Starbucks Corporation — Q3 FY2020 Form 10-Q
Reporting period: Quarter and first three quarters ended June 28, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. Starbucks operated more than 32,000 company-operated and licensed stores across 83 markets.
Financial performance
| Metric | Q3 FY2020 | Q3 FY2019 | First three quarters FY2020 | First three quarters FY2019 |
|---|---|---|---|---|
| Net revenues | $4,222.1 | $6,823.0 | $17,314.9 | $19,761.6 |
| Operating income/(loss) | $(703.9) | $1,121.3 | $1,003.4 | $2,994.6 |
| Net earnings/(loss) attributable to Starbucks | $(678.4) | $1,372.8 | $535.7 | $2,796.4 |
| Diluted EPS | $(0.58) | $1.12 | $0.45 | $2.25 |
| Operating margin | (16.7)% | 16.4% | 5.8% | 15.2% |
| Cash provided by operating activities | Not separately provided | Not separately provided | $107.1 | $3,938.8 |
- Q3 revenue fell 38.1% year over year; company-operated store revenue declined 37.8% and licensed-store revenue declined 58.6%. Global comparable-store sales fell 40%, reflecting a 51% transaction decline partly offset by a 23% increase in average ticket.
- For the first three quarters, revenue fell 12.4% and comparable-store sales declined 15%. The prior-year periods included $601.8 million of Q3 and $622.8 million of year-to-date divestiture gains, primarily from converting certain markets to licensed operations.
- Q3 operating margin was pressured by sales deleverage and COVID-related costs. Store operating expenses were 60.1% of revenue, compared with 38.7% a year earlier; product and distribution costs were 35.1%, compared with 32.2%.
- Operating cash flow for the first three quarters fell to $107.1 million from $3.9 billion. Investing activities used $1.3 billion, including $1.1 billion of capital expenditures. Financing activities provided $2.5 billion, including proceeds from debt issuance.
Liquidity, debt and capital
- At June 28, 2020, cash and cash equivalents were $4.0 billion; cash and investments totaled $4.4 billion. Approximately $1.7 billion of cash was held in foreign subsidiaries.
- Balance-sheet debt included $936.5 million of short-term debt, $1.25 billion of current long-term debt and $14.65 billion of long-term debt. Starbucks issued long-term notes in March and May 2020; long-term debt issuance proceeds were $4.7 billion in the first three quarters.
- Operating lease liabilities totaled $8.9 billion. Total shareholders’ deficit was $8.6 billion. The filing notes that lease accounting adoption materially increased reported assets and liabilities.
- Starbucks reported $2.7 billion of contractual borrowing capacity at quarter-end and said it complied with applicable covenants. It amended the fixed-charge coverage covenant for its $3 billion revolving credit lines through Q4 FY2021.
- Operating cash flow was affected by store closures and tax-payment timing, including a U.S. federal tax payment related to the Nestlé transaction. Starbucks expected FY2020 capital expenditures of approximately $1.5 billion.
Material developments, outlook and risks
- COVID-19 caused temporary closures, reduced customer traffic and modified store operations. By June 28, approximately 96% of Americas company-operated stores and over 80% of Americas licensed stores were open; nearly all company-operated stores in major international markets had reopened.
- Management reported improving comparable-store sales during Q3 and expected further improvement in comparable-store sales and operating margin in Q4. Absent significant COVID-19 relapses, it expected a return to profitability in Q4. The filing provides no specific full-year earnings or revenue guidance.
- Starbucks announced plans to close up to 400 additional U.S. urban stores over 18 months and up to 200 Canadian stores over two years. It estimated future restructuring costs of $300–$400 million; approximately $56 million was recorded for identified closures in Q3.
- Government payroll credits reduced store operating expenses by $266 million in Q3 and $301 million year to date. The company also received $21.7 million of international rent concessions in Q3.
- Share repurchases were suspended in April; $1.7 billion of shares had been repurchased during the first three quarters. The board declared a $0.41-per-share dividend, and management did not expect to reduce the quarterly dividend as a result of the pandemic.
- Key risks include renewed COVID-19 outbreaks and restrictions, further demand or traffic declines, disruption to licensees and supply chains, access to financing and covenant compliance, and volatile coffee, dairy and other commodity costs. Management recorded $55 million of valuation allowances against certain foreign deferred tax assets in Q3.
- The company described ongoing California Proposition 65 litigation concerning acrylamide warnings for coffee; Starbucks considered the likelihood of a loss remote and recorded no loss contingency. It reported no other legal proceeding management believed would materially affect its financial position, results or cash flows.
Important facts for investors to verify
- Whether store traffic, comparable sales and margins recover as expected, and whether renewed COVID-19 disruptions change the Q4 outlook.
- The cash-flow impact of ongoing operations, capital spending, debt maturities and the planned store closures, including final restructuring costs versus the $300–$400 million estimate.
- How government subsidies, rent concessions and tax-payment timing affected reported costs and cash generation, and whether these benefits recur.
- Debt and lease obligations, covenant terms and compliance, available borrowing capacity, and the sustainability of dividends while repurchases remain suspended.
- Progress in store reopenings and closures, licensee recovery and royalty relief, and any material changes in deferred tax asset recoverability or legal contingencies.