Starbucks Corporation — Form 10-Q Summary
Business context and reporting period: Fiscal 2014 third quarter ended June 29, 2014; year-to-date figures cover the three quarters ended that date. Comparatives are the quarter and three quarters ended June 30, 2013. Starbucks reported growth across its retail, licensed-store and Channel Development businesses.
Key financial results
| Metric | Q3 FY2014 | Q3 FY2013 | Three quarters FY2014 | Three quarters FY2013 |
|---|---|---|---|---|
| Net revenue | $4,153.7 million | $3,735.3 million | $12,267.1 million | $11,078.1 million |
| Operating income | $768.5 million | $615.2 million | $2,226.3 million | $1,789.9 million |
| Operating margin | 18.5% | 16.5% | 18.1% | 16.2% |
| Net earnings attributable to Starbucks | $512.6 million | $417.8 million | $1,480.3 million | $1,240.3 million |
| Diluted EPS | $0.67 | $0.55 | $1.94 | $1.63 |
| Cash dividends declared per share | $0.26 | $0.21 | $0.78 | $0.63 |
- Q3 revenue rose 11.2%; operating income rose 25%; diluted EPS increased 22%. Global comparable-store sales grew 6%, from a 2% increase in transactions and 4% increase in average ticket.
- Q3 operating margin expanded 200 basis points, primarily from sales leverage and lower commodity costs, mainly coffee. Year-to-date revenue increased 10.7% and operating margin expanded 190 basis points.
- Segment Q3 revenue and operating margin: Americas, $3.06 billion and 23.8%; EMEA, $323.5 million and 9.0%; China/Asia Pacific, $287.6 million and 35.0%; Channel Development, $375.3 million and 37.1%. China/Asia Pacific margin fell 120 basis points, while EMEA and Channel Development margins rose 580 and 800 basis points, respectively.
- Cash and cash equivalents were $1.02 billion at June 29, down from $2.58 billion at fiscal year-end; cash and investments totaled $2.0 billion, versus $3.3 billion. Current assets were $3.36 billion and current liabilities $2.88 billion.
- Long-term debt was $2.05 billion, up from $1.30 billion at fiscal year-end, following issuance of $750 million in senior notes. The company had no borrowings under its $750 million revolving credit facility and was in compliance with debt covenants.
- Year-to-date operating cash flow was negative $133.4 million, compared with positive $2.04 billion in the prior-year period. The main cause was the $2.76 billion cash payment to Kraft; management cited $2.6 billion of operating cash generated before the effect of that payment. Investing cash outflow was $1.12 billion; financing cash outflow was $295.7 million.
Material changes and unusual items
- Starbucks paid the Kraft arbitration award and related interest and fees in Q1 FY2014, extinguishing the $2.784 billion liability accrued in fiscal 2013. A $20.2 million credit reflected lower estimated prejudgment interest due to earlier payment. The payment materially reduced operating cash flow and cash balances.
- The company issued $400 million of 0.875% notes due 2016 and $350 million of 2.000% notes due 2018. Interest expense increased year over year, partly due to new debt.
- Q3 effective tax rate was 33.6%, versus 31.8% a year earlier; the filing attributes the increase primarily to the absence of prior-year tax-reserve benefits. Year-to-date rate was 33.8%, versus 31.9%.
- Starbucks corrected an immaterial prior-period classification error, moving certain foodservice fees from other operating expenses to revenue. The correction did not affect operating income or net earnings.
- At quarter-end, the company had 20,863 stores and had opened 1,096 net stores in the first three quarters. It repurchased $595.2 million of stock year to date and paid $587.8 million in dividends.
Outlook, risks and contingencies
- FY2014 outlook called for mid-single-digit comparable-store sales growth, continued Channel Development growth, 200 basis points of consolidated operating-margin improvement versus FY2013, and strong EPS growth after specified unusual prior- and current-year items. Capital expenditures were expected to be approximately $1.2 billion.
- FY2015 outlook called for mid-single-digit comparable-store sales growth, approximately 1,600 net new stores, and EPS growth over FY2014. About half of planned store openings were expected in China/Asia Pacific, with most of the remainder in the Americas.
- Management described continued investment in product innovation, food and beverage offerings, international expansion and emerging businesses. It expected EMEA improvement from disciplined licensed-store growth and aims to make China its largest market outside the U.S.
- Key stated risks include volatility and availability of coffee, dairy and other commodities; foreign-exchange movements; execution of initiatives; economic conditions; competition; and legal proceedings. Management said risk factors were not materially changed from the prior annual report.
- The planned sale of Australian company-operated store assets to the Withers Group remained conditional on obtaining a minimum number of lease consents; if completed, the expected loss was not material. A July 2014 agreement to sell Starbucks’ 50% Malaysian joint-venture interest for $88 million was subject to closing conditions and was expected to produce a gain.
- Management said cash flows and existing cash and short-term investments should fund foreseeable operating needs and shareholder distributions. Approximately $1.3 billion of cash and investments were held in foreign subsidiaries; repatriation could result in additional U.S. taxes.
Investor verification points
- Track whether comparable-store sales, transaction growth and margins persist, especially the China/Asia Pacific margin decline and EMEA recovery.
- Assess operating cash generation and liquidity after the Kraft payment, alongside planned capital expenditures, dividends and share repurchases.
- Review debt service and interest costs following the $750 million note issuance and the company’s available credit and commercial-paper capacity.
- Verify delivery against FY2014 and FY2015 outlook, including store openings, margin targets and the expected Malaysian and Australian transactions.
- Monitor commodity and currency exposures, including the company’s coffee purchase commitments and hedging activity.