Starbucks Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018 (52 weeks). The filing is an annual report; selected fourth-quarter figures are noted below. Starbucks operated in 78 markets, with 29,324 company-operated and licensed stores at year-end.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net revenue | $24.72 billion | $22.39 billion |
| Operating income | $3.88 billion | $4.13 billion |
| Operating margin | 15.7% | 18.5% |
| Net earnings attributable to Starbucks | $4.52 billion | $2.88 billion |
| Diluted EPS | $3.24 | $1.97 |
| Cash from operating activities | $11.94 billion | $4.25 billion |
| Capital expenditures | $1.98 billion | $1.52 billion |
Global comparable-store sales increased 2%, driven by a 3% increase in average ticket; transactions declined 1%. Fiscal Q4 revenue was $6.30 billion, operating income $956.6 million, net earnings $755.8 million, and diluted EPS $0.56.
Year-end cash and cash equivalents were $8.76 billion; cash and investments totaled approximately $9.2 billion. Total debt, including current maturities, was $9.44 billion, versus $3.93 billion a year earlier. Current assets were $12.49 billion and current liabilities $5.68 billion. Shareholders’ equity fell to $1.17 billion from $5.45 billion. Operating cash flow and cash balances benefited substantially from Nestlé’s upfront payment.
Material changes versus prior year
- Revenue rose 10%, supported by store openings, 2% comparable sales growth, foreign exchange, and consolidating East China after acquiring the remaining 50% interest.
- Operating income fell 6% and operating margin contracted 280 basis points. Drivers included food and beverage mix, East China’s lower-margin consolidated model, higher restructuring and impairment charges, and increased digital, technology, and partner investments.
- Reported net earnings and EPS rose sharply, but FY2018 included a $1.38 billion non-taxable gain from remeasuring Starbucks’ existing East China interest and a $499 million net divestiture gain, principally including the Tazo sale and Taiwan joint-venture sale. The lower effective tax rate—21.8% versus 33.2%—also reflected the Tax Act and the non-taxable East China gain.
- Cash from operations increased to $11.94 billion, principally because of the approximately $7 billion Nestlé prepaid royalty. The payment is recorded as deferred revenue and recognized over an estimated 40-year arrangement life; $6.8 billion remained in long-term deferred revenue at year-end.
- Starbucks acquired the East China joint venture for approximately $1.44 billion cash, began consolidating its operations, and reported $903 million of East China revenue and $73 million of net earnings after acquisition. It also sold Tazo for $383.8 million and converted Brazil retail operations to a licensed model.
Outlook, risks, and unusual items
- For FY2019, management expected moderate revenue growth, approximately 2,100 net new stores, a slight decline in consolidated operating margin, and a slight increase in the effective tax rate. GAAP diluted EPS was expected to decrease, while non-GAAP diluted EPS was expected to grow after excluding specified prior-year gains and certain costs. Capital expenditures were forecast at approximately $2.0 billion.
- Management’s priorities were to accelerate growth in the U.S. and China, extend the brand through the Global Coffee Alliance, and increase shareholder returns. Planned initiatives included further market realignment and licensing in France, the Netherlands, Belgium, and Luxembourg.
- Shareholder returns were $8.9 billion in FY2018: $7.2 billion of repurchases and $1.7 billion of dividends. After year-end, Starbucks initiated a $5.0 billion accelerated share repurchase and announced authorization for an additional 120 million shares.
- Key risks include consumer discretionary spending and competition; dependence on the Americas and China; coffee, dairy, and other commodity price or supply volatility; foreign exchange and geopolitical exposure; food safety, data security, and technology outages; labor and operating costs; and reliance on Nestlé and other licensees. The company had $1.1 billion of green-coffee purchase commitments and $9.35 billion of operating lease obligations.
- A California Proposition 65 coffee-warning lawsuit remained unresolved. The company considered a loss reasonably possible rather than probable and recorded no contingency; the financial impact was not predictable. A proposed regulation clarifying that coffee warnings are not required was pending, and the damages phase had been stayed.
- Management and the auditor reported effective internal control over financial reporting, but East China—representing $3.1 billion of assets—was excluded from management’s FY2018 control evaluation while integration and testing proceeded.
Important facts for investors to verify
- Separate recurring operating performance from the East China remeasurement gain, divestiture gains, Tax Act effects, and Nestlé’s one-time prepaid royalty when assessing earnings and cash flow quality.
- Track comparable-store transactions, ticket, and operating margins, particularly in the Americas and China, and assess whether management’s FY2019 outlook was achieved.
- Review the impact of East China consolidation on profitability, integration, goodwill and acquired intangibles, as well as progress on internal-control testing.
- Monitor debt, interest expense, lease commitments, share repurchases, and dividends against cash generation excluding the Nestlé advance.
- Follow the California litigation and regulatory outcome, commodity costs and supply, and the performance of Nestlé and licensed-store partners.