Starbucks Corporation — FY2012 Form 10-K Summary
Business context and reporting period
Starbucks filed its annual report for the 52-week fiscal year ended September 30, 2012. The company roasts and sells coffee and other beverages, food, and branded products through company-operated and licensed stores and consumer-product channels. It operated in 60 countries and had 18,066 stores at year-end, including 9,405 company-operated stores.
Fiscal 2012 reporting segments were Americas, Europe, Middle East and Africa (EMEA), China/Asia Pacific (CAP), and Channel Development. Americas contributed 75% of consolidated revenue. Segment structure changed in fiscal 2012; prior-year segment information was recast for comparability.
Financial results and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net revenue | $13.30 billion | $11.70 billion |
| Operating income / margin | $2.00 billion / 15.0% | $1.73 billion / 14.8% |
| Net earnings attributable to Starbucks | $1.384 billion | $1.246 billion |
| Diluted EPS | $1.79 | $1.62 |
| Cash from operating activities | $1.750 billion | $1.612 billion |
| Capital expenditures | $856 million | $532 million |
Fourth-quarter FY2012 revenue was $3.364 billion, operating income $520 million, Starbucks-attributable earnings $359 million, and diluted EPS $0.46. The comparable FY2011 quarter reported $3.032 billion, $448 million, $359 million, and $0.47, respectively.
- Consolidated comparable-store sales increased 7% for the year, from 6% higher transactions and 1% higher average ticket. Americas comparable sales rose 8%; CAP rose 15%; EMEA was flat.
- Cash and short-term investments totaled $2.037 billion at year-end, versus $2.051 billion a year earlier. Current assets were $4.200 billion and current liabilities $2.210 billion (approximately 1.9x current ratio).
- Long-term debt was $549.6 million, consisting principally of $550 million of 6.25% senior notes due 2017. No borrowings were outstanding under the $500 million revolving credit facility or commercial paper program.
- Operating cash flow less capital expenditures was approximately $894 million. Cash used in financing was $746 million, including $513 million of dividends and $549 million of cash share repurchases.
- Operating leases totaled $4.060 billion in future minimum payments; total disclosed contractual obligations were $5.788 billion. Green coffee purchase commitments were $854 million.
Material changes versus the prior comparable period
- Revenue increased 13.7%, led by comparable-store sales, 50% Channel Development revenue growth, and 20% licensed-store revenue growth. Company-operated store revenue rose 9.4%.
- Operating margin expanded 20 basis points, notwithstanding higher commodity costs. Management estimated higher commodities—primarily coffee—reduced operating income by about $214 million, or roughly 160 basis points of margin.
- Net earnings rose 11% and diluted EPS increased from $1.62 to $1.79. FY2011 included one-time gains, including a $55 million gain related to the Switzerland and Austria joint venture acquisition and a $30 million property-sale gain; these make the comparison less directly recurring.
- Channel Development revenue rose to $1.292 billion from $861 million, while its operating margin declined to 27.0% from 33.4%, reflecting commodity costs and product mix, including K-Cup launches.
- EMEA operating income fell to $10 million from $40 million, with margin declining to 0.9% from 3.8%, amid regional economic pressure, transformation investments, UK distribution-transition costs, and store impairments. CAP revenue grew 31% and operating income increased to $254 million from $193 million.
- Capital expenditures increased substantially, primarily for store renovation and growth. The company acquired Evolution Fresh and La Boulange during FY2012; La Boulange cost approximately $100 million.
Outlook, risks, contingencies, and unusual items
- For FY2013, management expected moderate revenue growth, driven by mid-single-digit comparable-store sales, new stores, and strong Channel Development growth; licensed stores were expected to account for one-half to two-thirds of new openings. Management anticipated further consolidated operating-margin and EPS improvement, higher capital spending, and approximately $1.2 billion of capital expenditures. The expected tax rate was approximately 33%.
- Management highlighted a goal of 1,500 stores in China by 2015 and a longer-term EMEA transformation toward mid-teens operating margin, while cautioning that the EMEA turnaround would take time.
- The principal business risks include coffee, dairy, and other commodity cost or availability; consumer spending and competition; dependence on the Americas segment; execution of international growth and strategic initiatives; foreign exchange; supply-chain disruption; food safety and brand risks; and legal, regulatory, labor, healthcare-cost, and information-security exposures.
- Kraft arbitration remained a significant contingency. Kraft sought up to $2.9 billion plus fees; Starbucks disputed the claim. Management said an unfavorable outcome was reasonably possible but not probable, could not reasonably estimate the potential loss, and recorded no loss contingency. An arbitration decision was expected in the first half of FY2013.
- After year-end, Starbucks signed an agreement to acquire Teavana for approximately $620 million in cash, subject to regulatory approval and customary closing conditions.
- Starbucks recognized $65.8 million of income from unredeemed stored-value cards in FY2012, including additional recognition following a court ruling on unclaimed-property laws. This is a notable non-store-sales earnings item.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the FY2013 comparable-sales and margin outlook was achieved, particularly given FY2012’s $214 million estimated commodity-cost impact.
- Progress and profitability in EMEA, and whether rapid CAP expansion—including the China store target—produced sustainable returns.
- Channel Development’s growth and margin recovery after its FY2012 margin decline.
- The outcome and financial impact, if any, of the Kraft arbitration; no loss was accrued and the possible loss was not estimable in this filing.
- Funding and returns from planned FY2013 capital spending and the Teavana acquisition, alongside dividends and repurchases.
- Future coffee purchase costs, inventory levels, and the company’s ability to pass input-cost changes through to customers.