Business context and reporting period
Starbucks Corporation’s unaudited Form 10-Q covers the fiscal second quarter and first two quarters ended March 29, 2015; comparisons are with the periods ended March 30, 2014. Unless noted, dollar amounts are in millions. Share and per-share data are retrospectively adjusted for the two-for-one stock split effective April 9, 2015.
The quarter’s results reflect the consolidation of Starbucks Japan, acquired in stages; Starbucks obtained control of the remaining shares on March 26, 2015. The company reported 22,088 stores at quarter-end.
Financial performance and position
| Metric | Q2 FY2015 | Q2 FY2014 | First two quarters FY2015 | First two quarters FY2014 |
|---|---|---|---|---|
| Revenue | $4,563.5 | $3,873.8 | $9,366.8 | $8,113.4 |
| Operating income | $777.5 | $644.1 | $1,693.1 | $1,457.7 |
| Operating margin | 17.0% | 16.6% | 18.1% | 18.0% |
| Net earnings attributable to Starbucks | $494.9 | $427.0 | $1,478.3 | $967.6 |
| Diluted EPS | $0.33 | $0.28 | $0.97 | $0.63 |
| Operating cash flow | Not separately presented | Not separately presented | $2,000.9 | $(983.5) |
- Q2 revenue rose 17.8%, and Starbucks-attributable earnings rose 15.9%. Global comparable-store sales increased 7% (transactions +3%, average ticket +4%).
- For the first two quarters, reported earnings included a $390.6 gain from remeasuring Starbucks’ pre-existing Starbucks Japan investment upon gaining control. The gain was almost entirely non-taxable; the reported effective tax rate was 28.2%, versus 33.9% in the prior-year period. Excluding the gain, the filing’s pro forma acquisition presentation reports Starbucks-attributable earnings of $1,097.3 for the two-quarter period.
- Cash and cash equivalents were $1,750.4; current assets were $4,245.4 and current liabilities $3,521.2 at March 29. Cash and investments totaled approximately $2.2 billion. Long-term debt was $2,048.5 carrying value ($2,050 face value); no credit-facility or commercial-paper borrowings were outstanding.
- Capital expenditures were $606.6 for the first two quarters. Operating cash flow was substantially higher year over year largely because the prior-year period included a $2.8 billion Kraft arbitration payment. Cash used in investing was $872.8 and cash used in financing was $975.4.
- Cash dividends declared were $0.16 per share for the quarter. Starbucks repurchased $342.4 of shares during the first two quarters.
Material changes and segment trends
- Consolidated Q2 revenue growth was driven by 7% comparable-store sales growth, 1,511 net new stores over the prior 12 months, and approximately $270 million of incremental revenue from Starbucks Japan; unfavorable foreign exchange reduced growth by nearly 2%.
- Americas revenue increased 11% to $3.1 billion; operating margin expanded 110 basis points to 22.7%, supported by sales leverage, with higher partner wages and benefits a partial offset.
- EMEA revenue declined 10% to $280.3, mainly due to unfavorable currency translation; operating margin expanded 470 basis points to 10.4%, including benefits from a shift toward licensed stores and store-asset sale gains.
- China/Asia Pacific revenue increased 124% to $595.2, mainly reflecting Starbucks Japan consolidation and 12% comparable-store sales growth. Operating margin fell 1,390 basis points to 18.9%, primarily because consolidation changed the accounting and operating model for Japan.
- Channel Development revenue increased 16% to $428.0 and operating margin expanded 210 basis points to 36.5%, supported by premium single-serve product sales, cost efficiencies, and equity-investee income.
Outlook, risks, and other notable items
- For fiscal 2015, management expected mid-single-digit global comparable-store sales growth, 1,650 net new stores, and revenue growth including Starbucks Japan, partly offset by unfavorable foreign exchange. Approximately half of planned openings were expected in China/Asia Pacific.
- Management expected consolidated operating margin to be flat versus fiscal 2014 and strong EPS growth, without providing a specific EPS target. Fiscal 2015 capital expenditures were expected to be approximately $1.4 billion.
- Management cited product innovation, food and beverage expansion, store growth, and investments in employee wages and benefits as priorities. It expected China to remain a significant growth driver and continued EMEA licensed-store expansion to support improved performance.
- Key risks discussed include coffee, dairy and other commodity prices and availability; currency movements; competition and customer acceptance; execution and integration of Starbucks Japan; economic conditions; and legal proceedings. The company said there had been no material change in previously disclosed risk factors and no pending legal matter it believed could materially adversely affect its financial position, results, or cash flows.
- Starbucks Japan added approximately $1.8 billion of assets at quarter-end. Management excluded the acquired business from its internal-control evaluation for this quarter and planned to include it beginning in fiscal Q1 2016 while documenting and testing its controls.
- Approximately $1.1 billion of cash and investments were held in foreign subsidiaries. Management did not anticipate repatriation for domestic liquidity needs, but warned that repatriation could result in material additional U.S. taxes.
- The company had committed to purchase green coffee under fixed-price contracts totaling $787 million and estimated price-to-be-fixed contracts of $257 million. It also expected to pay approximately $113.3 million for the Starbucks Japan cash-out in fiscal Q3.
Most important facts for investors to verify
- Separate recurring operating performance from the $390.6 million Starbucks Japan remeasurement gain when assessing first-half earnings and EPS.
- Track the effect of full Japan consolidation on segment revenue, margins, operating costs, and integration progress; reported comparisons are affected by a change in ownership and accounting model.
- Assess whether the fiscal 2015 outlook—flat consolidated operating margin, strong EPS growth, mid-single-digit comparable sales growth, and 1,650 net new stores—remains achievable amid currency headwinds.
- Monitor cash deployment and liquidity, including the Japan cash-out payment, planned $1.4 billion capital spending, dividends, repurchases, and the concentration of cash overseas.
- Follow commodity costs and supply, foreign-exchange exposure, and the company’s planned inclusion of Starbucks Japan in internal-control testing.