Starbucks Corporation — Q1 FY2017 10-Q
Reporting period: Quarter ended January 1, 2017; comparisons are with the quarter ended December 27, 2015. Amounts are in millions except per-share data.
Key financial results
| Metric | Q1 FY2017 | Prior-year quarter | Change |
|---|---|---|---|
| Net revenue | $5,732.9 | $5,373.5 | +6.7% |
| Operating income | $1,132.6 | $1,058.0 | +7% |
| Operating margin | 19.8% | 19.7% | +10 bps |
| Net earnings attributable to Starbucks | $751.8 | $687.6 | +9% |
| Diluted EPS | $0.51 | $0.46 | +11% |
| Cash provided by operations | $1,495.7 | $1,636.0 | Down |
Revenue growth reflected 2,163 net new stores over the preceding 12 months, 3% global comparable-store sales growth, and higher licensee sales and royalties. Comparable-store sales rose 3% in the Americas and 5% in China/Asia Pacific, and fell 1% in EMEA. The consolidated comparable-sales increase was driven by a 4% higher average ticket despite a 1% decline in transactions.
Cost of sales and occupancy costs fell to 40.0% of revenue from 40.7%, aided by sales leverage and lower coffee costs. Store operating expenses rose to 28.6% from 28.0%, reflecting partner investments. General and administrative expenses rose to 6.2% from 5.7%, partly due to digital, innovation, store development, and technology spending. The effective tax rate was 33.7%, versus 34.5%.
Segments and material changes
- Americas: Revenue +7% to $3,991 million; operating income $959 million. Operating margin declined 110 bps to 24.0%, primarily from store-partner investments.
- China/Asia Pacific: Revenue +18% to $771 million; operating income +29% to $163 million. Margin expanded 180 bps to 21.2%, including benefit from China business-tax changes and higher joint-venture income.
- EMEA: Revenue −16% to $262 million, reflecting conversion of company-operated stores to licensed operations, the Germany retail conversion, and unfavorable currency. Margin expanded 140 bps to 16.8% as the licensed-store mix reduced operating costs.
- Channel Development: Revenue +8% to $554 million; operating income +26% to $243 million. Margin increased 620 bps to 43.9%, benefiting from lower coffee costs, sales leverage, and joint-venture performance.
Net interest income and other increased to $24.1 million from $8.1 million, primarily due to favorable derivative fair-value movements. Interest expense increased to $23.8 million from $16.5 million, partly reflecting debt issued in 2016. Other comprehensive loss was $133.9 million, driven largely by a $171.8 million translation adjustment.
Cash, debt, and liquidity
- Cash and cash equivalents were $2,034.6 million; cash and investments totaled approximately $3.5 billion. About $1.8 billion of cash and investments was held in foreign subsidiaries.
- Total debt was $3,185.7 million, all long-term at quarter-end. Starbucks repaid $400 million of 0.875% senior notes at maturity during the quarter; no amounts were outstanding under its $1.5 billion revolving credit facility or $1 billion commercial-paper program.
- Operating cash flow was $1,495.7 million. Investing activities used $401.5 million, including $307.4 million for property and equipment. Financing activities used $1,155.0 million, including debt repayment, $364.0 million of dividends paid, and $408.1 million of share repurchases.
- Quarter-end current assets were $4,616.2 million and current liabilities were $4,397.3 million. The $1,578.3 million stored-value-card liability increased from $1,171.2 million at fiscal year-end, consistent with seasonal card loading.
Guidance, risks, and notable items
- For FY2017, management expected revenue growth in the mid-single digits against FY2016’s 53-week results; adjusted for the extra week and approximately 1% anticipated unfavorable currency translation, it expected growth of 8%–10%. Expectations included about 2,100 net new stores and mid-single-digit global comparable-store sales growth, with some improvement in the second half.
- Management expected a slight increase in consolidated operating margin and diluted EPS of $2.09–$2.11. Partner and digital investments were expected to rise approximately $250 million; fiscal-year capital expenditures were expected to be about $1.6 billion.
- Key risks cited include coffee, dairy, and other commodity costs and availability; foreign-exchange movements; competition and customer acceptance; food-safety incidents; information-technology breaches or failures; execution of initiatives, including Starbucks Japan integration; and legal proceedings. Management reported no material change to previously disclosed risk factors and no legal proceeding it believed could materially adversely affect the company.
- Management said results are subject to moderate seasonality and Q1 benefits from holiday stored-value-card loading; quarterly results are not necessarily indicative of the full year. It also noted that adoption of the new lease standard is expected to materially increase balance-sheet assets and liabilities, while the stock-compensation standard is expected to significantly affect earnings, EPS, and cash-flow presentation.
Important facts for investors to verify
- Whether comparable-sales trends—particularly declining transactions in the Americas and weak EMEA sales—improve as management expected.
- Whether partner, digital, and technology investments support growth without further pressure on store margins and overhead.
- Whether China/Asia Pacific and Channel Development margin gains are sustainable, and how store licensing changes affect revenue and profitability.
- How commodity costs, foreign currency, and derivative fair-value changes affect reported results and cash flow.
- Execution of FY2017 revenue, EPS, capital-expenditure, and store-opening expectations, alongside shareholder returns and debt obligations.