Starbucks(SBUX) - 2024 Q4 - Annual Report

Part I - Business and Risk Factors Business Overview Starbucks is the world's premier roaster, marketer, and retailer of specialty coffee, operating in 87 markets with a focus on global expansion and ethical sourcing Human Capital Management Starbucks employs approximately 361,000 people globally, prioritizing partner well-being through competitive compensation, comprehensive benefits, and an inclusive environment - As of September 29, 2024, Starbucks employed approximately 361,000 people worldwide, with 211,000 in the U.S. and 150,000 internationally; approximately 5% of U.S. company-operated store partners are unionized[25] - In the U.S., the workforce is 70.9% female and 28.4% male, with diverse partners comprising 51.9% of the retail team and 37.9% of corporate roles[20] - The company offers significant U.S. benefits, including comprehensive health insurance for partners working 20+ hours/week, 100% upfront tuition coverage, and a 401(k) plan with a 5% company match[21] Segment Financial Information The company operates through three reportable segments: North America, International, and Channel Development, with company-operated stores generating the majority of revenue - The company's three reportable segments are North America, International, and Channel Development[28] - Company-operated stores generated 82% of total net revenues in FY2024, while licensed stores accounted for 12%[31][37] - The Channel Development segment operates largely through a licensed model with the Global Coffee Alliance (Nestlé) and collaborative relationships with partners like PepsiCo[28] Product Supply and Competition Starbucks manages coffee purchasing and roasting to ensure quality, mitigating price volatility through contracts, and faces intense competition across various retail channels - The price of high-quality arabica coffee is volatile, subject to a premium above the 'C' commodity price, and influenced by supply, demand, weather, and political conditions in producing countries[41] - The company uses fixed-price and price-to-be-fixed purchase commitments, along with hedging instruments, to secure an adequate supply of green coffee through fiscal 2025[41] - Competition is faced from specialty coffee shops, large quick-service restaurants, and products sold through grocery, warehouse, and convenience channels[45] - Starbucks operates in 87 markets and its primary objective is to maintain its standing as a leading global brand through store expansion, innovation, and a focus on ethical sourcing[14] Global Store Count as of September 29, 2024 | Store Type | North America | International | Total Stores | % of Total | | :--- | :--- | :--- | :--- | :--- | | Company-operated | 11,161 | 9,857 | 21,018 | 52% | | Licensed | 7,263 | 11,918 | 19,181 | 48% | | Total | 18,424 | 21,775 | 40,199 | 100% | Revenue by Segment (FY 2024) | Segment | % of Total Net Revenues | | :--- | :--- | | North America | 75% | | International | 20% | | Channel Development | 5% | Retail Sales Mix by Product (Company-Operated Stores) | Product Type | FY 2024 | FY 2023 | FY 2022 | | :--- | :--- | :--- | :--- | | Beverages | 74% | 74% | 74% | | Food | 23% | 22% | 22% | | Other | 3% | 4% | 4% | Risk Factors The company identifies numerous risks that could materially affect its business, including brand value erosion, strategic initiative failures, and dependence on the North America segment - Brand value is critical and can be eroded by negative consumer responses, boycotts, or publicity related to company actions, ethical perceptions, or labor practices[63] - The company is highly dependent on the financial performance of its North America operating segment, which accounted for approximately 75% of consolidated total net revenues in fiscal 2024[78] - Increases in the cost or decreases in the availability of high-quality arabica coffee beans, dairy, and other commodities could adversely impact business operations and financial results[87] - Changes in labor availability and costs, including wages and benefits, as well as union organizing efforts, could adversely affect the business; unions represent partners at hundreds of U.S. company-operated stores[98] - Material failures, interruptions, or security breaches of information technology systems, which store customer data and are critical for operations like mobile ordering and payments, could harm the business[112] Cybersecurity Starbucks maintains a comprehensive cybersecurity program overseen by the CISO and Board, with no material incidents identified to date - The cybersecurity program is led by the CISO and overseen by the Board's Audit and Compliance Committee, which receives quarterly updates[119] - The program includes processes for identifying and managing risks, an incident response plan, employee training, and management of third-party risk[116][118] - As of the filing date, Starbucks has not identified any cybersecurity threats or incidents that have materially affected or are reasonably likely to materially affect its business strategy, results of operations, or financial condition[118] Properties As of September 29, 2024, Starbucks operated 21,018 company-operated stores, mostly leased, and owns most roasting facilities Major Owned and Leased Properties | Location | Approx. Size (Sq. Feet) | Purpose | | :--- | :--- | :--- | | York, PA | 1,957,000 | Roasting, warehousing and distribution | | Seattle, WA | 1,294,000 | Corporate administrative | | Minden, NV | 1,080,000 | Roasting, warehousing and distribution | | Kunshan, China | 630,000 | Roasting, warehousing and distribution | - As of September 29, 2024, Starbucks had 21,018 company-operated stores, almost all of which are leased[121] Part II - Market, Financials, and MD&A Shareholder and Market Information Starbucks common stock trades on Nasdaq under 'SBUX', with approximately 17,000 shareholders, and underperformed major indices over the past five years - There was no share repurchase activity during the fiscal fourth quarter ended September 29, 2024[126] Stock Performance Comparison (Sept 2019 - Sept 2024) | Index | Value of $100 Invested on 9/29/2019 | | :--- | :--- | | Starbucks Corporation | $122.41 | | S&P 500 | $209.84 | | Nasdaq Composite | $236.74 | | S&P Consumer Discretionary | $177.00 | Management's Discussion and Analysis (MD&A) In FY2024, Starbucks' consolidated net revenues grew 1% to $36.2 billion, but operating margin contracted to 15.0% due to reduced traffic and increased costs, prompting a "Back to Starbucks" strategy Results of Operations (FY 2024 vs FY 2023) For fiscal 2024, consolidated net revenues increased 1% to $36.2 billion, driven by new store openings but offset by decreased comparable store sales and a 130 basis point operating margin contraction Consolidated Revenues (in millions) | Revenue Type | FY 2024 | FY 2023 | % Change | | :--- | :--- | :--- | :--- | | Company-operated stores | $29,765.9 | $29,462.3 | 1.0% | | Licensed stores | $4,505.1 | $4,512.7 | (0.2)% | | Other | $1,905.2 | $2,000.6 | (4.8)% | | Total net revenues | $36,176.2 | $35,975.6 | 0.6% | - The 130 basis point contraction in operating margin was primarily driven by investments in store partner wages and benefits, deleverage, and increased promotional activity[140][144] - The effective tax rate increased to 24.3% in FY2024 from 23.6% in FY2023[146] Segment Performance In FY2024, North America revenue grew 2% with margin contraction, International revenue declined 2% with significant margin contraction, and Channel Development revenue decreased 7% but saw margin expansion - North America: Revenue grew 2% to $5.4 billion, but operating margin contracted 90 bps to 19.8% due to wage investments and deleverage[149][150] - International: Revenue declined 2% to $1.0 billion, and operating margin contracted 220 bps to 14.2%, driven by promotional activity and wage investments[153][154] - Channel Development: Revenue decreased 7% to $926 million, but operating margin expanded 120 bps to 52.3%, despite lapping the gain from the sale of Seattle's Best Coffee[157][158] Financial Condition, Liquidity, and Capital Resources As of September 29, 2024, Starbucks held $3.8 billion in cash, maintained a $3.0 billion undrawn credit facility, and returned $3.8 billion to shareholders in FY2024 - Cash and investments totaled $3.8 billion at the end of FY2024[161] - The company has a $3.0 billion unsecured revolving credit facility and a $3.0 billion commercial paper program, both with no outstanding balances at year-end[162][165] - In FY2024, $3.8 billion was returned to shareholders, consisting of $2.6 billion in dividends and $1.3 billion in share repurchases[140][169] Material Cash Requirements (as of Sept 29, 2024, in millions) | Obligation Type | Total | Less than 1 Year | 1 - 3 Years | 3 - 5 Years | More than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating lease obligations | $11,942.3 | $1,808.5 | $3,202.2 | $2,433.1 | $4,498.5 | | Debt principal payments | $15,700.0 | $1,250.0 | $3,000.0 | $2,350.0 | $9,100.0 | | Debt interest payments | $6,359.4 | $588.3 | $968.9 | $798.6 | $4,003.6 | | Purchase obligations | $1,296.0 | $1,010.0 | $245.9 | $40.1 | — | Critical Accounting Estimates Management identifies critical accounting estimates including income taxes, impairment of long-lived assets, and goodwill, with the China reporting unit's goodwill assessment noted as a critical audit matter - Key critical accounting estimates include income taxes, impairment of long-lived assets (property, plant, and equipment), and impairment of goodwill and indefinite-lived intangible assets[182] - Goodwill impairment testing requires management to make significant assumptions about future cash flows, revenue growth, operating expenses, and discount rates[187] - The goodwill impairment assessment for the China reporting unit was deemed a critical audit matter by the independent auditor due to the high degree of judgment required for its valuation assumptions[358][360] - FY2024 financial results were pressured by reduced customer traffic, leading to a new 'Back to Starbucks' strategy under new CEO Brian Niccol to bring customers back and return to growth[134][135] Key Financial Highlights (FY 2024 vs FY 2023) | Metric | FY 2024 | FY 2023 | Change | | :--- | :--- | :--- | :--- | | Total Net Revenues | $36.2 billion | $36.0 billion | +1% | | Operating Income | $5.4 billion | $5.9 billion | -8.5% | | Operating Margin | 15.0% | 16.3% | -130 bps | | Diluted EPS | $3.31 | $3.58 | -7.5% | | Capital Expenditures | $2.8 billion | $2.3 billion | +21.7% | Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for fiscal years 2024, 2023, and 2022, including detailed notes on accounting policies and financial components Notes to Consolidated Financial Statements The notes provide detailed explanations of accounting policies, including revenue recognition for stored value cards, debt and lease obligations, segment reporting by geography, and a subsequent acquisition in the U.K - Revenue from unredeemed stored value cards (breakage) totaled $207.6 million in FY2024 ($187.6 million in company-operated stores and $20.0 million in licensed stores)[251] - As of September 29, 2024, total long-term debt principal was $15.7 billion, with $1.25 billion due in fiscal 2025[314][317] - The total operating lease liability was $10.2 billion, with a weighted-average remaining lease term of 8.6 years and a discount rate of 3.4%[319] - In FY2024, the U.S. generated $26.7 billion in revenue (74% of total), and China generated $3.0 billion (8% of total)[349] - Subsequent to year-end, on October 14, 2024, Starbucks acquired 23.5 Degrees, a U.K. licensed partner, converting 113 licensed stores to company-operated[354] Consolidated Statement of Earnings Highlights (in millions) | Metric | FY 2024 | FY 2023 | FY 2022 | | :--- | :--- | :--- | :--- | | Total Net Revenues | $36,176.2 | $35,975.6 | $32,250.3 | | Operating Income | $5,408.8 | $5,870.8 | $4,617.8 | | Net Earnings Attributable to Starbucks | $3,760.9 | $4,124.5 | $3,281.6 | | Diluted EPS | $3.31 | $3.58 | $2.83 | Consolidated Balance Sheet Highlights (in millions) | Metric | Sep 29, 2024 | Oct 1, 2023 | | :--- | :--- | :--- | | Total Current Assets | $6,847.4 | $7,303.4 | | Total Assets | $31,339.3 | $29,445.5 | | Total Current Liabilities | $9,070.0 | $9,345.3 | | Long-term Debt | $14,319.5 | $13,547.6 | | Total Liabilities | $38,780.9 | $37,433.3 | | Total Deficit | $(7,441.6) | $(7,987.8) | Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of September 29, 2024, with an unqualified auditor opinion - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 29, 2024[363] - Management concluded that internal control over financial reporting was effective as of September 29, 2024[364] - The independent auditor, Deloitte & Touche LLP, provided an unqualified opinion on the company's internal control over financial reporting[366] Part III - Corporate Governance and Executive Compensation Directors, Officers, Compensation, and Accountant Services Information for Items 10 through 14, covering corporate governance, executive compensation, and related matters, is incorporated by reference from the forthcoming Proxy Statement - Information regarding directors, executive officers, corporate governance, executive compensation, security ownership, and principal accountant fees is incorporated by reference from the forthcoming Proxy Statement[373][374][375][376][377] Part IV - Exhibits and Financial Statement Schedules Exhibits and Financial Statement Schedules This section lists all financial statements and exhibits filed as part of the Form 10-K, with financial statements included in Item 8 and schedules omitted if not applicable - This section contains the list of all financial statements and exhibits filed with the 10-K[380]