10-QPeriod: Q3 FY2018

STARBUCKS CORP Quarterly Report for Q3 Ended Apr 1, 2018

Filed May 1, 2018For Securities:SBUX

Summary

Starbucks Corporation's Q2 2018 10-Q filing reveals a period of significant strategic shifts and acquisitions, most notably the full consolidation of its East China joint venture. This move substantially boosted revenue growth by 14% year-over-year to $6.0 billion, though it also impacted operating margins due to increased depreciation and amortization. The company is actively executing streamlining efforts, including the sale of the Tazo brand and the closure of Teavana retail stores, which are impacting specific segments but are part of a broader strategy to focus on high-returning businesses. Despite a decline in consolidated operating income and margin, driven by restructuring charges and impairments, the core business demonstrated resilience. Americas revenue grew 8% with comparable store sales up 2%, while China/Asia Pacific saw a substantial 54% revenue increase driven by the East China acquisition and new store openings. The company reaffirmed its full-year revenue growth outlook and provided EPS guidance, signaling confidence in its strategic direction and long-term growth prospects.

Financial Highlights

58 data points
Beta

Revenue

$6.03B

58.3% Gross Margin

Net Income

$660.10M

10.9% Net Margin

EPS (Diluted)

$0.47

Total Assets

$17.55B

Cash & Equivalents

$2.14B

Free Cash Flow

-$12.90M

Financial Statements
Beta
Revenue$6.03B
Cost of Revenue$2.51B
Gross Profit$3.52B
Operating Expenses$5.31B
Operating Income$772.50M
Interest Expense$35.10M
Net Income$660.10M
EPS (Basic)$0.47
EPS (Diluted)$0.47
Shares Outstanding (Basic)1.39B
Shares Outstanding (Diluted)1.41B

Key Highlights

  • 1Total net revenues increased 13.9% to $6.0 billion for the quarter ended April 1, 2018, compared to $5.3 billion in the prior year, largely driven by the acquisition of the East China joint venture and new store openings.
  • 2Operating income decreased by 17.4% to $772.5 million, with a notable decline in operating margin to 12.8% from 17.7% in the prior year, primarily due to restructuring and impairment expenses and the accounting impact of the East China consolidation.
  • 3The acquisition of the remaining 50% of the East China joint venture significantly impacted the China/Asia Pacific segment, driving a 54% revenue increase but also contributing to a decline in segment operating margin.
  • 4The company recorded restructuring and impairment charges totaling $134.7 million for the quarter, largely related to the closure of Teavana retail stores and goodwill impairment in Switzerland.
  • 5Americas segment revenue grew 8% with comparable store sales up 2%, though operating income slightly declined due to increased partner investments and a food-related mix shift.
  • 6Starbucks returned $3.2 billion to shareholders through share repurchases and paid $0.8 billion in dividends in the first two quarters of fiscal 2018.
  • 7The company provided a full-year fiscal 2018 outlook, expecting consolidated revenue growth of 9% to 11% and earnings per share between $3.32 and $3.36, reflecting a benefit from the East China acquisition gain and the Tax Cuts and Jobs Act.

Frequently Asked Questions

The primary driver of the substantial revenue increase was the full consolidation of Starbucks' East China joint venture, which began contributing 100% of its revenues and expenses to the consolidated financial statements starting in the second quarter of fiscal 2018. This, combined with incremental revenues from new store openings and global comparable store sales growth, led to a 13.9% increase in total net revenues.

The operating margin declined primarily due to the impact of several factors: significant restructuring and impairment expenses related to the closure of Teavana retail stores and goodwill impairment in Switzerland, increased investments in partners (employees), a food-related mix shift in the Americas, and the accounting treatment of consolidating the East China joint venture, which introduced higher depreciation and amortization expenses relative to revenue compared to the previous equity method accounting.

The Tax Cuts and Jobs Act (Tax Act) enacted in late 2017 has impacted Starbucks by lowering the U.S. federal corporate income tax rate, leading to a blended rate of 24.5% for fiscal 2018, down from 35%. The company also recorded a provisional transition tax on certain foreign earnings. These changes are expected to provide a benefit and fund investments and shareholder returns. The company is still refining its calculations related to the Tax Act, and actual effective tax rates may vary.

Starbucks continues to actively manage its cash and investments to fund operations, make acquisitions, and return capital to shareholders. In the first two quarters of fiscal 2018, the company repurchased $3.2 billion of its common stock and paid $0.8 billion in cash dividends. The company also announced an increase of 100 million shares to its share repurchase program in April 2018, demonstrating a commitment to shareholder returns.