Starbucks Corporation

Good afternoon. My name is Alex and I will be your conference operator today. I would like to welcome everyone to Starbucks fourth quarter and fiscal year end 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'd like to ask a question, simply press star then the number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. I will now turn the call over to Greg Smith, Vice President of Investor Relations. Mr. Smith, you may now begin your conference.

Good afternoon, everyone. Thank you for joining us today to discuss Starbucks' fourth quarter and fiscal year-end 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, North America and Chief Operating Officer, Michael Conway, Group President, International and Channel Development, and Leo Tsui, Chief Executive Officer, Starbucks China. 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 10Q. Starbucks assumes no obligation to update these overlooking 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 non-GAAP financial measures mentioned in today's call, please refer to the earnings release in our website at investor.starbucks.com to find a reconciliation of these non-GAAP measures to 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 26, 2021. For your calendar planning purposes, please note that our first quarter and fiscal year 2022 earnings conference call has been tentatively scheduled for Tuesday, February 1, 2022. Before we begin, there are four reminders I'd like to make with respect to the numbers that will be discussed on today's call. First, as noted in our earnings release, we have realigned our fully licensed Latin America and Caribbean markets to our international segment. As a result, we renamed the Americas segment to North America. All discussions and comparisons today are reflective of the resegmentation. Second, a reminder that Starbucks' fiscal year 2021 is a 53-week year instead of the usual 52 weeks. Fiscal year 2021 results on today's call are on a 14-week basis for the quarter and 53-week basis for the year, except year-on-year comparative metrics, including revenue growth, comp growth, EPS growth, and margin expansion, which are based on a 13-week or 52-week basis to exclude the impact of an extra fiscal week. Third, all references on today's call are on a non-GAAP basis, unless otherwise noted. And lastly, effective in the first quarter of fiscal 2022, Certain international integration-related expenses previously excluded from our non-GAAP results will be included, as they are expected to be representative of ongoing operations. Please refer to the reconciliation of these measures in a schedule showing adjusted fiscal 2021 EPS to bridge year-on-year impacts of this recast, as well as reconciliations of 53-week to 52-week metrics at the Supplemental Financial Data section of our website at investor.starbucks.com. I will now turn the call over to Kevin.

Well, thank you, Greg, and welcome everyone to today's call. I'm very pleased to comment on the record Q4 and FY21 results Starbucks reported today. I'm particularly pleased that we were able to deliver these results in Starbucks' 50th anniversary year and in the face of increased costs and unprecedented operating challenges resulting from the global pandemic. Today's results reflect very strong operating and financial performance across the board, with Q4 revenue growing 22 percent and full-year non-GAAP EPS of 168 percent over prior year. This was a record Q4 that punctuates a very strong FY21 performance with record highs in revenue, non-GAAP operating income, and non-GAAP EPS. our performance accelerated throughout FY21, fueling revenue growth of 21%, non-GAAP operating income grew 139%, and translated to a non-GAAP earnings of $3.24 per share, near the high end of our guidance for the year. Perhaps more persuasively than ever, the strength and resilience of the Starbucks brand and the power and opportunity afforded by the authentic connection and the deep trust and loyalty we have built with customers around the world is resonating. Today's results demonstrate that despite the pandemic, Starbucks' long-term, double-digit growth at scale model remains solidly intact. Today's results also underscore the passion and dedication of our over 400,000 Starbucks Green Apron partners. who serve nearly 100 million customer occasions around the world every week. And I'm humbled by our partners' commitment to each other and to our customers as we continue to navigate through the pandemic. Their resilience and service honors the company and our history, and I could not be more appreciative of their efforts. Finally, today's results demonstrate the success of the investments we have made. and will continue to make ahead of the growth curve in our people, digital, beverage and food innovation, and store experiences. These investments are driving and strengthening our global business and setting us up for even greater success in the future. Starbucks' longstanding view is that our partners guide this company, and we applaud other like-minded companies who are following our lead. Starbucks has been at the forefront of investing in our people since we opened our first store in the Pike Place Market in Seattle in 1971. We offered paid company health care 25 years before the Affordable Care Act, equity ownership in the form of Beanstalk to eligible part-time partners, free college tuition through the Starbucks College Achievement Plan with Arizona State University, and mental health support through our partnership with Lira. Investing in our people is the cornerstone of our storied 50-year history and tradition. And these investments continue to deliver real, measurable value to our partners, our customers, and our shareholders. I'll be providing granularity around the incremental partner investments we made beginning last year and the additional partner investments we will be making in fiscal 22 in a moment. On today's call, I will highlight Q4 performance in our key markets and provide detail around some of our actions and investments since the pandemic first surfaced in Q2 of 2020 that are contributing to our performance today and setting us up for accelerated growth in the future. I'll also open a window on our exciting holiday plans and several initiatives that will launch over the near term. Then I'll turn the call over to Rachel to provide a deep dive into our Q4 and fiscal year performance and share our guidance for fiscal 22. We'll then move on to Q&A. Over the last 18 months, Starbucks, like most global retail operators, has been confronted with a seemingly never-ending wave of consumer and business headwinds. Many businesses in our space have not survived. From day one of the pandemic, Starbucks leaders around the world were determined to use the company's size and scale to navigate whatever challenges lie ahead. With steadfast commitment to our people, our mission and values, a set of principles guided us through the pandemic. Every decision was rooted in our core purpose and reason for being. These decisions have made the Starbucks of today stronger and better positioned to profitably grow, extend our coffee leadership around the world, and create more value for our shareholders more than ever before in our history. Last year, we made significant pandemic-driven strategic investments, including providing our partners with financial support and economic certainty, avoiding layoffs while most of our stores were temporarily closed, and accelerating our U.S. store portfolio transformation by opportunistically repositioning 500 stores to better locations with more favorable economics. This last point, we expanded our portfolio of drive-thrus, introduced new store formats to meet our customers where they are, and turbocharged growth in our digital customer relationships in the U.S. and China. As a result of these successful investments, we are entering fiscal 22 with strong momentum around the world. In the U.S., our largest global market, our key growth driver is comparable sales. We grew a strong two-year comp to 11% in Q4, despite variants across the country that created a dynamic set of city-by-city COVID restrictions, which we had to navigate. We made significant progress addressing supply chain issues and experienced an overall improvement in inventory availability as we moved through the quarter by increasing production at existing suppliers, onboarding new suppliers, and strategically prioritizing key holiday and Q1 merchandise. While we made significant progress in addressing supply chain challenges as fiscal 2021 progressed, we remained cautious and vigilant as we entered fiscal 22, given the dynamic nature of the situation. The recovery in Q4 surged forward as evidenced by the sequential acceleration of two-year comp rule. We exited Q4 with even stronger 14% two-year comp growth in September, and closed to a record average ticket, driven by the strength of our fall beverage lineup, a shift in customer behavior toward more premium beverages, and strong food attach. We have great confidence for the year ahead, given the comp momentum throughout the quarter, combined with holiday plans certain to excite and delight our customers. and increasing consumer demand around the world today for everything Starbucks. Yesterday, we made an important announcement to raise wages across the U.S. in fiscal 22 to ensure we continue to attract and retain talented partners as consumer mobility continues to increase. We believe this investment, combined with our industry-leading benefits program, will enable us to remain an employer of choice. This builds on the historic partner investments and meaningful wage increases we made in fiscal year 21, and prioritizes significant additional investment to address inflation and wage compression that our tenured partners have experienced, while also increasing our wage floor. In December of 2020, I announced our intention to provide a starting wage of at least $15 an hour for our store partners across the country. And by the summer of 22, we will have delivered on that plan. Effective in January, partners with two or more years of service will get up to a 5% raise, and partners with five or more years will get up to a 10% raise, in keeping with our longstanding history of investing in our partners. And next summer, hourly partners in the U.S. will make an average of nearly $17 an hour, with barista rates ranging from $15 to $23 an hour across the country. In total, the FY21 and FY22 investments represent approximately $1 billion in incremental annual wages and benefits. We continue to build a great and enduring company by investing ahead of the growth curve, not just in wages, but in training and technology and the overall Starbucks experience for both our partners and our customers. And as we have seen in the past, we expect investment in the partner experience will be accretive to profits over time. We believe the US market is at a unique inflection point. Stakeholders and companies whose leaders correctly identify emerging trends, thoughtfully shape strategic action, and invest in the future will be big winners over the long term. In the quarters ahead, Starbucks will continue to target investment in high-returning assets that we believe will accelerate our double-digit growth at scale model, driving long-term, sustainable, and profitable growth. We continue to build and leverage our technology-first mobile and digital capabilities and accelerate growth in active Starbucks Rewards membership. We grew our 90-day active Starbucks Rewards members, representing our most loyal and engaged customers, by approximately 30 percent in fiscal year 21 to 24.8 million members. Noteworthy is that in Q4, 51 percent of U.S. tender for company-operated stores was generated by this loyal customer base. We continue to nurture and deepen our direct, personalized digital relationship with our members with enhancements to the program, like Stars for Everyone to expand reach and through payment partnerships with PayPal and VAT, where a customer can now reload their Starbucks card with a range of cryptocurrencies, including Bitcoin, Ethereum, and others, by converting digital currencies to physical currency and reloading their Starbucks card. Through blockchain or other innovative technologies, we are exploring how to tokenize stars, create the ability for other merchants to connect their rewards program to Starbucks Rewards, This will enable customers to exchange value across brands, engage in more personalized experiences, enhance digital services, and exchange other loyalty points for stars at Starbucks. An example of this innovation is evident in the recent launch of our Canadian loyalty program with Air Canada. Over the next year, you will see the first instance of this loyalty points exchange with other consumer brands. This approach will also serve as a foundation for a more aspirational concept for new, modern payment rails that align payment expenses with the value received by customers and merchants. We intend to be at the forefront of this disruptive innovation, which will unfold over the next few years. Finally, a rich pipeline of innovation will elevate the Starbucks experience in our stores and drive in-store productivity gains Examples include our Mustrena 2 espresso machines that more efficiently pulls triple shots of high-quality espresso, our Deep Brew artificial intelligence platform that has automated daily inventory management, and store staffing and training improvements designed to reduce complexity in our stores. Simplifying this workflow helps reduce the strain on our partners, resulting from the ever-increased demand in our stores, and enables our partners to connect and engage with their customers which is at the heart of the Starbucks experience. Starbucks is entering fiscal year 22 with strong customer demand and solid momentum in our U.S. business. An expanding and accelerating in-store channels and digital flywheel and Green Apron partners eager to deliver an elevated Starbucks experience to their customers. Having navigated through so many challenges over the past year, we are excited and optimistic about the year that has just begun. while remaining humble and mindful of unknown challenges. On to China. Starbucks China extended our market leadership position in Q4, despite pandemic-driven disruptions, propelled by an accelerated pace of store development and significant growth in digital customer relationships, all while achieving record customer engagement scores in the quarter and in the year. Starbucks has built one of the most respected consumer brands in China, with one in two consumers preferring Starbucks to any other brands in away-from-home coffee. Our growth strategy in the market continues to differentiate us and position us well for the long game. We continue to invest meaningfully in all aspects of our China business, including accelerated investment in our partners, the creation of award-winning experiential store designs, unprecedented benefits like healthcare for partners and their parents, rent assistance, and programs that offer career paths for young people from rural and remote provinces. Together, these investments further elevate the Starbucks brand and partner experience. They instill pride in our China partners and deepen our customer engagement and connection. Starbucks continues to be in a strong market expansion cycle, and as such, Much of our growth in China comes as we aggressively expand our store footprint and introduce more customers to the Starbucks experience. We expanded the store footprint with 225 net new stores in Q4, and we are going deeper and broader, deeper into existing cities and broader by opening in new cities. For the full fiscal year, we opened a record 654 net new stores and ended the year with 5,360 stores in 208 cities throughout China. As we noted on our Q3 earnings call, our recovery in China will not be linear. In Q4, we experienced COVID-related restrictions that constrained customer mobility in 18 provincial-level regions. At its peak in mid-August, approximately 80% of our stores in China were impacted by the pandemic, with some stores fully closed or operating at different levels of elevated public health protocols, such as mobile ordering only, limited seating, or health stations. Our recovery momentum was below expectation and pushed our two-year comps to a minus 10% in Q4. Cities with local COVID cases were impacted the most, with stores relying on transportation and tourism also materially impacted during the quarter. Notably, though, much like the U.S., China two-year comp also accelerated in the month of September, as we remain optimistic for the recovery. Despite these strong headwinds, China grew revenue 11% year on year. While our overall reported comp growth was minus 7% for Q4, if we exclude the lap of a VAT subsidy we received in fiscal year 20, along with the stores and cities that experienced local COVID cases or were in transportation and tourism zones, our core fleet of stores comped positive. Starbucks business and operating margins remained strong. And our commitment to China and our confidence in our long-term growth strategy in China is unwavering. In addition to expanding our portfolio of stores in China, we also expanded our digital footprint of 90-day Starbucks Rewards active members, reaching an all-time high of 17.9 million in Q4. This represents a sequential increase of 5% over Q3 and an increase of 33% over prior year. Frequency of purchases by our goal members remained at pre-pandemic levels despite the mobility limitations in the quarter, demonstrating the effectiveness of our efforts in up-leveling member engagement. One example was our Stardash Gift with Purchase campaign. that successfully lifted member frequency and spend and evolved into a highly anticipated activity for members to earn limited availability to Starbucks' 50th anniversary merchandise. With operations heavily impacted by COVID-related safety restrictions in the corner, we are laser focused on what we can control in China while continuing to elevate our partner and customer experiences to further elevate the Starbucks brand and build on the loyalty that will continue to drive our long-term growth. Including the U.S. and China, Starbucks' presence in 84 markets around the world provides us with a unique perspective on the global recovery from this pandemic. There is no doubt that we are seeing continued recovery in our markets. Latin America grew system sales by 113 percent in Q4, driven by a strong recovery in Mexico. EMEA posted system sales growth of 52% in the quarter, and Japan navigated through a challenging quarter, turning the corner towards renewed growth. We see positive signs in many other markets, as well as reinforcing our belief that pandemic-related headwinds are temporary. In addition, our strategic channel partnerships with the North American Coffee Partnership with PepsiCo and our Global Coffee Alliance with Nestle are on plan and have propelled Starbucks to number one share positions in the U.S. and throughout many other markets around the world, further underscoring the strength and resilience of the Starbucks brand and illuminating the decades-long runway of growth ahead. As we enter fiscal year 22, we are fully prepared for a record-breaking holiday with strong growth planned around the world and a holiday campaign designed to build genuine human connection as only Starbucks can at a time when human connection is more important than ever. In addition to new and iconic seasonal products, we are integrating brand building and transaction-driving marketing programs to demonstrate our values and touch our customers' hearts. We are prepared with inventory this holiday, and we are also anticipating that nearly $3 billion will be loaded on Starbucks cards this season by leveraging our digital and out-of-store distribution channels and creating a promotional presence in drive-through lanes, where we have seen significant channel shifts during the pandemic. We are ready for this holiday. In closing, Starbucks' strong performance through the recovery is a direct result of the hard work and dedication of our partners, as well as the investments we made both before and during the pandemic. We remain confident in our future and steadfast in our commitment to deliver long-term value to all stakeholders. This confidence supports the plan we announced today to return $20 billion to shareholders over the next three years through dividends and share repurchases. I'm particularly pleased that hundreds of thousands of Starbucks partners who are also Starbucks shareholders through our Beanstalk program will also benefit from this plan. Fifty years ago, Starbucks was founded as a different kind of company, a company that would balance profit with social conscience and embrace the ideal that doing good for one another and for society would actually be very good for business over the long term. Our performance in 2021 demonstrates the wisdom and correctness of that founding principle. As we enter our second 50 years, we continue to honor our history and heritage just as we boldly reimagine our future. And with that, I'll now turn the call over to Rachel. Rachel?