The operator welcomes everyone to the conference call for Starbucks' second quarter fiscal year 2024 results. The call will be led by the CEO and CFO, and other executives will join for Q&A. The call will include forward-looking statements and cautionary statements should be considered. GAAP results will be compared to non-GAAP results.

The non-GAAP results for Starbucks' Q2 earnings call were disappointing and did not meet expectations. Total company revenue was down 1%, global comparable store sales declined by 4%, and operating margins contracted by 140 basis points. However, the company remains strong and is confident in its ability to overcome these challenges due to its unique and customer-focused approach, as well as its love and expertise in coffee.

Despite facing challenges in certain markets and a cautious consumer, our brand remains strong and our leadership in coffee is unrivaled. Our global customer base remains loyal, our experiences are unique, and our product pipeline is highly appealing. While we continue to experience headwinds in some markets, we are confident in the long-term growth opportunities in the Middle East and China. We are also focused on executing three key opportunities in the U.S. to drive further success.

The business is looking to expand by meeting demand across different dayparts, launching new products, and reaching out to occasional and non-Starbucks Rewards customers. They are focusing on improving operational efficiency and providing customers with a better sense of when their order will be ready.

Starbucks is on track to rollout their new equipment-driven siren system, but they are also working on fine-tuning store processes with the help of the Toyota Production System Support Center. This new system, called the siren craft system, requires no capital and is expected to increase peak throughput and generate incremental returns. Starbucks is also investing in their Deep Blue technology to improve wait time estimates and product availability, with a focus on customers' favorite items. Overall, these efforts aim to enhance the customer experience, improve convenience, and better meet existing demand.

Starbucks is focused on improving their offerings to attract more customers, including tapping into overnight and weekend demand. They have seen success in a pilot program serving customers overnight and are aggressively pursuing options to build a $2 billion business in this area. They also plan to launch new and exciting products while maintaining their focus on core coffee offerings. They have seen success in their cold beverage sales and are working to bring more innovations to other dayparts.

In this paragraph, the speaker discusses the success and challenges of their new breakfast products and the need to drive more buzz and excitement for them. They also mention investing in their brand and addressing misinformation. The focus is on accelerating product innovations and reaching out to occasional and non-Starbucks Rewards customers. The success of their unique Starbucks Reserve Roasteries is also mentioned.

The company has maintained strong brand perception and measured pricing decisions, but customers are being more selective with their spending. To combat this, the company plans to improve their Starbucks app and offer more value to customers through exclusive in-app offers and improved wait time algorithms. This will help reach more occasional customers and showcase the value the company provides. The company is confident in their plans to strengthen their execution engines and drive long-term growth through their triple shot with two-pump strategy. The first strategic pillar is to elevate the brand by focusing on product innovation, building great stores, and operating them effectively.

Starbucks has announced new investments in coffee farms and new whole bean coffees to reinforce their leadership position. They are also expanding their Clover Vertica brewer and launching new flavors and functional products. They are working to cut their product development cycle in half and have a strong innovation pipeline for the second half of the year, including a new texture innovation for summer.

Starbucks is constantly innovating and introducing new products to their menu, with a focus on texture-based options and healthier, customizable choices. They are also investing in their food quality and expanding their grab-and-go options. Additionally, they are continuing to grow their global store footprint and are seeing strong returns and high incrementality from new store openings.

Starbucks is focusing on strengthening their digital presence and loyalty program, with the goal of doubling their Starbucks Rewards members over the next five years. They will be opening the Starbucks app to all customers in July and investing $600 million in digitizing their stores and targeting customers in personalized ways. This includes installing digital menu boards and using AI and machine learning to improve the digital customer experience and offer more personalized and relevant offers.

Starbucks is investing in a new revenue management system and offering compelling deals to attract customers throughout the day. They are also expanding their global presence, particularly in the Middle East where they have donated money to support humanitarian efforts. In China, macro pressures have led to a decline in traffic, but Starbucks remains the top choice for coffee among consumers and their morning business has grown.

In this paragraph, the speaker discusses the positive performance of Starbucks in terms of delivery, Starbucks Rewards membership, beverage innovation, and operating margins in China. They also mention their strong fundamentals and resilience in the face of a choppy recovery. The speaker reiterates their commitment to their China strategy and confidence in the market opportunity. They also mention growth in other international markets, showcasing the diversity of their business portfolio.

Starbucks' International segment, excluding China, experienced revenue and comp growth in the quarter, driven by strong performance in Latin America, Asia Pacific, and Japan. The company opened 230 new stores in the International segment, bringing the total store count to over 20,800. The company is on track to operate 1,000 stores in India by 2028 and plans to expand to Honduras and Ecuador, with a goal of reaching 55,000 stores globally by 2030. The company's triple shot strategy has led to operational efficiencies and cost reductions in the North American business, creating a more stable and satisfying work environment for employees.

Starbucks is seeing improvements in drive-thru times and efficiency in their supply chain through the use of technology. They have extended their goal for added efficiencies and have seen a decrease in partner turnover and an increase in partner engagement. The company is also focused on reinvigorating their partner culture and recently celebrated their first Starbucks Promises Day and will soon celebrate the 10th anniversary of their Starbucks College Achievement Plan.

The company's CEO, Laxman Narasimhan, acknowledges that the company had a tough quarter and needs to do better. He expresses confidence in the company's strategy and thanks the 460,000 partners for their work. The company plans to take swift action to accelerate investment and expects to return to algorithmic growth in the long-term. The results for the second quarter show a 1% decline in revenue due to a 4% decline in comparable store sales, offset by 8% net new company-operated store growth.

In the second quarter, Q2 consolidated operating margin decreased by 140 basis points due to various factors such as deleverage, investments in partner wages and benefits, and promotional activities. This resulted in a 7% decrease in EPS compared to the previous year. North America revenue remained flat, with 5% net new store growth offset by a 3% decline in comparable store sales. The decline in sales was driven by a decrease in transactions, partially offset by an increase in average ticket. The company's new store performance remained strong, with high incrementality and projected AUV and cash margin in line with last year's newly opened stores. North America's operating margin also decreased by 120 basis points to 18% in Q2.

The contraction in revenue in the segment was mainly due to deleverage, partner investments, and promotional activities, but was partially offset by pricing and operational efficiencies from the reinvention plan. These efforts have also resulted in cost savings and streamlined operations. In the international segment, revenue was flat due to a decline in comparable store sales and licensed store revenues, primarily in the Middle East. However, excluding China, there was revenue and comp growth, showing the strength of the international portfolio in markets such as Japan, Asia Pacific, Latin America, and the Caribbean.

In Q2, China's revenue decreased by 3% due to a decline in comparable store sales, but the market opened 118 new stores and maintained a double-digit store operating margin. The International segment's operating margin also decreased, but the company maintained its top position in the U.S. at-home coffee and ready-to-drink market. In China, the company launched a new Starbucks Refreshers platform to appeal to Gen Z. The channel development segment's revenue declined by 13%, but its operating margin increased due to growth in the North America Coffee Partnership joint venture. The company is on track to meet its full year operating margin target.

The company is revising their fiscal year guidance due to underperformance in the second quarter and continued headwinds in key markets. They are taking actions to improve their brand and attract more customers, which may take some time to fully materialize. As a result, their revenue, comp, margin, and earnings guidance will be impacted.

The company has revised its fiscal year 2024 guidance due to continued headwinds affecting global store growth expectations. However, they remain confident in their triple shop strategy and efficiency efforts, and their Channel Development segment continues to perform well. They will continue investing in their business and have revised their revenue and store growth expectations for the year.

The company expects flat to low single digits growth in EPS and non-GAAP EPS for fiscal year 2024 due to persistent headwinds. They also anticipate sequential revenue growth in Q4 and a mid-20% effective tax rate for the year. The company remains committed to their triple shot strategy and disciplined capital allocation, allowing them to navigate the current environment.

The speaker expresses gratitude for their partners and opens the call to Q&A. They address a question about the recent trends, mentioning that weather was a headwind but the launch of Lavender was successful. They also discuss the cautious consumer and the underlying pressures they face, which may be affecting sales.

The speaker discusses the challenge of attracting customers to their stores, particularly those who are not part of the Starbucks rewards program. They mention focusing on meeting demand, launching new products, and reaching out to occasional customers. They also address the potential issue of brand or product resonance with this customer base.

The speaker believes that the overall brand equity of the company is strong, with high scores in value. However, the occasional customers are making choices based on economic pressures and are looking for variety and value. The company is focused on connecting with these customers through their app ecosystem and building loyalty over time. In terms of global unit growth, the speaker is confident in maintaining outsized growth despite headwinds, and believes that challenges are not due to saturation or cannibalization. In China, the company has healthy unit economics and double-digit restaurant margin.

Laxman Narasimhan and Rachel Ruggeri discuss the company's global unit growth and the strong cash and cash returns they are seeing. They attribute this success to reduced store costs and efficient expansion plans. They also mention the high potential for growth in markets like China, where they have yet to fully penetrate. They have deliberately increased the number of stores in lower tier cities and new counties to take advantage of even stronger returns.

The speaker discusses the impact of a shift in their business on their development pipeline, resulting in a slower growth rate. They also mention seeing a shakeout in the competitive landscape in China, which they view as transitory. They choose not to participate in intense price competition and focus on being a premium brand. The speaker also briefly mentions their beverage pipeline and how they are evaluating their R&D process.

Starbucks has a strong business in China with competitive advantages, such as partnerships, distinctive stores, and a strong supply chain. They are focused on the premium end of the market and see potential for growth as the Chinese consumer becomes more exposed to coffee. In North America, Starbucks is innovating in both coffee and other beverages to attract occasional customers and open up new platforms for growth.

The speaker discusses the company's plans for R&D, specifically focusing on platforms for systematic innovation in both beverage and food. They also address the recent struggles in the market, citing intense price competition in China and unexpected consumer pressures.

Peter Saleh asks about the progress of the siren system, which was previously discussed at an Investor Day. Laxman Narasimhan clarifies that the system was never put on the back burner and is on track to be installed in less than 10% of stores. He also mentions that the company has added processes to reduce wait times in stores and that these processes will serve as a base for implementing the siren system in the future. The next question is from Lauren Silberman, who asks about the cadence of U.S. comp throughout the quarter and mentions the success of Lavender, which doesn't seem to be reflected in the comp.

The company saw success with its new product, Lavender, in the past quarter, particularly with its ice Lavender Matcha Latte which resonated well with Gen Z and Millennial customers. This product helped drive customers in the afternoon, and the company expects continued success in the future. However, due to the product launch being later in the quarter, the overall impact on customer numbers was not fully reflected in the quarter's results, but is expected to contribute to growth in the second half of the year.

The company is expecting their outlined plans to counterbalance the headwinds they are facing. They are confident in their strong portfolio and brand, and are looking at exit rates and comps for the remainder of the year. The quarter-over-quarter decline in Starbucks Rewards members is due to the consumer pullback, but they are still seeing growth in this area, as well as in mobile ordering and delivery. They are confident in their digital customer base and have plans to increase traffic in the coming quarters.

The speaker addresses two questions, one about correcting misinformation and its impact on sales loss, and the other about the Toyota production system. They mention that misinformation did have an impact on the business, but it is not quantified. The speaker also talks about investing in brand equity to strengthen the overall perception of the brand. Regarding the Toyota production system, they mention that it will help about a point, and they are currently working on deploying it during peak times.

The speaker discusses how deployment in stores and processing customers during peak times is a risk, but the estimated one percentage point improvement is conservative and may be even bigger. They also address a question about a hard forward, stating that they are looking to accelerate with the work they are doing. In response to a question about the long-term earnings algorithm, the speaker reaffirms their commitment to the reinvention plan and sees no change in their long-term goals and opportunities. Lastly, the speaker discusses the balance between their value strategy and protecting the long-term health of the brand in a tough environment.

Laxman Narasimhan, CEO of Starbucks, discusses the balance between maintaining a premium brand position and offering discounts to attract occasional users. He emphasizes the importance of providing quality service and reaching out to customers in an integrated way. The company has a clear action plan to address the challenges faced in the current quarter. The call ends with thanks and appreciation for the participants.

This summary was generated with AI and may contain some inaccuracies.