Starbucks Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended October 1, 2017 (52 weeks). The comparable fiscal 2016 period included 53 weeks; year-over-year comparisons are affected by that extra week. This is an annual filing, not a standalone fourth-quarter filing.
Business context
Starbucks operated in 75 countries with 27,339 stores at year-end: 13,275 company-operated and 14,064 licensed. The Americas generated 70% of revenue, China/Asia Pacific 14%, EMEA 5%, Channel Development 9%, and All Other Segments 2%. Kevin Johnson became CEO in April 2017, succeeding Howard Schultz, who became executive chairman.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net revenue | $22.387 billion | $21.316 billion |
| Operating income | $4.135 billion | $4.172 billion |
| Operating margin | 18.5% | 19.6% |
| Net earnings attributable to Starbucks | $2.885 billion | $2.818 billion |
| Diluted EPS | $1.97 | $1.90 |
| Cash from operating activities | $4.174 billion | $4.575 billion |
| Capital expenditures | $1.519 billion | $1.440 billion |
- Reported revenue rose 5%; excluding the $412 million impact of FY2016’s extra week, revenue growth was 7%. Global comparable-store sales increased 3%, driven by a 3% increase in average ticket; transactions were flat.
- Operating margin contracted 110 basis points, primarily from partner and digital investments, restructuring and impairment charges, and the missing 53rd week, partly offset by sales leverage. Net earnings rose about 2%, while diluted EPS increased about 4%.
- Year-end cash and cash equivalents were $2.462 billion; cash and investments totaled approximately $3.2 billion. Current assets were $5.283 billion and current liabilities $4.221 billion.
- Long-term debt, including current portion, was $3.933 billion on the selected-data presentation; the debt note reports $3.955 billion face value. Operating lease obligations were $8.614 billion. The company reported compliance with debt covenants and no borrowings under its credit facility at year-end.
- Cash used in investing activities was $850 million and cash used in financing activities was $3.002 billion. Starbucks returned $3.5 billion to shareholders through repurchases and dividends; FY2017 repurchases were $2.043 billion and dividends paid were $1.450 billion.
Material changes and unusual items
- Americas revenue increased 6% to $15.653 billion, but operating income fell to $3.663 billion and margin declined 190 basis points to 23.4%, reflecting investments, food mix and the extra-week comparison.
- China/Asia Pacific revenue rose 10% to $3.240 billion; operating income increased 21% to $765 million and margin expanded 210 basis points to 23.6%, aided by China’s VAT transition and higher joint-venture income.
- EMEA revenue declined 10% to $1.014 billion as Starbucks continued shifting toward a licensed model; operating margin fell to 11.5%. Channel Development revenue rose 4% to $2.009 billion and margin increased to 44.5%.
- FY2017 restructuring and impairment charges were $153.5 million, primarily related to Teavana store closures and goodwill impairment, with additional Switzerland and Canada impairments. Goodwill impairment totaled $87.2 million, including $69.3 million for Teavana and $17.9 million for Switzerland.
- Other income included an $83.9 million pretax gain on the Singapore retail operations sale and a $41 million gain on Square warrants. Stored-value-card breakage income was $104.6 million, versus $60.5 million in FY2016.
Outlook, risks and contingencies
- For FY2018, management expected high-single-digit underlying revenue growth, approximately 2,300 net new stores, and diluted EPS growth above 40% versus FY2017, largely due to the anticipated gain from the pending East China transaction. An additional 2–3 percentage points of revenue growth was expected from strategic initiatives. Planned capital expenditures were approximately $2.0 billion.
- Starbucks agreed to acquire the remaining 50% of its East China joint venture for approximately $1.3 billion and concurrently sell its 50% Taiwan interest for approximately $175 million; both were expected to close by early calendar 2018, subject to conditions and regulatory approval. The company also announced a pending $384 million Tazo asset sale to Unilever.
- Key stated risks include consumer-discretionary spending and intense competition; coffee, dairy and other input-cost volatility and supply disruption; labor costs and staffing; international, foreign-exchange and regulatory exposure; food safety and brand reputation; and technology, cybersecurity and customer-data risks. Starbucks noted that GDPR requirements would take effect in May 2018.
- Green-coffee purchase commitments were approximately $1.2 billion, including $336 million under price-to-be-fixed contracts. Total contractual obligations were $14.942 billion, including leases and debt. Management said operating cash flows were expected to fund commitments in the ordinary course.
- The filing reported no legal proceeding management believed would materially adversely affect consolidated financial position, results or cash flows. Gross unrecognized tax benefits were $196.9 million; approximately $42–$75 million could be recognized by the end of FY2018 through examinations or statute expirations. The filing received an unqualified audit opinion, including on internal control over financial reporting.
Most important facts for investors to verify
- Whether FY2018 comparable sales, store openings and underlying revenue growth met management’s expectations, separating operating growth from the anticipated East China gain.
- Completion, timing and economics of the East China acquisition, Taiwan divestiture and Tazo sale, including their effects on margins, cash and ownership mix.
- Whether Americas margin pressure and flat comparable-store transactions improved, and whether China/Asia Pacific growth and margins remained sustainable.
- Actual cash generation and capital spending relative to the $2.0 billion FY2018 investment plan, shareholder distributions and debt levels.
- Realized restructuring and lease-exit costs, commodity-price exposure, tax developments and the potential impact of cybersecurity, privacy and other regulatory risks.