Fiscal 2009 Guidance:
- As a baseline for its fiscal 2009 non-GAAP EPS expectations, the company is using fiscal 2008 consolidated comparable store sales of negative three percent and non-GAAP EPS of 71 cents.
- In addition, non-GAAP EPS for fiscal 2009 excludes up to an estimated 12 cents in lease exit costs associated with the fiscal 2008 U.S. and Australia store closure decisions.
- The management believes that if they were to report a 2% decline in consolidated comparable store sales in fiscal 2009, the company would deliver GAAP EPS of about 78 cents, or non-GAAP EPS of approximately 90 cents.
- Assuming the current environment worsens, the company believes even a 5% decrease in consolidated comparable store sales would result in GAAP EPS of approximately 68 cents, or non-GAAP EPS of around 80 cents.
- In the event of further deterioration in consumer spending and its associated impact on traffic, management believes a seven percent decline in consolidated same store sales would lead to GAAP EPS of approximately 59 cents, or non-GAAP EPS relatively flat year-over-year.
- Both GAAP and non-GAAP EPS estimates factor in a range of $200 million to $210 million in pretax positive benefit, or 17 cents to 18 cents of EPS, from the U.S. company-operated store closures, restructuring of the Australia market and cost savings from the leadership and non-store organization changes.
- In addition to lease exit costs, the first quarter will also be impacted by significant investment in field organization through the leadership conference in late October.
- The first quarter 2009 is expected to be the toughest comparable period year-over-year.
- The company’s 2009 U.S. store opening target is now approximately a negative 20 net new stores, which includes a nearly 225 company-operated store decline and approximately 205 net new licensed stores.
- Internationally, Starbucks is now planning to open approximately 700 net new stores in fiscal 2009, two-thirds of which are expected to be licensed, as it factors in the current global economic climate, with a more cautious approach in the UK and Western Europe.
- The company’s outlook for CapEx in fiscal 2009 has been further reduced to approximately $700 million.
- This is a reflection of lower store opening targets for its International segment.
Key questions and answers from the fourth quarter fiscal 2008 earnings call conducted by Starbucks on November 10, 2008.
Steven Kron (Goldman Sachs): Concerning the guidance, you are implying that despite a negative 2% comp and backing out the 18 cents from the transformational strategies that you’re still not going to see deleverage in the model. Are your benefits that will offset the negative 2% comp deleveraging going to accrue from store and supply chain efficiencies?
Troy Alstead: So far, we’ve not seen in these early weeks of the first quarter a deterioration of comps which is what we are think we’re hearing from any other premium brands and retailers. We’ve seen some optimistic movements from days to days, nothing to predict a trend yet but that’s been encouraging so far to us and we’ve not seen that deterioration so that’s our specific comment about Q1 comps so far.
Then with respect to how we’re going to do it in 2009, it is a wide ranging set of things around efficiencies at our store level but not only there, all throughout our supply chain, procurement, our distribution networks. In the stores it’s a number of things from waste management to lean efforts within our stores to how we lay out the bar so the efforts are easier for partners. It’s an entire range of things that are underway today some of which we’re already beginning to see the fruits of, some which will pay out as we continue to focus on them throughout the year.
Throughout the year this leadership team has taken the actions around the transformation agenda some of which were one time efforts to readjust our cost structure to where it needs to be but one of the benefits coming in to 2009 that we continue to focus on is a relentless pursuit of doing everything we do better and that’s at the store level and it’s in our supply chain, it’s in the support center building and you’ll see that in a highly focused leadership team. As we go through this year that’s the new spirit, the new process and the new set of systems we have in place.
Lawrence Miller (RBC Capital Markets): The tickets were down 3% and you talked about music and equipment driving that. What might that mean as we head in to the holiday season?
Howard Schultz: Personally, I’ve been more focused on the transaction and the traffic number than the overall comp especially in Q4. It was somewhat artificial as it relates to comparing it to a year ago. The music business has been significantly downsized and we also had a fairly robust brewing sale in Q4 a year ago which we didn’t have this year.
In terms of on a go forward basis, what we’ve done for holiday is we completely revamped all of the holiday merchandise to reflect price points that we thought would be perceived as tremendous value for our customers. The overall price points in holiday merchandise on the hard good side have a lower ticket price than a year ago with virtually the same margins.
We’re in a good position to execute against holiday with the same level of retained gross margin and there could be some attrition on ticket. However, to offset that we are seeing a higher level of attachment on food to those people who have been buying beverages because of the success of oatmeal and the other healthy products.
Matthew Difrisco (Oppenheimer & Co.): Are 20% of your cap ex going towards your remodels? Can you talk about some of the things that are included in that?
Troy Alstead: There’s a routine remodel program that we have in our store base as stores reach the five year market and generally the 10 year mark and those remodels are about refreshing the stores. It’s actually for the most part built in to our initial pro forma for each store that we build is an assumption that we will spend capital roughly at the five year market and again at the 10 year mark to renovate the store, to refresh it, to bring it to our current standards.
Thus what you see over the last year and in to 2009 are some increase of that which is just to a large extent a natural aging of the store population.
Peter Bocian: The other this is that previously, we have had two buckets around store cap ex. We said it’s either new or its renovation. What we tried to do is break out where we’re actually investing in equipment for the store.
John Glass (Morgan Stanley): Two quarters ago you thought you could earn 90 cents with 2% or 3% positive comps. Now, you say you can earn that amount with -2% or -3% comps. Can you provide more detail on that position?
Howard Schultz: It’s important to take a step back and understand the entire year with regard to transforming the company. Much of that has been an assault and focus on things that we have not looked at in the past and that was at the growth of the company and success and double digit comps in a sense covered up these things and gave us the air cover not to have to address it or not to address it as intently and disciplined as we’ve had now.
The discipline, the focus and the relentless pursuit of efficiency and saving money at the backend, those things that are not consumer facing has given us the encouragement and the optimism to make the statements we’ve made today.
Peter Bocian: At the last call at Q3 we were talking about the 90 cents to $1 and needing two to three points of positive comps to get to that and thus it wasn’t the 90 cents but it was more the middle of the range. However, it’s correct to recognize that we’ve gone after more costs than was there in Q3 and that covers in store operations, supply chain, procurement, store development based on a new international store number, etc. We have gone after more costs around re-architecting since we talked to you last at the end of Q3.
Howard Schultz: We did that with the anticipation that we began to believe that fiscal and calendar 2009 would be at least as bad in terms of the economic pressure and the consumer confidence and we had to do things before the year ended to put us in a position to win in 2009 and that’s what we’ve done.
David Tarantino (Robert W. Baird & Co., Inc.): Could you talk about the marketing and advertising opportunity? Given the success of the recent Election Day promotion, are you looking at becoming more aggressive on media advertising as a means to drive traffic going forward?
Howard Schultz: We have not been traditionally a spender of classic marketing and consumer facing activities that have been associated with most consumer brands. We did something last week that is very interesting to try and get underneath and understand with the question of how you leverage this on a go forward basis.
What it showed was that we were able to make a very small relative investment in terms of buying a spot on national TV and running it once and leveraging new media, the digital world, the viral community, the blogosphere and PR in a way that really very few brands can do. However because of the cultural relevance of Starbucks on national footprint and the fact that we were part of the national dialog on Election Day gave us an opportunity to do that.
We drove significant incremental traffic in to our stores with impressions on a day that was really valuable to us because of Thanksgiving coffee and the launch of Gold Card. We believe that there are other opportunities to do that. I don’t think we want to milk it but we want to be very disciplined and thoughtful about it. Then, at the same time in view of the economy and consumer confidence, we want to be extremely thoughtful about how we’re going to spend marketing dollars on a go forward basis.
In this environment, the rules of engagement no longer apply and what I mean by that specifically is I think our number one activity has to be to maintain our core customers and ignite our base and with Gold Card and that kind of promotion and the things we’re doing around value, we’ve been able to that. When you look at the way which our brand sits today, the relevancy of the sense of community that we have in our stores, that really did resonate with our customers and the public at large and we’ll look at other opportunities to do that. It was very clever, very smart and very cost efficient.
Joseph Buckley (Banc of America Securities): Starbucks Gold was off to such a great start. Does that make you nervous that you’re selling it to your best customers and then in effect discounting to your best customers?
Howard Schultz: In many ways fiscal 2008 was a year of learning with regard to value and value testing and driving a number of regional tests in different markets. In those tests we came away with the conclusion that if we provide unique value to our customers that really resonate with them, we will see a higher degree of frequency and perhaps even a higher average ticket.
This is an opportunity for us to reward loyal customers. It’s a great opportunity between now and the first of the year for this to be a fantastic valued gift because the research strongly suggests that a gift card of Starbucks, whatever face value it has, has a much higher value in terms of the connotation of the recipient.
I believe between that and the millions of cards that we’ve sold to Costco, will drive traffic in to our stores at a time when the cost of acquiring a customer for others is much higher than the cost of acquiring a customer in this kind of thing that we’re doing with both the Gold Card and Costco for us.
Lastly, what we’ve always seen as a result of the gift card and we believe we’ll see it in spades with both the Costco gift card and the Gold Card, is an annuity that comes after the first of the year which will bode well for calendar 2009.
John Ivankoe (J.P. Morgan): In your comments you talked about the 270 basis point decline on the COS side in the US and much of that due to inventory write down. Could you quantify that in both Q4 and the full year 2008 and whether you think any of that will recur in 2009?
Peter Bocian: We tried to break out as much as possible the movements within the company. When you think of the inventory adjustments, they would not be expected to recur. When you talk about the espresso excellence standards, we learned in 2008 so we introduced it, we implemented it but we’re going to go back in store operations and find a more cost effective way to deliver the same standard.
The last point was really around the introduction of the new platforms in the quarter. We will get better at some of the new platforms relative to procurement and cost of sales going forward on some of the beverage innovations we saw.
It’s all baked in to what was described relative to the sensitivities of EPS that we think we can achieve. Probably the only unique one is the inventory adjustments. The other ones we’re working on as part of our improvement plan to deliver better operating margin in 2009.
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