Business context and reporting period
Starbucks Corporation’s unaudited fiscal 2016 second-quarter Form 10-Q covers the quarter ended March 27, 2016, and the first two fiscal quarters compared with the corresponding 2015 periods. Fiscal 2016 includes 53 weeks, with the additional week in the fourth quarter. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
- Second-quarter revenue: $4.993 billion, up 9.4% year over year. Global comparable-store sales grew 6% (transactions +2%, average ticket +4%). Management attributed growth to comparable sales, new stores, and higher licensee sales and royalties; unfavorable currency translation reduced revenue by about $52 million.
- Second-quarter earnings: Operating income was $864.2 million, up 11%; operating margin rose 30 basis points to 17.3%. Net earnings attributable to Starbucks were $575.1 million versus $494.9 million; diluted EPS was $0.39 versus $0.33.
- First-half results: Revenue was $10.367 billion, up 10.7%; operating income was $1.922 billion, up 13.5%, and operating margin was 18.5% versus 18.1%. Net earnings attributable to Starbucks were $1.263 billion versus $1.478 billion, and diluted EPS was $0.84 versus $0.97. The prior-year period included a $390.6 million pretax gain from remeasuring Starbucks’ pre-existing interest in Starbucks Japan upon acquisition.
- Cash flow and investment: First-half operating cash flow was $2.186 billion versus $2.001 billion. Investing activities used $952.8 million, including $668.2 million of property and equipment additions. Financing activities used $1.463 billion, including $1.585 billion of share repurchases and $591.8 million of dividends paid. Cash and cash equivalents declined to $1.294 billion from $1.530 billion at fiscal 2015 year-end.
- Liquidity and debt: Cash plus short- and long-term investments totaled approximately $2.023 billion. Current assets were $3.884 billion and current liabilities $4.351 billion. Debt comprised $149.1 million of commercial paper, $399.8 million current portion of long-term debt, and $2.448 billion long-term debt. Starbucks issued $500 million of 2.10% senior notes due 2021; it reported compliance with debt covenants and no borrowings under its $1.5 billion revolving credit facility.
- Other: The quarterly dividend declared was $0.20 per share. At quarter-end, 25.2 million shares remained authorized for repurchase under the existing program; the company announced a further 100 million-share authorization on April 21, 2016.
Material changes and segment performance
- Americas revenue rose 10% to $3.456 billion; comparable sales grew 7%, and operating margin expanded 80 basis points to 23.5%.
- China/Asia Pacific revenue rose 14% to $678 million; comparable sales grew 3%, and operating margin increased 20 basis points to 19.1% for the quarter. First-half margin was lower year over year, partly reflecting the Starbucks Japan ownership change and higher costs.
- EMEA revenue declined 4% to $268 million, reflecting currency and a shift toward licensed stores. Quarterly operating margin was 10.3%, down 10 basis points.
- Channel Development revenue rose 8% to $461 million, while operating margin expanded 300 basis points to 39.5%, supported by single-serve products, lower green coffee costs, and joint-venture performance.
- Company-wide operating margin improvement reflected sales leverage and lower dairy costs, partly offset by partner and digital-platform investments. The first-half net income comparison was substantially affected by the prior-year Japan acquisition gain.
Outlook, commentary and risks
- For fiscal 2016, management expected revenue growth above 10%, including an estimated 2% contribution from the 53rd week; comparable-store sales growth somewhat above mid-single digits; and approximately 1,800 net new stores.
- Management forecast slightly higher consolidated operating margin and full-year EPS of $1.85–$1.86. The 53rd week was expected to contribute about $0.06 to fourth-quarter EPS. Partner and digital investments, and to a lesser extent currency, were expected to offset some benefits from growth, leverage, and efficiencies.
- Full-year currency translation was expected to reduce revenue growth by 1%–2%. EMEA management expected operating margin to approach 15% for fiscal 2016 amid a challenging consumer, economic, and geopolitical environment.
- Fiscal 2016 capital expenditures were expected to be approximately $1.4 billion. Management said operating cash flow and existing cash and investments should fund foreseeable business and shareholder needs, but significant acquisitions or new opportunities could require external funding. About $1.4 billion of cash and investments was held in foreign subsidiaries; repatriation could result in material additional taxes.
- Key disclosed risks include foreign-exchange and commodity-price volatility, competition, consumer acceptance, execution of initiatives and the Starbucks Japan integration, food-safety events, information-technology disruptions or breaches, and legal proceedings. Management reported no material change to previously disclosed risk factors and no legal proceeding believed likely to materially affect financial condition, results, or cash flows.
- Management was evaluating several new accounting standards. It expected the new lease standard to significantly increase reported assets and liabilities; it was also assessing revenue-recognition changes that would affect timing and classification of stored-value-card breakage income.
Important facts for investors to verify
- Whether comparable-store sales, new-store openings, and currency impacts support the full-year revenue outlook.
- Whether the planned partner and digital investments can be balanced with margin expansion, especially in China/Asia Pacific and EMEA.
- How the prior-year Japan acquisition gain affects year-over-year earnings comparisons, and how Japan performs on a comparable basis.
- Debt maturities, cash deployment, repurchases, dividends, and the funding of the approximately $1.4 billion capital-expenditure plan.
- Exposure to coffee, dairy, foreign exchange, food safety, technology, and regional economic risks, along with the eventual effects of lease and revenue-recognition accounting changes.