Starbucks Corporation
Q2 2024 Earnings Call Transcript

Published: 30 Apr 2024

[Operator:]

Good afternoon. My name is Diego, and I will be your conference operator today. I would like to welcome everyone to Starbucks Second Quarter Fiscal Year 2024 Conference Call. [Operator Instructions] I will now turn the call over to Tiffany Willis, Vice President of Investor Relations and ESG Engagement. Ms. Willis, you may begin your conference.

[Tiffany Willis:]

Welcome and good afternoon, and thank you for joining us today to discuss Starbucks' second 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'll be joined by Belinda Wong, Chairwoman and Co-Chief Executive Officer of Starbucks China; Brady Brewer, Chief Executive Officer of Starbucks International; and Michael Conway, Chief Executive Officer of Starbucks North America. 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 the second quarter fiscal year 2024 in 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 included 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, whereby current period results 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 related hedging activities. For non-GAAP financial measures mentioned in today's call, please refer to the earnings release on 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, June 14, 2024. Also for calendar planning purposes, please note that our third quarter fiscal year 2024 earnings conference call has tentatively been scheduled for Tuesday, July 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. Let me be clear from the beginning. Our performance this quarter was disappointing and did not meet our expectations. Our Q2 total company revenue was $8.6 billion, down 1% year-over-year. Our global comparable store sales declined 4% year-over-year, driven by a negative 3% comp growth in North America, led by declining traffic and a negative 11% comp growth in China. Our global operating margins contracted by 140 basis points to 12.8%, and our overall earnings per share declined by 7% to $0.68. While these results do not reflect our strengths, our capabilities or the opportunities ahead, we confront these challenges from a position of enduring strength. We have led the industry for more than 50 years because we have built a different kind of company, one that exceeds our partner expectations, one that delivers a distinctive and unique experience for our customers and one anchored in the love and craft of coffee. As a result, our worldwide brand equity remains resilient and strong. Our leadership in coffee remains unmatched. Our global base of customers remains loyal. Our experiences are differentiated and elevated, our partners are talented and engaged. Our forward-looking product pipeline is highly appealing. Our distinctive store development capability continues to perform incredibly well. Our network of stores is healthy and robust. Our stores are executing better than ever with a stronger operating foundation. Overall, partner engagement is very strong. Our triple shop with two pumps reinvention strategy continues to deliver, and our possibilities as a company remain limitless, Still we face a challenging operating environment. Headwinds discussed last quarter have continued in a number of key markets, we continue to feel the impact of a more cautious consumer, particularly with our more occasional customer and a deteriorating economic outlook has weighed on customer traffic and impact felt broadly across the industry. In the U.S., severe weather impacted both our U.S. and total company comp by nearly 3% during the quarter. The remainder of our challenges were attributable to fewer visits from our more occasional customers. Turning elsewhere. We still see economic volatility in the Middle East, but we remain confident in the region's long-term growth opportunities. In China, we still see the effects of a slower-than-expected recovery, and we see fierce competition among value players in the market, but we are strengthening our premium position and our team in China continues to execute with terrific rigor and heart as the market shakeout continues and as demand recovers and matures. None of these realities are excuses, some like weather are transitory. Others like a more cautious consumer may persist longer, but much is within our control. There are three execution opportunities in our U.S. business I want to expand on

[Rachel Ruggeri:]

Thank you, Laxman, and good afternoon, everyone. As Laxman shared, our performance this quarter did not reflect what we're capable of as a company. We have an incredible brand, loyal customers globally, a strong portfolio of highly profitable stores and in connection with our partners and customers that's unlike any other in our industry. We know that we can and we will do better. While it was a difficult quarter, we learned from our own underperformance and recognize the onus is on us to execute. We've sharpened our focus and with our comprehensive roadmap of well-thought-out of actions, the path forward is clear. With that, let me turn to our results. Our Q2 consolidated revenue was $8.6 billion, down 1% from the prior year due primarily to a 4% decline in comparable store sales driven by lower transactions, partially offset by 8% net new company-operated store growth over the prior year. Q2 consolidated operating margin contracted 140 basis points from the prior year to 12.8%, primarily driven by deleverage, partner wages and benefit investments as well as promotional activities, partially offset by pricing and our continued execution against reinvention related in-store operational efficiencies, which drove approximately 150 basis point savings in the quarter. Q2 EPS was down -- was $0.68, down 7% from the prior year, primarily due to the contraction of operating income in both the North America and International segments as a result of lower revenue. I'll now provide segment highlights for Q2. North America revenue was $6.4 billion in Q2, flat to the prior year as 5% net new company-operated store growth was mostly offset by a 3% decline in comparable store sales driven by a 7% decrease in transactions partially offset by a 4% increase in average ticket. Our U.S. company-operated business posted a 3% comparable store sales decline in Q2, driven by a 7% decrease in transactions. Consistent with Q1, the traffic decline was pronounced among more occasional customers with a more cautious consumer environment as a backdrop, and also included an estimated 3% adverse impact from extreme weather, including some store closures. Partially offsetting the decline was a 4% increase in average ticket reflecting pricing as well as the continued mix shift into cold beverages such as Iced Shaken Espresso and Matcha Tea Latte, which resonate with our customers. Additionally, our new store performance remains strong, with both year one AUV and cash margin of recently opened stores projected to be in line with last year's newly opened stores, preserving high incrementality even with our expanding footprint. North America's operating margin was 18% in Q2, contracting 120 basis points from the prior year. The contraction was primarily driven by deleverage, partner wage and benefit investments as well as promotional activities, partially offset by pricing and reinvention related in-store operational efficiencies. While deleverage drove the overall contraction in the segment's margin, efficiencies generated through our reinvention efforts meaningfully countered the deleverage we experienced in the quarter. While our reinvention plan is intended to provide a more balanced growth model and margin expansion, we're pleased to see the benefits counterbalance, broader headwinds in our business as our partner staffing and scheduling investments continue to unlock in-store efficiencies. The benefits continue to expand outside of stores as well, resulting in meaningful reduction in the segment's product and distribution costs as a percentage of revenue, partially driven by supply chain savings. We believe our strategies related to reinvention are working, creating more streamlined operations and tangible financial benefits across our business with more opportunity to come. Moving to international. The segment delivered $1.8 billion in revenue in the quarter, roughly flat to the prior year, primarily as 12% growth in net new company-operated stores was offset by a 6% decline in comparable store sales driven evenly by transactions and average ticket. Revenue was also impacted by a decrease in licensed store revenues, largely resulting from the negative impacts to our business in the Middle East. Although our revenue was impacted, our long-term aspirations in international has not wavered as there was revenue and comp growth across the International segment when excluding China. This speaks to the strength of our broader international portfolio, driven by markets like Japan, Asia Pacific, Latin America and the Caribbean. Shifting to China. In Q2, China's revenue declined 3%, driven by an 11% decrease in comparable store sales, consisting of 8% and 4% decline in average ticket and transactions, respectively, partially offset by a 14% net new store growth. The market continued to recover slower than expected, with further impacts from the timing of holiday related travel trends. Despite the complex environment, the market opened 118 net new stores in the quarter, while sustaining double-digit store operating margin for both new stores and the total portfolio, demonstrating the health and resilience of our brand in the market positioning us well in the market long term. Total International segment operating margin was 13.3% in Q2, contracting 340 basis points from the prior year, primarily driven by promotional activities, partner wage and benefit investments as well as sales mix shift, partially offset by pricing in certain markets. Shifting to channel development. The segment's revenue of $418 million in Q2 declined 13% from the prior year, largely in line with our expectations given the sale of Seattle's best coffee and SKU optimization. Importantly, we maintained the number one share position in both U.S. at-home coffee and U.S. ready-to-drink. As an example of innovation in China, we launched our Starbucks Refreshers platform with two flavors, the pink drink and the purple drink, to drive our much-desired cool portfolio beyond our stores, particularly among Gen Z. The segment's operating margin was 51.7% in Q2, expanding 1,610 basis points from prior year, driven primarily by growth in our North America Coffee Partnership joint venture income as well as lapping prior year impairment charges against certain manufacturing assets. The segment's operating margin is progressing in line with our original expectations continuing to target the full year range of high 40% to low 50%, a very attractive financial model. Now moving on to our guidance for fiscal year 2024. Given what we shared today, we're revising our fiscal year guidance, and I'll walk through both

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Sara Senatore with Bank of America. Please state your question.

[Sara Senatore:]

Hi, thanks. I guess it's a two-part question about trends that you were talking about. The first is that, you talked about weather as a headwind, and then you said that Lavender late in the quarter was one of the strongest launches you've had, similar to PSL, but your exit rate, it sounds like you're saying your exit rate was largely unchanged. So I'm trying to reconcile what would appear to have been, headwinds that aren't recurring and then very successful innovation with, the guidance and the exit rates. That's the first part. And the second is just, in terms of the cautious consumer, typically I think what we'd see is check management, and you don't seem to be seeing that. I think mix is still a tailwind for you. So it seems to me that, there's not as much evidence of, consumer caution as perhaps just some of what you were talking about that's Starbucks specific. So if you could just comment on those? Thanks.

[Laxman Narasimhan:]

Sara, thank you for your question. Let me address both of them, by pointing to the underlying pressures that we see consumers face, just in terms of what they have available to spend. So there's no question that, if you take some of these transitory headwinds out, which of course, are not an excuse in any way, and you look at the underlying headwinds, particularly around the pressures that consumers face, particularly with the occasional customer, what we're seeing is that's where the challenge is. It's a challenge with their traffic, and it's their challenge with them coming into our stores. If you look at our most loyal customers, they're coming in often, they're seeing the value that we provide in Starbucks rewards in our app. They are, premiumizing through customization as in the past, and so therefore what you see there, is you see a strong business with our loyal customers, particularly those within the environments of the Starbucks app. What we are focused on is first, how we meet the demand we all already have through ensuring that our partners of the processes, and the tools at the peak in order to meet the demand of customers, who at this moment are choosing not to complete their transactions in mobile order pay. The second thing is, we're clearly launching new products and our pipelines very strong. And what we are doing though, as part of that is the third element, is how we reach and deliver value to the more occasional customers, as well as those that are not in the Starbucks rewards ecosystem, and that's where the challenge lies, and that's how you reconcile the two points that you had made. So, we have a lot in our control, and we are focused on it, and we're focusing on the execution of those three opportunities, as a laid out in North America.

[Operator:]

Thank you. And our next question comes from Brian Harbour with Morgan Stanley. Please state your question.

[Brian Harbour:]

Thank you, good afternoon. When you talk about the more occasional customer, I'm curious, is that often a younger customer, and I think the broader question is just is there any sort of brand residence issue, with perhaps some of that customer base? Do you think there's sort of a product residence issue with them? Is there, more that needs to be done than just kind of accelerating the pace of new products, and some of the other drivers that you talked about in the near term?

[Laxman Narasimhan:]

Brian, thank you for your question. I think that if you look at our overall brand equity, it is and continues to be strong. If you look at the scores around value for what I get, strong. So, if I look at the occasional customer, though, they're clearly making choices based on the economic pressures they face. What they look for from us, is they look for variety. They look for the core. 50% of what we have, in the afternoon, as an example, is coffee. So obviously coffee is really important, and distinctiveness of coffee is very important, but they are looking for variety, and they're looking for value. And what we're focused on, is ensuring that we find a way to connect with them, to bring them into our app ecosystem, in order for them to see the value that we provide insight there. That's why you're going to see the actions we take in May. You're going to see the actions that we take in July, as we open up the app for all. That is going to make them, particularly North America, be able to see the value that we provide in a way that's much easier for them, and as they build loyalty over time, they will see even more value, as they come into the system. So that's as far as North America goes, and the steps that we are taking.

[Operator:]

Thank you. And our next question comes from Jeffrey Bernstein with Barclays. Please state your question.

[Jeffrey Bernstein:]

Great. Thank you very much. A broader question on the global unit growth. Just more broadly, your confidence, or I guess the prudence in maintaining what still is outsized growth with the headwinds seemingly large. Just wondering how you can be confident that the current challenges you're facing aren't in part due to maybe saturation, or cannibalization. And I guess that does end up pointing to China, and for China specifically, I think you mentioned healthy unit economics and double-digit restaurant margin. I was just wondering if, Rachel, maybe you could just talk about the specifics in terms of those sales margins, and returns that justify still that outsized growth in a very challenging China macro? Thank you.

[Laxman Narasimhan:]

Let me first, I'll take on the first question of global unit growth and hand over to Rachel to talk specifically about your question on China margins. Jeff, what we see is we see very strong cash and cash returns. And I think what we've done, both in the U.S., but also in the expansion plans that we have internationally. And I think what you see us, what we're focused on is ensuring that, we have reduced the cost of our stores and stores investment. We have done a very good job in bringing efficiency to that. And so as we expand, we see very good cash and cash returns. The reality is that, the penetration we have in many of these markets, and the headroom that we have internationally is very high. I mean, I think last time we talked about the fact that, I think we were just in 800 cities or in China, and the opportunity for us in terms of counties is about, over 3000. So I think we're like, we're not really penetrated as much, as we could be in a place like China, which is why we have confidence. As we look at the real estate options we have, the proposals that are coming together, the kind of cash returns we get are very strong. That's what gives us confidence in terms of the global unit growth. Rachel, you want to take the second part?

[Rachel Ruggeri:]

And if I would just add to that, when we look at the guidance that was given around our new store growth, particularly as it relates to China, that's really a very deliberate decision that, we took to be able to increase the number of stores that, we were opening in lower tier cities and new counties, where we see even stronger returns. So broadly, our returns are quite attractive, but they're even stronger in those lower tier cities and the new counties. And as a result of that, that shift actually impacts our development pipeline. So there's a timing impact in terms of new store growth. So that's why we're at 12%, which we think is still a very strong growth, and indicative of the opportunity that we see [technical difficulty].

[Operator:]

Are you still connected? One moment. Can you hear us? One moment.

[Laxman Narasimhan:]

We can hear you.

[Operator:]

Thank you. And our next question comes from David Palmer with Evercore ISI. Please state your question.

[David Palmer:]

Thanks. First, I wanted to ask a clarification. You mentioned in your prepared remarks that, you viewed some of the issues in China as transitory. I think you were speaking more about the competition, than you were about the consumer with that comment. I think you mentioned, something about a shakeout. I was wondering, if you could double click on that for us, what you're maybe seeing that would make you think that, the environment there would be competitively, would be a transitory one and it would get better that way. And then from a beverage innovation standpoint, I'm wondering how you're viewing the pipeline. Lavender happened. Spicy lemonade has happened. You have two new ones coming up. How are you viewing the pipeline differently than, and how are you thinking about the process of R&D differently today? And how are you evaluating what you've done? Thank you.

[Laxman Narasimhan:]

I think we have some technical problems in hearing you. But let me just try and recap the question. The first question was on competition in China and the comment around the shakeout that, we are starting to see. And the second comment was on beverage pipeline. So let me start with the competition in China. I think the growth that's taking place in the mass area of the China business, of the China overall coffee and tea segment, is one where we see just intense price competition. We're choosing not to participate in that. We are a premium brand. We've built a business over 25 years with a great deal of competitive advantages. You can see that there. We have amazing partners and stores. We have stores that look distinctive. We have an end-to-end supply chain that frankly, I would love to have in the U.S. And then we are steeped in coffee and the tradition of coffee in an end-to-end, as well as with the knowledge that we have in stores. So, we bring that to life very well in our business in China. At the same time what you are seeing, is the intense competition, particularly in the Tea segment and it overlaps into coffee, in the mass area is one where you are seeing, some of the shakeout happen in terms of the impact on people, and how they can really sustain that kind of intensity. For us our focus is on the premium end, and we're continuing to see that right now the headroom we have in China is large. I mean we're still at 13 cups per capita. Japan's at 280 and the U.S. is at 380. We know that over time as the Chinese consumer starts spending, what you're going to realize is that we have a business that is healthy. That has a P&L at the store operating margin level that is strong, and we're going to see that grow as the consumer gets more and more exposed to coffee. So that is what I mean, by the overall competitive environment in China. In terms of your question about the beverage pipeline, I think that's meant largely around North America. One of the things, we're seeing here is we are core in coffee, and we're tremendously excited about the innovations that we're bringing, with whole bean coffee and some of the coffee forward innovations that, we are seeing in our stores. But additionally as we look at the occasional customers they are looking for variety, and what we are doing is, we're finding ways to open up new platforms of growth. And last time I mentioned that, there were three platforms and these are foundational for additional new introductions that, we will make over time. The first one was textures. So we start with pearls, with our summer one program that starts next week. We then have a handcrafted energy platform that's coming in later on in this quarter. Additionally plant-based is an area where we've traditionally been really well known for. So, we are defining platforms and these are platforms around, which you can expect to see systematic innovations that come in not just this time around, but also you will see further more that come in around these platforms. That's how we're thinking about R&D. It's around platforms both in beverage as well as in food.

[Operator:]

Thank you. And our next question comes from Sharon Zackfia with William Blair. Please state your question.

[Sharon Zackfia:]

Hi good afternoon. Thanks for taking the question. I guess you know I'm trying to think through the sequencing of how we got here today, and it seems like in October, and early November at the Analyst Meeting demand was not a problem in the U.S. And I hear you saying that, you have a lot of unmet demand. But could you excuse me, kind of help us do a hindsight on how these issues have come to a crux, so quickly just four or five months hence since those kind of very ambitious goals that were given?

[Laxman Narasimhan:]

Thank you, Sharon. I think that if I look at the headwinds that, we see in the market in particularly with the consumer, and the pressures that they face. I think that they were sharper, and more accelerated than what we expected. I think in hindsight, if I look at the situation in China while long-term growth potential is, it's sort of thinking we're committed to the long-term in China the recovery has been choppy. But I think what we've seen particularly since that period, is we've seen more intense price competition than what we expected. None of that takes away from the long-term, but it's clear that what we had this quarter was tough.

[Operator:]

Thank you. And our next question comes from Peter Saleh with BTIG. Please state your question.

[Peter Saleh:]

Great. Thanks for taking the question. I didn't want to ask about the siren system. This was the focal point of the Investor Day a couple of a couple years ago. And it seemed like it was put on the back burner, for a little while, but now it seems like you're talking more bullish about this system going forward. So can you just give us an update, I think last we heard it was going to be rolled out, to less than 10% of the stores this year. What is the strategy now, and how does this help solve some of the issues you have? It sounds like some of the issues that you have, are more in the supply chain and not necessarily, within the four walls of the stores? Thanks.

[Laxman Narasimhan:]

Peter just to respond to your question. First of all the siren system was never put on the back burner. In fact, we're on track to having a siren system installed in in less than 10% of the stores, as much as we committed so it's on track. What we've added in here though, is the underlying processes, to ensure that we can reduce the wait time in the store. It is inside the four walls of the store. And that's what those processes are intended to do in the U.S. And so, that's what the acceleration of the processes are, that we've been testing. What they provide is a base on, which we will continue to implement the overall siren systems that, we showcased to you in the September Analyst Day, when you were here with us and we talked to it.

[Operator:]

Thank you. Our next question comes from Lauren Silberman with Deutsche Bank. Please state your question.

[Lauren Silberman:]

Thank you. One a follow-up and then a question. First can you just talk about the cadence of U.S. comp throughout the quarter? I know you mentioned Lavender was extremely successful, but it doesn't seem to be showing up in the comp, just given the commentary on the exit rate. So just help us understand the performance of new products and whether that's driving incremental customers you're targeting. And then just a quick one on like loyalty. It looks like active rewards members declined quarter-over-quarter which is very rare. Can you just talk about what you're seeing there given the commentary on the strength of the core customer? Thank you very much.

[Laxman Narasimhan:]

Do you want to take it on, Rachel?

[Rachel Ruggeri:]

Thank you, Lauren. I'll start with the comp, and what I spoke about in my prepared remarks about the exit rate. And Lavender was quite successful for us, as you heard in Laxman's prepared remarks. What we were encouraged by is that Lavender spoke to where our customers, particularly our Gen Z and Millennial customers, are now asking about which, is more news more often in a broader offering. So offering coffee, non-coffee, food, healthier choices. And so, we hit squarely with that with Lavender, by having particularly our most popular offering in Lavender was the ice Lavender, Matcha Latte. And so, that shows that when we innovate well, and our own expectations. And so that shows that when we innovate well, it's meeting our own expectations. Now it was later in the quarter. So it did do something for us in terms, of driving customers into the afternoon. Largely, we saw that platform resonate well in the afternoon with our customers. The Latte, we'll tend to do more in the morning, but broadly Lavender hit in the afternoon. So, we see that that overall offering and how we're trying to address the customer, more occasional customer with that worked well. But what I would say, is it was later in the quarter we got more opportunity coming going forward and as a result of that our exit rate in the quarter still reflected continued headings. Which we're reflecting in our guidance for the back of the half of the year. What we're expecting is the plans that we've outlined today, will help us counterbalance some of those headwinds. Particularly as we see those actions start to take place. So, I think it's important to think about there are continued headwinds in there. Our plans will counterbalance that. As we go after some of those challenges, I think the other thing to remember, is that we are coming with a position of strength as it relates, to the efficiencies around our triple shot. As well as the growth we have in new stores, and the strength we're seeing in our portfolio overall. We have a very strong portfolio, profitable portfolio globally. And our brand is strong. So, we look at all of that and that's how we're thinking, about the exit rates of comps, as well as what we're seeing for comps in the back half of the year. So hopefully that provides a little more texture.

[Laxman Narasimhan:]

Brady on launching?

[Brady Brewer:]

Thank you, Lauren. You talked about the year-over-year increase, but quarter-over-quarter declines of Starbucks Rewards members. I think just to be clear, that is in terms of 90-day frequency. So, we still have a very large population of SR members. There's about frequency of those customers. As I think consistent with the consumer pullback the more occasional and very occasional SR members, those ones visited less frequently within the quarter, as a result of that customer 90-day active quarter-over-quarter, that said, the 6% growth year-over-year. We're continuing to grow SR. MOP in the quarter, so we still have a very active customer base setting record high in MOP. Delivery grew double-digits - in the quarter, and we see a very active digital customers, and I think as Laxman talked about, with regard to how we're going to provide SR and traffic in the coming quarters. This is squarely aligned to this challenge is reactivating SRs bringing them back and demonstrating value in driving frequently through the app and through SR, and we have a lot of great programs lined up in the emergency units ahead.

[Operator:]

Thank you. And our next question comes from John Ivankoe with JPMorgan. Please state your question.

[John Ivankoe:]

Hi, thank you. Two parts if I may. I heard the word misinformation and I think some improving maybe scores around that. So I just wanted to get a sense of how much of an opportunity in terms of sales loss that, you think correcting misinformation might actually mean for Starbucks. I don't think you've quantified that, but that would be helpful. And then secondly, regarding the Toyota production system, I think I heard you say that it would help about a point. Correct me if I'm wrong about that, but that seems to be a fairly low number. And just talk about what kind of changes that would happen under the Toyota production system. And to us, one of the opportunities would be having food ready when the customer orders it. In other words, using food warming cabinets would be particularly effective, for both Mobile Order & Pay and drive-thru. So is that something that maybe as part of Siren that can be accelerated before the entire Siren System goes into place? Thank you.

[Laxman Narasimhan:]

John, thank you for the question. I think on the question about misperception, so misperception did have an impact on our business and in certain opportunities. We haven't really, we don't have a qualification for that. But what we do know is that our brand equity scores and the investment we made in the brand has certainly helped strengthen, well the overall perception of our brand with its extended review. So, in terms of Toyota production system, what we're doing first is, we're talking about how we're doing the peak of doing the deployment. So how we essentially work with deployment in the store, how we handle what happens at peak in terms of where people are deploying, how we actually process customers. And what you see is the typical risk. I know we've given you a qualification of one percentage point. That is a conservative estimate, because when it fully gets deployed and it is, you could see even bigger improvement in that matter. In regard to your question on the hard forward, that is doing something accepting and we're looking at accelerate, so it takes this agreement to the accelerate with the work that we are doing.

[Operator:]

Thank you. And our next question comes from Andrew Charles with Cowen & Company. Please state your question.

[Andrew Charles:]

Great. Thank you. I know you're committed, of course, to the tenants of the reinvention plan. But in light of the current environment and caution of the U.S. and China consumer, can you level set the long-term earnings algorithm introduced in November around guidance for 5% same-store sales and 15% plus EPS growth? Does that still apply to 2025 and beyond?

[Laxman Narasimhan:]

Andrew, thank you for your question. Everything we see, I know that we had a tough quarter. But everything we see in terms of the opportunities that lie ahead, as you look at the opportunities we have across the innovation that we see in terms of the pipeline going forward, not just here but beyond. If you look at the productivity opportunities, the store count opportunities, we believe we'll be back outdoor as a goal and we see no change in the long-term or our business - of the year earlier in this.

[Operator:]

Thank you. Then the last question comes from David Tarantino with Baird. You may ask your question.

[David Tarantino:]

Hi. Good afternoon. My question is on the value strategy that you laid out and the need to protect traffic or attract traffic in a tough environment. But I'm just wondering how you balance that with protecting the long-term health of the brand. Starbucks has always been a very premium brand position. And sort of training some of these occasional users to come in on discount might have some detrimental impact. So I'm just wondering how you balance those two things and the strategy that you have?

[Laxman Narasimhan:]

Thank you for your question. First of all, we do provide services. And we have no intention of going across the board and saying that it's not possible. What we are doing is we are serious about the fact that as a new team, as you move on the way, we are going to offer you the best levels of [technical difficulty]. Remember that our brand overall right now that means for what I get, is still very strong. So we are very good about that. And this is more about how we move the teams, and how we attract customers. But to those adults who are coming in on that, we need to find ways to reach them. We have to find ways to reach them. [technical difficulty].

[Rachel Ruggeri:]

Everything is more an integrated way around product as well as what our customers can get an app to [technical difficulty].

[Operator:]

Thank you. That was our last question. I'll now turn the call over to Laxman Narasimhan for closing remarks.

[Laxman Narasimhan:]

Thank you for joining us. We had a tough quarter, but we have a clear action plan that Rachel, team and I, [technical difficulty]. Thank you for joining us. And we appreciate the time to chat this afternoon.

[Operator:]

Thank you. This concludes today's conference. All parties may disconnect. Have a good day.