Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to Starbucks Coffee Company’s Second Quarter Fiscal Year 2014 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.

(Operator Instructions) Thank you. Ms. DeGrande, you may begin your conference..

Thank you, Mike. Good afternoon. This is JoAnn DeGrande, Vice President of Investor Relations for Starbucks Coffee Company. Joining me on the call today to discuss our second quarter results are Howard Schultz, Chairman, President and CEO; Troy Alstead, COO; and Scott Maw, CFO. Also joining us for Q&A are Cliff Burrows, Group President, U.S.

and Americas; John Culver, Group President, China, Asia Pacific and Channel Development; and Adam Brotman, Chief Digital Officer. 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 be available on our website at investor.starbucks.com. Before I turn the call over to Howard, I would like to announce the date of our next biennial analyst conference. That would be December 4 of this year.

And although we are in the early planning stages and we’ll not be formally sending out invitations soon, it is important to note that we will be hosting this event in our home market, Seattle. We hope you’ll be able to join us for the first conference in Seattle since 2006. I would now like to turn the call over to Howard Schultz.

Howard?.

Thank you, JoAnn, and welcome to everyone on today’s call. I’m very pleased to comment on the record second quarter results that Starbucks announced today, and to provide detail around several exciting new initiatives we have underway.

Q1’s momentum continued in Q2 with each of our retail segments around the world contributing positively to global comps for sales increase of 6% representing our 17th consecutive quarter of comp growth of 5% or greater and record Q2 revenues of $2.9 billion.

Particularly noteworthy was a 7% comp increase delivered by our China and Asia Pacific segment, and 6% comp increase delivered by our EMEA segment. The strongest comp growth in EMEA in 14 quarters.

EMEA’s performance in Q2 provides powerful evidence of the success of our continuing efforts to transform that important region, where we currently operate 2,065 stores and to position EMEA to resume delivering revenue growth and operating profitable new stores fulfilling the commitment we made on prior calls.

Record revenues combined with reduced operating costs to drive 130 basis point increase in consolidated operating margins to 16.6% enabling us to deliver an 18.4% or $100 million increase in operating income to $644 million and a 17% increase in earnings per share, after excluding last year’s non-recurring gain to a Q2 record of $0.56 per share.

In January, I shared with you our new senior leadership organizational structure. Central to the new structure is Troy Alstead’s promotion to Chief Operating Officer.

Today, Troy is focused on day to day execution and operational excellence across Starbucks business, providing me with the additional time to focus on driving faster and profitable growth and go over to more disruptive innovation across our company in around the world.

I’ll provide you with a preview of what to expect from us in the quarters ahead and then turn the call over to Troy and Scott Maw, our new CFO to take you through our Q2 operating and financial results in detail.

Over the last several years, we have further honed our best-in-class retail site selections, store development and design and construction expertise. That’s evidence of that fact is the tremendous success of our new store class. Sales to investment ratios of over 2 to 1.

Return on investment in excess of 50% and first year average unit volumes of over $1.2 million, all while delivering an enhanced experience to our customers. Several years ago, we saw an opportunity to reinvent the traditional QSR drive-through format.

And as a result, our new class of drive-through stores are providing Starbucks with a unique ability to the increasing numbers of our customers on the go. Highly profitable drive-through represent a significant growth opportunity for us and continue to remain a focal point of our store development efforts.

And with this tremendous success of our recently introduced award winning design drive-through only stores with walk-up windows, we are leveraging our drive-through store portfolio to provide further incrementality and add new runway for growth at a strategically complementary to our high profile urban street front locations.

Despite currently operating over 20,000 Starbucks stores in 64 countries, our research clearly demonstrates that Starbucks still accounts for very small share of total global coffee occasions and that we are significantly under-stored in many markets, including North America, China, Brazil and India, today our fastest growing international markets.

Over the months and quarters ahead, you will see us execute against the disciplined, highly targeted retail store development and rollout programs. Turning to coffee and tea.

Coffee will always be at our core and we are making significant investments across our business, including building our supply chain capabilities and elevating an operating standards to ensure that we continue to innovate and provide global thought leadership and undisputed authority of coffee quality sourcing and roasting.

At the same time as we have previously mentioned, we recently purchased our first operating coffee farm in Costa Rica and opened our seventh agronomy and farmer support center, this one in Ethiopia.

As I said in the past, tea is the most consumed beverage on earth behind water, and represents a $90 billion global category that we strongly believe is right to innovation and it represents an enormous global opportunity to Starbucks. And we are seizing that opportunity with Teavana.

Teavana’s sources and offers consumed as the highest quality of state teas available anywhere in the world. By summer, Starbucks customers will be able to sample and experience the whole range of Teavana branded handcrafted tea beverages loose-leaf teas and tea merchandize inside their local Starbucks store.

At the same time, we are putting a whole power of Starbucks digital, mobile, social and rewards programs against all the assets we have against the Teavana brand, affording us the unique ability to target and connect with consumers, providing us with an unparallel competitive advantage in the marketplace.

Following the opening of our Teavana Tea Bars in New York and Seattle, we’ll be expanding the concept to Chicago, Los Angeles and additional locations in New York City in the months ahead. And that does not nearly all. Last month, we announced one-of-a-kind partnership with Oprah Winfrey.

And starting this time in Tuesday supported by a comprehensive national advertising and marketing campaign, specially blended Teavana Oprah Chai will be available in Starbucks and Teavana stores across the U.S. and Canada, enabling us to further leverage and elevate Teavana brand.

Importantly for every Teavana Oprah Chai tea beverage or product sold, the donation will be made to the Oprah Winfrey Leadership Academy Foundation to benefit educational opportunities for youth, a program we at Starbucks could not be more excited about supporting.

In the months and quarters ahead, you will see firsthand of Starbucks will disruptive tea categories in ways large and small that will be reminiscence of how we change the coffee category. At the same time as we extend our coffee leadership and authority all over the world.

Customized beverage innovation continues to be a core strength of our company, and an area of a great interest to our customers.

We have a fantastic line up of cold, refreshing beverages ready for our customers as the warm weather arrives, with many markets experiencing Fizzio, Starbucks’ new platform of handcrafted cold carbonated beverages for the very first time. Last summer, we’ve tested Fizzio in select markets in the U.S. and Asia.

And following the overwhelming success of those tests, we will be rolling Fizzio out to 3,000 stores across the U.S. sunbelt, in Singapore, Korea and several cities in China this summer. We are launching the Fizzio brand with three fantastic flavors, Ginger Ale, Spiced Root Beer and Lemon Ale.

We’ll be adding additional locally relevant flavors as the summer progresses.

Fizzio combines the healthy all natural, preservative-free alternatives to sugar filled sodas with a theater of a custom handcrafted beverage that I am convinced will be a big hit with consumers and drive traffic and incrementality during the key afternoon daypart, just as it did in the test markets last summer.

Last quarter, we called your attention to a seismic shift in consumer behavior and migration from bricks and mortar retailing to the web and e-commerce.

While many retailers including many food and beverage QSRs continue to grapple with on how to navigate these shifts, Starbucks’ record Q2 results unequivocally demonstrates of the investments we began making years ago to create the world’s premier portfolio of digital, social and mobile technology assets are paying off and in a very big way.

Our integrated gift card, loyalty, social and mobile platform is bar none the largest and most successful in the world. Consider these metrics. Today, the Starbucks Card program is available in 28 countries. Card transactions now account for over one-third of all transactions in the U.S. and Canada stores.

Over 10 million Starbucks customers are actively using our mobile app, twice the number from only a year ago, and mobile payments now account for over 14% of tender in our company-operated stores in U.S. and Canada, rising 75% from just a year ago.

Over eight million active My Starbucks Rewards members are earning rewards in the form of stars with purchases, representing 25% of all transactions in our U.S. company-operated stores. And our first of its kind cross-channel Stars Down the Aisle program has awarded more than five million stars to customers purchasing packaged coffee at U.S.

grocery stores since the program debuted last July, demonstrating the value and the early stage opportunity of what we are calling stars as currency. Together, our best-in-class card, loyalty and mobile apps has enabled us to deepen our connection to our customers and create further separation from competitors.

More than that, we believe that to be successful today, a pure play bricks and mortar consumer retailer must create a high degree of mobile, social and digital engagement, and develop a seamless relationship with customers.

We further believe that accelerating global adoption of smartphones and mobile technologies in general will continue to transform and evolve the retail landscape in areas of payment, loyalty and consumer experiences in years to come and ways of just a year ago, we probably could not conceive of.

Today, as the retail industry’s unquestioned leader in mobile payment and mobile loyalty, we are uniquely positioned to leverage our digital leadership and to both, develop and monetize new platforms, revenue streams and opportunities for growth in ways that will be highly complementary to our existing core business and our customer base.

By way of example, major tech companies and retailers have recently begun inquiring about whether or not Starbucks would be willing to license and/or white label our technology and mobile platforms.

We are taking a very thoughtful and disciplined approach as we consider these overtones in what we believe will ultimately prove to be a very significant additional driver of long-term shareholder value. You’ll be hearing much more about our plans around mobile, digital and royalty in the months and quarters ahead.

Let me close by underscoring that despite our size and scope, the Starbucks brand and business is still in the very early stages of its growth and development.

The day to day management that our senior leadership team is providing the organization is framing up to the lead the company into and through the tremendously exciting next phase of breakthrough innovation and acceleration. Mobile growth lies ahead in ways that possibly you probably could not believe just a few years ago.

And I strongly believe unequivocally that there has never been a better and more exciting time to be a Starbucks partner. With that, I’ll turn the call over to Troy..

Thank you, Howard, and good afternoon, everyone. Our record second quarter was the outcome of a continued strong effort of each of our four reported segments.

Our business remains extremely healthy and poised for continued growth with all retail regions growing revenue at rates faster than the industry and the channel development business just beginning at top line acceleration. I’ll spend the next few minutes discussing the performance of these businesses.

Then, I’ll turn it over to Scott for a discussion of our consolidated results, segment margins and our outlook for the balance of the year. Let me start with the Americas segment, which delivered another quarter of solid results in a persistently difficult retail environment.

Total net revenues in the Americas grew to $2.8 billion in Q2, up 8% over the prior year. The largest driver of our revenue increase was the strong comp growth of 6%, with 3% coming from ticket growth and increased traffic contributing 2%. Encouragingly, both traffic and ticket growth accelerated throughout the quarter.

This combined with a healthy pipeline of innovation ready to get our stores into Q3, gives us great optimism for the back half of the year. One key component for our momentum is food. With food attached to only about one-third of U.S.

transactions, elevating our food programs to the level of our coffee excellence represents both a top priority and significant business opportunity for us and we’re making great headway. La Boulange has significantly improved the quality of our bakery offerings, and now in 6,000 U.S.

company-operated stores and another 2,500 licensed stores is driving results as well, up in the food category contribute two points of comp growth in the second quarter.

We continue to make enhancements throughout the line up, and as a result as we expand to new cities and leverage the operational earnings from those before, we see stronger results after launch. We remain on track to complete the bakery rollout across all U.S. company-operated stores before the end of September.

And thanks to the strong results that demanded from our licensees, we will complete the rollout across all U.S. licensed stores this year as well. As is our successful breakfast sandwich offerings which we launched nationwide in March 4 and have already lifted sales of those products by nearly 50%.

As our bakery rollout completes, we’ll turn our attention to food and another dayparts including lunch. We have significantly advanced our lunch program of bistro boxes, paninis and salads over the past few years, but there is a much larger price here and we’re ready to go after it.

We began testing different lunch options and are narrowing our focus to the best performance best on the results thus far. To ensure we have the right products rolling to our customers and to the dayparts and to ensure strong execution when we’re ready to roll out the new lunch program, we will deliberately do the test with a strong purpose.

And as we rollout our enhanced lunch program next year, complemented by a diverse beverage line up including Teavana tea and handcrafted sodas, we absolutely believe Starbucks grows across the U.S. will increasingly be seen as a destination for quick, delicious and high-quality lunch.

Now let me wrap up this discussion of food by saying very clearly that food is a huge opportunity and future growth driver, and we are already seeing very clear and tangible success as we roll the program throughout our stores.

Specifically food was the single largest incremental driver of comp growth in the second quarter, and food attaches clearly and consistently higher after the launch of La Boulange in the market. Most importantly, we’re delighting our customers in new ways with amazing food and we’ll continue to elevate the food experiences across all dayparts.

Speaking of dayparts, I will now talk briefly about what is becoming another opportunity for us going forward and that is our Evenings program. We have tested the Evenings program for the past few years in selected stores across several markets with great results.

The Evenings food offerings combined with beverages including wine and beer, drive a meaningful increase in sales during that time of the day, which has opened up to us an entirely new opportunity to provide great experiences to our customers and to drive incremental sales and profitability to the stores.

Based on these results, we are no longer testing Evenings. We’re now moving forward with the rollout of the program in a disciplined way over multiple years. Ultimately I would expect certainly greater than 1,000 stores across the U.S. to have an Evenings offering.

Our average ticket grew 3% in Q2 as I mentioned food was a driver, as was favorable beverage mix and pricing. Both limited time and new core beverage offerings continue to resonate with our customers. Our winter and spring promotion featured Caramel Flan, which delivered growth even over last year’s tremendously successful Vanilla Spice promotion.

And the introduction of Vanilla Macchiato was very low received, delivering incremental transactions at a higher price point. Additionally, we’re just beginning to leverage our vast My Starbucks Rewards member base to deliver meaningful marketing and promotions to the right person at the right time.

While the absolute number of offers we’re sending is increasing, each one is going to smaller, more precisely segmented sets of members.

The effectiveness is that our members receive offers relevant to them and want to take advantage of, as our membership base and our intelligence in this area grows, this will be an important tool to increase customer frequency and improve already strong retention.

We continue to be pleased with the growth of our licensed stores in the Americas as well. We drove double-digit revenue growth in our Americas licensed store business, fueled by strong comp growth in grocery stores as well as our Latin America markets. Moving now to EMEA where our momentum continues to build with each quarter.

Q2 was outstanding in every way, in what is our seasonally softest quarter, revenue growth at its highest rate in two years, comp growth at its highest rate in three years and profitability more than tripling over last Q2.

Revenue growth in the EMEA of 13% to $310 million was a function of favorable foreign currency exchange, strong comp growth and strong license store growth. Comp growth of 6% was driven by 5% less than transactions and 1% rise in average ticket. And we continue to show strong improvement across the region, especially in the U.K.

where a deep focus on operational excellence continues and results are very evident especially during the morning peak. The improved product line up is also contributed, bolstered by the now complete upgrade of the breakfast program.

The shift to higher quality offerings as well as the addition of certain healthier options has been well received, and certainly a continually improving economic climate in the U.K. is also contributing. As good as our company-operated growth was in EMEA in Q2, licensed store growth was even stronger.

The Middle East continues to outperform the comp growth in double-digits, while excellent results continued from Russia and Turkey among others. The strong performance in these markets supports our licensed focus of growth strategy in the region, were today nearly 60% of our stores are licensed, up nearly 5 percentage points from just a year ago.

In China and Asia Pacific, the continuity of high margin growth fuels our long-term aspirations to this dynamic region. CAP total net revenues grew 24% to $265 million in Q2. This is the 14th consecutive quarter of revenue growth in excess of 20%. In fact in 2010, the first year we recorded CAP as a separate region, revenues totaled only $410 million.

Now in 2014, we are well on our way to exceeding $1 billion in annual revenue. It is an impressive growth trajectory for a tremendous market and a testament to the passion of our partners throughout Asia to deliver a fantastic startup experience day-in and day-out. Our future in CAP remains extremely bright.

The largest driver of our Q2 revenue growth was from new stores, which totaled 174 net in the quarter to nearly 700 for the past 12 months. These new stores are delivering outstanding first year sales and generating strong first year profitability.

And the welcoming sophisticated new store designs are enhancing our already strong brand reputation in the region, and trying to trial new customers. Our existing stores are also driving delivering 7% comp growth in Q2, all as a result of increased traffic.

This included a sharp decline in comp growth in Thailand where the impact on the consumer from political instability weighed on the previously strong traffic trends. China grew even faster than the region evolved and accelerated over the first quarter, with low balance contributions from seasonal promotions, core beverages, tea and food.

Finally, let me touch on our channel development business, which again contributed nicely to our record Q2 performance and is triumphed for strong second half of fiscal ‘14. Revenues of $370 million represented 10% growth in Q2, in line with our previous guidance accelerated throughout the year.

Our diverse premium single cup portfolio was again the largest driver of revenue growth. We continue to gain share of the K-Cup market, experiencing 33% growth in dollar sales for the quarter than U.S. food, drug and mass channels.

And our recently amended agreement with Keurig Green Mountain will help drive additional future growth and profitability from this platform. We are nearing the anniversary of the May 2013 price reduction taken on packaged Coffee.

Encouragingly, we reached 10% revenue growth in Q2 even with this headwind, as that pricing effect normalizes in the second half of fiscal year and as we continue to innovate in this space, we see packaged coffee as another growth driver that will sustain channel developments double-digit revenue growth.

Now, I’m going to turn the call over to our new CFO, Scott Maw, to take you through consolidated results and targets for the full year.

Scott?.

Thanks, Troy, and good afternoon, everyone. I am pleased to join you on my first quarterly earnings call as CFO. It was an outstanding quarter as our global operations continued to produce record breaking results. We delivered comp growth in the heart of our target range. We over-delivered against our earnings per share target.

We also set Q2 records for revenue, earnings, operating margin and operating cash flow. And we returned nearly $0.5 billion to shareholders through dividends and share repurchase. At the same time, we invested back into the business including the addition of 335 net new stores globally, and by introducing La Boulange to over 3,300 U.S.

company-operated and licensed stores. It’s important to note that many of our metrics were impacted by unprecedented store closures and other disruption from severe weather in the U.S. With that said, the 6% total company comp number was still very much in line with our targets.

We also saw excellent balance globally in our comp growth with two regions at 6% and one at 7%. Consolidated net revenues are $3.9 billion, an increase of 9% from last year, despite unfavorable impacts from both, weather and foreign currency exchange.

Consolidated operating income grew 18% to $644 million in the second quarter, a full $100 million higher than Q2 last year. Consolidated operating margin expanded to 130 basis points to 16.6%. Importantly margins expanded in the all four reported segments.

100 basis points of commodity cost favorability coupled with strong sales leverage drove the improvement. Taking a quick look at regional profitability, operating income in the Americas grew to $606 million, an increase of 10% over last Q2. Operating margin expanded by 50 basis points to 21.6% due primarily to favorable commodity costs.

We did experience a bit of suppression to Q2 margins, due to the incremental marketing investment. However, we anticipate greater leverage to resume the second half of the year.

The combination of solid company-operated and licensed store growth is driving EMEA profitability higher as well, with operating income growing 240% over the last year to $18 million. We also drove significant expansion on operating margin, up 380 basis points to 5.7% in Q2, with improvements in every line item.

Sales leverage in line with our intense cost focus across the region, both in stores and in G&A were key drivers to the margin expansion. Moving onto CAP. Operating income of $87 million represented strong growth of 27% over the last Q2.

GAAP operating margin expanded 80 basis points to 32.8% as we were able to successfully offset the unfavorable margin impact of the portfolio mix shift towards company-operated stores through leverage on strong sales.

And our joint venture partnerships continue to thrive with particular strength in South Korea and in East China driving 21% growth in JV income in Q2. And flow-through for channel development in Q2 was exceptional, as we leveraged 10% revenue growth in the 35% profit growth to $127 million.

This was aided by another solid quarter from our North America coffee partnerships, primarily due to strong sales of bottled Frappuccino and iced coffee. Operating margin of 34.4% was a 660 basis point improvement over the last year.

The largest driver of this improvement was favorable coffee cost contributing 510 basis points, sales leveraging cost efficiencies also contributed to the margin expansion. With regard to our other segments, revenue of $119 million was down slightly from last Q2.

We saw continued growth from our newer emerging business, including Teavana and Evolution Fresh. However these are more than offset by lower revenue from Seattle’s Best Coffee as we lapped significant inventory sales for new account activity last Q2.

Our operating loss in all other segments expanded slightly in the second quarter to $8 million due to investment in our emerging businesses. Adding in all that, our robust global revenue growth and margin expansion drove earnings per share to the Q2 record at $0.56. Finally, a quick comment on liquidity.

In addition to amounts available under our credit facility, we had $1.2 billion of cash and cash equivalents at the end of the quarter. Q2 operating cash flow was $418 million, up 37% from last year, driven by strong business unit performance in ongoing working capital efficiencies.

Now that we’re half way through fiscal 2014, I’ll provide an updated outlook for the back half of the year. With the over-delivery on EPS in Q2, we are now targeting full year fiscal 2014 EPS in the range of $2.62 to $2.68.

That represents very strong 20% to 22% growth over fiscal ‘13 when excluding last year’s non-recurring gains due to the sales of equity in Mexico, Chine and Argentina and a fourth quarter recording of the Kraft litigation charge. Specific to the third quarter, we continue to target EPS in the range of $0.64 to $0.66.

And with better visibility into our business outlook for Q4, we are now targeting EPS in the range of $0.71 to $0.75. With respect to commodities, we continue to expect a $0.09 to $0.10 EPS benefit for fiscal 2014, which is net of pricing taken in CPG last Q3 as well as investments back into our business.

Our coffee needs are virtually locked for 2014 and more than 40% locked for fiscal ‘15 at prices slightly favorable to 2014.

So while coffee prices remain volatile, bouncing back up to $2 per pound this week, our strategic coffee buying practices have insulated us from an impact this year, and will allow us to continue to target strong earnings growth next year. Consolidated operating margin for fiscal 2014 is now expected at approximately 175 to 200 basis points.

We continue to expect moderate improvements in the Americas consistent with the first half of the year. In EMEA, we remain on target for operating margin reaching the high single digits as evidenced by our strong performance so far this year.

In CAP, we continue to target operating margin in the low 30% range including year-over-year margin deceleration in Q3 and Q4, as we allowed the extremely strong Japan performance of last Q3 and some non-routine items in last Q4.

And in channel development, we are now targeting approximately 500 basis points of margin expansion in fiscal ‘14 driven largely by a lower coffee costs and leverage on revenue growth. Due to a lower than anticipated tax rate in the first half of the year, we are taking our full year tax rate target down slightly to 34%.

All other targets remain unchanged including revenue growth of 10% or greater, strong global comparable store sales growth in the mid single digits, 1,500 net new stores globally and capital expenditures totaling approximately $1.2 billion. Halfway into fiscal 2014, we are extremely pleased with where our business stands.

The first half of the year was challenging with a soft holiday period, unprecedented winter weather and political instability in a number of our global markets. However, our customers, our partners and our brands had been extraordinary resilient. Through these challenges, we have grown revenue by more than 10%.

We’ve grown earnings 20% and we’ve expanded operating margin 200 basis points. Our business model is built to adapt. It was built to scale. And it was built to deliver results even in the most challenging periods. It has done that.

And as we look to the second half of this year and beyond, we are extremely well positioned to benefit from investments in our people and our stores and in innovation to continue to deliver world class shareholder value. With that, I’d like to turn the call back over to the operator for Q&A.

Operator?.

(Operator Instructions) In order to allow as many of you as possible the opportunity to ask questions, we ask you please limit yourself to one question only at a time. We will come back to you for follow-up questions as time allows. We will pause for just a moment to compile the Q&A roster.

Your first question comes from Sara Senatore, Sanford Bernstein..

Thank you very much. I just wanted to ask a quick question about comments that Howard made about being under-stored in the U.S., and I guess – or North America.

I would say very high cyclical with such strong comps, but one of the things that I’ve noticed as you did step-up unit growth over the past year and asking transactions start to trend a little bit lower. So maybe I’m off here and maybe it’s particularly weather and ex-weather, your traffic would have been in the 4% to 5% range.

But is there any reason to be concerned that maybe stepping up the unit growth, there is some cannibalization impacts that happens? Thank you..

Thank you for the question. I wouldn’t isolate any quarter or any period, whether it’s been any slight downturn traffic as any indication of a slowing or a lesser opportunity than we strongly believe we have.

We’ve done a fair amount of research this year with regard to the share of coffee occasions that we have, as well as looking at the density of our stores in relationship to revenue and share. And I can tell you that there is a strong indication and we have a significant upside in the U.S. and in Canada.

Also I think we’ve done a very good job over the last 12 to 18 months in creating store designs that are linked to real estate segmentation, which gives us the ability to almost create any configuration now in terms of size and the kind of real estate it is.

And as I indicated in my comments, this new drive-through opportunities that we think we have, both in the traditional sense and in these walk-up drive-throughs and drive-through only are very, very unique and proving to be a very strong economic model.

And I think playing off Troy’s comments, you’re so much upside we believe in the incrementality of creating new dayparts, fulfilling the needs that customers have other than the peak morning period.

And as a result of that, we can put Starbuck stores in areas that previously we probably thought would not the kind of stores that we would have gone after because they were morning daypart driven. And so I think we’ve got significant upside. And I also want to say one of the things very quickly.

This is not 2007 when we’re going to grow the company in an undisciplined way.

The disciplined and thoughtfulness around our real estate strategy, both coupled with the qualitative nature of design and the quantitative analysis that we’re putting these decisions through are very, very strong and very disciplined, but we do believe – ensure that we have a significant level of runway domestically and in Canada..

And so just to follow-up, you can maintain the traffic that we’ve seen so strong with this additional growth?.

Well, I don’t see any reason in the near-term that we can’t have mid single-digits in our company in terms of comp growth and a significant portion of that over time will be transactional..

Thank you..

Your next question comes from David Palmer, RBC Capital Markets..

Hi, and congratulations on the quarter. You said in the opening remarks, that you’re starting to leverage My Starbucks Rewards with more directive marketing, which I found interesting.

Could you expand on how you might be evolving your marketing and what the impacts that will have? And relatedly, is it possible that you’ll be making alliances with retailers to find ways to share loyalty programs and perhaps spread this targeted approach across channels to get these benefits to the channel development segment? Thank you..

Thanks David. Adam Brotman, our Chief Digital Officer is here. Let’s have him answer that question..

Sure. Well on the first part David, we are seeing an increasing amount of ability for us to learn what is really relevant for our customers, because of the data that we have from their card and loyalty purchases.

So that is driving our ability to drive incremental revenue in our core business through personalized offers and use more relevant communications in general. And then as far as your second part of your question, we are indeed seeing the expansion of stars as currency, Stars Down the Aisle, as Howard mentioned and as Troy mentioned.

And that’s something that we are going to continue to build on. So we make sure we’ve had nearly five millions stars redeemed already. We continue to see better results we expected in terms of Stars Down the Aisle and we plan on continuing that..

So I’ll just quote something Howard said in his remarks and Adam just alluded to that it’s important to recognize this.

We are in a very, very early stages of building out this entire digital program, understanding how to connect with customers across multiple channels through the loyalty program, the experiences they have in stores and with the power of the stars that we’re already seeing.

We’re already seeing and still at early days as that translates down the aisle. Very early days, so much more to come ahead of us..

Thank you..

Your next question comes from David Tarantino, Robert W. Baird..

Hi good afternoon, and congratulations as well. I wanted to ask about the traffic trends in the Americas segment, being up 2% this quarter. And I know you’ve referenced weather several times, and I think Troy, you mentioned that the traffic accelerated as the quarter progressed, which seems to mirror the weather impact.

But maybe you could just talk about the context of that number and what do you think maybe the underlying trends might have been outside of the weather impact?.

David, let me start that and I’ll have Cliff Burrows give you some expansion on it. First of all, as we said there is no question it was in acute extreme weather quarter, and of course that is underlying our performance.

I don’t – we’re not going to put a number on what things would have been without, but it was – in terms of the quarters we measured on our history, we had more stores closed and more disruption to opening hours than we never experienced before since we’ve kept track of things. So a very few quarter, with that said we currently see more ecstatic.

We delivered 6% comp growth in that kind of environment. And I think that speaks to the power of brand, what our food programs doing, loyalty is driving customers. The experiences we’re providing every day.

All of those things are way of help us overcome – what everybody else out there is experiencing is flat to negative growth as a result of weather, it’s allowed to deliver 6% comp growth. We did see an acceleration as I mentioned throughout the quarter.

Again not to comment specifically on what it would have been with or without, but a very, very strong results overall and something we’re very pleased with. I mean perhaps Cliff can add some more texture..

Yes, I’m not sure was it was a great deal to triumph [ph] just beside what really played in the quarter. Not only did it disrupt our lives in our operations, the extreme weather, but it also disrupted the lives of our customers. And they changed their routines, they changed their habits.

We will see overtime I am sure the balance particularly in transaction change, that was said by Harold earlier. If we look forward, we are confident that we can maintain that mid single-digit comp growth and the balance of taken transaction will change I am sure from quarter-to-quarter..

As we sit here heading into spring and summer, I don’t think we’ve had this strong of a pipeline of product that we think is, really I think on target for what our customers are expecting for us in terms of beverage innovation. And I think we’re all hoping that we’re going to get a very unique level of response given the power of Oprah Winfrey..

Thank you very much..

Your next question comes from John Glass, Morgan Stanley..

Thanks.

Scott, I know you said that coffee is still volatile etcetera and you’ve locked some in ‘15, but if you had to lock it in today around these prices, what kind of headwind do you think you’d propose us to ‘15? And perhaps more importantly, I think earlier in the quarter, you talked informally about some offsets you think you can have and the number varies.

What are those if you involved your thinking about how big those offset cost opportunities are?.

Yes. We haven’t really quantified, because it depends on so many things. It depends on where the market is, how much pricing we knew between now and then. Can I say calculated at any point in time, but given where we are today and the fact that pricing over the last couple of months, we haven’t been pricing a lot of coffee.

Because of the length of our position both for this year and next year, we didn’t have the luxury of find, if you will, to see how things allow in Brazil.

To second part of your question and be more specific, when we look at various scenarios, when doing the calculations, we know that up and down the P&L there are all sorts of things we can do to offset taking a look at investments we made, taking a look at our cost structure.

And those are things we’d do if we need to, as things get more clear on the coffee price side. The thing to remember is that coffee is only about 15% to 20% of our COGS and occupancy line on the P&L. It’s less than 10% of our total operating cost. And so just sort of scale that gives us a quite a bit of flexibility on things we could do..

And John, I’ll perhaps underscore some of what Scott said well, and the step-up a bit and look at this in a historical context. We have over a lot of years faced these kind of movements consistently time after time. The last time just being a few years ago.

And it’s important to remember that during all those times, we delivered very strong earnings growth and margin expansion. In fact, over-delivered in our earnings range during the period of that difficult coffee cost prices, just a few years ago.

So my point being that, number one, we are as protected as I think anybody and more so than most with respect to forward pricing in contracts. We have long relationships with our farmers, and we have every confidence in delivering our ability to continue to manage what happened in the marketplace.

And we also have increase discipline and capability around managing the P&L as Scott has referred to. It gives us every ability to continue to deliver great comp growth, almost despite what will happen in the broader coffee markets..

That’s very helpful. Thank you..

Your next question comes from Sharon Zackfia of William Blair..

Hi good afternoon. Howard, you made some interesting comments about licensing of the technology.

And being a consumer analyst and not a technology analyst, I’m just curious as you think about it as a company, what would be the potential risks if you’re licensing out your technology?.

Let’s go back to what I said, so there is no misunderstanding. We’ve been approached by tech companies and national retailers as to whether or not we would consider licensing or white-labeling the Starbucks’ mobile platform. I think you have to ask yourself, why are they asking us to do this? We have such a significant lead.

There isn’t a company that we can identify that is processing anything close to a million transactions a week, and we’re now way over five million. Most of the national retailers did not invest ahead of the growth curve. They do not have the capability in-house at this point to really execute this and to fully understand it.

Tech companies themselves obviously have the tech background and the insight that they do not have the interface on the physical side with the consumer to execute it. So we are in a very unique position having kind of saw, chicken and egg problem of both, the digital technology and obviously the interface with the consumer.

I think we don’t look at it as a risk, we look at it clearly as a very significant upside.

And the question we’re asking ourselves and we’re asking it through a very positive lens is we strongly believe that there is an opportunity in creating a monetization here that will be very complementary to the core business, and in a way it could add a flywheel effect of exposing more people to the Starbucks platform.

We have not made the decision as to what we will do, but I can share with you that we are actively pursuing a number of conversations because we probably strongly believe that one is a title wave of consumer adoption and smartphones and mobile commerce, and we are in the sweet spot of being in a position to take advantage of that in a very unique fashion.

And I should say domestically and internationally, don’t forget we are doing this now in over 20 countries..

Your next question comes from Joe Buckley, Bank of America Merrill Lynch..

Thank you. Can I just hear you talk a bit about the channel development segment and the opportunities, both in the U.S.

and internationally over the next year or so?.

Sure Joe. Thanks for that question. We’ll have John Culver, Group President of China and Asia Pacific, but also Channel Development, speak to that..

Yes. Thanks a lot, Joe. Obviously we’re very excited on the quarter performance of double-digit revenue growth of 10%, operating income growing to 35% and margin expansion of over 600 basis points. So momentum in the business continues to grow, and particularly as it relates to our K-Cup execution.

For the quarter, K-Cups grew 33% on the quarter versus a category growth of about 28%. And we finished the quarter with the highest share ever since we launched K-Cups. So really strong momentum in that business.

And with the new agreement with Keurig, we’re in much better position to add skews, as well as to accelerate the growth Down the Aisle as it relates to K-Cups.

On the packaged coffee side, we’ve also done a lot of work around innovation in that area, introducing the new package graphics as well as introducing new Blonde skews into the mix as well as adding to the Pike Place Roast expansion as well. Stars Down the Aisle continues to be a big piece of the growth in channel development.

As was previously mentioned, five million stars redeemed. And really leveraging the strategic flywheel that we’re building on the digital platforms through our retail stores and driving those customers from our retail stores, Down the Aisle.

From an international perspective, we’re very bullish on the opportunity internationally, particularly as it relates to ready-to-drink and the opportunity to exist there. We have strong businesses that have been built in Japan and Korea.

We’ve launched China earlier this year, and we continue to see very strong momentum in performance as it relates to the international business. And we are making investments in that area.

Jeff Hansberry, who recently ran channel development is now in Asia, running not only or retail business but is charged with integrating the channel business into the retail business there. So a lot of positive momentum and we’re very excited about the future..

Is the ready-to-drink opportunity a North American opportunity as well, or do you see that it as international? I mean I really [indiscernible] as I ask that..

Yes, Joe I think it’s both. I think we’ve got a very strong ready-to-drink business here in the U.S. We’ve got 11% share of the coffee in energy category. We grew share in the quarter 40 basis points here in the U.S. And we’ve got a strong level of base business with our bottled Frappuccino or Doubleshot.

And then a pipeline of innovation between, as it relates to ice coffee, as it relates to refreshers and then also our discoveries multi-served product that we’ve introduced recently in the last couple of quarters. So both domestically as well as internationally, RTD will be a big piece of the growth opportunity for the channel business overall..

Thank you..

Your next question comes from Karen Holthouse, Credit Suisse..

Hi, congratulations on a great comp in the quarter despite all the headwinds. One of the things I think there is a huge opportunity for longer term is the lunch business.

And when you look at sort of driving that lunch and afternoon daypart, has there been differences in adoption in suburban markets were having drive-throughs might add as unique sort of convenience factor to that.

And then also if you’ve started to do some targeted offers around it? How successful has that been and starting to drive frequency in the daypart versus the core breakfast daypart?.

Yes, Karen. It’s Cliff Burrows. Thanks for the question. Obviously our focus over the last – really in last two years has been in the acquisition of La Boulange, finding this fantastic range of products and capability. And then building infrastructure to rolling out, and as we said today we’re in 6,000 stores and 2,500 licensed stores.

At the same time, we are starting now to really test lunch, and we will be starting the test in a significant number of stores in summer. And I would expect us to start rolling that out in 2015 and get to most of the markets during that time.

Lunch over the last couple of years, we have seen growth with our paninis, with our salads and with our sandwich range. So we know the opportunity is there, but we know we’re only just beginning.

What we will be doing is leveraging what we’ve learned around breakfast and that in part is not only in pastries but it’s what we’ve done recently with breakfast sandwiches.

So that basis, plus the infrastructure around the three temperature distribution platform and freezers in the stores gives us opportunities to serve all our stores, sometimes remote markets and sometimes drive-through. One of the things been really encouraging for us is the strength of adoption and purchase of food items through the dry-through.

And I think we have really cracked the code on how do we optimize the customer experience with the connection with our baristas, how do we manage a tight range of products to best serve our customers.

So you’re going to see us at that range, in drive-through, you’re going to see us adapt it for remote markets and you’re going to see us utilize our three temperature distribution. So lots to come on that and we’re excited about what the opportunities in 2015. We’ve started the journey through.

Delighted with the quality that we’re being able to deliver, and we keep getting stronger and stronger. So, much more to come..

Thank you..

Your next question comes from Jason West, Deutsche Bank..

Yes, thanks. I guess just touch on that same topic a little bit. You guys mentioned, I think La Boulange added a couple of points to the comps in the quarter. I was wondering if you could kind of frame that versus what had been adding in the prior quarters.

And there has been talk about some hiccups and the rollout there in some press articles about the consumer response to some of the items.

If you could just kind of go over? How do you feel about the success of what you’ve rolled out? Do you need to make changes in the way things have been executed whether its product or the actual rollout?.

Troy and myself are both fine to answer the question. Jason, thank you for that question. There is no doubt that the challenge that we set for ourselves to transform our food business in a very good time. We are really, really delighted with the progress. We set ourselves a two-year timeframe to roll this out across the whole of the U.S.

to put in a consolidated food platform, distribution channels and transform the way we deliver food to our customers and we have learnt great deal. One of the advantages we’re having is in-house capability is we can check and adjust very, very quickly. Each rollout we’ve done has got stronger than the one we’ve built.

The ones was that rolled out since the start of the year have been absolutely fantastic. We’ve listened to the customers. Sometimes we will change the ingredients. Sometimes we will change the shape of product.

In our stores next week, will be the new ingredients in a familiar form to Lemon Loaf Cake, which I think will be extremely well received, adds to that the strength in breakfast sandwich platform, where we’re up a 150% and adds to that fantastic responses we’ve had to the platform [ph].

We are really, really pleased and that we’re building a new capability..

Thank you, Cliff. And Jason let me add just a couple of points to that. First of all, food in most recent quarters had been closer to a point or strong point of comps, so we’re seeing an acceleration of the contribution from food. And remember that is coming despite the fact that food is only in three-fourths or so of the U.S.

system, and we’re already seeing that significant contribution. So it’s very powerful. It’s a huge contribution to the business. It is natural and normal in any nature or system rollout we do going back to the days when we rolled up Frappuccino to refreshers a couple of years ago. They will always do learnings and check and adjust.

And most importantly focused on what are we hearing from our customers. And if there is a place for us to respond, we’ll do that. It’s important to note there is nothing more than we’re doing in La Boulange than we doing it rollouts historically. So frankly it’s been a bit overblown what these changes or issues are. There aren’t any.

In fact throughput will be at its highest level, highest historical level this year. There is absolutely no slowdown in the business. Food is an important contribution to comp growth. We expect that that tailwind from food will continue to the next year or two at least as we continue the bakery rollout and then move onto lunch.

So very significant contributions, overwhelmingly positive feedback from customers and we could be more excited about what food would mean for us in the quarters ahead..

Thanks helpful. Thank you..

Your next question comes from John Ivankoe, JPMorgan..

Hi great. Thank you. I think I have two questions related to the same point. Store operating expenses in the Americas didn’t lever in this quarter, despite the comps.

So whether it’s something like weather that maybe influence your ability to time, labor in the stores, or was there something unusual there that might not repeat? And secondly and maybe related to that line maybe not, when we see the use of the Starbucks card grow mobile, which is now 14%. It’s growing very, very quickly.

Does the consumer use of mobile allow you to be perhaps change the cost structure in the store significantly enhanced the change to the customer experience, and perhaps ways that we’re not thinking as more and more consumers do use the mobile platform to interact with your store?.

So I’ll take the first part and then I’ll turn it over to Adam for the second part. This is Scott. There is a number of puts and takes in store operating expenses, but I would say that it was definitely impacted by both – for the Americas, by both weather and foreign exchange as revenue was impacted.

So we did see core operating leverage excluding with..

And mobile payment is definitely helping us with both the customer experience and the store operational experience in terms of key areas such as throughput.

We are taking – it’s not only the fastest and easiest way to pay, we’re taking reloads out of the line and giving customers more information literally at their fingertips as they’re waiting in line around personalized offers, [indiscernible] and loyalties status in their star counts..

So in terms of the longer term – John, it’s Cliff, I would really see as utilizing any efficiency we get from mobile payments to focus on our customer experience. We are introducing a fantastic line up whether it’s new Frappuccinos this summer, whether it’s the Teavana Oprah Chai tea or whether its Fizzio later in the year.

So any benefit we can get, we’re going to use that opportunity to share these fantastic new products with our customers..

Thank you..

Your next question comes from Jeffrey Bernstein, Barclays..

Great. Thank you very much. Actually just one clarification, and then a question. I’ll start with the clarification. I think I’ve heard in your commentary recently, I’m not sure if it was from yourself or others but just specific to commodities and everyone is focusing on coffee.

And I’m just wondering what I’ve heard to maybe dairy to be more concerning or we should be paying more attention to the dairy versus coffee. So I’m wondering if you could add some color from what you are provided on coffee in terms of how you protect yourself on dairy and what mix that is and.

And then my question is just the ownership structure, broadly speaking both in the U.S. and aboard. Just wondering whether are you any shifts or directionally where you guys are thinking in terms of – in the U.S., I guess a 60% company ownership.

I’m wondering whether you think about moving that more towards licensing and obviously you’ve already done that in EMEA, but I think you mentioned that 60% licensed. We were looking back a few years, it was 40%. So just wondering is there further opportunity to take that to 80% or whether 60% is the right amount in EMEA? Thanks..

So let me have Scott take the first question related to dairy commodities and what we’re doing in that space, and then I’ll talk about ownership..

Thanks Jeffrey. I think the first thing I’d say about dairy is we do hedge dairy out about three to six months. The challenge of dairy is the market for hedging and price effective. It’s just much shallower and much shorter than it is for coffee, but we do protect ourselves out in a couple of quarters.

So we’ve been able to manage through some of the price increases that we’ve seen in dairy. With that said, we have seen some headwind. We still – it’s in that commodities cost favorability of $0.09 to $0.10, so that’s all inclusive.

So we’re completely confident we can cover it, but we do spend a lot of time looking at ways that we can hedge and manage dairy costs..

And then with respect to global ownership, when you see each region individually, there is a somewhat varying answer. In the U.S. we’ve always been predominantly company-operated. I expect we will always be predominantly company-operated for about 60% of our so stores in the U.S. owned and operated.

In the coming years, we see a tremendous opportunity to continue accelerating licensed store growth. So it’s likely that license stores will grow somewhat faster than do company-owned units, even though we are accelerating both within the U.S. in coming years given the opportunity that we see.

And even with that licensed store growth, we will remain still predominantly company-operated in the U.S. and with very, very strong returns both at the P&L level and also return on capital, even with that predominantly company-operated structure.

In EMEA, we began discussing and articulating the volume a year or two ago are very focused strategy to migrate more toward the license structure. And we are well in the path as I commented in my earlier remarks and we’ll continue on that path. We’re not at the ending point yet with the license opportunities we have.

And we see opportunity at high return on capital, company-owned stores in places, but far and away our growth would be dominated by license executions in Europe. And that will continue over a long period of time to shift that ownership mix more towards license in EMEA. And then in Asia Pacific, it’s actually somewhat different.

We’ve been predominantly licensed going back to our earlier stage of opening in that region back in the last 90s. And we are on a progression out for shifting that mix a bit closer to company-operated particularly as we accelerate growth into China with the amazing returns and the huge opportunity we see in China.

So Asia Pacific will slowly push a bit more for the company-owned overtime, although still likely remain 50/50 or stronger for licensed for the long run..

Thank you..

Your next question comes from Diane Geissler, CLSA..

Hello?.

Hi Diane..

I wanted to ask the role on the Evening hours moving from tests into launch. Not every store is going to be conducive to having Evening hours.

Can you talk about what percentage of the store base do you think will add that daypart, and also kind of the timeframe you would envision?.

Yes, thanks Diane. It’s Cliff. We have been testing Evenings about 25 stores in a number of cities across the U.S. We’ve been testing in urban locations and in suburban locations.

What we have seen is the wine and beer is the opportunity on the occasion for people to use our stores in a later daypart, and use it as a meeting place, use it as relaxing place, they use it for informal social groups to meet. What we are seeing which is really positive it’s not just about wine, but it is about the shareable plates of food.

It is also people buying our traditional beverages, our core beverages. And that’s really healthy place to be, because that’s how the mood of the store evolves. We feel very, very confident. This is now – it’s resonating with our customers. It gives us an opportunity to grow daypart and increase our revenues and profits in those stores.

We see as we said earlier that we can have a 1,000 or more over the next several years. We haven’t got final limits in it, and we’re just going to learn and grow over into, but it’s extremely significant concern to the number and it is accretive to everything you do in those stores..

She was also asking about hours..

I’m not sure the hours will vary greatly, because many of our stores stay open quite late and serve the population. It just gives us – I wouldn’t describe it as a peak, but it makes the stores much more alive, and we will put those hours out and adjust them as we do now.

I don’t see a major cost increase by spanning the hours as soon as taking more use of the hours for open..

Okay, thank you..

The last question comes from Keith Siegner with UBS. You may ask your question..

Thank you. And a strong quarter everyone. Cliff, one more question for you. High quality, rapid customized service has always been the hallmark of the retail stores.

And it used to several backs on top of just the strong underlying traffic growth, just moving to the three temperature model, as you add the La Boulange breakfast before warming and now its Fizzio and the La Boulange lunch.

Could you talk that the operations hurdles of pulling this all of, and maybe tie in what’s the customer feedback has built in, not about the products but about the service and is it keeping up with those standards to how are you doing? Thanks..

Thanks Keith for the question. And really add aha in everything we do, we need to make sure we take care of the work our partners do and that they are able to be successful in the product. And we recognize the tremendous steps that we’ve taken over the last 40 odd years and they continued to deliver amazing experience as far our customers.

Everything we do, we are testing to make sure operationally is as simple as it can be, but it’s relevant for the customer and enhances the overall experience. There is no doubt with every new product, there is a learning curve. And we do everything we can to give the right tools, to give the right support.

I do believe the work we’re doing around digital, in mobile technology overtime that will help and make it much more seamless experience. Obviously as we build new stores, as we refurbish new stores, we look at ways to make it more efficient. And that journey will carry on.

When we look at Fizzio, the simplicity of making those beverages, and we are learning from the work we did with Frappuccino reinventions several years ago, just to try and make that work simple. So we’re very, very consciously engaged. And one; we’ve got a long line of sight to the launch of these products. Two; we are testing them.

And three; we just keep checking and adjusting, involving our partners and listening to customers to make sure we check and adjust. And I think that’s the way, Keith, we feel confident and I’m very aware that we will focus on the spirits and that relationship between our partner and customer is key to our success..

Thank you..

Thank you, Cliff. That concludes our call for today, our second quarter 2014 earnings. Thank you for joining us..

This concludes today’s Starbucks Coffee Company’s second quarter fiscal year 2014 earnings conference call. You may now disconnect..