Starbucks(SBUX) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements (Unaudited) For the quarter ended January 1, 2023, Starbucks reported total net revenues of $8.71 billion, an 8.2% increase year-over-year, with net earnings attributable to Starbucks at $855.2 million and diluted EPS of $0.74 Consolidated Statements of Earnings For the quarter ended January 1, 2023, total net revenues increased by 8.2% to $8.71 billion, operating income rose to $1.25 billion, and net earnings attributable to Starbucks grew to $855.2 million, with diluted EPS increasing to $0.74 | Financial Metric | Q1 FY2023 (ended Jan 1, 2023) (in millions) | Q1 FY2022 (ended Jan 2, 2022) (in millions) | Change | | :--- | :--- | :--- | :--- | | Total Net Revenues | $8,713.9 | $8,050.4 | +8.2% | | Operating Income | $1,253.1 | $1,177.8 | +6.4% | | Net Earnings Attributable to Starbucks | $855.2 | $815.9 | +4.8% | | Diluted Earnings Per Share (EPS) | $0.74 | $0.69 | +7.2% | Consolidated Balance Sheets As of January 1, 2023, total assets were $28.26 billion, total liabilities stood at $36.92 billion, and total shareholders' deficit was $8.67 billion | Balance Sheet Item | Jan 1, 2023 (in millions) | Oct 2, 2022 (in millions) | | :--- | :--- | :--- | | Total Current Assets | $6,934.9 | $7,018.7 | | Total Assets | $28,256.1 | $27,978.4 | | Total Current Liabilities | $9,246.2 | $9,151.8 | | Long-term Debt | $13,176.7 | $13,119.9 | | Total Liabilities | $36,922.0 | $36,677.1 | | Total Shareholders' Deficit | $(8,673.8) | $(8,706.6) | Consolidated Statements of Cash Flows For Q1 FY2023, net cash provided by operating activities was $1.59 billion, while investing activities used $279.3 million and financing activities used $1.01 billion, resulting in a net increase in cash and cash equivalents of $368.1 million | Cash Flow Activity (Q1 FY2023) | Amount (in millions) | | :--- | :--- | | Net cash provided by operating activities | $1,593.2 | | Net cash used in investing activities | $(279.3) | | Net cash used in financing activities | $(1,007.8) | | Net increase in cash and cash equivalents | $368.1 | Notes to Consolidated Financial Statements The notes detail key accounting policies, the impact of COVID-19 on the China market, derivative instruments used for hedging, segment performance, and a subsequent event regarding the sale of Seattle's Best Coffee brand - During Q1 2023, the China market continued to experience significant business interruptions due to escalating COVID outbreaks, which suppressed customer mobility[21] - The company uses derivative instruments, including swaps and forward contracts, to hedge risks related to interest rates, foreign currency fluctuations, and commodity prices like coffee and dairy[24][25][26] - As of January 1, 2023, the company had repurchased 1.9 million shares of common stock for $191.4 million in the quarter. A quarterly cash dividend of $0.53 per share was declared[67] | Segment (Q1 2023) | Total Net Revenues (in millions) | Operating Income/(Loss) (in millions) | | :--- | :--- | :--- | | North America | $6,551.3 | $1,212.4 | | International | $1,680.1 | $240.4 | | Channel Development | $478.2 | $226.3 | | Corporate and Other | $4.3 | $(426.0) | - On January 13, 2023, Starbucks finalized the sale of the Seattle's Best Coffee brand to Nestlé, expecting to recognize a pre-tax gain of approximately $90 million in the second quarter of fiscal 2023[77] Management's Discussion and Analysis (MD&A) Management reported an 8% increase in consolidated net revenues to $8.7 billion, driven by 5% global comparable store sales growth, though operating margin decreased slightly by 20 basis points to 14.4% due to labor investments, inflation, and China's sales deleverage Overall Performance Overview In Q1 2023, Starbucks achieved 5% global comparable store sales growth, led by a 10% increase in the U.S., but offset by a 29% decrease in China, with consolidated net revenues growing 8% to $8.7 billion and operating margin contracting to 14.4% - Global comparable store sales grew 5%, driven by a 10% increase in the U.S. but partially offset by a 29% decrease in China due to COVID-19 related business conditions[82] - Consolidated operating margin decreased by 20 basis points to 14.4%, primarily due to investments in labor, inflationary pressures, and sales deleverage in China[82] - Management anticipates improved financial performance in the second half of fiscal 2023, driven by sales leverage, pricing, productivity gains, and an expected recovery in China[82] Segment Performance Analysis Segment performance was mixed in Q1 2023, with North America delivering strong results with 14% revenue growth to $6.6 billion, while the International segment's revenue fell 10% to $1.7 billion due to China's decline and unfavorable foreign currency translation | Segment (Q1 2023) | Revenue (in millions) | Revenue Change (YoY) | Operating Income (in millions) | Operating Margin | | :--- | :--- | :--- | :--- | :--- | | North America | $6,551.3 | +14% | $1,212.4 | 18.5% | | International | $1,680.1 | -10% | $240.4 | 14.3% | | Channel Development | $478.2 | +15% | $226.3 | 47.3% | - North America's operating margin decreased 40 basis points to 18.5%, primarily due to investments in labor and inflationary pressures, partially offset by strategic pricing[93] - International's operating margin fell 170 basis points to 14.3%, mainly due to sales deleverage from COVID-19 impacts in China[97] - Channel Development's operating margin increased 340 basis points to 47.3%, driven by growth in the North American Coffee Partnership joint venture[100] Store Portfolio Changes During Q1 FY2023, Starbucks opened 459 net new stores globally, ending the period with a total of 36,170 stores, representing a 5% increase from the prior year, with International leading the expansion | Region | Net New Stores (Q1 2023) | Total Stores (as of Jan 1, 2023) | | :--- | :--- | :--- | | North America | 86 | 17,381 | | International | 373 | 18,789 | | Total Company | 459 | 36,170 | Financial Condition, Liquidity and Capital Resources As of January 1, 2023, Starbucks held $3.6 billion in cash and investments, maintained $6.0 billion in credit facilities with no outstanding balances, resumed share repurchases totaling $191.4 million, and projects $2.5 billion in capital expenditures for fiscal 2023 - Cash and investments totaled $3.6 billion as of January 1, 2023[105] - The company has a $3.0 billion unsecured revolving credit facility and a $3.0 billion commercial paper program, both with no amounts outstanding at the end of the quarter[106][107] - Share repurchases resumed, with 1.9 million shares bought back for $191.4 million. 50.6 million shares remain available for repurchase under current authorizations[109] - Total capital expenditures for fiscal 2023 are expected to be approximately $2.5 billion[109] Quantitative and Qualitative Disclosures About Market Risk The company states that there have been no material changes in its market risk exposures for commodity prices, foreign currency exchange, equity security prices, or interest rates since the disclosures made in its Fiscal 2022 Annual Report on Form 10-K - There has been no material change in the commodity price risk, foreign currency exchange risk, equity security price risk, or interest rate risk from the last annual report (10-K)[115] Controls and Procedures Based on management's evaluation, the company concluded that its disclosure controls and procedures were effective as of January 1, 2023, with no material changes in internal control over financial reporting during the quarter - Management, including the interim CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of the end of the quarter[117] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[117] PART II. OTHER INFORMATION Legal Proceedings The company provides an update on a long-running lawsuit related to California's Proposition 65 regarding acrylamide in coffee, with Starbucks believing the likelihood of a material loss is less than reasonably possible - The company is involved in a lawsuit concerning Proposition 65 and acrylamide in coffee. After favorable rulings in lower courts, the case is now pending a petition for review by the California Supreme Court[72] - Management believes that the likelihood of incurring a material loss from this litigation is less than reasonably possible, and no loss contingency has been recorded[72] Unregistered Sales of Equity Securities and Use of Proceeds During Q1 FY2023, Starbucks repurchased approximately 1.9 million shares of its common stock for $191.4 million, with 50.6 million shares remaining available for repurchase under current authorizations | Period (Q1 FY2023) | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Total for Quarter | 1,934,002 | $98.97 | - As of the end of the quarter, 50,638,176 shares remained available for repurchase under the company's publicly announced plans[122]