings grow, but I'd also expect to look at that range over time, not immediately, not imminently, but we are well aware of others in the industry payout and I would anticipate as elevating that payout ratio at the appropriate time. So I think the strength of our cash flow in the business. Similarly with share repurchases, we are committed to a balance of dividends and repurchases. Of course repurchases are a much more opportunistic, but we are committed to the program and our Board has authorized a continued opportunities for us to be more active in the open market, so we'll take advantage of that as we believe market conditions exists for that. Now, with respect to debt, what I would tell you is I am looking closely at debt on our balance sheet and while we certainly are in a very, very strong cash flow position, we do recognize that we've got opportunity to optimize that balance sheet and bring some additional debt on some leverage over time and then we're well aware of what the market conditions are today and again looking very closely. We had nothing to announce today, but it's definitely something closing on our radar screen.

Operator: Jason West, Deutsche Bank.

Jason West - Deutsche Bank: Just a question on EMEA. If you guys could talk about, just thinking on holding onto the Company stores there, it's a business that's not earning much of a margin today and just wondering, you mentioned some refranchising, but I think that's for new growth, just if you revisited the thoughts on refranchising some of the Company business to try to pull more profits out of that market?

Howard Schultz - Chairman, President and CEO: Michelle is sitting in London. I think she's going to answer the question.

Michelle Gass - President, Starbucks Europe, Middle East and Africa: Yes. Jason, Michelle here. Actually, as Howard spoke to, we are actually now looking at franchising, not only for new growth but sale of some of our existing base and we have begun to do that in London and as we get some learnings in the U.K., we will look for other opportunities across the continent. So, to clarify, it's not just about new store growth. It is actually about looking at the sale of some of our existing base, and we're confident that this will dramatically shift the profitability of the market.

Operator: David Palmer, UBS.

David Palmer - UBS: Obviously, unbelievable performance, especially at the core U.S. retail. Last year, Starbucks did a $10 card for $5 with LivingSocial and I'm not acquainted with all the details on these deals, but that seemed at the time, to be a way to nudge the sales higher, after what was a tough June last year. This year, I think you did one with Groupon at the end of March when the retail momentum seems very strong. So, I'm wondering if you are doing things like this maybe more strategically as you are trying to think about broadening that Rewards user base, maybe just what were you thinking with these types of things?

Howard Schultz - Chairman, President and CEO: It's true that the success that we enjoyed with LivingSocial coupled with the learnings that we had in terms of analyzing it, gave us great confidence that during the right time of the year there was an opportunity to do this again. I think the Starbucks brand and the frequency and the relevancy of the Starbucks experience puts us in the unique position to leverage these kinds of opportunities versus a traditional retailer or restaurant. I think you are exactly right, the momentum in this quarter there was no specific need to be a catalyst, but we felt there's no reason to embrace the status quo. We learnt a great deal from LivingSocial so we had planned to do it again. I think that Starbucks is in a unique position in that we are a super-premium brand. You don't have to go to Starbucks as a discretionary purchase, but at the same time we've been able to find ways to provide a value proposition throughout the menu system and take advantage of these kinds of offers. When you couple that with the incrementality that we have gotten from our Rewards program, we have a new level of analytics that we feel is a significant competitive advantage going forward domestically and internationally, and we're now going to apply that to other channels of distributions specifically the grocery. And I want to go back to one question that was asked earlier about, is in fact the other channels is going to be as large as we've said in the past, and no one on this call should doubt whatsoever the commitment we have and the ambition for the multiple channels of distribution to live outside of our stores that will rival the scale of U.S. business. We have an opportunity as we demonstrated with VIA as we've demonstrated with Evolution to introduce product in our stores, create the brand and then draft off that into the grocery channel. These are early, early days but the evidence that we have about what I've just described, coupled with this new level of analytics and the benefit from these loyalty programs gives us great confidence that we have the tools, the resources and the multiple channels of distribution that no other consumer brand or retailer has to do things that have not been done before. And this loyalty program that we're going to into CPG is a significant idea both for the consumer and I also should say for the trade that we have been in close contact with. And I'm stun that no one has asked the question about the CPG opportunity in China. Did you not hear what I said? We are looking at the opportunity to take the CPG business into a largest growing market into the world leveraging the equity of the brand and our 1,000 store retail footprint in China.

Operator: John Ivankoe, JPMorgan.

John Ivankoe - JPMorgan: Howard I will follow-up on that last statement and then another question if I may. How many points of distribution do you think you could have in the CPG market in China, I mean is it like the U.S. in terms of grocery stores I don't know exactly what the numbers are there?

Howard Schultz - Chairman, President and CEO: I think the type of distribution that will ultimately have in Mainland China will be different than the core distribution we have in the U.S. That channel does not have the nationwide grocery businesses. However the demand for Starbucks coffee and coffee products that we had from customers and from people interested on the trade side has been growing and so we believe very strongly that we could take advantage of that and when we look at products like Bottled Frappuccino and the success of Blended Frappuccino in China which has been a significant opportunity for us. We think we can leverage Bottled Frappuccino in the same context that we have done in the U.S. which is $1 billion brand. So this is a big long term idea and its built-off of the unique trust and confidence and relevancy of the Starbucks retail brand in China. And for any of you who've been to Mainland China and seen that the people who are going into our stores in now over 70 cities in China are Chinese nationals who are using our stores in the same way that Starbucks customers have for years in the U.S. they are drinking Starbucks coffee, they are drinking special beverages and they are using stores as an extension of home and work.

John Ivankoe - JPMorgan: If I may, follow-up on a slightly different topic there was I guess some discussion on the last conference call that your early quarter sales, your March quarter sales may have been helped by very high Starbuck card redemptions because of the heavy gifting that happened in the December quarter. so I was hoping that you could kind of comment whether that was the case also comment, I don’t think I saw the number anywhere what the end of quarter March quarter Starbucks card balance was and you are kind of in the side just in case I don’t get cut off, Troy, if there is any way that we can tighten up the coffee cost guidance for '14 and '15, if it's an appropriate venue to do that?

Howard Schultz - Chairman, President and CEO: Well there is no doubt that we got a boost from the sale of Starbucks Holiday Cards following the holiday season. But the one thing that has happened over the course of the time is that the velocity of Starbucks Card sales are much more significant in the off peak holiday season than ever before, coupled with the fact that we now have a significant spike in other smaller holidays, Mother's Day, Father's Day, Graduation, Birthdays and gift giving. So, the card itself is growing at over 30% and we expect that to continue and we're just getting started with it. I think Troy is going to give you the answer to other question.

Troy Alstead - CFO and Chief Administrative Officer: John specifically, we had on the balance sheet at the end of March, at the end of the second quarter, deferred revenue on the P&L of ($668 million). That largely reflects Starbucks Card balances as it does each quarter, and our overall loads during the quarter were 32% higher than the same period of time last year. So, couple of metrics that I think tell you two things. One is the huge uptick in Starbucks Cards in all forms; mobile, physical card and loyalty program in the holiday period very profoundly came through our business in the second quarter. Card overall added roughly 2 percentage points of the comp growth during the second quarter, very powerful for us, and that is like what we've seen over the past couple of years as that program has built tremendously. I think as encouraging as anything is the fact that in the second quarter, not only did we benefit from that big holiday slew of the cards that came back into the store, we also were able to turn many new cards users into loyalty program members that now allows us to enact with them much more meaningfully, and we believe gives us trajectory even more significantly into Q3 and Q4. So the Card was very important to us in the quarter. Now specific to your question about coffee cost we have now purchased a little bit more than our price – a little bit more than half of our coffee needs for fiscal '14. We have been doing some incremental buying given current market conditions, so we've got about half – a little bit more than half of our needs locked up for '14 and given what we've locked as well as the visibility that we have into the market conditions and how we might press for the balance of the year, we expect that as I've told you before about $100 million of commodity tailwind we would expect come through the P&L in fiscal '14. That's the year-over-year benefit in fiscal '14. Now we're not meaningfully priced at all in the fiscal '15 yet, but I would just point out that given where the market has been trading and where we believe it will go from here we've got opportunity in fiscal '15 another year-over-year commodity tailwind, not a specific number yet but it could be a meaningful tailwind coming our way again in fiscal '15.

Operator: Mitch Speiser, Buckingham Research.

Mitch Speiser - Buckingham Research: My question is on the food program in general in the U.S. and a couple of parts to the question. First, have the same-store sales continue to grow quicker in food versus the overall business? Separately I sometimes get the pushback where that food is a lower margin product, so as it grows it can hurt margins, but is the offset a higher ticket and kind of how that works? Then the last part of the food question, is just on the health and wellness and the bakery product looks great I want to consider it under the umbrella of health and wellness, if you can maybe give us a little sense of where you might going with health and wellness in the Starbuck stores? Thank you.

Cliff Burrows - President, Americas: Firstly, we are seeing strong continued growth from food, and that has been the case now from the past 12 months. So, really we are putting very strong growth in food in the U.S. Obviously, overall it's a balance between food and beverage which is very important to us. On the margin I think the – we are getting healthy margins out of our food. The opportunity here is if we can increase attach, which historically has been one in three transactions, vacancy is a big opportunity. The other side it increases the relevance of Starbucks as the place for people to come to whether it's food on the way to work or indeed for their lunch. So, we see that continuing and we will support increased beverage sales throughout the dayparts as well. So, that is part of our strategy on food. If I talk about the health and wellness as it relates to a new bakery products, the fantastic thing with those new bakery products is they all natural ingredients while we are taking out any non-artificial ingredients, we use natural sweetening that’s where we can reduce sugar. So, when there is buffering there, finest ingredients calories are managed both by the balance of those ingredients plus portion size. So, that is a good part of it and health and wellness remains an important part of our strategy going forward, and you will see in the coming month that we will supplement La Boulange products with other products which will give that balance. It's important to us for both food and for better customer choice and in all parts of our range of beveraging food to give healthy options.

Howard Schultz - Chairman, President and CEO: And I'd like to just underscore Cliff's point about margins. While food has a lower gross margin than does our beverage platform, on a net margin level, so at the store level, food is actually additive to margin we would expect over time. The reason for that is if we're selling incremental food and as we will be increasingly successful, we believe that increasing mix of food in our stores. The rent is already paid, the lights are on, staff is in place, our partners are in the stores, so we have an opportunity to very incrementally, perhaps see that impact of gross margin very moderately, but I would expect it to be neutral to most likely positive to margin at the store level.

Operator: Joseph Buckley, Bank of America Merrill Lynch.

Joseph Buckley - Bank of America Merrill Lynch: Just a question on the China Asia-Pacific operating income performance for the quarter being flat. I know you mentioned making investment in the platform to grow the business, but could you talk a little bit about that for the quarter and what we should – how should we think about that going forward?

John Culver - President, Starbucks Coffee International: Joe, this is John Culver. With regards to the operating income and the impact that we saw when you look at on a year-over-year basis, there are really three things. First was, the portfolio mix shift that – fact that more and more of our growth is coming from our company-operated markets, and in particular China. So, in the quarter, as Troy mentioned, we grew store count 35% on a year-over-year basis. The second big item that hit us was this non-routine income and Troy quoted that at $6.7 million. That was the joint venture income that we took last year in the quarter…

Operator: Ladies and gentlemen this is the operator I apologize but there is a slight delay in today's conference, please hold and the conference will resume momentarily. Thank you for your patience.

Howard Schultz - Chairman, President and CEO: This is Starbucks. We're back on the call operator.

Operator: Your line is open.

Howard Schultz - Chairman, President and CEO: Do you have a question?

Joseph Buckley - Bank of America Merrill Lynch: This is Joe Buckley, I don't think if you can hear me, we can hear you but I cutoff.

Howard Schultz - Chairman, President and CEO: John, you want to take a shot to that?

John Culver - President, Starbucks Coffee International: So, with regards to the operating income and what we saw in the quarter, there are really three factors playing into it. First, with the portfolio mix shift and the fact that more and more of our growth is coming from our company owned markets. The second big piece was the investment that we continue to make in accelerating new store growth. And as Troy shared with you we grew our new store base over 35% on the same time while we make those investments we continue to see very strong returns here from a sales to investment ratio. And those metrics continue to exceed our expectations. And then the last big item which was a non-routine item was this some joint venture income that we have to laugh over from last year. It was accounting adjustment that took place last year. It was a $6.7 million. Accounting adjustment in the quarter and that was the other big non-routine item that we have to laugh over for the year.

Operator: Matthew DiFrisco, Lazard Capital Markets.

Howard Schultz - Chairman, President and CEO: You want to rephrase it, maybe I can get the answer.

Joseph Buckley - Bank of America Merrill Lynch: The only other side of that just being if you are seeing a nice improvement or at least seeing some impact there…

Operator: Brian Bittner, Oppenheimer.

Michael Tamas - Oppenheimer: This is (Mike Tamas) on for Brian. Can you just one of you talk about the consumer habits a little bit that you are seeing for people that aren't using the Starbucks cards. I thought I heard something mentioned about those users purchasing premium beverages and the like. So I'm just wondering kind of what the spending habits look like when people aren’t using the preloaded money?

Cliff Burrows - President, Americas: I'll try and answer that Mike. What we were trying to convey was that we were seeing incrementality in terms of the afternoon daypart from our cardholders and also we were seeing an increase in their purchasing of the indulgence beverages. We were not making – and I certainly didn’t intend to make any inference about changing habits of customers who pay by other means – and there remained a majority of our customers and they remain very consistent in their habits.

JoAnn DeGrande - IR: Thank you very much for joining us today for our second quarter earnings call. We appreciate your time and we will talk to you again at our Q3 call in July. Thank you. Have a good day.

Operator: This concludes today's Starbucks Coffee Company's second quarter fiscal year 2013 earnings conference call. You may now disconnect.