Starbucks Corporation

Good afternoon. My name is Devin and I will be your conference operator today. I would like to welcome everyone to Starbucks Coffee Company's second quarter fiscal year 2021 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 the star key and then the number two. I would now like to call over to Durga Dorosan, Vice President of Investor Relations. Ms. Dorosan, you may now begin your conference.

Good afternoon, everyone, and thank you for joining us today to discuss our second quarter fiscal year 2021 results. Today's discussion will be led by Kevin Johnson, President and CEO, and Rachel Ruggieri, CFO. And for Q&A, we will be joined by John Culver, Group President, International Channel Development and Global Coffee Tea and Cocoa, Brady Brewer, Chief Marketing Officer, Rossanne Williams, President, North America. 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. Starbucks assumes no obligation to update any of these forward-looking statements or information. GAAP results in fiscal 2021 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, May 28, 2021. Finally, for your calendar planning purposes, please note that our third quarter fiscal year 2021 earnings conference call has been tentatively scheduled for Tuesday, July 27. I will now turn the call over to Kevin. Kevin?

Well, good afternoon, and thank you for joining us today. I want to begin this call by recognizing the impressive momentum in our business, evidenced over this past year and further amplified by the Q2 results we released today. While the COVID-19 pandemic is not over, this momentum is giving us confidence to raise our full-year guidance, as Rachel will outline later. Starbucks is as well positioned as it has ever been, as global events have driven us to instill a new level of agility and speed into the business. With our growth at scale agenda in place well before the global pandemic emerged, we quickly set principles and established store protocols to guide us globally. We monitored events in real time and quickly adapted to changing conditions on a store-by-store basis around the world, working to provide safe familiar, and convenient experiences for our partners and customers. Many of us have lived this past year feeling isolated, protecting ourselves and our families from COVID-19. We now share a powerful craving for human connection, a desire to socialize and feel part of a community, and a need to be with others and heal. And with vaccination programs underway, and in turn consumer mobility, we have begun to see what we describe as the great human reconnection. This is evidenced by our Q2 sales in the U.S., which fully recovered in the quarter, as we had previously communicated, and the forward momentum across our business around the world as the COVID-19 vaccine distribution progresses at varying rate. It is no secret that consumer behaviors were disrupted as a result of the pandemic. We recognize shifts in behaviors early, and our understanding of those behaviors will guide our strategy well beyond the pandemic, as we believe many of these behaviors are here to stay. Our ability to move with speed and agility and to be out in front of these shifts has helped further differentiate Starbucks, positioning us well for the future. I have previously outlined the five most notable consumer behaviors we are laser focused on, which I will share with you again today. First, customers crave human connection. They have been longing to be together again, face to face, feeling part of a community. This is human nature and has always been central to the Starbucks experience. Second, they are looking for convenient, personalized experiences that effortlessly fit their lifestyle. Third, customers appreciate consistency, knowing what to expect at each visit. Fourth, customers seek out high-quality offerings that support the well-being of the planet and society. And finally, customers are increasingly looking to support brands with strong values, values that are demonstrated by actions. Not only have we been adapting to and benefiting from these consumer behaviors, but we also see a clear opportunity to further modernize and reinforce our leadership position, leveraging our strength in technology and predictive analytics, as well as the continued transformation of our store portfolio, offering experiences that will drive greater customer loyalty in ways only Starbucks can do. When we spoke with you last quarter, Markets were in the initial stages of gaining access to COVID-19 vaccines, and we were seeing very early signs of friends and families celebrating being together again to heal from a year filled with economic and social hardship that has challenged our overall well-being. Certainly, not all markets are moving at the same speed in terms of vaccine distribution, but we know that this is the key that enables all of us to once again be together as part of humanity. And there is no global brand better positioned than Starbucks. Founded 50 years ago, Starbucks was built for this moment. I want to share with you results from Q2 that reinforce my optimism for our long-term outlook. Let me begin in the U.S. Building on our very strong Q1 holiday results, our second quarter comparable store sales returned to strong, positive growth and a meaningful improvement from last quarter's minus 5%. In Q2, comparable store sales rose to an impressive 9% at the high end of our 5% to 10% guidance range for the quarter. Once again, the credit for this remarkable resilience and recovery goes to our phenomenal Green Apron partners who delivered another quarter of stellar performance in Q2. driving steady improvement, culminating in a new record for weekly sales and full U.S. comp recovery as we exited the quarter. Importantly in Q2, we further advanced the three business driving initiatives fundamental to our growth at scale agenda, elevating the customer experience, driving relevant beverage innovation, and expanding digital customer engagement. Let me share notable highlights from Q2 and our traffic driving initiatives for the balance of fiscal 2021. Starting with the largest contributor for the quarter, expanding digital customer engagement. Digital continues to be a significant driver of our sales recovery in the U.S. Starbucks Rewards contribution to the business continues to exceed pre-COVID levels, and for the second consecutive quarter is displaying all-time highs across key metrics. Between continued growth in SR member spend, fueled by strength in ticket and frequency, as well as new member acquisition, 52% of our U.S. company-operated sales in Q2 were driven by Starbucks Rewards members, reflecting strong member engagement and resilience. Total 90-day active members grew by over 1 million members in Q2 to a record 22.9 million. Relative to the launch of Stars for Everyone just six months ago, our 90-day active SR member base has expanded by 19%, a clear testament that the program is attracting customers as we had intended. The increase was underpinned by a meaningful uptick in conversions, with more app downloads advancing to member activations. With Stars for Everyone, customers can choose from a range of payment options, offering convenience, flexibility and choice. Our pioneering digital capabilities not only successfully transform our digital relationships to drive mobile ordering, but also amplify convenience and safety, which are both very much top of mind for our customers. We continue to leverage the advantages of our mobile app to elevate the personalization of the customer experience and deepen customer engagement. As a result, Mobile orders represented 26% of U.S. company-operated transactions in Q2, up from 18% a year ago. As we have seen each quarter, our digital channel's convenience has proven successful in driving demand. A quick comment on digital that I think is important to highlight, the increasing role that artificial intelligence is playing in the growth and success of our company, an initiative we call DeepRoot. In October 2019, I published an article on LinkedIn entitled, Can Artificial Intelligence Help Nurture Humanity? This article outlined a vision for how Starbucks would leverage artificial intelligence in support of our mission. And that vision has come to life with Deep Brew, our AI engine that is now used today throughout the company. Deep Brew personalizes the offers and suggestions we make to our customers. It is also at the center of trade area transformation, which I'll provide an update on in a moment. Deep Brew has now automated daily inventory orders across hundreds of U.S. stores as we deploy it broadly. It is supporting partner scheduling and optimizing it in ways that improve both the customer and the partner experience. Deep Brew drives our pandemic dashboard used by our retail leaders across the U.S., and Deep Brew is now doing predictive analytics to model vaccination progress in key markets around the world. Our work in AI is providing Starbucks the underlying predictive models, enabling us to fuel the great human reconnection by freeing up partners to do what they do best, connect with customers, and deliver a world-class customer experience. Elevating the customer experience is another fundamental business driving initiative underlying the Growth at Scale agenda. and perhaps the most important of all of our priorities. Starbucks has always excelled at meeting our customers where they are, even as transactions in the current environment have migrated from dense metro centers to suburbs and from cafes to drive-thrus. Company-operated sales in our U.S. suburban and rural locations, where drive-thrus are most predominant, continue to gain momentum. more than offsetting the impact from central business districts and metro centers where the recovery continues to lag. The drive-thru channel has improved quarter over quarter since the onset of the pandemic. We continue to invest in several initiatives to increase the throughput of our drive-thrus, including updated operational standards, handheld order devices, more efficient warming ovens, and accelerated deployment of our more efficient Mestrano espresso machine. As a result, drive-through saw slight improvement in out-the-window times versus the prior year. Out-the-window drove over 50% of net sales in Q2, increasing more than 10% from pre-pandemic levels, unlocking capacity and enhancing the customer experience by reducing wait times, ultimately fueling our business recovery. Last June, we wrote a letter to all stakeholders, outlining our plan to accelerate strategic initiatives focused on rapidly transforming our store portfolio and optimizing for shifting consumer behaviors. This plan, which we refer to as the America's trade area transformation, has positioned us extremely well for the future. We called this early, and in just nine months, we have already completed 70% of the strategic store closures, clearing the way for the development of new, innovative, and more efficient retail store formats over time. The plan leverages new store formats like Starbucks Pickup in dense metro areas that complements our traditional Starbucks Cafe formats in suburban and rural areas, and also enables us to balance continued growth in high-volume and high-margin locations, primarily cafes with drive-thrus. We are responding to customers' increased desire for convenience while also improving the overall profitability of every trade area. As the great human reconnection gains momentum and anticipation of behaviors and daily routines continuing to evolve, we are meeting our customers wherever they need us to be, with the right store, in the right place, and at the right time. Yet another key differentiator of the Starbucks brand. As our sales fully recovered in the quarter, average ticket remains meaningfully higher than pre-pandemic levels. This is true even as transactions have improved significantly quarter over quarter, giving the shift in sales next toward drive-through, where average spend tends to be higher, partially due to a higher incident of group orders. U.S. ticket comp growth of approximately 21 percent in Q2 was driven by a combination of increased beverage attach premium beverage mix, increased customization and upsizing, and all-time high food attach. The popularity of our innovative menu offerings, which command a premium price, also benefited U.S. ticket growth. Customers have responded extremely well to the new beverage platforms we have introduced, with a focus on relevant new handcrafted beverages that deliver on wellness trends, offer customers choice and support our sustainability agenda, our winter and spring menus resonated and drove momentum. Cold beverages delivered resounding year-over-year growth in Q2, led by cold espresso, Starbucks refreshers, and cold brew. Also driving our strength in cold beverages was our spring lineup, which launched in early March. We have seen an overwhelmingly positive response to oatmeal, with the iced brown sugar oat milk shake and espresso far exceeding expectations to date. This has helped us push year-over-year growth of 53% in all dairy beverage sales, a testament to the relevance of our sustainability agenda. Plant-based is also resonating in food, with the Impossible Breakfast Sandwich delivering record performance. which alongside other breakfast sandwiches and cake pops, pushed food attached to record highs in Q2. Any way you look at it, our second quarter results were phenomenal in the U.S. and exceeded our expectations. Importantly, affinity for Starbucks has strengthened, as measured by improvements in our customer connection scores and growth in customer loyalty, which further reinforces the strength and resilience of the Starbucks brand and healthy optimism for the future. I will now move on to China, our second lead growth market. The strong start to fiscal 21 continued as we entered Q2, and while a resurgence of COVID-19 restrictions impacted customer mobility as the quarter progressed, our China leadership team once again rapidly adapted to the changing conditions and successfully regained momentum as we exited the quarter. In Q2, we achieved 91 percent comp growth in China, including that favorability of approximately nine percentage points, which came in slightly below our expectations as unanticipated pandemic-related restrictions were imposed across the market. Nonessential travel was discouraged in Q2, severely impacting our stores located in travel hubs, including during the entirety of the Chinese New Year holiday. the peak domestic travel season, which saw a significantly lower number of travelers relative to both pre-pandemic and prior year levels. Even as mobility impacted our comps, our ability to expand our digital customer relationships in China through the Starbucks Rewards Program reinforces the long-term position of our brand in our fastest growing market. As we lapped the first anniversary of the pandemic, I am particularly pleased with our ability to dramatically expand digital customer relationships in China through the Starbucks Rewards Program. Our progress is evidenced by the number of 90-day active Starbucks Rewards members more than doubling versus prior year to 16.3 million, driving 72% of sales in China, up five percentage points from prior year. In addition, We expanded the Starbucks Now mobile order and pay service to WeChat in Q2, making our mobile ordering services ubiquitously available to customers on both Alibaba and WeChat ecosystems, as well as our Starbucks app. This enables us to acquire new customers in the WeChat ecosystem while enhancing the customer experience by allowing customers to place orders via the app of their choice. In Q2, We also launched our flagship store on JD.com, one of China's leading e-commerce platforms, offering merchandise, stored value cards, and seasonal food offerings, among other products. Mobile order sales mix hit a record 34% of sales in China, up from 30% in Q1, with 15% driven by Starbucks Delivers and 19% from Starbucks Now. Starbucks Rewards customer engagement continues to grow as mobile order sales have more than doubled in China over this past year. As COVID-related restrictions subsided late in the quarter, momentum in customer mobility improved, particularly in residential, office, and commercial trade zones. In addition, as much of our growth in China comes from our continued expansion of the store portfolio, We crossed the 4,900-store milestone with the opening of 110 net new stores in Q2. That equates to 14% growth in net new stores over the past 12 months, which is particularly impressive considering that we suspended new store development activities for a couple of months in China at the onset of the pandemic. This week, we announced our 5,000th store opening in China, underscoring our continued confidence in Starbucks' long-term growth opportunity in China. And finally, a few comments on the strength of our channel partnerships with Nestle and Pepsi. In the US, Starbucks' share of total packaged coffee outpaced the category, growing over 8% in dollar sales in Q2. This is a sharp contrast to the overall coffee category which declined due to a surge in pantry stocking that occurred last year at the onset of the pandemic. I'm proud to say that Starbucks remained the number one brand in total coffee in the U.S. and was the top share gainer of the coffee category in Q2, gaining nearly 1.5 points over the prior year. Internationally, Starbucks products on single-serve platforms, including Nespresso and Dolce Gusto, continue to exceed our expectations. And with the Q1 launch of Starbucks products on the Nespresso virtual line, our outlook is optimistic as we continue to build distribution, amplify the brand, and grow share. The Global Coffee Alliance is now in 71 markets around the world, up from 48 markets in Q2 fiscal year 20, bringing more customers the opportunity to enjoy Starbucks in many different ways. Similarly, consumption of our U.S. ready-to-drink coffee products through our North American coffee partnership with PepsiCo grew more than 23% in Q2, over a 5% jump from Q1. Q2 also marked the launch of new beverages, including the cold and crafted platform and new nitro cold beverages, leveraging last year's Starbucks Nitro ready-to-drink platform launch, which became the number one innovation in the ready to drink category. In summary, as you can see, there are many reasons to be confident and optimistic about the future for Starbucks. Personally, I am optimistic about the back half of this fiscal year. But even more importantly, it is clear to me that the actions we are taking, the customer and partner response we are seeing, and the focus and discipline we have brought to the business have clearly positioned Starbucks for the next several years of growth. The growth at scale algorithm we shared at our December Investor Day is solid. The Starbucks brand is stronger and more resilient than ever. We have more opportunities to reach customers than ever before, and we are continuing to personalize and enhance those interactions by always delivering for our customers a unique and innovative food and beverage experience in a safe environment with a personal touch where and when they want. As we celebrate our 50th anniversary throughout this year, we do so knowing that Starbucks' third place experience is well established and core to the great human reconnection that has begun. We are a destination for human connection, a warm and welcoming place for all, and a place that brings entire communities together. And that is exactly what the world needs. a place that inspires and nurtures the human spirit, one person, one cup, and one neighborhood at a time. And I want to thank our over 400,000 Green Apron partners in 83 markets around the world who have been navigating through this complex environment. Partners, it is you who exemplify what Starbucks has always stood for, a company with a purpose that goes beyond the pursuit of profit. A culture that demonstrates care for our partners, creates uplifting experiences for our customers, and plays a positive role in our communities and throughout society. And with that, I'm pleased to turn the call over to Rachel, who will walk you through our Q2 results. Rachel?