Starbucks Corporation (SBUX) Earnings Call Transcript & Summary

Hi, it's John for JPMorgan. Thank you, everyone, for joining the Starbucks session this morning. Joining -- with Starbucks is Pat Grismer, the company's Chief Financial Officer, who I believe will start us off with some slides.

Thank you very much, John. I do appreciate the opportunity to participate in today's session. Before we do get started with our fireside chat, I do want to provide a quick update on our sales recovery in our 2 lead growth markets, the U.S. and China. So I'm going to first share my screen. So if you'll bear with me, that's set up here. And hopefully, you can see the slides. I will be speaking to these slides that will soon be posted to our Investor Relations website. So I'll lead with our standard cautionary language as I will be making some forward-looking statements. But starting with the U.S., our sales recovery is sustained, with comp sales improving from minus 14% in July to minus 11% in August, on track to achieve positive comps by the end of our fiscal second quarter in 2021 as we've previously outlooked. We've noted at the bottom of the slide some 2 year comps to normalize for some variability in prior year lap. The recovery, as you can see, is unfolding fairly steadily. Worth noting that now more than half of our stores in the U.S. have at least limited seating available. And we've seen that as we've progressively opened our ordering and sales channels from drive-through to entry way pickup to in-store ordering and seating, comps have improved, and they're continuing on that path. Looking ahead, we expect 3 key initiatives will fuel our future recovery in the U.S. First, the deployment of handheld POS at the drive-through. Second, the rollout of curbside pickup where we have convenient parking. And third, today, the launch of Stars for Everyone. We are very pleased with the upward momentum in our U.S. business, but we still have a ways to go to fully recover sales in the U.S. and the overall operating environment remains somewhat uncertain. So prudently, we foresee another 6 months of recovery as previously outlooked, but we're very pleased with our progress thus far, and we're very optimistic for the future. So moving then to our second lead growth market, which is our business in China, you can see that our business there is approaching full sales recovery. We've posted flat comps in August, up from minus 10% in July. Those numbers include a 4 percentage point benefit from a temporary VAT exemption. So we've also shown the numbers without that temporary benefit. We are still on track to achieve positive comps, excluding the VAT benefit, by the end of our fiscal Q1 in 2021, as we have previously outlooked. Like the U.S., we've noted here at the bottom of the slide, 2-year comps which show a steadier recovery and turned positive in August. Our future recovery enablers in China include: number one, the accelerated development of our convenient store at Starbucks Now; number two, increased digital customer engagement, which has grown through ongoing improvements to our digital platform, including the recent introduction of Starbucks Rewards multi-tier redemption. And third, ongoing leverage of our digital partnership with Alibaba, which includes delivery. Now there are some headwinds to our full sales recovery in China, and those are continuing lower levels of traffic at travel and transportation hubs as well as city center locations that are impacted by reduced inbound international travel. So I'm going to wrap up my opening remarks with some reminders about some upcoming key dates. We are set to report our fourth quarter and full year earnings on October 29, at which point we will also provide guidance for fiscal 2021. Now that will be a 53-week fiscal year for Starbucks instead of the normal 52 weeks as happens every 5 or 6 years. We will highlight the impact of the 53rd week when we do provide guidance. Looking further ahead, we will host our Biennial Investor Day on December 9, which will obviously be conducted virtually. So I am going to now stop sharing my screen here, we've reached the end of the slides. And John, at this stage, really happy to take your questions.

Yes. Thank you. So the August comp of down 11% in the U.S. -- I assume I can ask you a very specific questions. How many stores, if any, are still closed? And could you tell me again the percentage of stores that have limited seating? You said it was a -- I think you said half the stores have limited seating?

Yes. So currently, about 3% of our company-owned stores in the U.S. remain closed. Those are concentrated in central business districts and large metropolitan areas. And yes, more than -- about 50% of our stores that are open do have some form of seating.

And the stores, more than 50% have seating, 57% of your stores have drive-through. So I mean would it be more likely that a drive-through store would not have its seating open? Or is that just really -- is that like a market like California, for example, just trying to get -- suggest -- of course, where I'm going to get is does seating mean higher sales performance?

Yes. In drive-throughs, more often than not, we do have seating available, which is important because there are customers who would prefer not to wait in the very long drive-through lines. They can come into the store, place their order and collect their order and be on their way. Or if they like, they can sit and say where we have limited seating available. With respect to the drive-through locations, they're performing really well. They are already comping positively. The cafés that are concentrated in our central business districts, they're continuing to comp negative, those that are open. But as I mentioned before, a large number of those remain closed. But all of that is reflected in the improving sales comps that I've shared.

And how do you define CBD or urban? Obviously, I mean I think you're -- there could be a lot of kind of cross-definition here. But what percentage of your stores would you define as CBD, which for obvious reasons take the longest to recover, getting full mobility back, subway traffic, other things like that?

Yes. And the best way to think about it is, as you mentioned before, about 60% of our company-owned stores in the U.S. are drive-through. The remaining 40% are cafés. Of that 40%, about 1/3 are in central business districts. Not all of those are closed, but a fair percentage are, and those represent the 3% of the total company-owned system that remain closed at the moment. But what I think is important to highlight is that through the pandemic, we've seen customers change their behavior. So as increasing numbers of our customers are working from home -- that's why we have low levels of traffic in central business districts, but we are seeing very significant increases in customer traffic at our suburban drive-throughs. Customers have changed their behaviors. They are eager to reestablish their routines and find some measure of normalcy. They're visiting Starbucks closer to home. They're tending to visit a bit later in the day, and they're spending more when they do come. So as customers have modified their behavior, we've adapted to accommodate them.

So again this is very quick math. So 60% of your drive-through stores are positive. 60% of your stores have drive-throughs and that cohort is positive, maybe more specifically. That would suggest something like comps are down somewhere like 25%, maybe more for the non-drive-through stores. I mean is that kind of within your expectations at this point in the recovery? And is -- I'm using the word self-help, I mean for the lack of a better word. Is there anything that you can do to kind of pull -- basically pull up that lacking cohort, that you feel that was -- is within your control of the votes to basically the government kind of opening, people just getting back to work?

Here's how we think about it. There will be a cohort that will, for some period of time, be under pressure until the environment normalizes. We don't know when that will be. We're not waiting for that. And so we are rapidly innovating in order to capture new demand, new occasions that we didn't have before that tied to how customers are currently leading their lives, which is why we have moved quickly to open up new channels of distribution at our existing stores, primarily in the suburbs because there's significant latent demand, there's unmet demand. And so as we've seen customers change their behavior patterns, we've moved swiftly in order to capitalize on that, recognizing that for a cohort of our stores, it may be some time before we see volumes return to where they were before, and we're not waiting around for that. And then also, as we mentioned back in June, some stores in central business districts that were already lagging in their performance in the current environment just aren't going to deliver a level of performance that will warrant maintaining those operations. And so many of those stores form part of the roughly 400 stores that we said we would accelerate closure on in the next 12 to 18 months, and that process has started. So we are rapidly shifting our business in response to shifting customer behavior in the near term. And for the long term, and of course, another important part of that is the rapid innovation around our convenient retail store format, which is the Starbucks Pickup store, where we're looking to accelerate the pace of development in the coming year, and that will be focused in these urban centers.

Yes. I mean there was a letter that was sent to landlords saying just -- you basically get a [indiscernible] -- hey, Starbucks is obviously a big tenant, but you're not getting the walk by traffic, the commute traffic, what have you, that a lot of stores would have contemplated when you sign those leases. Are you having success in that, that 40% of nondrive -- let's just assume that, that's the case. The 40% of non-drive-throughs or maybe that 1/3 of CBD, is the 40% is kind of getting significant rent reductions? I'm sure when a landlord says, "Hey, when you tell -- when Starbucks leaves the street, the value of that street goes down." I mean are landlords kind of recognizing that and giving you the kind of terms that basically make a marginal decision? One, in fact, that you'll stay because they appreciate that you add value to everyone around you.

Well, John, you're absolutely right. We recognize the strength and the power of our brand and the prominent position that we have in retail. And so we are seeing success in those conversations with landlords, but it's not necessarily in the way that you might expect or that you've alluded to. That is, we're not seeing short-term rent abatement. What we are seeing is more favorable terms for existing locations and importantly, for new locations, because remember, we're still growing. Even though we're accelerating the closure of stores, we have a very robust new store development program focused on our drive-through assets, largely in the suburbs, and we're able to bring to bear the current environment to secure favorable rent terms or lease terms for those new locations as well as for, again, existing. So to give you some examples of the types of concessions we're seeing, we are securing additional parking spots. That's very significant because, in fact, we see curbside pickup as an important enabler, as I mentioned before, of our longer term recovery. Already, we're in about 800 stores with curbside pickup. We will more than double that number in the next couple of months. We're also securing early termination rights in our new leases, which is important because circumstances, as we've learned, can change, and we need to have the flexibility to exit as the situation warrants. And then finally, we're also riding into our current leases and new leases, provisions for rent relief in the event of new disruptions comparable to what we've experienced in the last several months. We didn't have that in our leases before. So I think we've been able to capitalize on the current environment in a way that is very helpful to our current operations and to our future operations, but not necessarily in the form of rent abatement per se.

Okay. Yes. I want to just re-hit -- I'm just flipping back and forth on my notes. This conversation is great, by the way. I didn't -- I mean I didn't know we were going to be able to get to such specific detail. Let's see -- sorry about this. So the 3 initiatives in the U.S.: handheld point-of-sale, curbside and Stars for Everyone. So let's focus first on the handheld point-of-sale. Is that someone that's standing in the drive-through? Is that, that there's an additional person in the store? So kind of explain what that is and how much of a, I mean, of a theoretical throughput enhancer that could -- of course being weather -- and is that an all-weather type of an event? Or it's like this kind of like the profitable solution across your store base?

So all great questions, John. We are currently in the process of refining our model for handheld POS, so we're currently piloting and refining our model through the testing that we're doing so that we can rapidly deploy this. But absolutely, we expect this to be a game changer for us in drive-through. Bear in mind that when Starbucks was first launched as a concept, it was not designed for drive-through. We added drive-through as consumers who are looking for more convenience. But the fact is that given the profile of our menu, with beverages, they're hand crafted to customers' individual specifications down to how many pumps of syrup they want, how much ice they want, what kind of milk they want. You're seeing customers are pivoting to plant-based milk, and we're able to provide that to them. But given the complexity of the builds, the wait times in the drive-through line can be long. The other thing we've seen is that with how customers have changed their behavior in this pandemic. As I mentioned before, we're seeing tremendous demand at our drive-throughs in the suburbs because people are working from home. They're taking a break in the morning, maybe in the afternoon again. They're bringing the family with them. We have a significant increase in the average order size. And with that, very high ticket growth, and you saw that in our third quarter results. We're continuing to see that. We do expect that, that will moderate over time, but that does put pressure on the drive-through experience. And so we see handheld POS as an opportunity to collect orders sooner in the lines, so that we can start the production of those handcrafted beverages and be prepared to fulfill those orders more quickly than we are today. And we know from our experience, because we do measure this, that when we improve drive-through time, we reduce bulking. We reduce line rejection. So we're better able to capture the demand that is out there. The last thing we want to have happen is someone drive up to Starbucks, see along line and continue on their way. That's another reason why curbside pickup is so important because it provides customers another option. I don't want to get in the drive-through line, I've placed my order via my mobile phone. I can conveniently pull into a parking spot that is designated for pickup, and partners will bring my order out to me. That is working beautifully. That's taking pressure off the drive-through, and it's accommodating more of that customer demand.

Yes. And ironically, I mean I would think where you have drive-throughs is probably where you could most likely have curbside. So it's like...

That's right.

[indiscernible] And so it really does give -- and so it's going to go to 1,600 stores. Curbside will go to 1,600 stores relatively soon. Do you have an official number...

It will go to about 2,000, John. Excuse me. It will go to about that 2,000 stores in the coming months here. So we're working with a team. I have to give the team a lot of credit. They're moving very rapidly, adapting to customer behaviors, rapidly innovating and deploying tremendous discipline and urgency.

Okay. I mean and what -- sorry, it was 2,000. It's a huge accomplishment in such a short amount of time. But how many could have it in your opinion? Have you guys gone through the site-by-site on that?

It's early to say. So in the near term, we can see our way to 2,000. A lot of it has to do with the real estate and where our units are situated and the viability of having convenient parking spaces.

Yes, yes, definitely. Okay. I mean I went -- yes, I think handhelds, to me, again, this is my opinion, I wondered have you studied like how Chick-fil-A, for example, does handheld? I mean they don't have just one person doing it all. They have somebody that -- it's like not only can you order, but you actually pay. And it's -- so you can kind of do a lot of other things, and they kind of have done that. I don't know how much their capacity -- their drive-through capacity went up with handheld, but you can see it, how much faster it is. I don't know if that's...

Yes we...

Kind of who you'd benchmark or if it's fairly like [indiscernible].

Our team -- yes, John. Our team has gone to school on everybody in the category to learn best practices and rapidly apply them. Of course, we have a very complex technology stack that includes our loyalty program. And today, we're launching the Stars for Everyone. So we have to be very careful, thoughtful and deliberate about how we introduce even more complexity to that stack, to ensure that we execute with excellence both for our partners as well as our customers.

And do you think Star -- is Stars for Everyone an enhancement or do you think that's a potential game changer?

It is a game changer. That's how I think about it because as we have researched ways of capitalizing on the enormous success of our Starbucks Rewards program, time and again, what has surfaced in our consumer research is that the #1 point of friction, what prevents customers who love Starbucks from joining the program, is the requirement to prepay on a stored value card. So with Stars for Everyone, we are removing that barrier. And now all customers who use their mobile phone to place orders, who register as a member of Starbucks Rewards and register a credit card or a debit card, can pay with that credit card or debit card, not a stored value card, and earn stars. Now as you would expect, the stars earning rate is lower. So the current program with the stored value card is 2 stars per dollar. With Stars for Everyone, it's 1 star per dollar, but it's a [indiscernible], and it provides customers with a way of accessing value that we know is quite important. And we do expect, as we've observed with Starbucks Rewards previously, that when customers make the move and we're able to build that relationship with them and bring to bear our personalized marketing, their frequency increases and their average spend increases. And frankly, what I think is going to happen in the case of Stars for Everyone is that once customers become accustomed to how it facilitates their overall experience, many will choose to migrate and move to the existing...

Yes, exactly. When there's like...

They can earn about 2x.

Yes, yes, definitely. And so that -- so it still is credit/debit based? It's not -- the cash is not an option? Or did I misunderstand that?

I don't know. I believe cash still is an option. So you can -- the way that app has been designed, at the time you place the order, you can select your tender which would include a registered debit or credit card or you can indicate cash and scan at the register is how I understand it works.

Yes. Okay. Yes. And again -- and that some percentage of your customers, I see it every day, do pay with cash. I mean have you released, do you say what that number is, the percentage of your transactions that are still [ currency ]?

I don't know that we've released that before. I don't know that we've released that before, John.

Okay. Yes, I know. But it's not a small number. I mean and that person, by definition, you couldn't have a card before because that's -- or at least have a -- you have it on the phone. Okay.

John, what I would say is that the overriding insight underpinning continued enhancements to our Starbucks Rewards loyalty program, whether in the U.S. or in China is flexibility. Because remember, last year, we introduced multi-tier redemption here in the U.S. We launched that at the start of the summer in China, and that provides customers so much more flexibility in terms of how they can earn and use their rewards, and that has contributed to increased spend with our rewards members. The other thing I want to highlight, because I know that this question came up. In fact, I think you may have asked the question in our last earnings call, is in relation to our 90-day active Rewards members. And we did see, over the course of the pandemic, that number come down. It had been, I think, at 18.7 million at the beginning of the pandemic. And then at the end of our third quarter, it dropped down to, I think 16 million -- just over 16 million.

Yes, we have the tables in this.