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Starbucks CFO talks earnings, iced drinks, and unionization

Starbucks CFO Rachel Ruggeri joins Yahoo Finance Live to discuss third-quarter earnings, rising costs, consumer demand, unionization, wage hikes, and the outlook for growth.

Video Transcript

BRIAN SOZZI: Let's start with the big name here-- Starbucks is out with a better than expected earnings report as it eyes a key investor day in mid-September. But with the coffee chain seeing squeezes in the US from unionization efforts, and in China from COVID lockdowns, and globally from rising costs, Starbucks is set to double down on its reinvention plans set to take hold in 2023.

Let's dive into the earnings with Rachel Ruggeri, Starbucks CFO, and our very own Yahoo Finance's Brooke DiPalma is here as well. Rachel, I'll start with you here. Looking at the transaction growth in the US, it slowed in this current quarter from the previous quarter. Is that the first signs of the consumer pulling back on their spending and pulling back a little bit on going to Starbucks?

RACHEL RUGGERI: Actually, we see it as quite the opposite. What we saw in this quarter is we saw the highest number of customer accounts that we've ever seen. And we see the highest average weekly sales that we've ever seen. And so what that means for us is more customers are connecting with the brand and they're engaging greater when they come into our stores.

We've seen a little bit of a shift in terms of the composition of our revenue since the pandemic. And what we're seeing is higher ticket in a more modest transaction. So we look at that as just a difference in how our customers are choosing to come to us. And it speaks to the demand that we're seeing. And we're incredibly encouraged by it.

BROOKE DIPALMA: Good morning, Rachel, great to speak with you. Brooke here. I just want to emphasize and dive into that a little bit deeper. Cold beverages were really a highlight here in the US. They made up 75% of sales. Howard even highlighting saying, all bets are off in terms of operating leverage in terms of cold beverages there. But where exactly do you see the long-term growth here in the US?

RACHEL RUGGERI: Well, typically, cold beverages, at about 75% of our business, is typical in this quarter. So that's a 12% increase from prior quarter, but that's our typical seasonality. And in fact, we're in line with where we were last year. But the way we see cold and the opportunity around cold and all our beverages, frankly, is our ability to continue to create more premium offerings with an opportunity to customize.

The ability to personalize drinks is what we think helps differentiate Starbucks. It gives customers a choice and allows them to express theirselves through a drink that is suited for them. I'm a particular heavy ice drinker, and so being able to have that personalization, we think, has a lot of opportunity for us in the future.

BRAD SMITH: It's amazing to kind of hear about some of the fluctuations that we're seeing throughout this earnings season, especially on the international frontier-- and this is particularly important for Starbucks as well in China-- significant because of so much of the rate of store openings pre-pandemic. And even now, you're looking across some of the headwinds, the lockdowns, and even that knock-on revenue contribution as well. And so when you think about this region and when it will reach reliability In terms of some of the broader growth metrics that Starbucks has, what time frame are you looking at?

RACHEL RUGGERI: It's really hard to determine what the time frame will be. I mean, definitely, this recovery is nonlinear. But I think what gives us some encouragement is as the mobility restrictions have lifted more recently, we've seen sequential improvement in our average weekly sales, sequential improvement in our comps.

And that speaks to not only the power of the brand, but also speaks to the resiliency of our partners in the market. We have incredible partners in the market, and that's coming through. We also look to our other international markets as a proof point. And when we look at our market like Japan as an example, which is our third largest market-- in Japan, as restrictions have been lifted, we saw an incredible quarter this quarter in Japan.

And a lot of that comes from recovery consumption. We saw that in the US a year ago in Q3 when people were able to get out and about. And so we're benefiting from that. And we saw that in our international markets outside of China, with every single market showing growth. And it was really all in transactions.

And a big driver of it was the recovery consumption. Another big driver was the opening of travel. But I think what it speaks to is that it shows that when we are able to be out and about, customers want to come to Starbucks. And our job is to make sure that they come in and, more importantly, that they return.

JULIE HYMAN: Rachel, it's Julie here. I want to take a step back and look ahead as well a little bit to what we're going to be hearing from the company in September at that investor day. Howard Schultz on the conference call talked about, perhaps, some of the missteps that the company has taken in the past. He said some of it has to do with COVID, right, and was not things that the company did. But he said, unfortunately, many were self-induced. What needs to be fixed at Starbucks?

RACHEL RUGGERI: Well, really, what we're realizing particularly through our listening and co-collaboration sessions is that we have to create a better experience for our partners, first and foremost. And that comes in a lot of different ways. We need to create a better experience in terms of the stores.

So even though we've got this great demand and we're servicing all this customization and personalization, it's hard on the partners. And so our opportunity is create a better design in the stores, whether it's through more efficient equipment, whether it's through different operating practices, whether it's through an absolute design change. It's a combination of all of that will make it more efficient and less complex in our partners serving our customers.

In addition to that, we have to make further investments in our partners so that we can continue to be an employer of choice. And we've started those investments with the wage move that we just-- on 8/1, we took the last of our wage move for this year, where we've gotten all of our hourly partners in the US to an average of $17 an hour. We've also increased significantly our training and more modernized training so that our partners feel that they have what they need to be able to support our customers and these more personalized beverages.

We have ways ahead of us. But we're encouraged by the investments we're making and some of the green shoots we're seeing in terms of a slight reduction in some aspects of our turnover, as well as a slight increase in our partner engagement. But that's really our opportunity is to create the very best experience for our partners, because we know that, in turn, they'll create the best experience for our customers.

And that is really what differentiates Starbucks. And so that's where we're focused. And that's what we've learned and where we've decided that it's most important that we focus, not only now, but going forward, and ensuring that we never lose sight of that.

BROOKE DIPALMA: And I want to dive into those wage hikes and what an effective August 1. Of course, those wage hikes will not be effective at the stores that have voted Yes to unionize. So I'm curious-- how exactly do this trend of unionization efforts, as well as those wage hikes, impact Starbucks' bottom line here?

RACHEL RUGGERI: Well, what I'd say in terms of the wage hikes in general-- they're part of what we're guiding for Q4 and going forward. Now, going forward, as we'll share more at investor day-- as we make investments in our business, we're choosing to make investments that will drive an outsized return. And so those investments will help us strengthen our business over time.

And that will come in the aspects of reduced turnover, increased partner engagement, and a more stable and more efficient operating environment. That's going to help us create a better experience for our partners, which is the most important. But that, in turn, will lead to better overall profitable growth.

And we have evidence today in stores that we have throughout our over 9,100 company-operated stores-- we have evidence today where when we have lower turnover, we see higher partner engagement and we see customer-- excuse me, operational and financial metrics that are better than the peer set. So we have proof point that these are the right investments to be making. And that'll help us strengthen the business over time.

And in regards to what it means broadly to the company, I would just say we continue to focus on creating the very best experience for our partners. It's served Starbucks well for over 50 years. It's what creates value for our customers and for our shareholders. And it's important for us to be able to attract and, importantly, retain the very best partners that we can have.

JULIE HYMAN: Rachel, of course, a lot of your partners want this process to be through a union. Is Starbucks anti-union?

RACHEL RUGGERI: You know, my answer to that is that we still firmly believe that the best relationship we can have with our partners is a direct relationship. But we respect the process and we're focused on creating the very best experience. And as I said, that's really largely what our reinvention plan is centered around is creating that partner experience and ensuring we elevate that so that we can be competitive and we can maintain a competitive advantage so, again, so that we can retract-- excuse me, attract and retain the very best partners.

BRIAN SOZZI: Rachel, Starbucks pulled its guidance several months ago, but are you happy where Street estimates are going into that September 13 investor day?

RACHEL RUGGERI: Yes. I mean, we'll see what happens for Q4. As we shared on the call yesterday, we're encouraging-- even though we're not guiding, we provided some perspectives that will have further pressure relative to Q3, largely due to the timing of the recovery in China, as well as the fact that we're not seeing our inflationary pressures soften. They're not furthering, which is a good sign, but they're not softening.

And so we'll see them more in line with Q3, which is elevated versus prior year and elevated versus Q1 and Q2. So that gives us some encouragement. And importantly, what we're very encouraged by is the fact that we were able to overdeliver on our expectations this quarter, because it gave us good confidence of the fact that we can deliver, even as we're executing upon these plan investments in a very dynamic environment.