Starbucks Corporation — FY2014 Form 10-K Summary
Business context and reporting period
Fiscal 2014 was the 52-week year ended September 28, 2014. Starbucks operated in 65 countries, with 21,366 stores at year-end. The company reports Americas, EMEA, China/Asia Pacific (CAP), and Channel Development segments; Americas generated 73% of revenue. This annual filing also reports fourth-quarter results relevant to the requested 2014 Q4 period.
Financial performance and key metrics
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net revenue | $16.45 billion | $14.87 billion |
| Operating income (loss) | $3.08 billion | ($325 million) |
| Operating margin | 18.7% | (2.2%) |
| Net earnings attributable to Starbucks | $2.07 billion | $8 million |
| Diluted EPS | $2.71 | $0.01 |
| Cash from operating activities | $608 million | $2.91 billion |
| Capital expenditures | $1.16 billion | $1.15 billion |
| Cash, cash equivalents and investments | $2.2 billion | $3.3 billion |
| Long-term debt, including current portion | $2.05 billion | $1.30 billion |
Global comparable-store sales increased 6%, comprising 3% growth in transactions and 3% in average ticket. The FY2014 operating-margin improvement largely reflects the absence of FY2013’s $2.78 billion Kraft arbitration charge; excluding that comparison effect, sales leverage and lower commodity costs, especially coffee, supported improvement. FY2014 operating cash flow was reduced by the $2.76 billion Kraft payment; management cited $3.4 billion of operating cash generated before that payment, reflecting strong earnings and favorable working-capital changes.
FY2014 segment results: Americas revenue was $11.98 billion and operating margin 23.4% (up 190 basis points); EMEA revenue was $1.29 billion and margin 9.2% (up 370 basis points); CAP revenue was $1.13 billion and margin 33.0% (down 200 basis points); Channel Development revenue was $1.55 billion and margin 36.0% (up 630 basis points). All Other Segments reported a $27 million operating loss.
For FY2014 Q4, revenue was $4.18 billion versus $3.79 billion in FY2013 Q4; operating income was $855 million versus an operating loss of $2.12 billion; net earnings attributable to Starbucks were $588 million versus a loss of $1.23 billion; and diluted EPS was $0.77 versus a loss of $1.64.
Material changes versus the prior comparable period
- Revenue increased 10.6%, driven principally by company-operated stores, comparable-store growth, and net store additions. Starbucks ended the year with 1,599 more stores than a year earlier.
- Reported earnings rebounded sharply, primarily because FY2013 included the Kraft charge. In FY2014 the company paid the arbitration award and extinguished the related liability.
- Debt increased following the issuance of $750 million in senior notes in December 2013. The $750 million revolving credit facility had no borrowings at year-end, and Starbucks reported compliance with debt covenants.
- Cash dividends paid rose to $783 million from $629 million; share repurchases were $770 million, compared with $544 million in FY2013. Starbucks reported returning $1.6 billion to shareholders through dividends and repurchases.
- CAP revenue grew 23%, but margin declined as the store mix shifted toward company-operated stores. EMEA and Channel Development margins expanded, supported in part by a higher licensed-store mix in EMEA and lower coffee costs in Channel Development.
Outlook, management commentary, risks and unusual items
For FY2015, management expected revenue growth of 16%–18%, including 6%–7% from the acquisition of Starbucks Japan; mid-single-digit global comparable-store sales growth; and approximately 1,650 net new stores, about half in CAP. Management expected consolidated operating margin to decline slightly, partly due to the Japan acquisition’s shift from a joint-venture to company-operated model. It forecast strong EPS growth, including an anticipated after-tax acquisition-related gain of $325–$375 million ($0.43–$0.49 per share), an effective tax rate of approximately 31%, and capital expenditures of about $1.4 billion.
After year-end, Starbucks acquired an additional 39.5% of Starbucks Japan for approximately $511 million, bringing ownership to 79%; it planned to acquire the remaining interest, with total expected consideration for the remaining stake of approximately $382 million. The filing describes the accounting as still in process at filing date. FY2014 also included a $67.8 million gain from selling the Malaysia joint-venture interest. The company converted its Australian company-operated retail business to a licensed market.
Key risks include reliance on Americas, intense competition, discretionary consumer spending, coffee and dairy price and availability volatility, international market and currency exposure, supply-chain interruption, food safety, cybersecurity and technology failures, labor costs, and execution of growth initiatives. Green coffee purchase commitments totaled approximately $1.1 billion, and future operating lease payments totaled $4.96 billion. The company stated that other ordinary-course legal proceedings were not expected to have a material adverse effect. Deloitte issued an unqualified opinion on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Normalize FY2014 and FY2013 earnings, margins, and EPS for the one-time Kraft charge and payment; do not treat the headline year-over-year rebound as wholly recurring.
- Track FY2015 Japan acquisition accounting, the fair-value gain on Starbucks’ pre-existing stake, remaining buyout costs, and the acquired market’s effect on revenue, margins, and cash flow.
- Assess liquidity after the Kraft payment and Japan acquisition, including the level and availability of offshore cash and the company’s stated intention to reinvest foreign earnings.
- Monitor coffee and other commodity costs against purchase commitments, hedges, and the effect of those costs on store and Channel Development margins.
- Evaluate whether store expansion and comparable-store sales sustain growth, particularly in CAP and EMEA, while Americas remains the dominant revenue contributor.