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SBUX > SEC Filings for SBUX > Form 10-Q on 30-Apr-2013All Recent SEC Filings

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Form 10-Q for STARBUCKS CORP


30-Apr-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Certain statements herein, including statements regarding trends in or expectations relating to the expected effects of our initiatives and plans, as well as trends in or expectations regarding earnings per share, revenues, operating income, operating margins, comparable store sales, sales leverage, sales growth, expenses, dividends, share repurchases, other financial results, capital expenditures, scaling and expansion of international operations, shifts in our store portfolio to more licensed stores in EMEA and to more company-operated stores in CAP, profitable growth models and opportunities, strategic acquisitions, changes to organizational structures, commodity costs and our mitigation strategies, the transition from our distribution arrangement with Kraft to a direct distribution model, liquidity, cash flow from operations, use of cash, anticipated store openings, closings and renovations, the health and growth of our business overall and of specific businesses or markets, benefits of recent initiatives, increased traffic to our stores, operational efficiencies, product innovation and distribution, tax rates, and economic conditions in the US and international markets, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on currently available operating, financial and competitive information and are subject to various risks and uncertainties. Actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, coffee, dairy and other raw materials prices and availability, successful execution of our initiatives, successful execution of internal plans, fluctuations in US and international economies and currencies, the impact of competitors' initiatives, the effect of legal proceedings, and other risks detailed in our filings with the SEC, including in

Part I Item IA "Risk Factors" in the 10-K.

A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. You should not place undue reliance on the forward-looking statements, which speak only as of the date of this report. We are under no obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.


Table of Contents

This information should be read in conjunction with the condensed consolidated financial statements and the notes included in Item 1 of Part I of this 10-Q and the audited consolidated financial statements and notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in the 10-K.
General
Our fiscal year ends on the Sunday closest to September 30. All references to store counts, including data for new store openings, are reported net of store closures, unless otherwise noted.
Overview
Starbucks second quarter results demonstrate our continued focus on execution in our existing business portfolio while investing in future growth opportunities. Total net revenues increased 11% to $3.6 billion, driven by global comparable store sales growth of 6%. Consolidated operating income increased 26% and operating margin expanded 180 basis points to 15.3%. Earnings per share of $0.51, which includes $0.03 per share from the gain on the sale of our equity interest in our Mexico joint venture operations, represents growth of 28% over the prior year.
The Americas segment continued its strong performance in the second quarter with a 10% increase in revenues over the prior year, primarily driven by comparable store sales growth of 6%, comprised of a 5% increase in the number of transactions and a 2% increase in average ticket. Featured beverages and growth in afternoon food offerings contributed to the increase in comparable store sales. Operating margin expanded 220 basis points to 21.1%, driven by sales leverage due in part to a continued focus on store productivity, with lower coffee prices also contributing. Looking forward, we expect to continue to drive sales growth and profitability through new stores and the expansion of our pipeline of product offerings, including the roll out of La BoulangeTM products in our retail stores, to increase revenues throughout all dayparts. Our work to turn around the EMEA segment continues and we are making progress despite the economic uncertainty in the region. Revenues for the region were flat compared to the prior year and reflect the shift in our ownership structure, as we continue our focus on closing underperforming company-operated stores and growing our licensed store base in profitable locations. A continued focus on cost management and the shift in our store portfolio to more licensed stores contributed to an increase in operating margin of 450 basis points over the prior year. We expect the investments we are making in the region today will result in improved operating performance as we progress on our plan towards mid-teens operating margin in the future.
Our CAP segment results reflect a combination of rapid new store growth and solid performance from our existing store base. New store growth, paired with an 8% increase in comparable store sales, drove total net revenue growth of 22% over the prior year. Operating income was flat compared to the same quarter in the prior year, while operating margin contracted this quarter. The margin contraction was primarily a result of our continued investment spending to support growth in China and a shift in the composition of our store portfolio from licensed to company-operated stores. We expect this segment to continue to grow rapidly and become a more meaningful contributor to overall company profitability, with growth coming from a mix of net new store openings and comparable store sales growth.
Channel Development segment revenues grew 7% for the quarter, driven by sales of Starbucks- and Tazo-branded K-Cup® portion packs. Lower commodity costs, primarily coffee, were the primary contributor to the increase in operating margin for the second quarter of fiscal 2013. We expect our investments in continued innovation and new product offerings in fiscal 2013 will drive further growth and profitability within this segment over time. Comparable Store Sales
Starbucks comparable store sales for the second quarter of fiscal 2013 are as follows:

                                 Quarter Ended Mar 31, 2013                           Two Quarters Ended Mar 31, 2013
                         Sales             Change in        Change in           Sales             Change in          Change in
                         Growth          Transactions         Ticket           Growth           Transactions           Ticket
Consolidated                6  %               4  %              2 %              6  %                4 %                 2  %
Americas                    6  %               5  %              2 %              6  %                4 %                 2  %
EMEA                       (2 )%              (1 )%              - %             (1 )%                - %                (2 )%
China / Asia Pacific        8  %               4  %              3 %              9  %                6 %                 3  %


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Our comparable store sales represent the growth in revenue from Starbucks company-operated stores open 13 months or longer. Comparable store sales exclude the effect of fluctuations in foreign currency exchange rates. Fiscal 2013 - Financial Outlook for the Year For fiscal year 2013, we expect revenue growth driven by mid single-digit increased comparable store sales, new store openings and continued growth in the Channel Development business. Licensed stores will comprise between one-half and two-thirds of new store openings.
We expect continued robust consolidated operating margin and EPS improvement compared to fiscal 2012, reflecting the strength of our global business and the pipeline of profitable growth initiatives.
We expect increased capital expenditures in fiscal 2013 compared to fiscal 2012, reflecting new store growth, a continued focus on store renovations and additional investments in manufacturing capacity. Results of Operations (in millions)

Revenues

                                     Quarter Ended                    Two Quarters Ended
                            Mar 31,       Apr 1,        %       Mar 31,       Apr 1,        %
                              2013         2012      Change       2013         2012      Change
Company-operated stores    $ 2,807.7    $ 2,521.2     11.4 %   $ 5,797.3    $ 5,253.0     10.4 %
Licensed stores                322.1        290.3     11.0         672.2        596.9     12.6
CPG, foodservice and other     426.1        384.4     10.8         885.9        781.9     13.3
Total net revenues         $ 3,555.9    $ 3,195.9     11.3 %   $ 7,355.4    $ 6,631.8     10.9 %

Total net revenues for the second quarter and the first two quarters of fiscal 2013 increased $360 million and $724 million, respectively, primarily driven by increased revenues from company-operated stores (contributing $287 million and $544 million, respectively). An increase in comparable store sales was the primary driver of the increase in company-operated store revenues for both periods (approximately 6%, or $145 million, for the second quarter and approximately 6%, or $308 million, for the first two quarters). Also contributing for both periods were incremental revenues from 412 net new company-operated store openings over the past 12 months (approximately $82 million for the second quarter and $165 million for the first two quarters).

Licensed store revenue growth also contributed to the increase in total net revenues for the second quarter and the first two quarters of fiscal 2013 (approximately $32 million and $75 million, respectively). These increases were driven by increased product sales to and royalty revenues from our licensees, resulting from improved comparable store sales and the opening of 679 net new licensed stores over the last 12 months.
CPG, foodservice and other revenues increased $42 million and $104 million for the second quarter and the first two quarters of fiscal 2013, respectively. These increases were primarily due to increased sales of single serve products (approximately $25 million and $61 million, respectively).


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Operating Expenses
                                     Quarter Ended                                  Two Quarters Ended
                       Mar 31,       Apr 1,      Mar 31,    Apr 1,      Mar 31,       Apr 1,      Mar 31,    Apr 1,
                        2013          2012         2013      2012        2013          2012         2013      2012
                                                     % of Total                                       % of Total
                                                    Net Revenues                                     Net Revenues
Cost of sales
including occupancy
costs                $ 1,530.4     $ 1,411.9       43.0 %    44.2 %   $ 3,151.1     $ 2,908.0       42.8 %    43.8 %
Store operating
expenses               1,038.4         956.5       29.2      29.9       2,127.9       1,952.2       28.9      29.4
Other operating
expenses                 112.1         105.3        3.2       3.3         244.6         212.0        3.3       3.2
Depreciation and
amortization
expenses                 153.1         137.1        4.3       4.3         302.0         271.9        4.1       4.1
General and
administrative
expenses                 230.3         206.9        6.5       6.5         462.2         398.4        6.3       6.0
Total operating
expenses               3,064.3       2,817.7       86.2      88.2       6,287.8       5,742.5       85.5      86.6
Income from equity
investees                 52.5          52.2        1.5       1.6         107.0          97.1        1.5       1.5
Operating income     $   544.1     $   430.4       15.3 %    13.5 %   $ 1,174.6     $   986.4       16.0 %    14.9 %
Store operating
expenses as a % of
related revenues                                   37.0 %    37.9 %                                 36.7 %    37.2 %

Cost of sales including occupancy costs as a percentage of total net revenues decreased 120 basis points and 100 basis points for the second quarter and the first two quarters of fiscal 2013, respectively, primarily driven by lower coffee costs (approximately 50 basis points for both periods).
Store operating expenses as a percentage of total net revenues decreased 70 basis points for the second quarter and 50 basis points for the first two quarters of fiscal 2013. As a percentage of company-operated store revenues, store operating expenses decreased 90 basis points for the second quarter and 50 basis points for the first two quarters of fiscal 2013, primarily driven by sales leverage (approximately 90 basis points for the second quarter and 100 basis points for the first two quarters).

Other operating expenses as a percentage of total net revenues decreased 10 basis points for the second quarter and increased 10 basis points for the first two quarters of fiscal 2013. Excluding the impact of company-operated store revenues, other operating expenses decreased 60 basis points for the second quarter and increased 30 basis points for the first two quarters of fiscal 2013. The second quarter decrease was primarily driven by sales leverage from licensed store revenue growth (approximately 80 basis points). The increase for the first two quarters was primarily due to increased marketing related to the launch of the Verismo® system by Starbucks in Channel Development (approximately 90 basis points), partially offset by sales leverage.

General and administrative expenses as a percentage of total net revenues were flat for the second quarter and increased 30 basis points for the first two quarters of fiscal 2013. The increase for the first two quarters of fiscal 2013 was driven by the company's October Global Leadership Conference (approximately 40 basis points).
Income from equity investees was flat for the second quarter and increased $10 million for the first two quarters of fiscal 2013, primarily due to increased income from our joint venture operations in Japan and China, as well as improved performance from our North American Coffee Partnership joint venture which produces, bottles and distributes our ready to drink beverages. The improved performance from these joint ventures was partially offset by the absence this year of $6.7 million of non-routine income included in income from equity investees in the second quarter of the prior year.
The combination of these changes resulted in an increase in operating margin of 180 basis points for the second quarter and 110 basis points for the first two quarters of fiscal 2013.


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Other Income and Expenses
                                       Quarter Ended                                Two Quarters Ended
                         Mar 31,     Apr 1,     Mar 31,     Apr 1,      Mar 31,       Apr 1,     Mar 31,     Apr 1,
                          2013        2012        2013       2012        2013          2012        2013       2012
                                                    % of Total                                       % of Total
                                                   Net Revenues                                     Net Revenues
Operating income        $ 544.1     $ 430.4      15.3  %    13.5  %   $ 1,174.6     $  986.4      16.0  %    14.9  %
Interest income and
other, net                 50.8        35.3       1.4        1.1           48.0         58.5       0.7        0.9
Interest expense           (6.1 )      (8.8 )    (0.2 )     (0.3 )        (12.7 )      (17.4 )    (0.2 )     (0.3 )
Earnings before income
taxes                     588.8       456.9      16.6       14.3        1,209.9      1,027.5      16.4       15.5
Income taxes              198.1       146.8       5.6        4.6          386.8        335.2       5.3        5.1
Net earnings including
noncontrolling
interests                 390.7       310.1      11.0        9.7          823.1        692.3      11.2       10.4
Net earnings (loss)
attributable to
noncontrolling interest     0.3         0.2         -          -            0.6          0.4         -          -
Net earnings
attributable to
Starbucks               $ 390.4     $ 309.9      11.0  %     9.7  %   $   822.5     $  691.9      11.2  %    10.4  %
Effective tax rate
including
noncontrolling interest                          33.6  %    32.1  %                               32.0  %    32.6  %

For the second quarter and the first two quarters of fiscal 2013, net interest income and other increased $16 million and decreased $11 million, respectively. The increase for the second quarter was primarily due to a gain on the sale of our equity in the joint venture that operates Starbucks® stores in Mexico (approximately $35 million). Also contributing to the increase for the second quarter was net favorable foreign exchange fluctuations (approximately $4 million). These increases were partially offset by the absence of additional income recognized in the prior year period associated with unredeemed gifts cards due to a court ruling related to state unclaimed property laws (approximately $29 million).
The decrease for the first two quarters was primarily due to the absence of additional income recognized in the prior year period associated with unredeemed gifts cards due to a court ruling related to state unclaimed property laws (approximately $29 million) and mark-to-market adjustments from derivatives used to manage our risk of commodity price fluctuations (approximately $13 million). These decreases were partially offset by a gain on the sale of our equity in the joint venture that operates Starbucks® stores in Mexico (approximately $35 million).

The effective tax rate for the quarter ended March 31, 2013 was 33.6% compared to 32.1% for the same quarter in fiscal 2012. The increase in the rate for the second quarter of fiscal 2013 was primarily due to an increase in taxable income in the US relative to foreign jurisdictions with lower tax rates. The effective tax rate for the two quarters ended March 31, 2013 was 32.0% compared to 32.6% for the same period in fiscal 2012. The decrease in the rate for the first two quarters of fiscal 2013 was primarily due to the recognition of a net tax benefit in the first quarter of fiscal 2013 primarily from state income tax expense adjustments for returns filed in prior years.

Segment Information
Segment information is prepared on the same basis that our management reviews
financial information for operational decision-making purposes. The following
tables summarize the results of operations by segment (in millions):

                                       22
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  Table of Contents

Americas
                                  Quarter Ended                                  Two Quarters Ended
                   Mar 31,       Apr 1,      Mar 31,     Apr 1,      Mar 31,       Apr 1,      Mar 31,     Apr 1,
                    2013          2012         2013       2012        2013          2012         2013       2012
                                                % of Americas                                     % of Americas
                                                Net Revenues                                      Net Revenues
Total net
revenues         $ 2,604.1     $ 2,374.7                           $ 5,444.7     $ 4,953.2
Cost of sales
including
occupancy costs    1,000.0         941.6       38.4 %     39.7 %     2,092.5       1,948.3       38.4 %     39.3 %
Store operating
expenses             891.9         837.4       34.2       35.3       1,851.7       1,712.2       34.0       34.6
Other operating
expenses              21.2          18.7        0.8        0.8          51.2          39.2        0.9        0.8
Depreciation and
amortization
expenses             105.6          97.2        4.1        4.1         211.0         194.3        3.9        3.9
General and
administrative
expenses              38.1          32.4        1.5        1.4         100.9          63.0        1.9        1.3
Total operating
expenses           2,056.8       1,927.3       79.0       81.2       4,307.3       3,957.0       79.1       79.9
Income from
equity investees       2.4           2.1        0.1        0.1           2.4           2.1        0.0        0.0
Operating income $   549.7     $   449.5       21.1 %     18.9 %   $ 1,139.8     $   998.3       20.9 %     20.2 %
Store operating
expenses as a %
of related
revenues                                       37.5 %     38.6 %                                 37.3 %     37.8 %

Revenues
Americas total net revenues for the second quarter and the first two quarters of fiscal 2013 increased $229 million, or 10%, and $492 million, or 10%, respectively. These increases were primarily driven by increased revenues from company-operated stores (contributing $206 million and $436 million, respectively) and licensed stores (contributing $18 million and $41 million, respectively).
An increase in comparable store sales was the primary driver of the increase in company-operated store revenues for both periods (approximately 6%, or $140 million, for the second quarter and approximately 6%, or $293 million, for the first two quarters). The increases in licensed store revenues were primarily due to increased product sales to and higher royalty revenues from our licensees (approximately $19 million for the second quarter and approximately $45 million for the first two quarters), primarily resulting from improved comparable store sales and the opening of 270 net new licensed stores over the past 12 months. Operating Expenses
Cost of sales including occupancy costs as a percentage of total net revenues decreased 130 basis points and 90 basis points for the second quarter and the first two quarters of fiscal 2013, respectively. These decreases were primarily driven by lower coffee costs (approximately 40 basis points for the second quarter and approximately 30 basis points for the first two quarters). Also contributing to the decrease for both periods was sales leverage on occupancy costs.
Store operating expenses as a percentage of total net revenues decreased 110 basis points for the second quarter and 60 basis points for the first two quarters of fiscal 2013, primarily driven by sales leverage (approximately 100 basis points for both periods).
Other operating expenses as a percentage of total net revenues was flat for the second quarter and increased 10 basis points for the first two quarters of fiscal 2013. Other operating expenses as a percentage of non-company-operated store revenues increased 20 basis points for the second quarter and 140 basis points for the first two quarters of fiscal 2013. The increase for the first two quarters was primarily due to incremental costs related to our acquisition of Bay Bread LLC (doing business as La Boulange), which was completed in the fourth quarter of fiscal 2012.
General and administrative expenses as a percentage of total net revenues increased 10 basis points and 60 basis points for the second quarter and the first two quarters of fiscal 2013, respectively. The increase for the second quarter was largely due to investments in deepening certain capabilities across the organization to support future growth. The increase for the first two quarters was driven by the company's October Global Leadership Conference (approximately 50 basis points).
The combination of these changes resulted in an overall increase in operating margin of 220 basis points for the second quarter and 70 basis points for the first two quarters of fiscal 2013.


Table of Contents

EMEA

                                       Quarter Ended                               Two Quarters Ended
                         Mar 31,      Apr 1,     Mar 31,     Apr 1,     Mar 31,      Apr 1,     Mar 31,    Apr 1,
                           2013        2012        2013       2012        2013        2012        2013      2012
                                                      % of EMEA                                     % of EMEA
                                                    Net Revenues                                   Net Revenues
Total net revenues      $  273.2     $ 272.4                           $  579.3     $ 575.6
Cost of sales including
occupancy costs            140.8       143.9       51.5 %    52.8  %      293.3       294.4       50.6 %    51.1 %
Store operating
expenses                    83.2        91.9       30.5      33.7         173.5       185.7       29.9      32.3
Other operating
expenses                    10.7         8.9        3.9       3.3          19.1        17.6        3.3       3.1
Depreciation and
amortization expenses       13.7        14.3        5.0       5.2          27.9        28.5        4.8       5.0
General and
administrative expenses     19.6        20.4        7.2       7.5          38.0        37.8        6.6       6.6
Total operating
expenses                   268.0       279.4       98.1     102.6         551.8       564.0       95.3      98.0
Income from equity
investees                      -           -          -         -             -         0.3          -       0.1
Operating income (loss) $    5.2     $  (7.0 )      1.9 %    (2.6 )%   $   27.5     $  11.9        4.7 %     2.1 %
Store operating
expenses as a % of
related revenues                                   38.0 %    39.4  %                              36.8 %    37.3 %

Revenues
EMEA total net revenues increased $1 million for the second quarter of fiscal 2013 and increased $4 million, or 1%, for the first two quarters of fiscal 2013. Licensed store revenues grew (approximately $15 million, or 48%, for the second quarter and $27 million, or 44%, for the first two quarters), due to increased product sales to and higher royalty revenues from our licensees, primarily resulting from the opening of 117 net new licensed stores over the past 12 months and improved comparable store sales. The licensed store revenue increases were nearly offset by a decline in company-operated store revenues (approximately $15 million for the second quarter and approximately $26 million for the first two quarters), primarily resulting from our prior store portfolio optimization activities.
Operating Expenses
Cost of sales including occupancy costs as a percentage of total net revenues decreased 130 basis points for the second quarter and 50 basis points for the first two quarters of fiscal 2013. These decreases were primarily driven by a reduction to the estimated asset retirement obligations of our store leases in the region (approximately 220 basis points for the second quarter and approximately 100 basis points for the first two quarters), partially offset by the impact of a shift in the composition of our store portfolio in the region to more licensed stores.
Store operating expenses as a percentage of total net revenues decreased 320 basis points for the second quarter and 240 basis points for the first two quarters of fiscal 2013. As a percentage of company-operated store revenues, store operating expenses decreased 140 basis points for the second quarter and . . .

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