STARBUCKS CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements contained herein are “forward-looking” statements within the meaning of applicable securities laws and regulations. Generally, these statements can be identified by the use of words such as “aim,” “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “feel,” “forecast,” “intend,” “may,” “outlook,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “will,” “would,” and similar expressions intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These statements include statements relating to trends in, or expectations relating to, the effects of our existing and any future initiatives, strategies, investments and plans, including our Reinvention Plan, as well as trends in, or expectations regarding, our financial results and long-term growth model and drivers; our operations in the U.S. and China; our environmental, social and governance efforts; our partners; economic and consumer trends, including the impact of inflationary pressures; impact of foreign currency translation; strategic pricing actions; the conversion of certain market operations to fully licensed models; our plans for streamlining our operations, including store openings, closures and changes in store formats and models; 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; tax rates; business opportunities, expansions and new initiatives, including Starbucks Odyssey; strategic acquisitions; our dividends programs; commodity costs and our mitigation strategies; our liquidity, cash flow from operations, investments, borrowing capacity and use of proceeds; continuing compliance with our covenants under our credit facilities and commercial paper program; repatriation of cash to the U.S.; the likelihood of the issuance of additional debt and the applicable interest rate; the continuing impact of the COVID-19 pandemic or other public health events on our financial results; our ceo transition; our share repurchase program; our use of cash and cash requirements; the expected effects of new accounting pronouncements and the estimated impact of changes in U.S. tax law, including on tax rates, investments funded by these changes and potential outcomes; and effects of legal proceedings. Such statements are based on currently available operating, financial and competitive information and are subject to various risks and uncertainties. Actual future results and trends may differ materially depending on a variety of factors, including, but not limited to: the continuing impact of COVID-19 on our business; regulatory measures or voluntary actions that may be put in place to limit the spread of COVID-19, including restrictions on business operations or social distancing requirements, and the duration and efficacy of such restrictions; the resurgence of COVID-19 infections and the circulation of novel variants of COVID-19; fluctuations in U.S. and international economies and currencies; our ability to preserve, grow and leverage our brands; the ability of our business partners and third-party providers to fulfill their responsibilities and commitments; potential negative effects of incidents involving food or beverage-borne illnesses, tampering, adulteration, contamination or mislabeling; potential negative effects of material breaches of our information technology systems to the extent we experience a material breach; material failures of our information technology systems; costs associated with, and the successful execution of, the Company’s initiatives and plans; new initiatives and plans or revisions to existing initiatives or plans; our ability to obtain financing on acceptable terms; the acceptance of the Company’s products by our customers, evolving consumer preferences and tastes and changes in consumer spending behavior; partner investments, changes in the availability and cost of labor including any union organizing efforts and our responses to such efforts; failure to attract or retain key executive or employee talent or successfully transition executives; significant increased logistics costs; inflationary pressures; the impact of competition; inherent risks of operating a global business including any potential negative effects stemming from the Russian invasion of Ukraine; the prices and availability of coffee, dairy and other raw materials; the effect of legal proceedings; 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. You should not place undue reliance on the forward-looking statements, which speak only as of the date of this report. We are under no obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. This information should be read in conjunction with the consolidated financial statements and the notes included in Item 1 of Part I of this 10-Q and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), contained in the 10-K filed with the SEC on November 18, 2022. Introduction and Overview Starbucks is the premier roaster, marketer and retailer of specialty coffee in the world, operating in 84 markets. As of April 2, 2023, Starbucks had more than 36,600 company-operated and licensed stores, an increase of 6% 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. 27 Table of Contents We have three reportable operating segments: 1) North America, which is inclusive of the U.S. and Canada, 2) International, which is inclusive of China, Japan, Asia Pacific, Europe, Middle East, Africa, Latin America and the Caribbean; and 3) Channel Development. 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. We believe these key operating metrics are useful to investors because management uses these metrics to assess the growth of our business and the effectiveness of our marketing and operational strategies. Throughout this MD&A, we commonly discuss the following key operating metrics: • New store openings and store count • Comparable store sales growth • Operating margin Comparable store sales growth represents the percentage change in sales in one period from the same prior year period for company-operated stores open for 13 months or longer and exclude the impact of foreign currency translation. We analyze comparable store sales growth on a constant currency basis as this helps identify underlying business trends, without distortion from the effects of currency movements. Stores that are temporarily closed or operating at reduced hours due to the COVID-19 pandemic remain in comparable store sales while stores identified for permanent closure have been removed. Our fiscal year ends on the Sunday closest to September 30. 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 second quarter of fiscal 2023 demonstrate the overall strength of our brand. Consolidated net revenues increased 14% to $8.7 billion in the second quarter of fiscal 2023 compared to $7.6 billion in the second quarter of fiscal 2022, primarily driven by strength in our U.S. business and growth in our international licensed markets and the beginning of a recovery from COVID-19 pandemic-related business interruptions in China. During the quarter ended April 2, 2023, our global comparable store sales grew 11%, primarily driven by 12% growth in the U.S. market and 7% growth internationally, as evidenced by the strength of the Starbucks brand in global markets. Consolidated operating margin increased 280 basis points from the prior year to 15.2%, primarily driven by sales leverage, pricing, productivity improvement and the gain from sale of our Seattle's Best Coffee brand. These were partially offset by previously-committed investments in labor, including enhancements in retail store partner wages and benefits, increased general and administrative costs related to our Reinvention Plan and higher supply chain costs driven by inflationary pressures. We anticipate continued recovery in China, coupled with sales leverage, pricing and productivity gains from the Reinvention Plan, will position us to meet our expected financial results in the remainder of the fiscal year. 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) Revenues Quarter Ended Two Quarters Ended Apr 2, 2023 Apr 3, 2022 $ Change % Change Apr 2, 2023 Apr 3, 2022 $ Change % Change Company-operated stores $ 7,142.3 $ 6,276.7 $ 865.6 13.8 % $ 14,225.7 $ 12,999.1 $ 1,226.6 9.4 % Licensed stores 1,069.5 849.5 220.0 25.9 2,189.0 1,700.3 488.7 28.7 Other 508.0 509.4 (1.4) (0.3) 1,019.1 986.6 32.5 3.3 Total net revenues $ 8,719.8 $ 7,635.6 $ 1,084.2 14.2 % $ 17,433.8 $ 15,686.0 $ 1,747.8 11.1 % For the quarter ended April 2, 2023 compared with the quarter ended April 3, 2022 Total net revenues for the second quarter of fiscal 2023 increased $1.1 billion, primarily due to higher revenues from company-operated stores ($866 million). The growth of company-operated stores revenue was driven by an 11% increase in comparable store sales ($669 million), attributable to a 6% increase in comparable transactions and a 4% increase in average ticket. Also contributing was incremental revenues from 1,114 net new Starbucks ® company-operated stores, or a 6% increase, over the past 12 months ($312 million). Partially offsetting these increases was unfavorable foreign currency translation ($163 million). Licensed stores revenue increased $220 million contributing to the increase in total net revenues, driven by higher product and equipment sales to and royalty revenues from our licensees ($233 million). Partially offsetting this increase was unfavorable foreign currency translation ($21 million). 28 Table of Contents For the two quarters ended April 2, 2023 compared with the two quarters ended April 3, 2022 Total net revenues for the first two quarters of fiscal 2023 increased $1.7 billion, primarily due to higher revenues from company-operated stores ($1.2 billion). The growth of company-operated stores revenue was driven by a 8% increase in comparable store sales ($1.0 billion) attributed to a 6% increase in average ticket and a 2% increase in transactions. Also contributing to the increase were incremental revenues from 1,114 net new Starbucks company-operated stores, or a 6% increase, over the past 12 months ($571 million). Partially offsetting these increases was unfavorable foreign currency translation ($388 million). Licensed stores revenue increased $489 million contributing to the increase in total net revenues, driven by higher product and equipment sales to and royalty revenues from our licensees ($532 million). Partially offsetting this increase was unfavorable foreign currency translation ($57 million). Other revenues increased $33 million, primarily due to higher product sales and royalty revenue in the Global Coffee Alliance ($63 million), partially offset by the absence of revenues from the Evolution Fresh business following its sale in the fourth quarter of fiscal 2022 ($37 million). Operating Expenses Quarter Ended Two Quarters Ended Apr 2, 2023 Apr 3, 2022 $ Change Apr 2, 2023 Apr 3, 2022 Apr 2, 2023 Apr 3, 2022 $ Change Apr 2, 2023 Apr 3, 2022 As a % of Total Net Revenues As a % of Total Net Revenues Product and distribution costs $ 2,801.7 $ 2,465.8 $ 335.9 32.1 % 32.3 % $ 5,611.9 $ 4,992.7 $ 619.2 32.2 % 31.8 % Store operating expenses 3,636.0 3,314.7 321.3 41.7 43.4 7,301.3 6,714.6 586.7 41.9 42.8 Other operating expenses 126.2 101.7 24.5 1.4 1.3 255.4 203.4 52.0 1.5 1.3 Depreciation and amortization expenses 341.9 367.7 (25.8) 3.9 4.8 669.0 733.8 (64.8) 3.8 4.7 General and administrative expenses 620.4 481.5 138.9 7.1 6.3 1,201.3 1,007.3 194.0 6.9 6.4 Restructuring and impairments 8.8 4.4 4.4 0.1 0.1 14.7 (3.1) 17.8 0.1 0.0 Total operating expenses 7,535.0 6,735.8 799.2 86.4 88.2 % 15,053.6 13,648.7 1,404.9 86.3 87.0 Income from equity investees 51.4 49.1 2.3 0.6 0.6 109.2 89.4 19.8 0.6 0.6 Gain from sale of assets 91.3 — 91.3 1.0 nm 91.3 — 91.3 0.5 nm Operating income 1,327.5 948.9 378.6 15.2 12.4 % 2,580.7 2,126.7 454.0 14.8 13.6 Store operating expenses as a % of company-operated stores revenue 50.9 % 52.8 % 51.3 % 51.7 % For the quarter ended April 2, 2023 compared with the quarter ended April 3, 2022 Product and distribution costs as a percentage of total net revenues decreased 20 basis points for the second quarter of fiscal 2023, primarily due to pricing (approximately 120 basis points), partially offset by higher supply chain costs driven by inflationary pressures (approximately 100 basis points). Store operating expenses as a percentage of total net revenues decreased 170 basis points for the second quarter of fiscal 2023. Store operating expenses as a percentage of company-operated stores revenue decreased 190 basis points, primarily due to sales leverage (approximately 260 basis points), pricing (approximately 160 basis points) and productivity improvement (approximately 160 basis points). These were partially offset by previously-committed investments in labor, including enhancements in retail store partner wages and benefits (approximately 340 basis points). Other operating expenses increased $25 million for the second quarter of fiscal 2023, primarily due to higher support costs for our growing licensed markets ($9 million) and strategic investments in technology and other initiatives ($6 million). 29 Table of Contents Depreciation and amortization expenses as a percentage of total net revenues decreased 90 basis points, primarily due to lapping amortization expenses of acquisition-related intangibles assets that are now fully amortized. General and administrative expenses increased $139 million, primarily due to incremental investments in technology ($36 million), higher performance-based compensation ($30 million), increased support costs of strategic initiatives including the Reinvention Plan ($18 million), a donation to the Starbucks Foundation ($15 million) and higher partner wages and benefits ($13 million). Gain from sale of assets includes the sale of our Seattle's Best Coffee brand to Nestlé in the second quarter of fiscal 2023. The combination of these changes resulted in an overall increase in operating margin of 280 basis points for the second quarter of fiscal 2023. For the two quarters ended April 2, 2023 compared with the two quarters ended April 3, 2022 Product and distribution costs as a percentage of total net revenues increased 40 basis points for the first two quarters of fiscal 2023, primarily due to higher supply chain costs driven by inflationary pressures (approximately 130 basis points) and business mix shift (approximately 60 basis points), partially offset by pricing (approximately 160 basis points). Store operating expenses as a percentage of total net revenues decreased 90 basis points for the first two quarters of fiscal 2023. Store operating expenses as a percentage of company-operated stores revenue decreased 40 basis points, primarily due to pricing (approximately 210 basis points), sales leverage (approximately 120 basis points) and productivity improvement (approximately 110 basis points). These were partially offset by previously-committed investments in labor, including enhancements in retail store partner wages and benefits (approximately 340 basis points). Other operating expenses increased $52 million for the first two quarters of fiscal 2023, primarily due to higher support costs for our growing licensed markets ($17 million) and strategic investments in technology and other initiatives ($13 million). Depreciation and amortization expenses as a percentage of total net revenues decreased 90 basis points, primarily due to lapping amortization expenses of acquisition-related intangibles assets that are now fully amortized. General and administrative expenses increased $194 million, primarily due to incremental investments in technology ($64 million), increased support costs to address labor market conditions and leadership training ($28 million), higher performance-based compensation ($24 million), increased support costs of strategic initiatives including the Reinvention Plan ($24 million) and higher partner wages and benefits ($20 million). Income from equity investees increased $20 million, primarily due to higher income from our North American Coffee Partnership joint venture. Gain from sale of assets includes the sale of our Seattle's Best Coffee brand to Nestlé in the second quarter of fiscal 2023 . The combination of these changes resulted in an overall increase in operating margin of 120 basis points for the first two quarters of fiscal 2023. 30 Table of Contents Other Income and Expenses Quarter Ended Two Quarters Ended Apr 2, 2023 Apr 3, 2022 $ Change Apr 2, 2023 Apr 3, 2022 Apr 2, 2023 Apr 3, 2022 $ Change Apr 2, 2023 Apr 3, 2022 As a % of Total Net Revenues As a % of Total Net Revenues Operating income $ 1,327.5 $ 948.9 $ 378.6 15.2 % 12.4 % $ 2,580.7 $ 2,126.7 $ 454.0 14.8 % 13.6 % Interest income and other, net 18.4 46.3 (27.9) 0.2 0.6 30.0 46.2 (16.2) 0.2 0.3 Interest expense (136.3) (119.1) (17.2) (1.6) (1.6) (266.0) (234.4) (31.6) (1.5) (1.5) Earnings before income taxes 1,209.6 876.1 333.5 13.9 11.5 2,344.7 1,938.5 406.2 13.4 12.4 Income tax expense 301.3 201.1 100.2 3.5 2.6 581.1 447.4 133.7 3.3 2.9 Net earnings including noncontrolling interests 908.3 675.0 233.3 10.4 8.8 1,763.6 1,491.1 272.5 10.1 9.5 Net earnings attributable to noncontrolling interests — 0.5 (0.5) — — — 0.7 (0.7) — — Net earnings attributable to Starbucks $ 908.3 $ 674.5 $ 233.8 10.4 % 8.8 % $ 1,763.6 $ 1,490.4 $ 273.2 10.1 % 9.5 % Effective tax rate including noncontrolling interests 24.9 % 23.0 % 24.8 % 23.1 % For the quarter ended April 2, 2023 compared with the quarter ended April 3, 2022 Interest income and other, net decreased $28 million, primarily due to lapping higher investment gains in the prior year. Interest expense increased $17 million, primarily due to additional interest incurred on floating rate debt. The effective tax rate for the quarter ended April 2, 2023 was 24.9% compared to 23.0% for the same period in fiscal 2022. The increase was primarily due to lapping a beneficial return-to-provision adjustment recorded related to the divestiture of certain joint venture operations (approximately 260 basis points). For the two quarters ended April 2, 2023 compared with the two quarters ended April 3, 2022 Interest income and other, net decreased $16 million, primarily due to lapping higher investment gains in the prior year. Interest expense increased $32 million, primarily due to additional interest incurred on floating rate debt. The effective tax rate for the first two quarters ended April 2, 2023 was 24.8% compared to 23.1% for the same period in fiscal 2022. The increase was primarily due to lapping a beneficial return-to-provision adjustment recorded related to the divestiture of certain joint venture operations (approximately 120 basis points) and a decrease in stock-based compensation excess tax benefits (approximately 80 basis points). 31 Table of Contents Segment Information Results of operations by segment (in millions) : North America Quarter Ended Two Quarters Ended Apr 2, 2023 Apr 3, 2022 $ Change Apr 2, 2023 Apr 3, 2022 Apr 2, 2023 Apr 3, 2022 $ Change Apr 2, 2023 Apr 3, 2022 As a % of North America Total Net Revenues As a % of North America Total Net Revenues Net revenues: Company-operated stores $ 5,742.7 $ 4,936.3 $ 806.4 90.0 % 90.6 % $ 11,613.2 $ 10,150.4 $ 1,462.8 89.8 % 90.8 % Licensed stores 637.4 507.0 130.4 10.0 9.3 1,317.4 1,022.9 294.5 10.2 9.2 Other 0.5 2.4 (1.9) 0.0 0.0 1.2 4.7 (3.5) 0.0 0.0 Total net revenues 6,380.6 5,445.7 934.9 100.0 100.0 12,931.8 11,178.0 1,753.8 100.0 100.0 Product and distribution costs 1,821.7 1,564.0 257.7 28.6 28.7 3,739.3 3,193.4 545.9 28.9 28.6 Store operating expenses 2,951.6 2,625.4 326.2 46.3 48.2 5,983.0 5,327.7 655.3 46.3 47.7 Other operating expenses 63.4 47.1 16.3 1.0 0.9 128.9 95.3 33.6 1.0 0.9 Depreciation and amortization expenses 226.3 202.0 24.3 3.5 3.7 443.1 402.1 41.0 3.4 3.6 General and administrative expenses 91.2 71.3 19.9 1.4 1.3 193.5 148.0 45.5 1.5 1.3 Restructuring and impairments 8.5 4.4 4.1 0.1 0.1 13.6 (3.1) 16.7 0.1 0.0 Total operating expenses 5,162.7 4,514.2 648.5 80.9 82.9 10,501.4 9,163.4 1,338.0 81.2 82.0 Operating income $ 1,217.9 $ 931.5 $ 286.4 19.1 % 17.1 % $ 2,430.4 $ 2,014.6 $ 415.8 18.8 % 18.0 % Store operating expenses as a % of company-operated stores revenue 51.4 % 53.2 % 51.5 % 52.5 % For the quarter ended April 2, 2023 compared with the quarter ended April 3, 2022 Revenues North America total net revenues for the second quarter of fiscal 2023 increased $935 million, or 17%, primarily due to a 12% increase in comparable store sales ($584 million) driven by a 6% increase in transactions and a 5% increase in average ticket. Also contributing to these increases were the performance of net new company-operated store openings over the past 12 months ($205 million) and higher product and equipment sales to and royalty revenues from our licensees ($122 million). Operating Margin North America operating income for the second quarter of fiscal 2023 increased 31% to $1.2 billion, compared to $0.9 billion in the second quarter of fiscal 2022. Operating margin increased 200 basis points to 19.1%, primarily due to pricing (approximately 320 basis points) and sales leverage (approximately 270 basis points). Also contributing were productivity improvement (approximately 170 basis points) and lower COVID-19 pandemic related catastrophe pay for store partners (approximately 120 basis points). These increases were partially offset by previously-committed investments in labor, including enhancements in retail store partner wages and benefits (approximately 360 basis points) and inflationary pressures on commodities and our supply chain (approximately 120 basis points). 32 Table of Contents For the two quarters ended April 2, 2023 compared with the two quarters ended April 3, 2022 Revenues North America total net revenues for the first two quarters of fiscal 2023 increased $1.8 billion, or 16%, primarily due to a 11% increase in comparable store sales ($1.1 billion) driven by a 7% increase in average ticket and a 4% increase in transactions. Also contributing to these increases were net new company-operated store openings over the past 12 months ($388 million) and higher product and equipment sales to and royalty revenues from our licensees ($282 million). Operating Margin North America operating income for the first two quarters of fiscal 2023 increased 21% to $2.4 billion, compared to $2.0 billion for the same period in fiscal 2022. Operating margin increased 80 basis points to 18.8%, primarily due to pricing (approximately 420 basis points) and sales leverage (approximately 230 basis points). Also contributing was productivity improvement (approximately 120 basis points). These increases were partially offset by previously-committed investments in labor, including enhancements in retail store partner wages and benefits (approximately 380 basis points) and inflationary pressures on commodities and our supply chain (approximately 170 basis points). International Quarter Ended Two Quarters Ended Apr 2, 2023 Apr 3, 2022 $ Change Apr 2, 2023 Apr 3, 2022 Apr 2, 2023 Apr 3, 2022 $ Change Apr 2, 2023 Apr 3, 2022 As a % of International Total Net Revenues As a % of International Total Net Revenues Net revenues: Company-operated stores $ 1,399.6 $ 1,340.4 $ 59.2 75.5 % 78.7 % $ 2,612.5 $ 2,848.7 $ (236.2) 73.9 % 79.6 % Licensed stores 432.1 342.5 89.6 23.3 20.1 871.6 677.4 194.2 24.7 18.9 Other 23.1 19.5 3.6 1.2 1.1 50.8 52.3 (1.5) 1.4 1.5 Total net revenues 1,854.8 1,702.4 152.4 100.0 100.0 3,534.9 3,578.4 (43.5) 100.0 100.0 Product and distribution costs 632.9 580.5 52.4 34.1 34.1 1,226.5 1,196.4 30.1 34.7 33.4 Store operating expenses 684.4 689.3 (4.9) 36.9 40.5 1,318.3 1,386.9 (68.6) 37.3 38.8 Other operating expenses 49.9 39.5 10.4 2.7 2.3 100.6 78.7 21.9 2.8 2.2 Depreciation and amortization expenses 86.3 133.4 (47.1) 4.7 7.8 167.7 266.5 (98.8) 4.7 7.4 General and administrative expenses 87.4 79.6 7.8 4.7 4.7 167.9 170.9 (3.0) 4.7 4.8 Total operating expenses 1,540.9 1,522.3 18.6 83.1 89.4 2,981.0 3,099.4 (118.4) 84.3 86.6 Income from equity investees 0.8 0.6 0.2 — — 1.2 1.3 (0.1) — — Operating income $ 314.7 $ 180.7 $ 134.0 17.0 % 10.6 % $ 555.1 $ 480.3 $ 74.8 15.7 % 13.4 % Store operating expenses as a % of company-operated stores revenue 48.9 % 51.4 % 50.5 % 48.7 % For the quarter ended April 2, 2023 compared with the quarter ended April 3, 2022 Revenues International total net revenues for the second quarter of fiscal 2023 increased $152 million, or 9%, primarily due to higher product and equipment sales to and royalty revenues from our licensees ($111 million), 721 net new company-operated store openings, or a 10% increase, over the past 12 months ($107 million). Also contributing was a 7% increase in comparable store sales ($85 million), driven by a 7% increase in customer transactions, primarily attributable to business recovery from COVID-19 pandemic related disruptions in China. These increases were partially offset by unfavorable foreign currency translation ($163 million). 33 Table of Contents Operating Margin International operating income for the second quarter of fiscal 2023 increased 74% to $315 million, compared to $181 million in the second quarter of fiscal 2022. Operating margin increased 640 basis points to 17.0%, primarily due to sales leverage (approximately 470 basis points) and lapping amortization expenses of acquisition-related intangibles assets that are now fully amortized (approximately 250 basis points). These decreases were partially offset by higher partner wages and benefits (approximately 100 basis points). For the two quarters ended April 2, 2023 compared with the two quarters ended April 3, 2022 Revenues International total net revenues for the first two quarters of fiscal 2023 decreased $44 million, or 1%, primarily due to unfavorable foreign currency translation ($399 million), as well as a 3% decline in comparable store sales ($85 million), driven by a 3% decrease in customer transactions primarily due to COVID-19 pandemic related disruptions in China during the first quarter of fiscal 2023. These were partially offset by higher product and equipment sales to and royalty revenues from our licensees ($250 million), as well as 721 net new company-operated store openings, or a 10% increase, over the past 12 months ($183 million). Operating Margin International operating income for the first two quarters of fiscal 2023 increased 16% to $555 million, compared to $480 million for the same period in fiscal 2022. Operating margin increased 230 basis points to 15.7%, primarily due to lapping amortization expenses of acquisition-related intangibles assets that are now fully amortized (approximately 240 basis points) and sales leverage across markets outside of China (approximately 190 basis points). These increases were partially offset by sales deleverage related to COVID-19 pandemic related impacts in our China market during the first quarter of fiscal 2023 (approximately 160 basis points) and higher partner wages and benefits (approximately 100 basis points). 34 Table of Contents Channel Development Quarter Ended Two Quarters Ended Apr 2, 2023 Apr 3, 2022 $ Change Apr 2, 2023 Apr 3, 2022 Apr 2, 2023 Apr 3, 2022 $ Change Apr 2, 2023 Apr 3, 2022 As a % of Channel Development Total Net Revenues As a % of Channel Development Total Net Revenues Net revenues $ 480.7 $ 463.1 $ 17.6 $ 958.9 $ 880.1 $ 78.8 Product and distribution costs 345.6 300.5 45.1 71.9 % 64.9 % 639.8 559.3 80.5 66.7 % 63.5 % Other operating expenses 12.8 10.7 2.1 2.7 2.3 25.8 22.0 3.8 2.7 2.5 General and administrative expenses 2.1 2.5 (0.4) 0.4 0.5 4.1 5.8 (1.7) 0.4 0.7 Total operating expenses 360.5 313.7 46.8 75.0 67.7 669.8 587.1 82.7 69.9 66.7 Income from equity investees 50.6 48.5 2.1 10.5 10.5 108.0 88.1 19.9 11.3 10.0 Gain from sale of assets 91.3 — 91.3 19.0 nm 91.3 — 91.3 9.5 % nm Operating income $ 262.1 $ 197.9 $ 64.2 54.5 % 42.7 % $ 488.4 $ 381.1 $ 107.3 50.9 % 43.3 % For the quarter ended April 2, 2023 compared with the quarter ended April 3, 2022 Revenues Channel Development total net revenues for the second quarter of fiscal 2023 increased $18 million, or 4%, primarily due to higher Global Coffee Alliance product sales and royalty revenue ($20 million). Operating Margin Channel Development operating income for the second quarter of fiscal 2023 increased 32% to $262 million, compared to $198 million in the second quarter of fiscal 2022. Operating margin increased 1,180 basis points to 54.5%, primarily due to the gain from sale of our Seattle's Best Coffee brand (approximately 1,900 basis points), partially offset by impairment charges against certain manufacturing assets (approximately 360 basis points) . For the two quarters ended April 2, 2023 compared with the two quarters ended April 3, 2022 Revenues Channel Development total net revenues for the first two quarters of fiscal 2023 increased $79 million, or 9%, primarily due to higher Global Coffee Alliance product sales and royalty revenue ($63 million) and growth in our global ready-to-drink business ($27 million). Operating Margin Channel Development operating income for the first two quarters of fiscal 2023 increased 28% to $488 million, compared to $381 million for the same period in fiscal 2022. Operating margin increased 760 basis points to 50.9%, primarily due to the gain from sale of our Seattle's Best Coffee brand (approximately 950 basis points) and growth in our North American Coffee Partnership joint venture income (approximately 110 basis points), partially offset by impairment charges against certain manufacturing assets (approximately 190 basis points) and business mix shift (approximately 160 basis points). 35 Table of Contents Corporate and Other Quarter Ended Two Quarters Ended Apr 2, 2023 Apr 3, 2022 $ Change % Change Apr 2, 2023 Apr 3, 2022 $ Change % Change Net revenues: Other $ 3.7 $ 24.4 $ (20.7) (84.8) % $ 8.2 $ 49.5 $ (41.3) (83.4) % Total net revenues 3.7 24.4 (20.7) (84.8) 8.2 49.5 (41.3) (83.4) Product and distribution costs 1.5 20.8 (19.3) (92.8) 6.3 43.6 (37.3) (85.6) Other operating expenses 0.1 4.4 (4.3) (97.7) 0.1 7.4 (7.3) (98.6) Depreciation and amortization expenses 29.3 32.3 (3.0) (9.3) 58.1 65.2 (7.1) (10.9) General and administrative expenses 439.7 328.1 111.6 34.0 835.8 682.6 153.2 22.4 Restructuring and impairments 0.3 — 0.3 nm 1.1 — 1.1 nm Total operating expenses 470.9 385.6 85.3 22.1 901.4 798.8 102.6 12.8 Operating loss $ (467.2) $ (361.2) $ (106.0) 29.3 % $ (893.2) $ (749.3) $ (143.9) 19.2 % 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. For the quarter ended April 2, 2023 compared with the quarter ended April 3, 2022 Corporate and Other operating loss increased by 29% to $467 million for the second quarter of fiscal 2023 compared to $361 million for the second quarter of fiscal 2022. This increase was primarily driven by incremental investments in technology ($34 million), higher performance-based compensation ($25 million), increased support costs of strategic initiatives including the Reinvention Plan ($18 million) and a donation to the Starbucks Foundation ($15 million). For the two quarters ended April 2, 2023 compared with the two quarters ended April 3, 2022 Corporate and Other operating loss increased by 19% to $893 million for the first two quarters of fiscal 2023 compared to $749 million for the same period in fiscal 2022. This increase was primarily driven by incremental investments in technology ($62 million), increased support costs of strategic initiatives including the Reinvention Plan ($24 million), increased support costs to address labor market conditions ($16 million), higher performance-based compensation ($16 million) and a donation to the Starbucks Foundation ($15 million). 36 Table of Contents Quarterly Store Data Our store data for the periods presented is as follows: Net stores opened/(closed) and transferred during the period Quarter Ended Two Quarters Ended Stores open as of Apr 2, 2023 Apr 3, 2022 Apr 2, 2023 Apr 3, 2022 Apr 2, 2023 Apr 3, 2022 North America Company-operated stores 91 54 131 93 10,347 9,954 Licensed stores 10 (16) 56 7 7,135 6,972 Total North America 101 38 187 100 17,482 16,926 International Company-operated stores 174 102 271 315 8,308 7,587 Licensed stores 189 173 465 382 10,844 10,117 Total International 363 275 736 697 19,152 17,704 Total Company 464 313 923 797 36,634 34,630 Financial Condition, Liquidity and Capital Resources Cash and Investment Overview Our cash and investments totaled $3.7 billion as of April 2, 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, government treasury securities (foreign and domestic) and commercial paper as well as principal-protected structured deposits. As of April 2, 2023, approximately $2.6 billion of cash and short-term investment were held in foreign subsidiaries. Borrowing Capacity Revolving Credit Facility Our $3.0 billion unsecured five-year revolving credit facility (the “2021 credit facility”), of which $150 million may be used for issuances of letters of credit, is currently set to mature on September 16, 2026. The 2021 credit facility is available for working capital, capital expenditures and other corporate purposes, including acquisitions and share repurchases. We have the option, subject to negotiation and agreement with the related banks, to increase the maximum commitment amount by an additional $1.0 billion. Borrowings under the 2021 credit facility bear interest at a variable rate based on LIBOR, and, for U.S. dollar-denominated loans under certain circumstances, a Base Rate (as defined in the 2021 credit facility), in each case plus an applicable margin. The applicable margin is based on the Company’s long-term credit ratings assigned by the Moody’s and Standard & Poor’s rating agencies. The 2021 credit facility contains alternative interest rate provisions specifying rate calculations to be used at such time LIBOR ceases to be available as a benchmark due to reference rate reform. The “Base Rate” is the highest of (i) the Federal Funds Rate (as defined in the 2021 credit facility) plus 0.500%, (ii) Bank of America’s prime rate and (iii) the Eurocurrency Rate (as defined in the 2021 credit facility) plus 1.000%. On April 17, 2023, Starbucks amended the 2021 credit facility to replace LIBOR with Term SOFR (Secured Overnight Financing Rate) as a successor rate. All other material terms and conditions of the 2021 credit facility were unchanged. Borrowings under the amended 2021 credit facility will bear interest at a variable rate based on Term SOFR, and, for U.S. dollar-denominated loans under certain circumstances, a Base Rate (as defined in the 2021 credit facility), in each case plus an applicable margin. The applicable margin is based on the Company’s long-term credit ratings assigned by the Moody’s and Standard & Poor’s rating agencies. The “Base Rate” is the highest of (i) the Federal Funds Rate (as defined in the 2021 credit facility) plus 0.500%, (ii) Bank of America’s prime rate, and (iii) Term SOFR plus 1.000%. Term SOFR means the forward-looking SOFR term rate administrated by the Chicago Mercantile Exchange plus a SOFR Adjustment of 0.100%. The 2021 credit facility contains provisions requiring us to maintain compliance with certain covenants, including a minimum fixed charge coverage ratio, which measures our ability to cover financing expenses. As of April 2, 2023, we were in compliance with all applicable covenants. No amounts were outstanding under our 2021 credit facility as of April 2, 2023 or October 2, 2022. 37 Table of Contents Commercial Paper Under our commercial paper program, we may issue unsecured commercial paper notes up to a maximum aggregate amount outstanding at any time of $3.0 billion, with individual maturities that may vary but not exceed 397 days from the date of issue. Amounts outstanding under the commercial paper program are required to be backstopped by available commitments under the 2021 credit facility discussed above. The proceeds from borrowings under our commercial paper program may be used for working capital needs, capital expenditures and other corporate purposes, including, but not limited to, business expansion, payment of cash dividends on our common stock and share repurchases. As of April 2, 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 second quarter of fiscal 2023. Credit facilities in Japan Additionally, we hold Japanese yen-denominated credit facilities for the use of our Japan subsidiary. These are available for working capital needs and capital expenditures within our Japanese market. • A ¥5 billion, or $37.7 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 $75.4 million, credit facility is currently set to mature on March 27, 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 0.300%. As of April 2, 2023, we had ¥7 billion, or $52.8 million, of borrowings outstanding under these credit facilities. As of October 2, 2022, we had no borrowings outstanding under these 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 April 2, 2023, we were in compliance with all applicable covenants. Use of Cash We expect to use our available cash and investments, including, but not limited to, additional potential future borrowings under the credit facilities, commercial paper program and the issuance of debt to support and invest in our core businesses, including investing in new ways to serve our customers and supporting our store partners, repaying maturing debts, as well as returning cash to shareholders through common stock cash dividend payments and discretionary share repurchases and investing in new business opportunities related to our core and developing businesses. Furthermore, we may use our available cash resources to make proportionate capital contributions to our investees. We may also seek strategic acquisitions to leverage existing capabilities and further build our business. Acquisitions may include increasing our ownership interests in our investees. Any decisions to increase such ownership interests will be driven by valuation and fit with our ownership strategy. We believe that net future cash flows generated from operations and existing cash and investments both domestically and internationally combined with our ability to leverage our balance sheet through the issuance of debt will be sufficient to finance capital requirements for our core businesses as well as shareholder distributions for at least the next 12 months. We are currently not aware of any trends or demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, our liquidity increasing or decreasing in any material way that will impact our capital needs during or beyond the next 12 months. We have borrowed funds and continue to believe we have the ability to do so at reasonable interest rates; however, additional borrowings would result in increased interest expense in the future. In this regard, we may incur additional debt, within targeted levels, as part of our plans to fund our capital programs, including cash returns to shareholders through future dividends and discretionary share repurchases as well as investing in new business opportunities. If necessary, we may pursue additional sources of financing, including both short-term and long-term borrowings and debt issuances. We regularly review our cash positions and our determination of indefinite reinvestment of foreign earnings. In the event we determine that all or a portion of such foreign earnings are no longer indefinitely reinvested, we may be subject to additional foreign withholding taxes and U.S. state income taxes, which could be material. 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 second quarter of fiscal 2023, our Board of Directors approved a quarterly cash dividend to shareholders of $0.53 per share to be paid on May 26, 2023 to shareholders of record as of the close of business on May 12, 2023. 38 Table of Contents During the first quarter of fiscal 2023, we resumed our share repurchase program which was temporarily suspended in April 2022. During the two quarters ended April 2, 2023, we repurchased 4.9 million shares of common stock for $495.3 million. As of April 2, 2023, 47.7 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. Total capital expenditures for fiscal 2023 are expected to be approximately $2.5 billion. In the MD&A included in the 10-K, we disclosed that we had $33.2 billion of current and long-term material cash requirements as of October 2, 2022. There have been no material changes to our material cash requirements during the period covered by this 10-Q outside of the normal course of our business. Cash Flows Cash provided by operating activities was $2.4 billion for the first two quarters of fiscal 2023, compared to $2.0 billion for the same period in fiscal 2022. The change was primarily due to higher net earnings during the period and a decrease in net cash used by changes in other operating assets and liabilities. Cash used in investing activities for the first two quarters of fiscal 2023 totaled $907 million, compared to cash used in investing activities of $881 million for the same period in fiscal 2022. The change was primarily due to an increase in purchases of investments and higher spend on capital expenditures, partially offset by an increase in maturities and calls of investments and proceeds from the sale of assets. Cash used in financing activities for the first two quarters of fiscal 2023 totaled $1.3 billion compared to cash used in financing activities of $3.7 billion for the same period in fiscal 2022. The change is primarily due to a decrease in share repurchase activities, partially offset by higher repayments of long-term debt. Commodity Prices, Availability and General Risk Conditions Commodity price risk represents our primary market risk, generated by our purchases of green coffee and dairy products, among other items. We purchase, roast and sell high-quality arabica coffee and related products and risk arises from the price volatility of green coffee. In addition to coffee, we also purchase significant amounts of dairy products to support the needs of our company-operated stores. The price and availability of these commodities directly impact our results of operations, and we expect commodity prices, particularly coffee, to impact future results of operations. For additional details, see Product Supply in Item 1 of the 10-K, as well as Risk Factors in Item 1A of the 10-K. Seasonality and Quarterly Results Our business is subject to moderate seasonal fluctuations, of which our fiscal second quarter typically experiences lower revenues and operating income. However, the COVID-19 pandemic may have an impact on consumer behaviors and customer traffic that result in changes in the seasonal fluctuations of our business. Additionally, as our stored value cards are issued to and loaded by customers during the holiday season, we tend to have higher cash flows from operations during the first quarter of the fiscal year. However, since revenues from our stored value cards are recognized upon redemption and not when cash is loaded, the impact of seasonal fluctuations on the consolidated statements of earnings is much less pronounced. As a result of moderate seasonal fluctuations, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. 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 See Note 1 , Summary of Significant Accounting Policies and Estimates, to the consolidated financial statements included in Item 1 of Part I of this 10-Q, for a detailed description of recent accounting pronouncements. 39 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk There has been no material change in the commodity price risk, foreign currency exchange risk, equity security price risk or interest rate risk discussed in Item 7A of the 10-K.