Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
SBUX > SEC Filings for SBUX > Form 10-Q on 29-Apr-2014All Recent SEC Filings

Show all filings for STARBUCKS CORP

Form 10-Q for STARBUCKS CORP


29-Apr-2014

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, 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 potential 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 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 second quarter results reflect improvements across all segments. Consolidated total net revenues increased 9% to $3.9 billion, driven by global comparable store sales growth of 6%. Consolidated operating income increased $100 million, or 18%, to $644 million. Operating margin expanded across all reportable segments, contributing to a consolidated operating margin of 16.6%, reflecting growth of 130 basis points over the prior year quarter. Earnings per share of $0.56 increased 10% over the prior year quarter earnings per share of $0.51, which included a $0.03 per share gain on the sale of our equity interest in our Mexico joint venture operations.
The Americas segment continued its solid performance in the second quarter, growing revenues by 8% to $2.8 billion, primarily driven by comparable store sales growth of 6%, comprised of a 3% increase in average ticket and a 2% increase in number of transactions. Successful promotional beverages and expanded food offerings, including the rollout of our La Boulange™ food platform in the US, contributed to the growth in comparable store sales. Operating margin expanded 50 basis points to 21.6%, primarily due to lower commodity costs, mainly coffee. Looking forward, we expect to continue to drive revenue growth and margin expansion through new stores and expanded product offerings. We plan to continue elevating our food program, in part with the completion of the rollout of La Boulange™ bakery items in our US stores and enhancements to our lunch options.
In the EMEA segment, the combination of solid company-operated and licensed store growth drove increased revenues and profitability. Revenues grew 13% to $310 million, driven by favorable foreign currency exchange and comparable store sales growth of 6%, the highest growth in the region in fourteen quarters. Incremental revenues from 168 net new licensed store openings over the past year also contributed. Sales leverage, largely driven by our strategic portfolio shift to higher margin licensed stores, and continued cost management drove the increase in operating margin of 380 basis points over the prior year quarter, to 5.7%. We expect continued disciplined licensed store expansion and a focus on the customer experience in this region will result in improved operating performance as we progress on our plan towards mid-teens operating margin over time.


Table of Contents

The China/Asia Pacific segment leveraged strong sales in the quarter to offset the unfavorable margin impact of the portfolio shift toward more company-operated stores in this segment. New store growth, along with a 7% increase in comparable store sales, drove a 24% increase in revenues to $265 million. The 7% growth in comparable store sales was driven by an increase in number of transactions. Operating income grew 27% to $87 million, while operating margin expanded 80 basis points to 32.8%, primarily driven by sales leverage. We expect this segment will become a more meaningful contributor to overall company profitability in the future, as we look forward to continued new store openings and establishing China as our largest market outside of the US. Channel Development segment revenues grew 10% for the quarter to $370 million, primarily due to increased sales of premium single serve products, driven by sales of Starbucks- and Tazo-branded K-Cup® portion packs. Operating income grew $33 million, or 35%, to $127 million. Operating margin increased 660 basis points to 34.4% for the second quarter of fiscal 2014, primarily driven by lower coffee costs and sales leverage. 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 to become a more significant contributor to future growth.
Fiscal 2014 - Financial Outlook for the Year For fiscal year 2014, we expect revenue growth will be 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 175 to 200 basis points over fiscal 2013 and strong EPS growth when excluding the Kraft litigation charge and gains from the sales of our equity in our Mexico, Chile and Argentina joint ventures in fiscal 2013. Comparable Store Sales
Starbucks comparable store sales for the second quarter and the first two quarters of fiscal 2014:

                      Quarter Ended Mar 30, 2014         Two Quarters Ended Mar 30, 2014
                   Sales     Change in     Change in    Sales      Change in     Change in
                   Growth   Transactions    Ticket     Growth     Transactions    Ticket
Consolidated         6%          3%           3%         6%            3%           2%
Americas             6%          2%           3%         5%            3%           2%
EMEA                 6%          5%           1%         5%            4%           1%
China/Asia Pacific   7%          7%           -%         7%            7%           1%

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. Results of Operations (in millions)

Revenues

                                     Quarter Ended                    Two Quarters Ended
                            Mar 30,      Mar 31,        %       Mar 30,      Mar 31,        %
                              2014         2013      Change       2014         2013      Change
Company-operated stores    $ 3,068.0    $ 2,807.7      9.3 %   $ 6,411.8    $ 5,797.3     10.6 %
Licensed stores                356.2        322.1     10.6         758.0        672.2     12.8
CPG, foodservice and other     449.6        419.8      7.1         943.6        873.2      8.1
Total net revenues         $ 3,873.8    $ 3,549.6      9.1 %   $ 8,113.4    $ 7,342.7     10.5 %

Total net revenues for the second quarter and the first two quarters of fiscal 2014 increased $324 million and $771 million, respectively, primarily due to increased revenues from company-operated stores (contributing $260 million and $614 million, respectively). An increase in comparable store sales was the primary driver of the increase in company-operated store revenues (approximately 6% for both periods, or $152 million for the second quarter and $312 million for the first two quarters). Also contributing to net revenue growth for both periods were incremental revenues from 551 net new Starbucks® company-operated store openings over the past 12 months (approximately $127 million for the second quarter and $253 million for the first two quarters).


Table of Contents

Licensed store revenue growth also contributed to the increase in total net revenues for the second quarter and the first two quarters of fiscal 2014 (approximately $34 million for the second quarter and $86 million for the first two quarters). The increase for both periods was primarily due to increased product sales to and royalty revenues from our licensees, as a result of improved comparable store sales and the opening of 1,054 net new licensed stores over the past 12 months.
CPG, foodservice and other revenues increased $30 million and $70 million for the second quarter and the first two quarters of fiscal 2014, respectively. These increases were primarily due to increased sales of premium single serve products (approximately $23 million and $48 million, respectively).

Operating Expenses

                                      Quarter Ended                                  Two Quarters Ended
                       Mar 30,       Mar 31,     Mar 30,    Mar 31,      Mar 30,       Mar 31,     Mar 30,    Mar 31,
                        2014          2013         2014       2013        2014          2013         2014       2013
                                                     % of Total                                        % of Total
                                                    Net Revenues                                      Net Revenues
Cost of sales
including occupancy
costs                $ 1,629.2     $ 1,530.4       42.1 %     43.1 %   $ 3,424.2     $ 3,151.1      42.2  %     42.9 %
Store operating
expenses               1,134.5       1,038.4       29.3       29.3       2,309.6       2,127.9      28.5        29.0
Other operating
expenses                 110.9         105.8        2.9        3.0         225.8         231.9       2.8         3.2
Depreciation and
amortization
expenses                 174.4         153.1        4.5        4.3         344.1         302.0       4.2         4.1
General and
administrative
expenses                 240.6         230.3        6.2        6.5         483.2         462.2       6.0         6.3
Litigation                                                                 (20.2 )
charge/(credit)              -             -          -          -                           -      (0.2 )         -
Total operating
expenses               3,289.6       3,058.0       84.9       86.2       6,766.7       6,275.1      83.4        85.5
Income from equity
investees                 59.9          52.5        1.5        1.5         111.0         107.0       1.4         1.5
Operating income     $   644.1     $   544.1       16.6 %     15.3 %   $ 1,457.7     $ 1,174.6      18.0  %     16.0 %
Store operating
expenses as a % of
related revenues                                   37.0 %     37.0 %                                36.0  %     36.7 %

Cost of sales including occupancy costs as a percentage of total net revenues decreased 100 basis points and 70 basis points for the second quarter and first two quarters of fiscal 2014, respectively, primarily driven by lower commodity costs (approximately 100 basis points for the second quarter and 90 basis points for the first two quarters), mainly coffee.
Store operating expenses as a percentage of total net revenues were flat for the second quarter and decreased 50 basis points for the first two quarters of fiscal 2014. Store operating expenses as a percentage of company-operated store revenues were flat for the second quarter and decreased 70 basis points for the first two quarters of fiscal 2014. The decrease for the first two quarters of fiscal 2014 was primarily driven by higher litigation charges in the first quarter of the prior year period (approximately 40 basis points) and a decrease in marketing (approximately 20 basis points), largely due to lapping the prior year launch of the Verismo® system by Starbucks in company-operated stores. Other operating expenses as a percentage of total net revenues decreased 10 basis points for the second quarter and 40 basis points for the first two quarters of fiscal 2014. Excluding the impact of company-operated store revenues, other operating expenses decreased 50 basis points for the second quarter and 170 basis points for the first two quarters of fiscal 2014, primarily due to decreased marketing (approximately 20 basis points for the second quarter and 60 basis points for the first two quarters). The decrease for the first two quarters of fiscal 2014 was primarily attributable to the timing of product launches in Channel Development. Sales leverage from licensed store revenue growth (approximately 20 basis points for the second quarter and 30 basis points for the first two quarters) also contributed to the decreases. General and administrative expenses as a percentage of total net revenues decreased 30 basis points for both the second quarter and the first two quarters of fiscal 2014. The decrease for the second quarter was primarily due to increased sales leverage. The decrease for the first two quarters was primarily due to lapping our leadership conference held in the first quarter of the prior year period.
The $20.2 million litigation credit (contributing approximately 20 basis points for the first two quarters of fiscal 2014) reflects a reduction to our estimated prejudgment interest payable associated with the Kraft arbitration in the first quarter of fiscal 2014, as a result of paying our obligation earlier than anticipated. The $2.8 billion litigation charge was accrued in the fourth quarter of fiscal 2013 and fully extinguished in the first quarter of fiscal 2014.


Table of Contents

The combination of these changes resulted in an overall increase in operating margin of 130 basis points for the second quarter and 200 basis points for the first two quarters of fiscal 2014.
Other Income and Expenses

                                     Quarter Ended                                 Two Quarters Ended
                      Mar 30,      Mar 31,     Mar 30,    Mar 31,      Mar 30,       Mar 31,     Mar 30,    Mar 31,
                        2014         2013        2014       2013        2014          2013         2014       2013
                                                   % of Total                                        % of Total
                                                  Net Revenues                                      Net Revenues
Operating income     $  644.1     $  544.1      16.6  %    15.3  %   $ 1,457.7     $ 1,174.6      18.0  %    16.0  %
Interest income and
other, net               17.8         50.8       0.5        1.4           37.6          48.0       0.5        0.7
Interest expense        (16.7 )       (6.1 )    (0.4 )     (0.2 )        (31.3 )       (12.7 )    (0.4 )     (0.2 )
Earnings before
income taxes            645.2        588.8      16.7       16.6        1,464.0       1,209.9      18.0       16.5
Income taxes            218.3        198.1       5.6        5.6          496.4         386.8       6.1        5.3
Net earnings
including
noncontrolling
interests               426.9        390.7      11.0       11.0          967.6         823.1      11.9       11.2
Net earnings
attributable to
noncontrolling
interests                (0.1 )        0.3         -          -              -           0.6         -          -
Net earnings
attributable to
Starbucks            $  427.0     $  390.4      11.0  %    11.0  %   $   967.6     $   822.5      11.9  %    11.2  %
Effective tax rate
including
noncontrolling
interests                                       33.8  %    33.6  %                                33.9  %    32.0  %

For the second quarter and first two quarters of fiscal 2014, net interest income and other decreased $33 million and $10 million, respectively. These decreases were primarily due to lapping the gain on the sale of our equity in the joint venture that operates Starbucks® stores in Mexico in the prior year quarter (approximately $35 million). Also contributing to the decreases were unrealized losses on our trading securities portfolio (approximately $14 million for the second quarter and $10 million for the first two quarters), partially offset by favorable mark-to-market adjustments from derivatives used to manage our risk of commodity price fluctuations (approximately $8 million for the second quarter and $17 million for the first two quarters).
Interest expense increased $11 million for the second quarter and $19 million for the first two quarters of fiscal 2014, respectively, due to interest on the long-term debt we issued in the first quarter of fiscal 2014 and the fourth quarter of fiscal 2013.
The effective tax rate for the quarter ended March 30, 2014 was 33.8% compared to 33.6% for the same quarter in fiscal 2013. The slight increase in the rate was driven by the release of a capital loss valuation allowance in the prior year period. The effective tax rate for the two quarters ended March 30, 2014 was 33.9% compared to 32.0% for the same period in fiscal 2013. The increase in the rate for the first two quarters of fiscal 2014 was primarily due to lapping 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.


Table of Contents

Segment Information
Results of operations by segment (in millions):
Americas
                                      Quarter Ended                                  Two Quarters Ended
                       Mar 30,       Mar 31,     Mar 30,    Mar 31,      Mar 30,       Mar 31,     Mar 30,    Mar 31,
                        2014          2013         2014       2013        2014          2013         2014       2013
                                                    % of Americas                                     % of Americas
                                                    Net Revenues                                      Net Revenues
Total net revenues   $ 2,808.8     $ 2,604.1                           $ 5,881.7     $ 5,444.7
Cost of sales
including occupancy
costs                  1,059.6       1,000.0       37.7 %     38.4 %     2,223.8       2,092.5       37.8 %     38.4 %
Store operating
expenses                 963.9         891.9       34.3       34.2       1,963.5       1,851.7       33.4       34.0
Other operating
expenses                  23.7          21.2        0.8        0.8          49.0          51.2        0.8        0.9
Depreciation and
amortization
expenses                 114.8         105.6        4.1        4.1         227.1         211.0        3.9        3.9
General and
administrative
expenses                  41.2          38.1        1.5        1.5          80.7         100.9        1.4        1.9
Total operating
expenses               2,203.2       2,056.8       78.4       79.0       4,544.1       4,307.3       77.3       79.1
Income from equity
investees                    -           2.4          -        0.1             -           2.4          -          -
Operating income     $   605.6     $   549.7       21.6 %     21.1 %   $ 1,337.6     $ 1,139.8       22.7 %     20.9 %
Store operating
expenses as a % of
related revenues                                   37.6 %     37.5 %                                 36.7 %     37.3 %

Revenues
Americas total net revenues for the second quarter and the first two quarters of fiscal 2014 increased 8% for both periods or $205 million and $437 million, respectively. These increases were primarily due to higher revenues from company-operated stores (contributing $185 million and $386 million, respectively) and licensed stores (contributing $21 million and $56 million, respectively).
The increase in company-operated store revenues for both periods was driven by an increase in comparable store sales (approximately 6%, or $129 million, for the second quarter and approximately 5%, or $265 million, for the first two quarters). Also contributing were incremental revenues from 311 net new Starbucks® company-operated store openings over the past 12 months (approximately $88 million and $178 million, respectively). Partially offsetting these increases was unfavorable foreign currency exchange (approximately $21 million and $37 million, respectively), primarily driven by the strengthening of the US dollar against the Canadian dollar.
The increases in licensed store revenues were primarily due to increased product sales to and higher royalty revenues from our licensees, as a result of improved comparable store sales and the opening of 456 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 70 basis points and 60 basis points for the second quarter and the first two quarters of fiscal 2014, respectively. These decreases were primarily driven by lower commodity costs (approximately 60 basis points for the second quarter and 50 basis points for the first two quarters). Sales leverage on occupancy costs also contributed.
Store operating expenses as a percentage of total net revenues and as a percentage of company-operated store revenues, increased 10 basis points for the second quarter and decreased 60 basis points for the first two quarters of fiscal 2014. The slight increase for the second quarter was primarily driven by timing of marketing (20 basis points). The decrease for the first two quarters of fiscal 2014 was primarily driven by higher litigation charges in the first quarter of the prior year period (approximately 40 basis points) and a decrease in marketing (approximately 20 basis points), largely due to lapping the prior year launch of the Verismo® system by Starbucks in company-operated stores. General and administrative expenses as a percentage of total net revenues were flat for the second quarter and decreased 50 basis points for the first two quarters of fiscal 2014, primarily due to lapping our leadership conference held in the first quarter of the prior year period (approximately 40 basis points).


Table of Contents

The combination of these changes resulted in an overall increase in operating margin of 50 basis points for the second quarter and 180 basis points for the first two quarters of fiscal 2014.

EMEA
                                      Quarter Ended                                  Two Quarters Ended
                       Mar 30,       Mar 31,     Mar 30,    Mar 31,      Mar 30,       Mar 31,     Mar 30,    Mar 31,
                        2014          2013         2014       2013        2014          2013         2014       2013
                                                      % of EMEA                                         % of EMEA
                                                    Net Revenues                                      Net Revenues
Total net revenues   $   309.9     $   273.2                           $   649.5     $   579.3
Cost of sales
including occupancy
costs                    158.3         140.8       51.1 %     51.5 %       326.5         293.3       50.3 %     50.6 %
Store operating
expenses                  92.4          83.2       29.8       30.5         188.8         173.5       29.1       29.9
Other operating
expenses                  11.8          10.7        3.8        3.9          23.4          19.1        3.6        3.3
Depreciation and
amortization
expenses                  14.8          13.7        4.8        5.0          29.4          27.9        4.5        4.8
General and
administrative
expenses                  16.0          19.6        5.2        7.2          32.1          38.0        4.9        6.6
Total operating
expenses                 293.3         268.0       94.6       98.1         600.2         551.8       92.4       95.3
Income from equity
investees                  1.1             -        0.4          -           1.9             -        0.3          -
Operating income     $    17.7     $     5.2        5.7 %      1.9 %   $    51.2     $    27.5        7.9 %      4.7 %
Store operating
expenses as a % of
related revenues                                   37.6 %     38.0 %                                 36.7 %     36.8 %

Revenues
EMEA total net revenues increased $37 million, or 13%, for the second quarter of fiscal 2014 and increased $70 million, or 12%, for the first two quarters of fiscal 2014. These increases were primarily due to higher revenues from company-operated stores (contributing $27 million and $43 million, respectively). These increases were driven by an increase in comparable store sales (approximately 6%, or $12 million, for the second quarter and approximately 5%, or $24 million, for the first two quarters) and favorable foreign currency exchange (approximately $12 million and $19 million, respectively), primarily driven by the weakening of the US dollar against the British pound.
Licensed store revenues grew (approximately $8 million, or 18%, for the second quarter and $25 million, or 28%, for the first two quarters), due to increased equipment and product sales to and higher royalty revenues from our licensees, primarily from the opening of 168 net new licensed stores over the past 12 months and improved comparable store sales. Operating Expenses
Cost of sales including occupancy costs as a percentage of total net revenues decreased 40 basis points for the second quarter and 30 basis points for the first two quarters of fiscal 2014, primarily driven by sales leverage and continued cost management (approximately 110 basis points for the second quarter and 100 basis points for the first two quarters). Also contributing to the decreases were lapping higher inventory reserves in the prior year . . .

  Add SBUX to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for SBUX - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.