Release Date: July 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Starbucks Corp (SBUX, Financial) reported a total company revenue of $9.1 billion for Q3, up 1% year over year and 6% over Q2.
- The company saw strong performance in Japan, with double-digit growth driven by innovation and strong execution.
- Starbucks Rewards membership grew to 33.8 million in the U.S. and 22 million in China, indicating strong customer loyalty.
- Operational improvements, such as the introduction of the Siren System, have led to significant efficiency gains and reduced partner turnover.
- The company is ahead of its efficiency goals, achieving over 200 basis points of year-over-year efficiency gains, contributing to cost savings and margin improvements.
Negative Points
- Global comparable store sales declined by 3% year over year, with a 2% decline in North America and a 14% decline in China.
- Operating margins contracted by 70 basis points to 16.7%, primarily due to increased promotional activity and investments in store partner wages and benefits.
- The company is facing a challenging consumer environment, particularly in China, where cautious consumer spending and intensified competition have impacted results.
- Non-Starbucks Rewards customers in the U.S. showed a significant decline in transactions, contributing to a 6% overall decline in U.S. traffic.
- Despite strong product launches, the company is still navigating through a value-driven consumer environment, which has impacted overall sales performance.
Q & A Highlights
Q: Could you talk more about the actions taken on G&A and if it will continue to be a source of leverage into fiscal 2025? Also, regarding store efficiency, where will the reinvestments go?
A: Rachel Ruggeri, Executive Vice President and Chief Financial Officer: Our SG&A declined by about 5% year over year, driven by lower performance-based compensation and cost efficiencies. These efforts will continue into Q4 and beyond, helping us reinvest in promotional activities, partner wages, and benefits, while also driving margin expansion.
Q: Can you provide more details on the composition of the average check and the impact of promotional intensity?
A: Rachel Ruggeri, Executive Vice President and Chief Financial Officer: The 4% increase in average check was driven by multi-beverage orders and targeted promotional offers. About 75% of the increase was due to net pricing, including price adjustments in California. Our promotional intensity remains measured, focusing on driving growth in Starbucks Rewards membership.
Q: Could you elaborate on the strategic partnerships being explored in China and the potential for licensing?
A: Laxman Narasimhan, Chief Executive Officer: We are in the early stages of exploring strategic partnerships to enhance our competitive position in China. While we have built a strong premium brand, the competitive environment has changed, and we are looking at various options to strengthen our advantages in the market.
Q: What is causing the significant decline in non-rewards customer traffic in the U.S., and where do you think these customers are going?
A: Laxman Narasimhan, Chief Executive Officer: The challenging consumer environment is impacting away-from-home consumption. We are focusing on communicating value to non-rewards customers and have opened up the app for all to provide digital convenience. We also plan to target price investments funded by our efficiency programs.
Q: Can you clarify if the $4 billion in savings is a gross or net number, and discuss the returns on the Siren system installations?
A: Rachel Ruggeri, Executive Vice President and Chief Financial Officer: The $4 billion in savings is a net number. We are deploying Siren system process improvements across all U.S. stores and targeting high-impact areas to drive throughput. The returns are strong, and we are sequencing installations to optimize impact.
Q: How is the progress in the U.S. business translating into sales performance, and do you expect Q4 comp growth to be better than Q3?
A: Laxman Narasimhan, Chief Executive Officer: We are seeing improvements in key metrics like Mobile Order & Pay growth and drive-through efficiency. However, the challenging consumer environment leads us to expect flat to low single-digit comps for the year. The actions we are taking should position us for growth in FY 2025.
Q: Given the current challenges, how committed are you to the global rate of expansion, particularly the 7% to 8% range for company-owned stores?
A: Laxman Narasimhan, Chief Executive Officer: We are not chasing a number but are driven by ROI. We see strong cash-on-cash returns in both the U.S. and China, particularly in underpenetrated markets. We will continue to invest where we see incremental value and strong returns.
Q: Are there any major areas for incremental opportunities in staffing, scheduling, and partner wage and benefits? How do you balance cost efficiencies with partner and customer experience?
A: Laxman Narasimhan, Chief Executive Officer: We are focused on simplifying store operations, menus, and supply chain processes. The Siren system has been well-received by partners, enhancing their ability to connect with customers. We will continue to invest in delivering a stable partner experience to exceed customer expectations.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
