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 third 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, please press star, then the number two. I will now turn the call over to Durga Durasamy, Vice President of Investor Relations. Ms. Durasamy, you may now begin your conference.

Good afternoon, everyone, and thank you for joining us today to discuss our third quarter fiscal year 2020 results. Today's discussion will be led by Kevin Johnson, President and CEO, and Pat Grissom, CFO. And for Q&A, we will be joined by Ross Brewer, Chief Operating Officer and Group President Americas. 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, we estimate the impact of COVID-19 by comparing actual results to our previous forecast. 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. Starbucks assumes no obligation to update any of these forward-looking statements or information. GAAP 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. For certain non-GAAP financial measures mentioned in today's call, please refer to our website at investor.starbucks.com to find the corresponding GAAP measures as well as a reconciliation of these non-GAAP financial measures 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, August 28, 2020. Finally, for your calendar planning purposes, please note that our fourth quarter and fiscal year 2020 earnings conference call has been tentatively scheduled for Thursday, October 29, 2020. I will now turn the call over to Kevin.

Well, good afternoon and welcome. Thank you for joining us today. It's been three months since our last earnings call as the entire world, all of humanity, has been navigating the COVID-19 pandemic through this very dynamic and challenging period. In times of adversity, values matter. And I'm very proud of how Starbucks partners around the world have responded during this global pandemic, united by our mission and values and guided by three simple principles. prioritizing the health and well-being of Starbucks partners and the customers we serve, supporting local government and health officials as they work to mitigate and contain the virus, and showing up in a responsible and positive way in each and every community we serve. The dedication, agility, and positive energy of our partners inspires me. And for that, I am grateful. Throughout this dynamic period, I believe the combination of principle decision-making and transparency in our communication has built trust, trust with all stakeholders. We provided Starbucks partners economic certainty through the shutdown while prioritizing their health. As we reopened stores, we created safe, familiar, and convenient experiences for our customers. We remain committed to doing so as we adapt the store portfolio to cater to evolving patterns of consumer behavior, including on-the-go consumption, mobile order and pickup, drive-through, and contactless pickup and delivery in accordance with our multi-year strategy, which has been further validated by the unfortunate dynamics created by COVID-19. We showed up in the community to provide free coffee to the frontline healthcare workers who have been caring for those in need. We collaborated with our suppliers and, every step of the way, we supported our global license partners in markets around the world. With a strong balance sheet, we took appropriate steps to ensure liquidity and maintained our quarterly dividend payment to shareholders while maintaining flexibility for the future. And we did all of this while continuing to advance our long-term strategy to position Starbucks for continued success. Trust is earned, and building trust with all stakeholders is a very important attribute of Starbucks. I believe the significant investments we made this quarter have inspired Starbucks partners, strengthened customer loyalty, and will pay dividends long into the future. as the Starbucks brand is stronger than ever. On today's call, I will summarize the business recovery results that we are driving as we navigate the current situation and how we are rapidly adapting our business for this new reality. My hope is that from this call, you understand and take away two important points. First, our recovery plan is working. With the vast majority of stores around the world now reopened, we saw meaningful improvements in both sales and profitability as the quarter unfolded. Additionally, customer affinity for Starbucks is very strong, as demonstrated by improvements in our customer connection scores, growth in customer loyalty, and market share gains. While we anticipate these improvements to continue, our balance sheet and the strategic actions we have taken to position Starbucks to weather a more protracted disruption in global economic activity. And second, in response to clear shifts in consumer behavior and preferences, we are now accelerating strategic initiatives for the future and positioning Starbucks for continued long-term growth. We have moved aggressively to advance our evolution of the store base to accommodate trends that we have long seen emerging in our business that were only exacerbated by COVID-19. When taken together, these two points indicate a bright future ahead for all stakeholders of the Starbucks coffee company. Let me begin in the US, where the recovery accelerated throughout Q3. We exited the quarter with 96% of stores open, up from 44% at the beginning of the quarter. With health and well-being top of mind, We monitored trends and quickly adapted to support our partners and serve our customers safely and responsibly. Through a combination of new store operating protocols and service channels, we were able to amplify a number of contactless experiences for our customers, including drive-through, entryway pickup with mobile order and pay, and delivery. And with new proprietary data-driven decision tools that monitor public health conditions, government guidelines, customer preferences, and partner sentiment in real time, we were able to gradually and safely reopen a select number of our U.S. stores for limited seating experiences, expanding to nearly 30% of our U.S. company-operated stores by the end of the quarter. As a result, Weekly US comps steadily improved throughout the quarter, from the low point, a decline of minus 65% in mid-April, up to minus 16% as we exited Q3. And through all of this, we posted all-time high customer connection scores. Looking specifically at the comps of the 3,100 US stores that remained open throughout the entire quarter, Those stores improved sequentially from minus 14% comp in May to minus one in June to a positive 2% comp for July month to date. We have now developed new levels of agility and resilience that position us well for the future with the mindset and capability to safely, effectively, and confidently drive our continued recovery. We recognize that markets will experience varying levels of COVID-19 impact until new therapeutics and vaccines are developed. And we are well positioned to navigate this phase of the pandemic. Today, customers are seeking safe, familiar, and convenient experiences in many aspects of their lives. And in that regard, our digital assets have proven to be a competitive advantage. Within the quarter, we saw significant acceleration in the number of customers who downloaded the Starbucks app and joined Starbucks Rewards, totaling 3 million in the quarter and up 17% from Q2. Additionally, engagement with Starbucks Rewards customers outpaced non-Starbucks Rewards members, with year-over-year sales growth from Starbucks Rewards customers turning positive in early July. As a result, Starbucks Rewards, as a percentage of tender in Q3, rose four percentage points from a year ago to 46%, which is above the pre-COVID trend, highlighting our success in acquiring new loyalty members as well as reengaging our existing customer base. And finally, customer usage of mobile ordering increased to 22% of total transactions, up six percentage points from a year ago. Although our digital platform continues to be a source of strength, disruption to the weekday morning routines, notably commuting to work and school, is a headwind we are focused on across the U.S. as we continue to recover our business. We continue to see improvements in the morning peak period, as well as some customer occasions shifting to later in the morning day part. As we see customer visits shifting from urban cafes to suburban drive-thrus, Customers are also purchasing multiple beverages and food items on a single order, essentially a group order. These dynamics have contributed to a meaningful increase in average spend per order compared to pre-pandemic levels, leading to 25% average ticket comp growth for the quarter. As we reopen stores to include mobile orders, entryway pickup, and in-store to-go orders, Ticket growth moderated and transaction volume increased as the quarter unfolded. Almost 90% of sales volumes in Q3 flowed through the combination of drive-through and mobile order and pay. In addition, with national coverage in the U.S., Starbucks delivers transactions tripled in Q3 from Q2 levels, with the highest volume in the late morning and midday. All of this indicates that customers are adapting their routines, and we are well-positioned to drive further recovery by simply increasing throughput and enhancing those safe, familiar, and convenient experiences customers desire. As I will discuss in greater detail later, that is why we are accelerating innovative store formats like Starbucks Pickup and new operating protocols such as curbside delivery. as they align closely with the customer preferences that have evolved as a result of COVID-19. Let me now move on to China, where at the end of Q3, 99% of stores had reopened, with approximately 90% having regular operating hours and over 70% having full seating. Building on the positive recovery momentum from Q2, China demonstrated sequential improvements in monthly comparable sales across Q3, exceeding our expectations for the quarter. In addition to comp sales recovery, we reignited new store development, crossing the 4,400 store milestone with the opening of almost 100 net new stores in the quarter. Mobile order sales mix reached 23% of sales in Q3 with 12% coming from delivery and 11% from mobile order and pay, well above the mid-teens levels we saw pre-COVID. As digital adoption accelerates in China, we continue to innovate in ways that deepen customer relationships and extend the reach of the Starbucks experience across a variety of digital platforms and ecosystems. In May, we launched a new WeChat mini program with new functionality for WeChat users, including Starbucks delivers. And in June, we enhanced the Starbucks rewards program, introducing a multi-tier redemption system, similar to what we rolled out in the US last year. Fueled by these new digital initiatives, we have seen strong sequential growth in active rewards members. In fact, the Q3 90-day active members increased 25% over Q2 to 9.9 million, representing 9% growth over the prior year. We are pleased with the progress we are making in China to recover sales. However, we are reminded by the recent resurgence of COVID-19 cases in Beijing and the corresponding actions taken to mitigate the spread that our new normal requires us to monitor the situation in every community, rapidly adapt and innovate in ways that continue to bring more customers into our stores and increase the frequency of those visits. With the differentiated capabilities and strategic advantages we enjoy in China, including our digital partnership with Alibaba and our access to emerging technologies through our co-investment relationship with Sequoia Capital, We are confident that we will substantially recover our sales in China by the end of this calendar year, demonstrating the strength and resilience of the Starbucks brand in our fastest-growing market. Moving to channel development, this has been a quarter where demand for at-home coffee has soared, and our channel development business has demonstrated tremendous resilience and gained market share as customers adjust to their at-home routines. In the U.S., Starbucks' share of total packaged coffee grew significantly in Q3. 21% growth in dollar sales, outpacing the coffee category, which grew 13% in the quarter. Our domestic ready-to-drink business grew by 11%, gaining two points of share in Q3. Our global coffee alliance with Nestle, combined with our ready-to-drink partners, including PepsiCo and Tingy, have extended our ability to meet customers where they are, which is particularly important in the current environment. We are now in 53 markets with the Global Coffee Alliance, more than tripling our at-home coffee presence versus a year ago. And we expect to be in over 60 markets by the end of this fiscal year. With our near-term business recovery fully in motion and delivering results, Let me now focus on how we are leveraging this disruptive period to accelerate value creating initiatives that further differentiate Starbucks and fuel predictable, sustainable, long-term growth. Why is this important? In every industry, there are periods of disruption that create great opportunity for those businesses that adapt to the disruption, invest in relevant ways, and strengthen their differentiation and competitive advantage. Those businesses that fail to evolve typically fall behind. Given the strength of our brand, our advanced digital capabilities, and our strong balance sheet, I believe this is one of those rare opportunities to move aggressively and further differentiate Starbucks from our competition. And I will highlight three areas where we are doing just that. Convenient store formats, digital customer engagement, and plant-based menu items. Over the years, we have demonstrated a clear track record of reimagining store formats to better serve customers. And we are now reimagining how we further elevate the customer experience by leveraging these various store formats to create a network of stores in a community. Think of this as blending highly complementary store formats throughout a community that collectively better serve the expanding and shifting need states of customers in that community, and thus increasing revenue in the trade area while optimizing profitability and investment returns. We have been blending store formats in suburban markets for years, where we have complemented traditional Starbucks stores, the third place experience, with drive-through and mobile order pickup experiences that serve customers' need for convenience. We are introducing a simple handheld device to further increase throughput and improve the customer experience. And we are introducing a new curbside pickup experience that will be available in 700 to 1,000 locations by the end of this quarter, which enables incremental customer visits. In urban core markets where drive-throughs and curbside aren't feasible, we will begin to reposition our store formats to create a blend of traditional Starbucks stores with new Starbucks pickup stores. These stores are built in a smaller footprint and create a familiar and convenient walkthrough experience that is very relevant to customers in urban markets. Each of these Starbucks pickup stores will ideally be located within a three to five minute walk from a traditional Starbucks store, giving customers the flexibility to enjoy their beverage in our store or on the go. We plan to accelerate the development of over 50 of these stores over the next 12 to 18 months with a view to have several hundred in the U.S. over the next three to five years. We have also accelerated the rollout of a similar concept in China, Starbucks Now stores, adding nine new locations in Q3 for a total of 15. We are seeing firsthand the power of integrating physical and digital customer touchpoints to meet customers' growing need for convenience. In addition to accelerating our store transformation strategy, we are creating new capabilities that expand digital customer engagement. We're having great success bringing new customers onto the app and into the rewards program. We will build on this momentum in the fall when we introduce a new pay-as-you-go option for Starbucks Rewards members in the U.S. and Canada. This significant new addition will open up an invitation to join Starbucks Rewards to a much wider audience. While nearly half of our sales now comes from Rewards members who are preloading their stored value cards, we have heard from many more customers that they would like an option to earn rewards when paying directly with cash, credit, debit, and select digital wallets. By adding this capability to Starbucks Rewards, we will give customers more ways to pay and earn rewards when using the Starbucks app. In China, since we began our China Digital Partnership with Alibaba two years ago, we've worked together to deliver innovative digital services to our customers and transform the coffee industry in China. As part of our ongoing partnership, we are expanding our reach to customers across the Chinese mainland by introducing the Starbucks Now mobile order and pay feature to multiple platforms in the Alibaba digital economy, including Taobao, digital mapping and information provider Amap, local services app Qbay, and Alipay, which serve a combined user base of nearly 1 billion customers. Through these apps, customers will be able to pre-order and pay for their favorite Starbucks beverage and food online, and then pick up in person at most Starbucks stores across the Chinese mainland. Previously, this service was only available through our Starbucks China mobile app. This is a significant step forward, and we value our partnership with Alibaba greatly. We are listening to our customers and continually seeking ways to make Starbucks more relevant, inviting, and uplifting through personalized human connection. The seamless link between the customer experience we create in our stores and the power of the digital customer relationships. Finally, our recent announcements of plant-based beverage and food innovation through partnerships with Beyond Meat, Impossible, and Oatly reflect the fact that customers want more plant-based options. We believe that customers are embracing plant-based choices because they are good good, good for your health and good for the planet. We are shifting more beverage and food menu items to include plant-based options. Recent examples include cold brew with cinnamon almond milk foam in the U.S. and oat milk versions of two signature Starbucks beverages in China, oat milk latte and oat milk matcha latte. Early results from these innovations are very encouraging, so we are accelerating efforts to expand these offerings for our customers, and in the process, making meaningful progress against our planet-positive goals. Let me close by reinforcing two key messages I hope you take away from this call. First, our recovery strategy is working, as evidenced by the improving business results across all of our key segments. Second, we have future-proofed our business model and reinforced our balance sheet to enable us to play offense by accelerating key strategic initiatives that further differentiate Starbucks and reinforce the long-term, sustainable growth opportunity ahead. Those two points reinforce an optimistic view of our future. Before we conclude this call, I want to thank you all for joining us today. The last several months have been quite unprecedented in regard to public health and commerce, given the impacts of COVID-19. Simultaneously, there is a powerful awakening underway in America to address systemic racism and social inequality, issues that Starbucks has always embraced, believing that we have a role and responsibility to advance positive change. That has never been more true than it is today. The mission and values that unite Starbucks partners continue to help us navigate these complex times and inspire us to promote equity, create opportunities, and build resilient communities. And building upon the deliberate actions we have taken to provide a warm, welcoming, and safe environment for everyone, our work will not end. This is who we are at our core. and it is what our partners and customers expect of us. I again thank all Starbucks partners, your commitment, dedication, and caring for one another, as well as our customers and the communities in which we operate through this pandemic is heartwarming. You are the heartbeat of Starbucks, and I am proud to work in service of you. As always, We look forward to bringing you along our journey to create opportunities and strengthen our communities. Thank you for your time and attention today and for your ongoing support. Now, over to Pat.