Starbucks Corporation

Good afternoon. My name is Devon, and I will be your conference operator today. I would like to welcome everyone to Starbucks Coffee Company's fourth quarter and 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 and then the number one on your telephone keypad. If you would like to withdraw your question, please press star and then the number two. I would like to turn the call over now to Durga Dorozami, Vice President of Investor Relations. Ms. Dorozami, you may now begin the conference.

Good afternoon, everyone, and thank you for joining us today to discuss our fourth quarter and 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 Culver, Group President, International Channel Development, and Global Coffee Tea and Cocoa. 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 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. 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 their 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, November 27, 2020. I will now turn the call over to Kevin. Kevin?

Good afternoon, and thank you for joining us today. 2020 has been an extraordinary year, as together, everyone on this planet has been navigating a global pandemic and all of the implications that come along with it. This shared experience gives us much to reflect upon, learn from, and be inspired by. I am very proud of how Starbucks Partners responded, pulling together to support one another, creating safe and familiar experiences for our customers, and serving communities. Starbucks Partners, who proudly wear the green apron, have been at the forefront of these efforts, and I am enormously grateful for the courage, compassion, and dedication that they've shown throughout this journey. They inspire me, and fuel my positive outlook for the future. There are three words that I hope you take away from today's call, confidence, resilience, and optimism. Let me explain. First, in the most dynamic of times, Starbucks is consistently executing. Our recovery is progressing extremely well, as evidenced by better than expected sales and profits in the fourth quarter. which gives us great confidence going forward. Second, we have accelerated several growth strategies and are innovating rapidly to adapt to new customer behaviors and preferences, building a new level of resilience for the future. And third, Starbucks partners have risen to the occasion, which, coupled with an innovation agenda that elevates the customer experience, introduces exciting new beverages, and extends our digital customer relationships, leaves us very well positioned and gives me a tremendous sense of optimism for fiscal 21 and the future of the Starbucks coffee company. In these unprecedented times, Starbucks is more focused than ever on making the investments necessary to position our brand and our company for long-term success. We will maintain our disciplined approach to investing behind our best-in-class digital ecosystem and aligning our product portfolio, store base, and partner-led customer experience with evolving preferences and consumption patterns. Our track record of delivering across these areas underpinned the resilience of our business during this pandemic and will support Starbucks' continued leadership. Let me begin in the U.S. I could not be more pleased with our U.S. sales recovery, which progressed faster than we anticipated in our final quarter of fiscal 2020. We finished the quarter with a comparable store sales decline of 4 percent for the month of September, a vast improvement from the approximately 65 percent decline we experienced at the depth of the pandemic only five months ago. Fourth quarter comparable store sales declined 9 percent in the U.S. relative to the same quarter in the prior year. well above the better end of our guidance range. Importantly, transaction volumes in the U.S. climbed steadily throughout the quarter as we methodically and carefully restored in-store seating, with approximately 63% of our U.S. stores offering limited seating as we exited the quarter. Ticket growth was relatively stable across the quarter at approximately 20%, remaining meaningfully above historical levels. aided by continued strength in our drive-through channel, where customers tend to place larger orders. Central to the strength of our U.S. recovery has been a relentless focus on rapid innovation, adapting and adjusting to new customer behaviors, while continuing to drive the three strategies that are fundamental to our growth at scale agenda, elevating the customer experience, driving relevant beverage innovation, and expanding digital customer engagement. The first pillar of our growth at scale strategy, customer experience, is a key competitive differentiator for Starbucks and something that is paying dividends as customers now, more than ever, are seeking the comfort and care that Starbucks uniquely provides. As customers continue to adapt to work from home and study from home realities, they crave safe, familiar, and convenient experiences and have shifted their buying behavior accordingly. And we've adapted rapidly to meet those evolving needs. Broadly speaking, we've seen U.S. transactions migrate from dense metro centers to the suburbs, from cafes to drive-thrus, from early mornings to mid-mornings, with outpaced recovery on the weekends. We've adjusted our operations to match these new customer behavior patterns, including multiple new protocols to provide a safe experience for our partners and customers. And this has resulted in customer connection scores which are well above prior year levels. By caring for our partners since the start of this pandemic, providing them with economic certainty at a time of great vulnerability, we've successfully maintained very high levels of partner engagement. And this is paying off in the form of high-quality customer experiences. Those best moments that inspire Starbucks customers As evidence of these traffic shifts, U.S. sales comps were solidly positive for our drive-through locations and suburban stores for the fourth quarter and the month of September, respectively. Although this was offset by negative sales comps in our dense metro stores, particularly on weekdays, those numbers reflect the fact that approximately 3% of our stores were temporarily closed across the entire quarter, effectively weighing down the market comp by about 2 percentage points. To increase throughput and accommodate higher transaction volumes at our suburban locations, we've rolled out curbside pickup to approximately 800 U.S. company-operated locations and are on track to be in nearly 2,000 stores across the U.S. by the end of fiscal 2021. We've also introduced handheld point-of-sale devices to about 100 stores, with the goal of deploying these devices to approximately 400 additional stores by the end of Q1. And we are continuing to restore in-store seating across all of our stores in the U.S. as conditions allow. Building on the strength of our customer experience, differentiated products continue to be an important traffic driver as well, encompassing seasonal favorites as well as new innovations. The relaunch of our pumpkin spice platform in late August was a catalyst to our Q4 results. With pumpkin cream cold brew, which was first offered last year, actually outselling Pumpkin Spice Latte this season, leading the entire pumpkin platform to a record high in average daily units. Our cold beverages continued to resonate with customers, led by Starbucks refreshers and cold brew, with both delivering double-digit growth in Q4 and buoyed by positive year-over-year growth in Frappuccino beverages. These results reflect not only the appeal of our products, but also the effectiveness of our marketing campaigns, which reinforce the trust and familiarity of the Starbucks brand at a time when customers are craving a return to normalcy. And finally, as customers are increasingly seeking convenient and contactless experiences, our expanding drive-through presence and industry-leading mobile platform our primary vehicles to increasing convenience and digital customer engagement, have been instrumental to the strength of our recovery. As evidence of this, approximately 75% of U.S. sales volume in Q4 was drive-through and mobile orders. Although this was meaningfully down from 90% in Q3, reflecting a sizable shift to on-premise occasions in Q4 as we progressively restored seating in our cafes, This is notably higher than pre-COVID levels at approximately 60% of sales. Moreover, our mobile order transactions continue to grow, increasing from 18% in Q2 to 24% in Q4, aided by continued improvements to our mobile app, as well as an increased messaging across our marketing channels to drive further awareness, introducing more customers to our mobile app, which drove engagement to mobile order and benefited us operationally. Of course, another key driver of increased digital customer engagement is our Starbucks Rewards program. In Q4, Starbucks Rewards drove 47% of US company-operated tender for a second consecutive quarter, up from 43% in our fiscal Q1 prior to the onset of COVID-19. Importantly, Starbucks rewards contribution improved throughout the quarter and returned to pre-COVID levels, mainly driven by recovery in member spend and higher mobile order and pay usage, as I outlined previously. Additionally, our 90-day active rewards member base increased by 3 million members in Q4, approaching pre-COVID levels at 19.3 million, up 10% from the prior year. The successful launch of Stars for Everyone in mid-September was a key highlight in the quarter. The momentum we saw in the number of customers who downloaded the Starbucks app in Q3 continued throughout Q4, and the number of active customers who joined the Starbucks rewards program grew slightly in Q4 relative to Q3, likely helped by the late quarter launch of Stars for Everyone. These early results indicate that the flexibility of rewards payment options, including the removal of the stored value card requirement to earn stars, is resonating with customers. This gives us optimism regarding our ability to meaningfully grow the number of 90-day active Starbucks rewards members in fiscal 2021. Before moving on from our U.S. business, I'd like to remind you that as we announced in June, We are in the midst of accelerating the transformation of our dense metro business by closing lower-performing stores while continuing to capture that traffic where customers need us to be, including existing drive-through stores, new formats such as curbside, and more efficient Starbucks pickup locations. We expect much of this work to be completed in the next 12 to 18 months. At the same time, we remain focused on our strategy of developing drive-thru locations, largely in suburban and semi-rural locations, extending the reach of the Starbucks brand with high-volume, high-margin stores, providing our customers the convenience they are seeking. We continue to grow our delivery business through our partnership with Uber Eats, providing customers the ultimate form of convenience. I could not be more excited about the upward trajectory and level of innovation we're seeing in our U.S. business. I'll now move on to China, our second lead growth market. Building on the positive momentum in Q3, China demonstrated sequential improvements in monthly comparable store sales across Q4, delivering minus 3% for the quarter. This was in line with our expectations, led by initiatives very similar to what I described in the U.S. Outstanding customer experience, new product innovation, notably our new T-Cloud platform, and continued expansion of our digital platform. But what's most remarkable about the recovery in China, in my view, is the rapid re-acceleration of new store development, which is our number one driver of growth in China. I'm pleased to say that despite the challenging environment imposed by the pandemic, we crossed both the 4,600 and the 4,700 store milestone in Q4. opening almost 260 stores in the fourth quarter alone. That's an impressive 581 stores, or 14% growth, in the last 12 months. This is an incredible achievement by the team, considering we temporarily paused new store development activity in China for a couple of months starting in late January. Our disciplined approach to store development is paying off as these new stores are off to a strong start. with early returns substantially in line with pre-COVID levels. As part of our store development program in China, the local team has innovated a new retail format that caters to the need state of convenience, Starbucks Now, which is very similar to Starbucks pickups in the U.S. With speed and agility, Starbucks China opened 40 Now stores in fiscal 2020, with a presence in nine Chinese cities. Early results are very encouraging, and the team is increasing the pace of development for this innovative concept. On the digital front, we saw continued strength in our mobile platform in China, with mobile order sales mix more than doubling in the past 12 months to 26% in Q4, with 13% coming from delivery and 13% from mobile order impact. The digital innovations we launched in China throughout fiscal 2020, including a new WeChat mini program and the enhanced Starbucks rewards program, along with our digital partnership with Alibaba, have fueled customer engagement and strong sequential growth in active Starbucks rewards members. In Q4, China's 90-day active members increased 36% over Q3 to 13.5 million, representing 34% growth over the prior year. As with the U.S. business, I'm incredibly proud of the continued recovery and industry-leading innovation in China. The customer trends we are seeing in specialty retail extend to coffee at home, where demand remains elevated through the pandemic. We're applying our innovation mindset and agility to our channel development business to capture share, in at-home coffee and to maximize reach of the Starbucks brand across all channels and platforms. In the U.S., Starbucks' share of total packaged coffee grew significantly in Q4, with 17% growth in dollar sales, outpacing the coffee category, which grew 9% in the quarter. Consumption of our domestic, ready-to-drink coffee products grew 15% in Q4. Somewhat offsetting this strength was softness in the food service business, as offices, hotels, colleges, and entertainment centers continued to experience low levels of traffic. Through the Global Coffee Alliance with Nestle, we accelerated growth and innovation while maintaining our commitment to sustainability in Q4, including the introduction of non-dairy Starbucks creamers with 100% recyclable packaging to our full portfolio of at-home products, We entered nine new markets in the quarter, bringing Starbucks at-home coffee presence through the Global Coffee Alliance to 62 markets in just 24 months. We also continue to meet customers where they are through our global ready-to-drink portfolio, notably the continued performance of ready-to-drink nitro cold brew, the number one innovation in the category this year, exceeding expectations. Overall, We are very pleased with the accelerated expansion of the Starbucks brand around the world through the channel business. This is truly a brand amplifier. In summary, the Starbucks brand is stronger than ever. Our business recovery is progressing well, and through rapid innovation, we've built a new level of resilience for the future. We believe that the investments we made to protect our partners' well-being and provide them with economic certainty combined with our principled approach to decision-making and transparency of our communications, have built trust with all stakeholders and will pay dividends long into the future. I open my remarks by suggesting three words for you to take away from this call. Confidence in our strategy, resilience built from our innovation agility that continues to drive our business recovery, and optimism about fiscal 21 and the future of Starbucks. I close by adding one additional word for all Starbucks stakeholders to take away from today, gratitude. None of this would have been possible without the positive spirit and incredibly hard work of our 400,000 Green Apron partners around the world who serve our customers each day. They live our company mission and values every day. Partners are the heartbeat of Starbucks, and they fill me with gratitude and inspiration. Thank you, partners. Let me now hand the call over to Pat to discuss our financial performance for Q4 and fiscal 2020, as well as our guidance for fiscal year 21. Pat?