Starbucks Corporation — Q3 FY2013 Form 10-Q
Business context and period: Fiscal third quarter ended June 30, 2013; comparative quarter ended July 1, 2012. The filing also reports results for the first three quarters of fiscal 2013. Starbucks operates company-run and licensed stores and sells packaged coffee, tea and other products through its Channel Development and other businesses. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 FY2013 | Q3 FY2012 | First 3 quarters FY2013 | First 3 quarters FY2012 |
|---|---|---|---|---|
| Revenue | $3,741.7 | $3,303.6 | $11,097.2 | $9,935.4 |
| Operating income | $615.2 | $491.6 | $1,789.9 | $1,477.9 |
| Operating margin | 16.4% | 14.9% | 16.1% | 14.9% |
| Net earnings attributable to Starbucks | $417.8 | $333.1 | $1,240.3 | $1,025.1 |
| Diluted EPS | $0.55 | $0.43 | $1.63 | $1.33 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $2,037.8 | $1,126.9 |
| Capital expenditures | Not separately provided for the quarter | Not separately provided for the quarter | $782.2 | $516.5 |
- Q3 revenue increased 13.3%; management attributed growth to comparable-store sales, new stores and Channel Development. Global comparable-store sales rose 8%, with transactions up 7% and average ticket up 1%.
- Q3 operating income increased 25% and diluted EPS increased 28%. Management reported 150 basis points of operating-margin expansion, citing lower coffee costs and sales leverage among the drivers.
- For the first three quarters, net earnings rose about 21% and diluted EPS rose about 23%. Operating cash flow increased substantially, primarily reflecting lower working-capital use, including inventory and accounts payable movements.
- Cash and cash equivalents were $1,430.8 and short-term investments were $613.5 at June 30, 2013. Current assets were $4,239.7 versus current liabilities of $2,424.4.
- Long-term debt was $549.7, principally the $550 million of 6.25% Senior Notes; no current debt balance is shown. Starbucks had a $750 million revolving credit facility, reported compliance with its covenants, and anticipated issuing another $750 million of long-term debt in 2013.
- Cash dividends declared were $0.21 per share for the quarter. The company repurchased 10.8 million shares for $544.1 during the first three quarters; no shares were repurchased during Q3.
Material changes and business developments
- Americas revenue increased 12% in Q3 and operating margin expanded 210 basis points to 22.3%, supported by 9% comparable-store sales growth.
- EMEA revenue increased 2%; the operating margin improved to 3.2% from 0.6%, reflecting cost management and a shift toward licensed stores. Management described progress toward long-term profitability.
- China/Asia Pacific revenue increased 29% and operating income increased 38%; Q3 operating margin expanded to 36.2%. Growth included new stores and 9% comparable-store sales growth.
- Channel Development revenue rose 6%, primarily on premium single-serve product sales; its operating margin increased to 28.6% from 26.6%.
- Teavana, acquired in December 2012 for $615.8 million in cash, contributed to the sharp increase in All Other Segments revenue. The acquisition allocation included $466.2 million of goodwill, which is not tax deductible.
- Operating results were not affected by the fiscal 2013 segment-reporting changes. Certain corporate expenses were reassigned to operating segments and unallocated corporate expenses were shown separately as a reconciling item.
Outlook, risks and unusual items
- FY2013 outlook: Revenue growth driven by mid-single-digit comparable-store sales growth, new stores and Channel Development. Management expected continued operating-margin and EPS improvement versus FY2012, with capital expenditures of approximately $1.2 billion for the year.
- FY2014 outlook: Management expected mid-single-digit comparable-store sales growth, new stores, full-year operating-margin improvement of 150–200 basis points and strong EPS growth. Approximately half of new stores were expected in China/Asia Pacific.
- Kraft arbitration: Kraft claimed damages of up to $2.9 billion plus attorney fees over the terminated distribution agreement. Starbucks said an unfavorable outcome was reasonably possible but not probable, disputed Kraft’s estimate, and stated the possible loss could not be reasonably estimated; no loss contingency was recorded. Management said liquidity would be adequate if the outcome were unfavorable.
- Other notable items: A $35.2 million gain from selling Starbucks’ interest in its Mexico joint venture was recorded in Q2. Tax benefits from releasing certain tax reserves contributed to the lower Q3 effective tax rate of 31.8%, versus 32.3% a year earlier. In July 2013, Starbucks agreed to sell its Chile and Argentina interests for $61.8 million and expected to recognize a gain in Q4.
- Key stated exposures include coffee, dairy and other commodity prices and availability, foreign currencies, execution of growth initiatives, economic conditions and legal proceedings. Green-coffee purchase commitments at June 30 included $363 million under fixed-price contracts and an estimated $414 million under price-to-be-fixed contracts.
Important facts for investors to verify
- Whether comparable-store sales and transaction growth remain durable, and whether margin gains persist as coffee costs and sales leverage change.
- Delivery against FY2013 capital-spending plans and FY2014 margin and EPS outlook, particularly as store expansion accelerates in China/Asia Pacific.
- The eventual resolution and financial impact of the Kraft arbitration, for which the filing states no loss estimate can be made.
- Teavana’s performance and the assumptions supporting its acquisition goodwill and growth contribution.
- The planned $750 million debt issuance, related interest-rate exposure, and the effect of dividends and repurchases on liquidity and capital allocation.
- Cash-flow quality: the year-to-date increase in operating cash flow was largely attributed to working-capital movements, rather than solely earnings growth.