Starbucks Corp (SBUX) — Q1 2018 Earnings Call Transcript

Good afternoon, everyone. Thanks for joining us today to discuss our first quarter results for fiscal 2018. Today's discussion will be led by Kevin Johnson, President and CEO; and Scott Maw, CFO. For Q&A, we'll be joined by Roz Brewer, Group President Americas and Chief Operating Officer; Cliff Burrows, Group President, Siren Retail; John Culver, Group President, International and Channels; Matt Ryan, Global Chief Strategy Officer; and dialing in from Milan, Howard Schultz, Executive Chairman. 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 factors discussions in our filings with the SEC, including our last Annual Report on Form 10-K. Starbucks assumes no obligation to update any of these forward-looking statements or information. GAAP results in fiscal 2018 include several items related to strategic actions, including restructuring and impairment charges, transaction and integration costs, gains related to changes in ownership of international markets, and other items. These items are excluded from our non-GAAP results. Please refer to our website at investor.starbucks.com to find the reconciliation of non-GAAP financial measures referenced on today's call with their corresponding GAAP measures. This conference call is being webcast and an archive of the webcast will be available on our website as well. I will now turn the call over to Kevin.

Well, thank you, Tom, and welcome, everyone. Starbucks reported another quarter of record financial results in Q1 of fiscal 2018, highlighted by continued acceleration in our China/Asia Pacific segment. On today's call, I will provide an overview of company-wide performance in Q1 with a particular emphasis on our two unique and powerful global growth engines: our retail businesses in the U.S. and China. I'll then turn the call over to Scott, who will provide further detail on segment performance and an update on the impact of the new tax law. For the quarter, Starbucks delivered record revenues of $6.1 billion, a non-GAAP operating income margin of 19.2% and a non-GAAP EPS of $0.65 per share. And we opened 700 net new stores globally, with our newest class of stores continuing to deliver industry-leading returns and higher AUVs than the immediate prior class. China once again our fastest growing market in Q1, with 6% comp growth, driven entirely by increased transactions and 30% revenue growth. Customers' response to our Shanghai Roastery has been extraordinary and the Roastery is already performing well above expectation. I'll share more details around Starbucks' plans to maximize our opportunity in China in a moment. But let me start the call with an update on our U.S. business in Q1. We ended Q1 with 6% revenue growth and 2% comp growth in the U.S. Continued strength in throughput at peak and strong digital performance were noteworthy highlights in the quarter. But we recognized that overall our U.S. operating performance fell short of expectation. We have isolated the drivers of our Q1 underperformance and I want to take you through both the details and the corresponding actions we are taking. Through the first half of the quarter, our U.S. comps were 3%, with strong performance at peak, more than offsetting some softness in the afternoon. But as we launched our holiday program in mid-November, we saw a slowdown in transaction comps, bringing total comps for the back half of the quarter to roughly 1% with transaction comps slightly negative. Even though we grew operating income, these developments contributed to margin compression we experienced in the U.S. compared to Q1 a year ago. The decline in transaction comp was primarily driven by two factors. First, while traditionally contributing to Q1 comp growth, our limited-time holiday beverages, holiday gift cards, and holiday merchandise available for purchase in our stores' lobby underperformed in Q1. Holiday LTOs and merchandise did not resonate with our customers as planned. In Q1, our food comp was 2%. Our core beverage comp excluding holiday limited time offerings was 1%. And together, our holiday LTO and lobby items had a negative impact of over 1 point of comp. We are aggressively rationalizing our merchandise approach in conjunction with the transformation of our lobby strategy going forward. The second factor involved softness in visits by occasional non-Starbucks Rewards customers, a challenge likely exacerbated by the traditional changes in customer routines and traffic patterns during holiday continued with our afternoon and evening dayparts. Another proof point of changes in holiday routines was negative mall-store comp performance, several points below non-mall locations as we move through the quarter. As a reminder, mall stores comprise only 6% of our U.S. company-operated locations. We have a clear understanding of the issue and are accountable to fix it. The strength of our core customers, the performance of our business through the morning and lunch daypart, and upcoming food, beverage and digital innovation gives us confidence that we will be successful in doing so. Let me now share our plans for bringing the business to targeted levels of revenue growth, operating performance and profitability through the lens of the six operational priorities we set out for you last year. Our commitment to these priorities is unwavering. Let me start with our efforts to accelerate U.S. comps across all dayparts. We continue to reap the benefits of the success of our efforts to increase throughput at peak. Our highest peak volume stores continue to outperform the average for our U.S. portfolio overhaul; with efforts around staffing, technology, and lean principles all yielding measurable results. We've seen three successive quarters of sustained positive comp growth at peak. And believe that plan enhancements will continue this trend and are encouraged by our ability to have so quickly rallied our store partners, equipped them with the tools, technology, and resources to successfully improve operations. We will apply the same disciplined approach to improve performance in the afternoon daypart, and have identified a number of key operational actions that are underway. We're focused on elevating the Starbucks experience in the afternoon daypart, as store partners sharpen operational focus, and tune staffing and scheduling, simplification processes, and leverage improved routines and lean techniques. We're also driving continued innovation in food and beverage. Our Mercato fresh food menu is continuing to perform well in Seattle and Chicago, the two markets we launched last year. We recently launched Blonde espresso roast. This is the first time we've offered a second espresso roast in our stores. We have a big opportunity to leverage our core beverage platforms, particularly in ice coffee, tea, cold brew, and draft beverages, all of which skewed toward the afternoon. In response to strong customer demand, we are accelerating the rollout of Nitro Cold Brew from 1,300 stores currently to 2,300 stores in the U.S. by the end of the year. We have seen approximately 1 point of additional comp growth in stores offering Nitro Cold Brew during 2017. Nitro also provides the foundation for a broader platform of draft beverages that expand beyond coffee to include alternative milks and tea-based Nitro-infused beverages. Our plant-based beverage platform continues to expand, leveraging almond, coconut, and soy milk alternatives. Our refreshment platform including tea and Starbucks refreshers contributed comp growth again this quarter. These beverage platforms also aligned with our focus on the afternoon occasion. In addition to food and beverage innovation, we continue to accelerate the power and momentum of our digital flywheel. An initiative that has taken on added significance as we look to materially expand our universe of digitally connected Starbucks customers beyond only Rewards members. Let me touch on five developments that underscore the progress we made against this priority in Q1. We added over 1.4 million active Starbucks Rewards members in the U.S., up 11% year-over-year, and now have 14.2 million active members. Mobile payment in the U.S. has grown to over 30% of total tender. The ubiquity of mobile and credit card payment is enabling us to begin an exploration of cashless stores in the U.S. We expect payment methods will continue to evolve with acceptance increasingly becoming the global currency of the future. Building on partnerships with companies like Chase, Tencent, Alibaba, and others ensure us to explore new ideas that leverage our digital assets, global retail footprint, and global customer base with the digital payment platforms of today, while also monitoring the landscape of potential payment platforms of the future. Through our Rewards program, we continue to drive increases in per-member spend by leveraging personalized offerings and suggested selling to our customers. By expanding capacity at peak, we have now the ability to offer Mobile Order and Pay to our non-Rewards customers and will begin accelerating the ramp-up of Mobile Order and Pay to all customers beginning in March. We are accelerating our marketing engagement to expand digital customer relationships this quarter. In partnership with Chase and Visa, we are launching a co-branded credit card in February. These customers will earn Stars at an accelerated rate at Starbucks as well as earn Stars everywhere else they shop. In April, also with Chase and Visa, we are launching a co-branded stored value card targeted to customers who don't want or can't qualify for credit cards. This card will also let customers earn Stars wherever Visa is accepted. In March, we are launching a significant marketing initiative to sign up customers for special offers outside of Starbucks Rewards with only 14 million of the 75 million or so unique customers who visit us each month signed up for Rewards. We have a tremendous opportunity to leverage our new digital technologies to initiate and advance additional direct digital relationships. By the end of the fiscal year, we expect to establish millions of incremental digital customer relationships outside of Starbucks Rewards, giving us an entirely new direct marketing capability to a vast customer audience. We will update you on the progress of our digital expansion initiatives as we move through the year. To date, our U.S. business is a key driver of Starbucks overall financial performance, and while we face challenges in Q1 with holiday merchandise and LTOs, we are making progress against clear and consistent priorities with total customer transactions across new and existing stores up 5% year-on-year. Last year, we successfully dealt with our morning daypart and peak throughput issues, and we are applying the same rigor to address the occasional customer and the afternoon daypart issues. We look forward to updating you on our progress as we tune our U.S. retail growth engine to continue delivering industry-leading growth, profitability, and return on investment long into the future. Enabling long-term growth in China is a key priority, as it now represents our second largest and consistently our fastest-growing market. Starbucks has been operating outside of North America since the opening of our first store in Japan in 1996. Today, we operate nearly 14,000 stores in 75 markets outside the U.S. The growing relevance and success of our international business and specifically our business in China has emerged as a growth driver that is rapidly moving us beyond our longstanding dependence on our U.S. business for needle-moving growth. Today, we have two powerful independent but complementary engines driving Starbucks global growth, with a long-term opportunity clearly visible in China. Starbucks has cracked the code in China, and no Western consumer brand is better positioned than Starbucks in China. You have to experience our business in China for yourself to fully appreciate it, but we are much more than simply a coffee retailer. As our world-leading financial and operating performance attests. Let me share a few metrics that underscore the size of Starbucks' China opportunity. In 2014, China's GDP totaled $11 trillion, and many economists expected it to exceed $15 trillion by 2021. Rapid GDP growth is fueling a massive increase in China's middle class expected to reach 600 million consumers by 2021, up 100% from three years ago and almost twice the size of the total U.S. population. From an investment thesis, we have best-in-class unit economics, decades of whitespace to grow in both physical and digital retail, the most trusted brick-and-mortar brand in the market, and a world-class management team. We are in the nascent stages of building a business that will continue to deliver an increased portion of our revenue and operating income growth. The deep respect we have for our customers and partners in China, and that our customers and partners in China have for the Starbucks brand and each other have resulted in rapid sustained customer and market growth. And the strong underlying revenue and profit trends of the past will drive the many decades of growth on the horizon. Leveraging our digital flywheel continues to represent a huge opportunity to unlock for us in China. Since launching WeChat Pay one year ago and adding Alipay in September, digital payments have increased over 60% of total tender. 90-day active Starbucks Rewards members now total over 6 million. Our e-commerce and social gifting in China represented nearly $20 million in Q1, up threefold from a year ago. These are the reasons we feel comfortable doubling down on China through the East China acquisition, the transaction we closed in December. East China is now being integrated into our company-operated business enabling us to benefit and further leverage Belinda Wong's world-class China management team as well as the scale economics that come with it. As we complete the integration of East China, we will look to further accelerate our new store growth in China. I have no doubt that one day Starbucks will have more stores in China than we have in the U.S., and it's the reason we selected Shanghai for Starbucks' first international Roastery highlighting our fifth operating priority: elevating the Starbucks experience through Roasteries and Reserve. Starbucks' Shanghai Roastery opened only last month providing further evidence of our future opportunity in China and is among the crowning achievements in the company's history. Customers in some cases are lined up for hours to enter the Roastery and be taken on an immersive multi-sensory coffee, food, and tea journey. On its very first day of operation, the Shanghai Roastery became the highest-grossing Starbucks store in the world, averaging more than double the number of transactions of our highly successful Seattle Roastery, and with an average ticket of $29. The unparalleled retail experience delivered by the Shanghai Roastery will enable us to serve well over a million customers every year. At the same time, amplifies and elevates the Starbucks brand across China and CAP overall. Noteworthy is that our Starbucks Roastery in Seattle continues to delight customers and drive double-digit comps. In November, we opened the Princi bakery and cafe in the Seattle Roastery, and are already seeing significant lift to total food sales. The Princi bakery and cafe in the Shanghai Roastery is also driving significant customer engagement and revenue. The artisan nature and high quality of Princi baked goods are resonating loudly with our customers. We see a major opportunity to increase sales of Princi food beyond Roasteries. We are now venturing into building standalone Princi bakeries complete with Starbucks Reserve coffee and coffee bars. These stores will feature Reserve coffees, Princi food and design with elements of the Roastery design and product experience for customers and markets across the globe. Starbucks Roasteries, Starbucks Reserve brand, and Princi, operations that we refer to collectively as Siren Retail, remain central to our innovation capabilities and our strategy of maintaining our leadership position as the leading premium coffee retailer. We currently have four Roasteries under construction and the potential opportunity for Princi bakeries with Reserve coffee over the next decade. The opportunity is significant, as we are off to an excellent beginning to what we believe is an emerging food revenue and profit stream over time. As we pursue our Starbucks Reserve strategy, we benefit from the decades of experience that Howard brings to this business. As Tom mentioned, Howard is joining the call today from Milan, where he's working on our next international Roastery, and he's available to share his thoughts during Q&A. Our channels business is focused on our sixth operational priority of gaining share of at-home coffee; Scott will cover this in more detail. But in Q1, we grew share in the premium single-serve and packaged coffee categories to a record level despite an increasingly competitive environment. We have built a powerful CPG business in the U.S. and are committed to leveraging that business to create additional shareholder value going forward. While we invest in the priorities I've outlined, we also continue to make progress against our efforts to streamline the company. Besides completing the East China acquisition, in Q1, we also closed on the sale of Tazo to Unilever, transition Taiwan to a licensed market, and continue to close Teavana retail stores in Canada and the U.S. We plan to have all U.S. and Canada Teavana stores closed by the end of this month. Going forward you may expect this to take additional actions to further streamline the company and unlock value. A few final points, while we recognize that our revenue, comp, and EPS performance in Q1 fell short of both our current quarter and long-term guidance, I want to make clear that our commitment to our long-term growth targets and strategy, including our commitment to returning $15 billion to shareholders over the next three years in the form of dividends and buybacks is unwavering. We have sight line on the areas that need to be addressed in our U.S. business, and Roz Brewer and her team are aggressively pursuing the improvement plans I shared with you today. I assure you that we are just embarking on what will ultimately prove to be the most powerful and compelling growth opportunity in Starbucks history, China. With that, I'll turn the call over to Scott.

Thank you, Kevin, and good afternoon, everyone. Starbucks Q1 of fiscal 2018 reflected solid revenue growth of 6% or 7% after adjusting for a point of impact for the licensing of our business in Singapore, the sale of our Tazo tea business, the exit of our e-commerce business and the continued wind down of our Teavana stores, all streamline-driven activities. Q1 2018 represented the first $6 billion revenue quarter in our history. We earned $0.65 of non-GAAP EPS in Q1, including $0.07 of benefits from the U.S. tax law change and $0.02 of favorability below the operating income line from a true-up of our liability for unredeemed gift cards, principally from first-time breakage recognition for the market outside the U.S. and Canada. Non-GAAP operating margin of 19.2% represented a decline of 80 basis points year-over-year, primarily driven by sales leverage and food mix shift in the Americas. Despite delivering record results in Q1, we've recognized that we did not meet all of our expectations for the quarter, but as Kevin shared, we are laser-focused on executing against plans to drive improvement across the U.S. business, as we move into Q2 and through the back half of the year. I'll now take you through our Q1 operating performance by segment. Our Americas segment grew revenue 7% in Q1, primarily driven by 979 net new store openings over the past 12 months and a 2% comp growth, principally ticket. Americas operating margin declined 100 basis points to 23% in the quarter, primarily due to lower than expected revenues and food-related mix shift resulting from increased customer adoption and the increasing success of our food program. Kevin covered the key operating metrics and actions for the Americas segment, so let's move on to China/Asia Pacific. CAP segment revenues grew 9% in Q1 to a new quarterly record of $844 million, once again delivering company-leading top-line growth. Comp growth of 6% in China was driven by strong performance of core food and beverage categories, including improved breakfast and bakery offerings and growth in espresso. We entered seven new cities and opened a Q1 record 188 stores in China, and now own and operate over 3,100 stores in 138 cities. Our newest class of stores in China continues to outperform even the immediately prior class and deliver record revenues and profits and our best returns anywhere in the world. CAP's non-GAAP operating margin increased by 210 basis points, driven primarily by strong performance in China and South Korea; CAP's non-GAAP operating income increased nearly 20% to $212 million, once again representing the majority of Starbucks operating income growth in the quarter. Regarding Japan, while overall profitability, new store performance and total revenue remained in line with our expectations upon acquiring 100% of the market, our comp store performance continues to be impacted by softness in limited-time offerings, Frappuccino LTOs, in particular. We remain committed to turning Japan back to positive comp growth as we work through the mix shift issues. The new Japan Starbucks Rewards program launched only last quarter continues to resonate with our customers; we've already added over 600,000 new Rewards members up 45% in a few short months. Turning to EMEA. EMEA delivered revenue growth of 8% to $284 million or up 3% after adjusting for five points of foreign exchange. Company-operated store comp declined 1% driven by stock comps in the UK. Noteworthy is that today less than 20% of our EMEA total store portfolio is company-owned; that's a better measure of the performance of the EMEA segment is system-wide comps, which grew 3% in Q1 despite the difficult consumer economic and geopolitical backdrop. Operating margin of 13.8% declined 300 basis points over last year. Margin expansion in our licensed business was strong and in line with expectations driven by successful new store openings and strong system comps, but this was more than offset by underperformance in our company-owned markets. We remain committed to both growing Starbucks' profitable licensed business and lowering our EMEA overhead structure. On to channel development. Channel development revenues reached $560 million in Q1, up 1% year-over-year, but up 4% after adjusting for three points of impact from the Tazo sale this quarter, and a change in accounting treatment for certain receivables compared to 2017. On top of 8% growth and 16% growth in the first quarters of fiscal 2017 and 2016 respectively, while we achieved record market share in both premium roast and ground and K-Cups. Our core U.S. CPG business in Q1, revenue has been impacted by increased competition down the aisle. Our bottled coffee business with Pepsi delivered strong overall results again in Q1. We have now sold over 1.9 million bottles of Teavana bottled tea through the partnership we have with Anheuser-Busch launched last year. We still expect to launch Teavana packaged tea down the aisle before the end of 2018. And in China, we have sold 30 million bottles of Frappuccino beverages since launching our relationship with Tingyi five quarters ago. We now offer an expanding lineup of bottled coffee beverages for Chinese consumers to enjoy at home, at work, or on the go. Each of these partnerships is a successful example of the power of combining the Starbucks brand with the product marketing and distribution capability of leading food and beverage companies. Channel Development's operating margin remained strong at 43.4%, down slightly from last year given lower sales flow through. Before moving on to full-year fiscal 2018 targets, I'd like to identify three events that will have a significant positive impact on our financial returns moving forward. Our ongoing efforts to streamline our operations, the projected impact of our recently completed East China acquisition, and the impact of the new U.S. tax law. You can see specific financial impacts for each of these items in the schedules we have provided on our website. During the quarter, we accelerated and advanced our efforts to streamline our business that we began discussing with you last year. As a reminder, streamline is a company-wide lens through which we are examining each of our businesses in order to focus our investments on those businesses that will meaningfully contribute to revenue and profit growth while licensing or exiting those that won't. During Q1, we've recognized large gains on the sale of Tazo, the acquisition of East China and the sale of Taiwan while recording certain charges for exiting all Teavana stores among other actions. One specific example relates to product simplification; we are removing over 200 SKUs from our U.S. retail stores, primarily merchandise in the front lobbies of our stores, representing over 30% of total lobby items. This simplification effort increases our focus and reduces operational complexity in our stores. I want to note that comps in our lobbies have been quite flat to slightly negative for several years. Our full-year guidance set out for 2018 included the estimated impact of the streamlining activities including the U.S. comp impact of SKU rationalization. Finally, we are well underway to returning the $15 billion of capital to shareholders that Kevin referenced earlier, with $2 billion returned via dividends and share repurchases this quarter. The financial impact of consolidating East China includes a 4 percentage point lift to consolidated revenue and a slightly negative impact to consolidate operating margin. As you may recall from the acquisition of our business in Japan, the margin change is driven solely by the change in ownership, whereby we now have 100% of the revenue, expense, and profit as opposed to a small portion of the revenue and roughly half the profit under the former ownership model. We plan to discuss these impacts in greater detail during our China modeling call on January 31.

I will now turn the call over to the operator for Q&A.

Thank you. I was hoping to sort of just talk a little bit about the first quarter and implied rest of the year, which is to say you suggested that holiday and merchandising was an issue. But then also noted that 2Q will be softer, which means that maybe it wasn't just holiday. If January was also off to a soft start. So I guess, first, are you confident that you have the right diagnosis? Is there any chance that you are either losing share or cannibalizing yourself? And then second, to what extent can you preserve some of the earnings of the margin, if in fact, the low end of your guidance doesn't materialize through better expectations in the back-half, which is sort of what happened in 2017?

Yeah, thanks, Sara. It's Scott. I'll start. I think what's important to understand and what we're saying about Q2 is given some of the things that happened specifically during holiday, we're seeing some impacts of that early in the second quarter. Specifically, what we're seeing is we sell a lot of gift cards in the lobbies of our stores and through third parties. And those gift cards once again this year went to about one in six Americans. The gift card lows were about flat year-over-year. But as you know over the last many years those gift cards have actually contributed meaningfully to comps. Both as we closed out the first quarter, and then importantly in January and February, a little bit beyond as we went through the second quarter because those gift cards were roughly flat. We are just a little cautious on how the quarter is starting, so that's the first thing. The second thing is in the lobby category, what we see coming through into January is a little bit additional softness above what we'd expected. So Kevin talked about holiday LTOs and lobby down over a point. Lobby remains soft in January. So those two things are just a little bit of headwind. I think what we signaled for the year is we still have a high level of confidence in being within our 3% to 5% range. We're just a little bit cautious for Q2. And really EPS and revenue growth and comp growth still holds with what we guided last quarter.

And, Sara, this is Kevin, let me take your second question about share or cannibalization. I mean the short answer is no. And let me share the data with you that leads us to that conclusion. Certainly, we look at many external data sources to inform us of macro trends in away-from-home coffee and certainly away-from-home food and beverage. Those trends would suggest that overall daily customer occasions in food and beverage are relatively flat. Now, when we triangulate those data points with the fact that we grew total customer occasions across existing stores and new stores by 5% this quarter, that would imply that we're growing transactions faster than the market and taking some share. Now, the better view that we have is when we look at the micro trading areas. This is where we have our own analytics, where we look at a micro trading area that provides us data on traffic patterns. Whenever we build a new store in that trading area, we have predicted analytics to tell us what we think will happen and then we have post analytics to tell us what actually happened. The data suggest that when we build a new store in a trading area, we see increased customer occasions for Starbucks. When a competitor builds a new store in the micro trading area, our data shows little to no impact on Starbucks' traffic in that micro trading area. And so, that's how we think about it.

Yeah, I think what we said and we talked about this a little bit last quarter, Sara, is that in order to hit the comp guidance and the revenue guidance and profit guidance, 3% to 5% high-single-digits and 12%-plus. We need that 3% in order to get to 12%-plus. With that said, given just a little bit of softness in the first half of the year, we still think we're going to be able to deliver a 3% per year and therefore deliver the full EPS and margin guidance. The first half of the year is probably going to be a little bit softer, with the second half of the year accelerating.

Yeah, I agree with that. The only thing I would add is just to be careful not to over-rotate just looking at the U.S. China is becoming a bigger part of the growth agenda and contributing a larger percentage of our operating income growth. The 30% growth that we saw in China this last quarter, we just closed on East China, the Shanghai Roastery. And so, I think you need to look at both of these growth engines when you consider the overall enterprise P&L.

Hi. Good afternoon. Just one clarification on the commentary on fiscal second quarter. Are you signaling you expect it to be weaker than what you just reported for Q1 or more the same? And then, I guess, my real question is about - as you diagnose the U.S. business and look at the consumer feedback metrics that you get, are you seeing anything in the consumer feedback that would suggest any issues related to brand or operational performance or anything of that nature?

Yeah, I'll start, David. And then we will have Roz take the second half. So, if you do math on at least the 3% for the full year, and we just did 2%, I think it gives you a pretty good idea of what we think by somewhat softer. We're not signaling that January had been off to a big negative breath. That is not what we're signaling. All we're signaling is a little bit softer estimate for Q2.

Yeah, so concerning the customer piece, I will say that we've been really looking carefully at this afternoon daypart and the customer that visits our stores during that timeframe. We're learning a lot about them. But I can tell you that they're confident about our brand. They still are committed to Starbucks. We are making sure that we are ready for the customer in the afternoon dayparts by looking at our routine efforts in the stores and to make sure that we've got the right partners in front of them.

Just in terms of the equity of the brand, just in recent weeks two things came out that I think demonstrate and reaffirm the strength, the trust and the confidence in terms of Starbucks as a brand and a trusted company. Fortune survey came out and Starbucks was the fourth most admired company in the world. And then we have a constant effort year in and year out to make sure that we are as relevant as possible with young people. What came out is that Starbucks relevancy among teens is number one in any food and beverage retail brand in America. So I think, in terms of the equity of the brand, there's no issue whatsoever. This is a daypart challenge in the afternoon. Just like we figured out and cracked the code in the morning daypart, we will do the same thing in the afternoon.

Hi, good afternoon. I guess a question on the digital side. I think, last quarter you provided us with what the comps were for the Starbucks Rewards spend versus the more occasional customers. I was wondering if you might provide that again. And as it relates to broadening the digital ecosystem, I mean when can we kind of expect more information from you? And are there thoughts about enabling some sort of a Starbucks Rewards program, where you don't have to have a preloaded card?

Thank you for the question. Matt Ryan here, Sharon. First of all, as is obvious in the numbers, virtually all our comp this past quarter came from our digital customers. We saw a significant growth in the number of members, up 11% or so year on year, as well as healthy growth in member spend. So we're very, very pleased with what we saw. We've leaned into customer acquisition results. During this coming quarter, you're going to see some significant new initiatives added on, which have both short-term and long-term potential benefits. We are going to be targeting, not just the Starbucks Rewards customers, but all customers with ways for them to sign up and engage with us directly. That will create a new pool of customers that we can use our marketing capabilities to reach and talk to, and build a business from. You'll see that emerge across the course of the quarter, especially in March.

Thanks very much. Two if I could. First, just I'm still struggling with why the non-Rewards customer, the occasional customer is not coming as often. If you see, the brand is still strong and relevant, particularly young people, but they're not coming back. Is it as simple as the Frappuccino platform for example is getting tired? And if it is, what - how soon can you substitute products that really drive that afternoon business? Can you talk a little bit more about specific customer insight? I didn't think I heard that in answer to a prior question. And on the guidance, I just want to make sure I understand you. You've kept your guidance the same. But I think you said margins are going to be below and comps are going to be at the lower end. So in this excluding taxes, what's the plug that still gets you there if comps are at the low-end and margins are below?

Yeah, John. This is Kevin, I'll take your question and I'll let Scott take the second one. When you think about our patterns, it's first important to note that our core customer, especially in that morning daypart is very strong. That's just reflective of the increased throughput at peak that we've driven. I would say that the digital growth that we've seen, so core customers, morning daypart, daily ritual, throughput at peak strong. And that's beverage, food attach, strong. Number two, what we're calling the occasional customer, in some ways you could say are those non-Rewards customers or non-core, now the fact that we've grown active rewards by 11% means we're attracting more of the occasional customer into Rewards.

First of all, let me talk about in the first quarter, we added 1.4 million new active members and that really gives us an opportunity to do just what Matt mentioned is to bring them to the same level as our Starbucks Rewards customers that have been enjoying our business in the morning daypart. We have very strong beverage innovation plan for the remaining part of the year. We’ve been talking to you about our beverage innovation for some time now, but we've been able for the first time in a long time to introduce a second espresso roast, our blonde introduction that just started in the month of January, we're excited about that. But second, we have a number of cold offerings that we're introducing and some of them are accelerating into the second half of the year and I just remind you cold beverages are nearly 40% of total beverage sales and 50% of the overall growth that we're seeing right now is from our cold lineup. So the accelerating I think like our Nitro rollout, our Teavana teas, and our premium beverages. This is going to help us in the second half of the year.

Your question on margin, I'll just quantify a little bit for you. We had slight margin expansion in our last guidance and now we're seeing a little bit of margin contraction. We're not talking about big dollars, but you're asking a fair question. First of all, we did get a little bit more favorability than we had forecast below the line this quarter for some of the gift card, unredeemed gift card true-ups. And then that all of the net of the streamline activities are coming in a little bit more favorable than we originally thought, both of those are relatively small amounts.

Thanks. I heard in some previous answers you highlight the digital initiatives and you mention cold beverage innovation, just then. Are those the major factors that give you confidence in a back half acceleration? Could you maybe give some sort of a ranking of what is giving you confidence in the back half acceleration?

Maybe - David maybe I'll start financially and I'll ask Matt, Roz to weigh in operationally, because obviously what we're mainly focused on talking about the U.S. business. But if you talk about the global business back half acceleration from a margin standpoint. It's the things that we're doing in the middle of the P&L around cost of goods sold around waste and around labor, we talked about those, that's the first thing. The second thing is acceleration of profitability as we bring East China into the fully wind down Teavana. We're a little bit more optimistic on how that's going to add to overall profitability.

Certainly, to add to what Scott said, one of the things we see is continued growth in the core Starbucks Rewards program. We’ve seen healthy growth in recent quarters and we have every indication of the investments we’re making in technology that are sort of behind the scenes and less visible to you will continue to drive both acquisition as well as per member spend, so we’re very confident in that. I think the more important it is, we’re adding on a couple more major initiatives, so this quarter we will be launching with Chase and Visa, our first-ever co-branded credit card and that will enhance the value of the program to many of our customers.

This is Roz. Let me just mention some of the things that we're doing from an operational improvement standpoint in the afternoon daypart. For the first time, we're going to expand those through the full daypart and this includes some of the lessons that we've learned at peak from the routines and labor deployment improvements that really go a little bit further than that.

Hi, two questions if I may. First for Roz, and the second for John, if I may. Roz, as you bring a broad perspective and focus now on the Americas business. Do you think some sort of a value strategy that fits within the overall lens as Starbucks becomes more important, as we think about 2018 and 2019 and maybe bring back some of that non-core customer. And how may you be thinking about communicating a price to the consumer?

Actually I don't see a value position here. I actually think that our brand has the ability to speak even more at an up-leveling. When we talk about product innovation, we talk about making our core coffee even better, when we talk about our Frappuccino business it's about making the very best Frappuccino. So a value position is not the direction we're looking at; we feel like our brand can go to the next level.

The financial impact of consolidating East China includes a 4 percentage point lift to consolidated revenue and a slightly negative impact to our consolidated operating margin. As you may recall from the acquisition of our business in Japan, the margin change is driven solely by the change in ownership, whereby we now have 100% of the revenue, expense, and profit, as opposed to a small portion of the revenue and roughly half the profit under the former ownership model. We plan to discuss these impacts in greater detail during our China modeling call on January 31.

Great. Thanks. Before closing today's call, we wanted to provide an update on the timing of several upcoming events. We will host a supplemental call to discuss our business in China, as well as implications from a modeling standpoint next Wednesday, January 31 at 2:00 PM Pacific. We plan to host management meetings, local store tours, and a visit to the Roastery in Shanghai on May 16, with plans to visit a second market the following day on May 17. And finally, we are tentatively planning our 2018 Investor Day in New York on Wednesday, December 12.