10-QPeriod: Q3 FY2017

STARBUCKS CORP Quarterly Report for Q3 Ended Jul 2, 2017

Filed August 1, 2017For Securities:SBUX

Summary

Starbucks Corporation's (SBUX) 10-Q filing for the period ending July 2, 2017, showcases a quarter of solid revenue growth driven by new store openings and comparable store sales increases. Total net revenues rose 8% year-over-year to $5.7 billion. The company reported an operating income of $1.0 billion, though operating margins saw a slight decline, primarily due to significant goodwill and store asset impairments related to the strategic shift for Teavana retail operations, amounting to $102.3 million in the 'All Other Segments' category. Diluted earnings per share were $0.47, impacted by these impairment charges. Geographically, the Americas segment continued to be a strong performer, with revenue growth of 10% and comparable store sales up 5%. The China/Asia Pacific segment also showed robust growth, with revenues up 9% and operating margin expanding significantly due to tax structure changes. The EMEA segment experienced a revenue decline as the company continued its strategy of repositioning towards a licensed model, while the Channel Development segment saw healthy revenue and operating income growth. The company maintained a strong liquidity position with over $3.7 billion in cash and investments.

Key Highlights

  • 1Consolidated net revenues increased by 8% to $5.7 billion, driven by 2,341 net new stores and 4% global comparable store sales growth.
  • 2Operating income grew 2% to $1.0 billion, however, operating margin declined 110 basis points to 18.4% due to $102.3 million in goodwill and store asset impairments, primarily related to the Teavana business.
  • 3Diluted earnings per share (EPS) were $0.47, a decrease from $0.51 in the prior year quarter, significantly impacted by the impairment charges ($0.07 per share).
  • 4The Americas segment reported strong performance with 10% revenue growth and 5% comparable store sales growth.
  • 5China/Asia Pacific segment demonstrated healthy growth with 9% revenue increase and a significant operating margin expansion due to favorable tax structure changes.
  • 6The company continues to execute its strategy of repositioning the EMEA segment to a predominantly licensed model, leading to a revenue decline but a focus on long-term operational efficiency.
  • 7Starbucks ended the quarter with a strong cash and investments position of $3.7 billion, indicating healthy liquidity.
  • 8A significant subsequent event disclosed is the agreement to acquire the remaining 50% of the East China joint venture for approximately $1.3 billion, signaling a strategic move towards full ownership in a key market.

Frequently Asked Questions

The primary driver of the decrease in operating margin was $102.3 million in goodwill and store asset impairments, largely associated with the company's strategic decision to close Teavana-branded retail stores over the next several quarters. These impairments significantly impacted the 'All Other Segments' category.

The Americas segment showed strong growth with a 10% revenue increase and 5% comparable store sales growth. The China/Asia Pacific segment also performed well, with 9% revenue growth and a substantial expansion in operating margin driven by tax structure changes. The EMEA segment saw a revenue decline as it continues its transition to a licensed model, while the Channel Development segment reported solid growth in both revenue and operating income.

For fiscal year 2017, Starbucks expects consolidated revenue growth in the mid-single digits. Diluted EPS is projected to be between $1.96 and $1.97, which includes the impact of the goodwill and store asset impairments. The company anticipates slight improvement in consolidated operating margin for the full year compared to fiscal 2016, excluding these charges.

Key strategic moves include the ongoing repositioning of the EMEA segment to a licensed model, the decision to close Teavana retail stores, and the significant agreement to acquire the remaining 50% ownership of its East China joint venture. This acquisition in China signals a major step towards unifying operations in a critical growth market.