Q2 2020 Earnings Call
[music].
Good afternoon, My name is Hector and I'll be your conference operator today.
Welcome everyone to Starbucks coffee company's second quarter fiscal year 2020 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 would like to ask a question simply press Star then number one on your telephone keypad. If he would like to withdraw your question Press Star then the number two.
I'll now turn the call over to Durga doors, Tommy Vice President of Investor Relations Ms. Darst Tommy you May now begin your conference.
Good afternoon, everyone and thank you for joining us today to discuss our second quarter fiscal year Twentytwenty result.
Today's discussion will be led by Kevin Johnson, President and CEO and Pat Grismer CFO.
So Q and Amy will be joining by Ross Birla, Chief operating Officer 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 are subject to various risks and uncertainties that could cause our actual results could differ materially from these statements.
Any such statements should be considered in conjunction with cautionary statements you know a news release and respected discussion you know filings with the FCC, including although last annual report on form 10-K and quality of the report on form 10-Q.
In addition in some cases, we estimate the impact of Cold is 19 by comparing actual results to our previous forecast.
These forecasts were created prior to the spread of the virus what based on information available at the time and on a variety of assumption, which we believe were reasonable, but some or all of which made proved not to be accurate.
Starbucks assumes no obligation to update any of these forward looking statements or information.
GAAP results in fiscal Twentytwenty include several items related to strategic actions, including restructuring and impairment charges transaction and integration costs.
And other items.
These items are excluded from a non-GAAP results. Please refer to our web site at Investor Day, Starbucks Dot com to find the reconciliation of certain non-GAAP financial measures referenced in today's call, we did corresponding GAAP measures.
This conference call is being webcast and an archive of the webcast will be available on our website through Friday may 29 Twentytwenty.
Finally for your calendar planning purposes. Please note that our third quarter fiscal year Twentytwenty earnings Conference calls has been tentatively scheduled for Tuesday July 20, Eightth Twentytwenty I will now turn the call over to Kevin.
Good afternoon and welcome.
Around the world people frontline responders governments and businesses are all navigating extraordinary times.
On behalf of Starbucks I want to extend our deepest compassion and empathy for all those impacted by loss of life.
Links of anxiety in isolation.
And fears of both health and economic uncertainty during this pandemic.
It was just three weeks ago in the spirit of continued transparency.
When Pat and I shared with all stakeholders, our second intra quarter update on how covert 90 has impacted our business and how we are responding.
Today continued recovery in China strengthens our belief that these impacts are temporary and that we will emerge from this global pandemic with new insights and capabilities that will make our business, even stronger and more relevant.
The principles, we developed to drive our decision, making since the pandemic started in January our serving us well.
Bringing focus to our response and recovery effort.
The three simple principles are prioritizing the health and wellbeing of our partners and customers.
Playing a constructive role in supporting health and government officials as they work to mitigate the spread of this virus.
And.
Showing up in a positive and responsible way to serve our communities.
In our update to stakeholders on April eight we shares at the positive business momentum that drove one of the strongest holiday seasons in the history of our company continued well into our second quarter in the United States.
Our performance was obviously disrupted by the impacts of Cobot 19.
But we are confident.
At the Starbucks brand is well positioned and that our growth at scale agenda remains intact and will propel future growth when we emerge from this current crisis.
I will share some notable highlights for Q2.
And then offer some perspective on how we expect to recover our business over time.
Q2 is shaping up to be an exceptional quarter for Starbucks.
Driven by strong performance in the U.S. and channel development.
Even while we were simultaneously navigating the impact of covert 19 in China.
However.
Near the end of the quarter, the pandemic started to materially impact our business outside of China.
Most significantly in the U.S.
As a result consolidated revenue in Q2 was $6 billion, reflecting a 5% decline compared to prior year.
Primarily due to a 10% contraction in comparable store sales globally.
Driven by temporary store closures modified store operations and slower traffic.
Partially offset by strength in channel development.
In China, where the pandemic impacted our business for most of Q2.
Revenue and comparable store sales declined year over year by $325 million and 50% respectively.
Today, almost 100% of our stores in China are open.
Many with limited seating reduced hours and other safety protocols in place.
Starbucks stores that remain closed in China are primarily located in cinemas and enclosed entertainment venues.
Along with international travel hubs and certain tourism loans, where restrictions are still in effect.
Since we started reopening stores in late February we have seen meaningful improvements in China comparable store sales in commercial residential and office locations.
We're also seeing the mix of in store sales continuing to rise.
For the month of April comparable store sales in China were down approximately 35%.
Marking strong improvement from a weekly low of minus 90% in mid February.
Importantly, even though new store development activities were suspended for most of the quarter.
We opened 59 net new locations in China during Q2.
And another seven locations added thus far in April.
We are expecting to open at least 500 net new stores in fiscal 2020 with as many as 100 new stores. Originally planned for this year deferred to fiscal 2021.
This represents a rapid re acceleration of our new store development and speaks to the amazing spirit and enormous capability of our team in China.
Given this progress we believe our recovery plan is working.
And we remain optimistic about our ability to capitalize on the long term growth potential of the premium coffee market in China.
We believe barring any new disruptions that our business in China is on a path to substantial recovery by the end of this fiscal year.
Just last week, we launched the Starbucks good good marketing campaign, which features plant based alternatives in products and packaging.
With this program Starbucks in China introduced only a plant based milk alternative.
Also Starbucks is the first in China to offer national distribution of beyond meets plant based proteins.
With new Asian menu items served and packaging made from plant based materials.
This campaign is just one step in our larger aspiration.
To be planet positive.
While introducing relevant menu choices for customers.
Over the past 20 years in China, we've established and admired and trusted brand by investing in our partners and delivering a unique premium experience to our customers.
We continue to play the long game in China, as we invest in our future.
The state of the art coffee innovation part that we will we will be opening outside Shanghai in 2022.
We will serve as a key component of Starbucks worldwide coffee roasting network for customers in China and is a testament to the growth opportunity, we see for specialty coffee in the market.
Starbucks premium customer experience is highly differentiated in China and the brand is as strong as ever.
We continue to thoughtfully invest in China.
Market that has significant long term growth potential for Starbucks.
I am proud of how Starbucks, China continues to pave the way as one of our to lead growth markets.
Now onto the other lead growth market for Starbucks to use.
Coming off one of the strongest holiday quarters in the history of Starbucks us momentum continue to build well into Q2.
Prior to mid March revenue growth in the U.S. was accelerating to the strongest level in over four years.
Driven by comparable store sales growth of 8%.
Including comparable transaction growth of 4%.
Additionally to your comps were tracking to 12% growth the strongest in over three years.
With growth across all Dayparts and strong contributions from both our Starbucks rewards members and occasional customers.
It is very clear.
That our focus on the customer experience beverage innovation and digital customer relationships is a powerful combination.
Our performance was interrupted mid March when a national emergency was declared to mitigate coded 19.
We decided to close over 50% of our company operated stores and limit service to drive thru and delivery for those that remained open.
In that final three weeks of Q2 us comp sales swiftly to celebrate it.
And in the quarter down 3%.
Driven by a 7% contraction in traffic comp.
Based on the experience we gained navigating cobot 19 in China.
We have been as well prepared as anyone for this mitigate and contain phase in the us.
Particularly as our stores are well positioned to adopt operational safety protocols, while still meeting our customers' needs.
In the us almost 60% of our company operated stores include driver.
And over 80% of our customer occasions before the crisis. We're on the go with the majority of these orders being placed at the drive through or by using the Starbucks App to mobile order for pickup or delivery.
Of note during the second quarter 90 day active Starbucks rewards members are highly route nice highly engaged and loyal customer base with whom we can directly communicate digitally increased to 19.4 million in the us up 15 per.
Percent from a year ago.
Since the crisis started we've seen an average ticket growth increase throughout the quarter.
A result of group ordering as customers through this pandemic are making Starbucks runs for their homes.
Local essential businesses and for frontline response teams.
Overall.
Nitrile cold brew and refreshment continue to lead for beverage and our new all milk beverages, almond milk honey flat white and coconut milk Latte are also resonating well with customers.
Our innovation in food, notably, our new breakfast reps have surpassed expectations to date.
Similar to our experience in China, we're transitioning into new phase of operations, we call monitor and adapt.
We are now leveraging digital tools that enable us to monitor the code at 19 situation in every community across the U.S.
And leverage a variety of service options from contact list service entry way pickup curbside delivery or parking is available and at home delivery that allow us to thoughtfully, we opened stores and scale up operations.
We are finding new innovative ways to serve our communities.
Prioritizing the safety of our customers and partners.
With a focus on exceeding public health standards, and adjusting to new customer expectations.
The strength of our digital reach combined with a range of service options is enabling us to reopen stores community by community in a thoughtful way using the three simple principles that have guided our response thus far.
Our monitoring capability provides the input necessary for decisions that enable us to turn to dial up or down depending on the situation in the specific community or a specific store.
This is the beginning of the recovery as we reopened stores beginning in early May and we expect to have approximately 90% of all company operated us Starbucks stores reopened by early June with enhanced safety protocols and modified schedules.
We're also sharing our store safety protocols with our licensees across the US who continue to responsibly operate their stores, particularly in grocery locations across the country.
My summary on our us businesses. This.
This monitor and adapt phase in the US is the inflection point for reopening stores and begins a recovery process that requires ongoing monitoring community by community.
To rapidly adapt and drive the recovery.
We are well positioned to leverage our digital assets and new operating formats like contact was pickup and curbside to expand service to customers.
And our focus on the customer experience beverage innovation and digital differentiate Starbucks and will enable us to regain the momentum we had prior to covert 19.
At Starbucks the third place has always been about community connection and convenience.
And we expect to strengthen this competitive advantage through continued improvements in our digital capabilities and innovative store formats.
Enabling us to connect with customers and serve our community safely.
And with even greater convenience.
I am proud of how Starbucks partners in the us as shown up through all of this.
The fact that while serving their communities. They also served over 1 million free cups of coffee to the frontline responders, who have worked tirelessly to care for others.
Which makes us all very proud.
Leveraging the playbook that was developed in China and refined in the us.
We are working closely with our international license partners to navigate the current environment and prepare for recovery.
Guided by our mission and values and commitment to delivering the Starbucks experience safely and responsibly.
With Starbucks and 82 markets, we are committed to supporting our license partners around the world.
As they to navigate this challenge.
And finally.
A few comments on our channel development business.
The strategic value of our channel development segment has been clearly evident in the current environment.
Selling starbucks products through multiple channels amplifies the brand and extends our ability to meet customers where they are.
Even when they are unable to visit our retail stores.
Through the global Coffee alliance with Nestle and are ready to drink partners, including Pepsi and taking.
We offer a wide range of Starbucks products down the aisle in grocery stores at mass merchants and convenience stores and online.
In Q2. This segment's revenue grew by 16%, which includes a 5% favorable impact primarily related to the global coffee alliance transition related activity.
Boosting our share of the coffee market outside of specialty retail.
This continues to be an important element of our growth at scale agenda.
The global Coffee Alliance with Nestle was established just 20 months ago and since that time, we've now expanded the Starbucks brand to nearly 50 markets around the world.
It is clear that our channel strategy is working extremely well.
Before I hand over to Pat to walk you through the details of the quarter and balance of year perspective.
I want to reinforce one key point.
Starbucks is resilient.
For over 49 years since our founding we have overcome every challenge presented to us.
And our overcoming this challenge as well.
Our China business is on a path to recovered.
Our us business is entering the phase of reopening stores adapting to the new reality and restoring and rebuilding momentum.
And our channel development business is posting very strong results and acting as a brand amplifier.
Our growth at scale agenda provides the focus and discipline for us to successfully navigate this challenge.
We remain confident in our approach.
We understand there is much more to do and that we must be agile as the world Navigates Cobot 19 and works to create a vaccine.
We have a very clear path going forward, we are optimistic about the future.
We believe Starbucks will emerge from this experience, even stronger more determined and more focused than ever before.
But the real credit goes to Starbucks partners.
Together, we are emotionally connected to a mission grounded in humanity.
And together.
We are making principal decisions true to our values.
Partners are the key to our resilience.
It is why we will do all we can to provide them with economic certainty and support them through this challenging period.
After all.
Partners are the heartbeat of Starbucks.
Now I'll turn it over to pass through a deeper dive into our Q2 financial results.
Update on our fight 20 outlook and an overview of our financial readiness to whether this crisis Pat.
Thank you, Kevin and good afternoon, everyone I'd like to start by echoing Kevin's appreciation for all of our Starbucks partners, who continue to demonstrate their dedication to Starbucks in their communities in spite of the hardships spacing the global community right now.
Unsurprisingly business disruption attributable to the Cobot 19 pandemic has materially impacted our financial results. Our belief is that these impacts are temporary as evidenced by our continued recovery in China as Kevin outlined so I will highlight the financial impacts to provide investors with perspective.
Our normalized performance for the second quarter as well as insight into how future quarters results may be affected by these conditions in all cases, we had estimated these impacts by comparing Q2 actual reported results to our internal forecasts specific to each operating segment and market.
These forecasts were developed based on the most recent prevailing trends in revenue and profitability prior to the onset material coded 19 related business impacts specific to each operating segment and market. These impacts first started in China in late January and materialized in other markets.
Later in the quarter.
For the second quarter, Starbucks produced consolidated revenue of $6 billion down 5% from the prior year, we estimate the cobot 19 impact to be approximately $915 million due to temporary store closures restricted sales channels shortened operating hours.
Okay and severely reduced customer traffic.
As we shared earlier this month and an 8-K Q2, non-GAAP EPS was 32 cents down 47% from the prior year, we estimate the Kobin 19 impact to be approximately 45 cents, including not only profit flow through on the revenue impact, but I noted earlier, but also increase.
Mental cost that we incurred in response to the pandemic, which I will outline later.
I will first provide some highlights of segment operating results and consolidated margin performance for Q2, and will then share some perspective on balance of year results and liquidity.
Revenue for our Americas segment was flat in Q2 relative to the prior year at $4.3 billion as incremental sales from net new store growth of 3% over the past 12 months was effectively offset by a 3% decline in comparable store sales through the first 10 weeks to the quarter.
The U.S. delivered 8% comparable store sales growth building on was strong momentum from the past few quarters, but this was more than offset by a sharp decline in the final three weeks of the quarter due to the cobot 19 impact that I mentioned earlier, ultimately, resulting in a 3% decline for the quarter.
We estimate Americas' Q2 revenue decline attributable to covert non team to be approximately $450 million.
Through the month of February Americans, non-GAAP operating margin improved meaningfully versus the prior year, reflecting strong sales leverage and continued supply chain efficiencies. However, due to the rapid sales decline and significant investments in response to the cobot 19 outweigh the started to materialize in the USA.
In mid March Americas', Q2, non-GAAP operating margin landed at 14.4% down from 20.3% in the prior year.
We estimate that the Kobin 19 impact to America's non-GAAP operating income was approximately $420 million in Q2, consisting of flow through on lost sales as well as incremental investments, notably catastrophe wages as well as enhanced pay and benefits programs in support of our reach.
Tail store partners inventory write offs and store safety supplies.
Moving on to international business interruption, resulting from Cobas 19 impacted this segment for the majority of Q2, starting in China in late January and extending to other markets in March including Japan for.
For the quarter International's revenue declined by $395 million or 26% versus the prior year to $1.1 billion, primarily driven by 31% decrease in comparable store sales, partially offset by 11% net new store growth over the past 12 months.
We estimate International's Q2 revenue decline attributable to covert 19 to be approximately $465 million International's Q2, non-GAAP operating margin was 3.9% down from 19.3%. The prior year, we estimate that the Kogan 19 impact.
International non-GAAP operating income was approximately $280 million in Q2 with components similar to what I outlined for the Americas.
Further contributing to the margin decline was higher than normal sales mix of delivery transactions as customers shifted to off premise consumption, resulting in higher commission in packaging costs.
On to channel development revenue was $590 million in Q2 fiscal 2000, an increase of 16% over the prior year when normalizing for the 5% favorable impact of global Coffee Alliance transition related items channel developments revenue grew 11% in Q2.
Over the prior year transition related items include higher inventory sales as nestle prepare to fulfill foodservice customer orders under the global coffee alliance as well as a benefit related to the transfer of certain single serve product activities to Nestle on a go forward basis.
The segments non-GAAP operating margin was 37.8% and improvement of 360 basis points over the prior year.
Normalizing for the 330 basis point impact of the transition activities I, just mentioned channel development operating margin expanded 30 basis points in Q2.
Finally at the consolidated level non-GAAP operating margin of 9.2% in Q2 contracted 660 basis points year over year, we estimate the coated 19 impact non-GAAP operating income to be approximately $700 million inclusive of the amounts I cited for the America.
As an international.
In relation to the $915 million of consolidated revenue impact that I mentioned earlier this equates to approximately 80% of low through on lost revenue, which has materially higher than the 50% variable flow through rate that we typically observed in our business reflecting the.
In investments we've made in the short term to support our partners and manage our brand for the long term. We believe that these investments will strengthen our competitive position and fuel recovery as we emerge from the effects of the pandemic.
Now moving onto our outlook for fiscal 2020, given the global nature of our business our ability to provide updated guidance for the remainder of the year is predicated on the current phase of Cobot 19 response within each of our markets as Kevin discussed China, Our second largest market is in the recovery phase.
Which enhances our ability to estimate balance of your results, however to us Japan in Canada, which round out or largest markets are in earlier phases of covert 19 impact spots, which limits our ability to provide enterprise level guidance at this time as a result, we're continuing to spend.
And formal guidance for fiscal 2020, while providing updated outlooks for selective businesses and financial metrics I'll start with China.
With the progress we have seen today, including having 98% of our stores open as of today and continued improvements in customer traffic as Kevin mentioned, we believe China's comparable store sales will continue to improve in the second half of fiscal 2020 relative to the 50% decline reported for Q2 declining 20.
5% to 35% in Q3 and trending towards roughly flat by the end of Q4 relative to the prior year, yielding a decline of 15% to 25% in China's comparable sales for the full fiscal year.
While we temporarily positive new store openings in China in Q2, given coven 19 development activities resumes towards the end of quarter and we're on track to open at least 500 net new stores this fiscal year or over 80% of our original target. This will position us well to continue to capture the growth opportunity we see.
In China in fiscal 2001 and beyond.
Combining the effects of comparable store sales declines and new store development deferrals, we estimate revenue in China to be negatively impacted by coven 19 by approximately $750 million to $850 million with an estimated EPS impact of between 30 cents and 37 cents in fiscal 2000.
20, barring any new disruptions.
Moving to the US today, approximately 50% of our company operated stores and 46% of our licensed stores in the U.S are temporarily closed, but we expect to begin reopening many of them next week initially with modified operations and shorter operating hours. We currently expect approximately 90% of.
Company operated stores to be opened by early June.
Additionally, modifications to increase throughput and drive through delivery at the MLP channels in our existing stores are already underway, along with a new entry way Handoffs solution, which incorporates best in class safety protocols and as Kevin mentioned, we're also exploring curbside service in locations where part.
And is available we believe the focus actions, we're taking to deliver a contact list customer experience coupled with continued beverage innovation and expanded digital capabilities will help to restore the upward momentum in our us business that we were experiencing prior to the onset of covenants.
To date in April comparable sales growth for US company operated stores that are open is averaging approximately minus 25% or indexing at 75% of prior year levels. However, as we have not yet entered the recovery phase in the US it is premature to provide a balanced.
Your estimate of us revenue or earnings at this time.
But given the late quarter onset of cobot 19 impacts in the us as well as a materially higher local right a lot sales in the US we do expect the negative financial impacts of cobot 19 to be significantly greater in Q3 compared to Q2 and to extend in Q.
For so while the initial impacts in the us or less severe than they were in China from a comparable store perspective, owing to the prevalence of our drive to model in the US we do expect the impacts persist for a longer period of time as we move through the monitor and adapt phase with the recovery phase extending.
In the fiscal 2021.
We expect the Kogan 90 impacts in Canada in Japan, as well as in our international license businesses will follow a similar pattern as the use very pronounced in the third quarter with some easing of these impacts expected in the fourth quarter as these businesses moved into the recovery phase in any event.
Based on our substantial experience in China today, we continue to believe that these impacts are temporary that our brand is resilient and our business will fully recover overtime.
At the enterprise level, we expect the absolute flowed through an impact of Copel 19 to be materially greater in Q3 compared to Q2 in particular due to the longer duration of US Canada in Japan business disruption in Q3 compared to Q2 that said, we expect the rate.
The flow through online sales in Q3 to be slightly lower than in Q2 and to ease further in Q4, as we take appropriate steps to restore the profitability of company operated stores as they reopen in the back half of the year.
Consistent with the approach we've taken our two interim update this quarter, we will provide transparent updates as to what we are seeing and how that shakes our perspective on balance of your financial results as we execute our store reopening plant and have increased visibility into business performance trends in the us and other markets we expect.
To provide our next update in June after we've evaluated the performance of stores, we opened in the U.S and better understand the possible duration of temporary closures in Japan for.
From our perspective, the re opening up stores and actions, we're taking to position ourselves and crisis subsides do not fully defined recovery recovery and our view is when a company operating the market delivers positive comparable store sales growth and all existing stores are open with the exception of those undergoing renovation.
Yeah.
Finally on a reported basis channel development revenue is expected to decline between 6% an 8% in fiscal 2020 relative to the prior year as we lap certain transition items related to the global copy Alliance that benefited this segment's top line growth in fiscal 2019, the impacting more pronounced in Q.
Three and far less pronounced in Q4. Additionally, the disruption, resulting from cobot 19 is expected to adversely impact foodservice under the global coffee Alliance and are ready to drink business. During the balance of fiscal 2020. The segment's operating margin is expected to improved modestly in fiscal 2020 relative to the prior year.
The cash flow implications of these near term operating results are very material, but the scale of our company combined with the strength of our balance sheet enables us to manage our business for long term growth, while dealing with short term business realities in essence, we are investing and relationships with key.
It's not only to preserve those relationships such as strengthen them for the future. Let me provide several examples of how we're thinking about this first your salary and wage continuation and to a premium pay for those working on the front lines of our business both as communicated through the end of May we are investing in our.
Partners, who are critical to the Starbucks experience and instrumental to our long term success.
Second extending more flexible development and financial terms in Q3, we are investing in our international licensees, who our partners and driving long term growth.
Third through certain accelerated payments, we're helping strategic suppliers, whether this crisis. So that they can sustain the supply of our proprietary products and support our ongoing product innovation.
And fourth by honoring our upcoming quarterly dividend Declaration, we're supporting our shareholders with a predictable return of capital in an uncertain investment environment.
Dividend is payable on May 20 seconds to shareholders of record on May eight.
As disclosed in our most recent 8-K in addition to accessing additional capital to bridge near term cash needs, which we expect to peak in Q3, we are creating additional room for investment in our partners and the business more broadly by suspending share repurchases, reducing discretionary expenses.
And deferring certain capital expenditures due primarily to the deferral of some new store openings in store Refurbishments. We now expect capital expenditures for fiscal 2020 to total approximately $1.5 billion or $300 million lower than our original plan prior to the onset covance.
Team.
Importantly, we remain very much committed to our triple B plus credit rating and leverage cap of three times rent adjusted EBITDA that said, while the impacts of cobot 19 will cause us to exceed that leverage cap for a period of time, we view these impacts to be temporary we expect our leverage to return to near three to.
Heinz rent adjusted EBITDA in the latter part of fiscal 2021 in short our leverage policy is unchanged.
To summarize the financial impacts of Copel 19 are very material and will weigh on our Q3 performance in particular, but the progress we are making in China and the deliberate approach, we're taking into us to reopen stores reinforce our belief. These headwinds are temporary we're confident that our brand is.
Resilient and that our customers are eager to resume their daily routine we have the financial strength to make investments for the long term as we navigate challenges in the short term and we are inspired by the courageous partners, who serve our communities by serving our customers at a time when people are looking for the personal connection that defined.
The Starbucks brand.
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.
As a reminder.
If you would like to ask a question correct Star then the number one on your telephone keypad in order to allow as many questions as possible. We ask you to please limit yourself to one question added time, we'll come back for follow up question as time allows we'll pause for a moment to compile the Q and a roster.
Your first question comes from the line of David Palmer with Evercore ISI. Please proceed with your question.
Okay, Thanks, and good evening.
In the US could you talk about your store base in terms the percentages that are in what we are not only closed today those walk in locations, but also areas that you would anticipate being slower to rebuild sales, perhaps you want to use China as.
And now the hair, but what I'm thinking about as a mall locations those downtown areas or even drive throughs that depend on commuting and highway travel.
Any numbers against that so be helpful. As we think about your path to recovery and related Lee how much do you think social distancing in these walk in the stores will limit your capacity when they do reopened thanks very much.
Thanks, David Ross why don't you share a little bit of perspective on the U.S.
Thank you Kevin and thank you David for that question. Let me first start off talking about April. So today in April we did have drives for locations open and as Pat mentioned, we have comparable sales growth in those yet company operated stores, averaging down by about 25% or.
Indexing right at about 75% of prior levels. So as we reopened stores. We did a few things too and I really create analysis, we created a decision modeling tool that helped us look at.
Customer frequency that we saw in those ride three stores as well as looking at sources from local government guidance. The infection encouraged by county customer sentiment and partner sentiment. So when we open starting next week, we're going to open with modification and those modifications will drive first.
Cars will amplify delivery, we will have that mobile open mobile ordering pay channels open and then the addition of a new concept. The entry way handout, we will only have roughly 30 stores that will be cafe open and order and those 30 stores.
There'll be no suitable for we are making sure that we provide a sales environment for our customers and for our partners and we will monitor what happens as shelter in is lifted in certain regions and areas and then began to.
Reopened the captain stores you will see later in the summer will also add curbside.
Access to our stores so what we're doing David managing what we're learning and then opening stores accordingly, and applying our partners and our labor again.
Entryway model and also to to amplify drive through well also be.
Helping our customers use who app and make sure that they order ahead pickup in store even through drive through other channels that I described.
Thanks, Ross I'll, just add one other one other point that with share David to to reinforce will rise to set pre coded 80% of our customer occasions in stores in the US were to go takeaway.
And so by augmenting.
In store experience with mobile ordering and contact was pickup we could serve as significant volume of customers without.
Having the cafe seating area actually opened.
So I think thats, an important point areas that will be slower similar in China. It's office stores near office Parks, where office workers are not going back to work yet there will be a little slower and then I think we anticipate that the mall. The mall stores will also be slower and that mall stores are.
Less than eight fewer than 8% I think of the total total store fleet, new apps, but I think Ross captured quite well.
Your next question comes from John Ivankoe with JP Morgan. Please proceed with your question.
Hi, Thank you very much I wanted to follow up on.
The China piece of that the interim to that the percent of occasions to go that or within China. I mean, I think you've said a couple of times now 80% of the occasions. Our to go in the U.S. I would expect that number to be much lower than that in China, but help me clarify that.
Starbucks really does differentiate itself with the Kathy experience and the third place experience. So can you kind of I guess you triangulate.
Percentage of transactions.
That or to go in China with the thought that you might actually get to somewhere near flat comps at the end of the fourth quarter. How you can do that without basically a full reduction of yes, physical social business and within that market specifically.
And thank you and hope everyone has gone.
Okay. Thank you John I appreciate that.
Just real quick on China, traditionally, we've seen 80% of our business be Stan and.
Enjoy their drinks in the cafes as cobot head.
We hit a peak of nearly 80% of transactions being digital orders and those digital orders were all set up with the contact plus experience through.
Through.
Locking in the stores and picking up your orders in mobile order and pay and then and then the rest of it was digital with delivery.
What we see today is that in the stores that we have open we have roughly 83% of those stores have seating and them with social distancing in place and so we are seeing people come back into the cafes and sit there, albeit not to the levels that we saw pre coconut what we're seeing.
And is that there is a higher percentage of to go orders taking place in China, and we expect that trend to continue and if there is a silver lining I think it is forming a new habit in China, where you are seeing more people take to go orders and get used to doing that and so we're optimistic.
That the shift will continue to occur.
We anticipate the 80% of where we were pre Covance, we'll come back maybe not as high but the overall sales levels that we'll see in China.
We will get back to full recovery and on a path to full recovery by the end of this this fiscal year.
Thanks, John Let me just add one other observation when we look at consumer behavior.
On a global basis as it relates to covert 19.
After people have been sheltering at home in a lock down situation for several weeks China. It was three little over three weeks of US it's been about six weeks.
What they look for what consumer sentiment looks for is something that is safe experiences that are safe familiar and convenient and that is consistent around the world and so what we've done at Starbucks as Weve built the operating protocols in our stores to be safe to follow every and exceed every health standard we can exceed industry.
Are we can provide every customer safe experience.
Clearly getting that Starbucks experience is something that is familiar to them and.
When when you've had to be sheltering in place for for several weeks just to get out for nice nice uplifting experience at Starbucks is familiar and it's rewarding and so customers come back to our stores, but having is convenient.
Ability and those three attributes safe familiar and convenient that is something that works around the world.
Following these periods, where where people have been have been sheltering at home.
We've seen that in China, and I think we're going to see that in even a more amplified way in the you asked but it's something that we're seeing it every single market around the world when they come out of sort of the locked out phase.
Your next question comes from line Sharon Zackfia with William Blair. Please proceed with your question.
Hi, Good afternoon could you talk about how your digital trend has.
Kind of ramped as you've gone through April.
You did the update on Gold award for the second quarter. They be helpful to know what you're seeing with engagement.
As a voluntary that's month and then.
Can you also that give us an update on kind of.
Any initiatives you have on communicating safety protocols.
As you start to reopen more of the and room dining.
Our rise wondering what are they have you kind of respond as it relates to digital and U.S. and safety protocols and then maybe John can follow up on the China digital.
So once you get from stress.
Sure So as Kevin mentioned.
And when we started off the call. We saw as we were entering the quarter and actually exiting last year, our reward members, which are highly recognized customers.
Have really ground with us we have increased over 19 million of those customers in the last up to 18% year ago I'm one of the things that were as full as we've been going through this co that experience is our Starbucks rewards members. They remain roughly 44% of our business, even as we progress through the quarter.
And the majority roughly about 70% of them are frequent Starbucks rewards customers and they're still coming to our Stuart just less frequently.
So and also to to think about what that looks like over again time really we've not full.
Much change there there is.
Same frequency loss across all Dayparts, it's a little bit more pronounced in the morning, but that's to be expected because the routine and disrupt debt. So we are encouraged by what we've seen so far in the US. We believe that these highly resilient customers will come back to us out of routines and they look a little bit different.
But they will.
We remain in our work from home position, but even as local mandates get relax Lisa likely can monitor and adapt accordingly.
And just real quick Sharon on China, we continue to see digital being a key.
Element of our strategy in China, and really the adoption.
The digital transactions in our stores continues to accelerate when we've been able to do is leverage our Starbucks rewards membership.
Really maintain that connection and engagement.
During.
The covered the covet experience, we're seeing sequential improvements and overall weekly active members so more and more people continue to adopt digital app and interact with us digitally and as I share with shared and one of the scripts digital order mix is now 20.
9% in Q2, we had a peak in early February of 80%.
Early on and really you're seeing a good split between mobile order and pay making up about 16% of that 29% and delivery, making up about 13%. So we're very encouraged with the opportunity in digital and now.
Just a couple of days ago, we announced our partnership with Sequoia capital, which we think will further accelerate our ability to.
To leverage the digital flywheel and accelerate the pace of retail innovation as we look to partner with local tech.
Companies and keep startups in China.
Sharon you have your second part of that question.
I'd like to address the second credit Sharon's question. He also asked about the marketing tool.
Yes business and we do have a marketing plan schedule as we reopened next week.
And actually if you think about the set down that we had we delayed the introduction of our spring beverage lineup and double starting in addition to our happy hour. So you'll see those reignited on with a lot more energy then then and Pat.
We will spend within our existing plans for this year, just condensed balance and accelerate most of the work around our enabling our app and encouraging people to App is the App in order ahead, and then in terms of delivery, we've been able to accelerate and delivery we believe.
In some markets like New York, where we will have a handful of delivery only stores.
Full.
Some significantly higher volumes than normal with delivery in places like New York, but it's still early for us for delivery overall, but it is one of the channels that we will accelerate as we go through that both current and cobot recovery period.
Thank you.
Your next question comes from John Glass with Morgan Stanley. Please proceed with your question.
Thanks, very much but my question is on how you think about the pace of the us recovery.
Addition, obviously to the pandemic we're in a recession. So how do you think about incenting customers to come back and differently or is that not in your calculus. You believe when stores are opening consumers resume their normal pace of consumption. If you thought about like the product lineup differently now because of this situation and maybe if you if you're using kind as a benchmark.
Are there or consumer behaviors different or the purchasing different are they more price sensitive in China or have you really seeing no post pandemic or pre launch reopened price sensitivities in China.
Okay.
Yes, John This is Kevin let me just comment.
Pre co that we had built tremendous momentum in the business by focusing on three things the customer experience beverage innovation and digital customer relationships and that remains the powerful combination for for us to continue to engage in and drive frequency of customer visits.
But we recognized coming coming through the cobot experience that everyone around the world to sharing that really optimizing the initial store experience around these concepts of safe familiar and convenient is what gets customers now to start thats kind of the onramp to two.
That engagement now certainly we're going to we're going to know a lot more 30 days from now on the U.S., but I think is raws highlighted.
That in the drive through its just the number of drive throughs. We've had opened without even the cafe open we were delivering 75, roughly 75% of prior year revenue in those in those individual stores and so thats just an indication of the power of the brand and the strength of of connection that we have with customers now I think is.
Over this next week, when we open more stores and with the set of experiences that.
That Ross as articulated I think we're going to.
We're going to we're going to begin that path of engaging and.
I think I think 30 days are now we're going to have.
A much much clearer view of how rapidly that debt that goes and.
We've got a great beverage lineup that Ross just talked about that Scott that's going to release, we're going to we're going to market evangelize that we've got we just grew digital customer relationships by 15%.
To 90.4 million in the you asked were going to leverage that to communicate with our customers and we're going to we're going to be thoughtful and responsible with each step that we take.
And I think that's the formula.
Your next question comes from line of Sara Senatore with Bernstein. Please proceed with your question.
Hi, Thanks, and just following up on you asked I guess enterprise and ask on ticket growth, whereas a retired as if you talked about this.
Is that sort of an offset to and the impact on traffic from the period.
Can dynamically trick from some other concepts that higher check.
Our happening because theres more group ordering.
Yes, or where there are other drivers underpinning that menu innovation or.
Or shared more sustainable trackers and.
As you reopen stores in the year STM any sense and how much bigger joining in the stores that remain open lightning represented sales transfer from Curt. Good. We're just trying to figure out granary here open as you have been stores were sort of sits in winds down.
Like should we just think about kind of doubling the number of stores that opened in and that we're in that sales volume or is there some.
Transfer that's been happening thanks.
Rob why don't you take those questions.
Sure. Thank you fair for the questions first of all let me start with for the plant will start reopening stores next week and then with the anticipation that well have just a little greater than 90% in one and that's in the various formats.
When I think about the trend in both ticket and traffic I think about the exit of fourth quarter into first quarter, where we were seeing great pick up in terms of.
Beverage innovation, most predominantly and nitro cold brew and all cold coffee selling extremely well.
Play well through our holiday beverage lineup and a continued.
For the point, where we saw the 8% comp.
Into early marks the first two weeks of the quarter of the year. So first of all starts with our beverage innovation. The second thing is the in store experience and so we had done this significant amount of work to actually relieved that partner a lot of their tactics. They were doing in the stores and they were engaging with our.
Customers and some of the most meaningful ways, creating the best moments with our customers was really a real key change for us our customer sentiment and customer engagement numbers were at record levels. In addition to our partner engagement with at record levels as well, we actually saw that partner engagement care.
Over to when we began to slow down stores data cobot, we saw partners just volunteering to come work at stores very energetic response from customers has been great.
Okay, great social media placements.
From our customers concerning how grateful they were in and what they recognize our partners are dealing to work in stores. So I would just ticket back since there are the work that we've been working on for quite awhile now and it's around the beverage innovation. The digital engagement that we've created and then the in store experience and those things continue to drive.
And that is exactly where we got to the comp as we were coming into the cobot situation.
Yeah, I'll just add to the increase in ticket was group orders I mean, it with drive-thrus going through a drive through its typically someone making a family Starbucks, Ron and buying for their entire family or somebody making.
Let's say frontline responder run and buying getting food and beverage fruit for frontline responders. We saw a lot of that so it's really driven by the fact that was just drive through old and if you're going to take the time to go through drive through your load up and by for the entire family or the entire group.
And that drove down transaction drove drove up tick.
[music].
Your next question comes from line of David Tarantino with R.W. Baird. Please proceed with your question.
Hi, Good afternoon, I hope everyone is doing well.
Pat My my questions about the level of potential cash burn you might have.
In the current quarter I was wondering if you could maybe frame that up for US and then and then just talk about.
On that to maintaining the dividend throughout this crisis I think you mentioned that Theres no plan.
The suspended.
Just wondering what your margin of safety is relative to that that question and then I guess thirdly.
What point would you feel comfortable as the CFO ramping back up the capital spending.
With respect to growth and other discretionary capex. Thanks.
Thank you David.
I'll start off by saying that given the scale of our company combined with the strength of our balance sheet. We're confident that we will be able to maintain appropriate liquidity as we manage their current crisis.
Now when you consider that today over 15% of our company operated stores are closed in the us in Canada and those that are open are largely restricted to drive through in delivery channels and with store partner payroll protection temporarily in place.
Our cash burn rate has peaked.
And it's at approximately $125 million per week after capex, but before dividends.
We expect this burn rate to go down as we begin reopening large numbers of company operated stores in the us in Canada in the month of May and to reduce further in the month of June as we normalize our store partner pay practices and benefit from recapturing sales.
We have already taken steps to enhance our financial flexibility and that includes issuing $1.75 billion of bonds in March with the proceeds used to pay down outstanding commercial paper balances.
Temporarily suspending our share repurchase program differing certain capital expenditures and reducing discretionary spending and.
And so with the amount of cash currently available to us and that includes our existing credit facilities and additional borrowing capacity, if we need it we're comfortable with our overall liquidity position and we're well prepared to manage current operating conditions from a cash flow perspective and that includes the investment.
It's an interim partner wages and benefits, which we've extended through the end of May.
That said our near term focus clearly is on reopening our stores and optimizing their profitability as we emerge from the crisis and learn more about underlying customer traffic patterns and trends now you asked about our dividend as I said in my prepared remarks, one of the things that we're proud of is that we're able to maintain.
And our commitment to shareholders to provide some measure of certain return in an uncertain investment environment. So our intention today is to continue to pay our quarterly dividend.
As to Capex, we've already taken steps to trim Capex. This year that includes the deferral of certain new store openings that were planned for this year deferring those into next year that includes for example, China, where we had originally guided to 600 new stores. This year, we've taken that down.
On to at least 500. So there is some deferral of capital associated with that and we've taken the opportunity to trim some of our other capital spending programs, including store Refurbishments. The based on what we see today, including our expectation sales will start to recover as we come out this third quarter into the fourth quarter.
Into next year I would say at this stage, we would expect capex to normalize in fiscal 2020 ones, but it's simply too early to give any specific guidance around capex, but I would say that we're optimistic that given the shape of the recovery curve going into next year that our capital spending programs.
Which underpin so much of our growth we would expect to normalize next year.
Your next question comes from line of Jeffrey Bernstein with Barclays. Please proceed with your question.
Great. Thank you very much.
At a question for you in terms of pain and the outlook at least for the second half I know, it's tough to offer global second half guidance.
But you have given a from April color, So I believe us down 25% trying to down 35% and.
And we can obviously estimate the path to copper recovery.
Thank you very specific I'm trying to payout so with all that said what does it how do we think about it from a reasonable operating margin range in the U.S. in China based on its current comp trends or.
A few more comfortable to give kind of a sensitivity the annual benefit to earnings from points of copper based points of margin just trying to make sure.
Any outliers in terms of rest of year 2020, or 2021 modeling I don't have any form of sensitivity or framework. You can provide in terms of what the type of down comp you're talking about would imply for operating margins in those two big segments over the next couple of quarters. Thank you.
Okay.
Thank you Jeff.
Well current margin performance is obviously highly distorted by large level store closures and interim store partner pay practices. So talking about the value of incremental comp growth or incremental margin improvement is somewhat irrelevant I would say at this juncture.
Top priority and our near term goal is to return to cash positive store operations and to improve from their towards full recovery and we will do that by reopening large numbers of stores and improving their profitability, including normalizing store partner pay practices starting in may.
And based on our current store reopening plans, we expect that our cash needs are going to peak on this quarter.
Now as I said in my prepared remarks, we do expect the absolute impact.
Of the lower sales and increased investments to intensify in the third quarter.
Be much more significant than they were in the second quarter in large part given to the longer duration of impact because when you think about it and let's talk about the us business in the second quarter, we had between two and three weeks impacted by covered 19.
Outbreak in the third quarter.
For all intents and purposes, we're expecting 13 weeks of impact most significant in the month of April but reduced in the months of May and June as we reopened our stores and normalize our pay practices now for international it slightly different in the sense that we expect continued improvements in China from both a sales and margin perspective.
But we do expect adverse impacts in Japan in other markets, including EMEA.
To intensify compared to Q2, and that's again largely due to an extended duration of impact in the third quarter.
Unbalance, there's just too many unknowns and too many moving pieces to be able to provide more explicit guidance on Q3 results outside of China. At this time other than to say that the impacts to revenue and operating income will be much more substantial in absolute terms in Q3 compared.
Q2, but we do expect these impacts to moderate in the fourth quarter and we will continue our practice of providing updates to the investment community when we have better visibility to them.
Your next question comes from liners, and Dennis Geiger with Yes. Please proceed with your question.
Great. Thanks for the question just wondering if you could talk a bit more about the competitive environment, both in the U.S. and in China, and how the Starbucks brand is position coming out of this certainly depending on the situation with smaller chains in the independents or even the larger chains in the case of China, just what that might mean for customer demand for.
Your traffic trends.
Also site selection and longer term either development potentially thank you.
Yes. This is Kevin I would just start by commenting on the momentum that we have generated pre code and clearly the.
Posting an eight cop with with four four points of transaction growth in the you asked in the first up until the last.
Two two weeks of.
March.
Was clearly an indication that I think this combination of the in store experience beverage innovation and digital customer relationships was putting us in a position where we were I think growing share of the customer occasions is specialty coffee retail and I believe if anything the way we've navigated the virus.
Continues to put us in a very strong position competitively that said.
There is.
The economic implications.
Following this sort of yet to be yet to be determined I think we're very optimistic about.
Our competitive position that we step will be lot smarter 30 days from now after we get to see the reaction of the reopening in the United States.
Similarly in China.
I think we're also in a very strong competitive position I'd say, both in the us in China, where in the strongest competitive position that we've been in history the company.
And a lot of that comes through the focus and discipline that we had going in to covert as well as the principled way we have decided every action we've taken.
To navigate the cobot virus responsibly and thoughtfully.
Prioritizing the health and wellbeing of our partners and our customers you know the engagement partnership we've had with governments and health officials to help contained.
And mitigate contain the spread of the virus. The fact that we are showing up in a positive and responsible way at every community that were part of.
And so I think our competitive position is very strong that said we rise we've got to we've got to keep stay focused on the things that matter Weve got to do the right things for our partners and our customers that if we do that.
I think we emerged from this.
Strengthening.
The brand and strengthening the connection that we have with our customers.
Your next question comes from line of Catherine priority with Goldman Sachs. Please proceed with your question.
Great. Thank you if we look at coming the comp numbers in the U.S. segments that you discussed in March and then your guidance for April.
Overall it.
Suggested there hasn't really been a big sequential or weak on week improvement and the business and Linda with aggressive restaurant at most of them are showing one as we kind of weak improvement. So I'm wondering when you drill down a little bit on a weekly trends are you sorry the improvement.
Here with consumer or do you need to see these new initiatives like curbside or store reopening our for comps can reaccelerate okay.
Pat Pat why don't you take the numbers on the comp and then we'll hand off to Ross to talk about sort of the trends that she's watching in terms of customer behavior. Certainly thank you Catherine so since the third week of March when we initiated widespread closures of stores in the US we've seen then the.
The comps which include the impact of closures based on how we've defined comps for this period of time.
As being fairly steady in the range of minus 60 to minus 70 as we have in recent weeks reopened some more of our drive through stores, we've seen slight improvement within that range. So that we're closer to the minus 60 into that range, but it really is not until we begin to.
Open large numbers of stores starting the week of May 4th that we would anticipate seeing a material improvements in that number.
Yes, more stores in more ways for customers to engage in so Rob why don't you talk a little bit about sort of the the incremental ways that we're now engaging beyond just drive through as we reopened these stores next week.
Yes, so talking and thanks for the question. So first of all Pat did lead to a range so that 65% to 75%. So as you drill down there's probably some of those stores that are doing better and we're seeing it migrates. It really depends on those more local jurisdictions and where the sheltering and has been less debt and we're seeing that over the last.
Last week or so so in some instances is actually too early to tell also remember that we have really turned off any marketing on this times and so our customers are used to have introducing spring beverage. In addition to speaking to them on a one to one basis through our digital relationships and we've not.
Acknowledged our birthday presentation to our customers, we've not introduce happy hour nor are we done our double start date. So I would say that we're operating in that abnormal position in terms of how we communicate to our customers now coming out of the game we're doing.
A lot of new things with marketing digital media will have to be will have paid social owned earned media that all begins early next week. We're also creating new E mail contacts to each one of our members the 30 million that year.
We we can reach we will do that on in the next week and the most important thing is to let them know that we are open and it's surprising to us in some areas people are not aware for open or not will lead our actually had different hours in different regions. So it's too soon to tell in terms of where the pick up will be but where we are.
We're pretty.
Positive about the work that we have ahead of us in the reintroducing our summer beverage line. So we're encouraged by that I'll also mention too we have extensive work going on with our delivery partner and so you'll see some marketing and the delivery space as well, so dixit acceleration and these new models that we open.
On to talk about them pretty brown broadly and loudly and we'll know more over the next 30 day.
Okay.
Your next question comes from the line of Brian Bittner with Oppenheimer. Please proceed with your question.
Thanks, Thanks for the question.
China, you're expecting same store sales down 25 to 35 person than your and your third quarter and.
China. This afternoon said the same quarter their comps are down roughly 10%. Thus far what do you think striving to leg and your recovery versus appear like this just based on your knowledge of the market.
Is it about coffee in general and just in General do you expect a similar leg and your recovery in the U.S. as you reopened just.
Given your dependency on employment levels in your dependency on habitual high frequency level should we expect similar like leg and the recovery. Thanks.
John I'll, let you comment on China, Yeah, Ryan the biggest impact to us on on the recovery getting the rest of our stores open that aren't opened those stores right now are in some of our highest volume channels.
Those being the international travel hubs in airports the tourist areas.
As tourism has.
Has subsided in China, and then obviously some of the entertainment areas.
In the downtown urban areas and in the neighborhood. So once we get those stores reopened we feel that we can get back to a path, where our comps will continue to accelerate beyond what we're already seeing the good news is is that we continue to see transactions gained momentum in the market.
Number one number two we also see digital continuing to play a bigger role and in particular, MLP and ammo D and we're going to continue to leverage that.
And then number three.
Obviously, we're excited about getting new stores reopened as well and start opening new stores and we're on a path where we are going to hit the 500 stores by the end of this year and we're going to continue to accelerate what we've seen thus far in the month of April we've opened seven new stores they are performing.
Well.
We're also opening Starbucks now, which is a mobile order pickup in mobile order delivery store.
Concept, we now have it down in Shenzhen as well as in Beijing, We're going to continues accelerate that concept and one schools go back into session, which they start later this week and into next week, we foresee the mornings will continue to recover as people go back into offices and.
And get more back into route NYSE behaviors, which I think will help as well.
Okay.
Your next question comes from line of Andrew Charles with Cowen. Please proceed with your question.
Great. Thanks, very much for transparency and I hope you're staying safe. It was looking to get an update on supply chain particular on coffee and two luxury core coming you guys are somewhat insulated from protein challenges in shortages that are starting to surface that but given the amount of coffee that is imported in Latin Americas, a little bit earlier stages with Coca night.
Relative to us keep talking about the visibility you have into securing supply of coffee and electric report for breakfast sandwiches.
John maybe you take green coffee sourcing and then rise why don't you take rest to supply chain. The roasting network as well as is the crude sourcing, but John since you manage the coffee piece on green coffee sourcing a green coffee when you talk a little bit Andrew This is something that we're monitoring obviously, each and every day we feel.
Very good good with our positions on Green coffee inventories and how we're positioned in the marketplace. What we've seen in terms of Green coffee is that in Latin America, there through the harvest and we were able to secure the adequate supply that we need we're now moving into South America.
Into Brazil, and Colombia, and we're continuing to see those markets.
Good good crops. This year and we don't anticipate any supply disruption in that regard. So we feel good about the green coffee and then as we get adhere to the states, having the transportation set up to do so.
Andrew just.
Thank you John Andrew I'm, a couple of things on our roasting capacity, we've been able to keep our roasting facilities open in running we have followed local mandates for closure as you can imagine in Amsterdam and different areas, we shut down for a period of time, but we had a network of.
Coffee built into the system. We did go take a few units down to do cleaning procedures to make sure we had a safe environment. We've adjusted.
In our roasting facilities for social distancing and Thats been very effective for us it has not impacted our production capacity. So we feel pretty confident in our roasting capacity right now even before stores are opening we are in good shape in terms of food sourcing there. There's a lot of activity happening in proteins are breakfast sandwich businesses.
Secure.
I will talk a little bit about on breakfast as a category that we are intensely on wanting to regain as we reopened we feel confident that we've got the inventory there and then in close contact with all of our suppliers.
In that area. So right now we feel pretty good about our position.
Thanks for the question.
Your next question comes from Matt Difrisco with Guggenheim. Please proceed with your question.
Thank you.
My questions with respect to sort of the U.S stores in the 50% or so that are closed obviously, that's a higher number than a lot of your peers and that would suggest that those stores are those locations are somewhat hamstrung during the cobot situation of being locked down.
I would presume.
You're going to expect those not to open up at 75% index been pretty cobot.
May one.
As most probably were closed for reasons.
Employment not being back is that correct sort of an assumption, but also is there. Some leverage you have potentially with renegotiating rents are leases on some of these stores that if the new normal.
Looks a little bit as far as the recovery period, where they might be permanently hamstrung is there some level of renegotiating our leases where since you've closed these 50%.
That's giving you a little bit of a.
Entrance into that with the the landlords.
Matt This is Kevin let me just just comment on on the part of your question then I'll hand, it over to Pat.
You suggested that.
50% of the stores that we closed were hampered for some reason thats not the case, we decided when we went into the shelter at home to only opened drive-thrus.
And and we did that for partner safety, we just decided rather than have any.
You know any location that has a cafe opened during the period where.
The nation was sheltering at home and social distancing, we thought that was the safest way for us to ensure both our partner safety as well as out of our customers. So that's what that's what drove the decision to to close all those stores, whereas you know certainly others made different decisions and that's fine, but but we.
Prioritize the health and wellbeing of our Starbucks partners in the customers, which is why we were more aggressive perhaps than others and closing stores and then I'll hand over to Pat for.
For comments on on the rest of your question. Thank you Kevin and thanks, Matt for the question. So a couple of things I'll comment on the first is that as we reopened our stores.
That are currently close we will be applying our normal discipline to optimize store performance. We have a world class operations team that is as focused on the bottom line is on the topline and driving sales and so once we have better visibility to the sales recovery curves or those stores, we will be taking appropriate steps to optimize their profitability specific.
Finally, with respect to rent, but I'd like to say is it to date, we're quite proud of the fact that we have remained current on all of our rent payments, which we believe reinforces our position as a as a on.
But.
Developer of choice. If you will we are having ongoing conversations with our landlords in various markets regarding what may be commercially reasonable leased concessions in the current environment. So we've not yet confirm those arrangements and it's really premature to indicate what that release may look like but it is something.
We are pursuing.
I do think it is fair to to believe that occupancy lease rates are going to go down post go but just given the situation and.
I think thats a fair assumption.
Your next question comes from Chris Ocull with Stifel. Please proceed with your question.
Thanks, Good afternoon.
Could you describe the primary differences and maybe the approach to reopening in the U.S. compared to China I'm, just wondering if it will be easier to recover sales in one country more so than the other because of either the approach the country's taking to reopening or maybe because of just differences in consumer behavior.
Yes, let me just comment briefly and then I'll hand off to rise to sort of share the path for US and then John could close by a little bit of some of the differences in China.
For me I think.
The comment I would make was in China.
It was decisions were made centrally by central government on a city by city basis and even certain.
Office parks and things were actually coordinated when they opened and so the opening of stores was over a longer period of time than I think we're going to see in the U.S., but it was it was orchestrated.
City by city, and almost community by community centrally.
Keep in mind in China, the period of shutdown or the period of sheltering at home was about three weeks, whereas here in the U.S., it's been about six weeks.
And.
So now as we reopened in the you asked I think we anticipate that.
The stores are going to reopen across the nation at a faster rate, but the format. We're going to use is going to be in each store is going to be dependent on sort of what's happening in that particular store.
So I think theres a lot of similarities in terms of the safety protocols the operating protocols in the stores the way we.
The priorities the principles, we used to make these decisions.
I think there'll be a little bit of the difference in terms of.
In the U.S. deciding.
Opened them faster, but we'll decide geography by geography, what's the appropriate format. Rob why don't you once you share a little bit more about the plans that you see unfolding over the next.
30 days.
Sure. So Chris Thank you for that question so.
One other things I'll highlight and John Culver alluded to it earlier is that difference.
Habit between China, and you add China that sit down market and you add to the grab and go market. So for us to have access to aye good percentage number more than 50% of our story when you ask that drive free so that alone is going to create a difference. The second difference I will say in I think it's really obviously that.
We have this decentralized decision, making and so local municipalities can make a decision on opening and closing then shelter and a lot.
And the mobility at the customer so we'll learn those patterns through the month of may and be able to come back to us as Pat described.
In early tenants, but one of the things we're doing in its primary to US is partner safety and so as we reopened the stores where reopening in a safe environment, which is why these new mode to pick up in go we're really enforcing we're enforcing to download the app and pick up in order ahead. We're also providing the safety for.
Our partners things like a partner Precheck, we instituted that last week, where thermometers will be available in all stores on we will actually have on every partner take the temperature on them that level, they're ready to works, where theres a question Thats something that we learned some sign it was very helpful for us and so we are.
We learn from China, and then just expanded that work and then looked at government and local health.
Sales and what they were saying and that's how we plan to open and we'll be in this safe position until we learn more so we're going to learn if we go as Kevin caused in monitoring and that we're falling into line, there and really going to open our stores I'm encouraged that we'll have 90% of the stores open. The other thing I'll tell you if that our partners are really.
Wanting to.
Hey Star from connection also and so they're excited about rejoining the stores next week and we're having them somewhat of a homecoming celebration for them as they re enter the stores next week and actually take them through new training around the clean protocol and then also how to keep in cell safe.
In healthy and how to keep customer safe and healthy. So we've got a pretty strong reopening plan that kicks off early next week.
Thanks, Ross and John last word, yes, Chris just real quick on churn I think the big difference for US has been our ability to to leverage the relationships that we've been able to build with the government officials both in the central government the provincial government and then into the cities and.
Really taking those relationships and being able to understand how they're thinking about the reopening and working closely with them on staging our reopening based on what their plans were we also were very well connected into the local health officials as well and we.
Worked very closely with them to put together the safety protocols in our stores and how we would operate our stores going forward. So.
It really making sure that we created a safe environment and that we continue to build on the trust that our brand has with our customers and obviously with our partners and so what we've seen as we've opened up first off our partners similar to the US we're very excited to get back into stores and.
As a matter of fact since Weve begun.
And gotten to the 98% of stores reopened our customer experience scores has actually increased by over eight points.
Pre cope at levels, so the engagement level of our customers.
More importantly, the engagement level, our partners is really amplifying the strength of our brand in the resilience of Starbucks in the market. So very proud of the work and they've done and just want to recognize the China team for what they've done to navigate this complex situation.
Ladies and gentlemen that was our last question today I will now turn the call over to Mr., Kevin Johnson.
Hi.
Thank you.
I want to thank you for joining us today and I Hope you and your families are all safe and healthy.
We continue to navigate through this unprecedented situation staying true to our mission and values and I'm pleased with where we are China has demonstrated clear path to recovery do you asked is prepared to reopen a large number of stores next week and throughout the month of May our channels business has demonstrated resilience through all this and I am.
Confident in our approach and optimistic about our ability to continue to drive Starbucks recovery in this monitor and adapt base.
We all understand the power of the Starbucks brand is strong and through our principled actions, we have strengthened the trust and confidence of both our partners and our customers haven't Starbucks that will serve us very well for the long term.
I'm very proud of how Starbucks partners have shown up in every part of the world and we will continue to be focused.
Disciplined and transparent with all stakeholders as we continue to navigate the situation.
Thank you.
This concludes Starbucks coffee company's second quarter fiscal year 2020 conference call you may now disconnect.
Sure.