Starbucks Corporation — Q2 FY2022 10-Q
Reporting period: Quarter ended April 3, 2022; comparisons are with the quarter ended March 28, 2021. Fiscal 2022 is a 52-week year. Amounts are in U.S. dollars unless stated otherwise.
Business context
Starbucks operated in 84 markets and had 34,630 company-operated and licensed stores, up 5% year over year. Management attributed growth to U.S. demand, new stores, licensed-store sales and Channel Development, while COVID-19 restrictions in China significantly constrained activity.
Key financial results
| Metric | Q2 FY2022 | Prior-year quarter |
|---|---|---|
| Net revenue | $7.636 billion | $6.668 billion |
| Operating income | $948.9 million | $987.6 million |
| Operating margin | 12.4% | 14.8% |
| Net earnings attributable to Starbucks | $674.5 million | $659.4 million |
| Diluted EPS | $0.58 | $0.56 |
| Comparable-store sales | Global +7%; U.S. +12%; China −23% | — |
For the first two quarters, revenue was $15.686 billion, up 16.9%; operating income was $2.127 billion, up $225.5 million; operating margin was 13.6%, down from 14.2%; net earnings attributable to Starbucks were $1.490 billion, up from $1.282 billion; and diluted EPS was $1.28 versus $1.08.
Quarterly margin pressure reflected inflation in commodities and supply chains, higher partner wages and benefits, training and support costs, and lower temporary government subsidies. Pricing and sales growth partly offset these pressures. North America margin was 17.1% (down 220 basis points); International was 10.6% (down 520 basis points).
Cash flow, debt and liquidity
- Cash from operations for the first two quarters was $2.033 billion, down from $2.720 billion year over year. Capital expenditures were $871.9 million; investing cash outflow was $880.9 million.
- Financing cash outflow was $3.709 billion, including $3.998 billion of share repurchases and $1.139 billion of dividends, partly offset by $1.498 billion in long-term debt proceeds. Cash and cash equivalents declined to $3.913 billion from $6.456 billion at fiscal year-end.
- Long-term debt was $16.013 billion carrying value, including $1.999 billion classified as current and $14.014 billion long-term on the balance sheet. The $3 billion revolving credit facility was undrawn; the company reported compliance with covenants. Cash and investments totaled $4.3 billion.
- Total liabilities were $37.783 billion, exceeding total assets of $29.022 billion; shareholders’ deficit was $8.768 billion.
Material changes, outlook and risks
- U.S. comparable sales rose 12%, supported by a 7% increase in average ticket and 5% increase in transactions. China comparable sales fell 23%; about one-third of Starbucks’ China stores were temporarily closed or limited to mobile ordering.
- Management expected inflation-related costs, labor-market spending and investments in partners, technology and digital capabilities to weigh on operating margin for the remainder of FY2022. Fiscal 2022 capital expenditures were expected to be approximately $2 billion. No quantified earnings or revenue guidance was provided in the supplied filing text.
- On April 4, 2022, after the quarter ended, Starbucks announced a temporary suspension of share repurchases to increase investment in stores and partners. It had repurchased 36.3 million shares for $4.0 billion in the first two quarters.
- Key risks include COVID-19 disruptions, particularly in China; inflation and availability of coffee, dairy and other inputs; supply-chain and logistics costs; labor availability and costs; foreign exchange, competition and execution of planned investments. Management said the first-half results are not necessarily indicative of full-year results.
- In a California Proposition 65 coffee-warning lawsuit, the company reported an adverse prior trial ruling but also a later summary judgment in defendants’ favor based on a coffee exemption regulation; the plaintiff appealed. Starbucks considered a material loss less than reasonably possible and recorded no loss contingency.
Important facts for investors to verify
- Whether China mobility restrictions and store closures persist, and their effect on comparable sales and International margins.
- Whether pricing and sales leverage can offset inflation, supply-chain costs, and labor investments.
- Cash generation and liquidity after the substantial first-half buybacks, dividends and capital spending; confirm the ongoing effect of the repurchase suspension.
- Debt maturities, refinancing costs and the company’s ability to maintain covenant compliance.
- Execution of the approximately $2 billion FY2022 capital plan and any subsequent changes to outlook or risks.