10-QPeriod: Q1 FY2014

STARBUCKS CORP Quarterly Report for Q1 Ended Dec 29, 2013

Filed January 28, 2014For Securities:SBUX

Summary

Starbucks Corporation reported strong financial performance for the first quarter of fiscal year 2014, with total net revenues increasing by 12% year-over-year to $4.2 billion. This growth was driven by robust comparable store sales, up 5% globally, and the addition of new stores across its operating segments. The company saw a significant increase in operating income, growing 29% to $814 million, leading to an expansion in operating margin by 260 basis points to 19.2%. Diluted earnings per share reached $0.71, a 25% increase compared to the prior year quarter. Key to the quarter's results was the resolution of the significant Kraft Foods litigation, which resulted in a large charge in the prior fiscal year but a credit in the current quarter due to early payment of the award. The company's strategic initiatives, including the rollout of the La Boulange™ bakery platform and disciplined growth in licensed stores, particularly in the high-margin China/Asia Pacific region, are contributing positively to financial performance. Starbucks also continues to return capital to shareholders through dividends and share repurchases, while maintaining a strong liquidity position to fund future growth opportunities.

Financial Highlights

56 data points
Beta

Revenue

$4.24B

57.7% Gross Margin

Net Income

$540.70M

12.8% Net Margin

EPS (Diluted)

$0.35

Total Assets

$10.26B

Cash & Equivalents

$1.55B

Free Cash Flow

-$1.66B

Financial Statements
Beta
Revenue$4.24B
Cost of Revenue$1.80B
Gross Profit$2.44B
Operating Expenses$3.48B
Operating Income$813.50M
Interest Expense$14.50M
Net Income$540.70M
EPS (Basic)$0.36
EPS (Diluted)$0.35
Shares Outstanding (Basic)1.51B
Shares Outstanding (Diluted)1.53B

Key Highlights

  • 1Total net revenues increased 12% to $4.2 billion in Q1 FY14.
  • 2Global comparable store sales grew 5%, with a 4% increase in transactions.
  • 3Operating income surged 29% to $814 million, with operating margin expanding 260 basis points to 19.2%.
  • 4Diluted Earnings Per Share (EPS) grew 25% to $0.71.
  • 5The company resolved the significant Kraft Foods litigation, resulting in a $20.2 million litigation credit in the quarter after a large charge in the prior year.
  • 6The China/Asia Pacific segment continues to be the fastest-growing and highest-margin region.
  • 7Starbucks issued new debt in December 2013 to fund a portion of the Kraft litigation payment and for general corporate purposes.

Frequently Asked Questions

The significant litigation charge was related to an arbitration award in favor of Kraft Foods Group, Inc. Starbucks paid the full amount of the award, including prejudgment interest and attorneys' fees, in the first quarter of fiscal year 2014. This resulted in a $2.8 billion charge being accrued in the fourth quarter of fiscal 2013, and the full extinguishment of this liability in the current quarter. A credit of $20.2 million was recognized in the current quarter related to an earlier-than-anticipated payment of prejudgment interest.

The Americas segment showed solid performance with 8% revenue growth, driven by comparable store sales and new store openings. The EMEA segment improved with 11% revenue growth and a significant increase in operating margin due to cost management and a shift towards higher-margin licensed stores. The China/Asia Pacific segment remained the fastest-growing and highest-margin region, with revenue growth of 25%, though operating margin declined due to a lower contribution from equity investees. The Channel Development segment grew 7%, primarily driven by premium single-serve products.

For fiscal year 2014, Starbucks expects revenue growth driven by mid-single digit comparable store sales growth, new store openings (with approximately half in China/Asia Pacific), and continued growth in the Channel Development business. The company anticipates full-year consolidated operating margin improvement of 150 to 200 basis points over fiscal 2013 (excluding the Kraft litigation charge) and strong EPS growth.

Starbucks ended the quarter with $1.5 billion in cash and cash equivalents and $157 million in short-term investments. The company actively manages its cash to fund operating needs, debt payments, and shareholder returns. In the current quarter, they issued $750 million in new debt primarily to help fund the Kraft litigation payment. Starbucks also has a $750 million revolving credit facility and a commercial paper program available for working capital and other corporate purposes. They expect future cash flows from operations and existing cash reserves to be sufficient for their needs.