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Starbucks: Reports Record Q3-2017 Financial Results

Seattle / WA. (sc) Starbucks Corporation reported financial results for its 13-week fiscal third quarter and 39-week fiscal year to date ended July 2, 2017. Fiscal 2017 and fiscal 2016 GAAP results include items which are excluded from non-GAAP results. Please refer to the reconciliation of GAAP measures to non-GAAP measures at the end of this release for more information. Third quarter fiscal 2017 highlights:

  • Global comparable store sales increased 4 percent
    • Americas comp store sales increased 5 percent
      • U.S. comp store sales increased 5 percent, driven by a 5 percent increase in average ticket
      • U.S. average ticket increased 4 percent – transactions grew 1 percent after adjusting for the estimated impact of order consolidation following the shift in the Starbucks Rewards™ loyalty program from a frequency-based to spend-based model in Q3 FY16
    • CAP comp store sales increased 1 percent
      • China comp store sales increased 7 percent, driven by a 5 percent increase in transactions
  • Consolidated net revenues grew 8 percent to a Q3 record 5.7 billion USD; up 9 percent after excluding 53.7 million USD of unfavorable foreign currency translation
  • GAAP operating income increased 2 percent to 1.0 billion USD, inclusive of impairments
    • Non-GAAP operating income up 13 percent over non-GAAP operating income in Q3 FY16, to 1.2 billion USD
  • GAAP operating margin of 18.4 percent declined 110 basis points versus Q3 FY16, inclusive of impairments
    • Non-GAAP operating margin expands 100 bps over Q3 FY16, to 20.8 percent
  • GAAP EPS of 0.47 USD per share, down 8 percent versus Q3 FY16, inclusive of impairments
    • Non-GAAP EPS up 12 percent over Q3 FY16, to 0.55 USD per share
  • The company opened 575 net new stores globally, bringing total store count to 26’736 across 75 countries
  • Starbucks Rewards membership up 8 percent year-over-year, to 13.3 million active members
  • Starbucks Rewards represented 36 percent of U.S. company-operated sales
  • Mobile Payment increased to 30 percent of transactions in U.S. company-operated stores
  • Mobile Order and Pay increased to 9 percent of transactions in U.S. company-operated stores
  • The company repurchased 3.5 million shares of common stock in Q3 FY17; approximately 95 million shares remain available for purchase under current authorizations
  • The Board of Directors declared a cash dividend of 0.25 USD per share, payable on August 25, 2017, to shareholders of record as August 10, 2017

«Starbucks leveraged food and beverage innovation, an elevated in-store experience and personalized digital connections to our customers to deliver another quarter of record financial and operating performance, despite the softness impacting our principal sectors overall», said Kevin Johnson, Starbucks president and ceo. «Continued focus on execution against our strategic priorities enabled us to gain share and positions us well for the future».

«Starbucks once again reported record operating and financial performance in Q3 – reflecting the back-half acceleration we’ve been anticipating», said Scott Maw, Starbucks cfo. «Nonetheless, despite posting record performance in Q3 and further extending our lead compared to the industry overall, the combination of trends in the quarter and ongoing macro pressures impacting the retail and restaurant sectors has us a bit more cautious going into Q4».

Strategic Actions to Advance Growth Agenda and Increase Returns

Starbucks also announced several strategic actions to optimize its store portfolio, strengthen its core, accelerate execution against its long-term growth strategy and further increase returns on capital.

Company to Assume Full Ownership of the Mainland China Market

Starbucks announced plans to consolidate its business operations across Mainland China by acquiring the 50 percent of Shanghai Starbucks Coffee Corporation that it didn’t already own from JV partners Uni-President Enterprises Corporation (“UPEC”) and President Chain Store Corporation (“PCSC”). Customers in China have embraced the Starbucks brand and customer experience since the company opened its first store in the market 18 years ago. Starbucks stores in China are among the most innovative, coffee-forward Starbucks stores in the world, consistently generating strong revenue and same-store sales growth, record AUV’s and world-leading returns on investment. Mainland China is Starbucks largest and fastest growing international market with 2’800 stores in 130 cities, employing nearly 40’000 partners. Through this acquisition, the largest single acquisition in the company’s history, Starbucks will assume 100 percent ownership of approximately 1’300 Starbucks stores in 25 cities in the Shanghai, Jiangsu and Zhejiang Provinces. Also as announced earlier today, concurrently with the purchase of the East China JV, UPEC and PCSC will acquire Starbucks 50 percent interest in President Starbucks Coffee Taiwan Limited, and assume 100 percent ownership of Starbucks operations in Taiwan. Founded in 1997, the Taiwan JV currently operates approximately 410 Starbucks stores in Taiwan.

Company to Close all 379 Teavana Retail Stores

As reported on the Q2 call, many of the company’s principally mall-based Teavana retail stores have been persistently underperforming. Following a strategic review of the Teavana store business, the company concluded that despite efforts to reverse the trend through creative merchandising and new store designs, the underperformance was likely to continue. As a result, Starbucks will close all 379 Teavana stores over the coming year, with the majority closing by Spring 2018. The approximately 3’300 partners impacted by these closures will receive opportunities to apply for positions at Starbucks stores, as Starbucks remains on track to create 240’000 new jobs globally and 68’000 in the U.S. over the next five years.

Financial Targets

Third Quarter Fiscal 2017 Summary

Quarter Ended 2017/07/02
Comparable Store Sales(1) Sales Growth Change in Transactions Change in Ticket
Consolidated 4% 0% 4%
Americas 5% 0% 5%
CAP 1% 0% 1%
EMEA(2) 2% 0% 2%
(1) Includes only Starbucks company-operated stores open 13 months or longer. Comparable store sales exclude the effect of fluctuations in foreign currency exchange rates.
(2) Company-operated stores represent 18 percent of the EMEA segment store portfolio as of July 2, 2017.

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Operating Results

Quarter Ended Change
(USD in millions, except per share amounts) 2017/07/02 2016/06/26
Net New Stores 575 474 101
Revenues USD 5’661.5 USD 5’238.0 8%
Operating Income USD 1’044.2 USD 1’022.3 2%
Operating Margin 18.4% 19.5% (110) bps
EPS USD 0.47 USD 0.51 (8)%

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Consolidated net revenues were 5.7 billion USD in Q3 FY17, an increase of 8 percent over Q3 FY16. The increase was primarily driven by incremental revenues from the opening of 2’341 net new stores over the past 12 months and 4 percent growth in global comparable store sales.

Consolidated operating income grew 2 percent to 1’044.2 million USD in Q3 FY17, up from 1’022.3 million USD in Q3 FY16. Consolidated operating margin declined 110 basis points to 18.4 percent primarily due to goodwill and store asset impairments, which drove a 210 basis point decline, largely related to the change in strategic direction for Teavana. Excluding these impairments, margin expanded by 100 basis points driven primarily by sales leverage, partially offset by increased partner investments, largely in the Americas segment.

Q3 Americas Segment Results

Quarter Ended Change
(USD in millions) 2017/07/02 2016/06/26
Net New Stores 244 194 50
Revenues USD 3’991.9 USD 3’645.5 10%
Operating Income USD 974.8 USD 898.5 8%
Operating Margin 24.4% 24.6% (20) bps

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Net revenues for the Americas segment were 4.0 billion USD in Q3 FY17, an increase of 10 percent over Q3 FY16. The increase was driven by incremental revenues from 1’002 net new store openings over the past 12 months and 5 percent growth in comparable store sales.

Operating income of 974.8 million USD in Q3 FY17 grew 8 percent versus 898.5 million USD in Q3 FY16. Operating margin of 24.4 percent declined 20 basis points primarily due to higher investments in our store partners (employees), the impact of product sales mix and higher commodity costs. These decreases were largely offset by sales leverage.

Q3 China/Asia Pacific Segment Results

Quarter Ended Change
(USD in millions) 2017/07/02 2016/06/26
Net New Stores 250 209 41
Revenues USD 840.6 USD 768.2 9%
Operating Income USD 223.8 USD 182.8 22%
Operating Margin 26.6% 23.8% 280 bps

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Net revenues for the China/Asia Pacific segment grew 9 percent over Q3 FY16 to 840.6 million USD in Q3 FY17. The increase was primarily driven by incremental revenues from 1’056 net new store openings over the past 12 months and 1 percent growth in comparable store sales, partially offset by unfavorable foreign currency translation.

Q3 FY17 operating income of 223.8 million USD grew 22 percent over Q3 FY16 operating income of 182.8 million USD. Operating margin expanded 280 basis points to 26.6 percent primarily driven by the transition to China’s value added tax structure in Q3 FY16. Also contributing was higher income from our joint venture operations in the region.

Q3 EMEA Segment Results

Quarter Ended Change
(USD in millions) 2017/07/02 2016/06/26
Net New Stores 87 77 10
Revenues USD 249.9 USD 273.4 (9)%
Operating Income USD 9.8 USD 29.9 (67)%
Operating Margin 3.9% 10.9% (700) bps

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Net revenues for the EMEA segment were 249.9 million USD in Q3 FY17, a 9 percent decrease versus Q3 FY16. The decrease was primarily driven by the absence of revenue related to the sale of our Germany retail operations in Q3 FY16 as part of the ongoing shift to more licensed stores in the region, as well as unfavorable foreign currency translation. Partially offsetting these decreases were incremental revenues from the opening of 311 net new licensed stores over the past 12 months.

Operating income of 9.8 million USD in Q3 FY17 declined 67 percent versus operating income of 29.9 million USD in Q3 FY16. Operating margin declined 700 basis points to 3.9 percent due to a partial impairment of goodwill for our Switzerland market, which drove a 720 basis point decline. The remaining 20 basis point expansion was driven by leverage due to the shift in the portfolio towards more licensed stores, primarily driven by the sale of our Germany retail operations in Q3 FY16, and was partially offset by unfavorable foreign currency exchange.

Q3 Channel Development Segment Results

Quarter Ended Change
(USD in millions) 2017/07/02 2016/06/26
Revenues USD 478.7 USD 440.8 9%
Operating Income USD 210.2 USD 187.8 12%
Operating Margin 43.9% 42.6% 130 bps

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Net revenues for the Channel Development segment grew 9 percent over Q3 FY16 to 478.7 million USD in Q3 FY17. The increase was primarily driven by higher international sales, increased sales of premium single-serve and packaged coffee products, and higher foodservice sales.

Operating income of 210.2 million USD in Q3 FY17 increased 12 percent compared to Q3 FY16. Operating margin expanded 130 basis points to 43.9 percent primarily driven by lower coffee costs and higher income from the North American Coffee Partnership.

Q3 All Other Segments Results

Quarter Ended Change
(USD in millions) 2017/07/02 2016/06/26
Net New Stores (6) (6) 0
Revenues USD 100.4 USD 110.1 (9)%
Operating Loss USD (112.3) USD (14.9) 654%

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All Other Segments primarily includes Teavana-branded stores, Seattle’s Best Coffee, as well as Starbucks Reserve® and Roastery businesses. The increase in the operating loss in Q3 FY17 compared to Q3 FY16 was primarily due to the goodwill and asset impairment charges as a result of our strategy to focus on Teavana tea within Starbucks stores.

Year to Date Financial Results

Q3/2017 Q3/2016
Comparable Store Sales(1) Sales Growth Change in Transactions Change in Ticket
Consolidated 3% (1)% 4%
Americas 4% (1)% 4%
CAP 3% 1% 2%
EMEA(2) 0% (1)% 1%
(1) Includes only Starbucks company-operated stores open 13 months or longer. Comparable store sales exclude the effect of fluctuations in foreign currency exchange rates.
(2) Company-operated stores represent 18% of the EMEA segment store portfolio as of July 2, 2017.

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Operating Results

Three Quarters Ended Change
(USD in millions, except per share amounts) 2017/07/02 2016/06/26
Net New Stores 1’651 1’352 299
Revenues USD 16’688.5 USD 15’604.7 7%
Operating Income USD 3’112.1 USD 2’944.5 6%
Operating Margin 18.6% 18.9% (30) bps
EPS USD 1.43 USD 1.35 6%