Q4 2019 Earnings Call
Good afternoon, My name is Hector and I'll be your conference operator today.
I would like to I would like to welcome everyone to Starbucks Coffee Cup of coffee company's fourth quarter and fiscal year 2019 conference call.
All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question simply press Star then the number one on your telephone keypad.
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Simply press Star then the number two.
I will now turn the call over to Dugard door, Sami Vice President of Investor Relations.
Mr. Saw me you May now begin your conference.
Good afternoon, everyone and thank you for joining us today to discuss our fourth quarter and fiscal year 2019 results. Today's discussion will be led by capping Johnson, President and CEO and Pat Grismer CFO and so Q1, eight we will be joined by Roz Brewer.
Switching office and group President Americas.
John called Group, President International Channel development, and global coffee and tea.
This conference call will include forward looking statements, which is subject to various risks and uncertainties that could cause our actual results to differ materially from these statements any such statements should be considered in conjunction with cautionary statements is no earnings release and respected discussion.
You know filings with the FCC.
Including although a lot of annual report on Form 10-K .
Starbucks assumes no obligation to update any of these forward looking statements or information.
GAAP results in fiscal 2019 includes several items related to strategic actions, including restructuring and impairment charges transaction and integration costs.
On the items.
These items are excluded from our non-GAAP results.
Please refer to the total website at Investor Dot Starbucks Dot com to find a reconciliation of certain non-GAAP financial measures referenced in today's call would dare corresponding GAAP measures.
Additionally, as previously announced restated GAAP and non-GAAP wants to me financial information for fiscal 2018, and through Q3 fiscal 2019, reflecting our realigned operating segment reporting structure and leaf classification of.
Certain costs can also be accessed on our Investor Relations website.
That's our collective strategy for growth and review the great progress our teams have made implementing global coffee Alliance.
Today I'm pleased to share that Starbucks delivered strong operating results again in Q4.
Capping off a transformative year for the company as we continue to execute our growth at scale agenda with focus and discipline.
Pat will review our financial results in more detail later in the call.
But I'll start by sharing performance highlights for the quarter and the year.
As well as some key actions we've taken in important investments, we've made to enable predictable sustainable growth, while delivering value for all our stakeholders as we build and enduring company at Starbucks.
In the fourth quarter, Starbucks delivered revenue growth of 10%, excluding the 3% impact of streamline activities and foreign exchange.
Led by global comp sales growth of 5% and net store growth of 7% year over year.
These strong operating results yielded non-GAAP EPS of 70 cents for the quarter up 13% from last year.
In the US we posted comp sales growth of 6% in Q4, including comp transaction growth of 3%.
That's a two year sales comps of 10% for Q4.
The sequential improvement over our very strong results in Q3, and our best performance in the us in over two years.
In China, we posted 5% comp sales growth in Q core, including comp transaction growth of 2%.
That's a two year sales cost of 6% for Q4, demonstrating continued positive momentum in our fastest growing business.
Where we increased our store base by 17% over the prior year.
For the fiscal year Starbucks delivered record results in both total net revenues and non-GAAP EPS.
Total net revenues were $26.5 billion up 10% over the prior year when adjusted for streamline activities and foreign exchange.
This included 5% global comp sales growth for the year in over 1900, net new stores globally, yielding a record non-GAAP EPS of $2.83 for fiscal year, 2019 up 17% versus prior year.
With more than 31000 stores and 82 markets welcoming over 100 million customer occasions each week.
And enabling over 1 billion digital customer occasions per year.
Starbucks is a part of our customers every day routines around the world and I applaud the 400000 Green apron partners, who deliver a premium Starbucks experience to every customer they serve.
Because of our partners, we are achieving even higher levels of customer loyalty and brand preference.
Now, let me highlight some of the key initiatives and investments that drove our strong growth in fiscal 19.
And have laid the groundwork for what we expect will be another year, a strong operating performance in physical 20.
In keeping with our growth at scale agenda, I will talk about how we're accelerating growth in the us and China.
Our extending the reach of our brand through the global Coffee Alliance with Nestle.
And how we've increased stakeholder returns.
Now Im very proud of the progress the team has made against our three focused initiatives to accelerate growth in our us business.
Enhancing the in store experience.
Delivering relevant beverage innovation.
And driving digital relationships.
We have strong evidence that our approach is working as demonstrated by the fact that we are seeing traffic growth across all dayparts.
And we intend to build on this momentum in the year ahead.
We continue to see a strong correlation between Starbucks partner engagement.
And customer connection, which leads to increased customer frequency.
This reinforces our belief that the Starbucks experience delivered by our partners is a key competitive advantage and therefore.
We are making targeted investments to elevate the partner experience with clear evidence that this in turn elevates the customer experience and drives growth.
Throughout fiscal 19 in the EU glass, we invested in our partners by allocating additional store labor.
Increasing store level training.
And simplifying in store tasks, often with new technology.
For example.
We introduced a new staffing and scheduling system to optimize labor allocation based on partner preferences and predictive analytics.
These investments in our partners collectively elevated customer connections as evidenced by an all time high end customer connection scores in Q4.
And we will build on this momentum with incremental partner investments in fiscal year 20.
We also continue to invest in beverage innovation and I'm pleased to say that beverages contributed five points of our us comp sales growth in the fourth quarter led by the strength of our cold beverage platform.
We completed our rollout of Nitro cold brew across company operated stores in the US this summer and introduce new coal pumpkin beverage offerings.
The pumpkin cream cold brew.
And we're very encouraged by its reception we expect this momentum to continue as we move into the favorable holiday season.
And we look forward to sharing more details with you in the weeks ahead.
And finally, we've continued to pursue new opportunities to expand digital customer relationships investing to meet customers increasing desire for convenience and personalized offers.
Supported by the successful launch of multi tier redemption in early Q3, we saw us Starbucks rewards grow to 17.6 million active members at the end of Q4, a year over year increase of 15%.
This is an important growth driver because we know from experienced that when customers join Starbucks rewards their spend level with Starbucks increases meaningfully.
On our last earnings call I outlined the important strategic role that our digital flywheel plays in growing digital customer relationships clearly that strategy is working.
I want to highlight another very important element of our digital strategy artificial intelligence.
Over this past year, we've been dialing up our in house capabilities and investments in AI with an initiative we call deep approve.
Deeper rule will increasingly power, our personalization engine optimized store labor allocations and drive inventory management in our stores.
We plan to leverage de Bruin with AIDS that free up our partners. So that they can spend more time connecting with customers.
The brew is a key differentiator for the future and as we continue our quest to build a world class AI capabilities to better support partners.
Moving on to how we've accelerated growth in China.
Looking back over this past year I'm very pleased with the progress we've made to capitalize on one of the world's most compelling growth opportunities led by strong store development expanded digital customer engagement.
And category leading innovation.
Store development continues to be our number one driver of growth in China.
We opened over 600 net new stores in fiscal 19 and crossed the 4000 store Mark while maintaining best in class New store returns.
As we expand our store footprint.
We have also been investing in innovative retail formats, including our Starbucks now store in Beijing that opened in July our.
Our unique express retail experience that seamlessly integrates physical and digital touch points to enhance the mobile order and pay and the Starbucks delivers customer experience.
We are seeing encouraging early results from this new format.
And in China, We plan to open new Starbucks now stores in top tier cities in fiscal plenty leveraging this new store format to complement the third place store formats and increased market penetration.
As we've expanded our physical presence in China. We've also made significant strides expanding our digital presence in this fast growing market.
The Starbucks rewards program in China, which we upgraded in December 2018 continues to rapidly drive new membership.
At the end of Q4 active members reached 10 million up 45% over the prior year.
To support this growth, we upped level our team all flagship store in September to offer our Starbucks rewards members exclusive products and a taylormade gift experience.
And we enabled members to earn stars from online shopping.
We recently celebrated the one year anniversary of our China digital partnership with Alibaba and I'm pleased to share that we surpassed our goal of expanding Starbucks delivers to 3000 stores in 100 cities by the end of the fiscal year.
This propelled mobile order sales mix in China to 10% in the fourth quarter was seven points coming from Starbucks delivers and three points from our recently launched mobile mobile order for pickup.
In the fourth quarter, we also ushered in a new era of digital customer engagement in China with the launch of voice ordering and delivery by a team all genie.
As we continue to enhance the customer experience around mobile ordering.
These elevated digital experiences are key drivers of accelerated growth in Starbucks rewards membership in China and provide significant momentum for us to introduce further innovations in fiscal year 20, as we work to constantly elevate the customer experience and reward loyalty.
Moving onto the global Coffee Alliance.
Just one year after announcing this alliance with Nestle, we have launched three new coffee platforms in over 30, new markets Starbucks by this bresseau.
Starbucks by Dolce, Gusto, and Starbucks roast and ground coffee.
We did this in record time and ahead of schedule.
In addition to the coffee platforms. We also launched a new product category Starbucks Creamers in North America in Q4.
We entered China is at home and Foodservice segment through the alliance, allowing Chinese consumers to enjoy some of their favorite Starbucks copies in the comfort of their home.
This partnership has enabled us to accelerate the global reach of the Starbucks brand in key markets and looking ahead.
We plan to be in 50 global markets in the first half of 2020.
Moving on to returns to one of our key stakeholder groups our shareholders.
In the fourth quarter, we returned nearly $3 billion to shareholders through a combination of share repurchases and dividends, bringing our full year shareholder capital returns to $12 billion.
Including what we returned in fiscal year 18, we've now returned approximately $21 billion to shareholders well on our way to meeting our three year commitment of $25 billion by the end of fiscal year 20.
And I'm pleased to share that our board has approved a 14% dividend increase this quarter, making the 10th consecutive year that we've increased our dividend by a double digit percentage our growth at scale model combined with our strong balance sheet position Starbucks to have the financial flexibility to both invest in our growth.
And reward our shareholders.
In closing our fiscal year 19 performance gives us confidence that our growth at scale agenda is helping unlock the full potential of the Starbucks brand.
With great Intentionality, we've invested in our partners in technology and in our stores to drive long term growth.
And we've made significant progress to streamline our company.
Through organizational restructuring and through the licensing of some international markets, enabling us to bring even more focus and discipline to the core of our business.
This has helped us to accelerate the pace of innovation at Starbucks, both at the support center and in the field.
To deliver relevant meaningful and inspiring experiences for our partners and our customers.
And with the plants that we have developed for fiscal year 20.
Including continued investment we are excited about our ability to sustain this growth in the years ahead.
Reflecting back on the historic Starbucks leadership experience, we hosted in Chicago last month.
It is my strong belief that the store manager plays a pivotal role in the growth and success of our company.
That is why we convened 12000 store managers in field leaders from the us in Canada to reflect on and celebrate our mission and values, while recommitting to the shared belief that by better serving our partners, we enable them to stand shoulder to shoulder and create best moments for our customers.
This is at the center of who we are as a company.
And will remain a guiding light as we go forward.
The Chicago leadership experience was an important milestone in our journey.
And we will be back in Chicago again next month for another key milestones.
The opening of our six Starbucks Reserve Roastery.
This will be the largest Starbucks store in the world.
Beautifully designed iconic store on Michigan Avenue, and I can't wait to celebrate this opening with our partners and customers and we hope to see many of you there soon.
With that I'll turn over the call the Pat and look forward to taking your questions later in the call.
Matt.
Thank you Kevin and good afternoon, everyone. There are three key points that I want to emphasize today first fiscal 2019 was a very good year for Starbucks financially, reflecting sustained upward momentum in our business second we're confident in our ability to deliver non-GAAP operating income growth of eight.
Percent to 10% in fiscal 2020 underpinned by revenue growth of 6% to 8% demonstrating modest margin expansion, even as we continue to invest for the long term and third we remain fully committed to our long term model a double digit non-GAAP EPS growth.
I will begin by sharing segment highlights for our fourth quarter and an overview of key trends across fiscal 2019, followed by our guidance for fiscal 2020.
Our Americas segment delivered 9% revenue growth in Q4, driven by comp sales growth of 6% and net new store growth of 3% over the past 12 months.
Lapping, 4% comp sales growth in Q4 of last year, our us business delivered an impressive 6% comp sales growth in Q4, this year driven equally by transactions and average ticket.
These results were led by an improved in store experience a strong beverage lineup and increased digital engagement as Kevin mentioned.
Transactions grew across all dayparts for the second consecutive quarter and beverage, let our comp growth for a fifth consecutive quarter driving five points of comp sales growth with food contributing the remaining point.
The majority of the beverage growth was driven by our cold platform, which grew across all dayparts led by cold coffee refreshment and T.
The Nitro cold Brew platform, which reached full penetration of our company operated stores by the end of Q4 and was supported by National advertising for the first time in August continued to be well received drawing in more occasional customers and slightly favoring the afternoon day part.
Our fall beverage lineup also performed extremely well driven by the success of our pumpkin platform, along with cold coffee and Nitro.
Beverage attach beverage mix and pricing contributed evenly to the 3% growth in average ticket for the quarter.
Americans non-GAAP operating margin contracted by 100 basis points to 20.2% in Q4, primarily due to the onetime investment in our leadership conference as we've discussed on previous calls growth in wages and benefits and increased investments in labor hours to elevate the in store experience.
While accommodating higher volumes.
These increases in expense more than offset meaningful contributions from sales leverage and cost savings initiatives, notably supply chain efficiencies.
Moving onto our international segment, which delivered revenue growth of 6% on a reported basis in Q4, excluding the unfavorable impact of streamline related activities and foreign exchange at 5% and 1% respectively revenue grew 12% in the quarter. This was driven.
By 11% net new store growth over the past 12 months and 3% comp sales growth I would now like to highlight the fourth quarter performance of our lead international growth market China.
New store development continues to be our number one driver of growth in China, and I'm pleased to say that our pace of development in Q4 set a new record as we opened 201 net new stores growing store count by 17% versus the prior year importantly, our new stores continue to.
Separately high returns, even as we extended our presence to new cities, while Infilling established cities, China delivered comp sales growth of 5% in Q4, including 2% calm transaction growth led by the strength in digital customer engagement, primarily the growth of delivery Starbucks.
Rewards loyalty program and MLP.
Our international segments non-GAAP operating margin increased by 70 basis points to 21.7% in Q4, when excluding the 60 basis point favorable impact from streamline related activities. The segments non-GAAP operating margin increased by 10 basis points as the benefits.
As of sales leverage cost savings initiatives and labor productivity were largely offset by growth in wages and benefits and unfavorable shift in product mix and strategic investments.
On to channel development revenue declined 6% in Q4, excluding the impact of streamline related activities, primarily the global Coffee Alliance segment revenues increased approximately 5% non-GAAP operating margin declined by 510 basis points to third.
The 7.6% in Q4, when excluding the 310 basis point impact related to streamline channel developments operating margin declined 200 basis points in Q4 fiscal 2019, primarily due to an unfavorable shift in revenue mix.
I'd now like to take a step back and share some key insights from our full year performance underscoring our upward momentum across the year, let's start with revenue for the year, we reported topline growth of 7%, excluding the 3% unfavorable impact of streamline and foreign exchange.
Combined our revenues grew 10% above our long term growth algorithm of 7% to 9%.
These results demonstrate our potential to outperform our long term model.
In the first six months of fiscal 2019, we reversed the negative trend in us comp transaction growth that had persisted for several quarters and sustained at 3% in the second half of the year.
The turnaround in China's comp transaction growth moving from declines in the low to mid single digits last year, two an increase of 2%. This year was equally impressive, especially considering our accelerated pace of store development in that market.
And speaking of China development, it's worth noting that our store openings in lower tier cities in China accounted for a meaningfully higher percentage of total store growth in that market versus the prior year, yet portfolio investment returns remained very robust demonstrating starbucks resonance with China's growth.
The middle class.
Our store development in the US was also quite healthy as we grew net new stores by 3% in fiscal 19, even with a higher level of closures relative to the prior year as we repositioned our store portfolio for future growth.
This is industry, leading domestic growth for our retail business of Starbucks scale, and coupled with relatively low penetration in certain geographies gives us confidence that we will continue to achieve our 3% to 4% ongoing net new store growth target in the U.S.
Moving to margin, we reported consolidated operating margin of 17.2% for fiscal 2019 on a non-GAAP basis down 80 basis points year over year and in line with our ongoing model of 17% to 18%.
That said I would like to highlight some anomalous items that impacted our year over year margin performance for headwinds and one tailwind to.
The four headwinds were 70 basis points from streamline driven activities 50 basis points from us tax reform funded investments.
20 basis points from Simon retail and another 20 basis points from our onetime investment in the Chicago leadership Conference.
The one tailwind was 40 basis points from stored value card breakage due to a change in accounting treatment.
Adjusting for all these items consolidated non-GAAP operating margin was up 40 basis points, reflecting the benefits of sales leverage and productivity improvements, partially offset by non tax reform funded investments in our partners technology product innovation and stores as.
Kevin mentioned earlier, we believe these investments are critical to strengthening our competitive position in order to sustain long term growth consistent with our ongoing growth algorithm.
And finally, EPS, we reported full year non-GAAP EPS of $2.83 above the high end of our previous guidance, excluding a 7% benefit from unplanned tax favorability and a 1% benefit from streamline related activities.
Partially offset by a 1% headwind from foreign exchange non-GAAP EPS growth was 10% consistent with our long term EPS growth model of at least 10%.
So in summary, our fiscal 19 results not only reinforce our confidence in the strategies, we're implementing to grow the business, but also demonstrate the robustness of our long term double digit EPS growth algorithm.
Moving onto our guidance for fiscal 2020.
Starting with a key driver of our growth company operated comp sales growth globally, we are expecting comp sales growth of 3% to 4% in fiscal 2020 fueled by our to lead growth markets. The us at 3% to 4% and China at 1% to 3% all.
This is consistent with our ongoing growth model.
Moving onto the next key growth driver retail store development, we expect to add approximately 2000 net new Starbucks stores globally in fiscal 2020, a sequential improvement over fiscal 19 over half will be located in the us in China combined with China delivering approximately so.
600, net new stores, representing mid teens growth versus the prior year as with comp growth. This is consistent with our ongoing growth model.
With this combination of comp growth and unit growth, we are expecting enterprise level topline growth of 6% to 8% in fiscal 2020.
The one percentage point difference between next year's expected revenue growth and our ongoing growth model of 7% to 9% revenue growth is attributable to two things number one the sale of our ownership interest in Thailand in mid fiscal 2019 and number two.
Did 7% to 8% decline in channel developments revenue as we lap certain items related to the global coffee alliance that benefit that had the segment's top line growth in fiscal 2019.
Adjusting for these items channel developments revenue growth in fiscal 2020 is expected to be at the lower end ever ongoing range of 4% to 6%.
The global Coffee Alliance became EPS accretive in fiscal 2019, outperforming our original expectations and we expected to continue to be EPS accretive on a cumulative basis, including be associated share repurchase benefit funded in Q1 fiscal 19 by 5 billion.
Dollars of after tax proceeds from Nestle.
Let's move on to fiscal 2020 operating margin globally and across each of our operating segments. non-GAAP operating margin is expected to improve modestly over fiscal 2019, primarily due to sales leverage cost savings initiatives across our supply chain.
And overhead efficiencies the favorability from these items is expected to be partially offset by continued investments in our company operated retail business, primarily related to our partners and technology.
Let me add two additional points to the operating margin equation for fiscal 2020.
First commodities are expected to have minimal year over year impact on cost of goods sold as we expect favorability in green coffee prices net of farmer support payments to be more than offset by higher dairy costs. At this point, our overall coffee needs are over 80% price locked for fiscal two.
2020.
Second a few comments on Gionee net of investments, we expect meaningful gionee leverage in fiscal 2020 due to organizational efficiencies the completion of roaster redevelopment and the lap of our leadership conference. The recent reclassification of certain line items in the middle of our TNL all.
Also meaningfully benefits DNA, while adversely impacting store operating expenses as a result, while our long term operating income margin target of 17% to 18% still includes a 100 basis point overhead efficiency improvement through fiscal 2001. It is now spread.
Cross GNS and store operating expenses.
Below the operating income line, we expect considerably higher interest expense ranging between $415 million and $425 million in fiscal 2020 versus approximately $330 million in fiscal 2019. This is driven by debt issuances totaling.
$5 billion in the past 14 months combined with what we expect to issue. This fiscal year importantly, we remain committed to maintaining our leverage ratio below three times adjusted debt to EBITDAR.
As to the tax rate in fiscal 2020, we expect our effective GAAP and non-GAAP tax rates to be between 22% and 24%. This compares with a non-GAAP rate of 19.4% in fiscal 2019, which benefited from certain unplanned tax items that are not.
Specked into repeat to the same degree in fiscal 2020.
Capital expenditures in fiscal 2020 are expected to total approximately $1.8 billion roughly flat to fiscal 2019, reflecting the opening of our final Roastery next month and the licensing of several company operated markets over 80% of our capital spending in fiscal 2020.
We'll be allocated to where we see significant return opportunities within our Starbucks retail portfolio, new stores and strategic store related initiatives, including renovations of existing locations.
Finally at this juncture, we foresee minimal impact from foreign currency movements in fiscal 2020.
So when you add it all up our total revenue growth of 6% to 8% for fiscal 2020 is expected to translate into non-GAAP operating income growth of 8% to 10% consistent with our ongoing growth model, we expect to GAAP EPS in the range of $2.84.
Institute dollars and 89 cents down slightly from fiscal 2019, due largely to the lap of the one time gain attributable to the licensing of our Thailand operations.
We expect non-GAAP EPS in the range of $3 to $3.05 representing growth of 6% to 8% excluding the increase in our effective tax rate as we lap certain items that benefited fiscal 2019. This equates to expected non-GAAP EPS growth.
Of 11% to 13% in fiscal 20, consistent with our ongoing model of at least 10% EPS growth.
As a reminder, we expect the lab of income tax rate favorability from fiscal 2019 will impact our quarter to quarter non-GAAP EPS growth in fiscal 2020 with Q1 being the lowest at flat to down slightly given a nine percentage point EPS growth headwind.
Tied to last year's tax rate. Additionally, with the lap of the leadership conference in fiscal 2019, we expect to year over year non-GAAP EPS growth to be at its highest in Q4 for fiscal 2020 and with respect to quarterly cash flows we expect to make a tax payment of approximately.
$1 billion related to the Nestle transaction in early Q2.
So let me wrap things up first we are very pleased with our fiscal 19 results second we expect that fiscal 20 will be another good year for Starbucks delivering 8% to 10% operating profit growth. This demonstrates that we are executing very well from an operating.
Active underpinned by continued focus and discipline.
And third we are fully committed to our long term model of double digit non-GAAP EPS growth and we'll continue to make the investments necessary to sustain this growth over the long term.
With that Kevin and I are happy to take your questions joined by Roz Brewer and John Culver as Durga outlined at the top of our call. Thank you operator.
Thank you as a reminder, if you'd like to ask a question. Please press Star then the number one on your telephone keypad in order to allow as many questions as possible. We asked you to please limit yourself to one question at a time, we will come back for follow up questions as time allows we'll pause.
As for a moment to compiled acuity roster.