Starbucks Corporation — Q3 FY2022 Form 10-Q
Reporting period: Quarter ended July 3, 2022; year-to-date figures cover the first three quarters of fiscal 2022. Comparisons are to the quarter and first three quarters ended June 27, 2021. Starbucks operated more than 34,900 company-operated and licensed stores in 83 markets.
Financial performance
| Metric | Q3 FY2022 | Prior-year quarter | First 3 quarters FY2022 | Prior-year period |
|---|---|---|---|---|
| Net revenue | $8.15bn | $7.50bn | $23.84bn | $20.91bn |
| Operating income | $1.30bn | $1.49bn | $3.42bn | $3.39bn |
| Operating margin | 15.9% | 19.9% | 14.4% | 16.2% |
| Net earnings attributable to Starbucks | $913m | $1.15bn | $2.40bn | $2.43bn |
| Diluted EPS | $0.79 | $0.97 | $2.07 | $2.06 |
- Quarterly revenue increased 8.7%, while operating income fell 13% and net earnings fell about 21%. Margin declined 400 basis points. YTD revenue rose 14%; operating income increased slightly, but margin declined 180 basis points.
- Quarterly comparable store sales grew 3% globally: U.S. sales increased 9%, while China sales declined 44%. U.S. average ticket growth and new stores supported revenue; China restrictions sharply reduced customer mobility.
- Inflationary product and supply-chain costs, partner wage and training investments, and China sales deleverage weighed on profitability. Strategic pricing and sales leverage outside China partly offset the pressure.
- YTD operating cash flow was $3.30bn, versus $4.47bn; capital expenditures were $1.30bn. Investing activities used $1.38bn and financing activities used $5.07bn, including $4.01bn of share repurchases and $1.70bn of dividends paid.
- At July 3, cash and cash equivalents were $3.18bn, versus $6.46bn at fiscal year-end; cash and investments totaled about $3.5bn. Current assets were $7.07bn and current liabilities $8.40bn. Shareholders’ deficit was $8.67bn.
- Debt included approximately $14.93bn of long-term debt and $200m of short-term commercial paper. The company reported $2.8bn of general-purpose borrowing capacity, no revolver borrowings, and compliance with credit covenants.
Outlook, risks, and notable items
- Management expected inflationary pressures, labor-market costs, and incremental investment in partners, technology, and digital capabilities to continue weighing on operating margin for the remainder of FY2022. It cited the U.S. reinvention plan as a longer-term opportunity to improve partner and customer experience. Fiscal-year capital expenditures were expected to be approximately $2bn.
- Management said existing cash, operating cash flows, and borrowing capacity should fund business needs and shareholder distributions for at least the next 12 months. This is a forward-looking assessment, not a guarantee.
- COVID-19 restrictions in China, inflation, commodity availability and prices, foreign exchange, labor costs, supply-chain disruption, and execution of reinvention initiatives were identified as risks. Management said it could not predict the duration or impact of pandemic-related disruption.
- The company announced an estimated $15m–$20m of future reinvention-related restructuring costs, expected over the next three to nine months. It also recorded $20m of transaction costs associated with exiting the Russia market.
- Share repurchases were temporarily suspended on April 4, 2022 to increase investment in stores and partners; none occurred in Q3. The company repurchased 36.3m shares for $4.0bn during the first three quarters. A quarterly dividend of $0.49 per share was approved.
- The Evolution Fresh sale closed August 1, after the quarter; management did not expect a material effect on future results. In a California Proposition 65 coffee-warning lawsuit, Starbucks reported an appeal in progress and no recorded loss contingency, stating a material loss was less than reasonably possible.
Important facts for investors to verify
- Whether China sales and customer traffic recover, and how that affects International segment results and consolidated margins.
- Whether price increases can offset commodity, supply-chain, wage, and training costs without weakening customer demand.
- Cash generation, capital spending, debt maturities, dividends, and the effect of continued shareholder distributions on liquidity.
- Progress, costs, and expected benefits of the U.S. reinvention plan, including the disclosed restructuring estimate.
- Developments in the California litigation and any other legal, labor, or regulatory matters that could materially affect results.