What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-11-18 compared with 2021-11-19 · 124 added, 148 removed, 319 unchanged (46% of the section changed)

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All references to store counts, including data for new store openings, are reported net of related store closures, unless otherwise noted.

Fiscal year 2021 included 53 weeks, with the 53rd week falling in the fourth fiscal quarter.

Fiscal years 2020 and 2019 included 52 weeks.

For fiscal 2021, comparable store sales percentages were calculated excluding the extra week in the fourth quarter of fiscal 2021.

The discussion of our financial condition and results of operations for the year ended September 29, 2019, included in Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) can be found in the Annual Report on Form 10-K for the year ended September 27, 2020.

The fiscal 2021 Latin America and Caribbean licensed store market resegmentation did not have a material impact to prior year North America and International operating segment business trends and operating margins.

In the fourth quarter of fiscal 2021, certain changes were made to our management team, and our operating segment reporting structure was realigned as a result.

We realigned our fully licensed Latin America and Caribbean markets from our Americas operating segment to our International operating segment.

Additionally, we renamed the Americas operating segment to the North America operating segment, since it is comprised of our company-operated and licensed stores in the U.S.

We also made certain other immaterial changes between our International operating segment and Corporate and Other.

Concurrent with the change in reportable segments, we revised our prior period financial information to be consistent with the current period presentation.

There was no impact on consolidated net revenues, total operating expenses, operating income or net earnings per share as a result of these changes.

Fiscal year 2022 included 52 weeks.

Fiscal year 2021 included 53 weeks, with the 53rd week falling in the fourth fiscal quarter, and fiscal year 2020 included 52 weeks;

comparable store sale percentages below are calculated excluding the 53rd week.

The discussion of our financial condition and results of operations for the fiscal year ended September 27, 2020, included in Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) can be found in the Annual Report on Form 10-K for the fiscal year ended October 3, 2021.

We have three reportable operating segments:

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and 3) Channel Development.

Non-reportable operating segments such as Evolution Fresh and unallocated corporate expenses are reported within Corporate and Other.

Non-reportable operating segments and unallocated corporate expenses are reported within Corporate and Other.

Our financial results and long-term growth model will continue to be driven by new store openings, comparable store sales and margin management.

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• Operating margin

Starbucks results for fiscal 2021 demonstrate the overall strength and resilience of our brand.

Consolidated revenues increased 24% to $29.1 billion in fiscal 2021 compared to $23.5 billion in fiscal 2020, primarily due to business recovery from the COVID-19 pandemic.

Also contributing to the increase was $576 million of incremental revenue attributable to the extra week in fiscal 2021.

For the North America segment, comparable store sales increased 22% for fiscal 2021 compared to a decline of 12% in fiscal 2020.

Comparable store sales for our U.S.

market increased 21% for fiscal 2021 compared to a decline of 12% in fiscal 2020.

market also had a 7% increase in two-year comparable store sales (1) .

We lapped higher costs attributable to COVID-19 in the prior year, including catastrophe pay programs for company-operated store partners (employees), net of qualified tax credits provided by the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) and the Canada Emergency Wage Subsidy (“CEWS”).

In fiscal 2020, we announced a restructuring plan to optimize our North America store portfolio, primarily in dense, metropolitan markets, by blending store formats to better cater to changing customer tastes and preferences.

As of the fiscal year ended October 3, 2021, we had substantially completed our restructuring plan, which resulted in the closure of 807 stores in the U.S.

Costs incurred related to the restructuring efforts were recorded as restructuring and impairments on our consolidated statements of earnings.

In October 2021, we announced plans to deliver retail wage increases across the U.S.

in fiscal 2022.

This investment, combined with industry-leading benefits, supports Starbucks aspiration to remain an employer of choice that can attract and retain the high-quality talent necessary to support our continued growth.

For the International segment, comparable store sales increased by 16% for fiscal 2021 compared to a decline of 19% in fiscal 2020.

Comparable store sales for our China market increased 17%, inclusive of a 3% adverse impact from lapping the prior-year value-added tax (“VAT”) benefit.

Key markets in the International segment continued to experience pandemic-related restrictions that significantly impacted customer mobility during the year.

Although nearly all company-operated stores in these markets remained open, the modified operating protocols had an adverse impact to comparable store sales and operating results.

Revenue for our Channel Development segment decreased $331 million, or 17%, when compared with fiscal 2020.

This was largely due to the transition of certain single-serve product activities to Nestlé beginning in the fourth quarter of fiscal 2020.

This was partially offset by growth in our ready-to-drink business.

We expect Channel Development to return to more normalized reported revenue growth levels in fiscal 2022, as the fourth quarter of fiscal 2021 is the last quarter lapping these transition related activities.

During fiscal 2021, we began to experience certain supply shortages and transportation delays largely attributable to impacts of the COVID-19 pandemic as well as changes in customer demand and behaviors.

While we expect these shortages and delays may continue into fiscal 2022, we view them to be temporary and do not believe they will have a material impact to our long-term growth and profitability.

Absent significant and prolonged COVID-19 relapses or global economic disruptions, and based on the current trend of our business operations and our focused efforts to elevate customer experiences, enhance digital capabilities and drive beverage innovation, we are confident in the strength of our brand and the durability of long-term “Growth at Scale” strategy to deliver consistent revenue and income growth.

We anticipate the planned wage investment in the U.S., along with increased supply chain costs primarily related to inflationary pressures that began in the latter half of the fiscal year, will have an impact to operating margin in fiscal 2022.

However, these should be meaningfully offset by benefits from pricing decisions and leverage from revenue growth and productivity efficiency.

(1) Two-year comparable store sales metric is calculated as ((1 + % change in comparable store sales in FY20) * (1 + % change in comparable store sales in FY21)) - 1.

Two-year comparable store sales for the U.S.

of 7% = ((1 + (-12%)) * (1 + 21%)) - 1.

Starbucks results for fiscal 2022 demonstrate the resiliency and strength of our brand.

Consolidated revenues increased 11% to $32.3 billion in fiscal 2022 compared to $29.1 billion in fiscal 2021, primarily driven by strength in our U.S.

business and growth in our International segment excluding China, partially offset by the impact of the extra week in fiscal 2021 ($496 million) and unfavorable foreign currency translation.

For both the North America segment and U.S.

market, comparable store sales increased 12% for fiscal 2022 compared to an increase of 22% and 21% for the North America segment and the U.S.

market, respectively, in fiscal 2021.

Average ticket for the North America segment and the U.S.

market grew 7% and 8%, respectively, primarily driven by strategic pricing and increased demand for food items in our U.S.

The segment also experienced higher costs, primarily related to investments and growth in labor including enhanced store partner wages as well as increased spend on new partner training.

Also contributing were inflationary pressures on commodities and our supply chain.

In fiscal 2022, we announced our Reinvention Plan in the U.S.

market to increase efficiency while elevating the partner and customer experience.

We believe the investments in partner wages and training will increase retention and productivity while the acceleration of purpose-built store concepts and innovations in technologies will provide additional convenience and connection with our customers.

For the International segment, comparable store sales decreased by 9% for fiscal 2022 compared to an increase of 16% in fiscal 2021, driven by comparable store sales decline of 24% in our China market.

During the third and fourth quarters of fiscal 2022, our China market experienced COVID-19 pandemic related restrictions in multiple cities that severely impacted customer mobility.

Outside of China, strong growth in our major International markets, driven by product innovation and increasing digital capabilities, partially offset the unfavorability in our China market.

Revenue for our Channel Development segment increased $250 million, or 16%, when compared with fiscal 2021, driven by higher product sales to and royalty revenue from the Global Coffee Alliance and growth in our global ready-to-drink business.

Operating margin decreased 520 basis points to 44.3%, primarily due to a decline in our North American Coffee Partnership joint venture income due to inflationary pressures and supply chain constraints as well as business mix shift.

Despite 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.

We expect inflationary pressures on commodities and supply chain to continue to a lesser extent in fiscal 2023, relative to the impact on our business and financial metrics, including operating margin, as compared to fiscal 2022.

We anticipate that these should be offset by benefits from pricing decisions as well as from increased sales leverage and higher productivity driven by our Reinvention Plan.

Absent significant and prolonged COVID-19 relapses or global economic disruptions, and based on the current trend of our business operations and our focused efforts on the Reinvention Plan, we are confident in the strength of our brand and strategy for sustainable, profitable growth over the long-term.

Financial Highlights

• Total net revenues increased 24% to $29.1 billion in fiscal 2021 compared to $23.5 billion in fiscal 2020, including $576 million attributable to the extra week in fiscal 2021.

• Consolidated operating income increased to $4.9 billion in fiscal 2021 compared to $1.6 billion in fiscal 2020.

• Total net revenues increased 11% to $32.3 billion in fiscal 2022 compared to $29.1 billion in fiscal 2021, inclusive of $576 million attributable to the extra week in fiscal 2021.

• Consolidated operating income decreased to $4.6 billion in fiscal 2022 compared to $4.9 billion in fiscal 2021.

Fiscal 2022 operating margin was 14.3% compared to 16.8% in fiscal 2021.

Operating margin expansion was primarily due to sales leverage from business recovery and lapping higher COVID-19 related costs in the prior year, mainly catastrophe and service pay for store partners, net of temporary subsidies from the U.S.

and certain foreign governments, as well as pricing in North America in the current year.

These increases were partially offset by enhancements in retail store partner wages and benefits and, to a lesser extent, increased supply chain costs due to accelerated inflationary pressures in the latter half of fiscal 2021.

• Diluted earnings per share (“EPS”) for fiscal 2021 increased to $3.54, compared to EPS of $0.79 in fiscal 2020.

The increase was primarily driven by lapping the adverse impacts of COVID-19 in prior year.

Also contributing to the increase was a $0.56 gain net of estimated taxes on the divestiture of our South Korea joint venture and $0.10 related to the extra week in fiscal 2021.

• Capital expenditures were $1.5 billion for both fiscal 2021 and fiscal 2020.

• We returned $2.1 billion to our shareholders in fiscal 2021 through dividends.

We returned $3.6 billion in fiscal 2020 through share repurchases and dividends.

We temporarily suspended our share repurchase program in March 2020.

Due to our business recovery and restoration of certain leverage metrics, we have resumed our share repurchase program in the first quarter of fiscal 2022.

Operating margin contraction of 250 basis points was primarily due to investments and growth in labor, including enhanced retail store partner wages (approximately 290 basis points) as well as increased spend on new partner training and support costs (approximately 80 basis points).

Also contributing were inflationary pressures on commodities and our supply chain (approximately 270 basis points), sales deleverage related to COVID-19 pandemic related impacts in our China market (approximately 110 basis points), business mix shift (approximately 60 basis points) and lower government subsidies (approximately 60 basis points).

These increases were partially offset by sales leverage across markets outside of China (approximately 390 basis points) and strategic pricing, primarily in North America (approximately 320 basis points).

• Diluted earnings per share (“EPS”) for fiscal 2022 decreased to $2.83, compared to EPS of $3.54 in fiscal 2021.

The decrease was primarily driven by lapping the prior year $0.56 gain, net of estimated taxes, on the divestiture of our South Korea joint venture and $0.10 related to the extra week in fiscal 2021.

Also contributing were investments in labor and inflationary pressures on commodities and our supply chain, partially offset by growth in comparable store sales and lower restructuring costs.

• Capital expenditures were $1.8 billion in fiscal 2022 and $1.5 billion in fiscal 2021.

• We returned $6.3 billion to our shareholders in fiscal 2022 through share repurchases and dividends.

We returned $2.1 billion in fiscal 2021 through dividends.

In April 2022, we announced a temporary suspension of our share repurchase program to allow us to augment investments in our stores and partners.

We resumed our share repurchase program in the first quarter of fiscal 2023.

Acquisitions and Divestitures

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Total net revenues increased $3.2 billion, or 11%, over fiscal 2021, primarily due to higher revenues from company-operated stores ($2.0 billion).

The growth in company-operated store revenue was driven by a 20% increase in comparable store sales ($3.8 billion), attributable to a 9% increase in comparable transactions and a 10% increase in average ticket, the incremental revenues from 524 net new Starbucks ® company-operated store openings, or a 3% increase, over the past 12 months ($782 million), the impact of the extra week in fiscal 2021 ($496 million) and the impact of favorable foreign currency translation ($359 million).

Licensed stores revenue of $357 million also contributed to the increase in total net revenues, driven by higher product and equipment sales to and royalty revenues from our licensees ($270 million), the impact of the extra week in fiscal 2021 ($57 million) and the impact of favorable foreign currency translation ($28 million).

Other revenues decreased $256 million, primarily driven by the transition of certain single-serve product activities to Nestlé.

Partially offsetting this decrease was growth in our ready-to-drink business ($43 million) and the impact of the extra fiscal week in fiscal 2021 ($23 million).

The growth in company-operated store revenue was driven by an 8% increase in comparable store sales ($1.8 billion) attributed to a 5% increase in average ticket and 2% increase in comparable transactions.

Also contributing were the incremental revenues from 1,120 net new Starbucks company-operated store openings, or a 7% increase, over the past 12 months ($1.0 billion).

Partially offsetting these increases was the impact of the extra week in fiscal 2021 ($496 million) and unfavorable foreign currency translation ($368 million).

Licensed stores revenue increased $972 million, primarily driven by higher product and equipment sales to and royalty revenues from our licensees ($922 million) and the conversion of our Korea market from a joint venture to a fully licensed market in the fourth quarter of fiscal 2021 ($187 million).

Partially offsetting these increases were unfavorable foreign currency translation ($81 million) and the impact of the extra week in fiscal 2021 ($57 million).

Other revenues increased $249 million, primarily due to higher product sales and royalty revenue in the Global Coffee Alliance ($216 million) and growth in our ready-to-drink business ($44 million).

Partially offsetting these increases was the impact of the extra week in fiscal 2021 ($23 million).

Operating Expenses

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Store operating expenses as a % of related revenues 51.0 % 48.5 %

Product and distribution costs as a percentage of total net revenues decreased 260 basis points, primarily due to sales leverage driven by lapping the severe impact of the COVID-19 pandemic in the prior year and pricing in North America in the current year.

These decreases were partially offset by increased supply chain costs due to accelerated inflationary pressures in the latter half of fiscal 2021.

Store operating expenses as a percentage of total net revenues decreased 470 basis points.

Store operating expenses as a percentage of company-operated store revenues decreased 770 basis points, primarily due to sales leverage from business recovery and lapping higher COVID-19 related costs in the prior year, mainly catastrophe and service pay for store partners, net of temporary subsidies from the U.S.

and certain foreign governments (approximately 190 basis points) and labor efficiencies (approximately 110 basis points).

These decreases were partially offset by enhancements in retail store partner wages and benefits (approximately 140 basis points).

Other operating expenses decreased $71 million, primarily due to lower Global Coffee Alliance transaction costs, inclusive of lapping integration costs for the Global Coffee Alliance and a change of a related accrual estimate in fiscal 2021.

Product and distribution costs as a percentage of total net revenues increased 190 basis points, primarily due to higher supply chain costs due to inflationary pressures.

Store operating expenses as a percentage of total net revenues increased 100 basis points.

Store operating expenses as a percentage of company-operated store revenues increased 250 basis points, primarily due to investments and growth in labor, including enhanced retail store partner wages (approximately 320 basis points) as well as increased spend on new partner training and support costs (approximately 90 basis points).

Also contributing were lower temporary government subsidies (approximately 70 basis points).

These increases were partially offset by sales leverage.

Other operating expenses increased $102 million, primarily due to lapping a change in estimate relating to a transaction cost accrual ($23 million), higher support costs for our growing North America and International licensed stores ($22 million), transaction costs associated with our Russia market exit ($20 million) and strategic investments in technology and other initiatives ($15 million).

Depreciation and amortization expenses as a percentage of total net revenues decreased 50 basis points, primarily due to sales leverage.

General and administrative expenses increased $253 million, primarily due to higher performance-based compensation, recognizing the strength of the Company's overall recovery from pandemic-related business impacts ($111 million), incremental strategic investments in technology ($89 million), increased partner wages and benefits ($26 million) and the impact of the extra week in fiscal 2021 ($22 million).

Restructuring and impairment expenses decreased $108 million, primarily due to lower asset impairment related to our North America store portfolio optimization ($65 million), lapping the intangible asset impairment from the prior year ($22 million) and lower severance costs.

Income from equity investees increased $63 million, primarily due to higher income from our North American Coffee Partnership joint venture ($30 million) and growth in our South Korea joint venture prior to divestiture ($22 million).

We expect lower income from equity method investments in the future as a result of the sale of our South Korea joint venture (see Note 2 );

however, we do not expect this transaction to have a material impact on future revenue and operating margin trends.

The combination of these changes resulted in an overall increase in operating margin of 1,020 basis points in fiscal 2021 when compared to fiscal 2020.

General and administrative expenses increased $99 million, primarily due to incremental investments in technology ($92 million), increased partner wages and benefits ($59 million) and higher support costs to address labor market conditions ($36 million).

These increases were partially offset by lower performance-based compensation ($95 million).

Restructuring and impairment expense s decreased $124 million, primarily due to lower costs incurred related to our Reinvention Plan in the current year compared to prior year's North America store portfolio optimization, including lower accelerated lease right-of-use asset amortization costs ($84 million) and asset impairment charges ($68 million), partially offset by higher professional fees and higher severance costs ($27 million).

Income from equity investees decreased $151 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 ($140 million) and lower income from our North American Coffee Partnership joint venture ($18 million).

The combination of these changes resulted in an overall decrease in operating margin of 250 basis points in fiscal 2022 when compared to fiscal 2021.

Other Income and Expenses

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Effective tax rate including noncontrolling interests 22.4 % 21.6 %

Net gain resulting from divestiture of certain operations increased $865 million due to the sale of our ownership interest in our South Korea joint venture.

Interest income and other, net increased $50 million, primarily due to additional income from certain investments and net favorable fair value adjustments from derivatives used to manage our commodity price fluctuation risk.

Interest expense increased $33 million primarily due to additional interest incurred on long-term debt issued in March 2020 and May 2020.

Net gain resulting from divestiture of certain operations decreased $865 million due to lapping the sale of our ownership interest in our South Korea joint venture in the prior year.

Interest expense increased $13 million primarily due to additional interest incurred on long-term debt issued in February 2022.

The effective tax rate for fiscal 2022 was 22.4% compared to 21.6% for fiscal 2021.

The increase was due to the foreign rate differential on our jurisdictional mix of earnings (approximately 380 basis points) as well as higher pre-tax income in fiscal 2021, which resulted in lower rate benefits from several discrete items, including stock-based compensation excess tax benefits (approximately 380 basis points), the release of income tax reserves upon expiration of statute of limitations (approximately 150 basis points) and the remeasurement of deferred tax assets due to an enacted foreign corporate rate change (approximately 80 basis points).

These unfavorable drivers were partially offset by lapping valuation allowances recorded against deferred tax assets of certain international jurisdictions in the prior year (approximately 990 basis points).

The increase was due to lapping a prior year remeasurement of deferred tax assets due to an enacted foreign corporate rate change (approximately 130 basis points) and lapping the release of income tax reserves upon expiration of statute of limitations (approximately 70 basis points), partially offset by the release of valuation allowances recorded against deferred tax assets of a certain international jurisdiction (approximately 120 basis points).

See Note 14 , Income Taxes, for further discussion.

The Inflation Reduction Act was enacted on August 16, 2022, and includes a new 15% minimum tax on “adjusted financial statement income” beginning with the Company’s fiscal year 2024, and a new 1% excise tax on stock repurchases after December 31, 2022.

While these tax law changes have no immediate effect and are not expected to have a material impact on our future financial results, we will continue to evaluate its impact as further information becomes available.

Segment Information

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Operating income $ 4,486.5 $ 4,259.3 19.2 % 20.8 %

(1) North America licensed store revenues, total net revenues, product and distribution costs, other operating expenses, total operating expenses and operating income for the fiscal year ended September 27, 2020, have been restated to conform with current period presentation.

North America total net revenues for fiscal 2021 increased $4.2 billion, or 25%, primarily due to a 22% increase in comparable store sales ($3.1 billion) driven by a 13% increase in average ticket and a 7% increase in transactions and the impact of the extra week in fiscal 2021 ($427 million).

Also contributing to these increases were the performance of new stores compared to the closure of underperforming stores, including stores related to our restructuring plan ($394 million), higher product and equipment sales to and royalty revenues from our licensees ($151 million) primarily due to lapping the severe impact of the COVID-19 pandemic in the prior year and favorable foreign currency translation ($76 million).

North America total net revenues for fiscal 2022 increased $2.9 billion, or 14%, primarily due to a 12% increase in comparable store sales ($2.2 billion) driven by a 7% increase in average ticket and a 5% increase in transaction.

Also contributing to these increases were the performance of net new company-operated store openings over the past 12 months ($628 million) and higher product and equipment sales to and royalty revenues from our licensees ($487 million), primarily due to business recovery from the impact of the COVID-19 pandemic.

These increases were partially offset by the impact of the extra week in fiscal 2021 ($427 million).

Operating Margin

North America operating income for fiscal 2022 increased 5% to $4.5 billion, compared to $4.3 billion in fiscal 2021.

Operating margin increased 970 basis points to 20.8%, primarily due to sales leverage from business recovery and lapping higher COVID-19 related costs in the prior year, mainly catastrophe and service pay for store partners, net of temporary subsidies provided by the CARES Act and CEWS (approximately 180 basis points).

Also contributing to the margin improvements were pricing (approximately 130 basis points), lower restructuring expenses (approximately 80 basis points) and benefits from the closure of lower-performing stores (approximately 60 basis points).

These increases were partially offset by enhancements in retail store partner wages and benefits (approximately 150 basis points) and, to a lesser extent, increased supply chain costs due to accelerated inflationary pressures in the latter half of fiscal 2021.

Operating margin decreased 160 basis points to 19.2%, primarily due to investments and growth in labor, including enhanced retail store partner wages (approximately 350 basis points) as well as increased spend on new partner training and support costs (approximately 120 basis points).

Also contributing were inflationary pressures on commodities and our supply chain (approximately 350 basis points).

These were partially offset by strategic pricing (approximately 400 basis points) and sales leverage.

International

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General and administrative expenses 345.3 360.5 5.0 5.2

Restructuring and impairments — (1.2) — —

Total operating expenses 6,109.2 5,811.2 88.0 84.0

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Operating income $ 833.2 $ 1,245.7 12.0 % 18.0 %

(1) International licensed store revenues, total net revenues, product and distribution costs, other operating expenses, general and administrative expenses, total operating expenses and operating income for the fiscal year ended September 27, 2020, have been restated to conform with current period presentation.

International total net revenues for fiscal 2021 increased $1.7 billion, or 32%, primarily due to a 16% increase in comparable store sales ($697 million), driven by a 14% increase in transactions and a 1% increase in average ticket.

Also contributing to this increase were 746 net new Starbucks ® company-operated stores, or an 11% increase, over the past 12 months ($388 million).

Additionally, there was favorable foreign currency translation ($310 million), the impact of the extra week in fiscal 2021 ($127 million) and higher product sales to and royalty revenues from our licensees ($121 million) primarily due to lapping the impact of the COVID-19 pandemic in the prior year.

International total net revenues for fiscal 2022 increased $19 million, or 0.3%, primarily due to higher product sales to and royalty revenues from our licensees ($435 million), mainly due to continuing business improvement from the COVID-19 pandemic.

Additionally, there were 765 net new Starbucks company-operated stores, or a 11% increase over the past 12 months ($406 million).

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 ($187 million).

These were partially offset by a 9% decline in comparable store sales ($459 million), driven by a 5% decrease in customer transactions and a 4% decrease in average ticket, primarily attributable to COVID-19 related restrictions in China and lapping the prior-year value-added-tax benefit in China, unfavorable foreign currency translation ($436 million) and the impact of the extra week in fiscal 2021 ($127 million).

Operating Margin

International operating income for fiscal 2021 increased 236% to $1.2 billion, compared to $371 million in fiscal 2020.

Operating margin increased 1,090 basis points to 18.0%, primarily due to sales leverage driven by lapping the severe impact of the COVID-19 pandemic in the prior year as well as higher temporary government subsidies (approximately 170 basis points) and labor efficiencies (approximately 110 basis points).

Also contributing to this increase was lapping temporary royalty relief provided to licensees in the prior year (approximately 60 basis points).

International operating income for fiscal 2022 decreased 33% to $833.2 million, compared to $1.2 billion in fiscal 2021.

Operating margin decreased 600 basis points to 12.0%, primarily due to sales deleverage related to COVID-19 pandemic impacts in our China market (approximately 460 basis points), investments and growth in retail store partner wages and benefits (approximately 140 basis points), lower temporary government subsidies (approximately 100 basis points), higher commodity and supply chain costs due to inflationary pressures (approximately 90 basis points) and strategic initiatives (approximately 90 basis points).

These decreases were partially offset by sales leverage across markets outside of China.

Channel Development

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Operating income $ 817.3 $ 789.1 44.3 % 49.5 %

Channel Development total net revenues for fiscal 2021 decreased $331 million, or 17%, compared to fiscal 2020, primarily due to the transition of certain single-serve product activities to Nestlé ($348 million) and the lapping of higher transition activities related to the Global Coffee Alliance in the prior year ($85 million).

These were partially offset by growth in our ready-to-drink business ($52 million) and the impact of the extra week in fiscal 2021 ($21 million).

Channel Development total net revenues for fiscal 2022 increased $250 million, or 16%, compared to fiscal 2021, primarily due to higher Global Coffee Alliance product sales and royalty revenue ($216 million) and growth in our ready-to-drink business ($44 million).

These increases were partially offset by the impact of the extra week in fiscal 2021 ($21 million).

Operating Margin

Channel Development operating income for fiscal 2022 increased 4% to $817 million, compared to $789 million in fiscal 2021.

Operating margin increased 1,380 basis points to 49.5%, primarily due to the transfer of certain single-serve product activities to Nestlé as part of the Global Coffee Alliance (approximately 730 basis points) and lapping higher transition costs for the Global Coffee Alliance and a change in estimate relating to a transaction cost accrual in fiscal 2021 (approximately 380 basis points).

Strong performance from our North American Coffee Partnership joint venture (approximately 120 basis points) also contributed.

Corporate and Other

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Operating loss $ (1,519.2) $ (1,422.0) 6.8 %

(1) Corporate and other general and administrative expenses and operating loss for the fiscal year ended September 27, 2020, have been restated to conform with current period presentation.

Corporate and Other primarily consists of our unallocated corporate expenses and 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.

In the fourth quarter of fiscal 2022, we sold our Evolution Fresh brand and business.

Corporate and Other operating loss increased to $1.5 billion for fiscal 2022, or 7%, compared to $1.4 billion in fiscal 2021.

This increase was primarily driven by incremental investments in technology ($81 million) and higher performance-based compensation, due to better than expected business recovery ($57 million).

This increase was primarily driven by incremental investments in technology ($84 million), increased support costs to address labor market conditions ($36 million) and increased partner wages and benefits ($31 million).

These increases were partially offset by lower performance-based compensation ($62 million).

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Cash and Investment Overview

Our cash and investments were $6.9 billion and $4.8 billion as of October 3, 2021 and September 27, 2020, respectively.

Our cash and investments were $3.5 billion and $6.9 billion as of October 2, 2022 and October 3, 2021, respectively.

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, government treasury securities (domestic and foreign) and commercial paper.

As of October 3, 2021, approximately $2.9 billion of cash was held in foreign subsidiaries.

As of October 2, 2022, approximately $2.7 billion of cash and short-term investments were held in foreign subsidiaries.

Borrowing capacity

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Revolving Lines of Credit

During the fourth quarter of fiscal 2021, we replaced our $2.0 billion unsecured 5-year revolving credit facility (the “2018 credit facility”) and our $1.0 billion unsecured 364-Day credit facility (the “364-day credit facility”) with a new $3.0 billion unsecured 5-year revolving credit facility (the “2021 credit facility”).

Our 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.

Our $3.0 billion unsecured 5-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.

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The “Base Rate” of interest is the highest of (i) the Federal Funds Rate plus 0.500%, (ii) Bank of America’s prime rate, and (iii) the Eurocurrency Rate (as defined in the credit facility) plus 1.000%.

The 2021 credit facility is available for general corporate purposes.

As of October 2, 2022, we had no borrowings under the 2021 credit facility.

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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.

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 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 October 3, 2021, we had no amounts outstanding under our commercial paper program.

As of October 2, 2022, we had $175.0 million outstanding under our commercial paper program.

Credit Facilities in Japan

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Further, 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 in support of our “Growth at Scale” agenda.

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 the foreseeable future.

However, significant new joint ventures, acquisitions and/or other new business opportunities may require additional outside funding.

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.

If necessary, we may pursue additional sources of financing, including both short-term and long-term borrowings and debt issuances.

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 regularly review our cash positions and our determination of partial indefinite reinvestment of foreign earnings.

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See Note 14 , Income Taxes, for further discussion.

During the fourth quarter of fiscal 2021, we replaced our $2.0 billion 2018 credit facility and our $1.0 billion 364-day credit facility with a new $3.0 billion 2021 credit facility.

The 2021 credit facility was not drawn on in fiscal 2021 and is currently set to mature on September 16, 2026.

During each of the first three quarters of fiscal 2021, we declared a cash dividend to shareholders of $0.45 per share.

On September 30, 2020, and for each of the first three quarters of fiscal 2021, we declared a cash dividend of $0.45 per share.

During the fourth quarter of fiscal 2021, and for each of the first three quarters of fiscal 2022, we declared a cash dividend of $0.49 per share.

Dividends are generally paid in the quarter following the declaration date.

Cash returned to shareholders through dividends in

fiscal 2021 and 2020 totaled $2.1 billion and $1.9 billion, respectively.

Cash returned to shareholders through dividends in fiscal 2022 and 2021 totaled $2.3 billion and $2.1 billion, respectively.

During the fourth quarter of fiscal 2022, we declared a cash dividend of $0.53 per share to be paid on November 25, 2022, with an expected payout of approximately $608.3 million.

In March 2019, we entered into accelerated share repurchase agreements (“ASR agreements”) with third-party financial institutions totaling $2.0 billion, effective March 22, 2019.

We made a $2.0 billion up-front payment to the financial institutions and received an initial delivery of 22.2 million shares of our common stock.

In June 2019, we received an additional 3.9 million shares upon the completion of the program based on a volume-weighted average share price (less discount) of $76.50.

Outside of the ASR agreements noted above, we repurchased 36.6 million shares of common stock for $3.1 billion on the open market during the fiscal year ended September 29, 2019.

In total, we repurchased 139.6 million shares at a total cost of $10.1 billion for the fiscal year ended September 29, 2019.

Our Board of Directors approved an increase of 120 million and 40 million shares to our ongoing share repurchase program during the fiscal first quarter of 2019 and fiscal second quarter of 2020, respectively.

We temporarily suspended our share repurchase program in March 2020.

Prior to the suspension, we repurchased 20.3 million shares of common stock for $1.7 billion on the open market during the year ended September 27, 2020.

During the first quarter of fiscal 2022, we resumed our share repurchase program which had been temporarily suspended in March 2020.

During the fiscal year ended October 2, 2022, we repurchased 36.3 million shares of common stock for $4.0 billion on the open market.

On March 15, 2022, we announced that our Board 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 October 2, 2022, 52.6 million shares remained available for repurchase under current authorizations.

Due to our business recovery and restoration of certain leverage metrics, we have resumed our share repurchase program in the first quarter of fiscal 2022.

We have resumed our share repurchase program in the first quarter of fiscal 2023.

Other than operating expenses, cash requirements for fiscal 2023 are expected to consist primarily of capital expenditures for investments in our new and existing stores, our supply chain and corporate facilities.

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Cash provided by operating activities was $4.4 billion for fiscal 2022, compared to $6.0 billion for fiscal 2021.

The change was primarily due to higher net earnings and lapping the U.S.

federal tax payment related to the Nestlé transaction in fiscal 2020.

The change was primarily due to lower net earnings and an increase in inventory purchases and timing of income tax payments.

Cash used in investing activities totaled $2.1 billion for fiscal 2022, compared to $0.3 billion for fiscal 2021.

The change was primarily driven by net proceeds from the divestiture of our ownership interest in our South Korea joint venture and higher maturities and calls of investments.

This was partially offset by a decrease in sales of investments and higher capital contributions to equity method investments.

The change was primarily driven by lapping the net proceeds from the divestiture of our ownership interest in our South Korea joint venture and an increase in spend on capital expenditures.

Cash used in financing activities for fiscal 2022 totaled $5.6 billion, compared to cash provided by financing activities of $3.7 billion for fiscal 2021.

The change was primarily due to lower net proceeds from borrowing activities and higher debt repayments, partially offset by the temporary suspension of our share repurchase program.

The change 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

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The market price risk management policy governs how hedging instruments may be used to mitigate risk.

Risk limits are set annually and prohibit speculative trading activity.

Risk limits are set annually and speculative trading activities are prohibited.

We also monitor and limit the amount of associated counterparty credit risk, which we consider to be low.

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Excluding interest rate hedging instruments, cross currency swaps and foreign currency debt, hedging instruments generally do not have maturities in excess of three years.

Refer to Note 1 , Summary of Significant Accounting Policies, and Note 3 , Derivative Financial Instruments, to the consolidated financial statements included in Item 8 of Part II of this 10-K for further discussion of our hedging instruments.

Refer to Note 1 , Summary of Significant Accounting Policies and Estimates, and Note 3 , Derivative Financial Instruments, to the consolidated financial statements included in Item 8 of Part II of this 10-K for further discussion of our hedging instruments.

The sensitivity analyses disclosed below provide only a limited, point-in-time view of the market risk of the financial instruments discussed.

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These estimates are subjective and our ability to realize future cash flows and asset fair values is affected by factors such as ongoing maintenance and improvement of the assets, changes in economic conditions and changes in operating performance.

In fiscal 2020, we announced a restructuring plan to optimize our North America store portfolio, primarily in dense metropolitan markets, by developing new store formats to better cater to changing customer tastes and preferences.

As of October 3, 2021, 807 stores in the U.S.

and Canada were identified for closure, and substantially all were closed under the plan.

During fiscal years 2021 and 2020, we recorded approximately $155.4 million and $254.7 million, respectively, to restructuring and impairments on our consolidated statements of earnings.

These totals included $53.1 million and $151.0 million, respectively, related to impairment and disposition of company-operated store assets and $89.5 million and $87.7 million, respectively, primarily associated with accelerated amortization of ROU lease assets and other lease costs due to store closures prior to the end of contractual lease terms.

We expect total future restructuring costs under this plan, which are attributable to our North America segment, to be immaterial.

Asset impairment charges are discussed in Note 1 , Summary of Significant Accounting Policies, to the consolidated financial statements included in Item 8 of Part II of this 10-K.

In fiscal 2022, we announced our Reinvention Plan in the U.S.

market to increase efficiency while elevating the partner and customer experience.

As a result of the restructuring efforts in connection with the Reinvention Plan, we recorded an immaterial impairment charge on our consolidated statements of earnings during the fiscal year ended October 2, 2022.

Future impairment charges attributed to our Reinvention Plan are not expected to be material.

In fiscal 2021, we substantially completed our plan to reposition our North America store portfolio, primarily in dense metropolitan markets by pursuing strategic store closures and focusing on new store formats that better cater to changing customer tastes and preferences.

During fiscal year 2021, we recorded approximately $155.4 million to restructuring and impairments on our consolidated statements of earnings.

These totals included $53.1 million related to disposal and impairment of company-operated store assets and $89.5 million primarily associated with accelerated amortization of ROU lease assets and other lease costs due to store closures prior to the end of contractual lease terms.

As this restructuring plan was substantially completed in fiscal 2021, we did not recognize any material restructuring and impairment amounts related to this plan during the fiscal year ended October 2, 2022.

Asset impairment charges are discussed in Note 1 , Summary of Significant Accounting Policies and Estimates, to the consolidated financial statements included in Item 8 of Part II of this 10-K.

Goodwill and Indefinite-Lived Intangible Assets

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If we perform a quantitative assessment of an individual reporting unit’s goodwill, our impairment calculations contain uncertainties because they require management to make assumptions and to apply judgment when estimating future cash flows and asset fair values, including projected revenue growth and operating expenses related to existing businesses, product innovation and new store concepts, as well as utilizing valuation multiples of similar publicly traded companies and selecting an appropriate discount rate.

Estimates of revenue growth and operating expenses are based on internal projections considering the reporting unit’s past performance and forecasted growth, including assumptions regarding business recovery post COVID-19, strategic initiatives, local market economics and the local business environment impacting the reporting unit’s performance.

The discount rate is selected based

on the estimated cost of capital for a market participant to operate the reporting unit in the region.

Estimates of revenue growth and operating expenses are based on internal projections considering the reporting unit’s past performance

and forecasted growth, including assumptions regarding business recovery post COVID-19, strategic initiatives, local market economics and the local business environment impacting the reporting unit’s performance.

The discount rate is selected based on the estimated cost of capital for a market participant to operate the reporting unit in the region.

These estimates, as well as the selection of comparable companies and valuation multiples used in the market approaches are highly subjective, and our ability to realize the future cash flows used in our fair value calculations is affected by factors such as the success of strategic initiatives, changes in economic conditions, changes in our operating performance and changes in our business strategies, including retail initiatives and international expansion.

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and China, we do not anticipate incurring significant goodwill impairment in the next 12 months.

Our fiscal 2021 annual goodwill impairment testing, which was completed in the third fiscal quarter, resulted in an estimated fair value of our reporting units where a quantitative assessment was performed, was in excess of carrying value of approximately $74 billion.

Our fiscal 2022 annual goodwill impairment testing, which was completed in the third fiscal quarter, resulted in an estimated fair value of our reporting units where a quantitative assessment was performed, was in excess of carrying value of approximately $95 billion for the business units where a quantitative analysis on impairment was performed.

When assessing indefinite-lived intangible assets for impairment, where we perform a qualitative assessment, we evaluate if changes in events or circumstances have occurred that indicate that impairment may exist.

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The possibility exists that foreign earnings declared as indefinitely reinvested may be repatriated as our plans are based on our estimated working and other capital needs in jurisdictions where our earnings are generated.

While we do not expect to repatriate cash to the U.S.

While we do not expect to

repatriate cash to the U.S.

to satisfy domestic liquidity needs, if these amounts were distributed to the U.S., in the form of dividends or otherwise, we may be subject to additional foreign withholding taxes and U.S.

state income taxes, which could be material.

Our income tax expense, deferred tax assets and liabilities and liabilities for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid.

Our income tax expense, deferred tax assets and liabilities for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid.

Deferred tax asset valuation allowances and our liabilities for unrecognized tax benefits require significant management judgment regarding applicable statutes and their related interpretation, the status of various income tax audits and our particular facts and circumstances.

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RECENT ACCOUNTING PRONOUNCEMENTS

See Note 1 , Summary of Significant Accounting Policies, to the consolidated financial statements included in Item 8 of Part II of this 10-K for a detailed description of recent accounting pronouncements.

See Note 1 , Summary of Significant Accounting Policies and Estimates, to the consolidated financial statements included in Item 8 of Part II of this 10-K for a detailed description of recent accounting pronouncements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis