Starbucks Corporation — Q1 Fiscal 2013 Form 10-Q
Business context and period: The quarter ended December 30, 2012; comparisons are with the quarter ended January 1, 2012. Starbucks operates company-managed and licensed stores and has a Channel Development business. Management cautions that first-quarter results are seasonal and are not necessarily indicative of full-year results.
Key financial results
| Metric | Q1 FY2013 | Prior-year quarter | Change |
|---|---|---|---|
| Net revenue | $3.800 billion | $3.436 billion | +10.6% |
| Operating income | $630.6 million | $556.0 million | +16.6% |
| Operating margin | 16.6% | 16.2% | +40 basis points |
| Net earnings attributable to Starbucks | $432.2 million | $382.1 million | +13.1% |
| Diluted EPS | $0.57 | $0.50 | +14% |
| Operating cash flow | $1.067 billion | $466.3 million | More than doubled |
Revenue growth reflected 6% global comparable-store sales growth, new stores, and Channel Development expansion. Comparable sales were up 7% in Americas and 11% in China/Asia Pacific, but down 1% in EMEA. Cost of sales improved as a share of revenue, primarily from lower coffee-related costs; operating income also benefited from higher equity-method investee income. Net earnings included a lower effective tax rate of 30.4%, versus 33.0% in the prior-year quarter.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $1.852 billion and short-term investments were $607.6 million at quarter-end, totaling about $2.460 billion; long-term investments were another $80.0 million.
- Current assets were $4.416 billion and current liabilities were $2.391 billion. Long-term debt was $549.6 million, consisting of $550 million of 6.25% senior notes. No borrowings were outstanding under the $500 million unsecured credit facility; the company reported compliance with its covenants.
- Operating cash flow was $1.067 billion; investing activities provided $28.7 million and financing activities used $434.0 million. The operating cash-flow increase was primarily attributed to working-capital movements, including lower inventory and increased deferred revenue.
- Capital expenditures were $242.3 million. Starbucks repurchased $392.7 million of shares and paid $156.1 million in dividends. The declared quarterly dividend was $0.21 per share.
Material changes and management commentary
- Americas revenue increased 10%; operating margin fell 50 basis points to 20.8%, with leadership-conference, litigation, and Superstorm Sandy costs partly offset by sales leverage. Management cited a 190-basis-point Sandy impact on Americas operating margin.
- EMEA revenue rose 1% and operating margin improved 110 basis points to 7.3%, reflecting store portfolio changes, licensed-store growth, and cost efficiencies. Management said its goal remained a mid-teens operating margin, while noting the turnaround would take time.
- China/Asia Pacific revenue rose 28%, while operating margin declined 60 basis points to 33.7%, in part because of company-operated store expansion costs.
- Channel Development revenue rose 13% and operating margin increased 230 basis points to 25.5%, supported by K-Cup sales and improved inventory management; Verismo launched during the quarter.
- The company changed the allocation of certain general and administrative and depreciation expenses among segments. Prior-period segment data was revised; consolidated results were unchanged.
Outlook, risks, and contingencies
For fiscal 2013, management expected moderate revenue growth, mid-single-digit comparable-store sales growth, continued robust consolidated operating-margin and EPS improvement versus fiscal 2012, and higher capital expenditures. Licensed stores were expected to represent between one-half and two-thirds of new store openings. Fiscal-year capital expenditures were forecast at approximately $1.2 billion. Management said cash, investments, and expected operating cash flows should fund business needs and shareholder distributions for the foreseeable future.
Key risks include volatility and availability of coffee, dairy, and other commodities; foreign currency movements; execution of growth initiatives; and economic conditions. Starbucks was in arbitration with Kraft over termination of a distribution agreement. Kraft claimed up to $2.9 billion plus attorney fees; Starbucks said an unfavorable outcome was reasonably possible but not probable, could not reasonably estimate a possible loss, and recorded no loss contingency. An arbitration decision was expected in the first half of fiscal 2013.
Subsequent to quarter-end, Starbucks acquired Teavana for approximately $630 million in cash; purchase accounting was still in process. The company reported no material changes to previously disclosed risk factors and concluded disclosure controls were effective.
Investor facts to verify
- Whether comparable-store sales and margin trends continued, particularly in EMEA and China/Asia Pacific.
- Actual fiscal 2013 capital expenditures and progress toward the stated revenue, margin, and EPS outlook.
- The Kraft arbitration outcome and any resulting cash, earnings, or disclosure impact.
- Teavana’s final purchase accounting, integration costs, and contribution to results.
- Whether operating cash flow remains strong after seasonal holiday card loads and working-capital effects normalize.