Starbucks Corporation — Fiscal 2020 First-Quarter 10-Q
Business context and reporting period. The unaudited quarter ended December 29, 2019, compared with the quarter ended December 30, 2018. Starbucks operated in 82 markets and had 31,795 company-operated and licensed stores at quarter-end, up from 29,865 a year earlier. Its results are driven by store openings, comparable-store sales and margin management.
Financial results and liquidity
| Metric | Quarter ended Dec. 29, 2019 | Prior-year quarter |
|---|---|---|
| Net revenue | $7.097 billion | $6.633 billion |
| Operating income | $1.220 billion | $1.016 billion |
| Operating margin | 17.2% | 15.3% |
| Net earnings attributable to Starbucks | $885.7 million | $760.6 million |
| Diluted earnings per share | $0.74 | $0.61 |
| Cash from operating activities | $1.836 billion | $2.379 billion |
- Revenue increased 7.0%. Company-operated stores contributed $5.781 billion, licensed stores $792.0 million and other revenue $524.4 million. Global comparable-store sales rose 5%: transactions increased 2% and average ticket 3%.
- Cost of sales declined to 31.5% of revenue from 32.8%, reflecting supply-chain efficiencies. Store operating expenses increased to 39.8% of revenue from 39.0%; wage and benefit growth was a principal pressure. Management reported a 190-basis-point increase in operating margin.
- Operating cash flow fell by $542.9 million, primarily because of the timing of tax payments and refunds. Investing activities used $386.3 million, including $394.3 million of capital expenditures. Financing activities used $1.123 billion, including $1.091 billion of share repurchases and $484.2 million of dividends paid.
- Cash and cash equivalents were $3.041 billion at quarter-end; cash and investments totaled $3.3 billion. About $2.0 billion of cash was held in foreign subsidiaries. The company reported $497.9 million of commercial paper outstanding and $11.152 billion of long-term debt, including its current portion. It had no borrowings under its revolving credit facilities and was in compliance with debt covenants.
- Reported shareholders’ equity was a deficit of $6.760 billion. The balance sheet included $8.359 billion of operating lease right-of-use assets and $8.981 billion of operating lease liabilities.
Material changes versus the prior period
- Revenue rose $464.4 million, supported by 5% comparable-store sales growth and net new store openings. Company-operated revenue increased $410.4 million; licensed revenue increased $54.9 million.
- Americas comparable-store sales grew 6%, while International comparable-store sales grew 1%. Americas operating margin increased to 21.9% from 21.0%; International margin increased to 17.6% from 15.3%. Channel Development revenue declined 2% to $494.6 million, while its operating income was broadly flat at $175.5 million.
- Net earnings increased $125.1 million, while diluted EPS rose from $0.61 to $0.74. Weighted-average diluted shares fell to 1,191.0 million from 1,253.4 million, partly reflecting share repurchases.
- Operating cash flow was lower year over year, mainly due to tax-payment timing. Financing cash use was substantially lower than the prior-year quarter, when the company made a $5.0 billion accelerated share-repurchase payment.
- Starbucks adopted lease-accounting guidance on September 30, 2019. It recognized operating lease assets and liabilities, materially increasing reported balance-sheet assets and liabilities; management said adoption did not materially affect earnings. Prior-period balance sheets were not restated, limiting direct balance-sheet comparability.
Outlook, commentary, risks and contingencies
- Management expected fiscal 2020 capital expenditures of approximately $1.8 billion and stated that cash, operating cash flows and borrowing capacity were expected to support business investment and shareholder distributions. The filing does not provide a clear numerical earnings or revenue forecast.
- In late January 2020, after quarter-end, Starbucks closed more than half of its China stores and modified operating hours at others amid the coronavirus outbreak. The company said the disruption was expected to materially affect its International segment and consolidated results in the second quarter and full fiscal year, but its duration and financial impact could not be reasonably estimated.
- Risks identified include commodity prices and availability—especially coffee and dairy—foreign exchange, labor costs, competition, consumer preferences, technology and cybersecurity, and the coronavirus outbreak. Starbucks had committed to approximately $992 million of fixed-price green-coffee purchases and an estimated $456 million under price-to-be-fixed contracts.
- The company described a California Proposition 65 coffee-warning lawsuit. It considered the likelihood of a loss remote and recorded no loss contingency; a court status conference was scheduled for March 23, 2020. Management reported no other ordinary-course legal proceeding it believed would materially adversely affect the company.
- The quarterly dividend declared was $0.41 per share, payable February 21, 2020. The company repurchased 13.0 million shares for $1.1 billion during the quarter; 16.2 million shares remained authorized for repurchase.
Important facts for investors to verify
- Track the duration, store impact and financial consequences of the China disruption, particularly against management’s expectation of material effects on second-quarter and full-year results.
- Assess whether comparable-store sales and store expansion can offset wage, occupancy and other operating-cost pressures.
- Review operating cash-flow trends, including the effect of tax timing and seasonal first-quarter stored-value-card activity, alongside planned capital spending and shareholder returns.
- Monitor debt and liquidity, including commercial paper use, upcoming debt maturities, lease obligations and the company’s negative shareholders’ equity.
- Check coffee and dairy costs, hedge positions and purchase commitments, as well as developments in the Proposition 65 litigation.