Starbucks Corporation (SBUX) Q3 2011 Earnings Report, Transcript and Summary

Good afternoon. My name is Christian, and I will be your conference operator today. At this time, I would like to welcome everyone to the Starbucks Coffee Company Third Quarter Fiscal Year 2011 Earnings Conference Call. [Operator Instructions] Thank you. I'll now turn the call over to your host, Ms. DeGrande. Madam, you may begin.

Thank you. Good afternoon, ladies and gentlemen. This is JoAnn DeGrande, Director of Investor Relations of Starbucks Coffee Company. Joining me on the call today from New York is Howard Schultz, Chairman, President and CEO; and here with me in Seattle is Troy Alstead, CFO. Before we get started, I'd like to remind you that this conference call will contain forward-looking statements. Forward-looking statements are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements and should be considered in conjunction with cautionary statements in our earnings release, as well as Risk Factors 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. Please refer to the Investor Relations section of Starbucks' website at starbucks.com and to the financial statements accompanying the earnings release to find disclosures and reconciliations of non-GAAP financial measures mentioned on the call today, along with their corresponding GAAP measures. With that, I'd like to turn the call over to Howard Schultz. Howard?

Thank you, JoAnn, and good afternoon, everyone. I am delighted to report the record third quarter results that Starbucks announced today. Our third quarter results reflect the underlying strength and continuing momentum Starbucks has been experiencing across all of our global business segments. Never before in our 40-year history has Starbucks been healthier, more deeply connected to our customers and partners or better positioned to go after the tremendous business opportunities around the world that lie ahead. Our third quarter results also reflect the success of our efforts and investments to innovate and deliver the exciting new beverage and food products and formats to our customers around the world and to elevate the Starbucks Experience everywhere we do business. And the results are just beginning to demonstrate the power and extraordinary global potential of the unique blueprint for growth business model we unveiled last December. The very solid increase in global store traffic we experienced in Q3, despite significant economic uncertainty in many of the markets in which we operate, encourages us that our efforts and investments are resonating with our customers and will enable us to build long-term value for our shareholders. Today, I will share highlights of our Q3 performance and discuss a few accomplishments and developments that will not be evident from the figures alone. Then I'll turn the call over to Troy who will take you through the financials and introduce our fiscal 2012 targets. In Q3, Starbucks delivered another quarter of record revenue, operating income and earnings per share. Our consolidated revenues totaled $2.9 billion, up 12% over last year, driven largely by an 8% increase in global comp store sales. We delivered earnings of $0.36 per share, up 33% over last year. Our Q3 results were made possible by the passion, focus and energy…

Thanks, Howard, and good afternoon, everyone. The exceptional results that we reported today for our fiscal third quarter are a testament to the strength of the Starbucks brand, to the depth of the company's organizational capabilities and to the dedication of our partners around the world. Once again, we set third quarter record for several key metrics, including consolidated revenue, operating income, operating margin and earnings per share. All 3 reporting segments, the U.S, international and CPG, posted strong revenue and operating income growth. Our business has performed exceptionally well this year. And the third quarter continued that trend, despite significant headwinds from commodity costs and still challenging consumer environments in the U.S. and many other markets in which we operate. The foundation is in place to continue to aggressively pursue our aspirations to create a unique, multichannel, multibrand global consumer company. Today, I'll provide additional details on our fiscal third quarter performance, then, I will update you on our expectations for the fourth quarter, as well as our initial outlook for fiscal 2012. Third quarter revenues totaled $2.9 billion, up 12% from $2.6 billion a year ago. The revenue increase was primarily driven by an 8% increase in comparable store sales, attributable to 6% increase in traffic and a 2% increase in average ticket. Foreign exchange rates and higher CPG revenues also contributed to the increase. We reported consolidated operating income of $402 million in the third quarter, a 23% increase compared to third quarter of fiscal 2010 operating income of $328 million, and a 16% increase compared to last year's non-GAAP operating income of $348 million. Consolidated operating margin reached 13.7%, a 120 basis point improvement compared to last year's third quarter on a GAAP basis and 40 basis points on a non-GAAP basis. Increased sales leverage in…

[Operator Instructions] Our first question comes from John Glass with Morgan Stanley.

The questions are related and they relate to the K-Cups. First, could you talk about the $0.03 to $0.05? That sounds like it's a net number of some launch costs. If you're willing to talk about what you think those launch costs are, so maybe we can back into what you think the run rate is without those costs. And what -- just clarify your decision, I guess, not to launch these into your stores until late in 2012? That's like -- it sounds like it's a capacity issue or is there something else behind it strategically where you want to get it established? It would seem like you'd want to, if there was a choice to be made, you'd want to bring it to stores earlier to help that adoption faster for K-Cups and bring new people into that system, so why are you choosing the opposite strategy?

First on the $0.03 to $0.05, yes, you're right. That's a net number, it reflects our commitment to launch this new product and any new product in the right way, which will include meaningful spend against it over the first, second and likely third years, similar to what we're doing with VIA to really ensure that we are capturing the consumer demand that's available to us in building the proposition for the long term. So $0.03 to $0.05 is a nice contribution in the first year. It is not at, by any means, a mature margin contribution level in 2012 because of the spend we'll put against it. We won't quantify that spend quite yet, but I think as we move through 2012, we'll provide more visibility to what that looks like as we go. Now to the second part of your question, the launch in CPG is expected to consume really all the available capacity we have for Starbucks K-Cups. So in partnership with the Green Mountain, we've agreed to put the launch of K-Cups in the Starbucks stores late in the fiscal year. And that will ensure that we have all the volumes we need for what we think will be a very, very attractive and exciting launch in the CPG channel. Perhaps it's distinct from VIA, where we used our retail stores to build awareness of the product. What we know about K-Cups is that consumer awareness and the pent-up demand already exists, because it's an existing platform that's out there. And so we have the opportunity here to launch into CPG directly and first, and really capture a huge opportunity during that very, very critical holiday period. So that's what's behind that decision.

Troy, let me add one more thing to that. John, I think we're going to get the best of both worlds. We're going to draft off the momentum that already exists on K-Cups in the channels that they're already in, and the demand so far in terms of response has been significant in terms of selling process. But our calendar at retail is anywhere from 12 to 18 months forward. And we have a very robust product and promotional plan already in place, so I think on a parallel track, we're going to get all the benefits that exist from K-Cups and complementary channels. We're going to have a robust plan within our retail stores. And then we're going to come right after that in the late 2012 with K-Cups. So we feel we're in a very unique and very positive positions to take advantage of multiple channels of distribution that no one else has other than Starbucks.

Our next question comes from Sarah Senatore with Sanford Bernstein.

I wanted to ask another question about CPG business. Just thinking about the sort of VIA, you said 70,000 points of distribution. Can you give some color on which market is doing the best? What kind of distribution you have? I'm just trying to think forward if the K-Cups were or a single-serve product were to be available kind of internationally, what is the receptivity of the customer base, sort of broadly speaking, to Starbucks and single-serve?

I'm going to be ask Jeff Hansberry, our President of Consumer Products, to take that question.

Our strongest market and most mature market for VIA is the U.S. market, and we've been in market now for about one year. Our distribution stands at about 71% ACV per IRI. And in the last month, we grew at 41%. What's really encouraging on VIA is we continue to see growth both in winter and summer, as Howard mentioned in his comments, on Iced VIA. It's really countercyclical to coffee, so we're seeing growth around Iced VIA in the summer. Beyond that, we're seeing our repeat rates actually climb, and they're now at 38%, which is very encouraging. We're going to follow that with the launch of Breakfast Blend and House Blend in CPG this fall in the U.S. So we're very encouraged by the progress we're seeing.

Our next question comes from David Palmer with UBS.

Troy, question on CapEx, that $700 million guidance for fiscal '12. seemed just a little bit high to me, given the fact that the new company stores or the new store base in general will be heavy on China within the company store base internationally, and then licensed stores overall. So could you perhaps just give some color on the CapEx number, where -- how does that break down?

Yes, the breakout, David, is similar to the mix of our spend in years past, where new stores are a piece of that component but not the majority and not even half, actually. Our ongoing commitment to remodel our store base at similar levels to this year, although perhaps slightly higher in the year ahead, contribute a bit to that CapEx. But most meaningfully, the increase from 2011 to 2012 expected CapEx is driven by new stores, as we are growing all around the world. I will point out, it's -- these are early targets and we'll fine-tune that number for you throughout the year as we go.

Our next question comes from Sharon Zackfia with William Blair. Sharon Zackfia - William Blair & Company L.L.C.: I guess the question on China, where obviously those comps are kind of jaw-dropping that you're seeing there. And I guess, just curious, having watched you for a long time as you've grown in China, are you seeing, daypart utilization change, the mix of food versus beverages or just the general customer that's coming into the stores, has that really been changing over the past year?

Troy, you want me to take that?

Sure and -- go ahead. Go ahead, Howard.

Is John in the room as well?

Yes, he's here. He can follow on after you start the answer.

Okay. Let me begin by saying, I think few people remember that we've been in China now over 12 years. And during that time, I think we did a very good job of just building the brand in a way that would not be faddish but really trying to create the coffee ritual and demonstrate to Chinese local customers the relevancy of the Starbucks brand. I think early on, the stores were actually more popular than the coffee, because our stores literally became the third place between home and work. And most Chinese people live in smaller dwellings, and they use our stores as great meeting places. Over the last couple of years, what really has taken place is that the traffic has been building in multiple dayparts. And we're certainly beginning to see the early stages of the morning ritual. Although we have a long way to go, and I think that gives us even more opportunity and I think more excitement, because these numbers are being generated, really thus far, without the morning daypart being as significant as they are in other parts of the world. I think perhaps the most encouraging aspect of our Chinese business today is the response that we're getting in secondary and tertiary markets in cities that most Americans have never heard of, with populations ranging from 1 million to 6 million to 7 million people. In these markets, the response and the unaided awareness of Starbucks lines out the door in terms of almost a rite of passage as a result of Starbucks opening up in these cities. So when we look at the number of cities in China that are going to have 1 million people or more, and the government officials are telling us it's going to be over 100 cities, these are -- the opportunity, I think we have, is very significant. The challenge from the very beginning is to ensure the fact that we do not become something that's faddish. The hardest part in building a new brand in Asia is to make sure you do not become white hot and then all of a sudden, out of favor. I think we've done a very good job in building really strong local relevancy and relationships with customers, vendors and the government. And as a result of that, the local Chinese Starbucks team is off to a great start. I've said for the last couple of years, there's going to be lots challenges in China. We've learned a lot. We've made some mistakes. But we're going to have thousands of stores there and build a very big significant business, not only in our retail stores but the blueprint of growth in terms of complementary channels of distribution and other products are a significant part of the strategy.

This is John Culver on the call. Just a couple of things I would add on to what Howard just said. First off, in terms of the growth that we're seeing in China across all the markets to include the new cities that Howard talked about, it's being driven through transaction growth. And so it's attracting more customers in and continuing to increase the level of frequency of those customers coming into our stores. In addition, we've had some new innovations that we introduced in the quarter with our customizable Frappuccino, which was a huge success in China. And then also, we introduced VIA in both the mainland China as well as Taiwan and Hong Kong in the quarter. And the early results on VIA in China are very, very impressive, so we're very excited about that. And then also, as part of our integration into the Chinese culture and into the Chinese community, is the relationship that we're building in the Yunnan province around coffee, and Howard talked about that as part of the opening, but we're very excited about the opportunities this presents for us long term to continue to grow the business, and increasing the level of dayparts in the -- to our stores as well. So very good news in China.

Our next question comes from Jeffrey Bernstein with Barclays Capital.

Just a question on cash, you gave a lot of color on 2012. We didn't talk much about cash flow, you said, just yet. But I think like -- I know you guys are running north of $1 billion in cash currently on hand and my guess is you're running north of $1 billion of free cash likely next year. And I know you have significant available credit. I'm just wondering, I mean the dividend in the kind of low 1% range, should we think about the excess for -- primarily for share repurchase? I mean how should we think about 2012? I know you've alluded in the past the potential acquisition above and beyond kind of returning cash to shareholders. Whether you have any thoughts on whether an acquisition, might be U.S. or International or on beverages versus other areas such as food, kind of any thoughts you have on the use of cash and potential for acquisition?

Sure. You're right on your early part of that, Jeff, in the sense that we have well over $1 billion in cash in the balance sheet today, closer to $2 billion. We have a business that's produced a very, very healthy $1 billion in free cash flow, and I would fully expect that or better as we look at fiscal 2012. So we have the opportunity with that strong balance sheet and a healthy cash-producing company to do a number of things. And part of that is in returning cash to shareholders through share repurchases. We are committed to a share repurchase program that is based on valuation. And so we will, at different times, be in the market and will certainly return cash as appropriate through repurchases. We also have ongoing dividend program that's based on a targeted payout ratio. So as our earnings grow, I would expect dividends to grow over the years as well to match that, to stay within that range of the ratio. So those elements will likely grow, as time goes on and as our income grows. And then further, of course, we'll invest back in our business through CapEx, through growing the health of our infrastructure, to invest in our partners, that's fully appropriate. And with all that said, yes, we do expect that we'll be more active in M&A in the years ahead than we have been in the years past, as we see tremendous opportunity to leverage our capabilities and our speed to market in some areas and really further build out our blueprint for growth through selective, we think, smart and strategic acquisitions. So that will be part of the equation, and certainly shapes are thinking about cash as we look forward.

Any thought whether that'd be U.S. or international, or beverage versus food organ, or kind of directionally, which way you'd like to go?

Well, I -- our interests are very much global. So yes, we're looking at what opportunities there are in the U.S. but very much with our increased focus outside of the U.S., around development, we're really looking at all our geographies, key geographies, existing geographies, some of the emerging markets that we're in and evaluating what possibilities might be there. So very much of a global answer, I can't give you a specific breakout because we're not targeting it that way. But I can tell you that our interests are very broad-based.

Our next question comes from Keith Siegner with Crédit Suisse. Keith Siegner - Crédit Suisse AG: Troy, just a question for you on CPG, and kind of thinking about the margins from 2011 to 2012 and kind of going from let's say, the guidance this year, the high end of the range around 30% to 25% next year. When you think about that walk through, clearly, it's sounds like we're going to have headwinds from commodities, but how does the first full year without transition costs for packaged coffee, is that a positive? What about the K-Cups, is that positive to margins? In other words like, are we going to have another 1,000 basis points headwind from commodities and these other things I've said? If you could walk through those moving pieces year-over-year, that'd be great.

Sure, Keith. Let me speak to some of those pieces. One is yes, commodities, as I mentioned earlier, are absolutely a headwind for us in the full business. And that's most acutely impactful on margins in CPG, as it's a much more cost-intensive cost structure, as you know. I can tell you that the decline, as I spoke about earlier, from about 30% operating margin in CPG this year down to the targeted 25% next year is really all explained by commodities. Absent commodity inflation, we'd be at or improving our margin in the coming year. Now with that said, there are a few other moving pieces as well. K-Cups in its initial year will not be at mature margin levels that we expect to grow to with that exciting product over time, as we will spend against it, just as we have with VIA. So that's very accretive to earnings to the tune of $0.03 to $0.05 per share, but it will be somewhat lower margin in its first year too as we spend against that development. Similar VIA as we continue to grow and expand and invest behind VIA, that is profitable. It'll be more profitable in '12 than it was in 11. And yet, the margin structure on VIA will continue to be somewhat lower than what we see in the rest of our consumer products business. So those are some of the moving pieces, but I would just come back to the fact that it's really the biggest mover there, it's coffee costs. And that's the biggest driver that's resulting in that lower end of the 25% to 30% range next year.

Our next question comes from David Tarantino with Robert W. Baird. David Tarantino - Robert W. Baird & Co. Incorporated: Howard, just a question on the new organizational structure. I was wondering if you could provide a little bit more context on how you envision that structure helping the business? Maybe provide some specific examples of how you're thinking about using that structure to accelerate your International growth. And then Troy, maybe as a quick follow-up, if you could talk about whether that structure is going to lead to any efficiencies on the financial side.

Okay. I think there are a number of ways in which the company is going to benefit as a result of this new structure and alignment. But let me begin with what I said in my remarks, and that is John Culver and his team have done a, really, a spectacular job over the last 2 years in bringing International to the operating margin that is as respectable as it is today. But we think there's a long way to go. John and I have been talking for the past year or so just how broad-based his geography was. Just think about managing 50 countries, 50-plus countries and trying to be as present as possible in all of the geographies and the complexities of these organizations, as well as the fact that these markets are not all alike. International is not one organization. It's very different, diverse markets, different levels of maturity in terms of coffee and different levels of maturity just in terms of Starbucks brand. And so we began thinking about how can we leverage Starbucks' strongest operating talent against the biggest opportunity we have in terms of retail growth and the global opportunity, where we really believe we're in the nascent stage with only 6,000 stores. And I think given what Cliff has been able to do in the U.S. since he came here from Europe in transforming the U.S. business, if you divide the 3 territories with Michelle Gass, who's been with the company 15 years and really knows every aspect of our business, and put her in Europe and the Middle East, and put Cliff in the Americas, and then leave John where he once lived in Hong Kong and took care of China and Asia Pacific, we now have 3 very, very strong Starbucks'…

And David, to the second part of your question, as you just heard from Howard, the full, complete, entire motivation behind the restructure is about enabling growth. It's about positioning us with strong talent and teams, who can be focused on the uniqueness and the complexities of these individual regions around the world. So this restructure is not about seeking efficiencies. It is completely about going after the huge opportunity we see around the world that's been really validated by the growth in the last couple of years, the margin improvement, and now building on the great work in the last couple of years. This restructure allows us to accelerate and go after that more meaningfully. Now with that said, while there's no motivation around efficiencies here, as we drive growth and drive the top line in the years ahead as a result of this increased focus, I fully expect to drive margin improvement as a result of that.

Our next question comes from Gregory Badishkanian with Citigroup.

This is Jeff Hans speaking on behalf of Greg. You guys have done another remarkable job growing traffic on a 2-year trend in the U.S., despite -- this past quarter, despite a still pretty fragile consumer environment. So you -- can you guys talk a little bit about that disconnect? What's sort of driving that momentum in your business? And then what type of initiatives do you have in place in the near term to maybe sustain some of that?

Well, I think we've said from day 1 beginning in 2008 when we were really dealing with the height of the cataclysmic financial crisis, despite the challenges we were having at that time, we were not going to use the economy or the lack of consumer confidence as an excuse to grow our business. And I think nothing has changed. We are not looking at the economic environment. We're looking at what we can do to exceed expectations of our customers and create a great experience in every aspect of our business for both our people and our customers. And that has not changed. Over the next 12 to 18 months, we have a great, robust level of innovation, a pipeline of new products and new promotions. And as we head into the fall and holiday season, we're as enthused as we were in the last couple of years. I think when you look at the comp number overall at 8% globally or 9% for the U.S., these are stunning accomplishments, not only in spite of the economy. But if you look at other retailers or restaurants, these are top of class. Can we sustain those kinds of numbers over the next 12 months? I can't answer the question in the affirmative. I think Troy has given a good guidance in terms of mid-single-digit comps. But we're very confident that the -- what we have put in place in terms of consumer-facing initiatives and the level of innovation, not only in products and experience but through technology, that we're going to be able to create separation between us and everybody else. Two years ago, when the world was coming to an end, not only were we dealing with economy, but there was concern about McDonald's and others, and I think we've done a very good job in creating the kind of experience that really does differentiate Starbucks from everybody else both in terms of experience, the quality, the coffee and the relationship our customers have with our people. That has not changed. We're going to continue to invest in what is most important around the equity of the brand and any of the experience that we create in our stores. And we think that's going to continue to drive very strong comp store growth domestically and internationally.

Our next question comes from Joe Buckley with Bank of America.

I want to go back to China again for a moment. First on the transactions that gave you control of mainland China, are there any financial implications here from earnings standpoint to be aware of, just from the transactions alone? And then talk about changes that you'll execute, now that it is completely company-controlled, particularly with the expansion. How quickly do you think that will ramp either higher than what you provided for 2012 for guidance?

Joe, I'll speak to the first part, and then ask John Culver to jump in on the second piece of it. There is some transaction accounting that comes to play with the purchase this quarter. It's not a pretty meaningful number. It shows up in other operating income, so it's below the margin line, but there is a modest gain that shows up there and is responsible for some of the increase in that other operating expense -- or the income line that you'll see in our financial statements. Now in terms of what we'll do from here, I'll ask John to jump in.

Yes, Joe, in terms of the transaction itself and the integration of the business, really it's seamless. We've had operating control of that business within the partnership. What this allows us to do is buy back the equity portion of our business partner that was there and take over full control and operations from a P&L perspective with the business. So in terms of any changes, no changes other than the fact that it now allows us to go on uninhibited in terms of pushing the accelerator on growth there. And that's what we have here every intention of doing.

Joe, I just have one thing. And I think it's more than a subtle coincidence that the alignment of Cliff, John and Michelle are also coming at a time when we are acquiring these businesses back. I think there is a symmetry to the fact that we've got our best talent against a company-operated operation across the globe. And I think it's going to add significant long-term value to our shareholders. It's the right thing to do for our company and it's coming at a time when we really have the organization in place.

Our next question comes from Michael Kelter with Goldman Sachs.

I just wanted to ask about the International traffic number, which stayed the same even though China accelerated to the 30s. I guess I was curious what the negative offsets were in the International division and maybe what -- a status update on what's going on in those markets?

Yes, Mike, I'll speak to that. China, as I've said was extremely strong, even improving over previously. All our other company-owned markets remain positive and generally in good trends. The softest market we had was our largest international market, and that's in Canada. Again, positive same-store sales but a bit softer and that's due in parts to some -- in Western Canada, the harmonization of taxes impacted all of retailers including us, and so there's a little bit of softness that we've seen as a result of that, as well as some ongoing weather that contributed to our softness in Canada. But that's really, again, very consistent traffic to a large degree in U.K., and very, very strong improving traffic as we have talked about in China.

Our next question comes from John Ivankoe with JP Morgan. John Ivankoe - JP Morgan Chase & Co: Just, I think, few pretty quick ones. Looking, obviously, at your average unit volumes or same-store sales in the United States, and you've given what's obviously been a very high competency of opening units. Why is the company-operated unit -- and maybe, Howard, talking about your previous point with some of your best talent being focused on company-owned markets, why isn't it that number higher in 2012? Why is it 100 units? And I guess should we think about if trends continue, possibly 2013 is a breakout year to reopen a lot of the U.S., this is first question. And then secondly, how should we think about pricing for the remainder of '12? I mean is that something that you think you can do if you need it? I mean, could it be something that kind of in your arsenal, if you will, if commodity costs don't stay where they are currently?

With regard to U.S. growth, I think one thing I'd like to say is I think for anyone to conclude that the U.S. market is reaching a level of saturation for us, I think would be a wrong conclusion. I think what is occurring though is that during the downturn in the economy, when we stopped searching and securing U.S. retail sites and downsized the acquisition of real estate organizationally, we lost a lot of time. So it takes an entire organization, it takes a long time to secure sites, design stores. And I think we lost probably 1.5 years because of the downsize of the organization during the financial crisis. And so we're just building back that organization, and the lead times are great. For me personally, I remain bullish and enthusiastic about our ability to grow the U.S. business beyond the 100 store level per year. But organizationally, we've got to be in a position to be able to do that. And what I do not want to do and we will not do is have an undisciplined approach to real estate acquisition. We want to be extremely careful and highly disciplined to make sure that the return on investment. I think, what we're most proud of is the class of stores we've opened up in the last year, in terms of sales return on investment and sales to investment ratio, is of highest we've had in many, many years. And Troy can speak to that specifically.

Yes, our new store class in the last couple of years have continued to strengthen. And we've always had very good unit economics though it suffered a bit during the difficult days of a couple of years ago, but since then with the discipline that Howard mentioned around site selection, around close management of our new store costs, we have been able to improve those economic significantly to the point now where it is very, very attractive for us to invest in our U.S. business and add stores. Howard's point though, we fully intend to do that in the right way and at the right pace. And I would expect that new store will, while it's doubling in 2012, I would expect it to grow further in 2013 as we ramp up our capabilities and we position ourselves for growth. Now John, to the second part of your question around pricing, we have been, as you know, very judicious, very cautious in what we've done with pricing. And that comes out of a tremendous sensitivity to the consumer around value and around the place they're at right now. We've taken less pricing than just about everybody else out there down in coffee. And the result of that, I believe, has been a couple of things. One is the -- our results and our ability to drive traffic and increase frequency, speaks to a number of things we're doing around customer service and product innovation and relative program, but it also speaks, I think, to our value. And consumers recognizing that extreme quality we're offering them at a good value, as we've been careful with what we've done with our strategic pricing in our stores, and we've been conservative. Look at what we've done with pricing down the grocery aisle. I think it's no coincidence that we are one of the rare companies down the aisle that's actually growing volumes right now in coffee. While there is dollar share growth in some places driven by pricing, we've been cautious about that, and like the idea of grabbing volume share and positioning ourselves much better for the future. And what that does, I believe, is it allows us to drive earnings and meet our growth targets. It also allows us to preserve some pricing power for the future, if it's needed. And so we'll be cautious about it. We'll be careful about it, but it gives us tremendous flexibility that perhaps others don't have, as we approach the next year or 2.

Our final question comes from Mitch Speiser with Buckingham Research.

As we think about fiscal '12 and modeling on a quarterly basis, can you maybe give us a little bit of color just in the context, it seems like you might be marketing heavily behind K-Cup perhaps in the fall? And then of course, there is the coffee costs, which I would think would perhaps maybe decelerate on a year-over-year basis. Is it safe to say that if comps just say were to remain at the same level throughout the year, that we should expect the calendarization of earnings growth maybe to start off slower and end up stronger? And if you could maybe just give us some light on the calendarization of earnings growth.

Sure, Mitch. It's a bit early to be too specific about quarters. Probably, tell you a little bit more about that in November. But what I'll say for now is, yes, you're correct that coffee costs will likely be a bit more of an acute pain for us in the first half of the year, year-over-year. Simply because as we went through 2010, those coffee costs accelerated as we went. And so in the early part of the year, we'll be lapping relatively lower costs from a year ago, and so that year-over-year differential is a little bit more costly to us in the first part of the year than will be the second half of the year. Again, more specifics to come as we see how things play out throughout the year. And then beyond that, there is always lots of ups and downs. We, as you pointed out, will be launching K-Cups in the fall and -- but I think that's extreme positive for us and we're very much optimistic about it. We'll be spending against it, but K-Cups will be profitable for us, so I don't expect that to particularly drive calendarization. So to large degree, coffee is the one thing I could point out to you right now. And again, when we get to November, we'll talk a little bit more about how the quarters look.

Ladies and gentlemen, We have reached the end of the allotted time for questions and answers. Ms. DeGrande, are there any closing remarks?

Just briefly. Thank you, Christian. Thank you all for joining us today. That does conclude our third fiscal quarter call for 2011, and we will talk to you in November.

Ladies and gentlemen, this does conclude today's Starbucks Coffee Company Third Quarter Fiscal Year 2011 Earnings Conference Call. You may now disconnect.