Three weeks ago, shortly after earnings were released, I had the pleasure of speaking with Starbucks (NASDAQ:SBUX) CFO Michael Casey. I asked Casey about his decision to step down as CFO, the international operations of Starbucks, and a number of other topics. What follows are my notes from the interview. My notes are not word for word, so nothing here is directly quotable to Casey, but I do think the spirit and meaning of each question was appropriately captured.
NP: First off, I'd like to ask you about your decision to step down as CFO of Starbucks after more than 10 years in the position. Is there a set timeframe for you to step aside, and will you be continuing with the company in another capacity?
Michael Casey: Our first priority is to find the right person for the job, and I will continue as CFO at Starbucks for as long as that takes. We have announced the transition well in advance to allow plenty of time to find the ideal candidate and so that the change is not a surprise to investors. We expect to handle this transition much like we did the CEO transition from Orin Smith to Jim Donald.
I will remain with the company working on some of the other projects I currently work on. I'm currently responsible for business continuity, certain contract negotiations, IT, and I'm also the chief administration officer. I will have plenty of things to keep me busy for a while.
NP: OK, I have one follow-up to that. Last year, the CFO of OSI Restaurant Partners (NYSE:OSI) resigned and, at the time, made an impassioned speech about how heightened controllership and administrative accounting issues had taken some of the fun out of his job, leaving too little time for strategic thinking. Do you feel the same way?
MC: I do not feel the same way. I still enjoy being a CFO very much, and I enjoy the financial world more so than I ever have. But I have also been a CFO or a CEO for more than 30 years, and in order to have a smooth transition like we had with Jim Donald, it makes sense to start now.
NP: Let's change gears and look at Starbucks the company. Over the last few years, Starbucks has been turning toward licensee stores for a larger part of its growth. Do you expect this to continue?
MC: In the long term, we'll have an even split between company-owned stores and licensee stores. We also are interested in increasing our ownership in foreign markets when we have the opportunity and when the time is right. We currently own our operations in Canada, the U.K., Germany, and Singapore, and we also have the right to purchase equity in other markets in the future, and that is something we'll consider doing.
NP: Is Japan a market where you would consider increasing your ownership interest?
MC: Japan is a different story, because the company is publicly traded. We own 40% of Starbucks Japan, our joint-venture partner owns 40%, and the remaining 20% is held by shareholders. To increase our ownership, we need to buy out our joint-venture partner or purchase shares in the open market.
NP: Members of Starbucks' management have stated that China has the potential to be the company's second-largest market. How important is China to the company's 30,000 store goal? Outside of China, what are the biggest opportunities?
MC: Ultimately, China is an important market, but we are not reliant on China to reach 30,000 stores globally. China also isn't important to the company's earnings right now, but it will be important to the company's earnings five years from now. Right now, we're focused on building a foundation and team that can scale to 1,000 or more stores in China. In the near term, that will limit growth in profitability, but building that scale now makes growth easier in the future. In a smaller country, such as the Phillipines, we would scale the business differently. Large future opportunities include Brazil, India, and we're only about one-third of what we can be in Japan and still have plenty of room left to grow in Germany and the U.K.
NP: There has been a lot of what I'll call noise surrounding Starbucks forays into music, movies, and now I believe the possibility of a book was announced on the conference call. How would you recommend investors look at endeavors such as Akeelah and the Bee?
MC: These are all ways that we can enhance the customer experience at Starbucks. This all started from customers being interested in the music we were playing in our store and our ability to successfully sell those compilations. Akeelah and the Bee is an extension of the same strategy, but we do not invest in movies, production, etc.
NP: Starbucks generates a rapidly increasing amount of cash flow from operations and free cash flow. As this pot continues to grow, what are the company's plans?
MC: The growth in operating cash flow is largely from the efficiency we're gaining in our stores. As our operating cash flow increases, we have five areas that we focus on. First is to continue to build out new stores and to perform maintenance and upkeep on existing stores. Really, those two are 1a and 1b. Second, we look to invest in the roasting and infrastructure of our business. Third, we look to purchase equity in our international operations as we have done in Germany, Singapore, Hawaii, and Puerto Rico. Fourth, acquisition opportunities outside of the company don't come along often, but we do consider them. Fifth, and last, we consider share repurchases and dividends.
NP: At times, a few of us at Fool HQ have commented that Starbucks growth is so consistent it's boring. Other than the fact that Starbucks opens four to five stores a day, it appears easy on the surface. Perhaps you could speak to why growth has been so consistent?
MC: First of all, we're very focused on what we do, and we've put a lot of effort in maintaining excellent morale through stock options and health care. We've also focused on building processes and systems that allow our growth to scale. But most importantly, we built the foundation of people that we needed for growth in advance. We're constantly training and grooming back-ups in many positions who can graduate into larger roles as we expand.
NP: Tell me about something investors miss when they look at Starbucks and something that investors misunderstand when they look at Starbucks.
MC: Something investors miss is that the Starbucks experience is truly universal. It transcends politics, religion, and ethnic backgrounds. In every place we've tried putting stores, the store-level experience works. People are very receptive to it. Something investors misunderstand is same-store sales. Same-store sales are given way too much credit. We've been in this business for a long time and have been growing at 20% a year for a long time as well. If one month's sales are a little soft or a little strong, it's really not that big a deal either way.
NP: I know we're out of time and you have a meeting to run to. Is there anything you'd like to close with?
MC: Well, we just had a record performance this quarter and through the first half of the year on sales, earnings, and margins. We're focused on executing and keeping things new and fresh in our stores, and we're working hard at being innovative.
NP: Thank you again for your time, Michael.
MC: Thank you, I enjoyed it.
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Nathan Parmelee owns shares in Starbucks and OSI Restaurant Partners. You can view his profile here . The Motley Fool has a disclosure policy .
