Business context and reporting period
Starbucks Corporation’s unaudited Form 10-Q covers the quarter and first two quarters of fiscal 2019, ended March 31, 2019; comparatives ended April 1, 2018. Starbucks operated in 78 markets and had 30,184 stores at quarter-end, up 7% year over year. Global comparable-store sales grew 3% in the quarter, with transactions flat and average ticket up 3%.
Financial performance
Amounts are in U.S. dollars. Quarter refers to the three months ended March 31; year to date (YTD) refers to the first two fiscal quarters.
| Metric | Quarter 2019 | Quarter 2018 | YTD 2019 | YTD 2018 |
|---|---|---|---|---|
| Revenue | $6.306 billion | $6.032 billion | $12.939 billion | $12.106 billion |
| Operating income | $857.7 million | $772.5 million | $1.873 billion | $1.889 billion |
| Operating margin | 13.6% | 12.8% | 14.5% | 15.6% |
| Net earnings attributable to Starbucks | $663.2 million | $660.1 million | $1.424 billion | $2.910 billion |
| Diluted EPS | $0.53 | $0.47 | $1.14 | $2.05 |
| Operating cash flow | Not separately reported for the quarter | $2.769 billion | $2.289 billion | |
| Capital expenditures | Not separately reported for the quarter | $845.6 million | $896.7 million |
Quarter revenue rose 4.5%; company-operated store revenue increased 6.9%, licensed-store revenue 8.4%, while other revenue fell 18.9%, mainly following the Nestlé licensing of consumer-packaged-goods and foodservice businesses. Cost of sales was 41.3% of revenue, down from 41.7% for the quarter. Store operating costs increased to 30.9% of revenue from 29.7%, reflecting wage, benefit and partner investments. Quarter operating margin improved 80 basis points. YTD operating margin fell 110 basis points.
Quarter net earnings were nearly unchanged year over year, while diluted EPS increased, supported in part by a lower weighted-average share count after substantial repurchases. YTD earnings were down sharply, largely because the prior-year period included a $1.374 billion gain on acquiring the remaining East China joint-venture interest and significant divestiture gains.
Liquidity, debt and capital returns
At March 31, 2019, cash and cash equivalents were $2.055 billion and total cash and investments were approximately $2.4 billion, down from $9.2 billion at September 30, 2018. Current assets were $4.952 billion against current liabilities of $5.273 billion. Long-term debt was $9.142 billion, with $75 million of commercial paper outstanding; total debt carrying value was approximately $9.217 billion. The company reported a shareholders’ deficit of $5.037 billion.
YTD financing cash outflow was $8.778 billion, including $7.828 billion of share repurchases and $894.5 million of dividends paid. The company repurchased 109.3 million shares for $7.7 billion YTD and entered into a further $2 billion accelerated repurchase agreement, with final settlement expected by June 2019. Management expected fiscal 2019 capital expenditures of approximately $2.0 billion and said it would likely incur additional debt within targeted levels to fund capital programs and shareholder returns. It stated that operating cash flows, existing cash and investments, and borrowing capacity should be sufficient for foreseeable requirements.
Material changes, outlook and risks
- Starbucks sold its France and Netherlands company-operated retail businesses during the quarter, converting those markets to fully licensed operations. It also described continued restructuring and store closures; expected total lease exit costs were approximately $202.5 million.
- Fiscal 2019 adoption of revised stored-value-card breakage accounting moved breakage recognition into store revenue as redemptions occur. The company reported no material impact on the period’s results overall. A separate tax-accounting adoption increased deferred tax assets and opening retained earnings; revenue-accounting adoption also adjusted opening retained earnings.
- The approximately $7 billion Nestlé upfront payment remains deferred revenue and is recognized over an estimated 40-year arrangement. This alliance is expected to continue weighing on reported Channel Development revenue through fiscal 2019.
- No specific full-year earnings or revenue guidance is provided in the supplied filing text. Management cited store openings, comparable sales and margin management as growth drivers; global comparable-store sales were up 3% in the quarter. Fiscal second quarter typically has lower revenue and operating income, and results for an interim period may not indicate full-year results.
- Key stated exposures include coffee, dairy and other commodity prices and availability; foreign-exchange and economic fluctuations; competition and consumer acceptance; execution of initiatives and the East China integration; information-technology risks; and legal proceedings. Management reported no material changes to previously disclosed risk factors.
- In California Proposition 65 litigation concerning acrylamide warnings for coffee, Starbucks disputed the claims; a damages-phase trial was stayed. The company assessed a loss as reasonably possible rather than probable, recorded no loss contingency, and said the outcome and financial impact could not be predicted.
Most important facts for investors to verify
- How much reported revenue and comparable-store growth reflect underlying demand versus new stores, pricing, foreign exchange, licensing conversions and accounting changes.
- Whether higher store-level labor and partner investments can be offset by cost savings and sales leverage, particularly given the YTD margin decline.
- The sustainability of cash generation and liquidity after large repurchases, dividends and planned capital spending; also monitor debt, interest expense and future borrowing.
- Completion and final share count/cost of the $2 billion accelerated repurchase agreement, alongside the pace of any further buybacks.
- Progress and economics of the Nestlé alliance, deferred-revenue recognition, and the continuing reduction in Channel Development revenue.
- Developments in the California coffee-warning litigation and exposures to commodity prices, currencies and other disclosed risks.