Q1 2022 Starbucks Corp Earnings Call
Good afternoon, My name is Alex and I will be your conference operator today.
I would like to welcome everyone to Starbucks first quarter fiscal year 2022 conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you'd like to ask a question simply press Star then the number one on your telephone keypad.
If you'd like to withdraw your question Press Star then the number two.
I will now like to turn the conference over to Tiffany Willis Vice President of Investor Relations. Mr. Willis you May now begin your conference.
Good afternoon, everyone and thank you for joining us today to discuss Starbucks first quarter fiscal year 2022 results.
The discussion will be led by Kevin Johnson, President and CEO , and Rachel Gerry Executive Vice President and CFO and for Q&A, We will be joined by John Culver Group President of North America, and Chief Operating Officer, Michael Conway Group, President of International and Channel development and Leo soy.
Chief Executive Officer of Starbucks, China.
This conference call will include forward looking statements, which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements.
Any such statements should be considered in conjunction with cautionary statement in our earnings release and risk factors discussed in our filings with the SEC, including our last annual report on Form 10-K quarterly report on Form 10-Q .
Starbucks assumes no obligation to update any of these forward looking statements or information.
Got resolved in first quarter of fiscal year 'twenty 'twenty to include several items related to strategic actions <unk>.
<unk> restructuring and impairment charges transaction and integration costs and other items.
These items are excluded from our non-GAAP results.
All number of references on today's call are on a non-GAAP basis, unless otherwise noted.
For non-GAAP financial measures mentioned in today's call. Please refer to the earnings release, and our website at Investor Starbucks Dot com to find a reconciliation of those non-GAAP measures to their corresponding GAAP measures.
This conference call is being webcast and an archive of the webcast will be available on our website through Friday March four 2022.
Our calendar planning purposes. Please note that our second quarter fiscal year 2022 earnings conference call has been tentatively scheduled for Tuesday may 3rd 2022, and with that allow me to turn the call over to Kevin.
Thank you Tiffany and welcome everyone to today's call.
Before we dive into the quarter's results I want to take a moment to reflect on the fact the world is now entering the third year of this pandemic and recognize that over this period Starbucks has made significant progress driving our business recovery.
The last two years have been anything but linear maybe.
Many parts of the World continued to experience significant COVID-19 related disruptions.
Clothing, Starbucks to lead markets, United States and China.
However, through a dynamic and challenging environment three things have remained true for Starbucks.
First.
Global consumer demand for Starbucks is strengthening across our offerings and throughout all day parts.
This is a result of our work over the past year to expand digital customer relationships introduce new beverage offerings and provide a safe familiar and convenient experience for our customers.
Second.
We remain unwavering in the prioritizing the health and safety of our store partners and customers even when the associated cost may create short term earnings pressure.
We have consistently provided best in class Covid benefits to our partners since this pandemic began.
And third the.
The flexible operating protocols established from the beginning of the pandemic continued to serve us well.
The combination of these things has enabled us to adapt to near term challenges, while continuing to invest in what we know is a long term opportunity for all stakeholders.
Starbucks delivered record first quarter revenue of $8 1 billion, representing 19% growth.
Global same store sales grew 13% demonstrating strong customer affinity for Starbucks.
Demand for Starbucks continues to build and we are fully committed to capitalizing on this momentum for the long term.
That said, while we have seen extraordinary topline growth. We've also experienced extraordinary cost pressure, which impacted our margin performance.
As the omicron varied began to quickly spread resulted in higher than anticipated costs in three key areas across our U S business.
Each of which impacted our results similarly.
The highly transmissible omicron Barrett amplify staffing shortages in our supply chain.
Resulting in higher than planned distribution and transportation costs.
We also experienced a significant increase in our industry, leading cobot isolation pay for our partners.
And we saw higher than anticipated costs from training and Onboarding of New Starbucks partners.
Okay.
As we navigate the near term challenges of this latest co with various.
We remain confident in our ability to rapidly adapt while continuing to drive our long term agenda, a share gain growth and value creation.
And our other lead market China.
Zero Covid policy, there contributed to significant disruption to store hours and transaction volume.
Net new store growth and performance remains strong overall revenue and profitability came in below expectations.
While we believe that these dynamics are temporary we are focused on appropriately navigating the evolving macro dynamics and balancing long term investments in the business.
I'll now provide more insight into our Q1 results and the actions we are taking to address the current state of our business industry and overall economy.
While continuing to prioritize our partners and ensuring Starbucks delivers long term profitable growth.
In the U S. We experienced very strong customer demand over the holiday season.
Our ability to deliver the Starbucks experience to our customers, how when and where they want resulted in first quarter revenue of $5 3 billion.
Year over year revenue growth of 23% was driven by a double digit increase in customer traffic highlighting our compelling holiday lineup and strong in store and digital customer connection throughout the holiday season.
Customer demand increase through all day parts and resulted in record Starbucks card Activations and reloads in excess of $3 billion.
Starbucks rewards grew 21% to a record $26 4 million 90 day active members.
Average ticket grew mid single digits, demonstrating our continued differentiation through customized premium beverages and compelling food options.
Prior to the emergence of the omicron barriers, we were experiencing some inflationary pressures and staffing issues, resulting from the broader pandemic.
The omicron surge began inflationary costs and staffing shortages were amplified well in excess of our expectations.
As I mentioned three primary factors inflation COVID-19 related pay and training and Onboarding of new partners impacted our profitability to approximately the same degree.
While customer demand remains strong.
Now let me outline the impacts we believe these will have for the near term and more importantly, the actions, we're taking to address each of them.
Like many others in the industry, we felt the impact of the omicron in the wider COVID-19 pandemic.
More specifically, we experienced a rapid increase in supply chain costs related to distribution and transportation.
As our third party delivery providers had omicron related staffing shortages impacting their ability to fulfill a portion of our distribution needs.
This required us to greatly increase the use of much more expensive spot market and alternative delivery solutions in order to meet strong customer demand.
As a result supply chain driven inflationary costs were unexpectedly amplified by omicron and rapidly accelerated in December .
Impacting our U S business by more than 170 basis points on margin in the quarter.
As we entered fiscal year 'twenty two.
We had estimated full year inflationary impacts of around 200 basis points on margin.
For the balance of the year, we expect these costs to increase versus our previous estimate.
Like most economists, we anticipate supply chain disruptions will continue for the foreseeable future.
We've already taken pricing actions this fiscal year one in October of 2021 and another in January of 2022.
And we have additional pricing actions planned through the balance of this year.
Which play an important role to mitigate cost pressures, including inflation as we position our business for the future.
There are many factors that contribute to our thoughtful pricing strategy, including the.
The increasing U S inflation rate currently running at 7% or perhaps greater <unk>.
As well as wage customer demand and other costs.
Second the rapid spread of omicron through the U S required us to quickly adapt store protocols.
From our very beginning and as we've demonstrated throughout this pandemic Starbucks has always prioritized the health and wellness of our partners by offering some of the best benefits in the industry.
This moment is no different.
Covid vaccination pay has supported thousands of partners and the broader efforts in helping get more people vaccinated.
And with the highly transmissible omicron areas, we have more partners leverage our cobot isolation benefits as they were either home sick or home isolating after being exposed to the virus, which led to significantly higher COVID-19 related benefits paid unexpected.
We expect similar usage of Covid isolation and vaccination pay through this next quarter.
Moderating in the back half of fiscal 'twenty two.
Throughout this pandemic COVID-19 isolation pay has been a critically important partner benefit.
To help offset the higher than expected expense of this benefit we are taking the necessary measures to reduce spending in discretionary areas of our U S. P&L.
As an example, with strong customer demand, we believe we can tighten up a bit more in our G&A expenses, including promotional spend in marketing.
We believe these measures are prudent as we work to balance increasing cost pressures with our commitment to our partners.
Finally, with approximately 4 million Americans, who have not yet returned to the workforce nearly every business in the services industry is facing staffing challenges and increased turnover.
Battle for talent is notable.
While Starbucks has always been committed to attracting and retaining the best partners with our differentiated pay and benefits package, we too experienced staffing issues.
In response to this challenge and as an employer of choice, we hired an increasing number of new partners into our business this past quarter, which rapidly increased our training costs well above historic levels.
This investment is critical to the success of our business as we work to create a great Starbucks experience, where our partners still supported and customers' steel uplifted.
We know from experience that the continued investments in our partners, both tenured and new will continue to drive the levels of customer connection and overall productivity.
<unk>, the long term success and differentiation of our business.
And we remain confident that the $1 billion investment in partner wages and hours that we announced on our fiscal 'twenty. One Q4 call is the right long term investment to ensure we have the very best talent to support our business.
In addition to these actions and as we highlighted on the last call.
We continued to implement operational efficiencies throughout the organization to drive the productivity critical to our commitment to long term margin expansion.
In summary.
Demand in our U S market is very strong and we have tremendous opportunity for continued growth as highlighted by our robust revenue results as a leadership team we hold ourselves accountable to the actions we have outlined to ensure our revenue growth is also reflected in our bottom line.
To deliver compelling financial results to all Starbucks stakeholders, we must continue to balance ongoing profitability with long term investments.
Turning to China.
We continue to grow our store footprint in Q1, as we surpassed 5500 stores in the market.
This brings our global store footprint to a record 34317 stores.
It's important to note that our latest generation of new stores in China continued to perform well as best in class store profitability and return on investment were achieved.
Our 90 day active Starbucks rewards members in China reached nearly $18 million.
An increase of $2 6 million versus prior year with members contributing 75% of sales.
Mobility restrictions and the countries zero Covid policy have presented significant headwinds contributing to a minus 10% same store comp after adjusting for the VAT substance subsidy from a year ago.
We adhere to Covid health regulations, and as a result experienced closures dynamic store protocols or reduced operations in three quarters of our stores throughout China exiting Q1.
That said our business in China continues to represent significant long term growth.
We are playing the long game as we navigate a dynamic environment.
We are encouraged by the performance and growth in our digital offering is.
Is it drives new customer occasions, and opens new channels of convenience.
Digital ordering continues to resonate with customers growing to a Q1 record 38% of sales.
Customer demand was evident across both the morning and afternoon day parts.
This coupled with our continued store expansion is a testament to the significant growth opportunity in the market.
Through these challenges however, our partners persevered and responded to ensure in store safety by staffing health stations, taking temperatures and ensuring masks were worn by both partners and customers.
Importantly, our customer connection scores were at an all time high in the quarter.
As a testament to the resiliency of our partners and the strength of our brand giving.
Giving us confidence that as COVID-19 related restrictions eventually abate our opportunity for growth in China remains as compelling as ever.
Looking more broadly at the international markets outside of China, We saw strong results for the quarter.
The broad portfolio of markets in our international segment, excluding China delivered outstanding results this quarter, posting 27% revenue growth with strength across Europe .
Latin America.
Pan Korea, and broader Asia Pacific.
This illustrates the power of a diversified portfolio.
And gives us confidence in our global growth potential.
Shifting from international we continue to see impressive revenue growth from our channel development markets.
And we are pleased with the continued performance of the global Coffee Alliance with Nestle as Starbucks at home coffee continues to gain market share over the prior year driven by <unk>.
Starbucks by Mr. <unk>.
And through our North American coffee partnership with Pepsico.
We recently announced our entrance into the energy category with.
With Starbucks by energy drink, a ready to drink beverage crafted from caffeine naturally found in coffee fruit as well as anti oxidants to give consumers a feel good boost.
Energy drinks represent a rapidly growing category.
We believe this new beverage differentiates us.
Opening up another category in the portfolio for growth.
Before I turn the call over to Rachel.
Want to highlight that this quarter's record top line performance and a uniquely challenging operating environment.
Along with the set of actions outlined above.
It gives us confidence in our growth at scale agenda.
While quarterly results can be difficult to predict in this dynamic environment our.
Our strong demand and operating flexibility throughout this pandemic have enabled us to build an even stronger more resilient company.
While we expect these complexities to persist through the near term Starbucks is well positioned to adapt and continue to deliver great experiences for partners and customers.
Consumer demand for Starbucks is strong across all markets and continues to grow well.
We will continue to balance appropriate levels of near term profitability with the partner investments and innovations that drive customer loyalty and in turn long term growth.
For over two years now and thanks to our partners our business has emerged stronger after each wave of Covid search has peaked and.
And we expect this will be the case omicron runs its course.
We have significant growth opportunities ahead, and the investments we are making position Starbucks to continue capturing share in the fast growing coffee addressable market.
Driving double digit earnings growth over the long term.
With that.
We are reiterating our fiscal 'twenty two guidance for revenue.
But believe it is prudent to revise margin and earnings guidance to reflect the cost pressures that were amplified by the omicron variant.
We view these as near term pressures and we have a clear set of actions to manage through this moment.
With that I now turn the call over to Rachel to walk you through details of our Q1 results in fiscal 'twenty two guidance components Rachel.
Thank you, Kevin and good afternoon, everyone.
Q1 performance showcased the strength of the Starbucks brand underscored by strong customer demand, despite incremental COVID-19 headwind, which accelerated this quarter given the highly transmissible omicron variant.
Thanks time highlighted continued industry pressures and operational challenges, which we are actively addressing as Kevin highlighted a moment ago.
Starbucks delivered global revenue of $8 1 billion in the first quarter up 19% from the prior year setting a Q1 record primarily driven by the exceptional holiday performance in the U S. Coupled with strong results from our global portfolio with remarkable breadth and depth. Despite continued mobility disruption.
To our China operations impacted by the country Covid policy.
Q1, consolidated operating margin contracted 30 basis points from the prior year to 15, 1% due primarily to significant investments in store partner wages and benefits as well as inflation, partially offset by sales leverage and pricing in North America.
Q1, EPS was <unk> 72.
18% from the prior year, reflecting strong revenue growth. However, it was lower than our expectations due primarily to our U S business driven by the three key factors, Kevin outlined accelerated inflation extended COVID-19 related tank and increased spend on new partner training and support costs.
I will now provide some segment highlights for Q1.
The North America segment delivered revenue of $5 7 billion in Q1 up 23% from the prior year, primarily driven by 18% increase in comparable store sales, including a 12% increase in transactions and a 6% increase in average ticket.
Two year comp in this segment reached 12% for the quarter, representing the fifth quarter of sequential improvement and the highest two year comp since the onset of the pandemic.
Modified store hours across many regions.
Our average ticket remains elevated even if group ordering continues to normalize driven by pricing record breaking food attach which had its seventh consecutive quarter and at all time high and strong holiday performance.
Our drive through Windows, and mobile orders continue to account for approximately 70% of U S company operating sale offering our customers safe convenient and personalized ways to engage with Starbucks.
53% of spend in our U S company operated stores, which generated by our Starbucks rewards customer base with a 90 day active membership, reaching $26 4 million up 21% over the prior year, adding $1 6 million new active members in this quarter alone.
North America's operating margin was 18, 8% in Q1 up 10 basis points from the prior year, our sales pitch pricing sourcing savings and the benefit of the North America trade area of transformation were largely offset by investments in store partner wages.
Inflation as well as increased spend on.
A new partner training Onboarding and support costs to address labor market conditions.
Moving on to international.
In the International segment, we set a Q1 revenue record as the segment reached $1 9 billion up 12% over the prior year.
The growth was primarily driven by a 9% increase in net new stores over the past 12 months and strong sales growth from our international licensee, including the conversion of our Korean market to a fully licensed business.
These increases were partially offset by a 3% decrease in comparable store sales.
Excluding a 3% decline attributable to lapping the prior year of that benefit.
Segments comparable store sales were flat.
As we have current COVID-19 resurgence.
<unk> mobility and impacted our business in China, where the majority of stores were operating under elevated safety protocols and reduced store hours, even as we exited the quarter.
Reflecting the pandemic related safety and mobility restrictions in China, the markets comparable store sales declined 14% in Q1, including a 4% decrease from lapping the prior year of that release.
We remain committed to and focused on our growth strategy in the market.
As a result, we opened 197 net new stores.
16, new cities in the quarter in China, both record highs for any Q1 period.
Additionally, our over 5500 stores in the market remain committed to elevating the Starbucks experience.
Operational records with our highest customer engagement scores in the quarter and lowest partner turnover in the last three years.
Last month, we also extended Starbucks delivers to the my twin platforms market wide partnering with China's leading E Commerce service provider to enhance the customer experience continuing with our plan to grow our delivery business in the quarters to come.
Outside of China, a number of our international markets across our global portfolio.
Recovery in Q1, including Japan, and the UK contributing meaningfully to our revenue growth.
Operating margin for the International segment was 18, 3% in Q1 down 170 basis points from the prior year, mainly driven by investments in store partner wages and benefits and strategic initiatives as well as higher product and distribution costs from a sales mix shift partially offset by sale.
Leverage.
Moving on to channel development.
Revenue grew 12% to $417 million in Q1, primarily driven by growth in the global coffee alliance as well as the strength in our international ready to drink business.
Based on IRI.
Monitor data Starbucks once again regained the number one brand position in both the U S at home coffee and global ready to drink categories. During the quarter reinforcing customers' desire to replicate their Starbucks in store experience and fulfill their startups taste profile.
On the go.
The segment's operating margin was 43, 9% in Q1 down 480 basis points from the prior year as our North American coffee partnership joint venture income declined due to supply chain constraints and inflationary pressures as well as business mix shift.
Moving onto our guidance for fiscal 'twenty two.
We reiterate our fiscal 'twenty, two global comparable store sales growth guidance of high single digits and revenue guidance range of 32, 5% to 33 billion.
Considering the meaningful margin headwinds that exist in this dynamic operating environment with inflation at its highest level in decades.
19 resurgence is impacting our businesses globally and a continued industry wide labor shortage. We believe it is prudent to revise our fiscal 'twenty to operating margin and EPS guidance at this time.
Based on the latest trends in our outlook, we anticipate over 200 basis points of incremental margin pressure in fiscal 'twenty, two kind of inflation COVID-19 related pay new partner training and support costs as well as reduced sales from mobility restrictions combined.
As Kevin outlined however, we have and we will continue to take intentional steps to offset these pressures, including selectively accelerating price increases.
Managing numerous cost areas as well as actioning throughput initiatives across our operations.
We also believe there will be some moderation in staffing related cost specifically related to training expenses as our partner investments begin to translate into higher retention.
Collectively the margin benefits from these actions are expected to nearly offset the anticipated margin pressure.
In addition to these actions we will continue to prioritize investments that will drive our growth over the long term, including raising U S store partner wages as previously announced.
As a result, we expect fiscal 'twenty to GAAP margin to approach 16, 5% in <unk>.
non-GAAP margin to approach 17%.
Moving on to EPS.
Given our Q1 results and margin pressures expected in the balance of the year, our fiscal 'twenty to GAAP EPS is now expected to decline by a range of 4% to 6%.
Additionally, we expect our fiscal 'twenty, two non-GAAP EPS growth to be in the range of 8% to 10% from the base of $3 10.
21.
Fluids, the extra week and is adjusted for the change in our non-GAAP treatment of certain integration costs.
The EPS growth range reflects our Q1 results.
<unk> for the appropriate steps, we are taking to manage and drive the business.
For the impacts of the three headwinds we discussed.
In terms of quarterly margin and EPS cadence, we expect headwinds to intensify in Q2 as omicron disruptions escalated in January .
The intensity throughout Q2 is unknown, we expect Q2 quarterly non-GAAP EPS and margin to be below prior year levels with significant improvement in Q3 coming from our margin enhancement actions materializing.
Q4 is then expected to show continued recovery, but at a more gradual pace inclusive of the summer step up in wage investments as we raise the U S average store hourly wage to $17.
Assuming no other significant impacts, including further impacts from Covid, we anticipate our EPS to return to double digit growth in fiscal 'twenty three and beyond.
All other full year 'twenty, two guidance metrics, including global net new store count Capex interest expense and tax rate are unchanged from what we previously communicated on our fourth quarter fiscal 'twenty one earnings call.
Despite the unexpected global impact.
Our other potential variant resurgence is we remain confident in delivering outstanding top line growth in fiscal 'twenty two enabled by incredible customer demand, our diversified portfolio and continued ability to deliver the valuable human connection to our customers in a safe convenient and consistent manner.
Sure.
We also continue to stand by our commitment to returning 20 billion to our shareholders over the next three years and a return to more than $4 billion in Q1 between share repurchases and our quarterly dividend.
Finally, given the dynamic operating environment and the incremental cost pressures reflected in our fiscal 'twenty two guidance. We now expect year on year margin improvement in fiscal 'twenty three with a return to the long term target of 18% to 19% in fiscal 'twenty four.
Of course, all of these estimates presume no new material business disruptions, whether from the pandemic or the broader economy.
Although our efforts to adapt to the evolving Martin conditions may take longer than initially anticipated.
Long term growth model remains intact guided by the belief that the success of our company starts with investing in our partners, which ultimately creates value for customers and for all Starbucks stakeholders, including our shareholders.
In closing the three key summarizing my prepared remarks, our first key.
Q1 demonstrated our strong revenue growth and the resilience of our brand while also highlighting margin pressures, which we are addressing through purposeful action.
Given the evolving macro and operating environment, we are revising our margin and EPS outlook for fiscal 'twenty, two while reaffirming strong topline growth.
And finally, we remain committed to our long term growth model.
As always credit for our success today and tomorrow belongs to our passionate Starbucks partners around the world who deliver a safe.
And personalized Starbucks experience to our customers with care and commitment our partners to have our greatest respect and appreciation.
With that Kevin and I are happy to take your questions joined by John Culver, Michael Conway and <unk>.
Thank you operator.
As a reminder, if you'd like to ask a question Press 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 at a time, we will come back for follow up questions as time allows.
Your first question comes from Jeffrey Bernstein with Barclays. Please proceed with your question.
Great. Thank you very much.
Question on the operating margin guidance for both this year and the out years it.
It sounds like this year, you're announcing approaching 17% on a non-GAAP basis.
But now not getting back to the 18% to 19% until fiscal 'twenty four, albeit I guess still growing in fiscal 'twenty three off of the 17 I just want to make sure I understood that correctly and if you could.
And prioritize the initiatives to return to that 18% to 19%.
You had previously mentioned.
The labor investments should drive sales, which would be critical and then you had a variety of cost saving initiatives and ultimately pricing would be there to backstop I just want to make sure we have that prioritization right in terms of the biggest buckets.
Give you the confidence getting back to that 18% to 19%. Thank you.
Okay.
Yeah.
Hey, Brad this is Rachel thank you for the question.
I would start with say.
We look at FY 'twenty two based on what we saw in Q1 and what we're guiding to the balance of the year, we think approaching 17% to better gauge of our margin is allows us to as we're seeing we saw cost pressures accelerates in December and we're seeing those intensify as we noted in January and then.
Q2, now we will take action against those hospital take us a little bit of time and so for that reason, we believe it's prudent for us to guide approaching 17% with that as we exit FY 'twenty two.
And as we enter FY 'twenty three will now see a lower margin.
A slightly lower margin than what we had originally guided guided and as a result of that we're continuing to look at ways to drive sales.
As you outlined that is our biggest opportunity for us to be able to drive margin and to grow earnings in the future. So we will continue to invest in our business in the areas that are going to drive sales, but in this year estimate FY 'twenty. Three we will also continue to focus on the areas. This year and into next year that will help us continue the momentum that we are.
So sales is by and large our biggest opportunity. In addition to that as we've outlined we will continue to take pricing, while we balance pricing decisions and actions with our demand and so that will be another big opportunity for us as we continue to grow and then we will continue to find efficiencies in our business.
As we've outlined we've been working on efficiencies related to productivity that will help support this year and it will also expand into FY 'twenty three we certainly have opportunity as we think about from a tailwind perspective as we see recovery.
In China as well as in our U S business and as we continue to further the efficiencies focusing on but broadly I would say sales by and large it's going to be our continued opportunity for growth not only this year, but into FY 'twenty, great. Hopefully that gives you a perspective.
Thank you. Your next question comes from Jared Garber with Goldman Sachs. Please proceed with your question.
Hi, Thanks for the question I wanted to follow up on the previous question a little bit as it relates to margins.
Rachel or Kevin could you help frame, maybe some of the pricing actions that you've taken and what maybe you still have left in the chamber sort of speak to how.
Offset some of these pricing some of these inflationary pressures and what are you seeing on the demand side as it relates to sort of elasticity.
Demand.
These pricing actions going through in the last couple of months and then what Youre looking at going forward. Thanks.
Yes, Joe This is Kevin Thanks for the question Ive commented before we have a very sophisticated approach to pricing that leverages analytics artificial intelligence and overseen by our very talented team.
Who do the modeling and look at the elasticity of demand in along along with the pricing actions on an ongoing basis.
I think we mentioned some of the pricing actions. We took both in October and January I'll hand to Jon here in a second to talk through those in the U S. But with those pricing actions. We stopped was still saw incredibly strong demand through the holiday season, but John Let me hand to you to go through the specifics yes sure. Thanks for your question.
<unk> strategy as Kevin shared Rachel as well as driven by <unk>.
Several factors such as inflation rates partner investments the infrastructure investments that we want to make and then obviously the investments we want to make on continuing the innovation pipeline.
Do all of those things while balancing.
The premium value for our customers and the experience we want to provide them.
As we saw inflation begin to.
To increase in the middle of this past year.
We made the decision to take pricing and we implemented pricing effective October one.
As inflation continued to grow we saw that we needed to take additional action.
We did so effective January one so we've taken two.
Two moves around pricing to help mitigate the challenges that we're seeing now we also have additional pricing action that we have planned for the balance of the year that will Additionally help offset.
The trends in some of the cost pressures that we're seeing and as Kevin highlighted that's been informed by the analytics.
And the insight team in terms of elasticity, we have not seen any meaningful impact to customer demand.
Contrary to our customer demand continues to grow we're coming off of a very strong quarter in terms of transaction growth of 12% for the quarter in the U S. The highest since pre pandemic levels and our ticket is also very strong as well so we watch that very closely.
And we will adjust accordingly.
Thank you your.
Your next question comes from Andrew Charles with Cowen. Please proceed with your question.
Thanks question for John or Leo obviously, with China sales environment has been challenging and you guys are not immune to it despite some pretty impressive gains in the digital and loyalty strategies, China development remains robust and on track for the year, but just curious what would it take for you to reconsider China development plans to slowdown openings and focus more intensely on improving the same store sales.
Thanks.
Well once you take that one.
Yeah.
Sandy.
Hi, Andrew.
All I want to say happy new year to everyone. This is the second year.
Our Chinese EMEA and China.
On the opening and the development.
I'd like to say, we have actually opened up more than 1200 calls in the past few years and most of them.
So we opened up during the pandemic. This is equivalent to more than one of our portfolio, which is larger than many of the other retailers in the market for years and what is.
Kevin just mentioned, we have been able RBC installs to achieve best in class public Blakey and returns and this goes to show the huge market potential that we got here to unlock and so when you would see.
Development.
It is important to look at 70% of our growth actually in China, and stupid by our new store openings and I will say, we will continue to drive and leverage to help with the midyear as we see this market development and simply put the three strategy that we'd be working on its proven number one is to go one to estimate.
Two more people to the market.
Second is to go deeper.
Bringing on reach and diversified.
Portfolios.
Great New Colby experience to our customers and third.
Eight.
Coming back in with a resurgence we continue to be both mater to leverage the power of our data analytics and also to drive strong economics, including our store footprint. So that we can operate in this market and I must say that I've been in this market for more than 10 years.
We are really in the early stages of these markets and as we go why go deeper and go some onto Anthony I'll open essentially helping us to build our success for the long term. Thank.
Thank you Andrew.
And I'll just reinforce the key points that <unk> made is as we.
As we continue to build these net new stores.
They are performing as best in class store profitability and return on investment and as long as we keep delivering best in class profitability return on investment we're going to continue to lean in on building new stores and play the long game and your question Andrew is what would cause us to rethink the answer would be if we saw.
Revenue and return on investment not meeting that hurdle rate that we feel comfortable with we would we would reevaluate but right now it's amazing through this pandemic as Leo mentioned as we go wider and deeper in our new store development. They are performing extremely well and so we're going to continue to lean in.
Thank you. Your next question comes from Sara Senatore with Bank of America. Please proceed with your question.
I wanted to ask about the U S.
Here sales number and first of all did you see any impact on topline with the advent of Omicron I know you mentioned cost of course, but a lot of the industry.
The effect on comps in the back half of December and then.
On a related note.
Seeing transaction growth when mode. Most restaurants still are not so maybe could you talk a bit about whats happening is it is it coming in your urban markets.
Yes.
They have different regional footprint, just trying to understand how you.
Your traffic might be recovering in a way that the rest of the industry does it seem to be thanks.
Yes, Sarah Thanks for the question.
Yes, we did see a noma crime impact, especially amplified in the last two to three weeks of the quarter and it played out in a couple of ways obviously in terms of.
The cases search number one customer mobility was impacted but then also.
We saw our partners also have a similar surge in the number of cases as well as call outs, which Kevin spoke to and Rachel spoke to in terms of the omicron Covid pay the COVID-19 pay that we provide our partners now with that we.
We also are in the midst of having a record holiday quarter and couldnt be more proud of the work that the team did in terms of delivering very strong topline growth of 23%.
In a very very complex environment in terms of what we're seeing in terms of the transactions and the growth of transactions. There is a pent up demand for Starbucks and for people wanting and longing to return to their normal normalized routine. So a couple of things that I would just call out.
The beverage attach that were seeing in the stores continues to normalize we've seen strong beverage mix growth across in particular cold beverages, which now account for 70 over 70% of our beverage.
Transactions, we've also seen strength in all dairy and the growth of all dairy and then also an increase in the modifier.
Performance.
Whether it was the holiday beverage or or the overall promotion that we saw.
Very strong growth food continues to grow and break all times records in the quarter.
And really that's being driven by breakfast and by bakery. The other thing I would just add is that our peak transactions improved.
Versus the prior quarter and a year over year basis, and then we had strong growth on the digital side.
Now surpassed $26 million 90 day active members and as part of that are non MSR customer transactions continued to grow and reached its highest level since the pre pandemic in terms of the stores and where we saw.
Traction in that.
Suburban and the rural stores, where drive throughs are the most prevalent continued to outpace the rest of the portfolio. Our drive throughs had its fourth straight quarter of double digit comp growth <unk>.
The central business district, the urban core in the urban edge recovery also continues and it was in the third quarter in a row of positive comps for all three of those are vanities and then the convenience channel channels continue to play a big role between MLP drive thru and <unk>.
<unk> that accounted for over 70% of our sales in the quarter. So very encouraged with the strong customer demand is the way in which our partners really were able to meet the needs of our customers and step up under very very challenging circumstances.
And sorry, I would just add everything John just said, what we're seeing too is following each COVID-19 wave, we've seen customer customer demand strengthened and we anticipate that's going to happen following on the crowd as well, but John and his team have done a fantastic job.
Obligating navigating these waves and I think he did a great job outlining the actions that we've taken that has driven that result.
Thank you.
Your next question comes from John Glass with Morgan Stanley . Please proceed with your question.
Thank you very much going back to productivity.
What have you learned from this experience in terms of the ability to start to reduced store hours to reduce menu items and complexity and does that play a role in your productivity that is to say, reducing some of those things or is that antithetical to your goal of driving sales.
Yeah. Thanks. Thanks for the question John I will just comment briefly and I'll hand, it over to John to take you into some more details, but certainly we have learned to be very very adaptable throughout this pandemic and so certainly win.
When these COVID-19 waves hit we know how to adapt store protocol store hours, if if we need to consolidate partners in one store and temporarily close a store we do that if we need to amplify certain channels like drive through our mobile for pickup we do that so we've become very adaptable and I think one of the things that has helped US is also see the <unk>.
Opportunities for us to drive productivity gains certainly as we look to the future and.
And both are very important how we adapted to COVID-19 , but also how we simplify the work in our stores and bring solutions that give us productivity while at the same time it improves the partner and the customer experience and John I'll, Let you just talk a little bit about the details of some some things you guys are working on this is this is an area.
John that the team is laser focused on and clearly it starts with taken action to reduce the complexity of the work in our stores for our partners to meet the demand of our customers and we've shared previous calls the work that we've got going on around automated ordering.
That continues to be put in place to reduce those manual routines of our of our partners. We continue to make investments and improved functionality for our equipment.
And better.
Better flow through of that equipment in terms of what it's able to produce whether that's from Australia to machines, whether that's the warming ovens or whether thats, our cold brew system.
And then also at the same time always assessing our beverage routines ways in which we can build beverages become more effective and more productive and building those beverages and drive better productivity and then lastly in terms of eliminating low volume Skus, we have taken action to eliminate.
And reduce low volume skus.
We did that during the first surge of Covid, where we ran into some of the supply chain challenges. We took action to pull some of the low volume food items out of the stores and we have not had a meaningful impact to overall sales revenue. So productivity plays a key role for us going forward and it's in <unk>.
Area that we are laser focused on.
Thank you.
Your next question comes from Lauren Silberman with Credit Suisse. Please proceed with your question.
Thank you for the call format.
Membership rewards membership up 21% in the quarter U S traffic, 12%. So active rewards member growth is in Boston and traffic, which I think is something we've seen over the past couple of quarters can you talk about the dynamics of that difference.
Previously talked about members spending two to three times more once they join the program does that still hold with the newer cohorts that are coming into the program and if so how long does it take for those new members to move along that maturity curve.
Okay. Thank you very much Lauren.
As I shared we added and grew.
Our active memberships, 21% in the quarter and we now exceed 26 million active members.
We added 5 million active 90 day members on a year over year basis. So Starbucks rewards now represents 53% of the spend in our stores, which is at an all time high.
And which is a three point increase versus fiscal Q1 fiscal 'twenty one.
As part of that their growth in terms of spend has grown commensurately.
We're seeing significant increase in the spend in the first year membership versus the prior 12 months of the preceding membership we're seeing a strong lift in spend when they join regardless of whether the customer is high or low frequency and rewards members as you shared.
Spending at that elevated rate and visit our stores at three times frequency rate versus our non members. So we're going to continue as a company to double down in this area and we see it as significant upside and presenting tremendous value to meet the need states of our.
Customers.
Yes.
Thank you.
Our next question comes from David Tarantino with Baird. Please proceed with your question.
Hi, Good afternoon. My question is on the turnover in the U S. It seems like that might have surprised too.
And the most recent quarter given your commentary about.
Training costs and Onboarding new partners so.
I guess, that's a trend maybe we haven't heard from others. So I wanted to understand kind of what you think drove that.
Mike and turnover, if you had one and why you think that might ease.
As the year goes on here.
Yes, David I'll take that question and clearly.
It's no secret that we are in a constrained labor environment broadly across the across the country and in particular <unk>.
Service is one of the most heavily impacted.
In terms of finding available labor and staffing the needs of the business our turnover rates I would say as we track them.
They were and have been elevated versus our pre COVID-19 levels, but.
But what we've done with the actions that we've taken as we emerged out of the quarter.
We are beginning to see that turnover rates stabilize.
And basically our hourly turnover rate has basically flattened over the course of the last several weeks. In addition to that we've also seen a significant uptick in terms of partners' sentiment, which is improving as well so for us.
We are an employer of choice, we're going to continue to make the right investments in our partners whether that has to do with wage whether that has to do with benefits.
Or just really given them the opportunity to grow with the company.
And we feel very confident that we're going to come out of this in a much stronger place.
Given the actions that we've taken but clearly it is a challenging environment.
Had to adjust our labor models and.
And adjust store hours to address it and.
And we've been able to navigate it thus far and we have confidence that we'll continue to be able to navigate that.
Thank you your next.
<unk> comes from Andrew Barish with Jefferies. Please proceed with your question.
Yes, good afternoon.
So I was just trying to understand a little bit more on the.
Kind of 200 basis points.
Other inflation and how that.
They are different from what you were talking about.
Going into this year on the prior guide.
Sure.
I believe youre, referring to that.
The 200 basis points that maybe Kevin addressed in his prepared remarks, there's a couple of ways I look at the 200 that we had I think kevin's prepared remarks, we talked about.
With nearly 200 basis points. The majority of that was inflationary pressures as we began FY 'twenty two so as you recall, we had expected to have elevated cost pressures going into FY 'twenty two related to the decisions. We made around wage, but also the inflationary pressures both in freight and labor across there.
Supply chain and across into our commodities, what we've seen those those costs are actually as we've outlined it accelerated in December and have intensified really largely related to <unk>.
I'm, a crunch and into January so when we talk about the back half of the year, having another 200 basis points.
<unk>.
Headwinds the lion's share of that is really inflationary pressures related to on a crowd that we saw in December and that we're seeing further in Q2 that also includes the COVID-19 related pay as well as training as we get through Q2, and when Omicron subsides I don't know exactly when that will happen but.
We would expect that our inflationary pressures related to Amazon with lesson in terms of the impact on margin, but overall, our inflationary pressures in FY 'twenty two will remain elevated relative to FY 'twenty one.
Thank you.
Your next question comes from John <unk> with Jpmorgan. Please proceed with your question Hi, Thank you very much.
I wanted to get back to the discussion on U S traffic because.
It looks to us.
Same store traffic is still down double digits from the first quarter of.
<unk> 22 to the first quarter of 'twenty one.
It moved to what you said last quarter, a record number of discrete customers, obviously a record number.
MSR members, so I wonder what the board kind of addressable buckets in your opinion.
Or is that kind of.
Re attract the frequency of your previous customer base is the first point and secondly.
Is there anything you can do with the direct communication functions around MSR the personalization.
Have you to really step on the gas for that program.
To get back your overall.
Store visitation levels back to the levels it was at 19 or.
I think.
Fiscal first quarter of 'twenty, whatever you want to call it.
Yes, John just as it relates to the transactions that you mentioned, we are focused on getting back to those levels. A couple of things that are impacting it is.
Obviously.
The the way in which our stores are set up and how customers are being mobile are not going to work.
Not having their normal routines now we did see on the good side or positive side rich.
The return of the breakfast day, part and peak transactions, which gives us optimism for hope in terms of growing those transactions during that period. In addition.
I would say that we're going to continue to leverage the convenience channels of mobile order and pay as well as drive through delivery.
To meet the changing customer needs to drive transaction growth going forward as well and then lastly, I would say that we will continue to assess the store footprint to make sure that we are building new stores and relocating additional stores existing stores into the areas.
<unk> where customers.
Or given the pandemic and the changes that have occurred in the pandemic.
Starbucks rewards is going to play a significant role in that.
As part of that growth.
Thank you our last question comes from David Palmer with Evercore ISI. Please proceed with your question.
Thanks, just to follow up on.
On Johns.
With regard to on premise traffic.
Obviously been weak across all U S restaurants could you could you talk about your on premise traffic per store and how that compares to pre COVID-19 and looking at that gap.
Of that do you think is going to be easy sales win as soon as consumers become more comfortable with regard to COVID-19 .
And how much do you think might be a lingering change just due to behavior shifting longer term.
<unk>.
Yes, I think that what we've see well I know what we've seen is that as we've had to adjust store operating protocols and.
In some cases, we've gone to pick up only we've gone to drive through only and we've readjusted the format. So the ability for customers to come into the stores and two <unk>.
Sitting in the store.
It's not at the level of capacity than it was back prior to Covid. This is an area that we're continuing to focus on is adjusting and reopening the stores fully.
Number one as we're able to given COVID-19 and number two as we're able to give us some of the staffing challenges that we've seen so.
We continue to adjust.
And monitor this very closely and make decisions on a daily basis now in terms of customers and they're changing routines and how much is going to go back to where it was before and how much has changed.
Still confident that given the Starbucks experience our customers come to us.
Because they love a great premium experience.
High quality Cup of coffee.
Whether it is coming in our stores are coming through the convenience channels.
We're going to continue to grow in all those areas and meet the change whatever it is for our customers going forward in terms of their routines.
Thank you I will now turn the call over to Kevin Johnson for closing remarks.
Well. Thank you all for joining us today I hope you get a sense of three things number one is holiday period, we saw strong customer demand.
Number two what's the cost pressures, we're facing we're being proactive and a set of actions that we're taking across the company, including pricing and.
Tightening up and other discretionary cost areas to address this and certainly as we've seen in post in the past Covid surges that when those surges.
And we see stronger demand return from what we saw even before that code spike and we anticipate that to happen with <unk>. So we thank you all for joining us today and we're looking forward to having you also joining our annual meeting of shareholders in March. Thank you everybody.
This concludes Starbucks first quarter fiscal year 2022 conference call you may now disconnect.