The Starbucks Q1 2023 earnings call was historic, as it marked the final call for the company’s iconic CEO, Howard Schultz. As the leader of one of the world’s most recognizable brands, his departure marked a major turning point in the company’s history. But the call was not just about saying goodbye to a legend; it was also about looking ahead and understanding the direction in which Starbucks was heading.
Many questions were raised about the company’s presence and future in China, a key market for the company. Here are the eleven most interesting things we learned from Starbucks Q1 2023 earnings call.
Performance
- Q1 consolidated net revenues up 8%, to a record $8.7 billion, inclusive of approximately 3% unfavorable impact from foreign currency translation
- Net revenues for the North America segment grew 14% over Q1 FY22 to $6.6 billion in Q1 FY23, primarily driven by a 10% increase in company-operated comparable store sales, driven by a 9% increase in average tickets and a 1% increase in transactions, net new store growth of 3% over the past 12 months and strength in our licensed store sales.
- Starbucks Rewards loyalty program 90-day active members in the U.S. increased to 30.4 million, up 15% year-over-year
- Net revenues for the International segment declined 10% over Q1 FY22 to $1.7 billion in Q1 FY23, primarily driven by approximately 13% unfavorable impact from foreign currency translation and a 13% decline in comparable store sales, primarily attributable to suppressed mobility in China. These decreases were partially offset by our licensed store revenue growth, including higher product sales and royalty revenues, as well as net new store growth of 8% over the past 12 months
- The company opened 459 net new stores in Q1, ending the period with 36,170 stores globally: 51% company-operated and 49% licensed. At the end of Q1, stores in the U.S. and China comprised 61% of the company’s global portfolio, with 15,952 stores in the U.S. and 6,090 stores in China
- Net revenues for the Channel Development segment grew 15% over Q1 FY22 to $478.2 million in Q1 FY23, driven by growth in the Global Coffee Alliance and global ready-to-drink business
- GAAP earnings per share of $0.74 grew 7% over the prior year, including an estimated $0.06 dilutive impact from China
The performance of Starbucks in North America reported strong demand for Starbucks coffee.
The average weekly sales in U.S. company-operated stores reached a record high, and 8 of the 10 highest sales days in the company’s history were recorded in the quarter. This led to a 14% increase in revenues to a quarterly record of $6.6 billion and a comp sale of 10%. Starbucks Rewards membership in the U.S. totalled over 30 million members, up 15% from last year, and drove a record 56% of tender. The convenience channels such as Mobile Order & Pay, drive-through, and delivery continued to fuel the business, delivering 72% of U.S. revenue in Q1.
Starbucks remains confident in the future of its business in China.
Starbucks China team has been navigating the challenges posed by the COVID-19 pandemic. They have developed the flexibility to operate under any scenario, which has helped to build operating muscle and drive efficiency, productivity, profitability, and shareholder value. In the first quarter of 2023, Starbucks China saw a decline in comparable sales growth due to a new wave of COVID-19 infections in China which resulted in nearly 1,800 stores being closed at their peak. However, early indications show that consumers are returning to their pre-COVID routines, and a great demand is waiting to be unleashed. Starbucks saw the strongest level of sustained customer activity during the Chinese New Year festivities. The company is cautiously optimistic about its business recovery in China and expects the second half of the fiscal year to be stronger than the first half. Although the recovery of Starbucks’ business in China is uncertain, the company remains committed to the market and its long-term growth opportunities.
Fiscal 2023 guidance remains unchanged, and the company expects negative comparable sales growth to continue through the second quarter before improving in the rest of the year. While Starbucks anticipates the negative impact on its operating income in the second quarter to be comparable to or greater than the first quarter, the long-term opportunity in China remains very strong. Starbucks is focused on weathering the short-term challenges posed by COVID-19 and remains committed to its partners and customers in China.
The company’s performance in international markets outside of China has exceeded expectations.
Starbuck reported 25% growth in international markets outside of China and attribute this success to the continued recovery from the pandemic and a true tailwind. The company is experiencing strong revenue growth for the eighth consecutive quarter, driven by both product and digital. This growth is evident in various markets such as Latin America (50% revenue growth), EMEA (20% revenue growth), the UK (double-digit comp growth), Asia Pacific (20% revenue growth), and Japan (significant growth). The company is rolling out its digital flywheel in Japan and has seen success with the introduction of mobile order, pay, and multi-tier redemption. Management believes that international travel will bring more tailwinds to the company’s performance in these markets in the future.
Question and Answer
David Palmer with Evercore ISI asked about investment in China, specifically about metrics that make the brand confident that it would recover fully.
Chairperson of Starbucks China, Belinda Wong, states that the Starbucks brand remains as strong as ever and is well-positioned to capture growth opportunities. According to the latest brand tracker, Starbucks remains the first choice of Chinese customers in the away-from-home coffee category. It is the brand leader regarding brand affinity, visitation, and frequency.
Wong also mentioned that despite COVID disruptions in Q1, the customer connection score reached another record high in Q1. This is a result of the strong operating muscle, the strong relationships Starbucks has with its customer’s partners, and the brand’s strength. She also mentioned that no other competitor can match the competitive advantages Starbucks has, such as quality coffee, brand strength, connection, unique third place, omnichannel capabilities, national footprint, and digital ecosystem and supply chain excellence.
John Ivankoe with JPMorgan asked about the impact of COVID-19 on the China consumer market and the future of Starbucks in China.
Howard Schultz responded by sharing that the company is taking a conservative approach to the near term and sees a return to normalcy in the latter half of the year. However, the company does not have a clear line of sight on how the market will respond. He also mentioned that the company is directly involved with its Chinese team and will be in China over the next few months to assess the situation.
Wong provided more insight into the current situation in China, reporting very encouraging recovery momentum in January and strong traffic during the Chinese New Year. She mentioned that people are starting to return to work, engage in social activities, and visit Starbucks stores. All Starbucks stores in China are now open and operating without restrictions. She expressed confidence in Starbucks being well-positioned to capture future growth opportunities in China and achieve its goal of 9,000 stores by 2025.
Overall, the management is optimistic about the future of the China market but is taking a cautious approach and closely monitoring the situation.
Andrew Charles with Cowen asked a question regarding the reopening of Starbucks in China and its expected impact on the company’s operating leverage and margins.
Starbucks Chief Financial Officer Rachel Ruggeri responded by saying that the company expects margin expansion in China and that this will be driven by the recovery of sales and the growth that they are seeing beyond the recovery. She explained that the margins are expected to be different than what was seen in 2019 due to the growth in digital. In 2019, digital made up around 10% of overall sales in China, but now it is closer to 50%. This change in the margin structure has a different impact on overall dollars and volume. However, it led to solid margin expansion for the entire company this year and progressive expansion over the long term.
Ruggeri emphasised that the recovery in China, combined with growth in digital and other areas, will lead to solid margin expansion for Starbucks in the short and long term.
David Palmer with Evercore ISI asked a second question about the current state of Starbucks and how the brand is poised for growth even in the face of a potential recession.
Starbucks Chief Marketing Officer Brady Brewer responded by stating that the key to weathering a recession in the U.S. is momentum and innovation, with a focus on relevance and resilience. The brand is in a strong position with more customers than ever, high engagement, and a leading affinity among customers for their coffee. Brady also mentioned the continued success and innovation in their product line, particularly in cold, customized, and plant-based beverages.
Howard added that despite any economic headwinds, Starbucks is still poised for growth, with a high average ticket and a focus on customization that adds to the ticket value and the customer’s perceived value. Howard mentions that even during a discounting time, Starbucks does not need to discount heavily, and their customers are not trading down.
Overall, management continues to emphasize the company’s strong brand position and potential for growth Starbucks holds, even in the face of potential economic challenges.
Lauren Silberman with Credit Suisse asked about Starbucks Rewards and its growth potential.
Brewer responded by expressing optimism about the future of the program. He cited recent growth in membership, which has increased by 15% in the US and globally. Brewer attributes this success to the launch of the “Stars for everyone” program, which lowered the barriers and complexity for customers to join the rewards program.
Brewer also mentioned the changes made to the redemption tiers in Starbucks Rewards. The changes are meant better to align the cost of product redemptions with current pricing, creating discount efficiency and helping to manage margins. He explained that Starbucks Rewards is designed to offer both product and experiential benefits. The company will continue to add experiential benefits such as Reward Together, Starbucks Odyssey, and special events to make customers feel valued. Overall, Brewer believes there is still lots of opportunity for growth in Starbucks Rewards, and the company has an “incredible road map” ahead. He concludes by saying that customers can look forward to more coming from Starbucks Rewards in the future.
Jon Tower with Citigroup asked a question about Starbucks’ plans for pricing in the fiscal year 2023, given that inflation is still high.
Ruggeri responded by stating that the company currently benefits from pricing increases from the second half of last year. However, as the year progresses, the pricing levels will normalize to more historical levels as the inflation pressures start to soften.
Brian Harbour with Morgan Stanley asked a question regarding the growth and margins of the company’s channel development and its outlook for the year.
Starbuck Group President of International and Channel Development Michael Conway, explained that the company experienced strong growth in the quarter, with a 15% increase in sales. This growth was driven by the Coffee Alliance, the at-home coffee market, and strong North American coffee partnership performance. However, this growth was also influenced by seasonal and one-time factors, such as pricing and the establishment of a new co-man, and the company expects that growth to moderate in the future. Michael mentioned that the company remains optimistic about its growth profile, and they are launching a new Pink Drink, which should benefit the ready-to-drink business. Ruggeri added that the company continues to believe that channel development will be a mid-40s margin business, which is very strong and helps the company to reaffirm its guidance for the full year.