Business context and reporting period
Starbucks Corporation’s unaudited fiscal 2013 second-quarter Form 10-Q covers the quarter ended March 31, 2013, and the first two fiscal quarters (six months) compared with the corresponding prior-year periods. Starbucks operates company-operated and licensed stores and sells packaged products through its Channel Development business. Financial amounts below are in U.S. dollars.
Financial performance and position
| Metric | Quarter ended Mar. 31, 2013 | Prior-year quarter | Six months ended Mar. 31, 2013 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $3.556 billion | $3.196 billion | $7.355 billion | $6.632 billion |
| Operating income | $544.1 million | $430.4 million | $1.175 billion | $986.4 million |
| Operating margin | 15.3% | 13.5% | 16.0% | 14.9% |
| Net earnings attributable to Starbucks | $390.4 million | $309.9 million | $822.5 million | $691.9 million |
| Diluted EPS | $0.51 | $0.40 | $1.08 | $0.90 |
- Quarterly revenue rose 11.3%; comparable-store sales increased 6% globally, with transactions up 4% and average ticket up 2%. Quarterly operating income rose 26%, and diluted EPS rose 28%.
- Lower coffee costs and store-sales leverage helped improve consolidated operating margin by 180 basis points in the quarter. The effective tax rate was 33.6%, versus 32.1%.
- Six-month operating cash flow was $1.373 billion, compared with $575.6 million. Capital expenditures were $484.9 million, implying operating cash flow less capital expenditures of approximately $887.6 million. Investing cash outflow was $613.0 million; financing cash outflow was $718.5 million.
- Cash and cash equivalents were $1.223 billion at March 31; short-term investments were $474.5 million. Total current assets were $3.810 billion and current liabilities $2.270 billion. Long-term debt was $549.6 million; the company also reported $550 million of 6.25% senior notes.
- Six-month shareholder returns included $313.5 million of cash dividends and $588.1 million of share repurchases in the cash-flow statement. The board declared a quarterly dividend of $0.21 per share.
Material changes versus prior comparable periods
- Company-operated store revenue increased 11.4% for the quarter; licensed-store revenue increased 11.0%, and CPG, foodservice and other revenue increased 10.8%.
- Americas quarterly revenue grew 10%, with operating margin up to 21.1% from 18.9%. EMEA revenue was essentially flat, while the segment moved from a $7.0 million operating loss to $5.2 million of operating income. China/Asia Pacific revenue grew 22%, but operating income was nearly flat and margin contracted to 32.0% from 39.1%, reflecting investment and a greater company-operated store mix. Channel Development revenue grew 7% and operating margin rose to 27.4% from 24.7%.
- Operating cash flow increased substantially, primarily reflecting working-capital movements, including lower inventories. Investing outflow increased due mainly to the Teavana acquisition and higher capital spending; financing outflow increased mainly due to greater repurchases and dividends.
- Starbucks acquired Teavana on December 31, 2012, for $615.8 million in cash and separately paid $35.2 million of Teavana debt. Teavana contributed approximately $59 million of revenue in the quarter. The acquisition added $466.4 million of goodwill, which is not tax deductible.
Outlook, commentary, risks and unusual items
- For fiscal 2013, management expected revenue growth from mid-single-digit comparable-store sales growth, new store openings and Channel Development. Licensed stores were expected to represent one-half to two-thirds of new openings. Management expected consolidated operating margin and EPS to improve versus fiscal 2012 and projected capital expenditures of approximately $1.2 billion.
- Management cited continued Americas growth, ongoing EMEA turnaround efforts and rapid China/Asia Pacific expansion. EMEA’s longer-term aim was mid-teens operating margin. Management noted that CAP margin was pressured by growth investments and the shift toward company-operated stores.
- Quarterly net interest income and other included a $35.2 million gain on the sale of Starbucks’ interest in its Mexico joint venture; management said this added approximately $0.03 to EPS. Cash proceeds of $50.3 million were received in April. Prior-year results included approximately $29 million of income related to unredeemed gift cards that did not recur.
- The Kraft arbitration remained a significant contingency. Kraft claimed damages of up to $2.9 billion plus attorney fees; Starbucks said an unfavorable outcome was reasonably possible but not probable, disputed Kraft’s estimates, and could not reasonably estimate the possible loss. No loss contingency was recorded. A decision was expected in the second half of fiscal 2013.
- Key operating exposures include coffee and dairy prices and availability, foreign-currency movements, execution of growth initiatives and economic conditions. Starbucks had $352 million of fixed-price and an estimated $460 million of price-to-be-fixed green-coffee purchase commitments as of March 31.
- The company replaced its $500 million revolving credit facility with a $750 million facility maturing in February 2018; it reported compliance with applicable covenants. Management stated that available liquidity and expected cash flows were sufficient for foreseeable requirements, while noting potential additional U.S. taxes if foreign cash were repatriated.
Important facts for investors to verify
- How much of earnings growth reflects recurring store and Channel Development performance versus the $35.2 million Mexico joint-venture gain and other prior-year comparison items.
- Teavana’s post-acquisition sales, profitability, integration progress and the assumptions supporting its substantial, nondeductible goodwill balance.
- The outcome and potential financial exposure from the Kraft arbitration, including the timing of the decision.
- Whether CAP expansion can translate into improved margins, and whether EMEA’s turnaround and stated margin objective are achievable.
- The sustainability of operating cash flow after working-capital changes, alongside planned capital spending, dividends and share repurchases.