It is intent on best managing plans to match demand, scaling back openings, and rigorously managing expenditures in all areas where they are not critical to the mission.

- At the same time, it will continue to innovate and invest in those areas that preserve and reinvigorate the uniqueness of the Starbucks Experience through the transformation agenda.
- Like most other retailers and restaurants, the firm is experiencing a down-turn in customer traffic, demonstrated in reduced frequency of customer visits that ties to a real reduction in consumers’ discretionary spending habits.

Update on the Transformation Agenda:

- The first action outlined in the Transformation Agenda is slowing the pace of U.S. store openings by lowering the U.S. net new store opening target by around 425 stores in this fiscal year.
- In this respect, the firm has taken down the store opening target even further, including the reduction of an additional 30 company-operated stores and over 125 licensed stores from the fiscal 2008 opening target.
- We now expect to open around 1,020 net new stores in fiscal 2008 in the U.S, down from the nearly 1,800 stores opened in the prior year.

The firm has also reduced the U.S. store opening target for fiscal 2009, down to 250 net new company-operated stores, demonstrating commitment to optimize resources and reduce potential cannibalization of existing stores.

- In February, the firm carried out the espresso excellence training, which demonstrated commitment to partner engagement and training, and to improve the customer experience.
- Several other important initiatives include the new everyday brewed coffee, Pike Place Roast, designed to provide customers with a unique, consistent fresh-brewed coffee experience.
- Starbucks returned to the practice of grinding whole beans in the stores and brewing coffee every 30 minutes to provide customers with the freshest coffee possible.

The technical advancement of Mastrena gives the firm a three- to five-year leap ahead of others in terms of the quality and precision of every espresso shot made.

- In addition to elevating the quality of the beverages, the Mastrena also has a low physical profile, enabling people to visually connect with customers.
- By the end of 2008, more than 30% of U.S. company-operated stores will have the new machine and 75% will have it by the end of 2010 and new international stores will receive the Mastrena starting this summer.
- The firm also acquired the Coffee Equipment Company and its revolutionary Clover Brewing System.

Starbucks introduced the first phase of the Starbucks Card Rewards program in which it will continue to explore ways in which it enhances the Starbucks experience using this platform to create rewards.

- It introduced MyStarbucksIdea.com, a dynamic online community that allows it to deepen the relationship with customers beyond the doors of the stores and cultivate ideas directly from this valuable group of people.
- As part of the next phase of transformation initiatives, the firm is focusing specifically on the cold and blended categories, and this summer there will be a significant amount of product innovation through three new beverage platforms.
- The firm is leveraging the assets of the JV partnership with Pepsi-Cola to expand the successful Starbucks DoubleShot platform across multiple channels to bring to the market Starbucks Doubleshot and energy beverages in the retail stores.

The coffee company is committed to the Health and Wellness category and see this as an important long-term growth driver for the company.

- This summer, the firm will make the first significant step forward into this category with the introduction of a Health and Wellness beverage platform.
- Through its own extensive research and development, it believes it has hit the mark with the protein and fruit-blended beverage it has developed, which is made from simple ingredients that provide the benefit of sustained energy that customers want.
- It is also developing an exclusive, proprietary product through a partnership with an Italian supplier and represents a brand new category of beverage, which is both refreshing, low calorie, and indulgent at the same time.
- The firm took a decision to refine the entertainment strategy and restructure the entertainment business to focus on digital strategy and core content with music and books.

Long Range Plans:

- As it relates to the investment in stores, the firm plans to reduce the number of net new store openings in the U.S. over the three-year period, to less than 400 stores per year, with approximately 250 company-operated stores opening in each period.
- Over the three-year period, it will open a total of 1200 stores, with the goal to make these the “best of the best” opportunities.
- It plans to continue accelerating the unit growth in the international business, with net new store opening targets of 1,050 in 2009, 1,150 in 2010, and 1,300 in 2011.
- The mix of licensed stores to increase in international, with about 65% licensed over the three-year period.

Factoring in the lower 2008 store target for the U.S., total store count at the end of 2011 will be about 21,500 stores, with stores in the international markets growing from about 30% of the total store portfolio today, to over 40% in 2011.

- The firm is targeting international revenue to grow at a compound annual growth rate of 20% for the three-year period, driven by new store openings and continued growth in existing stores.
- The Consumer Products Group is expected to grow at least 15% per year through product and channel expansion.

The U.S. segment is expected to continue to grow but at a significantly slower pace, in line with the slowing of new store openings and more conservative expectations of same store sales growth.

- In 2011, total company revenues are expected to be just over $14 billion, which is a 10% three-year compound annual growth rate, with growth in 2009 expected higher than the 10%, and then moderating slightly over the three-year period.
- For fiscal 2011, EPS is expected to be in the range of $1.35 to $1.50, for fiscal 2010, the firm anticipates EPS in the range of a $1.10 to $1.20 and in 2009, it is targeting an EPS range of 90 cents to $1.00.

Fiscal 2008 Outlook:

- The firm has lowered the U.S. store opening target to 1,020 net new stores, down from 1,788 stores in 2007, and from the target of 1,175 communicated in January.
- The break-out of the stores is expected to be about 620 company-operated and 400 licensed.
- It still expects capital expenditures to be about $1.1 billion for the year, with the reduction in new store investment being offset by investments in innovation.
- Consolidated revenue growth of 13% to 14% for the year is expected, with year-to-date revenue growth at 15%.
- EPS would be somewhat lower than the 87 cents reported in fiscal 2007.

Key questions and answers from the second quarter earnings call conducted by Starbucks Corp. (SBUX: chart) on April 30, 2008.

John Glass (Morgan Stanley): On your long-term earnings outlook, can break down operating profit growth and what the buy-back contribution is?