Starbucks Corporation — Q1 Fiscal 2018 10-Q
Reporting period: Quarter ended December 31, 2017; comparable quarter ended January 1, 2017. Amounts are in U.S. dollars.
Business context and financial performance
Starbucks reported 5.9% revenue growth, supported by new store openings and 2% global comparable-store sales growth. The quarter included major portfolio changes: Starbucks acquired the remaining 50% of its East China joint venture, sold its Taiwan joint-venture interest and sold the Tazo brand. East China results will be consolidated from the second quarter of fiscal 2018.
| Metric | Q1 FY2018 | Prior-year quarter | Change / context |
|---|---|---|---|
| Net revenue | $6.074 billion | $5.733 billion | Up 5.9% |
| Operating income | $1.116 billion | $1.133 billion | Down 1.5% |
| Operating margin | 18.4% | 19.8% | Down 140 basis points |
| Net earnings attributable to Starbucks | $2.250 billion | $752 million | Materially elevated by transaction gains |
| Diluted EPS | $1.57 | $0.51 | Up 208%; includes significant one-time gains |
| Operating cash flow | $1.834 billion | $1.530 billion | Increase primarily reflected higher earnings |
| Investing cash flow | $395 million provided | $402 million used | Included sale proceeds and lower investment purchases |
| Financing cash flow | $1.040 billion used | $1.189 billion used | Included $1.601 billion of share repurchases and $428 million of dividends paid |
Revenue from company-operated stores was $4.742 billion, licensed stores $682 million, and CPG, foodservice and other $650 million. Cost of sales rose to 41.2% of revenue from 40.0%, primarily because of a food-related mix shift in the Americas. Restructuring costs were $27.6 million, mainly related to Teavana store closures. The company declared a quarterly dividend of $0.30 per share.
Material changes and unusual items
- Starbucks paid approximately $1.4 billion for the remaining East China interest, recorded as an acquisition payable; approximately $1.3 billion had been settled by the filing date. The acquisition generated a $1.326 billion non-cash gain from remeasuring Starbucks’ pre-existing 50% interest.
- Divestiture gains were $501 million, primarily from selling Tazo and the Taiwan joint-venture interest. Management attributed $0.23 of quarterly EPS to other streamlining efforts and $0.79 to the East China acquisition gain.
- The Tax Cuts and Jobs Act produced a blended fiscal 2018 U.S. federal corporate tax rate of 24.5%, versus 35% previously. The quarter included a provisional $77 million deferred-tax remeasurement benefit and $212 million of transition-tax expense, net of certain adjustments. Management said the Tax Act’s overall effect did not materially affect quarterly net earnings; estimates remained subject to change.
- Starbucks issued $1.0 billion of notes in November 2017: $500 million due 2020 and $500 million due 2047.
Debt, liquidity and outlook
At December 31, 2017, cash and cash equivalents were $3.661 billion and short- and long-term investments totaled about $470 million. Total debt carrying value was approximately $4.916 billion, including $350 million classified as current. The company had no commercial paper outstanding and reported compliance with applicable debt and credit-facility covenants. It had $2.0 billion and $1.0 billion revolving credit facilities available, subject to their terms. Management said operating cash flows, existing cash and investments, and borrowing capacity should fund expected needs and shareholder distributions.
- Fiscal 2018 revenue: Growth of 9%–11% versus fiscal 2017; management estimated approximately 4% from East China acquisition and an approximately 2% offset from other streamlining activities.
- Comparable sales and stores: Global comparable-store sales growth expected near the low end of the long-term 3%–5% target; approximately 2,300 net new stores planned.
- EPS and tax: Full-year EPS guidance of $3.32–$3.36, including a $0.94 East China acquisition-gain benefit. Expected effective tax rate was approximately 23%, subject to ongoing Tax Act assessment.
- Margins and investment: Consolidated and China/Asia Pacific margins were expected to decline for fiscal 2018 as East China shifts from an equity-method joint venture to company-operated reporting. Expected capital expenditures were approximately $2 billion.
Management commentary, risks and contingencies
Management cited food-related mix pressure in the Americas, sales deleverage and higher labor costs in parts of EMEA, and ongoing Teavana closures. Expected total Teavana lease-exit costs were approximately $143 million; the filing reported $16.6 million recorded in restructuring expense in the first quarter for lease-exit costs. Starbucks identified coffee, dairy and other commodity prices, foreign exchange, competition, customer acceptance, food-safety events, IT failures or breaches, execution of restructuring and East China integration, and Tax Act interpretation as risks. The company reported no material change to previously disclosed risk factors and no legal proceeding it believed would materially adversely affect its financial position, results or cash flows. Results are subject to seasonal fluctuations; the fiscal second quarter typically has lower revenue and operating income.
Important facts for investors to verify
- How much reported EPS and net income growth reflects recurring operations versus East China remeasurement and divestiture gains.
- East China’s post-acquisition revenue, operating margin, integration costs and amortization of acquired intangibles, including the effect on consolidated and China/Asia Pacific margins.
- Whether comparable-store sales, store growth and the 9%–11% revenue outlook are achieved, particularly given the expected low-end comparable-sales trend.
- Final Tax Act calculations, the effective tax rate and timing of transition-tax cash payments.
- Execution and total costs of Teavana closures, planned capital spending, and the balance between debt-funded capital needs, dividends and share repurchases.