27-Jul-2021 Starbucks Corp.

[Pages:21]Corrected Transcript

27-Jul-2021

Starbucks Corp. (SBUX)

Q3 2021 Earnings Call

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Copyright ? 2001-2021 FactSet CallStreet, LLC

Starbucks Corp. (SBUX)

Q3 2021 Earnings Call

Corrected Transcript

27-Jul-2021

CORPORATE PARTICIPANTS

Greg Smith

Vice President, Finance, Starbucks Corp.

Kevin Johnson

President, Chief Executive Officer & Director, Starbucks Corp.

Rachel Marie Ruggeri

Chief Financial Officer & Executive Vice President, Starbucks Corp.

Belinda Wong

Chairman and Chief Executive Officer, Starbucks China, Starbucks Corp.

John Culver

Group President, North America and Chief Operating Officer, Starbucks Corp.

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OTHER PARTICIPANTS

Jeffrey A. Bernstein

Analyst, Barclays Capital, Inc.

Sharon Zackfia

Analyst, William Blair & Co. LLC

David E. Tarantino

Analyst, Robert W. Baird & Co., Inc.

Christopher Carril

Analyst, RBC Capital Markets LLC

John Ivankoe

Analyst, JPMorgan Securities LLC

Dennis Geiger

Analyst, UBS Securities LLC

John Glass

Analyst, Morgan Stanley & Co. LLC

David Palmer

Analyst, Evercore ISI

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MANAGEMENT DISCUSSION SECTION

Operator: Good afternoon. My name is Hector, and I will be your conference operator today. I would like to welcome everyone to Starbucks Coffee Company's Third Quarter Fiscal Year 2021 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. [Operator Instructions]

I will now turn the call over to Greg Smith, Vice President of Investor Relations. Mr. Smith, you may begin your conference.

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Greg Smith

Vice President, Finance, Starbucks Corp.

Good afternoon, everyone. Thank you for joining us today to discuss Starbucks' third quarter fiscal year 2021 results. Today's discussion will be led by Kevin Johnson, President and CEO; and Rachel Ruggeri, CFO. And for Q&A, we will be joined by John Culver, Group President, North America and Chief Operating Officer; Mike Conway, Group President, International and Channel Development; and Belinda Wong, Chairman and Chief Executive Officer, Starbucks China.

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

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Starbucks Corp. (SBUX)

Q3 2021 Earnings Call

Corrected Transcript

27-Jul-2021

filings with the SEC including our last 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 results in fiscal 2021 include several items related to strategic actions, including restructuring and impairment charges, transaction and integration costs, and other items. These items are excluded from our nonGAAP results. For certain non-GAAP financial measures mentioned in today's call, please refer to our website at investor. to find a reconciliation of those non-GAAP measures to their corresponding GAAP measures.

This conference call is being webcast, and an archive of the webcast will be available on our website through Friday, August 27, 2021. For your calendar planning purposes, please note that our fourth quarter and fiscal year end 2021 earnings conference call has been tentatively scheduled for Thursday, November 4.

Finally, I want to take a moment on behalf of the company to recognize the contributions of Durga Doraisamy, a Starbucks Investor Relations partner of 7 years, including as the Head of IR for the past 2.5 years. Durga recently left Starbucks for an exciting opportunity overseas, and we extend our deepest thanks for all she has done on behalf of the company, our partners, and our shareholders.

I will now turn the call over to Kevin.

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Kevin Johnson

President, Chief Executive Officer & Director, Starbucks Corp.

Well, thank you, Greg. I, too, want to wish Durga and her husband well as they begin a new adventure in London. Durga leaves the team and our investor community in great hands with you, Greg, and thank you for stepping in to lead Investor Relations while we search for a permanent replacement for this important role.

Well, good afternoon, everyone, and thank you for joining us today. As we celebrate Starbucks' 50th anniversary, we are reminded of the increasing premium on genuine human connection, which has always been at the heart of Starbucks. If there is any lesson we can take from this past year, it is that our promise to uplift the everyday through authentic human connection over coffee is enduring and has never been more valuable and sought after. As humans, we belong together, and Starbucks was built for this moment.

Now, with customer mobility increasing, we are at the beginning of what we describe as the great human reconnection. The reopening of markets is translating to incredible increases in demand for Starbucks as people are again on the go, reconnecting, and socializing with one another. Human connection is the very foundation of the Starbucks experience.

The differentiated experience we create for our customers, strengthened through the actions we've accelerated over the past year, enables us to meet our customers wherever they need us to be. That experience is core to who we are at Starbucks, and it drove significant momentum through Q3. That experience is also a direct reflection of the 400,000 green apron partners, who continue to make every moment right.

It is our partners who deliver the elevated and uplifting experiences for each of the millions of customers we serve every day. Our partners make the difference. They are the heartbeat of Starbucks, and for that I am incredibly proud.

Now let me take you through Q3, which is highlighted by record-breaking results, fueled by the continued strength of the Starbucks brand around the world. The impressive momentum Starbucks saw in Q2 accelerated through

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Starbucks Corp. (SBUX)

Q3 2021 Earnings Call

Corrected Transcript

27-Jul-2021

Q3, in which we delivered record revenue of $7.5 billion, up 78% year-on-year, and a record non-GAAP EPS of $1.01. Additionally, two-year comparable store sales improved sequentially, led by an incredible overall performance in the US, as well as significant net new store growth in China, where we reached over 5,100 stores during the quarter and the double digit growth and continued share gains that our channels business delivered in the at-home market.

Our performance globally reflects the strength of our diverse portfolio and the benefits of scale as we once again exceeded our expectations for the quarter despite inflationary pressures and ongoing pandemic-related restrictions in certain global markets. Our focus combined with our unwavering commitment to innovating and elevating the Starbucks experience as our key differentiator has proven successful time and time again. All of this gives us confidence to raise guidance for the balance of the year and further positions the company for solid longterm growth.

In the US, our momentum accelerated in Q3 posting year-on-year revenue growth of 90% and two-year revenue growth of 16%. Comparable same-store sales grew 83%, and importantly, two-year comp grew 10%. This is at the high end of our long-term annual comp-growth target of 4% to 5%. We posted these results even with mobility restrictions still impacting some US geographies, with industry-wide pressure in pockets of the supply chain, and with our in-store cafe seating not yet fully reopened.

Not only have we posted incredible results as we emerge from the pandemic, our internal research also confirms Starbucks has gained meaningful market share in the US. And the momentum we have created is sustainable. In fact, Starbucks' competitive share is the highest this year that it has ever been in the away-from-home coffee and tea category.

Simply put, our green apron partners are delivering an experience that customers are craving, and the growing opportunities to serve our customers with the unmatched experience Starbucks offers gives us resounding confidence in the strength of the brand and the growth potential ahead.

One powerful example of innovation that is fueling our momentum is our beverage portfolio which, when coupled with our unparalleled ability for customizing hand-crafted beverages, separates Starbucks from the competition. The investments we have made over the past few years innovating and expanding our coffee-forward cold beverage platform continue to boost sales and draw new customers to Starbucks.

We continue to see strong demand for Starbucks Cold Brew, Nitro Cold Brew, and Starbucks Refresher beverages while Iced Shaken Espresso alone contributed more than a third of the Iced Espresso growth in the quarter. The cold category represented 74% of beverage sales in Q3, growing 10 percentage points over the past two years.

With the wide range of beverage options both cold and hot, our customers love personalizing their drinks. Over the last two years, we have seen a meaningful increase in customizations such as adding cold foam or a shot of espresso. Additionally, alternative dairy offerings represent nearly 25% of milk-related beverage sales, up from prior year. These innovative offerings in cold and alternative dairy are particularly attractive to millennial and Gen Z customers and are aligned with our focus on the well-being of people and the planet.

With premium customization of beverages coupled with operational improvements, the growth of both hot and cold beverages in stores is enabling margin expansion despite some continued inflationary pressures, which Rachel will discuss in more detail. In addition to beverage platform innovation, extending the in-store experience with digital customer relationships continues to extend our reach, deepen engagement, and enhance the

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Starbucks Corp. (SBUX)

Q3 2021 Earnings Call

Corrected Transcript

27-Jul-2021

customer experience, further differentiating Starbucks and offering customers ever-increasing choice as to how they engage with the brand.

We again added over 1 million new active Starbucks Rewards members in the quarter. With over 24 million active members now representing 51% of all spend in our US stores and up 8 percentage points over pre-pandemic levels, our ability to engage has never been higher. More and more of these customers are embracing experiences that effortlessly fit their lifestyle. With drive-thru representing 47% of transactions and mobile ordering for in-store pick-up, delivery, or curbside at 26% of transactions, we are leveraging all channels to better serve our customers.

While it is very clear that our Rewards program has accelerated our recovery in a meaningful way, where Q3 really stands out and what adds to our confidence is the acceleration we saw in our non-Rewards customers. While Rewards spend grew at a rapid mid-teens rate quarter-over-quarter, for the first time in 11 quarters nonRewards spend growth outpaced SR spend. This is further evidence of the great human reconnection. The rapid reengagement of non-Rewards customers not only propelled our record results, but also underscores the strength of the brand and the growth potential ahead.

And finally, we continue to make meaningful progress to reposition our US store portfolio through trade area transformation, which is now nearly 80% complete. In the past 12 months, we have opened 554 new stores combined with in-store seating and drive-thru service. This portfolio repositioning and new-store formats have increased drive-thru store performance to 75% of our total US sales, a number that continues to rise as we increase efficiency.

The improvements and additions we are making to our portfolio today will provide benefits for years to come.

With our focus on the customer experience, new beverage innovation, and digital customer relationships, we continue to increase share of customer occasions, while also contributing to a rapidly growing market for all things coffee.

Moving on to China, where we posted a very positive result with year-on-year revenue growth of 45%. Remarkably, total revenue in China has grown 23% in just two years as we continue to play the long game. And we are on track to open more than 600 net new stores this fiscal year. In Q3 alone, we opened 162 net new stores that continue to deliver best-in-class new store profitability and returns.

We ended the quarter with 5,135 stores, and we are well on track to operate over 6,000 stores by the end of fiscal year 2022. In addition, we posted 19% same-store comp growth in Q3 and saw sequential acceleration of our two-year comp when excluding the impact of value-added tax.

Furthermore, we gained strong momentum with sequential improvement on every key metric on a two-year basis, including total revenue growth, store-traffic recovery, and margin expansion. The health of our business in China is strong, and we've never been more confident in the long-term growth opportunity.

In addition to significant new store growth and sequential acceleration of two-year comps in China, we are expanding digital customer relationships and engagement by creating new occasions and experiences that make mobile ordering even more convenient and personalized. This has resonated strongly with our customers in China, propelling mobile ordering to 34% of sales, significantly higher than the 23% in the prior year and more than double pre-COVID levels.

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Starbucks Corp. (SBUX)

Q3 2021 Earnings Call

Corrected Transcript

27-Jul-2021

Starbucks Rewards continues to aggressively expand our digital ecosystem across major platforms, driving 90day active members to an all-time high of 17 million, a 4% increase over previous quarter and a 71% increase versus prior year. Gold members, a very important cohort, are engaging Starbucks at pre-pandemic levels.

Our performance in China is a testimony to the unparalleled strength of the Starbucks brand and our enduring relationship with our Chinese customers. Our rapidly growing store footprint, market-leading digital ecosystem and customer engagement, robust innovation pipeline, and the enduring love and loyalty for the Starbucks brand in China are all unmatched.

I have full confidence in the strength of the Starbucks brand in China and across all our international markets. There should be no misunderstanding of how big and robust our business in China is and will be. These are still early days, and our strategies are clearly working. Starbucks is uniquely positioned for success in China well into the future.

With phenomenal strength and growing momentum in our retail business, let me now move on to our channel development segment that also continues to exceed expectations. Over the past three years, we have made significant progress expanding our reach and amplifying the Starbucks brand through CPG, single-serve coffee, ready-to-drink, and food service. I attribute our success to the power of the Starbucks brand, the bold innovation that attracts new coffee lovers into our categories, and the caliber of our strategic business partners globally.

In Q3, Starbucks retained our number one brand position in total US at-home coffee and further expanded our leadership position versus other brands. The Starbucks brand continued to increase share in the total US category, impressively adding 1 percentage point over the prior year despite lapping a strong comp.

The Global Coffee Alliance with Nestl? is a powerhouse, and we continue to see strong performance across all aspects of the key strategic relationship. Earlier this year, building on the success of the Starbucks by Nespresso platform, we expanded and introduced Starbucks by Nespresso on the Vertuo line, which is already exceeding six-month distribution and velocity targets. In addition, the combination of strong CPG performance combined with a steady recovery in food service gives us added confidence.

In ready-to-drink, Starbucks is the number one premium brand globally, with our North American Coffee Partnership with PepsiCo growing 19% in consumption and our international ready-to-drink business growing double digits in EMEA and China Asia-Pacific. These channels amplify our brand in more than 80 markets around the world, offering millions of customers at home and at work options that complement their Starbucks in-store experience. And just yesterday, we announced plans to reach new markets and grow our Starbucks ready-todrink portfolio with Nestl?, who will now serve markets across Southeast Asia and Latin America.

Our channel development strategy to amplify the brand while growing share of at-home occasions continues to attract new customers to Starbucks with unparalleled choice, while driving best-in-class returns.

The key takeaway from today's call is this. We look to the future with as much conviction as ever in our strategy, as this quarter represents the beginning of a multi-year tailwind for Starbucks that is powered by three factors.

First, the total coffee addressable market is large and growing rapidly. The market is expected to grow to well over $400 billion in size globally over the next three years. That represents a compound annual growth rate of 8% to 9% as the market rapidly recovers from the global pandemic. Second, within this large and growing market, consumer preferences continue to shift from mainstream robusta coffee to premium arabica coffee where Starbucks is the leader. Third, and perhaps most important, Starbucks has rapidly adapted to new consumer

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Starbucks Corp. (SBUX)

Q3 2021 Earnings Call

Corrected Transcript

27-Jul-2021

behaviors and strengthened key points of differentiation. Our focus on the customer experience, relevant new beverage platforms, and expanded digital customer relationships are translating to increased consumer preference and deeper customer engagement.

The combination of a highly differentiated brand experience, a continued consumer shift to premium arabica coffee, and a large and growing addressable market is a powerful trifecta that provides our business with a multiyear tailwind. These factors, reinforced by the results of this past quarter, give us confidence that this is just the beginning of what is about to unfold.

And with that, I will turn the call over to Rachel, who will walk you through details of our Q3 results. Rachel?

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Rachel Marie Ruggeri

Chief Financial Officer & Executive Vice President, Starbucks Corp.

Thank you, Kevin, and good afternoon, everyone.

I'm thrilled to share with you the results of this milestone quarter, delivering record revenue and record non-GAAP EPS only four quarters after the depth of the pandemic. Over the past year, we have proven our ability to differentiate ourselves with the unique and personalized experiences we create for Starbucks customers whether in our stores, through our app, or down the grocery aisle leading to this quarter's impressive results.

Starbucks global revenue reached $7.5 billion in Q3, up 78% from the prior year, far surpassing the pre-pandemic quarterly record set in Q1 fiscal 2020 driven largely by the incredible performance in the US, our largest market. Q3 non-GAAP EPS was $1.01, up from the loss of $0.46 in the prior year driven by faster than expected margin recovery in the Americas due to sales leverage from lapping prior-year COVID-19 impacts and the benefit from continued strength in average ticket. Our Q3 EPS includes $0.09 of benefit related to discrete tax items, most of which was originally anticipated in Q4 as referenced on our previous earnings call.

The investments we have made in our business have made Starbucks stronger, more resilient, and positioned for long term growth. This powerful momentum gives us the confidence to meaningfully raise our EPS outlook for the full year, as I will explain later.

I will now take you through our Q3 fiscal 2021 operating performance by segment, followed by an analysis of our consolidated margin performance.

Our Americas segment which fueled our record quarter delivered revenue of $5.4 billion in Q3, 92% higher than the prior year primarily driven by an 84% increase in comparable store sales including 82% comp transaction growth. As Kevin mentioned, US comparable store sales growth reached 83% in Q3 driven by a material improvement in transaction comp of 80%.

Average store transactions continued to grow and ended the quarter at nearly 90% of pre-pandemic levels, presenting further opportunity to return to and grow beyond FY 2019 levels. As transactions have grown, we've maintained the strength in average ticket, up 1% over the prior year, remaining significantly elevated as many key post-pandemic consumer trends have continued. Growth of cold beverages and customization coupled with sustained strong beverage attach and record food attach in Q3 all contributed to the strong ticket and give us confidence in our ability to maintain a meaningful portion of the ticket gains over the coming quarters.

Americas Q3 non-GAAP operating margin expanded to 24.7%, up more than 200 basis points from Q3 of fiscal 2019 largely driven by sales leverage on our product and distribution costs, including waste favorability, the

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Starbucks Corp. (SBUX)

Q3 2021 Earnings Call

Corrected Transcript

27-Jul-2021

benefits of SKU rationalization over the prior two years, and favorable sales mix shift. Pricing and the benefits of trade area transformation also helped offset the sizeable investments in wages and benefits, as well as higher supply chain costs due to inflationary pressures. While we're thrilled with our margin performance in Q3, we expect it to moderate slightly in Q4 primarily due to the growing impact of inflation coupled with incremental investments critical to our continued growth, which I'll discuss in a moment.

Moving on to International, the International segment delivered revenue of $1.7 billion in Q3. Excluding a 10% favorable impact of foreign currency translation, the segment's revenue grew 65% over the prior year, reflecting a 41% increase in comparable store sales inclusive of a 5% adverse impact from lapping the prior-year VAT benefit. Strong sales growth from our international licensees as well as 8% net new store growth over the prior ? over the past 12 months also contributed to this growth.

Kevin spoke to our performance in China. In addition, the International segment performance was adversely impacted by virus resurgences in Japan with a state of emergency severely limiting consumer traffic during most of the quarter. It's important to remember that the vast majority of international markets in which we operate are behind the US in terms of both vaccination and mobility, so revenue recovery is predictably lagging in those markets. Still, our partners in every market remain focused on what they can control and what they do best. The moments of connection they are providing our customers during these challenging times will support growth as vaccination rates improve.

International non-GAAP operating margin rose to 22.5% from minus 2.7% in the prior year mainly driven by sales leverage from lapping the impacts of COVID-19 as well as store labor efficiencies across our company-operated markets and larger government subsidies. On a two-year basis, these temporary subsidies provide an approximately 200 basis point benefit in the quarter, boosting the segment's non-GAAP operating margin close to its pre-pandemic level of 22.7% in Q3 fiscal 2019.

On to Channel Development, revenue was $414 million in Q3, a decline of 7% from the prior year primarily driven by Global Coffee Alliance transition-related activities including a structural change in our single-serve business. When excluding the approximately 20% adverse impact of these transition-related activities, Channel Development's revenue increased by 13% in Q3 mainly driven by growth in the Global Coffee Alliance product sales and our ready-to-drink business.

The segment's non-GAAP operating margin expanded to 46.7% in Q3 from 35.6% in the prior year. Normalizing for the 700 basis point impact of Global Coffee Alliance transition-related activities I just mentioned, Channel Development's operating margin expanded 410 basis points in Q3 driven primarily by the strength of our ready-todrink business. We expect the impacts from the transition to be substantially completed by the end of fiscal 2021.

Finally, at the consolidated level, our non-GAAP operating margin was 20.5% in Q3, up from minus 12.6% in the prior year. The year-over-year increase in our operating margin for Q3 was primarily driven by sales leverage across the P&L as we lapped COVID-19 impacts and related costs as well as pricing in the Americas. These were partially offset by additional investments in retail store partner wages and benefits, which remain a strategic priority for us to support our world-class partners.

Given the strength of our performance in Q3 and the optimism we have for the fourth quarter, we're pleased to update our guidance across a number of key areas. We expect the momentum we have seen in the US underpinned by the ongoing great human reconnection to continue, and as a result, we expect both Americas and US comparable store sales growth in Q4 in the range of 22% to 25%. This corresponds to a two-year comp range for Q4 of 11% to 13%, reflecting further sequential improvement from an already strong level of 9% in the

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