Starbucks Corp (SBUX) — Q1 2021 Earnings Call Transcript

Good afternoon everyone and thank you for joining us today to discuss our first quarter fiscal year 2021 results. Today's discussion will be led by Kevin Johnson, President and CEO; and Pat Grismer, CFO. 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, Tea & Cocoa. Also present is Rachel Ruggeri, Senior Vice President, Finance for the Americas. 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 and quarterly report on Form 10-Q. Starbucks assumes no obligation to update any of these forward-looking statements or information. GAAP results in fiscal 2021 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. For certain non-GAAP financial measures mentioned in today's call, please refer to our website at investor.starbucks.com to find their corresponding GAAP measures as well as a reconciliation of these non-GAAP financial measures with their corresponding GAAP measures. This conference call is being webcast and an archive of the webcast will be available on our website through Friday, February 26, 2021. Finally, for your calendar planning purposes, please note that our second quarter fiscal year 2021 earnings call has been tentatively scheduled for Tuesday, April 27th. I will now turn the call over to Kevin.

Well, good afternoon, and thank you for joining us today. As I reflect on this past year, clearly, we have all been through a lot, a lot of trying times and a lot of change. And at a time when society and all of humanity are a bit fragile, I am optimistic because this year holds tremendous promise for healing. I believe Starbucks can play an important role in that healing process, bringing people together to feel connected, supporting our communities in a positive and responsible way, and advancing a more equitable and inclusive world. It was just one year ago this week that we temporarily closed stores across China to protect our partners and customers from the coronavirus. We quickly realized the need to establish a set of principles for navigating this virus to operate safely in a global pandemic and then shared our principles and store protocols with every market around the world. That approach has served us well. And I'm proud to say today, our business in China recovered in Q1, in line with our expectations and we remain on track to achieve full sales recovery of our U.S. business by the end of Q2. This journey has not been linear. And because we have operationalized our ability to monitor events in real-time and adapt to the changing conditions store-by-store, our recovery continues to track slightly ahead of our expectations. Since the start of this pandemic, while being guided by our three fundamental principles, our 400,000 Starbucks partners around the world have been well equipped with tools, resources, and support to enable quick decision-making at the store level. The agility with which our partners navigated an unprecedentedly complex global situation, while caring for each other and for our customers, leaves me as confident as ever about Starbucks' long-term outlook. Last month, when we met for our Biennial Investor Conference, we talked about Starbucks' resilience. There were three takeaways from that discussion that I want to reiterate as we share this quarter's results. First, our Growth at Scale agenda that we established almost three years ago has sharpened our focus, enabled disciplined execution, enhanced our ability to allocate capital to its highest and best uses, and unleashed a growth mindset throughout Starbucks. Second, our speed and agility has enabled us to rapidly adapt to changing consumer behaviors and strengthened our competitive position. And third, we have an innovation agenda for our customer experience and for store transformation that positions us well for future growth. Now, I want to share with you results from Q1 that reinforce our belief that Starbucks is stronger and more resilient than ever. Let me begin in the U.S. Our first quarter comparable store sales of minus 5% in the U.S. improved from the prior quarter's minus 9%. Even with pandemic-related business disruption in the latter half of the quarter that significantly reduced our ability to offer in-store seating, with over 60% of our U.S. company-operated stores offering limited seating as we entered our fiscal Q1, comparable store sales improved in October, building on the momentum we saw in the prior quarter. When COVID-19 cases began to surge mid-quarter, we adjusted our operations to grab and go in alignment with our principles and in support of regulatory requirements across a number of states. We rapidly adapted and ended the quarter with approximately 40% of our U.S. stores offering limited seating. Underpinned by our powerful innovation agenda, our phenomenal green apron partners delivered a very strong holiday performance in Q1, building positive momentum on our path to full U.S. comp recovery. Importantly in Q1, we laid a solid foundation for achieving our fiscal 2021 goals by further advancing the three business driving initiatives fundamental to our Growth at Scale agenda: elevating the customer experience, driving relevant beverage innovation, and expanding digital customer engagement. I will now share some notable highlights from Q1 and our traffic driving initiatives for the balance of fiscal 2021, starting with elevating the customer experience. We believe that many of our customers have adapted to their work or study from home realities. Their Starbucks visit has evolved from the stop on the way to a destination to being the destination worth leaving home for, because it is safe, familiar, and convenient. The work we have done to increase throughput in drive-thru, expand our digital reach, enable curbside pickup, and expand delivery capabilities was evident in Q1. U.S. stores with drive-thrus saw a slight improvement in out-the-window times and delivered positive comps throughout Q1. They drove over half of net sales in Q1, increasing more than 10% from pre-pandemic levels. These results give us confidence that our targeted initiatives to unlock capacity and enhance the customer experience at our drive-thru locations are boosting our business recovery, while strengthening our foundation for future growth. Our industry-leading mobile app continues to be an important tool for us to elevate the customer experience as a safe, convenient, and personalized way to order Starbucks. This quarter, mobile orders represented 25% of U.S. company-operated transactions in Q1, up from 17% before the pandemic, providing clear evidence that our initiatives are resonating with customers. We continue to see average ticket meaningfully higher than pre-pandemic levels, driven by group order. A combination of increased beverage attach, premium beverage mix, increased customization and upsizing, and an all-time high food attachment, all drove U.S. ticket growth of approximately 19% in Q1. In addition, our seasonal holiday beverage lineup, combined with our creative holiday marketing, created excitement amongst our green apron partners and drew customers into our stores. This year, we kicked off holiday with familiar beverages such as Peppermint Mocha and, of course, Starbucks joyful holiday cups, a 23-year ritual. Pumpkin Cream Cold Brew's tremendous success in last quarter's lineup provided a strong prelude to the December return of the new holiday favorite, Irish Cream Cold Brew. Our cold beverages continued to resonate with customers led by Iced White Chocolate Mocha, Iced Chai Latte, and Vanilla Sweet Cream Cold Brew, with all three delivering positive year-on-year growth. Food outperformed our expectations in Q1, driven by strength in breakfast wraps, the Impossible Breakfast Sandwich and holiday bakery items such as the Snowman Cookie and, of course, my grandson's favorite cake pops. Finally, we saw accelerating growth of digital customer relationships and customer engagement, a key highlight of the quarter. Following our successful launch of Stars for Everyone in Q4, Starbucks Rewards achieved phenomenal results in Q1, providing a strong foundation for growth in fiscal 2021 and beyond. Our 90-day active Starbucks Rewards member base, to whom we directly communicate and provide personalized offers, increased by 2.5 million members in Q1 to a record 21.8 million. This result surpassed our pre-COVID member base, representing a 15% increase relative to the same quarter in the prior year. I'm also happy to say that this holiday season, Starbucks Card activations, the cornerstone of our holiday gift program, exceeded our expectations. Starbucks Cards are a customer favorite for holiday gifting and are widely available through our stores and other distribution channels, including digitally. The success of Starbucks Cards illustrates the strong emotional bonds that we've created with customers and the relevance of the Starbucks experience even in the current environment. As the number of active Starbucks Rewards members grew during the quarter, so did their engagement. Rewards customers contributed 50% of U.S. company-operated sales in Q1, up from 43% last year before the onset of COVID-19, and up from 47% in the prior quarter, demonstrating our loyal customers' resilience and affinity for Starbucks. Any way you look at it, our first quarter results were quite strong in the U.S., particularly considering the headwind we faced from the current surge in COVID infections. I will now move on to China, our second lead growth market. Building on the positive momentum from the past two quarters, the China leadership team delivered another great quarter, which is a testament to our ability to rapidly adapt to changing conditions while focusing on the customer experience, new beverage innovation, and continued expansion of digital customer relationships just as we continue to do in the U.S. We delivered an impressive positive 5% comparable store sales growth in Q1, but what is most remarkable about our recovery in China is the rapid reacceleration of new store development, which is our number one driver of growth in that market. I'm pleased to share that in Q1; we opened almost 160 stores and crossed the 4,800 store milestone. That equates to 13% growth in net new stores over the last 12 months, which is particularly impressive considering that we suspended new store development activities for a couple of months at the onset of the pandemic in China. We entered 15 new cities in the quarter and stores in these cities are off to a strong start with customer traffic outperforming that of new stores in other cities in China. The performance of these new stores underscores our continued confidence in the long-term growth opportunity for Starbucks in China. We continue to dramatically expand digital customer relationships in China through the Starbucks Rewards program as evidenced by the number of 90-day active Rewards members growing to 15.4 million in Q1, a record increase of 51% versus the prior year and 14% over the previous quarter. In addition, we achieved record sales for this year's Double 11 campaign which grew by 86% versus last year and we also set a single-day retail sales record on our Starbucks Rewards members' night. Member engagement campaigns and additional functionalities launched through our Starbucks app and mini apps boosted member engagement and frequency throughout the quarter. In fact, with Starbucks Now Mobile Order & Pay services available across 99% of our store base and with Starbucks Delivers in 85% of our store base in China, mobile order sales mix hit a record 30% of the company's China sales, up from 26% in the last quarter with 14% driven by Starbucks Delivers and 16% from Starbucks Now. Rewards customer engagement continues to grow as mobile ordering has more than doubled in China over the past year. Starbucks remains Chinese consumers' first choice in the away-from-home coffee category and is the most talked about coffee brand on social media in China. The brand is stronger than ever in our fastest growing market. And finally, a few comments on our Channel Development business. The strategic value of our Channel Development segment in the current environment is clear. The availability of Starbucks' products through multiple channels has secured Starbucks leadership position in the category, acting as a brand amplifier for our specialty coffee retail business. The demand we saw last quarter in Starbucks At Home remained high, boosting our share of the coffee market outside of specialty retail. In the U.S., Starbucks' share of total package coffee grew significantly in the quarter with dollar sales up nearly 14%, nearly twice the category average. The Global Coffee Alliance with Nestlé has been a powerful partnership and I'm proud to say that for the first time ever, we finished calendar year 2020 as the number one coffee brand across the entire coffee category. Think about it, Starbucks is now the number one coffee brand ahead of all premium and mainstream choices. In addition, consumption of our U.S. Ready-to-Drink coffee products in partnership with PepsiCo grew 18% in the quarter. The introduction of Ready-to-Drink Nitro Cold Brew which was the number one innovation in the category last year, exceeded sales expectations. Unsurprisingly, our food service business continues to be impacted in the current environment with softness in workplace coffee consumption as well as business and leisure travel, which was partially offset by overall strength in our At Home Coffee and Ready-to-Drink businesses. With Nestlé, we entered four new markets in the quarter bringing Starbucks At Home Coffee presence through the Global Coffee Alliance to 66 markets in just over two years. Overall, we are proud of our alliance with Nestlé and pleased with the accelerated global expansion of the Starbucks brand through our Channels business. Now, before I hand the call over to Pat, I want to close by sharing a perspective and recognizing my Starbucks partners. Throughout this year, Starbucks will celebrate our 50th anniversary as a company and in that 50 years, since 1971, the most important ingredient that has created this iconic company are the Starbucks partners, who share a powerful connection to our mission, a mission grounded in human experience and brought to life through our values and company culture. It is those same Starbucks partners who are navigating the global pandemic, caring for one another, creating welcoming experiences for our customers, showing up in our communities, bringing new ideas and accelerating innovation, and rapidly adapting to our new reality every step of the way, showing the compassion and courage necessary to transform into this new version of Starbucks, a company that is more resilient, stronger than ever, and fully committed to a bright future full of adventure, growth, and positive impact on those we touch. And as markets around the world work tirelessly to vaccinate billions of people, we are prepared for what can only be described as the great human reconnection where people once again connect with others face-to-face to heal, to belong, to reflect, to share, and to celebrate. Starbucks was built for this moment. And to my Starbucks partners around the world, we all know that our purpose goes far beyond the pursuit of profit. This is our moment and I am proud to be your partner and grateful for everything you do for Starbucks, for each other, for our customers, and for the communities we are all a part of. I am optimistic about our shared future and I want to say thank you. Now, before he walks you through our Q1 results, I want to close by sharing my sincere gratitude for Pat Grismer. He has helped lead us through unprecedented change and transformative growth at an amazing pace in his time with Starbucks and he has played an instrumental role in unlocking considerable shareholder value over the past two years. I appreciate Pat's partnership with the entire leadership team at Starbucks and the lasting legacy he is leaving. Pat, as you prepare to retire, I want to thank you and wish you the very best in your next chapter. You leave the company in the great hands of a 16-year partner, Rachel Ruggeri, who is incredibly well positioned to assume the mantle of Starbucks' Chief Financial Officer on February 1st. Having worked closely together for many years, I look forward to partnering with you, Rachel as you lead our finance function and contribute as a valuable partner on our executive leadership team. Further, as you all may have seen today, Roz has accepted an incredible opportunity as Chief Executive Officer at another publicly traded company. She will be leaving Starbucks at the end of February and her next role is expected to be disclosed in the days ahead. In the meantime, I want to share that we're very excited for her and are grateful for her many contributions over the years in leading our operations across the Americas. Roz, on behalf of the entire leadership team, I want to thank you for your leadership and wish you every success in your new role, congratulations. With these shifts, I am immensely proud to have a very strong bench of Starbucks veterans who represent the next generation of leadership for our company. Rachel Ruggeri succeeding Pat as CFO, and as we flatten the organization, Rossann Williams, President of our North America Retail business, and Brady Brewer, Executive Vice President and Chief Marketing Officer, will now be reporting directly to me, taking on what have previously been responsibilities of our Chief Operating Officer. Combined, these three talented leaders have more than 45 years of Starbucks experience and we will not miss a beat. Rachel, Rossann, and Brady building on your passion, authenticity, and many years of success at Starbucks, I am excited about our next phase of Starbucks' growth together. I'd like to thank all of my partners for their support as we are well-positioned for the future. And now with that, I will turn the call over to Pat.

Thank you, Kevin and good afternoon everyone. As Kevin shared, we are very pleased with our start to fiscal 2021 with meaningful sequential improvements in quarterly financial results despite ongoing business disruption from the pandemic, again demonstrating the new level of resilience that we have introduced into the business during these unprecedented times. Starbucks reported global revenue of $6.7 billion in Q1, down 5% from the prior year. Q1 EPS was higher than the guidance range we provided on our last earnings call, primarily driven by better than expected margin recovery. Q1 GAAP EPS of $0.53 declined from $0.74 in the prior year but outperformed our guidance range as it also benefited from lower than expected restructuring and impairment costs as I will discuss in greater detail later. Q1 non-GAAP EPS was $0.61, down from $0.79 in the prior year, primarily due to the lingering impact of the pandemic. I will first take you through our Q1 fiscal 2021 operating performance by segment, followed by an analysis of our consolidated margin performance. I will then share some perspective on our outlook for Q2 and the full fiscal year. Our Americas segment delivered revenue of $4.7 billion in Q1, 6% lower than the prior year, primarily due to a 6% decline in comparable store sales as well as lower product sales to and royalty revenues from our licensees as a result of the pandemic. As Kevin mentioned, in the U.S., we saw continued sequential improvement in quarterly comparable store sales from minus 9% in the prior quarter to minus 5% in Q1. As we entered Q1, October improved modestly to minus 3% from minus 4% in September. Then, as the quarter progressed, U.S. comparable store sales were minus 4% and minus 8% in November and December respectively, primarily due to pandemic-related operating restrictions across several states, which impacted customer mobility. As Kevin also noted, approximately 40% of our U.S. company-operated store base was offering limited seating at the end of the quarter, down from more than 60% at the beginning of the quarter. So, we are quite pleased with our comparable store sales performance in Q1 in light of these increasing restrictions. Americas Q1 non-GAAP operating margin contracted 320 basis points from the prior year to 18.8%, primarily due to the impact of COVID-19 including sales deleverage and additional costs incurred as well as growth in retail partner wages and benefits. These impacts were partially offset by improved labor efficiency driven in part by order consolidation and sales mix shift as well as pricing. Notably, this represented a significant improvement from the previous quarter's non-GAAP operating margin of 16.7%. Moving on to International, the International segment delivered revenue of $1.7 billion in Q1. Excluding a 5% favorable impact of foreign currency translation, the segment's revenue in the quarter was flat relative to the prior year, reflecting 8% net new store growth over the past 12 months offset by lower product sales to and royalties from our international licensees as well as a 3% decline in comparable store sales, primarily due to COVID-19 inclusive of a 3% VAT benefit. In China, comparable store sales grew 5% in Q1, including VAT favorability of nearly five percentage points, were slightly positive when excluding the impact of VAT for the quarter. In line with our previous outlook, we substantially recovered our sales in China by the end of calendar 2020 even when excluding the temporary VAT benefit, demonstrating the strength and resilience of the Starbucks brand in our fastest growing market. In December, China's comparable store sales were up 4% or only slightly negative when excluding the nearly five percentage point VAT exemption benefit for the month, an improvement from October and November when excluding each month's VAT exemption benefit and setting aside the mid-Autumn festival seasonal shift that benefited October. International's non-GAAP operating margin declined by 100 basis points to 20.4% mainly due to sales deleverage as a result of the pandemic, partially offset by improved labor efficiency. Much like the Americas, this represented a very significant improvement from the previous quarter's non-GAAP operating margin of 16.3%. On to Channel Development, revenue was $371 million in Q1, a decline of 25% from the prior year, primarily due to a 22% unfavorable impact of Global Coffee Alliance transition related activities, including a structural change in our single-serve business. When excluding the impact of these transition related activities, Channel Development's revenue declined by 3% in Q1, mainly driven by the adverse impact of COVID-19 on the segment's foodservice business, partially offset by growth in our Ready-to-Drink business. The segment's non-GAAP operating margin expanded to 48.7% in Q1 from 36.6% in the prior year. Normalizing for the 840 basis point impact of Global Coffee Alliance transition related activities I just mentioned, Channel Development's operating margin expanded 370 basis points in Q1, driven primarily by the strength of our Ready-to-Drink business. Finally, at the consolidated level, non-GAAP operating margin was 15.5% in Q1, down from 18.2% year-over-year, but a substantial improvement from 13.2% in Q4. Unsurprisingly, much of the year-over-year reduction in our operating margin for Q1 was due to sales deleverage attributable to COVID-19 as well as growth in wages and benefits, partially offset by store labor efficiencies and pricing in the Americas. Moving on to our guidance for fiscal 2021 and starting with GAAP EPS. In Q1, GAAP EPS was $0.16 higher than the upper end of our guidance range, primarily reflecting lower than expected restructuring costs related to our trade area transformation initiative. This upside was attributable to two things. First, a shift in the timing of store closures to future quarters and second, a reduction in average restructuring cost per closed store. As we expect these lower restructuring costs to sustain, we are raising our full year fiscal 2021 GAAP EPS guidance by $0.08 from a range of $2.34 to $2.54 to a new range of $2.42 to $2.62, both inclusive of approximately $0.10 for the 53rd week. Now, moving to non-GAAP EPS guidance. Our strong start to the year combined with a tailwind from foreign currency translation as evidenced in our Q1 results provides optimism that we have the potential to exceed our full year non-GAAP EPS guidance barring, of course, any new significant and sustained waves of COVID-19 infections and any major economic disruptions. However, given where we are at in our fiscal year with three quarters to go and considering that we're continuing to see volatility from the pandemic, we believe it is prudent to provide a comprehensive guidance update with our second quarter earnings report, by which time we'll have much better visibility to full year results. Therefore, setting aside the updated fiscal 2021 GAAP EPS guidance I just mentioned, we reaffirm all other full year fiscal 2021 guidance for now including non-GAAP EPS in the range of $2.70 to $2.90, again, inclusive of approximately $0.10 for the extra week. We will however provide guidance for selected Q2 metrics given our better visibility to near-term trends which provide further evidence of recovery in line with our overall expectations. In the U.S., we expect to report a comparable store sales decline of approximately 2% for the month of January, representing a marked improvement from December's 8% decline. Then, as we lap material adverse COVID-19 impacts in the month of March, we expect U.S. comparable store sales growth of approximately 5% to 10% for the second quarter. This is consistent with our previous outlook that we would achieve full sales recovery in our U.S. business by the end of Q2 with a two-quarter lag beyond that before we expect to see full margin recovery. In China, we are seeing another wave of COVID-19 infections in selected provinces and a corresponding impact to customer mobility and store operating protocols. In addition, we started to lap material adverse COVID-19 impacts last week and this will continue through the remainder of Q2. Combining these two items, we expect to report a comparable store sales decline of approximately 7% for the month of January and comparable store sales growth of nearly 100% for the second quarter, reflecting very significant lapping effects in the months of February and March. On a two-year basis, that would equate to roughly flat compound growth in the second quarter as we move through the one-year anniversary of COVID-related store closures and return to our long-term growth algorithm in China. From an EPS perspective in Q2, we are expecting GAAP EPS in the range of $0.36 to $0.41 and non-GAAP EPS in the range of $0.45 to $0.50. These estimates reflect the comparable store sales growth estimates that I just provided as well as the normal margin seasonality we see in our business comparing Q2 to our holiday-driven Q1. To be clear, except for GAAP EPS, the rest of our full year fiscal 2021 guidance metrics are unchanged from what we communicated with our Q4 fiscal 2020 quarterly earnings report. This includes our expectation that our retail operating segments will deliver significant margin improvement on a non-GAAP basis as fiscal 2021 progresses, yielding meaningfully higher EPS in the third and fourth quarters than the first two quarters of the year. To summarize, we are delighted with the pace of business recovery in Q1 and the momentum that it provides for fiscal 2021, our China market has substantially recovered, although it is experiencing recent volatility and our U.S. business is on track to fully recover in the current quarter as we previously communicated. As a result, we remain confident in the strength of our brand and the durability of our growth model. I want to express my appreciation to our green apron partners for the critical role that they continue to play in our overall business recovery. Before I conclude, I'd like to thank Kevin and the Starbucks team. It has been an honor to be a Starbucks partner and I am proud of what we've accomplished as a team to unlock considerable shareholder value over the past two years. I am thrilled to pass the CFO baton to Rachel Ruggeri, a key member of our senior finance team. Rachel and I have been partnering to ensure a smooth transition and I would like to invite her to share a few words on this call. Thank you.

Thank you, Pat. I'm honored and humbled to assume the role of Chief Financial Officer at Starbucks. In my 16 years with the company, Starbucks has never been better positioned for long-term growth and I look forward to working with Kevin, our executive leadership team, and of course the partners around the globe to unlock that growth with focus and discipline. And to our investors and financial analysts who have joined us today, I very much look forward to speaking with you soon. And with that, I will turn today's call over to the operator to begin our Q&A session.

Thanks very much and congratulations to Pat and Roz on your new ventures. Good luck and we will miss you. Pat, Kevin, Roz, or all three, how should we view the relationship between check growth and traffic growth in the upcoming quarters? We have never experienced such a situation where traffic has significantly decreased while check has increased. Do you believe this will simply stabilize, or is it a coincidence? Are there initiatives in place to maintain the benefits of higher checks even as traffic rebounds, or could there be an overperformance based on that? Pat, how much has the decline in traffic and the bundling of orders contributed to margin benefits? How should we assess the impact on margins as traffic returns, while potentially seeing a decrease in average checks over time?

Yes, John, this is Kevin. I want to provide some insight on that. One significant factor contributing to the rise in ticket sales is group ordering. As we introduce grab and go options and customers seek safe and familiar experiences, they're purchasing multiple beverages and food items for larger groups than before. This explains why our traffic has decreased while the ticket average has increased. However, as we begin to reopen seating in our stores and vaccinations continue globally, I believe we will see this trend normalize. Nevertheless, I anticipate a long-term positive effect on ticket sales. Customers have become accustomed to premium beverages and higher food attachments during this period. I actually think the ticket average will emerge from this situation higher than it was prior, even as transaction volumes recover. The timing of this recovery will depend on the pace of vaccinations in various markets and how swiftly people return to typical foot traffic and normal work and school routines. Roz, would you like to provide any additional insight on this issue concerning the U.S.?

Yes, Kevin, I do. There's a couple of things here to think about in terms of the contributors. Kevin mentioned the higher beverage attach, the higher food attach. There's also the shift to cold beverages. And what we see in cold beverages is a couple of things. If you think about the decline in transactions that we've seen in our central business districts and our metro markets, those areas carry single beverages, and they were higher than average brewed coffee and those grew really at a lower range than our ticket options. So, what we're doing in beverage innovation is replacing that with cold beverages and replacing that with plant-based. And so that's why we're seeing this improved food attach. And so we feel confident that those kinds of innovations are going to keep that ticket higher than what we've seen in the past.

Thank you. Regarding the impact of higher prices on our margins and how we expect that to stabilize over time, we believe that some of the growth in ticket prices will continue, resulting in a persistent margin benefit. However, as customer behavior returns to normal, we anticipate some reversal of that margin benefit. It is also crucial to emphasize our ongoing initiatives in store operations aimed at enhancing productivity. This includes deploying handheld POS systems to improve drive-thru efficiency, which we expect will increase capacity and enhance margins. Additionally, we are introducing new equipment, including espresso machines and ovens, that will help reduce transaction times. We are also refining our operational processes to ensure that our new protocols consistently achieve higher efficiency in labor deployment. Thus, there are several initiatives in progress that will drive productivity and unlock further margin benefits, even as some sales activities normalize and reverse some of the recent margin gains.

Hi, good afternoon and congratulations, Roz, on the news. But we'll be sad to see you go. I guess I had a question on Stars for All, and it's probably best directed to Roz. As you rolled that out, clearly, you saw the membership jump in the U.S. I mean, how much of that is directly related to Stars for All, if you could kind of quantify that? And then any kind of quantitative elements on potentially how these Stars for All members differ from pre-existing cohorts of members and how you've kind of trended and potentially upselling them to the higher level of Starbucks Rewards?

Great. Thank you, Sharon, for that note of congratulations. So, just a little bit on SFE. The story behind SFE is we provided for our customer base the option for payment removal. And we knew that was one of the most significant sections that we had in growing our Starbucks Rewards members. So, this strong member growth that we're seeing is not only surpassing our pre-COVID highs but pushing well behind and you saw the numbers, 22 million active members, that's up 15% year-over-year. And it's helping us really fuel the all-time highs that we're seeing in Starbucks Rewards as they convert. And right now, our Starbucks Rewards percent of tenders is reaching nearly 50%, as Kevin mentioned. So, we are seeing some significant improvement with Stars for Everyone. Also, too, quarter-over-quarter, our mobile app downloads grew by 5% and our acquisitions grew 13%. So, we're seeing some significant movement in there in terms of how the conversion rate. The everything you asked for if there's any qualitative difference between who we're seeing coming in, we're just seeing just an expansion of our customer and just more love for the brand as we apply SFE. And so really, we don't have the exact numbers in terms of qualitatively how they differ. We just know that we have addressed a significant concern with payment removal. So, we're pleased with what we see so far.

Thanks and congrats everybody on their new roles. All the best Pat and Roz. Question on capacity and throughput. I mean, look, going back to the mid-2000s, I can think of times when Starbucks talked about reaching near capacity levels. And of course, some of those comments seem funny now, given the fact that you've come so much further in terms of your AUVs, especially after all you've done with mobile order and pay in terms of smoothing out the service for that and then the drive-thru expansion has also raised that. But I go by those drive-thrus and a lot of them look pretty full. And I wonder about the post-vaccine world and how much you think about capacity utilization or basically coming up on these bottlenecks, particularly in the drive-thru as we get to a post-vaccine reality. Could you talk about that? And what you might be working on to maximize your growth after the vaccine? Thanks.

Yes, Roz, why don't you take that and go through a little bit of the initiatives that we've done to increase throughput on the different channels? And then maybe I'll comment, but why I don't I let you take that question.

We have a lot of work underway to improve our service experience, especially with our drive-thru locations, which make up a significant portion of our stores. To start with, our most effective model is the drive-thru. As we progress, you can expect to see more drive-thrus being built in the Central United States, as well as in the Southeast and Southwest. The number of drive-thru locations will increase. We have three main strategies to boost drive-thru productivity. First, we are focusing on optimizing our current operations to improve our service times by ensuring our baristas can work efficiently. The second strategy involves developing and testing new technologies, such as handheld point-of-sale systems, which we currently have in 300 drive-thru locations and will expand to 500 by the end of February. We're also enhancing technology to streamline order management. Additionally, we plan to renovate 150 drive-thru stores that face challenges in meeting our productivity model, including redesigning layouts and simplifying sales processes. Lastly, we are exploring new drive-thru concepts, like drive-thru-only locations with no seating and dual drive-thru lanes. There is significant work ahead to fully realize the potential of our drive-thru operations.

Hi, thank you very much. I would actually like to pivot from that question. In terms of opportunities for the 40% of stores that do not have drive-thru, those that do have seating, that maybe the possibility of a drive-thru even on relocation isn't even possible within the trade area, could you have like some of the things that you can do to increase throughput overall consumer usage, whether on a late-COVID basis, or even a post-COVID basis to make that cohort of stores more productive? That's the first question. And then secondly, if I can sneak it in considering that the transactions which are down offset, obviously, by the ticket, you know, labor hours, presumably are down at the store. Do you have a sense of how variable labor should be? In other words, if transactions increased by 10%, is there a type of percent that you would think labor hours should increase this as we kind of think about rebuilding the models for the out years? Thanks.

Thanks John. Roz, why don't you take the first question that John asked, and then Pat will follow-up on the second question that he asked.

Yes, John. Thank you for the question. When considering productivity and models that might not include a drive-thru, we are examining all possible improvements within the building. As Pat mentioned, we have introduced our next-generation espresso machine, which allows for quicker preparation with a variety of coffee options. Additionally, we have new warming ovens that enhance operational efficiency and standards. It's also crucial to highlight our work with Deep Brew, which utilizes AI to optimize our equipment and store processes, thereby enhancing productivity. There is significant progress in our café seated stores, and you will see these advancements implemented over the next several quarters. Pat?

And John, as to your question regarding variable labor, what we focus on is flow-through on variable sales and that's particularly important as we expect continued sales recovery and then back into growth in the back half of the year. And even as we continue to make significant new investments in the middle of P&L in order to unlock future growth opportunity, we fully expect very meaningful sales leverage that comes with what we target as an approximate 50% flow-through on those variable sales. And that includes what we derive by way of leverage on fixed labor. So, there is a variable labor component that is embedded in that calculation. But importantly, it acknowledges that there is a fair portion of our total cost structure inclusive of labor that is fixed in terms of how we operate these stores. So, as we recover sales and further build from that point, we anticipate margin expansion as a consequence of sales leverage that helps to offset the impact of the additional investments we're making to unlock future growth.

Thank you. I wanted to ask about China. That was a very strong 5% comparable sales growth, and I was wondering if you could discuss this in the context of potentially slower growth due to competition and the intentional opening of new stores that could cannibalize sales. A year ago, you reported about 3% comparable sales growth and 16% unit growth, while now you have 5% comparable sales growth and 13% unit growth. Can you explain how much of this strong comparable sales growth might be attributed to reduced cannibalization versus less competition? Additionally, I think the economics for new units are still quite good, but perhaps a bit lower than before. I’m trying to understand the current competitive and operational environment.

Sara, thanks for the question. Maybe, John, I'll have you talk a little bit about what's happening in China new store growth and how we continue to drive China. And then let's go to Pat, Pat can reinforce kind of our view on the long-term growth model for China that we outlined at the Investor Day in December.

Thanks for the question, Sara. We are very proud of the work our team in China has done to manage the COVID situation and the current market surge. They have substantially recovered, meeting our expectations for the quarter with a 5% comparable store sales growth and 15% topline growth. Opening 160 new stores in this environment is truly remarkable. We remain optimistic about the long-term growth opportunities and the continued recovery expected this fiscal year. Our new stores are performing exceptionally well, with a 30% increase in the number of stores opened over the last year, despite a period when we slowed or halted growth due to the COVID crisis. The Starbucks Now expansion is seeing impressive performance as well. In the quarter, we opened 24 stores across nine cities, bringing our total to 40, and we plan to keep expanding this concept. Additionally, our digital presence is accelerating, contributing to our growth during the pandemic. Our active membership has increased to 15.4 million, which is a 56% increase from the previous year and a 14% increase from the last quarter. Mobile order sales are also strong, making up 30% of our sales mix, with mobile order pay at 16% and delivery at 14%. Overall, our total mobile order sales are now twice what they were last year at this time. We have established a model that can navigate the pandemic environment, and we are optimistic about achieving 100% comparable store sales for the second quarter while maintaining flat growth on a two-year basis for the market.

Thanks John and Sara to build on what John has said to put into perspective how we're thinking about comp growth in China long-term, you may recall at our December 2018 Investor Conference, we guided China comp growth of 1% to 3%. In recent quarters, we had delivered in the low single-digits. And we acknowledged at the time that as a consequence of a more tempered pace of growth in the broader economy, intensified competition and the sales transfer that comes from an aggressive pace of new unit development, that 1% to 3% was a reasonable expectation. Fast forward to our Investor Day, just a couple of months ago, where we updated that to a new range of 2% to 4%. I would say in relation to the factors I mentioned, no material change to the economy, competition, or sales transfer. But importantly, as John mentioned, significant improvements in our digital capability and how that has all resonated with our customers in China, which underpins our confidence in raising that long-term comp guidance range for China to this 2% to 4%, which we believe is quite powerful in the context of very aggressive unit development given the strong appeal of our brand and the outstanding unit level economics that delivers superior returns for us in China.

I would like to add that Kevin touched on the strength of the Starbucks brand in the market. We are clearly the leader in brand affinity and visitation among coffee houses. Customers choose us first for away-from-home handcrafted coffee beverages. In fact, one in two consumers prefers Starbucks over other coffee options. This strong consumer and customer perspective positions us well to overcome the challenges we face, which gives us confidence for the future.

Great. Thank you. Pat, congrats on retirement and Rachel, congrats on your new role. And Roz, based on the headlines coming out now, I guess look forward to seeing you at Walgreens, hopefully selling lots of Starbucks coffee. My question is on the labor side of things, which seems to be very topical, and happy to hear you guys talk about ongoing efficiencies. But when people talk about labor lately, it seems like there's a lot of opposing forces, obviously, you have the national minimum wage potentially going up on one. But then you have the elevated unemployment, which historically implies ample labor and therefore managing your costs better. So, just wondering if you can provide any thoughts in terms of your labor cost, and maybe employee availability outlook? I know you guys are an employer of choice, but your ability to offset the pressure, whether it's request saves technology, menu pricing, how you kind of think about those offsetting forces from a labor cost perspective? Thank you.

Thank you for your questions, Jeffrey. I'll start with our perspective before handing it over to Pat for some numbers. We strongly believe in investing in our partners because it is these partners who enhance the customer experience. When we invest in them and empower them to excel in serving our customers, we see improved customer connection scores, increased traffic, and rising sales. There is a clear link between our investment in partners and these positive metrics. That's why we implemented a notable increase in wages and benefits in the U.S. as we entered this fiscal year. To help offset some of that cost increase, we focus on two main areas. First is productivity and throughput. We have a 20,000 square foot Tryer Center in Seattle, which functions like a Silicon Valley incubation lab. Our talented human-centered design engineers work closely with our partners to find ways to enhance their productivity. This often involves optimizing store layouts and improving equipment to make tasks easier for our partners. Secondly, we are automating administrative tasks. For instance, our Deep Brew technology aids in automating inventory management, which reduces the time partners spend on counting inventory and filling out forms. Our Mastrena II machines in stores are equipped with Internet of Things sensors that transmit data back to our data center. Through machine learning, we can predict when these machines require maintenance or cleaning, which helps avoid potential downtime when partners arrive to open the store. This technology not only automates tasks but also creates an optimal environment for our partners, allowing them to focus on crafting beverages and engaging with customers. By improving the human-centered design experience in our stores, we can mitigate some of the increased costs, and now I'll pass it to Pat for further details.

Thank you, Kevin. I want to emphasize that our approach to the U.S. market mirrors our strategy in China, particularly regarding the improved comparable store sales driven by our investments in the brand and our store partners, which are crucial. To quantify this, a couple of years ago, we anticipated a 3% to 4% growth in comparable sales for our U.S. business during our Investor Day. More recently, we've raised that expectation to a range of 4% to 5%. This increase stems entirely from our confidence in the returns from these investments, especially in our partners, as well as substantial investments in our digital platforms. These efforts are designed to fully unlock the sales potential of the Starbucks brand, resulting in significant sales leverage. This not only covers the costs of these investments but also supports our expectation of modest annual margin expansion, which is essential for converting long-term revenue growth of 8% to 10% into operating income growth of 9% to 11%. As Kevin mentioned, all these elements work synergistically; our investments enhance productivity and sales leverage, leading to ongoing margin expansion that is core to our overall earnings growth strategy.

Great. Thank you. Just echo everyone else Pat and Roz. Best wishes in your next chapter and Rachel, good luck in your new role as well. Kevin, a question for you following the announcements that Roz and Pat will be departing in the coming weeks, while the business will be in the very capable hands of partners that have been with Starbucks for over 15 years, where are you going to be leaning in in the near-term to help ensure continuity and recovery?

Yes, Andrew, thank you for the question. Rachel has been a long-term partner at Starbucks in our finance organization, supporting the Americas. She is well-acquainted with Starbucks and fully understands what it takes to drive this business, which gives me great confidence. Additionally, as I reorganize the structure, I will have Rossann Williams and Brady Brewer reporting directly to me. Rossann has effectively been leading our North American business for over two years, and Brady is our Chief Marketing Officer. I believe the stability of our leadership in North America, along with Rachel's extensive knowledge stepping into the global CFO role, instills a lot of confidence. We also have a strong pool of talent at Starbucks, and the next generation of leadership is emerging in these roles, further assuring me. I will continue to foster teamwork based on trust and transparency with our leadership team. Rossann and Brady have been part of the executive team for over a year, and with Rachel joining us, we will maintain our momentum. I appreciate both Pat and Roz for their contributions and for developing strong successors in their positions. I am very grateful for their work.

Hi, good afternoon. My question is for Pat and its related to the upside in your Q1 earnings performance relative to the guidance. Pat, could you maybe unpack the factors that drove the upside relative to what you were thinking at the start of the quarter or whenever you gave the guidance? And then also, can you give us some perspective on whether that upside reflects maybe benefits that are coming in earlier than you anticipated or greater than you anticipated? And I guess the context of that second part is, how should we think about this flowing through to the 2022 outlook, for example?

Yes, thank you, David. So, we were very pleased with our Q1 results with non-GAAP EPS exceeding the midpoint of our guidance range by approximately $0.08. Picking that apart about $0.05 of that favorability was driven by our business segment performance, including better than expected margins in both the Americas and International and another $0.02 we would attribute to favorable foreign currency translation, and the remaining $0.01 attributable to a lower than expected tax rate, which is driven by unplanned discrete tax benefits. As to the business performance, we do expect that momentum to sustain balance of year. So, as I mentioned in my prepared remarks, we believe that it is possible that we could deliver full year results ahead of the guidance we've given. However, when you consider where we're at in our fiscal year with three quarters to go and when you also consider the continued volatility and the operating environment. It's prudent to hold at this stage. And that's what we've chosen to do. We've decided to hold our full year non-GAAP guidance, until we close Q2 and have half the year under our belt, we will then have much better visibility to the back half of the year and can make a more considered call on what guidance update may be appropriate at that point in time. But we are very encouraged by what we've seen thus far. Even with the recent volatility we've seen in China, we could not be more delighted with the accelerated recovery we've seen in our U.S. business going from a minus 8% comp in December to a minus 2% comp in January, well on our way to achieving the full sales recovery that we outlook for the U.S. business by the end of our second quarter, fully expecting the quarter to come in that 5% to 10% sales growth, that's comparable sales growth for us business. So, when you add it all up, there's every reason to be optimistic. It's just a matter of prudence. Again, given where we're at in our year and the fact that the pandemic is still impacting our business in different ways, but we're really pleased with the resilience we've built into our business and that's reflected in our results.

Thank you for the question, and congratulations to everyone on the new opportunities and roles. Kevin and Roz, you mentioned the strength in food and the higher food attachment. Generally, food has been a strong contributor to sales and comparable sales over the past several years. However, it seems like food has been somewhat deemphasized in the last couple of years due to a greater focus on beverages. Based on your observations from the recent quarters, particularly this last quarter, has this changed your perspective on customer behavior going forward? Does it affect how you view the food opportunity from here, including potential innovations, partnerships, or a renewed focus on that area?

Thank you for your question, Dennis. Let me share our perspective, and then I’ll let Roz add some insights from the U.S. standpoint. Strategically, we consider ourselves a beverage-first company; our focus is on handcrafted beverages tailored to each customer, particularly in coffee and tea. The experience we offer around these beverages is essential, which is why we emphasize our innovation in customer experience, new beverage options, and digital connections with customers. Understanding that we are a beverage-first company, and creating a unique experience around these beverages, has been crucial for our growth. This focus is a significant differentiator for Starbucks. While food is important, our primary strategy is to innovate and enhance our beverage platforms, emphasizing that our partners in stores craft each beverage for customers. When it comes to food, our R&D teams carefully design the menu to align with different parts of the day and the beverages we serve. They've done an excellent job in this regard over the years. A major trend in consumer behavior is the shift towards plant-based options, affecting both beverages and food. This shift is why we've introduced alternative milks such as almond, soy, and oat milk. On the food side, we've developed items like the Impossible Sausage Breakfast Sandwich and are incorporating more plant-based proteins into our menu. In fact, we have a Starbucks store in the Seattle area with a fully plant-based food menu, which serves as a test area for our innovations. The overarching trend I want to highlight is the growing consumer preference for plant-based options. Roz, I'll turn it over to you for any additional numbers or insights you may have on this topic.

Yes, Kevin, I think you hit a pretty strong there in terms of us really aligning with customer preference. I will say that the work that our team has been doing around our digital platform and getting to know our customers better than we've ever known them before, we're understanding how their preferences are trending. What this is also allowing us to do is to make great coffee as well, because now we're learning how to match and pair coffee with great food and beverage items so that we bring together both a food and beverage combination. So, the work ahead of us, by no means minimizes food, actually, we see it as a golden opportunity for us to just further expand our presence and create quality, food attach items to go along with great coffee.

Awesome. Great, thanks. Just quickly clarification and then a question. First, a clarification, on the slower pace of store closures that I think you'd mentioned earlier in the transcript, is there an expected revenue impact in 2021? And does the 40 basis point margin benefits still stand from those closures? And then my question is on the China loyalty members and the platform. Obviously, very impressive growth here and I was hoping maybe you could offer some insights into how customers in that market are using the brand now versus in the past perhaps differently you're seeing either day-part changes or ticket growth and I know obviously COVID might be muddying the visibility here and exactly understanding what the trends are, but if you could offer some insights into day-part usage, ticket growth, obviously, frequency changes around the platform that would be great.

Yes. Thank you, Kevin. So, Jon, with respect to trade area transformation progress, as of the end of Q1, we had completed approximately one-third of the store closures included in our trade area transformation initiative and expect to complete the majority of remaining closures by the end of this fiscal year as originally planned. So, there has been a bit of a delay relative to what we had anticipated at the beginning of the year and that's entirely a function of how thoughtfully the team is continuing to refine the store closure plans based on how we read the impacts we're seeing from stores as they are closed in terms of both sales transfer and margin with a view to continue to optimize as we go. But we're as committed to that program now as we were at the start of the year and even back to June when we first announced it and then subsequently expanded the program. As to the margin impact, we continue to expect about a 40 basis point improvement to our consolidated margin or enterprise margin on a full year basis. So, even with a slight delay to some of the closure activity, we continue to expect meaningful margin expansion as a result of this initiative.

And Jon to your question on China and the digital and what we're seeing a little bit deeper dive on it. First off, the day-part impact we've really seen an uptick in the morning day-part, but pretty much the recovery is taking place across all day-parts consistently. But from a digital mobile order and pay perspective, we are seeing an uptick on the morning side. In terms of the ticket, as it relates to digital, we are seeing ticket consistent with what we've seen previously. Generally, in China, our ticket runs a bit higher than the U.S. under normal circumstances that is because of group ordering and I would say our ticket is living up to that historical performance. The other aspect that we're seeing is social gifting and social gifting is a big piece of digital in China. We've introduced that as part of the Rewards program and we're seeing a nice uptick of that as well. So, very pleased with the progress the team is making there and we're going to continue to invest and double down on our digital footprint in China.

Thanks. And thanks for getting me in. Pat, my question is related to the plant-based beverages, is the shift to plant-based beverage is a positive for margin on the beverage side or does it compress the profitability relative to milk-based drinks all else equal? And how does continued optimization of the supply chain impact that dynamic over time?

Thank you for the question, Chris. I would say that from a margin perspective, currently, the impact is a little bit of a push because while there is incremental cost associated with those alternative milks, we do charge a premium and so that helps to mute the impact to margin. I would say much longer term, it remains to be seen. A lot of it will depend on how consumers increasingly migrate to those alternative milks, not just in our business, but broadly in a way that supports increased production, which should over time reduce the cost and then we have the opportunity to reevaluate whether at some stage it makes sense to change our pricing practices. I would say generally speaking, our goal is to maintain, if not expand our margins over time.

Well, I want to thank you all for joining us today and I also wanted to invite you to join us on March 17th for our Annual Meeting of Shareholders. It will be a virtual meeting where we will celebrate Starbucks and reflect on our journey over the last 50 years since the founding of the company in 1971, while at the same time looking forward to a very bright future and we hope that you join us for that virtual meeting and we'll look forward to seeing you or participating with you on March 17th. Thank you everybody.