Starbucks Corporation

Good afternoon. My name is Hector and I will be your conference operator today. I would like to welcome everyone to Starbucks Coffee Company's second quarter fiscal year 2020 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press star than the number two. I will now turn the call over to Durga Dorsami, Vice President of Investor Relations. Ms. Dorsami, you may now begin your conference.

Good afternoon, everyone, and thank you for joining us today to discuss our second quarter fiscal year 2020 results. Today's discussion will be led by Kevin Johnson, President and CEO, and Pat Grismer, CFO. And for Q&A, we will be joined by Roz Brewer, Chief Operating Officer and Group President Americas, John Carver, Group President, International Channel Development, and Global Coffee and Tea. This conference call will include forward-looking statements which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. Any such statements should be considered in conjunction with cautionary statements in our earnings release and risk factor discussions in our filings with the SEC, including our last annual report on Form 10-K and quarterly report on Form 10-Q. In addition, in some cases, we estimate the impact of COVID-19 by comparing actual results to our previous forecasts. These forecasts were created prior to the spread of the virus, were based on information available at the time, and on a variety of assumptions which we believe were reasonable, but some or all of which may prove not to be accurate. SABACS assumes no obligation to update any of these forward-looking statements or information. GAP results in fiscal 2020 include several items related to strategic actions, including restructuring and impairment charges, transaction and integration costs, and other items. These items are excluded from our non-GAAP results. Please refer to our website at investor.starbucks.com to find the reconciliation of certain non-GAAP financial measures referenced in today's call with their corresponding GAAP measures. This conference call is being webcast and an archive of the webcast will be available on our website through Friday, May 29, 2020. Finally, for your calendar planning purposes, please note that our third quarter fiscal year 2020 earnings conference call has been tentatively scheduled for Tuesday, July 28, 2020. I will now turn the call over to Kevin.

Good afternoon and welcome. Around the world, people, frontline responders, governments, and businesses are all navigating extraordinary times. On behalf of Starbucks, I want to extend our deepest compassion and empathy for all those impacted by loss of life, feelings of anxiety and isolation, and fears of both health and economic uncertainty during this pandemic. It was just three weeks ago, in the spirit of continued transparency, when Pat and I shared with all stakeholders our second intra-quarter update on how COVID-19 has impacted our business and how we are responding. Today, continued recovery in China strengthens our belief that these impacts are temporary and that we will emerge from this global pandemic with new insights and capabilities that will make our business even stronger and more relevant. The principles we developed to drive our decision-making since the pandemic started in January are serving us well. Bringing focus to our response and recovery effort, the three simple principles are prioritizing the health and well-being of our partners and customers, playing a constructive role in supporting health and government officials as they work to mitigate the spread of this virus, and showing up in a positive and responsible way to serve our communities. In our update to stakeholders on April 8th, we shared that the positive business momentum that drove one of the strongest holiday seasons in the history of our company continued well into our second quarter in the United States. Our performance was obviously disrupted by the impacts of COVID-19, but we are confident that the Starbucks brand is well positioned and that our growth at scale agenda remains intact and will propel future growth when we emerge from this current crisis. I will share some notable highlights from Q2 and then offer some perspective on how we expect to recover our business over time. Q2 was shaping up to be an exceptional quarter for Starbucks, driven by strong performance in the U.S. and channel development. even while we were simultaneously navigating the impact of COVID-19 in China. However, near the end of the quarter, the pandemic started to materially impact our business outside of China, most significantly in the US. As a result, consolidated revenue in Q2 was $6 billion, reflecting a 5% decline compared to prior year, primarily due to a 10% contraction and comparable store sales globally, driven by temporary store closures, modified store operations, and slower traffic, partially offset by strength in channel development. In China, where the pandemic impacted our business for most of Q2, revenue and comparable store sales declined year over year by $325 million and 50% respectively. Today, almost 100% of our stores in China are open, many with limited seating, reduced hours, and other safety protocols in place. Starbucks stores that remain closed in China are primarily located in cinemas and enclosed entertainment venues, along with international travel hubs and certain tourist zones where restrictions are still in effect. Since we started reopening stores in late February, we have seen meaningful improvements in China comparable store sales in commercial, residential, and office locations. We are also seeing the mix of in-store sales continuing to rise. For the month of April, comparable store sales in China were down approximately 35%, marking strong improvement from a weekly low of minus 90% in mid-February. Importantly, Even though new store development activities were suspended for most of the quarter, we opened 59 net new locations in China during Q2 and another seven locations added thus far in April. We are expecting to open at least 500 net new stores in fiscal 2020 with as many as 100 new stores originally planned for this year deferred to fiscal 2021. This represents a rapid reacceleration of our new store development and speaks to the amazing spirit and enormous capability of our team in China. Given this progress, we believe our recovery plan is working and we remain optimistic about our ability to capitalize on the long-term growth potential of the premium coffee market in China. We believe, barring any new disruption, that our business in China is on a path to substantial recovery by the end of this fiscal year. Just last week, we launched the Starbucks Good Good marketing campaign, which features plant-based alternatives in products and packaging. With this program, Starbucks in China introduced Oatly, a plant-based milk alternative. Also, Starbucks is the first in China to offer national distribution of Beyond Meat's plant-based proteins with new Asian menu items served in packaging made from plant-based materials. This campaign is just one step in our larger aspiration to be planet positive while introducing relevant menu choices for customers. Over the past 20 years in China, we've established an admired and trusted brand by investing in our partners and delivering a unique premium experience to our customers. We continue to play the long game in China as we invest in our future. The state-of-the-art coffee innovation park that we will be opening outside Shanghai in 2022 will serve as a key component of Starbucks' worldwide coffee roasting network for customers in China and is a testament to the growth opportunity we see for specialty coffee in the market. Starbucks' premium customer experience is highly differentiated in China, and the brand is as strong as ever. We continue to thoughtfully invest in China, a market that has significant long-term growth potential for Starbucks. I am proud of how Starbucks China continues to pave the way as one of our two lead growth markets. Now, on to the other lead growth market for Starbucks, the U.S. Coming off one of the strongest holiday quarters in the history of Starbucks, U.S. momentum continued to build well into Q2. Prior to mid-March, revenue growth in the U.S. was accelerating to the strongest level in over four years, driven by comparable store sales growth of 8%, including comparable transaction growth of 4%. Additionally, two-year comps were tracking to 12% growth, the strongest in over three years. With growth across all day parts and strong contributions from both our Starbucks rewards members and occasional customers, it is very clear that our focus on the customer experience, beverage innovation, and digital customer relationships is a powerful combination. Our performance was interrupted mid-March when a national emergency was declared to mitigate COVID-19. and we decided to close over 50% of our company-operated stores and limit service to drive-through and delivery for those that remained open. In that final three weeks of Q2, U.S. comp sales swiftly decelerated, ending the quarter down 3%, driven by a 7% contraction in traffic costs. Based on the experience we gained navigating COVID-19 in China, We have been as well prepared as anyone for this mitigate and contain phase in the U.S., particularly as our stores are well positioned to adopt operational safety protocols while still meeting our customers' needs. In the U.S., almost 60% of our company-operated stores include drive-thru, and over 80% of our customer occasions before the crisis were on the go. with the majority of these orders being placed at the drive-through or by using the Starbucks app to mobile order for pickup or delivery. Of note, during the second quarter, 90-day active Starbucks rewards members, our highly routinized, highly engaged, and loyal customer base, with whom we could directly communicate digitally, increased to 19.4 million in the U.S., up 15% from a year ago. Since the crisis started, we have seen an average ticket growth increase throughout the quarter, a result of group ordering as customers through this pandemic are making Starbucks runs for their homes, local essential businesses, and for frontline response teams. Overall, nitro cold brew and refreshment continue to lead for beverage and our new alt milk beverages Almond milk, honey flat white, and coconut milk latte are also resonating well with customers. Our innovation in food, notably our new breakfast wraps, have surpassed expectations to date. Similar to our experience in China, we are transitioning into a new phase of operations we call Monitor and Adapt. We are now leveraging digital tools that enable us to monitor the COVID-19 situation in every community across the U.S. and leverage a variety of service options from contactless service, entryway pickup, curbside delivery where parking is available, and at-home delivery that allow us to thoughtfully reopen stores and scale up operations. We are finding new, innovative ways to serve our communities. prioritizing the safety of our customers and partners with a focus on exceeding public health standards and adjusting to new customer expectations. The strength of our digital reach combined with a range of service options is enabling us to reopen stores community by community in a thoughtful way using the three simple principles that have guided our response thus far. Our monitoring capability provides the input necessary for decisions that enable us to turn the dial up or down, depending on the situation in the specific community or a specific store. This is the beginning of the recovery as we reopen stores, beginning in early May, and we expect to have approximately 90% of all company-operated U.S. Starbucks stores reopened by early June, with enhanced safety protocols and modified schedules. We are also sharing our store safety protocols with our licensees across the U.S. who continue to responsibly operate their stores, particularly in grocery locations across the country. My summary on our U.S. business is this. This monitor and adapt phase in the U.S. is the inflection point for reopening stores and begins a recovery process that requires ongoing monitoring, community by community, to rapidly adapt and drive the recovery. We are well positioned to leverage our digital assets and new operating formats like contactless pickup and curbside to expand service to customers. And our focus on the customer experience, beverage innovation, and digital, differentiate Starbucks and will enable us to regain the momentum we had prior to COVID-19. At Starbucks, the third place has always been about community, connection, and convenience. And we expect to strengthen this competitive advantage through continued improvements in our digital capabilities and innovative store formats, enabling us to connect with customers and serve our community safely and with even greater convenience. I am proud of how Starbucks Partners in the U.S. have shown up through all of this. The fact that while serving their communities, they also served over 1 million free cups of coffee to the frontline responders who have worked tirelessly to care for others, which makes us all very proud. Leveraging the playbook that was developed in China and refined in the U.S., we are working closely with our international license partners to navigate the current environment and prepare for recovery, guided by our mission and values and commitment to delivering the Starbucks experience safely and responsibly. With Starbucks in 82 markets, we are committed to supporting our licensed partners around the world as they too navigate this challenge. And finally, a few comments on our channel development business. The strategic value of our channel development segment has been clearly evident in the current environment. Selling Starbucks products through multiple channels amplifies the brand and extends our ability to meet customers where they are, even when they are unable to visit our retail stores. Through the Global Coffee Alliance with Nestle and our ready-to-drink partners, including Pepsi and Tingey, we offer a wide range of Starbucks products down the aisle in grocery stores, at mass merchants, in convenience stores, and online. In Q2, this segment's revenue grew by 16%, which includes a 5% favorable impact primarily related to the Global Coffee Alliance transition-related activity, boosting our share of the coffee market outside of specialty retail. This continues to be an important element of our growth at scale agenda. The Global Coffee Alliance with Nestlé was established just 20 months ago, and since that time, We have now expanded the Starbucks brand to nearly 50 markets around the world. It is clear that our channel strategy is working extremely well. Before I hand over to Pat to walk you through the details of the quarter and balance of your perspective, I want to reinforce one key point. Starbucks is resilient. For over 49 years since our founding, we have overcome every challenge presented to us and are overcoming this challenge as well. Our China business is on a path to recovery. Our U.S. business is entering the phase of reopening stores, adapting to the new reality, and restoring and rebuilding momentum. And our channel development business is posting very strong results and acting as a brand amplifier. Our growth at scale agenda provides the focus and discipline for us to successfully navigate this challenge. We remain confident in our approach. We understand there is much more to do and that we must be agile as the world navigates COVID-19 and works to create a vaccine. We have a very clear path going forward. We are optimistic about the future, and we believe Starbucks will emerge from this experience even stronger, more determined, and more focused than ever before. But the real credit goes to Starbucks partners. Together, we are emotionally connected to a mission grounded in humanity. And together, we are making principled decisions true to our values. Partners are the key to our resilience. It is why we will do all we can to provide them with economic certainty and support them through this challenging period. After all, partners are the heartbeat of Starbucks. Now, I'll turn it over to Pat for a deeper dive into our Q2 financial results, an update on our FY20 outlook, and an overview of our financial readiness to weather this crisis.