Q4 2020 Starbucks Corp Earnings Call

[music].

Good afternoon. My name is dead and I will be your conference operator today I would like.

Welcome everyone to Starbucks coffee company's fourth quarter fiscal year 2020 conference call all lines will be placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. If you would like to ask a question [laughter] plus star and the number one on your telephone keypad.

If you would like to withdraw your question. Please press Star then number two.

I would like to turn the call over now to target stores I'm <unk>, Vice President of Investor Relations Mr. <unk> you may now begin the conference.

Good afternoon, everyone and thank you for joining us today to discuss our fourth quarter and fiscal year Twinkie Twinkie results. Today's discussion will be led by Kevin Johnson, President and CEO and Pat Grismer CFO.

And for Q1 day, we will be joined by Ross Brewer, Chief Operating Officer and group President Americas, John Culver Group, President International Channel development, and global coffee tea and cocoa.

This conference call will include forward looking statements, which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements any such statements should be considered in conjunction with cautionary statements in our earnings release and risk factor.

Discussions you know filings with the FCC, including our last annual report on form 10-K, and quarterly report on form 10-Q.

In addition, we estimate the impact of COVID-19 by comparing actual results to our previous forecast. These fall costs, what created prior to the spread of the virus what based on information available at the time and on a variety of assumptions, which we believe are reasonable.

Starbucks assumes no obligation to update any of these forward looking statements or information.

GAAP results in fiscal Twentytwenty includes several items related to strategic actions, including restructuring and impairment charges transaction and integration costs and other items.

These items are excluded from our non-GAAP results.

For certain non-GAAP financial measures mentioned in today's call. Please refer to our website at Investor Dot Starbucks Dot com to find their corresponding GAAP measures as well as a reconciliation of these non-GAAP financial measures with their corresponding GAAP measures.

This conference call is being webcast and an archive of the webcast will be available on our website through Friday November 27th Twentytwenty I will now turn the call over to Kevin Kevin.

Good afternoon.

Thank you for joining us today.

2020, he's been an extraordinary year.

Together, everyone on this planet has been navigating a global pandemic and all the implications that come along with it.

The shared experience gives us much to reflect upon learn from and be inspired by.

I'm very proud of how Starbucks partners responded well.

Bring together to support one another.

I'd say that some of your experiences for our customers and serving communities.

Oh, its partners, who proudly wear the green apron have been at the forefront of these efforts.

And I am enormously grateful for the courage compassion and dedication that they've shown throughout this journey.

They inspire me.

Fuel my positive outlook for the future.

There are three words that I hope you take away from today's call.

Confidence.

Resilience and optimism.

Let me explain.

First.

And the most dynamic of times.

Starbucks is consistently executing.

Our recovery is progressing extremely well as evidenced by better than expected sales and profits in the fourth quarter.

Which gives us great confidence going forward.

Second we have accelerated several girls strategies and are innovating rapidly to adapt to new customer behaviors and preferences.

Building, a new level of resilience for the future.

And third.

Starbucks partners have risen to the occasion, which coupled with an innovation agenda that elevate the customer experience introduces exciting new beverages and extends our digital customer relationships.

This is very well positioned and gives me a tremendous sense of optimism for fiscal 21.

And the future of the Starbucks coffee company.

And these unprecedented times Starbucks is more focused than ever on making the investments necessary to position our brand and our company for long term success.

We will maintain our disciplined approach to investing behind our best in class digital ecosystem and aligning our product portfolio store base and partner led customer experience.

With evolving preferences and consumption patterns.

Our track record of delivering across these areas underpinned the resilience of our business during this pandemic.

And we'll support Starbucks continued leadership.

Let me begin in the U.S.

I could not be more pleased with our U.S. sales recovery, which progress faster than we anticipated in our final quarter of fiscal 2020.

We finished the quarter with a comparable store sales decline of 4% for the month of September a vast improvement from the approximately 65% decline we experienced at the depth of the pandemic only five months ago.

Fourth quarter comparable store sales declined 9% in the U.S. relative to the same quarter in the prior year.

Well above the better end of our guidance range importantly.

Importantly transaction volumes in the U.S. climb steadily throughout the quarter as we methodically and carefully restored in store seating with approximately 63% of our U.S. stores offering limited seating as we exited the quarter.

Ticket growth was relatively stable across the quarter at approximately 20%.

Remaining meaningfully above historical levels aided by continued strength in our dry through channel where customers tend to place larger orders.

Central to the strength of our U.S. recovery has been a relentless focus on rapid innovation adapting and adjusting to new customer behaviors.

While continuing to drive the three strategies that are fundamental to our growth at scale agenda.

Elevating the customer experience.

Rising relevant beverage innovation and expanding digital customer engagement.

The first pillar of our growth at scale strategy customer experience is a key competitive differentiator for Starbucks and something that is paying dividends as customers now more than ever are seeking the comfort and care that Starbucks uniquely provides.

As customers continue to adapt to work from home and study from home realities.

They crave safe familiar and convenient experiences and have shifted their buying behavior accordingly.

And we've adapted rapidly to meet those evolving needs.

Broadly speaking, we've seen us transactions migrate from dense metro centers to the suburbs.

From cafes to drive throughs.

From early mornings timid mornings.

Without paced recovery on the weekends.

We've adjusted our operations to match these new customer behavior patterns, including multiple new protocols to provide a safe experience for our partners and customers.

And this has resulted in customer connection scores, which are well above prior year levels.

By caring for our partners since the start of this pandemic, providing them with economic certainty at a time of great vulnerability.

We successfully maintain very high levels and partner engagement and.

And this is paying off in the form of high quality customer experiences.

Those best moments that inspire Starbucks customers to continue coming back.

As evidence of these traffic shifts.

Sales comps were solidly positive for our drive thru locations and suburban stores for the fourth quarter and the month of September respectively.

Although this was offset by negative sales comps in our debts metro stores, particularly on weekdays those.

Those numbers reflect the fact that approximately 3% of our stores were temporarily closed across the entire quarter effectively weighing down the market comp by about two percentage points.

To increase throughput and accommodate higher transaction volumes at our suburban locations.

Weve rolled out curbside pickup to approximately 800 U.S. company operated locations and are on track to be in nearly 2000 stores across the us by the end of fiscal 2021.

We've also introduced handheld point of sale devices to about 100 stores with the goal of deploying these devices to approximately 400 additional stores by the end of Q1.

And we are continuing to restore in store seating across.

Across all of our stores in the us as conditions allow.

Building on the strength of our customer experience differentiated products continue to be an important traffic driver as well encompassing seasonal favorites as well as new innovations.

The relaunch of our Pumpkin Spice platform in late August was a catalyst to our Q4 results.

With pumpkin cream cold Brew, which was first offered last year actually outselling pumpkin Spice Latte this season.

Leading the entire pumpkin platform to a record high in average daily units.

Our cold beverages continue to resonate with customers led.

Led by Starbucks, Refreshers and cold brew with both delivered delivering double digit growth in Q4, and Boyd by positive year over year growth in Frappaccino beverages.

These results reflect not only the appeal of our products, but also the effectiveness of our marketing campaigns.

Prior to the onset of COVID-19.

Importantly, Starbucks rewards comp contribution improved throughout the quarter and returned to pre covid levels.

Mainly driven by recovery and remember spend and higher mobile ordering pay usage as I outlined previously.

Additionally are 90 day active rewards member base increased by 3 million members in queue for approaching pre covid levels at 19.3 million up.

Up 10% from the prior year.

The successful launch of stars for everyone in mid September was a key highlight in the quarter.

The momentum we saw in the number of customers who downloaded the Starbucks App in Q3 continued throughout Q4 and the number of active customers, who joined the Starbucks rewards program grew slightly in queue for relative to Q3 likely.

Likely helped by the late quarter launch of stars for everyone.

These early results indicate that the flexibility of rewards payment options, including the removal of the stored value card requirement turn stars is resonating with customers.

This gives us optimism regarding our ability to meaningfully grow the number of 90 days active Starbucks rewards members in fiscal 2021.

Before moving on from R. U S business I would like to remind you that is we announced in June we.

We're in the midst of accelerating the transformation of our dense metro business by closing lower performing stores, while continuing to capture that traffic where customers needs to be including existing drive through stores.

New format, such as curbside and more efficient Starbucks pick up locations.

We expect much of this work to be completed in the next 12 to 18 months.

At the same time, we remained focused on our strategy of developing drive through locations largely in suburban and semi rural locations extending the reach of the Starbucks brand with high volume high margin stores, providing our customers that convenience they are seeking.

We continue to grow our delivery business through our partnership with Uber eats providing customers the ultimate ultimate form of convenience.

It cannot be more excited about the upward trajectory and level of innovation, we're seeing an R. U S business.

I will now move on to China, or second lead growth market.

Building on the positive momentum in Q3, China demonstrated sequential improvements in monthly comparable store sales across you for delivering minus 3% for the quarter.

This was in line with our expectations led by initiatives very similar to what I described in the U S.

Outstanding customer experience, new product innovation, notably, our new T cloud platform and.

And continued expansion of our digital platform.

But what's most remarkable about the recovery in China in my view.

Is the rapid reacceleration of new store development, which is our number one driver of growth in China.

I'm pleased to say that despite the challenging environment imposed by the pandemic. We cross both the 40 640 700 store milestone in queue for opening almost 260 stores in the fourth quarter alone that's.

That's an impressive 581 stores or 14% growth in the last 12 months.

This is an incredible achievement by the team considering we temporarily pause new store development activity in China for a couple of months starting in late January.

Are disciplined approach to store development is paying off as these new stores are off to a strong start.

<unk> early returns substantially in line with pre Covid levels.

As part of our store development program in China. The local team has innovated a new retail format that caters to the needs date, a convenience store.

Starbucks now, which is very similar to Starbucks pickups in the U S.

With speed and agility, Starbucks, China opened 40 now stores in fiscal 2020, but.

But the presence and nine Chinese cities.

Early results are very encouraging and the team is increasing the pace of development for this innovative concept.

On the digital front, we saw continued strength in our mobile platform in China with mobile order sales mix more than doubling in the past 12 months to 26% in queue for with 13% coming from delivery and 13% from mobile ordering pay well above the mid teen levels, we saw pre covid.

The digital innovations, we launched in China throughout fiscal 2020, including a new we chat many program and.

And the enhanced Starbucks rewards program, along with our digital partnership with Alibaba have fueled customer engagement and strong sequential growth and active Starbucks rewards members.

In queue for China's 90 day active members increased 36% over Q3 to $13 5 million.

Representing 34% growth over the prior year.

As what the U S business I'm incredibly proud of the continued recovery and industry, leading innovation in China.

The customer trends, we're seeing in specialty retail extended coffee at home where demand remains elevated through the pandemic.

We are applying our innovation mindset and agility to our channel development business to capture share in at home coffee and to maximize reach of the Starbucks brand across all channels and platforms.

And the U S. Starbucks Sheriff total package coffee grew significantly in queue for with 17% growth in dollar sales outpacing the copy category, which grew 9% in the quarter.

Consumption of our domestic ready to drink coffee products grew 15% in queue for.

Somewhat offsetting the strength was softness in the foodservice business as offices hotels colleges and entertainment centers continued to experienced low levels of traffic.

Through the global copulate with Natalie we accelerated growth and innovation, while maintaining our commitment to sustainability in queue for <unk>.

Including the introduction of non dairy Starbucks creamers with 100% recyclable packaging to our full portfolio of at home products.

We entered nine new markets and the quarter, bringing Starbucks at home coffee presence through the global copula lines to 62 markets and just 24 months.

We also continue to meet customers, where they are through our global ready to drink portfolio.

Notably the continued performance of ready to drink Nitro cold through the number one innovation in the category this year exceeding expectations.

Overall, we are very pleased with the accelerated expansion of the Starbucks brand around the world through the channel business. This.

This is truly a brand amplifier.

In summary.

The Starbucks brand is stronger than ever our business recovery is progressing well and through rapid innovation, we built a new level of resilience for the future.

We believe that the investments we may to protect our partner's wellbeing and provide them with economics certainty combined with our principled approach to decision, making and transparency of our communications have built trust with all stakeholders and we'll pay dividends long into the future.

I opened my remarks by suggesting three words for you to take away from this call.

Confidence in our strategy <unk>.

Resilience built from our innovation agility that continues to drive our business recovery and.

<unk> optimism about fiscal 21, and the future of Starbucks.

A close by adding one additional word for all Starbucks stakeholders to take away from today.

Gratitude.

None of this would have been possible without the positive spirit and incredibly hard work of our 400000 Green apron partners around the world who serve our customers each day.

They live our company mission and values every day.

Partners are the heartbeat of Starbucks and they fill me with gratitude and inspiration.

Thank you partners.

Let me know hand, the call over to Pat to discuss our financial performance for Q4, and physical 2020, as well as our guidance for fiscal year 21.

At.

Thank you Kevin and good afternoon, everyone as Kevin shared we are delighted with the performance of all our operating segments driving a strong finish to our fiscal 2020 for the quarter Starbucks reported global revenue of $6.2 billion down 8% from the prior year.

<unk>, we estimate the COVID-19 impact on queue for consolidated revenue to be approximately $1.2 billion driven by modified operations and reduced customer traffic queue for EPS was considerably higher than the guidance range. We provided on our last earnings call driven by faster than expected.

<unk> sales and margin recovery as well as the lower tax rate from the impact of certain discrete items queue for gap EPS declined from 67 and the prior year to 33 cents inclusive of higher than expected restructuring an impairment costs related to the acceleration of our strategy to reposition.

And restructure our company operated store portfolio in the Americas queue for non-GAAP EPS was 51.

Down from 70 in the prior year, the estimated negative impact of COVID-19 on queue for EPS was 35.

I will now provide some segment highlights and discuss consolidated margin performance for Q4 and will then provide guidance for fiscal 2021, including the expected impact up to 53rd week.

Starting with the Americas at $4.2 billion America's queue for revenue was 9% lower than the prior year, primarily due to a 9% decline in comparable store sales as well as lower product sales and royalty revenues from our licensees as a result of the COVID-19 outbreak we.

Estimate the queue for a decline in America's revenue and operating income attributable to COVID-19 to be approximately $830 million and $400 million respectively.

This equates to a flood through right on lost sales of about 48% in queue for essentially returning to the segments typical 50% variable flow through right. This is a significant sequential improvement from Q3, reflecting a decrease in catastrophe wages and enhanced paint programs as well as an increase in labor efficient.

C relative.

Relative to the prior year America's queue for non-GAAP operating margin contracted 350 basis points to 16.7%, primarily due to the impact of COVID-19, including sales to leverage an additional costs incurred as well as growth and retail partner wages and benefits partially offset by him.

Proved labor efficiency.

Importantly, America's sales and profitability trended simply across the quarter with sequential improvements each month. The U S posted a comparable sales decline of 4% in September improving from Linus, 11% in August and the business achieved positive profitability and every month of the quarter.

Moving on to international, including a 2% benefit the segments comparable store sales of minus 10% in queue for reflects faster than expected sales recovery in Japan boosted by successful seasonal product promotions and strong drive through performance I would now like to highlight the fourth.

Hunter performance of our lead international growth market China.

For the month of September China's comparable store sales were up 1%, including a four percentage point V exemption benefit, reflecting a slight sequential improvement to august's calm on a like for like basis for the fourth quarter, China's comparable store sales declined 3%, including the favorability.

Four percentage points.

International's queue for revenue of $1.5 billion with a 5% reduction versus the prior year, primarily due to the 10% decline in comparable store sales also contributing to the decline where lower product sales too and royalties from her licensees to do to COVID-19, we.

We estimate that the COVID-19 impact on the decline in internationals queue for revenue in operating income, what's approximately $300 million and $150 million respectively.

International's flowed through right on lost sales improved from roughly 55% in Q3, two approximately 50% in queue for primarily due to higher labor efficiency and lower waist, partially offset by a reduction in certain temporary benefits, including government relief programs internationals queue for.

Non-GAAP operating margin declined by 540 basis points from the prior year to 16, 3%, primarily due to the impact of COVID-19, largely stemming from sales deleverage and non restructuring store asset impairments as well as strategic investments, mainly technology and digital.

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To channel development revenue was $464 million in queue for a 9% decline from the prior year, primarily due to global coffee aligns transition related items, including a structural change in our single serve business. Excluding these transition related items channel developments revenue declined by.

Approximately 1% from the prior year, reflecting the adverse impact of COVID-19 on the segments foodservice business, partially offset by growth in at home coffee and ready to drink <unk>.

Channel developments queue for operating margin expanded by 510 basis points to 42, 7%, mainly due to a business mix shift driven by the strength in our ready to drink products as well as the structural change in our single serve business.

As a consolidated level non-GAAP operating margin was 13.2% in queue for down from 17.2% in the prior year unsurprisingly much of the year over year reduction in our operating margins for Q4 was due to sales deleverage attributable to COVID-19, as well as growth in wages.

Benefits and non restructuring store asset impairments and strategic investments, partially offset by labour efficiencies and supply chain savings.

We estimate the COVID-19 impact to queue for non-GAAP operating income to be roughly $550 million in relation to the $1.2 billion of COVID-19 impact on queue for consolidated revenue that I mentioned earlier this equates to a flow through rate of approximately 46% on lost revenue.

Which is close to the 50% variable flow through right do we typically observe in our business.

I will now provide guidance for fiscal 2021.

Starting with the key driver of our growth comparable sales growth for our company operated stores.

Barring any new significant and sustained waves of Covid, 19 infections and or global economic disruptions, we expect global comparable store sales growth of 18% to 23% in fiscal 2021.

<unk> bye sustained improvement in comparable store transactions across of both of our key markets. The U S. In China. These estimates are based on the experience. We've gained from navigating the impact of COVID-19 for the past nine months, including the more resilient operating protocols that we built into our business.

As well as the traffic driving initiatives and innovations that we plan for the year ahead.

For the Americas, and the U S. We expect comparable store sales to grow between 17% to 22% in fiscal 2021, and we continue to expect to achieve full comparable store sales recovery in the U S. By the end of our fiscal second quarter.

This assumes that we are able to continue to restore cafe seating and operating hours at R. U S stores nearing full capacity by the end of the second quarter.

For the International segment, we expect comparable store sales to grow between 25% and 30% in fiscal 2021.

This estimate is predicated on COVID-19 impacts continuing to lessen in Japan as well as China's current operating environment remaining substantially unchanged with full seating in regular operating hours and almost all locations. We continue to expect China's comparable store sales to fully recover by the.

End of our first quarter, excluding the benefit from the temporary exemption, which we will continue to expect will expire in January.

For the full fiscal year in 2021, we expect China's comparable store sales to grow between 27% and 32%.

Moving on to the next key growth driver retail store development.

Although we expect to open more stores globally, and physical 2021 than we did last year targeting approximately 2150, new store openings compared to about 2000, and physical 20, we expect store closures to increase versus prior year from approximately 600 physical 20.

To about 1050 in fiscal 21.

This is primarily due to the accelerated repositioning of R. U S store portfolio and the restructuring of our candidate business, but also reflects a slightly higher pace of closures in our international license store portfolio.

As a result, we expect to at approximately 1100 net new Starbucks stores globally in fiscal 2021 down from approximately 1400 in fiscal 2020.

For the Americas, we expect new store openings to be approximately 850, located mostly in the U S with roughly 800 store closures across the segment in fiscal 2021, yielding approximately 50 net new stores.

The closures are part of the trade area transformation initiative that we announced in June to accelerate the evolution of our store footprint intense metro centers clearing the way for the development of new more efficient retail store formats that cater to customers increasing desire for convenience, while also improving trade area profitability.

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Compared to the plans, we announced in June or guidance for fiscal 21 reflects an additional 200 store closures in the Americas Company operated store portfolio based on our current outlook on store performance, mostly in dense metro centers, where there is the potential for sales transfer for.

For International we expect to open approximately 1300, new stores in fiscal 21 and clothes approximately 250 stores, yielding 1050 net new stores next year, including approximately 600 net new stores in China.

This reflects a slower pace of international license store development as well as a slightly higher pace of international license store closures relative to fiscal 2020 in part due to the impacts of COVID-19, resulting from the relatively slow pace of recovery in many markets outside the U S. Importantly.

We believe these impacts are temporary and we expect the pace of global net store development to return to our long term growth guidance of 6% to 7% annually in fiscal 2022.

We expect channel developments revenue in fiscal 2021 to range between $1.4 billion and one 6 billion include.

Including the 53rd week.

The anticipated decline in the segments revenue from $1.9 billion in fiscal 2020 is primarily attributable to a structural change in our single serve business that was announced in February.

Pursuant to an arrangement between Nestle and current Dr. Pepper, resulting in a more royalty based revenue construct for Starbucks that took it back last month.

We do not expect the profitability of our single serve business to be materially impacted by this change.

Adding it all up we expect consolidated revenue to range between $28 billion and $29 billion in fiscal 2021, including approximately $500 million attributable to the 53rd week.

Let's move on to fiscal 2021 operating margin globally, we expect operating margin in fiscal 2021 to improve significantly over the prior year, driven primarily by three tailwind, partially offset by incremental strategic investments in our business the three tailwind or <unk>.

Number one sales leverage as we continue to recover from the impacts of COVID-19 number two the absence of certain COVID-19 related expenses unique to the prior year and number three ongoing supply chain efficiencies the.

The strategic investments are concentrated in three areas number one enhanced partner wages and benefits number two technology to drive further digital customer engagement expand retail sales and improve store operating efficiency and number three environmental sustainability, primarily within our.

Supply chain to reduce waste water consumption and carbon emissions.

These investments are spread across our product and distribution costs store operating expenses and G&A.

Let me add one additional point to the operating margin equation for fiscal 2021, we expect come on these to have minimal year over year impact on our product and distribution costs. At this point are overall coffee needs are mostly price locked for fiscal 2021.

Combining the impact of all of these margin drivers, we expect non-GAAP operating margin in fiscal 2021 to be between 16% and 17% starting well below the lower end of this range in the first half of the year in rising above the upper end of the strange in the back half of the year. Similarly, we expect our.

Retail operating segments to deliver significant margin improvement on a non-GAAP basis as fiscal 2021 progresses for channel development, we expect operating margin to exceed pre COVID-19 levels and approach the mid forties driven by the structural change in our single serve business, which I just described.

Below the operating income line, we expect interest expense to be between $470 million and $480 million in fiscal 2021 versus $437 million in fiscal 2020. The increase is driven by that issuances totaling $475 billion in the past eight.

Months importantly, we remain committed to our triple B plus b double a one credit rating and leverage cap of three times rent adjusted EBITDA, while the impacts of COVID-19 have resulted in the company exceeding that leverage cap. We view. These impacts is temporary and we expect our leverage to return to near targeted let.

<unk> and the latter part of fiscal 2021, as our operating cash flow continues to improve and we extinguish upcoming debt maturities.

Based on the strength of our cash flow I'm happy to report that we paid off a $500 million term loan in Q4 and as we previously announced our board of directors approved a 10% increase to our quarterly dividend representing the 10th consecutive annual increase since Starbucks commenced paying a dividend in 2010.

As to our tax rate in fiscal 2021, we expect our effective gap and non-GAAP tax rates to be in the mid 20% range. This compares with gap and non-GAAP tax rates of 26% and 27% respectively in fiscal 2020, which benefitted from certain.

Discrete tax items that are not expected to repeat to the same degree in fiscal 2021.

Finally, we currently expect the suspension of our share repurchase program to continue through the balance of fiscal 2021, we.

We expect capital expenditures in fiscal 2021 to total approximately $1.9 billion slightly higher than what we spend in fiscal 2019. The increase is primarily attributable to two things number one the re acceleration of new store development. Following a temporary pause during the pandemic.

And number two and expansion of our global supply chain, notably the development of the copy innovation Park in China that we announced earlier this year.

Finally at this juncture, we foresee minimal impact from foreign currency movements in fiscal 2021.

When you add it all up we expect gap EPS in the range of $2 and 30 <unk> to.

To $2 54 in fiscal 2021, including approximately 10.

For the 53rd week, we expect non-GAAP EPS in the range of $2 and $72.90 in fiscal 2021, including again, approximately 10 cents for the extra week, demonstrating further recovery and approaching pre pandemic levels.

Our tier one specifically, we expect to gape EPS in the range of 32 cents to 37.

And non-GAAP EPS in the range of 50 to 55 cents, reflecting our current stage of recovery.

Given this expectation for Q1, EPS and combined with the normal seasonality that tends to dampen our EPS in queue to we expect meaningfully higher EPS and the third and fourth quarters compared to the first two quarters of the year.

So let me wrap things up we are delighted with the pace of business recovery in fiscal 2020, and the momentum that it provides for fiscal 2021, we remain confident in the strength of our brand and the durability of our growth model and we are committed to making the investments necessary to sustain our compare.

Additive advantages reinforced by the consistent execution of a focused agenda.

On that note I would like to express my appreciation to our Green apron partners, who deliver the Starbucks customer experience in a manner that is truly unmatched and exemplifies our company's mission and values, which are the foundation of our business with.

With that Kevin and I are happy to take your questions joined by Ross 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. Please press star than the number one on your telephone keypad.

In order to allow as many questions as possible. We ask that you. Please lend me your <unk> to one question at a time, we will come back for follow up questions. As time allows will pause for a moment to compile the Q&A roadster.

Our first question comes from the lineup John either go with J P. Morgan. Please proceed with your question.

Hi, Thank you very much I mean, obviously lots of unpacking the call and congratulations on the progress that you've made the.

The question was really on U S segment margins, but I think I can apply it to China here as well.

A lot of companies have embarked on simplification efforts that have driven margins, you're very specifically have not.

As you have continued to give the customer the choice that they expect but but you have had a very significant shift in mobile order and pay which I assume it could potentially be leading get to some of the labor efficiencies that you alluded to.

Full of times in the call. So the question is as we kind of think about getting back to previous Martin's that were achieved in both of those segments. What type of an average unit volume may may be relative to 2019 do you think you need to achieve to get back to previous margin than our arena in an environment.

Average unit volume recovery Rican potentially start you're talking about some relatively near near term peaks.

Thanks, John will hand that to Pat to handle that thank you John for the question. So with respect to the impact of the increase in our digital business on a labor productivity. We've been very pleased with the growth of our digital business, but.

But even is that has increased and even as some of our cafe seating has remained closed we've added operational complexities to the business like enhanced and more frequent cleaning and managing social distancing in our cafes, including as customers come in for a mobile order and pay pick up and that is to ensure safety in our stores for both.

Our partners and our customers, which has been instrumental to our ability to welcome customers back to the business and so this is tended to offset some of the improved labor productivity that we would have otherwise realized.

And as a result of these new operational complexities along with the incremental investments, we're making to enhance partner wages and benefits are physical 21 margin guidance reflects the labor recovery will trail sales recovery with overall labor productivity, returning to pretty covid levels by Q4.

But I do want to clarify that the team remains very much focused on ensuring that we were driving enhanced productivity in our stores and that's largely through the redesign of in store operating routines as well as the introduction of new technologies as we continue to automate tasks. So it's really through a combination of how we responded to the new operating.

Environment to provide that safe and welcoming store atmosphere that our partners and customers require.

Along with how we're able to benefit from sales leverage as we recover our business now you asked what is the average unifying that we would need to achieve and how that compares to fiscal 19. As you know we're anticipating that we will have fully recovered comparable store sales by the end of our fiscal second quarter, but there will be a two quarter laugh.

Beyond that because of the dynamics I mentioned before we expect to see full margin recovery and that includes the improved labor productivity.

Our next question comes from the line of Chirpy Bernstein with Barclays. Please see what the question.

Great. Thank you very much.

Christian on the unit growth side of things.

China, and and more broadly, but trying to specifically I think your guidance culmination like 12% plus unit growth in fiscal 21, which looks like it's a step down from the prior 15% plus.

You talked about the global unit growth is pulling a little short of your 6% to 7% as well so specific with China, you think you're going to get back to that 15% plus post covid or is it maybe more of the law of large numbers.

Whether there's any gating factors being partners or real estate or demand.

I'm kind of in that context, I'm, just wondering as everyone talks about the.

Better opportunity from independent store closures and more attractive real estate, whether you're seeing either of those things at this point. Thank you very much.

Thank Jeffrey I'll head over to John call, Virginia would take them, Yeah, Jeffrey Uhm for China, We actually have accelerated store growth, we had a record quarter opened 259 stores in Q4 and.

Feel very good about our year over year growth in the store count perspective at 14%, we do see a pathway back to getting back to the historical levels.

We're guiding to the 600, but we're continuing to look for new opportunities.

Go faster, where it makes sense at the same time, we're innovating from a concept standpoint with Starbucks now and the acceleration of that and were encouraged by what we're seeing thus far and then as you look at the.

The new stores in the performance overall, we are seeing you know emerging back into those historical return trends and that gives us a lot of room for optimism in terms of the store growth model. So we are fully committed to accelerating growth.

We're gonna be opportunistic about it we believe in the number that were committed to and where we can give back more we will go after it we've had ongoing discussions with landlords as part of that and.

They're they're looking to partner with us.

For for the relevant sites and continuing to to.

Continuing to grow our business. So for US we will continue to push hard on store development.

Accounts for roughly 75% to 80% of our total revenue growth. So we see this as a big piece given the long runway we see there.

In Jeopardy. This is patches to build on what John has said I think it was a couple of years ago at our China Investor Conference that we talked about a longer term goal of reaching 6000 stores in China by the end of fiscal 22.

Remain optimistic that we will achieve that number and that does imply that following fiscal 21, we will see an acceleration of the pace of new unit development in China.

And our next question comes from the lineup John glass with more than just an issue with your question.

Okay. Thanks, very much I I also wanted to ask a question about your development in the Americas, maybe the closures issue is you're thinking thought changed on the closures about.

800 closures and.

In the us to get to a net 50 I think originally talked about 400 in the U S and 200 in Canada that including the license and that for example, or is that just an acceleration of the tow company closures and can you also talk about where you are in developing that new prototype a camera over at Starbucks now her cervix to go but where are you in that evolution to be open more stores.

How do you think about that in the equation for 21 development.

I was going to take Ah yes.

John that good question. So concerning the numbers are closer than the U S. We remained pretty much in line with historical levels.

And then as you stated about 850, new stores 800 closures Uhm, what we learned athlete concentrated to cover it process. We are learning more about where our customers are returning to access their coffee. So we've accelerated.

Closures that we have we have planned for the U S stores part of it is also to learning.

What our new.

Formats can offer US and said you asked a question about our new format. We are increasing the number of units that we have in the new format for instance.

It also includes a new channels as well so we have curbside stewards at about 800, and the U S 2000 announced by the end of 21.

We actually are working on restoring seed.

Seating in our stores, we have roughly 65% of our stores with restart seating.

So as we move forward and we have open three of the new.

Units that we are having the the New York area and one in Toronto area, and we are accelerating that throughout this year.

And adding more of those units as we go throughout the year, but those are called pick up Starbucks kindergarten Starbucks pick up stores.

And we will continue to deliver those asleep.

Throughout the year.

And John just to build on what <unk> said with respect to the composition of our store closures as we repositioned the portfolio when we announced our trade area transformation back in June via R. A K, we talked about 600 closures in the Americas that was 400 in the U S and 200 in Canada All company operated.

Stores and so with the incremental 200 store closures that we've announced that's about 100 and the U S and 100 in Canada and part of the reason why we've taken that up is that as our team and started the process of repositioning the portfolio over the course of the summer accelerating the strategic plans, we hope we already had in place while.

We've learned is that we've been able to manage the closures are much more efficiently than we had originally anticipated and that's largely about the average lease exit costs. So with this new information we were able to go back and take a look at the portfolio along with insights we have into how the Ah dense metro trade areas are performing and identify an incremental.

200 store closures that would create shareholder value through our ability to capture sales transfer from the stores that are closing at nearby locations. While also reducing cash operating losses underperforming stores, avoiding future capex that would otherwise have to spend to remodel some of these stores and that more than pays for.

These lease exit costs per unit and so.

The additional experienced just over the course of the summer put us in a much stronger position to move even more rapidly with a strategic transformation of our state and the thing I would point out that is a big benefit of that and certainly working in our guidance as a meaningful improvement to not only are America's operating margin, but then have that flows through to the enterprise at the <unk>.

Price level, it's on the order of 40 basis points. So we're really pleased with how our team has been able to respond to their learnings over the course of the summer and put together even more aggressive plans that are going to put us in a much more profitable position and also structure the business for.

Stronger growth going forward.

Our next question comes from the line of sooner Central what turns me. Please do with your question.

And can I have taken here may have been having a little bit of trouble.

And I wanted to ask about asking congestion target.

Implication is that next year volumes would be somewhere between flat with 2019 at 5% in the U S.

Considering that you started at 2020th.

Okay.

That conservative and also as we think of that ticket version of traffic and Yeah. You said that some of it is obviously cause it related.

Your ticket that years, you'll also get higher ticket. So I would just drive now.

Cancel the conference covering is perhaps less traffic driven than we might expect considering what happened.

Sure. Thanks.

Once you start and let Ross and add some color to it and kind of thank you Sarah as to the total comp expectations for next year I think in the current environment. Notwithstanding the fact that we are very pleased with the strength of our recovery. Thus far there is significant uncertainty as to how things are going to unfold whether as a.

Consequence of the progression of the pandemic or what may be happening in the broader economy and have us two are linked.

As we've thought about what is an appropriate level to target and we've been able to leverage models that our team is built we haven't.

We have an artificial intelligence data analysis team that does extraordinary work to help inform not only how we operate our stores based on prevailing conditions at each and every store, but also what we're expecting next year to look like for each and every store taking into consideration, both internal and external variables and based on those projections.

<unk>, it's fair to say that we have hedged somewhat to be appropriately conservative in the current environment and based on our progress to date, we remain very place and that includes a faster than expected acceleration over the course of the summer yielding what we consider to be very strong results for our fourth quarter that is provided significant mo.

Mentioned as we entered the sheer so I I would say that unbalance, our expectations are somewhat conservative but appropriately. So in the current environment and that remains our guidance policy is to communicate outcomes that we have reasonable degree of confidence we can deliver against and I think our our experienced here in the last year through the depth of the pandemic has.

Reinforced our ability to do that pretty well I'll ask <unk> to comment on the second part of your question in relation to ticket growth and what's driving that and how we see that trending into next year versus traffic yes.

There's two things I'll do first of all in terms of returning transactions.

Back to our stores. This for areas were looking at and I'll start there Uhm first of all I was looking at increasing the members and our loyalty program. We introduced the news stars for everyone program in mid September and that is moving in the right direction. We're pleased with what we're seeing so far secondly, we just talked about repositioning our store portfolio.

Meet our customers, where they are today and more importantly, whether it be in the future. So it's good for US now for the future work that we need to do for our customers and then also enhancing our engagement of our partners and we know when our our customers and our partners connect the experienced in the best known as in our stores yields benefits for Us and then last.

I'm, creating that leveraging our robust pipeline and beverage innovation, which we see in our file uhm outline the pumpkin pies.

Products and that's going forward in terms of.

The work that we're doing in terms of ticket.

Ticket has been enhanced we're looking at ticket at about $21 right now and it's L. What's happening there is at during the time of the pandemic, we reduce our reliance on price and so we're just now reintroducing price that we're keeping price in the range of 1% to 2%. So we can.

He needed to see beverage in terms of the size of the bedroom set a larger sized beverages multiple beverages and food attached and sell ticket continues to be strong for us and we're projecting to hold that through through the year and.

And Sarah just to provide a little bit more fabric on some of the numbers and I believe Ross may have it in his Berkley said $21 I assume at 21% of 21, but.

But just to help you understand some of the underlying drivers at the onset of Covid ticket comp in the U S company operated stores accelerated to 25% well beyond what we had expected and that was driven primarily by a shift in sales mix toward our drive through an MLP channels, where average spend tends to be higher in part due to a higher into.

<unk> of group borders now in the fourth quarter ticket growth moderated as compared to those previous highs, but it remained well above pre covid levels in the range of 3% to 4% and that's where it came in at 21% for the quarter and that was driven by order consolidation a mix shift to higher priced cold beverages like a refresher as in private Sheena and.

The increase in upsizing as more customers treated themselves to a dentist and Trent US we do expect further moderation of ticket growth in future quarters, particularly as we lap the U S onset of COVID-19, and the latter part of our physical second quarter.

I would say that our average ticket has has also benefited from the customer appeal of our plant based offerings, which are premium priced specifically were saying positive momentum and the alternate dairy space as its share of U S company offered to net sales nearly doubled in the corner and this includes the impact of modifiers for alternate milk and.

The addition of oatmeal and physical 21, we expect to see ongoing ticket benefits from premium product innovation and modifier growth maybe a couple of things I think you may find interesting in terms of how this relates to how consumer behavior is changing and how it's showing up in our business remote working has shifted urban transactions to the suburbs and this has led to higher.

Order consolidation is customers, who previously purchased for only themselves are increasingly mine for others and then as they are coming they're not just adding beverages for the larger party size, but we're gonna catch does that record highs and it continues to grow in fact, it's grown the fastest and drive thru and MLP.

We think because menu visibility is clearly sparking trial with personal recommendations, which will accelerate in the new year and even larger unlock moving forward now while beverage attach has trended down slightly through the quarter, which we continue to expect will happen is our transactions grow food.

Food attach actually grew and we believe that trial is the startup routine. So we see this is a very encouraging development and.

And I guess the last thing I would say is that our innovation in our promotions are resonating with customers, giving us optimism as we head into the holiday now we enjoyed the strength and new products like the impossible breakfast Sandwich and also our new breakfast wraps plus growth and refreshes and those are giving existing customers reasons to visit more frequently and it's giving new cussed.

<unk> reasons to visit.

Excited with the momentum we saw from our fall promotion and so that gives us confidence that as we move into the month of November with our holiday promotion, we will sustain the momentum so a variety of things related to the ticket growth. They give us reason for optimism as we enter the new year that again, we expect that to moderate as we start to laugh the more material impacts of Covid.

And the back half of the year as our traffic continues to grow.

Our next question comes from the line of David Tarantino with their please see with your question.

Hi, good afternoon.

I I had a question I guess about the U S comp trend.

Existing the quarter and it was a pretty impressive.

Moved from.

Yes to September so I was wondering if you could maybe.

Either the factors that drove that.

That change in the comp and then if you're willing.

Is that the trend that you're seeing so far in the current quarter.

And and.

Pat if you could maybe just help us.

Understand what you're assuming for the current quarter and that guidance.

Rose once you add some color on the actions that you think drove them and packing a follow up on that day. The second question sure. The line into the fourth quarter. There were several things that helped us with our comp performance one of those things is increasing the number of stores that we had open.

Standing drive through performance in actually bringing efficiency to the drive through so that we had better out the window performance and putting practices and efficiency and work into place in terms of labor deployment in those stores. In addition to that we had great success with introducing are averages around pumpkin spice.

And the Coke Pumpkin Cream code group product and then in addition to that we also saw improvement as we advance as seating and returned seating into our stores. We did recognize that our customers began to feel more comfortable coming out we saw advancements happening in our metro suburban.

<unk>, which we already had drive through stores located in those in those areas. In addition to seeing more regular business coming from the morning times is mid morning, and having are the resist ready in the stores at those times. So as a customer was adjusting wheeler adjusting along.

With them and so the combination of our in store efficiency labor deployment.

New beverages. In addition to drive through effectiveness, we began to see improved cop performance in our stores I'm exceeding fourth quarter.

And David just to build on what Ross had roz nailed it in terms of what the key drivers were that improvement from minus 11% in August two minus 4% in September you may be wondering if we hit minus 4% in September why are we saying that we won't see full comparable store sales recovery for another six months until the end of our second quarter that is the end.

March.

And.

What I would highlight is that the closer we get to full recovery I would say the harder it becomes to recapture or recover those remaining few percentages because when you think back to where we were in the April may timeframe and have our business progressed across the summer.

Much of the improvement was attributable to three openings stores and then is Raj mentioned reopening.

And alongside all the great operational improvements that our store managers and their teams have brought to life.

Now where to point, where we have to rely more heavily on some of the newer store innovations in relation to things like curbside pickup.

Or handheld P O S at the drive through to improve productivity. So we can capture more of a demand that is there at our drive through so we do expect more gradual improvement from this point forward just as a recovery to date has not been linear we don't think that it's going to necessarily be linear going forward, either but what I will tell you is.

Is that the strong momentum that we enjoy exiting September has continued into the month of October. So we're really pleased with how the first quarter of the new fiscal year is shaping up but we do expect that the overall.

Pace of progression that as the sequential improvements will taper.

We get closer and closer to full recovery and we're very excited about how things are shaping up overall thanks David.

Our next question comes from the lineup and controls with count. Please soon with your question.

Great. Thank you to talk about what you're observing coffee consumption per capita based on what you observe in the domestic MSR data and so what I'm trying to get better understand is that based on improving sales later in the morning, and potentially with either members ordering larger beverage sizes <unk> MSR guests visiting more frequently versus what you saw a few months ago.

Alright can be made that us consumers or function you on higher caffeine consumption to help get them through the pandemic is work from home patterns don't seem likely to reverse the foreseeable future.

Sure so in terms of.

What we're seeing from customers and their coffee consumption. What we're seeing is that their routines are actually changing and they're assisting near patterns based on this work from home as you described so we're seeing our morning business shift to mid morning, we're seeing a shift from.

R weekday business to our weekends, we'd had some extremely strong weekend and so I think what we're seeing more so in terms of more or less coffee consumption. It is their routines that are adjusting that and the other thing that we've seen is Pat talked about earlier is that we're seeing them by multiple beverages. So we do think that we are.

Dana by maybe a group and for family and for.

And also adding.

To those orders, but in terms of coffee consumption, it's hard to say I do know offer to you that are ready to drink business and John might want to talk about that for a minute is also clothing. So we are holding and retaining our customer throughout the day, if they're at retail are at their at and consumer yes.

Yeah, Let me just pick up a little bit on what Rob was talking about we're see rapid growth and share gains for Starbucks down the aisle and Kevin highlighted if that we saw the package coffee business here in the us grew 17%.

And the quarter far outpacing the category at 9% growth. So we're getting more than our fair share of that growth in terms of the share growth that we're seeing Starbucks brand grew 130 basis points are roasting Brown sure on Starbucks grew 160 and R. K cut share.

Grew 40 basis points, and then that also translates over into RTD.

And and <unk>, we saw considerable growth there and in particular strong share gains both across the addressable our television coffee category at 50 basis points chilled copy of 230 basis points gang and a shelf stable RTD coffee at 140 basis points.

And so.

Consumers are shifting Starbucks is available and they are consuming it in their home and and.

They're they're turning to us.

Our next question comes from the line of Chris Open with Stifel. Please see what's your question.

Thanks.

It's great to hear the company is using or analyzing consumer data to evaluate how consumer behavior has shifted and I know the companies use the data to help identify store closures and Starbucks pick up locations, but how is the company using the data to improve comp sales and do you believe you have a lot further opportunities toward that effort.

<unk>.

Yeah Christmas is Kevin Let me, let me comment then I'll I'll see if Ross and Jon Wanna add but.

Clearly right now what the date is telling us and what we've optimized around our experiences that are safe familiar inconvenient.

Clearly in the pandemic and it part of this is is our artificial intelligence tools are monitoring customer behavior and partner sentiment along with.

Data, that's fed to us on on the spread of Covid to give us insight at a per store level.

But the safe familiar convenient it's kind of the the three terms that we would characterize globally that customers are looking for.

And that's why I number one we've we've deployed these safety protocols consistently throughout our stores, we know how to if if if we can turn the dial up and open more seating or open other channels. We do if we have to turn the dial back in a market or near a store, where the where the virus is spreading we know how to do that and we know how to do that at a store level community level.

The the convenient part is.

Artificial intelligence tools and the data has shown us.

If we enable the channels of convenience that Ross and John both described in the us and China, whether it's drive through mobile order for pick up mobile order for delivery curbside, we enable those channels and then we find ways to increase the throughput in those channels rods mentioned, increasing you know the the.

Out the window time at drive thru a lot of that has been determined by we know if we add this hand-held point of sale at a drive through line and we'd go out in the line, we can speed up the ordering process, which helps US then better serve customers. So you know the the the data is helping us understand where we have opportunities to first of all it helps us understand.

Consumer behavior. So that we can we can get the themes that we have to focus on when we focus on specific areas of that customer experience that date is helping inform us. We're we're making progress and we're we're unlocking new opportunities for comp growth and we're doing that across certainly across the USA in China and then leveraged.

Not to help us rest of World Ross.

<unk>, maybe your John if you have other things you want to add it gives you an opportunity to comment.

Their area that we are monitoring very closely in terms that customer preferences is combining what we're learning about the customer with our brand equity work that we do and it's <unk>, it's really feeling a beverage inundation to give you an example.

The work that we're doing around contributing to the recovery around beverages. If you look at that.

We're growing in the cold space, just monitoring the sales right a cold and then optimizing the innovation in that area. So we're using the data to fuel our innovation for the future. We are also doing that as we look at new ways of managing our equipment.

And so when you look at our new equipment that is coming online over this year, it's all AI and Abel that's also allowing us to learn more about maintenance in the stores and how we apply labor. So we are actually trying to use the data.

Any different fronts to actually improve comp performance.

And uhm monitor where the customer will be in the future.

And I would just add Chris from a from a China perspective.

Has all the information is telling us it's about the digital footprint and how we engage our customers and make the.

Their ability to interact with Starbucks seamless.

And friction laws, so a real big focus on.

<unk> rewards and rewards members, we up level. The program in June are total rewards members grew 175% year over year in the corner, where now seven 2 million members in China are 90 day actors grew to 13 and a half million.

Are up 34% year over year and then what we're seeing in addition to that is this translation into the mobile ordering pay in mobile order and delivery aspect of the business and that accounted for 26% of transactions in the corner for China and that is up versus the low.

Single digits.

Prior to pre Covid pandemic. So the digital footprint is something that we are investing heavily in in China to continue to innovate continue to rapidly deployed engage our customers and then we've expanded it as well we now sit across all of Alibaba.

Platforms as well as the wechat platform for delivery and as part of that we just introduce social gifting for delivery on the Wechat platform. So really building now that footprint in a big way.

Starbucks now exist in 98% of our stores in China, and then the delivery program itself sits and 84% of our footprint in China covering all our customers. So digital is a big piece. The other piece. That's emerging is this health and wellness and we've launched the good good campaign earlier.

This year.

As our plant based beverages as well as food offerings in in particular.

We're seeing great success with old milk and the success that that's having and you were seeing this thirst from our customers around healthy options for themselves. So the team is working hard.

To develop those and then obviously on the store piece, it's the third place environment, how do we continue to innovate.

Around the third place environment, whether it is the now store, but then also how our reserves store showing up and how are we continuing to elevate that brand because of the third place is still very very relevant.

In China.

Our next question comes from the line of David Palmer with Evercore Isa Please too with your question.

Thank you question on rewards and digital you're 90 day rewards user growth was 10% and I was thinking about how impressive that is given the fact that traffic was down 25%.

Due to Covid. So I guess the stars for everyone is working and it's.

Perhaps you think of it this way too it's building your reservoir of digital connections.

That's maybe understated by rewards users on a regular basis because of course, they're these people that have opted out lately due to covid or had their lives disrupted. So are you thinking of it that way that there is a larger pool of lapsed users that would be easy to get on the back end of this that are better rewards man.

<unk>, but not quote regular ones and do you do you have a sense of how large that group is thank you.

Ross you Wanna take Ah sure. So uhm just to ground in a few data points there you're right at the end of September of 90, Diack disturbance reward members gratitude about 19.3 million and that's at more than 10% as you stated.

So what we're seeing in that is that we are engaging our occasional customer and that is something that we have not been able to do before we introduce stars for everyone. So what we're seeing right now is trying activation growth very early on let's stars for everyone. We're really optimistic in the ability to gain significantly more members in fiscal two.

21 of those 90 day active members will continue to innovate around the convenience and that loyalty peace and attract new customers and fueling growth in that area. One of the things that we're seeing is that whenever we introduced need announced in the stores, we have a much broader audience to introduce that to you. So we're seeing.

Uhm quite a bit of pick up there and we are encouraged by what we see so we do expect those numbers decline uhm and it is both too bye stars for everyone.

Our next question comes from the line of <unk>.

RBC capital markets suits your question.

Alright, Thanks for taking the question just on the margin guidance, how does that contemplate the shifts in uhm and transaction versus ticket and I think Pat you talked earlier about the the growth and food attach so assuming.

There's maybe perhaps normalization there uhm, yeah, how does that impact your margin guidance and what's implied there.

Yeah. Thank you for the question as we thought about the evolution of our margins over the course of physical 21, we've taken into account several things. The first thing I would say the most important is how we are rebuilding transactions across the ear and how that provides us the sales leverage that we've.

<unk> earned here in recent months is so important to our ability to drive improved profitability of our business. We further break that down into which channel lists coming through and what the implications are or average spend and then how we see our mix.

Further shifting so we have taken that into account as we thought through this range of 16% to 17% overall operating margin for the company for the entire fiscal year, recognizing that we will be below the bottom end of that range in the first half of the year and then above the top end of that range and the latter half of the year and that takes into a.

Into account not only the progression of our sales recovery, but importantly, how we are rebuilding margin while continuing to make investments the investments are pretty substantial just as we invested heavily through the depth of the crisis, we have some pretty significant investments planned for physical 21 behind the things that really.

Drive our business. So we're thinking about what is needed for the long term to strengthen key points of competitive advantage to unlock future sales growth and that starts with our partners. So we plan substantial investments behind enhanced partner wages and benefits, we planned very substantial investments in technology.

<unk> in order to extend the strength and the growth of our digital platforms, how that contributes to our business in ways that both John and Ross have articulated and then finally, where making incremental investments behind our bold ambitions and environmental sustainability those things tend to be offsets too.

To the sales leverage that we realize as we go as we grow our business and then also the ongoing efficiencies that we came through.

Operating productivity in our stores as well as ongoing supply chain efficiencies. So it truly is a mix of sales growth the composition of that growth in terms of how we see both.

Ticket and transactions evolving over the course of the year and then taking into consideration the investments necessary to strengthen the brand for the long term because we know those investments are important to maintain those key points of competitive advantage.

Our next question comes from the line of Gregory Frankfort with Bank of America. Please you with your question.

Hey, Hey, Hey, Thanks for the question I'm I'm I'm Gonna react Andrew Charles is question, a little bit differently, but I guess, when we look at the coffee category.

You guys in the U S or backfill will flat Duncan Comping modestly positive <unk>.

You're pointing out that the grocery store business is up.

Where's that you're coming from is it coming from independent coffee shops that are coming from other limited service players.

Or are Americans, just getting overcaffeinated at the moment I'm just curious your thoughts on that matter of states.

Well thanks for the question.

I kind of go back to.

Data and we shared on the addressable market of coffee at our last investor confidence and if <unk>. If you recall the projection was that the addressable market of coffee was gonna be growing at roughly a 5% kanger year after year, and where I think there was probably a little bit of a blip back in March and April during the period.

Where people are sheltering at home I don't think that has slowed down the growth for the addressable market a coffee. So you know if if the question is do we believe the market for coffee is gonna is growing and going to continue to grow the answer is yes.

The second part is how are we doing on gaining sure I think is dry colver highlighted when you when you look at at home coffee.

Clearly the data that we're getting from down the aisle as we're growing significant share in a rapidly growing market for at home coffee.

And if you look at what we've tracked over the last several months, where we've grown our same store comparable as in the U S. On a sequential basis and we track that we have regained.

The substantial portion of the share that that we probably gave back when we shut down all of our stores of April.

So I think we are in a growing addressable market of coffee I think we are in a share taking physician I think the investments that we're making for trade area transformation and everything that we have done to tune the customer experienced the beverage innovation interdigital customer relationships, we are poised for ongoing.

<unk> in a growing addressable market for coffee.

Okay Thanksgiving.

Our next question comes from the lineup Katherine forward with Goldman Sachs Blue suit your question.

Okay, great and.

Uhm It was very helpful and I love her to have guidance that you provided on the call today and get curious so you know as we contemplate you know that they can't get out for a second grade or correct desire to kind of every third or you know even potentially add that consumer sending to reconfirm here what are the elaborate that you have to.

Oh, how committed are you to be tricky taken back neck, and maybe said another way you know said that flow through the roughly 50% or are there reasons to believe that you know like it might have regret close barricaded levels that you sat earlier this year. Thank you.

Okay, Let me comment and then I'll head over to Pat to add to this first of all one.

One of the things when I talked about in in my comments about resilience.

Uhm, what I believe to be true as we have.

Develop these store protocols, but now have been embedded in the operation processes for how we run our Starbucks stores around the world and those store protocols have been a bear enabling us to operate in the world of Covid.

And so even in the world of Covid, where it certain markets. It's the the curve is increasing in other markets. The curve is flattening we've been able to see sequential improvements in same store comparable and I attribute that to the fact that those store protocols. We've now operationalized, we know how to keep our partner safe, we know how to serve coffee to our customers and.

Historic keep our customer safe.

And we are staying true to what to what really drove the turnaround at this company over the last two or three years, which is elevating the customer experience relevant beverage innovation and digital customer relationships.

So if I look at what's what's you know you'd think about what could unfold over the next year. So we're operating environment environment and I feel very confident we know how to do that because we built this new level of resilience throughout the company to do that you know.

That said the investments many of the investments. Pat has described are long term investments that are going to pay you know great returns for shareholders. You know yours to calm so for US. It's more about are we building long term shareholder value versus are we are we having to to to those investments quarter to quarter now we have some flexibility.

Ability and that but at the end of the day, we want to play the long game and we are so well positioned right now in my opinion, because we have now adapted the way we operate the company for this world of Covid, we've identified the shifts in consumer behavior, we're rapidly adapting to that new reality, we're investing ahead of that curve and a growing up.

Dressel market for copy and that just positions us to come out of this gaining massive amounts of share creating significant shareholder value and and so we're operating playing the long game now that said I'll, let Pat comment on the.

The part of your question. It said hey, if if we if we hit some unforeseen things how much flexibility do we have on the cost side. So Pat I think Kevin said, it really well in terms of the level of Brazilians that we built into our business, which gives us the ability to manage much more effectively going forward and we have seen examples already.

<unk> just in the last couple of quarters weather in Beijing and value on in China, or as well as in states, like California, Texas, and Florida, and the us when each case, we've been able to work with local authorities adjuster store operations as needed and we found that the operational disruption of these second wave so to speak is less severe than the initial way in terms of the depth.

Impact and its duration now uhm if in fact, we see a more significant impact.

It goes beyond our ability to manage as Kevin as described through our ability to dial up and dial back then I would expect that there would be some margin compression we will do our best as we did during the depths of the pandemic too slow discretionary spending where it makes sense to slow capex, where it makes sense, but we are absolutely commit.

<unk> to making the investments that we know are essential to our ability to strengthen our brand positioning to strengthen our key points of competitive advantage, they're going to put us in the best position to unlock the full value of the Starbucks plan for the long term and we have the the financial ability we have the balance sheet to continue to make those investments as we.

Did and ensure that for the long term.

The best positioned in the category.

Our next question comes from the line of Dennis <unk> with movies. Please see what's your question.

Great. Thank you curious could you could frame up whether the the bigger opportunity to continue to drive sales is more about the operational adjustments to meet the existing demand or about opportunities to drive new incremental demand. If you can parse that out I know a lot has been shared on kind of the innovative operational adjustments in recent months.

To meet that current demand no you've talked about how the schedule for continued rollout of curbside and handheld et cetera. So just kind of curious factor and all that and where we are kind of on that <unk>.

Meeting these existing demand timeline.

Timeline.

Thinking about your your your.

<unk> and your partner is doing a better job even of being more efficient in this new environment with with what they have put the new stuff coming just curious if you could kind of frame up those those two components.

More thank you.

Yeah. Thanks Rug. Once you go first and then and then let me out.

So what you're seeing right now is an acceleration of plans that we had that word plan to take place of the next three to five years and what we're doing is accelerating our innovation, particularly around training area transformation to reposition our stores for growth and so the new format that you see coming to market.

Where planned for our future growth and so we're bringing on more productivity within these models. It will help us optimise sales actually expand our our margin physician. So you are seeing accelerated innovation right now, we're moving a lot faster than bringing our innovation forward and that was all.

Based on future growth. So we're moving in that direction just at a faster pace.

Yeah, I'll just add that certainly what we've done with stars for everyone in the investments, we're making a digital that's all about long term.

Growth in relationships that's Y as we launched stars for everyone. We're tracking the number of new App downloads each week and we've seen that spike we track the number of new rewards customers. We sign up we've seen that go up we track the number of inactive rewards that members that we convert to active rewards members so that that expanded.

Customer reach digitally is gonna be a huge asset even even I'll say post covid or post vaccine.

But the fact that we're focusing on customer experience beverage innovation. In addition to digital is important for the following reason.

People are craving the opportunity to socialize right now and they can't everyone's being careful working from home schooling from home being cautious when they go out so safe familiar inconvenient is important right now but.

But once there is a vaccine therapeutics that now allow people to feel more comfortable socializing and being part of a community where.

We predict there's gonna be a huge huge demand for that third place experience again that seating in those stores and people coming to enjoy their beverage in their food with others and socialize in our stores and be a part of a community once but this is down the road when there's vaccine and therapeutics, there's gonna be.

You know a huge huge wave of demand for that and so not only are we laying the foundation with the digit relationships and taken care of our customers was safe familiar convenient, but we are also investing in ensuring the at when that demanded bowls that third place experience will be at the pinnacle of of serving those customers who want.

To come and be a part of a community and socialize again, because that's what that's something that we all aspire for.

Our final question comes from the lineup Andrew shows that would be M. O capital markets. Please suit your question.

Great. Thank you [noise] excuse me that's actually a good segue for my question I was actually hoping you could share more color on what you observe when you open the lobbies with full or partial seating things like how quickly customer behavior change what you do that how incremental it is to comes how that check rose to that customer compares to the overall check wrote that you <unk>.

Sure and if there's any regional differences are nuances I'd be interested in that as well. Thank you have it.

Ross.

Andrew in terms of what we're seeing as we reopen seating in our stores, we actually saw first of all.

Right need and demand for this and we immediately saw people working in our stores, bringing it work into our cafes and sitting for long periods of time, we had adjusted seating and all of our stores for their social distancing in the stores. We also have new cleaning protocols in the stores so that when someone leaves the table and a new.

Customer content, they know that the table is clean so the feedback that we're getting from our customers is that they feel safe and clean inside of Starbucks. So we're providing then safety, we're providing that familiarity and then we're introducing them to our new beverage lineup and so we're seeing uhm great customer engagement right now as we open seating in terms of <unk>.

<unk>.

Activity that we're seeing so in central business districts are likely in like New York Financial District.

Businesses have an open as you can imagine.

Traffic is still slight and some of those stores that's that 6% that you see that has not reopen and then lastly, I would tell you that we are seeing movement towards purchasing your coffee at stores near your home. So our metro suburban areas are doing well drive throughs are doing well and actually seating in those natural suburban areas.

Are doing extremely well we're also seeing just.

Just great customer engagement, even with people still coming through the drive through window at.

And I'm, taking advantage of the work that we're doing with curbside. So.

It's full engagement and what we're really pleased about is that you can access coffee just about in any way that you feel safe and that's the feedback that we're getting from our customers.

Just reinforce what Ross and we open the cafe for limited seating. The response is immediate and the impact on same store comp is immediate cussed.

Customers are craving and we do it in a safe way and as long as we as long as we continue to stay true to our principles about prioritizing the.

The health and wellbeing of our Starbucks partners in the customers, we serve and partnering with local health officials to help mitigate contain the spread of the virus and showing up at a positive and responsible way in the communities. We serve as long as we stay true to those principles provide that great experience and do it the safe way and continue to innovate with the relevant new beverage.

<unk> and expand digital where where we are well positioned and and we know how to do this.

With that this concludes our question and answer session and I will now turn the call over to Mister Kevin Johnson for any closing remarks.

Well. Thank you everyone is we conclude the call today I want to thank you all again for joining us as always we're committed to leading into the future and communicating with all of you.

Transparently and communicating with all our stakeholders transparency balancing our company's purpose and profit and keeping you informed of our aspirations and the progress along the way you know to that and we look forward to hosting you soon and talking about our path forward at our virtual December 9th Investor Day, and we hope you can all join.

Virtually for that.

And we want to take this opportunity to wish you and your families are happy Halloween and warm wishes for the holiday season ahead, and yes holiday season is upon us and next week or Peppermint Mocha returns for his 18th year alongside an exciting holiday menu in our stores. So we hope to see you at Starbucks, where we were gonna create that say so.

Inconvenient experience for each of you in our stores or at the curbside or at the drive through window, whatever fits your needs and we hope to bring a little holiday spark to you and your loved ones in the weeks ahead. So thanks for joining us.

This concludes Starbucks coffee companies Fourthquarter and fiscal year 2020 conference call. You may now disconnect your lines.