Seattle / WA. (sc) Starbucks Corporation reported financial results for its 13-week fiscal third quarter ended July 01, 2018. GAAP results in fiscal 2018 and fiscal 2017 include items which are excluded from non-GAAP results.
Q3 Fiscal 2018 Highlights
- Global comparable store sales increased 1 percent, driven by a 3 percent increase in average ticket
- Americas and U.S. comparable store sales increased 1 percent
- CAP comparable store sales decreased 1 percent
- China comparable store sales decreased 2 percent
- Consolidated net revenues of USD 6.3 billion, up 11 percent over the prior year including:
- 3 percent net benefit from consolidation of the acquired East China business and other streamline-driven activities, including Teavana mall store closures, the Tazo divestiture, and the conversion of certain international retail operations from company-owned to licensed models
- 1 percent benefit from foreign currency translation
- GAAP operating margin, inclusive of restructuring and impairment charges, declined 190 basis points year-over-year to 16.5 percent
- Non-GAAP operating margin of 18.5 percent declined 230 basis points compared to the prior year
- GAAP Earnings Per Share of USD 0.61, up 30 percent over the prior year
- Non-GAAP EPS of USD 0.62, up 13 percent over the prior year
- GAAP and non-GAAP EPS include USD 0.02 of unfavourability associated with May 29th anti-bias training
- Starbucks Rewards(TM) loyalty program added 1.9 million active members in the U.S., up 14 percent year-over-year; total member spend now represents 40 percent of U.S. company-operated sales
- Mobile Order and Pay represented 13 percent of U.S. company-operated transactions
- The company opened 511 net new stores in Q3 and now operates 28,720 stores across 77 markets
- The company returned USD 1.3 billion to shareholders through a combination of dividends and share repurchases
«Starbucks record performance in Q3 reflects successful execution against our strategic growth priorities and our commitment to deliver predictable, sustainable growth at scale – and meaningful increases in long-term value – for our shareholders,» said Kevin Johnson, Starbucks ceo and president. «We remain confident in our global growth strategies, in the sustainability of our leadership position around all things coffee and tea and in our leadership teams around the world to navigate our next phase of growth.»
«Starbucks record Q3 revenues and profits once again reflect the underlying strength of the Starbucks business and brand all around the world,» said Scott Maw, cfo. «We continue to grow share in virtually every market and channel in which we operate at the same time that our streamline initiatives are enabling us to sharpen our focus – and leverage our resources – against our highest value, long-term growth opportunities.»
Third Quarter Fiscal 2018 Summary
| Quarter Ended Jul 1, 2018 | ||||||
| Comparable Store Sales(1) | Sales Growth | Change in Transactions | Change in Ticket | |||
| Consolidated | 1% | (2)% | 3% | |||
| Americas | 1% | (2)% | 4% | |||
| CAP | (1)% | (3)% | 2% | |||
| EMEA(2) | 0% | (2)% | 3% | |||
(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 15% of the EMEA segment store portfolio as of July 1, 2018.
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| Operating Results | Quarter Ended | Change | ||||
| (USD in millions, except per share amounts) | Jul 1, 2018 | Jul 2, 2017 | ||||
| Net New Stores | 511 | 575 | (64) | |||
| Revenues | USD 6,310.3 | USD 5,661.5 | 11% | |||
| Operating Income | USD 1,038.2 | USD 1,044.2 | (1)% | |||
| Operating Margin | 16.5% | 18.4% | (190) bps | |||
| EPS | USD 0.61 | USD 0.47 | 30% | |||
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Consolidated net revenues grew 11 percent over Q3 FY17 to USD 6.3 billion in Q3 FY18, primarily driven by incremental revenues from the impact of our ownership change in East China, incremental revenues from 2,015 net new Starbucks store openings over the past 12 months, favorable foreign currency translation, and 1 percent growth in global comparable store sales.
Consolidated operating income declined 1 percent to USD 1,038.2 million in Q3 FY18, down from USD 1,044.2 million in Q3 FY17. Consolidated operating margin declined 190 basis points to 16.5 percent, primarily due to higher investments in our store partners (employees), product mix shift, largely food related, and the impact of our ownership change in East China, partially offset by lower restructuring and impairment costs.
Q3 Americas Segment Results
Net revenues for the Americas segment grew 6 percent over Q3 FY17 to USD 4.2 billion in Q3 FY18, primarily driven by incremental revenues from 902 net new store openings over the past 12 months and 1 percent growth in comparable store sales, partially offset by the absence of revenue related to the sale of our Brazil retail operations to a licensed partner in Q2 FY18.
Operating income declined 7 percent to USD 908.7 million in Q3 FY18, down from USD 974.8 million in Q3 FY17. Operating margin of 21.5 percent declined 290 basis points, primarily due to higher investments in our store partners (employees), food-related mix shift, and the impact of the May 29th anti-bias training for U.S. partners.
Q3 China/Asia Pacific Segment Results
Net revenues for the China/Asia Pacific segment grew 46 percent over Q3 FY17 to USD 1,229.0 million in Q3 FY18, primarily driven by incremental revenues from the impact of our ownership change in East China, incremental revenues from 746 net new store openings over the past 12 months, and favorable foreign currency translation, partially offset by the absence of revenue related to the sale of our Singapore retail operations to a licensed partner in Q4 FY17 and a 1 percent decrease in comparable store sales.
Q3 FY18 operating income of USD 234.1 million grew 5 percent over Q3 FY17 operating income of USD 223.8 million. Operating margin declined 760 basis points to 19.0 percent, primarily due to the impact of our ownership change in East China.
Q3 EMEA Segment Results
Net revenues for the EMEA segment grew 10 percent over Q3 FY17 to USD 275.4 million in Q3 FY18, primarily driven by incremental revenues from the opening of 375 net new licensed stores over the past 12 months and favorable foreign currency translation.
Operating income of USD 34.9 million in Q3 FY18 grew 256 percent versus operating income of USD 9.8 million in Q3 FY17. Operating margin expanded 880 basis points to 12.7 percent, primarily due to lapping the prior year partial impairment of goodwill related to our Switzerland retail business and favorable foreign currency impacts on cost of sales.
Q3 Channel Development Segment Results
Net revenues for the Channel Development segment of USD 509.0 million in Q3 FY18 increased 6 percent versus the prior year quarter primarily driven by increased sales in packaged coffee, foodservice and international channels, and higher sales of premium single-serve products, partially offset by the absence of revenue from the sale of our Tazo brand in Q1 FY18.
Operating income of USD 212.8 million in Q3 FY18 grew 1 percent compared to Q3 FY17. Operating margin declined 210 basis points to 41.8 percent, primarily driven by the impact of streamline-driven activities and lower income from our North American Coffee Partnership joint venture.
Q3 All Other Segments Results
All Other Segments primarily includes Seattle’s Best Coffee®, Starbucks Reserve(TM )Coffee and Roastery businesses, and Teavana-branded stores. The lower operating loss in Q3 FY18 as compared to the prior year was primarily due to fewer Teavana restructuring and other impairment costs.
Year to Date Financial Results
| Three Quarters Ended Jul 1, 2018 | ||||||
| Comparable Store Sales((1)) | Sales Growth | Change in Transactions | Change in Ticket | |||
| Consolidated | 2% | (1)% | 3% | |||
| Americas | 2% | (1)% | 3% | |||
| CAP | 1% | (1)% | 2% | |||
| EMEA((2)) | (1)% | (4)% | 3% | |||
(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 15% of the EMEA segment store portfolio as of July 1, 2018.
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| Operating Results | Three Quarters Ended | Change | ||||
| (USD in millions, except per share amounts) | Jul 1, 2018 | Jul 2, 2017 | ||||
| Net New Stores ((1)) | 1,381 | 1,651 | (270) | |||
| Revenues | USD 18,415.9 | USD 16,688.5 | 10% | |||
| Operating Income | USD 2,926.9 | USD 3,112.1 | (6)% | |||
| Operating Margin | 15.9% | 18.6% | (270) bps | |||
| EPS | USD 2.67 | USD 1.43 | 87% | |||
(1)Fiscal 2018 net new stores include the net closure of 303 Teavana-branded stores.
Fiscal 2018 Targets
The company updates its expected FY18 global comparable store sales and EPS targets, but reiterates its unit development and revenue growth expectations:
- Continues to expect approximately 2,300 net new Starbucks stores globally
- Now expects full year global comparable store sales growth to be just below the 3-5 percent targeted range; Q4 expected to be at the lower end of the 3-5 percent range
- Continues to expect consolidated revenue growth in the high single digits when excluding approximately 2 points of net favorability from the East China acquisition and other streamline-driven activities
- Now expects GAAP EPS in the range of USD 3.26 to USD 3.28 and non-GAAP EPS in the range of USD 2.40 to USD 2.42
The company will provide select quarterly and segment information regarding its business outlook during its regularly scheduled quarterly earnings conference calls; this information will also be available following the call on the company’s website.
Company Updates
- In May, Starbucks announced it will form a global coffee alliance with Nestlé S.A. to accelerate and grow the global reach of Starbucks brands in Consumer Packaged Goods (CPG) and Foodservice. As part of the alliance, Nestlé will obtain the rights to market, sell, and distribute Starbucks®, Seattle’s Best Coffee®, Starbucks Reserve®, Teavana™, Starbucks VIA® and Torrefazione Italia® packaged coffee and tea in all global at-home and away-from-home channels. Nestlé will pay Starbucks USD 7.15 billion in closing consideration, and Starbucks – with a focus on long term shareholder value creation – will retain a significant stake as licensor and supplier of roast and ground and other products going forward. Additionally, the Starbucks brand portfolio will be represented on Nestlé’s single-serve capsule systems. The agreement is expected to close in Q4 FY18.
- In June, the company announced that Howard Schultz would step down as executive chairman and member of the Board of Directors and be honored with the title of chairman emeritus effective June 26, 2018. Concurrently, Myron E. Ullman was appointed as the new chair of the Board and Mellody Hobson as vice chair of the Board upon Schultz’s retirement.
- Starbucks announced that Scott Maw, executive vice president and chief financial officer, will retire effective November 30, 2018. Starbucks has launched an external search for a new cfo. After his retirement, Maw will continue to support the transition in a senior consultant role through March 2019.
- On June 19, Starbucks announced a set of strategic priorities and corresponding operational initiatives to accelerate growth and create long-term shareholder value. Full details of the release and corresponding presentation may be found on the company’s website.
- Starbucks hosted its first-ever China Investor Day in Shanghai on May 16, where the company announced plans to build 600 net new stores annually over the next five years in People’s Republic of China – a goal that will double the market’s store count from the end of FY17 to 6,000 across 230 cities by FY22.
- The company announced it will phase out plastic straws from more than 28,000 stores worldwide by 2020, resulting in the elimination of more than 1 billion straws per year. Customers who prefer or need a straw can request one made of alternative materials for use with any cold drink.
- Starbucks announced that it closed more than 8,000 company-owned stores and its corporate offices in the U.S. on May 29 to conduct racial-bias training for partners (employees). The training was provided to nearly 175,000 partners across the country and will become part of the onboarding process for new partners. Afterwards, the company made the education materials available to other companies, including its licensees.
- Starbucks and Chase announced the availability of the Starbucks Rewards™ Visa® Prepaid Card in June, the first prepaid or debit product where you can earn Stars outside of Starbucks.
- Along with its licensed partner Alsea, Starbucks opened its first store in Uruguay in April, marking the brand’s 77th market globally and 18th in the Latin America and Caribbean region.
- The company repurchased 17.1 million shares of common stock in Q3 FY18; approximately 107 million shares remain available for purchase under current authorizations.
- As previously announced, the Board of Directors declared a cash dividend of USD 0.36 per share, payable on August 24, 2018, to shareholders of record as of August 9, 2018.
