Starbucks Corporation — 2024 Q2
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Good afternoon. My name is Diego, and I will be your conference operator today. I would like to welcome everyone to Starbucks' Second Quarter Fiscal Year 2024 Conference Call. [Operator Instructions] I will now turn the call over to Tiffany Willis, Vice President of Investor Relations and ESG engagement. Ms. Willis, you may begin your conference.
Welcome and good afternoon, and thank you for joining us today to discuss Starbucks' second quarter fiscal year 2024 results. Today's discussion will be led by Laxman Narasimhan, Chief Executive Officer; and Rachel Ruggeri, Executive Vice President and Chief Financial Officer. And for Q&A, we'll be joined by Belinda Wong, Chairwoman and Co-Chief Executive Officer of Starbucks China; Brady Brewer, Chief Executive Officer of Starbucks International; and Michael Conway, Chief Executive Officer of Starbucks North America.
Thank you, Tiffany, and thank you all for joining us this afternoon. Let me be clear from the beginning. Our performance this quarter was disappointing and did not meet our expectations. Our Q2 total company revenue was $8.6 billion, down 1% year-over-year. Our global comparable store sales declined 4% year-over-year, driven by a negative 3% comp growth in North America led by declining traffic and a negative 11% comp growth in China. Our global operating margins contracted by 140 basis points to 12.8%, and our overall earnings per share declined by 7% to $0.68.
first, meet the demand we have across dayparts to drive future growth; second, launch even more exciting and relevant new products while maintaining our focus on core coffee forward offerings; and third, reach and demonstrate more value for our occasional and non-Starbucks Rewards customers.
00 p.m. and 05:00 a.m. when our stores are traditionally closed. During this pilot test, we doubled our business. Building off that success, we are aggressively pursuing options to build a $2 billion business over the next 5 years. Overnight opportunities are incremental and create a complement to our existing delivery business, which grew by double digits in the U.S. this quarter with both ticket increase and transaction growth.
Thank you, Laxman, and good afternoon, everyone. As Laxman shared, our performance this quarter did not reflect what we're capable of as a company. We have an incredible brand, loyal customers globally, a strong portfolio of highly profitable stores and in connection with our partners and customers that's unlike any other in our industry. We know that we can and we will do better.
global revenue growth of low single digits from our previous range of 7% to 10%; global and U.S. comps of low single-digit decline to flat, both from the previous range of 4% to 6% growth; China comp of single-digit decline from the previous expectation of low single-digit growth in Q2 through Q4; global net new store growth of approximately 6% from our previous expectation of approximately 7%. We continue to expect our U.S. store count to grow by approximately 4% and now anticipate approximately 12% store growth in China from our previous expectation of approximately 13%; operating margin growth of approximately flat from the previous expectation of progressive expansion. Finally, we expect EPS and non-GAAP EPS growth of flat to low single digits from the previous range of 15% to 20%.
[Operator Instructions] with that, our first question comes from Sara Senatore with Bank of America.
I guess it's a two-part question about trends that you were talking about. The first is that you talked about weather as a headwind, and then you said that lavender late in the quarter was one of the strongest launches you've had similar to PSL. But your exit rate -- it sounds like you're saying your exit rate was largely unchanged. So I'm trying to reconcile what would appear to have been headwinds that aren't reoccurring and then very successful innovation with the guidance and the exit rates. That's the first part.
Sara, thank you for your question. Let me address both of them by pointing to the underlying pressures that we see consumers face just in terms of what they have available to spend. So there's no question that if you take some of these transitory headwinds out, which, of course, are not an excuse in any way, and you look at the underlying headwinds particularly around the pressures that consumers face particularly with the occasional customer, what we're seeing is that's where the challenge is. It's a challenge with their traffic and it's their challenge with them coming into our stores.
And our next question comes from Brian Harbour with Morgan Stanley.
When you talk about the more occasional customer, I'm curious, is that often a younger customer? And I think the broader question is just is there any sort of brand resonance issue with perhaps some of that customer base? Do you think there's sort of a product resonance issue with them? Is there more that needs to be done than just kind of accelerating the pace of new products and some of the other drivers that you talked about in the near term?
Brian, thank you for your question. I think that if you look at our overall brand equity, it is and continues to be strong. If you look at the scores around value for what I get, strong. So if I look at the occasional customer, though, they're clearly making choices based on the economic pressures they face. What they look for from us is they look for variety. They look for the core. 50% of what we have in the afternoon, as an example, is coffee. So obviously, coffee is really important, and distinctiveness of coffee is very important. But they are looking for variety and they're looking for value.
Our next question comes from Jeffrey Bernstein with Barclays.
Great. A broader question on the global unit growth, just more broadly, your confidence or, I guess, the prudence in maintaining what still is outsized growth with the headwinds seemingly large. Just wondering how you can be confident that the current challenges you're facing aren't, in part, due to maybe saturation or cannibalization.
Let me first -- I'll take on the first question of global unit growth and hand over to Rachel to talk specifically about your question on China margins. Jeff, what we see is we see very strong cash and cash returns and I think what we've done both in the U.S. but also in the expansion plans that we have internationally. And I think what you see is -- what we're focused on is ensuring that we have reduced the cost of our stores and stores investment. We have done a very good job in bringing efficiency to that. And so as we expand, we see very good cash-on-cash returns.
And if I would just add to that, when we look at the guidance that was given around our new store growth, particularly as it relates to China, that's really a very deliberate decision that we took to be able to increase the number of stores that we were opening in lower-tier cities and new counties where we see even stronger returns. So broadly, our returns are quite attractive, but they're even stronger in those lower-tier cities and the new counties. And as a result of that, that shift actually impacts our development pipeline. So there's a timing impact in terms of new store growth. So that's why we're at 12%, which we think is still a very strong growth and indicative of the opportunity that we see
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And our next question comes from David Palmer with Evercore ISI.
First, I wanted to ask a clarification. You mentioned in your prepared remarks that you viewed some of the issues in China as transitory. I think you were speaking more about the competition than you were about the consumer with that comment. I think you mentioned something about a shakeout. I was wondering if you could double-click on that for us, what you're maybe seeing that would make you think that the environment there would be -- competitively would be a transitory one and they would get better that way.
I think we had some technical problems in hearing you, but let me just try and recap the question. Your first question was on competition in China and the comment around the shakeout that we are starting to see. And the second comment was on beverage pipeline.
Our next question comes from Sharon Zackfia with William Blair.
I guess I'm trying to think through the sequencing of how we got here today. And it seems like in October and early November at the analyst meeting, demand was not a problem in the U.S., and I hear you saying that you have a lot of unmet demand. But can you kind of help us do a hindsight on how these issues have come to a crux so quickly, just 4 or 5 months hence since those kind of very ambitious goals that were given?
Thank you, Sharon. I think that if I look at the headwinds that we see in the market, in particular with the consumer and the pressures that they face, I think that they were sharper and more accelerated than what we expected. I think in hindsight, if I look at the situation in China, while long-term growth potential is sort of picking, we're committed to the long term in China. The recovery has been choppy. But I think what we've seen, particularly since that period is we've seen more intense price competition than what we expected. None of that takes away for the long term, but it's clear that what we had this quarter was tough.
And our next question comes from Peter Saleh with BTIG.
Great. I did want to ask about the Siren System. This was the focal point of the Investor Day a couple of years ago, and it seemed like it was put on the back burner for a little while, but now it seems like you're talking more bullish about this system going forward. So can you just give us an update? I think last we heard, it was going to be rolled out to less than 10% of the stores this year. What is the strategy now? And how does this help solve some of the issues you have? It sounds like some of the issues that you have are more in the supply chain and not necessarily within the four walls of the stores.
Peter, just to respond to your question, first of all, the Siren System was never put on the back burner. In fact, we're on track to having the Siren System installed in less than 10% of the stores, much as we committed. So it's on track.
Our next question comes from Lauren Silberman with Deutsche Bank.
One quick -- a follow-up and then a question. First, can you just talk about the cadence of U.S. comp throughout the quarter? I know you mentioned lavender was extremely successful. It doesn't seem to be showing up in the comp just given the commentary on the exit rate. So just help us understand the performance of new products and whether that's driving incremental customers you're targeting.
Do you want to take that one, Rachel?
Sure. Yes. Thank you, Lauren. I'll start with the comp and what I spoke about in my prepared remarks about the exit rate. And lavender was quite successful for us. As you heard in Laxman's prepared remarks, what we are encouraged by is that lavender both to what our customers, particularly Gen Z and Millennial customers, are asking about, which is more new more often and a broader offering, so offering, meaning coffee, non-coffee, food, healthier choices. And so we hit squarely with that with lavender by having particularly our most popular offering in lavender was the Iced Lavender Matcha Latte and so that shows that when we innovate well, we exceed our own expectations.
Brady, on loyalty?
Thank you, Lauren. You talked about the year-over-year increase but quarter-over-quarter declines of Starbucks Rewards members. And I think, just to be clear, that is in terms of 90-day frequency, so we still have a very large population of SR members. So it's about frequency of those customers.
Our next question comes from John Ivankoe with JPMorgan.
Two parts if I may. I heard the word misinformation and I think some improving maybe scores around that. So I just wanted to get a sense how much of an opportunity in terms of sales lost that you think correcting this information might actually mean for Starbucks. I don't think you've quantified that, but that would be helpful.
John, thank you for the question. I think on the question about misperception, misperception did have an impact on our business [indiscernible]. We haven't been -- we don't have a quantification for that. But what we do know is that our brand equity, the stores and the investment involved in the brand have certainly helped spending with overall perception of our brand [ we spend every year ].
And our next question comes from Andrew Charles with Cowen & Company.
I know you're committed, of course, to the tenets of the reinvention plan. But in light of the current environment and caution of U.S. and China consumer, can you level set the long-term earnings algorithm introduced November around guidance for 5% same-store sales and 15% plus EPS growth? Does that still apply to 2025 and beyond?
Andrew, thank you for your question. Everything we've seen, I know that we had a tough quarter. But everything we see in terms of the opportunities that lie ahead, as you look at the opportunities we have across [indiscernible], the innovation that we [ see ] in terms of the pipeline going forward [indiscernible] beyond. If you look at the productivity opportunities, the store count opportunities [indiscernible], we believe we'll be back [indiscernible]. And we see no change in the long-term outlook that we set earlier in this [ business ].
And the last question comes from David Tarantino with Baird.
My question is on the value strategy that you laid out and the need to check traffic or track traffic in a tough environment. But I'm just wondering how you balance that with protecting the long-term health of the brand. Starbucks has always been a very premium brand position and sort of training some of these occasional users to come in on discount might have some detrimental impact. So I'm just wondering how you balance those 2 things and the strategy that you have.
Thank you for your question. [indiscernible] and we have no intention of like going across the board and [indiscernible] what we are doing is we are [indiscernible] the fact that as [indiscernible] levels of [indiscernible] our brand overall right now [ that for what I can ] is still very strong [indiscernible]. So we feel very good about that. And this is more about how we [ move ] and how we [ manage ] customers, particularly those that don't [indiscernible] that is what we intend to do.
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That was our last question. I'll now turn the call over to Laxman Narasimhan for closing remarks.
Thank you for joining us. We had a tough quarter, but we have a clear action plan that the management team and I are [indiscernible] thank you for joining us, and we appreciate the time you're taking this afternoon.
Thank you. This concludes today's conference. All parties may disconnect. Have a good day.