Starbucks Corporation — Q2 FY2017 Form 10-Q
Reporting period: Quarter ended April 2, 2017; comparative quarter ended March 27, 2016. Fiscal-year-to-date figures cover the two quarters ended April 2, 2017. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and performance
Starbucks operates company-run and licensed stores and consumer packaged goods, foodservice and other businesses. Management reported strong quarterly performance, supported by new store openings and comparable sales growth. The company had 26,161 stores at quarter-end, up from 23,921 a year earlier.
Key financial metrics
| Metric | Q2 FY2017 | Q2 FY2016 | Change |
|---|---|---|---|
| Net revenue | $5,294.0 | $4,993.2 | +6% |
| Operating income | $935.4 | $864.2 | +8% |
| Operating margin | 17.7% | 17.3% | +40 bps |
| Net earnings attributable to Starbucks | $652.8 | $575.1 | +14% |
| Diluted EPS | $0.45 | $0.39 | +15% |
| Comparable store sales | +3% | — | Transactions -1%; average ticket +4% |
For the first two quarters, revenue was $11,027.0 million (+6%), operating income $2,068.3 million (+8%), operating margin 18.8% versus 18.5%, net earnings attributable to Starbucks $1,404.9 million (+11%), and diluted EPS $0.96 versus $0.84.
Q2 revenue by major stream: company-operated stores $4,195.4 million (+6%), licensed stores $546.7 million (+11%), and CPG, foodservice and other $551.9 million (-1%). Segment trends included Americas revenue growth of 8% and margin contraction of 130 bps; China/Asia Pacific revenue growth of 13% and margin expansion of 380 bps; EMEA revenue decline of 14% with margin expansion of 170 bps; and flat Channel Development revenue with margin expansion of 250 bps.
Cash flow, debt and liquidity
- Year-to-date cash from operations was $1,939.0 million, down from $2,185.5 million, primarily due to the timing of income-tax payments despite higher earnings. Investing activities used $565.3 million; capital expenditures were $637.9 million. Operating cash flow less capital expenditures was approximately $1,301 million.
- Financing activities used $1,317.9 million, including $727.8 million of dividends paid and $1,046.1 million of share repurchases; the company also issued $750.2 million of long-term debt and repaid $400 million of notes. Cash increased $35.1 million to $2,163.9 million.
- Cash and investments totaled approximately $3.5 billion. Current assets were $4,919.4 million and current liabilities $4,000.1 million. Reported debt was approximately $3,967.5 million, including $25 million of commercial paper; no revolver borrowings were outstanding. The $1.5 billion revolving credit facility was available, and the company reported compliance with debt covenants.
- In March, Starbucks issued ¥85 billion of 0.372% senior notes due 2024; proceeds were designated for eligible sustainability projects. The company had $98.9 million shares remaining under its repurchase authorization.
Outlook, commentary and risks
- FY2017 outlook: consolidated revenue growth in the mid-single digits versus fiscal 2016; after adjusting for the extra week in 2016 and anticipated unfavorable currency translation, growth was expected at the low end of 8%–10%. Management expected about 2,100 net new stores and mid-single-digit global comparable sales growth, with some improvement in the second half.
- Management expected slightly higher consolidated operating margin and FY2017 EPS of $2.06–$2.10. Partner and digital investments, product development, and Reserve and Roastery expansion were expected to increase by more than $250 million versus fiscal 2016. Fiscal-year capital expenditures were forecast at approximately $1.6 billion.
- Cost pressures and execution factors include coffee, dairy and other commodity prices and availability; currency movements; competition; technology and information-security risks; and execution of initiatives. Partner investments weighed on Americas margins, while China’s new VAT structure supported China/Asia Pacific margin gains.
- Q2 interest income and other, net included a $41 million gain on sale of Square warrants and an adjustment related to estimated indemnifications from the Germany retail sale. These items contributed to the increase in non-operating income. EMEA revenue also reflected the prior-year Germany retail divestiture and ongoing shift toward a licensed-store model.
- Teavana goodwill was $467.5 million, and its reporting unit’s fair value had been closest to carrying value in the prior annual test; annual impairment testing was planned for Q3 FY2017. No material fair-value adjustments were reported in the periods presented.
- Management said legal proceedings were ordinary-course matters and none was believed to have a material adverse effect; risk factors were unchanged from the prior 10-K. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether comparable-sales growth and ticket increases continue to offset transaction declines, particularly in the Americas.
- Whether the FY2017 revenue, margin, EPS, store-opening and capital-expenditure outlook remains achievable as partner and digital investments rise.
- How much of earnings growth reflects recurring operations versus the Square warrant gain and other favorable non-operating items.
- Cash-flow conversion and the effect of tax-payment timing; continued dividends and repurchases alongside higher debt.
- Teavana goodwill recoverability, commodity and foreign-exchange exposure, and the eventual financial-statement effects of pending accounting standards. Management expected the new lease standard to materially increase reported assets and liabilities; it also expected the stock-compensation standard to significantly affect reported tax expense, EPS and cash-flow presentation.