Starbucks Corporation — Q3 FY2017 Form 10-Q
Reporting period: Quarter ended July 2, 2017; year-to-date figures cover the three quarters ended July 2, 2017. Comparisons are with the quarter and three quarters ended June 26, 2016. Amounts are in U.S. dollars.
Business context and key financial metrics
| Metric | Q3 FY2017 | Prior-year quarter | First three quarters FY2017 | Prior-year period |
|---|---|---|---|---|
| Net revenues | $5.662 billion | $5.238 billion | $16.689 billion | $15.605 billion |
| Operating income | $1.044 billion | $1.022 billion | $3.112 billion | $2.945 billion |
| Operating margin | 18.4% | 19.5% | 18.6% | 18.9% |
| Net earnings attributable to Starbucks | $692 million | $754 million | $2.096 billion | $2.017 billion |
| Diluted EPS | $0.47 | $0.51 | $1.43 | $1.35 |
| Operating cash flow | Not stated for the quarter | Not stated for the quarter | $3.090 billion | $3.267 billion |
Quarterly global comparable-store sales increased 4% (transactions flat; average ticket up 4%). For the first three quarters, comparable sales grew 3% (transactions down 1%; average ticket up 4%). Starbucks operated 26,736 stores at quarter-end.
At July 2, 2017, cash and cash equivalents were $2.716 billion; short- and long-term investments totaled $998 million. Current assets were $5.509 billion and current liabilities $4.027 billion. Long-term debt was $3.936 billion, with no current debt shown; total liabilities were $8.673 billion. The $1.5 billion revolving credit facility was undrawn, and there were no commercial-paper borrowings. The company reported compliance with applicable debt covenants.
Material changes versus comparable periods
- Quarterly revenue grew 8.1%; operating income rose 2.1%, while diluted EPS fell about 8% and operating margin contracted 110 basis points. The quarter included $120.2 million of goodwill and asset impairment charges, which management said reduced EPS by $0.07.
- Year-to-date revenue grew 6.9%, operating income 5.7%, and diluted EPS from $1.35 to $1.43; operating margin declined 30 basis points.
- Q3 revenue growth reflected new stores and comparable sales. Americas revenue grew 10% with 5% comparable sales, while China/Asia Pacific revenue grew 9% with 1% comparable sales. EMEA revenue fell 9%, reflecting the shift toward licensed stores, the prior-year Germany store sale and currency effects.
- Operating cash flow declined to $3.090 billion from $3.267 billion, primarily due to the timing of income-tax payments, partly offset by higher earnings. Investing cash outflow was $670 million versus $1.558 billion; financing cash outflow was $1.823 billion versus $1.094 billion.
- During the first three quarters, Starbucks paid $1.090 billion in dividends and repurchased $1.214 billion of shares. It declared a quarterly dividend of $0.25 per share.
Outlook, management commentary, risks and unusual items
- FY2017 outlook: Management expected reported consolidated revenue growth in the mid-single digits versus FY2016’s 53-week results. After adjusting for the extra week in FY2016 and anticipated unfavorable currency translation, growth was expected at the lower end of the previously stated 8%–10% range. Global Q4 comparable sales were forecast at 3%–4%; approximately 2,200 net new stores were expected for the year.
- FY2017 diluted EPS guidance was $1.96–$1.97, including the $0.07 impairment impact. Excluding the impairment charges, management expected slight operating-margin improvement versus FY2016. Partner, product-development and innovation investments were expected to exceed the prior year by more than $250 million.
- Management planned to discuss updated long-term targets and FY2018 guidance on the Q4 earnings call. Prior long-term targets were revenue growth above 10%, EPS growth of 15%–20%, and mid-single-digit comparable sales growth.
- Teavana and Switzerland impairments: Starbucks finalized a strategy to close its Teavana-branded retail stores over the next several quarters while continuing to sell premium Teavana products through Starbucks stores and, to a lesser extent, consumer channels. Charges included $33.0 million for Teavana store assets, $69.3 million for Teavana goodwill, and $17.9 million for Switzerland goodwill. Switzerland’s outlook was affected by the strong Swiss franc relative to the euro, consumer behavior and tourism.
- Subsequent event: In Q4 FY2017, Starbucks signed an agreement to acquire the remaining 50% of its East China joint venture for approximately $1.3 billion, subject to approvals and closing conditions, with closing expected by early calendar 2018. The joint venture partners were to acquire Starbucks’ 50% Taiwan interest for approximately $175 million.
- Risks highlighted include currency and economic fluctuations, coffee, dairy and other commodity prices and availability, competition, technology and information-security risks, execution of initiatives and acquisitions, and legal proceedings. Management said there were no material changes to previously disclosed risk factors and no legal proceeding it believed would materially adversely affect the company.
- Approximately $2.0 billion of cash and investments were held in foreign subsidiaries. Most undistributed foreign earnings were considered indefinitely reinvested; repatriation could result in additional U.S. taxes that may be material. Starbucks also noted that adoption of the new lease standard was expected to materially increase balance-sheet assets and liabilities, with likely insignificant earnings impact.
Important facts for investors to verify
- Whether FY2017 revenue, comparable-sales, store-opening and EPS guidance was achieved, and how impairment-adjusted margins compare with management’s outlook.
- Execution, timing, funding and regulatory approval for the East China acquisition and Taiwan divestiture.
- Teavana store-closure costs and pace, remaining goodwill and intangible-asset values, and further impairment risk in Switzerland or other markets.
- Drivers of weaker quarterly EPS and margin, including partner investments, product mix, commodity costs, taxes and foreign-exchange effects.
- Cash generation and capital allocation, including dividends, share repurchases, capital expenditures, debt maturities and liquidity after the planned acquisition.