Starbucks Corporation — FY2015 Form 10-K
Business context and reporting period. Starbucks operates company-owned and licensed coffee stores and sells packaged coffee, tea, and other products. This annual report covers the 52 weeks ended September 27, 2015; the filing’s fourth quarter is included below where reported. The company operated in 68 countries and had 23,043 stores at year-end. Starbucks acquired full ownership of Starbucks Japan during the year.
Financial results and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net revenue | $19.16 billion | $16.45 billion |
| Operating income | $3.60 billion | $3.08 billion |
| Operating margin | 18.8% | 18.7% |
| Net earnings attributable to Starbucks | $2.76 billion | $2.07 billion |
| Diluted EPS | $1.82 | $1.35 |
| Operating cash flow | $3.75 billion | $607.8 million |
| Capital expenditures | $1.30 billion | $1.16 billion |
FY2015 revenue grew 16.5%; global comparable-store sales rose 7%, from 3% higher transactions and a 4% higher average ticket. Company-operated stores generated 79% of revenue. The Americas represented 69% of revenue. Cash and investments totaled approximately $1.9 billion at year-end; long-term debt, including current portion, was $2.35 billion, and shareholders’ equity was $5.82 billion. No borrowings were outstanding on the $750 million revolving credit facility at year-end, and the company reported compliance with debt covenants. Contractual obligations included $5.67 billion of operating lease payments.
Fourth quarter: Revenue was $4.91 billion, operating income $969.4 million, net earnings attributable to Starbucks $652.5 million, and diluted EPS $0.43.
Changes, unusual items, and management commentary
- Revenue increased 16.5% year over year, with growth across all reportable segments. Results included approximately $1.1 billion of incremental revenue from consolidating Starbucks Japan and favorable comparable-store sales; unfavorable currency translation reduced revenue by approximately $252 million.
- Net earnings and EPS benefited from a $390.6 million pretax remeasurement gain on Starbucks’ pre-existing Japan investment, adding $0.26 to EPS. The company also recorded a $61.1 million loss on early redemption of $550 million of 6.25% notes. The effective tax rate fell to 29.3% from 34.6%, partly reflecting the largely nontaxable Japan gain and tax benefits.
- Operating margin increased 10 basis points. Sales leverage and lower input costs were partly offset by the Japan ownership change and employee and digital investments. China/Asia Pacific revenue rose 112% and operating margin fell 1,210 basis points, largely because Japan shifted from equity-method accounting to consolidated retail operations. EMEA revenue declined 6%, substantially due to currency; its operating margin improved to 13.8%.
- Operating cash flow rose sharply versus FY2014, primarily because FY2014 included the $2.8 billion Kraft arbitration payment. Starbucks returned $2.4 billion to shareholders through repurchases and dividends in FY2015.
Outlook, risks, and contingencies
For FY2016, management expected revenue growth above 10%, comparable-store sales slightly above the mid-single digits, and approximately 1,800 net new stores, about half in China/Asia Pacific. It expected slight increases in consolidated operating margin and EPS; the extra 53rd week was expected to add about 2% to revenue growth and approximately $0.06 to EPS. Forecast capital expenditures were approximately $1.4 billion and the expected effective tax rate was 34%–35%. Management projected EMEA operating margin approaching 15%.
- Principal risks include coffee, dairy, and other commodity costs and availability; foreign exchange; consumer spending and competition; dependence on the Americas; execution of international expansion; labor costs; food safety; cybersecurity and technology interruptions; and supply-chain disruption.
- Green coffee purchase commitments totaled approximately $1.1 billion, expected with existing inventory to provide adequate supply through FY2016.
- The Kraft arbitration was paid and settled in FY2014. Starbucks said other ordinary-course legal matters were not believed to pose a material adverse effect. A subsequent European Commission state-aid decision concerning Netherlands tax arrangements could result in assessed past taxes estimated at no more than €30 million (approximately $32 million); the company was evaluating the decision.
- Management and the auditor reported effective internal controls, but Starbucks Japan was excluded from the FY2015 internal-control assessment while controls were being documented and tested. The financial-statement and internal-control audit opinions were unqualified.
Important facts for investors to verify
- How much of FY2015 EPS growth reflects recurring operations versus the Japan remeasurement gain and tax benefits.
- Whether comparable-store sales, store expansion, and margins—especially in China/Asia Pacific and EMEA—meet FY2016 expectations.
- Exposure to coffee and dairy input prices, foreign exchange, and the company’s ability to pass cost increases through to customers.
- Liquidity and capital allocation against debt, operating lease obligations, planned capital spending, dividends, and share repurchases.
- Outcome and tax impact of the Netherlands state-aid matter, and completion of internal-control integration for Starbucks Japan.