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By tktrimbath
March 31, 2004

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Starbucks Annual Stockholders Meeting 3/30/04

The following are quickly pulled together from my notes. There are gaps to fill and other points of view to hear. When in doubt, watch the Webcast or call Investor Relations. I don't know that that will work but it is worth a try.

This is something like the sixth SBUX meeting that I have attended. There was a change in venue but that didn't make any large difference. Maybe it provided more seating, but it didn't look like it. The room was filled to overflowing and folks were in the lobby as before. At least they were supposed to be able to watch the show on monitors but where is the fun in that? Oh yeah, that is where the free coffee, tea, and food were being served. The crowd has the smallest proportion of suits of any stockholder's meeting that I attend. The number of suits is almost always constant (except for MSFT) but the crowd was mostly a couple of thousand or more customer-stockholders. It was more of a big social gathering than a business discussion.

A few booths were arranged as usual where Starbucks employees answered questions about the social and environmental aspect of the business. The greatest number of booths was devoted to coffee. (Sarcasm on.) I can hear the shocked gasps even now. (Sarcasm off.) Because I don't drink coffee I spent the time mingling and talking to the folks at the one tea booth/bar. I learned about good tea as a novice customer at Starbucks back before the IPO. Tazo is fine but I really liked Starbucks' Russian Caravan. Ah, those were the days.

But enough about that.

The stage was set up as fancily as ever. This time it was a duplicate of the store front of store number one in Seattle's Pike Place Market. They even had people wandering around the sidewalk tables acting as customers. It was realistic except it didn't some struggling but talented musician performing in front of an open guitar case. A bit of a history lesson. They even replicated the originally politically incorrect brown logo that mentioned "coffee, tea, spices" and displayed much more of the Siren.

The lights went down and came back up on three drum bands that represented three coffee regions. They got the audience moving (as if unlimited free caffeine and pastries weren't enough) and their number was finished by Howard Schultz directing them for a bit with the CEO, Orin Smith, banging on the largest drums.

Howard started off the show with introductions. Besides the perfunctory management types there was also a polished video profiling one of the long-term employees. If there was any difference from previous years it was that management got more attention and the working folks got less. Hopefully that is not the start of a subconscious trend. One of the early investors was retiring and emphasized that it was time for him to leave and also that the company's best years were ahead.

Intentionally or not, Howard brought the mood down a bit by mentioning the terrorism and scandals in the news. I don't think he was trying to be a downer as much as taking the opportunity to encourage folks to "get a sense of humanity" and I am sure he meant that in a good way. That is the refreshing thing about Starbucks: they are much more heart felt about the world than any other company I track (we sold Ben and Jerry's a long time ago). He didn't get much applause but I think it was because what he said was serious enough that silence was more appropriate.

Enough of that. He headed on to good news. Finally some data. The company is seeing about 3 new stores per day and has a customer base of about 30,000,000 per week. Since SBUX's IPO, the S&P is up 175%, the Dow is up 200%, and the NASDAQ is up 250%. SBUX is up 3,350% in that time. His message was that it is possible to be financially successful and a positive influence on the world.

This year's poke at Starbucks came from David Letterman's Top Ten list of "Things You Don't Want to Hear in Starbucks". It must be on a web site somewhere. It was good. We laughed.

Orin Smith, CEO and President, got up and started off with more detailed numbers. Historically Starbucks has achieved compound annual growth rates of 40% for revenues, 38% for earnings per share, and 37% for market cap. Same store sales have never been below 5%. All of that essentially translates into a doubling of the company every two years for more than eleven years. The most recent year, 2003, same store sales were 8% and earnings per share and revenue grew at 24%. The lower growth is to be expected as the company grows large. It is now about $15,000,000,000 in market cap. Despite what should be slower growth, the first quarter of 2004 saw 10% same store sales, 28% in revenue, 35% in earnings per share, and store growth above projections.

On the more qualitative side of things, Orin listed Starbucks' awards and such. They are the #8 most admired company, within the top ten most impactful brands, within the top 100 of the most valuable brands, #34 in terms of best companies to work for (no one who ranked better is as large), #21 in corporate citizenship, and the recipient of "The Order of the Grand Cross" from the Government of Colombia. He stressed that these were measures that they expected to do better at. In particular they want to be the best and most impactful brand and think they can do it.

Innovations included more drinks, better machines behind the counter and in the home, more drive-throughs, small footprint stores that fit inside other stores, rural expansion, the debit/credit card, and the music. He mentioned that the rural expansion is going very well as is most profitable (but I can't remember what that is measure relative to).

Store expansion is seen at more than 10,000 within North America and at more than 15,000 elsewhere. Those numbers were typified as conservative and they smiled when they said that. Surprisingly the Starbucks culture is transferring well which suggests that the need for a "third place" is global.

The consumer products like coffee in the stores through Kraft and ready to drink beverages through Pepsi, are doing well. Starbucks has $480,000,000 of a $530,000,000 market. Food service through Sysco is also being added. The most significant merger or acquisition (which was it) was Seattle's Best Coffee and Torrefaziona Italia (and if I spelled that correctly it was by accident). They will maintain their brand, roasting and brewing habits which target a different palate. Don't ask me. I drink tea.

Goals in 2004 are for 25% revenue growth, 1300 more store globally, 3-7% same store sales, and increased guidance from what was .83-.85 to .86-.87. Over the next 3-5 years they hope for annualized 20% revenue growth, 3-7% same store sales, and 20-25% earning per share growth. Longer term they expect to have more than 25,000 stores while maintaining market share and core values. They want to be an enduring great company recognized and respected and to inspire human nature. If that sounds like hyperbole they figure why not shoot for something big and useful? Most workforces see 72% who see their job as just a paycheck . Starbucks sees 72% of its force emotionally engaged with their work. They like that trend.

The Duetto card is a debit card and a credit card with benefits passed back to the owner via credits at Starbucks. They advertised this with a operatic farcical music video starring some folks who could sing and act with a bunch of Starbucks people who had a sense of humor and could ham it up. The video was fun but I won't be getting a card. In true frugal Fool fashion, I don't charge much and I don't spend very much at Starbucks. (Now, if they had better tea service, oops, I'll get off that soapbox).

The president of North American operations evangelized for a while. He was exuberant and was seemed to be trying to get folks familiar with him since he has only had the job for about a year.

The Black Apron program was introduced as a way of emphasizing people and coffees that are exceptional. The people have to take training and take test. The coffee only has to take the test.

Starbucks is always proud of its social, cultural and environmental programs. These were given their due time but I doubt that I can do them justice. Beside, this post is already WAY too long. I will mention the Agronomy Center established in Costa Rica. Many coffee growers are going out of business, which makes it harder for Starbucks to buy great coffee. The Center will act as R&D for best practices and as an advocacy group to get the existing growers to stay with it and to make better coffee. It takes a lot of beans for 25,000 stores. For more information go find the web site.

In a mad bit of chaos, a local theater/circus group swarmed the stage and transformed the Seattle Storefront into a Parisian Starbucks. It was a fun production but the reason for it was to point out that the store is being well received and that others are opening in Paris.

Two weeks ago Starbucks/Hear Music and I think HP launched a venture where music CDs can be burned at the customer's direction and selection in less time that it takes to get a latte. A video showed the first site. It was impressive and massive and therefore a bit intimidating. The demonstration showed a much more compact system that operated from an HP TabletPC and a server/CD burner that was about the size of a desktop PC tower. It took a little bit longer than a latte, but it was fast enough and actually produced a CD with the artists' graphics on it and popped out a CD sleeve complete with liner notes and such. Each unit holds about 10,000 records worth of songs and they can be burned as albums or as user-defined mixes. As the next phase, ten stores in the Seattle area will be equipped soon. Now those of you who are still reading this might appreciate how long we were sitting there. It was good stuff but I was ready to quit. That was until Emmy Lou Harris came out. They demo'd the equipment with one of her albums and then she came out and played two songs. Hanging in there until the end pays off.

That concluded the main part of the meeting.

I'll skip ahead but, "What a surprise! Everything passed!"

I've paraphrased each exchange because it is too hard to transcribe verbatim from the balcony.
> A representative of Washington State's trade unions got up and said that Starbucks was the best company for corporate guidance in Washington State and that they got a B-. Then he went on to talk about expensing options. Howard responded by saying that Starbucks relies on options to encourage and create its culture. (My wife and I noted to each other that the two ideas are not incompatible. Starbucks can provide options and expense them).
> A Kenyan shareholder wanted to know why the social, cultural, and environmental programs emphasize South and Central America and not Africa. Orin pointed out it was because the programs are focused on where the most beans are bought and that he would appreciate it if Kenya did not require its growers to sell through government auction houses.
> Stock spilt probably won't happen until the stock is well high above $40 so the split price does not fall below $20.
> One guy tried to get the crowd to go "Hip, Hip Hurrah, for Starbucks" and I wished he'd stop.
> One non-stockholder wanted Starbucks to sell decaf- Frappucinos. My friend two seats down buys them for his daughter frequently.
> Dividends, not yet.
> CD prices are flexible this early in the program but for now they are something like $12.95/album, and about half that for 6 songs.
> Warming ovens, not microwaves, are being introduced in some European stores.
> There is a lot of cash on hand but it can't go to dividends because of contractual obligations. Starbucks has to be able to buy out certain partners under certain conditions.

The goody bag this year had a pound of Free Trade coffee, a Frappucino, an application for a Duetto card, and a thick brochure on Starbuck's social, cultural, and environmental policies.

Every year I underestimate how much more they can grow. A friend of mine always says that he leaves wanting to buy more on the next dip in the stock price, which doesn't always happen. This year was no different. They said they are nowhere neat saturation and I believe them. There is plenty of room for more stores and I like what they are doing with the drive-ins and the music. This has been a phenomenal story to watch and I have to say that I didn't see it coming. Sooner or later the Siren will cough but then I thought that Pixar couldn't produce a movie that would do better than Toy Story 2 or Monsters, Inc. So much for my pre-cognitive powers.

The story remains good. The Price to Earnings remains high. It is priced to perfection and yet they continue to outperform expectations. Amazing.

Bought my first good cup of tea there back in the early eighties.
LTBH and bought our first shares back in 1993.Those are gone now but we continue to hold and will continue to do so with what we saw today. I'd buy more but the Price to Earnings ratio is too high.

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