Starbucks Corp (SBUX) — Q4 2021 Earnings Call Transcript

Good afternoon, everyone. Thank you for joining us today to discuss Starbucks Fourth Quarter and Fiscal Year End 2021 results. Today's discussion will be led by Kevin Johnson, President and CEO; and Rachel Ruggeri, CFO. And for Q&A, we will be joined by John Colbert, Group President North America, and Chief Operating Officer, Michael Conway, Group President International and Channel Development, and Leo Tsoi, Chief Executive Officer, Starbucks China. 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.

Well, thank you, Greg, and welcome everyone to today's call. I'm very pleased to comment on the record Q4 and FY2021 results Starbucks reported today. I'm particularly pleased that we were able to deliver these results in Starbucks’ 50th anniversary year, and in the face of increased costs and unprecedented operating challenges resulting from the global pandemic. Today's results reflect very strong operating and financial performance across the board. With Q4 revenue growing 22%, and full-year non-GAAP EPS of 168% over the prior year. This was a record Q4 that punctuates a very strong FY21 performance with record highs in revenue, non-GAAP operating income, and non-GAAP EPS. Our performance accelerated throughout FY2021, fueling revenue growth of 21%, non-GAAP operating income grew 139%, and translated to a non-GAAP earnings of $3.24 per share, near the high end of our guidance for the year. Perhaps more persuasively than ever, the strength and resilience of the Starbucks brand and the power and opportunity afforded by the authentic connection and the deep trust and loyalty we have built with customers around the world is resonating. Today's results demonstrate that despite the pandemic, Starbucks’ long-term double-digit growth-at-scale model remains solidly intact. Today's results also underscore the passion and dedication of our over 400,000 Starbucks Green Apron partners, who serve nearly 100 million customer occasions around the world every week. And I'm humbled by our partners' commitment to each other and to our customers as we continue to navigate through the pandemic. Their resilience and service honors the Company and our history. And I could not be more appreciative of their efforts. Finally, today's results demonstrate the success of the investments we have made and will continue to make ahead of the growth curve in our people, digital, beverage and food innovation, and store experiences. These investments are driving and strengthening our global business and setting us up for even greater success in the future. Starbucks’ long-standing view is that our partners guide this Company, and we applaud other like-minded companies who are following our lead. Starbucks has been at the forefront of investing in our people since we opened our first store in the Pike Place Market in Seattle in 1971. We offered paid company healthcare 25 years before the Affordable Care Act, equity ownership in the form of Bean Stock to eligible part-time partners, free college tuition through the Starbucks College Achievement Plan with Arizona State University, and mental health support through our partnership with Lyra. Investing in our people is the cornerstone of our storied 50-year history and tradition. And these investments continue to deliver real, measurable value to our partners, our customers, and our shareholders. I'll be providing granularity around the incremental partner investments we made beginning last year, and the additional partner investments we will be making in fiscal '22 in a moment. On today's call, I will highlight Q4 performance in our key markets and provide detail around some of our actions and investments since the pandemic first surfaced in Q2 of 2020, that are contributing to our performance today and setting us up for accelerated growth in the future. I'll also open a window on our exciting holiday plans and several initiatives that will launch over the near term. Then, we will turn the call over to Rachel to provide a deep dive into our Q4 and fiscal year performance, and share our guidance for fiscal '22. We'll then move on to Q&A.

Thank you, Kevin. And good afternoon, everyone. It's my privilege to share with you Starbucks' strong finish to fiscal 2021, our 50th year in business, delivering the highest full-year revenue, operating income, and EPS in Company history, an accomplishment that is truly special considering the profound challenges we have navigated throughout the pandemic. Please note that as Greg discussed at the top of the call, fiscal '21 results that I will discuss today are non-GAAP, unless noted, and on a 14-week basis for the quarter, and a 53-week basis for the year, except year-on-year revenue comp, operating margin, and EPS growth metrics, which will be on a 13-week or 52-week basis to exclude the impact of an extra fiscal week for comparative purposes.

Well, thank you Greg, and welcome everyone to today's call. I'm very pleased to comment on the record Q4 and FY2021 results Starbucks reported today.

In Q4, Starbucks global revenue reached $8.1 billion, up 22% from the prior year, setting another quarterly record along with a fiscal year record of $29.1 billion primarily driven by the continued momentum in the U.S. and strong contributions from across the globe, despite the severe headwinds of the COVID Delta variant, our consolidated operating margin was 19.6% in Q4, up by 580 basis points from the prior year, the increase was primarily driven by sales leverage across the P&L as we lap the COVID-19 impacts and related costs, as well as pricing in North America. This was partially offset by rapid inflation related to logistics, commodities, and labor costs across our supply chain.

As a result of these successful investments, we are entering fiscal '22 with strong momentum around the world, and in the U.S., our largest global market, our key growth driver, this comparable sale. We grew a strong two-year comp, to 11% in Q4 despite variance across the country that created a dynamic set of city-by-city COVID restrictions, which we had to navigate. We made significant progress addressing supply chain issues and experienced an overall improvement in inventory availability as we move through the quarter by increasing production at existing suppliers, on-boarding new suppliers, and strategically prioritizing key holiday and Q1 merchandise. Finally, today's results demonstrate the success of the investments we have made and will continue to make ahead of the growth curve in our people, digital, beverage and food innovation, and store experiences. These investments are driving and strengthening our global business and setting us up for even greater success in the future.

To summarize, here are the 3 key takeaways from my discussion today. First, we are thrilled with what we accomplished in fiscal 2021, far surpassing the pre-pandemic performance levels, to deliver record high revenue, operating income, and EPS, even as global consumer mobility remains suppressed, and inflationary headwinds pressure our business. Second, fiscal 2022 will be a year of outsized investments, prioritizing our store partners, and ensuring we have the very best talent to drive, capture, and maintain lasting category share gains, while still delivering double-digit EPS growth, and initiating a return of $20 billion to our shareholders over the next 3 years. And finally, we remain fully committed to our ongoing growth model, and expect to progress towards our algorithm with an operating margin of 18% to 19% in fiscal 2023, while continuing to balance returns and investments necessary to sustain this performance over the long term.

Hi. Good afternoon. My question, Rachel, is on the margin outlook that you gave, 17% this year and then growing to 18% to 19% in 2023. And I'm just wondering if you could sort of paint the picture of how you get from this year's margin outlook to next year's margin outlook. Are there certain offsets that are going to develop throughout the year that will lead to better performance or is there something one-time in the cost structure this year? Anything you can do to help provide some visibility on that path would be great.

Yes, thank you for the question. What I would say is, when we look at our margin that we're guiding for this year, and we think about where we're headed to next year, as you know, there are over 640 basis points of dilution to our margin this year given the investments we're making, as well as some of the inflationary headwinds and changes as outlined in my prepared remarks. We're going to work this year to offset the majority of that through pricing, through sales leverage, through productivity and other efficiency measures. As we move into FY23, we'll continue those efforts, and that's going to allow us to return back to the 18% to 19% margin that we guided for the long term.

And David, this is Kevin. Let me just add to Rachel's comments. The strategic investment we're making in wage, here’s how to think about it. First, our Q4 and FY21 revenue results demonstrate that we are growing faster than the coffee addressable market as estimated by Euromonitor. We are taking market share. Then if you look at consumer mobility, it's going to continue to increase, and we want to recruit and retain the very best talent for our stores. The most important investment we can make is in our Green Apron partners. We know this to be true because it has been proven time and time again throughout our 50-year history that when we take care of our partners, they always rise to the occasion and create that unique Starbucks experience for our customers.

Thank you. I have a two-part question. Kevin, what do you think caused the acceleration in the U.S. market in September? Investors are trying to understand if this trend is something sustainable, similar to a significant post-Labor Day return to the office, or if it’s just a temporary boost from a successful PSL season. Rachel, could you clarify one aspect of the guidance? Does the non-GAAP EPS guidance of $3.40 or more include share buybacks, or is it excluded? Also, it would be helpful if you could provide the share count that this guidance is based on. Thank you.

Yeah, Andrew, I will take the first part of your question then I'll hand it to Rachel. Look, with COVID cases, in this case, the Delta variant, it creates this variability in consumer behavior. So, as you saw in the U.S., more government restrictions, and many of these were done state-by-state and city-by-city, that we had to respond to. That, I think was the impact in August, and as we responded to those and certainly as I think consumers start to see the Delta variant curve starting to slow, consumer mobility unfolds. So, these are all transitory and they are unpredictable, it is all related to the pandemic. So, the acceleration that we saw in both the U.S. and China are the exact same reason. It is just the variable of dealing with a global pandemic, and when these Delta variants and these other things pop up, it does have some impact on consumer mobility, but the one thing we know for sure, absolutely we see it in every market around the world, that as the spread of COVID gets under control as market-by-market, customers return to our stores immediately. That's why this investment in wage and ensuring we staff our stores with the very best, most talented Green Apron partners we can is so important.

Yes, John, we're seeing a record number of customers returning to our stores, as indicated by the significant transaction growth of 18% compared to the previous quarter. The customer behavior we're observing is very similar to that of prior quarters and pre-COVID.

Hi. Just kind of building on John's question, could you quantify where U.S. staffing is relative to pre-pandemic? And maybe even some metrics around where your hourly turnover and managerial turnover is relative to 2019 would be helpful.

What I'd say, Sharon, is a couple of things. Obviously, like all other retailers, we're navigating a very complex and unprecedented environment. And, yes, we have seen some staffing challenges in certain parts of the country but I think from the results we've been able to deliver demonstrate our ability to navigate through these challenges. When you look at it, one of the things that we've done during this time is we have also acted to adjust store operating hours and when I say that we've really looked at the evening day-part and pull that back from an hour’s perspective.

Sorry. Can you hear me now?

Certainly. Thank you, Kevin. Hi, Sarah. My pleasure to get this question. Actually, in Q4 last year, our last fiscal year, we were impacted by 3 waves of COVID decisions in the entire quarter, which picked 42 cities in total across the quarter. Now, what it means is that we saw elevated public health measures were implemented, which significantly reduced customer mobility, and disrupted consumption patterns. Our growth strategy in the market continues to differentiate us and position us well for the long game.

In the past quarter, we experienced about a 90-basis point impact from inflationary pressures globally. As we move into the first and second quarters, we anticipate that these pressures will increase due to factors like logistics, labor, and commodities, but we expect them to start stabilizing in the third and fourth quarters. We've included these considerations in our guidance for the year since it's difficult to predict when these inflationary pressures will ease.

Our business and operating margins remain strong. Our commitment to China, and our confidence in our long-term growth strategy in China is unwavering. In addition to expanding our portfolio of stores in China, we also expanded our digital footprint of 90-days Starbucks Rewards active members, reaching an all-time high of 17.9 million in Q4. This represents a sequential increase of 5% over Q3, and an increase of 33% over prior year. Frequency of purchases by our gold members remained at pre-pandemic levels, despite the mobility limitations in the quarter. As we enter fiscal year '22, we are fully prepared for a record-breaking holiday with strong growth plans around the world and a holiday campaign designed to build genuine human connection, as only Starbucks can, at a time when human connection is more important than ever. In addition to new and iconic seasonal products, we are integrating brand-building and transaction-driving marketing programs to demonstrate our values and touch our customers' hearts.

We remain fully committed to our ongoing growth model, and expect to progress towards our algorithm with an operating margin of 18% to 19% in fiscal 2023, while continuing to balance returns and investments necessary to sustain this performance over the long term.

Starbucks' strong performance through the recovery is a direct result of the hard work and dedication of our partners, as well as the investments we made both before and during the pandemic. We remain confident in our future and steadfast in our commitment to deliver long-term value to all stakeholders. In closing, Starbucks strong performance through the recovery is a direct result of the hard work and dedication of our partners, as well as the investments we made both before and during the pandemic. We remain confident in our future and steadfast in our commitment to deliver long-term value to all stakeholders.