Starbucks Corporation — Q1 FY2016 Form 10-Q
Business context and period: The quarter ended December 27, 2015, compared with the quarter ended December 28, 2014. Starbucks operates company-owned and licensed stores and sells consumer packaged goods, foodservice products, and other offerings. FY2016 includes 53 weeks, with the additional week in Q4.
Financial performance and position
- Revenue: Net revenue was $5.374 billion, up 11.9%. Company-operated stores contributed $4.211 billion; licensed stores $540.6 million; and CPG, foodservice and other $622.3 million. Global comparable-store sales grew 8%.
- Profit and margins: Operating income rose 16% to $1.058 billion; operating margin expanded 60 basis points to 19.7%. Net earnings attributable to Starbucks were $687.6 million, versus $983.1 million; diluted EPS was $0.46, versus $0.65. The prior-year quarter included a $390.6 million pretax gain on the Starbucks Japan acquisition.
- Cash flow: Operating cash flow was $1.636 billion, compared with $1.425 billion. Capital expenditures were $331.8 million. Investing activities used $360.1 million and financing activities used $528.7 million. Cash and cash equivalents increased to $2.264 billion from $1.530 billion at fiscal year-end.
- Liquidity and debt: Cash plus short- and long-term investments totaled approximately $2.747 billion. Total debt was approximately $2.348 billion, including $399.8 million classified as current. Starbucks had no borrowings under its $1.5 billion revolving credit facility or commercial paper program and reported compliance with debt covenants.
- Shareholder returns: The company declared a $0.20 per-share dividend, compared with $0.16 a year earlier, and repurchased 4.5 million shares for $267.1 million during the quarter.
Material changes and management commentary
- Revenue growth reflected 8% comparable-store sales growth, 1,693 net new stores over the prior 12 months, and the full consolidation of Starbucks Japan. Unfavorable foreign-currency translation reduced revenue growth by about 2%.
- Americas revenue grew 11% and operating margin increased to 25.1%, supported by comparable sales growth, sales leverage and lower dairy costs; partner and digital investments partly offset these benefits.
- China/Asia Pacific revenue rose 32%, primarily reflecting Starbucks Japan consolidation and store growth. Operating margin declined 240 basis points to 19.4%, principally due to the ownership-model change in Japan and higher compensation costs.
- EMEA revenue declined 6%, including currency pressure and a shift toward licensed stores. Channel Development revenue grew 16% and operating margin rose to 37.7%, supported by single-serve, foodservice and packaged coffee sales.
- Net earnings and EPS fell year over year largely because the prior-year period included the Japan acquisition remeasurement gain; the prior-year gain was also almost entirely non-taxable, contributing to the higher current-period effective tax rate of 34.5% versus 24.2%.
Outlook, risks and contingencies
- For FY2016, management expected revenue growth above 10%, comparable-store sales slightly above the mid-single digits, approximately 1,800 net new stores, and a slight increase in consolidated operating margin versus FY2015.
- FY2016 EPS guidance was $1.84–$1.86. Management expected the 53rd week to add approximately 2% to revenue growth and $0.06 to EPS in Q4. Planned capital expenditures were approximately $1.4 billion.
- Management cited continued investment in employees and digital platforms, including wages, benefits, mobile and loyalty initiatives. It expected China/Asia Pacific to become a more significant revenue-growth contributor and EMEA operating margin to approach 15% in FY2016.
- Key stated risks include coffee, dairy and other commodity prices and availability; foreign-currency movements and economic conditions; competition and customer acceptance; execution and integration of Starbucks Japan; IT-system failures or breaches; food-safety incidents; and legal proceedings. The company reported no material change to previously disclosed risk factors and no proceeding believed likely to have a material adverse effect.
- Approximately $1.3 billion of cash and investments was held in foreign subsidiaries. Most undistributed foreign earnings were considered indefinitely reinvested; repatriation could result in additional U.S. taxes, whose potential amount the company said was not practicable to estimate.
Important facts for investors to verify
- Assess whether comparable-store sales, new-store additions and the FY2016 revenue and EPS outlook are sustained; the reported quarter is not necessarily indicative of full-year results.
- Separate recurring operating performance from the prior-year $390.6 million Japan acquisition gain and related tax-rate comparison.
- Monitor China/Asia Pacific margins and the continuing effects of Japan’s change from joint-venture accounting to company-operated consolidation.
- Track foreign-exchange and commodity impacts, planned capital spending, debt maturities and the cash implications of dividends and share repurchases.