What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-02-02 compared with 2022-08-02 · 104 added, 175 removed, 236 unchanged (54% of the section changed)

12 unchanged sentences

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;

business opportunities and expansion;

the success of our licensing relationship with Nestlé, of our consumer packaged goods and foodservice business and its effects on our Channel Development segment results;

business opportunities, expansions and new initiatives, including Starbucks Odyssey;

strategic acquisitions;

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the effect of legal proceedings;

and 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.

and the effects of changes in tax laws and related guidance and regulations that may be implemented, including the Inflation Reduction Act of 2022 and other risks detailed in our filings with the SEC, including in the "Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results of Operations” sections of the company’s most recently filed periodic reports on Form 10-K and Form 10-Q and subsequent filings.

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.

4 unchanged sentences

Starbucks is the premier roaster, marketer and retailer of specialty coffee in the world, operating in 84 markets.

As of July 3, 2022, Starbucks had more than 34,900 company-operated and licensed stores, an increase of 5% from the prior year.

As of January 1, 2023, Starbucks had more than 36,100 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 July 3, 2022, our global comparable store sales grew 3%, primarily driven by 9% growth in the U.S.

market, partially offset by COVID-19 pandemic related restrictions in China, leading to a 44% decrease in China comparable store sales.

During the quarter ended January 1, 2023, our global comparable store sales

grew 5%, primarily driven by 10% growth in the U.S.

market, partially offset by COVID-19 pandemic-related business conditions in China, leading to a 29% decrease in China comparable store sales.

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.

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.

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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.

Fiscal 2023 and 2022 included 52 weeks.

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

Starbucks results for the third quarter of fiscal 2022 demonstrate the overall strength and resilience of our brand, despite continued COVID-19 pandemic related disruptions in our China market and global inflation.

Consolidated net revenues increased 9% to $8.2 billion in the third quarter of fiscal 2022 compared to $7.5 billion in the third quarter of fiscal 2021, primarily driven by strength in our U.S.

business and growth in our International segment excluding China, partially offset by COVID-19 pandemic related disruptions in China restricting customer mobility.

Consolidated operating margin decreased 400 basis points from the prior year to 15.9%, primarily driven by inflationary pressures, investments and growth in retail store partner wages as well as sales deleverage related to COVID-19 pandemic related impacts in our China market.

These decreases were partially offset by strategic pricing in North America and sales leverage across markets outside of China.

Starbucks results for the first quarter of fiscal 2023 demonstrate the overall strength and resilience of our brand, despite continued COVID-19 pandemic related disruptions in our China market and continued inflationary pressures.

Consolidated net revenues increased 8% to $8.7 billion in the first quarter of fiscal 2023 compared to $8.1 billion in the first quarter of fiscal 2022, primarily driven by strength in our U.S.

business and growth in our International segment excluding China, partially offset by COVID-19 pandemic related disruptions in China and unfavorable foreign currency translation.

Consolidated operating margin decreased 20 basis points from the prior year to 14.4%, primarily driven by previously committed investments in labor including enhanced store partner wages and benefits, inflationary pressures and sales deleverage in China, partially offset by strategic pricing in North America and sales leverage across markets outside of China.

For both the North America segment and our U.S.

market, comparable store sales increased 9% for the third quarter of fiscal 2022 compared to an increase of 84% and 83% for the North America segment and the U.S.

market, respectively, in the third quarter of fiscal 2021.

market, comparable store sales increased 10% for the first quarter of fiscal 2023 compared to an increase of 18% in the first quarter of fiscal 2022.

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

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

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.

For the International segment, comparable store sales declined 18% for the third quarter of fiscal 2022, driven by comparable store sales decline of 44% in our China market.

Our China market experienced unprecedented COVID-19 pandemic related restrictions in multiple cities that severely impacted customer mobility.

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

Net revenues for our Channel Development segment increased $66 million, or 16%, when compared with the third quarter of fiscal 2021.

market grew 9%, primarily driven by strategic pricing.

The segment also experienced higher costs, primarily related to enhancements in retail store partner wages and benefits, as well as increased supply chain costs due to inflationary pressures.

For the International segment, comparable store sales declined 13% for the first quarter of fiscal 2023, driven by comparable store sales decline of 29% in our China market, which experienced suppressed customer mobility and store closures due to pandemic-related restrictions and a spike in infections.

These contributed to a decline in both revenue and operating margin for the segment.

The unfavorable impacts were partially offset by strong growth in our major international markets outside of China.

Net revenues for our Channel Development segment increased $61 million, or 15%, when compared with the first quarter of fiscal 2022.

This was due to higher product sales to and royalty revenue from the Global Coffee Alliance and growth in our 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, given the prolonged COVID-19 pandemic related lockdowns in China that limited customer mobility during the third quarter and slowed recovery of the market, as well as increasing COVID-19 cases globally, we expect continued impacts on our business.

Additionally, our business expects the weights from inflationary pressures to continue as well as increased spend due to labor market conditions and 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 strategies, including our reinvention plan in the U.S.

market will elevate both the partner and customer experience, accelerating growth over the long-term.

Despite COVID-19 induced business interruptions in our China market, we have seen the strength and resilience of our brand as well as strong customer demand across our portfolio.

While we anticipate continued inflationary pressure, albeit to a lesser extent than in fiscal 2022, and COVID-related interruptions in the China market, we expect improved financial performance in the second half of fiscal 2023, driven by sales leverage, pricing, productivity gains from Reinvention, as well as recovery in China.

Absent significant and prolonged COVID-19 relapses or global economic disruptions, we believe our strategy will result in sustainable and profitable growth over the long-term.

Results of Operations (in millions)

Quarter Ended Three Quarters Ended

Quarter Ended

Company-operated stores $ 7,083.5 $ 6,722.4 $ 361.1 5.4 %

2 unchanged sentences

Total net revenues $ 8,713.9 $ 8,050.4 $ 663.5 8.2 %

For the quarter ended July 3, 2022 compared with the quarter ended June 27, 2021

Total net revenues for the third quarter of fiscal 2022 increased $654 million, primarily due to higher revenues from company-operated stores ($312 million).

The growth of company-operated stores revenue was driven by incremental revenues from 894 net new Starbucks ® company-operated stores, or a 5% increase, over the past 12 months ($258 million).

Also contributing to the higher revenue was a 3% increase in comparable store sales ($183 million), attributable to a 6% increase in average ticket offset by a 3% decrease in comparable transactions.

Partially offsetting these increases was unfavorable foreign currency translation ($136 million).

Licensed stores revenue increased $277 million contributing to the increase in total net revenues, driven by higher product and equipment sales to and royalty revenues from our licensees ($237 million) and the conversion of our Korea market from a joint venture to a fully licensed market in the fourth quarter of fiscal 2021 ($64 million).

Partially offsetting these increases was unfavorable foreign currency translation ($27 million).

Other revenues increased $65 million, primarily due to higher product sales and royalty revenue in the Global Coffee Alliance and growth in our ready-to-drink business.

For the three quarters ended July 3, 2022 compared with the three quarters ended June 27, 2021

Total net revenues for the first three quarters of fiscal 2022 increased $2.9 billion, primarily due to higher revenues from company-operated stores ($1.9 billion).

The growth of company-operated stores revenue was driven by a 8% increase in comparable store sales ($1.3 billion) attributed to a 4% increase in average ticket and 3% increase in comparable transactions.

Also contributing to the increase were incremental revenues from 894 net new Starbucks ® company-operated stores, or a 5% increase, over the past 12 months ($761 million).

Partially offsetting these increases was unfavorable foreign currency translation ($175 million).

Licensed stores revenue increased $768 million, primarily driven by higher product and equipment sales to and royalty revenues from our licensees ($671 million) and the conversion of our Korea market from a joint venture to a fully licensed market in the fourth quarter of fiscal 2021 ($143 million).

For the quarter ended January 1, 2023 compared with the quarter ended January 2, 2022

Total net revenues for the first quarter of fiscal 2023 increased $664 million, primarily due to higher revenues from company-operated stores ($361 million).

The growth of company-operated stores revenue was driven by a 5% increase in comparable store sales ($328 million), attributable to a 7% increase in average ticket offset by a 2% decrease in comparable transactions.

Also contributing was incremental revenues from 1,005 net new Starbucks ® company-operated stores, or a 6% increase, over the past 12 months ($259 million).

Partially offsetting these increases was unfavorable foreign currency translation ($225 million).

Other revenues increased $222 million, primarily due to higher product sales and royalty revenue in the Global Coffee Alliance and growth in our ready-to-drink business.

Licensed stores revenue increased $269 million contributing to the increase in total net revenues, driven by higher product and equipment sales to and royalty revenues from our licensees ($299 million).

Partially offsetting this increase was unfavorable foreign currency translation ($35 million).

Other revenues increased $34 million, primarily due to higher product sales and royalty revenue in the Global Coffee Alliance.

Operating Expenses

Quarter Ended Three Quarters Ended

Change Jul 3,

Quarter Ended

As a % of Total

Net Revenues As a % of Total

Product and distribution costs $ 2,810.2 $ 2,526.9 $ 283.3 32.2 % 31.4 %

8 unchanged sentences

Store operating expenses as a % of company-operated stores revenue 51.7 % 50.6 %

For the quarter ended July 3, 2022 compared with the quarter ended June 27, 2021

Product and distribution costs as a percentage of total net revenues increased 270 basis points for the third quarter of fiscal 2022, primarily due to higher supply chain costs driven by inflationary pressures.

Store operating expenses as a percentage of total net revenues increased 90 basis points for the third 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.

Other operating expenses increased $64 million for the third quarter of fiscal 2022, primarily due to lapping a change in estimate relating to a transaction cost accrual ($23 million), transaction costs associated with our Russia market exit ($20 million) and higher support costs for our North America licensed stores ($4 million).

Depreciation and amortization expenses as a percentage of total net revenues decreased 30 basis points, primarily due to sales leverage.

General and administrative expenses decreased $8 million, primarily due to lower performance-based compensation ($47 million) which was partially offset by increased partner wages ($22 million) and incremental investments in technology ($15 million).

Restructuring and impairment expenses decreased $6 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 ($11 million) and lower asset impairment charges ($4 million), partially offset by lapping prior year beneficial adjustment to severance expense ($9 million).

Income from equity investees decreased $51 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 ($45 million).

The combination of these changes resulted in an overall decrease in operating margin of 400 basis points for the third quarter of fiscal 2022.

For the three quarters ended July 3, 2022 compared with the three quarters ended June 27, 2021

Product and distribution costs as a percentage of total net revenues increased 200 basis points for the first three quarters of fiscal 2022, primarily due to higher supply chain costs due to inflationary pressures.

Store operating expenses as a percentage of total net revenues increased 60 basis points for the first three quarters of fiscal 2022.

Store operating expenses as a percentage of company-operated stores revenue increased 210 basis points, primarily due to enhancements in retail store partner wages and benefits (approximately 280 basis points), increased spend on new partner training and support costs (approximately 80 basis points) and lower temporary government subsidies in the prior year (approximately 80 basis points), partially offset by sales leverage.

Other operating expenses increased $88 million for the first three quarters of fiscal 2022, primarily due to lapping a change in estimate relating to a transaction cost accrual ($23 million), transaction costs associated with our Russia market exit ($20 million), higher support costs for our growing North America and International licensed stores ($18 million) and strategic investments in technology and other initiatives ($7 million).

Depreciation and amortization expenses as a percentage of total net revenues decreased 60 basis points, primarily due to sales leverage.

General and administrative expenses increased $63 million, primarily due to incremental investments in technology ($67 million), increased partner wages ($59 million) and increased support costs to address labor market conditions ($23 million).

These increases were partially offset by lower performance-based compensation ($88 million).

Restructuring and impairment expenses decreased $104 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 ($63 million) and lower asset impairment charges ($51 million).

These decreases were partially offset by lower severance related charges for certain company-operated prior year store closures ($9 million).

Income from equity investees decreased $122 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 ($99 million) and lower income from our North American Coffee Partnership joint venture ($28 million).

The combination of these changes resulted in an overall decrease in operating margin of 190 basis points for the first three quarters of fiscal 2022.

For the quarter ended January 1, 2023 compared with the quarter ended January 2, 2022

Product and distribution costs as a percentage of total net revenues increased 80 basis points for the first quarter of fiscal 2023, primarily due to higher supply chain costs driven by inflationary pressures.

Store operating expenses as a percentage of total net revenues decreased 10 basis points for the first quarter of fiscal 2023.

Store operating expenses as a percentage of company-operated stores revenue increased 110 basis points, primarily due to enhancements in retail store partner wages and benefits (approximately 350 basis points) and increased spend on new partner training (approximately 60 basis points), partially offset by sales leverage.

Other operating expenses increased $28 million for the first quarter of fiscal 2023, primarily due to higher support costs for our growing licensed markets ($8 million) and strategic investments in technology and other initiatives ($8 million).

Depreciation and amortization expenses as a percentage of total net revenues decreased 70 basis points, primarily due to lapping amortization expenses of acquisition-related intangibles assets.

General and administrative expenses increased $55 million, primarily due to incremental investments in technology ($28 million) and increased support costs to address labor market conditions and leadership training ($17 million).

Income from equity investees increased $18 million, primarily due to higher income from our North American Coffee Partnership joint venture.

The combination of these changes resulted in an overall decrease in operating margin of 20 basis points for the first quarter of fiscal 2023.

Other Income and Expenses

Quarter Ended Three Quarters Ended

Change Jul 3,

Quarter Ended

As a % of Total

Net Revenues As a % of Total

Operating income $ 1,253.1 $ 1,177.8 $ 75.3 14.4 % 14.6 %

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Effective tax rate including noncontrolling interests 24.6 % 23.2 %

For the quarter ended July 3, 2022 compared with the quarter ended June 27, 2021

Interest income and other, net decreased $16 million, primarily due to lower net gains from certain investments.

Interest expense increased $10 million, primarily due to additional interest incurred on long-term debt issued in February 2022.

The effective tax rate for the quarter ended July 3, 2022 was 23.4% compared to 18.2% for the same period in fiscal 2021.

The increase was primarily due to lapping a prior year remeasurement of deferred tax assets due to an enacted foreign corporate rate change (approximately 510 basis points).

For the three quarters ended July 3, 2022 compared with the three quarters ended June 27, 2021

Interest income and other, net decreased $3 million, primarily due to lower net gains from certain investments.

Interest expense increased $8 million, primarily due to additional interest incurred on long-term debt issued in February 2022.

The effective tax rate for the first three quarters ended July 3, 2022 was 23.2% compared to 21.7% for the same period in fiscal 2021.

The increase was primarily due to lapping a prior year remeasurement of deferred tax assets due to an enacted foreign corporate rate change (approximately 230 basis points).

For the quarter ended January 1, 2023 compared with the quarter ended January 2, 2022

Interest income and other, net increased $12 million, primarily due to lower net losses from certain investments.

Interest expense increased $14 million, primarily due to rising interest rates on floating rate debt and additional interest incurred on long-term debt issued in February 2022.

The effective tax rate for the quarter ended January 1, 2023 was 24.6% compared to 23.2% for the same period in fiscal 2022.

The increase was primarily due to a decrease in stock-based compensation excess tax benefits (approximately 150 basis points).

Segment Information

1 unchanged sentence

North America

Quarter Ended Three Quarters Ended

Change Jul 3,

Quarter Ended

North America

Total Net Revenues As a % of North America

Total Net Revenues

13 unchanged sentences

Store operating expenses as a % of company-operated stores revenue 51.6 % 51.8 %

(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 three quarters ended June 27, 2021, have been restated to conform with current period presentation.

For the quarter ended July 3, 2022 compared with the quarter ended June 27, 2021

North America total net revenues for the third quarter of fiscal 2022 increased $688 million, or 13%, primarily due to a 9% increase in comparable store sales ($421 million) driven by a 8% increase in average ticket and a 1% increase in transactions.

For the quarter ended January 1, 2023 compared with the quarter ended January 2, 2022

North America total net revenues for the first quarter of fiscal 2023 increased $819 million, or 14%, primarily due to a 10% increase in comparable store sales ($498 million) driven by a 9% increase in average ticket and a 1% increase in transactions.

Also contributing to these increases were the performance of net new company-operated store openings over the past 12 months ($183 million) and higher product and equipment sales to and royalty revenues from our licensees ($160 million).

Operating Margin

North America operating income for the third quarter of fiscal 2022 increased 2% to $1,330 million, compared to $1,304 million in the third quarter of fiscal 2021.

Operating margin decreased 230 basis points to 22.0%, primarily due to inflationary pressures on commodities and our supply chain (approximately 400 basis points), investments in labor including enhancements in retail store partner wages (approximately 220 basis points) as well as increased spend on new partner training and support costs (approximately 80 basis points).

North America operating income for the first quarter of fiscal 2023 increased 12% to $1.2 billion, compared to $1.1 billion in the first quarter of fiscal 2022.

Operating margin decreased 40 basis points to 18.5%, primarily due to investments in labor, including enhancements in retail store partner wages and benefits (approximately 390 basis points), inflationary pressures on commodities and our supply chain (approximately 210 basis points), as well as increased spend on new partner training (approximately 70 basis points).

These were partially offset by strategic pricing (approximately 510 basis points) and sales leverage.

For the three quarters ended July 3, 2022 compared with the three quarters ended June 27, 2021

North America total net revenues for the first three quarters of fiscal 2022 increased $2.6 billion, or 17% primarily due to a 13% increase in comparable store sales ($1.7 billion) driven by a 7% increase in average ticket and a 6% increase in transactions.

Also contributing to these increases were the performance of net new company-operated store openings over the past 12 months ($455 million) and higher product and equipment sales to and royalty revenues from our licensees ($372 million), primarily due to business recovery from impact of the COVID-19 pandemic.

Operating Margin

North America operating income for the first three quarters of fiscal 2022 increased 11% to $3.3 billion, compared to $3.0 billion for the same period in fiscal 2021.

Operating margin decreased 110 basis points to 19.4%, primarily due to investments in labor including enhancements in retail store partner wages (approximately 250 basis points) as well as increased spend on partner training and support costs (approximately 100 basis points), inflationary pressures on commodities and our supply chain (approximately 340 basis points) and lapping temporary subsidies provided by the CARES Act and CEWS (approximately 70 basis points).

These were partially offset by strategic pricing (approximately 350 basis points), lower restructuring activities (approximately 70 basis points) and sales leverage.

International

Quarter Ended Three Quarters Ended

Quarter Ended

As a % of International

Total Net Revenues As a % of International

Total Net Revenues

13 unchanged sentences

Store operating expenses as a % of company-operated stores revenue 52.3 % 46.3 %

(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 three quarters ended June 27, 2021, have been restated to conform with current period presentation.

For the quarter ended July 3, 2022 compared with the quarter ended June 27, 2021

International total net revenues for the third quarter of fiscal 2022 decreased $103 million, or 6%, primarily due to an 18% decline in comparable store sales ($238 million), driven by a 15% decrease in customer transactions and a 4% decrease in average ticket, primarily attributable to COVID-19 related restrictions in China as well as unfavorable foreign currency translation ($148 million).

These decreases were partially offset by higher product sales to and royalty revenues from our licensees ($134 million), 704 net new company operated store openings, or 10% increase, over the past 12 months ($90 million) as well as the conversion of our Korea market from a joint venture to a fully licensed market in the fourth quarter of fiscal 2021 ($64 million).

Operating Margin

International operating income for the third quarter of fiscal 2022 decreased 59% to $135 million, compared to $327 million in the third quarter of fiscal 2021.

Operating margin decreased 1,090 basis points to 8.5%, primarily due to sales deleverage related to COVID-19 pandemic related impacts in our China market (approximately 910 basis points), higher commodity and supply chain costs due to inflationary pressures (approximately 220 basis points), lower temporary government subsidies (approximately 170 basis points) and investments and growth in retail store partner wages and benefits (approximately 130 basis points).

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

For the three quarters ended July 3, 2022 compared with the three quarters ended June 27, 2021

International total net revenues for the first three quarters of fiscal 2022 increased $156 million, or 3%, primarily due to 704 net new Starbucks ® company-operated stores, or a 10% increase over the past 12 months ($307 million).

Additionally, there were higher product sales to and royalty revenues from our licensees ($274 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 ($143 million).

These increases were partially offset by a 10% decline in comparable store sales ($389 million), driven by a 6% 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 as well as unfavorable foreign currency translation ($218 million).

For the quarter ended January 1, 2023 compared with the quarter ended January 2, 2022

International total net revenues for the first quarter of fiscal 2023 decreased $196 million, or 10%, primarily due to unfavorable foreign currency translation ($236 million), as well as a 13% decline in comparable store sales ($170 million), driven by a 12% decrease in customer transactions and a 1% decrease in average ticket, primarily attributable to COVID-19 pandemic related disruptions in China.

These decreases were partially offset by higher product and equipment sales to and royalty revenues from our licensees ($139 million), as well as 649 net new company-operated store openings, or 9% increase, over the past 12 months ($76 million).

Operating Margin

International operating income for the first three quarters of fiscal 2022 decreased 29% to $616 million, compared to $868 million for the same period in fiscal 2021.

Operating margin decreased 540 basis points to 11.9%, primarily due to sales deleverage related to COVID-19 pandemic impacts in our China market (approximately 450 basis points), investments and growth in retail store partner wages and benefits (approximately 130 basis points), higher commodity and supply chain costs due to inflationary pressures (approximately 110 basis points), strategic initiatives (approximately 100 basis points) and portfolio shift impacts (approximately 90 basis points).

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

International operating income for the first quarter of fiscal 2023 decreased 20% to $240 million, compared to $300 million in the first quarter of fiscal 2022.

Operating margin decreased 170 basis points to 14.3%, primarily due to sales deleverage related to COVID-19 pandemic related impacts in our China market (approximately 650 basis points) and higher commodity and supply chain costs due to inflationary pressures (approximately 70 basis points).

These decreases were partially offset by sales leverage across markets outside of China (approximately 240 basis points) the resulting business mix (approximately 140 basis points), as well as lapping amortization expenses of acquisition-related intangibles assets that are now fully amortized (approximately 230 basis points).

Channel Development

Quarter Ended Three Quarters Ended

Change Jul 3,

Quarter Ended

As a % of Channel Development

Total Net Revenues As a % of Channel Development

Total Net Revenues

2 unchanged sentences

Other operating expenses 13.0 11.4 1.6 2.7 2.7

Depreciation and amortization expenses — 0.2 (0.2) — — 0.1 0.9 (0.8) — 0.1

General and administrative expenses 2.0 3.3 (1.3) 0.4 0.8

2 unchanged sentences

Operating income $ 226.3 $ 183.2 $ 43.1 47.3 % 43.9 %

For the quarter ended July 3, 2022 compared with the quarter ended June 27, 2021

Channel Development total net revenues for the third quarter of fiscal 2022 increased $66 million, or 16%, primarily due to higher Global Coffee Alliance product sales and royalty revenue ($54 million) and growth in our ready-to-drink business ($18 million).

Operating Margin

Channel Development operating income for the third quarter of fiscal 2022 decreased 11% to $192 million, compared to $216 million in the third quarter of fiscal 2021.

Operating margin decreased 1,220 basis points to 40.0%, primarily due to lapping a change in estimate relating to a transaction cost accrual (approximately 550 basis points), a decline in our North American Coffee Partnership joint venture income due to inflationary pressures and supply chain constraints (approximately 430 basis points) and business mix shift (approximately 230 basis points).

For the three quarters ended July 3, 2022 compared with the three quarters ended June 27, 2021

Channel Development total net revenues for the first three quarters of fiscal 2022 increased $205 million, or 18%, primarily due to higher Global Coffee Alliance product sales and royalty revenue ($161 million) and growth in our ready-to-drink business ($52 million).

For the quarter ended January 1, 2023 compared with the quarter ended January 2, 2022

Channel Development total net revenues for the first quarter of fiscal 2023 increased $61 million, or 15%, primarily due to higher Global Coffee Alliance product sales and royalty revenue ($43 million) and growth in our ready-to-drink business ($26 million).

Operating Margin

Channel Development operating income for the first three quarters of fiscal 2022 increased 1% to $573 million, compared to $569 million for the same period in fiscal 2021.

Operating margin decreased 720 basis points to 42.1%, primarily due to a decline in our North American Coffee Partnership joint venture income due to inflationary pressures and supply chain constraints (approximately 440 basis points), lapping a change in estimate relating to a transaction cost accrual (approximately 200 basis points), and business mix shift (approximately 160 basis points).

Channel Development operating income for the first quarter of fiscal 2023 increased 24% to $226 million, compared to $183 million in the first quarter of fiscal 2022.

Operating margin increased 340 basis points to 47.3%, primarily due to growth in our North American Coffee Partnership joint venture income.

Corporate and Other

Quarter Ended Three Quarters Ended

Quarter Ended

Net revenues:

2 unchanged sentences

Product and distribution costs 4.8 22.9 (18.1) (79.0)

Other operating expenses 5.9 3.3 2.6 78.8 13.2 10.4 2.8 26.9

Other operating expenses — 2.9 (2.9) nm

Depreciation and amortization expenses 28.7 32.9 (4.2) (12.8)

General and administrative expenses 396.1 354.5 41.6 11.7

Restructuring and impairments 2.0 — 2.0 nm 2.0 — 2.0 nm

Restructuring and impairments 0.7 — 0.7 nm

Total operating expenses 430.3 413.2 17.1 4.1

Operating loss $ (426.0) $ (388.1) $ (37.9) 9.8 %

(1) Corporate and other general and administrative expenses, total operating expenses and operating loss for the quarter and three quarters ended June 27, 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.

Corporate and Other primarily consists of our unallocated corporate expenses and Evolution Fresh, prior to its sale in the fourth quarter of fiscal 2022.

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 May 2022, the company announced entry into a definitive agreement to sell our Evolution Fresh brand and business.

The transaction closed on August 1st.

We do not expect a material impact to our future financial results.

For the quarter ended July 3, 2022 compared with the quarter ended June 27, 2021

Corporate and Other operating loss increased to $362 million for the third quarter of fiscal 2022, or 1%, compared to $359 million for the third quarter of fiscal 2021.

This increase was primarily driven by incremental investments in technology ($17 million), increased partner wages and benefits ($11 million) and increased support costs to address labor market conditions ($11 million).

These increases were partially offset by lower performance-based compensation ($31 million).

For the three quarters ended July 3, 2022 compared with the three quarters ended June 27, 2021

Corporate and Other operating loss increased to $1,111 million for the first three quarters of fiscal 2022, or 6%, compared to $1,051 million for the same period in fiscal 2021.

This increase was primarily driven by incremental investments in technology ($62 million), increased partner wages and benefits ($32 million) and increased support costs to address labor market conditions ($23 million).

For the quarter ended January 1, 2023 compared with the quarter ended January 2, 2022

Corporate and Other operating loss increased to $426 million for the first quarter of fiscal 2023, or 10%, compared to $388 million for the first quarter of fiscal 2022.

This increase was primarily driven by incremental investments in technology ($28 million) and increased support costs to address labor market conditions ($9 million).

These increases were partially offset by lower performance based compensation ($12 million).

2 unchanged sentences

Net stores opened/(closed) and transferred during the period

Quarter Ended Three Quarters Ended Stores open as of

Quarter Ended Stores open as of

North America

2 unchanged sentences

Total North America 86 62 17,381 16,888

124 51 224 (188) 17,050 16,752

International

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Total International 373 422 18,789 17,429

194 301 891 823 17,898 16,543

Total Company 459 484 36,170 34,317

(1) North America and International licensed stores as of June 27, 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 $3.5 billion as of July 3, 2022 and $6.9 billion as of October 3, 2021.

Cash and Investment Overview

Our cash and investments totaled $3.6 billion as of January 1, 2023 and $3.5 billion as of October 2, 2022.

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 July 3, 2022, approximately $2.8 billion of cash was held in foreign subsidiaries.

Our investment portfolio primarily includes highly liquid available-for-sale securities, including corporate debt securities, government treasury securities (foreign and domestic) and commercial paper as well as principal-protected structured deposits.

As of January 1, 2023, approximately $2.7 billion of cash and short-term investment were held in foreign subsidiaries.

Borrowing Capacity

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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 July 3, 2022, we were in compliance with all applicable covenants.

No amounts were outstanding under our 2021 credit facility as of July 3, 2022 or October 3, 2021.

As of January 1, 2023, we were in compliance with all applicable covenants.

No amounts were outstanding under our 2021 credit facility as of January 1, 2023 or October 2, 2022.

Commercial Paper

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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 July 3, 2022, we had $200 million of borrowings

outstanding under our commercial paper program.

As of October 3, 2021, we had no borrowings outstanding under this program.

Our total contractual borrowing capacity for general corporate purposes was $2.8 billion as of the end of our third quarter of fiscal 2022.

As of January 1, 2023, we had no borrowings outstanding under our commercial paper program.

As of October 2, 2022, we had $175.0 million in borrowings outstanding

under this program.

Our total contractual borrowing capacity for general corporate purposes was $3.0 billion as of the end of our first quarter of fiscal 2023.

Credit facilities in Japan

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These are available for working capital needs and capital expenditures within our Japanese market.

• A ¥5 billion, or $36.8 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 ¥5 billion, or $37.6 million, credit facility is currently set to mature on January 4, 2024.

Borrowings under this 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 $75.2 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 July 3, 2022 and October 3, 2021, we had no borrowings outstanding under these Japanese yen-denominated credit facilities.

Borrowings under this 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 January 1, 2023 and October 2, 2022, we had no borrowings outstanding under these Japanese yen-denominated credit facilities.

See Note 8, 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 July 3, 2022, we were in compliance with all applicable covenants.

As of January 1, 2023, we were in compliance with all applicable covenants.

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.

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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 third quarter of fiscal 2022, our Board of Directors approved a quarterly cash dividend to shareholders of $0.49 per share to be paid on August 26, 2022 to shareholders of record as of the close of business on August 12, 2022.

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

During the three quarters ended July 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 July 3, 2022, 52.6 million shares remained available for repurchase under current authorizations.

While we do not anticipate the need for repatriated funds to the U.S.

to satisfy domestic liquidity requirements, any foreign earnings which are not indefinitely reinvested may be repatriated at management’s discretion.

During the first quarter of fiscal 2023, our Board of Directors approved a quarterly cash dividend to shareholders of $0.53 per share to be paid on February 24, 2023 to shareholders of record as of the close of business on February 10, 2023.

During the first quarter of fiscal 2023, we resumed our share repurchase program which was temporarily suspended in April 2022.

During the quarter ended January 1, 2023, we repurchased 1.9 million shares of common stock for $191.4 million.

As of January 1, 2023, 50.6 million shares remained available for repurchase under current authorizations.

Other than normal operating expenses, cash requirements for the remainder of 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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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 provided by operating activities was $3.3 billion for the first three quarters of fiscal 2022, compared to $4.5 billion for the same period in fiscal 2021.

The change was primarily due to an increase in inventory and net cash used by changes in other operating assets and liabilities.

Cash used in investing activities for the first three quarters of fiscal 2022 totaled $1.4 billion, compared to cash used in investing activities of $1.0 billion 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 three quarters of fiscal 2022 totale d $5.1 billion compared to cash used in financing activities of $3.2 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.

Cash provided by operating activities was $1.6 billion for the first quarter of fiscal 2023, compared to $1.9 billion for the same period in fiscal 2022.

The change was primarily due to the timing of payments, lower non-cash depreciation and amortization expenses in current year, and net cash used by changes in other operating assets and liabilities.

Cash used in investing activities for the first quarter of fiscal 2023 totaled $279 million, compared to cash used in investing activities of $401 million for the same period in fiscal 2022.

The change was primarily due to an increase in maturities and calls of investments, partially offset by higher spend on capital expenditures.

Cash used in financing activities for the first quarter of fiscal 2023 totaled $1.0 billion compared to cash used in financing activities of $4.0 billion for the same period in fiscal 2022.

The change is primarily due to a decrease in share repurchase activities.

Commodity Prices, Availability and General Risk Conditions

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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.

Critical Accounting Estimates

The preparation of financial statements and related disclosures in conformity with U.S.

generally accepted accounting principles and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported.

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 and in the Notes to Consolidated Financial Statements in Part II, Item 8 of the 10-K describe the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements.

There have been no material changes to the Company’s critical accounting estimates since the 10-K.

RECENT ACCOUNTING PRONOUNCEMENTS

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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-Q

Item 2. Management’s Discussion and Analysis