Starbucks Corp (SBUX) — Q2 2020 Earnings Call Transcript

Good afternoon, everyone, and thank you for joining us today to discuss our second quarter fiscal year 2020 results. Today's discussion will be led by Kevin Johnson, President and CEO; and Pat Grismer, CFO. 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. Starbucks assumes no obligation to update any of these forward-looking statements or information. GAAP results in fiscal 2020 include several items related to strategic actions, including restructuring and impairment charges, transaction and integration costs and other items. 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 the corresponding GAAP measures. This conference call is being webcast, and an archive of the webcast will be available on our website through Friday, May 29, 2020. Finally, for your calendar planning purposes, please note that our third quarter fiscal year 2020 earnings conference call has been tentatively scheduled for Tuesday, July 28, 2020. I will now turn the call over to Kevin.

Good afternoon and welcome. Around the world, people, frontline responders, governments, and businesses are all navigating extraordinary times. On behalf of Starbucks, I want to extend our deepest compassion and empathy for all those impacted by loss of life, feelings of anxiety and isolation, and fears of both health and economic uncertainty during this pandemic. It was just three weeks ago, in the spirit of continued transparency, when Pat and I shared with all stakeholders, our second intra-quarter update on how COVID-19 has impacted our business and how we are responding. Today, continued recovery in China strengthens our belief that these impacts are temporary and that we will emerge from this global pandemic with new insights and capabilities that will make our business even stronger and more relevant. The principles we developed to drive our decision-making since the pandemic started in January are serving us well, bringing focus to our response and recovery effort. The three simple principles are prioritizing the health and well-being of our partners and customers, playing a constructive role in supporting health and government officials as they work to mitigate the spread of this virus, and showing up in a positive and responsible way to serve our communities. In our update to stakeholders on April 8, we shared that the positive business momentum that drove one of the strongest holiday seasons in the history of our company continued well into our second quarter in the United States. Our performance was obviously disrupted by the impacts of COVID-19, but we are confident that the Starbucks brand is well positioned and that our Growth at Scale agenda remains intact and will propel future growth when we emerge from this current crisis. I will share some notable highlights from Q2 and then offer some perspective on how we expect to recover our business over time. Q2 was shaping up to be an exceptional quarter for Starbucks, driven by strong performance in the U.S. and Channel Development, even while we were simultaneously navigating the impact of COVID-19 in China. However, near the end of the quarter, the pandemic started to materially impact our business outside of China significantly in the U.S. As a result, consolidated revenue in Q2 was $6 billion, reflecting a 5% decline compared to the prior year, primarily due to a 10% contraction in comparable store sales globally, driven by temporary store closures, modified store operations, and slower traffic, partially offset by strength in Channel Development. In China, where the pandemic impacted our business for most of Q2, revenue and comparable store sales declined year-over-year by $325 million and 50% respectively. Today, almost 100% of our stores in China are open, many with limited seating, reduced hours, and other safety protocols in place. Starbucks stores that remain closed in China are primarily located in cinemas and enclosed entertainment venues along with international travel hubs and certain tourist zones where restrictions are still in effect. Since we started reopening stores in late February, we have seen meaningful improvements in China comparable store sales in commercial, residential, and office locations. We are also seeing the mix of in-store sales continuing to rise. For the month of April, comparable store sales in China were down approximately 35%, marking strong improvement from a weekly low of minus 90% in mid-February. Importantly, even though new store development activities were suspended for most of the quarter, we opened 59 net new locations in China during Q2 and another seven locations added thus far in April. We are expecting to open at least 500 net new stores in fiscal 2020 with as many as 100 new stores originally planned for this year deferred to fiscal 2021. This represents a rapid reacceleration of our new store development and speaks to the amazing spirit and enormous capability of our team in China. Given this progress, we believe our recovery plan is working and we remain optimistic about our ability to capitalize on the long-term growth potential of the premium coffee market in China. We believe, barring any new disruptions, that our business in China is on a path to substantial recovery by the end of this fiscal year. Just last week, we launched the Starbucks GOOD GOOD marketing campaign, which features plant-based alternatives in products and packaging. With this program, Starbucks in China introduced Oatly, a plant-based milk alternative. Also, Starbucks is the first in China to offer national distribution of Beyond Meat's plant-based proteins with new Asian menu items served in packaging made from plant-based materials. This campaign is just one step in our larger aspiration to be planet positive while introducing relevant menu choices for customers. Over the past 20 years in China, we've established an admired and trusted brand by investing in our partners and delivering a unique premium experience to our customers. We continue to play the long game in China as we invest in our future. The state-of-the-art Coffee Innovation Park that we will be opening outside Shanghai in 2022 will serve as a key component of Starbucks worldwide coffee roasting network for customers in China and is a testament to the growth opportunity we see for specialty coffee in the market. Starbucks' premium customer experience is highly differentiated in China and the brand is as strong as ever. We continue to thoughtfully invest in China, a market that has significant long-term growth potential for Starbucks. I am proud of how Starbucks China continues to pave the way as one of our two lead growth markets. Now on to the other lead growth market for Starbucks, the U.S. Coming off one of the strongest holiday quarters in the history of Starbucks, U.S. momentum continued to build well into Q2. Prior to mid-March, revenue growth in the U.S. was accelerating to the strongest level in over four years, driven by comparable store sales growth of 8%, including comparable transaction growth of 4%. Additionally, two-year comps were tracking to 12% growth, the strongest in over three years. With growth across all dayparts and strong contributions from both our Starbucks Rewards members and occasional customers, it is very clear that our focus on the customer experience, beverage innovation, and digital customer relationships is a powerful combination. Our performance was interrupted mid-March when a national emergency was declared to mitigate COVID-19. And we decided to close over 50% of our company-operated stores and limit service to drive-through and delivery for those that remained open. In that final three weeks of Q2, U.S. comp sales swiftly decelerated, ending the quarter down 3%, driven by a 7% contraction in traffic comp. Based on the experience we gained navigating COVID-19 in China, we have been as well prepared as anyone for this mitigation-and-contain phase in the U.S., particularly as our stores are well positioned to adopt operational safety protocols, while still meeting our customers' needs. In the U.S., almost 60% of our company-operated stores include drive-through and over 80% of our customer occasions before the crisis were on-the-go, with the majority of these orders being placed at the drive-through or by using the Starbucks app to mobile order for pickup or delivery. Of note, during the second quarter, the 90-day active Starbucks Rewards members, our highly routinized, highly engaged, and loyal customer base, with whom we can directly communicate digitally, increased to 19.4 million in the U.S., up 15% from a year ago. Since the crisis started, we have seen an average ticket growth increased throughout the quarter, a result of group ordering as customers through this pandemic are making Starbucks runs for their homes, local essential businesses, and for frontline response teams. Overall, Nitro Cold Brew and refreshment continue to lead for beverage. And our new alt-milk beverages, Almondmilk Honey Flat White and Coconutmilk Latte, are also resonating well with customers. Our innovation in food, notably our new breakfast wraps, have surpassed expectations to date. Similar to our experience in China, we are transitioning into a new phase of operations we call monitor and adapt. We are now leveraging digital tools that enable us to monitor the COVID-19 situation in every community across the U.S. and leverage a variety of service options from contactless service, entryway pickup, curbside delivery where parking is available and at-home delivery, that allow us to thoughtfully reopen stores and scale up operations. We are finding new, innovative ways to serve our communities, prioritizing the safety of our customers and partners, with a focus on exceeding public health standards and adjusting to new customer expectations. The strength of our digital reach, combined with a range of service options, is enabling us to reopen stores, community by community in a thoughtful way, using the three simple principles that have guided our response thus far. My summary on our U.S. business is this. This monitor-and-adapt phase in the U.S. is the inflection point for reopening stores and begins a recovery process that requires ongoing monitoring community by community to rapidly adapt and drive the recovery. We are well positioned to leverage our digital assets and new operating formats like contactless pickup and curbside to expand service to customers. And our focus on the customer experience, beverage innovation, and digital differentiates Starbucks and will enable us to regain the momentum we had prior to COVID-19. At Starbucks, the third place has always been about community connection and convenience. And we expect to strengthen this competitive advantage through continued improvements in our digital capabilities and innovative store formats enabling us to connect with customers and serve our communities safely and with even greater convenience. I am proud of how Starbucks partners in the U.S. have shown up through all of this. The fact that while serving their communities, they also served over 1 million free cups of coffee to the frontline responders, who have worked tirelessly to care for others which makes us all very proud. Leveraging the playbook that was developed in China and refined in the U.S., we are working closely with our international license partners to navigate the current environment and prepare for recovery guided by our mission and values and commitment to delivering the Starbucks Experience safely and responsibly. With Starbucks in 82 markets, we are committed to supporting our license partners around the world as they too navigate this challenge. And finally, a few comments on our Channel Development business. The strategic value of our Channel Development segment has been clearly evident in the current environment. Selling Starbucks products through multiple channels amplifies the brand and extends our ability to meet customers where they are, even when they are unable to visit our retail stores. In Q2, this segment's revenue grew by 16% which includes a 5% favorable impact, primarily related to the Global Coffee Alliance transition-related activity, boosting our share of the coffee market outside of specialty retail. This continues to be an important element of our Growth at Scale agenda. The Global Coffee Alliance with Nestle was established just 20 months ago. It is clear that our channel strategy is working extremely well. Before I hand over to Pat to walk you through the details of the quarter and balance-of-year perspective, I want to reinforce one key point. Starbucks is resilient. For over 49 years since our founding, we have overcome every challenge presented to us and are overcoming this challenge as well. Our China business is on a path to recovery. Our U.S. business is entering the phase of reopening stores, adapting to the new reality and restoring and rebuilding momentum. And our Channel Development business is posting very strong results and acting as a brand amplifier. Our Growth at Scale agenda provides the focus and discipline for us to successfully navigate this challenge. We remain confident in our approach. We understand there's much more to do and that we must be agile as the world navigates COVID-19 and works to create a vaccine. We have a very clear path going forward. We are optimistic about the future, and we believe Starbucks will emerge from this experience even stronger, more determined, and more focused than ever before. But the real credit goes to Starbucks partners. Together, we are emotionally connected to a mission grounded in humanity. And together we are making principled decisions true to our values. Partners are the key to our resilience. It is why we will do all we can to provide them with economic certainty and support them through this challenging period. After all, partners are the heartbeat of Starbucks. Now, I'll turn it over to Pat for a deeper dive into our Q2 financial results, an update on our FY 2020 outlook, and an overview of our financial readiness to weather this crisis.

Thank you, Kevin and good afternoon everyone. I’d like to start by echoing Kevin's appreciation for all of our Starbucks partners who continue to demonstrate their dedication to Starbucks and their communities in spite of the hardships facing the global community right now. Unsurprisingly, business disruption attributable to the COVID-19 pandemic has materially impacted our financial results. Our belief is that these impacts are temporary as evidenced by our continued recovery in China as Kevin outlined. In all cases we have estimated these impacts by comparing Q2 actual reported results to our internal forecasts specific to each operating segment and market. For the second quarter, Starbucks produced consolidated revenue of $6 billion, down 5% from the prior year. We estimate the COVID-19 impact to be approximately $915 million due to temporary store closures, restricted sales channels, shortened operating hours, and severely reduced customer traffic. As we shared earlier this month in an 8-K, Q2 non-GAAP EPS was $0.32, down 47% from the prior year. We estimate the COVID-19 impact to be approximately $0.45 including not only profit flow-through on the revenue impact that I noted earlier but also incremental costs that we incurred in response to the pandemic which I will outline later. I will first provide some highlights of segment operating results and consolidated margin performance for Q2 and then we'll then share some perspective on balance of year results and liquidity. Revenue for our Americas segment was flat in Q2 relative to the prior year at $4.3 billion as incremental sales from net new store growth of 3% over the past 12 months was effectively offset by a 3% decline in comparable store sales. Through the first 10 weeks of the quarter, the U.S. delivered 8% comparable store sales growth building on strong momentum from the past few quarters. But this was more than offset by a sharp decline in the final three weeks of the quarter due to the COVID-19 impact that I mentioned earlier ultimately resulting in a 3% decline for the quarter. We estimate America's Q2 revenue decline attributable to COVID-19 to be approximately $450 million. Through the month of February, Americas' non-GAAP operating margin improved meaningfully versus the prior year reflecting strong sales leverage and continued supply chain efficiencies. However, due to the rapid sales decline and significant investments in response to the COVID-19 outbreak that started to materialize in the U.S. in mid-March, Americas Q2 non-GAAP operating margin landed at 14.4%, down from 20.3% in the prior year. We estimate that the COVID-19 impact to Americas non-GAAP operating income was approximately $420 million in Q2 consisting of flow-through on lost sales as well as incremental investments notably catastrophe wages as well as enhanced pay and benefits programs in support of our retail store partners, inventory write-offs, and store safety supplies. Moving on to International, business disruption resulting from COVID-19 impacted the segment for the majority of Q2 starting with China in late January and extending to other markets in March including Japan. For the quarter, International's revenue declined by $395 million or 26% versus the prior year to $1.1 billion, primarily driven by a 31% decrease in comparable store sales, partially offset by 11% net new store growth over the past 12 months. We estimate International's Q2 revenue decline attributable to COVID-19 to be approximately $465 million. International's Q2 non-GAAP operating margin was 3.9% down from 19.3% in the prior year. We estimate that the COVID-19 impact to International non-GAAP operating income was approximately $280 million in Q2 with components similar to what I outlined for the Americas. Further contributing to the margin decline was a higher-than-normal sales mix of delivery transactions as customers shifted to off-premise consumption, resulting in higher commission and packaging costs. On to Channel Development. Revenue was $519 million in Q2 fiscal '20, an increase of 16% over the prior year. When normalizing for the 5% favorable impact of Global Coffee Alliance transition-related items, Channel Development's revenue grew 11% in Q2 over the prior year. The segment's non-GAAP operating margin was 37.8%, an improvement of 360 basis points over the prior year. Normalizing for the 330 basis point impact of the transition activities I just mentioned, Channel Development's operating margin expanded 30 basis points in Q2. Finally, at the consolidated level, non-GAAP operating margin of 9.2% in Q2 contracted 660 basis points year-over-year. We estimate the COVID-19 impact to non-GAAP operating income to be approximately $700 million, inclusive of the amounts I cited for the Americas and International. In relation to the $915 million of consolidated revenue impact that I mentioned earlier, this equates to approximately 80% of flow-through on lost revenue which is materially higher than the 50% variable flow-through rate that we typically observe in our business, reflecting the significant investments we've made in the short term to support our partners and manage our brand for the long term. We believe that these investments will strengthen our competitive position and fuel our recovery as we emerge from the effects of the pandemic. Now moving on to our outlook for fiscal 2020. Given the global nature of our business, our ability to provide updated guidance for the remainder of the year is predicated on the current phase of COVID-19 response within each of our markets. As a result, we are continuing to suspend formal guidance for fiscal 2020, while providing updated outlooks for selected businesses and financial metrics. I’ll start with China. With the progress we have seen to date including having 98% of our stores open as of today and continued improvements in customer traffic as Kevin mentioned, we believe China's comparable store sales will continue to improve in the second half of fiscal 2020 relative to the 50% decline reported for Q2, declining 25% to 35% in Q3 and trending towards roughly flat by the end of Q4 relative to the prior year, yielding a decline of 15% to 25% in China's comparable sales for the full fiscal year. While we temporarily paused new store openings in China in Q2 given COVID-19, development activities resumed towards the end of the quarter and we are on track to open at least 500 net new stores this fiscal year or over 80% of our original target. This will position us well to continue to capture the growth opportunity we see in China in fiscal '21 and beyond. Combining the effects of comparable store sales declines and new store development deferrals, we estimate revenue in China to be negatively impacted by COVID-19 by approximately $750 million to $850 million with an estimated EPS impact of between $0.30 and $0.37 in fiscal 2020 barring any new disruptions. Moving to the U.S. Today approximately 50% of our company-operated stores and 46% of our licensed stores in the U.S. are temporarily closed. But we expect to begin reopening many of them next week, initially with modified operations and shorter operating hours. We currently expect approximately 90% of company-operated stores to be open by early June. Additionally, modifications to increase throughput in drive-through delivery and MOP channels in our existing stores are already underway along with a new entryway handoff solution, which incorporates best-in-class safety protocols. And as Kevin mentioned, we are also exploring curbside service in locations where parking is available. We believe the focused actions we are taking to deliver a contactless customer experience coupled with continued beverage innovation and expanded digital capabilities will help to restore the upward momentum in our U.S. business that we’re experiencing prior to the onset of COVID-19. To date in April, comparable sales growth for U.S. company-operated stores that are open is averaging approximately minus 25% or indexing at 75% of prior year levels. However, as we have not yet entered the recovery phase in the U.S., it is premature to provide a balance-of-year estimate of U.S. revenue or earnings at this time. But given the late quarter onset of COVID-19 impacts in the U.S., as well as a materially higher flow-through rate on lost sales in the U.S., we do expect the negative financial impacts of COVID-19 to be significantly greater in Q3 compared to Q2 and to extend into Q4. So while the initial impacts in the U.S. are less severe than they were in China from a comparable store perspective owing to the prevalence of our drive-through model in the U.S., we do expect the impacts to persist for a longer period of time as we move through the monitor and adapt phase with the recovery phase extending into fiscal 2021. We expect the COVID-19 impacts in Canada and Japan, as well as in our international license businesses will follow a similar pattern as the U.S. very pronounced in the third quarter with some easing of these impacts expected in the fourth quarter as these businesses move into the recovery phase. In any event based on our substantial experience in China today, we continue to believe that these impacts are temporary that our brand is resilient and our business will fully recover over time. At the enterprise level, we expect the absolute flow-through impact of COVID-19 to be materially greater in Q3 compared to Q2 in particular due to the longer duration of U.S., Canada and Japan business disruption in Q3 compared to Q2. That said, we expect the rate of flow-through on lost sales in Q3 to be slightly lower than in Q2 and to ease further in Q4 as we take appropriate steps to restore the profitability of company-operated stores as they reopen in the back half of the year. Consistent with the approach we have taken in our two interim update this quarter, we will provide transparent updates as to what we are seeing and how that shapes our perspective on the balance of year financial results as we execute our store reopening plan and have increased visibility into business performance trends in the U.S. and other markets. We expect to provide our next update in June after we've evaluated the performance of stores we opened in the U.S. and better understand the possible duration of temporary closures in Japan. From our perspective, the reopening of stores and actions we are taking to position ourselves when the crisis subsides do not fully define recovery. Recovery in our view is when a company-operated market delivers positive comparable store sales growth and all existing stores are open with the exception of those undergoing renovation. Finally, on a reported basis, Channel Development revenue is expected to decline between 6% and 8% in fiscal 2020 relative to the prior year as we lap certain transition items related to the Global Coffee Alliance that benefited the segment's top line growth in fiscal 2019 with the impact being more pronounced in Q3 and far less pronounced in Q4. Additionally, the disruption resulting from COVID-19 is expected to adversely impact foodservice under the Global Coffee Alliance and our ready-to-drink business during the balance of fiscal 2020. The segment's operating margin is expected to improve modestly in fiscal 2020 relative to the prior year. The cash flow implications of these near-term operating results are very material. But the scale of our company combined with the strength of our balance sheet enables us to manage our business for long-term growth while dealing with short-term business realities. In essence, we are investing in relationships with key constituents not only to preserve those relationships, but to strengthen them for the future. Let me provide several examples of how we are thinking about this. First, through salary and wage continuation and through premium pay for those working on the front lines of our business, both as communicated through the end of May we are investing in our partners who are critical to the Starbucks Experience and instrumental to our long-term success. Second, by extending more flexible development and financial terms in Q3, we are investing in our international licensees, who are our partners in driving long-term growth. Third, through certain accelerated payments, we are helping strategic suppliers weather this crisis so that they can sustain the supply of our proprietary products and support our ongoing product innovation. And fourth, by honoring our upcoming quarterly dividend declaration we are supporting our shareholders with a predictable return of capital in an uncertain investment environment. Our next dividend is payable on May 22 to shareholders of record on May 8. As disclosed in our most recent 8-K in addition to accessing additional capital to bridge near-term cash needs, which we expect to peak in Q3, we are creating additional room for investment in our partners and the business more broadly by suspending share repurchases, reducing discretionary expenses and deferring certain capital expenditures. Due primarily to the deferral of some new store openings and store refurbishments, we now expect capital expenditures for fiscal 2020 to total approximately $1.5 billion or $300 million lower than our original plan prior to the onset of COVID-19. Importantly, we remain very much committed to our BBB+ credit rating and leverage cap of three times rent-adjusted EBITDA. That said, while the impacts of COVID-19 will cause us to exceed that leverage cap for a period of time, we view these impacts to be temporary. We expect our leverage to return to near three times rent-adjusted EBITDA in the latter part of fiscal 2021. In short, our leverage policy is unchanged. To summarize, the financial impacts of COVID-19 are very material and will weigh on our Q3 performance in particular. But the progress we are making in China and the deliberate approach we are taking in the U.S. to reopen stores reinforce our belief that these headwinds are temporary. We are confident that our brand is resilient and that our customers are eager to resume their daily routines. We have the financial strength to make investments for the long-term as we navigate challenges in the short term. And we are inspired by the courageous partners, who serve our communities by serving our customers at a time when people are looking for the personal connection that defines the Starbucks brand. And 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. Thank you.

Thanks and good evening. In the U.S., could you talk about your store base in terms of the percentages that are not only closed today those walk-in locations, but also areas that you would anticipate being slower to rebuild sales? Any numbers against this that would be helpful as we think about your path to recovery. And relatedly, how much do you think social distancing in these walk-in stores will limit your capacity when they do reopen? Thanks very much.

Thanks David. Roz, why don't I let you share a little bit of perspective on the U.S.?

Thank you, Kevin. And thank you David for that question. Let me first start off talking about April. So to-date in April, we did have drive-through locations open. And as Pat mentioned, we had comparable sales growth in those U.S. company-operated stores averaging down by about 25% or indexing right at about 75% of prior levels. So, as we reopened stores, we did a few things to really create the analysis, we created a decision modeling tool that helped us look at the customer frequency that we saw in those drive-through stores as well as looking at sources from local government guidance, the infection curves by county, customer sentiment, and partner sentiment. So when we open starting next week, we're going to open with modifications. And those modifications will be drive-through stores. We will amplify delivery. We will have the Mobile Order & Pay channels open, and then the addition of a new concept, the entryway handoff. We will only have roughly 30 stores that will be café open and order. And in those 30 stores, there will be no seating. So we are making sure that we provide a safe environment for our customers and for our partners.

Thanks Roz. I'll just add one other point that we shared David to reinforce what Roz just said. Pre-COVID, 80% of our customer occasions in stores in the U.S. were for to-go take-away. By enhancing the in-store experience with mobile ordering and contactless pickup, we can serve a large number of customers even without opening the café seating area. This is an important consideration. Certain areas, such as those near office parks in China where office workers have not returned to work, will see a slower recovery. We also expect that the stores located in malls will experience slower performance. Mall stores make up less than 8% of the total store fleet in the U.S., and I believe Roz explained that well.

Hi. Thank you very much. I wanted to follow up on the situation in China regarding the percentage of to-go occasions there. You've mentioned several times that 80% of the occasions in the U.S. are to-go. I would expect that number to be significantly lower in China, but could you clarify that since Starbucks really distinguishes itself with the café experience and the concept of being a third place?

Yes. Thank you, John. I appreciate that. Just to clarify about China, traditionally we've seen 80% of our business involve customers staying and enjoying their drinks in the cafés. As COVID hit, we hit a peak of nearly 80% of transactions being digital orders. And those digital orders were all set up with the contactless experience through walking in the stores and picking up your orders in Mobile Order & Pay. And then the rest of it was delivery. What we see today is that in the stores that we have open we have roughly 83% of those stores have seating in them with social distancing in place. And so we are seeing people come back into the cafés and sit there albeit not to the levels that we saw pre-COVID. What we're seeing is that there is a higher percentage of to-go orders taking place in China and we expect that trend to continue. And if there is a silver lining, I think it is forming a new habit in China, where you are seeing more people take to-go orders and get used to doing that. And so we're optimistic that the shift will continue to occur. We anticipate the 80% of where we were pre-COVID will come back maybe not as high, but the overall sales levels that we'll see in China, we will get back to full recovery and on a path to full recovery by the end of this fiscal year.

Thanks, John. Let me just add one other observation. When we look at consumer behavior on a global basis as it relates to COVID-19, after people have been sheltering at home in a lockdown situation for several weeks – in China, it was a little over three weeks. In the U.S., it’s been about six weeks. What they look for – what consumer sentiment looks for is something that is safe - experiences that are safe, familiar, and convenient. And that is consistent around the world. And so what we've done at Starbucks is we've built the operating protocols in our stores to be safe to follow every – and exceed every health standard we can exceed and ensure we can provide every customer a safe experience. Clearly, getting that Starbucks Experience is something that's familiar to them. And when you've had to be sheltering in place for several weeks just to get out for a nice uplifting experience at Starbucks it's familiar and it's rewarding. And so customers come back to our stores. But having this convenient ability and those three attributes safety, familiarity, and convenience that is something that works around the world, following these periods where people have been sheltering at home.

Hi, good afternoon. Could you talk about how your digital trends have kind of ramped as you've gone through April? I know you gave the update on Rewards for the second quarter. It'd be helpful to know, what you're seeing with engagement as we've gone through this month.

Roz, why don't I have you kind of respond, as it relates to digital and U.S. and safety protocols?

Sure. So as Kevin mentioned in – when we started off the call, we saw as we were entering the quarter and actually exiting last year, our Rewards members which are our highly routinized customers have really grown with us. We've increased to over 19 million of those customers in the U.S., up 15% a year ago. One of the things that we're seeing as we've been going through this COVID experience is our Starbucks Rewards members, they remain roughly 44% of our business, even as we progress through the quarter. And the majority, roughly about 70% of them are our frequent Starbucks Rewards customers. And they're still coming to our stores just less frequently. So – and also to think about what that looks like over a daytime, really we've not seen much change there. There's same frequency loss across all dayparts. It's a little bit more pronounced in the morning but that's to be expected because the routines have been disrupted. So we are encouraged by what we've seen so far in the U.S. We believe that these highly resilient customers will come back to us. The routines may look a little bit different but they will – people remain in a work-from-home position.

And just real quick Sharon on China. We continue to see digital being a key element of our strategy in China and really the adoption of the digital transactions in our stores continues to accelerate. What we've been able to do is leverage our Starbucks Rewards membership to really maintain that connection and engagement during the COVID experience. We're seeing sequential improvements in overall weekly active members. So more and more people continue to adopt the digital app and interact with us digitally. And as I shared or was shared in one of the scripts, digital order mix is now 29% in Q2. We had a peak in early February of 80% early on. And really you're seeing a good split between Mobile Order & Pay making up about 16% of that 29% and delivery making up about 13%. So we're very encouraged with the opportunity in digital.

Sharon you have a second part of that question. I'd like to address the second part of Sharon's question. She also asked about the marketing piece around the U.S. business. And we do have a marketing plan schedule as we reopen next week. And actually, if you think about the shutdown that we had, we delayed the introduction of our spring beverage lineup and Double-Star Days in addition to our Happy Hour. You will see those initiatives revived with much more energy than before. We will operate within our current plans for this year, just streamlining them and speeding up most of the efforts related to enhancing our app and encouraging customers to use it and place orders in advance. And then in terms of delivery, we've been able to accelerate in delivery. We believe in some markets like New York where we will have a handful of delivery-only stores, we're seeing some significantly higher volumes than normal with delivery in places like New York.

Thanks very much. My question is on how you think about the pace of the U.S. recovery. In addition, obviously to the pandemic, we're in a recession. So how do you think about incenting customers to come back differently? Or is that not in your calculus? You believe once stores are open consumers resume their normal pace of consumption.

Yes. John, this is Kevin. Let me just comment. Pre-COVID, we had built a tremendous momentum in the business by focusing on three things: the customer experience, beverage innovation, and digital customer relationships. That remains the powerful combination for us to continue engaging and increasing the frequency of customer visits. However, we understand that after the COVID experience, enhancing the initial store experience with the concepts of safety, familiarity, and convenience is what prompts customers to start their engagement. Now certainly, we're going to know a lot more 30 days from now in the U.S. But I think as Roz highlighted, in the drive-throughs, just the number of drive-throughs we've had open without even the café open, we were delivering roughly 75% of prior year revenue in those individual stores. And so that's just an indication of the power of the brand and the strength of connection that we have with customers. Now I think over this next week when we open more stores and with the set of experiences that Roz has articulated, I think we're going to begin that path of engaging. And I think 30 days from now, we're going to have a much clearer view of how rapidly that goes. And we've got a great beverage lineup that Roz just talked about that's going to release. We're going to market and evangelize that. We've grown digital customer relationships by 15% to 19.4 million in the U.S. We're going to leverage that to communicate with our customers. And we're going to be thoughtful and responsible with each step that we take and I think that's the formula.

Hi, thank you. I wanted to follow up on the U.S. ticket growth, which I found surprisingly strong. I apologize if this has already been discussed, but is this growth balancing out the effects of the COVID pandemic on traffic?

Roz, why don't you take those questions?

Sure. Thank you, Sara, for your questions. First of all, let me start by saying that we plan to begin reopening stores next week, with the expectation that we will achieve slightly over 90% capacity by June 1 across the various formats. Sara when I think about the trend in both ticket and traffic, I think about the exit of the fourth quarter into first quarter where we were seeing great pickup in terms of our beverage innovation, most predominantly in Nitro, Cold Brew, and all cold coffee selling extremely well. It performed well during our holiday beverage lineup and continued to show positive results, achieving an 8% comparable sales increase in early March during the first 10 weeks of the year. This success primarily stems from our beverage innovation. The second thing is the in-store experience. And so, we had done a significant amount of work to actually relieve the partner of a lot of their tactics they were doing in the stores and they were engaging with our customers in some of the most meaningful ways. Creating the best moments with our customers was really a real key change for us. Our customer sentiment and customer engagement numbers were at record levels in addition to our partner engagement was at record levels as well. We actually saw that partner engagement carry over to when we began to slow down stores due to COVID. We saw partners just volunteering to come work at stores very energetic. The response from customers has been great.

Yes. I'll just add that the increase in ticket was due to group orders. Going through a drive-through typically involves someone making a family Starbucks run and buying for their entire family or someone making a purchase for frontline responders, getting food and beverages for them. We saw a lot of that. So it's really driven by the fact that it was just drive-through only. And if you're going to take the time to go through drive-through you're going to load up and buy for the entire family or the entire group. And that drove down transaction, drove up ticket.

Good afternoon. I hope everyone is doing well. Pat my question is about the level of potential cash burn you might have in the current quarter. I was wondering if you could maybe frame that up for us? And then just talk about your commitment to maintaining the dividend throughout this crisis.

Thank you, David. I'll start off by saying that, given the scale of our company combined with the strength of our balance sheet, we are confident that we will be able to maintain appropriate liquidity as we manage the current crisis. Now, when you consider that today over 50% of our company-operated stores are closed in the U.S. and Canada, and those that are open are largely restricted to drive-through and delivery channels, and with store partner payroll protection temporarily in place, our cash burn rate has peaked. And it's at approximately $125 million per week after CapEx, but before dividends. We expect this burn rate to go down as we begin reopening large numbers of company-operated stores in the U.S. and Canada in the month of May, and to reduce further in the month of June as we normalize our store partner pay practices and benefit from recapturing sales. We have already taken steps to enhance our financial flexibility and that includes issuing $1.75 billion of bonds in March, with the proceeds used to pay down outstanding commercial paper balances, temporarily suspending our share repurchase program, deferring certain capital expenditures, and reducing discretionary spending. And so with the amount of cash currently available to us and that includes our existing credit facilities and additional borrowing capacity, if we need it, we're comfortable with our overall liquidity position, and we're well prepared to manage current operating conditions from a cash flow perspective. And that includes the investments in interim partner wages and benefits, which we've extended through the end of May. That said, our near-term focus clearly is on reopening our stores and optimizing their profitability as we emerge from the crisis and learn more about underlying customer traffic patterns and trends. Now, as I said in my prepared remarks, we do expect the absolute impact of the lower sales and increased investments to intensify in the third quarter. It will be much more significant than they were in the second quarter in large part given to the longer duration of impact, because when you think about it, and let's talk about the U.S. business. In the second quarter, we had between two and three weeks impacted by COVID-19 outbreak. In the third quarter for all intents and purposes we're expecting 13 weeks of impact, most significant in the month of April but reduced in the months of May and June as we reopen our stores and normalize our pay practices. Now for International, it's slightly different in the sense that we expect continued improvements in China from both a sales and margin perspective but we do expect adverse impacts in Japan and other markets including EMEA to intensify compared to Q2. And that's again largely due to an extended duration of impact in the third quarter. On balance there are just too many unknowns and too many moving pieces to be able to provide more explicit guidance on Q3 results outside of China at this time other than to say that the impacts to revenue and operating income will be much more substantial in absolute terms in Q3 compared to Q2, but we do expect these impacts to moderate in the fourth quarter.

Great. Thanks for the question. Just wondering if you could talk a bit more about the competitive environment both in the U.S. and in China and how the Starbucks brand is positioned coming out of this certainly depending on the situation with smaller chains and the independents or even the larger chains in the case of China.

Yeah, this is Kevin. I would like to start by commenting on the momentum we generated before COVID. Posting an 8% comparable sales growth with four points of transaction growth in the U.S. up until the last two weeks of March clearly indicated that our combination of the in-store experience, beverage innovation, and digital customer relationships put us in a position to grow our share of customer occasions in the specialty coffee retail sector. I believe that the way we have handled the virus has placed us in a very strong competitive position. However, the economic consequences of this situation are still uncertain. We remain very optimistic about our competitive standing. We will have a clearer understanding in 30 days as we observe the response to the reopening in the United States. Likewise, in China, I believe we are also in a very strong competitive position.

Great. Thank you. If we look at the comp numbers in the U.S. business that you've discussed in March and then your guidance for April, overall it might suggest that there hasn't really been a big sequential or week-on-week improvement in the business.

Pat, why don't you take the numbers on the comp and then we'll hand off to Roz to talk about sort of the trends that she's watching in terms of customer behavior?

Certainly. Thank you, Katherine. So, since the third week of March when we initiated widespread closures of stores in the U.S., we've seen the comps which include the impact of closures based on how we've defined comps for this period of time, it's been fairly steady in the range of minus 60 to minus 70. As we have in recent weeks reopened some more of our drive-through stores, we've seen slight improvement within that range, so that we're closer to the minus 60 end of that range. But it really is not until we begin to reopen large numbers of stores starting the week of May 4 that we would anticipate seeing a material improvement in that number.

Yes. More stores and more ways for customers to engage. And so Roz, why don't you talk a little bit about sort of the incremental ways that we're now engaging beyond just drive-through as we reopen these stores next week?

Yes. So, Katherine thanks for the question. So first of all, Pat did allude to a range, so that 65% to 75%. So, as you drill down there's probably some of those stores that are doing better and we're seeing it migrate. It really depends on those local jurisdictions and where the sheltering-in has been lifted. And we're seeing that over the last week or so. So, in some instances, it's actually too early to tell. Also remember that we have really turned off any marketing in this time. And so our customers are used to us introducing spring beverage in addition to speaking to them on a one-to-one basis through our digital relationships. And we've not acknowledged our birthday presentations to our customers. We've not introduced Happy Hour, nor have we done our Double-Star Days. So, I would say that we're operating in an abnormal position in terms of how we communicate to our customers. Now, coming out of the gate, we're doing a lot of new things with marketing. We'll have digital media. We'll have TV. We'll have paid social owned earned media. That all begins early next week. We're also creating new email contacts for each of our members. We will reach out to those 30 million members in the next week. And the most important thing is to let them know that we are open. And it's surprising to us in some areas people are not aware if we're open or not and we've actually had different hours in different regions. So, it's too soon to tell in terms of where the pickup will be, but we're pretty positive about the work that we have ahead of us and reintroducing our summer beverage line. So, we're encouraged by that. I'll also mention too, we have extensive work going on with our delivery partner. And so you'll see some marketing in the delivery space as well.

Thanks very much. My question is on, how you think about the pace of the U.S. recovery.

Yes. John, this is Kevin. Let me just comment. Pre-COVID, we had built a tremendous momentum in the business by focusing on three things: the customer experience, beverage innovation, and digital customer relationships. And that remains the powerful combination for us to continue to engage and drive frequency of customer visits. But we recognize coming through the COVID experience that everyone around the world is sharing the need to optimize the initial store experience around these concepts of safety, familiarity, and convenience. Now certainly, we're going to know a lot more 30 days from now in the U.S. But I think as Roz highlighted, in the drive-throughs, just the number of drive-throughs we've had open without even the café open, we were delivering roughly 75% of prior year revenue in those individual stores. And so that's just an indication of the power of the brand and the strength of connection that we have with customers. Now I think over this next week when we open more stores and with the set of experiences that Roz has articulated, I think we're going to begin that path of engaging. And I think 30 days from now, we're going to have a much clearer view of how rapidly that goes.

Hi, thank you. Just a follow-up on the U.S., I guess, I was surprised at how strong the ticket growth was.

Roz, why don't you take those questions?

Thank you, Sara, for the questions. First of all, let me start by saying that we will begin reopening stores next week, and we anticipate being just slightly over 90% by June 1 in various formats. Sara when I think about the trend in both ticket and traffic, I think about the exit of the fourth quarter into first quarter where we were seeing great pickup in terms of our beverage innovation. Our holiday beverage lineup performed well, leading to an 8% comparable sales increase in the early weeks of March. This positive trend can be attributed to our beverage innovation. The second thing is the in-store experience. And so, we had done a significant amount of work to actually relieve the partner of a lot of their tactics they were doing in the stores and they were engaging with our customers in some of the most meaningful ways. Creating the best moments with our customers was really a real key change for us. Our customer sentiment and customer engagement numbers were at record levels in addition to our partner engagement was at record levels as well.