Starbucks Corporation — Q3 FY2019 Form 10-Q
Reporting period: Fiscal quarter and first three fiscal quarters ended June 30, 2019; comparisons are with the quarter and three quarters ended July 1, 2018. Amounts are in U.S. dollars.
Business context and performance
Starbucks operated more than 30,000 company-operated and licensed stores across 80 markets. The company continued shifting selected markets and its consumer packaged goods and foodservice businesses to licensed models, including sales of its Thailand business in Q3 and its France and Netherlands businesses in Q2. Global comparable-store sales increased 6% in Q3, driven by 3% higher transactions and 3% higher average ticket.
Key financial metrics
| Metric | Q3 FY2019 | Q3 FY2018 | First 3 quarters FY2019 | First 3 quarters FY2018 |
|---|---|---|---|---|
| Revenue | $6.823 billion | $6.310 billion | $19.762 billion | $18.416 billion |
| Operating income | $1.121 billion | $1.038 billion | $2.995 billion | $2.927 billion |
| Operating margin | 16.4% | 16.5% | 15.2% | 15.9% |
| Net earnings attributable to Starbucks | $1.373 billion | $853 million | $2.796 billion | $3.763 billion |
| Diluted EPS | $1.12 | $0.61 | $2.25 | $2.67 |
| Operating cash flow | Not separately provided | Not separately provided | $3.939 billion | $3.504 billion |
| Capital expenditures | Not separately provided | Not separately provided | $1.281 billion | $1.408 billion |
- Q3 revenue rose 8.1%; company-operated store revenue increased 9.4% and licensed-store revenue increased 9.7%. Revenue from “Other” declined 4.5%, principally reflecting the Nestlé licensing transition.
- Q3 reported earnings included a $601.8 million pretax gain from the Thailand divestiture. The gain materially contributed to the increase in quarterly net earnings; operating income increased by a more modest $83 million.
- Year-to-date net earnings declined against a prior-year comparison that included a $1.376 billion nontaxable gain from acquiring the remaining East China joint-venture interest.
- Q3 operating margin edged down 10 basis points; year-to-date operating margin declined 70 basis points. Management cited store-partner and wage investments, product mix, and the revenue effects of the Nestlé licensing arrangement, partly offset by sales leverage and cost savings.
- At June 30, cash and cash equivalents were $4.763 billion, versus $8.756 billion at September 30, 2018. Current assets were $7.735 billion and current liabilities $5.896 billion. Long-term debt was $11.159 billion, with no current debt portion; total debt was about $11.2 billion versus $9.4 billion at fiscal year-end. Shareholders’ equity was a deficit of $4.321 billion, largely following substantial share repurchases.
- Year-to-date financing cash outflow was $7.423 billion, including $7.973 billion of share repurchases and $1.331 billion of dividends. The company issued $2.0 billion of senior notes in May. Cash declined by $3.993 billion over the period.
Material changes, outlook, and risks
- Starbucks repurchased 116.1 million shares for approximately $8.0 billion during the first three fiscal quarters; 52.7 million shares remained authorized for repurchase at June 30. The quarterly dividend declared was $0.36 per share.
- Management expected fiscal 2019 capital expenditures of approximately $2.0 billion. It said cash from operations, existing cash and investments, and borrowing capacity were expected to fund core-business needs and shareholder distributions for the foreseeable future. No specific full-year earnings or revenue guidance is provided in the supplied filing text.
- The Nestlé Global Coffee Alliance included an upfront payment of approximately $7 billion, recorded as deferred revenue and recognized over an estimated 40-year economic life. At June 30, related deferred revenue was $174 million current and $6.6 billion long-term. Licensing the CPG and foodservice businesses reduced Channel Development revenue and changed its cost and margin profile; management expected the revenue trend to continue through fiscal 2019.
- Management expected adoption of the new lease standard in fiscal 2020 to add approximately $8 billion to $10 billion of right-of-use assets and lease liabilities, with an insignificant earnings impact expected. Changes to stored-value-card breakage accounting shifted recognition into store revenue; management said the adoption had no material impact on total financial results.
- Key stated exposures include coffee, dairy and other commodity prices, foreign currency movements, competition, execution of business initiatives, and legal proceedings. Starbucks reported no borrowings under its revolving credit facilities or commercial-paper program and said it complied with applicable debt covenants.
- In the California Proposition 65 coffee-warning litigation, the company disputed the claims and recorded no loss contingency, assessing the likelihood of an eventual loss as less than reasonably possible. A coffee-warning exemption regulation was approved and scheduled to take effect October 1, 2019; litigation proceedings were continuing.
Important facts for investors to verify
- How much of Q3 earnings growth reflects recurring store operations versus the $601.8 million Thailand divestiture gain.
- Whether comparable-store sales growth and store expansion can continue while wages, partner investments, and other operating costs pressure margins.
- The ongoing revenue, cost, and margin effects of the Nestlé licensing transition and market conversions to licensed operations.
- Debt, interest expense, liquidity, and the sustainability of dividends and share repurchases after the $8.0 billion year-to-date repurchase program.
- Whether the expected $8 billion to $10 billion lease-related balance-sheet addition, commodity exposure, and legal contingencies develop as described.