Starbucks Corp (SBUX) — Q4 2019 Earnings Call Transcript

Good afternoon, everyone, and thank you for joining us today to discuss our fourth quarter and fiscal year 2019 results. Today's discussion will be led by Kevin Johnson, President and CEO; and Pat Grismer, CFO. And for Q&A, we will be joined by Roz Brewer, Chief Operating Officer and Group President Americas; John Culver, Group President, International Channel Development and Global Coffee and Tea. 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. Starbucks assumes no obligation to update any of these forward-looking statements or information. GAAP results in fiscal 2019 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. Please refer to our website at investor.starbucks.com to find the reconciliation of certain non-GAAP financial measures referenced in today's call with their corresponding GAAP measures. Additionally, as previously announced, restated GAAP and non-GAAP quarterly financial information for fiscal 2018 and through Q3 fiscal 2019 reflecting our realigned operating segment reporting structure and reclassification of certain costs can also be accessed on our Investor Relations website. I would like to note that during today's call, we will be providing select presentation materials, which can be accessed via the webcast of this call and on our IR website at the conclusion of the call. An archive of the webcast will be available on our website through Thursday, November 28, 2019. Finally, for your calendar planning purposes, please note that our first quarter fiscal year 2020 earnings conference call has been tentatively scheduled for Tuesday, January 28, 2020. I will now turn the call over to Kevin.

Well, good afternoon, and welcome. As part of my ongoing visits to Starbucks stores around the world, I'm joining today's call from Tokyo. On this particular trip, John Culver and I are joined by Nestlé senior executives to discuss our collective strategies for growth and review the great progress our teams have made implementing the Global Coffee Alliance. Today I'm pleased to share that Starbucks delivered strong operating results again in Q4, capping off a transformative year for the company as we continue to execute our Growth at Scale agenda with focus and discipline. Pat will review our financial results in more detail later in the call, but I'll start by sharing performance highlights for the quarter and the year as well as some key actions we've taken and important investments we've made to enable predictable, sustainable growth while delivering value for all our stakeholders as we build an enduring company at Starbucks. In the fourth quarter, Starbucks delivered revenue growth of 10% excluding the 3% impact of streamline activities and foreign exchange, led by global comparable sales growth of 5% and net store growth of 7% year-over-year. These strong operating results yielded non-GAAP EPS of $0.70 for the quarter, up 13% from last year. In the U.S., we posted comparable sales growth of 6% in Q4, including comparable transaction growth of 3%. That's a two-year sales comp of 10% for Q4, a sequential improvement over our very strong results in Q3, and our best performance in the U.S. in over two years. In China, we posted 5% comparable sales growth in Q4, including comparable transaction growth of 2%. That's a two-year sales comp of 6% for Q4, demonstrating continued positive momentum in our fastest-growing business, where we increased our store base by 17% over the prior year. For the fiscal year, Starbucks delivered record results in both total net revenues and non-GAAP EPS. Total net revenues were $26.5 billion, up 10% over the prior year when adjusted for streamline activities and foreign exchange. This included 5% global comparable sales growth for the year and over 1,900 net new stores globally, yielding a record non-GAAP EPS of $2.83 for fiscal year 2019, up 17% versus the prior year. With more than 31,000 stores in 82 markets welcoming over 100 million customer occasions each week and enabling over one billion digital customer occasions per year, Starbucks is a part of our customers' everyday routines around the world. And I applaud the 400,000 green apron partners who deliver a premium Starbucks experience to every customer they serve. Because of our partners, we are achieving even higher levels of customer loyalty and brand preference. Now let me highlight some of the key initiatives and investments that drove our strong growth in fiscal 2019 and have laid the groundwork for what we expect will be another year of strong operating performance in fiscal 2020. In keeping with our Growth at Scale agenda, I will talk about how we're accelerating growth in the U.S. and China; how we're extending the reach of our brand through the Global Coffee Alliance with Nestlé; and how we've increased stakeholder returns. Now I'm very proud of the progress the team has made against our three focused initiatives to accelerate growth in our U.S. business: enhancing the in-store experience, delivering relevant beverage innovation, and driving digital relationships. We have strong evidence that our approach is working, as demonstrated by the fact that we are seeing traffic growth across all dayparts. And we intend to build on this momentum in the year ahead. We continue to see a strong correlation between Starbucks partner engagement and customer connection, which leads to increased customer frequency. This reinforces our belief that the Starbucks experience delivered by our partners is a key competitive advantage. And therefore, we are making targeted investments to elevate the partner experience, with clear evidence that this in turn elevates the customer experience and drives growth. Throughout fiscal 2019 in the U.S., we invested in our partners by allocating additional store labor, increasing store-level training, and simplifying in-store tasks, often with new technology. For example, we introduced a new staffing and scheduling system to optimize labor allocations based on partner preferences and predictive analytics. These investments in our partners collectively elevated customer connections as evidenced by an all-time high in customer connection scores in Q4. And we will build on this momentum, with incremental partner investments in fiscal year 2020. We also continue to invest in beverage innovation. And I'm pleased to say that beverages contributed five points of our U.S. comparable sales growth in the fourth quarter, led by the strength of our cold beverage platform. We completed our rollout of Nitro Cold Brew across company-operated stores in the U.S. this summer and introduced a new cold pumpkin beverage offering, the Pumpkin Cream Cold Brew. And we're very encouraged by its reception. We expect this momentum to continue as we move into the favorable holiday season. And we look forward to sharing more details with you in the weeks ahead. And finally, we have continued to pursue new opportunities to expand digital customer relationships, investing to meet customers' increasing desire for convenience and personalized offers. Supported by the successful launch of multi-tier redemption in early Q3, we saw U.S. Starbucks Rewards grow to 17.6 million active members at the end of Q4, a year-over-year increase of 15%. This is an important growth driver because we know from experience that when customers join Starbucks Rewards, their spend level with Starbucks increases meaningfully. On our last earnings call, I outlined the important strategic role that our digital flywheel plays in growing digital customer relationships. Clearly, that strategy is working. I want to highlight another very important element of our digital strategy: artificial intelligence. Over this past year, we have been dialing up our in-house capabilities and investments in AI with an initiative we call Deep Brew. Deep Brew will increasingly power our personalization engine, optimize store labor allocations, and drive inventory management in our stores. We plan to leverage Deep Brew in ways that free up our partners, so they can spend more time connecting with customers. Deep Brew is a key differentiator for the future. And as we continue our quest to build world-class AI capabilities to better support our partners. Moving on to how we've accelerated growth in China, looking back over this past year, I'm very pleased with the progress we've made to capitalize on one of the world's most compelling growth opportunities led by strong store development, expanded digital customer engagement, and category-leading innovation. Store development continues to be our number one driver of growth in China. We opened over 600 net new stores in fiscal 2019 and crossed the 4,000 store mark while maintaining best-in-class new store returns. As we expand our store footprint, we have also been investing in innovative retail formats, including our Starbucks Now store in Beijing that opened in July, a unique, express retail experience that seamlessly integrates physical and digital touchpoints to enhance the Mobile Order & Pay and the Starbucks Delivers customer experience. We are seeing encouraging early results from this new format. And in China, we plan to open new Starbucks Now stores in top-tier cities in fiscal 2020, leveraging this new store format to complement the third place store formats and increase market penetration. As we've expanded our physical presence in China, we've also made significant strides expanding our digital presence in this fast-growing market. The Starbucks Rewards program in China, which we upgraded in December 2018, continues to rapidly drive new membership. At the end of Q4, active members reached 10 million, up 45% over the prior year. To support this growth, we up-leveled our Tmall flagship store in September to offer our Starbucks Rewards members exclusive products and a tailor-made gift experience. And we enabled members to earn Stars from online shopping. We recently celebrated the one-year anniversary of our China digital partnership with Alibaba, and I'm pleased to share that we surpassed our goal of expanding Starbucks Delivers to 3,000 stores in 100 cities by the end of the fiscal year. This propelled mobile order sales mix in China to 10% in the fourth quarter, with seven points coming from Starbucks Delivers and three points from our recently launched mobile order for pickup. In the fourth quarter, we also ushered in a new era of digital customer engagement in China with the launch of voice ordering and delivery via Tmall Genie as we continue to enhance the customer experience around mobile ordering. These elevated digital experiences are key drivers of accelerated growth in Starbucks Rewards membership in China and provide significant momentum for us to introduce further innovations in fiscal year 2020 as we work to constantly elevate the customer experience and reward loyalty. Moving on to the Global Coffee Alliance, just one year after announcing this alliance with Nestlé, we launched three new coffee platforms in over 30 new markets: Starbucks by Nespresso, Starbucks by Dolce Gusto, and Starbucks roast and ground coffee. We did this in record time and ahead of schedule. In addition to the coffee platforms, we also launched a new product category, Starbucks Creamers, in North America in Q4. We entered China's at-home and food service segments through the alliance, allowing Chinese consumers to enjoy some of their favorite Starbucks coffees in the comfort of their home. This partnership has enabled us to accelerate the global reach of the Starbucks brand in key markets. And looking ahead, we plan to be in 50 global markets in the first half of 2020. Moving on to returns to one of our key stakeholder groups, our shareholders. In the fourth quarter, we returned nearly $3 billion to shareholders through a combination of share repurchases and dividends, bringing our full-year shareholder capital returns to $12 billion. Including what we returned in fiscal year 2018, we've now returned approximately $21 billion to shareholders, well on our way to meeting our three-year commitment of $25 billion by the end of fiscal year 2020. And I'm pleased to share that our board has approved a 14% dividend increase this quarter, making this the 10th consecutive year that we've increased our dividend by a double-digit percentage. Our Growth at Scale model combined with our strong balance sheet positions Starbucks to have the financial flexibility to both invest in our growth and reward our shareholders. In closing, our fiscal year 2019 performance gives us confidence that our Growth at Scale agenda is helping unlock the full potential of the Starbucks brand. With great intentionality, we've invested in our partners, in technology, and in our stores to drive long-term growth. And we've made significant progress to streamline our company through organizational restructuring and through the licensing of some international markets, enabling us to bring even more focus and discipline to the core of our business. This has helped us to accelerate the pace of innovation at Starbucks, both at the support center and in the field to deliver relevant, meaningful, and inspiring experiences for our partners and our customers. And with the plans that we've developed for fiscal year 2020 including continued investment, we are excited about our ability to sustain this growth in the years ahead. Reflecting back on the historic Starbucks Leadership Experience we hosted in Chicago last month, it is my strong belief that the store manager plays a pivotal role in the growth and success of our company. That is why we convened 12,000 store managers and field leaders from the U.S. and Canada to reflect on and celebrate our mission and values while recommitting to the shared belief that by better serving our partners, we enable them to stand shoulder-to-shoulder and create best moments for our customers. This is at the center of who we are as a company and will remain a guiding light as we go forward. The Chicago leadership experience was an important milestone in our journey, and we will be back in Chicago again next month for another key milestone, the opening of our sixth Starbucks Reserve Roastery. This will be the largest Starbucks store in the world, a beautifully designed iconic store on Michigan Avenue. And I can't wait to celebrate this opening with our partners and customers, and we hope to see many of you there soon. With that, I'll turn over the call to Pat and look forward to taking your questions later in the call.

Thank you, Kevin, and good afternoon, everyone. There are three key points that I want to emphasize today. First, fiscal 2019 was a very good year for Starbucks financially, reflecting sustained upward momentum in our business. Second, we are confident in our ability to deliver non-GAAP operating income growth of 8% to 10% in fiscal 2020, underpinned by revenue growth of 6% to 8%, demonstrating modest margin expansion even as we continue to invest for the long term. And third, we remain fully committed to our long-term model of double-digit non-GAAP EPS growth. I will begin by sharing segment highlights for our fourth quarter and an overview of key trends across fiscal 2019, followed by our guidance for fiscal 2020. Our Americas segment delivered 9% revenue growth in Q4 driven by comparable sales growth of 6% and net new store growth of 3% over the past 12 months. Lapping 4% comparable sales growth in Q4 of last year, our U.S. business delivered an impressive 6% comparable sales growth in Q4 of this year, driven equally by transactions and average ticket. These results were led by an improved in-store experience, a strong beverage lineup, and increased digital engagement, as Kevin mentioned. Transactions grew across all dayparts for the second consecutive quarter, and beverage led our comparable growth for a fifth consecutive quarter, driving five points of comparable sales growth with food contributing the remaining point. The majority of the beverage growth was driven by our cold platform which grew across all dayparts, led by cold coffee, refreshment, and tea. The Nitro Cold Brew platform, which reached full penetration of our company-operated stores by the end of Q4, and was supported by national advertising for the first time in August, continued to be well received drawing more occasional customers and slightly favoring the afternoon daypart. Our fall beverage lineup also performed extremely well, driven by the success of our pumpkin platform, along with cold coffee and Nitro. Beverage attach, beverage mix, and pricing contributed evenly to the 3% growth in the average ticket for the quarter. Americas' non-GAAP operating margin contracted by 100 basis points to 20.2% in Q4 primarily due to the one-time investment in our leadership conference as we've discussed on previous calls, growth in wages and benefits, and increased investments in labor hours to elevate the in-store experience while accommodating higher volumes. These increases in expense more than offset meaningful contributions from sales leverage and cost savings initiatives, notably supply chain efficiencies. Moving on to our International segment which delivered revenue growth of 6% on a reported basis in Q4. Excluding the unfavorable impact of streamline-related activities and foreign exchange at 5% and 1% respectively, revenue grew 12% in the quarter. This was driven by 11% net new store growth over the past 12 months and 3% comparable sales growth. I would now like to highlight the fourth quarter performance of our lead international growth market, China. New store development continues to be our number one driver of growth in China, and I'm pleased to say that our pace of development in Q4 set a new record as we opened 201 net new stores, growing store count by 17% versus the prior year. Importantly, our new stores continued to deliver exceptionally high returns even as we extended our presence to new cities while infilling established cities. China delivered comparable sales growth of 5% in Q4, including 2% comparable transaction growth led by the strength in digital customer engagement, primarily the growth of delivery, Starbucks Rewards loyalty program, and Mobile Order & Pay. Our International segment's non-GAAP operating margin increased by 70 basis points to 21.7% in Q4. When excluding the 60 basis point favorable impact from streamline-related activities, the segment's non-GAAP operating margin increased by 10 basis points as the benefits of sales leverage, cost savings initiatives, and labor productivity were largely offset by growth in wages and benefits, an unfavorable shift in product mix, and strategic investments. On to Channel Development, revenue declined 6% in Q4. Excluding the impact of streamline-related activities, primarily the Global Coffee Alliance, segment revenues increased approximately 5%. Non-GAAP operating margin declined by 510 basis points to 37.6% in Q4 when excluding the 310 basis point impact related to streamline, Channel Development's operating margin declined 200 basis points in Q4 fiscal 2019, primarily due to an unfavorable shift in revenue mix. I'd now like to take a step back and share some key insights from our full year performance underscoring our upward momentum across the year. Let's start with revenue. For the year, we reported top-line growth of 7%. Excluding the 3% unfavorable impact of streamline and foreign exchange combined, our revenues grew 10% above our long-term growth algorithm of 7% to 9%. These results demonstrate our potential to outperform our long-term model. In the first six months of fiscal 2019, we reversed the negative trend in U.S. comp transaction growth that had persisted for several quarters and sustained it at 3% in the second half of the year. The turnaround in China's comp transaction growth moving from declines in the low to mid-single digits last year to an increase of 2% this year was equally impressive, especially considering our accelerated pace of store development in that market. And speaking of China development, it's worth noting that our store openings in lower-tier cities in China accounted for a meaningfully higher percentage of total store growth in that market versus the prior year. Yet portfolio investment returns remained very robust, demonstrating Starbucks' resonance with China's growing middle class. Our store development in the U.S. was also quite healthy as we grew net new stores by 3% in fiscal 2019, even with the higher level of closures relative to the prior year as we repositioned our store portfolio for future growth. This is industry-leading domestic growth for a retail business of Starbucks' scale, and coupled with relatively low penetration in certain geographies gives us confidence that we'll continue to achieve our 3% to 4% ongoing net new store growth target in the U.S. Moving to margin, we reported consolidated operating margin of 17.2% for fiscal 2019 on a non-GAAP basis, down 80 basis points year-over-year and in line with our ongoing model of 17% to 18%. That said, I would like to highlight some anomalous items that impacted our year-over-year margin performance, four headwinds and one tailwind. The four headwinds were 70 basis points from streamline-driven activities; 50 basis points from U.S. tax reform-funded investments; 20 basis points from Siren Retail; and another 20 basis points from our one-time investment in the Chicago leadership conference. The one tailwind was 40 basis points from stored value card breakage due to a change in accounting treatment. Adjusting for all these items, consolidated non-GAAP operating margin was up 40 basis points, reflecting the benefits of sales leverage and productivity improvements, partially offset by non-tax reform-funded investments in our partners, technology, product innovation, and stores. As Kevin mentioned earlier, we believe these investments are critical to strengthening our competitive position in order to sustain long-term growth consistent with our ongoing growth algorithm. And finally EPS. We reported full-year non-GAAP EPS of $2.83, above the high end of our previous guidance. Excluding a 7% benefit from unplanned tax favorability and a 1% benefit from streamline-related activities, partially offset by a 1% headwind from foreign exchange, non-GAAP EPS growth was 10% consistent with our long-term EPS growth model of at least 10%. So in summary, our fiscal year 2019 results not only reinforce our confidence in the strategies we're implementing to grow the business, but also demonstrate the robustness of our long-term double-digit EPS growth algorithm. Moving on to our guidance for fiscal 2020 starting with the key driver of our growth, company-operated comp sales growth. Globally, we are expecting comp sales growth of 3% to 4% in fiscal 2020 fueled by our two lead growth markets: the U.S. at 3% to 4% and China at 1% to 3%. All of this is consistent with our ongoing growth model. Moving on to the next key growth driver, retail store development. We expect to add approximately 2,000 net new Starbucks stores globally in fiscal 2020, a sequential improvement over fiscal 2019. Over half will be located in the U.S. and China, combined with China delivering approximately 600 net new stores representing mid-teens growth versus the prior year. As with comp growth, this is consistent with our ongoing growth model. With this combination of comp growth and unit growth, we are expecting enterprise-level top-line growth of 6% to 8% in fiscal 2020. The one percentage point difference between next year's expected revenue growth and our ongoing growth model of 7% to 9% revenue growth is attributable to two things: number one, the sale of our ownership interest in Thailand in mid-fiscal 2019; and number two, an expected 7% to 8% decline in Channel Development's revenue as we lap certain items related to the Global Coffee Alliance that benefited the segment's top-line growth in fiscal 2019. Adjusting for these items, Channel Development's revenue growth in fiscal 2020 is expected to be at the lower end of our ongoing range of 4% to 6%. The Global Coffee Alliance became EPS accretive in fiscal 2019, outperforming our original expectations. And we expect it to continue to be EPS accretive on a cumulative basis, including the associated share repurchase benefit funded in Q1 of fiscal 2019 by $5 billion of after-tax proceeds from Nestlé. Let's move on to fiscal 2020 operating margin. Globally and across each of our operating segments, non-GAAP operating margin is expected to improve modestly over fiscal 2019, primarily due to sales leverage, cost savings initiatives across our supply chain, and overhead efficiencies. The favorability from these items is expected to be partially offset by continued investments in our company-operated retail business primarily related to our partners and technology. Let me add two additional points to the operating margin equation for fiscal 2020. First, commodities are expected to have minimal year-over-year impact on cost of goods sold, as we expect favorability in green coffee prices, net of farmer support payments to be more than offset by higher dairy costs. At this point, our overall coffee needs are over 80% price locked for fiscal 2020. Second, a few comments on G&A. Net of investments, we expect meaningful G&A leverage in fiscal 2020 due to organizational efficiencies, the completion of Roastery development, and the lap of our leadership conference. The recent reclassification of certain line items in the middle of our P&L also meaningfully benefits G&A while adversely impacting store operating expenses. As a result, while our long-term operating income margin target of 17% to 18% still includes a 100 basis point overhead efficiency improvement through fiscal 2021, it is now spread across G&A and store operating expenses. Below the operating income line, we expect considerably higher interest expense ranging between $415 million and $425 million in fiscal 2020 versus approximately $330 million in fiscal 2019. This is driven by debt issuances totaling $5 billion in the past 14 months combined with what we expect to issue this fiscal year. Importantly, we remain committed to maintaining our leverage ratio below three times adjusted debt to EBITDAR. As to the tax rate in fiscal 2020, we expect our effective GAAP and non-GAAP tax rates to be between 22% and 24%. This compares with a non-GAAP rate of 19.4% in fiscal 2019, which benefited from certain unplanned tax items that are not expected to repeat to the same degree in fiscal 2020. Capital expenditures in fiscal 2020 are expected to total approximately $1.8 billion, roughly flat to fiscal 2019, reflecting the opening of our final Roastery next month and the licensing of several company-operated markets. Over 80% of our capital spending in fiscal 2020 will be allocated to where we see significant return opportunities within our Starbucks retail portfolio, new stores, and strategic store-related initiatives including renovations of existing locations. Finally, at this juncture, we foresee minimal impact from foreign currency movements in fiscal 2020. So when you add it all up, our total revenue growth of 6% to 8% for fiscal 2020 is expected to translate into non-GAAP operating income growth of 8% to 10%, consistent with our ongoing growth model. We expect GAAP EPS in the range of $2.84 to $2.89, down slightly from fiscal 2019 due largely to the lap of the one-time gain attributable to the licensing of our Thailand operations. We expect non-GAAP EPS in the range of $3 to $3.05, representing growth of 6% to 8%. Excluding the increase in our effective tax rate as we lap certain items that benefited fiscal 2019, this equates to expected non-GAAP EPS growth of 11% to 13% in fiscal 2020, consistent with our ongoing model of at least 10% EPS growth. As a reminder, we expect the lap of income tax rate favorability for fiscal 2019 will impact our quarter-to-quarter non-GAAP EPS growth in fiscal 2020, with Q1 being the lowest at flat to down slightly, given a nine percentage point EPS growth headwind tied to last year's tax rate. Additionally, with the lap of the leadership conference in fiscal 2019, we expect year-over-year non-GAAP EPS growth to be at its highest in Q4 for fiscal 2020. And with respect to quarterly cash flows, we expect to make a tax payment of approximately $1 billion related to the Nestlé transaction in early Q2. So let me wrap things up. First, we are very pleased with our fiscal 2019 results. Second, we expect that fiscal 2020 will be another good year for Starbucks, delivering 8% to 10% operating profit growth. This demonstrates that we are executing very well from an operational perspective, underpinned by continued focus and discipline. And third, we are fully committed to our long-term model of double-digit non-GAAP EPS growth and will continue to make the investments necessary to sustain this growth over the long term. With that, Kevin and I are happy to take your questions joined by Roz Brewer and John Culver, as Durga outlined at the top of our call.

Hi, good afternoon. Congratulations on the great results. My question is about the traffic strength in the Americas; it seems like you've gained some momentum even as you compare to a tougher quarter last year. Could you discuss the factors that contributed to this? Also, I know you mentioned that traffic was positive throughout all parts of the day. How significant do you think the impact of operations was compared to the product news you had during the quarter? Thank you.

David, thanks for the question. Roz, do you want to take that one for us?

Thank you for the congratulations, David. It was a combination of factors. During the quarter, two main things occurred. We continued to innovate our beverage offerings while also heavily promoting them. We outlined our plans for early July, starting with flavored iced teas and then the fall beverage lineup featuring our pumpkin products. This strategy proved to be very effective, in addition to our efforts to streamline processes for our partners in the stores, enabling them to better engage with customers. This resulted in positive interactions across all dayparts. Moreover, our drive-through sales remain strong and are expected to grow throughout fiscal year 2020. I would also like to highlight the impact of our digital engagement initiatives, particularly the introduction of multitier redemption, which has successfully attracted our occasional customers during afternoons and our Happy Hour promotions.

And David, I'll just punctuate. The Growth at Scale agenda really is about delivering predictable sustainable growth. And to do that, we've really sharpened the focus on the elements that Roz mentioned and are executing with discipline. So if you look at the three initiatives that we prioritize to elevate the experience in our stores, drive relevant beverage innovation for our customers, and grow digital customer relationships, those three things are what's driving an all-time high in customer connection scores. That is in turn driving traffic growth. And those same three priorities that we've focused on throughout fiscal year 2019 will be the same ones we continue to drive in fiscal year 2020. And that's part of what gives us confidence that we are pushing on the right elements that we think differentiates the Starbucks brand versus alternatives in the market, strengthens the connection between our partners and the customers, driving customer connection scores to an all-time high and in turn driving traffic and growth.

Great. Thank you. My question actually is about the new espresso machines that you guys were trialing and testing, but it looks like you're rolling them out a little bit more broadly here. Curious what kind of benefits you're seeing from the new machines both in customer satisfaction, quality, and throughput. How many stores have them? And how long will it take for the whole base to, at least in the company-owned side, to get an upgrade to these new machines? Thank you.

Yes. So concerning the Mastrena machines that you're referring to for espresso engagement in our stores, yes, we are improving the number of Mastrena machines we have across the fleet. In addition to that, I think you're aware that we also placed Nitro machines in all of our U.S. company-operated stores as well. This is representing the work that we're doing with beverage innovation. We're continuing that expansion with Mastrena and should finish that work in the next 12 months or so.

Katherine, there's three key benefits of this new Mastrena machine that I want to really emphasize. Number one is it can pull a triple shot espresso with one pull. Today in our older machines, you have to pull a Doubleshot and then another single shot for any beverage that has three shots of espresso. So just that alone reduces the amount of time that a partner at the bar would need to take if they're preparing a beverage that has three shots of espresso in it. So that's number one, a big efficiency unlock. Number two, those machines have Internet of Things sensors built into them. And so we get telemetry data that comes into our support center. We can see every shot of espresso that's being pulled, and we can see centrally if there is a machine out there that needs tuning or maintenance. And that allows us to improve the quality of the shots that we're pulling. And third, with Deep Brew and our predictive analytics, we're going to be able to determine if a machine needs preventative maintenance on it before it breaks. And so that simplifies things for our partners.

I would just say Katherine on the international side we're also rolling the machines out internationally as well. And I think the benefits that both Roz and Kevin hit on are important benefits that we're seeing translate into the international markets as well. I would also just add that our partners absolutely love these machines, and it gives them much more visibility to the customer due to the lower profile of the machine itself being able to interact with customers and engage with them. And the benefits thus far are very meaningful for the business across all markets.

Great. Thank you very much. Question relates to China. Clearly, it seems like you're back to solid mid-single-digit growth the past couple of quarters. I'm wondering using 2020 hindsight here maybe what you think were the greatest challenges over the fourth quarter period or so where it seems like the comp trends were really challenged whether you thought it was internal or macro or competition? What do you think kind of resurrected that business? And with that as a backdrop, again, having done mid-single-digits the past two quarters just wondering why you think the fiscal 2020 guidance for 1% to 3% is appropriate when it seems like you're on track and running ahead of that level? Thank you.

Thanks, Jeffrey. John, why don't you?

Yes, I believe that what we're experiencing in China is a direct result of the digital presence we've established there, along with the significant innovations in our Modern Mixology products and the developments in our store footprint. Digital growth is occurring rapidly. As Kevin mentioned, digital orders made up 10% of our business this quarter, with 7% coming from delivery, which is a new channel for us, and 3% from Mobile Order & Pay. Digital has positively influenced our business. Additionally, we continually highlight the growth of our store footprint; we opened a record number of new stores this quarter. We are seeing strong economic returns and substantial revenue growth of 18% for the quarter, driven primarily by new stores. There has been a solid double-digit increase in total transactions, both from new and returning customers. I'm very confident about our standing in China and the efforts of our team there.

Pat, why don't you take the second question around the Growth at Scale long-term Growth at Scale growth model and specifically the way we think about our comp guidance in China.

Absolutely. Jeff, we are very pleased with the overall momentum in our business. However, it's too early to change the long-term guidance we provided at our 2018 Investor Day. Our policy is to guide conservatively, sharing expected outcomes that we are highly confident in delivering. This aligns with the predictable sustainable growth Kevin mentioned earlier. Specifically regarding China, the market dynamics affecting our comparable sales are consistent with a year ago. We are continuing to open new units at a faster rate, which does create pressure on existing units due to sales transfer. Additionally, we are observing a slower overall economic growth rate and an increase in competition, partly due to our success and the opportunities we see in the specialty retail coffee sector. Given all these factors, we believe it's sensible to guide for comparable sales growth in China at 1% to 3%, consistent with our ongoing model. We're pleased with the business's performance over the past year and are optimistic about our ability to maintain strong performance into fiscal 2020. Nevertheless, we think it's wise to reaffirm our guidance of 1% to 3%.

Thank you. I wanted to ask about some of the investments you've mentioned, whether in the Americas or in China. Given the strong comparisons, you've touched on the offsets and challenges from these investments. In the Americas, I noticed that store operating expenses have increased at a faster rate than revenue. Should we anticipate this trend continuing? Is this year indicative of a larger increase in your investments with partners, or should we expect that continued investment at this level is necessary to maintain your service standards and customer engagement? Regarding China, could you elaborate on the investments there and the product mix you've described as unfavorable? Is it related to value or food, or are there other factors contributing to the margin challenges?

Pat, why don't I let you take that with Sara, and then we'll see if Roz and John need to add to it. But why don't you go ahead and lead?

Thank you, Kevin. Sara, I'd like to take a moment to review the overall Q4 results. In my prepared remarks, I mentioned the consolidated margin for all of fiscal 2019, but I want to focus specifically on Q4, as the dynamics were somewhat different. On a reported basis, our non-GAAP operating margin of 17.2% showed a 90 basis point decline compared to Q4 of the previous year. However, it's important to note that this includes a 70 basis point effect from our leadership conference and a 30 basis point effect from streamline-driven activities. Excluding these factors, our non-GAAP operating margin actually improved by 20 basis points. While a 20 basis point improvement may seem modest given the 5% global sales comp for the quarter and in comparison to other quarters, I want to emphasize what was unique about Q4, especially recent trends affecting our flow through, which relate primarily to two margin drivers within our Americas segment. The first driver pertains to our investments aimed at sustaining long-term growth. In addition to the investments we made in fiscal 2018 with tax reform funding for partner wages and benefits, we added more labor hours in Q4 to capitalize on our positive sales momentum, enhance customer connections, and find opportunities to increase capacity in stores best positioned for incremental sales. This effort helped us explore the potential for future payback in terms of additional sales. This investment was not expected to pay back fully during the quarter, but it provided us with valuable data, which we are now using to improve our labor deployment moving forward through artificial intelligence and machine learning. Additionally, we invested in store-level equipment to support new product platforms and improve our operating efficiency. This investment is the first driver. The second driver is related to inflationary pressures, particularly regarding wages, benefits, and occupancy costs. As we discussed in Q3, we are facing margin pressures due to ongoing increases in statutory minimum wages and inflation in rents, culinary maintenance, and real estate taxes. Nonetheless, we expect modest margin expansion for fiscal 2020 as we balance our investments with anticipated benefits from sales leverage and ongoing cost-saving initiatives, especially in our supply chain. I also want to briefly address China, where the conditions are somewhat different. We plan to continue investing to maintain strong comp growth even while accelerating our development pace. However, product mix has become a headwind for us in China, particularly due to the increasing share of our delivery sales. As we have previously mentioned, delivery transactions dilute our overall margin, but they do contribute additional profit dollars. This situation contrasts with the U.S., where delivery is at an early stage and growing at a slower pace. Despite the differences between China and the U.S., a consistent factor in our strategy is to make strategic investments that enhance our competitive advantages and support long-term top-line growth. However, these investments may limit our margin expansion potential, which could have been stronger given the steady comp growth we anticipate going forward.

Great. Thanks. Good evening. Question on the key drivers between the U.S. and China. Even as I listened to this call, it sounds like there is an interesting contrast where China is more of a digital flywheel story with that 45% growth in rewards and you had that big jump up in digital order partly fueled by delivery. In the U.S., you've had that mid-teens growth in rewards users. But all the while this year, you've been ramping up as your cold beverage growth seems to be ramping. So I wanted to ask you, do you agree with that characterization in terms of the top drivers in each market? And how do you think those will play out in fiscal 2020? Thanks.

Let me share my thoughts at a high level, David, and then I will ask Roz and John to provide insights specifically on the U.S. and China. While we are concentrating on key initiatives to enhance customer experience in our stores, drive relevant beverage innovation, and nurture digital customer relationships, the two markets differ significantly. This past year, we've made considerable progress in our digital customer relationships in China, largely due to our partnership with Alibaba. In December, we introduced a spend-based rewards program, launched mobile order for pickup, and began Starbucks Delivers. The consumer base in China is notably more digitally adept than in other markets, as reflected in the percentage of transactions made via mobile apps like Alipay and WeChat Pay and the prevalence of digital mobile interactions. The efforts made by Belinda, Leo, and our exceptional leadership team in China this year were crucial in advancing the digital flywheel. A year ago, we lacked mobile ordering for pickup or delivery, but now, 10% of our sales mix is generated from these channels, with seven points coming from Starbucks Delivers and three from mobile order for pickup. In the U.S., we've had a digital flywheel and growth in active rewards members for several years, and our focus there has been on extending and accelerating that growth. More importantly, the improvements made in elevating the customer experience in our stores and enhancing beverage innovation while expanding digital customer relationships have proven beneficial. However, delivery through Starbucks Delivers in the U.S. remains quite limited, representing less than 1% of our sales mix, partly due to the differing cost dynamics between China and the U.S. Additionally, the Chinese consumer is more advanced in digital scenarios than their U.S. counterparts. We will continue to monitor how this evolves in the U.S. Overall, David, we have two distinctly different markets concerning consumer behavior and Starbucks' evolutionary stage, and our capabilities in each market are adapting to fit the customer demographics. Roz, could you share your insights on the U.S. side? John, please do the same for China.

Sure. I'll just add a few things here just to highlight that we're still seeing growth in our digital flywheel. Just in this quarter alone our loyalty programs contributed nearly two points of comp and that's making up about 42% of our tender right now. And typically in the fourth quarter where we usually see retraction, we actually saw active member growth of about 15% year-over-year approaching almost 18 million members. And then the new Starbucks Rewards which we're calling Starbucks Rewards 4.0 we're seeing good performance in our 90-day active consumers. And it's in line with our expectation. So we're still seeing improvement in growth in our relationships and our digital platforms. And we'll continue to see that as we get into fiscal year 2020.

Yes. And David from a China standpoint, I agree with what Kevin's comments were around the Chinese consumer and their digital capability and the savvy that they have. Just to put that into context, you've seen in our report our reported earnings the growth of the Starbucks Rewards program. So we up-leveled that December. We now have crossed the 10 million Starbucks Rewards members in China. We grew that 45% year-over-year. And our total member base is now in China sitting at 32.5 million, which is up 66% over a year ago. So really just strong digital engagement from the customers, when you drill down a little bit deeper into MOP, we've expanded MOP at China speed. We're now at more than 2,600 stores across 15 cities, and we're continuing to expand that program. So we've got about 65% of our store base covered. We're seeing a very strong healthy repeat on purchases which is enabling us to bring new users into the Starbucks Rewards program and penetrate that more deeply. And then you translate that into the new channel of delivery. We're seeing good success in delivery. We stand out over 3,000 stores in 100 cities. We now cover 80% of our store base. As we said, 7% of the sales mix, we're seeing a higher ticket through delivery, and stronger food attach. And we're seeing morning and lunch daypart increasing, so very optimistic about that. And then just don't lose sight of the need for us to continue to gain first-mover advantage on store growth. And we're going to continue to focus on accelerating our store growth. Clearly, the returns that we see in terms of new stores indicate that there is a lot of opportunity in that area. And as we continue to cultivate the coffee consumption in China, which now sits at less than four cups per year, per person, compared to 300 in the U.S., this is a huge opportunity. And then just one other thing, and then I'll stop, is the Global Coffee Alliance. And as Kevin shared, we spent the last few days, in China. We're here in Japan today, talking about the opportunity that the Global Coffee Alliance has for us in China. And we've announced that in August. We're rolling out across four platforms. We have over 20 products that we've launched. We walked the aisle in Shanghai. The Starbucks presence is absolutely stunning. And then foodservice is going to be a big opportunity as we focus in on office, as we focus in on universities, and as we focus in on the five-star hotels. So we're very optimistic about China.

Hi. Thank you. Yeah. First, I'm actually just going to stay on the Global Coffee Alliance. I think, what you said, there's a 7% to 8% reduction in revenue relative to some things that happened in 2019. I was just hoping you could talk about that. And just the comments that we're being made on accretion after buyback, just seem to be interesting that they were made at all. Just overall from a profitability perspective as we think about that segment, was fiscal 2020 in line with relative to what you originally thought? And if not why, and then I'll have a couple follow-ups.

Pat, why don't you take that, if you could?

Certainly, so John, what I'd like to highlight is what is driving the difference between our total revenue growth guidance for fiscal 2020 and our long-term growth model. So we've guided to a range of 6% to 8%. Our long-term growth model is 7% to 9%. That one percentage point difference is attributable to two things. One is the sale of our ownership interest in Thailand in fiscal 2019 and how that extends then with its impact into fiscal 2020. But then the second is, and I think this is more directly to your question, what we're expecting by way of a revenue decline in Channel Development from fiscal 2019 into fiscal 2020 even though we had lapped the onset of the Global Coffee Alliance. There were some temporary business transition activities in fiscal 2019 that are non-recurring. And they tend to mask the growth profile of our Channel Development business for fiscal 2020. And they relate primarily to lapping some elevated inventory sales to Nestlé in preparation for their direct fulfillment of customer orders, in addition to what were some final sales of Tazo-branded products that fell into fiscal 2019. So when you normalize for these temporary transition items in Channel Development and as well as for the ownership change in Thailand, we get back to a normalized total revenue growth rate of 7% to 9%. What I would like to highlight specifically in relation to Channel Development, given that we are guiding to an adjusted revenue growth rate of 4%, which is at the bottom end of our ongoing range of 4% to 6%, is that we would expect it to be 4% to 5% in the near-term and then 5% to 6% longer term with what we expect by way of an accelerated pace of international market expansion. So really what you see happening is a combination of things. Number one, it's overlapping some unusual benefits that we realized in fiscal 2019. But it's also the fact that the international market acceleration and how that impacts the shape of our revenue growth for the Channel Development segment, particularly, we see happening further out into the future.

John, you want to just comment on the international market expansion on Global Coffee Alliance, kind of what we achieved in fiscal 2019, and the outlook for fiscal 2020?

We've had some excellent collaboration with Nestlé as we launched the Global Coffee Alliance. The U.S. market is our most developed area, while our European presence is smaller, and the rest of the world presents new opportunities in consumer packaged goods and foodservice channels. Currently, we offer products in over 30 markets globally, and as Kevin mentioned, we aim to expand to 50 markets by spring 2020. We have introduced 28 SKUs across four different platforms. The partnership with Nespresso has been particularly fruitful, with strong growth in Starbucks-branded Nespresso capsules and robust performance with Dolce Gusto products. We are optimistic about the global potential of single-serve coffee, not just within the U.S. Recently, we launched creamers in the U.S. and plan to expand that to other regions. We introduced four flavors in August, generating around 10.4 billion impressions, indicating significant consumer and market enthusiasm. We are committed to ongoing innovation within the Global Coffee Alliance, and we’ve made impressive strides in developing product platforms quickly, which will continue. This has been a significant focus of our discussions with the Nestlé team over the past couple of days, and we are both very positive about the opportunities ahead.

John, there was a second part to your question regarding the EPS accretion from the Global Coffee Alliance. To confirm, that alliance became EPS accretive in fiscal 2019, which was quicker than we initially anticipated when we completed the transaction. We still expect that it will remain EPS accretive on a cumulative basis, even with the revenue decline I mentioned. This expectation also accounts for the positive impact of the share repurchases funded by the after-tax upfront cash payment from Nestlé.

Hi. Good afternoon. I actually had two questions, but one's pretty quick. I know in the past you've talked about the digital information you have now on people who are not yet rewards members and I think you've given that number in the past. I'm just curious if that continues to grow in the U.S.? And then secondarily on the margin outlook, I guess, I'm a little confused on the Americas particularly. I know the margin there has stabilized. So you had some benefit from the change in the gift card breakage. So I'm just wondering whether or not we should expect Americas margins to stabilize or not in 2020 as well?

Thanks, Sharon. Roz, why don't you take the first question on the digitally registered customers that Sharon asked. And then Pat why don't you take the margin question if you could? So Roz?

Great. Thank you. So, just on those digitally registered customers that we've seen in this recent quarter's first of all, we've seen the redemption shifted to new tiers and that's not impacting our overall Starbucks Rewards growth. The customers we've seen they've embraced the choices provided by these multiple redemption tiers. The 150-Star tier continues to see the majority of the redemption volume. And we've also seen that our low-frequency members that you've heard us refer to as our occasional customers are driving a more significant portion of the active members. So right now, we're seeing good movement in that space. And again, our Starbucks Rewards customers we've seen acceleration there in that member growth of about 15% to roughly 18 million members. Actually, that number is 17.6 million. The other thing I'll mention is that we continue to grow at peak in our morning peak timeframe, and we're seeing actually growth across all dayparts. That occasional customer that we're introducing to Starbucks Rewards is coming in the afternoons. And so we probably are seeing a lift through all the dayparts. And so that is the work that's happening by adding the new multitiers to the program.

Regarding your question on margin, I want to clarify that we anticipate modest margin improvement across all our segments in fiscal 2020. For the Americas, concerning breakage and overall margin, I need to explain what's going on with breakage. We implemented a new revenue recognition accounting standard at the beginning of fiscal 2019, which altered how we classify stored value card breakage from an interest line below operating income to the revenue line at the segment level. This change is more about the location in the financial statements and does not affect earnings per share. Overall, this change in accounting positively impacted our non-GAAP operating margin by about 40 basis points in fiscal 2019, with the most significant effect occurring in Q2 due to seasonal factors. However, I want to make it clear that breakage does not factor into comparable sales; it serves as another revenue driver following new stores and comparable sales. We will have already accounted for this impact in the first quarter of fiscal 2020, meaning that the benefits to our revenue and operating margin will be fully integrated into our figures. Therefore, breakage will not influence margin performance in fiscal 2020. Like other segments, we do expect modest margin expansion in the Americas in fiscal 2020, driven by anticipated sales leverage from our projected comparable sales growth in the range of 3% to 4%, along with significant cost savings, especially in our supply chain. This should be enough to counterbalance the investments we plan to make in fiscal 2020 to drive top-line growth. Additionally, the Americas margin will gain from the adjustment of the leadership conference in the fourth quarter. As you consider our margin performance throughout the year, expect it to be relatively stable in Q1, with modest improvements in Q2 and Q3, and a significant margin enhancement in Q4.

Thank you. I have a follow-up regarding Sharon's comments. Regarding the additional 17.6 million and the 15% growth, could you elaborate on whether you are observing a broader demographic coming on board compared to previous periods? There were some theories over the last couple of years when growth slowed that suggested the brand might have reached its peak as a premium brand. I'm interested in your overall value perception, particularly since the introduction of a tiered rewards program. Has this allowed you to appeal to a wider demographic, perhaps including more individuals with higher incomes than in the past?

Roz, why don't you go ahead and take that for us?

We are currently observing a wider range of customers showing interest in Starbucks. While we don't yet have specific data to categorize them as value or non-value customers, we do know they are more drawn to our beverage offerings than our food options. We are encouraged by the spending patterns of these customers, especially regarding Happy Hour promotions and their preferred times of visit. As we gather more insights, we will share them with you. For now, we are pleased that we are successfully bringing these customers into the Starbucks Rewards program and that we've added more redemption options to enhance the appeal of the Starbucks brand to a broader audience. We will provide additional information as it becomes available, but we currently lack detailed demographic data on these customers.

Let me just add a comment on the strength of the Starbucks brand. Growth at Scale has really enabled us to really sharpen our focus on those things that we believe differentiate Starbucks from all other opportunities and all other experiences. So the focus that we've put on the customer experience in our stores, the focus we've put on beverage innovation, the focus we've put on digital customer relationships and the fact that we have executed against this with discipline has driven our customer connection scores to an all-time high. The brand is healthy and strong and growing. And so in many ways our Growth at Scale agenda has really enabled us to put our energy behind the things that matter most and the things, candidly, that differentiate us from all others in the marketplace. And I think that is the significant reason why we're seeing transaction traffic growth, we're seeing comp growth, and we're seeing momentum across all aspects of Starbucks. And that is helping us in many ways both digitally. But it's also more importantly really amplified by the experience that our Starbucks partners, who proudly wear the green apron create for our customers each and every day.

Great. Thanks for the question. Just wanted to quickly touch a bit more on some of those key drivers that you talked about in the U.S. And I guess specifically, as you kind of think about beverage, the in-store experience as well as digital looking ahead, just anything incremental you could say about that leverage pipeline. Obviously, Nitro is relatively new across the system, but about how you feel about that beverage pipeline looking ahead? How much incremental opportunity there is on the in-store experience? And I guess similarly, with digital, a lot of commentary there. But just where you go from here, if you'd characterize winning and just the opportunity that'd be great? Thank you.

That's great. Roz, why don't you take that for us?

Sure. There's a couple reasons why we feel confident about our future in what we've been doing with the beverage innovation, the work we've been doing with in-store experience and our digital engagement. First of all, behind these things a lot of the work that we've done in-store is around the work that we did with the team works rollout in third quarter fiscal year '19. And so we'll benefit a lot from that in fiscal year '20. Then there is significant work in progress around inventory routines and automation, the food prep test that we do, backroom optimization. And all of those items are fueling the work as Kevin mentioned around machine learning and our applications to fuel Deep Brew. So, we feel confident about that work that's ongoing and that is already in process. In terms of beverage innovation, because we have been looking at not only beverage innovation, but equipment, having Mastrena there is an opportunity, having Nitro there. We introduced Cold Foam last year. It's allowing us to create new beverage combinations that our customers are really responding to in addition to the growth in cold. So, if you look at our sales in detail, cold which is our Refreshers, our iced teas, our cold coffee, and our Nitro Cold Brew are all doing extremely well for us. And so, that innovation will be ongoing. And then, from the point of the digital relationships, the more we learn about our customer base, the better we've been marketing to them. And so you will see our marketing become more personalized and that will help with retention and driving frequency in our stores. So we feel like there is more to come in those three areas, so we'll continue on the pathway we those three important initiatives for us because there's still more to be done in those areas.

Thanks, Hector. As we close today's call, I want you all to know how much we appreciate the support and the encouragement we've received from the investment community over this past year, as we've undertaken significant efforts to streamline the company, sharpen our focus, and drive improvements in operating performance. This would not be possible without the 400,000 talented Starbucks partners that I have the privilege to serve each and every day. Together, we look forward to a great year ahead and to sharing our results and our progress in future quarters. Thank you.