Q3 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 third quarter fiscal year 2022 conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
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 simply press Star then the number two.
I will now have snuck all over to Tiffany Willis Vice President of Investor Relations. Mr. Willis you May now begin your conference.
Thank you Alex and good afternoon, everyone and thank you for joining us today to discuss Starbucks third quarter fiscal year 2022 results.
Today's discussion will be led by Howard Schultz interim Chief Executive Officer.
Frank Britt Chief strategy Officer, Belinda Wong chairwoman of Starbucks, China, and Rachel Gerry Executive Vice President and CFO .
And for Q&A, we'll be joined by John Culver Group, President of North America, and Chief operating Officer.
And Michael Conway Group, President of International and Channel development.
Hall of Fame Executive Vice President and Chief Technology Officer.
This conference call will include forward looking statements, which are subject to various risks and uncertainties that can 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 factors discussed in our filings with the SEC, including our latest annual report on Form 10-K, and quarterly report on Form 10-Q.
Starbucks assumes no obligation to update any of these forward looking statements or information GAAP.
That results in third quarter of fiscal year 'twenty 'twenty to include several items related to strategic actions.
Clothing restructuring and impairment charges transaction and integration costs and other items.
These items are excluded from our non-GAAP results.
All numbers referenced in today's call on a non-GAAP basis, unless otherwise noted or if there is a non-GAAP adjustment related to the metric.
For non-GAAP financial measures mentioned in today's call. Please refer to our earnings release on our website at Investor Dot Com Investor Starbucks Dot com to find the 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 September 2nd 2022.
As a reminder, Starbucks 2022 investor day will be held on Tuesday September 13 2022.
This will be available to view from our web site beginning at 730 specific time.
Also for your calendar planning purposes. Please note that our fourth quarter and fiscal year 2022 earnings conference call has been tentatively scheduled for Thursday November 3rd 2022.
And with that allow me to turn the call over to Howard.
Thank you Tiffany.
Good afternoon, and welcome to everyone on today's call.
<unk> strong Q3 results highlighted by 9% global revenue growth to a record $8 $2 billion, 3% global comp growth of 9% comp growth in North America. Once again demonstrates the power and resilience of the Starbucks business and brand all over the world.
I've now been back as CEO for four months during that time I've immersed myself in every segment region operation an aspect of our business and give them my long history with the company and our culture and my unique understanding and appreciation of the Starbucks brand the drivers are going.
Global business and the special relationship that exist among our people our brand and our customers we've been able to pinpoint the source of each of the issues and challenges confronting the company upon my return.
Some are definitely COVID-19 related some are a function of not focusing on the long term and unfortunately, many were self induced.
More important we now have clear line of sight on what we need to do to totally reinvent the company and drive accelerated profitable growth around the world the.
The Q3 results, we announced today demonstrate the early progress we have made in just four short months and serve as a proof point of the significant long term global growth opportunity ahead for Starbucks.
Each business segment contributed to our Q3 performance I'm, particularly pleased that we delivered our results in the face of stiff ongoing consumer economic and inflationary headwinds Covid Lockdowns of course, China, the Shanghai, our largest China market largely closed for two months.
And that continues episodically today.
And continuing shifts in customer traffic and behaviors, including materially reduced office occupancy and our largest urban markets.
Our Q3 performance underscores the success of the investments we are making in our people extending our global leadership around everything coffee and groundbreaking beverage food and digital and technology innovation that is deepening our connection to customers in every market and every channel.
And our performance demonstrates that the Starbucks experience is more relevant and important than ever in today's unsettled world.
On today's call I will highlight the drivers of our Q3 revenue comp and EPS performance I will then turn the call over to Frank Brent Our Chief strategy Officer to provide an overview of our reinvention plan the strategy underpinning the investments, we're making to materially elevate our partner customer and store experiences.
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Next month at Investor Day in Seattle, you will see for yourselves, how accretive to our business. Our reinvention plan will be increasing efficiency, enabling us to seamlessly handle the increasing demand in our U S stores and most of all elevating our partner customer and in store experiences.
Our reinvention plan touches every aspect of the Starbucks experience and sets us up for accelerated long term profitable growth and value creation benefiting all stakeholders beginning in 2023.
We are executing against our reinvention plan with focus with discipline and a deep sense of urgency.
Next Bill Linda will update you on China, where our position in the market and our aspirations for the future has never been greater Rachel will provide a deep dive into our Q3 financial and operating results and then we'll move on to Q&A.
Four to Starbucks success, and long term growth strategy is our global leadership around everything coffee.
No company in the world, even remotely approaches Starbucks ability to source blend roast and craft the world's best Coffees and in Q3, we continued to extend our coffee leadership innovate and bring further elements of customization and premiums station to the entire coffee category, including around cold handcrafted.
And plant based coffee beverages.
Customer demand for specifically customized cold coffee beverages category Starbucks single Handedly created and is now expanding around the world is so strong that cold beverages now account for roughly 75% of our total beverage sales in U S company operated stores.
Customers are increasingly customizing their cold beverages by adding modifiers that enabled the creation of a virtually unlimited range of taste flavor and color profiles and then sharing your unique cold beverage creations with the world through social media.
Starbucks unique ability to deliver handcrafted customized cold beverages that satisfy customer desires and different need states, while creating opportunities for customers self expression deepens, our connection to customers sets us apart from any other industry participant and provides us with a.
Michigan ongoing competitive advantage in the marketplace.
I used shaken espresso introduced onto our iced espresso platform only last year is resonating so loudly with our Gen Z customers that it has already become the fastest growing product category in our U S company operated stores growing 50% year over year more than doubling year to date and.
Importantly, creating new customer occasions in the mid day and afternoon day parts.
Shaken the suppression was also resonating around the world in China for example, where ice shaken espresso was only introduced in June of this year and is already among our best selling ice coffee beverages, despite mobility restrictions in China.
Just to summarize what's going on with cold and specifically customized beverages, the premium customized cold coffee opportunity head for Starbucks all around the world is simply enormous.
Let me turn to North America.
The very strong demand for Starbucks coffee in the U S that we reported on our Q2 call has accelerated in Q3.
U S company operated stores delivered record average weekly sales.
Five of the top 10, grossing sales day in our history.
And a $410 million sales week.
In North America overall, the combination of customer shift towards premium cold beverages increased customization strategic decisions on our part with regard to beverage and food and modify our pricing and a 19% increase in food sales driving net revenues up 13%.
In addition, our North American license stores business now 7000 stores strong and growing also posted strong results with 24% revenue growth in the quarter.
While we are sensitive to be an impact.
Inflation and economic uncertainty are having on consumers.
It's critically important that you all understand we are not currently seeing any measurable reduction in customer spending or any evidence of customers trading down.
Reflecting the strength of the Starbucks brand deep customer engagement and loyalty pricing power and the premium nature of our beverage and food offerings.
What's driving some of the increase in traffic.
And to strengthen our business is our rewards program.
Active Starbucks rewards membership in Q3 totaled $27 4 million members up $3 2 million or 13% year over year and 3% sequentially.
Our loyal Starbucks rewards members drove a record 53% of U S company operated revenue mobile order and pay drive through and delivery also remained quite strong driving 72% of our U S revenue.
Increased Starbucks rewards membership customer excitement over our beverage and food offerings, plus a fantastic holiday lineup at am certain will delight, our customers gives us tremendous confidence heading into holiday in 2023.
My first order of business upon returning to Starbucks in April was to meet with Starbucks retail store and roasting plant partners across the United States in order to better understand the state of our business and the challenges confronting our partners in the company.
It soon became clear that record demand in our stores was masking significant underlying issues, including as we shared in our last call store designs that were gil suited to be evolving customer behavior and traffic patterns. We are seeing post COVID-19.
Our stores in many ways our windows on American.
And our partners everywhere shared similar anxieties over a wide range of issues affecting their families and their lives.
Round safety around mental physical and financial health issues over the widening cultural and racial divide in the state of our country and the world.
Many question, whether the American Dream and economic mobility was still realistic aspirations.
Our partners also shared how hard it had become to keep up with customer demand and how insufficient training had left new partners unprepared for their roles challenging partner and customer experiences in Hawaii.
The conversations were raw and in many ways painful for our leaders to here.
But core to Starbucks culture.
Is the requirement that we always speak with each other with honesty transparency and without judgment or fear of reprisal.
The truth is at times I was overwhelmed by what I heard the challenges the fears the desire for emotional and financial security and a sense of belonging and our partner's lives amid all uncertainty world.
At the same time I found myself feeling so proud so appreciative and oftentimes in all of our partners across the country, who showed up every day committed to delivering an elevated starbucks experience to our customers and communities. Despite the personal challenges and obstacles they were experiencing.
We were in a moment, where starbucks leaders needed to put themselves in the shoes of our partners and demonstrate great empathy and compassion towards them.
And we needed to address our partners concerns with urgency.
What began as informal partner meeting soon evolve into focused co creation sessions with Starbucks partners and leaders collaborated on how best to re imagine the next Starbucks.
We have since held over 100 co creation sessions and from these sessions reinvention, our reinvention plan has taken shape.
Today over 30 cross functional teams are focused exclusively on executing in the U S. Reinvention plan, you will see take shape over the quarters ahead.
And in time, you will see best practices sharing around the world.
We assembled our 200 top U S executives in Seattle last month to kickoff, Starbucks reinvention and change agenda.
In a few minutes Frank Brett a key architect of the plan. We will provide you with an overview you can begin to understand how accretive each pillar of the plan will be to our business and brand long into the future.
The strong revenue growth, we delivered in North America in Q3 is being replicated globally.
With the exception of China, where the zero Covid policy continues to result in mobility restrictions and limited store operations.
Each one of our international regions grew revenues by double digits in Q3.
Is an extraordinary accomplishment.
Reflecting both the strength of the Starbucks brand and strong and accelerating demand for Starbucks coffee all over the world.
Our international performance also underscores the correctness of our strategies of investing ahead of the curve and beverage digital and technology innovation that is relevant to our customers and driving new store growth in every market in which we operate.
Overall, our international segments, excluding China grew revenue, 33% year over year or 50%, excluding FX, while meaningfully expanding operating margin reflecting.
Reflecting the strong operating leverage inherent in our complementary portfolio of company operated and licensed stores.
Last month, several Starbucks leaders join me on a multi country tour across several strategic theaters of our EMEA business.
Every country, we visited we were inspired but what we heard felt an observed product quality service execution and knowledge of coffee across EMEA are all delivered at the highest levels.
Our EMEA teams are executing well weaving together, a powerful emotional connection and sense of belonging among our partners and customers with the Starbucks experience being a shared medium of exchange.
In our EMEA partners are literally thriving inspired and earnestly engaged in bringing our unique culture of respect purpose service and an authentic and aspirational loan of coffee to light.
Interestingly, while thousands of stores and many countries drove strong financial performance during the quarter.
To showcase one market in particular that serves as a proxy for the strength of the Starbucks brand and demonstrates the enormity of the international opportunity ahead.
Italy.
Italy, a market we only recently entered in a market that is close to my heart and that no one ever expected us to succeed him.
Airbus is flourishing in Italy.
The quality of the coffee the food and the partner and customer experiences are second to none.
Traffic in our Milan, Rome Street, Starbucks shrine to coffee is strong throughout the day driven largely by tourist activity.
But most importantly traffic in our Italy retail stores is largely local customer driven.
And when I was here and what I observed Italians drinking Straightest Russell at Starbucks.
We're being warmly welcomed in Italy, the country in which our Starbucks journey literally began.
Given the success, we are enjoying in Milan, we are now planning to open enrollment and in Florence.
As home to our EMEA roasting operations Amsterdam is a strategic foothold for our international efforts in July we committed to a plant expansion that will materially increase our roasting capacity in order to meet the rapidly growing demand for Starbucks coffee across to reach similar efforts are underway to support the supply.
Shang team that currently handles logistics over 4000 stores across 42 countries in the EMEA.
In Switzerland, we held highly productive sessions with our partners at Nestle.
Global coffee is among nestle's largest strategic growth categories, and our partnership with Nestle now extends across 81 markets focusing on at home coffee and foodservice channels.
Building on our number one share position in the United States at home retail and CPG coffee channels. We are in the very early stages of leveraging the stope, the Starbucks brand and nestle's global coffee platforms and significant distribution capabilities to create new Super premium coffee.
Occasions on the espresso platform all around the world.
Our partnership with Nestle is driving meaningful competitive advantages for both companies in the marketplace and is highly accretive to our business.
Looking ahead, we expect to see a closer Starbucks Nestle partnership.
This includes introduction of Starbucks varietals onto Nespresso digital sales platform.
That does not presently exist for us and represents a massive global opportunity.
Expansion of Starbucks necessarily partnership to include inclusion of many traditional Starbucks varietals under an expressive digital platform co creation of Starbucks Reserve varietals, where the virtual platform and the development of an espresso experience in our U S restaurants.
We're also looking forward to the launch of our ready to drink Starbucks Coffees in Southeast Asia, Oceana, and Latin America, which will begin rolling out in next quarter.
In China mobility restrictions and limits on in store dining continued to significantly impact. The business. However is as Melinda will soon share we are beginning to see green shoots of recovery with sales and comps coming out of the quarter, reflecting sequential improvement.
Lastly.
We have been working on a very exciting new digital initiative that builds on our existing industry, leading digital platform and.
An innovative new ways, all centered around coffee and most importantly loyalty.
We will reveal at Investor day.
We believe this new digital web three enabled initiative.
Will allow us to build on the current Starbucks rewards engagement model.
With its powerful spend to earn stars approach, while also introducing new methods of emotionally engaging customers expanding our digital third place community and offering a broader set of rewards, including one of a kind experiences that you can't get anywhere else.
Integrating our digital Starbucks rewards ecosystem with Starbucks branded digital collectibles as both a reward and our community building element.
This will create an entirely new set of digital network effects that will attract new customers and be accretive to existing customers and our core retail stores.
As I mentioned at the outset, we're looking forward to fully showcasing the power and the opportunity of our reinvention plan that we will unleash at next months Investor day.
With that I'll turn the call over to Frankfurt.
Thank you Howard and good afternoon, everyone and happy get fortunate of joining our company during one of its most exciting times at time of reinvention we.
We have come together as a Starbucks community is architected, a comprehensive plan to future proof and profitably grow the company. Our path forward is being informed by tens of thousands of daily customer experiences and our partner stories ideas and dreams that if all help shape.
Several months through on and collaborations sessions digital surveys live open forums and in direct dialogue with our key leaders. This process, it's indicative of a new and wide ranging approach democratizing innovation and Starbucks.
Our reinvention efforts will begin with our core U S company owned retail business and over time, we will extend across our global footprint.
Typically we have prioritized five major strategic shifts to pivot the U S business and the new direction.
Dave will provide the guideposts and address to what the overall program while the how of this agenda will be reviewed on Investor day in September to.
To that end.
Powered by ongoing partner co creation, we work to further connect the company truly operate as one global enterprise enabled by new ways of working in a range of contemporary practices and tools to start for the U S company owned retail business, we will focus on better integrate our culture and values across the three cohorts are.
L Partners operations partners and support Center partners, our end game.
A greater focus as a single company with agility and empowered organization and we see this work at the fabric that will help bind our change management agenda and will be meaningfully catalytic to our long term operating and financial performance.
Secondly, we are fully embracing the need to radically improve our in store partner experience. We know there are partners, who are vital to bringing an elevated Starbucks brand to our customers every day and we seek to honor empower and affirmed their strategic importance. The first principles our new partner engagement approach include both greater safety.
And kindness and our stores personalized career, passing that drives advancement and opportunity and an explicit and personal emphasis on improving overall partner will be to that end.
As we shared in our last earnings call. We have several high impact improvement efforts in flight, including this week's wage acceleration for all U S. In store partners doubling in store partner training divestments reintroduction of our iconic black apron coffee masters credentials and the implementation of a new digital partner engagement.
Platform, we also expect to rollout both universal Tiffany and a new recognition and battery platform by calendar year end 2022. Each of these substantial actions are part of a multi phase to path to reinventing the retail partner experience that we expect will have a direct positive effect on partner retention cost.
The connection and a central brand affinity metrics.
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Re imagine our stores. This starts with the core engine of production must be better calibrated for the customer happens to today and deliver superior experiences through personalization across every format and in every channel.
Innovations such as new bar configurations packaged coffee technology novel store prototypes are high priorities in the plan designed to improve throughput and heavily customized beverages, along with both customer and partner experience our high priority improvement efforts into key equipment acceleration to drive more efficient and effective operations.
Such as Clover verdict, and an extensive renovation and new store agenda.
Sure.
We will further evolve how we reconnect with customers mindful that each individual consumer must be provided a uniquely personal experience that has unified cross channels.
Building on our strong track record of superior customer engagement representative initiatives. In this figure included a re imagined approach for customer facing products and platforms new models of effortless digital ordering and further growing the value proposition of our loyalty programs through novel and new strategic partnerships.
Yes.
We will redesign with partnership means at Starbucks, creating new ways to continue to evolve.
From a listing company to co creation company. This translates into new approaches to shared innovation shared accountability and shared success. This is both a competitive and a generational necessity and for US is actually quite natural Starbucks has built through the power of our partners ideas and voices and we know that reinvention much.
First on leash, and then harnessed the power within every one of our partners. Finally, it's important to be declarative at within our highly integrated change agenda coffee innovation is far more than an initiative or a project stat. The role of coffee will be threaded throughout each of our priorities and service our inspiration.
<unk> and scarcity differentiator and define the future of Starbucks in summary reefer.
We firmly believe that when you combine the five strategic reinvention areas bolstered by our rich tapestry of aligned initiatives and the reaffirmation of the importance of coffee you'll begin to see the emergence of a starbucks that once again drives outsized performance financially.
Sized impact socially and creates a work environment, where all of our partners feel greater personal agency and are providing personalized career path that matches their unique needs and aspirations in the end. Our goal is to become a wholly new kind of company that again sets a new higher standard for our industry and our business overall, we look.
Forward to sharing more details on Investor day in September and now I will turn the call over to Belinda.
<unk> Bank in Q3, China faced its most severe COVID-19 disruptions since the onset of the pandemic mobility restrictions and Lockdowns were implemented faster and east more slowly under China's zero called that policy. Some high our largest market with more than 940 stores was completely locked down for approximately.
Two thirds of the quarter.
150 stores of roughly one third of our stores in the market were closed for almost six weeks, but the balance of our vacant stores operating without enjoy dialogue.
We entered Q3 with over 1300 stores close till one quarter of our total portfolio temporarily closed.
Exited the quarter with roughly 2000 stores across nearly 50 cities operating with mandated reductions exceeding capacity or other restrictions.
Miller patents related today with Covid restrictions being eased in some cities and new restrictions imposed in others. We continue to expect a recovery in China typically non linear.
In Q3, we continued to deepen our partnerships with suppliers landlords and local authorities streamline and adapt our supply chain at new chapters to I'll call that playbook and position the business for accelerated profitable growth as soon as COVID-19 restrictions are fully lifted.
Together. These efforts have provided us the flexibility of muscle we need to continue to operate.
Certainly as possible given the current market challenges as a result, we were able to quickly can we opened 90% of our Shanghai stores just within a few days of the city you'll be opening.
We continue to put our partners first ensuring the safety and wellbeing of compensating them fully even when our stores were closed.
In turn our partners continue to deliver exceptional experiences for our customers as reflected in our record high customer connection scores we achieved in Q3.
Covid is forcing startups to become more flexible resilience and agile in China and get even better at operating and executing at scale benefits.
Benefits of our investments in our people and our operations will become increasingly evident in post COVID-19 quarters and years ahead.
Covid related headwinds in Q3 resulted in Starbucks net revenue, China declining, 40% sales comp declining 44% versus last year.
But I am pleased to report that we saw immediate improvement in traffic and sales following shanghai's reopening in early June .
Steady sequential improvement in both metrics to the month.
Exited the quarter with a negative comp of 24% after indoor dining restrictions in Shanghai, but partially lifted at the end of June .
The improvement was skewed by customers returning to our stores celebrating that connection and similarity with the Starbucks brand.
We're seeing a strong positive correlation between comp improvement and the easing of Covid restrictions, giving us confidence that we'll see both a strong rebound in sales and improve flow through.
Alrighty restrictions in China are fully lifted.
We continued our store expansion in Q3.
Turning up 107 net new stores.
And entering three new cities, despite the headwinds and now operate 5761 stores across 228 cities.
And we remain on track to have 6000 stores in China by the end of this year.
Our new stores continue to achieve best in class returns and profitability.
The investments, we're making to elevate our customers' digital experience and strengthen.
Little connection to startups are paying off mobile ordering mobile ordering sales mix increased to a record high 47% in Q3.
Up 13% over prior year and up 4% over Q2, as we adapted to Covid driven changes in customer behavior. We.
Also continue to invest in product innovation, and extending Starbucks coffee leadership and authority in China.
All it mentioned ice shaken expresso introduced only in June has already become one of our best selling ice coffee beverages, among all Gen Z customers driving both sales and incremental traffic.
Our Q3 performance demonstrates the resilience of the Starbucks brand and business in China and that we're continuing our relentless focus on the long term, even as we navigate short term disruptions.
Fissioning us to resume accelerated and long term sustainable growth in China as soon as Covid restrictions are fully lifted.
Want to sincerely. Thank all of our partners in China for their dedication commitment and deep loyalty and for taking care of our communities our customers and each other during this unprecedented time.
With that I will turn the call over to Rachel Rachel.
Thank you Linda and good afternoon, everyone.
Howard mentioned at the top of the call we delivered record breaking revenue performance during the quarter driven by continued strong customer demand globally, despite a greater than expected impact from mobility restrictions in China.
Also exceeded our earnings expectation, demonstrating our ability to effectively deliver results, while executing on planned investments and navigating a dynamic environment.
In Q3, we delivered record quarterly global revenue of $8 2 billion up 9% from the prior year or 11% when excluding the 2% impact of foreign currency translation.
Our strong growth was driven by double digit revenue growth in the U S as well as nearly all major markets and channels across our global portfolio, partially offset by a 40% decline in China revenue.
Q3, consolidated operating margin contracted 350 basis points from the prior year to 16, 9%, primarily driven by ongoing inflationary headwinds significant investments in labor, including enhanced store partner wages and deleverage related to Covid Lockdowns in China.
These were partially offset by pricing in North America and leverage outside of China.
Q3, EPS was <unk> 84.
Declining 15% from the prior year, but ahead of expectation.
I will now provide segment highlights for Q3.
North America delivered revenue of $6 1 billion in Q3, 13% from the prior year and also an all time record primarily driven by a 9% increase on a comparable store sales, including an 8% increase in average ticket as well as net new store growth over the past 12 months.
Compelling growth in our U S license store business also contributed to the segment's strong revenue performance.
Our U S business posted 9% comparable store sales growth driven by ticket a remarkable feat considering we were lapping a record breaking quarter from last year.
Our average ticket reached an all time high yet again with the year over year increase driven by strategic pricing actions and food attach.
Strong free cash is a direct result of continued innovation, which resonates with our customers.
New items, including our lines frosted, coconut bar and staples, such as the grilled cheese sandwich.
Wow.
Our creative innovation approach has led to successful beverage and food pairings.
And food attach I'm driving day part growth.
While transactions remains below pre pandemic levels average weekly sales and unique customer counts reached record levels in the quarter demonstrating that the Starbucks brand is reaching more customers than ever our customers are highly engaged when they frequent our stores.
As both Howard and Frank discussed we are singularly focused on executing the reinvention plan.
Although measurable benefits of the reinvention plan investments will begin to manifest in FY 'twenty. Three we are encouraged by the investments made so far this year as we've already experienced increased labor availability availability and stability and more predictable operating hours as well as higher partner engagement scores in the U S.
Our tenured partner turnover those with one to two years of tenure has also improved evidenced that our targeted investments to address wage compressing are making a difference.
We know based on data across our more than 9000 U S company operated stores.
That stores with lower turnover and higher partner engagement tend to have better operational and financial metrics relative to their peer set often leading to better overall customer connection stores.
We believe our intentional and targeted investments, which are part of the reinvention plan or meaningfully elevate the Starbucks experience for partners stores and customers.
North America operating margin was 22, 2% in Q3 contracted 250 basis points from the prior year, primarily due to ongoing inflationary headwinds.
Our investments, including enhanced store partner wages, a new partner training support costs, partially offset by pricing.
While we began executing investments under the reinvention plan. We were also focused on taking disciplined actions to offset margin pressures.
Measures include targeted pricing actions.
Store throughput initiatives and prioritization of discretionary spend.
The segment to fund critical investments, while delivering Q3 performance as planned.
Moving on to international.
This segment delivered third quarter revenue of $1 6 billion down 6% from the prior year or up 3% when excluding a 9% unfavorable impact from foreign currency translation we.
We saw strong sales growth across every major market in this segment outside of China and increased our net new store count by 8% over the last 12 months.
The growth was partially offset by an 18% decline in comparable store sales, reflecting the severe impacts of COVID-19 lockdowns across China as Belinda noted.
Outside of China, the tremendous growth of our international markets across our global portfolio continued into Q3 growing at 50% and more than offsetting the revenue challenges we experienced in China, when excluding the impact of foreign currency translation.
Virtually all of our key markets and regions posted double digit revenue growth, including our licensed markets.
Most of these markets revenues have reached or exceeded pre COVID-19 levels and set new record highs in recent quarters, driven by strong innovation and expanded digital capabilities.
Momentum combined with a sizeable opportunity afforded by new store format gives us great confidence in the long runway of growth ahead for our international markets.
Operating margins for the International segment was 12, 4% in Q3 down 950 basis points from the prior year, mainly driven by Lee leverage related to Covid impacts in China sustained inflationary headwinds lapping higher prior year government subsidies as well as partner investments.
We offset by strong sales leverage across markets outside of China.
Looking ahead, however, the international segment May face near term challenges.
The prolonged lockdowns in China with limited mobility recovery in Q3, the headwinds now extend into Q4 at the market continues to recover.
The current pace of recovery implies China's operating income contribution as a percent of global operating income may be reduced further than what we had previously anticipated to roughly a quarter of the contribution realized in a typical fiscal year.
Outside of China, the increase in Covid cases around the world May temper. The rapid growth. We are currently seeing in many markets.
Moving on to channel development.
This segment's revenue grew 16% to 400 million in Q3, driven by growth in both the global coffee alliance and our ready to drink businesses.
Channel development continued to play an essential role in amplifying and diversifying the Starbucks presence around the world on trading near occasion.
Starbucks remains the market leader in both the total U S at home coffee and ready to drink category.
As Howard mentioned, our partnership with Nestle continues to strengthen and we're pleased with the competitive advantage. It has created and excited about the heightened performance. This strategic partnership will unleash.
Newer platforms continue to be significant drivers of growth for the global coffee alliance, including Starbucks by Nespresso and Starbucks Creamers.
Within our ready to drink lineups, we continue to be pleased with our recent product innovations like our new shelf Cup offerings in our international markets with robust innovation pipeline fueling continued long term growth.
The segment's operating margin was 40% in Q3 down 670 basis points from the prior year, mainly driven by a decline in joint venture income related to our U S ready to drink business, primarily due to inflation as well as business mix shift.
Now moving on to the balance of fiscal year 'twenty two.
While our guidance remains suspended for the balance suspended for the balance of this fiscal year. We wanted to provide some insights regarding Q4.
We now expect our Q4 margin and EPS to be lower than Q3 with greater year over year pressures, primarily due to three reasons.
First let's start with mobility recovering in China was later than expected impacting the pace of recovery previously assumed in Q4.
Second our Q3 performance benefited from approximately five cents of non reoccurring benefits, including release of accustomed duties accrual tax credits government subsidies and other items, which we do not expect to continue in Q4 and third as previously announced Q4 will be impacted by sequential step up in our investments.
As well as our typical seasonality.
Between executing on the reinvention plan and other investments such as increases in wage benefits announced earlier. This year, we expect our U S investments to more than double from Q3 to Q4.
Although these factors will impact our Q4 results expected to be transitory in nature, and our commitment to accelerating long term growth remains intact.
From a shareholder return perspective.
Although we announced the suspension of share repurchases for the balance of fiscal year 'twenty. Two we have nearly returned 6 billion between share repurchases and dividends during the first three quarters of fiscal 'twenty two.
Additionally, we remain committed to sustaining an attractive dividend and continue to target an earnings payout ratio of approximately 50%, which is near the top end of growth companies of our size and scale.
Our commitment reflects our confidence and the strength of the business and to returning compelling cash distributions distributions to shareholders, while retaining balance sheet flexibility and funding our investments.
In closing Cherokee takeaways from my discussion today.
Our Q3 performance underscoring continued strength in customer demand for Starbucks coffee of route across the globe.
With our ability to execute investments, despite macroeconomic and operational headwinds.
Our commitment to deliver shareholder value has not wavered, and we are making the right decisions and investments today for the future of Starbucks balancing the value we create for all stakeholders.
Our acceleration of long term growth is rooted in our ability to execute against our reinvention plan and we're looking forward to sharing details in providing a comprehensive update on our business outlook for FY 'twenty, three and beyond at our Investor Day in September .
As always the real credit for our success belongs to all of our Green apron partners around the world to strive to deliver the best Starbucks experience possible each and every day they have our greatest respect and appreciation as we reinvent the next phase of Starbucks together.
With that we will open the call to Q&A operator.
Thank you.
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 I appreciate all the color on the update.
Just had.
One question two parts the first just relates to.
The new CEO .
Just wondering your thoughts in terms of.
Whether that leader will have the ability to perhaps.
He has a different path than that laid out at the Investor day.
Seemed like there's some risk in terms of that hiring.
With the perhaps reinvention plan already laid out so any color you can provide on the CEO search.
Would be great and then just as a follow up is there any.
Color you can share in terms of the tweaks you are thinking about to the long term top or bottom line algorithm.
I know you previously alluded to some maybe acceleration of unit growth, but anything you can share in terms of early insights into the long term algorithm changes it would be great.
I'll take the first question, which I think is an easier one.
There is absolutely no risk whatsoever.
Two the reinvention modernization plan that we've outlined in terms of CEO succession, let me try and explain what I mean by that.
We've got a.
In my view, an extraordinary slate of candidates who are very interested in the job.
We've narrowed it down to a select few.
The biggest piece of this puzzle in addition to experience domain understanding of the market and our global person is an understanding of the culture values and guiding principles of the company someone who really has a conscience in terms of the humanities Starbucks.
And all of the candidates that we're talking to we're paralleling the reinvention and modernization plan. So there's no misunderstanding.
I can tell you that the candidates who are extremely excited and positive and in agreement with what we're doing in terms of investing ahead of the growth curve reinventing the partner customer in store experience and the equity and power of the brand as a parent no one on this call should.
Whatsoever that theres any risk in terms of this play and not being executed.
And lastly.
I've committed myself to stay as long as necessary to ensure the fact that the new CEO has a soft landing in the company that we have a long immersion process.
And then I transition on the board so I can mentor and help the next CEO I am encouraged by the quality of the candidates and certainly the candidates who were looking at the.
A world view of the economy geopolitical issues and understanding the power of the Starbucks brand and most importantly, the amenity of the company.
And Jamie I'll take the second part of your question as it relates to FY 'twenty three as you know we've suspended guidance for the remainder of this fiscal year and we look forward to sharing more about our long term growth algorithm with you at Investor day that we'll share our perspective on FY 'twenty three as well as a longer term time periods. So we will be looking forward to <unk>.
Data you then regarding what we're expecting for FY 'twenty three and beyond.
Thank you your.
And your next question comes from John <unk> with Jpmorgan. Please proceed with your question Hi.
Hi, Thank you I know, there's a lot of conversation about the U S business seeing record customer demand, but the.
Overall numbers still suggest that same store traffic is still down.
Somewhere in the double digits excuse me versus 2019, so I just wanted to kind of drill down a little bit in terms of what some capacity or efficiency enhancements at the store level might mean, so firstly.
Is there a plan or do you have a thought of kind of returning that that core.
Yeah morning day part business, the ritual business kind of the real habit driven business that was long such an important part of everyone's life in the U S is it just returned to normal from a customer side or do you have you have some specific initiatives to maybe bring that customer back it's kind of the first part of the question and the second part of the question as it relate.
To adding capacity in the afternoon, which I think is what your growth has been the best we've seen.
The food, we've seen a shift to cold how much capacity can be added to that attorney business through things like better training hours.
Procedural changes versus what might be more complicated and time consuming around equipment and actual physical store design that in this current environment, whether equipment or permitting what have you just might take more time.
Yes, John This is John Culver, just real quick we're very bullish.
Bullish on on our business right now just in terms of the overall growth prospects and the number of customers that are walking in our doors each and every day now clearly the composition of customer visits have shifted.
Versus what we saw on pre pandemic and so new routines are being established and were seeing that particularly in the suburban areas as well as the convenience channels a drive thru MLP.
MLP and delivery those channels accounted for 72% of our revenues generally speaking, we see single transactions in those channels with a much higher ticket, which is translated into higher ticket for.
For the quarter. So that's one big piece of it the <unk>.
Second piece as it related to day parts, we are seeing.
Morning, continuing to grow.
In the quarter represented 51% of our sales.
Which is beginning to return to normal that'll be driven by the urban core opening up back up we did see for the fifth consecutive quarter positive comp growth in the urban core and on the edges of that and we're optimistic that those morning routines are going to start coming back.
Which will drive higher transactions and probably a little bit lower ticket at that time, because those are our single transactions at that point in time, we continue to see strong beverage growth overall, 9% in the quarter Cold obviously was the biggest contributor 74% of our beverage.
Sales with cold, but when you look at it across all categories espresso brewed coffee refresher.
Refresh yours all of those were strong double digit in the quarter and then equally is the optimism that we have with the ability to customize and modify beverages. If you look at modifiers that are contributing to the growth of the business those grew over $60 million in the.
Quarter and contributed significantly to the attach rate. In addition, we're seeing a higher attach on food food drove 19% growth in the quarter and clearly across all day parts of food whether that be morning afternoon or early evening, we saw strong growth double digit growth.
Across all of those food categories. So we feel good about the about the numbers of customers coming in and then just a couple more data points I would add to this is first off our average weekly sales are at an all time high and when you look at our average weekly sales.
We were 30% up versus pre pandemic levels. Okay. So that's one data point the second data point as it relates to unique customer visits and this gets to more customers coming in our stores are unique customer visits were up 6% versus last year and up 9% versus.
This last quarter and clearly the mobile order and pay digital footprint continues to grow again 27 million members up 19%. So we feel good about the about the path that we're on as customers begin to normalize routines, we feel transactions will come up we'll continue.
To invest in the areas of engaging our customers.
Meeting them, where they are at so.
We feel good about the traction that we have thus far.
Thank you.
Your next question comes from Andy Barish with Jefferies. Please proceed with your question.
Hey, guys. Thanks.
So just wondering if there is any way to kind of quantify with its current.
Wade.
The wage inflation that you have.
Managed and put in place.
In response to some of the the partner issue but.
Also more so.
Kind of.
Where does this go next is it really more of a benefit if you and do you think that's kind of this latest increase sort of gets you.
Place for Brian .
Okay.
Andy I can start with part of that question and then I'll, probably turn it over to Frank to get a little bit more color, but what I can say is of the wage investments that we've taken in of our broader investments overall as you know, it's an incremental $1 billion. This year largely related to wage but in addition to that more training hours more labor.
Hours to be able to support some of our production what that does when you think about it is from a revenue standpoint on a consolidated basis in.
In Q3 that was about 2% of our overall consolidated revenue it'll be about 4% next quarter. So that gives you a perspective I think when we think about what's coming to FY 'twenty three certainly we'll share more about that at Investor day, but I think this really sets the stage for us to be able to do exactly the foundational parts of our re <unk>.
<unk> plan, which are really trying to address.
Better experience for our.
Partners through increasing the experience of our stores, providing better training overall benefit leading to an overall engagement increase for our partners. In addition to that we're also spending to be able to ensure that works and elevating the experience for our customers. The combination of that we see is a great Foundation.
Where we're headed in the future, but I'll turn it over to Frank to that a little bit more color I think that one of the.
Thesis, we have is the reinvention is that in the same way, we distinguish ourselves over the years to personalize the experience for the customer we feel like the same principles can be applied to our.
<unk> and so the work that we're doing is to lay the foundation to complement our wage increases to complement wage increases to meet a variety of other needs that folks have based on either where they are in their lives and are where they are in their careers and so what you should expect from us in the months and quarters ahead is a greater opportunity to personalize the experience for green.
<unk> to meet them, where they are and that could include a whole variety of things from new services, new types of flexibility new types of Credentialing models, you types of training notions and just moving us away from a one size fits all approach to meet people where they are in their lives. The same way we've done it so well with our customers.
Thank you.
Next question comes from Lauren Silberman with Credit Suisse. Please proceed with your question.
Thanks, So much Howard you mentioned no measurable reduction in customer spending the trade down can you talk about the performance of rewards customers versus non rewards customers and any differences in behavior between the cohorts.
Then related I believe Starbucks rewards is launched back in 2008 can you remind us of the reasons, we launched the program at that time as it's evolved over the last 15 years. How do you think it will play a role should we see a more challenging consumer environment.
Sure I think Rachel will begin the answer I can start with in terms of the difference between our rewards customers in our non rewards customers as what we saw is as John spoke about our customer count reached an all time high this quarter and that was both in Srs and <unk> rewards customers increased grade.
Here relative to our non rewards, but both groups increased and what we saw is our SRM members.
<unk> had a higher member spend all time high. So we saw an all time high in terms of member spend for our rewards customers and Thats driven by a combination of things Mark a strategic pricing where premium beverages, our personalization as well as greater attach so that's really what drove that so we're seeing an increase in engagement.
From our rewards customers and we think that has benefit for us over the longer term, particularly as we continue to personalize the experience more uniquely so that we can have a deeper relationship and engagement with the customer which will allow us to have the ability to continue to provide value in ways that are more personalized to them.
<unk> as a customer.
Thank you.
Your next question comes from David Palmer with Evercore ISI. Please proceed with your question.
Great. Thanks, and thanks for the comments, so far including on the customer response to pricing.
I wanted to ask about transactions I could have imagined a few quarters ago that transactions would be recovering on a three year basis versus pre COVID-19 levels, but transactions seem to have stalled out.
Few quarters actually.
Celebrated a bit versus 2019 I'm wondering why do you think that is what factors do you think are driving.
Somewhat more stubborn recovery when it comes to transaction. Thanks.
David This is Rachel I can take that question, what we'd say is absolutely we see lower transactions relative to pre pandemic levels. So FY 19, but we're actually seeing our transactions improved versus prior year. So we are ahead versus prior year, while still below from in F 2019 level.
And what we're seeing is really a change we believe it's a change in consumer behavior, where we're seeing a higher ticket and a more moderate transaction.
And I think what plays into that is some of the dynamics of where people work today versus going into the office each and every day. There is a shifting consumer behaviors. We've also created newer formats and more points of our stores. So that customers can meet us where they need us to be and we think that's also helped with the dynamic.
Shaping a different dynamic in terms of a revenue perspective transactions are always an opportunity, but the way we look at it as having more customers and seeing that those mark more and more customers are engaging with our brand and they're spending more with each visit and it turns out to be a different formula for us, but it equally.
Important for an electric we're just seeing growth in a different way.
I would add one other thing that hasn't come up yet and that is the relevancy that Starbucks has.
With young people and I think I mentioned this in the last call that one of the metrics for me personally it's always been trying to understand on an annual basis as our customer getting older or younger.
And.
We don't want to be in a business, where our customer base is aging.
And we have a.
The less relevant situation with younger people, we have never been in our history more relevant than we are today to Gen Z.
And to me that that core of that cohort is so powerful.
The attachment rate that we have with them and the loyalty is just building and so the other thing I'd say is that.
Of course, you got to look back to 2019, I understand that but the world has changed so dramatically.
Pattern recognition among customers is so different.
And if you didn't have the historical perspective that I understand that you do and you're just isolated Starbucks business to that.
Without historical numbers.
You'd have to say Wow, what an extraordinary franchise look at the equity of the brand on a global basis look at we're able to do in multiple formats multiple countries multiple channels of distribution.
And I think for me there is no doubt that the morning day part is going to come worrying back.
And it's not a question of if it's just a question of when.
You couple our our afternoon business now on coal with a morning business in terms of people coming back to work.
The acceleration of the business and the operating leverage that we always have had is just going to be that apparent and I think the work that we're doing on the partner side.
What we haven't said is.
There is a direct correlation with the investments, we're making with our people and retention and the greatest return and we can have on our investments is lowering attrition and retaining our people and that is what youll see in the quarters ahead.
Thank you your.
Your next question comes from Puneet <unk> with <unk>. Please proceed with your question.
Great. Thanks for taking the question I wanted to come back to the reinvention plan I think the third pillar was re imagining the stores.
I was hoping you could provide a little bit more context or color on this.
Are we talking about more store closures as this free models what exactly do you feel is the issue is it throughput and just trying to understand the level of investment you might need in 2023. Thank you.
We don't anticipate store closures will be material in any way.
We're going to we're going to share with you with great specificity, what we're going to how we're going to reinvent the store model. Both in terms of the customer journey and the equipment that is going to significantly give us capacity that we don't have and make our peoples make our partners job much easier you will see all of that.
And more September 13th and if I could just add we've already been spending.
Some of the investment we're doing this year.
The billion dollars some of it's pointed at some of the re imagining of the stores specifically, it's pointed at and ensuring that we had better uptime in our stores. So that the equipment is working and the partners are able to serve the customers and demand. In addition to that we've rolled out new and more innovative equipment to help.
With overall efficiency and the complexity in our stores. So we started that journey and we'll continue that but I think that's an important aspect of it is not always just about our new store, it's actually about helping to also improve the efficiency of the engine today and we can do some of that with operational standards as well as equipment and innovation and we start ups.
That process.
Let me introduce you to Devon favorite who will.
<unk> runs technology at Starbucks and I think just to give her an opportunity to share with you with her and team are working on with regard to reinvention.
Thanks, Howard and it's a pleasure to be here and joining Starbucks so.
As we think about that reinvention plan looking forward to sharing more on September 13th.
But to add onto what retail is just saying there is a real opportunity to continue to invest today and tomorrow in modernizing our stores job number one is making sure our partners have smooth operating stores and we know technology as it is at the core of that and then as we move forward and what we'll be sharing more on the 13th is as we look to <unk>.
Modernized technology and really be the engine behind the reinvention plan here we.
Believe that the critical competitive advantage that we're going to be bringing his speed at scale through really repositioning our core technology foundations to be even more agile and more cost efficient and look forward to sharing more of that thank you. John go ahead.
Just going to the investments that we're making in the immediate term.
Particularly on equipment to drive throughput and productivity and John This goes back to your second part of your question I apologize for not addressing it then but.
First and foremost it's about the strain of twos and getting the strain of machines out currently we're at 86% of our stores and we'll complete the rollout by the end of this fiscal year, we have warming ovens upgrades going on to our current ovens, we have 60% of those deployed.
We will have 75% deployed by the end of the fiscal year, we developed an in house proprietary cold Brew system and that's currently been deployed to all stores across the U S. And also we continue to see the growth of cold beverage so improvements into the cold beverage station.
And in particular cold beverage labeling which are dedicated to that station. We currently have those 38% of our stores that will go to 80% by the end of the fiscal year, we also see opportunity with handheld order points.
So if you think about it handheld tablets currently that's in 50% of our stores will continue to deploy that and anticipated 65% by the end of the year that will drive speed of service and in particular higher throughput in drive thru and then equally on the back of the house is the automate.
<unk> ordering and we are seeing huge opportunity for automated ordering as we are fully deployed across all food and merchandise across all stores in the U S. And we are quickly moving toward getting that up and running as it relates to the beverage and the remaining products in our stores.
So we've got a lot of work that's happening.
Around that and it will make our our business.
A lot more efficiently before the other question I just feel bad International's knocked the cover off the ball and no one's asked Michael Conway a question. So Michael I'll kind of give you some airtime.
Thanks Howard.
I appreciate it so I am excited about the results. We had as you shared we were up 50% ex China and international is just give a little more texture because the strength was across all the regions. So Latin America again strong comp growth well over 50% EMEA driven by the UK comps grew well into double digits again.
Asia Pacific also very strong strength double digit revenue growth.
And within within Asia, We had Korea 1700 stores. This quarter, we had Indonesia, which reached 500 stores and that's actually the 10th market globally to do so so a lot of growth in a lot of investments still going on and in Japan, Our third largest market globally, the comps accelerated to their strongest point this year and what's behind it I would say is three things first.
We partnered very closely with our business partners to invest in those key growth levers like expand into digital capability, So Starbucks rewards and mobile order and pay we've also enabled new channels like delivery, which has proven to be like in the U S quite quite incremental for transactions secondly arm that are.
Partners are investing in stores. So they have seen the resilience of the brand and the investing in stores, particularly stores like drive through what we're seeing.
Outsized growth and finally travel is slowly starting to return.
Specifically within the regions, but also we're starting to see across regions and that gives us.
Real outlook that as travel continue Theres more growth ahead in these regions. So we're excited about the growth we're seeing in international Fisher. Thank you Michael.
Thank you. Your next question comes from Sharon Zackfia with William Blair. Please proceed with your question Hi, Good afternoon I wanted to follow up on a comment you made earlier about retention and Leon Marc you can get there as tenure increases further Bruce does in the U S can you talk.
About what average tenure is now versus maybe where it was in 2019 and maybe similarly, I know you mentioned in China I think.
Connectivity scores are at an all time high where is that now in the U S. And how are you measuring throughput in the U S versus kind of more normalized pre pandemic.
Yes, Sharon this is John I'll take that on retention, obviously, we continue to make investments in our people both from a wage as well as from a training standpoint, we are seeing some green shoots and improving retention overall and we're optimistic.
That will carry into the coming quarter as well as we go into FY 'twenty three just to give you a few data points, we hired a record number of partners. This fiscal year, thus far and what we've been able to do as we've hired partners as we've been able to reduce the number of open positions.
And thus in turn increase the number of operating hours that our stores are open. This has been enabled we we streamline the hiring process.
Put this in place in record time.
For our individual markets and what we've seen is that after turnover peaked in Q2 of this year.
We're seeing the early signs of these investments paying off our average pay right now stands at roughly $17 an hour that's inclusive of our floor being at $15, an hour, which goes into effect broadly across the country effective August one.
That's significantly demonstrates this $1 billion wage investment that we're making this fiscal year and our people and then we also increased our recent training basically doubling the hours for new hire burritos to 40 hours as well as our new supervisors and as we.
Look at this area of the business labor staffing retention all those things that metrics. We're tracking is turnover hours of operation fully staff stores, and obviously operating with mobile order and pay open full time, Rachel alluded to the fact.
Stores with lower turnover drive higher partner engagement and deliver better operating and financial metrics, which does lead to higher customer experience stores and we are seeing.
Trend uptick in customer experience.
Customer experience scores. So we feel we're on the right path, we have more work to do but we are making progress.
Thank you.
Your next question comes from Andrew Charles with Cowen <unk> Company. Please proceed with your question.
Great. Thanks, Howard notwithstanding the strong U S same store sales you posted this quarter and your comments about not seeing any trade down reduce customer spend but with investor concern around a macro slowdown can you talk about if starbucks where to see deterioration U S traffic over the next 12 months or so what efforts Youre disposal would you lean into to remind customers that starbuck.
As an affordable luxury and if I can sneak one more in for Belinda looking beyond the 6000 store target for China at 2022 and is the prolonged state of China mobility restrictions, giving you any pause on medium term development plans I know you guys talked about Peacock ROIC prior to the shut it prior to the restrictions, but just curious for your updated thoughts. Thanks.
Well, let's.
Let's try and unpack the question about Starbucks as an affordable luxury and possibility of us of a significant slowdown economically in the country.
Historically 51 years in business.
We have been able to navigate and manage through very difficult economic headwinds and although we've we've raised prices.
Roughly about 5% or so over the last 12 months. The fact that our customers continue to see Starbucks not only as a great product and a great experience.
But all the things that ladder up to the equity of the brand and the quality of the coffee.
So.
Listen I think everyday that goes by what's on my mind is the significant challenge economically that people are going through.
We're not taking our success and current engagement with our customers in any way as an entitlement we have to earn it every day and I think when we had we had our 200 top people here from the field, just a week and a half ago.
We all talked about the need every single day to exceed the expectations of every single customer to understand what it means to take it personal as we did in 2008 during the cataclysmic financial crisis, and we managed through that one.
And I think the other thing is.
We've never had as many.
If you look at the national footprint and Starbucks the multiple footprints in terms of the different types of formats that Starbucks has.
It provides us with the ability to create convenience that we've never had before specifically in the drive thru and so.
If you if you take that and then you ladder up the Starbucks rewards program and that probably is where we would go to a to provide discounts and value and the value proposition on ongoing basis with our existing rewards customers. If in fact, there was a significant downturn in the economy.
But I think when we talk to our peer group as we have about what they're experiencing.
They are they are shocked stunned that Starbucks continues to create the kind of velocity without any indication whatsoever.
Customers are turning away from Starbucks or most specifically trading down and one one we highlighted cold beverages. So much was two reasons. One is that that is a gen Z product and as I said earlier that is a key customer cohorts with Starbucks secondarily, we have a significant competitive advantage in.
Our ability to customize almost any beverage that our customers want with speed.
And then.
OS piece of that is.
Competitive advantage that we have is that the modifiers that our customers are adding to cold is a greater number than they add too hot.
Modifiers or raising the ticket and the modifiers produced color and excitement to the Gen Z audience and they immediately put it on social media, but where we are in the early stages of the cold beverage platform in terms of what we're going to bring in terms of innovation and the modifiers and the customization gives us a significant.
Competitive advantage you layer all of that and what I said earlier and that is the morning day part coming back with velocity and I think all bets are off in terms of the operating leverage that we're going to get in here.
I'll answer the second part of the question. Thank you. Despite the Covid headwinds we remain on track to operate 6000 stores by the end of this year. We added 107 net new stores in Q3, with our new stores continuing to deliver great returns and profitability. The fact that we could still opened more than one store per day.
In Q3 speak volumes to our team's capabilities and our resilience and the strong operating muscle we have built.
We remain highly confident in the resilience and dynamism of the Chinese consumer economy.
China's coffee market is still in its very early stages and we have a long runway for growth ahead store development will continue to fuel the growth.
For Starbucks, China, and will continue to expand our retail footprint in a strategic and disciplined way, we're going to continue to go wide enter into more new cities. We're going to continue to go deep in filling with more innovative formats to deliver the perfect. The most relevant Starbucks experience for our customers and we're going to continue to grow smart.
By data powered decisions optimizing size formats locations investment et cetera. So thank you.
Thank you.
Our last question comes from Sara Senatore with Bank of America. Please proceed with your question.
Thank you so much just a quick clarification and then a question. The clarification is just on the comment about accelerating growth I think it was interpreted as meaning faster unit growth.
Versus perhaps productivity gains or volume in the stores and I just wanted to clarify if that was the right interpretation, but the core question is actually on China, I know clearly the lion's share of what's happening is driven by the restrictions, but Melinda could you maybe just talk about anything you can say about market share gains I know you mentioned.
Connection scores have never been higher as it typically correlated with comps are share gains just something to help us context.
Contextualized Starbucks positioning.
X all these exogenous factors.
Rachel will take the first question on our enthusiasm for growth and then Linda wound.
Yes, Sarah when we talk about accelerated growth.
Specifically talking about our metrics related to revenue margin and earnings and Thats really going to be fueled as it has in the past by growth in unit growth. So our new stores growth in innovation and as well as growth in our digital customer relationships. So that's how I think about what we're talking about.
Accelerated growth unit growth is a part of it it's one of the catalysts, but there are many other factors as we talk about accelerating our growth.
In China, I mean in Q3, we had a pretty difficult quarter because of COVID-19, but as I shared before we still achieved record high connection scores.
And where all the investments that we have put in into our partners and our operations.
We will become increasingly evident.
And will benefit us in the future.
And Super confident of our potential in China and once all the COVID-19 restrictions are lifted.
We're going to accelerate our growth once again, thank you.
So I think.
In terms of our Investor day, I really hope that the majority of you will make the trip to Seattle is still good whether at that point should rain.
But I think those of you who do not come will miss out on really seeing and understanding that breadth.
The level of innovation and monetization that we're going to bring to the company and how quickly it is going to comp. So I hope the oil content will be a good time.
A lot of interest that we've had already but please try and make it to <unk>.
Thank you so much and we'll see if September 13. Thank you.
Okay.
This concludes Starbucks third quarter fiscal year 2022 conference call.
Now disconnect.
Okay.
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