Starbucks Corporation (NASDAQ:SBUX) Q3 2023 Earnings Call Transcript

Starbucks Corporation (NASDAQ:SBUX) Q3 2023 Earnings Call Transcript August 1, 2023

Starbucks Corporation misses on earnings expectations. Reported EPS is $0.84 EPS, expectations were $0.95.

Operator: Good afternoon. My name is Diego, and I will be your conference operator today. I would like to welcome everyone to Starbucks Third 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. [Operator Instructions] 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’ third quarter fiscal year 2023 results. Today’s discussion will be led by Laxman Narasimhan, Chief Executive Officer; Rachel Ruggeri, Executive Vice President and Chief Financial Officer. And for Q&A, we will be joined by Belinda Wong, Chairwoman and Chief Executive Officer of Starbucks 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 report on Form 10-Q.

Starbucks assumes no obligation to update any of these forward-looking statements or information. GAAP results in third quarter fiscal year 2023 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. For non-GAAP financial measures mentioned in today’s call, please refer to the earnings release and on 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, September 1, 2023.

Also for your planning purposes, please note that our fourth quarter and fiscal year 2023 earnings call has been scheduled for Thursday, November 2, 2023. 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. In a few moments, Rachel Ruggeri will walk you through the detailed results of the third quarter, and Belinda Wong would then join us for Q&A. To start, our strong third quarter results point to all-around momentum in the business. This quarter, we grew consolidated revenue by 12%, up 14% when excluding more than a 1% impact in foreign currency translation to a record $9.2 billion. Importantly, earnings growth of 19% outpaced revenue growth with margin expanding by 50 basis points to 17.4%. Our strong performance reflects the strengthened foundation of our business, resulting from the significant progress we are making against our reinvention plan.

Since stepping into the role, I have now traveled to every region, working directly with partners. I left each interaction impressed by the differentiated global appeal of the Starbucks brand powered by innovation and anchored in our unique ability to deliver human connection. These experiences give me great confidence in the significant growth and margin opportunities in front of us, positioning us well to strengthen the brand and create outsized long-term shareholder value. It was this time last year when Howard and the team identified the must-win opportunities and investments for our foundational reinvention plan. While Rachel will walk you through detailed results, I will now outline the momentum we have from the quarter in five key priority areas while pointing out where we see further headroom.

Our first priority, we will elevate the brand by running great stores. This comes to life in the strengthened execution in North America. Our North America team delivered record revenue in the quarter, with a growth of 11% underpinned by 7% comparable same-store sales growth, leading to the highest average weekly sales in our history. Our ticket growth was driven by pricing, customization and food attach. Additionally, we continue to see improvements in items sold per labor hour. Operationally, we are seeing evidence that we are executing better. Barista attrition, where we are already industry-leading has improved further by 11% year-over-year. Through scheduling and staffing improvements, we are beginning to increase the number of hours per partner in store, critical to running great stores and improving partner engagement while also improving productivity.

Innovation in beverage and equipment continues to drive our business. In fact, our cold business reached 75% of U.S. beverage sales this past quarter. As the leader in premium coffee, we are particularly encouraged to see cold espresso beverages were up 13% year-over-year. Additionally, we continue to elevate the premium coffee experience in both cold and hot. For example, the rollout of our Clover Vertica brewer continues as planned, delivering a larger variety of high-quality hot coffee, including decaffeinated on demand. Our innovative equipment rollout remains on track, are faster and easier to use portable handheld cold form blenders continue to have an outsized impact for both the partner and customer experience. The cold foam blenders are now rolled out to all U.S. company-operated stores in time to meet the summer demand for Starbucks Refreshers’ frozen beverages.

The new blenders support the additional growth of cold foam, the fastest-growing customization at Starbucks. Modifiers such as cold foam now contribute to over $1 billion in revenue annually. The Mastrena 2 espresso machines and new warming ovens are also now in all U.S. company-operated stores. Taken all together, our equipment investments that we began last year are supporting labor efficiencies, allowing us to increase capacity during our busiest day parts. These investments are both elevating the Starbucks Experience and further differentiating us from competitors. In this past quarter in North America, we once again saw our unit volume outpace pre-COVID levels by double-digits with high attach rates across dayparts, the mornings as well as the afternoons.

Also in thinking about dayparts, our Starbucks Refreshers platform, which skews towards an alternate location occasion has seen double-digit growth this past quarter in every daypart. With this success, we are leaning in even further with a systematic pipeline of innovation across dayparts. This includes this summer’s launch of our Starbucks Refreshers frozen beverages, customization in our Oleato beverage platform as well as with our cold-pressed Cold Brew, which enters a testing phase across a few dozen stores this fourth quarter with a rollout across U.S. company-owned stores expected by the end of fiscal year 2024. Food is also fueling growth. This past quarter, we saw all-time high food attach and sales of breakfast sandwiches. As an attached business, food drove a higher ticket in the quarter, improving volume growth and contributing to the record average weekly sales.

Overall, we are excited about the significant opportunity in food as we explore new, elevated and convenient food offerings. We will share more of this in time. We also continue to grow and diversify our store portfolio. We see significant headroom for new store growth in underpenetrated areas in the U.S., including smaller cities as well as new formats in larger metros. New stores and remodels are where we are first prioritizing our Siren System equipment rollout and we plan to move all stores to brand-forward digital menu boards over the next couple of years to further sharpen personalization and daypart activation. We are seeing strong growth in delivery. In fact, we are close to creating a $1 billion incremental leg in our delivery business from minimal presence a few years ago.

And now we are operationally setting ourselves up for this channel in major markets, starting from a position of strength. As a second strategic priority, we’re looking ahead at how we will further strengthen and differentiate our leadership position in digital. In the third quarter, we continued to grow our digital universe. Our 90-day active Starbucks Rewards customers grew to nearly 75 million globally, growing more than 25% in the quarter. This was driven by a record 90-day active user base of 31.4 million Starbucks Rewards customers in the U.S., an approximate 15% growth or 4 million new customers from the previous year. Starbucks Rewards members in the U.S. drove 57% of tender for the second consecutive quarter, up over 3 percentage points from the prior year.

In China, we hit the highest number of 90-day active users we have ever had at over 20 million Starbucks Rewards customers. This is further evidence of our brand strength, relevance and customer engagement in the market. Starbucks has had a long track record of industry-leading digital innovation. As we approach the fundamental platform transformation underway with AI, we intend to invest to lead in this area using a foundational Deep Brew capability as the launching pad. Our focus in these investments will remain on improving the partner experience while elevating the customer experience and delivering productivity gains. We are revamping our approach to further accelerate digital innovation, including order, including payment and delivery enhancements, in terms of speed and personalization, which we believe leads to greater habituation by our customers.

This includes developments in the U.S. mobile app user experience as well. Additionally, we plan to make significant investments in China to further enhance our digital capabilities in the market. Our third priority is global growth. As a company with over 100 million customer occasions each week, more than 37,000 stores and operating in 86 markets around the world, the runway for global growth is limitless. For the quarter, we again saw double-digit top line growth across the International segment. The segment delivered record system sales for the second consecutive quarter as well as the highest revenue and operating margin since the fourth quarter of fiscal year 2021. Excluding the negative impact of foreign exchange, we continue to see double-digit growth in the company-owned markets of Japan and the U.K., while the geographic license partners across the rest of the world all reported very strong performance.

Our international store growth was 10% year-over-year. New stores are bringing attractive unit economics for the business while we benefit from strong growth in returns on invested capital in these markets. Turning to China. I am encouraged by our performance in the quarter. I had the opportunity to spend time in the market recently. I can now fully appreciate the extraordinary strength and resilience of the Starbucks brand, which is known as Xingbake locally. Looking at our third quarter results, our China revenue grew 51% from the prior year or up 60% when excluding a 9% impact of foreign currency translation. Additionally, we sequentially grew our revenue 8% from the prior quarter or up 10% when excluding a 2% impact of foreign currency translation, underscoring the robust long-term health of our business.

Despite these early days in our recovery journey, stores that opened in fiscal year 2019 or earlier achieved full sales recovery in the routine morning daypart while other dayparts reported sequential monthly improvement. A strong recovery in the third quarter was amplified by the many distinctive competitive advantage that set us apart in China. The first and foremost advantages are in comparable partners who honor the heritage of our company, bring sophisticated appreciation for our high quality coffee and passion for delivering the Starbucks Experience in ways that are relevant to our Chinese customers. Our second advantage is our vertically integrated operations. We start with a locally relevant and increasingly greener store footprint.

Our distinctively designed stores across formats celebrate the Chinese culture in a unique Xingbake manner, reflecting local arts, crafts and calligraphy. In the fall, we plan to open our Coffee Innovation Park, our single largest and most sustainable manufacturing investment outside of the U.S. This next-generation facility with state-of-the-art supply chain operations will also include a unique customer immersion center. Third, our locally relevant innovation in China for over 20 years has won over customers in what has historically been a tea-drinking culture. Today, we have nearly 6,500 stores and another nearly 2,400 points of customer connection through our We Proudly Serve program in China. And yet, there is so much more opportunity ahead in underpenetrated areas within this market.

Some growth facts to think about. The average person in China drinks 12 cups of coffee each year. That significantly lower coffee consumption than in Tier 1 cities like Shanghai, where we first entered the market and now have nearly 1,100 stores. And we still have more room to grow in Shanghai. Compare this also to Japan where our per capita is 200 cups versus the 12 cups in China and the U.S., where the per capita is closer to 380. We are still in our early days in China, one of the largest consumer markets. With our locally-based investments in R&D and locally relevant offerings like our Dragon dumplings, which had an amazing quarter. We have built a brand that is highly relevant for China, in China. And we believe our unique approach has us well positioned to play the long game and win.

Pixabay/Public Domain

Finally, another advantage in China is digital. This will be further demonstrated with highly digital supply chains we run and in the way we engage our customers. We are reshaping our business models, leaning into the remarkable loyalty of our Starbucks Rewards members as well as convenience offerings, including delivery and curbside for our On-The-Go business. A comment on our international business beyond the U.S. and China. We have seen very strong growth and strong unit economics in these markets. It is becoming an important third leg for us. Looking outside the stores in the third quarter, our Channel Development segment revenue was $449 million, down 6% year-over-year, while delivering operating margin of 46.3%, up 630 basis points year-over-year, reflecting SKU rationalization as well as the shifts taking place with a more on-the-go customer.

We continue to see the opportunity for growth in channel-through innovation, as evidenced by the highly successful ready-to-drink Starbucks Pink Drink and Starbucks Paradise Drink introduced last quarter and the Grab and Go series launched in Japan in partnership with Suntory. We saw unprecedented sales during the first month of the launch in Japan, just as we did with our cream cheese lattes in China. Our fourth strategic priority is fueling productivity. We think of our business as a theater in the front and a factory in the back. We have a clear opportunity to maximize efficiencies and effectiveness while reducing waste by focusing on a vast opportunity in stores and also above stores. We have focused on meaningful improvements in staffing and scheduling to ensure that we have the right combination of the right partners in the right roles with the right hours to fuel both engagement and productivity.

We also closed the third quarter on target with our waste reduction goals as we strive to make operations as efficient as possible while preserving the Starbucks Experience. This is just the beginning of the productivity journey at Starbucks. We have broadened the areas beyond our initial reinvention plan to include our end-to-end supply chain, direct and indirect procurement, how we design and build stores as well as opportunities across technology and our supporting processes. Arthur Valdez, Jr., who joined us recently as the Chief Supply Chain Officer, brings three decades of supply chain and logistics leadership to Starbucks and will be critical in these efforts. Along with sales leverage, what I could see in opportunities with future productivity gains gives me real confidence in long-term progressive margin expansion.

Finally, the DNA of Starbucks is nothing without our culture. This is inherent to the company and something I was quick to learn through my immersion and experience working in stores. Our fifth strategic priority is reinvigorating our culture of human connection. We will measure our success on our business performance through the lens of humanity, just as we always have. And that requires us to reinvigorate our culture. Our partners are the heart of our business for me. We will continue to invest in the overall partner experience through compensation and benefits as well as through in-store improvements. At Starbucks, we strive to be a different kind of company, but we do recognize that we are operating in a different kind of world. It is through that lens we have spent the last several months rolling out a new unifying mission for the company, new promises for all our stakeholders and soon, a new set of values that will reground the culture of Starbucks in our heritage and a more modernized workplace.

Before I turn the call over to Rachel, I want to leave you with this. It is an honor to be driving such a stellar branded company in one of its best chapters. While we continue to navigate in an environment with a heightened level of macro uncertainty around the world, we will execute with discipline and rigor on our priorities. After all, Starbucks is a strong, resilient brand delivering to customers what the world needs most right now, human connection. As I look at the runway in front of us, the possibilities to deliver that connection are truly limitless. What I see is a durable iconic business with multiple paths available for us to deliver on our long-term revenue growth of 10% to 12% and earnings growth of 15% to 20%. I look forward to discussing our strategies and plans for fiscal year 2024 and beyond in greater detail in November in an extended investor call organized in a hybrid media format.

We would share more details in the coming weeks. And with that, I’ll now turn the call over to Rachel to talk more about our remarkable third quarter financial performance of the quarter. Rachel?

Rachel Ruggeri: Thank you, Laxman, and good afternoon, everyone. I’m very pleased to discuss our Q3 performance, which beat our expectations as our innovation and our brand continues to resonate with our customers around the world, fueling demand across our stores and digitally. Our U.S. business delivered record breaking performance on many fronts, and our China business continued to recover in line with our expectations. It’s clear we have abundant opportunity ahead. Our overall performance was bolstered by the progress we’re making against our strategies, specifically our reinvention plan and it’s unfolding into tangible financial results. As a reminder, when we set guidance at the beginning of the year, we said that the benefits from our reinvention plan would amplify at the back half of this fiscal year, and that is exactly what we’re seeing, highlighting our ability to effectively reinvest in our business for the benefit of all stakeholders.

Our Q3 consolidated revenue reached a record $9.2 billion, up 12% from the prior year or up 14% when excluding more than 1% impact of foreign currency translation. The strength of the brand, loyalty of our customers and innovative products fueled strong sales resulting in double-digit consolidated comparable store sales growth of 10%. In addition to the 10% comparable store sales growth, revenue also benefited from 7% net new company-operated store growth globally year-over-year as well as continued momentum in our global licensed market. Q3 consolidated operating margin expanded 50 basis points from the prior year to 17.4%, exceeding our expectations, primarily driven by sales leverage, pricing and productivity improvement from increased efficiency in our U.S. stores.

Margin expansion was partially offset by investments in store partners as well as higher G&A costs in support of reinvention. Q3 EPS was $1, up 19% from the prior year, driven by strong performance across our business segments, demonstrating the power of a broad global portfolio. I’ll now provide segment highlights for Q3. North America delivered another record quarter of revenue with $6.7 billion in Q3, up 11% from the prior year, primarily driven by a 7% increase in comparable store sales, consisting of 6% and 1% growth in average ticket and transactions, respectively, as well as net new company-operated store growth of 4% year-over-year. Our results were further strengthened by the continued momentum from our licensed store business. Our U.S. business delivered 7% comparable store sales growth in Q3, primarily driven by solid ticket performance with 6% growth, which benefited from a combination of pricing, food attach and customization.

Our customers have relatively adopted the practice of customizing their beverages, allowing for a more personalized and differentiated experience while contributing to a growing higher-margin ticket with abundant opportunity ahead. In Q3, over 60% of beverages were customized, representing a 9% growth when compared to just five years ago. Cold Foam, for example, continues to be a customization favorite. This quarter’s all-time high food attach was driven by two of every five customers attaching food with their orders, up over 25% from just five years ago, driven by our delicious breakfast sandwiches leading to an all-time high ticket in the quarter. Transaction comparable sales growth in the quarter was 1%, which combined with record ticket drove the highest average weekly sales in our company’s history, surpassing the all-time high set during holiday in the first quarter of fiscal year 2023.

We are seeing more customers come into our stores with customer counts up 5% year-over-year, in line with the record high set in Q1 of this fiscal year. Our growing tech enabled convenience capabilities are driving our customers to engage more deeply with Starbucks as evidenced by the growth in customization, attach and mix shift towards more premium beverages, leading to record demand and incremental higher-margin revenue. Another proof point of our continued demand is the ongoing success of our Starbucks Rewards program, which ended the quarter achieving records on many fronts, a record number of active members, spend per member and total member spend. These records alone reflect the stickiness of our business, but we are most pleased by the consistency of our customer connection stores, which highlights customer satisfaction and the delivery of the Starbucks Experience.

U.S. licensed stores revenue continued its momentum this quarter, up 21% from the prior year with strength across the portfolio and vending food (ph) from increases in post-COVID travel, especially return of business travel, which benefits from Starbucks Connect, our digital offering, now rolled out across all major U.S. airports. North America’s operating margin was 21.8% in Q3, contracting 40 basis points from the prior year as expected, primarily driven by the timing of productivity focused labor investments as part of our reinvention plan. For color, the reinvention investments included partner wages and benefits as well as an increase in targeted partner training. The contraction was partially offset by favorable impacts of pricing coupled with labor productivity and sales leverage largely from the ramping benefits of the reinvention plan.

Moving on to International. In the quarter, the segment delivered $2 billion in revenue, the highest revenue since Q4 of fiscal year 2021, up 24% from the prior year or up 30% when excluding more than 5% impact from foreign currency translation. Our revenue growth reflects double-digit growth in all major markets, including China, which benefited from lapping prior year mobility restrictions. The growth is attributable to a 24% increase in comparable store sales, which was driven by 21% transaction growth as customers continued returning to our stores, largely in China as well, as remarkable digital engagement through the increasing Starbucks Rewards member base. In addition, the International segment delivered 11% net new company-operated store growth year-over-year, with China contributing a significant portion of store growth as we continue to invest ahead of the curve in China, supporting our long-term ambitions for the market.

Excluding China, our international markets combined continued their strong momentum with revenue growing 11% year-over-year in Q3 or up 14% when excluding a 3 percentage impact from foreign currency translation. The meaningful growth was a byproduct of our successful innovation and digital engagement across various markets. Excluding China, International had 8% store growth year-over-year and approximately 35% of our new stores year-to-date were drive-through, resulting in approximately 15% of total store count having the drive-through channel furthering our ability to create new occasions and serve new customers globally. Shifting to China. China had a strong quarter, delivering their highest beverage sales for Q3 over the last five years, underpinned by comparable store sales growth of 46% in Q3, in line with our expectations.

Comp growth was driven by strong transactions, which benefited from the lapping prior year Q3 mobility restrictions. As the market continues to recover, we’re pleased with the consistency of demand fueled by new product innovation, increasing digital capability, record sales of our Dragon Dumpling Festival food and an acceleration of new store openings amounting to nearly three stores per day. Average weekly sales in China grew quarter-over-quarter and we expect this to continue into Q4 with average weekly sales growth of low to mid-single digits, resulting in similar sized comp growth for the quarter. With the current demand and the long-term opportunity we see in China, we continue to invest in our stores, partners and communities. And we’ll have our largest roasting plant outside of the U.S., the Coffee Innovation Park opening this fall.

Our unwavering investments have contributed to our healthy recovery and performance, positioning us well for the long term. Operating margin for the International segment was 19% in Q3, expanding an impressive 660 basis points from the prior year, mainly driven by sales leverage from lapping prior year mobility restrictions in China, partially offset by investments in digital and partner wages as well as inflationary pressures. Shifting to Channel Development. The segment’s revenue contracted 6% year-over-year to $449 million in Q3, driven largely by at-home coffee while proudly holding the number one share position at 15.1%. Despite the softening of revenue, the segment remained strong due to the breadth and depth of the portfolio. We are particularly proud of our North American coffee partnership, which continued to see category-leading sales and share growth outpacing the total category.

Our innovation continues to distinguish us while benefiting the segment overall with strong performance. A perfect example of this is the award-winning ready-to-drink Starbucks Pink Drink and Starbucks Paradise Drink that Laxman mentioned earlier. The segment’s operating margin was 46.3% in Q3, up a resounding 630 basis points from prior year, driven by strength in the North America coffee partnership and sales mix shift. As previously shared, operating margin has returned to the segment’s normal mid-40s range, a testament of our strong partnerships and the benefits of a diversified portfolio. Now moving to guidance for the balance of fiscal year 2023. Given we’re in the final quarter of our fiscal year with clear visibility into full year results, combined with the momentum we’ve built, the pace of reinvention plan unfolding and the strength of our global portfolio, we have the confidence to move our full year earnings growth from the plans we shared in November of the low end of the 15% to 20% growth range to a growth of 16% to 17% for full year fiscal year 2023.

Despite the macroeconomic environment variables, we are poised to move our earnings growth guidance as it reflects the strength of our brand globally and the long-term durability that we are building through our reinvention plan. As it relates to our remaining guidance, we are pleased to reaffirm full year guidance on all other measures. As a reminder, that includes revenue growth of 10% to 12%, global comp growth near the high end of 7% to 9% and solid margin expansion. Store growth, capital spend and tax rate guidance also remain unchanged from what we shared previously. As a reminder, we expect an unfavorable impact from foreign currency translation of approximately 2 percentage points to 3 percentage points on fiscal year 2023 revenue and earnings, respectively.

With that, let me provide further detail around our Q4. First, in regard to International. Looking ahead to the balance of the year, we expect our International segment Q4 margin to expand year-over-year but to be meaningfully lower than Q3 due to seasonality along with accelerated digital and store renovation investments. Second, in regard to China, as I noted earlier, we expect China’s average weekly sales to continue to sustain the growth quarter-over-quarter, resulting in average weekly sales growth of low to mid-single digits in Q4, with similar sized comp growth as the market is lapping government stimulus for customers and favorable discounting from prior year coupled with the timing of difference of the Mid-Autumn Festival, which all contributed to prior year transaction growth.

We continue to expect a low to mid-single-digit comp on a full year basis, consistent with our prior guidance as well as record-breaking year of net new store development. Finally, as it relates to Channel Development, we expect revenue pressures to continue in Q4, driven largely by the at-home coffee business as customer behavior shift with revenue expected to be largely flat to prior year. However, we expect margins will continue to be above the mid-40s range, driven by seasonality, leveling to a strong mid-40s margin business for the full year. In summary, here are my key takeaways from my discussion today. Our momentum is in full swing and our strong brand, successful product innovations and financial and operational performance across the globe is a testament to our focus and our discipline.

Our reinvention plan investments are unfolding and providing tangible returns throughout our business. As a result of our solid performance, our full year fiscal year 2023 guidance including revenue has been reiterated and we are confident to move our earnings growth to 16% to 17% for full year fiscal 2023. Finally, I want to say thank you to our partners around the globe for showing up every day and making customer’s day brighter by extending active kindness. It’s because of you that the future is truly limitless. With that, we’ll open the call to Q&A. Operator?

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Q&A Session

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

Jeffrey Bernstein: Great. Thank you very much. I had one question and then just one clarification to Laxman’s comments. The question is just on the U.S. comp and traffic. It looks like the traffic was modestly positive this quarter, slowing a little bit from last quarter. And I think it’s safe to say that there’s going to be some slowing in the menu pricing in forward quarters, and therefore, the average ticket. So with the comp slowing and the average ticket likely to slow, I’m just wondering your confidence in the current algorithm for that 7% to 9% comp looking into next year. And the clarification is just Laxman, I think you mentioned that you would update long-term guidance when you report the fiscal fourth quarter. But with that said, I think you did mention the 10% to 12% revenue growth long term and 15% to 20% EPS growth.

So is that safe to say that those are levels you’re comfortable with as we look out into future years or all things are on the table as you offer your initial guidance next quarter?

Laxman Narasimhan: Well, there were several questions in there so let me just break this up. There was a question on the third quarter. There was a question about our expectations for the balance of the year. And then there was a question about the — what I’ve said earlier about my confidence and the multiple paths to achieving the 10% to 12% growth as well as the 15% to 20% earnings growth, and I’ll comment on all three. So let me first start with Q3. Q3 for us was a very strong quarter, as Rachel mentioned as well. It’s in line with our expectations. Our comps were consistent every month. We came off a lap in Q2, which was the impact of Omicron, and so we had a 7% comp, very consistent month over bond. The comp in Q3 was lapping a 9% comp from last year, so the 16% comp on a two year basis.

And so if you look at this, it’s really the strength of the brand, the actions and pricing we took but also the growing levels of customization and the levels of food attach that Rachel mentioned as well. And that is what led to the average weekly sales in Q3 continuing to break records. Now your question on transactions. Transactions in Q3 grew year-over-year across all dayparts. Traffic is below 2019 levels but units per store are above the 2019 average coming from higher food attach. So the food growth along with more customization and judicious price increases led to this record weekly sales that you saw in the quarter. So transactions, as I said, have grown year-over-year across all dayparts. We also had a strong increase in ticket. There’s a sort of balance between the pricing, which is very judicious, but also customization and increase in the number of units.

Delivery sales doubled in Q3 compared to a year ago, most of which is incremental occasions for our customers. So that’s Q3. Let me just highlight something about our loyal customers because that, in some ways, gives you a sense of the strength of the brand. Our [indiscernible] active Starbucks Rewards members have grown 4 million in number year-over-year. They come in more frequently, they buy more. And interestingly enough, as we’ve seen our sizes, we actually see the growth of our largest sizes over our smaller sizes. So we’re not seeing the down trading in our customer base. Our stored value credit, the balance of the card is also great sequentially. That’s how we exit Q3. As you look at the balance of the year, we feel that, first of all, the annualization of the pricing actions will continue.