Starbucks Earnings Call Insights: Remodel Strategy and the Consumer Environment

Starbucks Corporation (NASDAQ:SBUX) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Remodel Strategy

John Ivankoe – JPMorgan: If we could review what your remodel strategy is for fiscal ’13, how significant that could be and what you’ve been seeing in a control sample in terms of what the performance of those stores are versus the stores that you haven’t done, is the first question? And secondly, and I think it’s short. When might you have an opportunity to put Evolution products or Teavana products as part of the handcrafted beverage line within Starbucks? I think that that might be a very big opportunity for innovation to have around your product line, if you could discuss when that could possibly be?

Markets are at 5-year highs! Discover the best stocks to own. Click here for our fresh Feature Stock Pick now!

Troy Alstead – CFO and Chief Administrative Officer: I am going to ask Cliff Burrows to speak first on the remodel strategy and then he will start the discussion about Evolution and Teavana in the Starbucks stores and Jeff Hansberry here will be part of that discussion as well. Cliff?

Cliff Burrows – President, Americas: With regard to refurbishments this year, and I’ll talk specifically to the largest market of the U.S. We’ll do the same number of refurbishments, plus or minus as we did last year, as I shared in December when we met in New York. Where we have done major refurbishments we have seen significant improvement in the capacity we’ve built in that store, and the additional opportunities to introduce clover for example have all seen a significant lows. Our strategy around minor refurbishments carries on as it always has been and that’s about putting the store back in a good state, so really no changes there. If I hold it – to Jeff around developments of handcrafted beverages.

John Ivankoe – JPMorgan: Cliff, why don’t you be specific about how many stores we plan on touching in balance of the fiscal year.

Cliff Burrows – President, Americas: It will be about 1,400 stores that we will cover the show and that will be a mix 60-40 of minor to major, that sort of magnitude, but 500 major refurbishments this year.

Jeff Hansberry – President, Starbucks Channel Development, Seattle’s Best Coffee: So in terms of Evolution Fresh and Teavana entering Starbucks stores, as we’ve talked before, this is a critical element to our blueprint for growth strategy. So from an Evolution Fresh standpoint John we have already started moving the Evolution Fresh brand into Starbuck stores, and in fact now we’re in over 2,400 Starbuck stores, primarily in Western U.S. and as our new juicery comes online that will give us additional capacity to begin to move East in this year. So, we’ll continue to expand evolution into Starbucks stores and also into the natural and premium grocery segment as that brand continues to expand. We have had great results so far. With regards to Teavana we are less than four weeks into the integration but we have said all along that Teavana Beverages will play a role in Starbucks stores. We will come back with more details in the coming quarter as we develop that plan. But Teavana will play in Starbucks over time.

John Ivankoe – JPMorgan: The question if I am still on, which really is not just on the ready-to-drink but also the hand crafted beverages potentially that you could do with those sub-brands?

Cliff Burrows – President, Americas: John, I would say, yes the potential is there. Our priority is to rollout the Evolution bottled juices across the U.S. and let Jeff do his work on the integration of Teavana, more to follow, nothing to share at this time.

Jeff Hansberry – President, Starbucks Channel Development, Seattle’s Best Coffee: But I think the one last thing I would add John is, the key theme here is that these acquisitions in both product platforms absolutely offers us an opportunity in ready-to-drink across multiple channels and hand crafted and it’s something that in the right sequence of brand development and integration and rollout of these products you will see us pursue those opportunities and (it probably raises) the confidence in our ability over multiple quarters and multiple years to continue to drive strong same store sales growth for our systems.

The Consumer Environment

David Palmer – UBS: First question, just two quick questions. First question on China, it seems like your same store sales was remarkably stable, how would you characterize the consumer environment there? Secondly with regard to the Starbucks Card loads, Howard mentioned a statistic there, I didn’t quite catch that. How much have the loads – how much did the dollar loads grow year-over-year in that quarter?

Howard Schultz – Chairman, President and CEO: John are you on the line from Japan, can you answer the question about China?

John Culver – President, Starbucks Coffee International: Sure, David, thank you for the question. First off, we are extremely pleased with the continued momentum of our business in China both in terms of the performance of the existing stores as well as the new store growth that we are seeing. As I said more and more of our growth is coming from the new store base and less so from comp sales. Our comp sales have remained strong and when you look at it on a two-year basis, comps are in the mid-30s and on a three-year basis, comp sales are up into the 60s. So we feel very good about what’s happening with the consumer as it relates to the Starbucks brand. There is no doubt that you’ve seen some shift with other businesses and other companies in China, but for us, our traffic in our stores remains very strong, our transaction growth continues to grow. The Card, in terms of the adaptation of the Starbucks Card, we are now 1.4 million customers and that continues to accelerate and that’s just over a year old. We continue to be very encouraged about the innovation that we are bringing into our stores, the way that the customers are reacting to that and how they’re embracing the Starbucks experience.

Troy Alstead – CFO and Chief Administrative Officer: Dave, to your question about the Starbucks Card, there was a 25% increase in Starbucks Card values loaded in the first quarter over the prior year. What’ critical to that is that clearly, it is at a very strong level by itself, significantly outpaces the growth in the overall business and is exactly a harbinger for that future growth as those values loaded not only introduce new customers onto the platform but creates that deepens the loyalty, and creates that frequency opportunity as we move through the balance of this year and into the future.

Howard Schultz – Chairman, President and CEO: David, this is Howard. I would just add that, I believe that we’re in the nascent stage of being able to leverage and integrate social digital mobile our investment with square and the loyalty program into a very significant and robust opportunity going forward. The question I was asked about Teavana in terms of products, at some point there is a natural opportunity as part of the integration to take those assets, drive incremental traffic into Teavana benefiting from the ubiquity of Starbucks and the trust and loyalty in that program.

A Closer Look: Starbucks Earnings Cheat Sheet>>