10-QPeriod: Q1 FY2018

STARBUCKS CORP Quarterly Report for Q1 Ended Dec 31, 2017

Filed January 31, 2018For Securities:SBUX

Summary

Starbucks Corporation (SBUX) reported its first quarter fiscal year 2018 results for the period ending December 30, 2017. The company demonstrated robust revenue growth, up 6% year-over-year to $6.1 billion, driven by a combination of net new store openings and a 2% increase in global comparable store sales. A significant event during the quarter was the acquisition of the remaining 50% interest in the East China joint venture for approximately $1.4 billion, which contributed to a substantial one-time gain. This acquisition is expected to bolster future growth in the key China/Asia Pacific market. Net earnings attributable to Starbucks saw a dramatic increase to $2.25 billion from $751.8 million in the prior year's comparable quarter. This surge was largely influenced by a $1.3 billion gain from the East China joint venture remeasurement and other streamlining gains, including the sale of the Tazo brand and divestiture of Taiwan operations. While operational performance was solid, investors should note the impact of strategic streamlining efforts, including the closure of Teavana stores, which contributed to restructuring expenses. The company also highlighted the initial impacts of the Tax Cuts and Jobs Act, including a lower effective tax rate.

Financial Highlights

58 data points
Beta

Revenue

$6.07B

58.8% Gross Margin

Net Income

$2.25B

37.0% Net Margin

EPS (Diluted)

$1.57

Total Assets

$18.52B

Cash & Equivalents

$3.66B

Free Cash Flow

$1.40B

Financial Statements
Beta
Revenue$6.07B
Cost of Revenue$2.50B
Gross Profit$3.57B
Operating Expenses$5.05B
Operating Income$1.12B
Interest Expense$25.90M
Net Income$2.25B
EPS (Basic)$1.58
EPS (Diluted)$1.57
Shares Outstanding (Basic)1.42B
Shares Outstanding (Diluted)1.43B

Key Highlights

  • 1Total net revenues increased by 6% to $6.1 billion, driven by 2,305 net new stores and 2% comparable store sales growth.
  • 2Net earnings attributable to Starbucks surged by 199% to $2.25 billion, significantly boosted by a $1.3 billion gain from the acquisition of the East China joint venture.
  • 3The company acquired the remaining 50% of its East China joint venture for approximately $1.4 billion, a strategic move to enhance its presence in a key growth market.
  • 4Restructuring expenses were recognized due to ongoing streamlining efforts, including the closure of Teavana retail stores and other operational adjustments.
  • 5The Tax Cuts and Jobs Act resulted in a lower effective tax rate for the quarter, with provisional adjustments recorded for remeasured deferred tax liabilities and transition tax on foreign earnings.
  • 6Starbucks returned significant capital to shareholders, repurchasing $1.6 billion of common stock and declaring a quarterly cash dividend of $0.30 per share.
  • 7Operating income saw a slight decrease of 1% to $1.1 billion, with operating margin declining 140 basis points to 18.4% due to the impact of a food-related mix shift and restructuring costs.

Frequently Asked Questions

The primary driver of the significant increase in net earnings attributable to Starbucks was a $1.3 billion gain resulting from the remeasurement of Starbucks' pre-existing 50% ownership interest in its East China joint venture to fair value upon acquiring the remaining 50% stake. Additionally, gains from the divestiture of the Tazo brand and the Taiwan joint venture also contributed.

The acquisition of the East China joint venture will allow Starbucks to fully consolidate operations in a key growth market, driving revenue growth. However, it is expected to lead to a decline in consolidated and China/Asia Pacific segment operating margins in fiscal 2018 due to the change from a joint venture model (which included royalties) to a fully company-operated model. The company expects approximately 1,100 net new store openings in the China/Asia Pacific segment in fiscal 2018.

Starbucks is continuing its strategy to close Teavana-branded retail stores in fiscal year 2018 to focus on selling premium Teavana tea products within Starbucks-branded stores and consumer product channels. This strategy resulted in restructuring expenses during the quarter.

The Tax Cuts and Jobs Act (Tax Act) has led to a lower U.S. federal corporate income tax rate, resulting in a blended rate of 24.5% for fiscal 2018 and a lower effective tax rate for the quarter. Starbucks recorded provisional adjustments for remeasured net deferred tax liabilities and the transition tax on deemed repatriation of certain foreign earnings. Collectively, these impacts did not materially affect net earnings in this quarter, but the company is still refining its estimates.