Starbucks: Reports Record Q1 Fiscal 2018 Results

Seattle / WA. (sc) Starbucks Corporation reported financial results for its 13-week fiscal first quarter ended December 31, 2017. GAAP results in fiscal 2018 and fiscal 2017 include items which are excluded from non-GAAP results.

Q1 Fiscal 2018 Highlights

• Global comparable store sales increased 2 percent, driven by a 2 percent increase in average ticket
  • Americas and U.S. comp store sales increased 2 percent, driven by a 2 percent increase in average ticket
  • CAP comp store sales increased 1 percent, driven by a 1 percent increase in transactions
    • China comp store sales increased 6 percent, driven by a 6 percent increase in transactions
• Consolidated net revenues of USD 6.1 billion grew 6 percent versus the prior year
• GAAP operating margin of 18.4 percent declined 140 basis points compared to the prior year; non-GAAP operating margin of 19.2 percent declined 80 basis points
• GAAP Earnings Per Share of USD 1.57 included USD 0.79 of net gain related to the acquisition of East China and a USD 0.13 net benefit from other items which are excluded from non-GAAP results
  • Non-GAAP EPS grew 25 percent to USD 0.65 per share and included a USD 0.07 benefit from changes in the U.S. tax law
• Active membership in Starbucks Rewards in the U.S. grew 11 percent versus the prior year to 14.2 million, with member spend representing 37 percent of U.S. company-operated sales, and Mobile Order and Pay representing 11 percent of U.S. company-operated transactions
• Starbucks Card reached 42 percent of U.S. and Canada company-operated transactions
• The company opened 700 net new stores globally, bringing total store count to 28’039 across 76 markets
• The company returned a record USD 2 billion to shareholders in the quarter through a combination of dividends and share repurchases

«Starbucks reported another quarter of record financial results in Q1 of fiscal 2018, with consolidated revenues up 6 percent over last year – up 7 percent excluding 1 percent for the impact of streamlining activities in the quarter. China grew revenues 30 percent in Q1, with the strategic acquisition of East China positioning us to accelerate our growth in the key China market», said Kevin Johnson, president and ceo. «Today, Starbucks has two powerful, independent but complementary engines driving our global growth, the U.S. and China. Our work to streamline the company is sharpening our focus on our core operating priorities».

«Starbucks delivered solid revenue and profit growth and our first ever USD 6 billion revenue quarter in Q1», said Scott Maw, cfo. «We are laser-focused on accelerating growth in China and driving improvement across the U.S. business as we move into and through the back half of the year, and remain committed to delivering on the long-term targets we announced last quarter».

First Quarter Fiscal 2018 Summary

Comparable Store Sales(1)		Sales Growth		Change in Transactions		Change in Ticket
Consolidated		2%		0%		2%
Americas		2%		0%		2%
CAP		1%		1%		0%
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 16% of the EMEA segment store portfolio as of December 31, 2017.
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Operating Results

(USD in millions, except per share amounts)

Q1-2018

Q1-2017

Change

Net New Stores (1)

700

649

51

Revenues

USD 6’073.7

USD 5’732.9

6%

Operating Income

USD 1’116.1

USD 1’132.6

(1)%

Operating Margin

18.4%

19.8%

(140) bps

EPS

USD 1.57

USD 0.51

208%

(1) Q1 2018 net new stores include the closure of 2 Teavana-branded stores.
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Consolidated net revenues grew 6 percent over Q1 FY17 to USD 6.1 billion in Q1 FY18, primarily driven by incremental revenues from the opening of 2’305 net new stores over the past 12 months and a 2 percent growth in global comparable store sales.

Consolidated operating income declined 1 percent to USD 1’116.1 million in Q1 FY18, down from USD 1’132.6 million in Q1 FY17. Consolidated operating margin declined 140 basis points to 18.4 percent, primarily due to food-related mix shift in the Americas, as well as restructuring costs related to the company’s ongoing efforts to streamline business operations.

Q1 Americas Segment Results

(USD in millions)

Q1-2018

Q1-2017

Change

Net New Stores

278

251

27

Revenues

USD 4’265.8

USD 3’991.4

7%

Operating Income

USD 979.4

USD 958.5

2%

Operating Margin

23.0%

24.0%

(100) bps

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Net revenues for the Americas segment grew 7 percent over Q1 FY17 to USD 4.3 billion in Q1 FY18, primarily driven by incremental revenues from 979 net new store openings over the past 12 months and a 2 percent growth in comparable store sales.

Operating income of USD 979.4 million in Q1 FY18 grew 2 percent versus USD 958.5 million in Q1 FY17. Operating margin of 23.0 percent declined 100 basis points primarily due to food-related mix shift, partially offset by sales leverage.

Q1 China/Asia Pacific Segment Results

(USD in millions)

Q1-2018

Q1-2017

Change

Net New Stores

300

303

(3)

Revenues

USD 843.7

USD 770.8

9%

Operating Income

USD 196.8

USD 163.4

20%

Operating Margin

23.3%

21.2%

210 bps

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Net revenues for the China/Asia Pacific segment grew 9 percent over Q1 FY17 to USD 843.7 million in Q1 FY18, primarily driven by incremental revenues from 1’033 net new store openings over the past 12 months and a 1 percent increase in comparable store sales. The increase was partially offset by the absence of revenue related to the sale of our Singapore retail operations to a licensed partner in Q4 FY17 as part of the company’s ongoing efforts to streamline business operations and retail geographies.

Q1 FY18 operating income of USD 196.8 million grew 20 percent over Q1 FY17 operating income of USD 163.4 million. Operating margin expanded 210 basis points to 23.3 percent, primarily due to sales leverage and favorable foreign currency translation.

Q1 EMEA Segment Results

(USD in millions)

Q1-2018

Q1-2017

Change

Net New Stores

123

95

28

Revenues

USD 283.9

USD 262.4

8%

Operating Income

USD 39.1

USD 44.1

(11)%

Operating Margin

13.8%

16.8%

(300) bps

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Net revenues for the EMEA segment grew 8 percent over Q1 FY17 to USD 283.9 million in Q1 FY18, primarily driven by favorable foreign currency translation and incremental revenues from the opening of 365 net new licensed stores over the past 12 months.

Operating income of USD 39.1 million in Q1 FY18 declined 11 percent versus operating income of USD 44.1 million in Q1 FY17. Operating margin declined 300 basis points to 13.8 percent primarily driven by sales deleverage in company-operated stores.

Q1 Channel Development Segment Results

(USD in millions)

Q1-2018

Q1-2017

Change

Revenues

USD 560.3

USD 553.7

1%

Operating Income

USD 243.3

USD 242.9

—%

Operating Margin

43.4%

43.9%

(50) bps

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Net revenues for the Channel Development segment of USD 560.3 million in Q1 FY18 increased 1 percent versus the prior year quarter primarily driven by our foodservice, international and packaged coffee channels. This increase was partially offset by competitive pricing on single-serve items and the absence of revenue from the sale of our Tazo tea brand late in Q1 FY18.

Operating income of USD 243.3 million in Q1 FY18 was flat compared to Q1 FY17. Operating margin declined 50 basis points to 43.4 percent primarily driven by deleverage on cost of sales and lower income from our North American Coffee Partnership joint venture, partially offset by lower marketing expense.

Q1 All Other Segments Results

(USD in millions)

Q1-2018

Q1-2017

Change

Net New Stores

(1)

—

(1)

Revenues

USD 120.0

USD 154.6

(22)%

Operating Income/(Loss)

USD (30.0)

USD 9.6

nm

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All Other Segments primarily includes Teavana-branded stores, Seattle’s Best Coffee®, and Starbucks Reserve™ and Roastery businesses. The operating loss in Q1 FY18 was primarily due to restructuring costs related to our strategy to close Teavana retail stores and focus on Teavana tea within Starbucks stores.

Fiscal 2018 Targets

The company reiterates the following full year FY18 targets, with the exception of earnings per share which has been modified for the expected net impact of changes in the U.S. tax law and related reinvestments. Year-over-year growth is based on prior year non-GAAP results.

• Continue to expect approximately 2’300 net new stores globally
• Continue to expect 3-5 percent comparable store sales growth globally, expect to be near the low end of the range for the year
• Continue to expect consolidated revenue growth in the high single digits consistent with long term guidance; when including approximately 2 percent of net favorability related to the acquisition of East China and other streamlining activities, we expect consolidated revenue growth of approximately 9-11 percent in FY18
• Now expect GAAP EPS in the range of USD 3.32 to USD 3.36 and non-GAAP EPS in the range of USD 2.48 to USD 2.53, consistent with guidance issued last quarter but updated to include the expected net impact of the new U.S. tax law’s federal statutory tax rate and related reinvestments

Company Updates

• On December 31, Starbucks completed the previously announced acquisition of the remaining 50 percent share of its East China business from long-term joint venture partners, Uni-President (UPEC) and President Chain Store Corporation (PCSC). As a result of this acquisition, Starbucks has assumed 100 percent ownership of over 1’400 Starbucks stores in Shanghai and in the Jiangsu and Zhejiang Provinces, bringing the total number of company-owned stores in China to over 3’100 at the time of closing. Also on December 31, UPEC and PCSC acquired Starbucks 50 percent interest in President Starbucks Coffee Taiwan Limited and assumed 100 percent ownership of Starbucks operations in Taiwan.
• The company completed its previously announced sale of the Tazo Tea brand to Unilever on December 11. Starbucks will instead drive a single tea brand strategy and focus with its super premium tea brand, Teavana, by continuing to invest in the growth, innovation and development of the Teavana brand of teas in its Starbucks stores and in channels outside its stores.
• Last week, the company was named 5th in Fortune’s World’s Most Admired Companies survey, and placed in the top spot for the food services industry.
• The company opened its Starbucks Reserve™ Roastery in Shanghai, China, on December 5, now the largest Starbucks store in the world. The Roastery features onsite baking by Italian food purveyor Rocco Princi for the first time ever in China and features onsite roasting and brewing of Starbucks Reserve coffees. Starbucks also brought Princi Bakery to the U.S. inside its Seattle Roastery in November 2017.
• Together with its local business partner, Baristas del Caribe, LLC, Starbucks opened its first store in Puerto Rico since Hurricane Maria struck the island in September 2017. The two companies and their namesake nonprofit foundations have also collectively contributed more than USD 1.3 million toward emergency relief and long-term rebuilding efforts across the region.
• In November 2017, the company opened its first store in Jamaica and entered its 76th market globally, marking a historic milestone for the global coffee company’s Caribbean operations and its storied history of sourcing high-quality coffee from the region going back more than four decades.
• The company repurchased 28.5 million shares of common stock in Q1 FY18; approximately 52 million shares remain available for purchase under current authorizations.
• The Board of Directors declared a cash dividend of USD 0.30 per share, payable on February 23, 2018, to shareholders of record as of February 8, 2018.