Starbucks Corporation — Q1 FY2023 Form 10-Q
Reporting period: Quarter ended January 1, 2023; comparison is with the quarter ended January 2, 2022. Amounts are in U.S. dollars. Starbucks operated more than 36,100 company-operated and licensed stores across 84 markets.
Financial performance
| Metric | Q1 FY2023 | Prior-year quarter | Change |
|---|---|---|---|
| Net revenues | $8.714 billion | $8.050 billion | +8.2% |
| Operating income | $1.253 billion | $1.178 billion | +6.4% |
| Operating margin | 14.4% | 14.6% | -20 basis points |
| Net earnings attributable to Starbucks | $855 million | $816 million | +4.8% |
| Diluted EPS | $0.74 | $0.69 | +7.2% |
| Operating cash flow | $1.593 billion | $1.871 billion | -14.8% |
| Capital expenditures | $517 million | $417 million | +$100 million |
Revenue growth reflected stronger U.S. sales and licensed-store revenue, partly offset by China disruptions and unfavorable currency translation. Company-operated store revenue rose 5.4%; licensed-store revenue rose 31.6%. Global comparable-store sales increased 5%: U.S. comparables rose 10%, while China declined 29%. The International segment’s comparables declined 13%.
Product and distribution costs rose to 32.2% of revenue from 31.4%, mainly from inflation-driven supply-chain costs. Store operating expenses were 42.1% of revenue versus 42.2%; however, as a share of company-operated store revenue they rose to 51.7% from 50.6%, reflecting wage, benefit and training investments. Net earnings margin was 9.8%, compared with 10.1%.
Financial position and liquidity
- Cash and cash equivalents were $3.187 billion; short-term investments were $124 million. Management reported total cash and investments of $3.6 billion, including long-term investments.
- Total debt carrying value was approximately $14.926 billion, including $1.749 billion current and $13.177 billion long-term. No commercial-paper or revolving-credit-facility borrowings were outstanding at quarter-end; $3.0 billion of revolving capacity was available. The company reported compliance with applicable debt covenants.
- Current assets were $6.935 billion and current liabilities $9.246 billion. Shareholders’ deficit was $8.674 billion, reflecting a longstanding deficit position.
- Cash dividends paid were $608 million and share repurchases were $191 million. The company resumed repurchases during the quarter; 50.6 million shares remained authorized for repurchase.
Segments and material changes
- North America: Revenue increased 14% to $6.551 billion; operating margin declined 40 basis points to 18.5%. Comparable sales rose 10%, with a 9% increase in average ticket and 1% transaction growth. Pricing and sales leverage partly offset labor and inflation costs.
- International: Revenue declined 10% to $1.680 billion; operating margin declined 170 basis points to 14.3%. China’s pandemic-related mobility constraints and store closures weighed on results; foreign currency translation also reduced revenue.
- Channel Development: Revenue increased 15% to $478 million and operating margin rose 340 basis points to 47.3%, primarily reflecting Global Coffee Alliance and ready-to-drink growth and higher equity income.
- Consolidated operating income increased, but margin fell as labor investments, inflation and China sales deleverage outweighed pricing and sales leverage elsewhere. Interest expense rose $14 million to $130 million, partly due to higher rates on floating-rate debt and additional debt issued in February 2022.
Outlook, risks and unusual items
Management expected continued, though moderating, inflation and further COVID-related disruption in China, while anticipating improved financial performance in the second half of FY2023 from sales leverage, pricing, Reinvention-related productivity gains and China recovery. This is qualitative outlook, not quantified full-year earnings guidance. FY2023 capital expenditures were expected to be approximately $2.5 billion. Management stated available cash, operating cash flows and borrowing capacity should cover capital needs and shareholder distributions for at least the next 12 months.
Key risks cited include China pandemic conditions, inflation and commodity availability/prices—particularly coffee and dairy—labor costs and organizing activity, foreign exchange, consumer demand, competition, technology and cybersecurity, and execution of strategic initiatives. Operating cash flow was lower year over year, while capital spending increased.
After quarter-end, Starbucks finalized the sale of Seattle’s Best Coffee to Nestlé on January 13, 2023 and expected to recognize an approximately $90 million pretax gain in Q2 FY2023. The quarter included an immaterial Reinvention Plan restructuring charge. In the California Proposition 65 coffee-warning litigation, the plaintiff petitioned the state Supreme Court for review; Starbucks recorded no loss contingency and said a material loss was less than reasonably possible. Management reported effective disclosure controls and no material change in risk factors from its latest Form 10-K.
Important facts for investors to verify
- Whether China traffic and comparable sales recover, and how much that affects International revenue and margins.
- Whether wage, benefit, training and supply-chain costs moderate enough for pricing and Reinvention productivity to support margin recovery.
- Whether operating cash flow and planned $2.5 billion capital spending support dividends and discretionary repurchases without additional borrowing.
- The timing and realized Q2 impact of the Seattle’s Best Coffee sale gain, and the company’s progress against its qualitative second-half outlook.