Starbucks: Reports Q4 and FY Fiscal 2019 Results

Seattle / WA. (sc) Starbucks Corporation reported financial results for its 13-week fiscal fourth quarter and 52-week fiscal year ended September 29, 2019. GAAP results in fiscal 2019 and fiscal 2018 include items which are excluded from non-GAAP results. «I’m very pleased with our strong finish to fiscal 2019, as we sustained positive momentum across each of our business segments,» said Kevin Johnson, president and ceo. «Our U.S. business delivered 6 percent comparable store sales growth in the fourth quarter, while China grew comparable store sales by 5 percent and total transactions by 13 percent. Our strong performance throughout fiscal 2019 gives us confidence in a robust operating outlook for fiscal 2020.»

«We are making meaningful progress against our strategic priorities while streamlining the company, bringing more focus and discipline to everything we do. The investments we are making for the long term – in our partners, our stores, beverage innovation and digital – are collectively delivering an elevated Starbucks Experience, as evidenced by all-time-high customer connection scores in the fourth quarter. This long-term focus is instrumental to how we are building an enduring company,» concluded Johnson.

Fourth Quarter Fiscal 2019 Highlights

• Global comparable store sales up 5 percent, driven by a 3 percent increase in average ticket and a 2 percent increase in comparable transactions
  • Americas and U.S. comparable store sales up 6 percent, both driven by a 3 percent increase in average ticket and a 3 percent increase in comparable transactions
  • International comparable store sales up 3 percent, driven by a 3 percent increase in average ticket and a 1 percent increase in transactions; China comparable store sales increased 5 percent, with comparable transactions up 2 percent
• The company opened 630 net new stores in Q4, yielding 31,256 stores at the end of the quarter, a 7 percent increase over the prior year
• Consolidated net revenues of USD 6.7 billion grew 7 percent over the prior year
  • Consolidated net revenues grew 10 percent over the prior year adjusted for unfavorable impacts of approximately 3 percent from Streamline-driven activities
  • Streamline-driven activities include the licensing of our CPG and Foodservice businesses to Nestle following the close of the transaction on August 26, 2018, and the conversion of certain international retail operations from company-operated to licensed models
• GAAP operating margin expanded 90 basis points year-over-year to 16.1 percent, primarily due to sales leverage, cost savings initiatives, lapping prior-year Nestle transaction-related costs and lower restructuring and impairment charges, partially offset by growth in wages and benefits, increased investments in labor hours and the 2019 Starbucks Leadership Experience
  • Non-GAAP operating margin of 17.2 percent declined 90 basis points compared to the prior year. Excluding a 30-basis point unfavorable impact from Streamline-driven activities, non-GAAP operating margin declined by approximately 60 basis points compared to the prior year
• GAAP Earnings Per Share of USD 0.67, up 20 percent over the prior year
  • Non-GAAP EPS of USD 0.70, up 13 percent over the prior year, inclusive of a 4 percent benefit from income tax rate favorability
• The company returned USD 2.7 billion to shareholders through a combination of share repurchases and dividends
• Starbucks® Rewards loyalty program grew to 17.6 million active members in the U.S., up 15 percent year-over-year

Full Year Fiscal 2019 Highlights

• Global comparable store sales up 5 percent, driven by a 3 percent increase in average ticket and a 1 percent increase in comparable transactions
  • Americas and U.S. comparable store sales up 5 percent, both driven by a 3 percent increase in average ticket and a 2 percent increase in comparable transactions
  • International comparable store sales up 3 percent, driven by a 2 percent increase in average ticket and a 1 percent increase in comparable transactions; China comparable store sales increased 4 percent, with comparable transactions flat
• Consolidated net revenues of USD 26.5 billion grew 7 percent over the prior year
  • Consolidated net revenues grew 10 percent over the prior year adjusted for unfavorable impacts of approximately 2 percent from Streamline-driven activities and 1 percent from foreign currency translation
• GAAP operating margin declined 30 basis points year-over-year to 15.4 percent
  • Non-GAAP operating margin of 17.2 percent declined 80 basis points compared to the prior year. Excluding a 70-basis point unfavorable impact from Streamline-driven activities, non-GAAP operating margin declined by approximately 10 basis points compared to the prior year
• GAAP Earnings Per Share of USD 2.92, down 10 percent over the prior year
  • Non-GAAP EPS of USD 2.83, up 17 percent over the prior year, inclusive of a 7 percent benefit from income tax rate favorability
• The company returned USD 12.0 billion to shareholders through a combination of share repurchases and dividends

20191031-STARBUCKS-Q4-FY-2019-01.

Fiscal 2019 Re-segmentation

In the fourth quarter of fiscal 2019, the company realigned its operating segment reporting structure to better reflect the cumulative effect of its streamlining efforts. Specifically, the previous China/Asia Pacific (CAP) segment and Europe, Middle East, and Africa (EMEA) segment have been combined into one International segment. The company will continue to provide supplemental information on its two lead growth markets, the U.S. and China, in its quarterly earnings news releases in accordance with its «Growth at Scale» agenda.

Concurrently, results of Siren Retail, a non-reportable operating segment consisting of Starbucks ReserveTM Roastery + Tasting Rooms, Starbucks Reserve brand and Princi operations, which was previously included within Corporate and Other, is now reported within the Americas and International segments based on the geographical location of the operations.

Further, to better support the review of its results, the company changed the classification of certain costs. The most significant change was the reclassification of company-operated store occupancy costs from cost of sales to store operating expenses. The company also made certain other immaterial changes. These reclassifications have been retrospectively applied.

There was no impact to consolidated net revenues, consolidated operating income, or net earnings per share as a result of these changes.

Concurrent with the change in reportable segments and reclassification of certain operating expenses noted above, the company revised its prior period financial information to be consistent with the current period presentation.

20191031-STARBUCKS-Q4-FY-2019-02.

Q4 Americas Segment Results

Net revenues for the Americas segment grew 9 percent over Q4 FY-2018 to USD 4.7 billion in Q4 FY-2019, primarily driven by 6 percent growth in comparable store sales, 607 net new store openings, or 3 percent store growth, over the past 12 months, and the impact of the adoption of new revenue recognition accounting for stored value card (SVC) breakage.

Operating income grew 5 percent to USD 938.9 million in Q4 FY-2019, up from USD 890.8 million in Q4 FY-2018. Operating margin of 20.2 percent declined 70 basis points, primarily due to the 2019 Starbucks Leadership Experience, growth in wages and benefits and increased investments in labor hours, partially offset by cost savings initiatives and sales leverage.

Net revenues for the International segment grew 6 percent over Q4 FY-2018 to USD 1.6 billion in Q4 FY-2019, primarily driven by 1,337 net new store openings, or 11 percent store growth, over the past 12 months, and a 3 percent increase in comparable store sales, partially offset by a 5 percent revenue-dilutive impact of converting certain retail businesses to fully licensed markets.

Q4 FY-2019 operating income of USD 262.7 million grew 18 percent over Q4 FY-2018 operating income of USD 222.4 million. Operating margin expanded 180 basis points to 16.7 percent, primarily due to sales leverage, cost savings initiatives, labor efficiencies and the impact of the conversions of certain retail businesses to fully licensed markets, partially offset by growth in wages and benefits, unfavorable product mix shift and strategic investments.

Net revenues for the Channel Development segment declined 6 percent from Q4 FY-2018 to USD 508.1 million in Q4 FY-2019, primarily due to licensing our CPG and Foodservice businesses to Nestle following the close of the transaction on August 26, 2018.

Operating income of USD 190.9 million in Q4 FY-2019 was flat compared to Q4 FY-2018. Operating margin expanded 220 basis points to 37.6 percent, primarily due to lapping prior year costs associated with the establishment of the Global Coffee Alliance, including business taxes associated with the up-front payment and employee-related costs. This favorability was partially offset by the impact of our ownership changes, including licensing our CPG and Foodservice businesses to Nestle and the sale of our Tazo brand.

Fiscal 2020 Guidance

The company introduces the following fiscal year 2020 guidance (all growth targets are relative to fiscal year 2019 non-GAAP measures unless specified):

• Global comparable store sales growth of 3 percent to 4 percent
• Approximately 2,000 net new Starbucks stores globally
  • Americas approximately 600 net new stores (3 percent to 4 percent growth in the U.S.)
  • International approximately 1,400 net new stores (mid-teens growth in China)
• Consolidated GAAP revenue growth of 6 percent to 8 percent
• Consolidated operating income growth of 8 percent to 10 percent
• Consolidated operating margin improving modestly
• GAAP interest expense of approximately USD 415 to USD 425 million
• GAAP and non-GAAP effective tax rate in the range of 22 percent to 24 percent
• GAAP EPS in the range of USD 2.84 to USD 2.89
  • Non-GAAP EPS in the range of USD 3.00 to USD 3.05
• Capital expenditures of approximately USD 1.8 billion

Company Updates

1. In July, Starbucks opened its first Starbucks NowTM store in Beijing, China. The new express store format integrates Starbucks store environment with the company’s Mobile Order + Pay technology and Starbucks® Delivers into one seamless and convenient experience for customers.
2. In September, Starbucks hosted over 12,000 store managers and field operations leaders at its largest ever Leadership Experience. The three-day conference held in Chicago was designed to help strengthen leadership capabilities and solidify the foundation of an enduring company.
3. In September, Starbucks welcomed three new appointees to its Board of Directors: Richard E. Allison, Jr., Chief Executive Officer of Domino’s; Andrew Campion, Executive Vice President and Chief Financial Officer of Nike; and Isabel Ge Mahe, Apple’s Vice President and Managing Director of Greater China. These appointments increased Starbucks board of directors to 13 members.
4. The company repurchased 23.5 million shares of common stock in Q4 fiscal 2019; approximately 29.2 million shares remain available for purchase under the current authorization.
5. The Board of Directors declared a cash dividend of USD 0.41 per share, an increase of 14 percent, payable on November 29, 2019, to shareholders of record as of November 13, 2019.