Business context and reporting period
Starbucks Corporation filed this unaudited Form 10-Q for the quarter ended July 2, 2023, the third quarter of fiscal 2023. The company operates company-owned and licensed coffee stores and consumer-products businesses in 86 markets. It reported 37,222 stores, up 7% year over year.
Financial performance
Amounts are in millions of dollars except per-share data and percentages. Comparisons are with the corresponding prior-year period.
| Metric | Q3 FY2023 | Q3 FY2022 | First three quarters FY2023 | First three quarters FY2022 |
|---|---|---|---|---|
| Net revenue | $9,168 | $8,150 | $26,602 | $23,836 |
| Operating income | $1,584 | $1,296 | $4,165 | $3,422 |
| Operating margin | 17.3% | 15.9% | 15.7% | 14.4% |
| Net earnings attributable to Starbucks | $1,142 | $913 | $2,905 | $2,403 |
| Diluted EPS | $0.99 | $0.79 | $2.52 | $2.07 |
| Operating cash flow | Not separately stated | Not separately stated | $4,064 | $3,298 |
| Capital expenditures | Not separately stated | Not separately stated | $1,634 | $1,295 |
Revenue, margins and segment trends
- Q3 revenue rose 12.5%. Company-operated store revenue increased 13.2%, licensed-store revenue 18.8%, while other revenue fell 8.2%.
- Global comparable-store sales increased 10%: 7% in the U.S. and 24% internationally. The international result chiefly reflected China’s recovery from pandemic-related disruptions.
- Q3 operating margin expanded 140 basis points. Management cited pricing, sales leverage and U.S. store productivity, partly offset by partner wage and benefit investments and higher general and administrative costs.
- International Q3 operating margin increased to 19.0% from 8.5%, including the benefit of sales leverage and comparison with prior-year China restrictions. North America margin decreased to 21.7% from 22.0%, as labor investments partly offset pricing and productivity benefits.
- Q3 net earnings increased 25% and diluted EPS rose from $0.79 to $0.99. The filing attributes the earnings improvement to higher operating income and a lower quarterly effective tax rate.
Liquidity, debt and capital allocation
- At July 2, 2023, cash and cash equivalents were $3,357 million and short-term investments were $263 million. Total cash and investments were approximately $3.9 billion; about $2.5 billion of cash and short-term investments were held in foreign subsidiaries.
- Current assets were $7,171 million and current liabilities $9,215 million. Cash plus short-term investments therefore did not cover current liabilities; reported working capital was negative by approximately $2.0 billion.
- Balance-sheet debt comprised $34.5 million of short-term debt, $1,835.9 million of current long-term debt and $13,544.4 million of long-term debt. The company had no commercial-paper borrowings and no amounts drawn under its $3.0 billion revolving facility; it was in compliance with applicable covenants.
- Operating lease liabilities totaled $8,956 million. Shareholders’ deficit was $8,349 million.
- For the first three quarters, the company paid $1,825 million in cash dividends and repurchased $699 million of stock. It declared a quarterly dividend of $0.53 per share, payable August 25, 2023.
Material changes and unusual items
- First-three-quarter revenue increased 11.6% and operating margin rose 130 basis points. Comparable-store sales increased 9%, and store openings contributed to growth; unfavorable foreign-currency translation was a significant offset, including $484 million against company-operated store revenue growth.
- Operating cash flow rose to $4,064 million from $3,298 million, primarily reflecting higher net earnings and less cash used by changes in operating assets and liabilities. Investing cash use was $1,406 million, broadly similar to the prior-year period. Financing cash use declined to $2,113 million from $5,073 million, mainly because share repurchases were lower.
- The sale of Seattle’s Best Coffee assets to Nestlé generated $110 million of proceeds and a $91.3 million pretax gain, included in first-three-quarter operating income. The gain is not part of Q3 results.
- Interest expense increased, which management attributed primarily to higher debt balances and rising interest rates. Corporate and Other operating loss also increased, reflecting technology and strategic-plan spending, performance compensation and charitable donations.
Outlook, commentary and risks
- Management estimated fiscal 2023 capital expenditures of approximately $2.5 billion and said existing cash, future operating cash flows and borrowing capacity should be sufficient for business needs and shareholder distributions for at least the next 12 months.
- The company expects to use cash for store, supply-chain and corporate investments, debt repayment, dividends and discretionary repurchases. It stated there had been no material changes to its previously disclosed material cash requirements outside the normal course of business.
- Management said the Reinvention Plan’s U.S. investments in partner wages and training had improved retention and productivity; technology and store-format initiatives are intended to improve customer convenience and connection. Future restructuring and impairment costs related to the plan were not expected to be material.
- Key disclosed risks include coffee and dairy price and availability, labor costs and organizing activity, inflation and economic conditions, foreign exchange, China and other geopolitical exposure, competition, supply-chain execution, technology and data-security issues, public-health events, and legal proceedings. The company reported no material change to previously disclosed risk factors and no legal proceeding it believed would materially adversely affect its financial position, results or cash flows.
- Management cautioned that interim results are not necessarily indicative of full-year results. The filing did not provide specific full-year revenue, earnings or margin guidance.
Most important facts for investors to verify
- Whether comparable-store sales growth, especially the China recovery and U.S. transaction trends, continues after Q3.
- Whether pricing, productivity and sales leverage can sustain margin gains while partner wages, benefits, training and strategic investments remain elevated.
- How coffee, dairy, logistics, foreign-exchange and interest-rate movements affect costs, cash generation and earnings.
- Whether planned capital spending, dividends and repurchases remain supportable given negative working capital, substantial debt and lease obligations.
- The extent to which reported earnings and segment margins benefited from the one-time $91.3 million Seattle’s Best Coffee sale gain and from lapping prior-year China restrictions and intangible amortization.