Starbucks Corporation — Q2 FY2020 Form 10-Q
Reporting period: Quarter ended March 29, 2020; comparisons are with the quarter ended March 31, 2019. Fiscal year ends September 27, 2020. Starbucks operated in 82 markets, with 32,050 company-operated and licensed stores at quarter-end.
Financial performance
- Q2 revenue: $5.996 billion, down 4.9% year over year. Company-operated store revenue fell 7.6% to $4.766 billion; licensed-store revenue rose 1.7% to $689.8 million; other revenue rose 15.2% to $539.9 million.
- Comparable sales: Global comparable-store sales fell 10%, reflecting a 13% transaction decline partly offset by a 4% increase in average ticket. Americas declined 3%; International declined 31%.
- Profit and margins: Operating income was $487.4 million, down 43.2%, and operating margin was 8.1%, versus 13.6%. Net earnings attributable to Starbucks were $328.4 million, down 50.5%; diluted EPS was $0.28 versus $0.53. Net interest expense was $99.2 million.
- First two quarters: Revenue was $13.093 billion, up 1.2%; operating income was $1.707 billion, down 8.9%, and operating margin was 13.0% versus 14.5%. Starbucks-attributable earnings were $1.214 billion versus $1.424 billion; diluted EPS was $1.02 versus $1.14.
- Cash flow: Operating cash flow for the first two quarters was $474.8 million, versus $2.769 billion a year earlier. Capital expenditures were $758.3 million; the resulting operating-cash-flow-minus-capex figure was negative $283.5 million. Cash and cash equivalents ended at $2.572 billion, down from $2.687 billion at fiscal year-end.
- Liquidity and debt: Cash and investments totaled approximately $2.8 billion. Debt included $1.107 billion of short-term commercial paper, $1.249 billion of current long-term debt, and $11.659 billion of long-term debt. The company reported $2.4 billion of total contractual borrowing capacity and compliance with applicable covenants.
- Balance sheet: Total assets were $27.479 billion and total liabilities were $35.012 billion. Shareholders’ deficit was $7.530 billion. Operating lease right-of-use assets of $8.261 billion and lease liabilities of $8.904 billion were reported following lease-accounting adoption.
Material changes and business drivers
- COVID-19-related closures, restricted hours, reduced traffic, and modified store operations materially reduced Q2 revenue and operating income. At quarter-end, 44% of Americas company-operated stores were open, mostly with modified service; approximately 70% of International stores were open, many with restrictions. More than 95% of China stores were open by early April.
- International segment revenue fell 26% in Q2 and recorded a $15.4 million operating loss, compared with $201.8 million of operating income a year earlier. Americas operating income fell 27% to $621.2 million. Channel Development revenue rose 16% to $519.1 million and operating income rose 27% to $189.6 million, aided by Global Coffee Alliance transition activity with Nestlé.
- Q2 store operating expenses increased to 45.4% of revenue from 40.5%; reported overall operating margin declined 550 basis points. Higher store costs included partner pay programs, occupancy costs, sales deleverage, inventory write-offs, and product waste.
- Cash-flow comparison was affected by the U.S. federal tax payment related to the Nestlé transaction and COVID-19 store closures. Fiscal 2019 cash flow also included substantially greater share repurchases.
Outlook, risks, and unusual items
- Management expected COVID-19’s negative financial impact to be significantly greater in Q3 than Q2 and to continue into Q4. The filing gives no quantified earnings or revenue guidance.
- Fiscal 2020 capital expenditures were expected to be approximately $1.5 billion, reduced from the prior forecast because of deferred store openings, refurbishments, and other spending. Management said it did not expect to reduce the quarterly dividend at the report date; the declared dividend was $0.41 per share. Share repurchases were temporarily suspended in mid-March and remained suspended as of the filing date.
- COVID-19 risks include prolonged closures or reduced operations, changes in customer behavior and discretionary spending, additional inventory or asset impairments, supply-chain and partner-credit stress, and reduced ability to realize deferred tax assets. Starbucks recorded approximately $50 million of inventory write-offs in Q2 and an immaterial store-asset impairment. It recorded approximately $35 million of CARES Act payroll tax credits as a reduction of store operating expenses and expected additional credits.
- Starbucks issued $1.75 billion of senior notes in March 2020: $500 million due 2027, $750 million due 2030, and $500 million due 2050. It also had $1.1 billion of commercial paper outstanding, most of which matured in Q3.
- Management considered the likelihood of loss remote in the California Proposition 65 coffee-warning litigation and recorded no loss contingency. Other ordinary-course legal proceedings were not identified as likely to have a material adverse effect.
Key facts for investors to verify
- Whether store reopening pace, customer traffic, and comparable sales recovery matched management’s expectations, particularly in the U.S., Canada, and China.
- Subsequent-quarter revenue, operating margins, cash flow, and any further inventory write-offs, impairments, or deferred-tax valuation allowances.
- Commercial-paper maturities, access to committed borrowing capacity, debt covenant headroom, and interest expense.
- Whether the $1.5 billion capital-expenditure expectation and dividend policy were maintained, and when share repurchases resumed.
- The amount and timing of government payroll tax credits and other assistance, as well as the financial condition of licensees, suppliers, and other partners.