Rick Munarriz : Let me kick things off. Starbucks has said that earnings for the current quarter will meet expectations, and you said earnings for the next quarter will be better than previously expected. What is behind your optimistic outlook?
Jim Donald: We had said that the third quarter, [which] we are in now, will hit our expectations, and we expect to exceed that in the fourth quarter. What we are seeing is continual growth and opportunities for the back half of the year in both quarters that lead us to believe that those expectations that we talked about yesterday will be met.
RM: Same-store sales for Starbucks keep growing. What is behind that?
JD: Rick, it is everything that we continue to focus on and continue to execute on better each and every day. As we get stronger and stronger, as we open up more and more stores, we have partners that stay around longer and longer, and they begin to understand exactly what it takes to execute....
When you combine that with constantly improving our speed of service [and] constantly innovating the product line of both beverages and foodstuffs, we look at continuing to add more things into a store to improve the experience that the customer is going to get. You develop a continuation of transactions, and partners and customers that have been around awhile. Our most loyal customers begin to tell others, and we tend to give that experience to them as well, and that continues to grow the transaction count.
RM: How much of that same-store sales growth is due to price hikes on existing products and how much is because a typical Starbucks customer is now buying more product?
JD: It is a little bit of both. We have said that in the comparable-store sales, 4% of the 7% [increase] was transaction and 3% was ticket, and some of the price increase is in the ticket along with the customers who are buying another drink or a foodstuff ... or picking up some of our brewing equipment or other merchandise that we have for sale [like] our CDs. We have recently launched our music business, and quite frankly we have been very pleased with the performance in the CD selections.
RM: At the store level, what percentage of sales are coffee drinks nowadays?
JD: We don't really break that out as a percentage of sales, but the beverages themselves obviously are a lion's share of our mix.
RM: Has that number changed dramatically over the past decade?
JD: Rick, it really hasn't. We still see a growth in food, a growth in merchandise, a growth in music, but by and large, it is beverages that continue to drive our core.
RM: And how is Starbucks doing with its tea business?
JD: Very well. All of the components that I just mentioned -- and tea [in particular] -- are running commensurate with our total growth. We are very pleased with the performance of Tazo, and we have launched some variations of tea [in] our shaken drinks that we have just [released] for this summer as well as last summer.
RM: I am starting to see a lot of Tazo in grocery stores these days. While that obviously helps the brand, does it hurt at the store level as far as sales go?
JD: No it doesn't, and what we are seeing is similar to what our license stores do for Starbucks. We are able to offer Starbucks coffee, Seattle's Best Coffee, [and] Tazo Tea in venues that the customers are in [so they] have the opportunity to pick them up [there] as well as in our stores.
RM: Your company is about to open its first company-owned and -operated store in China, in Xing Dao. If I walk into that location, what am I seeing in terms of menu and the Starbucks experience?
JD: If I blindfolded you, flew you to Xing Dao, and didn't tell you where you were ... with the exception of the menu writings, you wouldn't know where you were. The experience as well as the beverages -- there might be some regional differences that would probably tip you off -- but you would find ... that the experience and the quality of the beverages and the selection of the beverages are very similar.
RM: Are you selling more warm tea products as opposed to warm coffee products in China, or is it all pretty much the same everywhere you go?
JD: The mixes are probably too minute to really calculate, but China is ramping up very quickly on becoming a coffee culture, and while they do drink a lot of tea, we are seeing some growth on the coffee side.
RM: Your company claims that there is room for 30,000 units worldwide. That is more than three times as many as you have open today. Where are these new Starbucks going to go?
JD: Well, we said that our long-term goal was 25,000, and that was 10,000 on the U.S. side and 15,000 on the international side. In October, we said that we think 30,000 is our long-term goal with the additional 5,000 coming from the U.S., so we see opportunities to fill in existing areas. In our most mature markets such as Seattle, we still see lots of room for growth. We also see opportunities in highway locations. We see opportunities in malls. We see opportunities in drive-thru sites where we normally wouldn't think a site would work.
In addition to that, when we have areas like China and other new countries that we are looking in, plus fill-in, whether it is the U.K., whether it is Japan or whether it is Thailand, each one of those areas represents a piece of that 30,000 potential store growth.
RM: So how many of those 15,000 international units that you were talking about do you visualize ending up in China?
JD: A lot, a lot. Too big to probably even say. China will be our largest market outside of the U.S.
Stop by tomorrow for more coffee talk with Rick Munarriz and Starbucks CEO Jim Donald.
Longtime Fool contributor Rick Munarriz does not own shares in Starbucks. The Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.