Q2 2023 Starbucks Corporation Earnings Call
Speaker 2: Good afternoon.
Speaker 2: My name is Diego and I will be your conference operator today. I would like to welcome everyone to Starbucks. Second quarter.
Speaker 2: fiscal year, 2020 and 23 conference call.
Speaker 2: All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session.
Speaker 2: If you would like to ask a question, simply press star, then the number one on your telephone keypad.
Speaker 2: If you would like to withdraw your question, press the star then the number 2 on your telephone keypad.
Speaker 2: I will now turn the call over to Tiffany Willis, Vice President of Inressor Relations. Miss Willis, you may now begin your conference.
Speaker 3: Good afternoon everyone and thank you for joining us today to discuss Starbucks second quarter fiscal year 2023 results. Today's discussion will be led by Luxemann Narasimann, Chief Executive Officer Rachel Wajary, Executive Vice President and Chief Financial Officer.
Speaker 3: And for Q&A, we'll be joined by Brady Brewer, Executive Vice President, Chief Marketing Officer. Frank Britt, Executive Vice President, Chief Reinvention Officer. Michael Conway, Group President of International and Channel Development. AJ Jones II, Executive Vice President and Chief Communications Officer of Public Affairs. Sarah Trilling, Executive Vice President and President of Starbucks North America. And Belinda Wong, Chairwoman and Chief Executive Officer of Starbucks China. This conference call will include forward-looking statements, which are subject to various risks and uncertainties.
Speaker 3: that could cause our actual results to differ materially from these statements. Any such statement should be considered in conjunction with cautionary statements and our earnings release and risk factors discussed in our filings with the FCC, including our latest annual report on Form 10-K and quarterly report on Form 10-Q .
Speaker 3: information.
Speaker 3: GAT results in second quarter fiscal year 2023, and the comparative period includes several items related to strategic actions, including restructuring and impairment charges, transaction and integration costs, and other items.
Speaker 3: These items are excluded from our non-gat results.
Speaker 3: All numbers referenced on today's call are on a non-gap basis unless otherwise noted or there is no non-gap adjustment related to the metric.
Speaker 3: For non- GAAP financial measures mentioned in today's call, please refer to the Ernie's release and our website at investor.starbucks.com to find reconciliation of those non- GAAP measures to their corresponding GAAP measures .
Speaker 3: This conference call is being webcast and an archive of the webcast will be available on our website through Friday, June 2nd, 2023.
Speaker 3: Also for your calendar planning purposes, please note that our third quarter fiscal year 2023 earnings conference call has been tentatively scheduled for Tuesday, August 1, 2023.
Speaker 3: Now, before I turn the call over to Luxembourg, I want to mention that our prepared remarks for today's call will run approximately 40 minutes, which is longer than what we plan for future calls.
Speaker 3: But we thought it would be beneficial to give Luxemann ample time to provide his observations as our new CEO .
Speaker 3: And now with that, I'll turn the call over to Lakshman.
Speaker 4: Thank you, Tiffany, and good afternoon everyone.
Speaker 4: It's both a great privilege and responsibility to serve as Starbucks CEO .
Speaker 4: both a great privilege and responsibility to serve a Starbucks CEO . On behalf of the Board of Directors,
Speaker 4: and our Starbucks partners.
Speaker 4: I'd like to thank Howard Schultz for his leadership of the company over the last year. Howard's return in April of 2022 came at a pivotal moment for the company and with great personal and family sacrifice.
Speaker 4: And I want to personally thank Howard for his over 40 years of ingenuity, creativity, service, and enduring love for a company and the iconic Starbucks brand.
Speaker 4: and for his willingness to always lean in in service of our partners and customers.
Speaker 4: Since joining in September .
Speaker 4: The company has given me a uniquely designed program to fully immerse myself in all aspects of our business. The program involved spending time in our stores, distribution centers, roasting plants, support centers, and on our own coffee farm in Costa Rica. And I have traveled to meet our partners and business leaders in several international markets across Asia, Latin America, and Europe . I would have formerly ran the company through the second quarter, my immersion exposed me to all aspects of day-to-day leadership responsibilities.
Speaker 4: I have learned about the company through the eyes of my founder.
Speaker 4: and we will update you with these official plans into your course. Let me start today's call by sharing my overarching observations. The progress and momentum from our reinvention and the opportunities ahead for Starbucks. A ratio will then walk you through the details of our second quarter fiscal year 2023 performance. We will then open the call for Q&A. What you can take away today is confirmation that we are well positioned to continue to unlock value for all our stakeholders. My first observation is that Starbucks is uniquely in the business of human connection. Since our earliest days we have been a brand that brings people together.
Speaker 4: from the vantage points of serving customers in stores and in drive-through windows.
Speaker 4: point of serving customers in stores and in drive-through windows. Many are coming to us.
Speaker 4: for connection with others. There is no doubt Starbucks has conventionally been the main stay meet-up spot.
Speaker 4: beverage or food occasion. As a world in a crisis of disconnection where loneliness, division and polarization have become far to common, the everyday ritual of coffee is a powerful way to make connection happen with others and with yourself.
Speaker 4: Starbucks delivers connection no matter how you visit us, in stores, drive-throughs or digitally. We are there to provide this connection, any place, any time.
Speaker 4: That brings me to my second observation.
Speaker 4: I've worked side by side with our partners in our stores, and have experienced firsthand how our stores and our operations are still evolving to meet the demands of our customers. There is more work to do to tailor our stores to the demand that we see, advance our technology, enhance how we innovate our equipment, and also more fundamentally how we get back to focusing on fundamental operations and executing better. A priority that is evident with my deep engagement over the last several months across supply chain technology, reinvention, store development, store operations, marketing, and product.
Speaker 4: Take for example the SIREN system that we showcased at investor day.
Speaker 4: This is one example of how we can continue to do more to better support our stores and into our partners.
Speaker 4: To strengthen our health, we need to think of our businesses having fears of the front.
Speaker 4: To strengthen our health, we need to think of our business as having fears at the front with a factory in the back.
Speaker 4: Our field is aware our store partners are focusing on their craft and delivering an elevated experience to our customers.
Speaker 4: To simplify the store part of experience and drive greater productivity within and beyond the store level, we see significant efficiencies in our supply chain, support systems and processes. This is what I mean by our opportunity to strengthen our factory in the back.
Speaker 4: Let me give you a few examples.
Speaker 4: Today our store delivery is involved a high touch one size fits all model.
Speaker 4: We are out of stock on more items than we would like. Through segmentation and a format-specific approach, we will be able to lower costs, while creating a better experience for our partners.
Speaker 4: and ultimately for our customers. We also have abundant opportunities to optimize what we buy across several areas.
Speaker 4: our customers. We also have abundant opportunities to optimize what we buy across several areas, as well as opportunities.
Speaker 4: In how we buy it. Currently we have over 1,500 cup and lid combinations across our network.
Speaker 4: As we streamline, we will create a portfolio of fewer, most sustainable and less costly cups, while further simplifying operations in our stores.
Speaker 4: All of these opportunities, but they live a top line growth and margin expansion and create long-term value.
Speaker 4: My third observation is that we are a company that strives to be different.
Speaker 4: And we are now operating in a different kind of world.
Speaker 4: One thing that has stood out to me here at Starbucks is our culture. Since my first day it has been clear that Starbucks' culture is like that of no other company.
Speaker 4: There is a strong partner first mentality that is both coped down and bottom up.
Speaker 4: At the same time, the world in which we operate is evolving. There is clear opportunity to build stronger capabilities, drive even deeper engagement, and adapt a global mindset. With that in mind as a leadership team, we fully acknowledge the need to evolve and modernize our brand, our business.
Speaker 4: our capabilities and our culture to meet the needs of an ever-changing world. We are therefore refounding the company and as part of that we are getting back to its basics.
Speaker 4: You already know about our invention.
Speaker 4: We've also just recently introduced a new mission in set of promises as a contemporary expression of our mutual success.
Speaker 4: Our mission is this, with every cup, with every conversation, with every community, we nurture the limitless possibilities of human connection.
Speaker 4: The rollout of this work across the globe is well underway. It is driving conversations at all levels within the company and is being met with overwhelmingly positive reception.
Speaker 4: and the capacity for much more. We've only just scratched the surface of what we can accomplish with this iconic brand company. We see significant growth headroom and the opportunity further separate Starbucks or others. We also see opportunities to expand margins while continuing to invest in the business for the long term. With that, let me turn to our second quarter performance. The company exceeded expectations in Q2 fiscal year 2023 by nearly all measures, delivering strong results across the broader Starbucks portfolio. Our performance, including continued success in the US and international markets, as well as the recovery we've been seeing in China.
Speaker 4: can be attributed to the strength of the global brand, relevant innovation in our product stores, and powerful execution by our partners.
Speaker 4: Let me first start globally and then with North America and the US.
Speaker 4: North America delivered revenue growth of 17% in Q2, growing to 6.4 billion. We captured a remarkably 11% Comb growth globally, with 12% Comb growth in both North America and the US for the second quarter, driven by mid-single-digit growth balanced between transactions and ticket. On North America growth comes on top of 12% Comb growth in the prior year. We expect this demand to continue as we push the envelope with innovation.
Speaker 4: A recent example is the highly successful launch of Oliato and innovation how it identified and is personally led for us. In fact we have already reached an audience of 5 billion people since they were announced with the February Global Launch of Starbucks Oliato beverages making this one of the top five product launches in the last five years.
Speaker 4: Given the success we are seeing, we look forward to bringing this exciting new offering to more stores and more markets around the world this year. Scaled profitable innovation is one of the things that fuels our performance and is it continued area of focus. Our performance is a result of a near-perfect intersection of three things. One, our successful innovative beverages, such as our pistachio cream cold brew, that inspires the expanded use of modifiers.
Speaker 4: 2. Our in-demand food portfolio which resulted in record sales of our sous vide egg bites and breakfast sandwiches.
Speaker 4: And three, our attractive convenience capabilities, mobile order and pay, drive-through and delivery, we saw sequential improvement and now comes for 74% of Q2 US company-owned revenue.
Speaker 4: You can expect us to lean strongly on purposeful innovation to further capture the tremendous opportunity, both in what we do and in how we do it.
Speaker 4: Speaking of convenience channels, our 90-day active Starbucks Awards membership added more than 400,000 members in the quarter in the US, bringing our total membership to 30.8 million members.
Speaker 4: In addition, we've increased membership by 4 million Euro a year in the US, representing 15% growth.
Speaker 4: Rewards members account for 57% of US company-operated revenue in Q2, which marks the highest contribution on record and represents growth of 3% on a year-over-year basis.
Speaker 4: We are excited about a growth in active rewards members as it's a contributing factor in consistent amount.
Speaker 4: We have been a vanguard in this area, and you can expect us to further invest and lead. An example of that investment is Starbucks Connect, which is now in over one third of our US licensed stores, giving our customers even more opportunities to engage with our brand. With such a diverse portfolio across our US licensed locations, such as hotels, airports, and other retailers, coupled with increasing offerings of convenience, we are able to capture further demand, evidenced by revenue in the quarter up 25% year over year, supporting our strategy to meet and serve our customers wherever they are.
Speaker 4: We are pleased with the multifaceted progress to date.
Speaker 4: For example.
Speaker 4: Barista turnover reduced by over 9% from a high in March Q2 fiscal year 2022, leading to fewer near-hives per store. We've been able to increase the average hours per barista per week by 4% year over year, a metric we know is one of the many meaningful inputs in achieving the desired compensation of our barpas.
Speaker 4: Clearly, partner scheduling is a real opportunity for us, and we are laser focused on it.
Speaker 4: Additionally, items per labor hour, a metric which reached a record high in December 2022, continued a strong pace into and throughout Q2 despite seasonal trends. This demonstrates increased productivity in the midst of strong volumes, all while partner engagement and customer connection scores stabilized. The rollout of handheld cold foam blenders
Speaker 4: Supporting customization demand commenced in the quarter, with completion targeted for third quarter. Just in time to support our summer demand as the desire for cold form customization continues to grow.
Speaker 4: The clover vertical brewers also began to roll out in the squatter and will be in nearly 40% of our company operating stores across the US by the end of this fiscal year. The vertical offers our customers a freshest cup of brewed coffee.
Speaker 4: point of innovation and the progress against our reinvention is our Q2 margin in North America of 19.2 percent a 200 basis point expansion year over year.
Speaker 4: We have more to do to reinvent our business.
Speaker 4: Though we have further opportunity ahead, we are proud to see that our strategies are working and momentum is building.
Speaker 4: Moving on to international, we are pleased with the strength and growth across our broader portfolio. Q2 revenue is $1.9 billion, up 9% for the prior year, and up 19%, excluding 10% impact on foreign currency translation, representing our third highest quarterly revenue.
Speaker 4: due largely to China's fossil and expected recovery. We also achieved the highest ever quarterly system sales internationally, and we delivered a company-operated 7% COMP driven by transaction growth, spotlighting demand.
Strong comms were also captured across the regions outside of China with markets like Japan and the UK both posting double-digit comms for the 8th consecutive quarter.
We are very pleased to see our international store strategies working. In the quarter, our net-use stores grew by 363, representing 8% growth year-over-year. As we look ahead to the end of the fiscal year, we will reach 20,000 stores across the international segment on pace with the growth strategy we outlined at investor day.
We expect China to remain on track to achieve a 13% net new store growth target for this year. Additionally, Asia Pacific, EME and Latin American markets are also expected to contribute meaningfully, becoming an area further rampages and a more significant contributor to our overall global growth.
Moving on to China, Q2 mark the significant turning point when we finally began to emerge on three years of unprecedented COVID disruptions embarking on the recovery journey that we have envisioned.
We saw robust recovery in Q2, reinforcing the resilience of our partners, the strength of our brand and the close relationships that we have built with our customers. We experienced faster than expected recovery, closing the quarter with nearly $800 million in revenue, up 3% for the prior year.
and up 11%, excluding the 8% impact of foreign currency translation. Conft growth of 3% marks the first positive con since the third quarter of fiscal year 2021. Importantly, we accelerated our store development in the quarter, opening 153 net new stores.
more than doubling the net near stores in the previous quarter. We now operate over 6,200 stores across 244 cities, giving us a track to meet our goal of 9,000 stores by 2025.
Our bold decision to continue opening new stores at the past three years, despite COVID disruptions and mobility restrictions, is paying off as they continue to deliver returns and profitability. Further accelerated recovery is a rapidly expanding army channel business.
Starbucks delivers achieved 21% year-on-year growth to make up 23% of the sales tax.
While overall mobile ordering reached 47% of sales, 4% of the prior.
It is highly incremental and interwoven into a customer's lifestyles.
Our attractive portfolio supports the increasing demand, but he got in the position of strength to capture opportunities, China transitions to the next phase of recovery.
While we don't expect a straight line of recovery, we are confident in our long-term opportunity. We look forward to serving our customers with the elevated experience only Starbucks can deliver. Now, let me wrap up the segment with forms for channel development.
Our Starbucks brand and successful partnerships continue to fuel the success of our channel development business with revenues of over $480 million in the quarter, up 4% year over year.
Our UF at-home coffee continues to resonate with customers.
as a winning the seasons with a well-received promotions and product launches.
In terms of ready to drink, Starbucks has outgrown the category in sales growth for two consecutive quarters and remains the number one brand in the US.
To continue this trend, we launched a much anticipated pink drink and paradise drink, which have already been met with overwhelming excitement. Before I pass the call over to Rachel, I want to again extend my gratitude to our partners, our leadership team and to Howard for the significant progress we have made as a company of these past year. I also want to...
to reinforce my confidence in our reinvention. The work underway to re-found our business, brand and culture, and our position to fully realize the limitless potential of Starbucks. The work underway to re-found our business, brand and culture, and our position to fully realize the limitless potential of Starbucks.
For our long-term sustainable growth, we will look to discover ways to first, further elevate the brand by getting the basics right.
operating our stores well and with a beverage forward food attached focus for redeformation.
Second, build on our leadership position in digital by scaling and introducing new and relevant customer experiences. Third, evolve to a more global presence for our business and for our brand. Fourth, work to become less wasteful and move with greater speed.
With a reinvention plan driving progress against our business goals, a contemporized mission and a brand differentiated with human connection are a moment of strengthening the business overall. Our focus on delivering elevated experiences will continue to set us apart. As I look to close my remarks for the call, I want to reaffirm our guidance for the air, reflecting my optimism for our future, even while recognizing we are operating in a challenging environment.
I have great confidence in our leadership team and our partners as we carry on this journey together. We continue to build our plans for the medium to long term to recognize our limitless long-term growth potential. I could not be more excited, no more grateful for the opportunity to build upon Starbucks' iconic legacy and shepherd in a new era for the company.
With that, I'll now turn it over to Rachel to discuss our Q2 fiscal year 2023 results in greater detail.
Rachel? Thank you, Luxemann, and welcome to your first Starbucks earnings call. And good afternoon, everyone.
I'm so proud to discuss our outstanding Q2 performance, underscoring strength in both pop line and margin globally. We delivered double-digit comp in all company-operated markets, excluding China, as well as positive comp in China driven by better than expected recovery and saw continued strength in our licensed markets. This momentum was made possible by the investments we are making in our stores and partners through Sara
and allowed us to continue unlocking capital to reinvest in our business. As a result, our business and brand remain strong.
As we begin on this next step in our journey, I'm confident that our execution against our reinvention plan and broader strategies will progress us into our new era.
RQ2 consolidated revenues reached 8.7 billion.
slightly above our Q1 level and up 14% from the prior year, and up 17% excluding more than 2% impact of foreign currency translation. Revenue growth was primarily driven by 11% comparable sales growth.
but specifically given the seasonality pressures we typically experience in Q2.
Q2 consolidated operating margin expanded 130 basis points from the prior year to 14.3%, exceeding our expectations, primarily driven by sales leverage, including better than expected recovery in China, pricing, productivity improvement, and lapping prior year COVID-related pay.
The margin expansion was partially offset by investments in store partners, higher G&A costs in support of reinvention and inflation. U2 EPS was 74 cents up 25% from the prior year.
In addition to our strong global performance and better than expected recovery in China, this also includes an approximately three cents of one-time benefit from Starbucks rewards redemption to your changes in North America, which reduced the related liabilities.
In addition to our strong global performance and better than expected recovery in China, this also includes an approximately three cents of one-time benefit from Starbucks Rewards redemption tier changes in North America, which reduce the related liabilities. I will now provide segment highlights for Q2.
North America delivered revenue of $6.4 billion in Q2, another quarterly record and up 17% from the prior year. The growth was primarily driven by a 12% increase in comparable store sales, consisting of 6% and 5% growth in transactions and average ticket respectively.
as well as net new company-operated store growth of 4% year-over-year, further strengthened by the continued momentum of our licensed store business.
The segments outstanding performance was led by the U.S. Posting 12% comping Q2 with transaction and ticket equally contributing to the growth also bolstered by lapping the Omicron variant of COVID in the prior year. Remarkably, store traffic has surpassed pre-pandemic levels in our busiest day parts.
And even with higher levels of beverage customization and complexity, we were able to serve the surge in traffic as we unlocked incremental store capacity through reinvention. Starbucks Rewards Tender reached a record 57% of U.S. company-operated sales in the quarter, showcasing customer loyalty and connection and indicating a successful launch of the changes to our Star Redemption tiers.
We also continue to expand our store footprint across the U.S., reaching over 9,300 stores, with stores opened in the last few years, driving nearly 50% cash-on-cash returns despite the inflationary environment.
As part of our development strategy, we are committed to enhancing sustainability through greener stores with the program saving almost 60 million in annual operating costs in the U.S. alone through water savings and energy reduction when compared to historic store practices.
Our runway of growth, coupled with store-level cash returns and commitment to sustainability, is exceptional for a company of our scale, contributing meaningfully to our robust capital position and ability to continue reinvesting in our business.
US license store revenue sustained its momentum this quarter of 25% from the prior year with strengths across the portfolio and further supported by the rollout of Starbucks Connect as Lutrimans spoke about earlier, broadening our opportunity to reach our customers through our expanding network of stores. North America's operating margin was 19.2% in Q2, expanding 200.
A better customer experience or productivity are amplifying efforts field margin growth in the quarter.
A margin benefit of approximately 60 basis points was also captured in the quarter due to the re-evaluation of our Starbucks Rewards liability, which will not occur in the balance of the year.
Moving on to International. The segment delivered revenue of $1.9 billion in the quarter, also a Q2 record and up 9% from the prior year.
When excluding a 10% impact from foreign currency translation, the segment's revenue grew 19%, reflecting double-digit growth in all major markets, including China. The growth was driven by strength across our licensed businesses, a 10% net new company-operated store growth year over year.
and a 7% increase in comparable store sales from transactions.
Our international markets across the globe continue to demonstrate strong momentum. Excluding China, the segment's Q2 revenue grew 14% from the prior year, or up 25% when excluding an 11% impact of foreign currency translation.
Once again, our international markets, excluding China, collectively achieved double-digit comp growth driven largely by transactions.
Let me highlight the incredible performance of Japan this quarter, our third largest market globally, which surpassed 1,800 stores and delivered their eighth consecutive quarter of double-digit comp in Q2, as Lutchman mentioned earlier. The market also up-leveled its market by 1,000 stores,
Star Rewards program through introduction of a multi-tier redemption system designed to offer more customer choices and elevate the program economics. Subsequent to the quarter in April , Japan also became the third global market to introduce Aliato beverages, offering the innovative lineup at more than 60 of their select stores.
including the Starbucks Reserve Roastry Tokyo. While still early, our performance in this market, a market that embraces innovation, appears promising.
Shifting to China, China posted comp growth of 3% in Q2, meaningfully exceeding our expectations, including 30% comp growth in March as we began lapping heightened mobility restrictions in the prior year.
From the early weeks of January , when China emerged from peak affections and mobility restrictions were lifted in different cities, we saw broad-brace recovery across all trade zones, day parts, and city tiers.
This was fueled by a strong rebound in traffic as customers returned physically to our stores to enjoy moments of reconnection.
Starbucks Rewards active members rebounded 17.8 million by the end of Q2 and hit a new record high by the first week of Q3. The sharp, immediate rebound in traffic demonstrated the strength of our brand and the relationships we have built with customers.
For the remainder of the fiscal year, we will continue to face uncertainties such as changes in customer behaviors and the pace of international travel recovery as COVID in China enters a new endemic phase. Nevertheless, we feel confident Starbucks is well positioned for this next phase of recovery. Operating margin for the international segment was 17% in Q2, expanding 390 basis points from the prior year, mainly driven by sales leverage across markets, but specifically driven by the better than expected recovery in China, partially offset by higher store partner wages and benefits. Shifting to channel development.
The segment's revenue grew 4% from the prior year to $481 million in Q2, in line with our expectations, driven primarily by growth in the Global Coffee Alliance. Global Channel Development extends customer occasions beyond our stores to amplify and diversify the Starbucks presence around the world. Our newer at-home platforms.
the market leader in global ready-to-drink categories, with North America Coffee Partnership outgrowing the category and continuing to gain share for the past two quarters in a row.
The North America Coffee Partnership saw shared gains across platforms.
The North America Coffee Partnership shall share gains across platforms, and we're excited about our robust pipeline of innovation.
To name a few, we launched Frappuccino Mini Cans in late March to bring a perfect-sized treat to our consumers. We're also elevating our portfolio with bottled Starbucks Pink Drink and Starbucks Para-Sized Drink, which were inspired by popular handcrafted beverages in our stores and just hit store shelves in April .
Segment's margin was nearly 40% for the quarter, and we continue to expect Channel Development's margin to normalize in the mid-40s range towards the end of the year. Now moving on to our guidance for Fiscal 2023.
As Lechman discussed, we are reaffirming our guidance for the fiscal year, balancing our incredible momentum and optimism with the economic uncertainties we continue to face around the world. Let me provide some additional insights on our outlook.
First, in the U.S., a meaningful part of the 12% comp in the quarter reflected a lap of omicron in the earlier part of the quarter, which was incorporated into our original guidance for Q2.
US COMP has normalized as anticipated in March and into Q3, with expected annual COMP continuing to be in the guidance range of 7% to 9%. Second, similar to COMP, our Q2 North America margin also benefited from lapping a sizable amount of COVID pay in relation to Omicron, accounting for 120 beta...
Acknowledging the uncertain environment, we expect China Comp to improve in the back half of the year, driven in large part by the lap of mobility restrictions in Q3 of the prior year coupled with the continued recovery leading to low to mid single digit comp on a full year basis. Lastly, China Comp will continue to improve in the back half of the year, driven in large part by the lap of mobility restrictions in Q3 of the prior year.
Although China's Q2 margin was also stronger than expected, it benefited from the timing of certain investments. As we continue to ramp our operations in the balance of the year, we plan to resume investments required to drive sustainable growth over the long term.
Further, here are some points of clarification on guidance. Regarding the shape of margin, we continue to expect sequential margin improvement in both Crew 3 and Q4. We expect Q3 margin near the prior year level, with Q4 expanding meaningfully over prior year.
as we lap the significant investments in wages and benefits. Note the quarterly margin shape in Q3 and Q4 is not expected to mirror the prior year.
We also expect EPS to step up in the second half of the fiscal year, improving sequentially in Q3 and Q4. We expect year-over-year EPS growth in Q3 to be meaningfully lower than our fiscal year guidance range of 15 to 20%, with Q4 year-over-year EPS growth slightly above the high end of our guidance range.
portion of the G&A growth will reflect critical technology investments which we believe will fuel our reinvention and business growth. Importantly, as we conclude the first half of the fiscal year, our global performance is closely tracking to our original expectations as the significant unexpected headwinds in China were offset by strong performance in the U.S.
on our original fiscal 2023 outlook.
Lastly, despite the current interest rate environment, our balance sheet remains very healthy, supported by our strong cash flows and a measured financial policy targeting leverage below three times lease adjusted debt to EBITDA.
We are in an enviable position to continue to invest in our business, deliver on our shareholder return commitments, and retain financial flexibility in the face of current economic uncertainty.
In summary, here are key takeaways from my discussion today. One, our global business and brand remains strong, demonstrated by both top line and margin performance in Q2. We are brewing on all cylinders across our building blocks of growth, namely strong comp propelled by digital engagement.
unrivaled innovation, and engaged partners, store growth anchored by best-in-class cash returns, and margin uplifted by reinvention as it continues to gain traction.
Two, our fiscal year guidance remains unchanged, balancing our optimism with the economic uncertainties around the world. And finally, our new era is coming to life as we continue unlocking capacity and driving capital returns to reinvention.
The investments being fused into our business is centering us on our core, while increasing differentiation and building resiliency to help us realize our limitless future.
Before I close, I want to express my deep appreciation for our partners around the world, especially our Green Apron partners, for the critical role they played in achieving our success this quarter. Our future rests on the shoulders of many, and it's our collective unwavering commitment to serve our partners, customers, and all of those from farm to cup.
in the best way possible to allow Starbucks to deliver on our limitless possibilities. With that, we will open the call to Q&A.
allow Starbucks to deliver on our limitless possibilities. With that, we will open the call to Q&A. Operator.
As a reminder, if you would 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.
We'll pause for a moment to compile the Q&A roster. Our first question comes from John Ivanko, J.P. Morgan.
Hi, thank you very much. The question is on the US staffing environment, specifically the store level partners. It seems like that's where some of the biggest opportunity might really remain for this company going forward. I don't think I need to review second half of 21 great resignation, your own specific challenges with labor. Obviously.
importantly, you know how the current staffing and partner environment is being reflected in terms of overall customer service, in terms of the customer satisfaction and speed. So if we can just spend a couple of minutes as you see the current staffing environment and the opportunity maybe over the next year. Thank you. Hey, John , thank you for your question.
Firstly, I will give a bit of an overview and then I'll call on Frank and Sarah to provide their perspectives.
Firstly, Starbucks continues to be a brand with a very strong employee value proposition and we are able to attract a lot of applicants for the jobs that we have open.
As I mentioned in my prepared remarks, we're seeing growing stabilization in what we see in our front line. As I mentioned, we are seeing lower levels of attrition and greater stabilization in our retail talent. Additionally, as you look at the improvements that we are making in our scheduling processes,
Yeah, it is clearly an acute labor market environment and we are mindful of that. We have continued however to build on Lax's points to a distinguished self as a preferred employer of choice for frontline workforces and we view that through the lens of how do we create value for the partner as we continue to partner in building the company together.
Specifically in scheduling, we see scheduling as a significant opportunity as we continue to contour hours by store and by day part, and ultimately in service of getting our partners what their needs are relative to the shifts they would like to see week to week, as well as the hours they need week to week in service of their goals professionally and otherwise. And then finally I would say that we have a very robust agenda to continue programmatically improving the partner experience.
We can unpack some of the specifics on that, but this is part of the ongoing agenda for reinvention. We feel pleased with our progress, but we feel like there's significant opportunity to continue to create even more opportunities for them and their careers.
Sarah, any comments from your time in Storrs? I would just give one overlay. In addition to what's already been discussed, we put a tremendous amount of effort over the last quarter in bringing our teams together in formats that allow them to celebrate our mission, to build capability.
And it's paying off, you know, in terms of their engagement with the company. So that's one. In fact, just last week and this week, we've got partners gathering to focus at the store level all around connection and driving a different level of customer connection and customer service. I would also say that the investment.
that we've made in really the core of our business, notably coffee and the way that we're celebrating our Black apron partners, we're investing in partners going to origin and just more training to build competency around craft is also another area that's driving engagement with our partners at the store level and lastly community which is something.
that our partners care deeply about. We wrapped up our April month of service, and again, that was a great way to help our partners feel connected to something bigger and with mission and values at the heart of it. If I can add one more thing, I think we're seeing strong pickup in the program of tipping, that we have scaled across our stone network.
Thank you. Your next question comes from Sarah Senator with Bank of America. Great. Thank you very much. I just wanted to ask about the strength of the quarter, maybe in the context of other comments about both the near-term and long-term outlook. So on this screen it's requested to ask if the
just because some of the things Rachel mentioned, the COVID laps, I think would have been embedded in the outlook initially. And maybe in that same vein, Lexman's view that you are reinventing or re-founding the brand, not something I would typically associate with a brand that is putting up the kind of performance that we saw in the second quarter. So if you could just contextualize the strength of the quarter in your full year outlook and also...
the view about the sort of the the brain going forward. Thanks. Rachel? Sure, thanks Sarah. The way I look at it is we were incredibly pleased with the performance in Q2, but when you think about, as I shared in my prepared remarks, you know we benefited from the lap of Omicron.
as well as the one-time adjustment from the STAR liability, that was expected. So we expected that and that was driven in the comp that we saw in the quarter in North America as well as broadly. But in addition to that, while we recovered better than what we expected in China,
When we look out towards the balance of the year, we expect our average weekly sales in China to continue and increase to improve sequentially quarter over quarter, but at a more moderate pace than what we saw in Q2. We've already seen it start to moderate, and that's really driven by the fact that there's still some uncertainty in the overall environment from a recovery standpoint when you look at things like consumer behavior as well as
Thank you.
Your next question comes from Jeffrey Bernstein with Barclays. Great, thank you very much. Just looking out beyond this year, Rachel or Laxman, I'm just wondering how you think about the operating margins in the coming years.
Maybe framing it relative to pre-COVID levels. Back in the day, high teens were the norm. I'm just wondering whether that's still a realistic target.
if so, maybe by when or or perhaps Laxman that's just no longer the focus or It's just not necessarily attainable based on the outside inflation ongoing investments you're making in the business
Just wondering how you think about the top versus the bottom line balance there. Thanks very much. I think in terms of guidance on this call, our focus is entirely on this year. So we are confirming our guidance for this year.
I think as I mentioned earlier, as I've gone through the immersion and I've worked in various parts of the company.
There's no question what we see is we see headroom in terms of our top line.
We also see opportunities for us to improve margins over time. I gave a couple of examples in the prepared remarks about things that were apparent. We can buy different and we can buy better.
Our end-to-end supply chain has significant opportunities to reduce costs and improve availability. We can enhance our tech stack, both to lower costs and then actually reinvest it back in the tech stack to support the large digital push that we are making.
Our stores need to better reflect what is needed to meet the evolved demand from where they were initially designed. A beverage innovation is strong. Food could use more work.
and our innovation could be more purposeful and targeted. And these are the kinds of opportunities that I mentioned are the opportunities in the factory, in the back. We also have opportunities in the theater in the front.
So I think as you look at it, you know, clearly there's top line headroom and there's opportunities to sequentially improve margins. But in this call, we are focused entirely on confirming our guidance for this year.
Thank you. Your next question comes from David Palmer, Evercore ISI. Thanks. Wanted to get your texture on the China market and your message there. Your four year trend versus pre-COVID levels, your 24%
below where China's same-store sales would have been in this last quarter and and just doing the math on your commentary for the year would appear that your same-store sales would still be roughly that that amount below pre-COVID levels so the recovery would be kind of stalling out if we just assumed that low-to-mid single-digit comp for the year so
I know you said a lot about China, but I'm wondering, you know, what is the thought process behind that sort of sales and, you know, what color can you give behind it? Thanks.
Rachel and then we'll call on Billingdefer some commentary. Right. Thanks David. I think as we look at the remainder of the year for China as I had shared previously, we expect that our average weekly sales will continue to improve sequentially quarter over quarter. We also expect that our comp will approve.
especially as we lap the mobility restrictions from prior year. But when you think about the overall environment, you know, while we're encouraged by the fact that we're seeing strong traffic in afternoon day parts as well as on our weekends, which just speaks to a customer need to connect, there's still a lot happening in terms of the overall environment as it relates to recovery.
And so when we put all of that together and we think about that, when we look to the balance of the year, we expect it to continue to improve, but at a more moderate pace relative to what we saw in Q2. And that's what brings us to the full year guidance range of a low to mid single digit comp, which I think when you look at that does reflect momentum, but it also reflects confidence, especially when you look at
Last year we ended the year with a negative 24% comp on a full year basis and a negative 9% even more recently in our last quarter. So that's how we're thinking about recovery. We're very encouraged by many of the signs that we see, but there's a lot that we're navigating. And so we feel very good about the guidance we've given as we think about the back half of the year.
And with that, I'll turn it over to Belinda. Thank you. I'll just provide some colors on our recovery. China has finally turned a new chapter from pandemic to pandemic. And Q2 marks the start of our solid and broad recovery, and it's only the beginning. We see strongly bounded traffic and spray-till success back to our stores for reconnection and the third place experience our customers have long craved.
And we are best positioned for this moment because we are in a human connection business. And our unique third place in the Starbucks experience cannot be replicated anywhere else. And we achieved 30% cost in March and the strong momentum continues in Q3. We are firing on all cylinders to accelerate our top line and bottom line growth for balance of the year and beyond.
and we will leverage our market-leading store portfolio to capture the pent-up demand for reconnection, and we are ready to accelerate even faster our new store growth in the second half of the year. Our evolving, up-to-the-channel capability, the strength of our delivery business, our mobile order and pay, and e-commerce, all built in the past few years and ready to serve our customers for any occasion, anywhere, and anytime. Highly incremental. And in fact, our mobile order and pay business achieved the highest record sales in the mix of 24% in Q2.
We built strong operating muscle and agility to innovate and execute. We have the ability to adapt further with speed to meet new customer needs with disciplined execution in source. The enduring power and strength of the Starbucks brand and the deep connection we have with our customers and partners are all second to none. With that, our 60,000 partners in China are ready to capture the exciting growth ahead. Thank you.
Your next question comes from Peter Sala with DTIG. Great, thanks. I wanted to ask about the SIREN system. Laxman, I think you mentioned it briefly, but really didn't provide a lot more color on it. I know this was something you guys talked about in great detail at the Investor Day in the...
as the testing that is underway on the SIREN system. As you see, some of the nearer term equipment launches have happened and have landed on time. We have a very systematic approach to how we think about our equipment and the testing that we're doing, and I feel very good about the progress we are making on that system. So all systems go as far as we're concerned.
Sarah, I wonder whether you wanted to touch a little bit on some of the equipment launches that we've had so far. Yes, thank you. Happy to. I mean, specific to siren system, Laxmana, as you said, cold beverage as well as the food station incubation tests are complete and feasibility begins in Q3, right, for the rollout. And I think both of which, these stations have already shown measurable impact on both productivity as well as throughput and testing. So we're quite we're quite bullish on them.
And then overall, you know, absolutely, we're already seeing the benefits of the investments that we've made in equipment. We're serving more customers during our busiest day parks than we did pre-pandemic. And when I'm out in stores, you know, I certainly hear firsthand from our partners how the equipment is making the work easier. And it's evident in speed with service. You can see it in our drive-through times. And you can also see it importantly in our productivity numbers.
As we're thinking about summer and the weather is warming up around the country, some of the things that we've launched more recently called Bold Blenders as well as labors at that station specifically make it easier to serve customers and enable the innovation that's going to be coming. The last piece I'd call out that we're really excited about as it relates to our core, again, coffee is Clover Vertica. We all know waste and throughput. What other 200 concentrated, an 85% average Sayr SSayed N
are going to benefit favorably. But I think more important, we're putting coffee at the center. And our partners are incredibly enthusiastic about the offering that we'll give to our customers and the pride that they'll feel in terms of the quality that's in the cup. So very, very excited about that one as well. Great. Frank, the comment? Yes, Sarah. You mentioned productivity. I think it's probably worth highlighting that while we So this is has a lot to do with the 38 crew members because the amount of calls it gives to their carriers and other agents in their people remained constant that may seem unlikely inside Boots, but if you think through the Schweitzer and the metrics and sees that these are 22, you often notice that needs to be considered the same Leversteins. But general stock prices and reduced usability
all yielding tangible value and enduring value for our partners and for our customers. Thank you. The last question comes from Lauren Silberman, Credit Suisse. Thank you for the question and congrats.
Really strong US comps and traffic. Can you all unpack where the growth is coming from? So is traffic primarily coming from new customers or existing customers? Rewards members or more occasional customers? Then can you just give us an update on where you're running with transactions for store per day? Thank you very much.
Great, let me start with Brady. I think I'd love for you to give your perspectives on the question, please. Sure, yeah. In the quarter you saw in the U.S. business, an equal part in the comp between transaction comp and ticket comp. Of course, we were overlapping some bad weather last year, some Omicron surge, but really when we look under the surface of that too, as Rachel shared in her opening remarks, we
record customer counts for the quarter. When we look year over year, then we saw growth there, transaction comps growing in our busiest day parts. And when we get underneath the hood of that, it's really brand strength. We have growing affinity for the Starbucks brand. We saw some very good highs within the quarter for brand affinity.
We look at the relevance of the innovation, so our ice shake and espresso platform continuing to grow, our refreshers platform continuing to grow, which just reinforces our cold customized plant-based beverage strategy is just yielding continued growth. You heard Lakshman talk about pistachio cream cold brew. We launched Oliato in the quarter. So there's so much for customers to be excited about and giving them a reason to come to Starbucks.
And then lastly, I would just say the execution. You see our Starbucks reward membership, rewarding Starbucks for that with more of their visits. Now 57% of US transactions are from our rewards members. And what they're telling us is, as you heard me say before, they are finding a beverage they can't get anywhere else. And so all of those things compile into a great force of momentum for Starbucks. And we continue to be a strong brand that's poised for growth in the future. And I would just add Lauren to that, that you had asked about TSDs.
And we have seen our TSDs grow relative to pre-COVID levels. In fact, in our busiest day part, our morning day part, we have surpassed our pre-COVID levels. And that's in large part due to the momentum we're seeing in our reinvention. We're able to unlock capacity and better serve our customers and we're seeing that come to us.
as well as our non-SR members. So our overall customer count is increasing. Those customers are more engaged with our brand and we see that in terms of unit growth as well as increasing transactions and then overall ticket leading to the highest, second highest average weekly sales that we've seen, second only to last quarter, which was an all-time high. So we're incredibly encouraged by what we're seeing from an overall volume.
all for joining us today for our second quarter fiscal year 2023 earnings call. We appreciate your investment and your time.
Thank you. And with that we conclude today's conference call. All parties may now disconnect. Have a great evening.