Item 2. Management’s Discussion and Analysis
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. By their nature, forward-looking statements involve risks, uncertainties, and other factors (many beyond our control) that could cause our actual results to differ materially from our historical experience or from our current expectations or projections. Our forward-looking statements, and the risks and uncertainties related thereto, include, but are not limited to, those described under 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 with the SEC, as well as:
• our ability to preserve, grow and leverage our brands;
• the acceptance of the company’s products and changes in consumer preferences, consumption, or spending behavior and our ability to anticipate or react to them; shifts in demographic or health and wellness trends; or unfavorable consumer reaction to new products, platforms, reformulations, or other innovations;
• the costs associated with, and the successful execution and effects of, our existing and any future business opportunities, expansions, initiatives, strategies, investments and plans, including our Reinvention Plan;
• the impacts of partner investments and changes in the availability and cost of labor including any union organizing efforts and our responses to such efforts;
• the ability of our business partners, suppliers and third-party providers to fulfill their responsibilities and commitments;
• higher costs, lower quality, or unavailability of coffee, dairy, energy, water, raw materials, or product ingredients;
• the impact of significant increases in logistics costs;
• unfavorable global or regional economic conditions and related economic slowdowns or recessions, low consumer confidence, high unemployment, weak credit or capital markets, budget deficits, burdensome government debt, austerity measures, higher interest rates, higher taxes, political instability, higher inflation, or deflation;
• inherent risks of operating a global business including geopolitical considerations related to our business in China and any potential negative effects stemming from the Russian invasion of Ukraine;
• failure to attract or retain key executive or partner talent or successfully transition executives;
• the potential negative effects of incidents involving food or beverage-borne illnesses, tampering, adulteration, contamination or mislabeling;
• negative publicity related to our company, products, brands, marketing, executive leadership, partners, board of directors, founder, operations, business performance, or prospects;
• potential negative effects of a material breach, failure, or corruption of our information technology systems or those of our direct and indirect business partners, suppliers or third-party providers, or failure to comply with personal data protection laws;
• our environmental, social and governance (“ESG”) efforts and any reaction related thereto such as the rise in opposition to ESG and inclusion and diversity efforts;
• risks associated with acquisitions, dispositions, business partnerships, or investments – such as acquisition integration, termination difficulties or costs or impairment in recorded value;
• the impact of foreign currency translation, particularly a stronger U.S. dollar;
• the impact of substantial competition from new entrants, consolidations by competitors, and other competitive activities, such as pricing actions (including price reductions, promotions, discounting, couponing, or free goods), marketing, category expansion, product introductions, or entry or expansion in our geographic markets;
• the impact of changes in U.S. tax law and related guidance and regulations that may be implemented, including on tax rates and the Inflation Reduction Act of 2022;
• the impact of health epidemics, pandemics or other public health events on our business and financial results, and the risk of negative economic impacts and related regulatory measures or voluntary actions that may be put in place, including restrictions on business operations or social distancing requirements, and the duration and efficacy of such restrictions;
• failure to comply with anti-corruption laws, trade sanctions and restrictions or similar laws or regulations; and
• the impact of significant legal disputes and proceedings, or government investigations.
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.
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Introduction and Overview
Starbucks is the premier roaster, marketer and retailer of specialty coffee in the world, operating in 86 markets. As of July 2, 2023, Starbucks had more than 37,200 company-operated and licensed stores, an increase of 7% 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.
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 include 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 2023 demonstrate the overall strength of our brand. Consolidated net revenues increased 12% to $9.2 billion in the third quarter of fiscal 2023 compared to $8.2 billion in the third quarter of fiscal 2022, primarily driven by strength in our U.S. business and international licensed markets as well as continued recovery from COVID-19 pandemic-related business interruptions in China. During the quarter ended July 2, 2023, our global comparable store sales grew 10%, primarily driven by 7% growth in the U.S. market and 24% growth internationally, demonstrating the strength of the Starbucks brand globally. Consolidated operating margin increased 140 basis points from the prior year to 17.3%, primarily driven by sales leverage, pricing and productivity improvement from increased efficiency in our U.S. stores. These were partially offset by previously-committed investments in labor, including enhancements in retail store partner wages and benefits as well as increased general and administrative costs related to our Reinvention Plan.
Results of Operations (in millions)
Revenues
Quarter Ended Three Quarters Ended
Jul 2,
2023 Jul 3,
2022 $
Change %
Change
Jul 2,
2023 Jul 3,
2022 $
Change
%
Change
Company-operated stores $ 7,556.7 $ 6,675.5 $ 881.2 13.2 % $ 21,782.4 $ 19,674.7 $ 2,107.7 10.7 %
Licensed stores 1,136.2 956.8 179.4 18.8 3,325.2 2,657.0 668.2 25.1
Other 475.4 517.8 (42.4) (8.2) 1,494.4 1,504.4 (10.0) (0.7)
Total net revenues $ 9,168.3 $ 8,150.1 $ 1,018.2 12.5 % $ 26,602.0 $ 23,836.1 $ 2,765.9 11.6 %
For the quarter ended July 2, 2023 compared with the quarter ended July 3, 2022
Total net revenues for the third quarter of fiscal 2023 increased $1.0 billion, primarily due to higher revenues from company-operated stores ($881 million). The growth of company-operated stores revenue was driven by a 10% increase in comparable store sales ($632 million), attributable to a 5% increase in comparable transactions and a 4% increase in average ticket. Also contributing was incremental revenues from 1,265 net new Starbucks ® company-operated stores, or a 7% increase, over the past 12 months ($336 million). Partially offsetting these increases was unfavorable foreign currency translation ($96 million).
Licensed stores revenue increased $179 million contributing to the increase in total net revenues, driven by higher product and equipment sales to and royalty revenues from our licensees ($185 million).
Other revenues decreased $42 million, primarily due to a decline in revenue in the Global Coffee Alliance ($31 million) and the absence of revenues from the Evolution Fresh business following its sale in the fourth quarter of fiscal 2022 ($18 million).
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For the three quarters ended July 2, 2023 compared with the three quarters ended July 3, 2022
Total net revenues for the first three quarters of fiscal 2023 increased $2.8 billion, primarily due to higher revenues from company-operated stores ($2.1 billion). The growth of company-operated stores revenue was driven by a 9% increase in comparable store sales ($1.6 billion) attributed to a 5% increase in average ticket and a 3% increase in transactions. Also contributing to the increase were incremental revenues from 1,265 net new Starbucks company-operated stores, or a 7% increase, over the past 12 months ($907 million). Partially offsetting these increases was unfavorable foreign currency translation ($484 million).
Licensed stores revenue increased $668 million contributing to the increase in total net revenues, driven by higher product and equipment sales to and royalty revenues from our licensees ($716 million). Partially offsetting this increase was unfavorable foreign currency translation ($66 million).
Other revenues decreased $10 million, primarily due to the absence of revenues from the Evolution Fresh business following its sale in the fourth quarter of fiscal 2022 ($55 million), partially offset by an increase in revenue in the Global Coffee Alliance ($32 million).
Operating Expenses
Quarter Ended Three Quarters Ended
Jul 2,
2023 Jul 3,
2022 $
Change
Jul 2,
2023 Jul 3,
2022 Jul 2,
2023 Jul 3,
2022 $
Change Jul 2,
2023 Jul 3,
2022
As a % of
Total Net Revenues As a % of
Total Net Revenues
Product and distribution costs $ 2,864.2 $ 2,613.6 $ 250.6 31.2 % 32.1 % $ 8,476.1 $ 7,606.4 $ 869.7 31.9 % 31.9 %
Store operating expenses 3,697.6 3,302.5 395.1 40.3 40.5 10,998.9 10,017.1 981.8 41.3 42.0
Other operating expenses 138.7 135.1 3.6 1.5 1.7 394.1 338.4 55.7 1.5 1.4
Depreciation and amortization expenses 342.2 356.8 (14.6) 3.7 4.4 1,011.2 1,090.5 (79.3) 3.8 4.6
General and administrative expenses 604.3 486.7 117.6 6.6 6.0 1,805.6 1,494.0 311.6 6.8 6.3
Restructuring and impairments 7.1 14.0 (6.9) 0.1 0.2 21.8 10.9 10.9 0.1 0.0
Total operating expenses 7,654.1 6,908.7 745.4 83.5 84.8 22,707.7 20,557.3 2,150.4 85.4 86.2
Income from equity investees 69.7 54.1 15.6 0.8 0.7 179.0 143.5 35.5 0.7 0.6
Gain from sale of assets — — — — — 91.3 — 91.3 0.3 —
Operating income $ 1,583.9 $ 1,295.5 $ 288.4 17.3 % 15.9 % $ 4,164.6 $ 3,422.3 $ 742.3 15.7 % 14.4 %
Store operating expenses as a % of company-operated stores revenue 48.9 % 49.5 % 50.5 % 50.9 %
For the quarter ended July 2, 2023 compared with the quarter ended July 3, 2022
Product and distribution costs as a percentage of total net revenues decreased 90 basis points for the third quarter of fiscal 2023, primarily due to pricing.
Store operating expenses as a percentage of total net revenues decreased 20 basis points for the third quarter of fiscal 2023. Store operating expenses as a percentage of company-operated stores revenue decreased 60 basis points, primarily due to sales leverage (approximately 250 basis points) and productivity improvement (approximately 190 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) and increased spend on partner training (approximately 50 basis points).
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 that are now fully amortized.
General and administrative expenses increased $118 million, primarily due to incremental investments in technology ($38 million), increased support costs of strategic initiatives including the Reinvention Plan ($27 million), higher performance-based compensation ($20 million) and a donation to the Starbucks Foundation ($15 million).
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Income from equity investees increased $16 million, primarily due to higher income from our North American Coffee Partnership joint venture.
The combination of these changes resulted in an overall increase in operating margin of 140 basis points for the third quarter of fiscal 2023.
For the three quarters ended July 2, 2023 compared with the three quarters ended July 3, 2022
Store operating expenses as a percentage of total net revenues decreased 70 basis points for the first three quarters of fiscal 2023. Store operating expenses as a percentage of company-operated stores revenue decreased 40 basis points, primarily due to pricing (approximately 180 basis points), sales leverage (approximately 160 basis points) and productivity improvement (approximately 130 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) and increased spend on partner training (approximately 50 basis points).
Other operating expenses increased $56 million for the first three quarters of fiscal 2023, primarily due to higher strategic investments in technology and other initiatives ($21 million) and support costs for our growing licensed markets ($21 million).
Depreciation and amortization expenses as a percentage of total net revenues decreased 80 basis points, primarily due to lapping amortization expenses of acquisition-related intangibles assets that are now fully amortized.
General and administrative expenses increased $312 million, primarily due to incremental investments in technology ($103 million), increased support costs of strategic initiatives including the Reinvention Plan ($57 million), higher performance-based compensation ($45 million), donations to the Starbucks Foundation ($30 million) and other labor and leadership support costs ($26 million).
Income from equity investees increased $36 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 130 basis points for the first three quarters of fiscal 2023.
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Other Income and Expenses
Quarter Ended Three Quarters Ended
Jul 2,
2023 Jul 3,
2022 $
Change
Jul 2,
2023 Jul 3,
2022 Jul 2,
2023 Jul 3,
2022 $
Change Jul 2,
2023 Jul 3,
2022
As a % of Total
Net Revenues As a % of Total
Net Revenues
Operating income $ 1,583.9 $ 1,295.5 $ 288.4 17.3 % 15.9 % $ 4,164.6 $ 3,422.3 $ 742.3 15.7 % 14.4 %
Interest income and other, net 21.3 19.8 1.5 0.2 0.2 51.1 66.0 (14.9) 0.2 0.3
Interest expense (140.9) (123.1) (17.8) (1.5) (1.5) (406.9) (357.6) (49.3) (1.5) (1.5)
Earnings before income taxes 1,464.3 1,192.2 272.1 16.0 14.6 3,808.8 3,130.7 678.1 14.3 13.1
Income tax expense 322.4 278.5 43.9 3.5 3.4 903.4 725.9 177.5 3.4 3.0
Net earnings including noncontrolling interests 1,141.9 913.7 228.2 12.5 11.2 2,905.4 2,404.8 500.6 10.9 10.1
Net earnings attributable to noncontrolling interests 0.2 0.8 (0.6) 0.0 0.0 0.2 1.5 (1.3) 0.0 0.0
Net earnings attributable to Starbucks $ 1,141.7 $ 912.9 $ 228.8 12.5 % 11.2 % $ 2,905.2 $ 2,403.3 $ 501.9 10.9 % 10.1 %
Effective tax rate including noncontrolling interests 22.0 % 23.4 % 23.7 % 23.2 %
For the quarter ended July 2, 2023 compared with the quarter ended July 3, 2022
Interest expense increased $18 million, primarily due to higher debt balances and a rising interest rate environment.
The effective tax rate for the quarter ended July 2, 2023 was 22.0% compared to 23.4% for the same period in fiscal 2022. The decrease was primarily due to the release of valuation allowances recorded against certain deferred tax assets of an international jurisdiction (approximately 300 basis points), partially offset by lapping beneficial valuation allowance activity from the prior year.
For the three quarters ended July 2, 2023 compared with the three quarters ended July 3, 2022
Interest income and other, net decreased $15 million, primarily due to lapping higher investment gains in the prior year.
Interest expense increased $49 million, primarily due to higher debt balances and a rising interest rate environment.
The effective tax rate for the first three quarters ended July 2, 2023 was 23.7% compared to 23.2% 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 70 basis points) and a decrease in stock-based compensation excess tax benefits (approximately 50 basis points), offset by the release of valuation allowances recorded against certain deferred tax assets of an international jurisdiction (approximately 120 basis points).
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Segment Information
Results of operations by segment (in millions) :
North America
Quarter Ended Three Quarters Ended
Jul 2,
2023 Jul 3,
2022 $
Change
Jul 2,
2023 Jul 3,
2022 Jul 2,
2023 Jul 3,
2022 $
Change Jul 2,
2023 Jul 3,
2022
As a % of North America
Total Net Revenues As a % of North America
Total Net Revenues
Net revenues:
Company-operated stores $ 6,080.6 $ 5,513.2 $ 567.4 90.2 % 91.0 % $ 17,693.9 $ 15,663.6 $ 2,030.3 90.0 % 90.9 %
Licensed stores 655.8 544.2 111.6 9.7 9.0 1,973.2 1,567.1 406.1 10.0 9.1
Other 1.4 1.0 0.4 0.0 0.0 2.6 5.7 (3.1) 0.0 0.0
Total net revenues 6,737.8 6,058.4 679.4 100.0 100.0 19,669.7 17,236.4 2,433.3 100.0 100.0
Product and distribution costs 1,885.4 1,713.2 172.2 28.0 28.3 5,624.7 4,906.5 718.2 28.6 28.5
Store operating expenses 2,990.1 2,670.0 320.1 44.4 44.1 8,973.2 7,997.8 975.4 45.6 46.4
Other operating expenses 67.8 55.4 12.4 1.0 0.9 196.7 150.7 46.0 1.0 0.9
Depreciation and amortization expenses 230.4 201.2 29.2 3.4 3.3 673.5 603.2 70.3 3.4 3.5
General and administrative expenses 93.1 76.5 16.6 1.4 1.3 286.6 224.5 62.1 1.5 1.3
Restructuring and impairments 7.1 12.0 (4.9) 0.1 0.2 20.7 8.9 11.8 0.1 0.1
Total operating expenses 5,273.9 4,728.3 545.6 78.3 78.0 15,775.4 13,891.6 1,883.8 80.2 80.6
Operating income $ 1,463.9 $ 1,330.1 $ 133.8 21.7 % 22.0 % $ 3,894.3 $ 3,344.8 $ 549.5 19.8 % 19.4 %
Store operating expenses as a % of company-operated stores revenue 49.2 % 48.4 % 50.7 % 51.1 %
For the quarter ended July 2, 2023 compared with the quarter ended July 3, 2022
Revenues
North America total net revenues for the third quarter of fiscal 2023 increased $679 million, or 11%, primarily due to a 7% increase in comparable store sales ($379 million) driven by a 6% 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 ($206 million) and higher product and equipment sales to and royalty revenues from our licensees ($108 million).
Operating Margin
North America operating income for the third quarter of fiscal 2023 increased 10% to $1.5 billion, compared to $1.3 billion in the third quarter of fiscal 2022. Operating margin decreased 30 basis points to 21.7%, primarily due to previously-committed investments in labor, including enhancements in retail store partner wages and benefits (approximately 360 basis points) and increased spend on partner training (approximately 50 basis points), partially offset by pricing (approximately 220 basis points), labor productivity (approximately 210 basis points) and sales leverage.
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For the three quarters ended July 2, 2023 compared with the three quarters ended July 3, 2022
Revenues
North America total net revenues for the first three quarters of fiscal 2023 increased $2.4 billion, or 14%, primarily due to a 10% increase in comparable store sales ($1.5 billion) driven by a 7% increase in average ticket and a 3% increase in transactions. Also contributing to these increases were net new company-operated store openings over the past 12 months ($593 million) and higher product and equipment sales to and royalty revenues from our licensees ($390 million).
Operating Margin
North America operating income for the first three quarters of fiscal 2023 increased 16% to $3.9 billion, compared to $3.3 billion for the same period in fiscal 2022. Operating margin increased 40 basis points to 19.8%, primarily due to pricing (approximately 350 basis points), labor productivity (approximately 150 basis points) and sales leverage. These increases were partially offset by previously-committed investments in labor, including enhancements in retail store partner wages and benefits (approximately 370 basis points) and increased spend on partner training (approximately 50 basis points) as well as inflationary pressures on commodities and our supply chain (approximately 100 basis points).
International
Quarter Ended Three Quarters Ended
Jul 2,
2023 Jul 3,
2022 $
Change
Jul 2,
2023 Jul 3,
2022 Jul 2,
2023 Jul 3,
2022 $
Change
Jul 2,
2023 Jul 3,
2022
As a % of International
Total Net Revenues As a % of International
Total Net Revenues
Net revenues:
Company-operated stores $ 1,476.1 $ 1,162.3 $ 313.8 74.8 % 73.3 % $ 4,088.5 $ 4,011.1 $ 77.4 74.2 % 77.7 %
Licensed stores 480.4 412.6 67.8 24.3 26.0 1,352.0 1,089.9 262.1 24.5 21.1
Other 16.4 9.8 6.6 0.8 0.6 67.3 62.1 5.2 1.2 1.2
Total net revenues 1,972.9 1,584.7 388.2 100.0 100.0 5,507.8 5,163.1 344.7 100.0 100.0
Product and distribution costs 677.3 550.3 127.0 34.3 34.7 1,903.8 1,746.8 157.0 34.6 33.8
Store operating expenses 707.5 632.5 75.0 35.9 39.9 2,025.7 2,019.3 6.4 36.8 39.1
Other operating expenses 54.3 60.2 (5.9) 2.8 3.8 155.0 138.8 16.2 2.8 2.7
Depreciation and amortization expenses 83.1 125.0 (41.9) 4.2 7.9 250.8 391.4 (140.6) 4.6 7.6
General and administrative expenses 77.0 81.8 (4.8) 3.9 5.2 244.9 252.7 (7.8) 4.4 4.9
Total operating expenses 1,599.2 1,449.8 149.4 81.1 91.5 4,580.2 4,549.0 31.2 83.2 88.1
Income from equity investees 0.8 0.4 0.4 0.0 0.0 2.0 1.6 0.4 0.0 0.0
Operating income $ 374.5 $ 135.3 $ 239.2 19.0 % 8.5 % $ 929.6 $ 615.7 $ 313.9 16.9 % 11.9 %
Store operating expenses as a % of company-operated stores revenue 47.9 % 54.4 % 49.5 % 50.3 %
For the quarter ended July 2, 2023 compared with the quarter ended July 3, 2022
Revenues
International total net revenues for the third quarter of fiscal 2023 increased $388 million, or 24%, primarily due to a 24% increase in comparable store sales ($253 million) driven by a 21% increase in customer transactions, primarily attributable to business recovery from COVID-19 pandemic related disruptions in China. Also contributing were 863 net new company-operated store openings, or an 11% increase, over the past 12 months ($131 million) and higher product and equipment sales to and royalty revenues from our licensees ($77 million). These increases were partially offset by unfavorable foreign currency translation ($86 million).
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Operating Margin
International operating income for the third quarter of fiscal 2023 increased 177% to $375 million, compared to $135 million in the third quarter of fiscal 2022. Operating margin increased 1,050 basis points to 19.0%, primarily due to sales leverage (approximately 860 basis points), including lapping prior year mobility restrictions in China. Also contributing was lapping amortization expenses of acquisition-related intangibles assets that are now fully amortized (approximately 260 basis points), partially offset by digital investments (approximately 110 basis points) and inflationary pressures (approximately 100 basis points).
For the three quarters ended July 2, 2023 compared with the three quarters ended July 3, 2022
Revenues
International total net revenues for the first three quarters of fiscal 2023 increased $345 million, or 7%, primarily due to higher product and equipment sales to and royalty revenues from our licensees ($326 million) and 863 net new company-operated store openings, or an 11% increase, over the past 12 months ($314 million). Also contributing was a 5% increase in comparable store sales ($168 million) driven by a 4% increase in customer transactions. These increases were partially offset by unfavorable foreign currency translation ($485 million).
Operating Margin
International operating income for the first three quarters of fiscal 2023 increased 51% to $930 million, compared to $616 million for the same period in fiscal 2022. Operating margin increased 500 basis points to 16.9%, primarily due to sales leverage (approximately 290 basis points) and lapping amortization expenses of acquisition-related intangibles assets that are now fully amortized (approximately 250 basis points).
Channel Development
Quarter Ended Three Quarters Ended
Jul 2,
2023 Jul 3,
2022 $
Change
Jul 2,
2023 Jul 3,
2022 Jul 2,
2023 Jul 3,
2022 $
Change Jul 2,
2023 Jul 3,
2022
As a % of Channel Development
Total Net Revenues As a % of Channel Development
Total Net Revenues
Net revenues $ 448.8 $ 479.7 $ (30.9) $ 1,407.7 $ 1,359.9 $ 47.8
Product and distribution costs 293.0 325.8 (32.8) 65.3 % 67.9 % 932.7 885.2 47.5 66.3 % 65.1 %
Other operating expenses 14.8 13.6 1.2 3.3 2.8 40.6 35.7 4.9 2.9 2.6
Depreciation and amortization expenses 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.0 0.0 0.0
General and administrative expenses 1.9 2.3 (0.4) 0.4 0.5 6.2 8.1 (1.9) 0.4 0.6
Total operating expenses 309.7 341.7 (32.0) 69.0 71.2 979.6 929.1 50.5 69.6 68.3
Income from equity investees 68.9 53.7 15.2 15.4 11.2 177.0 141.9 35.1 12.6 10.4
Gain from sale of assets — — — nm nm 91.3 — 91.3 6.5 % nm
Operating income $ 208.0 $ 191.7 $ 16.3 46.3 % 40.0 % $ 696.4 $ 572.7 $ 123.7 49.5 % 42.1 %
For the quarter ended July 2, 2023 compared with the quarter ended July 3, 2022
Revenues
Channel Development total net revenues for the third quarter of fiscal 2023 decreased $31 million, or 6%, primarily due to a decline in revenue in the Global Coffee Alliance ($31 million).
Operating Margin
Channel Development operating income for the third quarter of fiscal 2023 increased 9% to $208 million, compared to $192 million in the third quarter of fiscal 2022. Operating margin increased 630 basis points to 46.3%, primarily due to growth in our North American Coffee Partnership joint venture income (approximately 410 basis points) and mix shift (approximately 310 basis points).
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For the three quarters ended July 2, 2023 compared with the three quarters ended July 3, 2022
Revenues
Channel Development total net revenues for the first three quarters of fiscal 2023 increased $48 million, or 4%, primarily due to an increase in revenue in the Global Coffee Alliance ($32 million) and growth in our global ready-to-drink business ($27 million).
Operating Margin
Channel Development operating income for the first three quarters of fiscal 2023 increased 22% to $696 million, compared to $573 million for the same period in fiscal 2022. Operating margin increased 740 basis points to 49.5%, primarily due to the gain from sale of our Seattle's Best Coffee brand (approximately 650 basis points) and growth in our North American Coffee Partnership joint venture income (approximately 200 basis points), partially offset by impairment charges against certain manufacturing assets (approximately 120 basis points).
Corporate and Other
Quarter Ended Three Quarters Ended
Jul 2,
2023 Jul 3,
2022 $
Change
%
Change
Jul 2,
2023 Jul 3,
2022 $
Change
%
Change
Net revenues:
Other $ 8.8 $ 27.3 $ (18.5) (67.8) % $ 16.8 $ 76.7 $ (59.9) (78.1) %
Total net revenues 8.8 27.3 (18.5) (67.8) 16.8 76.7 (59.9) (78.1)
Product and distribution costs 8.5 24.3 (15.8) (65.0) 14.9 67.9 (53.0) (78.1)
Other operating expenses 1.8 5.9 (4.1) (69.5) 1.8 13.2 (11.4) (86.4)
Depreciation and amortization expenses 28.7 30.6 (1.9) (6.2) 86.8 95.8 (9.0) (9.4)
General and administrative expenses 432.3 326.1 106.2 32.6 1,267.9 1,008.7 259.2 25.7
Restructuring and impairments — 2.0 (2.0) nm 1.1 2.0 (0.9) (45.0) %
Total operating expenses 471.3 388.9 82.4 21.2 1,372.5 1,187.6 184.9 15.6
Operating loss $ (462.5) $ (361.6) $ (100.9) 27.9 % $ (1,355.7) $ (1,110.9) $ (244.8) 22.0 %
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 July 2, 2023 compared with the quarter ended July 3, 2022
Corporate and Other operating loss increased by 28% to $463 million for the third quarter of fiscal 2023 compared to $362 million for the third quarter of fiscal 2022. This increase was primarily driven by incremental investments in technology ($38 million), increased support costs of strategic initiatives including the Reinvention Plan ($27 million), higher performance-based compensation ($17 million) and a donation to the Starbucks Foundation ($15 million).
For the three quarters ended July 2, 2023 compared with the three quarters ended July 3, 2022
Corporate and Other operating loss increased by 22% to $1.4 billion for the first three quarters of fiscal 2023 compared to $1.1 billion for the same period in fiscal 2022. This increase was primarily driven by incremental investments in technology ($100 million), increased support costs of strategic initiatives including the Reinvention Plan ($57 million), higher performance-based compensation ($33 million) and donations to the Starbucks Foundation ($30 million).
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Quarterly Store Data
Our store data for the periods presented is as follows:
Net stores opened/(closed) and transferred during the period
Quarter Ended Three Quarters Ended Stores open as of
Jul 2,
2023 Jul 3,
2022 Jul 2,
2023 Jul 3,
2022 Jul 2,
2023 Jul 3,
2022
North America
Company-operated stores 105 96 236 189 10,452 10,050
Licensed stores 5 28 61 35 7,140 7,000
Total North America 110 124 297 224 17,592 17,050
International
Company-operated stores 272 130 543 445 8,580 7,717
Licensed stores 206 64 671 446 11,050 10,181
Total International 478 194 1,214 891 19,630 17,898
Total Company 588 318 1,511 1,115 37,222 34,948
Financial Condition, Liquidity and Capital Resources
Cash and Investment Overview
Our cash and investments totaled $3.9 billion as of July 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 July 2, 2023, approximately $2.5 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 $150.0 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, which was most recently amended in April 2023, 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 July 2, 2023, we were in compliance with all applicable covenants. No amounts were outstanding under our 2021 credit facility as of July 2, 2023 or October 2, 2022.
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 July 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
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program. Our total contractual borrowing capacity for general corporate purposes was $3.0 billion as of the end of our third 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 $34.5 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 $69.1 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 July 2, 2023, we had ¥5 billion, or $34.5 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 July 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 third quarter of fiscal 2023, our Board of Directors approved a quarterly cash dividend to shareholders of $0.53 per share to be paid on August 25, 2023 to shareholders of record as of the close of business on August 11, 2023.
During the first quarter of fiscal 2023, we resumed our share repurchase program which was temporarily suspended in April 2022. During the three quarters ended July 2, 2023, we repurchased 6.9 million shares of common stock for $699.3 million. As of July 2, 2023, 45.7 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.
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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 $4.1 billion for the first three quarters of fiscal 2023, compared to $3.3 billion for the same period in fiscal 2022. The change was primarily due to a decrease in net cash used by changes in operating assets and liabilities and higher net earnings during the period.
Cash used in investing activities totaled $1.4 billion for each of the first three quarters of fiscal 2023 and fiscal 2022, respectively. Increased maturities and calls of investments in fiscal 2023 were offset by increased capital expenditures and higher investment purchases.
Cash used in financing activities for the first three quarters of fiscal 2023 totaled $2.1 billion compared to cash used in financing activities of $5.1 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
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. 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.
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.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.