Starbucks Corporation

good afternoon my name is alex and i will be your conference operator today i would like to welcome everyone to starbucks third quarter fiscal year 2022 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 simply press star then the number two I will now turn the call over to Tiffany Willis, Vice President of Investor Relations. Ms. Willis, you may now begin your conference.

Thank you, Alex, and good afternoon, everyone. And thank you for joining us today to discuss Starbucks' third quarter fiscal year 2022 results. Today's discussion will be led by Howard Schultz, Interim Chief Executive Officer, Frank Britt, Chief Strategy Officer, Belinda Wong, Chairwoman of Starbucks China, and Rachel Ruggieri. Executive Vice President and CFO. And for Q&A, we will be joined by John Culver, Group President of North America and Chief Operating Officer, Michael Conway, Group President of International and Channel Development, Deb Hollisay, Executive Vice President and Chief Technology Officer. This conference call will include forward-looking statements, which are subject to various risks and uncertainties that can cause our actual results to differ materially from these statements. Any such statement should be considered in conjunction with cautionary statements and our earnings release and risk factors discussed in our filings with the SEC, including our latest 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. GAT results in third quarter fiscal year 2022 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. All numbers referenced on today's call are on a non-GAAP basis, unless otherwise noted or if there's a non-GAAP adjustment related to the metric. For non-GAAP financial measures mentioned in today's call, please refer to our earnings release on our website at investor.com. investor.starbucks.com to find a reconciliation of those 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, September 2nd, 2022. As a reminder, Starbucks 2022 Investor Day will be held on Tuesday, September 13th, 2022. The event will be available to view from our website beginning at 7.30 Pacific time. Also, for your calendar planning purposes, please note that our fourth quarter and fiscal year 2022 earnings conference call has been tentatively scheduled for Thursday, November 3rd, 2022. And with that, allow me to turn the call over to Howard.

Thank you, Tiffany. Good afternoon and welcome to everyone on today's call. Starbucks Strong Q3 results highlighted by 9% global revenue growth to a record $8.2 billion. 3% global comp growth, and 9% comp growth in North America once again demonstrates the power and resilience of the Starbucks business and brand all over the world. I've now been back as CEO for four months. During that time, I've immersed myself in every segment, region, operation, and aspect of our business. And given my long history with the company and our culture, In my unique understanding and appreciation of the Starbucks brand, the drivers of our global business, and the special relationship that exists among our people, our brand, and our customers, we've been able to pinpoint the source of each of the issues and challenges confronting the company upon my return. Some were definitely COVID-related. Some were a function of not focusing on the long term. And unfortunately, many were self-induced. More important, we now have clear line of sight on what we need to do to totally reinvent the company and drive accelerated profitable growth around the world. The Q3 results we announced today demonstrate the early progress we have made in just four short months and served as a proof point of the significant long-term global growth opportunity ahead for Starbucks. Each business segment contributed to our Q3 performance. I'm particularly pleased that we delivered our results in the face of stiff, ongoing consumer, economic, and inflationary headwinds. COVID lockdowns across China that kept Shanghai, our largest China market, largely closed for two months, and that continues episodically today. And continuing shifts in customer traffic and behaviors including materially reduced office occupancy in our largest urban markets. Our Q3 performance underscores the success of the investments we are making in our people, extending our global leadership around everything coffee, and in groundbreaking beverage, food, digital, and technology innovation that is deepening our connection to customers in every market and every channel. And our performance demonstrates that the Starbucks experience is more relevant and important than ever in today's unsettled world. On today's call, I will highlight the drivers of our Q3 revenue, comp, and EPS performance. I will then turn the call over to Frank Britt, our Chief Strategy Officer, to provide an overview of our reinvention plan, a strategy underpinning the investments we are making to materially elevate our partner, customer, and store experiences. Next month, at Investor Day in Seattle, you will see for yourselves how accretive to our business our reinvention plan will be, increasing efficiency, enabling us to seamlessly handle the increasing demand in our U.S. stores, and most of all, elevating our partner customer and in-store experiences. Our reinvention plan touches every aspect of the Starbucks experience and sets us up for accelerated, long-term, profitable growth and value creation benefiting all stakeholders beginning in 2023. We are executing against the reinvention plan with focus, with discipline, and a deep sense of urgency. Next, Belinda will update you on China, where our position in the market and our aspirations for the future have never been greater. Rachel will provide a deep dive into our Q3 financial and operating results, and then we'll move on to Q&A. Core to Starbucks' success and long-term growth strategy is our global leadership around everything coffee. No company in the world even remotely approaches Starbucks' ability to source, blend, roast, and craft the world's best coffees. And in Q3, we continue to extend our coffee leadership, innovate, and bring further elements of customization and premiumization to the entire coffee category, including around cold, handcrafted, and plant-based coffee beverages. Customer demand for specifically customized cold coffee beverages, a category Starbucks single-handedly created and is now expanding around the world, is so strong that cold beverages now account for roughly 75% of our total beverage sales in US company-operated stores. Customers are increasingly customizing their cold beverages by adding modifiers that enable the creation of a virtually unlimited range of taste, flavor, and color profiles, and then sharing their unique cold beverage creations with the world through social media. Starbucks' unique ability to deliver handcrafted, customized cold beverages that satisfy customer desires and different need states, while creating opportunities for customers' self-expression, deepens our connection to customers, sets us apart from any other industry participant, and provides us with a significant ongoing competitive advantage in the marketplace. Iced shaken espresso, introduced onto our iced espresso platform only last year, is resonating so loudly with our Gen Z customers that it has already become the fastest growing product category in our U.S. company-operated stores, growing 50% year-over-year, more than doubling year-to-date, and importantly creating new customer occasions in the midday and afternoon day parks. Ice shake and espresso is also resonating around the world. In China, for example, where ice shake and espresso was only introduced in June of this year, it is already among our best-selling iced coffee beverages, despite mobility restrictions in China. Just to summarize what's going on with cold and specifically customized beverages, the premium customized cold coffee opportunity had for Starbucks all around the world is simply enormous. Let me turn to North America. The very strong demand for Starbucks coffee in the U.S. that we reported on our Q2 call has accelerated in Q3. U.S. company-operated stores delivered record average weekly sales, five of the top 10 grossing sales day in our history, and a $410 million sales week. In North America overall, the combination of customer shift towards premium cold beverages, increased customization, strategic decisions on our part with regard to beverage and food and modifier pricing, and a 19% increase in food sales, driving net revenues up 13%. In addition, our North American licensed stores business, now 7,000 stores strong and growing, also posted strong results, with 24% revenue growth in the quarter. While we are sensitive to the impact inflation and economic uncertainty are having on consumers, it's critically important that you all understand we are not currently seeing any measurable reduction in customer spending or any evidence of customers trading down, reflecting the strength of the Starbucks brand, deep customer engagement and loyalty, pricing power, and the premium nature of our beverage and food offerings. What's driving some of the increase in traffic and the strength in our business is our rewards program. Active Starbucks rewards membership in Q3 totaled 27.4 million members, up 3.2 million or 13% year-over-year and 3% sequentially. Our loyal Starbucks rewards members drove a record 53% of U.S. company-operated revenue. Mobile order and pay, drive-through, and delivery also remained quite strong, driving 72% of our U.S. revenue. Increased Starbucks rewards membership, customer excitement over our beverage and food offerings, plus a fantastic holiday lineup that I am certain will delight our customers gives us tremendous confidence heading into holiday and 2023. My first order of business upon returning to Starbucks in April was to meet with Starbucks retail store and roasting plant partners across the United States in order to better understand the state of our business and the challenges confronting our partners and the company. It soon became clear that record demand in our stores was masking significant underlying issues, including, as we shared in our last call, store designs that were ill-suited to the evolving customer behavior and traffic patterns we are seeing post-COVID. Our stores in many ways are windows on America, and our partners everywhere shared similar anxieties over a wide range of issues affecting their families and their lives around safety, around mental, physical, and financial health issues, over the widening cultural and racial divide in the state of our country and the world. Many questioned whether the American dream and economic mobility was still realistic aspirations Our partners also shared how hard it had become to keep up with customer demand and how insufficient training had left new partners unprepared for their roles, challenging partner and customer experiences alike. The conversations were raw and in many ways painful for our leaders to hear. But core to StarGraph's culture is the requirement that we always speak with each other with honesty, transparency, and without judgment or fear of reprisal. The truth is, at times, I was overwhelmed by what I heard. The challenges, the fears, the desire for emotional and financial security, and the sense of belonging in our partners' lives emitted all uncertainty whirled. At the same time, I found myself feeling so proud, so appreciative, and oftentimes in awe of our partners across the country who showed up every day committed to delivering an elevated Starbucks experience to our customers and communities. despite the personal challenges and obstacles they were experiencing. We were in a moment where Starbucks leaders needed to put themselves in the shoes of our partners and demonstrate great empathy and compassion towards them. And we needed to address our partners' concerns with urgency. What began as informal partner meetings soon evolved into focused co-creation sessions where Starbucks partners and leaders collaborated on how best to reimagine the next Starbucks. We've since held over 100 co-creation sessions. And from these sessions, our reinvention plan has taken shape. Today, over 30 cross-functional teams are focused exclusively on executing the US reinvention plan you will see take shape over the quarters ahead. And in time, you will see best practices shared around the world. our 200 top US executives in Seattle last month to kick off Starbucks' reinvention and change agenda. In a few minutes, Frank Britt, a key architect of the plan, will provide you with an overview so you can begin to understand how accretive each pillar of the plan will be to our business and brand long into the future. The strong revenue growth we delivered in North America in Q3 is being replicated globally. With the exception of China, where the zero COVID policy continues to result in mobility restrictions and limited store operations, each one of our international regions grew revenues by double digits in Q3. It's an extraordinary accomplishment, reflecting both the strength of the Starbucks brand and strong and accelerating demand for Starbucks coffee all over the world. Our international performance also underscores the correctness of our strategies of investing ahead of the curve in beverage, digital, and technology innovation that is relevant to our customers and driving new store growth in every market in which we operate. Overall, our international segments, excluding China, grew revenue 33% year over year, or 50% excluding FX, while meaningfully expanding operating margin, reflecting the strong operating leverage inherent in our complimentary portfolio of company-operated and licensed stores. Last month, several Starbucks leaders joined me on a multi-country tour across several strategic theaters of our EMA business. In every country we visited, we were inspired by what we heard, felt, and observed. Product quality, service execution, and knowledge of coffee across EMA are all delivered at the highest levels. Our EMA teams are executing while weaving together a powerful emotional connection and sense of belonging among our partners and customers with the Starbucks experience being the shared medium of exchange. And our EMA partners are literally thriving, inspired and earnestly engaged in bringing our unique culture of respect, purpose, service, and an authentic and aspirational love of coffee to life. Interestingly, while thousands of stores in many countries drove strong financial performance during the quarter. I want to showcase one market in particular that serves as a proxy for the strength of the Starbucks brand and demonstrates the enormity of the international opportunity ahead. Italy. Italy, a market we only recently entered and a market that is close to my heart and that no one ever expected us to succeed in. Starbucks is flourishing in Italy. The quality of the coffee, the food, and the partner and customer experiences are second to none. Traffic in our Milan roastery, Starbucks' shrine to coffee, is strong throughout the day, driven largely by tourist activity. But most importantly, traffic in our Italy retail stores is largely local, customer-driven. And when I was there, what I observed is Italians drinking straight espresso at Starbucks. We are being warmly welcomed in Italy, the country in which our Starbucks journey literally began. Given the success we are enjoying in Milan, we are now planning to open in Rome and in Florence. As home to our EMA roasting operations, Amsterdam is a strategic foothold for our international efforts. In July, we committed to a planned expansion that will materially increase our roasting capacity in order to meet the rapidly growing demand for Starbucks coffee across the region. Similar efforts are underway to support a supply chain team that currently handles logistics to over 4,000 stores across 42 countries in the MES. In Switzerland, we held highly productive sessions with our partners at Nestle. Global coffee is among Nestle's largest strategic growth categories, and our partnership with Nestle now extends across 81 markets, focusing on at-home coffee and food service channels. Building on our number one share position in the United States at home, retail, and CPG coffee channels, we are in the very early stages of leveraging the Starbucks brand and Nestle's global coffee platforms and significant distribution capabilities to create new super premium coffee occasions on the Espresso platform all around the world. Our partnership with Nestle is driving meaningful competitive advantages for both companies in the marketplace and is highly accretive to our business. Looking ahead, we expect to see a closer Starbucks Nestle partnership. This includes introduction of Starbucks varietals onto Nespresso's digital sales platform, a channel that does not presently exist for us and represents a massive global opportunity. Expansion of Starbucks Nestle partnership to include inclusion of many traditional Starbucks varietals on the Nespresso digital platform co-creation of Starbucks Reserve Rivals for the virtual platform, and the development of an espresso experience in our U.S. roasters. We're also looking forward to the launch of our ready-to-drink Starbucks coffees in Southeast Asia, Oceania, and Latin America, which will begin rolling out in next quarter. In China, mobility restrictions and limits on in-store dining continue to significantly impact the businesses. However, as Belinda will soon share, we are beginning to see green shoots of recovery with sales and comps coming out of the quarter reflecting sequential improvement. Lastly, we have been working on a very exciting new digital initiative that builds on our existing industry-leading digital platform in innovative new ways, all centered around coffee and, most importantly, loyalty. that we will reveal at investor day. We believe this new digital web three enabled initiative will allow us to build on the current Starbucks rewards engagement model with its powerful spend to earn stars approach, while also introducing new methods of emotionally engaging customers, expanding our digital third place community and offering a broader set of rewards, including one of a kind experiences that you can't get anywhere else. integrating our digital Starbucks rewards ecosystem with Starbucks branded digital collectibles as both a reward and a community building element. This will create an entirely new set of digital network effects that will attract new customers and be accretive to existing customers and our core retail stores. As I mentioned at the outset, we're looking forward to fully showcasing the power and the opportunity of our reinvention plan. that we will unleash at next month's investor day. With that, I'll turn the call over to Frank Brink.