Starbucks Corporation — Q2 FY2012 Form 10-Q
Reporting period: Fiscal second quarter ended April 1, 2012; year-to-date figures cover the two quarters ended that date. Comparatives are the quarter and two quarters ended April 3, 2011. Figures are unaudited and in millions of dollars except per-share data.
Financial performance
| Metric | Q2 FY2012 | Q2 FY2011 | Two quarters FY2012 | Two quarters FY2011 |
|---|---|---|---|---|
| Net revenue | $3,195.9 | $2,785.7 | $6,631.8 | $5,736.5 |
| Operating income | $430.4 | $376.1 | $986.4 | $878.0 |
| Net earnings attributable to Starbucks | $309.9 | $261.6 | $691.9 | $608.1 |
| Diluted EPS | $0.40 | $0.34 | $0.90 | $0.79 |
| Operating margin | 13.5% | 13.5% | 14.9% | 15.3% |
- Quarterly revenue grew 14.7%, operating income 14.4%, and Starbucks-attributable earnings 18.5%; diluted EPS increased 18%. Year-to-date revenue grew 15.6%, operating income 12.3%, and attributable earnings 13.8%.
- Quarterly comparable-store sales rose 7% globally, reflecting 6% higher transactions and 1% higher ticket. Americas comps increased 8%; China/Asia Pacific rose 18%; EMEA declined 1%.
- Higher commodity costs, mainly coffee, reduced Q2 operating income by about $64 million and operating margin by approximately 200 basis points. Consolidated Q2 operating margin was flat year over year; year-to-date margin fell 40 basis points.
Cash flow, balance sheet and liquidity
- Year-to-date operating cash flow was $575.6, down from $669.5. Investing used $287.0 versus $139.1, including $313.8 of capital expenditures and $29.7 for acquisitions. Financing used $11.9 versus $61.3. Cash increased $284.1 to $1,432.2.
- At April 1, 2012, cash and short-term investments totaled approximately $2.23 billion, compared with $2.05 billion at October 2, 2011. Current assets were $4,351.5 and current liabilities $1,971.4.
- Long-term debt was $549.6, consisting of $550 million of 6.25% Senior Notes; the company also reported a $500 million unsecured credit facility available for corporate purposes. Starbucks said it was in compliance with debt covenants and believed cash, investments, and operating cash flows were adequate for foreseeable needs.
- Dividends paid year to date were $255.0; the quarterly dividend declared was $0.17 per share. Share repurchases were $15.7 year to date, with 24.0 million shares remaining authorized.
Material changes and segment performance
- Channel Development revenue rose 57% in Q2, principally from Starbucks- and Tazo-branded K-Cup packs and the direct-distribution transition for packaged coffee. Segment operating income increased to $81.7, but margin declined 740 basis points amid commodity pressure and mix effects.
- Americas revenue grew 10% and operating income was $463.0; strong traffic and sales leverage helped offset higher commodity costs.
- China/Asia Pacific revenue grew 32%, with 18% Q2 comparable-store sales growth; operating income increased to $69.5. Starbucks said it remained on track for 1,500 stores in China by 2015.
- EMEA revenue rose 14%, but the segment recorded a $5.5 operating loss, compared with $7.7 operating income a year earlier. Management cited regional economic headwinds, restructuring investments, and higher UK distribution costs.
- The company acquired Evolution Fresh for $30 million in cash in November 2011. Fiscal 2012 reporting also realigned segments and moved certain shared costs to corporate/unallocated expenses; prior periods were recast, with no effect on consolidated operating income or earnings.
Outlook, commentary and risks
- For FY2012, management expected mid-single-digit comparable-store sales growth, growth from net new stores and Channel Development, and modest consolidated operating-margin and EPS improvement versus FY2011. Licensed stores were expected to make up one-half to two-thirds of new openings across the cited regions.
- FY2012 capital expenditures were expected to be approximately $900 million, above FY2011, for store renovations, new stores, systems, and manufacturing capacity.
- Management identified coffee and other commodity prices and availability, foreign exchange, economic conditions, execution of initiatives, competition, and legal proceedings as risks to results. The filing noted no material change to previously disclosed risk factors.
- Kraft arbitration: Starbucks claimed damages of up to $62.9 million plus fees; Kraft’s expert estimated claims of up to $2.9 billion including premium and interest. Starbucks said an unfavorable outcome was not probable but was reasonably possible, could not reasonably estimate a loss, and recorded no loss contingency. Arbitration was scheduled for July 11–31, 2012.
- Q2 net interest income and other included approximately $29 million of income related to unredeemed gift cards following a court ruling on state unclaimed-property laws. Management stated the quarter’s results are not necessarily indicative of the full fiscal year.
Investor verification priorities
- Track coffee and other commodity costs, hedging effects, and whether sales growth can protect consolidated and Channel Development margins.
- Monitor operating cash flow, inventory growth, capital spending against the approximately $900 million forecast, and cash returns to shareholders.
- Assess EMEA’s turnaround progress and operating losses, alongside China/Asia Pacific expansion and comparable-store sales momentum.
- Follow the Kraft arbitration, including the range of asserted claims, timing, and any subsequent resolution or change in loss assessment.
- Separate recurring earnings from the approximately $29 million gift-card-related income and assess the repeatability of Channel Development growth drivers.