Starbucks: Reports Record Q2 Fiscal 2018 Results

Seattle / WA. (sc) Starbucks Corporation reported financial results for its 13-week fiscal second quarter ended April 1, 2018. GAAP results in fiscal 2018 and fiscal 2017 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.

Q2 Fiscal 2018 Highlights

Global comparable store sales increased 2 percent, driven by a 3 percent increase in average ticket
- Americas and U.S. comp store sales increased 2 percent
- CAP comp store sales increased 3 percent
  - China comp store sales increased 4 percent
Consolidated net revenues of USD 6.0 billion, up 14 percent over the prior year including:
- 3 percent net benefit from consolidation of the recently 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
- 2 percent benefit from foreign currency translation
GAAP operating margin, inclusive of restructuring and impairment charges, declined to 12.8 percent, down 490 basis points compared to the prior year
- Non-GAAP operating margin of 16.2 percent declined 170 basis points compared to the prior year
GAAP Earnings Per Share of USD 0.47, up 4 percent over the prior year
- Non-GAAP EPS of USD 0.53, up 18 percent over the prior year
The Starbucks RewardsTM loyalty program added 1.6 million active members in the U.S., up 12 percent over the prior year

Starbucks RewardsTM member spend increased to 39 percent of U.S. company-operated sales; Mobile Order and Pay represented 12 percent of U.S. company-operated transactions
The company opened 468 net new Starbucks stores in Q2 and now operates 28’209 stores across 76 markets. During the quarter, the company also closed 298 Teavana® stores
The company returned USD 2.0 billion to shareholders in the quarter through a combination of dividends and share repurchases

«Starbucks Q2 of fiscal 2018 represented another quarter of record financial results, highlighted by accelerating momentum across our Americas business – particularly in the U.S., continued strong performance in China and our strongest comp growth in Japan in five quarters», said Kevin Johnson, president and ceo. «At the same time we made measurable progress against each of the strategic initiatives that position Starbucks to continue delivering best-in-class operating and financial results long into the future».

«We have a clear set of actions underway to improve profitability through a combination of comp and beverage growth and savings across COGS, waste and labor as we move through the back half of the year», said Scott Maw, cfo. «We are continuing to invest in our business – strategically and with a ‘long game’ mentality – while at the same time taking decisive near-term action to maximize our brand portfolio and ensure that we continue to deliver outsized returns to our shareholders in the quarters and years ahead».

Second Quarter Fiscal 2018 Summary

	Quarter Ended Apr 1, 2018
Comparable Store Sales(1)	Sales Growth	Change in Transactions	Change in Ticket
Consolidated	2 percent	(1) percent	3 percent
Americas	2 percent	0 percent	3 percent
CAP	3 percent	0 percent	3 percent
EMEA(2)	(1) percent	(4) percent	3 percent

(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 percent of the EMEA segment store portfolio as of April 1, 2018.

Operating Results	Quarter Ended		Change
( USD in millions, except per share amounts)	Apr 1, 2018	Apr 2, 2017	Change
Net New Stores (1)	170	427	(257)
Revenues	USD 6’031.8	USD 5’294.0	14 percent
Operating Income	USD 772.5	USD 935.4	(17) percent
Operating Margin	12.8 percent	17.7 percent	(490) bps
EPS	USD 0.47	USD 0.45	4 percent

(1) Q2 2018 net new stores include the closure of 298 Teavana-branded stores.

Consolidated net revenues grew 14 percent over Q2 FY17 to USD 6.0 billion in Q2 FY18, primarily driven by incremental revenues from the impact of our ownership change in East China, incremental revenues from 2’103 net new Starbucks store openings over the past 12 months, and 2 percent growth in global comparable store sales.

Consolidated operating income declined 17 percent to USD 772.5 million in Q2 FY18, down from USD 935.4 million in Q2 FY17. Consolidated operating margin declined 490 basis points to 12.8 percent, primarily due to restructuring and impairments, food-related mix shift primarily in the Americas segment, higher investments in our store partners (employees), and the impact of our ownership change in East China.

Q2 Americas Segment Results

Net revenues for the Americas segment grew 8 percent over Q2 FY17 to USD 4.0 billion in Q2 FY18, primarily driven by incremental revenues from 966 net new store openings over the past 12 months and a 2 percent growth in comparable store sales.

Operating income declined 3 percent to USD 801.3 million in Q2 FY18, down from USD 826.1 million in Q2 FY17. Operating margin of 20.0 percent declined 220 basis points, primarily due to higher investments in our store partners (employees) and food-related mix shift.

Q2 China/Asia Pacific Segment Results

Net revenues for the China/Asia Pacific segment grew 54 percent over Q2 FY17 to USD 1’186.4 million in Q2 FY18, primarily driven by incremental revenues from the impact of our ownership change in East China, incremental revenues from 759 net new store openings over the past 12 months, favorable foreign currency translation, and a 3 percent increase in comparable store sales. The increase was partially offset by the absence of company-operated store revenue related to the sale of our Singapore retail operations to a licensed partner in Q4 FY17.

Q2 FY18 operating income of USD 204.6 million grew 16 percent over Q2 FY17 operating income of USD 175.9 million. Operating margin declined 570 basis points to 17.2 percent, primarily due to the impact of our ownership change in East China.

Q2 EMEA Segment Results

Net revenues for the EMEA segment grew 15 percent over Q2 FY17 to USD 266.1 million in Q2 FY18, primarily driven by favorable foreign currency translation and incremental revenues from the opening of 385 net new licensed stores over the past 12 months. Partially offsetting the increase was a decrease in comparable store sales.

Operating loss of USD 4.3 million in Q2 FY18 declined 116 percent versus operating income of USD 27.7 million in Q2 FY17. Operating margin declined 1’360 basis points to (1.6) percent, primarily driven by a partial impairment of goodwill related to our Switzerland retail business and sales deleverage on company-operated stores.

Q2 Channel Development Segment Results

Net revenues for the Channel Development segment of USD 500.2 million in Q2 FY18 increased 8 percent versus the prior year quarter primarily driven by higher sales of premium single-serve products and lapping a prior year revenue deduction adjustment, partially offset by the absence of revenue from the sale of our Tazo brand in the first quarter of fiscal 2018.

Operating income of USD 215.3 million in Q2 FY18 grew 11 percent compared to Q2 FY17. Operating margin expanded 100 basis points to 43.0 percent, primarily driven by lapping a revenue deduction adjustment, partially offset by lower income from our North American Coffee Partnership joint venture.

Q2 All Other Segments Results

All Other Segments primarily includes Seattle’s Best Coffee®, Starbucks ReserveTM Coffee and Roastery businesses, and Teavana-branded stores. The operating loss in Q2 FY18 was primarily due to restructuring costs related to our strategy to close Teavana retail stores and focus on TeavanaTM tea within Starbucks stores.

Year to Date Financial Results

	Two Quarters Ended April 1, 2018
Comparable Store Sales(1)	Sales Growth	Change in Transactions	Change in Ticket
Consolidated	2 percent	0 percent	2 percent
Americas	2 percent	0 percent	2 percent
CAP	2 percent	0 percent	2 percent
EMEA(2)	(1) percent	(4) percent	3 percent

(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 percent of the EMEA segment store portfolio as of April 1, 2018.

Operating Results	Two Quarters Ended		Change
( USD in millions, except per share amounts)	Apr 1, 2018	Apr 2, 2017	Change
Net New Stores (1)	870	1’076	(206)
Revenues	USD 12’105.5	USD 11’027.0	10 percent
Operating Income	USD 1’888.6	USD 2’068.3	(9) percent
Operating Margin	15.6 percent	18.8 percent	(320) bps
EPS	USD 2.05	USD 0.96	114 percent

(1) Fiscal 2018 net new stores include the net closure of 300 Teavana-branded stores.

Fiscal 2018 Targets

The company reiterates the following full year FY18 targets but notes that all guidance items exclude the yet to be determined impact of its previously announced plan to close more than 8’000 company-owned stores in the U.S. on May 29, 2018 to conduct racial-bias training for all partners (employees) in the U.S.

Continue to expect approximately 2’300 net new Starbucks 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 when excluding approximately 2 points of net favorability from the East China acquisition and other streamline-driven activities
Continue to 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

Company Updates

Starbucks announced it will close more than 8’000 company-owned stores and its corporate offices in the U.S. on May 29 to conduct racial-bias training for all partners (employees) in the U.S. The training will be provided to nearly 175’000 partners (employees) across the country and will become part of the onboarding process for new partners. Once complete, the company will make the education materials available to other companies, including its licensees.
The company hosted its 26th Annual Meeting of Shareholders on March 21 in Seattle. The company announced that Starbucks had reached 100 percent pay equity for partners of all genders and races performing similar work across the U.S.
In partnership with Closed Loop Partners and its Center for the Circular Economy, Starbucks committed USD 10 million in March to establish a groundbreaking consortium launching the NextGen Cup Challenge. Through the NextGen Cup Challenge, the consortium will award accelerator grants to promote the development of more sustainable cup solutions and invite industry participation and partnership on the way to identifying a global solution.
The company announced that it had entered into an agreement with SouthRock Capital Ltda – a leading multi-brand restaurant operator in Brazil – to fully license Starbucks retail operations in Brazil. The agreement provides SouthRock the rights to develop and operate Starbucks stores across the country. With the transition of ownership in Brazil, Starbucks retail operations across all markets in Latin America and the Caribbean became wholly licensed.
In March Starbucks opened the doors to its 46’000-square foot Hacienda Alsacia Visitor Center, located on the grounds of its Costa Rican coffee farm.
The company opened its Starbucks ReserveTM Coffee SODO store in Seattle on February 27, inviting visitors to take a journey of discovery with small-lot Starbucks ReserveTM coffees and PrinciTM food. This location is the first of the company’s new Starbucks Reserve store concept, introducing a marketplace-style environment to showcase its premium Starbucks Reserve brand.
In February, Starbucks and Chase announced the availability of the Starbucks RewardsTM Visa® Card, a co-brand credit card integrated directly into the Starbucks RewardsTM loyalty program. The new credit card is an expansion of the ongoing relationship between the two companies. Chase Merchant Services is the payment processing partner for Starbucks stores in the U.S. and Canada, and Chase Pay is accepted at participating Starbucks stores in the U.S., as well as through the Starbucks mobile app.
For the 12th consecutive year, Starbucks was named one of the World’s Most Ethical Companies by the Ethisphere Institute in February. Separately, Starbucks was named the fifth most admired company in the world by Fortune magazine in January. This is the 16th year in a row that Starbucks has appeared on Fortune’s global list.
The company closed an underwritten public offering of USD 1 billion of 3.100 percent senior notes due 2023 and USD 600 million of 3.5 percent senior notes due 2028. The company plans to use the net proceeds for general corporate purposes, including the repurchase of Starbucks common stock under the company’s ongoing share repurchase program, business expansion, payment of cash dividends on Starbucks common stock, or the financing of possible acquisitions.
The company repurchased 27.4 million shares of common stock in Q2 FY18; the company’s Board of Directors has authorized an additional 100 million shares for repurchase under its ongoing share repurchase program. With the additional 100 million shares, the company now has approximately 124 million shares available for purchase under current authorizations.
The Board of Directors declared a cash dividend of USD 0.30 per share, payable on May 25, 2018, to shareholders of record as of May 10, 2018.