Starbucks Corporation (NASDAQ:SBUX) Q1 2023 Earnings Call Transcript

Starbucks Corporation (NASDAQ:SBUX) Q1 2023 Earnings Call Transcript February 2, 2023

Operator: Good afternoon. My name is Diego, and I will be your conference operator today. I would like to welcome everyone to Starbucks First Quarter Fiscal Year 2023 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. I will now turn the call over to Tiffany Willis, Vice President of Investor Relations. Ms. Willis, you may now begin your conference.

Tiffany Willis: Thank you, Diego, and good afternoon, everyone, and thank you for joining us today to discuss Starbucks’ First Quarter Fiscal Year 2023 results. Today’s discussion will be led by Howard Schultz, Interim Chief Executive Officer; Brady Brewer, Executive Vice President and Chief Marketing Officer; and Rachel Ruggeri, Executive Vice President and Chief Financial Officer. And for Q&A, we’ll be joined by Frank Britt, Executive Vice President, Chief Strategy and Transformation Officer; Sara Trilling, Executive Vice President and President of Starbucks North America; Michael Conway, Group President of International and Channel Development; and Belinda Wong, Chairwoman of Starbucks China, who is joining us today from on the ground in China.

This conference call will include forward-looking statements, which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. Any such statements should be considered in conjunction with cautionary statements in our earnings release and risk factors discussed in our filings with the SEC, including our latest annual report on Form 10-K and quarterly reports on Form 10-Q. Starbucks assumes no obligation to update any of these forward-looking statements or information. GAAP results in first quarter fiscal year 2023 and the comparative period includes several items related to strategic actions, including restructuring and impairment charges, transaction and integration costs and other items.

These items are excluded from our non-GAAP results. All numbers referenced on today’s call are on a non-GAAP basis unless otherwise noted or there is no non-GAAP adjustment related to the metric. For non-GAAP financial measures mentioned in today’s call, please refer to the earnings release and our website at investor.starbucks.com to find reconciliations of those non-GAAP measures to their corresponding GAAP measures. This call is being webcast, and an archive of the webcast will be available on our website through Friday, March 3, 2023. And for calendar planning purposes, please note that our second quarter fiscal year 2023 earnings call has been tentatively scheduled for Tuesday, May 2, 2023. Now before I turn the call over, let me first say thank you to Howard.

Because in our short amount of time together, I have witnessed a relentless focus on our culture while not compromising results. You have reinforced the importance of dreaming bigger than others may even think is possible. And for that, I will forever be grateful. And so now the floor is yours. Howard.

Howard Schultz: Thank you, Tiffany. I did not expect that. Thank you very much. Good afternoon, and welcome, everyone. I’m pleased to comment on the strong financial and operating results Starbucks reported today, highlighted by record quarterly sales of $8.7 billion, up 8% over last year, up 12%, excluding foreign exchange, a stunning 10% comp growth in the U.S. and North America, 5% comp growth globally. And except for China, very strong sales and comp growth in every international market we are in. We posted strong results despite challenging global consumer and inflationary environments, a softer quarter for retail overall and an unprecedented COVID-related headwinds that unfolded in China. Credit belongs to our partners around the world who continue to successfully satisfy record demand in our stores while delivering an elevated Starbucks Experience to our customers.

In China, COVID-related mobility restrictions and a spike in COVID infections following the end of zero COVID resulted in comp sales of minus 29% for the quarter, 4x worse than what we expected. Weak sales combined with the cost to support the health, the safety and well-being of our partners, our first priority, negatively impacted total company earnings by $0.06, resulting in Q1 EPS of $0.75 per share. Despite short-term headwinds, we are confident that the end of Zero COVID marks the beginning of China’s emergence from three years of pandemic, puts the country on a path to reintroducing normalcy and routine back into people’s lives and positions the country to resume pre-COVID levels of consumer, social and economic growth. We also believe at the end of Zero COVID will enable renewed consumer activity in China and recovery of our business in the back half of fiscal 2023.

Our view is informed by patterns of post-COVID behaviors we have seen in countries around the world as consumer activity accelerates as years of pent-up demand is released. Today, our stores in China are again open without restriction and our partners are back at work. Many have been infected and recovered from COVID. Noteworthy is that we saw a meaningful sequential improvement in sales and traffic as we move through January as people began resuming aspects of their pre-COVID lives, including gradually returning to our stores. More on China shortly. Our performance in Q1 underscores the success of the investments we are making in our people in extending our global leadership around everything coffee and in relevant innovation that together are driving sales and transaction growth around the world.

Starbucks is more relevant globally today than ever before in our history, ideally positioning us to successfully execute our ambitious growth agenda and have roughly 45,000 stores delivering best-in-class returns around the world by the end of fiscal 2025. On today’s call, I will highlight the drivers of our performance in Q1 and provide an update on the progress of our reinvention initiatives. I will then provide granular details specifically around the shape of our business in China and shine a bright light on the positive correlation between increases in consumer activity in China and the recovery of our business. Next, Brady will detail the beverage, food, mobile, digital and store innovation that drove record demand for Starbucks Coffee in every market outside of China in Q1.

And he will speak to our record holiday performance, the strong growth in U.S. Starbucks Rewards membership sequentially and year-over-year and the extraordinary record of $3.3 billion loaded on cards and gifted in the U.S. We entered Q1 with roughly $2 billion globally waiting to be spent in our stores, increased Starbucks Rewards membership and card loads serve as both a current annuity and the future driver of our business. And then finally, Rachel will highlight our Q1 financial and operating performance and speak to the confidence we have in our full-year 2023 guidance despite the significant impact from China, and we’ll turn the call over to the operator for Q&A. Let me begin with North America. The record demand for Starbucks Coffee in North America, we’ve reported on our Q4 call accelerated in Q1 and through holiday.

Despite the difficult operating environment that most retailers, particularly brick-and-mortar retailers experienced in the quarter. Average weekly sales in the U.S. company-operated stores reached a record high in Q1, exceeding the prior record set in Q4 of fiscal ’22. This is — this next line, I think, is just — even when I read it, I’m surprised, with eight of the 10 highest sales days in our history recorded in the quarter. Consistently strong demand drove revenues up 14% to a quarterly record of $6.6 billion and a comp sale of 10% over last year. And Q1 momentum has continued in Q2. Active Starbucks Rewards membership in the U.S. exiting Q1 totaled over 30 million members, up four million members or 15% over last year and up 6% sequentially.

Loyal Starbucks Reward members drove a record 56% of tender, up 3% from last year, reflecting increased customer engagement throughout our system. Our convenience channels, Mobile Order & Pay, drive-through and delivery continue to fuel our business, delivering 72% of U.S. revenue in Q1. We continue to add high returning drive-throughs that attract new customers, expand our footprint and drive new customer occasions. Our over 6,600 store U.S. license business posted similar strong results with 32% revenue growth and double-digit comps across all operating segments. What’s interesting to me is while grocery retailers are representative segment within our licensed business experienced traffic and spend related headwinds across their store base in Q1, their Starbucks business proved to be the bright spot bringing incremental traffic into their stores and driving sales for us as well.

We continued to roll out Starbucks Connect enabling licensed stores to offer all Starbucks Mobile Order & Pay and Rewards benefits, expanding the value offering we provide our customers and licensees and enabling us to capture demand across our broader store portfolio. Starbucks Connect is proving to be highly incremental, and we see great upside for it. Cross-functional teams continue to successfully execute against our reinvention initiatives and our reinvention investments are having a measurable positive impact on our business, evidenced by an 8% improvement in U.S. hourly retail partner turnover. Improved turnover correlates to more stable store environments, elimination of new hire-related costs, particularly training and measurable improvements in productivity, speed of service and partner customer experience scores that we’re already seeing.

Our Q1 performance demonstrates that our reinvention plan investments are the right investments that we are making and are delivering results and creating shareholder value, providing us with tremendous confidence in the revenue, margin and EPS expectations that we shared at our Investor Day. Let me turn to international. Outside of China, the momentum we saw in our International segment exiting Q4 continued in Q1. Excluding China and foreign currency translation, revenues for the quarter are up 25% and comps were up 11%, fueled by recovery consumption in Japan and a rebound in tourism activity across our EMEA markets, following the lift of COVID restrictions. One great example is Alshaya. Alshaya is our license partner in the Middle East for the last 23 years and among our largest international licensees with over 1,800 stores across 13 markets.

They reported their strongest quarter with the Starbucks brand ever in Q1. We added 370 new stores in international in Q1 and now operate 18,700 stores across 84 markets, 43% company-operated and 57% licensed. Strong growth in our international license business reflects the outside returns the Starbucks brand delivers to our licensees, driving increased investment by our licensees in our business and growing customer engagement with our Starbucks brand around the world. Turning to channel development. The Starbucks brand relevant innovation and seasonal moments are resonating with our customers and driving sales and occasions around the world, resulting in a 15% increase in channel revenues in Q1 over last year to $478 million. We continue to hold the #1 dollar share in U.S. at-home coffee and in Q1 outpaced dollar sales growth in North America ready-to-drink category overall, again demonstrating the unique power of the Starbucks brand.

In China, Starbucks received the ready-to-drink new product launch of the Year award for the introduction of Bottled Frappuccino Oat Latte. We will continue to delight our customers with exciting new beverage innovation in the months ahead, including with the launch of Starbucks ready-to-drink Pink Drink inspired by the overwhelming success of Pink Drinks served in our retail stores and certain to become a customer favorite, especially with our young customers and our Gen Z audience. Let me begin the discussion around China by saying that Starbucks has been in China now for over 24 years, and that our confidence in the future of Starbucks business in China and our aspirations for the market and our partners has never been greater. We exited Q1 with almost 6,100 Starbucks stores across 240 cities, and our newest class of stores continue despite the challenges we’ve had to achieve best-in-class returns and profitability.

And we remain on plan to have 9,000 stores in China by the end of 2025. Our belief in China is based on our leadership position in the market, our relationship with our partners and the trust that we have among our Chinese customers and the market and our brand position. Since 2020, our Starbucks China team has been navigating the most acute COVID-related mobility restrictions and disruptions anywhere in the world, while at the same time, developing the flexibility to execute under any COVID scenario. By leading in together in service of their customers and fellow partners, our China team has navigated every challenge obstacle and volatility that COVID had put in their way, building more capability, flexibility and operating muscle with each unexpected test.

That flexibility and operating muscle, coupled with deliberate investments that we’ve made throughout the pandemic, supported our business in Q1 and will increasingly drive efficiency, productivity, profitability and shareholder value and enable us to deliver an even more relevant and elevated Starbucks experience to our partners and our customers in the years ahead. As I shared on our last call, our recovery in China gained momentum in Q4 of 2022 despite severe mobility restrictions in many of our larger cities. We saw sequential improvement in all key operating metrics driven by the success of mobile and digital technology investments and expanded delivery capabilities built during COVID that made it easier for our customers to engage with us and better enable us to serve them.

The direct positive correlation we saw between increased consumer activity in China and sales in our stores and the speed and consistency with which our business was accelerating, gave us great confidence moving through the quarter. However, in September, a new wave of COVID spiked resulting in further increased mobility restrictions, new mobile, digital and delivery capabilities enabled us to partially offset the reduction in store traffic in September. However, in early December, Zero COVID was lifted and COVID infection spiked across China, resulting in a dramatic decline in consumer activity across the country and causing the most severe COVID disruptions any retailer had encountered. For us, at its peak, nearly 1,800 Starbucks stores were closed during that month.

As a result, comps in Q1 declined 29% with a 42% comp decline in December alone. But like consumers everywhere, our customers in China are creating a full return to familiar pre-COVID routines and lifestyles and huge consumer demand in China is waiting to be unleashed. Early indications are that it is beginning to happen in our largest cities now with many Chinese recovered from COVID, people returning to work, border and travel restrictions lifted, mall traffic and retail store activity on the rise and consumers reintroducing social activity back into their daily lives. We saw the strongest level of sustained customer activity we’ve seen in years in the run-up to and during Chinese New Year festivities. As Rachel would share, we are expecting the second half of fiscal 2023 in China to be stronger than the first half but uncertainties remain and the better part of valor is to remain cautious around precisely when our recovery in China will take full flight.

However, when it does, pattern recognition, the return on pre-COVID routines and the adoption of new post-COVID routines will become self-evident in China, and customers will flock to Starbucks stores to enjoy moments of reconnection their favorite Starbucks beverages and the premium Starbucks experience our partners in China deliver. And Q1 headwinds will shift to tailwinds. We’ve seen this pattern repeat in markets around the world, including the United States. Despite the challenges and the uncertainties of the last three years, Starbucks’ commitment to China and to our partners and business in China has never wavered. Almost 25 years after entering the market, I remain more confident than ever that we are still only in the early chapters of our growth story in China, and I’m looking forward to being with our China partners for the first time in years when I visit the country this Spring.

Laxman’s immersion continues to go spectacularly well. He and I engage daily as he absorbs more about our company and business and he wins the hearts and minds of Starbucks partners everywhere. Only weeks from now, Lax will take full control of the company and together with our leadership team, bring reinvention to life, guide Starbucks into a new era of growth and begin writing the next chapters of our storied history. I cannot be more confident that Lax is the right CEO at the right time for Starbucks. And Starbucks Coffee Company domestically and around the world is in great hands with him as the CEO. This — my last earnings call is very special for me and a powerful emotional reminder of the intersection of my life at Starbucks. It was 1983, walking the beautiful streets of Milan at the inspiration for what Starbucks could one day be and made first struck me.

Photo by Gema Saputera on Unsplash

40 years later, I’m not sure where the years have gone. 40 years later, we have over 36,000 stores around the world, serving over 100 million customers each week. Along the way, we have created opportunity, cared for and improve the lives of millions of Starbucks partners and made progress against my goal of creating a different kind of company, a company steeped in humanity, humility and respect, where everyone is welcome, and we embrace the belief that our differences make us better and stronger. And a company unlike any company, my father ever got a chance to work for, but there’s much more opportunity and much more work ahead. Finally, while Starbucks has launched many successful coffee beverages over the years, my Starbucks journey will come full circle when I return to Milan later this month to introduce something much bigger than any new promotion or beverage.

While I was in Italy last summer, I discovered an enduring, transformative new category and platform for the company, unlike anything I had ever experienced. The word I would use to describe it without giving too much away is alchemy. We won’t unveil details today, but it will be a game changer, so standby. Many people have asked me if my final earnings call as Starbucks CEO is bitter sweet, it really isn’t. Starbucks business and brand, the quality of our coffee, the relevance of the Starbucks partner and customer experiences have defined us since our founding in 1971 and have never been better or stronger. And our future has never been brighter. It will be my pleasure to take a front row seat as Laxman leads Starbucks into and through the exciting new era of growth ahead.

With that, I’ll turn the call over to Brady.

Brady Brewer: Thank you, Howard. I know I speak for so many when I say thank you for your relentless pursuit of elevating the Starbucks customer and partner experience. Your leadership to our reinvention has us well positioned to continue advancing towards our biggest aspirations with Laxman and our strengthened leadership team. Good afternoon, everyone. I’m incredibly proud of our strong Q1 performance across all markets. Today, I’ll focus on what we saw in the U.S. this quarter. In addition to the strong customer demand for Starbucks overall, our results benefited from last year’s strategic pricing actions and increased food attached with record sales for both Sous Vide Egg Bites and breakfast sandwiches. Our product portfolio and innovations continue to resonate with customers, especially our cold, customized beverage innovation.

Beverage sales increased 13%, led by our strength in the espresso category, with featured holiday beverages like the Caramel Brulée Latte and sugar cookie almond milk latte contributing to growth. Customized beverages continue to be a differentiator with customers all year long. Modifier sales were up 28% year-over-year in our U.S. company-operated stores, showing that customers are visiting Starbucks for beverages customized to their preferences that they cannot find anywhere else. The strength and relevance of the Starbucks brand continued to accelerate this holiday season as we surpassed, as Howard said, 30 million active Starbucks Rewards members, we drove record-breaking mobile order usage at 27% of transactions in the U.S. company-operated stores, and we reached an all-time high in the population of our weekly total active customer base.

We also saw more than $3.3 billion loaded on Starbucks cards in the U.S., exceeding last year’s record results and setting a new record. In fact, our gifting business was so strong that the unit sales of Starbucks Cards were greater than the next four brands of gift cards combined. This not only drives new Starbucks Rewards registrations, but it also drives our business in Q2 as evidenced by the high 56% Starbucks Reward tender that we saw in our U.S. company-operated stores at the end of the quarter. Said another way, during the holiday season, Starbucks truly becomes the currency of kindness and it drives our business. At the heart of Starbucks is uplifting human connection. This is a core part of our reinvention, and we accelerated our reinvention investments in the quarter, driving continued improvement in our industry-leading partner retention.

We’re also committed to elevating the customer experience. And within the quarter, we launched our first Starbucks rewards — Reward Together partnership with Delta Airlines, which offers members of both Delta SkyMiles and Starbucks Rewards, new ways to earn rewards. On December 8, we also launched the Starbucks Rewards Odyssey experience in beta to select members. Odyssey members have been invited to partake in multiple Odyssey journeys driving increased engagement and loyalty from our members and now ownership in their loyalty experience. We also announced the national expansion of our partnership with DoorDash, which alongside Uber Eats also provides us the ability to serve customers in a convenient way and enjoy Starbucks wherever they are.

And we announced changes to our Starbucks Rewards redemption tiers, which not only supports critical program growth and discount efficiencies, but it also allows us to add increasing value relevant to our members by making popular items like cold coffee, more attainable, the changes that our members have praised. Finally, we’re furthering the value delivered to our SR members by bringing them coffeehouse culture and content through a new series in the Starbucks app called the Starbucks Daily, which will launch with this month. In short, Starbucks is an incredibly strong brand and one that is poised for growth. I’ll now turn it over to Rachel.

Rachel Ruggeri: Thank you, Brady, and good afternoon, everyone. Let me begin by saying that I am very proud of what we achieved in Q1 with nearly every business contributing to our strong performance. The remarkable strength in nearly all major markets and channels across the globe led to outperformance across our metrics when excluding the headwinds in China. Our Q1 consolidated revenues of $8.7 billion were another record quarterly high, up 8% from the prior year or 12% when excluding an approximately 3% impact of foreign currency translation. The revenue growth was primarily driven by 5% comparable store sales growth, 5% net new store growth over the past 12 months, impressive momentum in our U.S. and international licensed stores as well as our channel development businesses.

When excluding China and the impact from foreign currency translation, revenues in all three of our reporting segments continued to expand double-digit, demonstrating the demand of our diverse portfolio and power of our innovation as we focus on our new era of growth. Q1 consolidated operating margin contracted 60 basis points from the prior year to 14.5%, primarily driven by investments in growth in labor, part of which represent the reinvention plan, inflation and deleverage in China. The contraction was partially offset by pricing in North America and sales leverage across markets outside of China. The deleverage in China was more significant than expected, while other margin drivers were largely in line with our original guidance. Q1 EPS was $0.75, up 4% from the prior year, including an approximate $0.06 dilutive impact from the headwinds in China relative to our original expectations.

Although we anticipated China’s recovery to be nonlinear, the headwinds in Q1 were larger than our prior estimate by approximately $0.06 due to the unforeseen changes in COVID restriction and infection spikes. The significant strength across our global portfolio, however, largely offset the impacts from China’s performance, keeping us on track to achieve our fiscal 2023 growth targets, as I’ll discuss in a moment. First, I’ll provide segment highlights for Q1. North America delivered another quarter of all-time record revenue in Q1 of $6.6 billion, up 14% from the prior year, primarily driven by a 10% increase in comparable store sales, inclusive of a 9% increase in average ticket, net new store growth of 3% over the past 12 months and very strong growth in our U.S. licensed store business.

Our U.S. company-operated stores had a record revenue quarter with 10% comp growth in Q1, fueled by strength in digital, innovation, and record holiday performance as both Howard and Brady shared. In addition to the continued strength in ticket, the number of unique customers grew 10%, setting another all-time record and further expanding our reach. Let me also highlight the very strong performance of U.S. licensed stores this quarter, which posted revenue growth in excess of 30% and 15% system comp growth over the prior year Q1 with strength across the portfolio. Performance was particularly strong in retail and travel as pre-COVID behavior normalcy returns, with U.S. licensed store revenue indexing at roughly a 140% of pre-pandemic levels.

Grocery also experienced strong growth, powered by the continued rollout of Starbucks Connect despite the overall decline in customer traffic across the rest of grocery store industry. North America’s operating margin was 18.6% in Q1, contracting 20 basis points from the prior year, primarily due to previously committed investments in labor, including enhanced store partner wages and benefits as well as inflationary headwinds, partially offset by pricing and sales leverage. While Q1 operating margin declined sequentially from Q4 fiscal 2022, driven primarily by seasonal sales mix shift, we gained productivity through reinvention, including improved partner retention and equipment rollouts, paving the way for progressive margin expansion in the latter half of fiscal 2023 and years to come.

Moving to international. The segment delivered revenue of $1.7 billion in Q1, down 10% from the prior year or up 2% when excluding a nearly 13% unfavorable impact from foreign currency translation. The revenue growth was driven by sustained momentum across all major markets outside of China as well as an 8% increase in total store count over the past 12 months. The growth was partially offset by a 13% decline in comparable store sales, including a 29% decline in China. Although China posted a comp decline of 29% in Q1, the heaviest decline of 42% was experienced in December with pressure carrying into Q2, all of which was well below our original estimates, as mentioned in my opening. Just to give you a little color, at its peak, nearly 1,800 stores or close to 30% of our portfolio were temporarily closed due to sharp fall in traffic and labor shortage because of partners falling sick to COVID.

Outside of China and excluding the impact of foreign currency translation, our diverse international markets across the globe continued to outperform in Q1. Once again, these markets together achieved double-digit comp growth, driven primarily by transactions. Their revenue grew 25% in the quarter when excluding a 17% unfavorable impact of foreign currency translation with successful holiday campaigns across all regions. Operating margins for the International segment was 14.3% in Q1, down 400 basis points from the prior year, mainly driven by deleverage in China, but partially offset by strong sales leverage across other global markets and the resulting business mix. Shifting to channel development. The segment’s revenue grew 15% to $478 million in Q1, driven by double-digit growth in both the Global Coffee Alliance and our global ready-to-drink businesses.

Within the Global Coffee Alliance, newer platforms continue to be key drivers of growth, including Starbucks by Nespresso and Starbucks Creamers. Our ready-to-drink lineups are fueled by core platforms in our international markets and robust innovations in the pipeline. Sustainability was also top of mind for the segment, trailblazing recyclable, multi-serve iced coffee bottle made from recyclable plastic. The segment’s operating margin was 47.4% in Q1, up 350 basis points from the prior year, primarily driven by strength in our North American Coffee Partnership joint venture income. Now moving to our guidance for fiscal 2023. Let me take a few minutes to go deeper on the implications to our business from the challenges we’re facing in China.

In January, China’s comparable sales growth was a decline of approximately 15%, which was an improvement from a decline of 42% in December. While we’re seeing early positive signs of momentum rebuilding, headwinds related to COVID still exist in the market and are expected to impact the full Q2. As a result, we anticipate the negative impact on the operating income in Q2 to be comparable to or greater than Q1. Although we previously projected China recovery as early as Q3 of this fiscal year, we do not have clear line of sight into the timing of recovery and believe China’s contribution as a percentage of our fiscal 2023 consolidated operating income to be lower than our original guidance assumed. However, our long-term opportunity in China is very strong.

We expect the market to see meaningful sales rebound once recovery is in full swing. Until then, we continue to stay focused on the long-term growth opportunities that China will deliver while weathering the short-term and transitory challenges. Now even with that backdrop and taking into account the uncertainty of China’s recovery timing, our fiscal 2023 guidance remains unchanged. As a few point of clarification on guidance, in China, we now expect negative comps to continue through the second quarter, followed by improvement in the balance of the year. Another point of clarification is that China store growth remains unchanged as we execute our strategy to expand in new cities. Also, our guidance continues to include the impacts of significant investments related to our reinvention plan and inflationary pressures which largely remain comparable to what we had originally anticipated.

Lastly, our guidance reflects the latest projection of foreign currency translation with approximate two and three percentage point unfavorable impacts on fiscal 2023 revenue and earnings growth, respectively. This reflects an improvement of approximately one percentage point on both revenue and earnings growth relative to our previous expectations. Additionally, in terms of quarterly shape, operating margin is expected to decline sequentially in Q2, near prior year level driven primarily by the COVID-related headwinds in China. We still expect margins to expand in the back half of the year, improving sequentially in Q3 and Q4 as sales leverage, pricing, productivity gains from reinvention as well as recovery in China begin to contribute to positive margin expansion as the year progresses.

We continue to expect the quarterly EPS shape to roughly mirror the shape of operating margin with a sequential decline in Q2 and a meaningful step up in the second half of the fiscal year. Lastly, we also remain committed to returning approximately $20 billion to shareholders by the end of fiscal 2025 between share repurchases and dividends. Our repurchase program resumed in Q1 of this fiscal year and will accelerate as reinvention gains ground. Since the inception of our dividend program, 51 quarters ago, our annual dividend growth has averaged greater than 20%, and our dividend payout rates near the top percentile of growth companies of our size and our scale, which is an exceptional complement to our long-term EPS growth target as high as 15% to 20%.

In summary, here are key takeaways for my discussion today. First, our business and our brand are strong and strengthening every day as demonstrated by the record sales in Q1. Next, our Q1 performance serves as proof point that we are progressing nicely against our strategy, inclusive of our reinvention plan and delivering the results we projected. And finally, we will continue to innovate in the critical areas of digital, product and stores as our new era of growth is just beginning to unlock, and we are excited about what lies ahead, including welcoming Laxman as CEO this spring and on our second quarterly earnings call. Now before I close, I want to express my sincere gratitude for a hard work of our Starbucks Green Apron partners across the globe, including those in China who serve our customers in a way that only Starbucks knows how.

Also, with this being Howard’s last earnings call, I would be remiss if I didn’t take a moment to thank Howard for his vision to create a company that is truly different, where value is created for all. I know that I speak for many of us when I say we will honor your legacy while taking the company to the next level, all in making you, our partners, and our shareholders proud. With that, we’ll open the call to Q&A. Operator?

 See also 10 Hot Healthcare Stocks To Buy Now and 10 Hot Tech Stocks To Buy Now .

Q&A Session

Operator: Thank you. . And your first question comes from Jeffrey Bernstein with Barclays.

Jeffrey Bernstein: Great. Thank you very much. And congratulations, Howard, on your final call.

Howard Schultz: Thank you.

Brady Brewer: Thanks, Jeff.

Jeffrey Bernstein: My question is just on — as I think about the U.S. comp clearly strong, up 10%. I’m just wondering if you can talk a little bit about the traffic you’re seeing today versus maybe pre-COVID. I think we all recognize that the sales are well above pre-COVID levels in total. But clearly, the average check has been the driver of that. I’m just wondering if you can — how you get comfortable with the fact that the brand is as strong as ever, whether you’re able to look at the number of beverages sold. Maybe that’s a better indicator or how you think about the business, again, when you strip out obviously the outsized menu pricing that’s been taken. And just as an aside, Howard, I think everyone was looking up Alchemy real quick since you made mention, I’m just wondering what specifically we’re talking about as the definition seems to be transformation of matter? Would love to get any kind of incremental color you want to give? Thank you.

Howard Schultz: . Rachel, you want to take the comp question, maybe, Sara, can help you as well.

Rachel Ruggeri: Sure. Let me start with that. Thanks, Jeffrey for the question. In response to your question around traffic, our 10% comp, as you know, was largely driven by ticket. Our transactions, transactions per store per day, which is how we measure the health of our business are still below pre-COVID levels and actually slightly below prior-year. But what’s important is we saw our traffic, TSDs as well as our units and overall ticket grow in our highest demand period. So our morning daypart and our midday, which is up till about 1’o clock saw a year-over-year increase of both transactions and units as well as ticket. In addition to that, those dayparts are also in line with 2019 levels. So why that gives us encouragement is our reinvention plan is squarely rooted at creating capacity in our busiest dayparts.

So as we start to move along our reinvention plan, it’s going to help us increase that capacity while creating a better experience for our partners and our customers. So that gives us a lot of confidence that our growth objectives and our ambitions for this year and beyond are well suited.

Jeffrey Bernstein: Thank you.

Howard Schultz: Next question.

Operator: And our next question comes from Sara Senatore with Bank of America. Please state your question. Sara, your line is open.

Sara Senatore: Sorry, hi, can you hear me now?

Operator: Yes, go ahead please.

Sara Senatore: Okay, thank you. I was wondering, Rachel, if you could just talk briefly, you mentioned China was a $0.06 headwind. So ex that, certainly, earnings would have actually been better than we were thinking. Could you just talk maybe in order of magnitude where internally you might have seen surprise? Is it the fact that U.S. comps came in a bit higher than your long-term guide has been? Is it from the other — is it from the other geographies or segments. I just am trying to understand kind of how to think about that. And a related question, I think you said last year, China was about 25% of what it normally would be. Are you able to give us any kind of gauge of what it might look like this year, given its slower to ramp than maybe you had anticipated?