Starbucks Corporation — Q3 FY2015 Form 10-Q
Business context and reporting period. The quarter ended June 28, 2015; year-to-date figures cover the three quarters ended that date. Comparisons are with the corresponding periods ended June 29, 2014. Results include Starbucks Japan following its acquisition and consolidation, which materially affects year-over-year comparisons. All share and per-share amounts reflect the April 2015 two-for-one stock split.
Financial performance
| Metric | Q3 FY2015 | Q3 FY2014 | Three quarters FY2015 | Three quarters FY2014 |
|---|---|---|---|---|
| Net revenue | $4.881 billion | $4.154 billion | $14.248 billion | $12.267 billion |
| Operating income | $938.6 million | $768.5 million | $2.632 billion | $2.226 billion |
| Operating margin | 19.2% | 18.5% | 18.5% | 18.1% |
| Net earnings attributable to Starbucks | $626.7 million | $512.6 million | $2.105 billion | $1.480 billion |
| Diluted EPS | $0.41 | $0.34 | $1.39 | $0.97 |
| Operating cash flow | Not separately stated for the quarter | Not separately stated for the quarter | $2.779 billion | $(133.4) million |
- Q3 revenue rose 17.5% and operating income rose 22%; diluted EPS increased 21%. Global comparable-store sales grew 7%, with transactions up 4% and average ticket up 3%.
- Q3 operating margin expanded 70 basis points, primarily from sales leverage; the Japan ownership change and related transaction and integration costs reduced margin by about 90 basis points.
- Year-to-date earnings include a $390.6 million pretax gain from remeasuring Starbucks’ pre-existing Japan investment upon gaining control. This one-time gain materially boosted reported year-to-date earnings; the filing’s pro forma presentation is not a substitute for reported results.
- Cash from operations improved substantially year over year mainly because the prior-year period included a $2.8 billion payment related to the Kraft arbitration. The filing also cites higher earnings, partly offset by working-capital timing.
Balance sheet, debt and liquidity
- At June 28, 2015, cash and cash equivalents were $2.081 billion; cash and investments totaled approximately $2.6 billion. About $937 million of cash and investments was held in foreign subsidiaries.
- Total assets were $12.869 billion and total liabilities were $7.011 billion. Current assets were $4.761 billion and current liabilities were $4.049 billion.
- Debt carrying value was approximately $2.897 billion, including $549.8 million classified as current. In June, Starbucks issued $850 million of notes: $500 million at 2.700% due 2022 and $350 million at 4.300% due 2045.
- Investing activities used $1.292 billion year to date, including $284.3 million for acquisitions and $943.5 million in capital expenditures. Financing activities used $996.8 million, including $719.7 million of dividends paid and $921.1 million of cash used for share repurchases.
- The $750 million revolving credit facility had no borrowings outstanding; the company reported compliance with applicable debt and credit-facility covenants.
Material changes and segment performance
- Starbucks completed the acquisition of the remaining Starbucks Japan shares in March 2015, reaching 100% ownership. Japan contributed $332.7 million of Q3 revenue and $42.3 million of Q3 net earnings. Consolidation raised China/Asia Pacific revenue but lowered its reported margin versus the prior joint-venture accounting treatment.
- Americas: Q3 revenue increased 12% to $3.415 billion; comparable sales rose 8%. Operating margin expanded 120 basis points to 25.0%.
- EMEA: Q3 revenue decreased 9% to $294.7 million, mainly due to unfavorable currency translation. Comparable sales rose 3%; operating margin expanded 320 basis points to 12.2%, helped by a shift toward licensed stores.
- China/Asia Pacific: Q3 revenue increased 127% to $652.7 million, largely reflecting Japan consolidation; comparable sales rose 11%. Operating margin fell 1,200 basis points to 23.0%, primarily because Japan shifted from equity-method accounting to consolidated retail operations.
- Channel Development: Q3 revenue rose 8% to $403.6 million, supported by premium single-serve products and foodservice; operating margin declined 160 basis points to 35.5%, reflecting marketing and coffee costs.
- Year-to-date other comprehensive loss was $156.4 million, driven largely by currency translation. The company repurchased 20.7 million shares for $975.9 million and declared quarterly dividends of $0.16 per share.
Outlook, commentary and risks
- For FY2015, management expected revenue growth from Japan, 1,650 net new stores and mid-single-digit global comparable sales, partly offset by unfavorable foreign currency translation. Approximately half of planned openings were expected in China/Asia Pacific.
- Management expected consolidated operating margin to be flat versus FY2014 and strong EPS growth. Fiscal-year capital expenditures were expected to be approximately $1.3 billion.
- Management described continued product innovation, food and beverage expansion, store growth, digital investment and partner wage and benefit investments as priorities. It expected disciplined licensed-store expansion to support EMEA performance and China to remain a growth market.
- In July 2015, after quarter-end, Starbucks redeemed its $550 million 6.250% notes due 2017. The redemption is expected to result in a $61.1 million charge in Q4 FY2015, plus a $2.0 million reclassification to interest expense.
- Key disclosed risks include coffee and dairy price and availability, foreign-exchange movements, economic conditions, competition, customer acceptance, execution and integration of initiatives including Japan, and legal proceedings. Management said there were no material changes to previously disclosed risk factors and no pending legal matter it believed could materially adversely affect the company.
- Disclosure controls were assessed as effective. Starbucks Japan was excluded from the quarter-end internal-control evaluation while the company documents and tests its controls; inclusion was planned beginning in Q1 FY2016.
Important facts for investors to verify
- Separate underlying operating growth from the Japan consolidation effect and the $390.6 million acquisition-related remeasurement gain; assess comparable or pro forma results with their stated limitations.
- Track the effect of Japan’s ownership-model change on China/Asia Pacific margins, integration costs and expected growth in Japan’s other channels.
- Compare FY2015 guidance with subsequent results, particularly flat operating-margin expectations, strong EPS growth and the 1,650-store plan.
- Monitor coffee, dairy and currency exposure, hedging outcomes, and the potential tax cost if foreign earnings were repatriated; the company said it did not anticipate needing repatriation for domestic liquidity.
- Assess the impact of the post-quarter debt redemption charge, ongoing dividends and buybacks, and planned capital expenditures on cash and leverage.
- Follow completion of Starbucks Japan internal-control integration and any material developments in legal proceedings or other contingencies.