STARBUCKS CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements herein are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Generally, these statements can be identified by the use of words such as “aim,” “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “feel,” “forecast,” “intend,” “may,” “outlook,” “plan,” “potential,” “project,” “seek,” “should,” “will,” “would,” and similar expressions intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These statements include statements relating to trends in or expectations relating to the effects of our existing and any future initiatives, strategies, investments and plans, as well as trends in or expectations regarding our financial results and long-term growth model and drivers; our operations in the U.S. and China; our environmental, social and governance efforts; our partners; economic and consumer trends, including the impact of inflationary pressures; the conversion of several market operations to fully licensed models; our plans for streamlining our operations, including store openings, closures and changes in store formats and models; expanding our licensing to Nestlé of our consumer packaged goods and Foodservice businesses and its effects on our Channel Development segment results; tax rates; business opportunities and expansion; strategic acquisitions; our dividends programs; commodity costs and our mitgation strategy; our liquidity, cash flow from operations, investments, borrowing capacity and use of proceeds; continuing compliance with our covenants under our credit facilities and commercial paper program; repatriation of cash to the U.S.; the likelihood of the issuance of additional debt and the applicable interest rate; the continuing impact of the COVID-19 pandemic on our financial results and future availability of governmental subsidies for COVID-19 or other public health events; our ceo transition; our share repurchase program; our use of cash and cash requirements; the expected effects of new accounting pronouncements and the estimated impact of changes in U.S. tax law, including on tax rates, investments funded by these changes and potential outcomes; and effects of legal proceedings. Such statements are based on currently available operating, financial and competitive information and are subject to various risks and uncertainties. Actual future results and trends may differ materially depending on a variety of factors, including, but not limited to: further spread of COVID-19 and related disruptions to our business; regulatory measures or voluntary actions that may be put in place to limit the spread of COVID-19, including restrictions on business operations or social distancing requirements, and the duration and efficacy of such restrictions; the resurgence of COVID-19 infections and the circulation of novel variants of COVID-19; fluctuations in U.S. and international economies and currencies; our ability to preserve, grow and leverage our brands; the ability of our business partners and third-party providers to fulfill their responsibilities and commitments; potential negative effects of incidents involving food or beverage-borne illnesses, tampering, adulteration, contamination or mislabeling; potential negative effects of material breaches of our information technology systems to the extent we experience a material breach; material failures of our information technology systems; costs associated with, and the successful execution of, the Company’s initiatives and plans; new initiatives and plans or revisions to existing initiatives or plans; our ability to obtain financing on acceptable terms; the acceptance of the Company’s products by our customers, evolving consumer preferences and tastes and changes in consumer spending behavior; partner investments, changes in the availability and cost of labor including any union organizing efforts and our responses to such efforts; failure to attract or retain key executive or employee talent; significant increased logistics costs; inflationary pressures; the impact of competition; inherent risks of operating a global business including any potential negative effects stemming from the Russian invasion of Ukraine; the prices and availability of coffee, dairy and other raw materials; the effect of legal proceedings; the effects of changes in tax laws and related guidance and regulations that may be implemented and other risks detailed in our filings with the SEC, including in Part I Item IA “ Risk Factors ” in the 10-K. A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. You should not place undue reliance on the forward-looking statements, which speak only as of the date of this report. We are under no obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. This information should be read in conjunction with the consolidated financial statements and the notes included in Item 1 of Part I of this 10-Q and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), contained in the 10-K filed with the SEC on November 19, 2021. Introduction and Overview Starbucks is the premier roaster, marketer and retailer of specialty coffee in the world, operating in 84 markets. As of April 3, 2022, Starbucks had more than 34,600 company-operated and licensed stores, an increase of 5% from the prior year. Additionally, we sell a variety of consumer-packaged goods, primarily through the Global Coffee Alliance established with Nestlé and other partnerships and joint ventures. During the quarter ended April 3, 2022, our global comparable store sales grew 7%, primarily driven by 12% growth in the U.S. market, partially offset by COVID-19 related restrictions in China, leading to a 23% decrease in China comparable store sales. We have three reportable operating segments: 1) North America, which is inclusive of the U.S. and Canada, 2) International, which is inclusive of China, Japan, Asia Pacific, Europe, Middle East, Africa, Latin America and the Caribbean; and 3) Channel 31 Table of Contents Development. Non-reportable operating segments such as Evolution Fresh and unallocated corporate expenses are reported within Corporate and Other. We believe our financial results and long-term growth model will continue to be driven by new store openings, comparable store sales growth and operating margin management, underpinned by disciplined capital allocation. We believe these key operating metrics are useful to investors because management uses these metrics to assess the growth of our business and the effectiveness of our marketing and operational strategies. Throughout this MD&A, we commonly discuss the following key operating metrics: • New store openings and store count • Comparable store sales growth • Operating margin Comparable store sales growth represents the percentage change in sales in one period from the same prior year period for company-operated stores open for 13 months or longer and exclude the impact of foreign currency translation. We analyze comparable store sales growth on a constant currency basis as this helps identify underlying business trends, without distortion from the effects of currency movements. Stores that are temporarily closed or operating at reduced hours due to the COVID-19 pandemic remain in comparable store sales while stores identified for permanent closure have been removed. Our fiscal year ends on the Sunday closest to September 30. Our fiscal 2022 year includes 52 weeks while our fiscal 2021 year included 53 weeks, with the 53rd week falling in the fourth quarter of fiscal 2021. All references to store counts, including data for new store openings, are reported net of store closures, unless otherwise noted. Starbucks results for the second quarter of fiscal 2022 demonstrate the overall strength and resilience of our brand, despite continued COVID-19 related disruptions in certain international markets, especially China. Consolidated net revenues increased 15% to $7.6 billion in the second quarter of fiscal 2022 compared to $6.7 billion in the second quarter of fiscal 2021, primarily driven by strength in our U.S. business, incremental revenues from new store openings and growth in our licensed stores, partially offset by continued COVID-19 pandemic related disruptions in China restricting customer mobility. Consolidated operating margin decreased 240 basis points from the prior year to 12.4%, primarily driven by inflationary pressures on commodities and our supply chain as well as investments and growth in retail store partner wages and benefits, partially offset by pricing and lower restructuring expenses in North America. For both the North America segment and the U.S., comparable store sales increased 12% for the second quarter of fiscal 2022 compared to an increase of 9% in the second quarter of fiscal 2021. Average ticket for both the North America segment and the U.S. grew 7%, primarily driven by pricing and increased demand for food items in our U.S. market. The segment also experienced higher costs, primarily related to increased supply chain costs due to inflationary pressures, enhancements in retail store partner wages and increased spend on new partner training and support costs to address labor market conditions, partially offset by pricing and lapping restructuring expenses in the prior period. For the International segment, comparable store sales declined 8%, inclusive of a 3% adverse impact from lapping the prior-year value-added tax benefit. Comparable store sales for our China market declined 23% for the second quarter of fiscal 2022, inclusive of a 4% adverse impact from lapping the prior-year value-added tax benefit. Our China market experienced unprecedented COVID-19 pandemic related restrictions in multiple cities that severely impacted customer mobility; approximately one third of our stores in China remain temporarily closed or offer mobile ordering channels only. Strong business recovery in other international markets partially offset the unfavorability in our China market. Net revenues for our Channel Development segment increased $93 million, or 25%, when compared with the second quarter of fiscal 2021. This was largely due to higher product sales to and royalty revenue from the Global Coffee Alliance and growth in our international ready-to-drink business. Despite continued COVID-19 induced business interruptions, especially in our China market, we have seen the strength and resilience of our brand as well as strong customer demand across our portfolio. However, COVID-19 related mobility restrictions remain in place in China. Additionally, our business expects the weights from inflationary pressures and increased spend due to labor market conditions to continue as well as incremental investments in our partners, technology and digital capabilities. While we anticipate these will have an adverse impact on our operating margin for the remainder of the fiscal year, we are confident that our strategy will elevate both the partner and customer experience, accelerating growth over the long-term. 32 Table of Contents Results of Operations (in millions) Revenues Quarter Ended Two Quarters Ended Apr 3, 2022 Mar 28, 2021 $ Change % Change Apr 3, 2022 Mar 28, 2021 $ Change % Change Company-operated stores $ 6,276.7 $ 5,653.1 $ 623.6 11.0 % $ 12,999.1 $ 11,379.6 $ 1,619.5 14.2 % Licensed stores 849.5 595.0 254.5 42.8 1,700.3 1,208.8 491.5 40.7 Other 509.4 419.9 89.5 21.3 986.6 829.1 157.5 19.0 Total net revenues $ 7,635.6 $ 6,668.0 $ 967.6 14.5 % $ 15,686.0 $ 13,417.5 $ 2,268.5 16.9 % For the quarter ended April 3, 2022 compared with the quarter ended March 28, 2021 Total net revenues for the second quarter of fiscal 2022 increased $968 million, primarily due to higher revenues from company-operated stores ($624 million). The growth of company-operated stores revenue was driven by a 7% increase in comparable store sales ($402 million), attributable to a 4% increase in average ticket and a 3% increase in comparable transactions. Also contributing to the increase were incremental revenues from 885 net new Starbucks ® company-operated stores, or a 5% increase, over the past 12 months ($250 million). Partially offsetting these increases was unfavorable foreign currency translation ($55 million). Licensed stores revenue increased $255 million also contributed to the increase in total net revenues, driven by higher product and equipment sales to and royalty revenues from our licensees ($228 million) and the conversion of our Korea market from a joint venture to a fully licensed market in the fourth quarter of fiscal 2021 ($40 million). Other revenues increased $90 million, primarily due to higher product sales and royalty revenue in the Global Coffee Alliance and volume growth in our international ready-to-drink business. For the two quarters ended April 3, 2022 compared with the two quarters ended March 28, 2021 Total net revenues for the first two quarters of fiscal 2022 increased $2.3 billion, primarily due to higher revenues from company-operated stores ($1.6 billion). The growth of company-operated stores revenue was driven by a 10% increase in comparable store sales ($1.1 billion) attributed to a 6% increase in comparable transactions and a 3% increase in average ticket. Also contributing to the increase were incremental revenues from 885 net new Starbucks ® company-operated stores, or a 5% increase, over the past 12 months ($503 million). Partially offsetting these increases was unfavorable foreign currency translation ($61 million). Licensed stores revenue increased $492 million, primarily driven by higher product and equipment sales to and royalty revenues from our licensees ($434 million) and the conversion of our Korea market from a joint venture to a fully licensed market in the fourth quarter of fiscal 2021 ($79 million). Other revenues increased $158 million, primarily due to higher product sales and royalty revenue in the Global Coffee Alliance and volume growth in our international ready-to-drink business. 33 Table of Contents Operating Expenses Quarter Ended Two Quarters Ended Apr 3, 2022 Mar 28, 2021 $ Change Apr 3, 2022 Mar 28, 2021 Apr 3, 2022 Mar 28, 2021 $ Change Apr 3, 2022 Mar 28, 2021 As a % of Total Net Revenues As a % of Total Net Revenues Product and distribution costs $ 2,465.8 $ 1,992.4 $ 473.4 32.3 % 29.9 % $ 4,992.7 $ 4,041.5 $ 951.2 31.8 % 30.1 % Store operating expenses 3,314.7 2,823.3 491.4 43.4 42.3 6,714.6 5,690.7 1,023.9 42.8 42.4 Other operating expenses 101.7 87.7 14.0 1.3 1.3 203.4 179.5 23.9 1.3 1.3 Depreciation and amortization expenses 367.7 366.7 1.0 4.8 5.5 733.8 732.6 1.2 4.7 5.5 General and administrative expenses 481.5 464.4 17.1 6.3 7.0 1,007.3 936.5 70.8 6.4 7.0 Restructuring and impairments 4.4 23.0 (18.6) 0.1 0.3 (3.1) 95.2 (98.3) — 0.7 Total operating expenses 6,735.8 5,757.5 978.3 88.2 % 86.3 % 13,648.7 11,676.0 1,972.7 87.0 87.0 Income from equity investees 49.1 77.1 (28.0) 0.6 1.2 89.4 159.7 (70.3) 0.6 1.2 Operating income $ 948.9 $ 987.6 $ (38.7) 12.4 % 14.8 % $ 2,126.7 $ 1,901.2 $ 225.5 13.6 % 14.2 % Store operating expenses as a % of company-operated stores revenue 52.8 % 49.9 % 51.7 % 50.0 % For the quarter ended April 3, 2022 compared with the quarter ended March 28, 2021 Product and distribution costs as a percentage of total net revenues increased 240 basis points for the second quarter of fiscal 2022, primarily due to supply chain costs due to inflationary pressures. Store operating expenses as a percentage of total net revenues increased 110 basis points for the second quarter of fiscal 2022. Store operating expenses as a percentage of company-operated stores revenue increased 290 basis points, primarily due to enhancements in retail store partner wages and benefits (approximately 260 basis points), lapping of higher temporary government subsidies in the prior year (approximately 150 basis points) and increased spend on new partner training and support costs to address labor market conditions (approximately 80 basis points), partially offset by sales leverage. Other operating expenses increased $14 million for the second quarter of fiscal 2022, primarily due to higher support costs for our growing licensed markets ($4 million) and strategic investments in technology and other initiatives ($3 million). Depreciation and amortization expenses as a percentage of total net revenues decreased 70 basis points, primarily due to sales leverage. General and administrative expenses increased $17 million, primarily due to incremental investments in technology ($24 million), increased partner wages and benefits ($19 million) and increased support costs to address labor market conditions ($10 million). These increases were partially offset by lower performance-based compensation ($33 million). Restructuring and impairment expenses decreased $19 million, primarily due to lower restructuring activities related to our North America store portfolio optimization in the prior year, specifically lower accelerated lease right-of-use asset amortization costs ($13 million) and lower asset impairment charges ($7 million). Income from equity investees decreased $28 million, primarily due to the conversion of our Korea market from a joint venture to a fully licensed market in the fourth quarter of fiscal 2021 ($27 million). The combination of these changes resulted in an overall decrease in operating margin of 240 basis points for the second quarter of fiscal 2022. 34 Table of Contents For the two quarters ended April 3, 2022 compared with the two quarters ended March 28, 2021 Product and distribution costs as a percentage of total net revenues increased 170 basis points for the first two quarters of fiscal 2022, primarily due to supply chain costs due to inflationary pressures. Store operating expenses as a percentage of total net revenues increased 40 basis points for the first two quarters of fiscal 2022. Store operating expenses as a percentage of company-operated stores revenue increased 170 basis points, primarily due to enhancements in retail store partner wages and benefits (approximately 280 basis points), lapping of higher temporary government subsidies in the prior year (approximately 80 basis points) and increased spend on new partner training and support costs to address labor market conditions (approximately 100 basis points), partially offset by sales leverage. Other operating expenses increased $24 million for the first two quarters of fiscal 2022, primarily due to higher support costs for our growing licensed markets ($11 million) and strategic investments in technology and other initiatives ($4 million). Depreciation and amortization expenses as a percentage of total net revenues decreased 80 basis points, primarily due to sales leverage. General and administrative expenses increased $71 million, primarily due to incremental investments in technology ($52 million), increased partner wages and benefits ($38 million) and increased support costs to address labor market conditions ($11 million). These increases were partially offset by lower performance-based compensation ($41 million). Restructuring and impairment expenses decreased $98 million, primarily due to lower restructuring activities related to our North America store portfolio optimization in the prior year, specifically lower accelerated lease right-of-use asset amortization costs ($52 million) and lower asset impairment charges ($48 million). Income from equity investees decreased $70 million, primarily due to the conversion of our Korea market from a joint venture to a fully licensed market in the fourth quarter of fiscal 2021 ($54 million) and lower income from our North American Coffee Partnership joint venture ($19 million). The combination of these changes resulted in an overall decrease in operating margin of 60 basis points for the first two quarters of fiscal 2022. Other Income and Expenses Quarter Ended Two Quarters Ended Apr 3, 2022 Mar 28, 2021 $ Change Apr 3, 2022 Mar 28, 2021 Apr 3, 2022 Mar 28, 2021 $ Change Apr 3, 2022 Mar 28, 2021 As a % of Total Net Revenues As a % of Total Net Revenues Operating income $ 948.9 $ 987.6 $ (38.7) 12.4 % 14.8 % $ 2,126.7 $ 1,901.2 $ 225.5 13.6 % 14.2 % Interest income and other, net 46.3 17.3 29.0 0.6 0.3 46.2 32.7 13.5 0.3 0.2 Interest expense (119.1) (115.0) (4.1) (1.6) (1.7) (234.4) (235.8) 1.4 (1.5) (1.8) Earnings before income taxes 876.1 889.9 (13.8) 11.5 13.3 1,938.5 1,698.1 240.4 12.4 12.7 Income tax expense 201.1 230.5 (29.4) 2.6 3.5 447.4 416.5 30.9 2.9 3.1 Net earnings including noncontrolling interests 675.0 659.4 15.6 8.8 9.9 1,491.1 1,281.6 209.5 9.5 9.6 Net earnings attributable to noncontrolling interests 0.5 — 0.5 — — 0.7 — 0.7 — — Net earnings attributable to Starbucks $ 674.5 $ 659.4 $ 15.1 8.8 % 9.9 % $ 1,490.4 $ 1,281.6 $ 208.8 9.5 % 9.6 % Effective tax rate including noncontrolling interests 23.0 % 25.9 % 23.1 % 24.5 % For the quarter ended April 3, 2022 compared with the quarter ended March 28, 2021 35 Table of Contents Interest income and other, net increased $29 million, primarily due to higher net gains from certain investments. Interest expense increased $4 million, primarily due to additional interest incurred on long-term debt issued in February 2022. The effective tax rate for the quarter ended April 3, 2022 was 23.0% compared to 25.9% for the same period in fiscal 2021. The decrease was primarily due to a beneficial return-to-provision adjustment recorded related to the prior year divestiture of certain joint venture operations. For the two quarters ended April 3, 2022 compared with the two quarters ended March 28, 2021 Interest income and other, net increased $14 million, primarily due to higher net gains from certain investments. The effective tax rate for the first two quarters ended April 3, 2022 was 23.1% compared to 24.5% for the same period in fiscal 2021. The decrease was primarily due to a beneficial return-to-provision adjustment recorded related to the prior year divestiture of certain joint venture operations. Segment Information Results of operations by segment (in millions) : North America (1) Quarter Ended Two Quarters Ended Apr 3, 2022 Mar 28, 2021 $ Change Apr 3, 2022 Mar 28, 2021 Apr 3, 2022 Mar 28, 2021 $ Change Apr 3, 2022 Mar 28, 2021 As a % of North America Total Net Revenues As a % of North America Total Net Revenues Net revenues: Company-operated stores $ 4,936.3 $ 4,268.4 $ 667.9 90.6 % 92.0 % $ 10,150.4 $ 8,553.2 $ 1,597.2 90.8 % 91.8 % Licensed stores 507.0 368.1 138.9 9.3 7.9 1,022.9 756.6 266.3 9.2 8.1 Other 2.4 2.0 0.4 — — 4.7 4.4 0.3 — — Total net revenues 5,445.7 4,638.5 807.2 100.0 100.0 11,178.0 9,314.2 1,863.8 100.0 100.0 Product and distribution costs 1,564.0 1,213.1 350.9 28.7 26.2 3,193.4 2,473.5 719.9 28.6 26.6 Store operating expenses 2,625.4 2,203.1 422.3 48.2 47.5 5,327.7 4,442.1 885.6 47.7 47.7 Other operating expenses 47.1 39.2 7.9 0.9 0.8 95.3 80.7 14.6 0.9 0.9 Depreciation and amortization expenses 202.0 186.0 16.0 3.7 4.0 402.1 374.9 27.2 3.6 4.0 General and administrative expenses 71.3 77.7 (6.4) 1.3 1.7 148.0 148.5 (0.5) 1.3 1.6 Restructuring and impairments 4.4 23.0 (18.6) 0.1 0.5 (3.1) 95.2 (98.3) — 1.0 Total operating expenses 4,514.2 3,742.1 772.1 82.9 80.7 9,163.4 7,614.9 1,548.5 82.0 81.8 Operating income $ 931.5 $ 896.4 $ 35.1 17.1 % 19.3 % $ 2,014.6 $ 1,699.3 $ 315.3 18.0 % 18.2 % Store operating expenses as a % of company-operated stores revenue 53.2 % 51.6 % 52.5 % 51.9 % (1) North America licensed stores revenue, total net revenues, product and distribution costs, other operating expenses, total operating expenses and operating income for the quarter and two quarters ended March 28, 2021, have been restated to conform with current period presentation. For the quarter ended April 3, 2022 compared with the quarter ended March 28, 2021 36 Table of Contents Revenues North America total net revenues for the second quarter of fiscal 2022 increased $807 million, or 17%, primarily due to a 12% increase in comparable store sales ($510 million) driven by a 7% increase in average ticket and a 5% increase in transactions. Also contributing to these increases were the performance of new stores compared to the closure of underperforming stores in prior year including stores related to our restructuring plan ($146 million) and higher product and equipment sales to and royalty revenues from our licensees ($139 million). Operating Margin North America operating income for the second quarter of fiscal 2022 increased 4% to $932 million, compared to $896 million in the second quarter of fiscal 2021. Operating margin decreased 220 basis points to 17.1%, primarily due to higher supply chain costs resulting from inflationary pressures (approximately 350 basis points), investments in labor including enhancements in retail store partner wages and benefits (approximately 280 basis points) and support costs to address labor market conditions (approximately 100 basis points) as well as lapping temporary subsidies provided by the CARES Act and CEWS (approximately 140 basis points). These were partially offset by sales leverage as well as pricing (approximately 390 basis points), sourcing savings (approximately 80 basis points), lower restructuring activity expenses (approximately 40 basis points) and benefits from the closure of lower-performing stores (approximately 40 basis points). For the two quarters ended April 3, 2022 compared with the two quarters ended March 28, 2021 Revenues North America total net revenues for the first two quarters of fiscal 2022 increased $1.9 billion, or 20% primarily due to a 15% increase in comparable store sales ($1.3 billion) driven by a 9% increase in transactions and a 6% increase in average ticket. Also contributing to these increases were the performance of new stores compared to the closure of underperforming stores in prior year including stores related to our restructuring plan ($287 million) and higher product and equipment sales to and royalty revenues from our licensees ($268 million), primarily due to business recovery from impact of the COVID-19 pandemic. Operating Margin North America operating income for the first two quarters of fiscal 2022 increased 19% to $2.0 billion, compared to $1.7 billion for the same period in fiscal 2021. Operating margin decreased 20 basis points to 18.0%, primarily due to investments in labor including enhancements in retail store partner wages and benefits (approximately 310 basis points) and increased spend on new partner training and support costs to address labor market conditions (approximately 120 basis points), higher supply chain costs resulting from inflationary pressures (approximately 300 basis points) and lapping temporary subsidies provided by the CARES Act and CEWS (approximately 90 basis points). These were partially offset by sales leverage as well as pricing (approximately 300 basis points), lower restructuring activity expenses (approximately 100 basis points), sourcing savings (approximately 80 basis points) and benefits from the closure of lower-performing stores (approximately 50 basis points). 37 Table of Contents International (1) Quarter Ended Two Quarters Ended Apr 3, 2022 Mar 28, 2021 $ Change Apr 3, 2022 Mar 28, 2021 Apr 3, 2022 Mar 28, 2021 $ Change Apr 3, 2022 Mar 28, 2021 As a % of International Total Net Revenues As a % of International Total Net Revenues Net revenues: Company-operated stores $ 1,340.4 $ 1,384.7 $ (44.3) 78.7 % 84.6 % $ 2,848.7 $ 2,826.4 $ 22.3 79.6 % 85.2 % Licensed stores 342.5 226.9 115.6 20.1 13.9 677.4 452.2 225.2 18.9 13.6 Other 19.5 25.4 (5.9) 1.1 1.6 52.3 40.4 11.9 1.5 1.2 Total net revenues 1,702.4 1,637.0 65.4 100.0 100.0 3,578.4 3,319.0 259.4 100.0 100.0 Product and distribution costs 580.5 528.0 52.5 34.1 32.3 1,196.4 1,064.2 132.2 33.4 32.1 Store operating expenses 689.3 620.2 69.1 40.5 37.9 1,386.9 1,248.6 138.3 38.8 37.6 Other operating expenses 39.5 32.0 7.5 2.3 2.0 78.7 67.6 11.1 2.2 2.0 Depreciation and amortization expenses 133.4 143.4 (10.0) 7.8 8.8 266.5 283.4 (16.9) 7.4 8.5 General and administrative expenses 79.6 82.1 (2.5) 4.7 5.0 170.9 167.2 3.7 4.8 5.0 Total operating expenses 1,522.3 1,405.7 116.6 89.4 85.9 3,099.4 2,831.0 268.4 86.6 85.3 Income from equity investees 0.6 26.8 (26.2) — 1.6 1.3 53.0 (51.7) — 1.6 Operating income $ 180.7 $ 258.1 $ (77.4) 10.6 % 15.8 % $ 480.3 $ 541.0 $ (60.7) 13.4 % 16.3 % Store operating expenses as a % of company-operated stores revenue 51.4 % 44.8 % 48.7 % 44.2 % (1) International licensed stores revenue, total net revenues, product and distribution costs, other operating expenses, general and administrative expenses, total operating expenses and operating income for the quarter and two quarters ended March 28, 2021, have been restated to conform with current period presentation. For the quarter ended April 3, 2022 compared with the quarter ended March 28, 2021 Revenues International total net revenues for the second quarter of fiscal 2022 increased $65 million, or 4%, primarily due to 751 net new Starbucks company-operated store openings, or an 11% increase over the past 12 months ($104 million). Additionally, there were higher product sales to and royalty revenues from our licensees ($89 million), primarily due to continuing improvement of our licensees from the COVID-19 pandemic. Also contributing to the increase was the conversion of our Korea market from a joint venture to a fully licensed market in the fourth quarter of fiscal 2021 ($40 million). These increases were partially offset by an 8% decline in comparable store sales ($108 million), driven by a 5% decrease in average ticket and a 3% decrease in customer transactions, primarily attributable to COVID-19 related restrictions in China and lapping the prior-year VAT benefit as well as unfavorable foreign currency translation ($53 million). Operating Margin International operating income for the second quarter of fiscal 2022 decreased 30% to $181 million, compared to $258 million in the second quarter of fiscal 2021. Operating margin decreased 520 basis points to 10.6%, primarily due to strategic initiatives, largely in China (approximately 180 basis points), an increase in product and distribution costs from a sales mix shift (approximately 160 basis points), investments and growth in retail store partner wages and benefits (approximately 130 basis points), lower temporary government subsidies (approximately 90 basis points) and increased supply chain costs due to inflationary pressures (approximately 50 basis points). These decreases were partially offset by lower amortization expenses (approximately 80 basis points). 38 Table of Contents For the two quarters ended April 3, 2022 compared with the two quarters ended March 28, 2021 Revenues International total net revenues for the first two quarters of fiscal 2022 increased $259 million, or 8%, primarily due to 751 net new Starbucks ® company-operated stores, or an 11% increase over the past 12 months ($217 million). Additionally, there were higher product sales to and royalty revenues from our licensees ($166 million), primarily due to continuing improvement of our licensees from the COVID-19 pandemic. Also contributing to the increase was the conversion of our Korea market from a joint venture to a fully licensed market in the fourth quarter of fiscal 2021 ($79 million). These increases were partially offset by a 6% decline in comparable store sales ($151 million), driven by a 5% decrease in average ticket primarily attributable to COVID-19 related restrictions in China and lapping the prior-year VAT benefit in China as well as unfavorable foreign currency translation ($70 million). Operating Margin International operating income for the first two quarters of fiscal 2022 decreased 11% to $480 million, compared to $541 million for the same period in fiscal 2021. Operating margin decreased 290 basis points to 13.4%, primarily due to strategic initiatives, largely in China (approximately 140 basis points), investments and growth in retail store partner wages and benefits (approximately 130 basis points), an increase in product and distribution costs from a sales mix shift (approximately 120 basis points) and increased supply chain costs due to inflationary pressures (approximately 50 basis points). These decreases were partially offset by lower amortization expenses (approximately 80 basis points). Channel Development Quarter Ended Two Quarters Ended Apr 3, 2022 Mar 28, 2021 $ Change Apr 3, 2022 Mar 28, 2021 Apr 3, 2022 Mar 28, 2021 $ Change Apr 3, 2022 Mar 28, 2021 As a % of Channel Development Total Net Revenues As a % of Channel Development Total Net Revenues Net revenues $ 463.1 $ 369.9 $ 93.2 $ 880.1 $ 741.2 $ 138.9 Product and distribution costs 300.5 231.9 68.6 64.9 % 62.7 % 559.3 465.4 93.9 63.5 % 62.8 % Other operating expenses 10.7 13.1 (2.4) 2.3 3.5 22.0 24.1 (2.1) 2.5 3.3 Depreciation and amortization expenses — 0.3 (0.3) — 0.1 — 0.6 (0.6) — 0.1 General and administrative expenses 2.5 2.3 0.2 0.5 0.6 5.8 4.5 1.3 0.7 0.6 Total operating expenses 313.7 247.6 66.1 67.7 66.9 587.1 494.6 92.5 66.7 66.7 Income from equity investees 48.5 50.3 (1.8) 10.5 13.6 88.1 106.7 (18.6) 10.0 14.4 Operating income $ 197.9 $ 172.6 $ 25.3 42.7 % 46.7 % $ 381.1 $ 353.3 $ 27.8 43.3 % 47.7 % For the quarter ended April 3, 2022 compared with the quarter ended March 28, 2021 Revenues Channel Development total net revenues for the second quarter of fiscal 2022 increased $93 million, or 25%, primarily due to higher Global Coffee Alliance product sales and royalty revenue ($77 million) and volume growth in our ready-to-drink businesses ($18 million). Operating Margin Channel Development operating income for the second quarter of fiscal 2022 increased 15% to $198 million, compared to $173 million in the second quarter of fiscal 2021. Operating margin decreased 400 basis points to 42.7%, primarily due to business mix shift driven by growth in the Global Coffee Alliance. For the two quarters ended April 3, 2022 compared with the two quarters ended March 28, 2021 39 Table of Contents Revenues Channel Development total net revenues for the first two quarters of fiscal 2022 increased $139 million, or 19%, primarily due to higher Global Coffee Alliance product sales and royalty revenue ($107 million) and volume growth in our ready-to-drink businesses ($34 million). Operating Margin Channel Development operating income for the first two quarters of fiscal 2022 increased 8% to $381 million, compared to $353 million for the same period in fiscal 2021. Operating margin decreased 440 basis points to 43.3%, primarily due to a decline in our North American Coffee Partnership joint venture income due to supply chain constraints and inflationary pressures as well as a business mix shift. Corporate and Other (1) Quarter Ended Two Quarters Ended Apr 3, 2022 Mar 28, 2021 $ Change % Change Apr 3, 2022 Mar 28, 2021 $ Change % Change Net revenues: Other $ 24.4 $ 22.6 $ 1.8 8.0 % $ 49.5 $ 43.1 $ 6.4 14.8 % Total net revenues 24.4 22.6 1.8 8.0 49.5 43.1 6.4 14.8 Product and distribution costs 20.8 19.4 1.4 7.2 43.6 38.4 5.2 13.5 Other operating expenses 4.4 3.4 1.0 29.4 7.4 7.1 0.3 4.2 Depreciation and amortization expenses 32.3 37.0 (4.7) (12.7) 65.2 73.7 (8.5) (11.5) General and administrative expenses 328.1 302.3 25.8 8.5 682.6 616.3 66.3 10.8 Total operating expenses 385.6 362.1 23.5 6.5 798.8 735.5 63.3 8.6 Operating loss $ (361.2) $ (339.5) $ (21.7) 6.4 % $ (749.3) $ (692.4) $ (56.9) 8.2 % (1) Corporate and other general and administrative expenses, total operating expenses and operating loss for the quarter and two quarters ended March 28, 2021, have been restated to conform with current period presentation. Corporate and Other primarily consists of our unallocated corporate expenses, as well as Evolution Fresh. Unallocated corporate expenses include corporate administrative functions that support the operating segments but are not specifically attributable to or managed by any segment and are not included in the reported financial results of the operating segments. For the quarter ended April 3, 2022 compared with the quarter ended March 28, 2021 Corporate and Other operating loss increased to $361 million for the second quarter of fiscal 2022, or 6%, compared to $340 million for the second quarter of fiscal 2021. This increase was primarily driven by incremental investments in technology ($22 million), increased partner wages and benefits ($12 million) and increased support costs to address labor market conditions ($10 million). These increases were partially offset by lower performance-based compensation ($26 million). For the two quarters ended April 3, 2022 compared with the two quarters ended March 28, 2021 Corporate and Other operating loss increased to $749 million for the first two quarters of fiscal 2022, or 8%, compared to $692 million for the same period in fiscal 2021. This increase was primarily driven by incremental investments in technology ($45 million), increased partner wages and benefits ($21 million) and increased support costs to address labor market conditions ($11 million). These increases were partially offset by lower performance-based compensation ($24 million). 40 Table of Contents Quarterly Store Data Our store data for the periods presented is as follows: Net stores opened/(closed) and transferred during the period Quarter Ended Two Quarters Ended Stores open as of Apr 3, 2022 Mar 28, 2021 Apr 3, 2022 Mar 28, 2021 Apr 3, 2022 Mar 28, 2021 North America Company-operated stores 54 (209) 93 (289) 9,954 9,820 Licensed stores (16) 20 7 50 6,972 6,881 Total North America (1) 38 (189) 100 (239) 16,926 16,701 International Company-operated stores 102 123 315 308 7,587 6,836 Licensed stores 173 71 382 214 10,117 9,406 Total International (1) 275 194 697 522 17,704 16,242 Total Company 313 5 797 283 34,630 32,943 (1) North America and International licensed stores as of March 28, 2021, have been recast as a result of our fiscal 2021 operating segment reporting structure realignment. Financial Condition, Liquidity and Capital Resources Investment Overview Our cash and investments totaled $4.3 billion as of April 3, 2022 and $6.9 billion as of October 3, 2021. We actively manage our cash and investments in order to internally fund operating needs, make scheduled interest and principal payments on our borrowings, make acquisitions and return cash to shareholders through common stock cash dividend payments and share repurchases. Our investment portfolio primarily includes highly liquid available-for-sale securities, including corporate debt securities and government treasury securities (foreign and domestic). As of April 3, 2022, approximately $2.9 billion of cash was held in foreign subsidiaries. Borrowing Capacity Revolving Credit Facility Our $3 billion unsecured five-year revolving credit facility (the "2021 credit facility"), of which $150 million may be used for issuances of letters of credit, is currently set to mature on September 16, 2026. The 2021 credit facility is available for working capital, capital expenditures and other corporate purposes, including acquisitions and share repurchases. We have the option, subject to negotiation and agreement with the related banks, to increase the maximum commitment amount by an additional $1.0 billion. Borrowings under the 2021 credit facility will bear interest at a variable rate based on LIBOR, and, for U.S. dollar-denominated loans under certain circumstances, a Base Rate (as defined in the 2021 credit facility), in each case plus an applicable margin. The applicable margin is based on the Company’s long-term credit ratings assigned by the Moody’s and Standard & Poor’s rating agencies. The 2021 credit facility contains alternative interest rate provisions specifying rate calculations to be used at such time LIBOR ceases to be available as a benchmark due to reference rate reform. The “Base Rate” is the highest of (i) the Federal Funds Rate (as defined in the 2021 credit facility) plus 0.050%, (ii) Bank of America’s prime rate and (iii) the Eurocurrency Rate (as defined in the 2021 credit facility) plus 1.000%. The 2021 credit facility contains provisions requiring us to maintain compliance with certain covenants, including a minimum fixed charge coverage ratio, which measures our ability to cover financing expenses. As of April 3, 2022, we were in compliance with all applicable covenants. No amounts were outstanding under our 2021 credit facility as of April 3, 2022 or October 3, 2021. Commercial Paper Under our commercial paper program, we may issue unsecured commercial paper notes up to a maximum aggregate amount outstanding at any time of $3.0 billion, with individual maturities that may vary but not exceed 397 days from the date of issue. Amounts outstanding under the commercial paper program are required to be backstopped by available commitments under the 2021 credit facility discussed above. The proceeds from borrowings under our commercial paper program may be used for 41 Table of Contents working capital needs, capital expenditures and other corporate purposes, including, but not limited to, business expansion, payment of cash dividends on our common stock and share repurchases. As of April 3, 2022 and October 3, 2021, we had no borrowings outstanding under our commercial paper program. Our total contractual borrowing capacity for general corporate purposes was $3 billion as of the end of our second quarter of fiscal 2022. Credit facilities in Japan Additionally, we hold Japanese yen-denominated credit facilities for the use of our Japan subsidiary. These are available for working capital needs and capital expenditures within our Japanese market. • A ¥5 billion, or $41.1 million, credit facility is currently set to mature on December 31, 2022. Borrowings under such credit facility are subject to terms defined within the facility and will bear interest at a variable rate based on TIBOR plus an applicable margin of 0.400%. • A ¥10 billion, or $82.2 million, credit facility is currently set to mature on March 27, 2023. Borrowings under such credit facility are subject to terms defined within the facility and will bear interest at a variable rate based on TIBOR plus an applicable margin of 0.350%. As of April 3, 2022 and October 3, 2021, we had no borrowings outstanding under these Japanese yen-denominated credit facilities. See Note 7, Debt, to the consolidated financial statements included in Item 1 of Part I of this 10-Q for details of the components of our long-term debt. Our ability to incur new liens and conduct sale and leaseback transactions on certain material properties is subject to compliance with terms of the indentures under which the long-term notes were issued. As of April 3, 2022, we were in compliance with all applicable covenants. Use of Cash We expect to use our available cash and investments, including, but not limited to, additional potential future borrowings under the credit facilities, commercial paper program and the issuance of debt to support and invest in our core businesses, including investing in new ways to serve our customers and supporting our store partners, repaying maturing debts, as well as returning cash to shareholders through common stock cash dividend payments and discretionary share repurchases and investing in new business opportunities related to our core and developing businesses. Furthermore, we may use our available cash resources to make proportionate capital contributions to our investees. We may also seek strategic acquisitions to leverage existing capabilities and further build our business. Acquisitions may include increasing our ownership interests in our investees. Any decisions to increase such ownership interests will be driven by valuation and fit with our ownership strategy. We believe that net future cash flows generated from operations and existing cash and investments both domestically and internationally combined with our ability to leverage our balance sheet through the issuance of debt will be sufficient to finance capital requirements for our core businesses as well as shareholder distributions for at least the next 12 months. We are currently not aware of any trends or demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, our liquidity increasing or decreasing in any material way that will impact our capital needs during or beyond the next 12 months. We have borrowed funds and continue to believe we have the ability to do so at reasonable interest rates; however, additional borrowings would result in increased interest expense in the future. In this regard, we may incur additional debt, within targeted levels, as part of our plans to fund our capital programs, including cash returns to shareholders through future dividends and discretionary share repurchases as well as investing in new business opportunities. If necessary, we may pursue additional sources of financing, including both short-term and long-term borrowings and debt issuances. We regularly review our cash positions and our determination of indefinite reinvestment of foreign earnings. In the event we determine that all or a portion of such foreign earnings are no longer indefinitely reinvested, we may be subject to additional foreign withholding taxes and U.S. state income taxes, which could be material. We do not anticipate the need for repatriated funds to the U.S. to satisfy domestic liquidity needs. During the second quarter of fiscal 2022, our Board of Directors approved a quarterly cash dividend to shareholders of $0.49 per share to be paid on May 27, 2022 to shareholders of record as of the close of business on May 13, 2022. During the first quarter of fiscal 2022, we resumed our share repurchase program which was temporarily suspended in March 2020. During the two quarters ended April 3, 2022, we repurchased 36.3 million shares of common stock for $4.0 billion. On March 15, 2022, we announced that our Board of Directors authorized the repurchase of up to an additional 40 million shares under our ongoing share repurchase program. On April 4, 2022, we announced a temporary suspension of our share repurchase program to allow us to augment investments in our stores and partners. Repurchases pursuant to this program were last made on April 1, 2022. As of April 3, 2022, 52.6 million shares remained available for repurchase under current authorizations. 42 Table of Contents Other than normal operating expenses, cash requirements for the remainder of fiscal 2022 are expected to consist primarily of capital expenditures for investments in our new and existing stores, our supply chain and corporate facilities as well as repayment of debt maturities due later this fiscal year. Total capital expenditures for fiscal 2022 are expected to be approximately $2 billion. In the MD&A included in the 10-K, we disclosed that we had $33.7 billion of current and long-term material cash requirements as of October 3, 2021. There have been no material changes to our material cash requirements during the period covered by this 10-Q outside of the normal course of our business. Cash Flows Cash provided by operating activities was $2.0 billion for the first two quarters of fiscal 2022, compared to $2.7 billion for the same period in fiscal 2021. The change was primarily due to net cash used by changes in operating assets and liabilities, partially offset by higher net earnings. Cash used in investing activities for the first two quarters of fiscal 2022 totaled $881 million , compared to cash used in investing activities of $579 million for the same period in fiscal 2021. The change was primarily due to an increase in spend on capital expenditures. Cash used in financing activities for the first two quarters of fiscal 2022 totaled $3.7 billion compared to cash used by financing activities of $2.7 billion for the same period in fiscal 2021. The increase was primarily due to resuming our share repurchase program, partially offset by net proceeds from issuance of long-term debt. Commodity Prices, Availability and General Risk Conditions Commodity price risk represents our primary market risk, generated by our purchases of green coffee and dairy products, among other items. We purchase, roast and sell high-quality arabica coffee and related products and risk arises from the price volatility of green coffee. In addition to coffee, we also purchase significant amounts of dairy products to support the needs of our company-operated stores. The price and availability of these commodities directly impact our results of operations, and we expect commodity prices, particularly coffee, to impact future results of operations. For additional details, see Product Supply in Item 1 of the 10-K, as well as Risk Factors in Item 1A of the 10-K. Seasonality and Quarterly Results Our business is subject to moderate seasonal fluctuations, of which our fiscal second quarter typically experiences lower revenues and operating income. However, the COVID-19 pandemic may have an impact on consumer behaviors and customer traffic that result in changes in the seasonal fluctuations of our business. Additionally, as our stored value cards are issued to and loaded by customers during the holiday season, we tend to have higher cash flows from operations during the first quarter of the fiscal year. However, since revenues from our stored value cards are recognized upon redemption and not when cash is loaded, the impact of seasonal fluctuations on the consolidated statements of earnings is much less pronounced. As a result of moderate seasonal fluctuations, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. RECENT ACCOUNTING PRONOUNCEMENTS See Note 1 , Summary of Significant Accounting Policies and Estimates, to the consolidated financial statements included in Item 1 of Part I of this 10-Q, for a detailed description of recent accounting pronouncements. Item 3. Quantitative and Qualitative Disclosures About Market Risk There has been no material change in the commodity price risk, foreign currency exchange risk, equity security price risk or interest rate risk discussed in Item 7A of the 10-K.