Starbucks Corporation — Fiscal 2021 Form 10-K
Business context and reporting period. Starbucks operates and licenses coffee stores and sells branded products through retail, grocery and foodservice channels in 84 markets. This annual report covers the fiscal year ended October 3, 2021. Fiscal 2021 comprised 53 weeks; fiscal 2020 comprised 52 weeks. The additional week contributed $576 million of revenue, including $496 million from company-operated stores.
Financial performance
| Metric | Fiscal 2021 | Fiscal 2020 |
|---|---|---|
| Net revenue | $29.06 billion | $23.52 billion |
| Operating income | $4.87 billion | $1.56 billion |
| Operating margin | 16.8% | 6.6% |
| Net earnings attributable to Starbucks | $4.20 billion | $928 million |
| Diluted EPS | $3.54 | $0.79 |
| Cash provided by operating activities | $5.99 billion | $1.60 billion |
| Capital expenditures | $1.47 billion | $1.48 billion |
- Revenue rose 24%, principally reflecting recovery from pandemic impacts, comparable-store sales growth, new stores, favorable currency translation and the extra week. Company-operated store revenue increased 28%; licensed-store revenue increased 15%; other revenue fell 13%.
- Operating-margin recovery reflected sales leverage, lower pandemic-related costs and North American pricing, partly offset by higher partner wages and benefits and late-year supply-chain inflation.
- Fiscal 2021 net earnings included an $864.5 million pretax gain from selling Starbucks’ 50% interest in its South Korea joint venture. Management attributed $0.56 of diluted EPS to the divestiture, net of estimated taxes; $0.10 of EPS related to the extra week.
- North America represented 70% of revenue and generated $4.26 billion of operating income, at a 20.8% margin. International generated $1.25 billion of operating income at an 18.0% margin. Channel Development revenue declined 17% to $1.59 billion, primarily after certain single-serve activities transitioned to Nestlé; operating income nevertheless increased to $789 million.
- Comparable-store sales increased 22% in North America and 16% internationally. U.S. comparable sales rose 21%, with a 7% two-year increase; China comparable sales increased 17%.
- Cash and investments totaled $6.9 billion at year-end, including $6.46 billion of cash and cash equivalents. The company reported $14.62 billion of debt carrying value, $14.71 billion of debt principal, and a shareholders’ deficit of $5.32 billion. It had $3.0 billion of unused revolving credit capacity and no year-end borrowings under that facility or its commercial-paper program.
- Operating cash flow increased to $5.99 billion. Cash used in investing was $320 million, including $1.47 billion of capital expenditures and $1.18 billion of divestiture proceeds. Cash used in financing was $3.65 billion, including $2.12 billion of dividends. No shares were repurchased during fiscal 2021.
Changes, outlook and risks
- Fiscal 2021’s rebound should be assessed against the pandemic-depressed fiscal 2020 comparison. The extra week and South Korea divestiture gain also affect comparability.
- Management expected fiscal 2022 capital expenditures of approximately $2 billion and announced U.S. retail wage increases. It anticipated wage investment and inflation-related supply-chain costs would pressure operating margin, partly offset by pricing, revenue growth and productivity. The filing gives no specific consolidated revenue, EPS or margin guidance.
- Management expected Channel Development to return to more normalized reported revenue growth in fiscal 2022 as the transition-related comparison ended. Supply shortages and transportation delays were expected to continue into fiscal 2022, but management viewed them as temporary and not material to long-term growth and profitability.
- Management expressed confidence in its long-term “Growth at Scale” strategy, conditional on no significant, prolonged COVID-19 relapse or global economic disruption. COVID-19 restrictions and changing customer behavior remained uncertain, particularly in international markets.
- Key risks include coffee, dairy and other input-cost volatility; supply-chain and labor constraints; inflation; dependence on North America and growth in China; foreign-exchange and geopolitical risks; competition; and cybersecurity, privacy, food-safety and brand risks. Starbucks identified 807 U.S. and Canadian stores for closure under its portfolio restructuring plan and said substantially all had closed; remaining plan costs were expected to be immaterial.
- In a California Proposition 65 coffee-warning case, the trial court granted defendants summary judgment based on a coffee exemption regulation; the plaintiff appealed. Starbucks said a material loss was less than reasonably possible and recorded no loss contingency. The filing says other proceedings were not believed likely to have a material adverse effect.
- The independent auditor issued unqualified opinions on the financial statements and internal control. Its critical audit matter concerned management’s indefinite-reinvestment assertion for foreign earnings, including up to approximately $290 million of potential unrecognized tax liability associated with $1.8 billion of taxable temporary differences.
Important facts for investors to verify
- How much of the sales and margin rebound persists after removing the extra week, pandemic recovery effects and temporary government subsidies?
- How do U.S. wage increases, inflation, commodity prices and supply availability affect fiscal 2022 margins and store staffing?
- What are the recurring earnings and cash-flow implications of the South Korea divestiture gain and the transition of single-serve activities to Nestlé?
- Can China and other international markets sustain store growth and profitability amid pandemic restrictions, competition and geopolitical uncertainty?
- How will debt, substantial lease commitments and the shareholders’ deficit shape capital returns, including resumed share repurchases and dividends?
- What is the eventual outcome of the Proposition 65 appeal and the foreign-earnings tax exposure described in the audit matter?