Operator:

Good afternoon. My name is Diego and I will be your conference operator today. I would like to welcome everyone to the Starbucks Third Quarter Fiscal Year 2024 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the conference call over to Tiffany Willis, Senior Vice President of Investor Relations. Ms. Willis, you may now begin your conference.

Laxman Narasimhan:

Thank you, Tiffany. And thank you for joining us this afternoon. Let me start by laying out our results for this quarter. Our Q3 total company revenue was $9.1 billion, up 1% year-over-year and 6% over Q2. Our global comparable store sales declined 3% year-over-year, driven by a negative 2% comp growth in North America and a negative 14% comp growth in China and partially offset by strong performance in Japan. Our global operating margins contracted by 70 basis points to 16.7% and overall earnings per share for the quarter was $0.93. Our total company results were in line with guidance, but international performance, particularly in China was challenged. We are not satisfied with the results, but our actions are making an impact. Leading business and operational indicators are trending in the right direction ahead of our financial results and our runway for improvement is long. We see green shoots in our US business driven by the three-part action plan outlined last quarter. First, meet and unlock capacity for new demand through a relentless focus and improvements to our US store operations and on elevating the experience we create for our partners and customers. Second, attract new customers and drive transaction growth by launching and integrating more exciting new products with relevant marketing, while maintaining our focus on core coffee forward offerings. And third, reach new customers and demonstrate our value by making sure customers believe that Starbucks experience is worth it every time. First, our largest opportunity, meet and unlock capacity for new demand. A relentless focus on improving operational execution across our nearly 10,000 US company operated stores is the cornerstone of our near-term plan. While it is early days of progress, our plan is working. If you walk away from today's call with one thought, let it be the significant changes and long-term upside potential taking place within our US stores and across our end-to-end supply-chain to unlock growth, enhance the customer experience and drive cost efficiencies. Within our stores, we've seen material positive momentum across core store health and performance metrics with notable improvements in partner scheduling and turnover, critical store issues and inventory management. Stores ranked in our top two operational performance quartiles reached a new high during the quarter, a 28% upwards shift from Q2, but we have more opportunity. Our focus on operational excellence, driven by a reinvention plan has led to a multi-second year-over-year improvement in out-of-the-window times, a nearly 50% reduction in calls received via customer contact center for my order took too long and Mobile Order & Pay and delivery uptime rates of 99%. These are key indicators of our work to drive growth by addressing customer wait times, product availability and the customer experience. This quarter, we also introduced Phase 1 of our Siren Craft systems, which includes several process and partner-driven enhancements to our US store operations. Changes include a new peak time play caller role, strategic investments in partner hours, training, new routines, simple enhancements to technology and an evolved beverage build process. Early deployment across 1,200 stores demonstrated a material incremental improvement across key performance, throughput, efficiency and reliability metrics. Encouraged by this, we fully deployed Siren Craft systems process improvements across our entire portfolio of US company operated stores this week. Later this quarter, we will begin rolling out a simple refit to our espresso machines, which we expect to improve espresso throughput by up to 15% without compromising quality. And with a minor software change in our store production systems, we have a similar ability to improve food throughput. When paired with Siren system equipment announced as part of our reinvention plan, these new processes become a forced multiplier that we expect to drive a true step-change improvement. Early assessments demonstrate the capability to drive a 10-second to 20-second wait time reduction and a resulting comp opportunity range of 1% to 1.5%. Leveraging our Deep Brew analytics platform, we have identified customer experience outlier stores, approximately 10% of our network and have developed targeted plans to address and improve them, including accelerated Siren system deployment. Similarly, we are accelerating the pace of our new-store builds and renovations with 580 net new builds and more than 800 renovations planned in North America for FY 2024. Store development efforts are focused on Tier-2 and Tier-3 cities where we see population growth and forecast both underserved demand and high incrementality. Increasingly, these new-store builds and renovations also include Siren system equipment. In line with prior guidance, we remain on track to deploy equipment in less than 10% of company operated stores by the end of FY 2024 and about 40% by the end of FY 2026. Building on our pilot, Starbucks and Gopuff have agreed to terms for an expanded relationship to open 100 delivery-only kitchens across the US. We're also accelerating the rollout of digital storyboards with target deployment across most US stores in the next two years, a year earlier than originally anticipated. Lastly, we are working on other ways to enhance the cafe experience. This includes new and expanded seating options that elevate many stores, while upholding a safe and inviting place for partners and customers. A key outcome of our operational efforts has been material and sustained improvements to the partner experience. Driven by precision partner-centric staffing and scheduling efforts, we ended the quarter with a new post-pandemic low partner turnover rate, the best shift completion rate in two years and a 13% improvement in average hours per partner, now the highest on record. These initiatives create more stability in our stores, provide more predictability for our partners and sustain our experienced flywheel. Looking beyond our stores, we continue to realize new efficiencies, cost savings and performance improvements across our end-to-end supply chain, thanks to strong support from our suppliers and we see even more headroom. We have a structured process to realize significant continued improvements across our end-to-end supply chain. We are ahead of plan on productivity. We expect our productivity to drive efficiency and unlock capital from areas that don't touch the customer. In turn, these savings will enable us to target investments that drive value for our customers beginning later in Q4, reigniting our North America flywheel for growth. We are early days on this journey, building both our strategic sourcing and revenue management capabilities. Our second priority is to drive demand through relevant product innovation with coffee at our core. We've seen meaningful improvement here as well. This quarter, we drove traffic into our stores through an engaging and innovative pipeline of products supported by integrated marketing campaigns. Cold share was up 1% year-over-year, representing 76% of our beverage mix through the quarter. Our newly formulated iced coffee received positive feedback. Our strength in Cold espresso innovation continued to drive the platform's growth, up 4% year-over-year. And we launched Starbuck's Milano Duetto whole bean coffee in Milan, ahead of a global launch this October. Beyond coffee, our new Summer-Berry Starbucks Refreshers beverages with Pearls drove the highest week one product launch in our history. Their success buoyed the entire Starbucks Refreshers beverage platform to an all-time high during the quarter. As mentioned in Q2, we continue to build out our 24-month product pipeline, while accelerating our pace of innovation. For example, recognize the growing appeal and opportunity created by the energy category, we launched a new hand-crafted iced energy beverages across our US stores in just three months compared to a normal 12 to 18. Looking forward, we believe our Q4 product offerings, including the return of pumpkin spice, combined with supporting marketing activities and offers, provides the right formula to drive customer interest, demand and deeper engagement with both new and existing customers. Our third and final near-term priority is to reach new customers and demonstrate the value we offer by ensuring the Starbucks experience is worth it every time. Recognizing the premium position of our brand, we've been measured in our use of offers. During this quarter, only 14% of our transactions were driven by offers compared to a competitor average of 29%. Of offer-driven transactions, 10% were star-based offers targeted to Starbucks Rewards members. Only 4% were driven by five -- by price-based offers. Our best offers are in the app. Together, offers and other integrated marketing activities when paired with exciting product innovation, successfully grew Starbucks Rewards membership, reactivated many lapsed Rewards members and drove customer traffic on promotional days and product launch weeks. Active US Starbucks Rewards members grew to 33.8 million during the quarter. Members across every decile increased the frequency of their visits. We're focused on the continued growth of the program because the average active member spends materially more annually and drives a higher life-time value for the business than a non-member. Research also tells us that the most inactive Starbucks Rewards members don't realize they've lapsed. This demonstrates a continued opportunity to drive return visits, active member growth and deeper customer loyalty. Looking forward, we will continue to use more targeted offers, coupled with select pricing actions funded by efficiency initiatives to drive traffic and conversion. We plan to leverage a mix of paid media, acquisition and retention offers, disruptive signage and partner education to drive transactions and increase the frequency of visits with a focus on product launches and continued Starbucks Rewards member growth. It's worth remembering the ubiquity of the Starbucks brand and our ability to intercept customers. For instance, our business is up 13% in airports and up 9% in hotels, pointing to these trends. Leveraging our brand and our ability to intercept customers while demonstrating value, not just in price but through a premium experience remains a sizable opportunity across our entire store portfolio. Moving on to digital. As part of our action plan, we made continued improvements to our Starbucks app, including wait time algorithm enhancements that have improved order-ready accuracy by nearly 50 percentage points. This combined with in-app offers helped drive a 10% year-over-year growth in Mobile Order & Pay revenue, a 7% year-over-year increase in MOP transactions. Looking deeper, our data shows that one in four non-Starbucks Rewards members want the ability to use Mobile Order & Pay. Nearly 80% of those customers don't want to join a Rewards program or create an account to do it. In response, we opened MOP for all to provide those customers the convenience they seek, while removing perceived barriers to entry. We believe these enhancements to the digital experience, coupled with more effortless ordering will continue to drive Starbucks Rewards membership over time with customers increasing frequency and spend. Once customers are in our digital ecosystem, they're more likely to remain engaged across channels and drive greater lifetime value. In summary, our plans are beginning to work. We are recovering our brand from its perceptions. We're rebuilding the operational foundation of our stores and supply-chain. We're reducing costs to support investments. We're sustaining partner experience improvements and we're working to make the Starbucks experience worth it every time. While it's early days, I'm confident in the trajectory of our US business and the operational improvements we're making. And I'm reassured by the impact our work is expected to deliver in FY 2025 and beyond. Looking outside the US, we continue to see weakness in parts of our international business and strength in others. Headwinds persist in the Middle East, Southeast Asia, parts of Europe, driven by widely discussed misperceptions about our brand. In some European markets, consumers are stretched. At the same time, we see significant strength in markets like Japan and parts of Latin America. China is one of our most notable international challenges and an area I'd like to talk about in more detail. The competitive market dynamics in China are reflected in our recent results. We continue to face a more cautious consumer spending and intensified competition. In the past year, unprecedented store expansion and a mass segment price war at the expense of comp and profitability have also caused significant disruptions to the operating environment. Still, we have made progress in important areas. Through Q3, metrics like average daily transactions, weekly sales and operating margin improved sequentially quarter-over-quarter. Starbucks Rewards members grew by 1.6 million to a record high 22 million active members and customer connection scores reached a new high, while partner turnover reached a new low. We've built an amazing business in China over the past 25 years, a business for China built by an outstanding local team. We've pioneered the growth of the premium coffee industry in market with our Starbucks and Starbucks Reserve brands and brand equity remains distinctive. We have incredibly committed and expert partners with an unmatched depth in coffee and craft. Our stores are distinctive and industry leading and our supply-chain is world class. New stores have expanded our presence to more than 900 county cities and continue to drive exceptional cash-on-cash returns and a payback of less than two years. We're looking beyond near-term challenges and towards long-term opportunities in the market. We built Starbucks in China around three principles. A great customer experience is grounded in a great partner experience. Our coffee will always be distinctive and high quality with low penetration relative to other markets, which provides continued headroom. Our beautiful stores will celebrate the culture and traditions of China and their local communities. Even in a challenging market, we have stayed true to these principles and our relative premium positioning. This is reflective in the competitive margins we have sustained in the face of price competition. Over the past 25 years, we've gone through different phases of growth in China and have relied on different strategic partnerships to grow our business and capabilities, like joint ventures and strategic partnerships in technology, real estate and supply-chain. As we look forward, we see higher growth and margin opportunities in China. We're building the next generation of Starbucks grounded in our premium brands and with a business that is even more digital, innovative and locally relevant. To do so, as our strategy evolves, we are in the early stages of exploring strategic partnerships to further enhance our competitive position to accelerate growth and innovate to win in the long term in China. We remain completely committed to our business and our partners in China for the next 25 years and beyond. The long-term opportunity for us is significant. Before I close, I would like to confirm that Elliott Management is a shareholder in our company and our conversations to date have been constructive. On the business, my continued confidence is rooted in the focus, energy and effort of our partners across the business and around the globe. Our growing culture of focused innovation and relentless execution continues to enhance our capabilities, operational muscle and executional discipline, driving forward our action plan and our long-term triple shot strategy, while helping return the business to sustainable algorithmic growth. And with that, I'll turn this over to Rachel.

Operator:

[Operator Instructions] In order to allow as many questions as possible, we ask you to please limit yourself to one question at a time. We will come back for follow-up questions as time allows. Your first question comes from Brian Harbour, Morgan Stanley.

Laxman Narasimhan:

No, Brian.

Rachel Ruggeri:

Sure. Thanks, Brian. Let me start with the G&A actions. So in the quarter, our G&A actually declined year-over-year by about 5%. And the drivers of that include performance-based compensation, so lower performance-based compensation, coupled with lapping over some foundation investments from the prior year. In addition to that, given the environment, we made some deliberate decisions to focus on cost efficiencies, which helped us offset some of the investments we've made in wages and benefits as well as the investments we've made in technology. We'll expect that to further into Q4. As we look to the out years, we will continue to drive leverage in our G&A as part of our overall efficiency focus and efforts. Now on the store side, you asked about reinvesting, where does that go? And as far as our in-store and out-of-store efficiencies, those investments largely this year have helped to support the promotional activities as well as the investments we've made in our partner wages and benefits. Now as we look towards next year, we'll continue on our path of efficiency efforts. Those efforts will help us to be able to unlock the capacity to be able to reinvest back into our business in a sundry of different areas, but it will also allow us to drive margin expansion. So, I think that answered all of your questions. Thank you.

Sara Senatore:

Great. Thank you very much. I wanted to ask about the comp -- composition. So I think, Rachel, you mentioned average check benefited from multi-beverage orders, which I guess suggests that perhaps you're not seeing premiumization or customization anymore, but rather just increased group sizes? And then you also mentioned pricing. How much price you have year-over-year if you could give any color on that? And then the final piece, you talked about much lower promotional intensity or mix than what we see from some of your competitors. But I'm trying to understand how does that 14% compare perhaps to what Starbucks might have -- might have seen in the past? Thanks.

Laxman Narasimhan:

Sara, just to build on the question that you asked in Rachel's response, the Starbucks brand is grounded in the idea that if you exceed the partner expectations, you will exceed the customer expectations. And it is in this experience that we deliver the premiumness of the brand. And when you look at the words worth it for the Starbucks experience, what we measure in our work and brand equity is not just about price, it is about the quality, the distinctive quality, the product customization that you mentioned, the consistency of the experience that we create both in stores and digitally, delivered at a price that customers believe is worth it when they come into the store to transact with us or when they transact with us across channels. Now one of the things that we have been very careful about is that given the premiumness of the brand, we've been very careful about the offers. And as Rachel said, it is at a lower intensity than it is for some of the other brands. What we've tried to do is focus on the Starbucks Rewards members. For our business, 60% of our revenue comes from the SR program and 40% comes from the non-SR program. And what we've found is that some of these offers that we have done, particularly for Starbucks Rewards members has helped drive engagement and incremental visits. We talked a bit about the fact that we've seen engagement go up in every decile of the Starbucks Rewards members. If I look at our non-SR customers, which is about 40% of it, what we've been working on is ensuring that we give them office to come in and become part of the SR program. Additionally, they have told us about a fourth of them tell us that they want the digital convenience, but they don't necessarily want to be part of the program. So, we've done things around how we open up the app for them to order and get the digital convenience. What we see over time is for the non-SR customers, we still have the opportunity to target price investments funded by the progress we're making in our efficiency program. And all the way brings it back to our three-part action plan in terms of what we're doing to continue to deliver the kind of premium experience Starbucks is about.

Jeffrey Bernstein:

Great. Thank you very much. My question was on China. The headwinds, Laxman, as you mentioned, are seemingly large, the comps down 14%. I think you mentioned or just highlighted the ramp-in competition and the macro challenges and the price wars. But with that said, I know you mentioned exploring strategic partnerships and you've had partnerships in the past. Just curious if you could provide some more color. I know in the past, the Board has evaluated alternatives such as the licensing of China, similar to other multinational QSRs, which would kind of allow you to participate in the growth, but mitigate the volatility and reduce your capital needs. So, I'm just wondering what your thoughts are on that, whether that was kind of the reference you made earlier, maybe some of the pros and cons as you contemplate the potential for those strategic alternatives such as licensing? Any color would be great. Thank you.

Operator:

Thank you. And your next question comes from Peter Saleh with BTIG. Please state your question.

Laxman Narasimhan:

So first of all, I think we are operating in a challenging consumer environment. You see the impact of that in away from home consumption. If you look at our business at home for grocery stores with our brands, you're seeing volume increase, you're seeing share increase in a category that's in decline, but we're seeing volume increase at home. In our ready-to-drink business, we're seeing clearly that there has some challenges, but with the work that our joint-venture team is doing, we're seeing progress there. But away from home consumption, you see the impact of the challenging consumer environment. What we're focused on is what is it that we can do to control what we have. And so the Starbucks Rewards members, you see greater engagement, that is 60% of our revenue. Clearly, if you look at the sort of lower deciles of the Starbucks Rewards program, we see opportunity even there for them to increase their visitations. But if I look at what we're seeing with our non-SR customers, we still maintain the number one position in terms of coffee shops visited from the research that we do internally and for the equity work we've done. So, I think that this is a statement around the overall environment. We know that there are things that we can do in order to communicate value better to our non-SR customers, which is why we've opened up the app for all starting this quarter. And once they come in and once they see what's happening inside the convenience of the mobile auto-pay channel, they will get exposed to what we have inside the app. And we know that we have an opportunity as we look at the end-to-end efficiencies that we can get in our supply-chain that we can target price investments in those areas that will help them realize the price proposition that we have overall. If you really step back and look at us, we've been very disciplined over the last many years. We've taken less pricing than many, but we also recognize the environment we're operating in is challenged. And so, I think what you'll see us do is be measured in the way we do this and do it through the app and target price investments where appropriate, leveraging off the efficiency work that Rachel spoke about.

Jon Tower:

Great. Thanks for taking the questions. I guess maybe first a clarification on the question. Rachel, you mentioned the $4 billion in savings. Just want to ensure that that's a gross or net number. And then I guess maybe going to the Siren stations that you've talked about, I know you're still on track to get 40% or less than 40% done in North America by the end of fiscal 2026. Can you talk about what you're seeing with respect to returns? And what's the impediment to accelerating that type of remodel schedule picking it up, say, instead of less than 40% by the end of 2026, picking that up to 50%, 60% or pulling forward more to current fiscal 2025, say.

Laxman Narasimhan:

On your second question on the Siren Craft -- on the Siren systems and the equipment deployment, well, firstly, we've deployed the process improvements across all our stores in the US this week. This has been very well received, the inclusive of the new routines, the training, the beverage bills, the partner investments that we will see transaction impact with that. Now, we have matched our Siren system equipment rollouts with the renovations of store bills because of the returns that that gives us. But it's not stopping us from actually using those Siren system equipment in order for us to debottleneck these outlier stores. And as I mentioned in my prepared remarks, with the work we've done with Deep Brew and the analytics that we have, there were 10% of our stores that have the highest customer service outages. For these 10% stores that is less than 1,000, right, there's work going on store by store. And what we're doing store by store is to look to see this combination of process improvements, how we run the stores as well as looking at a renovation cycle to potentially resequence them in order for us to bring the Siren systems in an accelerated fashion to help us debottleneck these stores. Now later this quarter, we're going to start rolling out a couple of things that will help us attack some of the bottleneck areas we see. For example, with this retrofit to our espresso machines, a same quality, higher throughput, we're going to see the rollout start to over 6,000 espresso-constrained stores starting next quarter. We're doing the same thing with some of the software changes we're making around food and how we drive throughput there. So, these are targeted sequenced efforts that will have high impact on those stores with the greatest constraints. You will see Clover Vertica being all stores by the end of financial year 2025. So, we're going at this, not just waiting for the whole system, but looking at portions of it that we can bring in in a more accelerated fashion in order for us to drive throughput in the stores.

Operator:

Your next question comes from Sharon Zackfia with William Blair. Please state your question. Sharon Zackfia, your line is open. Please unmute yourself. All right. We'll move on to the next question. And our next question comes from David Tarantino with Baird. Please state your question.

Laxman Narasimhan:

Let me start with the three-part action plan that we had in place. The first one was fixing our stores. And I think that we're making strong progress here. And so if you just look at examples of MOP, the growth rate we had quarter-over-quarter, which was a -- sorry, year-over-year, which was a 10% growth. The uptime that we had in MOP, obviously, big improvements. So, that's an example of the kind of improvements that we're seeing. Our drive-throughs are more efficient. I mean, the multi-second improvements we've seen clearly translate as well into our ability to meet the demand that we have. The product innovations, we touched on some of those that we have and the impact of those, the Summer-Berry Refreshers, the highest sales we've ever had in the launch week leading to the refresher platform reaching 18% of sales. So, examples over there and also the work we're doing with our SR program, an increase in number and increasing the engagement of these. So, those are all the -- all the metrics that we have in terms of the kind of improvements that we're seeing against three-part action plan. As we look ahead into this quarter and we look at, for example, July, what you see in July is the fact that we are seeing shifts in routines in July. We normally see that from a seasonality perspective, but I think we've seen more pronouncements -- more pronounced changes in the routines in July in addition to some of the tech outages that have impacted people across industries. And so, we see the disruptions, for example, in the airport stores that I mentioned or the hospitality stores where we're seeing strong growth. And so what I would say to you is that our guidance does, at the end of the day, reflect the challenging consumer environment and what we expect the comps to be flat to low-single digit for the year. But what I expect is that these actions that we're putting in place will position us stronger to see growth in FY 2025.

Operator:

Thank you. And our next question comes from Sharon Zackfia with William Blair. Please state your question.

Rachel Ruggeri:

Yes,

Sharon Zackfia:

Okay, perfect. I felt like a Verizon commercial. I wanted to ask, I know you gave the kind of returns you're seeing in US new stores as well as in China. But I think with the weakness you're seeing in comps, it kind of begs the question of how committed you are to this kind of global rate of expansion in the 7% to 8% range for company-owned stores.

Rachel Ruggeri:

The only thing I would add to that is just given the fact that we do see these strong returns and the incremental nature to our overall business, we see the vast opportunity. We have a very rigorous site selection process. We also have an ability to be able to monitor overall performance. And the combination of all of that allows us to strengthen our portfolio through the growth of new stores. So, we see it as an important part of our overall long-term growth algorithm. But I think what's important in what Laxman said is it really comes down to ensuring that we keep monitoring the overall economics. And as long as we see the kind of returns we see today, then it supports our long-term growth ambitions.

John Ivankoe:

Hi, thank you. We generally have the perception that, the US is the leading market for Starbucks around the world. And certainly, it is in terms of total sales. But my question was as you look around the world in Latin America, in Europe, in Asia, and a lot of markets really are competitive and have challenging consumer environments, what have you. Is there anything that you can point to that are -- is being done particularly well in any of these markets from a food, from a service, from a beverage perspective that maybe can be some tangible leading indicators that we can start to get excited about as we think about fiscal 2025 and 2026 innovation past what you've already done? Thank you.

Operator:

Thank you. And your next question comes from Christine Cho with Goldman Sachs. Please state your question.

Laxman Narasimhan:

I feel very good about the progress we are making on delivering a more stable partner experience in our stores in the US. I think if I just look at the average hours per partner, where we are, it's -- it's reached a real high -- a historic high. So, I feel good about that. I think part of what we are looking to continue to do is how we ensure we simplify in the stores, how we simplify our menus, how we simplify our beverage bills, how we simplify in our supply-chain, what happens upstream versus downstream and how we focus on training, how we ensure more consistency in the experiences that we deliver. And the Siren Craft system is a great example of this. Some of the stories we've heard as we've rolled this out over the course of -- over the last several weeks, including this week across all our network, is just what it's doing in terms of the partner reception and the positivity we hear from partners, including what they say about their ability to connect with customers and also deliver a more personal experience in stores. So, it's clearly -- this is the sort of thing that we have to do and just continue to make the right investments to deliver the right partner experience in order to exceed the customer expectations that I know a premium brand like ours is all about.

David Palmer:

Thank you. I wanted to go back and look at some of the products and the value strategies from April through July. There's -- you were very active with some of the new products and they would be something beyond the coffee core, they would be things that you would think would drive not just the strong trial that you say, but incremental traffic to your business. And I know you were going to dial up some value marketing, maybe you confirm if you felt like you did that. But I'm wondering what do you think worked particularly well, not just in the first trial week or two, but on a more sustaining basis from that in these initiatives, including the value and the new products? And in light of the traffic decline of 6%, I'm wondering what do you think we’re really the offsets? Has there been some decline in the coffee core or is there a daypart, or how should we think about offsets to these things that you're doing? Thanks very much.

Operator:

Thank you. That was our last question. I will now turn the call over to Laxman Narasimhan for closing remarks. Thank you.

Operator:

Thank you. This concludes Starbucks' Third Quarter Fiscal Year 2024 Conference Call. You may now disconnect.

Operator:

Good afternoon. My name is Diego, and I will be your conference operator today. I would like to welcome everyone to Starbucks' Second Quarter Fiscal Year 2024 Conference Call. [Operator Instructions] I will now turn the call over to Tiffany Willis, Vice President of Investor Relations and ESG engagement. Ms. Willis, you may begin your conference.

Laxman Narasimhan:

Thank you, Tiffany, and thank you all for joining us this afternoon. Let me be clear from the beginning. Our performance this quarter was disappointing and did not meet our expectations. Our Q2 total company revenue was $8.6 billion, down 1% year-over-year. Our global comparable store sales declined 4% year-over-year, driven by a negative 3% comp growth in North America led by declining traffic and a negative 11% comp growth in China. Our global operating margins contracted by 140 basis points to 12.8%, and our overall earnings per share declined by 7% to $0.68.

Operator:

[Operator Instructions] with that, our first question comes from Sara Senatore with Bank of America.

Operator:

And our next question comes from Brian Harbour with Morgan Stanley.

Laxman Narasimhan:

Brian, thank you for your question. I think that if you look at our overall brand equity, it is and continues to be strong. If you look at the scores around value for what I get, strong. So if I look at the occasional customer, though, they're clearly making choices based on the economic pressures they face. What they look for from us is they look for variety. They look for the core. 50% of what we have in the afternoon, as an example, is coffee. So obviously, coffee is really important, and distinctiveness of coffee is very important. But they are looking for variety and they're looking for value.

Operator:

Our next question comes from Jeffrey Bernstein with Barclays.

Rachel Ruggeri:

And if I would just add to that, when we look at the guidance that was given around our new store growth, particularly as it relates to China, that's really a very deliberate decision that we took to be able to increase the number of stores that we were opening in lower-tier cities and new counties where we see even stronger returns. So broadly, our returns are quite attractive, but they're even stronger in those lower-tier cities and the new counties. And as a result of that, that shift actually impacts our development pipeline. So there's a timing impact in terms of new store growth. So that's why we're at 12%, which we think is still a very strong growth and indicative of the opportunity that we see

Operator:

Are you still connected? One moment. Can you hear us?

Operator:

And our next question comes from David Palmer with Evercore ISI.

Sharon Zackfia:

I guess I'm trying to think through the sequencing of how we got here today. And it seems like in October and early November at the analyst meeting, demand was not a problem in the U.S., and I hear you saying that you have a lot of unmet demand. But can you kind of help us do a hindsight on how these issues have come to a crux so quickly, just 4 or 5 months hence since those kind of very ambitious goals that were given?

Operator:

And our next question comes from Peter Saleh with BTIG.

Laxman Narasimhan:

Peter, just to respond to your question, first of all, the Siren System was never put on the back burner. In fact, we're on track to having the Siren System installed in less than 10% of the stores, much as we committed. So it's on track.

Operator:

Our next question comes from Lauren Silberman with Deutsche Bank.

Rachel Ruggeri:

Sure. Yes. Thank you, Lauren. I'll start with the comp and what I spoke about in my prepared remarks about the exit rate. And lavender was quite successful for us. As you heard in Laxman's prepared remarks, what we are encouraged by is that lavender both to what our customers, particularly Gen Z and Millennial customers, are asking about, which is more new more often and a broader offering, so offering, meaning coffee, non-coffee, food, healthier choices. And so we hit squarely with that with lavender by having particularly our most popular offering in lavender was the Iced Lavender Matcha Latte and so that shows that when we innovate well, we exceed our own expectations.

Laxman Narasimhan:

Brady, on loyalty?

Operator:

Our next question comes from John Ivankoe with JPMorgan.

Laxman Narasimhan:

John, thank you for the question. I think on the question about misperception, misperception did have an impact on our business [indiscernible]. We haven't been -- we don't have a quantification for that. But what we do know is that our brand equity, the stores and the investment involved in the brand have certainly helped spending with overall perception of our brand [ we spend every year ].

Andrew Charles:

I know you're committed, of course, to the tenets of the reinvention plan. But in light of the current environment and caution of U.S. and China consumer, can you level set the long-term earnings algorithm introduced November around guidance for 5% same-store sales and 15% plus EPS growth? Does that still apply to 2025 and beyond?

Operator:

And the last question comes from David Tarantino with Baird.

Laxman Narasimhan:

Thank you for your question. [indiscernible] and we have no intention of like going across the board and [indiscernible] what we are doing is we are [indiscernible] the fact that as [indiscernible] levels of [indiscernible] our brand overall right now [ that for what I can ] is still very strong [indiscernible]. So we feel very good about that. And this is more about how we [ move ] and how we [ manage ] customers, particularly those that don't [indiscernible] that is what we intend to do.

Operator:

That was our last question. I'll now turn the call over to Laxman Narasimhan for closing remarks.

Operator:

Thank you. This concludes today's conference. All parties may disconnect. Have a good day.

Operator:

Good afternoon. My name is Diego and I will be your conference operator today. I would like to welcome everyone to Starbucks’ First Quarter Fiscal Year 2024 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now turn the call over to Tiffany Willis, Vice President of Investor Relations. Ms. Willis, you may now begin your conference.

Laxman Narasimhan:

Thank you, Tiffany, and thank you all for joining us this afternoon. I will start by sharing an overview of our business performance in our first quarter of fiscal 2024. I will then turn it over to Rachel Ruggeri to walk through the detailed segment results. We saw strong momentum and a highly successful holiday in the quarter with record revenue and expanded margins. We saw strong growth in our loyalty programs, sequentially increased in frequency and record spend among our loyal customers. Positive traction from new product innovations, exciting momentum in China with our focus on premium, and progress on the execution Triple Shot strategy. We also saw some unexpected headwinds which impacted the rate of growth. We feel very confident about our robust plans to address these challenges. While we are already seeing traction, there was an impact in the quarter, and it will take some time to normalize. Let me walk you through the details. Our performance in the quarter was fundamentally strong. Our Q1 total company revenue was a record $9.4 billion, up 8% year-over-year. Our global comparable store sales grew 5% year-over-year, supported by a 5% comp growth in North America, driven by 4% ticket growth, and 10% comp growth in China. Our global operating margins expanded by 130 basis points to 15.8% and our overall earnings per share grew 20% to $0.90. This speaks to the continued successful execution of our reinvention plan and the durable business we are building. We are fortunate to have built one of the strongest brands in the world and we continue to benefit from customer loyalty. Throughout the quarter, we saw our most loyal customers around the world coming into our stores more often. Specifically in the US, we set new records with our 90-day active reward members growing 13% year-over-year to a record 34.3 million, with tender reaching an all-time high of 59%, demonstrating increased engagement. Importantly, the frequency of our most loyal customers increased sequentially and spend per member reached a record in Q1, fueled by our holiday promotion which significantly exceeded our expectations. Our cold and gingerbread platforms drove a record high ticket in the US in the quarter. We also had the highest sales of Starbucks gift cards in our history, making us number two in gift cards sold. In total, we have an incredible $3.6 billion preloaded onto our cards in the US in the quarter. In short, our growing Starbucks Rewards members are visiting our stores more frequently and increasing their spend each time that they come. We also saw great momentum in China. We aim to be the best in the premium market in China. Our brand equity across Starbucks and Starbucks Reserve is second to none. Based on our latest brand tracker, Starbucks continues to be the first choice in away from home coffee, including among the Gen Z consumers. We continue to lead in brand affinity and have the highest awareness, brand familiarity, and purchase-intent scores. We have the most outstanding partners in our stores, with very strong customer connection, and the highest retention rates in our industry. We offer distinctive global and locally relevant product innovation anchored on superior coffee with food attachments and a morning daypart that now has surpassed pre-COVID levels. Our loyal customers, a major part of tender, are coming more often, and our loyalty program is growing. We're doing all of this while offering premium physical and digital experiences delivered across our distinctive store portfolio, across other physical channels and through our digital connection and doing so at a commensurate value. This ambition being best in premium in China is in line with our long-term growth ambitions for China. Let me now talk about the headwinds and our response. We entered the first quarter very strong globally, we had great momentum in August and September and that continued into October, which exceeded our expectations across every measure. Beginning in mid-November, while our business continued to grow, the growth rate was impacted by three unexpected factors. First, we saw a negative impact to our business in the Middle East. Second, events in the Middle East also had an impact in the US, driven by misperceptions about our position. Our most loyal customers remained loyal and in fact increased their frequency and spend in the quarter. But we did see a softening of US traffic. Specifically, our occasional US customers who tend to visit in the afternoon came in less frequently. I will speak in a moment as to how we quickly responded with an effective action plan. Finally, we experienced a slower than expected recovery in China, driven by a more cautious consumer. While we had a relatively very strong 11/11 holiday, the overall market weakness led to significantly increased pricing competition. We responded quickly to these headwinds. In the US, we implemented targeted offers aimed at bringing our occasional customers into our loyalty program. As we've seen over time, Starbucks Rewards members develop a routinized long-term relationship with our brand that increases both ticket and transactions. Additionally, we activated new capabilities within our proprietary deep Deep Brew data analytics and AI tool to identify and incentivize specific Rewards members cohorts. Finally, we are leaning further into our brand marketing and factual narrative and social media to engage these audiences where they are. We've already seen the positive impact of these new initiatives with our more occasional customers beginning to rebound in December. However, we continue to see further opportunity to welcome back our very occasional customers. We feel good about the trajectory over the course of the quarter, but it will take time for our plans to be fully realized. In China, we remain very confident in the long term. The market is going through a transition as we see an increase in mass market competitors, which we believe will shake out over time, and the market will emerge looking fundamentally different than what we see today. We expect a much larger and tiered market as per capita consumption continues to increase and the market matures. There are three key elements in our China strategy. First, we are offering more coffee forward, locally relevant product innovations and we're increasing engagement in social media channels through influences and partnerships, which are highly effective in China. These actions are increasing awareness and have led to greater customer frequency. Second, we have made significant investments in technology, increasing our omni-channel capability, allowing us to serve more customers through new occasions. These investments have also led to a more digitized store environment, increasing efficiency of our supply chain and stores, while enhancing the partner experience and strengthening our unit economics in both existing and new stores. Finally, we're increasing the percentage of new stores opening in lower tier markets and new county cities, where we see meaningfully stronger new store economics. As you can see, we moved quickly to respond and implement a plan to address these unexpected headwinds. It will take time for these action plans to be fully realized. That said, we remain confident in our Triple Shot strategy and our long-term growth. So let me share some of the progress in the quarter. Our first Triple Shot Reinvention priority is to elevate our brand by operating great stores and driving product innovation. The best lever for elevating our brand is our store experience. We continue to raise the bar on running great stores with a focus on enhancing both our partner and customer experience. One example is the continued rollout of our Siren System cold and food stations. We remain on track to have approximately 10% of our stores equipped with a Siren System by the end of this year. We are a coffee company, and we will continue to lead with coffee innovation. We're continuing the installation of our Clover Vertica in nearly 10% of our US company-operated stores in the quarter. We are on track to have on-demand single-cup brewers installed in nearly 60% of our US company-operated stores in fiscal year 2024. This will continue to elevate our coffee offering while also making partners more productive by reducing waste and creating efficiencies in store, allowing them to spend more time doing what they do best, connecting with our customers. Just imagine, a perfectly brewed on-demand cup of coffee at any time throughout the day, even decaf. This quality and the offering are like no other in the industry. We also continue to offer coffee blends which are distinctive and remind people of the romance of coffee. Our Verona blend is anchored in the essence of Verona, Italy. It was our tribute to the city of romance in Italy. In celebration of our five years in Italy, we will introduce a new coffee, Starbucks Milano Roast, inspired by the art and culture of Milan. Milan's miart, an international modern and contemporary art fair, is the perfect backdrop to a launch in our Milan Roastery that will then scale globally. The moment will capture our love of coffee, the passion of our partners, and the dynamism of Milano. Today, we're excited to launch the Oleato platform with Oleato customizations across the US. In the coming weeks, we will also launch Chocolate Covered Strawberry Creme Frappuccino and a Chocolate Hazelnut Cookie Cold Brew in time for Valentine's Day. Starting this week and continuing over the next few months, we will be introducing three new beverage platforms, each of which is squarely aimed at our Gen Z and millennial customers across a range of coffee and cold beverages and compelling for the afternoon. These product innovations are examples of how we continuously elevate the brand and welcome customers back with a unique Starbucks experience. We're also offering new and exciting options beyond coffee, including food that appeals to different dayparts, especially the afternoon. In January, we added new menu items, including the Potato, Cheddar & Chive Bakes and the Chicken, Maple Butter & Egg Sandwich. These are products that tide our customers over between lunch and dinner. Importantly, our digital experience makes attaching food to afternoon drink orders easy and convenient. We've seen a very positive customer response to these new items and we are expanding inventory to meet the strong demand. We're also pleased with the pace of our new store openings and strong unit economics. Our most recent age class of company operated new stores in the US is averaging unit volumes of approximately $2 million with ROIs of approximately 50%. And as we continue to open more stores, growing by approximately 4% this year in the US on a base of over 16,000, including licensed stores, we will further invest in purpose-built stores to meet our customers where they need and want us to be. This includes drive-throughs which have grown by over 500 stores since Q1 of last year. Even in the US, we see abundant greenfield opportunity ahead. Our second strategic priority is further strengthening and differentiating our leadership position in digital. We saw our mobile order and pay surpass a record high 30% of all transactions in the quarter. And we reduced downtime of mobile order and pay by half, as we continued to find ways to deliver a better customer experience. We'll continue to make the Starbucks app even better, including adding the ability to use a personal cup in ordering through the app, and the rollout of more accurate order wait times. We're also laser focused on ensuring our customers can personalize their orders in whatever way they want. One example is helping customers find products based on dietary needs. We saw record results in our US delivery business with growth of nearly 80% year-over-year, aided by our expanded partnership with DoorDash. We see significant growth for continued incremental growth as delivery represents only 2% of our transactions. Our purpose-built stores optimized for delivery and fulfillment help seize this opportunity. Additionally, we are conducting a pilot with Gopuff, targeting a fully incremental opportunity for overnight orders between 5:00 PM and 5:00 AM. In this pilot, Starbucks trained baristas prepare handcrafted Starbucks drinks and food inside Gopuff micro-fulfillment centers, delivering to the customer's door in about 30 minutes. To further expand the reach and impact of mobile ordering and rewards, we now offer Starbucks Connect in over 40% of our more than 6,700 US licensed stores with further expansion planned for this year. We're also pleased to share that Bank of America will be our next Starbucks Rewards partner, delivering even more value to our most loyal customers. This opportunity builds with the great success of our partnership at Delta Airlines that is deep in connection and engagement with our members, and is one of two new Starbucks Rewards partnerships we told you we would roll out this year. Our third strategic priority is becoming truly global. Our international business represents an important growth opportunity for us over the long term. If you look at our business excluding the headwinds, we had a strong quarter, demonstrating the momentum and resiliency across the portfolio. We opened over 420 net new stores in the quarter, a growth of 10% year-over-year, bringing total store count to over 20,600 stores with nearly 14,000 of those stores outside of China and the US. In Japan, we reached a milestone of 1,900 stores across the market with much opportunity ahead. Let me address our business in the Middle East. I am deeply distressed by the violence shaking the region. As I have shared, Starbucks condemns violence against the innocent, hate and weaponized speech. We are intensely focused on supporting our partners and the many other stakeholders affected by what is taking place. We have seen a significant impact on traffic and sales in the region, and we are working with our licensees during this time to ensure the safety and well-being of our partners and our customers. I shared earlier in my remarks how we are addressing the near-term situation in China. Overall, our business and brand in China remain strong. Our revenue in the quarter grew 20% in constant currency, underpinned by a 10% increase in comparable store sales growth as the market lapped prior year mobility restrictions. As we strengthen our position in the premium market in China, let me point to a few accomplishments of the quarter. We launched 12 new coffee forward beverages in the quarter, including Intenso, which was incredibly popular with our customers, including Gen Z, fueling the morning daypart, which is now larger than pre-COVID levels. Our digital channels accounted for a record 52% of sales, up 4 percentage points quarter-over-quarter. Our Starbucks Rewards Gold member frequency increased by nearly 10% over the prior quarter with total member engagement setting a record 73% of tender, demonstrating the stability of our most loyal customers. Our new stores continue to deliver attractive returns on both the top line and profitability, with further strength in unit economics in stores opened in new county cities. And our turnover amongst full-time store partners reached a record low in the quarter, coupled with an all-time high partner satisfaction score. Early this month we celebrated our 25th anniversary in China. With nearly 7,000 stores, we have built a durable business. We have built a terrific brand, and we are well on track to hit our 9,000 store target by 2025 and continue to have full confidence in the market opportunity. We continue to see enormous potential in China's premium market, and no one is better positioned to lead in this space. Even as we navigate a dynamic environment, we remain confident in our long-term growth in our international segment. As part of elevating our brand across the international segment, along with a second reserve store in India, we will open two additional Starbucks roasteries that celebrate coffee, art and design in markets outside the US and China. We will announce these locations and opening timings in due course. Turning to our fourth priority, we've focused on unlocking $3 billion in efficiencies, and I'm pleased to say that we're making steady progress. Our Triple Shot Reinvention efforts delivered 130 basis points of margin expansion in the first quarter of the fiscal year. As you've heard me say often, the key to our success is the experience that our partners create for our customers. We're investing in a better experience for our partners to advance our business through a more balanced growth model as we unlock efficiency. In the quarter, we have seen the effectiveness of the reinvention-driven investments we have made in in-store operational efficiencies, such as standards, equipment innovation, and scheduling improvements, leading to a more stable environment for our partners. Turnover has decreased by 5% year-over-year and is now well below pre-COVID levels. Average partner hours increased 10%, leading to a 14 percentage point increase in partner sentiment related to scheduling, specifically preferred hours, which we know is important to partners. We are listening to our partners and investing to make their experience better. Of course, we have more work to do, but we are proud of the progress we have made to date. Outside of our stores, we're working to drive efficiencies across our supply chain and expenses. I am pleased with the progress and we remain on track to unlock [few billion] (ph) dollars in efficiencies over the next three years. Our final priority is reinvigorating our partner culture. In addition to the investments in partner experience, we're focused on partner culture. Our leadership team and Board of Directors have been deeply engaged in putting the partner experience at the heart of the business. An independent assessment found that our strategic investments, greater on the ground support, a dedicated labor relations team, and more bespoke management trading are having a tangible impact on the commitments we've made to our partners. The assessment was also clear that there has been no union busting playbook at Starbucks. I want to be clear in my view on the matter of unionization at Starbucks. We believe in a direct relationship with our partners, and in the 4% of our stores in the US where our partners have chosen to be represented by a union, we are committed to finding a constructive path forward with those unions. I care deeply about our partners, their experiences and safety at Starbucks and their futures. Our partners remain core to the success of our business. And I am proud to be restitching the fabric of the green apron for all partners. Going forward, we plan to continue to focus deeply on reinvigorating our partner culture. It's a priority for me and I'll continue spending time each month working up close, shoulder to shoulder with partners in stores. I did this during my visit to India earlier this month and I will continue doing it to stay grounded in the realities of the business. Good and not so good. I'm also proud to have earned my Coffee Master black apron along with my executive leadership team. A deep connection to partners and to coffee is a top priority for me and for every leader at Starbucks. As you look ahead to what is brewing for Starbucks in 2024, I have great optimism. We have a strong strategy. Our refreshed mission, values and promises are underpinning everything we do. We have many strengths to build on and a clear plan to navigate this dynamic environment. While it will take time, we are confident we have significant headroom to further grow top line and bottom line in the long term and invest in our partners and the business while delivering strong shareholder returns. Finally, before I turn this over to Rachel, I want to remind everyone that Starbucks is focused on human connection. We stand for belonging. We stand for joy. We stand for humanity. That is what differentiates our brand and our business and has for the last 52 years. We believe this has never been more important in the world. And with that, Rachel.

Tiffany Willis:

Thank you, Rachel. Before we open the call to Q&A, we request that your questions today be focused on the quarterly performance that we just discussed, as this call is not to address questions related to recent proxy filing. With that, Diego, let's take the first question.

Jeffrey Bernstein:

Great. Thank you very much. Just a question on the fiscal ‘24 guidance. I appreciate that you tempered the comp growth for both the US and China. For the US, it looks like it's only a point and China, it's only a few points, but we would define that, I guess, as modestly. And, you mentioned that fiscal 2Q is expected well below the targets before accelerating the rest of the year. So with that as backdrop, I'm just wondering if you could talk a little bit about, I think you mentioned January has been softer than expected, any color you could provide there? And otherwise, your confidence in that new guidance, it does seem like it implies a rather sharp acceleration in the back half of the year. I'm just wondering how you think about the guidance relative to maybe tempering it further and not having that risk if perhaps the recovery doesn't play out as fast as you might be expecting? Thank you.

Operator:

Thank you. Your next question comes from Brian Harbour with Morgan Stanley.

Laxman Narasimhan:

Sure, let me start and I'll call on Brady a bit, to provide some more color. As we said earlier, what we saw in the US was a quarter that was actually very strong till about the middle of November. And what you see in the results, very strong performance of the loyal customers, very strong holiday performance, very strong brand equity, and very strong performance on gift card sales. And we mentioned as well that we've got about $3.6 billion loaded on our card. So manifestation of the overall brand being very strong. And so there is, of course, what we do have, the isolated impact with the occasional customers, particularly those that visit in the afternoon. So if you look at some of the actions that we have in place, first, there is actually more demand than we're currently meeting in the US. Second, our loyalty program is already performing exceptionally well as Rachel mentioned. But we have a combination of things we've been doing to address the traffic slowdown, particularly in the afternoon. The first area is innovation. We mentioned a couple of new products coming in time for Valentine's Day, but we're going to have three new beverage platforms coming in the next six months, and you will see how important that is for us over time. The second action is we're opening up our app ecosystem to bring more people into the app because we know that our members developed a routinized long-term relationship with our brand that increases both traffic and transactions. And third, we are implementing targeted offers aimed at some of these very occasional customers to bring them back into the stores. And all that of course is foundational to, we continue to execute in our stores in order to elevate partner pride, bring a great deal of passion back into the business, and ensure that we can meet more of the demand that we know exists. Brady, do you want to give a bit more flavor around some of the activations, particularly on the innovation side?

Operator:

Your next question comes from Peter Saleh with BTIG.

Laxman Narasimhan:

We have Belinda online here. So maybe I'll turn this over to Belinda. Do you want to answer that question, please?

Operator:

Your next question comes from Lauren Silberman with Deutsche Bank.

Laxman Narasimhan:

Well, let me take this on. First of all, we are seeing no slowdown in our loyal SR customers. In fact, we're seeing an increase in frequency. They're buying more. They're customizing more. That part of the business is extremely strong. We did see, as you rightfully said, a slowdown in the very occasional customers, which we're still working to get back. But the folks in the middle who are occasional, some of the tactics that we used, which of course you're seeing, essentially helped bring them back into the fray in terms of the traffic we've seen it bounce back towards December. So we're focused on ensuring that we do the right thing in terms of welcoming back our very occasional customers with the right offer, with the right innovation, and with the right experience in stores.

Brian Bittner:

Thanks for taking the question. Rachel, I wanted to ask about the operating margin expansion in the Americas segment. Obviously, it was very impressive. And it was driven by leverage on your store operating expense line. In fact, when we break it down on a dollar basis, on a same store basis, those operating expenses were actually flattish or even slightly down year-over-year. Can you just unpack what's going on in that line item? How sustainable is this performance on the operating expense line?

Operator:

Your next question comes from David Palmer with Evercore ISI.

Brady Brewer:

Yeah, thank you, David. It's a great question. My perspective is a little different in that we don't see a tradeoff in frequency between cold beverage customers and hot beverage customers. It's really a shift in generational taste preferences where that highly frequent millennial Gen Z customer is drinking cold coffee every day, just as people of different generations were drinking hot coffee to start their day every day. So we've seen a continued increase in our cold beverage in our portfolio, as you noted. But what I found with the cold beverages is there are infinite customizations possible on the cold beverage platform. And what that means is that it's increasingly a beverage you can't get anywhere else. And so it has a staying power to it. So we don't see a trade-off in frequency from hot or cold. Cold is a great business for us, and we don't see a threat there, we see a great opportunity. You mentioned about the capacity that we can put in place with Siren Systems and other aspects of the things we're doing in reinvention, which is really about accelerating our capacity to create and craft cold beverages at pace with our customers, both in drive-through, mobile order, and delivery in particular. So that is a huge opportunity for the company. And on hot beverage, I would say we're not leaving that customer behind. We're continuing to innovate on hot beverages just as we did today with the launch of our Oleato beverages. We're launching Clover Vertica store across our portfolio. We're in 10% of stores now. And that is the best cup of brewed coffee you've ever been able to get at Starbucks rolling out on a proprietary machine. And then lastly, you mentioned, or Lax mentioned, our Milano Roast, which is really our passion for coffee coming to fruition. So whether you're a cold coffee customer or a hot coffee customer, we're increasingly creating a reason for you to visit and we see no trade-off there.

Sara Senatore:

Thank you very much. I just wanted to ask about unit growth. I know in both the US and China, I know you mentioned new, the most recent vintage of high volumes and strong ROIs in the US, but I was curious if you are seeing anything that might suggest that the acceleration and unit growth may be translating into slower same-store transaction growth? I know this is a very kind of idiosyncratic quarter, but in the past, I think when we have seen faster growth, it has sometimes corresponded with slower same-store transactions and I wanted to see if you had any color on any variation in markets or infill versus greenfield? And then if you could just maybe address that same question in China. Thank you.

Rachel Ruggeri:

Sure. Thanks, Sarah, for the question. In the US, what we see is we continue to see that our unit volumes, as we shared in Laxman’s prepared remarks, are continuing to grow. And importantly, when you look at the growth in North America and in the US businesses this quarter, our revenue grew 9%. So you've got a 5% comp in there. And we've already spoken to, though we were pleased with the performance and the strength we saw, particularly our most loyal customers, we talked about some of the headwinds that related to some of the impact we saw there. But when you look broadly and you look at the combination of comp and new store growth driving to that 9%, it shows you that we still have a lot of, I'd call it, opportunity even in the US in terms of continuing to open more new stores. When we do it through purpose design, we're able to look at the market and determine how do we drive the overall trade area higher with a variety of different types of stores to meet customers where they are. So we see a lot of opportunity there. And with that, I'll turn it over to…

Belinda Wong:

Okay, thank you. So despite the shorts-term headwinds, the long-term opportunity in China is clear. I think everyone will agree to that. So I talked extensively at the investor forum about the huge greenfield opportunities to both increase penetration in existing cities and entering new county cities. So as of end Q1, we are only in 857 cities out of nearly 3,000 in China. The opportunities are abundant. And new stores continue to deliver best-in-class store profitability and returns. And when you look at new county city stores that we have entered recently and in the past couple years, it consistently outperformed top-tier cities, new stores, and profitability too. So as Laxman has pointed to, we will accelerate our entry into new county cities. So we are on track to reach 9,000 stores, so many opportunities out there. We will -- we have a very sophisticated system visualized and to help our team to identify the right areas to open to optimize the cannibalization impact and where we should be going. So with our experience, our team, our operating muscle, and track record, I have full confidence in our store expansion plan and we're on target to achieving 13% store growth in FY ‘24.

Operator:

Your next question comes from Andrew Charles, TD Cowen.

Rachel Ruggeri:

Sure, thank you, Andrew. When we looked at the guidance for China, it's largely based around, I wouldn't say the seasonality is maybe as distinct as what we see in the US business with Q2 being so much lower than any of our other quarters and strengthening as we go through Q3, Q4, particularly because we're lapping quite a bit of compares from the prior year. If you recall last year in Q3, we were lapping the COVID impacts from the prior year. So we have a pretty big lap when you look at that comp and that compare in Q3. So it's more around the progression we expect in the business, less about the compare or about seasonality, and more about the progression in the business. And what we're looking to is Chinese New Year as an example is a good indicator of what we expect to see around the consumer environment, and that's factored into our assumptions. So a lot of it depends on mainly the recovery, the time it's going to take as Belinda and team work on the action plans, which are in some ways, I'd say adapted to what we're saying. We've already led in the premium market, but we're adapting some of our strategies as it relates to the awareness of the customer and how we go after the customer through the innovation and new channels of social media. So we expect that that's going to take some time and that's reflected in the guidance range. But I would think about it that way, is more about the recovery and the progression from where we are with the plans today, which we're expecting we'll see a rebound and closer to a stabilization in the back half of the year.

Belinda Wong:

Yeah.

Operator:

Your next question comes from Sharon Zackfia with William Blair.

Laxman Narasimhan:

So I think what I heard you say was, were there any demographic, specific demographics that it impacted? And the second question was, on the three beverage platforms, is there something that is a trade-off between speed? Is that correct? I couldn't hear you properly, actually. Maybe you could repeat that question.

Brady Brewer:

Sure. So in terms of beverage platforms specifically, I'll start there. We put every product we offer through a very rigorous set of tests and measures to make sure that it's conducive to operations, that it's easier for our partners to deliver in the stores, and make sure that it's a creative to the business. A lot of times what we'll do is we'll bring in a new product and we'll take a lower volume product out just to maintain the total complexity of the system rather than just add, add, add. We have a very disciplined approach about how we do that. And so the three beverage platforms, which we won't reveal yet, have gone through that. And so It's really about how to do these products in a way that's accretive to the business and specifically targeted. And so in these cases, this is about looking at that occasional customer and frequent customer, but particularly appealing for the afternoon where we want to continue to build our business. We've really laser targeted these products for those occasions and so we're excited to bring those to customers. And then with regards to the demographics, Starbucks attracts a very wide range of customers around the world, and particularly in the US, again, a very wide range of customers. So the way that I would characterize it is occasional, and I know we've spoken about the very occasional. That's really what we would say is the audience with whom we saw that impact in November and started rebounding in December. So that's where I would leave it and say we've got plans to bring them back.

Andrew Strelzik:

Hey, thanks for taking the question. I wanted to just make sure that we understand the bridge from the revised or lowered revenue growth guidance to the maintained EPS growth guidance. Obviously the first quarter operating margin was very strong, particularly in North America. So is something changing there in your expectations for the year? The cost saves coming through faster or greater? Is there a change in how you're thinking about buyback contribution? Just any more texture on that bridge would be helpful. Thanks.

Operator:

Thank you. The last question comes from John Ivankoe with JPMorgan. You may ask your question.

Rachel Ruggeri:

The way I would look at it, John, is as we showed in the first quarter, we were able to demonstrate that margin expansion of 130 basis points at the total company level, given a combination of sales leverage. So we still had strong sales growth, right? That sales leverage, as well as the flow through from that sales leverage and the in-store operational efficiencies that we spoke to. And when we think about the back half of the year, we'll expect to continue to see benefit from the revenue growth and the sales leverage that comes from that. But we'll also see benefit from the in-store and out-of-store operational efficiencies, which we do have ability to increase our focus on some of those areas, which will help to ensure our 15% to 20% earnings growth commitment on a full-year basis. Outside of that, we also have investments as it relates to G&A, as it relates to our reinvention. And we'll continue to make the investments because those investments drive a meaningful impact and they're a driver of our competitive advantage. But we do have an ability to also dial up and dial down some of those investments to help support the commitments we're making. As it relates to the years ahead, I don't think it's probably best to just focus on the year we're in right now. But that's how I would expect the guidance to come together and how I'd think about Q2 relative to the balance of the year.

Rachel Ruggeri:

Yeah. I do think it's just worth noting is that our buybacks are expected to be nearly 1% of our earnings growth net of interest, so small in the scheme of things.

Laxman Narasimhan:

Thank you so much, Diego. I will close by reiterating our strong momentum from the quarter and our overall confidence in our long-term growth. While we continue to navigate some headwinds, we're encouraged by the strength of our brand, particularly with our loyal customers around the world and the plans that we have in place to address the challenges we have identified. On a broader level, I've come to learn that we truly are a different kind of company here at Starbucks, but we are now operating in a different kind of world. We recognize that no one can solve the many difficult problems in the world alone. Starbucks is, however, and will continue to be the world's third place, providing people with places to come together, to connect, to find common ground, to feel they belong, and to bring a little joy in their everyday. Thank you for joining us this afternoon.

Operator:

Hello. My name is Kevin, and I'll be your conference operator today. I'd like to welcome everyone to Starbucks Fourth Quarter and Full Fiscal Year 2023 Conference Call. [Operator Instructions]. I will now turn the call over to Tiffany Willis, Vice President, Investor Relations. Ms. Willis, you may now begin your conference.

Laxman Narasimhan:

Thank you, Tiffany. Good morning, everyone. Welcome to Starbucks' Fourth Quarter and Fiscal Year 2023 Earnings Conference Call. Thank you in advance to those who will join us this afternoon where we will share an update on our long-term strategies and celebrate the launch of a holiday at Starbucks. Before we get started this morning, I'd like to express my deepest gratitude to our Starbucks partners around the world for a very successful fiscal year 2023. I've learned through connecting with so many of you how our reinvention plan has continued to be well executed, giving us great momentum in this age of our transformation at Starbucks. I have discovered how our brand is uniquely delivered in our stores and digitally through our extraordinary partners and the tremendous headroom we see for our global business. Turning now to our business performance. Rachel and I will share details of our strong results delivered in the quarter and fiscal year 2023, and we will also share our confidence in the company's long-term opportunity with guidance for fiscal year 2024. What you will take away from this call today is that we have great momentum, fueled largely by our reinvention plan. We are seeing the work pay off through improved partner and customer experiences, as well as captured improvements in efficiency and margin. We believe this bodes well for this next year and for years beyond. To deliver our long-term sustainable growth, we are focused on five areas. You will hear more on what we call our triple shot reinvention and our continued momentum this afternoon. The discussion will provide a more detailed outlook on our three core and two enabling priority areas. First, we will elevate the brand through our stores. Second, we will strengthen and scale in digital. Third, we will become truly global. Fourth, we will unlock efficiencies, including outside stock. Finally, we will reinvigorate the partner culture at Starbucks. In the fourth quarter, our total company revenue reached a record $9.4 billion, representing an 11% increase year-over-year. Full-year revenue reached a record of $36 billion, representing 12% growth year-over-year for fiscal 2023, or 14% when excluding the 2% impact of foreign currency translation, aligning our revenue growth at the high end of our guidance range. Equally impressive, our global comparable store sales increased 8% year-over-year, both for the quarter and the fiscal year 2023, driven by a healthy mix of ticket and transaction growth. We grew earnings per share by 31% to $1.06 for the quarter and by $0.20 to $3.54 for the fiscal year, again, aligning to the top end of our guidance range. Importantly, we grew margin by 310 basis points for the fourth quarter and 100 basis points on a full-year basis. And we did all this while growing our global store count to over 38,000, in line with our store growth guidance of 7% in fiscal year 2023. Demand for Starbucks remains strong around the world. Here in the U.S., our largest market, we saw momentum sustain throughout the quarter. Revenue for the quarter was up a record 12%, underpinned by 8% comps. We had a remarkable fall launch that led to record-breaking average weekly sales. Our 90-day active Starbucks Rewards members reached a new record this quarter of nearly 33 million 90-day active members, and setting records in spend per member and total member spend. Customers remain loyal to their favorite four menu classics that have stood the test of time, including the Pumpkin Spice Latte, which celebrated its 20th anniversary. In addition to very strong performance in our core offerings, we also have strong performance with new offerings, including our Apple-inspired beverages and food items. The results from the quarter, including the dynamic way we are driving ticket growth, give us great confidence in our menu innovation on both an individual product overall portfolio level. We have proven that complementary yet competing products and flavors can successfully coexist, such as pumpkin and Apple, with the right menu innovation, marketing mix, and strategic pricing strategies. As customer demands have evolved, we've delivered more beverages, food, and personalization and customization across existing and new formats to meet their expectations and grow the business. Our continued investments in our partners, equipment, supply chain, and technology are paying off, evidenced by a margin expansion across North America to 23.2% this past quarter. Timed with our busiest cold foam promotion of the year, the recent rollout of our new portable cold foamers to all U.S. company-operated stores, enhanced productivity in the fourth quarter. and lessened the trade on our partners, while continuing to meet the high cold beverage demand. In support of the continued growth in cold beverages, we delivered over 550 new Nugget ice machines and remained on track with installation prioritized for our most ice-constrained stores in fiscal year 2024. Clover Vertica, our on-demand single-cup brewer, is now installed in over 600 of our stores across the U.S., and we continue the on-schedule rollout of the Siren System cold and food stations, prioritizing new stores and renovation locations. Our portfolio and pipeline management of new equipment design and rollout plans are robust and enabled us to deliver our results. We have created a more stable environment in our stores. Hours per partner increased in the quarter by 5% as we continue filing schedules that fit our partners and customers' needs. Total was down in the fourth quarter by 10%, while barista tenure increased by 16% for the quarter. Customer connection scores also improved in the quarter relative to this time last year. We did all of this by investing over 20% of this year's profits back into our partners and stores through wages, training, equipment, and new store growth. All this is further evidence that our strategy is working. Turning to International. In the fourth quarter, we saw record store growth of nearly 600 stores across the segment, with International store count remaining higher than that of the U.S. We also experienced record double-digit revenue growth internationally in the quarter, with continued growth on every key market around the world. Our comparable same-store sales in our company-operated markets for both the U.K. and Japan remained well above historical averages in fiscal year 2023, with growth attributed to higher profitability and higher productivity store formats, as well as elevated digital and partner experiences. We saw strong customer demand for our beverage and food offerings around the world with record global demand for our pumpkin platform. And in our international license markets, Starbucks Rewards programs grew by 4 million 90-day active members, now contributing to 30% of total sales, up 9 percentage points in just one year, driven by the growth for Starbucks Digital Solutions. Supported by our strong brand globally, outside of China, our International segment is well ahead of the growth pace we indicated at last year's Investor Day, with focused growth in our company-operated markets and motivated business partners powering our licensed stores. Turning to China. We were pleased with our performance in the quarter. delivering revenue growth of 8% from the prior year or up 15% when excluding approximately 6% impact of foreign currency translation. This has further supported by a comp of 5% squarely in line with our expectations. Full-year revenue grew to $3 billion, up 3% from the prior year or up 11% excluding approximately 8% impact foreign currency translation with comp of 2%. Our performance in China improved sequentially quarter-over-quarter, with revenue in the second half of the year 20% higher than the first half, reflecting our growth momentum. These results underscore the strength of beverage and food offerings, the success of our market strategies, and the powerful execution unleashed by our partners in China as we capture the abundant opportunities in front of us. We continue to see strength from coffee-forward innovations, delighting our customers with locally relevant product innovation like the Moose Espresso and the smaller-sized Intenso range, a first in the world. We're also seeing higher food sales with tremendous headroom in this area, driving both transaction and ticket opportunities. In Q4, we saw continued momentum across the omnichannel experiences of Starbucks in China with strength in store through Mobile Order & Pay, Mobile Order Delivery, E-commerce, and in channels. China now has over 21 million active loyalty members, representing 22% year-over-year growth, with many members skewing younger to build our next generation of customers. In the quarter, we opened a record 326 net new purpose-driven stores in China, reaching 13% net new store growth over the prior year to over 6,800 stores at the end of fiscal year 2023. The outstanding financial returns of new stores give us confidence we will reach our goal of 9,000 stores by 2025, opening nearly 1,000 net new stores every year. Finally, the September opening of the China Coffee Innovation Park, designed to be our most energy-efficient and sustainable coffee manufacturing and distribution center in the world, further signaled our commitment to the largest consumer market in the world and the growth of our business in China for China. We look forward to sharing more on the headroom we see in China later today. The momentum against the backdrop of headwinds in China this past year gives us optimism in our position and affirm our distinctive competitive advantages for our business. These advantages include our uplifting partners, including our China leadership team, our distinctive stores, our vertically integrated and highly digitized efficient operations, and our relevant innovation. We will maintain our leading position in the premium market as we continue to grow in scale across our current portfolio and through new tiers of cities in this growing market of coffee drinkers. Finally, our channel business continues to elevate the Starbucks brand around the world at home and on the go, creating Starbucks moments for consumers outside of our retail stores. We're the number one ready-to-drink brand around the world. Notably, in the fourth quarter, we celebrated our five-year partnership with the Global Coffee Alliance with Nestlé. This Nestlé relationship, which includes We Proudly Serve Food service locations as well as additional partnerships, such as our Nova Mera channel partnership with PepsiCo and international partners like Tingyi and Arla have helped us grow our customer touch points, and is now in nearly 90 markets around the world. For fiscal year 2023, we saw notable growth in our leading channel market position as well as accretive brand equity as we continue to be recognized for our innovation. Some notable accolades include awards in China Ready Select, in the Europe, Middle East, Africa multiserve business as well as achieving 1 billion in servings in Korea and selling out of Grab & Go in Japan. In closing, while navigating an environment of unprecedented volatility throughout fiscal year 2023, we finished our fourth quarter and full year strong delivering on our guidance. Our reinvention is moving ahead of schedule, fueling revenue growth, efficiency and margin expansion. Notably, we continue to see the positive impact of our reinvention on our partner and customer experiences, proof points that we can continue to innovate, grow, and strengthen our business while creating value for all. Looking ahead, we remain fully optimistic about our headroom across the U.S. and internationally, and we see limitless possibilities across all areas of the business. While the global business environment remains uncertain, we are confident in our ability to adapt and innovate to meet evolving consumer needs. We will continue to invest in our partners to expand upon our reinvention and to deliver on our sustainability and social impact initiatives, all while driving long-term growth. We feel very good about the business momentum for next year, the continued strength of the brand, and the opportunity for growth in the years ahead. I look forward to sharing greater detail around these strategies for growth with you later this afternoon. Our performance this past year and the plans ahead give us great confidence in the multiple paths we have in front of us to achieve our long-term results. I will now hand the call over to Rachel to walk you through further details of the fourth quarter and fiscal year 2023 results, as well as our fiscal year 2024 guidance. Thank you all for joining us this morning, and we look forward to seeing you this afternoon. Rachel?

Tiffany Willis :

Thank you, Rachel. At this time, we'll proceed with our normal Q&A session, which will last until the top of the hour. Just for clarification, this Q&A session shall be focused on our fourth quarter and full fiscal year 2023 results and fiscal year 2024 guidance. Questions on topics outside of either of those should be held into our afternoon strategy meeting. Kevin, please open the call for questions.

Sara Senatore :

Thank you, very much. I had a question about China, please, which I think we've heard the competitive environment there very intense. And I was just curious if that was perhaps some of what we saw in terms of positive traffic, but perhaps a negative ticket, and then some of the investments you're making, and perhaps that might be gating factors for margin expansion? The positive same-store sales, I think, certainly suggest that your business is executing well. But just trying to get a read on competitive intensity and maybe implications for new unit economics and the margin structure for the business going forward. Thanks.

Operator:

Next question is coming from Jeffrey Bernstein from Barclays. Your line is now live.

Laxman Narasimhan:

I'll take the first question and Rachel for the second. On the first question, clearly, we're reading all these statements about the macro uncertainty, and it's clear that we are navigating the uncertain economies and markets around the world. But rather than talking about the economy in general terms, let me just speak about what we see with the Starbucks customer. Customer demand for us remains strong. We're not really seeing any change in the sentiment in our customer base at this time. And I think what it does is it reflects the strength of the Starbucks brand globally, it reflects the loyalty of our customers, it reflects our position in their routine and it also reflects the long-term durability of this business. Now we, of course, watch all of this extremely carefully. Unlike 2008, which is the number that people have been tattling around, we have a widely more diversified set of channels that we participate in. We have digital relationships worldwide with over 75 million customers in terms of their last 90-day activity. But we can reach a multiple of those digitally. So, it's a much larger universe than what we would traditionally refer to as just our 90-day active users. So, we have the ability to reach our customers, and we have multiple levers in terms of how we deal with any uncertainty that we might see, and that's true as well in the U.S. So, I feel good about the momentum we have. We're obviously extremely watchful and humble about where we are, and we'll do everything we can to exceed the expectations of our partners and our customers. But we do have multiple levers to play. Rachel?

Operator:

Next question is coming from David Palmer from Evercore ISI. Your line is now live.

Rachel Ruggeri:

David, I would start with saying our guidance on margin for next year is progressive margin expansion. And remember, on a full-year basis -- even with the strength we saw in Q4, on a full-year basis, we achieved 100 basis points of margin expansion, which we're incredibly pleased with. In the quarter, in Q4, we saw very strong margin expansion, particularly in North America, the 420 basis points that we spoke about, that as the benefits of the reinvention have begun to amplify. And so, we expected that would amplify in the back half of the year, and that's what happened. And so, when you look at the drivers of that 420 basis points, the largest driver of it, around 340 basis points or so, is leverage we saw in our store operating expense. And that's really driven by, what I'd say, is the sustained operational efficiencies from our reinvention. So, the investments we made are fueling growth, investments in our partners, in wages, in training, in our new store and equipment, and that's leading to a more stable environment overall, which is supporting that leverage. It's allowing us to be more efficient in how we serve the customer. So that's the biggest driver in the quarter. Next is sales leverage, followed by a strategic pricing. And that sales leverage really comes from the fact that in Q4, our fall launch resonated with customers, and we saw record demand really across the globe, but largely in our U.S. business, and that also fueled the margin expansion. And then that all helped to offset the investments we've made, including investments in G&A, investment in partner wages, as well as investment in G&A. Now when we look to FY '24, we will expect some of that momentum to continue. But I would say it's more important to look on a full-year basis, and we'll continue to see margin expand more in line with what we saw on the full-year basis. But again, continued margin expansion. And it's that combination of strength in our revenue, but also strength in our reinvention, which is delivering very tangible financial results.

Operator:

Next question is coming from Lauren Silberman from Deutsche Bank. Your line is now live.

Rachel Ruggeri:

Lauren, I'll start by just saying, overall, our traffic continues to be strong and it's growing. So, when you look at the success of our performance in the quarter, particularly in the U.S., our highest-ever average weekly sales were driven by a combination of strength in traffic but also strength in overall ticket. And we saw a record number of customers coming into our stores and spending a record amount. Now those customers are both our rewards customers as well as our non-Starbucks Rewards customers. So, we're seeing growth in our customer base across the segments. And that's driving strong performance as each customer is spending more. And I think what's unique about our business, particularly over the past couple of years is we've evolved and adapted towards our changing consumer demands. And so, we're seeing total transactions growing overall, both in our comp stores, in our new stores as well as our licensed stores. And importantly, we're seeing units per transaction significantly higher. And that's driven by the growth we're seeing in drive-through as well as delivery, which has a higher attach rate or more group orders. And that's all leading to the stronger performance that we saw in the quarter and will fuel the momentum as we go forward. And in terms of traffic, when I think about FY '24, the comp guidance range that we provided includes continuing improvement in our traffic. So, our transactions per store per day improved this quarter versus last quarter and the year before. And we'll expect that improvement to continue in FY '24, as well as we'll continue to expect an improvement in ticket as we very purposely innovate around customization, more premium beverages as well as ensure we're able to continue to drive attach. And the combination of that will support our double-digit revenue growth that I guided to.

Operator:

Next question is coming from Sharon Zackfia from William Blair. Your line is now live.

Laxman Narasimhan:

Let me start and then Rachel can add to it. One of the things that the team has worked on incredibly on over the last year or so is putting in place a much stronger operating foundation in the stores. And I'm very proud of the progress that they are making. And that includes how we deal with the processes in the drive-thrus. You're seeing real improvement in terms of out of the window of time in the drive-thru. The team has put operating practices across these various formats. And I feel very good about the progress that they are making in that area. I think in terms of the automation or the equipment that we have also brought into the store, that has also been a driver of some of the changes that we have seen. I think just ahead of the summer, we were able to get in the portable cold foam blender into stores, which really helped our partners deal with the growth in volume on beverages in the summer. So, a combination of operating practices, the equipment that we are putting in place, all of that adds to much stronger operational foundation in our store, and we expect that to continue.

Operator:

Next question is coming from John Ivankoe from JPMorgan. Your line is now live.

Laxman Narasimhan:

John, if I could take that on. Thank you for your question. We have more opportunities than what we have realized, but we make very good progress. If you look at staffing and scheduling and how we are working on that, I think we've made material progress in that area. And I think as a consequence of that, you've seen attrition levels now lower than where they were pre-COVID. You see tenures of partners in the store increase. And that's going to continue. I think if you just look at what we've been able to achieve with the investments that we've made in our partners with wages and other benefits that have been provided to them. If you take a look at the take-home income, on average for our partners on a year-over-year basis, it's up 20% on average. Now there's still more to come. If you go back to 2020 and you look at where we are right now, the number is about close to 50% higher, but we still have further opportunities. And I think what that's going to help us, it's going to help us at peak times. It's going to help us in the speak 15 minutes that you talked about. But also as we look at demand overall and we look at the portfolio of stores we run and how we work with digital with those, you're going to see a stock later this afternoon around how we find ways to simplify what happens in the store and also meet a broader set of demand with very careful choices about how we locate stores, what we do with stores, how we digitally amplify what we are doing in terms of demand. But also, in supply, how we link that with the equipment we're bringing in with a strong operating foundation. So, there's more opportunity than what we have now.

Brian Harbour:

Good morning. Can I just ask about the step-up in your CapEx budget and what that's going to be directed towards? And I guess, more broadly, is there any sort of equipment rollout that you're kind of accelerating versus what you've previously talked about, or perhaps store remodels that could be accelerated?

Operator:

Our last question today is coming from Danilo Gargiulo from Bernstein. Your line is now live.

Laxman Narasimhan:

I'm very pleased with the way that the reinvention plan is implemented. A couple highlights I think the progress we've made on staffing and scheduling is extremely strong. Furthermore, if you look at what we've been able to accomplished with regard to efficiencies and the culture and the capability and the processes we now have in place in order to systematically attack these efficiencies across the business is actually very strong as well. What we are accelerating on top of that is how we think about purpose-defined stores and what we're doing in putting together a strong operating foundation in our stores. That is going to really help us as we create the infrastructure, we create the store footprint, against which we will add to the equipment that we have in stores. Our equipment pipeline, what we have, the way we manage our new equipment, what's coming in, that entire pipeline and portfolio management is entirely on track. And we feel very good about the progress we are making there. And I think that is something that we're going to continue to see going forward.

Laxman Narasimhan:

I want to thank you all for joining us this morning. I want to appreciate all your questions, and I look forward to seeing you all this afternoon when we have our strategic update, and when we get to celebrate our holiday launch with you. Thank you all for joining us this morning.

Operator:

Good afternoon. My name is Diego, and I will be your conference operator today. I would like to welcome everyone to Starbucks Third Fiscal Year 2023 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to Tiffany Willis, Vice President of Investor Relations. Ms. Willis, you may now begin your conference.

Laxman Narasimhan:

Thank you, Tiffany, and thank you all for joining us this afternoon. In a few moments, Rachel Ruggeri will walk you through the detailed results of the third quarter, and Belinda Wong would then join us for Q&A. To start, our strong third quarter results point to all-around momentum in the business. This quarter, we grew consolidated revenue by 12%, up 14% when excluding more than a 1% impact in foreign currency translation to a record $9.2 billion. Importantly, earnings growth of 19% outpaced revenue growth with margin expanding by 50 basis points to 17.4%. Our strong performance reflects the strengthened foundation of our business, resulting from the significant progress we are making against our reinvention plan. Since stepping into the role, I have now traveled to every region, working directly with partners. I left each interaction impressed by the differentiated global appeal of the Starbucks brand powered by innovation and anchored in our unique ability to deliver human connection. These experiences give me great confidence in the significant growth and margin opportunities in front of us, positioning us well to strengthen the brand and create outsized long-term shareholder value. It was this time last year when Howard and the team identified the must-win opportunities and investments for our foundational reinvention plan. While Rachel will walk you through detailed results, I will now outline the momentum we have from the quarter in five key priority areas while pointing out where we see further headroom. Our first priority, we will elevate the brand by running great stores. This comes to life in the strengthened execution in North America. Our North America team delivered record revenue in the quarter, with a growth of 11% underpinned by 7% comparable same-store sales growth, leading to the highest average weekly sales in our history. Our ticket growth was driven by pricing, customization and food attach. Additionally, we continue to see improvements in items sold per labor hour. Operationally, we are seeing evidence that we are executing better. Barista attrition, where we are already industry-leading has improved further by 11% year-over-year. Through scheduling and staffing improvements, we are beginning to increase the number of hours per partner in store, critical to running great stores and improving partner engagement while also improving productivity. Innovation in beverage and equipment continues to drive our business. In fact, our cold business reached 75% of U.S. beverage sales this past quarter. As the leader in premium coffee, we are particularly encouraged to see cold espresso beverages were up 13% year-over-year. Additionally, we continue to elevate the premium coffee experience in both cold and hot. For example, the rollout of our Clover Vertica brewer continues as planned, delivering a larger variety of high-quality hot coffee, including decaffeinated on demand. Our innovative equipment rollout remains on track, are faster and easier to use portable handheld cold form blenders continue to have an outsized impact for both the partner and customer experience. The cold foam blenders are now rolled out to all U.S. company-operated stores in time to meet the summer demand for Starbucks Refreshers' frozen beverages. The new blenders support the additional growth of cold foam, the fastest-growing customization at Starbucks. Modifiers such as cold foam now contribute to over $1 billion in revenue annually. The Mastrena 2 espresso machines and new warming ovens are also now in all U.S. company-operated stores. Taken all together, our equipment investments that we began last year are supporting labor efficiencies, allowing us to increase capacity during our busiest day parts. These investments are both elevating the Starbucks Experience and further differentiating us from competitors. In this past quarter in North America, we once again saw our unit volume outpace pre-COVID levels by double-digits with high attach rates across dayparts, the mornings as well as the afternoons. Also in thinking about dayparts, our Starbucks Refreshers platform, which skews towards an alternate location occasion has seen double-digit growth this past quarter in every daypart. With this success, we are leaning in even further with a systematic pipeline of innovation across dayparts. This includes this summer's launch of our Starbucks Refreshers frozen beverages, customization in our Oleato beverage platform as well as with our cold-pressed Cold Brew, which enters a testing phase across a few dozen stores this fourth quarter with a rollout across U.S. company-owned stores expected by the end of fiscal year 2024. Food is also fueling growth. This past quarter, we saw all-time high food attach and sales of breakfast sandwiches. As an attached business, food drove a higher ticket in the quarter, improving volume growth and contributing to the record average weekly sales. Overall, we are excited about the significant opportunity in food as we explore new, elevated and convenient food offerings. We will share more of this in time. We also continue to grow and diversify our store portfolio. We see significant headroom for new store growth in underpenetrated areas in the U.S., including smaller cities as well as new formats in larger metros. New stores and remodels are where we are first prioritizing our Siren System equipment rollout and we plan to move all stores to brand-forward digital menu boards over the next couple of years to further sharpen personalization and daypart activation. We are seeing strong growth in delivery. In fact, we are close to creating a $1 billion incremental leg in our delivery business from minimal presence a few years ago. And now we are operationally setting ourselves up for this channel in major markets, starting from a position of strength. As a second strategic priority, we're looking ahead at how we will further strengthen and differentiate our leadership position in digital. In the third quarter, we continued to grow our digital universe. Our 90-day active Starbucks Rewards customers grew to nearly 75 million globally, growing more than 25% in the quarter. This was driven by a record 90-day active user base of 31.4 million Starbucks Rewards customers in the U.S., an approximate 15% growth or 4 million new customers from the previous year. Starbucks Rewards members in the U.S. drove 57% of tender for the second consecutive quarter, up over 3 percentage points from the prior year. In China, we hit the highest number of 90-day active users we have ever had at over 20 million Starbucks Rewards customers. This is further evidence of our brand strength, relevance and customer engagement in the market. Starbucks has had a long track record of industry-leading digital innovation. As we approach the fundamental platform transformation underway with AI, we intend to invest to lead in this area using a foundational Deep Brew capability as the launching pad. Our focus in these investments will remain on improving the partner experience while elevating the customer experience and delivering productivity gains. We are revamping our approach to further accelerate digital innovation, including order, including payment and delivery enhancements, in terms of speed and personalization, which we believe leads to greater habituation by our customers. This includes developments in the U.S. mobile app user experience as well. Additionally, we plan to make significant investments in China to further enhance our digital capabilities in the market. Our third priority is global growth. As a company with over 100 million customer occasions each week, more than 37,000 stores and operating in 86 markets around the world, the runway for global growth is limitless. For the quarter, we again saw double-digit top line growth across the International segment. The segment delivered record system sales for the second consecutive quarter as well as the highest revenue and operating margin since the fourth quarter of fiscal year 2021. Excluding the negative impact of foreign exchange, we continue to see double-digit growth in the company-owned markets of Japan and the U.K., while the geographic license partners across the rest of the world all reported very strong performance. Our international store growth was 10% year-over-year. New stores are bringing attractive unit economics for the business while we benefit from strong growth in returns on invested capital in these markets. Turning to China. I am encouraged by our performance in the quarter. I had the opportunity to spend time in the market recently. I can now fully appreciate the extraordinary strength and resilience of the Starbucks brand, which is known as Xingbake locally. Looking at our third quarter results, our China revenue grew 51% from the prior year or up 60% when excluding a 9% impact of foreign currency translation. Additionally, we sequentially grew our revenue 8% from the prior quarter or up 10% when excluding a 2% impact of foreign currency translation, underscoring the robust long-term health of our business. Despite these early days in our recovery journey, stores that opened in fiscal year 2019 or earlier achieved full sales recovery in the routine morning daypart while other dayparts reported sequential monthly improvement. A strong recovery in the third quarter was amplified by the many distinctive competitive advantage that set us apart in China. The first and foremost advantages are in comparable partners who honor the heritage of our company, bring sophisticated appreciation for our high quality coffee and passion for delivering the Starbucks Experience in ways that are relevant to our Chinese customers. Our second advantage is our vertically integrated operations. We start with a locally relevant and increasingly greener store footprint. Our distinctively designed stores across formats celebrate the Chinese culture in a unique Xingbake manner, reflecting local arts, crafts and calligraphy. In the fall, we plan to open our Coffee Innovation Park, our single largest and most sustainable manufacturing investment outside of the U.S. This next-generation facility with state-of-the-art supply chain operations will also include a unique customer immersion center. Third, our locally relevant innovation in China for over 20 years has won over customers in what has historically been a tea-drinking culture. Today, we have nearly 6,500 stores and another nearly 2,400 points of customer connection through our We Proudly Serve program in China. And yet, there is so much more opportunity ahead in underpenetrated areas within this market. Some growth facts to think about. The average person in China drinks 12 cups of coffee each year. That significantly lower coffee consumption than in Tier 1 cities like Shanghai, where we first entered the market and now have nearly 1,100 stores. And we still have more room to grow in Shanghai. Compare this also to Japan where our per capita is 200 cups versus the 12 cups in China and the U.S., where the per capita is closer to 380. We are still in our early days in China, one of the largest consumer markets. With our locally-based investments in R&D and locally relevant offerings like our Dragon dumplings, which had an amazing quarter. We have built a brand that is highly relevant for China, in China. And we believe our unique approach has us well positioned to play the long game and win. Finally, another advantage in China is digital. This will be further demonstrated with highly digital supply chains we run and in the way we engage our customers. We are reshaping our business models, leaning into the remarkable loyalty of our Starbucks Rewards members as well as convenience offerings, including delivery and curbside for our On-The-Go business. A comment on our international business beyond the U.S. and China. We have seen very strong growth and strong unit economics in these markets. It is becoming an important third leg for us. Looking outside the stores in the third quarter, our Channel Development segment revenue was $449 million, down 6% year-over-year, while delivering operating margin of 46.3%, up 630 basis points year-over-year, reflecting SKU rationalization as well as the shifts taking place with a more on-the-go customer. We continue to see the opportunity for growth in channel-through innovation, as evidenced by the highly successful ready-to-drink Starbucks Pink Drink and Starbucks Paradise Drink introduced last quarter and the Grab and Go series launched in Japan in partnership with Suntory. We saw unprecedented sales during the first month of the launch in Japan, just as we did with our cream cheese lattes in China. Our fourth strategic priority is fueling productivity. We think of our business as a theater in the front and a factory in the back. We have a clear opportunity to maximize efficiencies and effectiveness while reducing waste by focusing on a vast opportunity in stores and also above stores. We have focused on meaningful improvements in staffing and scheduling to ensure that we have the right combination of the right partners in the right roles with the right hours to fuel both engagement and productivity. We also closed the third quarter on target with our waste reduction goals as we strive to make operations as efficient as possible while preserving the Starbucks Experience. This is just the beginning of the productivity journey at Starbucks. We have broadened the areas beyond our initial reinvention plan to include our end-to-end supply chain, direct and indirect procurement, how we design and build stores as well as opportunities across technology and our supporting processes. Arthur Valdez, Jr., who joined us recently as the Chief Supply Chain Officer, brings three decades of supply chain and logistics leadership to Starbucks and will be critical in these efforts. Along with sales leverage, what I could see in opportunities with future productivity gains gives me real confidence in long-term progressive margin expansion. Finally, the DNA of Starbucks is nothing without our culture. This is inherent to the company and something I was quick to learn through my immersion and experience working in stores. Our fifth strategic priority is reinvigorating our culture of human connection. We will measure our success on our business performance through the lens of humanity, just as we always have. And that requires us to reinvigorate our culture. Our partners are the heart of our business for me. We will continue to invest in the overall partner experience through compensation and benefits as well as through in-store improvements. At Starbucks, we strive to be a different kind of company, but we do recognize that we are operating in a different kind of world. It is through that lens we have spent the last several months rolling out a new unifying mission for the company, new promises for all our stakeholders and soon, a new set of values that will reground the culture of Starbucks in our heritage and a more modernized workplace. Before I turn the call over to Rachel, I want to leave you with this. It is an honor to be driving such a stellar branded company in one of its best chapters. While we continue to navigate in an environment with a heightened level of macro uncertainty around the world, we will execute with discipline and rigor on our priorities. After all, Starbucks is a strong, resilient brand delivering to customers what the world needs most right now, human connection. As I look at the runway in front of us, the possibilities to deliver that connection are truly limitless. What I see is a durable iconic business with multiple paths available for us to deliver on our long-term revenue growth of 10% to 12% and earnings growth of 15% to 20%. I look forward to discussing our strategies and plans for fiscal year 2024 and beyond in greater detail in November in an extended investor call organized in a hybrid media format. We would share more details in the coming weeks. And with that, I'll now turn the call over to Rachel to talk more about our remarkable third quarter financial performance of the quarter. Rachel?

Operator:

Thank you. [Operator Instructions] Your first question comes from Jeffrey Bernstein, Barclays. Please state your question.

Laxman Narasimhan:

Well, there were several questions in there so let me just break this up. There was a question on the third quarter. There was a question about our expectations for the balance of the year. And then there was a question about the -- what I've said earlier about my confidence and the multiple paths to achieving the 10% to 12% growth as well as the 15% to 20% earnings growth, and I'll comment on all three. So let me first start with Q3. Q3 for us was a very strong quarter, as Rachel mentioned as well. It's in line with our expectations. Our comps were consistent every month. We came off a lap in Q2, which was the impact of Omicron, and so we had a 7% comp, very consistent month over bond. The comp in Q3 was lapping a 9% comp from last year, so the 16% comp on a two year basis. And so if you look at this, it's really the strength of the brand, the actions and pricing we took but also the growing levels of customization and the levels of food attach that Rachel mentioned as well. And that is what led to the average weekly sales in Q3 continuing to break records. Now your question on transactions. Transactions in Q3 grew year-over-year across all dayparts. Traffic is below 2019 levels but units per store are above the 2019 average coming from higher food attach. So the food growth along with more customization and judicious price increases led to this record weekly sales that you saw in the quarter. So transactions, as I said, have grown year-over-year across all dayparts. We also had a strong increase in ticket. There's a sort of balance between the pricing, which is very judicious, but also customization and increase in the number of units. Delivery sales doubled in Q3 compared to a year ago, most of which is incremental occasions for our customers. So that's Q3. Let me just highlight something about our loyal customers because that, in some ways, gives you a sense of the strength of the brand. Our [indiscernible] active Starbucks Rewards members have grown 4 million in number year-over-year. They come in more frequently, they buy more. And interestingly enough, as we've seen our sizes, we actually see the growth of our largest sizes over our smaller sizes. So we're not seeing the down trading in our customer base. Our stored value credit, the balance of the card is also great sequentially. That’s how we exit Q3. As you look at the balance of the year, we feel that, first of all, the annualization of the pricing actions will continue. We don’t have any lagging significant comp impacts from the previous year. And we do expect pricing trends to moderate as we go into the final quarter, as you said, but we do expect to end the year in line with the comp expectations of 7% to 9% growth that we had set. Now in terms of answering your question about the long term, the – what I have seen in both top line as well as in the earnings growth gives me real confidence in the fact that what we’ve guided to previously, the 10% to 12% revenue growth and the earnings growth of 15% to 20%, we have multiple paths to getting to that. So that just really signals the resilience of the business, the durability of the brand and the multiple paths we see, both in terms of top line as well as earnings growth, which I’m happy to elaborate on.

Sharon Zackfia:

Hi. Good afternoon. I was curious about the comments on the number of hours per partner. Can you give us kind of some color around where that is now and where you'd like that to be in the U.S.? How long you think it takes to get there? And kind of what the associated productivity improvements would be? I assume that's throughput related but would love some color on that.

Operator:

Thank you. Your next question comes from Andrew Charles, TD Cowen. Please state your question.

Laxman Narasimhan:

Got it. I'll get Belinda to take the first question, Rachel to take the second, and then I'll come in with some summary comments at the end. Belinda?

Laxman Narasimhan:

Rachel?

Laxman Narasimhan:

Well, let me just close with a couple of observations. I was in the China market for an extended period in this quarter. And I got to actually work with our partners and stores. I got to spend time in our supply chain. I got to spend time in our support centers, including looking at our teams that are leading what we do in digital. And I have to tell you, I've been going to China, studying China, advising on China, running business with China for 20 years. And this is a very unique business. It's been a business that's been built with love, and it's remarkable in terms of the passion our partners have. I was very impressed. I think it is still early days. I mean, when you start looking at the headroom you have, and as Belinda said, the headroom is large. So as people come into the market, they're essentially driving a conversion of tea to coffee, which of course, remember, for 20 years, we've been doing and we've got to 12 cups per capita. The numbers, by the way, significantly higher in Shanghai, but it's still much lower than a tea drinking country like Japan, which has had a history of coffee house culture over time. So the headroom is really large. If you look at what we also do with our brand, don't forget, we have these -- we proudly serve a Starbucks points of customer connection. In addition, our ready-to-drink partnership with is also growing significantly. And we're also available for coffee at home, so our brand is being built across multiple channels and the investments we're making in digital are very strong. With the investments we're making to more vertically integrate our supply chain, it gives a greater flexibility in China and also greater productivity. So I think in addition to that, your other question on productivity, as I look at what I see with regard to the opportunities we have both in the stores and out of our stores, and that, by the way, cuts across all the whole business, we have further productivity options, which just gave us confidence on margin in terms of the progressive margin improvement that we have made. So early days in China, market going to expand and further opportunities for us to get productivity.

Brian Harbour:

Yeah. Thank you. Good afternoon. I wanted to ask just about the point on kind of supply chain and procurement. I think you guys have been pretty clear on the labor side, what the opportunity is there, what you're doing. Could you elaborate though just more on the supply chain side and where you see the most opportunity there? How that factors into where you think margins can go?

Operator:

Thank you. Your next question comes from David Palmer with Evercore ISI. Please state your question.

Laxman Narasimhan:

I think first of all, let me just clarify something. In your question, I think you suggested -- you made a couple of comments about our Starbucks Rewards members. Let me just give you -- let me just address that. We have more of them, so we had a 4 million growth year-over-year. It's a 15% growth. Our Starbucks Rewards members come in more frequently. So they're not coming in less frequently, they come in more frequently. They buy more after joining the program, right? And as I said, they're also choosing larger sizes as they come in. The investments we have made in marketing and what we're doing with digital, in particular, what it tells you is that we are even further increasing the pace at which we are bringing innovation and changes in terms of what we do. We have a whole list of benefits that we could bring. And we're taking up the agility in the company in terms of the investments we make, which will help us make this even bigger and stronger. So that's the way I would address your question about the Starbucks Rewards members. It's a key area of growth. The other thing you should be aware of is as we have scaled this, we have scaled this to connect, which is all our licensed stores. And I think 40% of our licensed stores today have connect, and we're seeing growth in our license business as well as a consequence of that. Finally, we're scaling this globally. You're seeing us take it to our geographic partners the Starbucks Digital Solutions. There is very strong adoption. And you see the kind of results you see, which our geographic license partners are announcing or are sharing with us. I mean, very strong results, and Starbucks Digital Solutions is extremely capable of delivering that. In China, we're seeing real growth there, too. And in fact, that is where we're making a big investment as well in digital because we see that as a way not just to strengthen our relationship but also to drive results through what we do with digital. So I think overall, this is a big area. It's a big area of focus for me. And it's part of the second big priority for us around strengthening and scaling digital. I’ll make a last comment. We have a fundamentally amazing capability called Deep Brew inside the company. It’s where we have made investments in machine learning and artificial intelligence. I think the ability for us to be at the vanguard of this and to early adopt what we do in this area furthermore, given all the innovations that are going on, and the re-platforming that’s going on just gives me greater confidence in what we do in digital. This will be a key area of growth for us.

John Ivankoe:

Hi. Thank you. I was hoping that if you could address the biggest opportunities to kind of regrow same-store transactions versus 2019? I mean, what those -- I guess, as you see kind of the bigger opportunities to be, whether in daypart or specific type of customer. And secondly, with same-store traffic up 1%, do you feel like you are specifically addressing peak hour throughput? In other words, is the factory part of Starbucks, as you would call it, properly set up? I mean, is the engine specifically running such that you can achieve all those peak hour transactions, especially where mobile orders might be coming in at a very short amount of time. Thank you.

Operator:

Thank you. Your next question comes from Peter Saleh with BTIG. Please state your question.

Rachel Ruggeri:

Hi, Peter. This is Rachel. Thank you for the question. We've been encouraged by the performance we've seen in North America, both on the top line and on the bottom line. And year-to-date in North America, we're sitting at about 19.9% (ph) margin with about 40 basis points of expansion, and that's driven by a combination of sales leverage, pricing, the benefits from the reinvention plan showing up in productivity, which is helping to offset some of the investments we've made and we see opportunity to continue to expand margin over the long term as the benefits of the reinvention continue to amplify. And so I would look at that as really the reinvention is a significant driver of our opportunity in terms of margin expansion. Through reinvention, we're unlocking capacity to be able to serve demand that leads to sales leverage. And in addition to that, we're creating efficiency and resiliency in the middle of the business that's also supporting margin expansion. So I look at it more about what we've already seen progress today with reinvention, what we would expect to see going forward. And that leads us to solid margin expansion at the company level this year and progressive margin expansion in the future, which of course, will be driven in large part by North America.

Operator:

Thank you. And your next question comes from Sara Senatore with Bank of America. Please state your question.

Rachel Ruggeri:

Sure. Thanks, Sara. I'll take the first question around comp. And when we look at the balance of the year related to comp, we just expect the momentum in the business to continue. So when you think about in North America in this current quarter, we were encouraged by the fact that our growth in comp was a combination of transaction growth. So we saw transactions grow above prior year in every single daypart. And that was coupled with an elevated ticket. And that was a combination of not only strategic pricing but a balanced contribution from increased customization as well as record attach. That drove strong growth in the quarter that, I would say, from a revenue standpoint, we have fundamentals from a revenue perspective that are broad. And we would expect that to continue, that momentum to continue as we look at the balance of the year and going on a full year basis. So that will continue to be fueled through innovation as well as through continued growth in our digital customer rewards membership and our increasing capability around convenience, including growth in digital. So we see all of that as signs to help support the 7% to 9% comp range that we've guided on a full year basis. Now when you think about outside of North America, we'd say we expect our recovery to sustain in China, and that was through the guidance I gave around a low to mid-single-digit comp on a full year basis as well as contribution from International and the momentum we're seeing. So we think across the board, the momentum we're seeing, the recovery in China, coupled with the strong performance we're seeing in North America gives us the confidence to be able to maintain the 7% to 9% comp range on a full year basis for North America and then at the high end of the range for total company.

Operator:

Thank you. Your next question comes from Joshua Long with Stephens. Please state your question.

Laxman Narasimhan:

Right. We have very strong share in out-of-home coffee. I think we're tied for #1 so we feel good about that. At the same time, what you are seeing with the customer is the customer is becoming more on-the-go. And what you are seeing with that is if you stop looking at channels where we have products like we have with our North American coffee partnership or frankly, our stores or our licensed stores, we're clearly benefiting from more from customers on the go. So you see some of that shift take place. But at-home coffee, our shares are very strong. Go ahead, please.

Operator:

Your next question comes from Danilo Gargiulo with Bernstein. Please state your question.

Laxman Narasimhan:

Rachel?

Laxman Narasimhan:

Just one thing I'd add to is our pipeline of equipment innovation is very strong. And the way we manage the portfolio, the way we manage the pipeline is very strong. And if you look at some of the commitments that we have made around investments like the portable cold foam blender, it's one of the fastest rollouts in our history in terms of how it's reached all our stores. So when we have them ready, when we do the renovations, when we have new stores built in automatically, they are actually getting the Siren System. And I feel very good about the way we are managing the portfolio of investments that we are making in this area.

David Tarantino:

Hi. Good afternoon. I have a follow-up question on the commentary related to the longer-term targets. I know we're going to get more details in November on this. But I think the comments were that you have multiple paths to deliver both the revenue and the earnings targets. And I wanted to focus in on the revenue part of that. I guess if you continue to grow at the rate you're growing from a unit growth perspective, I think you would need to maintain that comp outlook that you gave previously to get to the revenue guidance, unless I'm missing something. So I guess the question is, are you signaling that maybe the unit growth element could change and the comp element could change and you could still get there? I guess, maybe any clarification on that front would be helpful.

Operator:

Your next question comes from Zack Fadem with Wells Fargo. Please state your question.

A – Laxman Narasimhan:

So thank you for your question. As I said earlier, we see significant margin improvement opportunities at work that will come to productivity. We’ll set the appropriate details of this at a later point. But I can just tell you this, as I look at the investments we’re making in store, but importantly, what we see about the store. We have opportunities. So I feel very good about the 15% to 20% earnings growth.

Laxman Narasimhan:

Thank you all for joining us on this third quarter 2023 earnings call. I deeply appreciate it, and I look forward to seeing you all in November. Until then, thank you.

Operator:

Good afternoon. My name is Diego, and I will be your conference operator today. I would like to welcome everyone to Starbucks Second Quarter Fiscal Year 2023 Conference Call. [Operator Instructions] I will now turn the call over to Tiffany Willis, Vice President of Investor Relations. Ms. Willis, you may now begin your conference.

Laxman Narasimhan :

Thank you, Tiffany, and good afternoon, everyone. It's both a great privilege and responsibility to serve as Starbucks CEO. On behalf of the Board of Directors and our Starbucks partners, I'd like to thank Howard Schultz for his leadership of the company over the last year. Howard's return in April of 2022, and came at a pivotal moment for the company and with great personal and family sacrifice. And I want to personally thank Howard for his over 40 years of ingenuity, creativity, service and enduring love for our company and the iconic Starbucks brand and for his willingness to always lean in, in service of our partners and customers. Since joining in September, the company has given me a uniquely designed program to fully immerse myself in all aspects of our business. The program involves spending time in our stores, distribution centers, roasting plants, support centers and on our own coffee farm in Costa Rica. And I have traveled to meet our partners and business leaders in several international markets across Asia, Latin America and Europe. While Howard formally ran the company through the second quarter, my emotion exposed me to all aspects of day-to-day leadership responsibilities and well-prepared made transition into the CEO role on March 20, a few days ahead of our Annual Meeting of Shareholders. I have learned about the company through the eyes of our founder, customers, farmers, partners and the community and through listing meetings with our shareholders. Perhaps most importantly, I've been actively listening and learning from our partners, working side-by-side to earn my Barista certification and developing the deepest level of respect for coffee and Barista craft. In my time with the company, I have also been working closely with the executive leadership team. I have been impressed with the great progress and forward momentum of the company, and I am optimistic about our long-term growth headroom and the margin improvement potential. We also see great opportunity to further strengthen the business, elevate the brand and do everything we can do to make this a great place for partners to work. We will continue to build our Reinvention Plan with additional opportunities, and we will update you with these additional plans in due course. Let me start with this call by sharing my overarching observations, the progress and momentum from our Reinvention and the opportunities ahead for Starbucks. Rachel will then walk you through the details of our second quarter fiscal year 2023 performance. We will then open the call for Q&A. What you can take away today is confirmation that we are well positioned to continue to unlock value for all our stakeholders. My first observation is that Starbucks is uniquely in the business of human connection. Since our earliest days, we have been a brand that brings people together from the vantage points of serving customers in stores and in drive-thru windows. Many are coming to us for connection with others. There is no doubt, Starbucks has conventionally been the mainstay meet-up spot. At the same time, nearly 2/3 of U.S. consumers are by themselves when seeking a beverage or food occasion. As a world in a crisis of disconnection, where loneliness, division and polarization have become far too common, the everyday ritual of coffee is a powerful way to make connection happen with others and with yourself. Starbucks delivers connection no matter how you visit us, in stores, drive-thrus or digitally, we are there to provide this connection, any place, any time. That brings me to my second observation. Our performance is strong, but our health could be stronger. I've worked side by side with our partners in our stores and have experienced firsthand how our stores and our operations are still evolving to meet the demands of our customers. There is more work to do to tailor our stores on the demand that we see, advance our technology, enhance how we innovate our equipment and also more fundamentally, how we get back to focusing on fundamental operations and executing better, a priority that is evident with my deep engagement over the last several months across supply chain, technology, reinvention, store development, store operations, marketing and product. Take, for example, the Siren System that we showcased at Investor Day. This is one example of how we can continue to do more to better support our stores and in turn our partners. It is also about the operating processes that we have in our stores and how we make them even more robust. To strengthen our health, we need to think of our business as having theaters at the front with a factory in the back. Our theaters are aware our store partners are focusing on their craft and delivering an elevated experience to our customers. To simplify the store partner experience and drive greater productivity within and beyond the store level, we see significant efficiencies in our supply chain, support systems and processes. This is what I mean by our opportunity to strengthen our factory in the back. Let me give you a few examples. Today, our store deliveries involve a high-touch one-size-fits-all model. We are out of stock in more items than we would like. Through segmentation and a format-specific approach, we will be able to lower costs while creating a better experience for our partners and ultimately for our customers. We also have abundant opportunities to optimize what we buy across several areas as well as opportunities in how we buy it. Currently, we have over 1,500 cup and lid combinations across our network. As we streamline, we will create a portfolio of fewer, more sustainable and less costly cups while further simplifying operations in our stores. All of these opportunities will deliver top line growth and margin expansion and create long-term value. My third observation is that we are a company that strives to be different, and we are now operating in a different kind of world. One thing that has stood out to me here at Starbucks is our culture. Since my first it has been clear that Starbucks' cultures like that of no other company. There is a strong partner-first mentality that is both top down and bottom up. At the same time, the world in which we operate is evolving. There is clear opportunity to build stronger capabilities, drive even deeper engagement and adapt a global mindset. With that in mind, as a leadership team, we fully acknowledge the need to evolve and modernize our brand, our business, our capabilities and our culture to meet the needs of an ever-changing world. We are, therefore, refounding the company. And as part of that, we are getting back to its basics. You already know about our Reinvention. We've also just recently introduced a new mission in set of promises as a contemporary expression of our mutual success. Our mission is this. With every cup, with every conversation, with every community we nurture the limitless possibilities of human connection. The rollout of this work across the globe is well underway. It is driving conversations at all levels within the company and is being met with overwhelmingly positive reception. As we evolve, what differentiates us will remain. We will modernize, yes, and we will straight through to who we are at our core, much like our promises say. We are a company that at its best works to build bridges to a better future for our partners. At our best, we uplift the every day for our customers. At our best, we ensure the future of coffee for all. At our best, we make positive contributions to our communities. And at our best with the environment, we give back more than we take. And as a result, we generate enduring long-term returns for our shareholders. These have been my three overarching observations. We are in the business of human connection. Our performance is strong, but our health can be stronger, enable the fearless in the front by strengthening the factories in the back, and we continue to strive to be a different kind of company that is now operating in a different kind of world. Through this lens, we will be disciplined in delivering against what has been limiting us in our journey towards the limitless future. We are seeing great progress in the work underway with our Reinvention Plan and the capacity for much more. We've only just scratched the surface of what we can accomplish with this iconic brand and company. We see significant growth headroom and the opportunity to further separate Starbucks from others. We also see opportunities to expand margins while continuing to invest in the business for the long term. With that, let me turn to our second quarter performance. The company exceeded expectations in Q2 fiscal year 2023 by nearly all measures, delivering strong results across the broader Starbucks portfolio. Our performance, including continued success in the U.S. and international markets as well as the recovery we've been seeing in China can be attributed to the strength of the global brand, relevant innovation in our product and stores and powerful execution by our partners. Let me first start globally and then with both America and the U.S. Our Q2 revenue was $8.7 billion, up 14% for the prior year and up 17%, excluding more than 2% impact of foreign currency translation. North America delivered revenue growth of 17% in Q2, growing to $6.4 billion. We captured a remarkable 11% comp growth globally with 12% comp growth in both North America and the U.S. for the second quarter, driven by mid-single-digit growth balanced between transactions and ticket. Our North America growth comes on top of 12% comp growth in the prior year. We expect this demand to continue as we push the envelope with innovation. A recent example is the highly successful launch of Oleato, an innovation Howard identified and is personally led for us. In fact, we have already reached an audience of 5 billion people since our announcement of the February global launch, Starbucks Oleato beverages, making this one of the top 5 product launches in the last 5 years in terms of brand awareness and excitement. The new innovative beverage platform is currently available in 650 stores across three markets

Operator:

[Operator Instructions] Your first question comes from John Ivankoe, JPMorgan.

Laxman Narasimhan :

Hey, John, thank you for your question. Firstly, I will give a bit of an overview, and then I'll call on Frank and Sara to provide their perspectives. Firstly, Starbucks continues to be a brand with a very strong employee value proposition, and we are able to attract a lot of applicants for the jobs that we have open. As I mentioned in my prepared remarks, we're seeing growing stabilization in what we see in our front line. As I mentioned, we are seeing lower levels of attrition and greater stabilization in our retail talent. Additionally, as you look at the improvements that we are making in our scheduling processes, we're able to deliver an average hours per week to our partners 4% higher at this point in time. That, of course, does matter because it does have an implication on the compensation that they have. There are clearly more things in the pipeline as well. And Frank, I'd love for you to give your comments on how you see the environment there.

Laxman Narasimhan :

Sara, any comments from your time in stores?

Laxman Narasimhan :

If I can add one more thing. I think we're seeing a strong pickup in the program of tipping that we have scaled across our store network.

Sara Senatore :

I just wanted to ask about the strength of the quarter, maybe in the context of comments -- other comments about both the near-term and long-term outlook. So it sounds like there was significant upside to your own expectations for the quarter and objectively very strong. But you're not raising full year guidance, which makes me wonder if maybe your reinvestment path is going to be higher than you had previously anticipated just because some of the things Rachel mentioned, the COVID relapse, I think, would have been embedded in the outlook initially. And maybe in that same vein, Laxman's view that you're reinventing or refounding the brand, not something I would typically associate with the brand that's putting up the kind of performance that we saw in the second quarter. So if you could just contextualize the strength of the quarter in your full year outlook and also the view about the sort of the brand going forward?

Rachel Ruggeri :

Sure. Thanks, Sara. The way I'd look at it is we were incredibly pleased with the performance in Q2. But when you think about, as I shared in my prepared remarks, we benefited from the lap of Omicron as well as the onetime adjustment from the Star liability. That was expected. So we expected that, and that was driven in the comp that we saw in the quarter in North America as well as broadly. But in addition to that, while we recovered better than what we expected in China, when we look out towards the balance of the year, we expect our average weekly sales in China to continue and increase to improve sequentially quarter-over-quarter, but at a more moderate pace than what we saw in Q2. We've already seen it start to moderate. And that's really driven by the fact that there's still some uncertainty in the overall environment from a recovery standpoint when you look at things like consumer behavior as well as recovery in key segments like our international travel. So when we take all of that into account, when we look at our guidance for the full year, we believe reaffirming our guidance allows us to continue to convey the momentum, but also for the confidence we have while still navigating a rather uncertain environment globally.

Jeffrey Bernstein :

Great. Just looking out beyond this year, Rachel or Laxman, I'm just wondering how you think about the operating margins in the coming years, maybe framing it relative to pre-COVID levels back in the day, high teens were the norm. I'm just wondering whether that's still a realistic target? And if so, maybe by when or perhaps Laxman, that's just no longer the focus or it's just not necessarily attainable based on the outsized inflation and ongoing investments you're making in the business. Just wondering how you think about the top versus the bottom line balance there?

Operator:

Your next question comes from David Palmer, Evercore ISI.

Laxman Narasimhan :

Rachel and then -- I'll call in Belinda for some commentary. Rachel?

Belinda Wong :

Thank you. I'll just provide some colors on our recovery. China has finally turned a new chapter from pandemic to endemic. And Q2 marked the start of our solid and broad recovery and it’s only the beginning. We see strong rebound in traffic as Rachel has said, back to our stores for reconnection and the third place experience our customers have long craved. And we are that sufficient for this moment because we are in a human connection business and our unique price and the type of experience cannot be replicated anywhere else. And we achieved 30% comp in March and the strong momentum continues in Q3. We are firing on all cylinders to accelerate our top line and bottom growth for balance of the year and beyond. And we will leverage our market-leading store portfolio to capture the pent-up demand for reconnection and we are ready to accelerate even faster new store growth in the second half of the year. Our evolving omnichannel capability, the strength of our delivery business, our mobile order and pay and e-commerce, all built in the past few years and ready to serve our customers for any occasion, anywhere and anytime, highly incremental and in fact our mobile order and pay business achieved the highest record sales and mix of 24% in Q2. We've built strong operating muscle and agility to innovate and execute. We have the ability to adapt further with speed to meet new customer needs with disciplined execution in stores. The enduring power and strength of the Starbucks brand and the deep connection we have with our customers and partners are all second to none. With that, our 60,000 partners in China are ready to capture the exciting growth ahead.

Peter Saleh :

Great. I wanted to ask about the Siren System. Laxman, I think you mentioned it briefly, but really didn't provide a lot more color on it. I know this is something you guys talked about in great detail at the Investor Day in the fall. Just curious if you could give us an update on the testing and rollout of the system and the impact you're expecting going forward?

Sara Trilling :

Yes. Thank you. Happy to. I mean specific to Laxman, as you said, cold beverage as well as the food station, incubation tests that are complete and feasibility begins in Q3, right, for the rollout. And I think both of which these stations have already shown measurable impact on both productivity as well as throughput and testing. So we're quite bullish on them. And then overall, absolutely, we're already seeing the benefits of the investments that we've made in equipment. We're serving more customers during our busiest dayparts than we did pre-pandemic. And when I'm out in stores, I certainly hear firsthand from our partners how the equipment is making the work easier. And it's evident in speed with service. You can see it in our drive-thru times and you can also see it importantly in our productivity numbers. As we're thinking about summer and the weather is warming up around the country, some of the things that we've launched more recently called Blenders as well as at that station specifically make it easier to serve customers and enable the innovation that's going to be coming. The last piece I'd call out that we're really excited about as it relates to our core, again, coffee is Clover Vertica. We all know waste and throughput are going to be -- they're going to benefit favorably. But I think more importantly, we're putting coffee at the center, and our partners are incredibly enthusiastic about the offering that we'll give to our customers and the pride, right, that they'll feel in terms of the quality in the cup. So very, very excited about that one as well.

Frank Britt :

Yes, Sara, you mentioned productivity. I think it's probably worth highlighting that while we typically see a decline in productivity during winter months due to seasonality and volume within our stores compared to last year, we've seen a sustainment of strong IPLH, our proxy for productivity. And I think this affirms to your point, Sara, the alchemy of partner changes in store workflow and equipment, all yielding tangible value and enduring value for our partners and for our customers.

Lauren Silberman :

Congrats, really strong U.S. comps and traffic. Can you help unpack where the growth is coming from? So is traffic primarily coming from new customers or existing customers, Rewards members or more occasional customers? And then can you just give us an update on where you're running with transactions per store per day?

Brady Brewer :

Sure. Yes. In the quarter, you saw in the U.S. business, an equal part in the comp between transaction comp and ticket comp. Of course, we are overlapping some bad weather last year, some Omicron surge. But really when we look under the surface of that, too, as Rachel shared in her opening remarks, record customer counts for the quarter when we look year-over-year, that we saw growth there. Transaction comps growing in our busiest dayparts. And when we get underneath the hood of that, it's really brand strength. We have growing affinity for the Starbucks brand. We saw some very good highs within the quarter for brand affinity. We look at the relevance of the innovation, so our Iced Shaken Espresso platform continuing to grow, our Refreshers platform continuing to grow, which just reinforces our cold customized plant-based beverage strategy is just yielding continued growth. You heard Laxman talk about Pistachio Cream Cold Brew. We launched Oleato in the quarter. So there's so much for customers to be excited about and giving them a reason to come to Starbucks. And then lastly, I would just say the execution. You see our Starbucks Rewards membership rewarding Starbucks for that with more of their visits. Now 57% of U.S. transactions are from our Rewards members. And what they're telling us is, as you heard me say before, they are finding a beverage they can't get anywhere else. And so all of those things compile into a great force of momentum for Starbucks, and we continue to be a strong brand that's poised for growth in the future.

Laxman Narasimhan :

Thank you, Rachel. I'm very pleased with the results of this quarter, and we are clearly moving with momentum as a business. There's clearly further opportunities for us and for this wonderful brand. It's a privilege to lead it. I want to thank you all for joining us today for our second quarter fiscal year 2023 earnings call. We appreciate your investment and your time.

Operator:

Good afternoon. My name is Diego, and I will be your conference operator today. I would like to welcome everyone to Starbucks First Quarter Fiscal Year 2023 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to Tiffany Willis, Vice President of Investor Relations. Ms. Willis, you may now begin your conference.

Howard Schultz:

Thank you, Tiffany. I did not expect that. Thank you very much. Good afternoon, and welcome, everyone. I'm pleased to comment on the strong financial and operating results Starbucks reported today, highlighted by record quarterly sales of $8.7 billion, up 8% over last year, up 12%, excluding foreign exchange, a stunning 10% comp growth in the U.S. and North America, 5% comp growth globally. And except for China, very strong sales and comp growth in every international market we are in. We posted strong results despite challenging global consumer and inflationary environments, a softer quarter for retail overall and an unprecedented COVID-related headwinds that unfolded in China. Credit belongs to our partners around the world who continue to successfully satisfy record demand in our stores while delivering an elevated Starbucks Experience to our customers. In China, COVID-related mobility restrictions and a spike in COVID infections following the end of zero COVID resulted in comp sales of minus 29% for the quarter, 4x worse than what we expected. Weak sales combined with the cost to support the health, the safety and well-being of our partners, our first priority, negatively impacted total company earnings by $0.06, resulting in Q1 EPS of $0.75 per share. Despite short-term headwinds, we are confident that the end of Zero COVID marks the beginning of China's emergence from three years of pandemic, puts the country on a path to reintroducing normalcy and routine back into people's lives and positions the country to resume pre-COVID levels of consumer, social and economic growth. We also believe at the end of Zero COVID will enable renewed consumer activity in China and recovery of our business in the back half of fiscal 2023. Our view is informed by patterns of post-COVID behaviors we have seen in countries around the world as consumer activity accelerates as years of pent-up demand is released. Today, our stores in China are again open without restriction and our partners are back at work. Many have been infected and recovered from COVID. Noteworthy is that we saw a meaningful sequential improvement in sales and traffic as we move through January as people began resuming aspects of their pre-COVID lives, including gradually returning to our stores. More on China shortly. Our performance in Q1 underscores the success of the investments we are making in our people in extending our global leadership around everything coffee and in relevant innovation that together are driving sales and transaction growth around the world. Starbucks is more relevant globally today than ever before in our history, ideally positioning us to successfully execute our ambitious growth agenda and have roughly 45,000 stores delivering best-in-class returns around the world by the end of fiscal 2025. On today's call, I will highlight the drivers of our performance in Q1 and provide an update on the progress of our reinvention initiatives. I will then provide granular details specifically around the shape of our business in China and shine a bright light on the positive correlation between increases in consumer activity in China and the recovery of our business. Next, Brady will detail the beverage, food, mobile, digital and store innovation that drove record demand for Starbucks Coffee in every market outside of China in Q1. And he will speak to our record holiday performance, the strong growth in U.S. Starbucks Rewards membership sequentially and year-over-year and the extraordinary record of $3.3 billion loaded on cards and gifted in the U.S. We entered Q1 with roughly $2 billion globally waiting to be spent in our stores, increased Starbucks Rewards membership and card loads serve as both a current annuity and the future driver of our business. And then finally, Rachel will highlight our Q1 financial and operating performance and speak to the confidence we have in our full-year 2023 guidance despite the significant impact from China, and we'll turn the call over to the operator for Q&A. Let me begin with North America. The record demand for Starbucks Coffee in North America, we've reported on our Q4 call accelerated in Q1 and through holiday. Despite the difficult operating environment that most retailers, particularly brick-and-mortar retailers experienced in the quarter. Average weekly sales in the U.S. company-operated stores reached a record high in Q1, exceeding the prior record set in Q4 of fiscal '22. This is -- this next line, I think, is just -- even when I read it, I'm surprised, with eight of the 10 highest sales days in our history recorded in the quarter. Consistently strong demand drove revenues up 14% to a quarterly record of $6.6 billion and a comp sale of 10% over last year. And Q1 momentum has continued in Q2. Active Starbucks Rewards membership in the U.S. exiting Q1 totaled over 30 million members, up four million members or 15% over last year and up 6% sequentially. Loyal Starbucks Reward members drove a record 56% of tender, up 3% from last year, reflecting increased customer engagement throughout our system. Our convenience channels, Mobile Order & Pay, drive-through and delivery continue to fuel our business, delivering 72% of U.S. revenue in Q1. We continue to add high returning drive-throughs that attract new customers, expand our footprint and drive new customer occasions. Our over 6,600 store U.S. license business posted similar strong results with 32% revenue growth and double-digit comps across all operating segments. What's interesting to me is while grocery retailers are representative segment within our licensed business experienced traffic and spend related headwinds across their store base in Q1, their Starbucks business proved to be the bright spot bringing incremental traffic into their stores and driving sales for us as well. We continued to roll out Starbucks Connect enabling licensed stores to offer all Starbucks Mobile Order & Pay and Rewards benefits, expanding the value offering we provide our customers and licensees and enabling us to capture demand across our broader store portfolio. Starbucks Connect is proving to be highly incremental, and we see great upside for it. Cross-functional teams continue to successfully execute against our reinvention initiatives and our reinvention investments are having a measurable positive impact on our business, evidenced by an 8% improvement in U.S. hourly retail partner turnover. Improved turnover correlates to more stable store environments, elimination of new hire-related costs, particularly training and measurable improvements in productivity, speed of service and partner customer experience scores that we're already seeing. Our Q1 performance demonstrates that our reinvention plan investments are the right investments that we are making and are delivering results and creating shareholder value, providing us with tremendous confidence in the revenue, margin and EPS expectations that we shared at our Investor Day. Let me turn to international. Outside of China, the momentum we saw in our International segment exiting Q4 continued in Q1. Excluding China and foreign currency translation, revenues for the quarter are up 25% and comps were up 11%, fueled by recovery consumption in Japan and a rebound in tourism activity across our EMEA markets, following the lift of COVID restrictions. One great example is Alshaya. Alshaya is our license partner in the Middle East for the last 23 years and among our largest international licensees with over 1,800 stores across 13 markets. They reported their strongest quarter with the Starbucks brand ever in Q1. We added 370 new stores in international in Q1 and now operate 18,700 stores across 84 markets, 43% company-operated and 57% licensed. Strong growth in our international license business reflects the outside returns the Starbucks brand delivers to our licensees, driving increased investment by our licensees in our business and growing customer engagement with our Starbucks brand around the world. Turning to channel development. The Starbucks brand relevant innovation and seasonal moments are resonating with our customers and driving sales and occasions around the world, resulting in a 15% increase in channel revenues in Q1 over last year to $478 million. We continue to hold the #1 dollar share in U.S. at-home coffee and in Q1 outpaced dollar sales growth in North America ready-to-drink category overall, again demonstrating the unique power of the Starbucks brand. In China, Starbucks received the ready-to-drink new product launch of the Year award for the introduction of Bottled Frappuccino Oat Latte. We will continue to delight our customers with exciting new beverage innovation in the months ahead, including with the launch of Starbucks ready-to-drink Pink Drink inspired by the overwhelming success of Pink Drinks served in our retail stores and certain to become a customer favorite, especially with our young customers and our Gen Z audience. Let me begin the discussion around China by saying that Starbucks has been in China now for over 24 years, and that our confidence in the future of Starbucks business in China and our aspirations for the market and our partners has never been greater. We exited Q1 with almost 6,100 Starbucks stores across 240 cities, and our newest class of stores continue despite the challenges we've had to achieve best-in-class returns and profitability. And we remain on plan to have 9,000 stores in China by the end of 2025. Our belief in China is based on our leadership position in the market, our relationship with our partners and the trust that we have among our Chinese customers and the market and our brand position. Since 2020, our Starbucks China team has been navigating the most acute COVID-related mobility restrictions and disruptions anywhere in the world, while at the same time, developing the flexibility to execute under any COVID scenario. By leading in together in service of their customers and fellow partners, our China team has navigated every challenge obstacle and volatility that COVID had put in their way, building more capability, flexibility and operating muscle with each unexpected test. That flexibility and operating muscle, coupled with deliberate investments that we've made throughout the pandemic, supported our business in Q1 and will increasingly drive efficiency, productivity, profitability and shareholder value and enable us to deliver an even more relevant and elevated Starbucks experience to our partners and our customers in the years ahead. As I shared on our last call, our recovery in China gained momentum in Q4 of 2022 despite severe mobility restrictions in many of our larger cities. We saw sequential improvement in all key operating metrics driven by the success of mobile and digital technology investments and expanded delivery capabilities built during COVID that made it easier for our customers to engage with us and better enable us to serve them. The direct positive correlation we saw between increased consumer activity in China and sales in our stores and the speed and consistency with which our business was accelerating, gave us great confidence moving through the quarter. However, in September, a new wave of COVID spiked resulting in further increased mobility restrictions, new mobile, digital and delivery capabilities enabled us to partially offset the reduction in store traffic in September. However, in early December, Zero COVID was lifted and COVID infection spiked across China, resulting in a dramatic decline in consumer activity across the country and causing the most severe COVID disruptions any retailer had encountered. For us, at its peak, nearly 1,800 Starbucks stores were closed during that month. As a result, comps in Q1 declined 29% with a 42% comp decline in December alone. But like consumers everywhere, our customers in China are creating a full return to familiar pre-COVID routines and lifestyles and huge consumer demand in China is waiting to be unleashed. Early indications are that it is beginning to happen in our largest cities now with many Chinese recovered from COVID, people returning to work, border and travel restrictions lifted, mall traffic and retail store activity on the rise and consumers reintroducing social activity back into their daily lives. We saw the strongest level of sustained customer activity we've seen in years in the run-up to and during Chinese New Year festivities. As Rachel would share, we are expecting the second half of fiscal 2023 in China to be stronger than the first half but uncertainties remain and the better part of valor is to remain cautious around precisely when our recovery in China will take full flight. However, when it does, pattern recognition, the return on pre-COVID routines and the adoption of new post-COVID routines will become self-evident in China, and customers will flock to Starbucks stores to enjoy moments of reconnection their favorite Starbucks beverages and the premium Starbucks experience our partners in China deliver. And Q1 headwinds will shift to tailwinds. We've seen this pattern repeat in markets around the world, including the United States. Despite the challenges and the uncertainties of the last three years, Starbucks' commitment to China and to our partners and business in China has never wavered. Almost 25 years after entering the market, I remain more confident than ever that we are still only in the early chapters of our growth story in China, and I'm looking forward to being with our China partners for the first time in years when I visit the country this Spring. Laxman's immersion continues to go spectacularly well. He and I engage daily as he absorbs more about our company and business and he wins the hearts and minds of Starbucks partners everywhere. Only weeks from now, Lax will take full control of the company and together with our leadership team, bring reinvention to life, guide Starbucks into a new era of growth and begin writing the next chapters of our storied history. I cannot be more confident that Lax is the right CEO at the right time for Starbucks. And Starbucks Coffee Company domestically and around the world is in great hands with him as the CEO. This -- my last earnings call is very special for me and a powerful emotional reminder of the intersection of my life at Starbucks. It was 1983, walking the beautiful streets of Milan at the inspiration for what Starbucks could one day be and made first struck me. 40 years later, I'm not sure where the years have gone. 40 years later, we have over 36,000 stores around the world, serving over 100 million customers each week. Along the way, we have created opportunity, cared for and improve the lives of millions of Starbucks partners and made progress against my goal of creating a different kind of company, a company steeped in humanity, humility and respect, where everyone is welcome, and we embrace the belief that our differences make us better and stronger. And a company unlike any company, my father ever got a chance to work for, but there's much more opportunity and much more work ahead. Finally, while Starbucks has launched many successful coffee beverages over the years, my Starbucks journey will come full circle when I return to Milan later this month to introduce something much bigger than any new promotion or beverage. While I was in Italy last summer, I discovered an enduring, transformative new category and platform for the company, unlike anything I had ever experienced. The word I would use to describe it without giving too much away is alchemy. We won't unveil details today, but it will be a game changer, so standby. Many people have asked me if my final earnings call as Starbucks CEO is bitter sweet, it really isn't. Starbucks business and brand, the quality of our coffee, the relevance of the Starbucks partner and customer experiences have defined us since our founding in 1971 and have never been better or stronger. And our future has never been brighter. It will be my pleasure to take a front row seat as Laxman leads Starbucks into and through the exciting new era of growth ahead. With that, I'll turn the call over to Brady.

Rachel Ruggeri:

Thank you, Brady, and good afternoon, everyone. Let me begin by saying that I am very proud of what we achieved in Q1 with nearly every business contributing to our strong performance. The remarkable strength in nearly all major markets and channels across the globe led to outperformance across our metrics when excluding the headwinds in China. Our Q1 consolidated revenues of $8.7 billion were another record quarterly high, up 8% from the prior year or 12% when excluding an approximately 3% impact of foreign currency translation. The revenue growth was primarily driven by 5% comparable store sales growth, 5% net new store growth over the past 12 months, impressive momentum in our U.S. and international licensed stores as well as our channel development businesses. When excluding China and the impact from foreign currency translation, revenues in all three of our reporting segments continued to expand double-digit, demonstrating the demand of our diverse portfolio and power of our innovation as we focus on our new era of growth. Q1 consolidated operating margin contracted 60 basis points from the prior year to 14.5%, primarily driven by investments in growth in labor, part of which represent the reinvention plan, inflation and deleverage in China. The contraction was partially offset by pricing in North America and sales leverage across markets outside of China. The deleverage in China was more significant than expected, while other margin drivers were largely in line with our original guidance. Q1 EPS was $0.75, up 4% from the prior year, including an approximate $0.06 dilutive impact from the headwinds in China relative to our original expectations. Although we anticipated China's recovery to be nonlinear, the headwinds in Q1 were larger than our prior estimate by approximately $0.06 due to the unforeseen changes in COVID restriction and infection spikes. The significant strength across our global portfolio, however, largely offset the impacts from China's performance, keeping us on track to achieve our fiscal 2023 growth targets, as I'll discuss in a moment. First, I'll provide segment highlights for Q1. North America delivered another quarter of all-time record revenue in Q1 of $6.6 billion, up 14% from the prior year, primarily driven by a 10% increase in comparable store sales, inclusive of a 9% increase in average ticket, net new store growth of 3% over the past 12 months and very strong growth in our U.S. licensed store business. Our U.S. company-operated stores had a record revenue quarter with 10% comp growth in Q1, fueled by strength in digital, innovation, and record holiday performance as both Howard and Brady shared. In addition to the continued strength in ticket, the number of unique customers grew 10%, setting another all-time record and further expanding our reach. Let me also highlight the very strong performance of U.S. licensed stores this quarter, which posted revenue growth in excess of 30% and 15% system comp growth over the prior year Q1 with strength across the portfolio. Performance was particularly strong in retail and travel as pre-COVID behavior normalcy returns, with U.S. licensed store revenue indexing at roughly a 140% of pre-pandemic levels. Grocery also experienced strong growth, powered by the continued rollout of Starbucks Connect despite the overall decline in customer traffic across the rest of grocery store industry. North America's operating margin was 18.6% in Q1, contracting 20 basis points from the prior year, primarily due to previously committed investments in labor, including enhanced store partner wages and benefits as well as inflationary headwinds, partially offset by pricing and sales leverage. While Q1 operating margin declined sequentially from Q4 fiscal 2022, driven primarily by seasonal sales mix shift, we gained productivity through reinvention, including improved partner retention and equipment rollouts, paving the way for progressive margin expansion in the latter half of fiscal 2023 and years to come. Moving to international. The segment delivered revenue of $1.7 billion in Q1, down 10% from the prior year or up 2% when excluding a nearly 13% unfavorable impact from foreign currency translation. The revenue growth was driven by sustained momentum across all major markets outside of China as well as an 8% increase in total store count over the past 12 months. The growth was partially offset by a 13% decline in comparable store sales, including a 29% decline in China. Although China posted a comp decline of 29% in Q1, the heaviest decline of 42% was experienced in December with pressure carrying into Q2, all of which was well below our original estimates, as mentioned in my opening. Just to give you a little color, at its peak, nearly 1,800 stores or close to 30% of our portfolio were temporarily closed due to sharp fall in traffic and labor shortage because of partners falling sick to COVID. Outside of China and excluding the impact of foreign currency translation, our diverse international markets across the globe continued to outperform in Q1. Once again, these markets together achieved double-digit comp growth, driven primarily by transactions. Their revenue grew 25% in the quarter when excluding a 17% unfavorable impact of foreign currency translation with successful holiday campaigns across all regions. Operating margins for the International segment was 14.3% in Q1, down 400 basis points from the prior year, mainly driven by deleverage in China, but partially offset by strong sales leverage across other global markets and the resulting business mix. Shifting to channel development. The segment's revenue grew 15% to $478 million in Q1, driven by double-digit growth in both the Global Coffee Alliance and our global ready-to-drink businesses. Within the Global Coffee Alliance, newer platforms continue to be key drivers of growth, including Starbucks by Nespresso and Starbucks Creamers. Our ready-to-drink lineups are fueled by core platforms in our international markets and robust innovations in the pipeline. Sustainability was also top of mind for the segment, trailblazing recyclable, multi-serve iced coffee bottle made from recyclable plastic. The segment's operating margin was 47.4% in Q1, up 350 basis points from the prior year, primarily driven by strength in our North American Coffee Partnership joint venture income. Now moving to our guidance for fiscal 2023. Let me take a few minutes to go deeper on the implications to our business from the challenges we're facing in China. In January, China's comparable sales growth was a decline of approximately 15%, which was an improvement from a decline of 42% in December. While we're seeing early positive signs of momentum rebuilding, headwinds related to COVID still exist in the market and are expected to impact the full Q2. As a result, we anticipate the negative impact on the operating income in Q2 to be comparable to or greater than Q1. Although we previously projected China recovery as early as Q3 of this fiscal year, we do not have clear line of sight into the timing of recovery and believe China's contribution as a percentage of our fiscal 2023 consolidated operating income to be lower than our original guidance assumed. However, our long-term opportunity in China is very strong. We expect the market to see meaningful sales rebound once recovery is in full swing. Until then, we continue to stay focused on the long-term growth opportunities that China will deliver while weathering the short-term and transitory challenges. Now even with that backdrop and taking into account the uncertainty of China's recovery timing, our fiscal 2023 guidance remains unchanged. As a few point of clarification on guidance, in China, we now expect negative comps to continue through the second quarter, followed by improvement in the balance of the year. Another point of clarification is that China store growth remains unchanged as we execute our strategy to expand in new cities. Also, our guidance continues to include the impacts of significant investments related to our reinvention plan and inflationary pressures which largely remain comparable to what we had originally anticipated. Lastly, our guidance reflects the latest projection of foreign currency translation with approximate two and three percentage point unfavorable impacts on fiscal 2023 revenue and earnings growth, respectively. This reflects an improvement of approximately one percentage point on both revenue and earnings growth relative to our previous expectations. Additionally, in terms of quarterly shape, operating margin is expected to decline sequentially in Q2, near prior year level driven primarily by the COVID-related headwinds in China. We still expect margins to expand in the back half of the year, improving sequentially in Q3 and Q4 as sales leverage, pricing, productivity gains from reinvention as well as recovery in China begin to contribute to positive margin expansion as the year progresses. We continue to expect the quarterly EPS shape to roughly mirror the shape of operating margin with a sequential decline in Q2 and a meaningful step up in the second half of the fiscal year. Lastly, we also remain committed to returning approximately $20 billion to shareholders by the end of fiscal 2025 between share repurchases and dividends. Our repurchase program resumed in Q1 of this fiscal year and will accelerate as reinvention gains ground. Since the inception of our dividend program, 51 quarters ago, our annual dividend growth has averaged greater than 20%, and our dividend payout rates near the top percentile of growth companies of our size and our scale, which is an exceptional complement to our long-term EPS growth target as high as 15% to 20%. In summary, here are key takeaways for my discussion today. First, our business and our brand are strong and strengthening every day as demonstrated by the record sales in Q1. Next, our Q1 performance serves as proof point that we are progressing nicely against our strategy, inclusive of our reinvention plan and delivering the results we projected. And finally, we will continue to innovate in the critical areas of digital, product and stores as our new era of growth is just beginning to unlock, and we are excited about what lies ahead, including welcoming Laxman as CEO this spring and on our second quarterly earnings call. Now before I close, I want to express my sincere gratitude for a hard work of our Starbucks Green Apron partners across the globe, including those in China who serve our customers in a way that only Starbucks knows how. Also, with this being Howard's last earnings call, I would be remiss if I didn't take a moment to thank Howard for his vision to create a company that is truly different, where value is created for all. I know that I speak for many of us when I say we will honor your legacy while taking the company to the next level, all in making you, our partners, and our shareholders proud. With that, we'll open the call to Q&A. Operator?

Jeffrey Bernstein:

Great. Thank you very much. And congratulations, Howard, on your final call.

Brady Brewer:

Thanks, Jeff.

Howard Schultz:

[Indiscernible]. Rachel, you want to take the comp question, maybe, Sara, can help you as well.

Jeffrey Bernstein:

Thank you.

Operator:

And our next question comes from Sara Senatore with Bank of America. Please state your question. Sara, your line is open.

Operator:

Yes, go ahead please.

Rachel Ruggeri:

Sure. Thanks, Sara. In terms of the question around Q1 and what drove our business outside of the headwinds in China. So if you took headwinds out, to your point, we would have been above expectations. It's a combination of things. It's stronger performance in our U.S. business, which is inclusive of our U.S. license. So our U.S. company operated as well as our U.S. license. It's also growth across our international markets. So excluding China, we had tremendous growth across our markets, which really speaks to the diversity of the depth and diversity of our portfolio. We also had tremendous growth in our channels business. In addition to that, we saw some favorability in terms of foreign exchange, smaller, but that was also a combination. So it was all of those factors together, that would have given us a stronger Q1 than what we had originally expected. Now when you think about that as it pertains to the balance of the year, we're able to reaffirm our guidance because even though we're seeing headwinds in China, and we continue to believe we'll have strong momentum across the other businesses. You can imagine there are a lot of other factors at play continuing inflationary pressures, economic challenges. So the combination of all of that gives us confidence that reaffirming our guidance is right given the position we're in today.

Michael Conway:

Yes. Thank you. To the question, I would say definitely our markets outside of China performed even better than we thought. Just to note a year-ago, most of our markets we would have said is fully recovered. And so what we're seeing now with this 25% growth is growth over growth and performance over performance. And we were also expecting in some markets to see the economy inflation slow demand and it hasn't. So as Howard talked about the tailwind, we are seeing a true tailwind and continued recovery coming out of the pandemic in all of these markets. Just for example, Latin America, we're seeing revenue growth of over 50%; EMEA, over 20%; U.K., which is a company-operated market, is having double-digit comp growth; Asia-Pacific, over 20% revenue growth, and we actually crossed 5,000 stores across that region. And then Japan, which is our third largest company-operated market is also continuing with significant growth. This is our eighth consecutive quarter of strong revenue growth, driven by not only product but actually digital. Within Japan, we are rolling out the digital flywheel, Mobile Order & Pay is fully penetrated. We've doubled our sales of Mobile Order & Pay over the last quarter. And we just introduced multi-tier redemption, which has shown success in the U.S. We're seeing a significant improvement here as well. So as we think about going forward in these markets, we see more tailwind. The international travel is just starting to come back as they start to go to other markets as well, we're going to see further tailwind going forward.

Operator:

Thank you. Your next question comes from David Palmer with Evercore ISI. Please go ahead.

Howard Schultz:

David, thank you. Belinda is on the call, and she's sitting, I believe, in Shanghai, and I think she'd be best suited to answer your question regarding China recovery, the situation that she's seeing on the ground. So Belinda, can you respond to that first. And then Brady will talk about the brand.

Howard Schultz:

Brady, do you want to go to brand?

Howard Schultz:

I would just add one thing that I think we both said in our prepared remarks, but I think it's worth repeating. At a time when people are generally trading down, and there's a lot of discounting going on, we had the highest average ticket, I believe, in our history in the month of December. And so we don't see ourselves in a situation where we need to discount heavily, and we don't see a situation where our customers are trading down. And I think the strategic advantage we have, which we talked about in the last call is customization and how our customers are creating their own proprietary beverage and that adds to the ticket and obviously adds to the value perception that customers believe they're getting at Starbucks.

Operator:

And our next question comes from John Ivankoe with JPMorgan. Please state your question.

Howard Schultz:

Again, I'll yield to Belinda. But before I do, I think between myself and Rachel, we've been very clear that we want to take a very conservative view, especially in the near-term. In the back half of the year is where we see the return to some level of normalcy. Listen, we don't have line of sight, and I don't think anyone does on how quick things are going to respond. We just have pattern recognition for many other markets. And also, Belinda has shared with us, and we've seen the numbers of what's happened to the run-up and during Chinese New Year, which was quite robust. And so I think, John, I think we're going to be very careful, very sensitive. We are going to be on the ground in China and see for ourselves in the next month or two. And we have been very directly involved with our Chinese team trying to support them, but they've been under a lot of pressure. We just don't know. So Belinda, I think you should just give your color and what you believe is going to happen from your perspective.

Operator:

Thank you. Your next question comes from Andrew Charles with Cowen. Please go ahead.

Howard Schultz:

Thank you.

Rachel Ruggeri:

Sure. What I'd say, Andrew, is that we do expect to have margin expansion in China, and that will be driven by the recovery as well as the growth we're seeing beyond recovery. But in terms of a margin expectation, we would expect margin to actually be different than what we saw in 2019 as you see the growth in digital. Just to give you an example, in 2019, digital was about 10% of overall sales in the market. It's now closer to 50%. So that has a different margin structure to it. We know it leads to more overall dollars in overall volume, but it does change the margin structure. But despite that, when you take China and where we're expecting from a recovery standpoint, both this year and beyond, that leads us to the solid margin expansion we're talking about for total company this year as well as the progressive margin expansion that we spoke about at Investor Day. So it will be one part of the whole collective that will allow us to have that expansion over the long-term.

Peter Saleh:

Great. Thanks. And Howard, I echo the congrats as well. I wanted to ask about the labor dynamic in China. I know you guys indicated tonight that there was some staffing challenges with the surge in COVID. But just trying to think in the months and quarters ahead, do you expect to see any staffing shortages. I know you've built a lot of stores since pre-COVID. Just trying to understand the staffing situation in that market and the ability to meet demand when it does return?

Belinda Wong:

Yes. Thank you for the question. The labor shortage from December was mainly because of our partners with COVID infections and there are all -- they have all returned back to work. We do not have any labor shortage issue, and we're ready to rock and roll in hiring more people to get ready for our new store opening. So and I just wanted to highlight the fact that we have been taking care of our partners in the last three years and this year and in the last quarter, you could see that we have all-time low turnover rate and people are staying with us. And so far, I don't see any issue at all with our hiring or our people staying with Starbucks. So thank you.

Lauren Silberman:

Thank you very much. I wanted to ask about Starbucks Rewards. So you continue to grow double-digits even at 30 million-plus members. How much opportunity do you think exists for further growth? And what are the barriers to transition non-rewards to reward members? And then just related, I know that you guys are planning to change the redemption value in the rewards program for the first time in a few years. Can you just talk about the reasons for the changes? Thank you very much.

Operator:

And your next question comes from Danilo Gargiulo with Bernstein. Please state your question.

Howard Schultz:

Frank Britt?

Howard Schultz:

Thanks Frank.

Jon Tower:

Thanks for taking the question. And best wishes to Howard on what's next. Curious if you could just two things. First, talk about any incremental pricing that might be planned for fiscal '23, particularly in the U.S., given that inflation while moving lower, in aggregate is still pretty sticky. Wondering your thoughts on pricing has changed? Then secondly, if you could dig into the progress the company has made on testing the Siren system in the U.S. and when investors can expect any sort of initial feedback on expected returns and say, the impact on stores going forward?

Sara Trilling:

Sure.

Rachel Ruggeri:

Yes. Thanks, Jon. So in terms of incremental pricing, our comp and our revenue in North America right now, largely in our U.S. business is benefiting from pricing that was taken in back half of last year. So we're benefiting from the annualization of that pricing. As we comp that this year, we'll start to see our pricing levels normalize more to historical level ranges than what we had seen previously. And typically, our pricing had been taken in line with inflationary pressures. So given that we're seeing inflation, we're still seeing inflation elevated relative to prior years below FY '22, but we're starting to see it soften slightly. So we don't have expectations that we'll have to further that pricing increase. And instead, what we'll see is, we'll start to see pricing normalize to more historical levels by the back half of the year.

Sara Trilling:

Yes, absolutely. So thank you for the question. So we're continuing to roll out equipment innovations to help make the work easier for our partners, and of course drive efficiency and ultimately enable partners to better serve our customers and do it with grace. I mean no more are we in a position to roll out single pieces of equipment over a multi-year time horizon. No way, no thanks. It just can't happen given the unbelievable demand that we're seeing in our business. And so, so far, we've deployed handheld order points in 54% of our stores, cold beverage labelers in 81% [indiscernible] espresso stations 94% and the new warming ovens in 90% of our stores. So all the sides kind of those handheld order points, which are very, very useful in drive throughs are going to be rolled out fully this year. And we're seeing the benefits of that across the board. Our drive-through window times, as example, are up, as is our Mobile Order & Pay uptime, just two examples of that. I think in Q1, we completed our automated ordering for food and lobby, which removed task time and freed up energy to again focus on customers. And we've got more in the hopper. We're really just getting started as we look to reinvention to continue to drive throughput in our stores. And in close, I'd just say, we've seen all-time highs in productivity.

Operator:

Thank you. The last question comes from Brian Harbour with Morgan Stanley. Please state your question.

Howard Schultz:

Michael?

Rachel Ruggeri:

And if I would just add, we continue to believe that channel development will be a mid-40s margin business, which is really strong, and that's what helps us in terms of being able to reaffirm our guidance on a full-year basis.

Howard Schultz:

I'd just add last word.

Howard Schultz:

Someone told me a week ago, this was my 108th not consecutive, but earnings conference call. I don't know if that's an award or not. But as many people on the phone that I've learned -- I've known many, many years, thank you for your friendship and support of Starbucks. This past year has been a gift for me. And I leave, I think, with the company, with the win that it's back with his tremendous leadership team. And Laxman, I'm thrilled that you're here. So thank you all very, very much. Really appreciate the opportunity, and thank you again for your friendship and support. Thank you.

Operator:

Good afternoon. My name is Diego, and I will be your conference operator today. I would like to welcome everyone to Starbucks' Fourth Quarter and Fiscal Year End 2022 Conference Call. [Operator Instructions] I would now turn the call over to Tiffany Willis, Vice President of Investor Relations. Ms. Willis, you may now begin your conference.

Howard Schultz:

Thank you, Tiffany. Well, hello from Milan. Today has been a very special day for me and a powerful emotional reminder of the intersection of my life and years with Starbucks. It was 40 years ago, walking the beautiful streets of Milan, that the inspiration for the possibilities of what Starbucks could one day be and mean around the world first struck me. And here I am, back in Milan, celebrating the early days of our beautiful, thriving business in Italy, a country in which no one expected Starbucks to succeed, on the very day of our global launch of holiday, an event that has become a phenomenon all over the world. So much of Starbucks' inspiration has come from Italy. And in Italy, our partner's dedication to the art of coffee, to the elegance and passion of coffee craft and to the delivery of a premium coffee experience to our customers, is being executed at the highest level. Italians have embraced Starbucks. Our top-selling beverage is actually a solo espresso, validating the quality of our coffee and the relevance of Starbucks customer experience that has defined us since Starbucks' founding in 1971. We recently opened our 20th store in Verona to record crowds, with Rome and Naples fast following in 2023. Milan and Italy are reflections of the premium coffee experience Starbucks is delivering to customers in cities and countries everywhere as demonstrated by the very strong Q4 and fiscal 2022 financial and operating performance Starbucks reported this afternoon. In Q4, Starbucks grew global revenues 11% over prior year to a quarterly record of $8.4 billion driven by 7% comp growth globally and 11% comp growth in North America. For the fiscal year, we grew global revenues 13% over prior year to a record $32.3 billion driven by 8% comp growth globally and 12% comp growth in North America. We also grew our global store base 6% in fiscal '22 and ended the year with roughly 36,000 stores in 83 countries. Today, Starbucks serves over 100 million customer occasions from our retail stores around the world and across all channels, delivers over 400 million customer coffee occasions globally every week. We continue to manage the business through today's challenging operating environment, more mindful than ever of the unprecedented global economic uncertainties and challenges confronting our customers. Our strong performance in the quarter and year is particularly gratifying, in that it underscores the relevance of the Starbucks brand and the strength of our relationships with our customers around the world in the face of these unprecedented challenges. We saw strong demand for Starbucks coffee in Q4 and throughout the year in every market and channel in which we operate. We are encouraged by the early signs of recovery we saw in China in Q4, where innovation, increased customer physical and digital engagement with the Starbucks brand and the relaxing of COVID restrictions, drove solid positive sales momentum and sequential quarterly improvement. The speed with which our business in China accelerated in Q4 and the strong positive correlation between Starbucks revenue growth and the relaxing of COVID mobility restriction reinforces our confidence in Starbucks' long-term growth opportunity in China. However, as you know, over the past few weeks, there has been a significant resurgence of COVID in China. With the resurgence has come renewed lockdowns and mobility restrictions pursuant to China's strict zero-COVID policy, including in many cities in which we operate, meaningfully reducing traffic in our stores. We anticipate the current COVID-related uncertainty to continue and repeat the view we shared on our Q3 call and our Investor Day, that while our long-term aspirations for China remain undiminished, we expect the recovery of our business in the country to be nonlinear. I'll spend more time on China in a few minutes. In fiscal 2022, we drove meaningful growth in our global customer base. In the U.S. alone, we grew our unique customers 9% year-over-year, and our U.S. customers are engaging more deeply with the Starbucks brand as evidenced by a 16% increase in U.S. Starbucks Rewards membership year-over-year to nearly 29 million members, up 5% over Q3. Today, Starbucks is connecting to more customers more deeply, both in the U.S. and around the world, than ever before, ideally positioning us to drive further acceleration in revenues and comps in the quarters and years ahead. Our performance supports our confidence in the ambitious growth agenda we announced in September, in which we will be adding roughly eight new stores per day, delivering best-in-class returns around the world every day for the next three years, bringing us to nearly 45,000 stores globally by the end of fiscal 2025. Our Q4 results also demonstrate evidence of early but highly encouraging benefits from reinvention plan investments we detailed at Investor Day in September. And as you will hear from Frank Britt, our Chief Strategy and Transformation Officer, we have clear line of sight to a full array of benefits reinvention will deliver in the quarters and years ahead. Following Frank, Sara Trilling, a 20-year Starbucks partner, who recently took over leadership of our North American business after having successfully led Asia Pacific for the last four years, she will provide insights into our business in North America today and what to expect in the quarters ahead. Then Rachel will highlight our financial and operating performance in Q4 and for the year and provide guidance for the year ahead. And finally, we will end the call with Q&A. When fully rolled out, Starbucks' reinvention, co-created in partnership with our partners across the country, will touch and elevate every aspect of our Starbucks partner, customer and store experiences. Last week, 2,000 Starbucks leaders from across U.S. and Canada converged in Seattle to coalesce around reinvention and take it back to their local markets. I don't think I've ever seen greater engagement in over 40 years of a more positive response to any Starbucks gathering in our history. Reinvention investments will make it easier for our partners to do their jobs, better enable partners to satisfy growing demand in our stores and provide greater opportunity for our partners to engage with our customers. Reinvention investments are already having a measurable positive impact on our business and operations, most notably in terms of improved partner retention, increased speed of service and an elevated customer experience. And I'm particularly pleased that reinvention investments are bringing coffee excellence, coffee craft and joy and a little bit of love back into being a Starbucks Barista. Key to Starbucks' success and the foundation of our long-term growth strategy is Starbucks' continued global leadership around all things coffee and espresso, hot and cold, Starbucks' core. In Q4, we continued to grow from our core, innovate, introduce new levels of customization and premiumization and extend our global coffee leadership in both the hot and cold beverage categories, with an emphasis on cold coffee, a category we single-handedly created and are growing around the world. Customer demand for customized, handcrafted Starbucks cold beverages is so strong that, today, cold coffee beverages account for 76% of total beverage sales in our U.S. company-operated stores. And customers are increasingly further customizing their cold coffee beverages by adding high-margin beverage flavor modifiers to create unique beverages tailored to their own particular taste preferences. We also continue to introduce innovative new core hot coffee and espresso beverages and innovate around iconic platforms, like pumpkin spice, up 17% over last year driven by increased customization, including cold foams. As part of reinvention, we are rolling out a new, completely proprietary, handheld cold foamer that enhances beverage quality and increases speed of service while reducing complexity for our partners. The response from our partners has been overwhelming. Our growing base of new U.S. customers and Starbucks Rewards members, combined with very strong customer response to our innovative hot and cold beverage lineup to deliver the highest net sales week in our history in September. Let me just repeat that. In our history, we had the biggest sales week in September. The strength of our business as we exited September, coupled with a fantastic holiday lineup kicking off today, with our stores turning red, holiday favorites on the menu and the return of our iconic red cups, gives us tremendous confidence heading into holiday in 2023. In North America overall, the combination of customer shifts towards premium hot and cold beverages, increased customization, strategic decisions around beverage, food and modifier pricing and an 18% increase in food sales drove net revenues up 15% year-over-year to a record $6.1 billion. Once again, our convenience channels, drive-through, Mobile Order & Pay and delivery drove 72% of our total sales volume. Starbucks Rewards members drove a record 55% of tender in our U.S. company-operated stores in Q4. Starbucks Rewards continues to deliver value to our customers, enable customer connection and drive our business. And despite its global scale and growth, we have significant untapped opportunities to grow our Rewards program in a very unique way. We recently launched our Reward Together program, enabling a select group of leading brands to partner with us by linking their loyalty program to Starbucks Rewards. Through Reward Together, we will engage and reward members of both brands with new benefits and experiences that will make our Rewards program even more valuable, drive membership and increase customer lifetime value. Our first U.S. partnership with Delta Airlines launched last month to an extraordinary customer response. Both Delta and Starbucks were overwhelmed with what took place. And in September, we announced Starbucks Odyssey, our next-generation loyalty model that integrates NFTs with Rewards. Starbucks Odyssey will enable us to connect even more deeply with customers and give our customers the opportunity to earn and purchase digital collectible assets that will unlock access to new benefits, a digital community and immersive coffee experiences that they cannot get in any other place. Customer response to Starbucks Odyssey has been overwhelming. You will hear more about the Starbucks Odyssey in a few weeks when our first wave of customers have an opportunity to explore this new exciting way to experience and connect with Starbucks. The numbers that we will release in terms of the response will surprise many of you. Our fast-growing 6,600 North American-licensed store business posted very strong results in Q4, with revenues up 25% in Q4 and 29% for the year. We are proceeding with the rollout of [Starbucks Connect] across the U.S. licensed store portfolio. Starbucks Connect enables licensed stores for the first time to offer the full array of Starbucks' Mobile Order & Pay and Rewards benefits. And as you will hear from Sara, the 1,600 licensed stores that have adopted Starbucks Connect are seeing a significant lift in business since adoption. Starbucks Connect enables us to capture demand across our broader portfolio and will be highly accretive to our business. The momentum we saw in our International segment coming out of Q3 continued in Q4, with revenues for the quarter up 12% to $1.8 billion on a constant currency basis. For the year, revenues grew 9% year-over-year to $6.9 billion, also on a constant currency basis. We added 518 stores during the year and now operate nearly 18,500 stores around the world. We are sensitive to the challenges that the rapid increase in the value of our dollar is posing to our International licensees and remain in close contact as we work together to navigate the dynamic environment that we are all operating in. Turning to our Channels business. Starbucks is the number one share in U.S. at-home coffee. Starbucks is the number one share in global ready-to-drink coffee, and continued growth in our Global Coffee Alliance with Nestle combined to deliver strong performance in Q4, with revenues increasing 18% on a constant currency basis to $484 million. For the year, revenues also increased 18% to $1.8 billion on a constant currency basis. Now let me begin the discussion around China by saying that Starbucks has been in China for 20 years and that our aspirations for our business in China has never been greater. We have over 6,000 stores in China today. And as Belinda shared at Investor Day, we have close to 9,000 stores -- we will have close to 9,000 stores by 2025. We will be opening our Starbucks China Coffee Innovation Park, including our largest coffee roasting and packaging plant outside the U.S. in summer 2023. Starbucks employs over 60,000 passionate, dedicated partners in China. Our partners are deeply engaged with their customers and demonstrated by today's record high customer connection scores. We continue to be an employer of choice and lead the way in partner investments, recently introducing a 14th month bonus for all full-time partners. And we continue to invest in China to create career and opportunity paths for our partners and to support the communities we serve. We also continue to expand our customer base in China and deepen our digital connection to customers. Active Starbucks Rewards membership grew 29% sequentially in Q4 over Q3 to over 17 million members, just below historic levels, coinciding with the lifting of restrictions and reflecting the relevance and underlying strength of the Starbucks brand in China. Mobile ordering sales mix, nonexistent prior to 2019, drove 44% of mix in Q4. Delivery, up 35% year-over-year, now representing over 24% of sales. We expect mobile, digital, loyalty and delivery to continue to grow and drive our business. However, we are ultrasensitive to the evolving macro challenges that have surfaced regarding China, particularly in connection with the impact of the zero-COVID policy. But our strong belief in China is based on our success in the country and our commitment to playing the long game. We are confident that when COVID disruptions affecting the country abate, Starbucks will emerge not only as the undisputed leader in our category, but likely the number one Western consumer brand in the country for having continued to meaningfully invest in our partners and in our business throughout the pandemic and despite the disruptions. Laxman's immersion is going spectacularly well. He's visited and worked in stores in the U.S. and U.K., quickly connecting and winning the hearts of Starbucks partners wherever he goes, just this week earning his Barista certification in record time and store Green Apron. Laxman's commitment to becoming intimate with store operations and our partner and customer experiences reflects our mutual understanding of what is most important in these early days of his joining Starbucks. He and I engage daily as he absorbs more and more about the company and our business. And the Board, leadership team and I are all deeply invested in his success. I cannot be more confident that Laxman is the right CEO at the right time for Starbucks. Today, Laxman has a front-row seat as we launch our all-important holiday season. Soon, along with our leadership team, he will be leading the company, bringing reinvention to life and guiding Starbucks to the next chapters of our storied history. In closing, Starbucks has never been financially stronger, better positioned or more confident in our future as we enter Q1 and holiday and embark on the exciting new era of growth ahead. With that, I'll turn the call over to Frank. Frank?

Sara Trilling:

Thank you, Frank, and good afternoon, everyone. I'm Sara Trilling. I'm pleased to join you today for my first earnings call in my new role, leading the North America business. While I'm relatively new to this particular role, I'm a 20-year partner and most recently served as Senior Vice President of Asia Pacific. Over my Starbucks career, I've touched nearly every aspect of the business and have served many leadership positions across a variety of functions, including store development, retail operations, product and marketing. And I'm looking forward to applying the relevant breadth and depth of my experiences to this next phase of growth in North America. To build on some of the comments from Frank and Howard, we continue to see very healthy growth in our North America business. As we highlighted at Investor Day, we saw the highest net sales week of all time with the launch of our fall promo. And I'm pleased to share this subsequently led to an incredibly strong September, with the three high sales weeks in our history. Our strong quarter, comparable sales of 11% and revenue growth of 15% were largely driven by a record-breaking fall launch, coupled with continued strategic pricing actions and increased food attach as well as the shift to more premium beverages and a growing demand for personalization in both company-operated as well as licensed businesses. Elevated from pre-pandemic levels, we maintained ticket comp strength in our U.S. company-operated business at 10%, representing our fifth consecutive quarter of increased ticket comp. These results reflect the continued strength in demand for Starbucks as our customers fell into their new normal routine and behaviors. We fully expect the momentum from our record fall launch to continue as our highly anticipated holiday at Starbucks launched just today and include some great seasonal offerings. What gives us further confidence in the holiday season is the strength of the Starbucks brand with younger, more diverse customer groups. More than half our U.S. customer base is Gen Z and Millennials, reflecting relevancy and brand love across generational cohorts, trends we see with diverse customer cohorts as well. We are incredibly pleased with our momentum in the business and the reinforcement of our strategy in the following key areas. First, we've established sustained relevancy of the Starbucks brand in customer loyalty. In fact, Starbucks is consistently, quarter-over-quarter, the leader in market share, first choice and past 30-day visitation when it comes to an away-from-home coffee occasion as measured by our brand equity tracker. We're also pleased to share that customer connection scores have increased 5 points versus pre-pandemic levels. The strength of the brand is further illustrated by the success of our iconic pumpkin spice platform, which grew 17% year-over-year and continues to resonate with customers who love the classic Pumpkin Spice Latte as well as newer additions, such as the Pumpkin Cream Cold Foam modifier. Second, our cold customized beverage strategy is working. We're seeing growth in both hot and cold and increasing customization. In Q4, more than 60% of beverage units sold in the U.S. company-operated business were customized, contributing to the $1 billion and growing annual net sales for modifiers, representing growth of 2x since the first fiscal 2019. Finally, we reinforced our unique position in providing experiential convenience as evidenced by all-time highs in Starbucks Rewards engagement amid Mobile Order & Pay orders. The Starbucks Rewards program in the U.S. grew 90-day active members, ending FY '22 with nearly 29 million members. This represents growth of 16% year-over-year and 55% of our U.S. company-operated revenue in the quarter, up nearly 4% from prior year, representing the highest-ever percent of tender. Mobile Order & Pay surpassed 26% in Q4 for the first time in a quarter, finishing fiscal year '22 at 25% of total transactions. We're incredibly optimistic about our continued momentum in digital, following the unprecedented interest in Starbucks Odyssey, the integration of NFTs with our industry-leading loyalty program to create an accessible Web3 community that brings unique aspects of our brand to life in a new way. We also experienced a wildly successful launch of Reward Together with Delta. With this partnership, our Rewards members are able to earn miles faster through their everyday purchase at Starbucks and earn even more Stars on days when they travel with Delta. The initial response from customers has been extraordinary and beyond our expectation, and this is just the start. Importantly, we finished the year with nearly 25% of our U.S. license portfolio live with Starbucks Connect, allowing us to create a seamless digital experience across our stores, giving customers more ways to connect with our brands, furthering the value of the rewards experience. As part of our reinvention and as we shared at our September Investor Day, we're investing in equipment to innovate for an improved partner and customer experience. We have completed the deployment of Starbucks Cold Brewer and have rolled out the Mastrena 2 espresso machine and new warming ovens to nearly 95% and 72%, respectively, of our stores across the U.S. This equipment collectively supports improvement in our throughput during both peak and full day, while providing the foundation to support elevated partner and customer experiences as we further reinvention plan investments and productivity. The rollouts for these three items will be completed by fiscal year '23 for our company-operated stores. Additionally, we rolled out nearly 60% of our handheld point-of-sale investments to nearly 75% of our cold beverage labelers. Handheld POS is already helping us capture new and latent demand in support of our ambitious revenue expectations. And we expect to see further benefit as we extend the rollout for handheld POS into fiscal year '24. While still in the early days of development, partner and customer reception of the new Siren System innovation we shared at Investor Day is overwhelmingly positive, including the Clover Vertica brewer and the new proprietary on-demand cold-pressed Cold Brew technology. We expect to begin rolling out Clover Vertica brewer later in this fiscal year, with our broader Siren System innovations fast following in fiscal year 2024. Through our investments, we're giving our partners more time to focus on coffee craft and connect with customers, enabling them to continue delivering experiential convenience in a way that only Starbucks can. The powerful unlock is our reinvention positions us for sustainable, profitable growth over the long term. In fact, just this last week, we welcomed nearly 2,000 retail leaders from U.S. and Canada to Seattle for our District Manager Leadership Experience. This powerful three day event is designed with great intention to provide a renewed understanding of the critical role each leader plays in our business and with our people and equip them fully to lead their stores and store partners through our reinvention and into our future as we all breathe life into this reinvention plan. To close, what I would leave you with -- is with this. This is an incredibly exciting time to lead our North America business. While the macro environment may have uncertainty, our performance is once again demonstrating the strength and resilience of our brand and our business. We are well positioned in this environment, which will only further strengthen as our reinvention comes to life. I'll now turn it over to Rachel.

Operator:

[Operator Instructions] Your first question comes from Andrew Charles with Cowen. Please state your question.

Howard Schultz:

Thank you for the question. This is Howard. I'm sitting with Brady Brewer, Chief Marketing Officer of Starbucks, and he'll take your question. Brady?

Operator:

Thank you. Your next question comes from Jeffrey Bernstein with Barclays.

Howard Schultz:

Thanks, Jeff. Well, let's try and kind of go through the question based on our history, what we've seen in the near term and why we're so confident. If you go back many years, although this is an unprecedented time, we have demonstrated, time and time again, that there is an affordable luxury to Starbucks that our customer base has been willing to support and the loyalty to Starbucks continues. Now in the past, we did not have the inherent benefit of the Rewards program, which as you heard in our prepared remarks, is generating significant revenue for Starbucks, which is highly predictable, and a relationship with that customer base is extremely loyal. The other thing that's different from the years past and which gives us so much confidence is that we've always monitored whether or not our customer base was getting younger every year. We've never wanted to see our customer base get generationally older. We wanted to see it get younger. Not only has it gotten younger, but that young customer, that Gen Z customer, tends to have significantly more discretionary money at their disposal. And their loyalty to Starbucks has been quite significant and predictable. Then you have the pricing power of Starbucks, which we're certainly not going to try and raise prices during this time. But certainly, we've demonstrated, over the last 12 months or so, that we've got almost 6% price increases and we haven't seen the loyalty and the transactions abate. I think customization, which we spoke a lot about in our prepared remarks, is obviously giving us -- and the ticket is becoming more accretive as a result of the modifiers, and those modifiers seem to be more consistent and greater with cold beverages, which is now over 75% of the U.S. business. And then I think we look at the promotional plan that we have for the balance of the year and we look back on our history in terms of the beverages that have succeeded, we look back on the short-term history in terms of what beverages have really been home runs, and I can honestly say we sat through a beverage lineup of innovation a few weeks back and we really had to cull the amount of beverages because we knew we couldn't handle it because there were just too many that we felt so good about. The last thing I'd say, and this is not as quantitative as I would like but it's real, is that during the pandemic and certainly in the last year, Starbucks has picked up consistently -- consistent market share, both in our category and our ability to intercept traffic as a result of the strategic nature of our real estate multiple formats, and we certainly can't avoid this conversation and not talk about the overwhelming success in revenue and how accretive drive-throughs have been. And so net-net, we're highly concerned and humbled by the environment. There isn't a day that goes by in which the lens of every decision we're making is not made -- is made through the concern of what's happening in America and around the world. But we feel that we've got the resources and the know-how, the history and the innovation to produce the kind of numbers that we feel very confident about. Thank you.

Sara Senatore:

Hi, thank you so much. I have a question and then a follow-up, please. So the question is really about, you just mentioned the premiumization and customization and how that seems to be more common with cold beverages. I guess that feels like it's been a tailwind for a little while now. How much further can you push this, if you will? So cold accounts for 76% in total. How much higher can that be? And as you think about customization, you could share sort of what percentage of orders are customized or something that could give us a sense of how far along you might be in that penetration throughout.

Sara Senatore:

I'm sorry. And just a question about China. I just wanted to clarify, as you talk about the restrictions, it's really about mobility, not about challenges in opening new stores. Thanks.

Brady Brewer:

Yes. I think the -- as Howard said, hot coffee is growing, but cold beverage, over the last few years, has just accelerated, and that added an entire stack of sales volume into the stores. What we're seeing, and Sara mentioned, is that the cold-customized plant-based beverage platform is particularly appealing. The younger you go, the colder the beverage. We've seen significant year-over-year growth in Iced Espresso, which is our biggest product category. We're continuing to now see growth in hot espresso. Refreshers, Nitro, Cold Brew are all growing significantly. But as Howard said, modifiers have grown in double digits year-over-year. Now over 60% of our beverages are customized. And why is that important? It's important because what our customers have discovered is that their favorite beverage is not possible to buy anywhere else. I think that links to the earlier question about navigating rough times too, is this is a beverage you can only get at Starbucks and you can't make it home. And increasingly, customization has enabled that in our stores. So we're just getting started. Lots of growth opportunity ahead.

Lauren Silberman:

Thank you for the question. I wanted to ask about China. Can you talk about your composition of locations in China across Tier 1, Tier 2 and lower-tier cities and just in terms of unit growth, where you're growing across those tiers? And then any color you can provide on trends you're seeing in Tier 1 versus other cities would be helpful. Thank you.

Belinda Wong:

Thank you, Howard. Thank you for the question. Starbucks continues to lead the market in brand share and preference, fueled by our premium positioning, a competitive advantage founded on the exceptional coffee experience delivered by our partners and the deep connections cultivated with our customers. We're very delighted to see the robust growth of the -- of China's coffee market in recent years with the entry of new brands and players. Different brands offer different value propositions, targeting different segments and locations, but together, we'll accelerate coffee culture and overall category adoption. In terms of our new store development strategy, as I have shared during Investor Day, we will build -- we will follow our purpose-built store strategy. And we will go deeper into optimizing our store portfolio, increasing the density in key trade areas in our top 20 cities, in the existing cities that we're in. And we'll also go wider into entering -- continue entering into new cities that we're not in yet. There are plenty of opportunities to grow in those two areas. And thirdly, we will go smarter. We have a very strong store development system that's built by our incredible team in the local market. Powered by data, we have more accurate data to understand where we should be opening the format and the size, and not just the third place experience, but we're able to accurately project where is best placed in terms of our new stores to fulfill omnichannel customer needs in all the cities, be it new or existing cities that we operate in. And lastly, we're going to go greener. As I've shared before during Investor Day, we're going to open 2,500 greener stores by 2025 as part of the portfolio. So we're very confident in the way we're going to grow our new stores and comprehending the increase in the China market. Thank you.

John Ivankoe:

Thank you. For several calls now, we've been talking about the record number of discrete customers that Starbucks has. And obviously, that's very admirable to be able to talk about that, just having the breadth of the customer base. And I would like to put that in context, 55% on MSR. Presumably, that's a customer that you could get to come to your brand a lot, in other words, to actually have increased frequency relative to the brand of the past. So can you talk about the frequency opportunity that you have, I mean, I guess, in two parts? I mean, one, you're kind of bringing back that 2019 customer to come back as often today as they used to three years ago, kind of the first part of the question. And then, secondly, what are the frequency-driving opportunities that you have for some of the new customers? I mean talk about that as both part of the MSR program as well as other initiatives that you may have.

Brady Brewer:

Sure. Thank you, John. While transactions are still lower than FY '19 or pre-COVID levels, what we are seeing is transactions continue to grow. And what is -- a part of this is that products sold, as measured by units per store per day, have been consistently higher than FY '19. So what we're seeing is more group orders. Starbucks Rewards frequency is a function both of our SR members visiting frequently, but we're also adding so many new members. And what we're doing is acquiring customers who are lower frequency and bringing them into the program, which helps increase their frequency. The SR program tends to see a very significant increase in frequency in the first year of membership. And so SR is a strong driver of that for us.

Jon Tower:

Great. I just want to follow up on the China recovery. And curious to understand what's embedded in your expectations for the year for the China outlook. Specifically, it sounds like, obviously, you're betting in your guidance the idea that there's a reopening in the back half of the year. So what's the risk to the numbers, particularly the comp and the earnings recovery in the back half of this year should COVID -- zero-COVID policy stay in place?

Rachel Ruggeri:

Yes. Thank you for the question. The way we've considered the recovery in China is really, as we said in the beginning, based on mobility. And so when we talk about an outsized performance in the back half of the year, it's as we lap the severity of the lockdowns. So even though there may still be challenges, if you recall, we have, towards the end of Q2, started to see the severity of the lockdowns with a negative 23% comp in that quarter, followed by a negative 44% comp in the following quarter. So we're basing our expectations of recovery based on the laps and the increased mobility. Certainly, there's -- as we've indicated today, it's nonlinear, but that's how our actual assumptions for recovery are based, which is part of our guidance.

Belinda Wong:

Yes, yes. Let me just add to the fact that how pleased we are to see a solid sequential improvement in Q4 in terms of our revenue and comp sales growth. It's humbling to see what a strong positive correlation we're seeing between easing restrictions and our business recovery. I mean the incredible sequential improvement on our 90-day active members enthusiastically coming back to our stores as soon as the mobility restrictions eases, it really gives us a lot of confidence on our ability to rebound as soon as the mobility restrictions are lifted. So I just wanted to add that. Thank you.

Belinda Wong:

Yes. Despite the short-term COVID disruptions, as we shared at Investor Day, we remain laser-focused on executing our China growth agenda with great discipline and confidence, right? As you heard, we achieved record high-quality new store growth. And now, we have 6,021 new stores across 230 cities, and those new stores continue to achieve best-in-class returns and profitability. We also focused on our fast-growing omnichannel business, and that continued to gain great momentum. As Howard shared, Starbucks Delivers, sales grew 35% year-on-year to a record 24% of our sales mix. That's pretty incredible. And total mobile ordering sales mix now reached 44%. That's something we're very pleased to see, and it's going to be here to stay as we unfold more occasions from our customers. Customers' engagement, as I said before, Rewards active members coming back, we're very pleased to see that. And that's really close to our historic high as well. And we are achieving the highest customer connection score. Our partners are really on the ground, serving our customers. We're learning every day as to how to operate our stores better. We're increasing our muscle and our operational capability. We're getting smarter in our supply chain and our store development. So I'm very pleased to see. And also, one more thing. In terms of our partner engagement, we have achieved record-low full-time retail partner turnover in FY '22. That really demonstrates the partner investments that we have made over the past years are really paying off. So we're very humbled and -- but well positioned and excited to capture the future growth opportunities. Thank you.

John Glass:

Thanks very much. On the reinvention plan, inside of '23, can you help us prioritize what you think drive sales the most? You talked about retention improving. You've talked about some equipment upgrades. If there's a way to sort of rank order what you think sort of benefits the business, or if there's a cadence, should we think about certain of these initiatives benefiting one part of the year versus the other? And inside of that, can you just talk about speed of service and where you are, where you want to be? It would seem to me, just based on personal experience, that that's still an issue and maybe a gating factor to unlocking greater traffic growth over the next couple of quarters. Thanks.

Frank Britt:

Sure. The partner experience as the core of the operating model of Starbucks is designed to drive retention, improve connection scores, both to the partner and customer. And the secondary effect, to answer your question about top line growth, is it creates more capacity that allows us to capture that incremental demand that sometimes is challenged in the current operating environment. And so the core of the reinvention agenda, of course, is the combining of innovation around store, customer and partner. But at the end of the day, it's designed to give us the capacity to engage the customers how they want to be engaged, in service of supporting their needs and ultimately, the performance.

Operator:

Thank you. Your next question comes from David Tarantino with Baird.

Howard Schultz:

Sure. I'll start and respond, and then I'll give it to Michael Conway, who runs International. I think Starbucks has some very unique long-term relationships that go back, in some cases, in terms of the Middle East, Mexico and Latin South America, Korea, some of these relationships go back 25, 30 years. And there's others. And so there is a tremendous level of loyalty, friendship that we have well beyond the business relationship. So we're in constant contact side-by-side with our partners to ensure the fact that they know that if something did come up, we would be a backstop and be there for them. That has not, in any way, been the case, and they have not indicated anything. But we certainly want to be the kind of partner that we can look back on with great pride that we were there for them. I'll give it to Michael Conway, who is working side-by-side with them every day.

Operator:

Your next question comes from Nicole Miller with Piper Sandler.

Howard Schultz:

Why don't Frank and Sara take a shot at that? Thank you for the question, Nicole.

Howard Schultz:

Thanks, Frank. And Sara?

Operator:

Thank you. The last question comes from Danilo Gargiulo with Bernstein. You may ask your question.

Howard Schultz:

Brady?

Danilo Gargiulo:

No. That was about the Starbucks system as a whole, so the 9% -- 7% to 9% unique customers that you've seen this quarter.

Howard Schultz:

On behalf of all of us at Starbucks, I wish you and your families a wonderful Thanksgiving vacation, and we look forward to speaking with you at the end of Q1. Have a great holiday season. Thank you very much.

Operator:

Good afternoon. My name is Alex, and I will be your conference operator today. I would like to welcome everyone to Starbucks Third Quarter Fiscal Year 2022 Conference Call All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to Tiffany Willis, Vice President of Investor Relations. Ms. Willis, you may now begin your conference.

Howard Schultz:

Thank you, Tiffany. Good afternoon, and welcome to everyone on today's call. Starbucks' strong Q3 results highlighted by 9% global revenue growth to a record $8.2 billion, 3% global comp growth and 9% comp growth in North America once again demonstrates the power and resilience of the Starbucks business and brand all over the world. I've now been back as CEO for four months. During that time, I've immersed myself in every segment, region, operation and aspect of our business. And given my long history with the Company and our culture and my unique understanding and appreciation of the Starbucks brand, the drivers of our global business and the special relationship that exists among our people, our brand and our customers, we've been able to pinpoint the source of each of the issues and challenges confronting the Company upon my return. Some are definitely COVID related, some were a function of not focusing on the long term, and unfortunately, many were self-induced. More important, we now have clear line of sight on what we need to do to totally reinvent the Company and drive accelerated profitable growth around the world. The Q3 results we announced today demonstrate the early progress we have made in just four short months and served as a proof point of the significant long-term global growth opportunity ahead for Starbucks. Each business segment contributed to our Q3 performance. I'm particularly pleased that we delivered our results in the face of stiff ongoing consumer economic and inflationary headwinds. COVID lockdowns across China that kept Shanghai, our largest China market, largely closed for two months, and that continues episodically today, and continuing shifts in customer traffic and behaviors including materially reduced office occupancy in our largest urban markets. Our Q3 performance underscores the success of the investments we are making in our people, extending our global leadership around everything coffee and in groundbreaking beverage, food, digital and technology innovation that is deepening our connection to customers in every market and every channel. And our performance demonstrates that the Starbucks Experience is more relevant and important than ever in today's unsettled world. On today's call, I will highlight the drivers of our Q3 revenue comp and EPS performance. I will then turn the call over to Frank Britt, our Chief Strategy Officer, to provide an overview of our reinvention plan, the strategy underpinning the investments we are making to materially elevate our partner, customer and store experiences. Next month, at Investor Day in Seattle, you will see for yourselves how accretive to our business our reinvention plan will be, increasing efficiency, enabling us to seamlessly handle the increasing demand in our U.S. stores and most of all, elevating our partner, customer and in-store experiences. Our reinvention plan touches every aspect of the Starbucks Experience and sets us up for accelerated long-term profitable growth and value creation benefiting all stakeholders beginning in 2023. We are executing against the reinvention plan with focus, with discipline and a deep sense of urgency. Next, Belinda will update you on China, where our position in the market and our aspirations for the future have never been greater. Rachel will provide a deep dive into our Q3 financial and operating results, and then we'll move on to Q&A. For to Starbucks' success and long-term growth strategy is our global leadership around everything coffee. No company in the world even remotely approaching Starbucks' ability to source, blend, roast and craft the world's best coffees. And in Q3, we continued to extend our coffee leadership, innovate and bring further elements of customization and premiumization to the entire coffee category, including around cold, handcrafted and plant-based coffee beverages. Customer demand for specifically customized cold coffee beverages, a category Starbucks single-handedly created and is now expanding around the world, is so strong that cold beverages now account for roughly 75% of our total beverage sales in U.S. company-operated stores. Customers are increasingly customizing their cold beverages by adding modifiers that enable the creation of a virtually unlimited range of taste, flavor and color profiles, and then sharing their unique coal beverage creations with the world through social media. Starbucks' unique ability to deliver handcrafted, customized cold beverages that satisfy customer desires and different need states while creating opportunities for customers' self-expression deepens our connection to customers, sets us apart from any other industry participant and provides us with a significant ongoing competitive advantage in the marketplace. Iced Shaken Espresso introduced onto our Iced Espresso platform only last year, is resonating so wildly with our Gen Z customers that it has already become the fastest-growing product category in our U.S. company-operated stores, growing 50% year-over-year, more than doubling year-to-date and importantly creating new customer occasions in the midday and afternoon day parts. Iced Shaken Espresso was also resonating around the world. In China, for example where Iced Shaken Espresso was only introduced in June of this year, it is already among our best-selling iced coffee beverages despite mobility restrictions in China. Just to summarize what's going on with cold and specifically customized beverages. The premium customized cold coffee opportunity ahead for Starbucks all around the world is simply enormous. Let me turn to North America. The very strong demand for Starbucks Coffee in the U.S. that we reported on our Q2 call has accelerated in Q3. U.S. company-operated stores delivered record average weekly sales, 5 of the top 10 grossing sales day in our history and a $410 million sales week. In North America, overall, the combination of customer shift towards premium cold beverages, increased customization, strategic decisions on our part with regard to beverage and food and modifier pricing and a 19% increase in food sales, driving net revenues up 13%. In addition, our North American licensed stores business, now 7,000 stores strong and growing, also posted strong results with 24% revenue growth in the quarter. While we are sensitive to the impact inflation and economic uncertainty are having on consumers, it's critically important that you all understand we are not currently seeing any measurable reduction in customer spending or any evidence of customers trading down, reflecting the strength of the Starbucks brand, deep customer engagement and loyalty, pricing power and the premium nature of our beverage and food offerings. What's driving some of the increase in traffic and the strength in our business is our Rewards program. Active Starbucks Rewards membership in Q3 totaled 27.4 million members, up 3.2 million or 13% year-over-year and 3% sequentially. Our loyal Starbucks Rewards members drove a record 53% of U.S. company-operated revenue, Mobile Order & Pay, drive-through delivery also remained quite strong, driving 72% of our U.S. revenue. Increased Starbucks Rewards membership, customer excitement over our beverage and food offerings, plus a fantastic holiday lineup that I'm certain will delight our customers gives us tremendous confidence heading into holiday and 2023. My first order of business upon returning to Starbucks in April was to meet with Starbucks retail store and roasting plant partners across the United States in order to better understand the state of our business and the challenges confronting our partners and the Company. It soon became clear that record demand in our stores was masking significant underlying issues, including, as we shared in our last call, store designs that were ill suited to the evolving customer behavior and traffic patterns we are seeing post COVID. Our stores, in many ways, are windows on America, and our partners everywhere shared similar anxieties over a wide range of issues, affecting their families and their lives around safety, around mental, physical and financial health issues over the widening cultural and racial divide in the state of our country and the world. Many questions whether the American Dream and economic mobility was still realistic aspirations. Our partners also shared how hard it had become to keep up with customer demand and how insufficient training had left new partners unprepared for their roles, challenging partner and customer experiences alike. The conversations were raw and in many ways, painful for our leaders to hear. But core to Starbucks culture is the requirement that we always speak with each other with honesty, transparency and without judgment or fear of appraisal. The truth is, at times, I was overwhelmed by what I heard. The challenges, the fears, the desire for emotional and financial security and the sense of belonging in our partner's lives amid an all uncertainty world. At the same time, I found myself feeling so proud, so appreciative and oftentimes in awe of our partners across the country who showed up every day committed to delivering an elevated Starbucks Experience to our customers and communities despite the personal challenges and obstacles they were experiencing. We were in a moment where Starbucks leaders needed to put themselves in the shoes of our partners and demonstrate great empathy and compassion towards them. And we needed to address our partners concerns with urgency. What began as informal partner meeting soon evolved into focused co-creation sessions where Starbucks partners and leaders collaborated on how best to re-imagine the next Starbucks. We've since held over 100 co-creation sessions. And from these sessions, our reinvention plan has taken shape. Today, over 30 cross-functional teams are focused exclusively on executing the U.S. reinvention plan you will see take shape over the quarters ahead. And in time, you will see best practices shared around the world. We assembled our 200 top U.S. executives in Seattle last month to kick off Starbucks reinvention and change agenda. In a few minutes, Frank Britt, a key architect of the plan, will provide you with an overview so you can begin to understand how accretive each pillar of the plan will be to our business and brand long into the future. The strong revenue growth we delivered in North America in Q3 is being replicated globally. With the exception of China where the Zero COVID policy continues to result in mobility restrictions and limited store operations, each one of our international regions grew revenues by double digits in Q3. It's an extraordinary accomplishment, reflecting both the strength of the Starbucks brand and strong and accelerating demand for Starbucks coffee all over the world. Our international performance also underscores the correctness of our strategies of investing ahead of the curve in beverage, digital and technology innovation that is relevant to our customers in driving new store growth in every market in which we operate. Overall, our international segment, excluding China, grew revenue 33% year-over-year or 50% excluding FX, while meaningfully expanding operating margin, reflecting the strong operating leverage inherent in our complementary portfolio of company-operated and licensed stores. Last month, several Starbucks leaders joined me on a multi-country tour across several strategic theaters of our EMEA business. In every country we visited, we were inspired by what we heard, felt and observed, product quality, service execution and knowledge of coffee across EMEA are all delivered at the highest levels. Our EMEA teams are executing well, we think together a powerful emotional connection and sense of belonging among our partners and customers with the Starbucks Experience being the shared medium of exchange. And our EMEA partners are literally thriving, inspired and earnestly engaged in bringing our unique culture of respect, purpose, service and an authentic and aspirational love of coffee to life. Interestingly, while thousands of stores in many countries drove strong financial performance during the quarter, I want to showcase one market in particular that serves as a proxy for the strength of the Starbucks brand and demonstrates the enormity of the international opportunity ahead. Italy. Italy, a market we only recently entered and a market that is close to my heart and that no one ever expected us to succeed in. Starbucks is flourishing in Italy. The quality of the coffee, the food and the partner and customer experiences are second to none. Traffic in our Milano Roastery, Starbucks' shrine to coffee, is strong throughout the day, driven largely by tourist activity. But most importantly, traffic in our Italy retail stores is largely local customer driven. And when I was there, what I observed is Italians drinking straight espresso at Starbucks. We are being warmly welcomed in Italy, the country in which our Starbucks journey literally began. Given the success we are enjoying in Milan, we are now planning to open in Rome and in Florence. As home to our EMEA roasting operations, Amsterdam is a strategic foothold for our international efforts. In July, we committed to a planned expansion that will materially increase our roasting capacity in order to meet the rapidly growing demand for Starbucks Coffee across the region. Similar efforts are underway to support a supply chain team that currently handles logistics to over 4,000 stores across 42 countries in EMEA. In Switzerland, we held highly productive sessions with our partners at Nestle. Global Coffee is among Nestle's largest strategic growth categories and our partnership with Nestle now extends across 81 markets focusing on at-home coffee and food service channels. Building on our number one share position in the United States at home, retail and CPG coffee channels, we are in the very early stages of leveraging the Starbucks brand and Nestle's global coffee platforms and significant distribution capabilities to create new super premium coffee occasions on the espresso platform all around the world. Our partnership with Nestle is driving meaningful competitive advantages for both companies in the marketplace and is highly accretive to our business. Looking ahead, we expect to see a closer Starbucks Nestle partnership. This includes introduction of Starbucks varietals onto Nespresso's digital sales platform, a channel that does not presently exist for us and represents a massive global opportunity. Expansion of Starbucks-Nestle partnership to include inclusion of many traditional Starbucks varietals on the Nespresso digital platform, co-creation of Starbucks Reserve arrivals for the virtual platform and the development of an espresso experience in our U.S. Roasteries. We're also looking forward to the launch of our ready-to-drink Starbucks coffees in Southeast Asia, Oceania and Latin America, which will begin rolling out in next quarter. In China, mobility restrictions and limits on in-store dining continue to significantly impact the business. However, as Belinda will soon share, we are beginning to see green shoots of recovery with sales and comps coming out of the quarter, reflecting sequential improvement. Lastly, we have been working on a very exciting new digital initiative that builds on our existing industry-leading digital platform in innovative new ways, all centered around coffee and most importantly, loyalty that we will reveal at Investor Day. We believe this new digital Web three-enabled initiative will allow us to build on the current Starbucks Rewards engagement model with its powerful spend-to-earn Stars approach while also introducing new methods of emotionally engaging customers, expanding our digital third place community and offering a broader set of rewards, including one-of-a-kind experiences that you can't get anywhere else. Integrating our digital Starbucks Rewards ecosystem with Starbucks branded digital collectibles as both a reward and a community building element, this will create an entirely new set of digital network effects that will attract new customers and be accretive to existing customers in our core retail stores. As I mentioned at the outset, we are looking forward to fully showcasing the power and the opportunity of our reinvention plan that we will unleash at next month's Investor Day. With that, I'll turn the call over to Frank Britt.

Belinda Wong:

Thank you, Frank. In Q3, China faced its most severe COVID disruption since the onset of the pandemic. Mobility restrictions and lockdowns were implemented faster and eased more slowly under China's Zero COVID policy. Shanghai, our largest market with more than 940 stores, was completely locked down for approximately 2/3 of the quarter. In Beijing, 150 stores or roughly 1/3 of our stores in the market were closed for almost six weeks, with the balance of our Beijing stores operating without indoor dining. We entered Q3 with over 1,300 stores close to 1/4 of our total portfolio temporarily closed. We exited the quarter with roughly 2,000 stores across nearly 50 cities operating with mandated reductions in seating capacity or other COVID restrictions. Similar patents remain today with COVID restrictions being eased in some cities and new restrictions imposed in others. We continue to expect our recovery in China to be nonlinear. In Q3, we continued to deepen our partnerships with suppliers, landlords and local authorities, streamline and adapt our supply chain, add new chapters to our COVID playbook and position the business for accelerated profitable growth as soon as COVID restrictions are fully lifted. Together, these efforts have provided us the flexibility and muscle we need to continue to operate as efficiently as possible given current market challenges. As a result, we were able to move quickly to reopen 90% of our Shanghai stores just within a few days of the 50 reopening. We continue to put our partners first, ensuring their safety and well-being and compensating them fully even when our stores were closed. In turn, our partners continue to deliver exceptional experiences for our customers as reflected in the record high customer connection scores we achieved in Q3. COVID is forcing Starbucks to become more flexible, resilient and agile in China and get even better at operating and executing at scale. The benefit of our investments in our people and our operations will become increasingly evident in post-COVID quarters and years ahead. COVID-related headwinds in Q3 resulted in Starbucks net revenue in China declining 40% and sales comp declining 44% versus last year. But I'm pleased to report that we saw immediate improvement in traffic and sales following Shanghai's reopening in early June, saw steady sequential improvement in both metrics through the month and exited the quarter with a negative comp of 24% after indoor dining restrictions in Shanghai were partially lifted at the end of June. The improvement was fueled by customers returning to our stores and celebrating the reconnection and familiarity with the Starbucks brand. We're seeing a strong positive correlation between comp improvement and the easing of COVID restrictions, giving us confidence that we'll see both a strong rebound in sales and improved flow-through once mobility restrictions in China are fully lifted. We continued our store expansion in Q3, opening up 107 net new stores and entering three new cities despite the headwinds and now operate 5,761 stores across 228 cities, and we remain on back to have 6,000 stores in China by the end of this year. Our new stores continue to achieve best-in-class returns and profitability. The investments we're making to elevate our customers' digital experience and strengthen their digital connection Starbucks are paying off. Mobile ordering sales mix increased to a record high 47% in Q3, up 13% over prior year and up 4% over Q2 as we adapted to COVID-driven changes in customer behavior. We also continue to invest in product innovation and extending Starbucks coffee leadership and authority in China. As Howard mentioned, Iced Shaken Espresso introduced only in June has already become one of our best-selling iced coffee beverages among our Gen Z customers, driving both sales and incremental traffic. Our Q3 performance demonstrates the resilience of the Starbucks brand and business in China and that we're continuing our relentless focus on the long term even as we navigate short-term disruptions, positioning us to resume accelerated and long-term sustainable growth in China as soon as COVID restrictions are fully lifted. I want to sincerely thank all of our partners in China for their dedication, commitment and deep loyalty and for taking care of our communities, our customers and each other during this unprecedented time. With that, I'll turn the call over to Rachel. Rachel?

Operator:

[Operator Instructions] Your first question comes from Jeffrey Bernstein with Barclays. Please proceed with your question.

Howard Schultz:

I'll take the first question, which I think is an easier one. There is absolutely no risk whatsoever to the reinvention modernization plan that we've outlined in terms of CEO succession. And let me try and explain what I mean by that. We've got a, in my view, an extraordinary slate of candidates who are very interested in the job. We've narrowed it down to a select few. The biggest piece of this puzzle, in addition to experience, domain understanding of the market and a global person, is an understanding of the culture, values and guiding principles of the Company, someone who really has a conscience in terms of the humanity in Starbucks. And all the candidates that we are talking to, we are paralleling the reinvention and modernization plan, so there's no misunderstanding. And I can tell you that the candidates are extremely excited and positive and in agreement with what we're doing in terms of investing ahead of the growth curve, reinventing the partner customer and store experience and the equity and power of the brand is apparent. No one on this call should think whatsoever that there's any risk in terms of this plan not being executed. And lastly, I've committed myself to stay as long as necessary to ensure the fact that the new CEO has a soft landing in the Company, that we have a long immersion process, and then I transition on the Board so I can mentor and help the next CEO. I'm encouraged by the quality of the candidates. And certainly the candidates who are we are looking at a world view of the economy, geopolitical issues and understanding the power of the Starbucks brand and most importantly, the humanity of the Company.

Operator:

Your next question comes from John Ivankoe with JPMorgan. Please proceed with your question.

John Culver:

John, this is John Culver. Just real quick. We're very bullish on our business right now just in terms of the overall growth prospects and the number of customers that are walking in our doors each and every day. Now clearly, the composition of customer visits have shifted versus what we saw in pre-pandemic. And so, new routines are being established. And we're seeing that particularly in the suburban areas as well as the convenience channels of drive-through, MOP and delivery. Those channels accounted for 72% of our revenues. Generally speaking, we see single transactions in those channels with a much higher ticket, which has translated into higher ticket for the quarter. So that's one big piece of it. The second piece as related to day parts, we are seeing morning continuing to grow in the quarter, represented 51% of our sales which is beginning to return to normal. That will be driven by the urban core opening up -- back up. We did see for the fifth consecutive quarter, positive comp growth in the urban core and on the edges of that. And we're optimistic that those morning routines are going to start coming back, which will drive higher transactions and probably a little bit lower ticket at that time because those are single transactions at that point in time. We continue to see strong beverage growth overall, 9% in the quarter. Cold, obviously, was the biggest contributor, 74% of our beverage sales was cold. But when you look at it across all categories, espresso, brewed coffee, refreshers, all those were strong double digit in the quarter. And then equally is the optimism that we have with the ability to customize and modify beverages. If you look at modifiers that are contributing to the growth of the business, those grew over $60 million in the quarter and contributed significantly to the attach rate. In addition, we're seeing a higher attach on food. Food drove 19% growth in the quarter and clearly across all day parts of food, whether that'd be morning, afternoon or early evening, we saw strong growth, double-digit growth across all those food categories. So we feel good about the numbers of customers coming in. And then just a couple more data points I would add to this is, first off, our average weekly sales are at an all-time high. And when you look at our average weekly sales, we were 30% up versus pre-pandemic levels, okay? So that's one data point. The second data point as it relates to unique customer visits, and this gets to more customers coming in our stores. Our unique customer visits were up 6% versus last year and up 9% versus last quarter. And clearly, the Mobile Order & Pay digital footprint continues to grow, again, 27 million members, up 19%. So, we feel good about the path that we're on. As customers begin to normalize routines, we feel transactions will come up. We'll continue to invest in the areas of engaging our customers and meeting them where they're at. So, we feel good about the traction that we have thus far.

Andy Barish:

Just wondering if there's any way to kind of quantify what this current wage increase, the wage inflation that you have managed and put in response to some of the partner issue, but also more so kind of where does this go next? Is it really more of a benefits issue? And do you think this kind of -- this latest increase sort of gets you place from all front?

Frank Britt:

Yes. I think that one of the thesis we have is the reinvention is that in the same way that we distinguish ourselves over the years to personalize the experience for the customer, we feel like the same principles can be applied to our Green Aprons. And so, the work that we're doing is to lay the foundation to complement wage increases -- to complement wage increases to meet a variety of other needs that folks have based on either where they are in their lives and or where they are in their careers. And so what you should expect from us in the months and quarters ahead is a greater opportunity to personalize the experience for Green Aprons to meet them where they are. And that could include a whole variety of things from new services, new types of flexibility, new types of credentialing models, new types of training notions and just moving us away from a one-size-fits-all approach to meet people where they are in their lives, the same way we've done it so well with our customers.

Lauren Silberman:

Howard, you mentioned no measurable reduction in customer spending or trade down. Can you help us the performance of Rewards customers versus non-Rewards customers? And any differences in behavior between the cohorts? And then related, I believe Starbucks Rewards was launched back in 2008. Can you remind us of the reasons you launched the program at that time? And as it evolved over the last 15 years, how do you think it will play a role should we see a more challenging consumer environment?

Rachel Ruggeri:

I can start with in terms of the difference between our Rewards customers and our non-Rewards customers is what we saw is, as John spoke about, our customer counts reached an all-time high this quarter, and that was both in SR and non-SR. Our SR rewards customers increased greater relative to our non-Rewards, but both groups increased. And what we saw is our SR members had a higher member spend, all-time high. So we saw an all-time high in terms of member spend for our rewards customers. And that's driven by a combination of things, more strategic pricing, more premium beverages, more personalization as well as greater attach. So that's really what drove that. So we're seeing an increasing engagement from our Rewards customers. And we think that has a benefit for us over the longer term, particularly as we continue to personalize the experience more uniquely so that we can have a deeper relationship and engagement with the customer which will allow us to have the ability to continue to provide value in ways that are more personalized to them individually as a customer.

David Palmer:

Great. And thanks for the comments so far, including on the customer response to pricing. I wanted to ask about transactions. I could have imagined a few quarters ago that transactions would be recovering on a three-year basis versus pre-COVID levels, but transactions seem to have stalled out in the last few quarters, actually decelerated a bit versus 2019. I'm wondering why do you think that is? And what factors do you think are driving somewhat more stubborn recovery when it comes to transactions?

Howard Schultz:

I would add one other thing that hasn't come up yet, and that is the relevancy that Starbucks has with young people, and I think I mentioned this in the last call that one of the metrics for me personally has always been trying to understand on an annual basis, is our customer getting older or younger. And we don't want to be in a business where our customer base is aging, and we have a less relevant situation with younger people. We have never been, in our history, more relevant than we are today to Gen Z. And to me, that cohort is so powerful and the attachment rate that we have with them and the loyalty is just building. And so the other thing I'd say is that of course, you're going to look back to 2019, I understand that, but the world has changed so dramatically. Pattern recognition among customers is so different. And if you didn't have the historical perspective, that I understand that you do, and you just isolated Starbucks business today without historical numbers. You have to say, wow, what an extraordinary franchise, look at the equity of the brand on a global basis. Look what we're able to do in multiple formats, multiple countries, multiple channels of distribution. And I think for me, there's no doubt that the morning day part is going to come roaring back. And it's not a question of if, it's just a question of when. And you couple our afternoon business now on cold with a morning business in terms of people coming back to work, the acceleration of the business and the operating leverage that we always have had is just going to be that apparent. And I think the work that we're doing on the partner side, what we haven't said is there is a direct correlation with the investments we're making with our people and retention. And the greatest return that we can have on our investments is lowering attrition and retaining our people. And that is what you'll see in the quarters ahead.

Peter Saleh:

I want to come back to the reinvention plan. I think the third pillar was reimagining the stores. I was hoping, Howard, you could provide a little bit more context or color on this? Are we -- are we talking about more store closures? Is this remodels? What exactly do you feel is the issue? Is it throughput? I'm just trying to understand the level of investment you might need in 2023.

Rachel Ruggeri:

And if I could just add, we've already been spending, Peter. Some of the investment we're doing this year of the $1 billion, some of it's pointed at some of the reimagining of the stores. Specifically, it's pointed at ensuring that we have better uptime in our stores so that the equipment is working and the partners are able to serve the customers and the demand. In addition to that, we've rolled out new and more innovative equipment to help with overall efficiency and the complexity in our stores. So we've started that journey, and we'll continue that. But I think that's an important aspect of -- it's not always just about a new store. It's actually about helping to also improve the efficiency of the engine today, and we can do some of that with operational standards as well as equipment and innovation, and we've started that process.

Belinda Wong:

Yes. Thanks, Howard, and it's a pleasure to be here in joining Starbucks. So as we think about the reinvention plan, looking forward to sharing more on September 13, but to add on to what Rachel was just saying, there is a real opportunity to continue to invest today and tomorrow in modernizing our stores. Job number one is making sure our partners have smooth operating stores, and we know technology is at the core of that. And then as we move forward and what we'll be sharing more on the 13th is as we look to modernize technology and really be the engine behind the reinvention plan here, we believe that the critical competitive advantage that we're going to be bringing is speed at scale through really repositioning our core technology foundations to be even more agile and more cost efficient. And I look forward to sharing more of that.

John Culver:

Thank you. Just going to the investments that we're making in the immediate term, particularly on equipment to drive throughput and productivity. And John, this goes back to your second part of your question, I apologize for not addressing it then. But first and foremost, it's about the Mastrena two and getting Mastrena machines out. Currently, we're in 86% of our stores, and we'll complete the rollout by the end of this fiscal year. We have warming oven upgrades going on to our current ovens. We have 60% of those deployed, and we'll have 75% deployed by the end of the fiscal year. We've developed an in-house proprietary cold brew system, and that's currently been deployed to all stores across the U.S. And also, we continue to see the growth of cold beverage. So improvements in the cold beverage station and in particular, cold beverage labelers which are dedicated to that station. We currently have those in 38% of our stores that will go to 80% by the end of the fiscal year. We also see opportunity with handheld order points. So if you think about it, handheld tablets, currently, that's in 50% of our stores will continue to deploy that and anticipated in 65% by the end of the year. That will drive speed of service and in particular, higher throughput and drive-thru. And then equally on the back of the house is the automated ordering. And we are seeing huge opportunity for automated ordering as we are fully deployed across all food and merchandise, across all stores in the U.S. and we are quickly moving towards getting that up and running as it relates to the beverage and the remaining products in our stores. So, we've got a lot of work that's happening around that, and it will make our business operate a lot more efficiently.

Michael Conway:

Thanks, Howard. I appreciate it. So I am excited about the results we had. As you shared, we were up 50% ex China and international. Just to give a little more texture because the strength was across all the regions. So Latin America, again, strong comp growth, well over 50%. EMEA, driven by the U.K., comps grew well into the double digits again. Asia Pacific, also very strong strength, double-digit revenue growth. And within Asia, we had Korea at 1,700 stores this quarter. We had Indonesia which reached 500 stores, and that's actually the 10th market globally to do so. So a lot of growth and a lot of investments still going on. And in Japan, our third largest market globally, the comps accelerated to their strongest point this year. And what's behind it? I would say of three things. First, we partner very closely with our business partners to invest in those key growth levers, like expanding the digital capabilities, so Starbucks Rewards and Mobile Order & Pay. We've also enabled new channels like delivery, which is proven to be like in the U.S. quite incremental for transactions. Secondly, our license partners are investing in stores. So they are seeing the resilience of the brand and the investing in stores, particularly stores like drive-thru where we're seeing outsized growth. And then finally, travel is slowly starting to return, specifically within the regions, but also we're starting to see across regions, and that gives us a real outlook that as travel continues, there's more growth ahead in these regions. So we're excited about the growth we're seeing in international, for sure.

Sharon Zackfia:

I wanted to follow up on a comment you made earlier about retention and the unlock you can get there as tenured increases for the baristas in the U.S. Can you talk about what average tenure is now versus maybe where it was in 2019? And maybe similarly, I know you mentioned in China, I think customer connectivity scores are at an all-time high. Where is that now in the U.S.? And how are you measuring throughput in the U.S. versus kind of more normalized pre-pandemic?

Operator:

Your next question comes from Andrew Charles with Cowen and Company. Please proceed with your question.

Howard Schultz:

Well, let's try to unpack the question about Starbucks as an affordable luxury and possibility of a significant slowdown economically in the country. Historically, 51 years in business, we have been able to navigate and manage through very difficult economic headwinds. And although we've raised prices roughly about 5% or so over the last 12 months, the fact that our customers continue to see Starbucks not only as a great product and a great experience but all the things that ladder up to the equity of the brand and the quality of the coffee. So listen, I think every day that goes by, what's on my mind is the significant challenge economically that people are going through, and we're not taking our success and current engagement with our customers in any way as an entitlement. We have to earn it every day. And I think when we had our 200 top people here from the field just 1.5 weeks ago, we all talked about the need every single day to exceed the expectations of every single customer to understand what it means to take it personal as we did in 2008 during the cataclysmic financial crisis, and we managed through that one. And I think the other thing is, we've never had as many -- if you look at the national footprint of Starbucks, the multiple footprints in terms of the different types of formats that Starbucks has provides us with an ability to create convenience that we've never had before, specifically in the drive-thru. And so if you take that and then you ladder up the Starbucks Rewards program, and that probably is where we would go to provide discounts and value and a value proposition on an ongoing basis with our existing Rewards customers if, in fact, there was a significant downturn in the economy. But I think when we talk to our peer group as we have about what they're experiencing, I think they're shocked, stunned that Starbucks continues to create the kind of velocity without any indication whatsoever of customers turning away from Starbucks or most specifically trading down. And why we highlighted cold beverages so much was two reasons. One is that, that is a Gen Z product. And as I said earlier, that is a key customer cohort for Starbucks. Secondarily, we have a significant competitive advantage in our ability to customize almost any beverage that our customers want with speed. And then the last piece of that is the competitive advantage that we have is that the modifiers that our customers are adding to cold is a greater number than they add to hot. The modifiers are raising the ticket and the modifiers produce color and excitement to the Gen Z audience and they immediately put it on social media. But we're in the early stages of the cold beverage platform in terms of what we're going to bring in terms of innovation and the modifiers and the customization gives us a significant competitive advantage. You layer all of that on what I said earlier, and that is the morning day part coming back with velocity. And I think all bets are off in terms of the operating leverage that we're going to get in here.

Operator:

Our last question comes from Sarah Senatore with Bank of America. Please proceed with your question.

Howard Schultz:

Rachel will take the first question on our enthusiasm for growth and then Belinda will end it.

Howard Schultz:

Belinda?

Howard Schultz:

So I think in terms of our Investor Day, I really hope that the majority of you will make the trip to Seattle. There's still good weather at that point. It shouldn't rain. But I think those of you who do not come will miss out on really seeing and understanding the breadth of the level of innovation and modernization that we're going to bring to the Company and how quickly it's going to come. So I hope that you all come. It will be a good time, a lot of interest that we've had already, but please try and make it to Seattle. Thank you so much, and we'll see you September 13. Thank you.

Operator:

Good afternoon. My name is Alex, and I will be your conference operator today. I would like to welcome everyone to Starbucks Second Quarter Fiscal Year 2022 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to Tiffany Willis, Vice President of Investor Relations. Ms. Willis, you may now begin your conference.

Howard Schultz:

Thank you, Tiffany. Love and responsibility brought me back to Starbucks, my love of the company and my deep responsibility to our partners and shareholders. In the month I've been back, I've traveled the country and met with thousands of Starbucks retail store partners and visited all 5 of our roasting plants, and I've learned first-hand about the unique challenges confronting the company today. I've also experienced the passionate relationship our partners have with the company and the enduring emotional connection our customers have to the Starbucks brand. COVID presented unprecedented operating challenges to consumer brands. COVID also drove dramatic changes in customer behavior that Starbucks stores and systems were not designed or built for. The challenges have been amplified by record demand for Starbucks coffee in our U.S. stores that has accelerated with the lifting of COVID restrictions. Our Q2 results tell the story. In Q2, our sales comp in North America grew 12% over last year, 23% compared to Q2 2020. Both drive-thru and Mobile Order & Pay activity have surged, together now generating over 70% of our U.S. store volume. Delivery, a nearly $500 million business, is up 30% in the first half of fiscal year. And in our stores, customers are increasingly further customizing already complex handcrafted cold beverages. The combination of shifts and customer patterns, accelerating demand and algorithms built for different customer behaviors has placed tremendous strain on our U.S. store partners. Ordinarily, we would have anticipated and invested ahead of the shifts we're seeing, but COVID disruptions interfered with our ability to make the required investments in store design, operations, infrastructure and technology to do so. As a result, we've been unable to meet the relentless demand we're seeing in our U.S. stores as seamlessly as our customers and partners expect and candidly deserve. Simply said, we do not, today, have the adequate capacity to meet the growing demand for Starbucks coffees. Going forward, we will be making investments in our partners and business to literally catch up on investments we have not made and make further investments to position the company ahead of the coming growth curve. We will also be accelerating our new store growth with 90% of new stores being high-returning drive-thru. Our newest class of drive-thrus will integrate new store designs, technology, including more handheld devices and equipment improvements that will increase efficiency, speed of service, and we believe deliver even greater profitability in the future. We will then incorporate the new technologies and equipment into our existing stores and provide our people with the tools and resources they need to elevate the Starbucks experience we deliver to our customers and create even more demand in the future. And we'll be making significant investments to extend our digital capabilities and deepen our digital connection to customers and the emotional attachment our customers have to the Starbucks brand. Returns on our digital investments are consistently among the highest returns we generate, which brings us to the decision we will revisit in fiscal '23 to suspend stock buybacks. Buying back stock yields us, on average, about a 10% return. With Starbucks' treasure trove of global assets, a 10% return is not satisfactory to me. Throughout our history, the investments we have made in our people and business have always delivered outsized returns to our shareholders. We're so eager to show off our pipeline of disruptive innovation that we're moving our Investor Day up to September in Seattle from December in New York. The significant innovation around technology and personalization we will reveal our industry game-changers that will further increase store productivity and efficiency. What you will see is the coming transformation and reimagination of the Starbucks customer and partner experiences. The transformation will accelerate already record demand in our stores, but the investments will enable us to handle the increased demand and deliver increased profitability, while also delivering an elevated experience to our customers, and most importantly, reducing strain on our partners. We must reintroduce joy in the customer and emotional connection back into the partner experience. We've identified over $200 million of investment that's incremental to the significant investments we've already committed to in our U.S. company-operated stores this year. These include further investments in training, wage and equipment and new investments in internal communication with our people, where we will launch a new partner app to communicate directly with all store partners. We will also be reaffirming our commitment to coffee excellence and partner education by reintroducing our black apron, Coffee Master and origin trip programs. And in 2023, we will introduce enhanced digital tipping for our partners. We believe these investments will improve retention and recruiting and elevate the experience we deliver to our partners and our customers. Over the last month, we've realigned Starbucks U.S. organization to focus entirely on transforming and reimagining our core U.S. business. Belinda Wong will share plans for accelerated growth in China as soon as COVID-related mobility restrictions there are lifted. And make no mistake, our aspirations around China have never been greater and I remain convinced Starbucks' business in China will be eventually larger than our business in the U.S. We have a big breakthrough idea around the launch of Starbucks Web 3.0 and a unique platform for NFTs that Brady Brewer and Adam Brotman, architect of Mobile Order & Pay and the Starbucks digital app, who is serving as a special adviser to us, will shortly tell you about. I believe Web 3.0 will create an authentic digital third place experience and drive substantial new revenue streams for Starbucks and be accretive to the brand. Our Web 3.0 strategy is a proxy for the greater ambition we have for the company going forward. Despite the fact that post COVID, our customers are not using our stores the same way, and we've been operationally challenged as a result, our national retail footprint and best-in-class real estate portfolio is still enabling us to meet customers wherever they are and irrespective of their need state. This relentless demand we're seeing in our stores today underscores this reality. Looking ahead, trying to imagine thousands of vastly more productive and efficient Starbucks stores reconfigured to align with today's customer behavior and built around technology that will deliver increased speed of service, improved labor management and reduced unit cost, an elevated partner and customer experience. Now imagine the accretive impact to our financials when we reengineer our stores to deliver what we're capable of in delivering and arm our people with the tools and resources they need to once again exceed our customers' expectations. From my perspective, I understand what's needed, and I'm back to lead this transformation and committed to seeing it through. Starbucks sits alone with something few, if any, of our peers literally have, and that is unmet demand. Companies spend hundreds of millions of dollars on marketing, promotions and social media trying to create demand. We have demand everywhere we look, despite having not lived up to the expectations we set for ourselves, let alone exceeding the expectations of our customers and our people since the pandemic. The big opportunity ahead for us is to meet strong and growing demand in our stores more efficiently and effectively and to leverage technology to enhance productivity and reduce burden on our store partners. Let me highlight just a few sources of the accelerating demand we're seeing in our U.S. stores and business. Mobile Order & Pay, an over $4 billion business, is up 400% in 5 years, is up 20% over last year. Our $500 million delivery business is up 30% over last year. The Starbucks Card puts our brand in the hands of nearly 120 million people and is alone larger than the entire gift card category. Starbucks customers are increasingly prepaying for their purchases in huge volumes, roughly $11 billion last year, and we are on track to exceed that figure this year. At this moment, well over $1 billion is loaded on Starbucks Cards waiting to be spent in our stores. And active Starbucks Rewards membership in the U.S. grew 17% over last year to Q2 to 27 million members. Strong underlying demand means the productivity and efficiency investments I've described represent literally low-hanging fruit available to us right now. And ever since, Starbucks remains a growth company today and will remain a growth company into the future. Two related dynamics underscore the power of the equity of the Starbucks brand and support our growth aspirations

Brady Brewer:

Thank you, Belinda. Starbucks is one of the most sought-after brands in the world. And by engaging deeply with our customers over 50 years, we've amassed a treasure trove of assets, both physical and digital, just 1 example being the nearly 27 million active Starbucks Rewards members in the U.S. We're activating these unique brand assets as a catalyst to accelerate the future of Starbucks as a global brand and as a business. From our beginning, we've nurtured human connection and served a fundamental belief that coffee brings us together. We brought this to life in what we've called the third place, a place between home and work, where you could connect and feel a sense of belonging over coffee. Now we are extending the third place concept of Starbucks into a new kind of community. Emerging technologies associated with Web 3, and specifically NFTs, now enable this aspiration and allow us to extend who Starbucks has always been at our core. We are creating the digital third place. To achieve this, we will broaden our framework of what it means for people to be a member of the Starbucks community, adding new concepts such as ownership and community-based membership models that we see developing in the Web 3 space. We will lead by aligning our initiatives with our sustainability commitments, making deliberate choices to build the community on environmentally sustainable Web 3 platforms. Imagine acquiring a new digital collectible from Starbucks, where that product also serves as your access pass to a global Starbucks community, one with engaging content experiences and collaboration all centered around coffee. This community will further strengthen the Starbucks brand, engage our partners and we expect it to be accretive to our business. Starbucks has the history of taking leading-edge technology and innovation and making it accessible and approachable to the mainstream. You've seen it with our digital experiences, whether it was introducing ability to pay with your phone, mobile order or even access WiFi long ago. Starbucks can serve as a bridge to the future for our nearly 100 million customer occasions per week around the world. We'll take our first step toward a digital third place and our broad vision for Web 3 with an anticipated launch in this year. This is just the beginning of an exciting future. Now I'll turn it over to Rachel.

Operator:

[Operator Instructions]. Your first question comes from Sarah Senatore with Bank of America.

Howard Schultz:

Well, thank you, Sara. As I mentioned in my remarks, over the last few weeks, I pretty much have crisscrossed the country in meeting with Starbucks partners and really listening very carefully to their concerns, their suggestions in what we really are calling a co-creation to the future of the company. I think it's important to understand that the business, as I mentioned, has changed dramatically in terms of Mobile Order & Pay, cold beverages is now almost 80% of the business. And the equipment in our stores and the layout of the stores have not been designed for the way customers are using our stores today. And that has put enormous pressure on our people. So the first thing we must do is give them new tools, and there will be upgrades in equipment that will be sequentially brought into the stores to try and relieve them on the pressure, that's 1 investment on the equipment side. There'll be a fair amount of investment in technology to do everything we can to upgrade the algorithms of labor scheduling and there will be upgrades in the digital app itself to be able to provide customers with a more accurate method of when their beverage is going to be ready. And then there's the wage piece. And I think as I said, we've always been ahead of the curve, but I think we haven't done enough. And I think it's -- we have to recognize that there is a lot of pressure on our people. We want to do everything we can, and so we're going to raise wages again. And I think if you think about Starbucks, Starbucks has been probably quite essentially the most experiential brand over the last 20, 30 years, and that experience comes to life as a relation -- because of the relationship that our people have with our customers. If we want to exceed the expectations of our customers, we have to exceed the expectations of our people. And so during COVID and post COVID, our attrition rate, like almost every other retailer, has gone up significantly. If you look at where we can really be much more efficient is that we can provide our people with better training, better wages, better equipment behind the counters to give them the tools and resources, the self-confidence and self-esteem to do their job, we will lower attrition and our retention rate will be much greater. That alone is a significant level of ways in which we can take money out of the P&L and money out of the store economics. So I think, let me put it in my own language. I mean, you have to ask yourself, is Starbucks half empty or half full? Listen, Starbucks is completely half full. Look at the assets we have. Look at how many customers are reaching out to Starbucks every day. The demand is accelerating, and that's despite the fact that we're not doing our best. As I said in my remarks, just wait until we upgrade the system, upgrade wages, give our people the tools and confidence. And once again, you're going to see us recording the kind of store-level economics we have in the past. The other thing I'd say is that the inflationary issues, which are significant and growing, that's an anomaly in America. We all know the inflation is a problem, but it's going to come down. And the other issue is China. We are so well positioned in China for the future, and the China restrictions are going to abate, and there's no consumer brand that I can identify that is better positioned than we are to take advantage. And as I said in my remarks, the China business is going to be bigger than the U.S. So is it glass half full? You bet it is.

Andrew Barish :

Just a quick question on the areas of inflation that you're seeing now. I understand the future needs for equipment and training and wages, but where specifically are you seeing the inflation accelerating at this point, if you could?

Operator:

Your next question comes from Andrew Charles with Cowen.

Howard Schultz :

I want to be very careful because I want to be sensitive to the people we're talking to and be respectful of all the candidates. Obviously, we want someone who has domain cultural experience in terms of the sensitivity of the values and culture of Starbucks Coffee Company. The person really needs to understand what it means to put on a green apron and work behind the Starbucks counter and be able to enhance and preserve the culture and values that we hold so dear at Starbucks. That person needs to have global experience. We're a global company. And obviously, we're looking for a servant leader and someone who's going to be here for the long term. There's no shortage of people who would like this job, and I think the Board and I have been very encouraged by the fact that we've been able to talk to wonderful candidates who really bring a lot to the table, but we're being very judicious and very careful, but we are going to find the right person. And I've committed to the Board that I will do everything I can to ensure a soft landing and good immersion. And then I'll stay on the Board to help the company and help the new CEO.

Jeffrey Bernstein :

Thank you very much and welcome back Howard. Just one clarification and then a question. The clarification, I know you mentioned $200 million of incremental investment on the conference call, yet I see the press release is talking about upwards of $1 billion for the fiscal year. So I just wanted to reconcile whether the $1 billion is all inclusive of prior investments as well as the $200 million? But otherwise, my question, Howard, is just as we look to fiscal '23, it does seem like you're in somewhat of an unusual position kind of echoing the last question, returning as CEO. But expecting to hire a new CEO on the floor, I'm just wondering how do you walk that fine line stabilizing the business today but being sensitive to not offering too much of a new strategy or making major structural changes, which I would think would be something the new CEO will be keen to establish?

Rachel Ruggeri :

Sure. Thanks, Jeffrey. So from an investment perspective, the more than 200 that Howard shared in his prepared remarks, that's in relation to -- we've already made investments this year, and that's incremental to the investments we've already committed to this year. So if you recall, we've already committed to investments on wage, some aspects of training as well as labor. In addition to that, we're having another round of investments on top of that that will be related to further wage investments, but also modernizing our training and our collaboration as well as celebrating coffee and coffee excellence as well as some equipment and other innovation in our stores to help with overall store productivity and improving our store operations. So the collective nature of that gets to about $1 billion in this year alone.

Operator:

Your next question comes from John Ivankoe with JPMorgan.

Howard Schultz :

Well, John, first off, you and I are probably the oldest people on this call. For those of you who are not familiar with John's career, he's been with us, I think, since the IPO in '92. So John, I think you've seen this movie before. Listen, the decision to suspend the buyback was not symbolic. We're not making symbolic decisions. We're making strategic decisions that we think are the best interest of our shareholders. And the investments that we're currently making are going to drive a better return than the current way in which we look at buybacks, which is 10%, 11%. And for example, if we increase retention at 10%, 20%, the investments we're making are going to be significantly greater than that. You're right about the balance sheet, but I wanted to be very conservative, and I certainly wanted to send a signal to the market that we're playing the long game. We're not in it for the short run. We've always been -- always embraced building a great enduring company. That's where we are today. Starbucks' best days are ahead of us. We've never been more enthused, more proud, more optimistic, and this is the right decision to make. Rachel, do you want to add some on it?

Howard Schultz :

Rachel, before we get another question, if you don't mind, Michael, would you just take a few minutes because there's been a lot of chatter about China's impact on international? And just give a -- I know you just got back from Japan and Korea, just talk a little bit about your trip in international in general.

Operator:

Your next question comes from Jared Garber with Goldman Sachs.

Howard Schultz:

Thank you. I'm going to give that to Brady. Go ahead, Brady.

Operator:

Your next question comes from John Glass with Morgan Stanley.

Rachel Ruggeri :

Sure. I can speak to the more than $200 million that Howard shared in his prepared remarks is relative to FY '22. In terms of what we're expecting for FY '23 and FY '24, we have near-term pressure in our business, and that's between the pressure we're seeing in, with inflation as well as what we're seeing in China and then the investments we're choosing to make. But while we're seeing near-term pressure, we have line of sight to a very solid path of accelerated growth in the future. I'm excited to share that with you at Investor Day. So at Investor Day, we'll provide more about our business as well as our broader, more comprehensive capital allocation strategy for '23 and beyond.

Operator:

Your next question comes from Lauren Silberman with Credit Suisse.

Howard Schultz:

Because we are in a situation where anything we say or might say could be misinterpreted by outside attorneys that are trying to find ways at which Starbucks at fault, I want to be very careful here. My prepared remarks needs to be what we're going to say regarding the union issues. My comments and the emotional relationship that I had in these meetings, partners across the country were really quite extraordinary. The love that people have for the company. The challenges that they've had personally and professionally as a result of COVID. The responsibility that they feel Starbucks has, which we agree with, to do everything we can to make their life better. But I don't want to go any further than that because I think the investments we're going to make for our people is a method to do everything we can to exceed our expectations, and we'll speak more about that in September. And I just want to say, we're moving up the Investor Day from December to September because we are quite enthused and excited to kind of move it up and share with you our plans for the future, accelerated growth, new store ideas, the technology, all the things we're going to share with you, including the relationship that we'll have with our people. And I think, just thinking out loud, I think we should have some of our people who are tenured managers of Starbucks and tenured green apron partners, they would talk to you about their experience with the company, which I think you'll find quite interesting.

Peter Saleh :

Howard, you mentioned additional wage increases and investments. You also mentioned some enhanced tipping options that are coming. Can you talk about that decision and maybe the timing? And what you expect the consumer response to that to be?

Brady Brewer :

Sure. So yes, I mean, I think on the tipping side of things, we're adding functionality throughout the year. We've got a lot of people working on this. As Howard said, it's one of the top requests. Currently, a customer can tip using the MLP experience, but we don't have the ability in many other parts of our store experience when a person is paying with a credit card, a stored value card or the app in our cafe and in the drive-thru. So that's what we anticipate working very quickly against to bring that functionality to our partners.

Howard Schultz :

Can I just repeat that? Every Starbucks person who is a non-manager at Starbucks will be getting an increase in pay.

Operator:

Your next question comes from David Tarantino with Baird.

Howard Schultz :

Sure. I think, given the investment question, I'll give it to Rachel, turn to the margin question, I'll give that to Rachel as well. But clearly, the inflationary number, which is quite stiff, is going to abate. And when it does, we'll be in a great position because we will do -- we will have done things to handle the demand which we're having trouble doing now. But Rachel, go ahead.

Operator:

Your next question comes from Sharon Zackfia with William Blair.

John Culver:

Yes. Sharon, this is John. I think what we're seeing is that as we get our stores operating at full capacity and as we come through COVID early in the quarter, we have now increased hours of operation. And at the same time, also increase to full staffing levels in our stores and having all channels open. So we're getting a much better read on how our productivity is progressing. Clearly, we measure on drive-thru out the window time. Clearly, in the stores, we measure items sold per labor hour. And there are other measurements that, that we track as well. We watched all those things very closely. I think one of the things I would just also highlight on the investments we're making for the remainder of this year is a big investment on training for our partners. And one of the things that we heard loud and clear in these listening session and co-creation sessions was they wanted more training. And today, we offer about 23 hours of training to a new barista entering our stores, and we're going to push that 40 hours beginning the end of June, and that will significantly enhance their skill sets, make them more confident in preparing the beverages and ultimately, make them feel successful reducing overall complexity of doing the job and ultimately feeling successful. So ultimately, we do feel that will help increase productivity. But it's all about enhancing that partner experience giving them the tools that they need to be successful and making sure that we're investing in them. And then you've got the equipment aspect as well. We've got significant investments that we're making around the Mastrena machines, around the Merrychef ovens, around handheld order points for drive-thru and also the investments we're going to make on the cold beverage station to increase the capacity of the cold beverage work area for our partners going forward, which will help improve productivity as well.

David Palmer :

Welcome back, Howard. I think John was actually touching on the question I was going to ask about, which is around capacity constraints. I'm wondering if you could maybe touch on what you're seeing in terms of service times or any metrics that would sort of prove to you that there's an opportunity or room for improvement. And I got a sense from your answer just then and before that that you think a lot of this is going to be solved more on the capital investment side with new machines, for example, and sort of reconfiguring how the cold beverage area works. But do you think there's also going to be more expense type investment, labor, you mentioned the people with the handhelds and the drive-thru, any sort of breakdown of how you see this investment playing out?

Operator:

Thank you. I will now turn the call over to Howard Schultz for closing remarks.

Operator:

This concludes Starbucks' Second Quarter Fiscal Year 2022 Conference Call. You may now disconnect.

Operator:

Good afternoon. My name is Alex, and I will be your conference operator today. I would like to welcome everyone to Starbucks First Quarter Fiscal Year 2022 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Tiffany Willis, Vice President of Investor Relations. Ms. Willis, you may now begin your conference.

Kevin Johnson:

Thank you, Tiffany, and welcome, everyone, to today's call. Before we dive into the quarter's results, I want to take a moment to reflect on the fact the world is now entering the third year of this pandemic and recognize that over this period, Starbucks has made significant progress driving our business recovery. The last two years have been anything but linear. Many parts of the world continue to experience significant COVID-related disruptions, including Starbucks' two lead markets, United States and China. However, through a dynamic and challenging environment, three things have remained true for Starbucks. First, global consumer demand for Starbucks is strengthening across our offerings and throughout all dayparts. This is a result of our work over the past year to expand digital customer relationships, introduce new beverage offerings, and provide a safe, familiar and convenient experience for our customers. Second, we remain unwavering in prioritizing the health and safety of our store partners and customers, even when the associated costs may create short-term earnings pressure. We have consistently provided best-in-class COVID benefits to our partners since this pandemic began. And third, the flexible operating protocols we established from the beginning of the pandemic continued to serve us well. The combination of these things has enabled us to adapt to near-term challenges while continuing to invest in what we know is a long-term opportunity for all stakeholders. Starbucks delivered record first quarter revenue of $8.1 billion, representing 19% growth. Global same-store sales grew 13%, demonstrating strong customer affinity for Starbucks. Demand for Starbucks continues to build, and we are fully committed to capitalizing on this momentum for the long-term. That said, while we have seen extraordinary top line growth, we've also experienced extraordinary cost pressure, which impacted our margin performance. As the Omicron variant began to quickly spread, it resulted in higher-than-anticipated costs in three key areas across our U.S. business, each of which impacted our results similarly. A highly transmissible Omicron variant amplified staffing shortages in our supply chain, resulting in higher-than-planned distribution and transportation costs. We also experienced a significant increase in our industry-leading COVID isolation pay for our partners, and we saw higher-than-anticipated costs from training and onboarding of new Starbucks partners. As we navigate the near-term challenges of this latest COVID variant, we remain confident in our ability to rapidly adapt while continuing to drive our long-term agenda of share gains, growth, and value creation. In our other lead market, China, the zero-COVID policy there contributed to significant disruption to store hours and transaction volume. Net new store growth and performance remained strong, yet overall revenue and profitability came in below expectations. While we believe that these dynamics are contemporary, we are focused on appropriately navigating the evolving macro dynamics and balancing long-term investments in the business. I'll now provide more insight into our Q1 results and the actions we are taking to address the current state of our business, industry, and overall economy while continuing to prioritize our partners and ensuring Starbucks delivers long-term profitable growth. In the U.S., we experienced very strong customer demand over the holiday season. Our ability to deliver the Starbucks Experience to our customers how, when, and where they want, resulted in first quarter revenue of $5.3 billion. Year-over-year revenue growth of 23% was driven by a double-digit increase in customer traffic, highlighting our compelling holiday lineup and strong in-store and digital customer connection throughout the holiday season. Customer demand increased through all dayparts and resulted in record Starbucks Card activations and reloads in excess of $3 billion. Starbucks Rewards grew 21% to a record 26.4 million 90-day active members. Average ticket grew mid-single digits, demonstrating our continued differentiation through customized premium beverages and compelling food options. Prior to the emergence of the Omicron variant, we were experiencing some inflationary pressures and staffing issues resulting from the broader pandemic. When the Omicron surge began, inflationary costs and staffing shortages were amplified well in excess of our expectations. As I mentioned, three primary factors

Operator:

[Operator Instructions] Your first question comes from Jeffrey Bernstein with Barclays. Please proceed with your question.

Rachel Ruggeri:

This is Rachel. Thank you for the question. How I’d start would say, as we look at FY2022, based on what we saw in Q1 and what we’re guiding for the balance of the year, we think approaching 17%, the better gauge of our margin has allowed us to – as we’re seeing, we saw cost pressures accelerate in December, and we’re seeing those intensify as we noted in January and into Q2. Now we’ll take action against those costs but it will take us a little bit of time. And so, for that reason, we believe it’s prudent for us to guide approaching 17%. With that, as we exit FY2022 and as we enter FY2023, we’ll now see a lower margin – a slightly lower margin than what we had originally guided. And as a result of that, we’re continuing to look at ways to drive sales, as you outlined. That is our biggest opportunity for us to be able to drive margin and to grow earnings in the future. So, we’ll continue to invest in our business in the areas that are going to drive sales both in this year as in FY2023. We’ll also continue to focus on the areas this year and into next year that will help us continue the momentum that we’re seeing. So, sales is by and large, our biggest opportunity. In addition to that, as we’ve outlined, we’ll continue to take pricing while we balance pricing decisions and actions with our demand. And so that will be another big opportunity for us as we continue to grow. And then we’ll continue to find efficiencies in our business. As we’ve outlined, we’ve been working on efficiencies related to productivity that will help support this year and it will also expand into FY2023. We certainly have opportunity as we think about, from a tailwind perspective, as we see recovery both in China as well as in our U.S. business and as we continue to further the efficiencies focusing on. But broadly, I would say sales, by and large, is going to be our continued opportunity for our growth not only this year but into FY2023. So hopefully, that gives you a perspective.

Jared Garber:

Hi, thanks for the question. Wanted to follow up on the previous question a little bit as it relates to margins. Rachel or Kevin, could you help frame maybe some of the pricing actions that you’ve taken? And what maybe you still have left in the chamber, so to speak, to help offset some of these pricing – or some of these inflationary pressures? And what are you seeing on the demand side as it relates to sort of elasticity of demand with these pricing actions going through in the last couple of months and then what you’re looking at going forward? Thanks.

John Culver:

Yes, Jared, thanks for your question. Our pricing strategy, as Kevin has shared and Rachel as well, is driven by several factors such as inflation rates, partner investments, the infrastructure investments that we want to make, and then obviously, the investments we want to make on continuing the innovation pipeline. We do all those things while balancing the premium value for our customers and the experience we want to provide them. As we saw inflation begin to increase in the middle of this past year, we made the decision to take pricing and we implemented pricing effective October 1. As inflation continued to grow, we saw that. We needed to take additional action and we did so effective January 1. So, we’ve taken two moves around pricing to help mitigate the challenges that we’re seeing. Now we also have additional pricing action that we have planned for the balance of the year that will additionally help offset the trends and some of the cost pressures that we’re seeing. And as Kevin highlighted, that’s being informed by the analytics and insight team. In terms of elasticity, we have not seen any meaningful impact to customer demand. To the contrary, our customer demand continues to grow. We’re coming off of a very strong quarter in terms of transaction growth at 12% for the quarter in the U.S., the highest since pre-pandemic levels, and our ticket is also very strong as well. So we watch that very closely and we will adjust accordingly.

Andrew Charles:

Great. Thanks. A question for John or Leo. Obviously, the China sales environment has been challenging, and you guys are not immune to it despite some pretty impressive gains in the digital and loyalty strategies. China development remains robust and on track for the year, but just curious what would it take for you to reconsider China development plans to slow down openings and focus more intensely on improving the same-store sales? Thanks.

Leo Tsoi:

Certainly. Hi, Andrew. First of all, I want to say Happy New Year to everyone. This is the second year – second day of our Chinese New Year here in China. Now your question on the store opening and the development, what I’d like to say is that we have actually opened more than 1,200 stores in the past two years, and most of them we actually opened during the pandemic. This is equivalent to more than one-fifth of our portfolio, which is larger than many of the other retailers in the market for years. And what is more, as Kevin just mentioned, we have been able, all these new stores to achieve the best-in-class profitability and returns. And this goes to show the huge market potential that we are here to unlock. And so when you see this entire development, it is important to note that 70% of our growth actually in China is driven by our new store openings, and I’ll say, will continue to drive and leverage the opportunity here as we see in this market development. And simply put, the three strategies that we’ve been working on is proven. Number one is to go wide to add them into more [indiscernible] cities. Second is to go deeper by bringing a rich and diversified stock portfolios that curate new coffee experience to our customers. And third, as the pandemic is coming back and with a resurgence, we continue to be go smarter to leverage the power of our data analytics and also to drive our store economics, including our store footprint so that we can operate in these markets. And I have – I must say that I’ve been in this market for more than 10 years. What I’m seeing is we are really in the early stages of these markets. And as we go wide, go deep and go smarter, actually, our opening is actually helping us to build our success for the long-term. Thank you, Andrew.

Operator:

Thank you. Your next question comes from Sara Senatore with Bank of America. Please proceed with your question.

John Culver:

Yes. Sara, thanks for the question. Yes, we did see an Omicron impact especially amplify in the last two to three weeks of the quarter. And it played out in a couple of ways, obviously, in terms of as the cases surged, number one, customer mobility was impacted. But then also, we saw our partners also have a similar surge in the number of cases as well as call-outs, which Kevin spoke to and Rachel spoke to in terms of the Omicron COVID pay or the COVID pay that we provide our partners. Now with that, we also were in the midst of having a record holiday quarter and couldn't be more proud of the work that the team did in terms of delivering very strong top line growth of 23% in a very, very complex environment. In terms of what we're seeing in terms of the transactions and the growth of transactions, there is a pent-up demand for Starbucks and for people wanting and longing to return to their normalized routine. So a couple of things that I would just call out. First, the beverage attach that we're seeing in the stores continues to normalize. We've seen strong beverage mix growth across, in particular, cold beverages, which now account for 70% – over 70% of our beverage transactions. We've also seen strength in alt-dairy and the growth of alt-dairy and then also an increase in the modifier performance, whether it was the holiday beverage or the overall promotion that we saw, very strong growth. Food continues to grow and break all-time records in the quarter, and really, that's being driven by breakfast and by bakery. The other thing I would just add is that our peak transactions improved versus the prior quarter and a year-over-year basis. And then we had strong growth on the digital side. We now surpassed 26 million 90-day active members. And as part of that, our non-SR customer transactions continued to grow and reached its highest level since the pre-pandemic. In terms of the stores and where we saw traction in that, the suburban and the rural stores, where drive-thrus are the most prevalent, continue to outpace the rest of the portfolio. Our drive-thrus had its fourth straight quarter of double-digit comp growth. The central business district, the urban core and the urban edge recovery also continues, and it was the third quarter in a row of positive comps for all three of those urbanities. And then the convenience channels continue to play a big role. Between MOP, drive-thru and delivery, that accounted for over 70% of our sales in the quarter. So very encouraged with the strong customer demand and the way in which our partners really were able to meet the needs of our customers and step up under very, very challenging circumstances.

Operator:

Thank you. Your next question comes from John Glass with Morgan Stanley. Please proceed with your question.

Kevin Johnson:

Yes. Thanks for the question, John. I'll just comment briefly and then I'll hand it over to John to take into some more detail. But certainly, we have learned to be very, very adaptable throughout this pandemic. And so certainly, when these COVID waves hit, we know how to adapt store protocols, store hours, if we need to consolidate partners in one store and temporarily close a store, we do that. If we need to amplify certain channels like drive-thru or mobile for pickup, we do that. So we've become very adaptable. And I think one of the things that's helped us is also see the opportunities for us to drive productivity gains certainly as we look to the future. And both are very important, how we adapt to COVID but also how we simplify the work in our stores and bring solutions that give us productivity while, at the same time, it improves the partner and the customer experience. And John, I'll let you just talk a little bit about the details of some things you guys are working on.

Operator:

Thank you. Your next question comes from Lauren Silberman with Credit Suisse. Please proceed with your question.

John Culver:

Okay. Thank you very much, Lauren. As I shared, we added and grew our active memberships 21% in the quarter and we now exceed 26 million active members. We added five million active 90-day members on a year-over-year basis. So Starbucks Rewards now represents 53% of the spend in our stores, which is at an all-time high and which is a three-point increase versus fiscal – Q1 fiscal 2021. As part of that, their growth in terms of spend has grown commensurately. We're seeing significant increase in the spend in the first year of membership versus the prior 12 months of the preceding membership. We're seeing a strong lift in spend when they join, regardless of whether the customer is high or low frequency. And Rewards members, as you shared, are spending at an elevated rate and visit our stores at a 3x frequency rate versus our nonmembers. So we're going to continue, as a company, to double down in this area, and we see it as significant upside and presenting tremendous value to meet the need states of our customers.

David Tarantino:

Hi, good afternoon. My questions on the turnover in the U.S, it seems like that might have surprised you in the most recent quarter, given your commentary about training costs and onboarding new partners. So I guess that’s a trend maybe we haven’t heard from others. So I wanted to understand kind of what you think drove that spike in turnover if you had one, and why you think that might ease as the year goes on here.

Operator:

Thank you. Your next question comes from Andrew Barish with Jefferies. Please proceed with your questions.

Rachel Ruggeri:

Sure, and I believe you’re referring to the 200 basis points that maybe Kevin addressed in his prepared remarks. There’s a couple of ways I’d look at the 200 that we had is in Kevin’s prepared remarks, we talked about nearly 200 basis points, the majority of that was inflationary pressures as we began FY2022. So as you recall, we had expected to have elevated cost pressures going into FY2022 related to the decisions we made around wage but also the inflationary pressures, both in freight and labor across our supply chain and across and through our commodities. What we’ve seen, those costs have actually, as we’ve outlined, accelerated in December and have intensified, really largely related to Omicron into January. So when we talk about the back half of the year having another 200 basis points of headwinds, the lion’s share of that is really inflationary pressures related to Omicron that we saw in December and that we’re seeing further in Q2. That also includes the COVID-related pay as well as training. As we get through Q2 and when Omicron subsides, I don’t know exactly when that will happen, but as it does, we would expect that our inflationary pressures related to Omicron would lessen in terms of the impact on margin. But overall, our inflationary pressures in FY2022 will remain elevated relative to FY2021.

John Ivankoe:

Hi, thank you very much. I wanted to get back to the discussion on U.S. traffic because it looks to us that U.S. same-store traffic is still down double digits from the first quarter of 2022 to the first quarter of 2021, and despite at least what you said last quarter, a record number of discrete customers, obviously, a record number of MSR members. So I wonder like what the big kind of addressable buckets in your opinion there is to kind of re-attract the frequency of your previous customer base is kind of the first point. And secondly, is there anything that you can do with the direct communication functions around MSR, the personalization, what have you to really step on the gas for that program to get back your overall store visitation levels back to the levels it was in 2019 or fiscal first quarter of 2020, whatever you want to call it?

Operator:

Thank you. Our last question comes from David Palmer with Evercore ISI. Please proceed with your questions.

John Culver:

Yes. I think that what we see – well, I know what we’ve seen is that as we’ve had to adjust store operating protocols, in some cases, we’ve gone to pickup-only, we’ve gone to drive-thru-only and we’ve readjusted the format. So the ability for customers to come into the stores and to sit in the store is not at the level of capacity than it was back prior to COVID. This is an area that we’re continuing to focus on in adjusting and reopening the stores fully, number one, as we’re able to, given COVID, and number two, as we’re able to, given some of the staffing challenges that we’ve seen. So we continue to adjust and monitor this very closely and make decisions on a daily basis. Now in terms of customers and their changing routines and how much is going to go back to where it was before and how much has changed, we feel confident that given the Starbucks Experience, our customers come to us because they love a great premium experience in a high quality cup of coffee. And whether it is coming in our stores or coming through the convenience channels, we’re going to continue to grow in all those areas and meet the change whatever it is for our customers going forward in terms of their routines.

Kevin Johnson:

Well, thank you all for joining us today. I hope you get a sense of three things

Operator:

Good afternoon. My name is Alex, and I will be your conference operator today. I would like to welcome everyone to Starbucks Fourth Quarter and Fiscal Year-end 2021 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator instructions]. I will now turn the call over to Greg Smith, Vice President of Investor Relations. Mr. Smith, you may now begin your conference.

Kevin Johnson:

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 prior year. This was a record Q4 that punctuates a very strong FY’21 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 guided 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 continued 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. Over the last 18 months, Starbucks, like most global retail operators, has been confronted with a seemingly never-ending wave of consumer and business headwinds. Many businesses in our space have not survived. From day one of the pandemic, Starbucks leaders around the world were determined to use the Company's size and scale to navigate whatever challenges lie ahead with steadfast commitment to our people, our mission and values, a set of principles guided us through the pandemic. Every decision was rooted in our core purpose and reason for being. These decisions have made the Starbucks of today stronger and better positioned to profitably grow, extend our coffee leadership around the world, and create more value for our shareholders more than ever before in our history. Last year, we made significant pandemic-driven strategic investments, including providing our partners with financial support and economic certainty, avoiding layoffs while most of our stores were temporary closed, and accelerating our U.S. store portfolio transformation by opportunistically repositioning 500 stores to better locations with more favorable economics. To this last point, we expanded our portfolio of drive-thru 's, introduced new store formats to meet our customers where they are, and turbo-charged growth in our digital customer relationships in the U.S. and China. 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. While we made significant progress addressing supply chain challenges as fiscal 2021 progressed, we remain cautious and vigilant as we enter fiscal '22 given the dynamic nature of the situation. The recovery in Q4 surged forward as evidenced by the sequential acceleration of 2-year comp growth. We exited Q4 with even stronger 14% 2-year comp growth in September and closed to a record average [Indiscernible] driven by the strength of our fall beverage lineup, a shift in customer behavior toward more premium beverages, and strong food attach. We have great confidence for the year ahead given the current momentum throughout the quarter, combined with holiday plans certain to excite and delight our customers, and increasing consumer demand around the world today for everything Starbucks. Yesterday we made an important announcement to raise wages across the U.S. in fiscal '22, to ensure we continue to attract and retain talented partners, as consumer mobility continues to increase. We believe this investment, combined with our industry-leading benefits program, will enable us to remain an employer of choice. This builds on the historic partner investments and meaningful wage increases we made in fiscal year 21, and prioritizes significant additional investment to address inflation and wage compression that our 10-year partners have experienced, while also increasing our wage floor. In December of 2020, I announced our intention to provide a starting wage of at least $15 an hour for our store partners across the country. And by the summer of '22, we will have delivered on that plan. Effective in January, partners with 2 or more years of service will get up to a 5% raise, and partners with 5 or more years will get up to a 10% raise, in keeping with our longstanding history of investing in our partners. And next summer, hourly partners in the U.S. will make an average of nearly $17 an hour with barista rates ranging from 50 to $23 an hour across the country. In total, the FY21 and FY22 investments represent approximately $1 billion in incremental annual wages and benefits. We continue to build a great and enduring Company by investing ahead of the growth curve, not just in wages, but in training and technology and the overall Starbucks experience for both our partners and our customers. And as we have seen in the past, we expect investment in the partner experience will be accretive to profits over time. We believe the U.S. market is at a unique inflection point. Stakeholder and companies whose leaders correctly identify emerging trends, thoughtfully shapes strategic action, and invest in the future will be big winners over the long term. In the quarters ahead, Starbucks will continue to target investment in high returning assets that we believe will accelerate our double-digit growth at scale model, driving long-term, sustainable, and profitable growth. We continue to build and leverage our technology first, mobile and digital capabilities and accelerate growth in active Starbucks Rewards membership. We grew our 90-day active Starbucks Rewards members, representing our most loyal, engaged customers by approximately 30% in fiscal year 21 to 24.8 million members. Noteworthy is that in Q4, 51% of U.S. tender for Company-operated stores was generated by this loyal customer base. We continue to nurture and deepen our direct, personalized, digital relationship with our members, with enhancements to the program, like Stars for Everyone to expand reach, and through payment partnerships with PayPal and [Indiscernible] where a customer can now reload their Starbucks card with a range of cryptocurrencies, including Bitcoin, Ethereum, and others, by converting digital currencies to physical currency and reloading their Starbucks card. Through Blockchain or other innovative technologies, we're exploring how to tokenize Starz, create the ability for other merchants to connect their rewards program to Starbucks Rewards. This will enable customers to exchange value across brands, engage in more personalized experiences, enhance digital services, and exchange other loyalty points for Starz at Starbucks. An example of this innovation is evident in the recent launch of our Canadian Loyalty Program with Air Canada. Over the next year, you will see the first instance of this loyalty points exchange with other consumer brands. This approach will also serve as a foundation for a more aspirational concept for new, modern payment rails that align payment expenses with the value received by customers and merchants. We intend to be at the forefront of this disruptive innovation, which will unfold over the next few years. Finally, a rich pipeline of innovation will elevate the Starbucks experience in our stores, and drive in-store productivity gains. Examples include our Mastrena 2 espresso machines that more efficiently pulls triple shots of high-quality espresso. Our Deep Brew artificial intelligence platform that has automated daily inventory management, and store staffing and training improvements designed to reduce complexity in our stores. Simplifying this workflow helps reduce the strain on our partners, resulting from the ever-increased demand in our stores. It enables our partners to connect and engage with their customers, which is at the heart of the Starbucks experience. Starbucks is entering fiscal year '22 with strong customer demand and solid momentum in our U.S. business, and expanding and accelerating in-store channels and digital flywheel and green apron partners, eager to deliver an elevated Starbucks experience to their customers. Having navigated through so many challenges over the past year, we are excited and optimistic about the year that has just begun, while remaining humble and mindful of unknown challenges. On to China. Starbucks China extended our market leadership position in Q4 despite pandemic-driven disruptions, propelled by an accelerated pace of store development and significant growth in digital customer relationships, all while achieving record customer engagement scores in the quarter and in the year. Starbucks has built one of the most respected consumer brands in China, with one in two consumers preferring Starbucks to any other brands in a way from home coffee. Our growth strategy in the market continues to differentiate us and position us well for the long game. We continue to invest meaningfully in all aspects of our China business, including accelerated investment in our partners, the creation of award-winning experiential store designs, unprecedented benefits like healthcare for partners and the parents, rents assistance and programs that offer career paths for young people from rural and remote provinces. Together, these investments further elevate the Starbucks brand and partner experience. They instill pride in our China partners and deepen our customer engagement and connection. Starbucks continues to be in a strong market expansion cycle. And as such, much of our growth in China comes as we aggressively expand our store footprint, and introduce more customers to the Starbucks experience. We expanded the store footprint with 225 net new stores in Q4, and we are going deeper and broader. Deeper into existing cities, and broader by opening in new cities. For the full fiscal year, we opened a record 654 net new stores, and ended the year with 5,360 stores in 208 cities throughout China. As we noted on our Q3 earnings call, our recovery in China will not be linear. In Q4, we experienced COVID -related restrictions that constrained customer mobility in 18 provincial level regions. At its peak in mid-August, approximately 80% of our stores in China were impacted by the pandemic, with some stores fully closed or operating at different levels of elevated public health protocols, such as mobile ordering only, limited seating, or health stations. Our recovery momentum was below expectation and pushed our 2-year comps to a minus 10% in Q4. Cities with local COVID cases were impacted the most, with storage relying on transportation and tourism also materially impacted during the quarter. Notably though, much like the U.S., China 2-year comp also accelerated in the month of September as we remain optimistic for the recovery. Despite these strong headwinds, China grew revenue 11% year-on-year. While our overall reported comp growth was minus 7% for Q4, if we exclude the lap of that subsidy we received in fiscal year '20, along with the stores in cities that experienced local COVID cases or were in transportation and tourism zones, our core fleet of stores, comp positive. positive. Starbucks 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, demonstrating the effectiveness of our efforts in up-leveling member engagement. One example was our Star Dash, gift with purchase campaign that successfully lifted member frequency and spend, and evolved into a highly anticipated activity for members to earn limited availability to Starbucks 50th anniversary merchandise. With operations heavily impacted by COVID related safety restrictions in the quarter, we are laser-focused on what we can control in China, while continuing to elevate our partner and customer experiences to further elevate the Starbucks brand, and build on the loyalty that will continue to drive our long-term growth. Including the U.S. and China, Starbucks presence in 84 markets around the world provides us with a unique perspective on the global recovery from this pandemic. There is no doubt that we are seeing continued recovery in our markets. Latin America grew system sales by 113% in Q4, driven by a strong recovery in Mexico. EMEA posted system sales growth of 52% in the quarter. And Japan navigated through a challenging quarter, turning the corner towards renewed growth. We see positive signs in many other markets, as well as reinforcing our belief that pandemic-related headwinds are temporary. In addition, our strategic channel partnerships with the North American Coffee Partnership with PepsiCo, and our global coffee alliance with Nestle, are on plan and have propelled Starbucks to number 1 share positions in the U.S. and throughout many other markets around the world, further underscoring the strength and resilience of the Starbucks brand and illuminating the decade-long runway of growth ahead. 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. 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're prepared with inventory this holiday, and we're also anticipating that nearly $3 billion will be loaded on Starbucks cards this season, by leveraging our digital and out-of-store distribution channels and creating a promotional presence in drive-thru lanes, where we have seen significant channel shift during the pandemic. We are ready for this holiday. 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. This confidence supports the plan we announced today to return $20 billion to shareholders over the next three years through dividends and share repurchases. I'm particularly pleased that hundreds of thousands of Starbucks partners, who are also Starbucks shareholders through our Bean Stock program, will also benefit from this plan. 50 years ago, Starbucks was founded as a different kind of Company. A Company that would balance profit with social conscious, embrace the ideal that doing good for one another and for society would actually be very good for business over the long term. Our performance in 2021 demonstrates the wisdom and correctness of that founding principle. As we enter our second 50 years, we continue to honor our history and heritage just as we boldly reimagine our future. And with that, I'll now turn the call over to Rachel. Rachel.

Operator:

Thank you. [Operator instructions]. Our first question comes from the line of David Tarantino with Baird. Please proceed with your question.

Rachel Ruggeri:

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 FY’23, 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. We feel confident in that given that our growth at scale agenda and our focus on pipeline of innovation, our ability to continue to grow our digital customer membership, and our ability to continue to accelerate the service experience through new stores and through the experience for creating in-stores, coupled with productivity and efficiency throughout our global network is really what allows us to continue on that path towards 18% to 19% margins in line with our long-term guidance.

David Tarantino:

Okay. Thank you.

Andrew Charles:

Great. Thanks. I just have a two-part question. Kevin, what do you attribute to the U.S. acceleration in September? I think investors are trying to get a sense if this is something more enduring, like a post -- like a larger post-Labor Day return to office, or perhaps something more transitory like a successful PSL season. And Rachel, just to clarify one piece of the guidance, does the non-GAAP EPS guidance of $3.40 plus, does that incorporate share buybacks or is that excluded from the EPS guidance? And if you can just provide a share count that guidance is contingent on to help flush that out, it'd be very helpful. Thanks.

Rachel Ruggeri:

Sure. And to the second part, Andrew, what I would say is generally -- we're looking at about approximately 1% impact to EPS from the share repurchases, which is in line with our long-term guidance, slightly elevated this year just given that this year’s repurchases will be a little bit higher than '23 and '24, given the impact of the proceeds from Korea but approximately 1% and that's provided in our guidance.

John Ivankoe:

Hi. Thank you. Just looking at the numbers, it seems like one of your biggest opportunities is bringing back the U.S. traffic counts, I guess to at least what they were in 2019, if not even above what they were in 2019. So, I wanted to get either your sense of the visibility of that happening, if there are any green sheets, for example, suburban drive - throughs, for example, that are seeing that increase in traffic and you do you think you have the staffing today in the stores that would allow that return to traffic or would it be necessary to add a step function change in some of the labor hours to reach that increase consumer demand. Thank you. Thanks John, I'll hit to A - John Culver to share his perspective on the question.

Operator:

Thank you. Our next question comes from Sharon Zackfia with William Blair. Please proceed with your question.

John Culver:

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. It demonstrates our ability to navigate through these challenges, whether it be staffing, whether it be any of the supply chain challenges, or any of the inflationary pressures. When you look at it, one of the things that we've done during this time as we've looked at adjusting the staffing levels and how do we manage through this, is we've 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. And that has enabled us to redeploy staffing into other stores where we need it. So, we're continuing to do that. In terms of your question around attrition. We are over the last year, we have approximately 70% of our hourly partners are new to Starbucks and we continue to make investments in them from a training standpoint, as we announced yesterday for all our partners. In addition, we've made investments now and we announced this yesterday around recruiting and adding recruiters -- more recruiters into the regions to really focus and find, and attract new talent. And then also at the same time, we continue to work very closely with our partners to understand how we can continue to make them effective, as well as reduced complexity in the store. And complexity is a big thing for us, a big focus. And then that we're looking at two things. Number one is driving automation in the stores. We've driven automated ordering for food and merchandise that will be fully rolled out across all of our U.S. Company-owned stores by the middle of this quarter. And then in addition, we continue to make investments in equipment. And from an equipment standpoint, whether it's a strainer, whether it's our warming ovens, or whether it's our cold brew system, all these equipment investments also make our partners more effective in free up time for them as they do their task. So, a lot of work going on. I'm very proud of the way in which our partners have navigated over the course of the last year in particular, and as we've experienced some of these challenges, and we feel as though we are in a very good spot in managing through this, and we will continue to make investments in this area. It's an area we're watching very closely.

Sara Senatore:

Sorry. Can you hear me now?

Sara Senatore:

Sorry about that. I have a question and then a follow-up. The first is on China. It sounds like you're seeing just the impact of the pandemic rather than, say, slower macro growth, or what others have alluded to, or competition. So, I guess just -- if you could just kind of talk about that in the context of what you're seeing there in terms of transaction, and ticket. Giving back a little bit of the ticket, I didn't know if there’s an underlying dynamic there outside of just the pandemic that might be playing out. And then my follow-up was on the investments you're making holistically. I certainly understand why, and to your point, the payout has been visible, but why not sort of approach it more ratably as opposed to a lot upfront in the coming year, just given the volatility in the operating environment and you're coming off of obviously depressed earnings growth from the pandemic. Can you just talk about the timing, and different molding of it? Thanks

Leo Tsoi:

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 weights 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 the customer mobility, and disrupted the consumption patterns. As you know, the borders also remained closed. And when we see what these impacts to us, it means that over half of our stores were located in cities, hit by local cases. And around 80% of our stores we're operating under the [Indiscernible] safety protocols at the peak of the resurgence. So that's why weighted down by these headwinds, we in Q4 delivered a 11% revenue growth year-over-year as Kevin pointed out. And that means in Q4, the converse of net minus 7% or minus 3% if we exclude the lapping over of FY'20 VAT reliefs. However, I must say that when we exclude the thoughts in the [Indiscernible] with local cases, as well as transportation than tourist stores. Our comp was actually positive, excluding the FI retention and VAP release. And more importantly as Rachel also pointed out, our operating income was -1% versus last year. And if we actually exclude the one of [Indiscernible] FY20, we actually achieved this -- how we improved this -- our improvement on the operating income. So, this is really showing and demonstrating in our team's operational ability. So, I'll just say that there are -- we are seeing these pandemic dynamics are happening in the market, but I would -- I'm confidently saying that it is a short-term. And there are -- they are going to recover; we're going to recover. And this is why our focus right now is focused on what we can control. The navigates, all these short-term volatility with our team's ability while capturing the key opportunity by for example, accelerating our future growth and elevating our fiscal engagements and our customer experience. I think this fall is going to power our future -- color our future growth, and feel sustainable competitive advantage of set of China. And over to you.

Operator:

Thank you. Our next question comes from the line of John Glass with Morgan Stanley. Please proceed with your question.

Kevin Johnson:

Okay. Let me have -- I'll have Rachel's comment is going to -- I want John Colbert to give you sort of perspective on where we're at the supply chain. Rachel.

John Culver:

Yeah, John, just really quick. On the inflationary impacts from a supply chain standpoint, we are seeing impacts, and that's evidenced by some of the inventory levels in our stores, but I feel very good about the way in which we've been able to navigate it. Those supply impacts began in mid - fiscal '21 and we would expect that they will continue into this coming year. All right? And what we're seeing is headwinds on commodity pricing, challenges around transportation, and also the ability for our distributors and manufacturers to find labor to work in their factories and distribution centers. A couple of things that we've done with the team is, number 1, we've worked very closely to add new manufacturing and supply partners across our critical categories. And that is a dividend for us and we're seeing inventory ease in those categories, i.e., old milk, breakfast sandwiches, egg bites et cetera. Whereas building throughput, and production capacity, we have suppliers adding new lines so that they can increase their safety stock. We've worked with suppliers to invest in wage for their workers, and many of them have done so. And the last thing I would say that what we've done, is we've really focused our production effort on high volume items. In some of those lower volume items, we pull back on and deprioritize. So, all that work and the actions that we've taken, we started early on as we began to see these challenges, we've addressed some. We're not out of the woods yet, but we feel very good about the path that we're on. And as Kevin highlighted, we're very confident that as we head into holiday, our inventory position is very strong. And we'll continue to watch this very closely and we'll continue to work with our supply network to ensure we've got an adequate supply of products in our stores. And then the last thing I would say is that clearly like other retailers, we're seeing customers come back into our stores at record levels. And the strength of our business is very strong. So, we're very encouraged around the progress that we're making and the growth opportunities that we see going forward.

John Glass:

Thank you.

Jeffrey Bernstein:

Great. Thank you very much. Just a follow-on to that return of cash discussion, which is obviously a bullish sign that $20 billion investment you're making. But with that said, Kevin just thinking bigger picture. I think you said in your press release that you're currently 50-50 Company-owned and licensed. Just wondering what the thoughts are around increasing that licensing mix over time, which would seemingly generate a higher margin annuity stream of royalty income, allow for greater Balance Sheet leverage, maybe return incremental cash. I'm not sure whether that would require a change in the China ownership structure. But we've obviously seen that at your largest multinational QSR peers. So just essentially looking for an update to the thoughts on that 10-20-30 scenario from the 2020 Investor Day. Just to get your sense for the outlook on the ownership structure. Thank you.

Operator:

Thank you. Our final question comes from Jon Tower with Wells Fargo. Please proceed with your question.

Kevin Johnson:

All right, John, let me take the first part of your question and then I'll hand to Rachel on the second part. Look, when it comes to pricing, we continue to be very thoughtful and very strategic in how we look at pricing and we're actually using machine learning and some of the Deep Brew technologies that inform our pricing team on where and how to take that price. I prefer not to say, hey, here's the amount of price we've built into this plan, but I think we certainly have more upside in prices that we needed. But it is a dynamic thing because we're watching inflation and we really want to do this in a way that stays true to the thoughtfulness that we've always had in the past and part of this is how do you take, the right amount of price, the right time and not have customer attrition. We're the share we want to grow share of customer occasions right now. And so, that's the balance that we strike, and it's really a fairly dynamic thing. So, for, us to -- we just -- I prefer not to say, here's what we built because I think we actually have more if we need it, we could take less if we don't need it. All I will say is that I know we've got a world-class pricing team backed up by world-class analytics and insight. And we are -- we were very good at this in fiscal '21 and we're going to be very good at it going forward. Rachel?

Operator:

Thank you. At this time, there are no further questions. I will now turn the call over to A - Kevin Johnson for closing remarks.

Operator:

This concludes Starbucks fourth quarter and fiscal year-end 2021 conference call. You may now disconnect.

Operator:

Good afternoon. My name is Hector, and I will be your conference operator today. I would like to welcome everyone to Starbucks Coffee Company's Third Quarter Fiscal Year 2021 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now turn the call over to Greg Smith, Vice President of Investor Relations. Mr. Smith, you may begin your conference.

Kevin Johnson:

Well, thank you, Greg. I too want to wish Durga and her husband well as they begin a new adventure in London. Durga leaves the team and our investor community in great hands with you Greg and thank you for stepping in to lead Investor Relations while we search for a permanent replacement for this important role. Well, good afternoon, everyone. And thank you for joining us today. As we celebrate Starbucks’ 50th anniversary, we are reminded of the increasing premium on genuine human connection, which has always been at the heart of Starbucks. If there is any lesson we can take from this past year, it is that our promise to uplift every day through authentic human connections over coffee is enduring. It has never been more valuable and sought after. As humans, we belong together and Starbucks was built for this moment. Now, with customer mobility increasing, we are at the beginning of what we describe as the great human reconnection. The reopening of markets is translating to incredible increases in demand for Starbucks as people are again on the go reconnecting and socializing with one another. Human connection is the very foundation of the Starbucks experience. The differentiated experience we create for our customers strengthened through the actions we’ve accelerated over the past year enables us to meet our customers wherever they need us to be. That experience is core to who we are at Starbucks and it drove significant momentum through Q3. That experience is also a direct reflection of the 400,000 Green Apron partners who continue to make every moment right. It is our partners who deliver the elevated and uplifting experiences for each of the millions of customers we serve every day. Our partners make the difference. They are the heartbeat of Starbucks and for that, I am incredibly proud. Now, let me take you through Q3, which is highlighted by record-breaking results, fueled by the continued strength of the Starbucks brand around the world. The impressive momentum Starbucks saw in Q2 accelerated through Q3, in which we delivered record revenue of $7.5 billion, up 78% year-on-year, and a record non-GAAP EPS of $1.01. Additionally, two year comparable store sales improved sequentially led by an incredible overall performance in the U.S., as well as significant net new store growth in China, where we reached over 5,100 stores during the quarter and the double-digit growth and continued share gains that our channels business delivered in the At Home market. Our performance globally reflects the strength of our diverse portfolio and the benefits of scale, as we once again exceeded higher expectations for the quarter, despite inflationary pressures and ongoing pandemic-related restrictions in certain global markets. Our focus, combined with our unwavering commitment to innovating and elevating the Starbucks experience as our key differentiator has proven successful time and time again. All of this gives us confidence to raise guidance for the balance of the year, and further positions the company for solid long-term growth. In the U.S., our momentum accelerated in Q3, posting year-on-year revenue growth of 90% and two year revenue growth of 16%. Comparable same-store sales grew 83% and importantly two year comp grew 10%. This is at the high end of our long-term annual comp growth target of 4% to 5%. We posted these results even with mobility restrictions still impacting some U.S. geographies with industry-wide pressure in pockets of the supply chain and with our in-store cafe seating not yet fully reopened. Not only have we posted incredible results as we emerge from the pandemic, our internal research also confirms Starbucks has gained meaningful market share in the U.S., and the momentum we have created is sustainable. In fact, Starbucks competitive share is the highest this year that has ever been in the away from home coffee and tea category. Simply put, our Green Apron partners are delivering an experience that customers are craving and the growing opportunities to serve our customers with the unmatched experience Starbucks offers gives us resounding confidence in the strength of the brand and the growth potential ahead. One powerful example of innovation that is fueling our momentum is our Beverage portfolio, which when coupled with our unparalleled ability for customizing handcrafted beverages, separates Starbucks from the competition. The investments we have made over the past few years, innovating and expanding our coffee-forward cold beverage platform continue to boost sales and draw new customers to Starbucks. We continue to see strong demand for Starbucks Cold Brew, Nitro Cold Brew and Starbucks Refresher beverages while ice shaken espresso alone contributed more than a third of the iced espresso growth in the quarter. The cold category represented 74% of beverage sales in Q3, growing 10 percentage points over the past two years. With the wide range of beverage options both cold and hot, our customers love personalizing their drinks. Over the last two years, we’ve seen a meaningful increase in customizations such as adding Cold Foam or Shot of Espresso. Additionally alternative dairy offerings represent nearly 25% of milk-related beverage sales, up from prior year. These innovative offerings in cold and alternative dairy are particularly attractive to millennial and Gen Z customers and are aligned with our focus on the well-being of people and the planet. With premium customization of beverages, coupled with operational improvements, the growth of both hot and cold beverages in stores is enabling margin expansion despite some continued inflationary pressures which Rachel will discuss in more detail. In addition to beverage platform innovation, extending the in-store experience with digital customer relationships continues to extend our reach, deepen engagement and enhance the customer experience, further differentiating Starbucks and offering customers ever-increasing choice as to how they engage with the brand. We again added over 1 million new active Starbucks Rewards members in the quarter, with over 24 million active members now representing 51% of all spend in our U.S. stores and up 8 percentage points over pre-pandemic levels, our ability to engage has never been higher. More and more of these customers are embracing experiences that effortlessly fit their lifestyle with drive-thru representing 47% of transactions and mobile ordering for in-store pickup delivery or curbside at 26% of transactions. We are leveraging all channels to better serve our customers. While it is very clear that our Rewards program has accelerated our recovery in a meaningful way, where Q3 really stands out and what adds to our confidence is the acceleration we saw in our non-rewards customers. While rewards spend grew at a rapid mid-teens rate quarter-over-quarter, for the first time in 11 quarters non-rewards spend growth outpaced SR spend. This is further evidence of the great human reconnection. The rapid reengagement of non-rewards customers not only propelled our record results, but also underscores the strength of the brand and the growth potential ahead. And finally, we continue to make meaningful progress to reposition our U.S. store portfolio through trade area transformation, which is now nearly 80% complete. In the past twelve months, we’ve opened 554 new stores combined with in-store seating and drive through service. This portfolio repositioning and new store formats have increased drive-thru performance to 75% of our total U.S. sales. A number that continues to rise as we increase efficiency. The improvements and additions, we are making to our portfolio today will provide benefits for years to come. With our focus on the customer experience, new beverage innovation and digital customer relationships, we continue to increase share of customer occasions, while also contributing to a rapidly growing market for all things coffee. Moving on to China where we posted a very positive result with year-on-year revenue growth of 45%. Remarkably, total revenue in China has grown 23% in just two years as we continue to play the long game and we are on track to open more than 600 net new stores this fiscal year. In Q3 alone, we opened 162 net new stores that continued to deliver best-in-class new store profitability and returns. We ended the quarter with 5,135 stores and we are well on track to operate over 6,000 stores by the end of fiscal year 2022. In addition, we posted 19% same-store comp growth in Q3 and saw sequential acceleration of our two-year comp when excluding the impact of value-added tax. Furthermore, we gained strong momentum with sequential improvement on every key metric on a two-year basis including total revenue growth, store traffic recovery and margin expansion. The health of our business in China is strong and we’ve never been more confident in the long-term growth opportunity. In addition to significant new store growth and sequential acceleration of two-year comps in China, we are expanding digital customer relationships and engagement by creating new occasions and experiences that make mobile ordering even more convenient and personalized. This has resonated strongly with our customers in China propelling mobile ordering to 34% of sales, significantly higher than the 23% in the prior year and more than double pre-COVID levels. Starbucks Rewards continues to aggressively expand our digital ecosystem across major platforms, driving 90-day active members to an all-time high of $17 million, a 4% increase over previous quarter and a 71% increase versus prior year. Gold members, a very important cohort are engaging Starbucks at pre-pandemic levels. Our performance in China is a testimony to the unparalleled strength of the Starbucks brand and our enduring relationship with our Chinese customers. Our rapidly growing store footprint, market-leading digital ecosystem and customer engagement, robust innovation pipeline and the enduring love and loyalty for the Starbucks brand in China are all unmatched. I have full confidence in the strength of the Starbucks brand in China and across all our international markets. There should be no misunderstanding of how big and robust our business China is and will be. These are still early days and our strategies are clearly working. Starbucks is uniquely positioned for success in China well into the future. With phenomenal strength and growing momentum in our retail business, let me now move on to our Channel Development segment that also continues to exceed expectations. Over the past three years, we have made significant progress expanding our reach and amplifying the Starbucks brand through CPG, single-serve coffee, ready-to-drink and foodservice. I attribute our success to the power of the Starbucks brand, the bold innovation that attracts new coffee lovers into our categories and the caliber of our strategic business partners globally. In Q3, Starbucks retained our number one brand position in total U.S. At Home Coffee and further expanded our leadership position versus other brands. The Starbucks brand continued to increase share in the total U.S. category, impressively adding 1 percentage point over the prior year, despite lapping a strong comp. The Global Coffee Alliance with Nestle is a powerhouse and we continue to see strong performance across all aspects of the key strategic relationship. Earlier this year, building on the success of the Starbucks by Nespresso platform, we expanded and introduced Starbucks by Nespresso on the virtual line, which is already exceeding six month distribution and velocity targets. In addition, the combination of strong CPG performance combined with a steady recovery in foodservice gives us added confidence. In ready-to-drink, Starbucks is the number one premium brand globally with our North American coffee partnership with PepsiCo growing 19% in consumption and our International ready-to-drink business growing double-digits in EMEA and China, Asia Pacific. These channels amplify our brand in more than 80 markets around the world offering millions of customers At Home and At Work options that complement their Starbucks in-store experience. And just yesterday, we announced plans to reach new markets and grow our Starbucks ready-to-drink portfolio with Nestle, who will now serve markets across Southeast Asia and Latin America. Our channel development strategy to amplify the brand, while growing share of At Home occasions continues to attract new customers to Starbucks with unparalleled choice, while driving best-in-class returns. The key take-away from today’s call is this

Operator:

[Operator Instructions] Your first question comes from the line of Jeffrey Bernstein with Barclays. Please proceed with your question.

Kevin Johnson:

Yes. Jeffery, thanks for the question. Let me share some thoughts and then I’ll hand it over to Belinda to comment a bit further. Jeffery, we’ve been in China now for over twenty years. And every step of the way we have built Starbucks in China for China. And the brand resonates with our customers in China. So, I think that’s number one. Number two, we are in a market building mode right now. Most of our growth comes from the new stores that we open and the fact that the new stores that we have been opening are performing at some of the highest AUV levels prior generations gives us confidence that we are continuing to expand our reach and presence in China. I think those two things. Certainly, from a geopolitical standpoint, we’ve got businesses in 84 markets around the world. So we constantly deal with geopolitical situations and I’d say, there is not a geopolitical situation that has really impacted us in China over the last couple of years and I don’t really foresee that happening as long as we continue to stay focused on what we do and what we do well, which has created great experience for our customers in China. Take care of our Starbucks partners who proudly wear the Green Apron in China. And we are bullish. We continue to invest, whether it’s the investment we are making in new stores, whether it’s the coffee innovation park, the first sustainable roasting plant that we are building in China, the work we are doing with coffee farmers in Yunnan and I’d sort of look at the – this navigating the – some of the implications of COVID as just being short-term. And so, that’s why I kind of look at it as a very – from a very bullish perspective long-term. So let me hand it over to Belinda. Belinda, I’ll let you comment a bit further on Jeffery’s question.

Kevin Johnson:

Thank you, Belinda. I think, Rachel had one other comment, Jeffery to your question.