Starbucks Corporation — Q1 Fiscal 2012 Form 10-Q
Reporting period: Quarter ended January 1, 2012; comparable quarter ended January 2, 2011. Amounts are in millions except per-share data. The company notes that quarterly results are not necessarily indicative of full-year results.
Business context and results
Starbucks operates company-managed and licensed stores and consumer-products businesses. Management attributed growth to comparable-store sales, new stores, branded K-Cup products, and the transition to direct distribution of packaged coffee and tea. The company opened 241 net stores during the quarter and reported 17,244 stores at period end.
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Net revenues | $3,435.9 | $2,950.8 | +16.4% |
| Operating income | $556.0 | $501.9 | +10.8% based on reported amounts |
| Net earnings attributable to Starbucks | $382.1 | $346.6 | +11.1% |
| Diluted EPS | $0.50 | $0.45 | +11.1% |
| Operating margin | 16.2% | 17.0% | Down 0.8 percentage points |
| Net margin | 11.1% | 11.7% | Down approximately 0.6 percentage points |
| Operating cash flow | $466.3 | $673.6 | Down $207.3 |
The MD&A separately states operating income increased 16.2%, which does not reconcile with the reported amounts of $556.0 and $501.9; those amounts imply growth of approximately 10.8%. Investors should verify the source figures and percentage.
Revenue, margins, cash flow, debt and liquidity
- Company-operated store revenue rose 11.4% to $2,731.8; licensed-store revenue rose 20.6% to $306.6; CPG, foodservice and other revenue rose 62.0% to $397.5. The CPG segment specifically reported 72% revenue growth.
- Global comparable-store sales increased 9%, comprising 7% transaction growth and 2% higher average ticket. Americas comps rose 9%, EMEA 2%, and China/Asia Pacific 20%.
- Cost of sales including occupancy increased to 43.5% of revenue from 40.4%. Management said higher commodity costs, primarily coffee, reduced operating income by approximately $105 and operating margin by approximately 300 basis points. Sales leverage and other expense movements partly offset the pressure.
- Cash provided by operations was $466.3, with management citing higher inventory and increased payments of accounts payable as principal reasons for the year-over-year decline. Capital expenditures were $153.5. Cash and cash equivalents ended at $1,569.6, up from $1,148.1 at fiscal year-end.
- Cash plus short-term investments totaled approximately $2,273.2. Current assets were $4,237.1 and current liabilities $2,158.8. Long-term debt was $549.5; the company also had a $500 credit facility and reported compliance with its debt covenants.
- Cash dividends declared were $0.17 per share, compared with $0.13 a year earlier. The company repurchased $15.7 of stock during the quarter.
Material changes and segment performance
- Management reorganized reporting into Americas, EMEA, China/Asia Pacific, CPG, and Other; prior-period segment information was recast. A change in corporate cost allocations did not affect consolidated operating income or net earnings.
- Americas revenue increased 11%; operating margin declined approximately 80 basis points, principally reflecting coffee costs.
- EMEA revenue increased 17%, including the consolidation of Switzerland and Austria operations. Management said revenue and operating margin were below expectations; the segment’s operating margin declined approximately 320 basis points.
- China/Asia Pacific revenue increased 38%, supported by store growth and 20% comparable-store sales; operating margin declined approximately 350 basis points, including costs of expansion.
- CPG revenue increased 72%, largely from K-Cup sales and direct distribution. Its operating margin declined approximately 1,270 basis points, primarily due to higher commodity costs and the mix and economics of the expanded business.
- Starbucks acquired Evolution Fresh, a super-premium juice company, for $30 in cash; $18 of the acquired net assets was goodwill.
Outlook, risks and unusual items
- For fiscal 2012, management expected mid-single-digit comparable-store sales growth, net new stores, and strong CPG growth; it forecast modest consolidated operating-margin and EPS improvement versus fiscal 2011.
- Management expected fiscal 2012 capital expenditures of approximately $800–$900, above fiscal 2011, for store renovations and manufacturing capacity. It noted higher commodity costs and spending to expand CPG direct distribution as offsets to growth.
- The Kraft distribution-agreement dispute was in binding arbitration, with trial expected in mid-2012. Starbucks said it could not estimate the range of outcomes and acknowledged a possible material adverse outcome. Kraft’s asserted damages were not provided; the filing says the previously publicized $750 offer is not an appropriate estimate of potential arbitration exposure.
- Commodity prices and availability, especially coffee and dairy, foreign exchange, execution of growth initiatives, economic conditions, competition, and legal proceedings were identified as risks. Management reported no material change to previously disclosed risk factors or market risks.
- The company reported effective disclosure controls. It had begun implementing Hyperion financial systems and was updating related processes and internal controls.
Important facts for investors to verify
- Reconcile the MD&A’s stated 16.2% operating-income growth with the reported income figures, which imply approximately 10.8% growth.
- Monitor commodity-cost effects on gross margin and whether planned pricing, sales leverage, or hedging offsets them.
- Track CPG profitability and the sustainability of growth from K-Cups and the direct-distribution transition.
- Follow the Kraft arbitration, including any damages information, claims, and potential financial exposure; the filing provides no estimable range.
- Assess delivery of the modest full-year margin and EPS improvement outlook alongside planned $800–$900 capital spending and international expansion.