Starbucks Corporation — Fiscal 2021 First Quarter 10-Q
Reporting period: Quarter ended December 27, 2020; comparisons are with the quarter ended December 29, 2019. Starbucks operated 32,938 stores in 83 markets. The quarter reflects ongoing recovery from COVID-19, with nearly all stores open but many operating below full capacity.
Financial performance and position
| Metric | Q1 FY2021 | Prior-year quarter |
|---|---|---|
| Revenue | $6.749 billion | $7.097 billion |
| Operating income / margin | $913.5 million / 13.5% | $1.220 billion / 17.2% |
| Net earnings attributable to Starbucks | $622.2 million | $885.7 million |
| Diluted EPS | $0.53 | $0.74 |
| Cash provided by operating activities | $1.836 billion | $1.836 billion |
| Cash used in investing activities | $272.5 million | $386.3 million |
| Cash and cash equivalents | $5.028 billion | $4.351 billion at FY2020 year-end |
Revenue declined 4.9%; operating income fell $306.3 million and net earnings fell about 30%. Operating margin contracted 3.7 percentage points. The filing reports a 23.0% effective tax rate, versus 22.6% a year earlier. Interest expense increased $28.8 million to $120.7 million, primarily reflecting debt issued in 2020.
At quarter-end, cash and investments totaled approximately $5.5 billion, against current liabilities of $7.884 billion. Debt was approximately $15.9 billion, including short-term debt and current maturities; operating lease liabilities were a further $9.0 billion. Total liabilities were $37.9 billion and shareholders’ deficit was $7.9 billion. Operating cash flow was nearly unchanged year over year, supported in part by working-capital changes and noncash asset impairment charges.
Material changes and drivers
- Comparable-store sales fell 5% globally, with transactions down 19% and average ticket up 17%. Americas comparable sales declined 6%; International declined 3%.
- Americas revenue fell 6% and operating margin declined to 17.3% from 21.9%, reflecting pandemic-related sales deleverage, partner costs and restructuring charges.
- International revenue increased 5%, helped by new stores and foreign currency; operating income was approximately flat. China comparable sales increased 5%, including a temporary VAT-related benefit.
- Channel Development revenue declined 25%, largely due to the transfer of single-serve product activities to Nestlé and softer foodservice demand. Segment operating margin increased to 48.7%, partly reflecting that transfer.
- Restructuring and impairment charges were $72.2 million, versus $6.3 million. General and administrative expenses rose $37.9 million, including technology investment and performance-based compensation.
Outlook, risks and unusual items
- Management expected approximately 800 U.S. and Canada store closures under its portfolio plan; 713 had been identified by quarter-end. About 500 additional closures were expected over the following 9 to 12 months. Estimated future restructuring costs were $100 million to $120 million.
- Fiscal 2021 capital expenditures were expected to be approximately $1.9 billion. The filing does not provide clear numerical full-year earnings or revenue guidance.
- Management described recovery as continuing and said it believed the business was positioned to regain momentum, subject to no significant COVID-19 relapses or global economic disruptions. Risks include renewed restrictions, customer traffic and spending, labor and commodity costs, currency movements, competition and execution of strategic initiatives.
- The quarterly dividend was maintained at $0.45 per share; management did not expect to reduce it due to the pandemic. Share repurchases remained suspended, with resumption tied to restoring leverage targets, which management then expected in late FY2021.
- The company had $299.7 million of commercial paper outstanding and $192.9 million borrowed under Japanese credit facilities. No borrowings were outstanding under its U.S. revolving credit facilities; combined credit-line covenants had been amended through Q4 FY2021.
- A California Proposition 65 coffee-warning case was on appeal after a trial court granted summary judgment for defendants. Starbucks said a material loss was less than reasonably possible and recorded no contingency.
Important facts for investors to verify
- Whether store traffic and comparable sales continued to recover, particularly in the Americas, and how COVID-related restrictions affected store capacity.
- The pace, final cost and financial effects of planned U.S. and Canada store closures and related lease impairments.
- Whether expected FY2021 capital spending and the dividend remain supported by operating cash flow and available liquidity.
- Debt maturities, leverage targets, covenant terms and the timing of any share-repurchase resumption.
- How much Channel Development performance reflects ongoing demand versus the Nestlé transition, and whether China’s reported sales momentum persists without the temporary VAT benefit.