Business context and reporting period
Starbucks Corporation’s unaudited fiscal 2015 first quarter ended December 28, 2014; comparisons are with the quarter ended December 29, 2013. The company reported growth across its segments. Results include Starbucks Japan from its October 31, 2014 acquisition date.
Financial results
| Metric | Q1 FY2015 | Prior-year quarter |
|---|---|---|
| Net revenue | $4.803 billion | $4.240 billion |
| Operating income | $915.5 million | $813.5 million |
| Operating margin | 19.1% | 19.2% |
| Net earnings attributable to Starbucks | $983.1 million | $540.7 million |
| Diluted EPS | $1.30 | $0.71 |
| Operating cash flow | $1.425 billion | $(1.402) billion |
Revenue rose 13%, driven by comparable-store sales growth, new stores, and Japan consolidation. Consolidated comparable-store sales increased 5%: transactions rose 2% and average ticket 3%. Operating income grew 13%, while margin edged down 10 basis points. The prior-year period included a $20.2 million litigation credit.
Net earnings included a $390.6 million pre-tax, largely non-taxable gain from remeasuring Starbucks’ pre-existing Japan investment upon obtaining control. Management said Japan acquisition effects and related transaction and integration costs together benefited reported EPS by $0.49. The effective tax rate was 24.2%, versus 34.0%.
Cash and cash equivalents were $1.857 billion at quarter-end; cash and investments totaled approximately $2.3 billion. Long-term debt was $2.048 billion. Current assets were $4.546 billion and current liabilities $3.558 billion. No amounts were outstanding under the $750 million revolving credit facility or commercial paper program; the company was in compliance with debt covenants. Cash dividends declared were $0.32 per share.
Material changes and segment performance
- Starbucks Japan: Starbucks acquired Sazaby’s 39.5% interest for $509 million, bringing its ownership to 79%. Japan contributed $192.8 million of revenue and $20.3 million of net earnings after the acquisition date. The next tender settlement occurred December 29, just after quarter-end; the company expected to acquire the remaining approximately 6.3% through a cash-out process during the first half of calendar 2015.
- Americas: Revenue grew 10% to $3.367 billion; comparable sales rose 5%. Operating margin expanded 50 basis points to 24.3%.
- EMEA: Revenue declined 2% to $333 million, including unfavorable currency effects. Comparable sales increased 4%; operating margin rose to 15.0% from 9.9%, aided by licensed-store mix and cost management.
- China/Asia Pacific: Revenue rose 86% to $496 million, largely reflecting Japan consolidation; comparable sales increased 8%. Operating margin fell to 21.8% from 30.4%, principally due to the change from equity-method accounting to consolidating Japan.
- Channel Development: Revenue grew 10% to $443 million and operating margin expanded to 35.6% from 29.6%, reflecting lower coffee costs and cost efficiencies.
Cash flow, outlook, risks and other items
Operating cash flow improved from a $1.402 billion use to $1.425 billion provided, chiefly because the prior-year quarter included a $2.8 billion Kraft arbitration payment. Holiday Starbucks Card loadings and deferred revenue also support seasonally higher first-quarter operating cash flow. Investing cash use was $522.5 million, including the Japan acquisition; financing cash use was $668.3 million, including dividends, repurchases, and restricted cash for the subsequent tender settlement.
For fiscal 2015, management expected revenue growth from Japan, approximately 1,650 net new stores, and mid-single-digit global comparable-store sales growth, partly offset by unfavorable currency translation. It expected consolidated operating margin to decline slightly versus fiscal 2014, primarily because of Japan’s dilutive ownership model, while forecasting strong EPS growth. Planned capital expenditures were approximately $1.4 billion.
Management identified foreign exchange and commodity prices—particularly coffee and dairy—as key exposures, alongside competition, execution and integration of Japan, and economic conditions. Approximately $1.1 billion of cash and investments were held in foreign subsidiaries; repatriation could trigger material taxes, though management did not anticipate needing to repatriate funds for domestic liquidity. The company reported no material changes to previously disclosed risk factors or off-balance-sheet arrangements and no legal proceeding it believed would materially adversely affect results. Disclosure controls were deemed effective; Japan was excluded from the quarter-end internal-control evaluation while integration and testing proceeded.
Important facts for investors to verify
- Separate recurring operating performance from the $390.6 million Japan remeasurement gain and the disclosed $0.49 per-share acquisition-related benefit.
- Track the completion and cost of acquiring the remaining Starbucks Japan shares, integration progress, and Japan’s effect on consolidated margins.
- Compare fiscal 2015 store-opening, comparable-sales, margin, EPS, and capital-spending expectations with subsequent results; the filing cautions that quarterly results are seasonal and not necessarily indicative of the full year.
- Monitor currency and commodity movements, foreign cash and any repatriation tax consequences, and the company’s substantial lease and purchase commitments.