Starbucks Corporation — Q2 FY2014 Form 10-Q
Reporting period: Quarter and first two quarters ended March 30, 2014; comparative periods ended March 31, 2013. Balance-sheet comparisons are with September 29, 2013. Amounts are in U.S. dollars.
Business context and results
Starbucks operates company-run and licensed stores and a consumer packaged goods, foodservice and other business. Management attributed quarterly growth to comparable-store sales, new stores and premium single-serve products.
| Metric | Q2 FY2014 | Q2 FY2013 | First two quarters FY2014 | First two quarters FY2013 |
|---|---|---|---|---|
| Net revenue | $3.874 billion | $3.550 billion | $8.113 billion | $7.343 billion |
| Operating income | $644.1 million | $544.1 million | $1.458 billion | $1.175 billion |
| Operating margin | 16.6% | 15.3% | 18.0% | 16.0% |
| Net earnings attributable to Starbucks | $427.0 million | $390.4 million | $967.6 million | $822.5 million |
| Diluted EPS | $0.56 | $0.51 | $1.26 | $1.08 |
Quarterly revenue rose 9.1%, operating income 18%, and diluted EPS 10%. The prior-year quarter's EPS included a $0.03 gain from the sale of the company’s Mexico joint-venture interest. Global comparable-store sales increased 6% in Q2, reflecting 3% transaction growth and 3% higher average ticket.
Segments and operating drivers
- Americas: Revenue increased 8% to $2.809 billion; operating margin rose 50 basis points to 21.6%. Comparable-store sales grew 6%. Lower commodity costs, primarily coffee, supported margin.
- EMEA: Revenue increased 13% to $309.9 million; operating margin increased 380 basis points to 5.7%. Management cited comparable-store sales growth, licensed-store expansion, sales leverage and cost management.
- China/Asia Pacific: Revenue increased 24% to $265.3 million; operating margin rose 80 basis points to 32.8%. Comparable-store sales increased 7%, driven by transactions.
- Channel Development: Revenue increased 10% to $370.4 million; operating margin increased 660 basis points to 34.4%, mainly on single-serve product sales, lower coffee costs and leverage.
Cash flow, balance sheet and capital
- For the first two quarters, operating cash flow was negative $983.5 million, versus $1.373 billion generated in the prior-year period. The primary cause was the $2.764 billion cash payment to Kraft related to the arbitration award; excluding the payment’s effect, management cited $1.8 billion of operating cash flow.
- Investing cash outflow was $549.0 million; financing cash inflow was $157.4 million. Capital expenditures were $503.6 million. Cash and cash equivalents declined $1.385 billion to $1.190 billion.
- At March 30, cash and short-term investments totaled about $1.490 billion, versus $3.234 billion at September 29, 2013. Current assets were $3.579 billion and current liabilities $2.734 billion.
- Long-term debt was $2.048 billion, up from $1.299 billion at fiscal year-end. Starbucks issued $750 million of senior notes in December 2013; no revolving-credit-facility borrowings were outstanding. The company reported compliance with debt covenants.
- Cash dividends declared were $0.26 per share for Q2. The company repurchased $301.2 million of shares during the first two quarters. Fiscal 2014 capital expenditures were forecast at approximately $1.2 billion.
Outlook, risks and unusual items
- Fiscal 2014 outlook called for mid-single-digit comparable-store sales growth, driven by new stores and continued Channel Development growth; about half of planned new stores were expected in China/Asia Pacific. Management projected full-year operating-margin improvement of 175–200 basis points over fiscal 2013 and strong EPS growth, excluding the fiscal 2013 Kraft charge and gains on sales of interests in Mexico, Chile and Argentina joint ventures.
- Management expected continued U.S. La Boulange bakery rollout and lunch enhancements, disciplined EMEA licensed-store expansion, further China/Asia Pacific store openings, and growth in premium single-serve products. EMEA’s longer-term objective was a mid-teens operating margin.
- The Kraft arbitration payment was made in Q1 FY2014. A $20.2 million litigation credit in the first two quarters reflected a reduction in estimated prejudgment interest; the prior-year comparative period had no such credit. Management said other ordinary-course legal proceedings were not expected to materially adversely affect financial position, results or cash flows.
- Key disclosed risks include coffee, dairy and other commodity prices and availability; foreign-exchange and economic movements; competition; execution of initiatives; and legal proceedings. The company said risk factors were not materially changed from its FY2013 Form 10-K.
- Cash flows are seasonal, with holiday Starbucks Card loadings contributing to stronger first-quarter operating cash flows. Approximately $1.1 billion of cash and investments was held in foreign subsidiaries; repatriation could trigger additional U.S. taxes, potentially material. Management stated existing resources and expected cash flows should fund operations and shareholder distributions for the foreseeable future.
- The company corrected an immaterial prior-period classification error, moving certain foodservice fees from other operating expenses to revenue; management stated there was no impact on operating income or net earnings.
Investor verification priorities
- Assess the cash-flow and liquidity effects of the Kraft payment and the decline in cash and short-term investments.
- Compare the FY2014 margin and EPS outlook with subsequent reported results, noting the stated exclusions for FY2013 unusual items.
- Track coffee and other commodity costs, comparable-store sales, and margin trends across segments, especially the China/Asia Pacific store-portfolio shift.
- Review debt maturities, interest costs, capital spending, dividends and share repurchases against cash generation.
- Check subsequent disclosures for developments in legal matters, foreign-cash repatriation, and material changes to risks or guidance.