Starbucks Corporation — Q1 Fiscal 2022 10-Q
Reporting period: Quarter ended January 2, 2022; compared with the quarter ended December 27, 2020. Starbucks operated in 84 markets and had 34,317 company-operated and licensed stores, up 4% year over year.
Financial performance
- Revenue: $8.05 billion, up 19.3% from $6.75 billion. Company-operated store revenue rose 17.4%; licensed store revenue rose 38.6%.
- Comparable sales: Global comparable store sales increased 13%, driven by transactions up 10% and average ticket up 3%. North America comps rose 18%; International comps declined 3%, including a 14% decline in China.
- Profitability: Operating income was $1.18 billion, up 29%; operating margin expanded to 14.6% from 13.5%. Net earnings attributable to Starbucks were $816 million, up 31%; diluted EPS was $0.69 versus $0.53. Net margin was 10.1% versus 9.2%.
- Costs: Product and distribution costs rose to 31.4% of revenue from 30.4%, largely reflecting inflationary supply-chain costs and product mix, partly offset by North American pricing. Wage, benefit, training, and support investments pressured store costs. Lower restructuring charges and sales leverage supported margin expansion.
- Cash flow: Operating cash flow was $1.87 billion versus $1.84 billion. Capital expenditures were $417 million, and investing activities used $401 million. Financing activities used $3.97 billion, including $3.52 billion of share repurchases and $576 million of dividends paid. Cash and cash equivalents ended at $3.97 billion, down from $6.46 billion at fiscal year-end.
- Liquidity and debt: Cash and investments totaled $4.4 billion. Current assets were $7.26 billion versus current liabilities of $8.92 billion. Debt included $200 million of commercial paper, $999 million current long-term debt, and $13.59 billion long-term debt. The company had $2.8 billion of contractual borrowing capacity for general corporate purposes, no revolver borrowings, and reported compliance with applicable covenants.
- Capital allocation and equity: Starbucks repurchased 31.1 million shares for $3.5 billion and declared a quarterly dividend of $0.49 per share. Total shareholders’ deficit increased to $8.46 billion from $5.32 billion, largely reflecting repurchases and dividends.
Material changes and segment results
- Revenue growth reflected stronger U.S. holiday sales and recovery versus the pandemic-affected comparison period, store growth, higher licensee sales, and Korea’s conversion from a joint venture to a licensed market.
- North America revenue increased 23% and operating margin rose to 18.9% from 17.2%, with pricing, sales leverage, and lower restructuring costs partly offset by inflation and labor investments.
- International revenue increased 12%, but operating margin fell to 16.0% from 16.8%. China restrictions weighed on sales; comparable sales there declined 14%.
- Channel Development revenue increased 12%, while operating margin declined to 43.9% from 48.7%, primarily due to lower North American Coffee Partnership joint-venture income and mix shifts.
- The prior-year quarter included $72 million of restructuring and impairment expense; the current quarter recorded a $7.5 million net benefit in that line, with no material restructuring charges.
Outlook, risks, and contingencies
- Management expressed confidence in its long-term growth model, citing store growth, comparable sales, digital capabilities, contactless service, and beverage innovation. It did not provide a specific full-year revenue or earnings forecast in the supplied filing text.
- Fiscal 2022 capital expenditures were expected to be approximately $2.0 billion. Management said operating margin would remain under pressure from inflation, labor-market conditions, and pandemic-related partner pay and benefits; pricing and operational improvements were identified as potential mitigations.
- Omicron-related restrictions affected North America and International markets, particularly China, while staffing shortages increased costs. Other cited risks included labor availability and wage inflation, union-organizing activity, commodity prices and availability, logistics costs, foreign exchange, competition, and disruption to operations.
- Starbucks disputed claims in California Proposition 65 coffee-warning litigation. An adverse material loss was assessed as less than reasonably possible, and no loss contingency was recorded. Management reported no other legal proceeding expected to have a material adverse effect.
- Government subsidies reduced current-quarter store operating expenses by $11.5 million; prior-year qualified credits reduced them by $19.8 million.
Important facts for investors to verify
- Whether comparable-sales momentum, especially in North America, persists as pandemic comparisons and operating restrictions change.
- Whether pricing and operating improvements offset inflation, supply-chain costs, wage increases, and labor shortages without weakening demand or margins.
- China’s recovery and the effect of pandemic restrictions on International sales and margins.
- Cash and liquidity trends after substantial repurchases and dividends, upcoming debt maturities, and continued covenant compliance.
- Whether the approximately $2.0 billion fiscal 2022 capital expenditure outlook and management’s long-term growth expectations remain current.
- Potential outcomes of the California litigation and developments in union-organizing activity and related labor costs.