STARBUCKS CORP annual report, FY2020

Business context and reporting period

Starbucks Corporation’s Form 10-K covers the 52-week fiscal year ended September 27, 2020. Starbucks operates in 83 markets through company-operated and licensed stores and consumer-product channels. It reported three segments: Americas, International and Channel Development. Fiscal 2020 results were heavily affected by COVID-19 disruptions.

Financial performance and liquidity

• Consolidated comparable-store sales fell 14%, reflecting a 22% transaction decline partly offset by a 10% increase in average ticket.
• Americas revenue was $16.38 billion and operating margin 11.1%; International revenue was $5.15 billion and operating margin 6.9%. Channel Development revenue was $1.93 billion, down 3%, while its operating margin rose to 35.7%.
• Cash and cash equivalents were $4.35 billion; total cash and investments were approximately $4.8 billion. Current assets were $7.81 billion and current liabilities $7.35 billion.
• Long-term debt, including current portion, was $15.91 billion; short-term debt was $439 million. Shareholders’ deficit was $7.81 billion. Operating lease liabilities totaled approximately $8.91 billion.
• Starbucks paid $1.92 billion in dividends and repurchased $1.70 billion of shares during fiscal 2020. Repurchases were suspended in March.

Material changes versus the prior year

• Revenue declined 11%, operating income fell 62%, and diluted EPS declined 73%. Operating margin contracted 880 basis points, mainly from sales deleverage, COVID-related partner pay and other costs, restructuring, and impairment charges.
• Fiscal 2020 net earnings also reflect the absence of the $623 million divestiture gain recorded in fiscal 2019. Fiscal 2019 cash flow included different timing of tax payments and refunds, affecting the year-over-year comparison.
• Operating cash flow fell 68% to $1.60 billion, primarily due to store closures and modified operations, a U.S. federal tax payment related to the Nestlé transaction, and tax-payment timing.
• Fiscal 2020 included $278.7 million of restructuring and impairment expense and approximately $50 million of COVID-related inventory write-offs. Qualified government payroll credits reduced store operating expenses by $349.6 million.
• Adoption of the new lease accounting standard materially increased reported assets and liabilities; prior-year balance-sheet amounts were not restated.

Outlook, management commentary, risks and contingencies

• Management reported sequential comparable-sales improvement as stores reopened; by fiscal year-end, nearly all company-operated and licensed stores were open. China was approaching comparable-sales recovery, while U.S. sales and profitability showed upward momentum. These expectations depend on the course of the pandemic and economic conditions.
• Starbucks planned to close approximately 800 U.S. and Canadian stores over 18 months, including approximately 100 closed in the fourth quarter. It had identified 405 stores for closure by year-end and estimated future restructuring costs of $260 million to $400 million.
• Fiscal 2021 capital expenditures were expected to be approximately $1.9 billion. Management expected share repurchases to remain suspended through fiscal 2021 and stated it did not expect to reduce the quarterly dividend because of COVID-19.
• Channel Development revenue was expected to be lower in fiscal 2021 as single-serve coffee shifted to a more royalty-based model; management expected no material earnings impact and an accretive segment-margin effect.
• Key risks include further COVID-19 disruption or relapses, consumer traffic and spending weakness, labor and occupancy costs, coffee and other commodity prices, supply-chain interruptions, competition, and reliance on licensees and Nestlé. China performance, foreign exchange, cybersecurity and privacy, and food safety are also significant risks.
• Potential store impairments and restructuring costs depend on recovery assumptions and final closure decisions. The filing also discloses tax uncertainties, including $123.7 million in gross unrecognized tax benefits. In a California Proposition 65 coffee-warning lawsuit, the court granted defendants summary judgment; the plaintiff had not filed a notice of appeal as of the report.
• The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting.

Important facts for investors to verify

• Whether sales, traffic and operating margins continue recovering, especially in the Americas and China.
• Actual store closures, related restructuring charges, and whether targeted store formats improve returns.
• Cash generation, debt maturities and interest costs, liquidity, and the company’s ability to sustain dividends while repurchases remain paused.
• Delivery of fiscal 2021 capital-spending plans and the financial effect of the Channel Development business-model transition.
• Exposure to COVID-19 developments, commodity and labor costs, licensee health, and potential tax or legal outcomes.