Starbucks Corporation (SBUX) — FY2016 Form 10-K
Business context and reporting period. Starbucks operates company-owned and licensed coffee stores and sells packaged coffee, tea, and other products through consumer-goods and foodservice channels. This annual filing covers the fiscal year ended October 2, 2016; FY2016 included 53 weeks, compared with 52 weeks in FY2015. The extra week contributed approximately $400 million of revenue and $0.06 per diluted share.
Financial performance
| Metric | FY2016 | FY2015 | Change or context |
|---|---|---|---|
| Net revenue | $21.316 billion | $19.163 billion | +11.2%; includes extra-week impact |
| Operating income | $4.172 billion | $3.601 billion | +15.9% |
| Operating margin | 19.6% | 18.8% | +80 basis points |
| Net earnings attributable to Starbucks | $2.818 billion | $2.757 billion | +2.2% |
| Diluted EPS | $1.90 | $1.82 | FY2016 included $0.06 from the extra week; FY2015 included a $0.26 acquisition-related benefit |
| Cash from operations | $4.575 billion | $3.749 billion | +22.0% |
| Capital expenditures | $1.440 billion | $1.304 billion | Approximate operating cash flow less capital expenditures: $3.135 billion |
| Cash and investments | $3.405 billion | $1.924 billion | Includes cash, short-term investments, and long-term investments |
| Long-term debt, including current portion | $3.602 billion | $2.348 billion | FY2016 balance-sheet debt; net of cash and investments, approximately $0.2 billion |
Current assets were $4.761 billion and current liabilities were $4.547 billion at year-end. The company reported $2.129 billion of cash and cash equivalents. It had no borrowings under its $1.5 billion revolving credit facility or commercial-paper program and was in compliance with debt covenants. Operating lease obligations totaled $7.285 billion; total contractual obligations were $13.285 billion.
Segments and operating trends
- Americas: Revenue rose 11% to $14.795 billion; comparable sales increased 6%; operating margin expanded 110 basis points to 25.3%. This segment represented about 69% of consolidated revenue.
- China/Asia Pacific: Revenue rose 23% to $2.939 billion; comparable sales increased 3%; operating margin expanded 60 basis points to 21.5%. Growth reflected store openings and Starbucks Japan ownership.
- EMEA: Revenue fell 8% to $1.125 billion, mainly from foreign-exchange headwinds and a shift to licensed stores; operating margin declined 30 basis points to 13.5%.
- Channel Development: Revenue increased 12% to $1.933 billion and operating margin expanded 400 basis points to 41.8%, supported by single-serve products, lower coffee costs, and joint-venture income.
- Global comparable sales grew 5%, comprising a 4% increase in average ticket and 1% transaction growth. The company ended the year with 25,085 stores worldwide.
Material changes versus FY2015
- Revenue growth was supported by comparable sales, store openings, the extra fiscal week, and the full-year effect of Starbucks Japan. The Japan acquisition also changed the revenue and expense mix by moving the business from equity-method accounting to company-operated reporting.
- Operating margin improved mainly through sales leverage and lower commodity costs, partly offset by increased investment in employees and digital platforms.
- Net income grew more slowly than operating income; FY2015 included a $390.6 million pretax gain from remeasuring Starbucks’ existing Japan stake. FY2015 also included a $61.1 million debt-extinguishment loss.
- Debt increased following $1.25 billion of debt issuance in FY2016. The company returned $3.2 billion to shareholders through repurchases and dividends, versus $2.4 billion in FY2015.
- In FY2016, Starbucks sold its German retail operations to AmRest, converting 144 company-operated stores to licensed stores, and sold its Spanish joint-venture interest.
Outlook, risks, and unusual items
FY2017 outlook: Management expected consolidated revenue growth of approximately 8% versus FY2016’s 53-week results, or approximately 10% on a comparable 52-week basis. It projected mid-single-digit comparable sales growth, approximately 2,100 net new stores, slightly higher consolidated operating margin, an effective tax rate of about 34%, and diluted EPS of $2.09 to $2.11. Partner and digital investment was expected to increase by approximately $250 million; capital expenditures were expected to be about $1.6 billion.
Management cited growth priorities including employee investment, coffee leadership, store expansion, new customer occasions, at-home coffee, Teavana, and digital engagement. Key risks include dependence on Americas performance; intense competition; coffee, dairy, and other commodity cost or supply volatility; foreign-exchange and international-market exposure; labor and real-estate costs; food safety; cybersecurity and technology disruption; and execution of growth initiatives and partner relationships. The company had $1.1 billion in green-coffee purchase commitments and stated that existing inventory and commitments were expected to provide adequate supply through FY2017.
The filing reports no current legal proceeding that management believed could materially adversely affect consolidated financial position, results, or cash flows. The major historical litigation item was the Kraft arbitration charge recorded in FY2013 and paid in FY2014. About $3.3 billion of cumulative undistributed foreign earnings was considered indefinitely reinvested; repatriation could result in material additional U.S. taxes. Management reported no material goodwill or intangible-asset impairment in FY2016. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Assess underlying growth after separating the 53rd week and the FY2015 Japan remeasurement gain from reported comparisons.
- Track Americas comparable sales, transaction growth, and margins given the segment’s substantial share of revenue and cash generation.
- Evaluate whether FY2017 revenue, EPS, margin, store-opening, and investment targets were achieved; these are management expectations, not guarantees.
- Monitor commodity prices, currency effects, labor and occupancy costs, and the mix shift between company-operated and licensed stores.
- Consider debt alongside substantial lease commitments and shareholder distributions, and review the potential tax consequences of foreign-earnings repatriation.