Starbucks Corporation — FY2013 Form 10-K
Business context and reporting period. Starbucks operates company-owned and licensed coffee shops and sells branded products through consumer packaged goods and foodservice channels. The fiscal year ended September 29, 2013 and comprised 52 weeks; the filing also reports fourth-quarter results. Starbucks operated in 62 countries and had 19,767 stores at year-end. Company-operated stores generated 79% of annual revenue.
Key financial results
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net revenue | $14.892 billion | $13.300 billion |
| Operating income (loss) | $(325) million | $1.997 billion |
| Operating margin | (2.2)% | 15.0% |
| Net earnings attributable to Starbucks | $8 million | $1.384 billion |
| Diluted EPS | $0.01 | $1.79 |
| Cash provided by operations | $2.908 billion | $1.750 billion |
| Capital expenditures | $1.151 billion | $856 million |
| Cash and short-term investments at year-end | $3.234 billion | $2.037 billion |
| Long-term debt, including current portion | $1.299 billion | $550 million |
| Total assets / shareholders’ equity | $11.517 billion / $4.480 billion | $8.219 billion / $5.109 billion |
Operating cash flow less capital expenditures was approximately $1.757 billion. Current assets were $5.471 billion and current liabilities were $5.377 billion, including the $2.784 billion accrued Kraft charge. Reported liquidity therefore includes a large litigation accrual due for payment. The company had a $750 million revolving credit facility, no borrowings under the facility or commercial-paper program at year-end, and issued $750 million of 10-year notes at 3.85% during FY2013.
Material changes and operating performance
- Revenue increased 12%, with global comparable-store sales up 7%: transactions rose 5% and average ticket rose 2%.
- The primary earnings distortion was a $2.784 billion pretax charge following the Kraft arbitration award. Excluding that charge mechanically, operating income would have been approximately $2.459 billion and operating margin approximately 16.5%; reported results and EPS include the charge.
- Americas revenue rose 11% to $11.001 billion; operating margin expanded to 21.5% from 20.3%.
- EMEA revenue increased 2% to $1.160 billion; operating margin improved to 5.5% from 0.6%, helped by store portfolio optimization and cost management.
- China/Asia Pacific revenue rose 27% to $917 million; operating income grew 27% to $321 million, with a 35.0% margin. Comparable-store sales increased 9%.
- Channel Development revenue grew 10% to $1.421 billion, primarily on premium single-serve products; margin improved to 29.2% from 26.3%, partly due to lower coffee costs.
- Starbucks acquired Teavana for approximately $616 million in cash; the acquisition contributed to higher All Other Segments revenue and expenses. The company also sold its Chile business to a joint venture partner and divested interests in Argentina and Mexico, recording gains on certain transactions.
Outlook, commentary, and risks
For FY2014, management expected mid-single-digit global comparable-store sales growth, approximately 1,500 net new store openings, and continued Channel Development growth. It forecast consolidated operating-margin improvement of 150–200 basis points versus FY2013 results excluding the Kraft charge, strong EPS growth, an effective tax rate of approximately 34.5%, and capital expenditures of approximately $1.2 billion. Management said the Kraft payment was expected to be funded with available U.S. cash and additional debt, and that it believed liquidity and operating cash flows were sufficient for planned investment and shareholder distributions.
The arbitrator ordered Starbucks to pay Kraft $2.228 billion in damages plus estimated interest and attorneys’ fees of $557 million. The credit agreement was amended after the ruling to exclude the litigation impact, up to $2.9 billion, from specified covenant calculations through December 31, 2014. Other material risks include consumer discretionary spending and competition; coffee, dairy, and other commodity prices and availability; reliance on the Americas segment; execution and profitability in international markets; supply-chain disruption; and protection of the brand, food safety, information systems, and intellectual property. Coffee purchase commitments totaled $882 million at year-end, and operating lease obligations were $4.586 billion.
Starbucks paid $629 million in dividends and repurchased $544 million of shares during FY2013. The fourth-quarter dividend declared was $0.26 per share. The annual report received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Timing and final cash funding of the Kraft award, including any differences from the estimated interest and attorneys’ fees.
- Underlying operating margin and EPS after separating the one-time litigation charge from ongoing results.
- Delivery of FY2014 targets for comparable sales, store openings, margin improvement, EPS growth, and capital spending.
- Whether rapid CAP growth and EMEA restructuring translate into sustainable operating income and cash flow.
- Exposure to coffee and other input costs, and the extent to which purchase commitments, pricing, and hedges mitigate that exposure.
- Debt, lease, dividend, and repurchase commitments relative to liquidity after payment of the Kraft award.