Starbucks Corporation

Good afternoon. My name is Diego and I will be your conference operator today. I would like to welcome everyone to Starbucks first quarter fiscal year 2025 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, please press star then the number one on your telephone keypad. If you would like to withdraw your question, please press the star followed by 2 on your telephone keypad. I will now turn the call over to Tiffany Willis, Senior Vice President of Investor Relations. Ms. Willis, you may now begin your conference.

Thank you, Diego, and good afternoon, everyone, and thank you for joining us today to discuss Starbucks' first quarter fiscal year 2025 results. Today's discussion will be led by Brian Nickel, Chairman and Chief Executive Officer, and Rachel Ruggieri, Executive Vice President and Chief Financial Officer. This conference call will include forward-looking statements, which are subject to various risks and uncertainties that could cause our actual results to differ from these statements. Any such statements should be considered in conjunction with cautionary statements in 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. Revenue, operating margin, and EPS growth metrics on today's call are measured in constant currency and represent non-GAAP measures. Please refer to the earnings release and our website at investor.starbucks.com to find reconciliations of these non-GAAP measures to the corresponding GAAP measures. This conference call is being webcast and an archive of the webcast will be available on our website through Friday, March 14th, 2025. Also, for your calendar planning purposes, please note that our second quarter fiscal year 2025 earnings conference call has been tentatively scheduled for Tuesday, April 29, 2025. And with that, I'll now turn the call over to Brian.

Good afternoon, and thank you for joining today. Over the past four months, we've been focused on getting back to Starbucks and those things that have always set us apart. a welcoming coffee house where people gather and where we serve the finest coffee handcrafted by our skilled baristas. We believe it's the fundamental change in strategy we needed to solve our underlying issues, restore confidence in our brand and return the business to sustainable long-term growth. While we're only one quarter into our turnaround, we're moving quickly to act on the back to Starbucks efforts we outlined on our last call. And today we've seen a positive response. As Rachel will outline in greater detail, our financial performance met our expectations for the quarter with a total company revenue of $9.4 billion, a global comparable store sales decline of 4%, a global operating margin of 11.9%, and overall earnings per share of 69 cents. To be clear, these results have room for improvement, but I'm confident the disciplined investments we're making in labor, marketing, technology, and stores this fiscal year will help stabilize the business and position Starbucks for future growth. We're also working to change the role, structure, and size of our support teams to improve efficiency and accountability. This will ensure we deliver on our commitments and our work to get back to Starbucks. Let me share with you some of the progress we've made through the quarter and what we're focusing on next. Our path back to Starbucks in the US is driven by four core initiatives. Reintroduce Starbucks to the world, deliver the customer experience to win the morning, reestablish Starbucks as the community coffee house and ensure Starbucks is the unrivaled best job in retail, recognizing our success starts and ends with our Green Apron partners. During the quarter, we move quickly to refocus the business, our mission and our marketing to align with our core identity as the premier purveyor of the finest coffee in the world. We started by reducing the frequency of discount-driven offers, resulting in 40% fewer discounted transactions year over year. We also removed the extra charge for non-dairy milk customizations and identified several other steps we can take to make our pricing architecture more transparent for customers. And just this week, we launched a new Coffee Forward U.S. marketing campaign, reintroducing the brand to a broader customer audience. Our work to reintroduce our brand is just beginning. but our core business is already strengthening, demonstrating that when we talk about our business, customers respond. Through the quarter, we saw a shift in our sales mix towards coffee and espresso-based beverages, which over-delivered and compensated for lower than expected performance across our holiday promotions. We've been focused on simplifying our menu to position partners for success, improve consistency, drive customer satisfaction, and enhance our economics. As part of this work, we made some late simplifications to our holiday product lineup and believe we have more opportunity ahead as we follow a disciplined stage-gate process to innovate and bring to market fewer, better beverage and food offerings that reflect our premium positioning. In the coming months, you'll see us begin to optimize our menu offerings, resulting in roughly 30% reduction in both beverages and food SKUs by the end of fiscal year 2025. As we do, we'll work to lead this market with breakthrough beverage and food innovation. We'll do this by being responsive to customer trends and their changing preferences. We'll rely on our highly engaged Green Apron partners for inspiration, like we did with our Lavender lineup last year, and we'll be more responsive and tuned in to cultural moments, like we did with the Dubai Matcha. We also saw continued improvement in comp trends, driven by Back to Starbucks efforts launched during Q1. Non-Starbucks rewards customer traffic grew quarter over quarter, Starbucks rewards membership and spend grew both quarter over quarter and year over year. And price parity for non-dairy milk customizations brought back lapsed Starbucks rewards members. Our US category share among QSRs also recovered in Q1 following two quarters of decline. These things tell us our actions are resonating with customers. Progress like this shows me that the Starbucks brand is still resilient and strong and that we have significant future potential More importantly, it shows that we can sell more of our core beverages simply by demonstrating our premium value. A key part of the premium value we provide is quickly and consistently delivering a high-quality, handcrafted beverage to customers. The handoff from our barista to the customer is our brand moment of truth, and we've been working hard to get that moment right. Through the quarter, we've continued to test and learn as we position the business to achieve our four-minute throughput goal with a moment of connection, It's become clear through our pilot work that order sequencing creates more of a bottleneck than capacity. In short, investments in staffing and deployment, processes, and algorithm technology demonstrate the greatest opportunity to deliver a four-minute wait time in most of our cafes. As a result, we've started to segment stores by transaction volume and are now targeting installation of SIREN equipment only in our highest quartile stores where it is needed to meet our throughput expectations. We've also invested additional coverage hours across more than 3,000 U.S. company-operated stores through precision scheduling, introduced new brewed coffee and tea routines, and simplified beverage builds. And soon, we'll launch a pilot across 700 stores, looking at staffing levels to improve our Green Apron partners' ability to serve the world's finest coffee with a moment of connection. We'll use learnings from this to inform the future investments we need to make in store coverage hours to deliver both an exceptional partner and customer experience and further differentiate our brand. Looking forward, we're beginning to pilot a new in-store prioritization algorithm and are exploring other technology investments to improve order sequencing and our efficiency behind the counter. We're also progressing efforts that build on the strength and popularity of the Starbucks app, This includes development of a capacity-based time slot model that allows customers to schedule mobile orders and a mid-year update that will simplify customization options, improve upfront pricing, and provide real-time price changes as customers customize beverages. Lastly, we're planning to fully deploy digital menu boards and cafes across our U.S. company-owned stores over the next 18 months to make our offerings more easily understood and to better show customization add-ons. We also made strides to reestablish Starbucks as the community coffee house. To make it easier for our customers to enjoy a cup of coffee their way, condiment bars will be back in all our U.S. company-owned stores by the end of the week. We reintroduced ceramic mugs and handwritten notes on cups to better connect with customers and elevate the cafe experience for those who choose to stay and work. We rolled out new cafe service standards and expanded free refills on hot and ice-brewed coffee and tea to non-Starbucks rewards customers at participating stores. We announced a new coffeehouse code of conduct to prioritize our spaces for customers, and we continue to target a full rollout of Clover Vertica brewers by the end of fiscal year 2025. We're taking a hard look at our store portfolio as well. In the U.S. alone, we still see the potential to double our store count while improving the overall health of our portfolio. We'll do this through a strong store renovation program, new store builds, and store closures. and we're going to make sure our stores are warm and welcoming with work continuing on store design standards and cost to build. Early customer and partner reactions to our plans show we've got the right strategy. Both the reintroduction of coffee condiment bars and the expansion of free refills were identified as top drivers of purchase intent. In the coming months, our teams will be focused on refreshing our menu boards and improving cafe merchandising to reflect the coffee house feel and better showcase our simplified menu. We'll start an expanded test of risers and shelves at the point of handoff to help separate the cafe and mobile experience. And we'll begin to scale projects to increase and diversify seating across more of our cafes. To deliver a great customer experience, we also have to deliver a great partner experience. It's why everything we do starts and ends with our Green Apron partners and why I'm committed to ensuring Starbucks is the unrivaled best job in retail. In the past quarter, we more than doubled paid parental leave for eligible U.S. store partners, and we made a new commitment to promote from within 90% of retail leadership roles over the next three years, helping thousands of partners grow their careers and their incomes. As a result, through the quarter, shift completion, average hours per partner, partner retention, and hourly partner engagement improved. Looking forward, we'll continue to prioritize efforts that help our Green Apron partners succeed both at work through continued improvements to our staffing model and in their lives through industry-leading benefits, competitive pay, and careers that create lasting economic opportunity. Turning to international, I've had a chance to see our operations in Italy, Japan, and South Korea, and meet with our international licensed business partners over the past few months. As I shared with them, many of our international markets set an example for the experience we aim to deliver in the U.S. and present a great long-term opportunity, particularly as we continue to grow our store footprint and recover our business in certain challenge markets. Just last week, I also made my first market visit to China. While there, I saw firsthand the strength of our brand, our team, and the premium customer experience we offer. I saw how dynamic the market is and the opportunities ahead. I also saw several near-term changes we can make to stabilize and strengthen our business while continuing to explore strategic partnerships to grow in China. We're processing these learnings and we will share more as we do. From my time there, I also believe there are several lessons we can learn from the strength of our supply chain in China to realize opportunities in our North American business. If you take one thing From today's call, let it be this. Despite near-term challenges, we have significant strengths and a clear plan. The response we've seen since fundamentally shifting our strategy to get back to Starbucks gives us confidence we're on the track to turn the business around. We are where we want to be one quarter in, but much of our work is just beginning. As we continue to learn and implement our Back to Starbucks plan, I believe we'll make it easier to be a customer, and in turn, I believe they'll visit more often. We'll also find more ways to set our partners up for success so they're able to deliver a great customer experience every time. In doing so, we'll reinvigorate our brand, drive stronger financial returns, and return Starbucks to growth. There is important work ahead, and I look forward to bringing you along. With that, I'll turn it over to Rachel.