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Starbucks Corp  (NASDAQ:SBUX)
Q2 2019 Earnings Call
April 25, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, my name is Hector, and I will be your conference operator today. I would like to welcome everyone to Starbucks Coffee Company Second Quarter Fiscal Year 2019 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 Durga Doraisamy, Vice President of Investor Relations. Mr Samy, you now begin your conference.

Durga Doraisamy -- Director of Investor Relations

Good afternoon everyone and thank you for joining us today to discuss our second quarter results for fiscal year 2019. Today's discussion will be led by Kevin Johnson, President and CEO; and Pat Grismer, CFO. And for Q&A, we will be joined by Roz Brewer, Chief Operating Officer and Group President, Americas; John Culver, Group President, International, Channel Development and Global Coffee and Tea.

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 factor discussions in our filings with the SEC, including our last annual report on Form 10-K. Starbucks assumes no obligation to update any of these forward-looking statements or information.

GAAP results in fiscal 2019 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. Please refer to our website at investor.starbucks.com to find a reconciliation of certain non-GAAP financial measures referenced in today's call with their corresponding GAAP measures.

This conference call is being webcast, and an archive of the webcast will be available on our website through May 24, 2019.

I will now turn the call over to Kevin.

Kevin R. Johnson -- Chief Executive Officer & Director

Well, thank you, Durga, and good afternoon everyone. I'm very pleased to share with you today another quarter of solid operating results at Starbucks demonstrating that our growth at scale agenda is working. This agenda is enabling more consistent, predictable results through focused and disciplined execution. Q2 was another solid quarter, where we executed well against our long-term strategic priorities.

We sustained positive sales momentum in the US, delivering up 4% sales comp, and the second consecutive quarter of slightly positive transaction growth. We drove a sequential improvement in China sales comp at 3% with a meaningful increase in transaction comp as well, while continuing the rapid expansion of our store base.

We opened our 30,000th store globally and maintained a pace of 7% worldwide net store growth over the past 12 months, which is industry leading for a company of our scale. Through the global coffee alliance with Nestle, we expanded our CPG presence into six new markets and launched Starbucks Coffee on the Nespresso and Dolce Gusto single serve platforms. And we realized meaningful results from our continued focus on disciplined cost reduction, which helped to mitigate the margin dilutive impact of significant investments made over the past year.

Now these results are a testament to the strength of the Starbucks brand and the power of our customer partner connections, which are important sources of competitive advantage throughout the 78 markets, where we collectively serve more than 100 million customer occasions each week. We are managing the business for long-term growth and value creation by staying true to the mission and values that built this great company, while at the same time, embracing new ideas and innovating in ways that are relevant to our customers, inspiring to our partners, and meaningful to our business. We believe this is what builds an enduring Company.

Our streamlining efforts over the past two years have enabled us to focus more of our resources and management attention on the core drivers of our business, and then execute with discipline. We are making meaningful progress against our three key strategic priorities: accelerating growth in our two target long-term growth markets; the US and China, expanding the global reach of our brand through the global coffee alliance with Nestle, and increasing shareholder returns. Streamline is all about simplifying our business while adopting new ways of working so that we can respond to customers' evolving needs with greater speed and agility, and deliver more sustainable and predictable financial outcomes. As evidenced by the past three quarters results, our streamline strategy is working.

One way that we are streamlining our business is by consolidating our Company ownership positions, most recently, focusing on Europe. In fact, I was in Europe last week, meeting with our license partners, including Alsea to whom we successfully transitioned our Company-operated stores in France and the Netherlands in Q2. Following this transaction, our EMEA segment is now almost 90% licensed. We will continue to evaluate our global store ownership footprint for opportunities to further optimize our portfolio, improve profitability and unlock shareholder value without sacrificing growth.

Over the past nine months, our streamline activities have also fundamentally transformed the way we work to drive a more rapid pace of innovation throughout the Company. We started our journey in September restructuring leadership to better support our retail stores and align with our long-term priorities. We also started to change the way we work to accelerate innovation by embracing modern day methodologies including human centered design that amplifies focus on the customer. Smaller cross-functional teams that go from idea to action in 100 days and then learn and adapt, and new applications of machine learning that support various aspects of our business.

We also consolidated and centralized our customer and partner research capabilities to provide a single source of quantitative and qualitative insights to inform decisions across the Company. With clearly defined priorities informed by customer research, our teams are working on a number of innovation projects in our tryer lab in Seattle. The tryer lab is a new space that we created complete with all of the assets needed to ideate, prototype and benchmark new store design concepts, in-store equipment, store operations and many other projects. This new lab enable cross-functional teams to develop a wide range of innovation that is enabling us to constantly improve the customer partner experience in our stores.

Collectively, these actions are accelerating the pace of innovation and driving the improving business results that we've reported in recent quarters while also building a pipeline of future ideas in the areas of store design, beverage platforms, and customer experience.

I'll now highlight the progress we're making against each of our strategic priorities, starting in the US, where we focused on three key drivers of growth; enhancing the in-store experience, delivering beverage innovation, and driving digital relationships. Enhancing the in-store experience encompasses building customer connections and creating those best moments that keep customers coming back time and time again. We saw continued improvement in our customer connection scores this quarter driven by the actions we are taking to enable our store partners to better connect with customers. This reinforces our actions are working. Our efforts in the area of beverage innovation also paid off in Q2 with continued momentum in cold beverage platforms across multiple dayparts. Supported only with a social media strategy that was the second most viral Starbucks campaign ever Cloud Macchiato launched in March to great success exceeding our expectations and driving incremental customer occasions. We also received a very strong customer response to our Mocha beverage platform. And finally, during the second quarter, we crossed the 50% mark for the deployment of Nitro Cold Brew in the US company-operated stores, and we remain on track to reach our goal of 100% deployment by the end of fiscal 2019.

We are building on this momentum with the strong beverage innovation planned for the summer with product offerings that we believe will address customer seasonal taste preferences and needs base. With respect to driving digital relationships, we are pleased with the continued momentum of our Starbucks Rewards program. In the second quarter, we expanded our active member base by half a million customers, a 13% increase that takes active Rewards membership to 16.8 million.

This momentum has a positive impact on our results with Starbucks Rewards members accounting for 41% of sales in US stores in Q2. We are also very pleased with the smooth rollout of our enhanced Starbucks Rewards Loyalty program that provides customers greater choice and flexibility in redeeming rewards. In addition, we expanded the Starbucks Delivers program in the second quarter to almost 1,600 stores across seven major markets in the US.

It is still early days and our primary focus is to drive customer awareness that leads to trial and adoption of this new channel. This approach is enabling us to refine the program as it grows and ensure a quality customer experience. We remain excited about the potential delivery and we'll continue to update you on our progress in coming quarters.

Finally, we announced a $100 million investment in Valor Siren Ventures to continue to accelerate the pace of innovation by providing Starbucks with early visibility and access to the most relevant technologies, products and solutions for the retail industry. The combination of measurable improvements in customer connection, market response to new beverage platforms and continued growth in active rewards members provide evidence this strategy is working.

I'll now move on to our second key growth market, China, where a year ago we were integrating our East China acquisition as we unified China Mainland into a company-operated market. With that integration largely complete, all stores opened for 13 months or longer in China Mainland are now included in our comp base starting in Q2.

China delivered 3% comp sales growth for the quarter, up from 1% in Q1, with meaningful improvement in traffic comp relative to the prior three quarters. This performance is especially noteworthy when you consider the intensity of competition from discounting in China, as well as our aggressive pace of new store development. On the development front, we opened 553 net new stores over the last 12 months, representing a 17% annual growth rate.

Importantly, we continue to achieve best-in-class profitability and returns on these investments, which reinforces our conviction to sustain a pace of 600 net new stores annually with the goal of reaching 6,000 stores in fiscal 2022. This development program is fundamental to our strategy of building the category-leading concept in the world's fastest-growing major economy.

While the growth in long-term opportunity of China specialty coffee category will continue to attract many competitors, our leadership position is underpinned by our brand strength and operating results, which are the key points of competitive advantage in China. We win because of the premium quality of our coffee and hand-crafted beverages, the exceptional third place experience we create in each store and the emotional connection that our partners have built with our customers.

Each of these points of differentiation is reflected in customer feedback from a recent brand equity survey that we perform annually, which reaffirm that Starbucks continues to lead across key consumer metrics in the specialty coffee category and is the customers' first choice for away from home coffee. We are building on that brand strength and have successfully rolled out Starbucks Delivers in partnership with ALIBABA to more than 2,100 stores across 35 cities throughout China.

Our team in China accomplished this in only 4 months again demonstrating our operational agility. While still in the launch phase performance to date is meeting our expectations with average delivery time under 20 minutes, higher average ticket and strong trial from existing Starbucks Rewards members. This gives us confidence that we are building a meaningful and sustainable delivery channel to complement our existing in-store experience, as we plan to expand Starbucks Delivers to 3,000 stores across 50 cities in China by the end of fiscal 2019.

We are very pleased with the performance of the new Starbucks Rewards program in China. Since the launch of mere four months ago member acquisition has accelerated and 90-day active rewards members increased by 1 million during Q2 to total of 8.3 million. The phenomenal growth of the Starbucks rewards program in China is a testament to the power of the brand, we are now building on this momentum with plans to bring mobile order and pay to China by the end of fiscal '19.

We are making this new feature available by leveraging our current digital infrastructure and the Starbucks app to enhance our ability to serve customers, both on our app and in our stores. We are very pleased with our continued success in China, the strength and relevance of the brand, expansion and performance of our new stores accelerating comp growth in existing stores, positive progress on Starbucks Delivers and the phenomenal customer reception to the Starbucks rewards program are all signs that we are well positioned for long-term growth in China.

Now, moving on to our second strategic priority, expanding our global reach through the global coffee alliance with Nestle. The global coffee aligns exceeded our expectations during the second quarter from a topline perspective and continues to expand the reach of the Starbucks brand. Late in fiscal Q2, Nestle launched the first 24 Starbucks SKUs across three platforms; Starbucks coffee by Nespresso, Starbucks coffee by Dolce Gusto and Starbucks roast in ground and whole bean coffee through CPG channel. These products co-created by Starbucks and Nestle are now being deployed to 16 global markets, as part of our wave one rollout through September.

The first six of these markets launched in March, extending our reach to major retailers. Retailers are supported by our full suite of marketing resources that are adaptable for each market across digital, social and in-store channels to drive greater awareness of the Starbucks brand globally. The inaugural launch marks just the beginning for the global coffee aligns with a robust pipeline of new products and markets for Starbucks at home and in Food Services lined up to support future growth, driving financial returns as well as the worldwide expansion of the brand.

And finally, I'll share the progress we're making on our third strategic priority, increasing our focus on shareholder returns. In March, we initiated a new $2 billion accelerated share repurchase plan, which we expect to complete by the end of June. This puts us on a path to deliver over 80% of our $25 billion shareholder capital return commitment by the end of this fiscal year, with the significant operating cash that our business continues to generate and a watchful eye on investment returns, we are well on our way to delivering against our shareholder capital return commitments.

In summary, the strength of our performance in Q2 has further validated our growth at scale agenda and the strategies we are pursuing to create long-term shareholder value with more sustainable predictable business results driven by focused and disciplined execution. We are making solid progress on each of our key strategies. With strategy is ultimately about execution. The credit for our success goes to the Starbucks partners around the world who proudly where the green apron. Each of them relentlessly delivers an elevated Starbucks experience and for that I am both proud and grateful.

With greater focus and discipline we have positioned our company for the next chapter of growth, growth that is anchored in our mission, our values and in our brand promise. We're playing the long game as we continue to look to the future and build an enduring company.

With that I'd like to now turn the discussion over to Pat to walk through consolidated and segment results for Q2 and provide an update on our full-year outlook. Pat. ?

Patrick J. Grismer -- Chief Financial Officer, Executive Vice President

Thank you, Kevin and good afternoon everyone, I too and pleased with the sustained positive business momentum that we demonstrated in the second quarter. On a reported basis, total revenue grew 5%, excluding the impact of Streamline-related activities, notably the Global Coffee Alliance, as well as the impact of foreign currency translation, total revenue grew 9%. This increase in revenue was underpinned by the growth of our Global Retail Business, including net new store growth of 7% over the past 12 months and global comp sales growth of 3%. Non-GAAP EPS of $0.60 was up 13% versus prior year and included a favorable impact of $0.01 related to discrete income tax items.

I will now take you through our Q2 operating performance by segment. Our Americas segment delivered 8% revenue growth in Q2, driven by net new store growth of 4% over the past 12 months and 4% comp sales growth with slightly positive comp transaction growth in the US for a second consecutive quarter, as Kevin highlighted earlier. Key drivers of Americas' comp sales growth in the quarter were an improved in-store experience and a stronger beverage platform. Beverage, our highest-margin category contributed 3 points of comp sales growth in Q2, while food drove 1 point of comp sales growth. Within beverage, our cold platform continued to perform well lead by refreshment, Iced Espresso, and iced coffee. Beverage innovation also contributed to comp sales growth in the quarter with the successful launch of Cloud Macchiato and the ongoing strength of our Cold Foam platform.

And while much of the beverage comp sales growth was driven by ticket, close to half of the ticket growth was from beverage mix and attach demonstrating that our higher-margin premium offerings resonated with customers and customers bought more beverages per transaction. From a daypart perspective, we saw continued strong transaction growth at peak, additionally afternoon performance improved for a third consecutive quarter with the best performance in the past three years as our improved in-store experience is driving improvement across all dayparts.

In addition to strong revenue performance, Americas non-GAAP operating margin expanded 120 basis points to 21.3% in Q2, primarily due to sales leverage, cost savings initiatives, and new revenue recognition accounting on stored value card breakage, partially offset by partner and technology investments which were largely funded by upside from US tax reform.

Moving on to China/Asia-Pacific or CAP, our fastest-growing business segment. CAP segment revenues grew 9% in Q2. Excluding the 4% impact of foreign currency translation, revenue grew 13% in the quarter. This was driven by 12% net new store growth over the past 12 months and 2% comp sales growth. I would now like to highlight the second-quarter performance of two key markets in our CAP segment, China and Japan. We continue to open new stores at a rapid pace in China, growing store count by 17% versus the prior year. Importantly, our new stores continue to deliver exceptionally high returns even with higher market penetration.

China also delivered comp sales growth of 3% in Q2 with just a 1% decline in comp transactions, a meaningful improvement relative to the prior three quarters helped by delivery and other digital initiatives. 4% comp ticket growth was driven by pricing, merchandise, and food. The momentum we saw in our Japan business at the start of the fiscal year continued into Q2, driving 3% comp sales growth, as well as comp transaction growth for the third consecutive quarter. These results were driven by successful LTO performance in blended and espresso beverages, as well as the continued growth of our Starbucks rewards program in Japan.

CAP's non-GAAP operating margin increased by 60 basis points to 23.2% primarily due to sales leverage and cost savings initiatives. Onto our channel development segment, which reported a revenue decline of 21% in Q2, including the impact of the Global Coffee Alliance, which reduced segment revenues by approximately $120 million in the quarter as expected. Excluding the impact of the Global Coffee Alliance, segment revenues were flat. Non-GAAP operating margin declined by 730 basis points to 34.3% in Q2, largely due to the impact of Streamline. Absent the 640 basis point Streamline impact, the segment's non-GAAP operating margin declined 90 basis points. While the profitability of the segment will continue to evolve, we are pleased with the growth and overall performance that the Global Coffee Alliance is driving, which is slightly ahead of our expectations to date in fiscal ' 19 and is supporting the continued expansion of the Starbucks brand worldwide.

Consolidated operating margin totaled 15.8% on a non-GAAP basis, down 40 basis points year-over-year, largely due to the impact of licensing our channel development business. Excluding the 80 basis point unfavorable impact of streamline activities, non-GAAP operating margin expanded by approximately 40 basis points, reflecting the impact of cost savings initiatives, sales leverage, and new revenue recognition accounting for card breakage, partially offset by investments in our partners, technology, and Siren Retail.

Moving on to our guidance for fiscal '19. Now at the midpoint of our fiscal year, we have better visibility to anticipated full-year results. We now expect fiscal 2019 GAAP EPS in the range of $2.40 to $2.44, up from a range of $2.32 to $2.37. Our fiscal 2019, non-GAAP EPS is now expected to be in the range of $2.75 to $2.79, the midpoint of which implies approximately 14% year-over-year growth. Relative to our previous non-GAAP EPS range of $2.68 to $2.73 for fiscal 2019, two-thirds of the increase is attributable to tax benefits and one-third is driven by better-than-expected operating results to date in fiscal '19.

At the consolidated level, we still expect operating margin for fiscal '19 to be down moderately relative to fiscal '18. Compared to previous expectations, this reflects an improvement in Americas operating margin, offset by a reduction in channel development operating margin and continued investments in Siren Retail. Driven by better-than-expected sales, we now expect Americas' operating margin for fiscal '19 to improve slightly versus prior year. Conversely, channel development operating margin for fiscal '19 is now expected to land in the mid-30% range due to shifts in sales mix. That said, we continue to be pleased with the overall performance of the Global Coffee Alliance.

Additionally, for fiscal '19, we now expect our GAAP effective tax rate to be in the range of 20% to 22% and non-GAAP effective tax rate to be in the range of 19% to 21% with improvements attributable to discrete tax benefits. All other full-year 2019 guidance metrics, including global comp growth and net new stores, are unchanged from what was previously communicated and reaffirmed on our first quarter fiscal '19 earnings call.

Although we don't provide annual G&A guidance, we would like to reaffirm and clarify our previous commitment to reduce G&A by 100 basis points as a percentage of system sales over a three-year period ending in fiscal '21 net of investments. We are absolutely committed to delivering on this commitment and we'll do so by limiting non-GAAP G&A to approximately $1.7 billion for fiscal '21. This will equate to a three-year CAGR of approximately 1% in non-GAAP G&A with fiscal '18 as our base.

Given our commitment to sustain high single-digit revenue growth, this disciplined management of G&A will help to unlock operating leverage in our overall economic model. We will accomplish this through a combination of cost reductions and sales leverage, even as we continue to invest in areas that are essential to the growth and vibrancy of our business, a large portion of these investments will be made this year, primarily a carryover of investments initiated in fiscal '18 and largely funded by upside from US tax reform. These investments also include the impact of our Siren Retail business, which is expected to dilute our overall operating margin by approximately 70 basis points this fiscal year. These investments are a key reason for our margin performance to date in fiscal '19 despite the meaningful comp sales growth we've delivered. Please note that all of this is consistent with our full-year guidance for 2019 as well as our ongoing growth algorithm.

To summarize, we are very pleased with our performance in the second quarter and fiscal '19 year-to-date. We are confident in our ability to deliver our fiscal '19 guidance while investing for the long term to build an enduring brand. Of course, none of this would be possible without the significant efforts of all our partners in our 78 markets across the globe. It is their unwavering commitment to serving our customers that drives the financial results and the outlook that I've shared today.

And with that, Kevin and I are happy to take your questions. Joined by Roz Brewer and John Culver as Durga outlined at the top of our call. Thank you. Operator?

Questions and Answers:

Operator

Thank you. (Operator Instruction) Our first question comes from the line of John Glass with Morgan Stanley. Please proceed with your question.

John Glass -- Morgan Stanley -- Analyst

Thanks very much. I wonder if you could just talk a little bit about what unlocked the US margin improvement this quarter. If you exclude the the impairments of the restructuring charge, it was a meaningful improvement versus the prior quarter and comps really didn't change. And so maybe talk about what the components are that you got this quarter. You didn't see last quarter and when you talk about modest or slight improvement a year, it seems like with the back half being easier, you're lapping some of the investments you made a year ago. Post tax reform that it may actually be, it would seem that that's a modest -- that's a modest assumption just a modest improvement in US margins.

Patrick J. Grismer -- Chief Financial Officer, Executive Vice President

Yeah, John, this is Pat. Thank you for the question. We are very pleased with America's overall margin performance. And just to highlight non-GAAP operating margin was up 120 basis points versus prior year which was a meaningful sequential improvement from the 60 basis point contraction in America's Non-GAAP operating margin in Q1 and there were really 3 key drivers of the improvement. First, sales leverage, which included the impact of pricing as well as cost savings initiatives, primarily in supply chain. I would also highlight however a contributions from an accounting change related to breakage, which benefited our non-GAAP operating margin.

These were offset, as you mentioned, to some extent by the investments that we made in our partners and in technology. Those investments were largely initiated starting in Q3 of last year and were predominantly funded by upside from US tax reform. So you're absolutely right, as we make our way into the back half of fiscal '19, we will face less pressure from those investments. However, I would highlight we are making a meaningful investment in the fourth quarter in the Americas division behind a leadership conference and that is factored into our overall guidance for the year, but it's on that basis that we have taken up our full year guidance for Americas non-GAAP operating margin to a slight improvement versus prior year, versus last quarter when we had outlooked a slight degradation in margin year-over-year, for the full year.

Operator

Our next question comes from the line of Sharon Zackfia with William Blair. Please proceed with your question.

Sharon Zackfia -- William Blair -- Analyst

Hi, good afternoon. I guess I'd be curious to hear how the digital relationships are going that are not Starbucks rewards. And if you could kind of quantify where that is now. I think last quarter it was 13 million. And how much that's contributing to the acceleration you're seeing in the Starbucks Rewards members itself kind of in the conversion there.

Rosalind Gates Brewer -- Chief Operating Officer and Group President of Americas

Thanks. Sharon, just a few numbers for you. We are seeing about 16.8 million active SR members that's up 13%. We are still seeing our MLP continuing to grow just over 15% and that's up 3% from prior year, flat quarter-to-quarter. Our registered non-SR digital relationships grew to 15.3 million. And so that's up just over 2%. This is the quarter that we did introduce the new multi-tier redemption plan, which includes also the redemption for all for our new members and so we are just in the beginning of that program, and this is part of the growth that we're expecting in the future.

Operator

Our next question comes from the line of Matthew DiFrisco with Guggenheim Securities. Please proceed with your question.

Mac -- Guggenheim Securities -- Analyst

Hi. This is Mac (ph) for Matt. Just one question on the China traffic, I know it's roughly four quarters of negative traffic at this point. I was just wondering why you're not seeing better support from the rewards program. And if you think the mobile order and pay is the key unlocked transaction growth in China.

John Culver -- Group President of International, Channel Development and Global Coffee & Tea

Yeah, Mac, this is John. I would say that, first off, as I shared at the Investor Conference in December, the key metric that we track as it relates to transactions is total transaction growth in the market. And we saw strong double-digit transaction growth across the entire store portfolio. As a reminder, over 80% of our total revenue growth is driven by our new stores and the rest is driven by same-store sales, we did see sequential improvement in transactions in our comp stores in the quarter. And I think that's important to note. And obviously Rewards continues to play a key role from a reward standpoint our rewards membership we basically up leveled our current program from a frequency-based program to a spend-based program in December.

Our 90-day active membership in the quarter since that change has increased over 25% on a year-over-year basis. We now have 8.3 million active 90-day members and that is a significant step change in terms of the growth rate from what we had seen previously in the program. And today when you look at rewards in our stores in China, they represent -- our rewards members represent over 50% of the transactions in our Starbucks stores. Now clearly as we continue to lay the rails for our digital footprint in China, MLP is going to play an important piece of that and we're excited about the opportunity to launch MLP, in the stores in China by the end of this fiscal year.

Operator

Our next question comes from the line of John Ivankoe with JPMorgan. Please proceed with your question.

John Ivankoe -- JPMorgan -- Analyst

Hi, thank you. I was hoping to get some insight on the labor market in the United States and not just the cost and availability, and I do want to address that for you all as well, but the turnover of labor that you're seeing at the store level, the quality that you're seeing at the store level, especially as it relates to processing peak hour transactions. And obviously, we can see results broadly which do I think include a slightly positive -- very slightly positive same-store traffic. But are there any issues that you're seeing, even in a local market basis across the US and what are you doing to be proactive to assume that the labor market is going to continue to tighten from here.

Rosalind Gates Brewer -- Chief Operating Officer and Group President of Americas

So we've not seen really a change in our attrition rate or turnover rate in our labor in our stores. One of the things that I can tell you is that we are increasing our engagement with our partners in our stores. Right now our customer connection scores are some of the highest in the history, we just experienced just this quarter alone a 0.3% (ph) improvement over last year. So we're moving in the right direction there. And then, a lot of that work is coming from what we're doing in terms of making better jobs easier work in the stores for our partners and actually adding training to the stores.

I'll also mention too that we implemented TeamWorks this quarter and TeamWorks is our labor scheduling initiative and it allows our schedule accuracy to improve. And our partners really respond to that because they know their hours. And I -- actually it makes the planning process much easier for the store manager and reduces the amount of work. So, we've got great engagement right now, a we're not seeing a shift in our attrition right now.

Operator

Your next question comes from Andrew Charles with Cowen & Company. Please proceed with your question.

Andrew Charles -- Cowen & Company -- Analyst

Great, thank you. Pat, just two separate model questions for you. Just first on cap, can you like quantify the impact to cap margins from the LMA (ph) delivery commissions and is there an elevated headwind to margins in the quarter that we should be thinking about as perhaps you subsidize consumer facing fees to build awareness. And then, I know this could be in the Q, but can you also disclose how much of America's 2Q gross margins improvement was attributable to the accounting change in gift card breakage given 2Q is the seasonally heaviest time frame for the redemptions. And just on that, is there any net benefit that you're seeing from the gift card breakage change in accounting structure versus what was in interest income before. Is there any net benefit, if you will, to EPS or is that net neutral?

Patrick J. Grismer -- Chief Financial Officer, Executive Vice President

So, Andrew, I'll take the gift card breakage part of your question first. Then we'll come back to the question on China. First, I want to clarify how the new accounting standard is impacting our P&L generally and then share some perspective on how this has impacted our operating margin specifically. We adopted the new revenue recognition accounting standard this fiscal year and for the most part, the standard reclassifies stored value card breakage from the interest and other line below operating income and outside of segment results to the revenue line at the segment level.

The new standard also introduces some timing changes, but those are relatively minor. So, on an annual basis, it's mostly a matter of P&L geography that doesn't have a significant impact on EPS. I also want to clarify that breakage is not accounted for in comp sales. It's simply another revenue driver after new stores and comp sales. On a full year basis, this change in accounting does have a beneficial impact to non-GAAP operating margin of about 40 basis points with the greatest impact in Q2 due to seasonality. All of this is reflected in our full-year operating margin guidance for fiscal '19 at both the consolidated and segment levels.

With respect to the impact to the Americas and how prominent this was? I do want to highlight that the individual beneficial margin impacts of sales leverage and cost savings, primarily from supply chain were greater than the positive impact that we realized from the accounting change. So my view is that fundamental business performance was far and away the driver of our improved operating performance in the Americas. It was not driven by an accounting change. The other thing I would say about the performance in the Americas is that we've seen much higher levels of customer partner engagement and we believe that this is contributing strongly to our performance across all dayparts in the Americas. So, that's some perspective on the accounting change and where that sets relative to other drivers of margin performance in the quarter.

With respect to the question you raised around the impact on LMR (ph) and whether there is a significant impact to our overall margin equation because of commissions and so forth. That is not the case. Really what's driving the performance in China is fundamental business performance where we're seeing sales leverage, which includes some measure of pricing, but also very strong improvement in average spend along with continued discipline in cost management, and that's what's driving the margin performance and we expect that will sustain. We do not anticipate that because of LMR or other digital initiatives that's going to have a meaningful impact to our margin equation in that market.

George Dowdie -- Senior Vice President, Global Food Safety, Quality & Regulatory

And Andrew, this is George. I would just add on the margin question on CAP overall, in the quarter, we did see an 80 basis point improvement in margin and that was driven by the sales leverage and cost savings initiatives that the teams have put in place over there, which we've guided toward.

Operator

Your next question comes from the line of David Tarantino with Robert W. Baird. Please proceed with your question.

David Tarantino -- Robert W. Baird -- Analyst

Hi, good afternoon. My question is on the US business, and specifically on the recent changes you made to the rewards program. I was wondering if you could comment on how those changes have been received initially by consumers. I think Kevin mentioned that the rollout was smooth, but maybe there are some media reports that suggest otherwise. So if you could just comment on that. And then secondly, if you could talk about your vision for how that will help to drive the business moving forward. Thanks.

Rosalind Gates Brewer -- Chief Operating Officer and Group President of Americas

Thank you, David. So a couple of data points that I will share with you. So the program is newly launched just in the last couple of weeks and so far we continue to closely monitor the member calls and the commentary versus our call centers and to date the volume has been well below our forecast. And we've also been monitoring social media as well. And if you are comparing this to times in the past when we've made these transitions, this is significantly lower, our response from our customers and any transition they are experiencing.

The program, the vision for the program is to really provide more access to potential members. So if you think about it, the first part of it is allowing our new members to have rewards earlier. So to give you an example, they earn rewards right away. The first reward comes at 25 stars after 2 to 3 visits. In the past your first free reward would have come after 30 to 43 first visits. And so this is an opportunity for us to start our customers out at earning and redeeming stars right away.

The second part of it, along the lines of the multi-tier redemption for our current members. It's an option for them to really redeem their stars when they reach 125 stars, now members are able redeem their stars at 5 tier levels ranging from 25 to 400 stars and also to expand the number of items that they can redeem like merchandise or at-home coffee. So it's a much broader expanded program for us. There is no star exploration for Starbucks rewards credit card holders.

So we think that this program is more accessible for us. We've also launched behind this a new Starbucks rewards app so that you can have the interface for the partner. So when the partner feature your name come up. They're able to know how many stars you have available and began to explain the program to you when you initially come to the store. So that's different than what we've had before. We think that that is keeping any of the tension down just because our partners are now able to explain the program right from the POS system and tell them what's available to them.

Operator

Your next question comes from the line of Sara Senatore with AllianceBernstein. Please proceed with your question.

Sara Senatore -- AllianceBernstein -- Analyst

Great, thank you. I have a question about the MSR spend per member. Just trying to sort of back of the envelope, it looks like you might have a seen a bit of improvement in either non-MSR spend per member or the MSR spend, at least we get to know which it might be, so I just wanted to know, first of all, is that the case and what you might attribute it to in terms of the event, is this the new loyalty program getting MSR numbers in. And is it more of the happy hours that are getting the non-members in. So just wanted to sort of confirm our calculations and also the drivers. Again a point of clarification on the margins in the channel development. You said the issue was mix, and is it geographic mix, or product mix. Just trying to understand that. Thanks.

Rosalind Gates Brewer -- Chief Operating Officer and Group President of Americas

Yeah, this is Rose, I'll start with what we're seeing in terms of spend per member and any other changes that could be happening. First of all the new program is much too new to equate any dollars to it in and understand the performance yet. I will tell you that we are seeing an improvement in our afternoon business. We have seen when we introduced more of our cold beverage innovation. It's improving afternoons and our non-SR members tend to shop with us in the afternoons. We're also seeing our drive through performance increase and we've added labor hours to our drive through to accommodate that. So we do think that we are getting a -- this is the first or actually the second quarter, we've seen a slight uptick in our afternoon performance. We believe we'll continue to see that based on the kind of beverage innovation that we are seeing. But our current spend per member has stayed in line with what we've seen in the past.

Patrick J. Grismer -- Chief Financial Officer, Executive Vice President

And then, Sara, this is Pat responding to your question regarding channel development margin. We did experience a higher mix of lower margin sales in our channel development segment primarily Tazo sales to Unilever and overall volume subject to our Global Coffee Alliance with Nestle. Also contributing to the lower segment margin for the quarter was a non-recurring adjustment for intangible asset amortization which is not material to our full year segment or consolidated outlook. And I do want to reinforce that although the full year segment margin for channel development will be lower than we had previously guided, we remain very pleased with the progress we're making with the Global Coffee Alliance with Nestle and how that's expanding the presence of our brands globally.

Operator

Your next question comes from Dennis Geiger with UBS. Please proceed with your question.

Dennis Geiger -- UBS -- Analyst

Great, thank you. Ross, wondering if you could talk some more about the throughput and the operations opportunity in the US, where are you now with that effort. What kind of benefits, maybe, have you seen in recent quarters? And I guess how significant can that be. And I guess its just a last piece of that is there any chance that the increased customer engagement is any kind of drag on that or no. Thanks.

Durga Doraisamy -- Director of Investor Relations

No. So actually the work that we're seeing on in-store execution is going well for us. A lot of the work that we're doing is automating some of the processes in the stores, team works being the first part of that in terms of labor scheduling and taking the hours away from our store managers. We are -- actually removed about 12 hours of work in the stores at this point. So we'll continue to do that level of work -- administrative work. That's exactly right. Administrative work things like scheduling and work that needs to be done in store, and it's actually creating more time for customer-facing opportunities and so that's where we're seeing customer connection scores increase and actually a chance for baristas to do the best job that they can in terms of things like informing our customers of the new MTR program. So we are really actually still moving in that direction. I will also mention -- in terms of do we see anything impacting that in the future and we've got plans through the rest of the year to continue to improve the work in the stores. The administrative work in the stores and you'll continue to see that work growing the way we're monitoring it is to really look at customer connections scores and also partner engagement.

Operator

Your next question comes from Jeffrey Bernstein with Barclays. Please proceed with your question.

Jeffrey Bernstein -- Barclays -- Analyst

Great, thanks very much. I had a question on the store ownership structure. Kevin, I know you mentioned in your prepared remarks and, Pat, I think you have a fresh set of eyes and has some franchising experience in your past. So just looking at the US business, specifically you know more than 50% of the stores are still company-operated. And I know you talked about how you made a big push recently around more of the European region and push that pretty significantly licensed.

So I was wondering how you think about the right balance of ownership, you would think and investors seem to believe that increase in the licensing mix would obviously easy operating volatility, but also allow maybe for increasing leverage greater return of cash perhaps better valuation, just wondering how each of you think about the appropriate mix and maybe what factors might impact that decision both positively and negatively.

Kevin R. Johnson -- Chief Executive Officer & Director

Yeah, let me, Jeffrey. Let me, this is Kevin. Let me began and kind of share strategic purpose perspective and I'll let Pat, jump in and add to this, but it is over the last 2 years as part of our streamline efforts we've been focused one element of Streamline is retail market alignment and much of that has been looking at our international markets and making the determination are those markets best operated in a license structure or company-operated structure. And so we've transitioned a number of markets to license partners, while at the same time acquiring 100% of the joint venture in East China and unifying China Mainland as company-operated.

And so we're going to continue to do that in the markets that we have transitioned to license partners we've transitioned these markets to long-term license partners that oftentimes operate in other markets. Example, most recently in Europe we transitioned France and the Netherlands to Alsea who is a longtime partner who has managed and grown the Starbucks brand in many other markets around the world. And so, by doing that, that is not only a better financial outcome, but it's also they will grow that market faster than we would have and so we support those license partners in doing that and we've got great respect for the value that they can bring and the way they can bring the brands to life in those markets.

Now, your question sort of touched upon the US, in the US, if you look at the returns that we get from operating the US as a company operated market, our ability to bring the brand to live and operate generates not only maximum financial outcomes for our shareholders, but it also allows us to ensure that we are establishing and setting the brand in the right way that we are able to then leverage with other markets around the world. Pat. I'll let you add.

Patrick J. Grismer -- Chief Financial Officer, Executive Vice President

Yeah. Thank you, Kevin. And Jeff, the way we typically think about ownership with respect to any market is really guided by 3 dimensions; unit level profitability investment returns and long-term growth. And when you look at the shape of our US business what you see is a very high level of profitability, led by the fact that we are a beverage first concept, which has very high gross margin. And we have very strong investment returns in our new units again led by the fact that we're a beverage first concept that doesn't have a kitchen they can tend to weigh on total investment and so our sales to investment ratio is very strong in the US. And then growth even for a concept with our level of penetration. We have significant runway remaining and that's why, as part of our total growth algorithm, we indicated that we saw the US business continue growing net units at a rate of 3% to 4% per year, which I think is industry leading for a concept of our scale in a market like the US. And the reality is, with our level of company ownership and our continued commitment to investing behind that growth, we are creating significant shareholder value for the long-term by maintaining that ownership position which is balanced very nicely with a very large and growing license business.

So the mix feels very good and there is no doubt that we're creating significant shareholder value by maintaining and growing our ownership position in the US.

Operator

Your next question comes from the line of Gregory Francfort with Bank of America. Please proceed with your question.

Gregory Francfort -- Bank of America -- Analyst

Hey. Just a quick one on the accounting change, can you quantify if there was an EBITDA dollar impact and what that was during the quarter and then and then my strategic question is just on store growth I think in the US is now 2 points lower than it was maybe a year or two ago. Have you seen changes in cannibalization as you slowed store growth and how do you quantify that and kind of what are you seeing in the numbers that suggests that that strategy has played out and maybe it's supporting your per store business.

Patrick J. Grismer -- Chief Financial Officer, Executive Vice President

Gregory. This is Pat. I'll address the first part of your question in relation to the accounting and then Roz will take the question on US store growth. The accounting change -- I'm not going to put a dollar amount on it, but as I indicated earlier, the favorable impact to our consolidated operating margin, non-GAAP operating margin in the quarter was about 60 basis points. And we do expect that impact is going to be the highest in Q2 for reasons of seasonality. And then over to Roz.

Rosalind Gates Brewer -- Chief Operating Officer and Group President of Americas

Yes. So Greg on if we're seeing any cannibalization and what are we doing around store growth in the America is we continue to add new stores, as you're probably aware, we are still in the period of store closures, which is going to be always a chance for us to really prune our business and look at what units are performing and not performing. Just in this quarter alone, if you look at the company-operated stores, plus the license stores, this quarter were up 20 units and we continue to have a fairly aggressive new store plan. So what that would look like is that we actually opened 84 stores in this quarter, we closed 97. So we're in a good position to continue to look at our portfolio and we're adding strategically.

One of the things, if you, we're engaged with us during our investors call we talked about looking at new formats, and so we're actually adding new formats. In addition to that, understanding that the needs data convenience continues to grow. So things like smaller units, more drive through stores and also advancing our cafes to make sure that they are up to date with new technology and new equipment, so we remain pretty smart about what we're doing with our store development portfolio.

Operator

Your next question comes from the line of Will Slabaugh with Stephens. Please proceed with your question.

At this time, there is no response.

Will Slabaugh -- Stephens -- Analyst

Thank you. Sorry about that. I had a question on updated thoughts on competition in China just given new entrants and general coffee store growth in the region. And along those same lines many of your competitors in that region offer a different experience often the less inviting physical space there could be much smaller, so I'm curious how you're thinking about the consumer behavior in your stores versus how they're behaving in competitors stores and if that makes you want to evolve anything that you're currently doing in the market.

John Culver -- Group President of International, Channel Development and Global Coffee & Tea

Well, this is John. I would say that from a China perspective, we continue to stay focused on the third-place experience in elevating the coffee experience in the customer connection that our partners have with our customers who come in the door. In addition, we continue to expand our business into other channels, whether that be through delivery, through new concepts that we're creating, as well as, through eventually, the Global Coffee Alliance later this year.

Now, as Kevin talked about, we are seeing accelerated competitive environment in China and discounting as part of that. And I would just say that we continue to take the long-term view and belief in our strategy and executing in a way that continues to elevate the experience for our customers. As a company, in China, we're not looking to buy short-term revenue, rather we're looking at continuing to build on the 20-year history and the success that we've had in the market. Kevin talked in his comments about our brand strength that's never been stronger more relevant and that's indicative through the brand survey that we just recently completed. Our total transactions continue to grow double-digits. Our new stores continue to perform best in class. This year we'll open 600 stores and continue to gain share in the marketplace. And the financial foundation that we've been able to build in China regardless of the competitive environment or the change in consumer environment allows us to continue to make meaningful investments and adapt our model to this changing consumer environment.

So, for us, these are the very early days for our business in China. We are very optimistic about the future growth opportunity that exist there and we're going to stay focused on the strategy that we put in place on continuing to expand the reach and the availability of Starbucks Coffee in the marketplace.

Kevin R. Johnson -- Chief Executive Officer & Director

Yeah, I would just add to John's comments as well that Starbucks has been in China for 20 years now. And throughout that 20-year period, we understand what differentiates Starbucks both globally as well as in China and we're going to stay true to those principles. We're playing the long game. And we're very confident in the strategy.

Operator

Your next question comes from Andy Barish with Jefferies. Please proceed with your question.

Andy Barish -- Jefferies -- Analyst

Yeah, thanks. Just dovetailing on China and digging in a little bit more. With East China now in the comp base, can you give us some color on that contribution to the overall comp. And I think there was more impact in the business historically as there were a lot of openings in that business. Is that impact starting to lessen as you move out to some of the lower tiers and spread out the unit growth a little bit?

John Culver -- Group President of International, Channel Development and Global Coffee & Tea

Yes, Andy, this is John. Obviously this is the first quarter with which we had East China in the comp base. And when we -- when we look at it versus the rest of the old company owned businesses, the comp performance in both markets was relatively equal. And more importantly, is when you look at the way in which we have the operations setup up across the country in the regions, are regions in China, throughout China performed very strong. We obviously delivered comp growth of 3%, which was sequential improvement quarter-to-quarter. Top line revenue grew 16%. Total transactions low double digits. New store performance continue to be best-in-class.

We grew store count 17% and we now operate nearly 3,800 stores across 161 cities. So we feel that we are in a very good position to continue to win in the marketplace and continue to lead the growth of the coffee market and capture more than our fair share.

Operator

Ladies and gentlemen, that was our last question today. This concludes Starbucks Coffee Company's second quarter fiscal year 2019 conference call. You may now disconnect.

Duration: 63 minutes

Call participants:

Durga Doraisamy -- Director of Investor Relations

Kevin R. Johnson -- Chief Executive Officer & Director

Patrick J. Grismer -- Chief Financial Officer, Executive Vice President

John Glass -- Morgan Stanley -- Analyst

Sharon Zackfia -- William Blair -- Analyst

Rosalind Gates Brewer -- Chief Operating Officer and Group President of Americas

Mac -- Guggenheim Securities -- Analyst

John Culver -- Group President of International, Channel Development and Global Coffee & Tea

John Ivankoe -- JPMorgan -- Analyst

Andrew Charles -- Cowen & Company -- Analyst

George Dowdie -- Senior Vice President, Global Food Safety, Quality & Regulatory

David Tarantino -- Robert W. Baird -- Analyst

Sara Senatore -- AllianceBernstein -- Analyst

Dennis Geiger -- UBS -- Analyst

Jeffrey Bernstein -- Barclays -- Analyst

Gregory Francfort -- Bank of America -- Analyst

Will Slabaugh -- Stephens -- Analyst

Andy Barish -- Jefferies -- Analyst

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