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Starbucks CFO: We aren’t seeing a demand issue

Starbucks CFO Rachel Ruggeri joins Yahoo Finance Live to discuss company earnings, disappointing China sales, the impact of price hikes, providing value to customers, driving growth, and the outlook for Starbucks.

Video transcript

BRIAN SOZZI: Starbucks shares are under pressure as investors lock in on a disappointing quarter for China sales. That focus is overshadowing a good quarter for Starbucks US fueled by demand for holiday drinks and egg bites.

Let's welcome back Starbucks CFO Rachel Ruggeri. Yahoo Finance's Brooke DiPalma is here as well. Good to see you both.

Rachel, of course, I'll start with you. Let's lock in on China here. Have you started to see any sales improvement here out of the country as more locations have opened up?

RACHEL RUGGERI: Yes. So we've seen improvement in the month of January, and I shared that on the call. So we're encouraged by the signs of improvement that we're seeing. We still believe there will be some headwinds in this quarter, but we're expecting to see more tailwinds in the back half of the year as full recovery starts to take place, travel increases, and people can get back, you know, more to normal day-to-day routines. And so we're looking forward to that because it's going to help with our overall-- what we had provided was reaffirmation of our guidance for full year, and China will be a big part of that.

BRIAN SOZZI: Rachel, within that guidance, that reaffirmation, do you see China sales growing again in the back half of the year?

RACHEL RUGGERI: Yes. We see China start to grow and contribute meaningfully in the back half of the year, and that's going to be-- that's supporting part of our reaffirmation of the guidance, but it also gives us good confidence in the long-term growth targets that we've alluded to.

BROOKE DIPALMA: And here in the US, same-store sales were better than expected, but we're down after 2:00 PM. Do you think that high inflation and recession fears have caught up to the US consumer?

RACHEL RUGGERI: I would say we don't see a challenge in our demand today, and, in fact, what we're encouraged by is our reinvention plan is going to allow us to unlock even further demand. So the-- we're working on being able to unlock the capacity in our busiest day parts. And so we see the opportunity to continue to service even more demand in the periods where we're busiest, and that's really the proposition that we're going after. So I would say demand is just coming to us in different ways.

BROOKE DIPALMA: And here in the US, how much did Starbucks raise menu prices from this time last year, and do you expect to raise prices in the first half of this year once again?

RACHEL RUGGERI: The increase that we're seeing in our ticket related to pricing is annualization from pricing moves we took last year. Our pricing was taken largely in line with our inflationary pressures. So this year the ticket is benefiting from the annualization of that.

When we comp that in the back half of the year, we'll start to see pricing return more towards historical levels, and so we'll see a moderation of our ticket and an increase to our overall transactions. So we've guided a comp range of 7% to 9% in the US business, but you'll start to see more of a balance between ticket and transaction.

BRIAN SOZZI: Rachel, given the economic concerns here in the US, do you have anything baked in in terms of more promotions on the app or more promotions in general to get people back in the restaurants in the afternoon?

RACHEL RUGGERI: You know, the reality of it is while we understand that our customers are dealing with a lot of uncertainty and economic challenges, we aren't seeing an issue with our demand today, and so we're not planning on discounting or moves of that nature. We continue to grow our rewards program, and that creates value for our customers. We increased in the quarter by about-- in the US business, we grew by 15% to 30 million members. That's up 4 million versus prior year and 1.7 million versus the prior quarter.

So that speaks to the value that it creates for the customer, and also it's good for our business. So we'll continue to lean on aspects of our business like that to be able to bring more customers in and to be able to provide them with the value that they're seeking.

BROOKE DIPALMA: And the Starbucks rewards update is getting a lot of buzz among main street, Wall Street. How exactly will this boost margins for Starbucks? But for the main consumer, what does this mean about that cafe misto hack that they have grown to love?

RACHEL RUGGERI: Yeah, I mean, I think the reality is we're trying to ensure that we're able to continue to grow the program while we create an efficiency. We've taken pretty significant pricing moves over the past couple of years in line with the inflationary pressures. So it's important to make sure that our product redemption aligns with that.

But we've also, through the changes in the rewards program, offered value for customers in different areas. For an iced coffee, for example, now they can have a contribution or attribution in terms of earning stars towards iced coffee. So we've been able to take some benefits in the program to allow some members to be able to choose their favorite beverages and earn along those lines.

It will help support our margin proposition in the future as well as our revenue growth. So overall, we see it as a good driver to our business but also still provides value to our customer.

BRIAN SOZZI: Within the various costs on your income statement, Rachel, do you see disinflation?

RACHEL RUGGERI: We don't today see a material impact from disinflation. We did see-- we did see a slight easing in terms of coffee costs and noncoffee commodity costs such as plastics, but then we saw an increase in terms of our overall logistics. Part of that is due to demand, but it's also a fact of that there's still challenges across the supply chain.

So broadly, we're still seeing inflation at an elevated level in FY '23. Not as high as FY '22, but it is still elevated.

BROOKE DIPALMA: You've invested a lot into labor, wage benefits-- wage and benefits. You had the highest turnover-- rather, improved turnover rate since Q2 of 2022. Where do you think labor for Starbucks stands right now?

RACHEL RUGGERI: You know, we're in a good position today, and we believe that's because we've invested ahead of the curve, and we're continuing to make investments. Part of our reinvention plan, right, is to continue to roll out equipment that creates efficiency in the stores, create a better experience for our partners as they're serving our customers. We've leaned into increased training. We've leaned into better wages and benefits.

The combination of that has helped us so that we've been able to bring turnover down and, importantly, improve retention. It creates a more stable environment, which is good for our partners, but it's also good for our customers.

BRIAN SOZZI: And, Rachel, on the call last night, Howard teased some form of something new called alchemy. And I appreciate you probably can't say much about it, but maybe you could just narrow it down. Is it a new restaurant concept? Is it a drink? Is it a food? Is it something that Howard is just working on separately once he steps aside as CEO in a couple weeks?

RACHEL RUGGERI: Well, what I can say-- I can't share much about it, but what I can say is it leads to innovation, which I think is an area we've always played well in at Starbucks. We've always found ways to try to surprise and delight our customers, and this will prove to do something in that fashion.

And what it does is ultimately-- you think about today part of our proposition is you have to come into the stores because so much of what we make, it's hard to make at home. This is another way to lean into that area, give customers a reason to come in to our stores, and, importantly, a reason to come back.

BRIAN SOZZI: All right, well, if it's a drink or food, I'm likely a buyer. Starbucks CFO Rachel Ruggeri, always nice to get some time with you. And thank you, of course--

RACHEL RUGGERI: Thank you.

BRIAN SOZZI: --to our very own Brooke DiPalma.