Starbucks Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended September 29, 2019 (52 weeks). The filing also reports fiscal fourth-quarter results. All financial amounts are U.S. dollars.
Business context and reporting period
Starbucks operated in 81 markets, with 31,256 stores at year-end: 15,834 company-operated and 15,422 licensed. Its reportable segments were Americas, International, and Channel Development. Company-operated stores generated 81% of fiscal-year revenue. In Q4, the company combined its former China/Asia Pacific and EMEA segments into International and moved Siren Retail results into the geographic segments; prior periods were revised for comparability without changing consolidated revenue or earnings.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net revenue | $26.51 billion | $24.72 billion |
| Operating income | $4.08 billion | $3.88 billion |
| Operating margin | 15.4% | 15.7% |
| Net earnings attributable to Starbucks | $3.60 billion | $4.52 billion |
| Diluted EPS | $2.92 | $3.24 |
| Operating cash flow | $5.05 billion | $11.94 billion |
| Capital expenditures | $1.81 billion | $1.98 billion |
| Cash and investments | $2.98 billion | $9.21 billion |
| Long-term debt, including current portion | $11.17 billion | $9.44 billion |
Revenue rose 7.2%; company-operated store revenue grew 9.4%, licensed-store revenue 8.4%, while other revenue fell 12.1%, mainly reflecting the Nestlé licensing transition. Comparable sales increased 5% overall, with transactions up 1% and average ticket up 3%. Americas revenue was $18.26 billion and International revenue $6.19 billion. Fiscal Q4 revenue was $6.75 billion, operating income $1.08 billion, net earnings attributable to Starbucks $802.9 million, and diluted EPS $0.67, compared with $6.30 billion, $956.6 million, $755.8 million, and $0.56, respectively, in Q4 FY2018.
Operating margin declined 30 basis points, primarily due to employee investments and wage and benefit growth, the Nestlé licensing model, and other strategic investments. Those pressures were partly offset by sales leverage, cost savings, lower restructuring costs, and stored-value-card breakage revenue recognition. Interest expense increased to $331 million from $170 million, largely reflecting additional debt. FY2019 effective tax rate was 19.5%, versus 21.8%.
Liquidity, debt and capital returns
Cash and investments fell to $3.0 billion from $9.2 billion, principally as the company used the Nestlé advance to fund shareholder returns. Operating cash flow fell sharply from FY2018, primarily because FY2018 included the upfront Nestlé payment. FY2019 investing cash outflow was $1.01 billion and financing cash outflow was $10.06 billion.
At year-end, total liabilities were $25.45 billion, current assets $5.65 billion, and current liabilities $6.17 billion. Shareholders’ deficit was $6.23 billion, compared with positive equity of $1.17 billion a year earlier; the company cited substantial share repurchases among its capital actions. Debt principal obligations totaled $11.24 billion, with $5.11 billion of scheduled interest payments in the contractual-obligations table. Operating lease commitments were $10.23 billion. No amounts were drawn on its revolving credit facilities or commercial-paper program, and the company reported covenant compliance.
Starbucks returned approximately $12.0 billion to shareholders in FY2019 through repurchases and dividends. It repurchased 139.6 million shares for approximately $10.1 billion and paid $1.76 billion in dividends. A $0.41-per-share dividend was declared for payment after year-end. Management expected FY2020 capital expenditures of approximately $1.8 billion and stated that operating cash flow, cash and investments, and borrowing capacity should fund foreseeable core-business needs and shareholder distributions.
Material changes, outlook and risks
- Nestlé alliance: The Global Coffee Alliance shifted most packaged-goods and foodservice activity to a licensed model. The approximately $7 billion upfront prepaid royalty is deferred and recognized over an estimated 40-year economic life; $175.2 million was recognized in FY2019.
- Store portfolio: Thailand, France, and the Netherlands operations were sold and converted to licensed markets. The Thailand sale generated a $601.9 million pretax gain; the combined FY2019 divestiture gain was $622.8 million.
- Earnings comparability: FY2018 included a $1.38 billion nontaxable gain from remeasuring the existing East China joint-venture interest upon acquisition, as well as other divestiture gains. FY2019 EPS also reflected a Thailand sale gain. These items make reported year-over-year earnings less representative of underlying operating trends.
- Cash flow and capital structure: FY2019 operating cash flow was much lower than FY2018 due to the prior-year Nestlé advance, while large repurchases and new debt contributed to lower cash, higher debt, and negative shareholders’ equity.
- Outlook: The filing gives expected FY2020 capital expenditures of about $1.8 billion but does not provide a clear numerical revenue or EPS forecast. Starbucks emphasized disciplined store expansion, digital and product initiatives, employee investment, and cost savings.
- Key risks: Management identified consumer spending and competition, wage and benefit inflation, coffee and other commodity costs and supply, foreign exchange, reliance on licensees and Nestlé, China market and integration risks, cybersecurity and privacy, and food safety. The auditor identified China goodwill valuation as a critical audit matter because fair value depends on forecasts, particularly future revenue.
- Legal and accounting items: In the California Proposition 65 coffee-warning litigation, Starbucks said a loss was less than reasonably possible and recorded no contingency. The company expected adoption of the new lease standard in FY2020 to add approximately $8–9 billion of right-of-use assets and lease liabilities, with an insignificant income-statement impact. The financial-statement and internal-control audits received unqualified opinions.
Most important facts for investors to verify
- Whether comparable-sales growth and store expansion can sustain revenue growth while wages and benefits continue to pressure margins.
- Underlying earnings and cash generation excluding the East China and divestiture gains, the Nestlé advance timing effect, and other unusual items.
- How the Nestlé alliance develops, including the economics of ongoing product sales and royalty revenue versus the former owned CPG and foodservice model.
- Debt service, lease obligations, and liquidity after substantial repurchases; also assess the effect of the expected lease-accounting balance-sheet increase.
- China performance and the assumptions supporting the carrying value of China goodwill, alongside competitive, regulatory, and currency risks.