Starbucks Corporation (NASDAQ:SBUX) Q1 2024 Earnings Call Transcript

Starbucks Corporation (NASDAQ:SBUX) Q1 2024 Earnings Call Transcript January 30, 2024

Starbucks Corporation misses on earnings expectations. Reported EPS is $0.9 EPS, expectations were $0.93. Starbucks Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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 2024 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. [Operator Instructions] I would 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 2024 results. Today’s discussion will be led by Laxman Narasimhan, Chief Executive Officer, and Rachel Ruggeri, Executive Vice President and Chief Financial Officer. And for Q&A, we will be joined by Belinda Wong, Chairwoman and Co-Chief Executive Officer of Starbucks China, and Brady Brewer, Executive Vice President and Chief Marketing Officer. This call will include forward-looking statements, which are subject to various risks and uncertainties that can 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 report on Form 10-Q.

Starbucks assumes no obligation to update any of these forward-looking statements or information. GAAP results in the first quarter fiscal year 2024 and the comparative period include 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. As part of our non-GAAP results, revenue, operating margin, and EPS growth metrics on today’s call are measured in constant currency. Current period results, however, are converted into United States dollars using the average monthly exchange rates from the comparative period rather than the actual exchange rates for the current period, excluding any related hedging activities.

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 conference call is being webcast and an archive of the webcast will be available on our website through Friday, March 15, 2024. Also, for your calendar planning purposes, please note that our Second Quarter Fiscal Year 2024 Earnings Conference Call has been tentatively scheduled for Tuesday, April 30, 2024. And with that, I’ll now turn the call over to Laxman.

Laxman Narasimhan: Thank you, Tiffany, and thank you all for joining us this afternoon. I will start by sharing an overview of our business performance in our first quarter of fiscal 2024. I will then turn it over to Rachel Ruggeri to walk through the detailed segment results. We saw strong momentum and a highly successful holiday in the quarter with record revenue and expanded margins. We saw strong growth in our loyalty programs, sequentially increased in frequency and record spend among our loyal customers. Positive traction from new product innovations, exciting momentum in China with our focus on premium, and progress on the execution Triple Shot strategy. We also saw some unexpected headwinds which impacted the rate of growth.

We feel very confident about our robust plans to address these challenges. While we are already seeing traction, there was an impact in the quarter, and it will take some time to normalize. Let me walk you through the details. Our performance in the quarter was fundamentally strong. Our Q1 total company revenue was a record $9.4 billion, up 8% year-over-year. Our global comparable store sales grew 5% year-over-year, supported by a 5% comp growth in North America, driven by 4% ticket growth, and 10% comp growth in China. Our global operating margins expanded by 130 basis points to 15.8% and our overall earnings per share grew 20% to $0.90. This speaks to the continued successful execution of our reinvention plan and the durable business we are building.

We are fortunate to have built one of the strongest brands in the world and we continue to benefit from customer loyalty. Throughout the quarter, we saw our most loyal customers around the world coming into our stores more often. Specifically in the US, we set new records with our 90-day active reward members growing 13% year-over-year to a record 34.3 million, with tender reaching an all-time high of 59%, demonstrating increased engagement. Importantly, the frequency of our most loyal customers increased sequentially and spend per member reached a record in Q1, fueled by our holiday promotion which significantly exceeded our expectations. Our cold and gingerbread platforms drove a record high ticket in the US in the quarter. We also had the highest sales of Starbucks gift cards in our history, making us number two in gift cards sold.

In total, we have an incredible $3.6 billion preloaded onto our cards in the US in the quarter. In short, our growing Starbucks Rewards members are visiting our stores more frequently and increasing their spend each time that they come. We also saw great momentum in China. We aim to be the best in the premium market in China. Our brand equity across Starbucks and Starbucks Reserve is second to none. Based on our latest brand tracker, Starbucks continues to be the first choice in away from home coffee, including among the Gen Z consumers. We continue to lead in brand affinity and have the highest awareness, brand familiarity, and purchase-intent scores. We have the most outstanding partners in our stores, with very strong customer connection, and the highest retention rates in our industry.

We offer distinctive global and locally relevant product innovation anchored on superior coffee with food attachments and a morning daypart that now has surpassed pre-COVID levels. Our loyal customers, a major part of tender, are coming more often, and our loyalty program is growing. We’re doing all of this while offering premium physical and digital experiences delivered across our distinctive store portfolio, across other physical channels and through our digital connection and doing so at a commensurate value. This ambition being best in premium in China is in line with our long-term growth ambitions for China. Let me now talk about the headwinds and our response. We entered the first quarter very strong globally, we had great momentum in August and September and that continued into October, which exceeded our expectations across every measure.

Beginning in mid-November, while our business continued to grow, the growth rate was impacted by three unexpected factors. First, we saw a negative impact to our business in the Middle East. Second, events in the Middle East also had an impact in the US, driven by misperceptions about our position. Our most loyal customers remained loyal and in fact increased their frequency and spend in the quarter. But we did see a softening of US traffic. Specifically, our occasional US customers who tend to visit in the afternoon came in less frequently. I will speak in a moment as to how we quickly responded with an effective action plan. Finally, we experienced a slower than expected recovery in China, driven by a more cautious consumer. While we had a relatively very strong 11/11 holiday, the overall market weakness led to significantly increased pricing competition.

We responded quickly to these headwinds. In the US, we implemented targeted offers aimed at bringing our occasional customers into our loyalty program. As we’ve seen over time, Starbucks Rewards members develop a routinized long-term relationship with our brand that increases both ticket and transactions. Additionally, we activated new capabilities within our proprietary deep Deep Brew data analytics and AI tool to identify and incentivize specific Rewards members cohorts. Finally, we are leaning further into our brand marketing and factual narrative and social media to engage these audiences where they are. We’ve already seen the positive impact of these new initiatives with our more occasional customers beginning to rebound in December. However, we continue to see further opportunity to welcome back our very occasional customers.

We feel good about the trajectory over the course of the quarter, but it will take time for our plans to be fully realized. In China, we remain very confident in the long term. The market is going through a transition as we see an increase in mass market competitors, which we believe will shake out over time, and the market will emerge looking fundamentally different than what we see today. We expect a much larger and tiered market as per capita consumption continues to increase and the market matures. There are three key elements in our China strategy. First, we are offering more coffee forward, locally relevant product innovations and we’re increasing engagement in social media channels through influences and partnerships, which are highly effective in China.

These actions are increasing awareness and have led to greater customer frequency. Second, we have made significant investments in technology, increasing our omni-channel capability, allowing us to serve more customers through new occasions. These investments have also led to a more digitized store environment, increasing efficiency of our supply chain and stores, while enhancing the partner experience and strengthening our unit economics in both existing and new stores. Finally, we’re increasing the percentage of new stores opening in lower tier markets and new county cities, where we see meaningfully stronger new store economics. As you can see, we moved quickly to respond and implement a plan to address these unexpected headwinds. It will take time for these action plans to be fully realized.

That said, we remain confident in our Triple Shot strategy and our long-term growth. So let me share some of the progress in the quarter. Our first Triple Shot Reinvention priority is to elevate our brand by operating great stores and driving product innovation. The best lever for elevating our brand is our store experience. We continue to raise the bar on running great stores with a focus on enhancing both our partner and customer experience. One example is the continued rollout of our Siren System cold and food stations. We remain on track to have approximately 10% of our stores equipped with a Siren System by the end of this year. We are a coffee company, and we will continue to lead with coffee innovation. We’re continuing the installation of our Clover Vertica in nearly 10% of our US company-operated stores in the quarter.

We are on track to have on-demand single-cup brewers installed in nearly 60% of our US company-operated stores in fiscal year 2024. This will continue to elevate our coffee offering while also making partners more productive by reducing waste and creating efficiencies in store, allowing them to spend more time doing what they do best, connecting with our customers. Just imagine, a perfectly brewed on-demand cup of coffee at any time throughout the day, even decaf. This quality and the offering are like no other in the industry. We also continue to offer coffee blends which are distinctive and remind people of the romance of coffee. Our Verona blend is anchored in the essence of Verona, Italy. It was our tribute to the city of romance in Italy.

In celebration of our five years in Italy, we will introduce a new coffee, Starbucks Milano Roast, inspired by the art and culture of Milan. Milan’s miart, an international modern and contemporary art fair, is the perfect backdrop to a launch in our Milan Roastery that will then scale globally. The moment will capture our love of coffee, the passion of our partners, and the dynamism of Milano. Today, we’re excited to launch the Oleato platform with Oleato customizations across the US. In the coming weeks, we will also launch Chocolate Covered Strawberry Creme Frappuccino and a Chocolate Hazelnut Cookie Cold Brew in time for Valentine’s Day. Starting this week and continuing over the next few months, we will be introducing three new beverage platforms, each of which is squarely aimed at our Gen Z and millennial customers across a range of coffee and cold beverages and compelling for the afternoon.

These product innovations are examples of how we continuously elevate the brand and welcome customers back with a unique Starbucks experience. We’re also offering new and exciting options beyond coffee, including food that appeals to different dayparts, especially the afternoon. In January, we added new menu items, including the Potato, Cheddar & Chive Bakes and the Chicken, Maple Butter & Egg Sandwich. These are products that tide our customers over between lunch and dinner. Importantly, our digital experience makes attaching food to afternoon drink orders easy and convenient. We’ve seen a very positive customer response to these new items and we are expanding inventory to meet the strong demand. We’re also pleased with the pace of our new store openings and strong unit economics.

Our most recent age class of company operated new stores in the US is averaging unit volumes of approximately $2 million with ROIs of approximately 50%. And as we continue to open more stores, growing by approximately 4% this year in the US on a base of over 16,000, including licensed stores, we will further invest in purpose-built stores to meet our customers where they need and want us to be. This includes drive-throughs which have grown by over 500 stores since Q1 of last year. Even in the US, we see abundant greenfield opportunity ahead. Our second strategic priority is further strengthening and differentiating our leadership position in digital. We saw our mobile order and pay surpass a record high 30% of all transactions in the quarter.

And we reduced downtime of mobile order and pay by half, as we continued to find ways to deliver a better customer experience. We’ll continue to make the Starbucks app even better, including adding the ability to use a personal cup in ordering through the app, and the rollout of more accurate order wait times. We’re also laser focused on ensuring our customers can personalize their orders in whatever way they want. One example is helping customers find products based on dietary needs. We saw record results in our US delivery business with growth of nearly 80% year-over-year, aided by our expanded partnership with DoorDash. We see significant growth for continued incremental growth as delivery represents only 2% of our transactions. Our purpose-built stores optimized for delivery and fulfillment help seize this opportunity.

Additionally, we are conducting a pilot with Gopuff, targeting a fully incremental opportunity for overnight orders between 5:00 PM and 5:00 AM. In this pilot, Starbucks trained baristas prepare handcrafted Starbucks drinks and food inside Gopuff micro-fulfillment centers, delivering to the customer’s door in about 30 minutes. To further expand the reach and impact of mobile ordering and rewards, we now offer Starbucks Connect in over 40% of our more than 6,700 US licensed stores with further expansion planned for this year. We’re also pleased to share that Bank of America will be our next Starbucks Rewards partner, delivering even more value to our most loyal customers. This opportunity builds with the great success of our partnership at Delta Airlines that is deep in connection and engagement with our members, and is one of two new Starbucks Rewards partnerships we told you we would roll out this year.

Our third strategic priority is becoming truly global. Our international business represents an important growth opportunity for us over the long term. If you look at our business excluding the headwinds, we had a strong quarter, demonstrating the momentum and resiliency across the portfolio. We opened over 420 net new stores in the quarter, a growth of 10% year-over-year, bringing total store count to over 20,600 stores with nearly 14,000 of those stores outside of China and the US. In Japan, we reached a milestone of 1,900 stores across the market with much opportunity ahead. Let me address our business in the Middle East. I am deeply distressed by the violence shaking the region. As I have shared, Starbucks condemns violence against the innocent, hate and weaponized speech.

We are intensely focused on supporting our partners and the many other stakeholders affected by what is taking place. We have seen a significant impact on traffic and sales in the region, and we are working with our licensees during this time to ensure the safety and well-being of our partners and our customers. I shared earlier in my remarks how we are addressing the near-term situation in China. Overall, our business and brand in China remain strong. Our revenue in the quarter grew 20% in constant currency, underpinned by a 10% increase in comparable store sales growth as the market lapped prior year mobility restrictions. As we strengthen our position in the premium market in China, let me point to a few accomplishments of the quarter. We launched 12 new coffee forward beverages in the quarter, including Intenso, which was incredibly popular with our customers, including Gen Z, fueling the morning daypart, which is now larger than pre-COVID levels.

Our digital channels accounted for a record 52% of sales, up 4 percentage points quarter-over-quarter. Our Starbucks Rewards Gold member frequency increased by nearly 10% over the prior quarter with total member engagement setting a record 73% of tender, demonstrating the stability of our most loyal customers. Our new stores continue to deliver attractive returns on both the top line and profitability, with further strength in unit economics in stores opened in new county cities. And our turnover amongst full-time store partners reached a record low in the quarter, coupled with an all-time high partner satisfaction score. Early this month we celebrated our 25th anniversary in China. With nearly 7,000 stores, we have built a durable business.

We have built a terrific brand, and we are well on track to hit our 9,000 store target by 2025 and continue to have full confidence in the market opportunity. We continue to see enormous potential in China’s premium market, and no one is better positioned to lead in this space. Even as we navigate a dynamic environment, we remain confident in our long-term growth in our international segment. As part of elevating our brand across the international segment, along with a second reserve store in India, we will open two additional Starbucks roasteries that celebrate coffee, art and design in markets outside the US and China. We will announce these locations and opening timings in due course. Turning to our fourth priority, we’ve focused on unlocking $3 billion in efficiencies, and I’m pleased to say that we’re making steady progress.

Our Triple Shot Reinvention efforts delivered 130 basis points of margin expansion in the first quarter of the fiscal year. As you’ve heard me say often, the key to our success is the experience that our partners create for our customers. We’re investing in a better experience for our partners to advance our business through a more balanced growth model as we unlock efficiency. In the quarter, we have seen the effectiveness of the reinvention-driven investments we have made in in-store operational efficiencies, such as standards, equipment innovation, and scheduling improvements, leading to a more stable environment for our partners. Turnover has decreased by 5% year-over-year and is now well below pre-COVID levels. Average partner hours increased 10%, leading to a 14 percentage point increase in partner sentiment related to scheduling, specifically preferred hours, which we know is important to partners.

We are listening to our partners and investing to make their experience better. Of course, we have more work to do, but we are proud of the progress we have made to date. Outside of our stores, we’re working to drive efficiencies across our supply chain and expenses. I am pleased with the progress and we remain on track to unlock [few billion] (ph) dollars in efficiencies over the next three years. Our final priority is reinvigorating our partner culture. In addition to the investments in partner experience, we’re focused on partner culture. Our leadership team and Board of Directors have been deeply engaged in putting the partner experience at the heart of the business. An independent assessment found that our strategic investments, greater on the ground support, a dedicated labor relations team, and more bespoke management trading are having a tangible impact on the commitments we’ve made to our partners.

The assessment was also clear that there has been no union busting playbook at Starbucks. I want to be clear in my view on the matter of unionization at Starbucks. We believe in a direct relationship with our partners, and in the 4% of our stores in the US where our partners have chosen to be represented by a union, we are committed to finding a constructive path forward with those unions. I care deeply about our partners, their experiences and safety at Starbucks and their futures. Our partners remain core to the success of our business. And I am proud to be restitching the fabric of the green apron for all partners. Going forward, we plan to continue to focus deeply on reinvigorating our partner culture. It’s a priority for me and I’ll continue spending time each month working up close, shoulder to shoulder with partners in stores.

I did this during my visit to India earlier this month and I will continue doing it to stay grounded in the realities of the business. Good and not so good. I’m also proud to have earned my Coffee Master black apron along with my executive leadership team. A deep connection to partners and to coffee is a top priority for me and for every leader at Starbucks. As you look ahead to what is brewing for Starbucks in 2024, I have great optimism. We have a strong strategy. Our refreshed mission, values and promises are underpinning everything we do. We have many strengths to build on and a clear plan to navigate this dynamic environment. While it will take time, we are confident we have significant headroom to further grow top line and bottom line in the long term and invest in our partners and the business while delivering strong shareholder returns.

Finally, before I turn this over to Rachel, I want to remind everyone that Starbucks is focused on human connection. We stand for belonging. We stand for joy. We stand for humanity. That is what differentiates our brand and our business and has for the last 52 years. We believe this has never been more important in the world. And with that, Rachel.

Rachel Ruggeri: Thank you, Laxman, and good afternoon, everyone. Let me start by saying that I am so proud of the significant margin expansion and double-digit earnings growth we delivered in our first quarter despite the top line headwinds we experienced. Our strong focus on reinvention continued to unlock efficiencies, driving a balanced outcome where both revenue growth and margin expansion drove our earnings growth. As we have shared, we are unlocking multiple paths to support our earnings growth over the long term, creating a more durable business and this quarter proved testament to that durability. Our Q1 consolidated revenue reached a record $9.4 billion, up over 8% from the prior year, even with the confluence of factors adversely impacting our business, as Laxman discussed in detail at the top of our call.

The revenue increase was driven by 5% comparable store sales growth, 8% net new company operated store growth, as well as a 6% increase in our global licensed store revenue over the prior year, underscoring the strength of our broader portfolio and our execution. Q1 consolidated operating margin expanded 130 basis points from the prior year to 15.8%, primarily driven by sales leverage and reinvention-related in-store operational efficiencies, partially offset by our continued investments in our partners. Our reinvention has successfully driven resiliency in our business, with our North America margin expanding a notable 280 basis points in the quarter, which I will discuss in further detail in a moment. Q1 EPS was $0.90, up 20% from the prior year.

Our strong double-digit EPS growth in the quarter demonstrates multiple paths to drive growth and profitability. I’ll now provide segment highlights for Q1. North America delivered another quarter of record revenue in Q1 with $7.1 billion, up 9% from the prior year, driven by a combination of a 5% increase in comparable store sales, inclusive of a 4% and 1% increase in average ticket and transactions respectively, as well as net new company operated growth of 4% over the prior year. Our US licensed store business also contributed to the segment’s growth from increased travel and further rollout of our Starbucks Connect program. Our US company operated business delivered 5% comparable store sales growth in Q1, driven by 4% ticket growing from pricing, mix, and customization.

This led us to having our highest average ticket in our 50-plus year history, as our successful holiday innovation and complementary product offerings, including our new Chai Tea Latte and Sugar Plum Cheese Danish, resonated with customers. Comparable transactions for the quarter increased 1% as traffic was pressured to negative single digits in November before it started to rebound in December. In light of the pressure traffic, and as Laxman mentioned earlier, customers showed strong loyalty through our Starbucks Rewards program with record engagement and the highest ever spend per member. North America’s operating margin was 21.4% in Q1, expanding 280 basis points from the prior year, driven by 240 basis points from reinvention-related in-store operational efficiencies, as well as sales leverage and pricing, partially offset by continued investment in our partners.

This substantial margin expansion in the quarter reflected the meaningful labor staffing and scheduling improvements we made as part of our reinvention. We unlocked significant stability by focusing on staffing and scheduling hours based on partners preferred shifts, which enhanced both our partners experience and subsequent store performance. We saw a store efficiency increase as items per labor hour reached its highest levels in the quarter. Outside of stores, we reaped the benefits of enhanced sourcing and waste reductions in the first quarter, as seen by improvement in the segment’s product and distribution costs. When you think about the operational efficiencies that continue to manifest both in and out of stores, we expect to continue delivering progressive margin expansion.

Moving to international. The segment delivered $1.8 billion in revenue in the quarter, up 12% from the prior year. The revenue growth was driven by a 12% increase in net new company-operated stores year-over-year, as well as a 7% increase in comparable store sales, driven by 11% transaction growth, partially offset by a 3% decline in average ticket. As Laxman mentioned, the pace of recovery in China was slower than expected. That, coupled with a negative impact to our business in the Middle East, pressured our international segment as a whole. However, we continue to see these headwinds as transitory and remain committed to our long-term growth ambitions in the segment. In Q1, China’s revenue grew 20%, driven by 15% new store growth, as well as a 10% increase in comparable store sales growth, including 21% transaction growth, largely related to the market lapping prior year COVID impact.

Comparable ticket, however, declined 9% due to mix shift, including lower sales of merchandise and increased promotional environment. The market opened 169 net new stores and entered 28 new county cities in the quarter, serving as a proof point that our commitment to expanding our premium position in the market has not wavered. Total international segment operating margin was 13.1% in Q1, contracting 110 basis points from the prior year. The contraction was primarily driven by investments in partner wages and benefits, business mix shift as a greater portion of the segment’s revenue was generated in our company-operated markets versus the prior year and strategic investments, partially offset by sales leverage. Shifting to channel development.

The segment’s revenue of $448 million in Q1 declined 7% from the prior year, largely in line with our expectations given the sale of Seattle’s Best Coffee. Our business continues to resonate with customers as Starbucks maintained the number one share position in both US At Home coffee and US Ready to Drink in the first quarter as our holiday offerings such as Peppermint Mocha and Gingerbread were among customer favorites. The segment’s operating margin was 46.8% in Q1, down 60 basis points from prior year, driven by product costs in Global Coffee Alliance, partially offset by business makeshift. Although there was contraction in the first quarter, we continue to expect the segment’s full-year operating margin to expand to the high 40% to low 50% range and be accretive to our total company margin.

Now, moving on to our guidance for fiscal year 2024. We are confident that the business pressures we experienced in the first quarter are transitory. With that, our guidance shared at our reinvention update in November remains unchanged related to our global store growth, operating margin, and EPS. However, given the collective magnitude of headwinds on our first quarter revenue and the time it will take for our action plans to be realized, we are revising our full year outlook for revenue and comp to reflect our Q1 results, as well as account for recent trends, including a softer than planned January, which we expect will impact our Q2 performance. With that, we now expect our full year global revenue growth in the range of 7% to 10%, revised from our previous range of the low end of 10% to 12%.

Full year global and US comp growth in the range of 4% to 6%, both revised from the previous range of 5% to 7%. China comp growth of low single digits for the balance of the year, revised from the previous range of 4% to 6% in Q2 through Q4 with higher comp in Q1. Just to be clear, we continue to expect to deliver full year global store growth at approximately 7%, progressive operating margin expansion on a full-year basis, full-year EPS and non-GAP EPS growth in the range of 15% to 20% as we have multiple paths to such earnings growth as we demonstrated in the first quarter. As an additional insight, here are a few clarification items related to guidance. As a reminder, our guidance does not include any impact from foreign currency translation and assumes constant currency.

In terms of quarterly shape, we expect growth rates for our global revenue, comp, operating margin, as well as GAAP and non-GAAP EPS to be the lowest in Q2 and meaningfully below our full fiscal year guidance ranges due to the pressures we discussed in today’s call. These metrics are then expected to rebound and stabilize in the second half of our fiscal year. While we continue to expect our effective GAAP and non-GAAP tax rates in the mid-20% range, they are expected to be meaningfully higher than our fiscal year 2023 tax rate of 23.6%, which benefited from certain discrete non-recurring tax items. Finally, our disciplined capital allocation approach continues to deliver significant results. The combination of revenue growth, margin expansion, and improved working capital underpinned by the disciplined capital allocation increased our Q1 cash from operations to a record $2.4 billion.

Our strong cash generation, together with our leverage and investment grade rating, creates exceptional shareholder returns while maintaining balance sheet flexibility to fund our critical investments, creating a competitive advantage. In summary, here are key takeaways from my discussion today. First, our Triple Shot Reinvention is continuing to unlock our greatest potential, evidenced by the strong operating margin performance and balanced earnings growth in the first quarter in spite of the pressured environment. Next, our revenue and comp guidance has been revised to reflect our Q1 results and expected near-term and transitory headwinds. But importantly, despite these headwinds, we remain committed to our full-year fiscal 2024 EPS growth in the range of 15% to 20%.

Further, we have robust plans to navigate through the complex and dynamic environment and recognize our plans will take time to materialize, but remain confident in our long-term growth. And finally, our focused and disciplined approach to capital allocation drives our financial fortitude and balance sheet optionality, keeping us in a position of strength. Before I close, I want to thank all the partners across the globe who consistently find ways to create joy and foster connection to and with our customers. You give me the confidence that our best days are yet to come. So, thank you, partners. With that, I’ll turn it back to Tiffany.

Tiffany Willis: Thank you, Rachel. Before we open the call to Q&A, we request that your questions today be focused on the quarterly performance that we just discussed, as this call is not to address questions related to recent proxy filing. With that, Diego, let’s take the first question.

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Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from Jeffrey Bernstein, Barclays. Please go ahead.

Jeffrey Bernstein: Great. Thank you very much. Just a question on the fiscal ‘24 guidance. I appreciate that you tempered the comp growth for both the US and China. For the US, it looks like it’s only a point and China, it’s only a few points, but we would define that, I guess, as modestly. And, you mentioned that fiscal 2Q is expected well below the targets before accelerating the rest of the year. So with that as backdrop, I’m just wondering if you could talk a little bit about, I think you mentioned January has been softer than expected, any color you could provide there? And otherwise, your confidence in that new guidance, it does seem like it implies a rather sharp acceleration in the back half of the year. I’m just wondering how you think about the guidance relative to maybe tempering it further and not having that risk if perhaps the recovery doesn’t play out as fast as you might be expecting? Thank you.

Rachel Ruggeri: Sure. Yeah. Thank you, Jeffrey. This is Rachel. As it relates to our guidance, when we look at our revised revenue guidance, it’s based on the performance we saw in Q1, as well as the near-term and transitory headwinds that we’ve spoken about. With that, we expect Q2 will be below the full-year guidance ranges, largely due to the fact it’s going to take some time for our plans to materialize, as well as we’ll continue to see impacts to our business in the Middle East. But what gives us confidence in that revenue range is the fact that we still have a very strong and growing loyal customer base. We’re having increased capability as it relates to our digital programs around the world. And we’ve also seen that our reinvention has been very successful in helping us to meet increasing demand.

Most specifically in this quarter, we saw really strong demand supported in our morning daypart, our busiest daypart in our US business. And we actually exceeded both prior year, the year before, and we’re right on line with pre-COVID level. So we’re encouraged by that overall just in terms of transactions. And in addition to that, as we talked about in the call, we’re confident that we have multiple levers to be able to drive our earnings growth. Revenue growth is one factor, and we believe we’ve got growth in that guidance range. That will help drive margin expansion through — flow through. But in addition to that, we have in-store and out-of-store efficiencies that we’re seeing great success with. And so that gives us some confidence that we have a balanced path and multiple leverage to be able to drive that earnings growth of 15% to 20% on a full year basis.

Operator: Thank you. Your next question comes from Brian Harbour with Morgan Stanley.

Brian Harbour: Yeah, thank you. Good afternoon. Could you talk more about kind of the specific plans to drive sort of the occasional customer? And it sounds like you would expect some pretty solid improvement in US sales as we go through the year. It sounds like what was new was some new product platforms. Could you just elaborate on how quickly you think those will work, what might be coming on the product side that drives your confidence in US sales?

Laxman Narasimhan: Sure, let me start and I’ll call on Brady a bit, to provide some more color. As we said earlier, what we saw in the US was a quarter that was actually very strong till about the middle of November. And what you see in the results, very strong performance of the loyal customers, very strong holiday performance, very strong brand equity, and very strong performance on gift card sales. And we mentioned as well that we’ve got about $3.6 billion loaded on our card. So manifestation of the overall brand being very strong. And so there is, of course, what we do have, the isolated impact with the occasional customers, particularly those that visit in the afternoon. So if you look at some of the actions that we have in place, first, there is actually more demand than we’re currently meeting in the US.

Second, our loyalty program is already performing exceptionally well as Rachel mentioned. But we have a combination of things we’ve been doing to address the traffic slowdown, particularly in the afternoon. The first area is innovation. We mentioned a couple of new products coming in time for Valentine’s Day, but we’re going to have three new beverage platforms coming in the next six months, and you will see how important that is for us over time. The second action is we’re opening up our app ecosystem to bring more people into the app because we know that our members developed a routinized long-term relationship with our brand that increases both traffic and transactions. And third, we are implementing targeted offers aimed at some of these very occasional customers to bring them back into the stores.

And all that of course is foundational to, we continue to execute in our stores in order to elevate partner pride, bring a great deal of passion back into the business, and ensure that we can meet more of the demand that we know exists. Brady, do you want to give a bit more flavor around some of the activations, particularly on the innovation side?

Brady Brewer: Sure. Thank you, Brian. Thank you, Lax. As Laxman said, there’s a calendar of compelling product innovation. Laxman spoke about the new beverage platforms that are coming over the next few months. On food, we’re seeing a lot of momentum on this health conscious all day breakfast and all day snacking that I spoke about on the investor day. As we’ve released new products in that space, we’ve seen great resonance with customers and will continue to mine that space. Then we look at digital. Laxman referenced the 30% of US transactions coming through MOP. We’re seeing high demand for that service even among occasional customers. So increasing the reach of the app, number one. Increasing personalized communication in the app, both to drive tickets for those routinized customers, but also frequency for the less frequent customers is a capability that we continue to build.