Business context and reporting period
Starbucks Corporation’s unaudited Form 10-Q covers the quarter ended June 27, 2021, and the first three quarters of fiscal 2021. The company operated more than 33,200 company-operated and licensed stores in 83 markets. Nearly all stores had reopened by quarter-end. Fiscal 2021 includes a 53rd week in the fourth quarter.
Results rebounded sharply from the prior-year quarter, when COVID-19 restrictions severely reduced sales. Accordingly, the reported growth rates are affected by a very weak comparison period.
Financial and operating highlights
| Metric | Quarter ended June 27, 2021 | First three quarters of FY2021 |
|---|---|---|
| Net revenue | $7.50 billion, up 77.6% | $20.91 billion, up 20.8% |
| Operating income | $1.49 billion, versus a $704 million loss | $3.39 billion, versus $1.00 billion |
| Operating margin | 19.9%, versus negative 16.7% | 16.2%, versus 5.8% |
| Net earnings attributable to Starbucks | $1.15 billion, versus a $678 million loss | $2.43 billion, versus $536 million |
| Diluted EPS | $0.97, versus a $0.58 loss | $2.06, versus $0.45 |
| Cash provided by operating activities | Not separately presented for the quarter | $4.47 billion, versus $107 million |
Quarterly global comparable-store sales rose 73%: transactions increased 75%, while average ticket declined 1%. U.S. comparable sales rose 83%, with two-year comparable sales up 10%. International comparable sales rose 41%; China rose 19%, including a 6% adverse impact from lapping a prior-year VAT benefit. First-three-quarter global comparable sales increased 21%.
Quarterly revenue growth was concentrated in company-operated stores, whose revenue rose 84.7%; licensed-store revenue increased 126.4%, while other revenue declined 5.0%. For the first three quarters, company-operated revenue rose 26.8%, licensed revenue 6.0%, and other revenue fell 16.8%.
Americas and International operating income recovered to $1.32 billion and $318 million, respectively, from losses in the prior-year quarter. Channel Development revenue declined 7% in the quarter, but operating income rose to $216 million and its margin to 52.2%, aided by lower alliance transition costs and the transfer of certain single-serve product activities to Nestlé.
Cash, debt and liquidity
At June 27, 2021, cash and cash equivalents were $4.75 billion; cash plus short- and long-term investments totaled approximately $5.19 billion. Cash increased $402 million from fiscal year-end. First-three-quarter investing cash outflow was $986 million, including $986 million of property, plant and equipment additions. Financing cash outflow was $3.17 billion, including $1.59 billion of dividends and $1.25 billion of long-term debt repayments.
Total debt carrying value was $14.62 billion, comprising $999 million current and $13.62 billion long-term; there was no commercial paper or revolving credit facility borrowing outstanding. Total liabilities were $36.27 billion and shareholders’ deficit was $6.80 billion. Operating lease liabilities totaled about $8.91 billion. Starbucks reported $3.0 billion of available U.S. revolving and commercial-paper capacity and stated it was compliant with applicable covenants.
Material changes versus the prior comparable period
- The sharp quarterly earnings and margin recovery primarily reflects reopening and the comparison with pandemic-disrupted sales and costs in 2020. Quarterly operating margin increased 3,660 basis points; first-three-quarter margin increased 1,040 basis points.
- For the quarter, product and distribution costs fell to 29.4% of revenue from 35.1%, and store operating expenses to 39.6% from 60.1%. Recovery-driven sales leverage and lower prior-year pandemic costs were key factors; current results also benefited from government payroll credits.
- First-three-quarter operating cash flow rose substantially, mainly due to higher earnings and the timing of tax payments and refunds. Cash used in financing shifted from a $2.49 billion inflow in the prior-year period to a $3.17 billion outflow, reflecting debt repayments, lower new debt proceeds, and suspended share repurchases.
- Long-term debt declined from $14.66 billion at fiscal 2020 year-end to $13.62 billion at quarter-end; short-term debt and the current portion of long-term debt also declined overall.
Outlook, management commentary and risks
Management described business momentum as strong and expressed confidence in the brand and long-term growth model, conditional on no significant, prolonged COVID-19 relapse or global economic disruption. International markets continued to face pandemic restrictions. Management cited contactless customer experiences, digital capabilities and beverage innovation as priorities.
For fiscal 2021, capital expenditures were expected to be approximately $1.7 billion. Starbucks expected to close about 180 additional U.S. and Canadian stores over the following 6–12 months, completing a portfolio plan expected to total approximately 820 closures; about 790 had been closed or identified for closure. Estimated remaining restructuring costs were $20–$30 million, primarily in 2021. Share repurchases were suspended and expected to remain suspended through fiscal year-end; management did not expect to reduce the quarterly dividend.
Subsequent to quarter-end, Starbucks agreed to sell its 50% interest in Starbucks Coffee Korea for a combined $1.175 billion, subject to Korean regulatory approval and expected to close within 90 days. The market is expected to move to a fully licensed model, with a material pretax gain expected on closing; the amount of that gain was not specified.
Key risks include renewed COVID-19 disruption, consumer demand and mobility, labor availability and costs, coffee and dairy prices and availability, foreign exchange, competition, information-technology and food-safety incidents, and litigation. The company reported no material change to its previously disclosed risk factors. A long-running California Proposition 65 coffee-warning case was on appeal; Starbucks said a material loss was less than reasonably possible and recorded no contingency.
Other notable items: qualified payroll and other government credits reduced store operating expenses by $56.4 million in the quarter and $173.7 million year to date, compared with $266.0 million and $301.0 million in the corresponding 2020 periods. The credits and pandemic-related costs affect period comparability. Starbucks also reported a $2.2 million opening retained-deficit adjustment from adopting expected-credit-loss accounting.
Important facts for investors to verify
- How much of the reported sales and earnings rebound reflects sustainable demand versus lapping the pandemic-affected prior-year quarter?
- Whether comparable-sales momentum, transaction trends and International recovery persist, particularly as restrictions and COVID-19 conditions change.
- Whether wage, commodity, supply-chain and other inflationary pressures offset sales leverage and pricing benefits.
- Progress and final costs of the planned North American store closures, and whether remaining restructuring charges align with the $20–$30 million estimate.
- Completion, proceeds and final pretax gain from the Korea transaction, including regulatory approval and the resulting licensed-market economics.
- Cash flow, capital spending, debt reduction, covenant compliance and the timing of any resumption of share repurchases.