Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
Our fiscal year ends on the Sunday closest to September 30. All references to store counts, including data for new store openings, are reported net of related store closures, unless otherwise noted. Fiscal years 2023 and 2022 included 52 weeks. Fiscal year 2021 included 53 weeks, with the 53rd week falling in the fourth fiscal quarter.
The discussion of our financial condition and results of operations for the fiscal year ended October 3, 2021, included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) can be found in the Annual Report on Form 10-K for the fiscal year ended October 2, 2022.
Overview
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 and Africa, Latin America and the Caribbean; and 3) Channel Development. Non-reportable operating segments and unallocated corporate expenses are reported within Corporate and Other.
Our financial results and long-term growth model will continue to be driven by new store openings, comparable store sales and margin management. 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
• Operating margin
Starbucks results for fiscal 2023 demonstrate the overall strength of our brand. Consolidated revenues increased 12% to $36.0 billion in fiscal 2023 compared to $32.3 billion in fiscal 2022, primarily driven by strength in our U.S. business and growth in our International segment, partially offset by the impact of unfavorable foreign currency translation.
For both the North America segment and U.S. market, comparable store sales increased 9% for fiscal 2023 compared to an increase of 12% in fiscal 2022. Average ticket for both the North America segment and the U.S. market grew 6%, primarily driven by pricing in our U.S. market. The segment also experienced higher costs, primarily related to previously-committed investments in store partner wages and benefits and increased spend on partner training, as well as inflationary pressures on commodities and our supply chain. In fiscal 2022, we announced our Reinvention Plan in the U.S. market to increase efficiency while elevating the partner and customer experience. We believe the investments in partner wages and training have increased retention and in-store operational efficiencies while the acceleration of purpose-built store concepts and innovations in technologies have provided additional convenience and connection with our customers.
For the International segment, despite COVID-19 pandemic-related headwinds in China in the first half of the year, revenue grew 8% in fiscal 2023 compared to fiscal 2022, primarily driven by net new company-operated store openings and higher product sales to and royalty revenues from our licensees. Also contributing to the increase was a 5% increase in comparable store sales, driven by customer transactions, compared to a decrease of 9% in fiscal 2022. These increases were partially offset by the impact of unfavorable foreign currency translation.
Revenue for our Channel Development segment increased 3% in fiscal 2023 compared with fiscal 2022, primarily driven by higher Global Coffee Alliance product sales and royalty revenue and growth in our global ready-to-drink business. In fiscal 2023, we sold the assets associated with the Seattle's Best Coffee brand to Nestlé, which resulted in a pre-tax gain of $91.3 million.
We have seen the strength and resilience of our brand as well as strong customer demand across our portfolio, with revenue and operating margin growth in fiscal 2023. We expect to continue our trend of global new store growth in fiscal 2024, driven by a dynamic portfolio of store formats in the U.S. and leveraging the strength of our brand internationally. We anticipate continued benefits from increased sales leverage and pricing decisions as well as in-store operational efficiencies driven by our Reinvention Plan. We expect the inflationary pressures on commodities and supply chain that impacted fiscal 2023 to moderate in fiscal 2024, relative to the impact on our business and financial metrics, including operating margin. Absent global economic disruptions, and based on the current trend of our business operations and our focused efforts on the Reinvention Plan, we are confident in the strength of our brand and strategy for sustainable, profitable growth over the long-term.
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Financial Highlights
• Total net revenues increased 12% to $36.0 billion in fiscal 2023 compared to $32.3 billion in fiscal 2022.
• Consolidated operating income increased to $5.9 billion in fiscal 2023 compared to $4.6 billion in fiscal 2022. Fiscal 2023 operating margin was 16.3% compared to 14.3% in fiscal 2022. Operating margin expansion of 200 basis points was primarily due to pricing (approximately 250 basis points), sales leverage (approximately 240 basis points) and in-store operational efficiencies (approximately 160 basis points). These increases were partially offset by previously-committed investments in store partner wages (approximately 250 basis points) and higher general and administrative expenses, primarily in support of our Reinvention Plan (approximately 130 basis points).
• Diluted earnings per share (“EPS”) for fiscal 2023 increased to $3.58, compared to EPS of $2.83 in fiscal 2022. The increase was primarily driven by sales growth and in-store operational efficiencies. This increase was partially offset by previously-committed investments in store partner wages and higher general and administrative expenses, primarily in support of our Reinvention Plan.
• Capital expenditures were $2.3 billion in fiscal 2023 and $1.8 billion in fiscal 2022.
• We returned $3.4 billion to our shareholders in fiscal 2023 through share repurchases and dividends. We returned $6.3 billion in fiscal 2022 through share repurchases and dividends.
Acquisitions and Divestitures
See Note 2 , Acquisitions, Divestitures and Strategic Alliance, to the consolidated financial statements included in Item 8 of Part II of this 10-K for information regarding acquisitions and divestitures.
RESULTS OF OPERATIONS — FISCAL 2023 COMPARED TO FISCAL 2022
Consolidated results of operations (in millions) :
Revenues
Fiscal Year Ended Oct 1,
2023 Oct 2,
2022 %
Change
Net revenues:
Company-operated stores $ 29,462.3 $ 26,576.1 10.9 %
Licensed stores 4,512.7 3,655.5 23.4
Other 2,000.6 2,018.7 (0.9)
Total net revenues $ 35,975.6 $ 32,250.3 11.6 %
Total net revenues increased $3.7 billion, or 12%, over fiscal 2022, primarily due to higher revenues from company-operated stores ($2.9 billion). The growth in company-operated store revenue was driven by an 8% increase in comparable store sales ($2.1 billion) attributed to a 5% increase in average ticket and 3% increase in comparable transactions. Also contributing were the incremental revenues from 1,339 net new Starbucks company-operated store openings, or a 7% increase, over the past 12 months ($1.2 billion). These increases were partially offset by the impact of unfavorable foreign currency translation ($555 million).
Licensed stores revenue increased $857 million, primarily driven by higher product and equipment sales to and royalty revenues from our licensees ($898 million), largely due to revenue growth from existing stores and the opening of 988 net new Starbucks licensed stores over the past 12 months, partially offset by the impact of unfavorable foreign currency translation ($64 million).
Other revenues decreased $18 million, primarily due to the absence of revenues from the Evolution Fresh business following its sale in the fourth quarter of fiscal 2022 ($60 million), partially offset by an increase in revenue in the Global Coffee Alliance ($37 million).
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Operating Expenses
Fiscal Year Ended Oct 1,
2023 Oct 2,
2022 Oct 1,
2023 Oct 2,
2022
As a % of Total
Net Revenues
Product and distribution costs $ 11,409.1 $ 10,317.4 31.7 % 32.0 %
Store operating expenses 14,720.3 13,561.8 40.9 42.1
Other operating expenses 539.4 461.5 1.5 1.4
Depreciation and amortization expenses 1,362.6 1,447.9 3.8 4.5
General and administrative expenses 2,441.3 2,032.0 6.8 6.3
Restructuring and impairments 21.8 46.0 0.1 0.1
Total operating expenses 30,494.5 27,866.6 84.8 86.4
Income from equity investees 298.4 234.1 0.8 0.7
Gain from sale of assets 91.3 — 0.3 —
Operating income $ 5,870.8 $ 4,617.8 16.3 % 14.3 %
Store operating expenses as a % of related revenues 50.0 % 51.0 %
Product and distribution costs as a percentage of total net revenues decreased 30 basis points, primarily due to pricing (approximately 120 basis points), partially offset by inflationary pressures on commodities and our supply chain (approximately 80 basis points).
Store operating expenses as a percentage of total net revenues decreased 120 basis points. Store operating expenses as a percentage of company-operated store revenues decreased 100 basis points, primarily due to in-store operational efficiencies (approximately 160 basis points), sales leverage (approximately 160 basis points) and pricing (approximately 160 basis points). These were partially offset by previously-committed investments in store partner wages and benefits (approximately 290 basis points) and increased spend on partner training (approximately 30 basis points).
Other operating expenses increased $78 million, primarily due to higher strategic investments in technology and other initiatives ($32 million) and support costs for our growing licensed markets ($25 million).
Depreciation and amortization expenses as a percentage of total net revenues decreased 70 basis points, primarily due to lapping amortization expenses of acquisition-related intangibles assets that are now fully amortized.
General and administrative expenses increased $409.3 million, primarily due to incremental investments in technology ($140 million), increased support costs of strategic initiatives including the Reinvention Plan ($86 million), higher performance-based compensation ($74 million) and other labor and leadership support costs ($31 million).
Income from equity investees increased $64 million, primarily due to higher income from our North American Coffee Partnership joint venture ($64 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 200 basis points in fiscal 2023 when compared to fiscal 2022.
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Other Income and Expenses
Fiscal Year Ended Oct 1,
2023 Oct 2,
2022 Oct 1,
2023 Oct 2,
2022
As a % of Total
Net Revenues
Operating income $ 5,870.8 $ 4,617.8 16.3 % 14.3 %
Interest income and other, net 81.2 97.0 0.2 0.3
Interest expense (550.1) (482.9) (1.5) (1.5)
Earnings before income taxes 5,401.9 4,231.9 15.0 13.1
Income tax expense 1,277.2 948.5 3.6 2.9
Net earnings including noncontrolling interests 4,124.7 3,283.4 11.5 10.2
Net earnings/(loss) attributable to noncontrolling interests 0.2 1.8 0.0 0.0
Net earnings attributable to Starbucks $ 4,124.5 $ 3,281.6 11.5 % 10.2 %
Effective tax rate including noncontrolling interests 23.6 % 22.4 %
Interest income and other, net decreased $16 million, primarily due to lapping higher investment gains in the prior year.
Interest expense increased $67 million primarily due to higher debt balances and higher interest rates.
The effective tax rate for fiscal 2023 was 23.6% compared to 22.4% for fiscal 2022.The increase was due to lapping a beneficial return-to-provision adjustment related to the divestiture of certain joint venture operations (approximately 50 basis points) and a year-over-year decrease in beneficial valuation allowance activity related to international jurisdictions (approximately 40 basis points). See Note 14 , Income Taxes, for further discussion.
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Segment Information
Results of operations by segment (in millions) :
North America
Fiscal Year Ended Oct 1,
2023 Oct 2,
2022 Oct 1,
2023 Oct 2,
2022
As a % of North America
Total Net Revenues
Net revenues:
Company-operated stores $ 23,905.4 $ 21,214.2 90.0 % 90.8 %
Licensed stores 2,659.1 2,150.5 10.0 9.2
Other 5.1 6.1 0.0 0.0
Total net revenues 26,569.6 23,370.8 100.0 100.0
Product and distribution costs 7,530.4 6,677.2 28.3 28.6
Store operating expenses 11,959.2 10,860.0 45.0 46.5
Other operating expenses 263.8 202.1 1.0 0.9
Depreciation and amortization expenses 910.1 808.4 3.4 3.5
General and administrative expenses 389.7 303.3 1.5 1.3
Restructuring and impairments 20.7 33.3 0.1 0.1
Total operating expenses 21,073.9 18,884.3 79.3 80.8
Operating income $ 5,495.7 $ 4,486.5 20.7 % 19.2 %
Store operating expenses as a % of related revenues 50.0 % 51.2 %
Revenues
North America total net revenues for fiscal 2023 increased $3.2 billion, or 14%, primarily due to a 9% increase in comparable store sales ($1.9 billion) driven by a 6% increase in average ticket and a 3% increase in comparable transactions. Also contributing to the increase were the performance of net new company-operated store openings over the past 12 months ($813 million) and higher product and equipment sales to and royalty revenues from our licensees ($487 million).
Operating Margin
North America operating income for fiscal 2023 increased 22% to $5.5 billion, compared to $4.5 billion in fiscal 2022. Operating margin expanded 150 basis points to 20.7%, primarily due to pricing (approximately 300 basis points), in-store operational efficiencies (approximately 230 basis points) and sales leverage. These were partially offset by previously-committed investments in store partner wages and benefits (approximately 300 basis points) and increased spend on partner training (approximately 40 basis points), as well as inflationary pressures on commodities and our supply chain (approximately 80 basis points).
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International
Fiscal Year Ended Oct 1,
2023 Oct 2,
2022 Oct 1,
2023 Oct 2,
2022
As a % of International
Total Net Revenues
Net revenues:
Company-operated stores $ 5,556.9 $ 5,361.9 74.2 % 77.3 %
Licensed stores 1,853.6 1,505.0 24.8 21.7
Other 77.1 73.2 1.0 1.1
Total net revenues 7,487.6 6,940.1 100.0 100.0
Product and distribution costs 2,608.4 2,357.7 34.8 34.0
Store operating expenses 2,761.1 2,701.8 36.9 38.9
Other operating expenses 219.0 191.4 2.9 2.8
Depreciation and amortization expenses 335.1 513.0 4.5 7.4
General and administrative expenses 335.8 345.3 4.5 5.0
Total operating expenses 6,259.4 6,109.2 83.6 88.0
Income from equity investees 2.7 2.3 0.0 0.0
Operating income $ 1,230.9 $ 833.2 16.4 % 12.0 %
Store operating expenses as a % of related revenues 49.7 % 50.4 %
Revenues
International total net revenues for fiscal 2023 increased $548 million, or 7.9%, primarily due to 927 net new Starbucks company-operated stores, or a 12% increase over the past 12 months ($421 million), as well as higher product sales to and royalty revenues from our licensees ($411 million). Also contributing to the increase was a 5% increase in comparable store sales ($233 million), primarily driven by customer transactions. These were partially offset by the impact of unfavorable foreign currency translation ($543 million).
Operating Margin
International operating income for fiscal 2023 increased 48% to $1.2 billion, compared to $833.2 million in fiscal 2022. Operating margin increased 440 basis points to 16.4%, primarily due to sales leverage (approximately 270 basis points) and lapping amortization expenses of acquisition-related intangibles assets that are now fully amortized (approximately 240 basis points).
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Channel Development
Fiscal Year Ended Oct 1,
2023 Oct 2,
2022 Oct 1,
2023 Oct 2,
2022
As a % of Channel Development
Total Net Revenues
Net revenues $ 1,893.8 $ 1,843.6
Product and distribution costs 1,250.1 1,194.2 66.0 % 64.8 %
Other operating expenses 54.6 51.6 2.9 2.8
Depreciation and amortization expenses 0.1 0.1 0.0 0.0
General and administrative expenses 8.4 12.2 0.4 0.7
Total operating expenses 1,313.2 1,258.1 69.3 68.2
Income from equity investees 295.7 231.8 15.6 12.6
Gain from sale of assets 91.3 — 4.8 —
Operating income $ 967.6 $ 817.3 51.1 % 44.3 %
Revenues
Channel Development total net revenues for fiscal 2023 increased $50 million, or 3%, compared to fiscal 2022, primarily due to higher Global Coffee Alliance product sales and royalty revenue ($37 million) and growth in our ready-to-drink business ($22 million).
Operating Margin
Channel Development operating income for fiscal 2023 increased 18% to $968 million, compared to $817 million in fiscal 2022. Operating margin increased 680 basis points to 51.1%, primarily due to the gain from sale of our Seattle's Best Coffee brand (approximately 480 basis points) and growth in our North American Coffee Partnership joint venture income (approximately 300 basis points), partially offset by impairment charges against certain manufacturing assets (approximately 100 basis points).
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Corporate and Other
Fiscal Year Ended Oct 1,
2023 Oct 2,
2022 %
Change
Net revenues:
Other $ 24.6 $ 95.8 (74.3) %
Total net revenues 24.6 95.8 (74.3)
Product and distribution costs 20.2 88.3 (77.1)
Other operating expenses 2.0 16.4 (87.8)
Depreciation and amortization expenses 117.3 126.4 (7.2)
General and administrative expenses 1,707.4 1,371.2 24.5
Restructuring and impairments 1.1 12.7 (91.3)
Total operating expenses 1,848.0 1,615.0 14.4
Operating loss $ (1,823.4) $ (1,519.2) 20.0 %
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.
Corporate and Other operating loss increased to $1.8 billion for fiscal 2023, or 20%, compared to $1.5 billion in fiscal 2022. This increase was primarily driven by incremental investments in technology ($131 million), increased support costs of strategic initiatives including the Reinvention Plan ($86 million) and higher performance-based compensation ($56 million).
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash and Investment Overview
Our cash and investments were $4.2 billion and $3.5 billion as of October 1, 2023 and October 2, 2022, respectively. We actively manage our cash and investments in order to internally fund operating needs, make scheduled interest and principal payments on our borrowings, fund acquisitions and return cash to shareholders through common stock cash dividend payments and share repurchases. Our investment portfolio primarily includes highly liquid available-for-sale securities, including corporate debt securities, government treasury securities (domestic and foreign) and commercial paper as well as principal-protected structured deposits. As of October 1, 2023, approximately $2.5 billion of cash and short-term investments were held in foreign subsidiaries.
Borrowing Capacity
Credit Facilities and Commercial Paper
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 October 1, 2023, we were in compliance with all applicable covenants. No amounts were outstanding under our 2021 credit facility as of October 1, 2023 or October 2, 2022.
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Our total contractual borrowing capacity for general corporate purposes was $3.0 billion as of the end of fiscal 2023.
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 our 2021 credit facility. The proceeds from borrowings under our commercial paper program may be used for working capital needs, capital expenditures and other corporate purposes, including, but not limited to, business expansion, payment of cash dividends on our common stock and share repurchases. As of October 1, 2023, we had no amounts outstanding under our commercial paper program. As of October 2, 2022, we had $175.0 million in borrowings outstanding under this program.
Credit Facilities in Japan
Additionally, we hold the following Japanese yen-denominated credit facilities that are are available for working capital needs and capital expenditures within our Japanese market:
• A ¥5 billion, or $33.5 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 $67.0 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 October 1, 2023 we had ¥5 billion, or $33.5 million, of borrowings outstanding under these credit facilities. As of October 2, 2022, we had no borrowings outstanding under these credit facilities.
See Note 9 , Debt, to the consolidated financial statements included in Item 8 of Part II of this 10-K 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 October 1, 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, refinancing debt maturities, 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 partial indefinite reinvestment of foreign earnings. In the event we determine that all or another 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. See Note 14 , Income Taxes, for further discussion.
During each of the first three quarters of fiscal 2022, we declared a cash dividend to shareholders of $0.49 per share. During the fourth quarter of fiscal 2022, and for each of the first three quarters of fiscal 2023, we declared a cash dividend of $0.53 per
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share. Dividends are generally paid in the quarter following the declaration date. Cash returned to shareholders through dividends in fiscal 2023 and 2022 totaled $2.4 billion and $2.3 billion, respectively. During the fourth quarter of fiscal 2023, we declared a cash dividend of $0.57 per share to be paid on November 24, 2023, with an expected payout of approximately $651.2 million.
During the fiscal year ended October 2, 2022, we repurchased 36.3 million shares of common stock for $4.0 billion on the open market. During the fiscal year ended October 1, 2023, we repurchased 10.0 million shares of common stock for $1.0 billion on the open market. On March 15, 2022, we announced that our Board authorized the repurchase of up to an additional 40 million shares under our ongoing share repurchase program. As of October 1, 2023, 42.6 million shares remained available for repurchase under current authorizations.
Other than normal operating expenses, cash requirements for fiscal 2024 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 2024 are expected to be approximately $3.0 billion.
The following table summarizes current and long-term material cash requirements as of October 1, 2023, which we expect to fund primarily with operating cash flows ( in millions ):
Material Cash Requirements
Total Less than 1
Year
1 - 3
Years
3 - 5
Years
More than
5 Years
Operating lease obligations (1)
$ 10,594.2 $ 1,577.6 $ 2,931.1 $ 2,206.9 $ 3,878.6
Debt obligations
Principal payments 15,519.3 1,819.3 2,750.0 1,100.0 9,850.0
Interest payments 6,362.2 520.8 909.3 740.6 4,191.5
Purchase obligations (2)
1,078.4 694.6 311.4 72.4 —
Other obligations (3)
391.4 114.4 145.6 33.4 98.0
Total $ 33,945.5 $ 4,726.7 $ 7,047.4 $ 4,153.3 $ 18,018.1
(1) Amounts include direct lease obligations, excluding any taxes, insurance and other related expenses.
(2) Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on Starbucks and that specify all significant terms. Green coffee purchase commitments comprise 92% of total purchase obligations.
(3) Other obligations include other long-term liabilities primarily consisting of long-term income taxes payable, asset retirement obligations, equity investment capital commitments and finance lease obligations.
Cash Flows
Cash provided by operating activities was $6.0 billion for fiscal 2023, compared to $4.4 billion for fiscal 2022. The change was primarily due to a decrease in net cash used by changes in operating assets and liabilities, including lower inventory purchases driven by reduced coffee commodity prices, and higher net earnings during the period.
Cash used in investing activities was $2.3 billion for fiscal 2023, compared to $2.1 billion for fiscal 2022. The change was primarily due to an increase in spend on capital expenditures and increased purchases of investments in fiscal 2023, partially offset by increased maturities and calls of investments in fiscal 2023.
Cash used in financing activities was $3.0 billion for fiscal 2023, compared to $5.6 billion for fiscal 2022. The change was primarily due to a decrease in share repurchase activities, partially offset by an increase in net payments of commercial paper.
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 , as well as Risk Factors in Item 1A of this 10-K.
FINANCIAL RISK MANAGEMENT
Market risk is defined as the risk of losses due to changes in commodity prices, foreign currency exchange rates, equity security prices and interest rates. We manage our exposure to various market-based risks according to a market price risk management policy. Under this policy, market-based risks are quantified and evaluated for potential mitigation strategies, such as entering into hedging transactions. The market price risk management policy governs how hedging instruments may be used to mitigate
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risk. Risk limits are set annually and speculative trading activities are prohibited. We also monitor and limit the amount of associated counterparty credit risk, which we consider to be low. We use interest rate swap agreements and treasury locks to primarily hedge against changes in benchmark interest rates related to anticipated debt issuances. We also use cross-currency swaps and foreign exchange debt instruments to hedge against changes in the fair value of our net investments in foreign operations. Excluding interest rate hedging instruments, cross currency swaps and foreign currency debt, hedging instruments generally do not have maturities in excess of three years. Refer to Note 1 , Summary of Significant Accounting Policies and Estimates, and Note 3 , Derivative Financial Instruments, to the consolidated financial statements included in Item 8 of Part II of this 10-K for further discussion of our hedging instruments.
The sensitivity analyses disclosed below provide only a limited, point-in-time view of the market risk of the financial instruments discussed. The actual impact of the respective underlying rates and price changes on the financial instruments may differ significantly from those shown in the sensitivity analyses.
Commodity Price Risk
We purchase commodity inputs, primarily coffee, dairy products, diesel, cocoa, sugar and other commodities, that are used in our operations and are subject to price fluctuations that impact our financial results. We use a combination of pricing features embedded within supply contracts, such as fixed-price and price-to-be-fixed contracts and financial derivatives to manage our commodity price risk exposure.
The following table summarizes the potential impact as of October 1, 2023 to Starbucks future net earnings and other comprehensive income (“OCI”) from changes in commodity prices. The information provided below relates only to the hedging instruments and does not represent the corresponding changes in the underlying hedged items (in millions) :
Increase/(Decrease) to Net Earnings Increase/(Decrease) to OCI
10% Increase in
Underlying Rate
10% Decrease in
Underlying Rate 10% Increase in
Underlying Rate 10% Decrease in
Underlying Rate
Commodity hedges $ 1.2 $ (1.2) $ 33 $ (33)
Foreign Currency Exchange Risk
The majority of our revenue, expense and capital purchasing activities are transacted in U.S. dollars. However, because a portion of our operations consists of activities outside of the U.S., we have transactions in other currencies, primarily the Chinese renminbi, Japanese yen, Canadian dollar, British pound, South Korean won and euro. To reduce cash flow volatility from foreign currency fluctuations, we enter into derivative instruments to hedge portions of cash flows of anticipated intercompany royalty payments, inventory purchases, intercompany borrowing and lending activities and certain other transactions in currencies other than the functional currency of the entity that enters into the arrangements, as well as the translation risk of certain balance sheet items. The volatility in the foreign exchange market may lead to significant fluctuation in foreign currency exchange rates and adversely impact our financial results in the case of weakening foreign currencies relative to the U.S. dollar.
The following table summarizes the potential impact as of October 1, 2023 to Starbucks future net earnings and other comprehensive income from changes in the fair value of these derivative financial instruments due to a change in the value of the U.S. dollar as compared to foreign exchange rates. The information provided below relates only to the hedging instruments and does not represent the corresponding changes in the underlying hedged items ( in millions ):
Increase/(Decrease) to Net Earnings Increase/(Decrease) to OCI
10% Increase in
Underlying Rate 10% Decrease in
Underlying Rate 10% Increase in
Underlying Rate 10% Decrease in
Underlying Rate
Foreign currency hedges $ 27 $ (27) $ 197 $ (197)
Equity Security Price Risk
We have minimal exposure to price fluctuations on equity mutual funds and equity exchange-traded funds within our marketable equity securities portfolio. Marketable equity securities are recorded at fair value and approximates a portion of our liability under our Management Deferred Compensation Plan (“MDCP”). Gains and losses from the portfolio and the change in our MDCP liability are recorded in our consolidated statements of earnings.
We performed a sensitivity analysis based on a 10% change in the underlying equity prices of our investments as of October 1, 2023 and determined that such a change would not have a significant impact on the fair value of these instruments.
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Interest Rate Risk
Long-term Debt
We utilize short-term and long-term financing and may use interest rate hedges to manage our overall interest expense related to our existing fixed-rate debt, as well as to hedge the variability in cash flows due to changes in benchmark interest rates related to anticipated debt issuances. See Note 3 , Derivative Financial Instruments and Note 9 , Debt, to the consolidated financial statements included in Item 8 of Part II of this 10-K for further discussion of our interest rate hedge agreements and details of the components of our long-term debt, respectively, as of October 1, 2023.
The following table summarizes the impact of a change in interest rates as of October 1, 2023 on the fair value of Starbucks debt (in millions) :
Fair Value Decrease in Fair Value for a 100 Basis Point Increase in Underlying Rate
Long-term debt (1)(2)
$ 13,426 $ (820)
(1) Amount disclosed is net of $16 million change in the fair value of our designated interest rate swaps. Refer to Note 3 , Derivative Financial Instruments, for additional information on our interest rate swap designated as a fair value hedge.
(2) Includes $750 million in Senior Notes that matured on October 1, 2023 but remained in current portion of long-term debt on the consolidated balance sheet as the debt repayment was not made until the first day of fiscal 2024.
Available-for-Sale Debt Securities
Our available-for-sale securities comprise a diversified portfolio consisting mainly of investment-grade debt securities. The primary objective of these investments is to preserve capital and liquidity. Available-for-sale securities are recorded on the consolidated balance sheets at fair value with unrealized gains and losses reported as a component of accumulated other comprehensive income. We do not hedge the interest rate exposure on our investments. We performed a sensitivity analysis based on a 100 basis point change in the underlying interest rate of our available-for-sale securities as of October 1, 2023 and determined that such a change would not have a significant impact on the fair value of these instruments.
CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are those that management believes are the most important to the portrayal of our financial condition and results and require the most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Judgments and uncertainties may result in materially different amounts being reported under different conditions or using different assumptions.
Our significant accounting estimates are discussed in additional detail in Note 1 , Summary of Significant Accounting Policies and Estimates, to the consolidated financial statements included in Item 8 of Part II of this 10-K. We consider financial reporting and disclosure practices and accounting policies quarterly to ensure that they provide accurate and transparent information relative to the current economic and business environment. During the past five fiscal years, we have not made any material changes to the accounting methodologies used to assess the areas discussed below, unless noted otherwise. We believe that our significant accounting estimates involve a higher degree of judgment and/or complexity for the reasons discussed below:
Income Taxes
We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the respective tax bases of our assets and liabilities. Deferred tax assets and liabilities are measured using current enacted tax rates expected to apply to taxable income in the years in which we expect the temporary differences to reverse. We routinely evaluate the likelihood of realizing the benefit of our deferred tax assets and may record a valuation allowance if, based on all available evidence, we determine that some portion of the tax benefit will not be realized.
In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies and results of operations. In projecting future taxable income, we consider historical results and incorporate assumptions about the amount of future state, federal and foreign pre-tax operating income adjusted for items that do not have tax consequences. Our assumptions regarding future taxable income are consistent with the plans and estimates we use to manage our underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income/(loss).
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In addition, our income tax returns are periodically audited by domestic and foreign tax authorities. These audits include review of our tax filing positions, such as the timing and amount of deductions taken and the allocation of income between tax jurisdictions. We evaluate our exposures associated with our various tax filing positions and recognize a tax benefit only if it is more likely than not that the tax position will be sustained upon examination by the relevant taxing authorities, including resolutions of any related appeals or litigation processes, based on the technical merits of our position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. For uncertain tax positions that do not meet this threshold, we record a related liability. We adjust our unrecognized tax benefit liability and income tax expense in the period in which the uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position or when new information becomes available. As discussed in Note 14 , Income Taxes, to the consolidated financial statements included in Item 8 of Part II of this 10-K, there is a reasonable possibility that our unrecognized tax benefit liability will be adjusted within 12 months due to the expiration of a statute of limitations and/or resolution of examinations with taxing authorities.
We have generated income in certain foreign jurisdictions that may be subject to additional foreign withholding taxes and U.S. state income taxes. We regularly review our plans for reinvestment or repatriation of unremitted foreign earnings. The possibility exists that foreign earnings declared as indefinitely reinvested may be repatriated as our plans are based on our estimated working and other capital needs in jurisdictions where our earnings are generated. While we do not expect to repatriate cash to the U.S. to satisfy domestic liquidity needs, if these amounts were distributed to the U.S., in the form of dividends or otherwise, we may be subject to additional foreign withholding taxes and U.S. state income taxes, which could be material.
Our income tax expense, deferred tax assets and liabilities for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid. Deferred tax asset valuation allowances and our liabilities for unrecognized tax benefits require significant management judgment regarding applicable statutes and their related interpretation, the status of various income tax audits and our particular facts and circumstances. Although we believe that the judgments and estimates discussed herein are reasonable, actual results, including forecasted business performance, could differ, and we may be exposed to losses or gains that could be material. To the extent we prevail in matters for which a liability has been established or are required to pay amounts in excess of our established liability, our effective income tax rate in a given financial statement period could be materially affected.
Property, Plant and Equipment and Other Finite-Lived Assets
We evaluate property, plant and equipment, operating lease right-of-use (“ROU”) assets and other finite-lived assets for impairment when facts and circumstances indicate that the carrying values of such assets may not be recoverable. When evaluating for impairment, we first compare the carrying value of the asset to the asset’s estimated future undiscounted cash flows. If the estimated undiscounted future cash flows are less than the carrying value of the asset, we determine if we have an impairment loss by comparing the carrying value of the asset to the asset's estimated fair value and recognize an impairment charge when the asset’s carrying value exceeds its estimated fair value. The adjusted carrying amount of the asset becomes its new cost basis and is depreciated over the asset's remaining useful life.
Long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For company-operated store assets, the impairment test is performed at the individual store asset group level, which is inclusive of property, plant and equipment and lease ROU assets. The fair value of a store’s assets is estimated using a discounted cash flow model. For other long-lived assets, fair value is determined using an approach that is appropriate based on the relevant facts and circumstances, which may include discounted cash flows, comparable transactions or comparable company analyses.
Our impairment calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values. Key assumptions used in estimating future cash flows and asset fair values include projected revenue growth and operating expenses, as well as forecasting asset useful lives and selecting an appropriate discount rate. For company-operated stores, estimates of revenue growth and operating expenses are based on internal projections and consider the store’s historical performance, the local market economics and the business environment impacting the store’s performance. The discount rate is selected based on what we believe a buyer would assume when determining a purchase price for the store. The fair value of a store’s ROU asset is estimated considering what a market participant would pay to lease the asset for its highest and best use. These estimates are subjective and our ability to realize future cash flows and asset fair values is affected by factors such as ongoing maintenance and improvement of the assets, changes in economic conditions and changes in operating performance.
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In fiscal 2022, we announced our Reinvention Plan in the U.S. market to increase efficiency while elevating the partner and customer experience. As a result of the restructuring efforts in connection with the Reinvention Plan, we recorded immaterial impairment charges on our consolidated statements of earnings during the fiscal years ended October 1, 2023 and October 2, 2022. Future impairment charges attributed to our Reinvention Plan are not expected to be material.
Asset impairment charges are discussed in Note 1 , Summary of Significant Accounting Policies and Estimates, to the consolidated financial statements included in Item 8 of Part II of this 10-K.
Goodwill and Indefinite-Lived Intangible Assets
We evaluate goodwill and indefinite-lived intangible assets for impairment annually during our third fiscal quarter, or more frequently if an event occurs or circumstances change that would indicate impairment may exist. When evaluating these assets for impairment, we may first perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. If we do not perform a qualitative assessment, or if we determine that it is not more likely than not that the fair value of the reporting unit exceeds its carrying amount, we calculate the estimated fair value of the reporting unit using discounted cash flows or a combination of discounted cash flow and market approaches.
When assessing goodwill for impairment, our decision to perform a qualitative impairment assessment for an individual reporting unit is influenced by a number of factors, inclusive of the carrying value of the reporting unit’s goodwill, the significance of the excess of the reporting unit’s estimated fair value over carrying value at the last quantitative assessment date, the amount of time in between quantitative fair value assessments and the date of acquisition. If we perform a quantitative assessment of an individual reporting unit’s goodwill, our impairment calculations contain uncertainties because they require management to make assumptions and to apply judgment when estimating future cash flows and asset fair values, including projected revenue growth and operating expenses related to existing businesses, product innovation and new store concepts, as well as utilizing valuation multiples of similar publicly traded companies and selecting an appropriate discount rate. Estimates of revenue growth and operating expenses are based on internal projections considering the reporting unit’s past performance and forecasted growth, strategic initiatives, local market economics and the local business environment impacting the reporting unit’s performance. The discount rate is selected based on the estimated cost of capital for a market participant to operate the reporting unit in the region. These estimates, as well as the selection of comparable companies and valuation multiples used in the market approaches are highly subjective, and our ability to realize the future cash flows used in our fair value calculations is affected by factors such as the success of strategic initiatives, changes in economic conditions, changes in our operating performance and changes in our business strategies, including retail initiatives and international expansion. We continue to believe the fair value of each of our reporting units is significantly in excess of its carrying value, and absent a sustained multi-year global decline in our business in key markets such as the U.S. and China, we do not anticipate incurring significant goodwill impairment in the next 12 months. Our fiscal 2023 annual goodwill impairment testing was completed in the third fiscal quarter. Where a quantitative assessment was performed, the estimated fair value of our reporting units exceeded carrying value by approximately $101 billion.
When assessing indefinite-lived intangible assets for impairment, where we perform a qualitative assessment, we evaluate if changes in events or circumstances have occurred that indicate that impairment may exist. If we do not perform a qualitative impairment assessment or if changes in events and circumstances indicate that a quantitative assessment should be performed, management is required to calculate the fair value of the intangible asset group. The fair value calculation includes estimates of revenue growth, which are based on past performance and internal projections for the intangible asset group’s forecasted growth, and royalty rates, which are adjusted for our particular facts and circumstances. The discount rate is selected based on the estimated cost of capital that reflects the risk profile of the related business. These estimates are highly subjective, and our ability to achieve the forecasted cash flows used in our fair value calculations is affected by factors such as the success of strategic initiatives, changes in economic conditions, changes in our operating performance and changes in our business strategies, including retail initiatives and international expansion. We do not anticipate recording significant impairment charges in the next 12 months.
Definite-lived intangible asset impairment charges are discussed in Note 8 , Other Intangible Assets and Goodwill, to the consolidated financial statements included in Item 8 of Part II of this 10-K.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 , Summary of Significant Accounting Policies and Estimates, to the consolidated financial statements included in Item 8 of Part II of this 10-K for a detailed description of recent accounting pronouncements.