Kevin Johnson
President and Chief Executive Officer at Starbucks
Thank you, Tiffany and welcome everyone to today's call. Before we dive into the quarter's results, I want to take a moment to reflect on the fact, the world is now entering the third year of this pandemic and recognize that over this period Starbucks has made significant progress driving our business recovery. The last two years have been anything but linear, many parts of the world continue to experience significant COVID related disruptions, including Starbucks to lead markets, United States and China.
However, through a dynamic and challenging environment, three things have remained true for Starbucks. First, global consumer demand for Starbucks is strengthening across our offerings and throughout all day part. This is a result of our work over the past year to expand digital customer relationships, introduce new beverage offerings and provide a safe, familiar and convenient experience for our customers. Second, we remain unwavering in the prioritizing the health and safety of our store partners and customers, even when the associated cost may create short-term earnings pressure.
We have consistently provided best-in-class COVID benefits to our partners since this pandemic began. And third, the flexible operating protocols we established from the beginning of the pandemic continue to serve us well. The combination of these things has enabled us to adapt to near-term challenges, while continuing to invest in what we know is a long-term opportunity for all stakeholders.
Starbucks delivered record first quarter revenue of $8.1 billion, representing 19% growth. Global same-store sales grew 13%, demonstrating strong customer affinity for Starbucks. Demand for Starbucks continues to build and we are fully committed to capitalizing on this momentum for the long-term. That said, while we have seen extraordinary top line growth, we've also experienced extraordinary cost pressure, which impacted our margin performance. As the Omicron variant began to quickly spread, it resulted in higher than anticipated costs in three key areas across our US business, each of which impacted our results similarly.
The highly transmissible Omicron variant amplified staffing shortages in our supply chain, resulting in higher-than-planned distribution and transportation costs. We also experienced a significant increase in our industry-leading COVID isolation pay for our partners and we saw higher than anticipated costs from training and onboarding of new Starbucks partners. As we navigate the near-term challenges of this latest COVID variant, we remain confident in our ability to rapidly adapt, while continuing to drive our long-term agenda of share gains, growth and value creation.
In our other lead market China, the zero COVID policy there contributed to significant disruption to store hours and transaction volume. Net new store growth and performance remained strong, yet overall revenue and profitability came in below expectations. While we believe that these dynamics are temporary, we are focused on appropriately navigating the evolving macro dynamics and balancing long-term investments in the business.
I'll now provide more insight into our Q1 results and the actions we were taking to address the current state of our business, industry and overall economy, while continuing to prioritize our partners and ensuring Starbucks delivers long-term profitable growth. In the US, we experienced very strong customer demand over the holiday season. Our ability to deliver the Starbucks experience to our customers how, when and where they want resulted in first quarter revenue of $5.3 billion.
Year-over-year revenue growth of 23% was driven by a double-digit increase in customer traffic, highlighting our compelling holiday lineup and strong in-store and digital customer connection throughout the holiday season. Customer demand increased through all day parts and resulted in record Starbucks card activations and reloads in excess of $3 billion. Starbucks Rewards grew 21% to a record 26.4 million, 90-day active members. Average ticket grew mid-single digits, demonstrating our continued differentiation through customized, premium beverages and compelling food options.
Prior to the emergence of the Omicron variant, we were experiencing some inflationary pressures and staffing issues resulting from the broader pandemic. As the Omicron surge began, inflationary costs and staffing shortages were amplified, well in excess of our expectations. As I mentioned three primary factors inflation, COVID related pay and training and onboarding of new partners impacted our profitability to approximately the same degree, even while customer demand remained strong.
Now let me outline the impacts we believe these will have for the near-term and more importantly the actions we are taking to address each up. Like many others in the industry, we felt the impact of Omicron in the wider COVID-19 pandemic. More specifically, we experienced a rapid increase in supply chain costs related to distribution and transportation as our third party delivery providers had Omicron related staffing shortages, impacting their ability to fulfill a portion of our distribution needs.
This required us to greatly increase the use of much more expensive spot market and alternative delivery solutions in order to meet strong customer demand. As a result, supply chain driven inflationary costs were unexpectedly amplified by Omicron and rapidly accelerated in December, impacting our US business by more than 170 basis points on margin in the quarter.
As we entered fiscal year '22, we had estimated full year inflationary impacts of around 200 basis points on margin. For the balance of the year, we expect these costs to increase versus our previous estimate. Like most economists, we anticipate supply chain disruptions will continue for this foreseeable future. We've already taken pricing actions this fiscal year, one in October of 2021 and another in January 2022. And we have additional pricing actions planned through the balance of this year, which play an important role to mitigate cost pressures including inflation as we position our business for the future.
There are many factors that contribute to our thoughtful pricing strategy including the increasing US inflation rate currently running at 7% or perhaps greater, as well as wage, customer demand and other costs. Second, the rapid spread of Omicron through the US required us to quickly adapt store protocols. From our very beginning and as we've demonstrated throughout this pandemic, Starbucks has always prioritized the health and wellness of our partners by offering some of the best benefits in the industry. This moment is no different.
Our COVID vaccination pay supported thousands of partners and the broader efforts in helping get more people vaccinated. And with the highly transmissible Omicron variant, we had more partners leverage our COVID isolation benefits, as they were either homesick or home isolating after being exposed to the virus, which led to significantly higher COVID related benefits pay than expected.
We expect similar usage of COVID isolation and vaccination pay through this next quarter, moderating in the back half of fiscal '22. Throughout this pandemic, COVID isolation pay has been a critically important partner benefit to help offset the higher than expected expenses benefit, we are taking the necessary measures to reduce spending in discretionary areas of our US P&L. As an example, with strong customer demand, we believe we can tighten up a bit more in our G&A expenses including promotional spend and marketing.
We believe these measures are prudent as we work to balance increasing cost pressures with our commitment to our partners. Finally, with approximately 4 million Americans who have not yet returned to the workforce, nearly every business in the services industry is facing staffing challenges and increased turnover. The battle for talent is notable. While Starbucks has always been committed to attracting and retaining the best partners with our differentiated pay and benefits package, we too experienced staffing issues.
In response to this challenge and as a employer of choice, we hired an increasing number of new partners into our business this past quarter, which rapidly increased our training costs well above historic levels. This investment is critical to the success of our business as we work to create a great Starbucks experience where our partners still supported and customers feel uplifted. We know from experience that the continued investments in our partners both tenured and new will continue to drive the levels of customer connection and overall productivity that support the long-term success and differentiation of our business and we remain confident that the $1 billion investment in partner wages and hours that we announced on our fiscal '21 Q4 call is the right long-term investment to ensure we have the very best talent to support our business. In addition to these actions and as we highlighted on the last call, we continue to implement operational efficiencies throughout the organization to drive the productivity critical to our commitment to long-term margin expansion.
In summary, demand in our US market is very strong and we have tremendous opportunity for continued growth, as highlighted by our robust revenue results. As a leadership team, we hold ourselves accountable to the actions we have outlined to ensure our revenue growth is also reflected in our bottom line, to deliver compelling financial results to all Starbucks stakeholders, we must continue to balance ongoing profitability with long-term investments.
Turning to China. We continue to grow our store footprint in Q1 as we surpassed 5500 stores in the market. This brings our global store footprint to a record 34,317 stores. It's important to note that our latest generation new stores in China continue to perform well, as best-in-class store profitability and return on investment were achieved. Our 90-day active Starbucks Rewards members in China reached nearly 18 million, an increase of 2.6 million versus prior year with members contributing 75% of sales.
Mobility restrictions and the country's zero COVID policy have presented significant headwinds, contributing to a minus 10% same-store comp after adjusting for the VAT subsidy from a year ago. We adhere to COVID health regulations and as a result experienced closures, dynamic store protocols or reduced operations in three quarters of our stores throughout China exiting Q1. That said, our business in China continues to represent significant long-term growth. We are playing the long game as we navigate a dynamic environment.
We are encouraged by the performance and growth in our digital offering, as it drives new customer occasions and opens new channels of convenience. Digital ordering continues to resonate with customers growing to a Q1 record 38% of sales. Customer demand was evident across both the morning and afternoon dayparts. This coupled with our continued store expansion is a testament to the significant growth opportunity in the market.
Through these challenges however, our partners persevered and responded to ensure in-store safety by staffing health stations, taking temperatures and ensuring masks were worn by both partners and customers. Importantly, our customer connection scores were at an all time high in the quarter. This is a testament to the resiliency of our partners and the strength of our brand, giving us confidence that as COVID related restrictions eventually abate, our opportunity for growth in China remains as compelling as ever.
Looking more broadly at the international markets outside of China, we saw strong results for the quarter. The broad portfolio of markets in our international segment excluding China delivered outstanding results this quarter, posting 27% revenue growth with strength across Europe, Latin America, Japan, Korea and broader Asia Pacific. This illustrates the power of a diversified portfolio and gives us confidence in our global growth potential.
Shifting from international, we continue to see impressive revenue growth from our Channel Development markets and we are pleased with the continued performance of the Global Coffee Alliance with Nestle, as Starbucks at-home coffee continues to gain market share over the prior year, driven by Starbucks by Nespresso. And through our North American Coffee Partnership with PepsiCo, we recently announced our entrance into the energy category with Starbucks by a energy drink. Our ready-to-drink beverage crafted from caffeine naturally found in coffee fruit, as well as antioxidants to give consumers a feel good boost.
Energy drinks represent a rapidly growing category. We believe this new beverage differentiates us, opening up another category in the portfolio for growth.
Before I turn the call over to Rachel, I want to highlight that this quarter's record top line performance in a uniquely challenging operating environment, along with the set of actions outlined above, gives us confidence in our growth at scale agenda. While quarterly results can be difficult to predict in this dynamic environment, our strong demand and operating flexibility throughout this pandemic have enabled us to build an even stronger, more resilient company.
While we expect these complexities to persist through the near-term, Starbucks is well positioned to adapt and continue to deliver great experiences for partners and customers. Consumer demand for Starbucks is strong across all markets and continues to grow. We will continue to balance appropriate levels of near-term profitability with the partner investments and innovations that drive customer loyalty and in turn long-term growth.
Over two years now and thanks to our partners, our business has emerged stronger after each wave of COVID surges peaked and we expect this will be the case as Omicron runs its course. We have significant growth opportunities ahead and the investments we are making position Starbucks to continue capturing share in the fast growing coffee addressable market, while driving double-digit earnings growth over the long-term.
With that, we are reiterating our fiscal '22 guidance for revenue but believe it is prudent to revise margin and earnings guidance to reflect the cost pressures that were amplified by the omicron variant. We view these as near-term pressures and we have a clear set of actions to manage through this moment.
With that, I now turn the call over to Rachel to walk you through details of our Q1 results and fiscal '22 guidance components. Rachel?
