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

Show all filings for STARBUCKS CORP

Form 10-Q for STARBUCKS CORP


30-Jul-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, profitability, 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, the anticipated issuance of debt and applicable interest rate, 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


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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.
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 third quarter results demonstrate the success of our growth platforms and the overall strength of our business. Total net revenues increased 13% to $3.7 billion, with every segment contributing. Global comparable store sales grew 8%, driven by a 7% increase in number of transactions. Consolidated operating income increased 25% to $615 million and operating margin expanded 150 basis points to 16.4%. Earnings per share was $0.55, representing growth of 28% over the prior year quarter.
The Americas segment continued its strong performance in the third quarter, growing revenues 12% to $2.8 billion, primarily driven by comparable store sales growth of 9%, comprised of a 7% increase in number of transactions and a 2% increase in average ticket. Strength in beverage innovation and promotions, operational improvements, and expanded food offerings all contributed to the increase in comparable store sales. Operating margin expanded 210 basis points to 22.3%, driven by sales leverage and lower coffee costs. Looking forward, we expect to continue to drive sales growth and profitability through new stores and expanded product offerings, including the continued roll out of La Boulange® bakery items in our retail stores.
In the EMEA segment, we are continuing to make steady progress toward long-term profitability in the region. Revenues grew 2% to $287 million compared to the prior year, driven by licensed store revenue growth nearly offset by a decline in company-operated store revenues. This reflects the shift in our ownership structure, as we have closed underperforming company-operated stores and are focused on growing our licensed store base in profitable locations. Ongoing cost management and our prior store portfolio optimization activities contributed to an increase in operating margin of 260 basis points over the prior year to 3.2%. We expect the investments we are making in this region will result in improved operating performance as we progress on our plan towards mid-teens operating margin over time.
Our CAP segment results reflect a combination of rapid new store growth and solid performance from our existing store base, including our joint venture operations in China and Japan. New store growth, along with a 9% increase in comparable store sales, drove a 29% increase in total net revenues to $234 million. Operating income grew 38% to $85 million and operating margin expanded 250 basis points to 36.2%, driven by sales leverage, improved performance from our joint venture operations and lower coffee costs. We expect this segment will become a more meaningful contributor to overall company profitability in the future, as we look forward to continued store openings and establishing China as our largest market outside of the US.
Channel Development segment revenues grew 6% for the quarter to $336 million, primarily due to increased sales of premium single serve products, driven by sales of Starbucks- and Tazo-branded K-Cup® portion packs, partially offset by decreased pricing on packaged coffee. Lower coffee costs was the primary contributor to the 200 basis point increase in operating margin for the third quarter of fiscal 2013. As we continue to expand customer occasions outside of our retail stores, including growing our presence in the premium single serve category, we expect this segment will become a more significant contributor to our future growth.


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Comparable Store Sales
Starbucks comparable store sales for the third quarter of fiscal 2013 are as
follows:

                                 Quarter Ended Jun 30, 2013                           Three Quarters Ended Jun 30, 2013
                        Sales            Change in          Change in           Sales             Change in           Change in
                        Growth         Transactions           Ticket           Growth           Transactions           Ticket
Consolidated                8 %              7 %                 1  %             7  %                5 %                 1  %
Americas                    9 %              7 %                 2  %             7  %                5 %                 2  %
EMEA                        2 %              5 %                (3 )%            (1 )%                2 %                (2 )%
China / Asia Pacific        9 %              8 %                 -  %             9  %                7 %                 2  %

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 comparable store sales growth, 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. Fiscal 2014 - Financial Outlook for the Year For fiscal year 2014, we expect revenue growth driven by mid-single-digit comparable store sales growth, new store openings, and continued growth in the Channel Development business. Approximately one-half of new store openings will be in China / Asia Pacific, with the remaining half coming primarily from the Americas.
We expect full-year consolidated operating margin improvement of 150 to 200 basis points and strong EPS growth.
Results of Operations (in millions)

Revenues

                                     Quarter Ended                    Three Quarters Ended
                            Jun 30,       Jul 1,        %        Jun 30,       Jul 1,        %
                              2013         2012      Change       2013          2012      Change
Company-operated stores    $ 2,986.3    $ 2,615.6     14.2 %   $  8,783.7    $ 7,868.6     11.6 %
Licensed stores                342.0        308.2     11.0        1,014.2        905.1     12.1
CPG, foodservice and other     413.4        379.8      8.8        1,299.3      1,161.7     11.8
Total net revenues         $ 3,741.7    $ 3,303.6     13.3 %   $ 11,097.2    $ 9,935.4     11.7 %

Total net revenues for the third quarter and the first three quarters of fiscal 2013 increased $438 million and $1.2 billion, respectively, primarily driven by increased revenues from company-operated stores (contributing $371 million and $915 million, respectively). An increase in comparable store sales was the primary driver of the increase in company-operated store revenues for both periods (approximately 8%, or $217 million, for the third quarter and approximately 7%, or $525 million, for the first three quarters). Also contributing for both periods were incremental revenues from 802 net new company-operated store openings over the past 12 months (approximately $102 million for the third quarter and $267 million for the first three quarters). Licensed store revenue growth also contributed to the increase in total net revenues for the third quarter and the first three quarters of fiscal 2013 (approximately $34 million and $109 million, respectively). These increases were driven by increased


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product sales to and royalty revenues from our licensees, resulting from improved comparable store sales and the opening of 756 net new licensed stores over the last 12 months.
CPG, foodservice and other revenues increased $34 million and $138 million for the third quarter and the first three quarters of fiscal 2013, respectively. These increases were primarily due to increased sales of premium single serve products (approximately $29 million and $90 million, respectively).

Operating Expenses
                                     Quarter Ended                                 Three Quarters Ended
                       Jun 30,       Jul 1,      Jun 30,    Jul 1,      Jun 30,       Jul 1,      Jun 30,    Jul 1,
                        2013          2012         2013      2012        2013          2012         2013      2012
                                                     % of Total                                       % of Total
                                                    Net Revenues                                     Net Revenues
Cost of sales
including occupancy
costs                $ 1,597.6     $ 1,446.1       42.7 %    43.8 %   $ 4,748.6     $ 4,354.1       42.8 %    43.8 %
Store operating
expenses               1,084.1         976.0       29.0      29.5       3,212.2       2,928.3       28.9      29.5
Other operating
expenses                 105.3         105.9        2.8       3.2         349.9         317.9        3.2       3.2
Depreciation and
amortization
expenses                 153.3         136.7        4.1       4.1         455.3         408.6        4.1       4.1
General and
administrative
expenses                 249.6         199.0        6.7       6.0         711.7         597.4        6.4       6.0
Total operating
expenses               3,189.9       2,863.7       85.3      86.7       9,477.7       8,606.3       85.4      86.6
Income from equity
investees                 63.4          51.7        1.7       1.6         170.4         148.8        1.5       1.5
Operating income     $   615.2     $   491.6       16.4 %    14.9 %   $ 1,789.9     $ 1,477.9       16.1 %    14.9 %
Store operating
expenses as a % of
related revenues                                   36.3 %    37.3 %                                 36.6 %    37.2 %

Cost of sales including occupancy costs as a percentage of total net revenues decreased 110 basis points and 100 basis points for the third quarter and the first three quarters of fiscal 2013, respectively, primarily driven by lower coffee costs (approximately 60 basis points for the third quarter and 50 basis points for the first three quarters).
Store operating expenses as a percentage of total net revenues decreased 50 basis points for the third quarter and 60 basis points for the first three quarters of fiscal 2013. As a percentage of company-operated store revenues, store operating expenses decreased 100 basis points for the third quarter and 60 basis points for the first three quarters of fiscal 2013, primarily driven by sales leverage (approximately 110 basis points and 80 basis points, respectively).

Other operating expenses as a percentage of total net revenues decreased 40 basis points for the third quarter and was flat for the first three quarters of fiscal 2013. Excluding the impact of company-operated store revenues, other operating expenses decreased 150 basis points for the third quarter and 30 basis points for the first three quarters of fiscal 2013. These decreases were primarily driven by sales leverage from licensed store revenue growth (approximately 100 basis points the third quarter and approximately 20 basis points for the first three quarters). Also contributing to the decrease for the third quarter of fiscal 2013 was timing of marketing (approximately 50 basis points), largely due to lapping the prior year launch of Starbucks® Blonde Roast.

General and administrative expenses as a percentage of total net revenues increased 70 basis points for the third quarter and 40 basis points for the first three quarters of fiscal 2013. These increases were due in part to a donation to the Starbucks Foundation during the quarter (approximately 30 basis points for the third quarter and 10 basis points for the first three quarters). Also contributing to the increase for the first three quarters of fiscal 2013 were costs related to our October Global Leadership Conference (approximately 20 basis points). The remaining change for both periods was primarily the result of increased costs to support overall company growth.
Income from equity investees increased $12 million for the third quarter and $22 million for the first three quarters of fiscal 2013, primarily due to increased income from our joint venture operations in China and Japan, as well as improved performance from our North American Coffee Partnership joint venture which produces, bottles and distributes our ready to drink beverages. The increase for the first three quarters 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.


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The combination of these changes resulted in an increase in operating margin of 150 basis points for the third quarter and 120 basis points for the first three quarters of fiscal 2013.

Other Income and Expenses
                                       Quarter Ended                               Three Quarters Ended
                         Jun 30,     Jul 1,     Jun 30,     Jul 1,      Jun 30,       Jul 1,      Jun 30,     Jul 1,
                          2013        2012        2013       2012        2013          2012         2013       2012
                                                    % of Total                                        % of Total
                                                   Net Revenues                                      Net Revenues
Operating income        $ 615.2     $ 491.6      16.4  %    14.9  %   $ 1,789.9     $ 1,477.9      16.1  %    14.9  %
Interest income and
other, net                  3.5         9.7       0.1        0.3           51.4          68.2       0.5        0.7
Interest expense           (6.3 )      (8.9 )    (0.2 )     (0.3 )        (19.0 )       (26.2 )    (0.2 )     (0.3 )
Earnings before income
taxes                     612.4       492.4      16.4       14.9        1,822.3       1,519.9      16.4       15.3
Income taxes              194.6       159.1       5.2        4.8          581.4         494.2       5.2        5.0
Net earnings including
noncontrolling
interests                 417.8       333.3      11.2       10.1        1,240.9       1,025.7      11.2       10.3
Net earnings
attributable to
noncontrolling interest       -         0.2         -          -            0.6           0.6         -          -
Net earnings
attributable to
Starbucks               $ 417.8     $ 333.1      11.2  %    10.1  %   $ 1,240.3     $ 1,025.1      11.2  %    10.3  %
Effective tax rate
including
noncontrolling interest                          31.8  %    32.3  %                                31.9  %    32.5  %

For the third quarter and the first three quarters of fiscal 2013, net interest income and other decreased $6 million and $17 million, respectively. The decrease for the third quarter was primarily due to a decrease in stored value card breakage income (approximately $9 million), resulting from timing and increased utilization of card balances by customers. The decrease for the first three 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 unfavorable mark-to-market adjustments from derivatives used to manage our risk of commodity price fluctuations (approximately $16 million), partially offset by a gain on the sale of our equity in the joint venture that operates Starbucks® stores in Mexico in the second quarter of fiscal 2013 (approximately $35 million).

The effective tax rate for the quarter ended June 30, 2013 was 31.8% compared to 32.3% for the same quarter in fiscal 2012. The decrease in the rate for the third quarter of fiscal 2013 was primarily due to benefits from releasing certain tax reserves, primarily related to statute closures and the outcome of a federal audit. The effective tax rate for the three quarters ended June 30, 2013 was 31.9% compared to 32.5% for the same period in fiscal 2012. The decrease in the rate for the first three quarters of fiscal 2013 was primarily due to benefits from releasing certain tax reserves in the third quarter of fiscal 2013 and 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):

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Americas
                                  Quarter Ended                                 Three Quarters Ended
                   Jun 30,       Jul 1,      Jun 30,     Jul 1,      Jun 30,       Jul 1,      Jun 30,     Jul 1,
                    2013          2012         2013       2012        2013          2012         2013       2012
                                                % of Americas                                     % of Americas
                                                Net Revenues                                      Net Revenues
Total net
revenues         $ 2,776.5     $ 2,471.2                           $ 8,221.2     $ 7,424.4
Cost of sales
including
occupancy costs    1,051.2         965.1       37.9 %     39.1 %     3,143.6       2,913.4       38.2 %     39.2 %
Store operating
expenses             934.8         858.1       33.7       34.7       2,786.6       2,570.3       33.9       34.6
Other operating
expenses              23.0          20.2        0.8        0.8          74.1          59.4        0.9        0.8
Depreciation and
amortization
expenses             105.2          97.2        3.8        3.9         316.2         291.5        3.8        3.9
General and
administrative
expenses              43.0          31.9        1.5        1.3         143.9          94.9        1.8        1.3
Total operating
expenses           2,157.2       1,972.5       77.7       79.8       6,464.4       5,929.5       78.6       79.9
Income from
equity investees         -             -          -          -           2.4           2.1        0.0        0.0
Operating income $   619.3     $   498.7       22.3 %     20.2 %   $ 1,759.2     $ 1,497.0       21.4 %     20.2 %
Store operating
expenses as a %
of related
revenues                                       36.8 %     38.0 %                                 37.2 %     37.9 %

Revenues
Americas total net revenues for the third quarter and the first three quarters of fiscal 2013 increased $305 million, or 12%, and $797 million, or 11%, respectively. These increases were primarily driven by increased revenues from company-operated stores (contributing $280 million and $717 million, respectively) and licensed stores (contributing $20 million and $61 million, respectively).
An increase in comparable store sales was the primary driver of the increase in company-operated store revenues for both periods (approximately 9%, or $203 million, for the third quarter and approximately 7%, or $496 million, for the first three quarters). The increases in licensed store revenues were primarily due to increased product sales to and higher royalty revenues from our licensees, primarily resulting from improved comparable store sales and the opening of 330 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 120 basis points and 100 basis points for the third quarter and the first three quarters of fiscal 2013, respectively. These decreases were primarily driven by store initiatives to reduce waste (approximately 30 basis points for the third quarter and 40 basis points for the first three quarters) and lower coffee costs (approximately 30 basis points for both periods). 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 100 basis points for the third quarter and 70 basis points for the first three quarters of fiscal 2013, primarily driven by sales leverage.
Other operating expenses as a percentage of total net revenues was flat for the third quarter and increased 10 basis points for the first three quarters of fiscal 2013. Other operating expenses as a percentage of non-company-operated store revenues increased 20 basis points for the third quarter and 100 basis points for the first three quarters of fiscal 2013. The increase for the first three 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 20 basis points and 50 basis points for the third quarter and the first three quarters of fiscal 2013, respectively. The increase for the first three quarters was driven by our October Global Leadership Conference (approximately 40 basis points).
The combination of these changes resulted in an overall increase in operating margin of 210 basis points for the third quarter and 120 basis points for the first three quarters of fiscal 2013.


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EMEA

                                       Quarter Ended                             Three Quarters Ended
                         Jun 30,      Jul 1,     Jun 30,    Jul 1,     Jun 30,      Jul 1,     Jun 30,    Jul 1,
                           2013        2012        2013      2012        2013        2012        2013      2012
                                                     % of EMEA                                     % of EMEA
                                                    Net Revenues                                  Net Revenues
Total net revenues      $  287.2     $ 282.0                          $  866.6     $ 857.5
Cost of sales including
occupancy costs            147.5       149.8       51.4 %    53.1 %      440.8       444.2       50.9 %    51.8 %
Store operating
expenses                    85.8        88.2       29.9      31.3        259.3       274.0       29.9      32.0
Other operating
expenses                     9.9         8.4        3.4       3.0         29.0        26.0        3.3       3.0
Depreciation and
amortization expenses       13.7        14.4        4.8       5.1         41.6        42.9        4.8       5.0
General and
administrative expenses     21.0        19.6        7.3       7.0         59.0        57.4        6.8       6.7
Total operating
expenses                   277.9       280.4       96.8      99.4        829.7       844.5       95.7      98.5
Income from equity
investees                      -           -          -         -            -         0.3          -         -
Operating income        $    9.3     $   1.6        3.2 %     0.6 %   $   36.9     $  13.3        4.3 %     1.6 %
Store operating
expenses as a % of
related revenues                                   37.6 %    37.2 %                              37.0 %    37.3 %

Revenues
EMEA total net revenues increased $5 million, or 2%, for the third quarter of fiscal 2013 and increased $9 million, or 1%, for the first three quarters of fiscal 2013. Licensed store revenues grew (approximately $13 million, or 35%, for the third quarter and $40 million, or 41%, for the first three quarters), due to increased product sales to and higher royalty revenues from our licensees, primarily resulting from the opening of 125 net new licensed stores over the past 12 months and improved comparable store sales. The licensed store revenue increases were partially offset by a decline in company-operated store revenues (approximately $9 million for the third quarter and approximately $35 million for the first three 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 170 basis points for the third quarter and 90 basis points for the first three quarters of fiscal 2013. These decreases were primarily due to a reduction to the estimated asset retirement obligations of our store leases in . . .

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