STARBUCKS CORP - Quarter Report: 2019 December (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 29, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 0-20322
Starbucks Corporation
(Exact Name of Registrant as Specified in its Charter)
| Washington | 91-1325671 | ||||
(State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) | ||||
2401 Utah Avenue South, Seattle, Washington 98134
(Address of principal executive offices)
(206) 447-1575
(Registrant’s Telephone Number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title | Trading Symbol | Name of each exchange on which registered | ||||||
| Common Stock, par value $0.001 per share | SBUX | NASDAQ Global Select Market | ||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | x | Accelerated filer | ¨ | Non-accelerated filer | ¨ | Smaller reporting company | ☐ | ||||||||||||||||
| Emerging growth company | ☐ | ||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Shares Outstanding as of January 22, 2020 | ||
| 1,173.7 million | ||
STARBUCKS CORPORATION
FORM 10-Q
For the Quarterly Period Ended December 29, 2019
Table of Contents
| PART I. FINANCIAL INFORMATION | ||||||||
| Item 1 | ||||||||
| Item 2 | ||||||||
| Item 3 | ||||||||
| Item 4 | ||||||||
| PART II. OTHER INFORMATION | ||||||||
| Item 1 | ||||||||
| Item 1A | ||||||||
| Item 2 | ||||||||
| Item 6 | ||||||||
PART I — FINANCIAL INFORMATION
Item 1.Financial Statements
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(in millions, except per share data)
(unaudited)
| Quarter Ended | |||||||||||
| Dec 29, 2019 | Dec 30, 2018 | ||||||||||
| Net revenues: | |||||||||||
| Company-operated stores | $ | 5,780.7 | $ | 5,370.3 | |||||||
| Licensed stores | 792.0 | 737.1 | |||||||||
| Other | 524.4 | 525.3 | |||||||||
| Total net revenues | 7,097.1 | 6,632.7 | |||||||||
| Cost of sales | 2,236.4 | 2,175.8 | |||||||||
| Store operating expenses | 2,821.5 | 2,586.8 | |||||||||
| Other operating expenses | 101.8 | 97.6 | |||||||||
| Depreciation and amortization expenses | 351.0 | 333.4 | |||||||||
| General and administrative expenses | 434.2 | 448.0 | |||||||||
| Restructuring and impairments | 6.3 | 43.2 | |||||||||
| Total operating expenses | 5,951.2 | 5,684.8 | |||||||||
| Income from equity investees | 73.9 | 67.8 | |||||||||
| Operating income | 1,219.8 | 1,015.7 | |||||||||
| Interest income and other, net | 15.9 | 24.8 | |||||||||
| Interest expense | (91.9) | (75.0) | |||||||||
| Earnings before income taxes | 1,143.8 | 965.5 | |||||||||
| Income tax expense | 258.5 | 205.1 | |||||||||
| Net earnings including noncontrolling interests | 885.3 | 760.4 | |||||||||
| Net earnings/(loss) attributable to noncontrolling interests | (0.4) | (0.2) | |||||||||
| Net earnings attributable to Starbucks | $ | 885.7 | $ | 760.6 | |||||||
| Earnings per share - basic | $ | 0.75 | $ | 0.61 | |||||||
| Earnings per share - diluted | $ | 0.74 | $ | 0.61 | |||||||
| Weighted average shares outstanding: | |||||||||||
| Basic | 1,180.4 | 1,242.0 | |||||||||
| Diluted | 1,191.0 | 1,253.4 | |||||||||
See Notes to Consolidated Financial Statements.
3
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions, unaudited)
| Quarter Ended | |||||||||||
| Dec 29, 2019 | Dec 30, 2018 | ||||||||||
| Net earnings including noncontrolling interests | $ | 885.3 | $ | 760.4 | |||||||
| Other comprehensive income/(loss), net of tax: | |||||||||||
| Unrealized holding gains/(losses) on available-for-sale debt securities | (0.1) | 2.2 | |||||||||
| Tax (expense)/benefit | — | (0.5) | |||||||||
| Unrealized gains/(losses) on cash flow hedging instruments | 32.4 | (9.1) | |||||||||
| Tax (expense)/benefit | (6.6) | 1.8 | |||||||||
| Unrealized gains/(losses) on net investment hedging instruments | 23.7 | (21.9) | |||||||||
| Tax (expense)/benefit | (6.0) | 5.6 | |||||||||
| Translation adjustment and other | 76.1 | 1.6 | |||||||||
| Tax (expense)/benefit | — | — | |||||||||
| Reclassification adjustment for net (gains)/losses realized in net earnings for available-for-sale debt securities, hedging instruments, and translation adjustment | (10.7) | 8.1 | |||||||||
| Tax expense/(benefit) | 2.3 | (0.7) | |||||||||
| Other comprehensive income/(loss) | 111.1 | (12.9) | |||||||||
| Comprehensive income including noncontrolling interests | 996.4 | 747.5 | |||||||||
| Comprehensive income/(loss) attributable to noncontrolling interests | (0.4) | (0.2) | |||||||||
| Comprehensive income attributable to Starbucks | $ | 996.8 | $ | 747.7 | |||||||
See Notes to Consolidated Financial Statements.
4
STARBUCKS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
(unaudited)
| Dec 29, 2019 | Sep 29, 2019 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 3,040.5 | $ | 2,686.6 | |||||||
| Short-term investments | 68.4 | 70.5 | |||||||||
| Accounts receivable, net | 908.1 | 879.2 | |||||||||
| Inventories | 1,408.7 | 1,529.4 | |||||||||
| Prepaid expenses and other current assets | 474.0 | 488.2 | |||||||||
| Total current assets | 5,899.7 | 5,653.9 | |||||||||
| Long-term investments | 199.8 | 220.0 | |||||||||
| Equity investments | 411.3 | 396.0 | |||||||||
| Property, plant and equipment, net | 6,390.9 | 6,431.7 | |||||||||
| Operating lease, right-of-use asset | 8,358.5 | — | |||||||||
| Deferred income taxes, net | 1,731.4 | 1,765.8 | |||||||||
| Other long-term assets | 484.7 | 479.6 | |||||||||
| Other intangible assets | 739.1 | 781.8 | |||||||||
| Goodwill | 3,515.9 | 3,490.8 | |||||||||
| TOTAL ASSETS | $ | 27,731.3 | $ | 19,219.6 | |||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT) | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 1,085.6 | $ | 1,189.7 | |||||||
| Accrued liabilities | 1,637.8 | 1,753.7 | |||||||||
| Accrued payroll and benefits | 578.5 | 664.6 | |||||||||
| Income taxes payable | 1,414.0 | 1,291.7 | |||||||||
| Current portion of operating lease liability | 1,268.9 | — | |||||||||
| Store value card liability and current portion of deferred revenue | 1,694.1 | 1,269.0 | |||||||||
| Short-term debt | 497.9 | — | |||||||||
| Current portion of long-term debt | 498.7 | — | |||||||||
| Total current liabilities | 8,675.5 | 6,168.7 | |||||||||
| Long-term debt | 10,653.2 | 11,167.0 | |||||||||
| Operating lease liability | 7,711.7 | — | |||||||||
| Deferred revenue | 6,748.8 | 6,744.4 | |||||||||
| Other long-term liabilities | 701.2 | 1,370.5 | |||||||||
| Total liabilities | 34,490.4 | 25,450.6 | |||||||||
| Shareholders’ equity/(deficit): | |||||||||||
Common stock ($0.001 par value) — authorized, 2,400.0 shares; issued and outstanding, 1,174.5 and 1,184.6 shares, respectively | 1.2 | 1.2 | |||||||||
| Additional paid-in capital | 41.1 | 41.1 | |||||||||
| Retained earnings/(deficit) | (6,414.8) | (5,771.2) | |||||||||
| Accumulated other comprehensive loss | (387.4) | (503.3) | |||||||||
| Total shareholders’ equity/(deficit) | (6,759.9) | (6,232.2) | |||||||||
| Noncontrolling interests | 0.8 | 1.2 | |||||||||
| Total equity/(deficit) | (6,759.1) | (6,231.0) | |||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT) | $ | 27,731.3 | $ | 19,219.6 | |||||||
See Notes to Consolidated Financial Statements.
5
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions, unaudited)
| Quarter Ended | |||||||||||
| Dec 29, 2019 | Dec 30, 2018 | ||||||||||
| OPERATING ACTIVITIES: | |||||||||||
| Net earnings including noncontrolling interests | $ | 885.3 | $ | 760.4 | |||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 369.2 | 350.8 | |||||||||
| Deferred income taxes, net | 10.4 | (354.6) | |||||||||
| Income earned from equity method investees | (62.9) | (55.0) | |||||||||
| Distributions received from equity method investees | 64.3 | 63.7 | |||||||||
| Stock-based compensation | 90.3 | 97.3 | |||||||||
| Non-cash lease costs | 294.9 | — | |||||||||
| Other | 5.1 | 6.1 | |||||||||
| Cash provided by changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | (22.9) | (28.8) | |||||||||
| Inventories | 122.8 | 44.8 | |||||||||
| Prepaid expenses and other current assets | (28.5) | 847.3 | |||||||||
| Income taxes payable | 125.1 | 489.3 | |||||||||
| Accounts payable | (110.3) | (21.3) | |||||||||
| Deferred revenue | 426.7 | 362.7 | |||||||||
| Operating lease liability | (301.6) | — | |||||||||
| Other operating assets and liabilities | (31.8) | (183.7) | |||||||||
| Net cash provided by operating activities | 1,836.1 | 2,379.0 | |||||||||
| INVESTING ACTIVITIES: | |||||||||||
| Purchases of investments | (38.0) | (108.7) | |||||||||
| Sales of investments | 64.6 | 32.1 | |||||||||
| Maturities and calls of investments | 1.3 | 14.2 | |||||||||
| Additions to property, plant and equipment | (394.3) | (431.4) | |||||||||
| Other | (19.9) | (16.6) | |||||||||
| Net cash used in investing activities | (386.3) | (510.4) | |||||||||
| FINANCING ACTIVITIES: | |||||||||||
| Net proceeds from issuance of commercial paper | 398.9 | — | |||||||||
| Proceeds from issuance of commercial paper (maturities longer than 90 days) | 99.0 | — | |||||||||
| Repayments of long-term debt | — | (350.0) | |||||||||
| Proceeds from issuance of common stock | 33.1 | 108.4 | |||||||||
| Cash dividends paid | (484.2) | (446.7) | |||||||||
| Repurchase of common stock | (1,091.4) | (5,114.7) | |||||||||
| Minimum tax withholdings on share-based awards | (78.4) | (55.3) | |||||||||
| Other | — | (0.3) | |||||||||
| Net cash used by financing activities | (1,123.0) | (5,858.6) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 27.1 | (4.7) | |||||||||
| Net increase/(decrease) in cash and cash equivalents | 353.9 | (3,994.7) | |||||||||
| CASH AND CASH EQUIVALENTS: | |||||||||||
| Beginning of period | 2,686.6 | 8,756.3 | |||||||||
| End of period | $ | 3,040.5 | $ | 4,761.6 | |||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | |||||||||||
| Cash paid during the period for: | |||||||||||
| Interest, net of capitalized interest | $ | 87.2 | $ | 73.0 | |||||||
| Income taxes/(refunds) | $ | 92.1 | $ | (707.3) | |||||||
See Notes to Consolidated Financial Statements.
6
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
For the Quarter Ended December 29, 2019 and December 30, 2018
(in millions, except per share data, unaudited)
| Common Stock | Additional Paid-in Capital | Retained Earnings/(Deficit) | Accumulated Other Comprehensive Income/(Loss) | Shareholders’ Equity/(Deficit) | Noncontrolling Interests | Total | |||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance, September 29, 2019 | 1,184.6 | $ | 1.2 | $ | 41.1 | $ | (5,771.2) | $ | (503.3) | $ | (6,232.2) | $ | 1.2 | $ | (6,231.0) | ||||||||||||||||||||||||||||||||
| Cumulative effect of adoption of new accounting guidance | — | — | — | 12.5 | 4.8 | 17.3 | — | 17.3 | |||||||||||||||||||||||||||||||||||||||
| Net earnings/(loss) | — | — | — | 885.7 | — | 885.7 | (0.4) | 885.3 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income/(loss) | — | — | — | — | 111.1 | 111.1 | — | 111.1 | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 91.3 | — | — | 91.3 | — | 91.3 | |||||||||||||||||||||||||||||||||||||||
| Exercise of stock options/vesting of RSUs | 2.8 | — | (54.1) | — | — | (54.1) | — | (54.1) | |||||||||||||||||||||||||||||||||||||||
| Sale of common stock | 0.1 | — | 8.9 | — | — | 8.9 | — | 8.9 | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | (13.0) | — | (46.1) | (1,061.8) | — | (1,107.9) | — | (1,107.9) | |||||||||||||||||||||||||||||||||||||||
Cash dividends declared, $0.41 per share | — | — | — | (480.0) | — | (480.0) | — | (480.0) | |||||||||||||||||||||||||||||||||||||||
| Balance, December 29, 2019 | 1,174.5 | $ | 1.2 | $ | 41.1 | $ | (6,414.8) | $ | (387.4) | $ | (6,759.9) | $ | 0.8 | $ | (6,759.1) | ||||||||||||||||||||||||||||||||
| Balance, September 30, 2018 | 1,309.1 | $ | 1.3 | $ | 41.1 | $ | 1,457.4 | $ | (330.3) | $ | 1,169.5 | $ | 6.3 | $ | 1,175.8 | ||||||||||||||||||||||||||||||||
| Cumulative effect of adoption of new accounting guidance | — | — | — | 495.6 | — | 495.6 | — | 495.6 | |||||||||||||||||||||||||||||||||||||||
| Net earnings/(loss) | — | — | — | 760.6 | — | 760.6 | (0.2) | 760.4 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income/(loss) | — | — | — | — | (12.9) | (12.9) | — | (12.9) | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 98.0 | — | — | 98.0 | — | 98.0 | |||||||||||||||||||||||||||||||||||||||
| Exercise of stock options/vesting of RSUs | 6.0 | — | 45.0 | — | — | 45.0 | — | 45.0 | |||||||||||||||||||||||||||||||||||||||
| Sale of common stock | 0.2 | — | 8.1 | — | — | 8.1 | — | 8.1 | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | (72.0) | (0.1) | (151.1) | (4,848.8) | — | (5,000.0) | — | (5,000.0) | |||||||||||||||||||||||||||||||||||||||
Cash dividends declared, $0.36 per share | — | — | — | (448.8) | — | (448.8) | — | (448.8) | |||||||||||||||||||||||||||||||||||||||
| Balance, December 30, 2018 | 1,243.3 | $ | 1.2 | $ | 41.1 | $ | (2,584.0) | $ | (343.2) | $ | (2,884.9) | $ | 6.1 | $ | (2,878.8) | ||||||||||||||||||||||||||||||||
See Notes to Consolidated Financial Statements.
7
STARBUCKS CORPORATION
INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| Note 1 | ||||||||
| Note 2 | ||||||||
| Note 3 | ||||||||
| Note 4 | ||||||||
| Note 5 | ||||||||
| Note 6 | ||||||||
| Note 7 | ||||||||
| Note 8 | ||||||||
| Note 9 | ||||||||
| Note 10 | ||||||||
| Note 11 | ||||||||
| Note 12 | ||||||||
| Note 13 | ||||||||
| Note 14 | ||||||||
| Note 15 | ||||||||
| Note 16 | ||||||||
8
STARBUCKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1: Summary of Significant Accounting Policies
Financial Statement Preparation
The unaudited consolidated financial statements as of December 29, 2019, and for the quarters ended December 29, 2019 and December 30, 2018, have been prepared by Starbucks Corporation under the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, the financial information for the quarters ended December 29, 2019 and December 30, 2018 reflects all adjustments and accruals, which are of a normal recurring nature, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. In this Quarterly Report on Form 10-Q (“10-Q”), Starbucks Corporation is referred to as “Starbucks,” the “Company,” “we,” “us” or “our.”
In the fourth quarter of fiscal 2019, we changed the classification of certain costs on our consolidated statements of earnings and revised prior period information to be consistent with the current period presentation. The most significant impact to the first quarter of fiscal 2019 was the reclassification of our company-operated store occupancy costs from costs of sales to store operating expenses of approximately $582.9 million. We also made certain other immaterial changes. There was no impact to consolidated revenues, consolidated operating income, or net earnings per share as a result of these changes. Additionally, certain prior period information on the consolidated statements of cash flows was reclassified to conform to the current year presentation.
The financial information as of September 29, 2019 is derived from our audited consolidated financial statements and notes for the fiscal year ended September 29, 2019 (“fiscal 2019”) included in Item 8 in the Fiscal 2019 Annual Report on Form 10-K (“10-K”). The information included in this 10-Q should be read in conjunction with the footnotes and management’s discussion and analysis of the consolidated financial statements in the 10-K.
The results of operations for the quarter ended December 29, 2019 are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending September 27, 2020 (“fiscal 2020”).
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
On September 30, 2019, we adopted the new guidance from the Financial Accounting Standards Board (“FASB”) on the recognition and measurement of leases utilizing the modified retrospective approach. As a result, the prior period information reported under the previous lease guidance has not been restated.
As permitted under the new guidance, we elected the package of practical expedients, which allowed us to retain our prior conclusions regarding lease identification, classification and initial direct costs. For our lease agreements with lease and non-lease components, we elected the practical expedient to account for these as a single lease component for all underlying classes of assets. For our adoption, we did not elect to use hindsight for our existing leases. Additionally, for short-term leases with an initial lease term of 12 months or less and with purchase options we are reasonably certain will not be exercised, we elected to not record right-of-use assets or corresponding lease obligations on our consolidated balance sheet. We will continue to record rent expense for each short-term lease on a straight-line basis over the lease term.
The new guidance had a material impact on our consolidated balance sheet; however, it did not have a material impact on our consolidated statement of earnings. The most material impact was the recognition of right-of-use assets of $8.4 billion, with corresponding lease liabilities of $9.0 billion relating to our operating leases. Existing deferred rent and tenant improvement allowances of approximately $568.0 million, previously recorded within other long-term liabilities, were recorded as an offset to our gross operating lease right-of-use assets. Additionally, pursuant to the transition guidance, we derecognized build-to-suit lease assets, previously recorded in property, plant and equipment, net, along with the corresponding liabilities on the consolidated balance sheet as of September 30, 2019. Accordingly, these leases have been recorded as operating leases as of the adoption date and are now included in operating lease, right-of-use assets and operating lease liabilities on the consolidated balance sheet as of December 29, 2019. As of the adoption date, accumulated deficit within shareholder's equity on our consolidated balance sheet decreased by $17.3 million, primarily related to the derecognition of build-to-suit leasing arrangements.
In the first quarter of fiscal 2020, we adopted the new guidance from the FASB on the reclassification of certain tax effects from accumulated other comprehensive income (“AOCI”) which permits entities to reclassify the stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Tax Act”) from AOCI to retained earnings. The guidance was adopted prospectively with no material impact on the consolidated financial statements as of December 29, 2019.
9
Recent Accounting Pronouncements Not Yet Adopted
In December 2019, the FASB issued guidance simplifying the accounting for income taxes by removing certain exceptions to the general principles. The guidance will be effective at the beginning of our first quarter of fiscal 2022. Early adoption of the amendments is permitted. Depending on the amendment, adoption may be applied on a retrospective, modified retrospective or prospective basis. We are currently evaluating the impacts of adoption of the new guidance to our consolidated financial statements.
Note 2: Acquisitions, Divestitures and Strategic Alliance
Fiscal 2019
In the third quarter of fiscal 2019, we sold our company-operated retail business in Thailand to Coffee Concepts Thailand, a joint venture between Maxim's Caterers Limited and F&N Retail Connection Co. Ltd, converting this operation to a fully licensed market. This transaction resulted in a pre-tax gain of $601.9 million, which was included in net gains resulting from divestiture of certain operations on our consolidated statements of earnings.
In the second quarter of fiscal 2019, we sold our company-operated retail businesses in France and the Netherlands to Alsea, S.A.B. de C.V. converting these operations to fully licensed markets. These transactions did not have a material impact to our consolidated financial statements.
Note 3: Derivative Financial Instruments
Interest Rates
From time to time, we enter into designated cash flow hedges to manage the variability in cash flows due to changes in benchmark interest rates. We enter into interest rate swap agreements and treasury locks, which are synthetic forward sales of U.S. treasury securities settled in cash based upon the difference between an agreed-upon treasury rate and the prevailing treasury rate at settlement. These agreements are cash settled at the time of the pricing of the related debt. Each derivative agreement's gain or loss is recorded in AOCI and is subsequently reclassified to interest expense over the life of the related debt.
To hedge the exposure to changes in the fair value of our fixed-rate debt, we enter into interest rate swap agreements, which are designated as fair value hedges. The changes in fair values of these derivative instruments and the offsetting changes in fair values of the underlying hedged debt due to changes in the relevant benchmark interest rates are recorded in interest expense. Refer to Note 8 Debt, for additional information on our long-term debt.
Foreign Currency
To reduce cash flow volatility from foreign currency fluctuations, we enter into forward and swap contracts to hedge portions of cash flows of anticipated intercompany royalty payments, inventory purchases, and intercompany borrowing and lending activities. The resulting gains and losses from these derivatives are recorded in AOCI and subsequently reclassified to revenue, cost of sales, or interest income and other, net, respectively, when the hedged exposures affect net earnings.
From time to time, we may enter into financial instruments, including but not limited to forward contracts or foreign currency-denominated debt, to hedge the currency exposure of our net investments in certain international operations. The resulting gains and losses from these derivatives are recorded in AOCI and are subsequently reclassified to net earnings when the hedged net investment is either sold or substantially liquidated.
Foreign currency forward and swap contracts not designated as hedging instruments are used to mitigate the foreign exchange risk of certain other balance sheet items. Gains and losses from these derivatives are largely offset by the financial impact of translating foreign currency-denominated payables and receivables; these gains and losses are recorded in interest income and other, net.
Commodities
Depending on market conditions, we may enter into coffee forward contracts, futures contracts, and collars to hedge anticipated cash flows under our price-to-be-fixed green coffee contracts, which are described further in Note 5, Inventories, or our longer-dated forecasted coffee demand where underlying fixed price and price-to-be-fixed contracts are not yet available. The resulting gains and losses are recorded in AOCI and are subsequently reclassified to cost of sales when the hedged exposure affects net earnings.
Depending on market conditions, we may also enter into dairy forward contracts and futures contracts to hedge a portion of anticipated cash flows under our dairy purchase contracts and our forecasted dairy demand. The resulting gains or losses are recorded in AOCI and are subsequently reclassified to cost of sales when the hedged exposure affects net earnings.
10
To mitigate the price uncertainty of a portion of our future purchases, including dairy products, diesel fuel and other commodities, we enter into swap contracts, futures and collars that are not designated as hedging instruments. The resulting gains and losses are recorded in interest income and other, net to help offset price fluctuations on our beverage, food, packaging and transportation costs, which are included in cost of sales on our consolidated statements of earnings.
Gains and losses on derivative contracts and foreign currency-denominated debt designated as hedging instruments included in AOCI and expected to be reclassified into earnings within 12 months, net of tax (in millions):
Net Gains/(Losses) Included in AOCI | Net Gains/(Losses) Expected to be Reclassified from AOCI into Earnings within 12 Months | Outstanding Contract/Debt Remaining Maturity (Months) | |||||||||||||||||||||
| Dec 29, 2019 | Sep 29, 2019 | ||||||||||||||||||||||
| Cash Flow Hedges: | |||||||||||||||||||||||
| Interest rates | $ | 17.8 | $ | 0.5 | $ | 2.5 | 154 | ||||||||||||||||
| Cross-currency swaps | (0.8) | (1.4) | — | 59 | |||||||||||||||||||
| Foreign currency - other | 8.1 | 12.9 | 4.7 | 36 | |||||||||||||||||||
| Coffee | 8.6 | (1.0) | 6.5 | 24 | |||||||||||||||||||
| Dairy | — | — | — | 4 | |||||||||||||||||||
| Net Investment Hedges: | |||||||||||||||||||||||
| Foreign currency | 16.0 | 16.0 | — | 0 | |||||||||||||||||||
| Cross-currency swaps | 5.6 | — | — | 117 | |||||||||||||||||||
| Foreign currency debt | (13.9) | (26.1) | — | 51 | |||||||||||||||||||
Pretax gains and losses on derivative contracts and foreign currency-denominated long-term debt designated as hedging instruments recognized in OCI and reclassifications from AOCI to earnings (in millions):
| Quarter Ended | |||||||||||||||||||||||||||||
Gains/(Losses) Recognized in OCI Before Reclassifications | Gains/(Losses) Reclassified from AOCI to Earnings | Location of gain/(loss) | |||||||||||||||||||||||||||
| Dec 29, 2019 | Dec 30, 2018 | Dec 29, 2019 | Dec 30, 2018 | ||||||||||||||||||||||||||
| Cash Flow Hedges: | |||||||||||||||||||||||||||||
| Interest rates | $ | 20.0 | $ | (15.7) | $ | 0.8 | $ | 1.4 | Interest expense | ||||||||||||||||||||
| Cross-currency swaps | 6.2 | (8.0) | (0.2) | (0.4) | Interest expense | ||||||||||||||||||||||||
| 5.6 | (11.3) | Interest income and other, net | |||||||||||||||||||||||||||
| Foreign currency - other | (4.7) | 14.6 | 1.7 | 1.4 | Licensed stores revenues | ||||||||||||||||||||||||
| (0.3) | 0.5 | Cost of sales | |||||||||||||||||||||||||||
| Coffee | 11.0 | — | — | (0.2) | Cost of sales | ||||||||||||||||||||||||
| Dairy | (0.1) | — | — | — | |||||||||||||||||||||||||
| Net Investment Hedges: | |||||||||||||||||||||||||||||
| Cross-currency swaps | 10.7 | — | 3.3 | — | Interest expense | ||||||||||||||||||||||||
| Foreign currency debt | 13.0 | (21.9) | — | — | |||||||||||||||||||||||||
11
Pretax gains and losses on non-designated derivatives and designated fair value hedging instruments and the related hedged item recognized in earnings (in millions):
| Gains/(Losses) Recognized in Earnings | |||||||||||||||||
| Location of gain/(loss) recognized in earnings | Quarter Ended | ||||||||||||||||
| Dec 29, 2019 | Dec 30, 2018 | ||||||||||||||||
| Non-Designated Derivatives: | |||||||||||||||||
| Foreign currency - other | Interest income and other, net | $ | 3.4 | $ | (7.9) | ||||||||||||
| Dairy | Interest income and other, net | — | (2.1) | ||||||||||||||
| Diesel fuel and other commodities | Interest income and other, net | 0.9 | (6.6) | ||||||||||||||
| Fair Value Hedges: | |||||||||||||||||
| Interest rate swap | Interest expense | (10.9) | 16.1 | ||||||||||||||
| Long-term debt (hedged item) | Interest expense | 4.2 | (16.9) | ||||||||||||||
Notional amounts of outstanding derivative contracts (in millions):
| Dec 29, 2019 | Sep 29, 2019 | ||||||||||
| Interest rate swap | $ | 1,500 | $ | 1,500 | |||||||
| Cross-currency swaps | 1,021 | 341 | |||||||||
| Foreign currency - other | 1,140 | 1,125 | |||||||||
| Coffee | 43 | 52 | |||||||||
| Dairy | 3 | 1 | |||||||||
| Diesel fuel and other commodities | 15 | 17 | |||||||||
12
Fair value of outstanding derivative contracts (in millions) including the location of the asset and/or liability on the consolidated balance sheets:
| Derivative Assets | |||||||||||||||||
| Balance Sheet Location | Dec 29, 2019 | Sep 29, 2019 | |||||||||||||||
| Designated Derivative Instruments: | |||||||||||||||||
| Interest rates | Other long-term assets | $ | 17.5 | $ | 0.1 | ||||||||||||
| Cross-currency swaps | Other long-term assets | 12.0 | 0.2 | ||||||||||||||
| Foreign currency - other | Prepaid expenses and other current assets | 8.9 | 11.4 | ||||||||||||||
| Other long-term assets | 5.7 | 7.8 | |||||||||||||||
| Coffee | Prepaid expenses and other current assets | 9.8 | — | ||||||||||||||
| Other long-term assets | 0.1 | — | |||||||||||||||
| Interest rate swap | Other long-term assets | 7.3 | 18.2 | ||||||||||||||
| Non-designated Derivative Instruments: | |||||||||||||||||
| Foreign currency | Prepaid expenses and other current assets | 3.5 | 1.0 | ||||||||||||||
| Diesel fuel and other commodities | Prepaid expenses and other current assets | 1.0 | 0.2 | ||||||||||||||
| Derivative Liabilities | |||||||||||||||||
| Balance Sheet Location | Dec 29, 2019 | Sep 29, 2019 | |||||||||||||||
| Designated Derivative Instruments: | |||||||||||||||||
| Interest rates | Other long-term liabilities | $ | — | $ | 2.6 | ||||||||||||
| Cross-currency swaps | Other long-term liabilities | 7.4 | 9.7 | ||||||||||||||
| Foreign currency - other | Accrued liabilities | 1.7 | 0.6 | ||||||||||||||
| Other long-term liabilities | 1.1 | 0.1 | |||||||||||||||
| Coffee | Accrued liabilities | — | 1.0 | ||||||||||||||
| Other long-term liabilities | — | 0.1 | |||||||||||||||
| Non-designated Derivative Instruments: | |||||||||||||||||
| Foreign currency | Accrued liabilities | 1.6 | 3.0 | ||||||||||||||
| Diesel fuel and other commodities | Accrued liabilities | 0.1 | 1.1 | ||||||||||||||
The following amounts were recorded on the consolidated balance sheets related to fixed-to-floating interest rate swaps designated in fair value hedging relationships:
| Carrying amount of hedged item | Cumulative amount of fair value hedging adjustment included in the carrying amount | ||||||||||||||||||||||
| Dec 29, 2019 | Sep 29, 2019 | Dec 29, 2019 | Sep 29, 2019 | ||||||||||||||||||||
| Location on the balance sheet | |||||||||||||||||||||||
| Long-term debt | $ | 757.6 | $ | 761.8 | $ | 7.6 | $ | 11.8 | |||||||||||||||
Additional disclosures related to cash flow gains and losses included in AOCI, as well as subsequent reclassifications to earnings, are included in Note 11, Equity.
13
Note 4: Fair Value Measurements
Assets and liabilities measured at fair value on a recurring basis (in millions):
| Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||
| Balance at December 29,2019 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 3,040.5 | $ | 3,040.5 | $ | — | $ | — | |||||||||||||||
| Short-term investments: | |||||||||||||||||||||||
| Available-for-sale debt securities | |||||||||||||||||||||||
| Commercial paper | 0.5 | — | 0.5 | — | |||||||||||||||||||
| Corporate debt securities | 3.5 | — | 3.5 | — | |||||||||||||||||||
| Total available-for-sale debt securities | 4.0 | — | 4.0 | — | |||||||||||||||||||
| Marketable equity securities | 64.4 | 64.4 | — | — | |||||||||||||||||||
| Total short-term investments | 68.4 | 64.4 | 4.0 | — | |||||||||||||||||||
| Prepaid expenses and other current assets: | |||||||||||||||||||||||
| Derivative assets | 23.2 | 9.8 | 13.4 | — | |||||||||||||||||||
| Long-term investments: | |||||||||||||||||||||||
| Available-for-sale debt securities | |||||||||||||||||||||||
| Corporate debt securities | 91.1 | — | 91.1 | — | |||||||||||||||||||
| Auction rate securities | 5.8 | — | — | 5.8 | |||||||||||||||||||
| U.S. government treasury securities | 98.6 | 98.6 | — | — | |||||||||||||||||||
| State and local government obligations | 3.6 | — | 3.6 | — | |||||||||||||||||||
| Mortgage and other asset-backed securities | 0.7 | — | 0.7 | — | |||||||||||||||||||
| Total long-term investments | 199.8 | 98.6 | 95.4 | 5.8 | |||||||||||||||||||
| Other long-term assets: | |||||||||||||||||||||||
| Derivative assets | 42.6 | 0.1 | 42.5 | — | |||||||||||||||||||
| Total assets | $ | 3,374.5 | $ | 3,213.4 | $ | 155.3 | $ | 5.8 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Accrued liabilities: | |||||||||||||||||||||||
| Derivative liabilities | $ | 3.4 | $ | — | $ | 3.4 | $ | — | |||||||||||||||
| Other long-term liabilities: | |||||||||||||||||||||||
| Derivative liabilities | 8.5 | — | 8.5 | — | |||||||||||||||||||
| Total liabilities | $ | 11.9 | $ | — | $ | 11.9 | $ | — | |||||||||||||||
14
| Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||
| Balance at September 29, 2019 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 2,686.6 | $ | 2,686.6 | $ | — | $ | — | |||||||||||||||
| Short-term investments: | |||||||||||||||||||||||
| Available-for-sale debt securities | |||||||||||||||||||||||
| Commercial paper | 0.5 | — | 0.5 | — | |||||||||||||||||||
| Corporate debt securities | 3.5 | — | 3.5 | — | |||||||||||||||||||
| Total available-for-sale debt securities | 4.0 | — | 4.0 | — | |||||||||||||||||||
| Marketable equity securities | 66.5 | 66.5 | — | — | |||||||||||||||||||
| Total short-term investments | 70.5 | 66.5 | 4.0 | — | |||||||||||||||||||
| Prepaid expenses and other current assets: | |||||||||||||||||||||||
| Derivative assets | 12.6 | — | 12.6 | — | |||||||||||||||||||
| Long-term investments: | |||||||||||||||||||||||
| Available-for-sale debt securities | |||||||||||||||||||||||
| Corporate debt securities | 101.2 | — | 101.2 | — | |||||||||||||||||||
| Auction rate securities | 5.8 | — | — | 5.8 | |||||||||||||||||||
| U.S. government treasury securities | 106.5 | 106.5 | — | — | |||||||||||||||||||
| State and local government obligations | 4.9 | — | 4.9 | — | |||||||||||||||||||
| Mortgage and other asset-backed | 1.6 | — | 1.6 | — | |||||||||||||||||||
| Total long-term investments | 220.0 | 106.5 | 107.7 | 5.8 | |||||||||||||||||||
| Other long-term assets: | |||||||||||||||||||||||
| Derivative assets | 26.3 | — | 26.3 | — | |||||||||||||||||||
| Total assets | $ | 3,016.0 | $ | 2,859.6 | $ | 150.6 | $ | 5.8 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Accrued liabilities: | |||||||||||||||||||||||
| Derivative liabilities | $ | 5.7 | $ | 1.1 | $ | 4.6 | $ | — | |||||||||||||||
| Other long-term liabilities: | |||||||||||||||||||||||
| Derivative liabilities | 12.5 | — | 12.5 | — | |||||||||||||||||||
| Total liabilities | $ | 18.2 | $ | 1.1 | $ | 17.1 | $ | — | |||||||||||||||
There were no material transfers between levels, and there was no significant activity within Level 3 instruments during the periods presented. The fair values of any financial instruments presented above exclude the impact of netting assets and liabilities when a legally enforceable master netting agreement exists.
Gross unrealized holding gains and losses on available-for-sale debt securities and marketable equity securities were not material as of December 29, 2019 and September 29, 2019.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets and liabilities recognized or disclosed at fair value on the consolidated financial statements on a nonrecurring basis include items such as property, plant and equipment, goodwill and other intangible assets and other assets. These assets are measured at fair value if determined to be impaired.
The estimated fair value of our long-term debt based on the quoted market price (Level 2) is included at Note 8, Debt. There were no material fair value adjustments during the quarters ended December 29, 2019 and December 30, 2018.
15
Note 5: Inventories (in millions):
| Dec 29, 2019 | Sep 29, 2019 | ||||||||||
| Coffee: | |||||||||||
| Unroasted | $ | 609.3 | $ | 656.5 | |||||||
| Roasted | 253.7 | 276.5 | |||||||||
| Other merchandise held for sale | 269.1 | 288.0 | |||||||||
| Packaging and other supplies | 276.6 | 308.4 | |||||||||
| Total | $ | 1,408.7 | $ | 1,529.4 | |||||||
Other merchandise held for sale includes, among other items, serveware, food and tea. Inventory levels vary due to seasonality, commodity market supply and price fluctuations.
As of December 29, 2019, we had committed to purchasing green coffee totaling $992 million under fixed-price contracts and an estimated $456 million under price-to-be-fixed contracts. A portion of our price-to-be-fixed contracts are effectively fixed through the use of futures. See Note 3, Derivative Financial Instruments for further discussion. Price-to-be-fixed contracts are purchase commitments whereby the quality, quantity, delivery period and other negotiated terms are agreed upon, but the date, and therefore the price, at which the base “C” coffee commodity price component will be fixed has not yet been established. For most contracts, either Starbucks or the seller has the option to “fix” the base “C” coffee commodity price prior to the delivery date. For other contracts, Starbucks and the seller may agree upon pricing parameters determined by the base “C” coffee commodity price. Until prices are fixed, we estimate the total cost of these purchase commitments. We believe, based on relationships established with our suppliers in the past, the risk of non-delivery on these purchase commitments is remote.
Note 6: Supplemental Balance Sheet Information (in millions):
Prepaid Expenses and Other Current Assets
| Dec 29, 2019 | Sep 29, 2019 | ||||||||||
| Income tax receivable | $ | 141.0 | $ | 141.1 | |||||||
| Other prepaid expenses and current assets | 333.0 | 347.1 | |||||||||
| Total prepaid expenses and current assets | $ | 474.0 | $ | 488.2 | |||||||
Property, Plant and Equipment, net
| Dec 29, 2019 | Sep 29, 2019 | ||||||||||
| Land | $ | 46.8 | $ | 46.8 | |||||||
| Buildings | 569.7 | 691.5 | |||||||||
| Leasehold improvements | 8,121.7 | 7,948.6 | |||||||||
| Store equipment | 2,722.8 | 2,659.5 | |||||||||
| Roasting equipment | 783.9 | 769.6 | |||||||||
| Furniture, fixtures and other | 1,818.8 | 1,799.0 | |||||||||
| Work in progress | 360.3 | 358.5 | |||||||||
| Property, plant and equipment, gross | 14,424.0 | 14,273.5 | |||||||||
| Accumulated depreciation | (8,033.1) | (7,841.8) | |||||||||
| Property, plant and equipment, net | $ | 6,390.9 | $ | 6,431.7 | |||||||
Accrued Liabilities
| Dec 29, 2019 | Sep 29, 2019 | ||||||||||
| Accrued occupancy costs | $ | 74.3 | $ | 176.9 | |||||||
| Accrued dividends payable | 482.4 | 485.7 | |||||||||
| Accrued capital and other operating expenditures | 684.8 | 703.9 | |||||||||
| Self insurance reserves | 218.0 | 210.5 | |||||||||
| Accrued business taxes | 178.3 | 176.7 | |||||||||
| Total accrued liabilities | $ | 1,637.8 | $ | 1,753.7 | |||||||
16
Note 7: Other Intangible Assets and Goodwill
Indefinite-lived intangible assets
| (in millions) | Dec 29, 2019 | Sep 29, 2019 | |||||||||
| Trade names, trademarks and patents | $ | 206.5 | $ | 203.4 | |||||||
Finite-lived intangible assets
| Dec 29, 2019 | Sep 29, 2019 | ||||||||||||||||||||||||||||||||||
| (in millions) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||||||||
| Acquired and reacquired rights | $ | 1,084.3 | $ | (589.7) | $ | 494.6 | $ | 1,075.0 | $ | (537.2) | $ | 537.8 | |||||||||||||||||||||||
| Acquired trade secrets and processes | 27.6 | (19.9) | 7.7 | 27.6 | (19.2) | 8.4 | |||||||||||||||||||||||||||||
| Trade names, trademarks and patents | 41.1 | (23.7) | 17.4 | 40.6 | (22.9) | 17.7 | |||||||||||||||||||||||||||||
| Licensing agreements | 15.9 | (12.6) | 3.3 | 16.2 | (12.2) | 4.0 | |||||||||||||||||||||||||||||
| Other finite-lived intangible assets | 22.4 | (12.8) | 9.6 | 22.0 | (11.5) | 10.5 | |||||||||||||||||||||||||||||
| Total finite-lived intangible assets | $ | 1,191.3 | $ | (658.7) | $ | 532.6 | $ | 1,181.4 | $ | (603.0) | $ | 578.4 | |||||||||||||||||||||||
Amortization expense for finite-lived intangible assets was $54.1 million for the quarter ended December 29, 2019 and $54.5 million for the quarter ended December 30, 2018, respectively.
Estimated future amortization expense as of December 29, 2019 (in millions):
| Fiscal Year Ending | Total | ||||
| 2020 (excluding the quarter ended December 29, 2019) | $ | 162.6 | |||
| 2021 | 197.0 | ||||
| 2022 | 163.3 | ||||
| 2023 | 2.7 | ||||
| 2024 | 2.1 | ||||
| Thereafter | 4.9 | ||||
| Total estimated future amortization expense | $ | 532.6 | |||
Goodwill
Changes in the carrying amount of goodwill by reportable operating segment (in millions):
| Americas | International | Channel Development | Corporate and Other | Total | |||||||||||||||||||||||||
| Goodwill balance at September 29, 2019 | $ | 496.7 | $ | 2,958.4 | $ | 34.7 | $ | 1.0 | $ | 3,490.8 | |||||||||||||||||||
Other(1) | 0.3 | 24.8 | — | — | 25.1 | ||||||||||||||||||||||||
| Goodwill balance at December 29, 2019 | $ | 497.0 | $ | 2,983.2 | $ | 34.7 | $ | 1.0 | $ | 3,515.9 | |||||||||||||||||||
(1)“Other” primarily consists of changes in the goodwill balance resulting from foreign currency translation.
Note 8: Debt
Short-term Debt
Under our commercial paper program, we may issue unsecured commercial paper notes up to a maximum aggregate amount outstanding at any time of $3 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 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 December 29, 2019, we had $497.9 million of borrowings outstanding under the program.
17
Long-term Debt
Components of long-term debt including the associated interest rates and related estimated fair values by calendar maturity (in millions, except interest rates):
| Dec 29, 2019 | Sep 29, 2019 | Stated Interest Rate | Effective Interest Rate(1) | |||||||||||||||||||||||
| Issuance | Amount | Estimated Fair Value | Amount | Estimated Fair Value | ||||||||||||||||||||||
| November 2020 notes | $ | 500.0 | $ | 501 | $ | 500.0 | $ | 501 | 2.200 | % | 2.228 | % | ||||||||||||||
| February 2021 notes | 500.0 | 501 | 500.0 | 500 | 2.100 | % | 2.293 | % | ||||||||||||||||||
| February 2021 notes | 250.0 | 251 | 250.0 | 250 | 2.100 | % | 1.600 | % | ||||||||||||||||||
| June 2022 notes | 500.0 | 510 | 500.0 | 509 | 2.700 | % | 2.819 | % | ||||||||||||||||||
| February 2023 notes | 1,000.0 | 1,033 | 1,000.0 | 1,033 | 3.100 | % | 3.107 | % | ||||||||||||||||||
October 2023 notes(2) | 750.0 | 797 | 750.0 | 798 | 3.850 | % | 2.859 | % | ||||||||||||||||||
March 2024 notes(3) | 775.3 | 786 | 788.3 | 795 | 0.372 | % | 0.462 | % | ||||||||||||||||||
| August 2025 notes | 1,250.0 | 1,350 | 1,250.0 | 1,351 | 3.800 | % | 3.721 | % | ||||||||||||||||||
| June 2026 notes | 500.0 | 504 | 500.0 | 502 | 2.450 | % | 2.511 | % | ||||||||||||||||||
| February 2028 notes | 600.0 | 644 | 600.0 | 644 | 3.500 | % | 3.529 | % | ||||||||||||||||||
| November 2028 notes | 750.0 | 835 | 750.0 | 837 | 4.000 | % | 3.958 | % | ||||||||||||||||||
| May 2029 notes | 1,000.0 | 1,086 | 1,000.0 | 1,080 | 3.550 | % | 3.871 | % | ||||||||||||||||||
| June 2045 notes | 350.0 | 393 | 350.0 | 390 | 4.300 | % | 4.348 | % | ||||||||||||||||||
| December 2047 notes | 500.0 | 520 | 500.0 | 518 | 3.750 | % | 3.765 | % | ||||||||||||||||||
| November 2048 notes | 1,000.0 | 1,175 | 1,000.0 | 1,160 | 4.500 | % | 4.504 | % | ||||||||||||||||||
| May 2049 notes | 1,000.0 | 1,165 | 1,000.0 | 1,165 | 4.450 | % | 4.433 | % | ||||||||||||||||||
| Total | 11,225.3 | 12,051 | 11,238.3 | 12,033 | ||||||||||||||||||||||
| Aggregate debt issuance costs and unamortized premium/(discount), net | (81.0) | (83.1) | ||||||||||||||||||||||||
Hedge accounting fair value adjustment(2) | 7.6 | 11.8 | ||||||||||||||||||||||||
| Total | $ | 11,151.9 | $ | 11,167.0 | ||||||||||||||||||||||
(1)Includes the effects of the amortization of any premium or discount and any gain or loss upon settlement of related treasury locks or forward-starting interest rate swaps utilized to hedge the interest rate risk prior to the debt issuance.
(2)Amount includes the change in fair value due to changes in benchmark interest rates related to our October 2023 notes. Refer to Note 3, Derivative Financial Instruments, for additional information on our interest rate swap designated as a fair value hedge.
(3)Japanese yen-denominated long-term debt.
The indentures under which the above notes were issued require us to maintain compliance with certain covenants, including limits on future liens and sale and leaseback transactions on certain material properties. As of December 29, 2019, we were in compliance with all applicable covenants.
The following table summarizes our long-term debt maturities as of December 29, 2019 by fiscal year (in millions):
| Fiscal Year | Total | ||||
| 2020 | $ | — | |||
| 2021 | 1,250.0 | ||||
| 2022 | 500.0 | ||||
| 2023 | 1,000.0 | ||||
| 2024 | 1,525.3 | ||||
| Thereafter | 6,950.0 | ||||
| Total | $ | 11,225.3 | |||
18
Note 9: Leases
The following significant lease accounting policies from our most recent Annual Report on Form 10-K have been updated to reflect the adoption of FASB's new guidance on the recognition and measurement of leases.
The majority of our leases are operating leases for our company-operated retail store locations. We also lease, among other things, roasting, distribution and warehouse facilities and office space for corporate administrative purposes. We do not enter into lease transactions with related parties.
We categorize leases as either operating or finance leases at the commencement date of the lease. Operating lease agreements may contain tenant improvement allowances, rent holidays, rent escalation clauses and/or contingent rent provisions. We have lease agreements with lease and non-lease components, which are accounted for together as a single lease component for all underlying classes of assets.
We recognize a right-of-use (“ROU”) asset and lease liability for each operating and finance lease with a contractual term greater than 12 months at the time of lease inception. We do not record leases with an initial term of 12 months or less on our consolidated balance sheet but continue to record rent expense on a straight-line basis over the lease term. Our leases often include options to extend or terminate at our sole discretion, which are included in the determination of lease term when they are reasonably certain to be exercised.
Our lease liability represents the present value of future lease payments over the lease term. Given our policy election to combine lease and non-lease components, we also consider fixed common area maintenance (“CAM”) part of our fixed future lease payments; therefore, fixed CAM is also included in our lease liability.
We cannot determine the interest rate implicit in each of our leases. Therefore, we use market and term-specific incremental borrowing rates. Our incremental borrowing rate for a lease is the rate of interest we expect to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. Because we do not borrow on a collateralized basis, we consider a combination of factors, including our credit-adjusted risk-free interest rate, the risk profile and funding cost of the specific geographic market of the lease, the lease term and the effect of adjusting the rate to reflect consideration of collateral. Our credit-adjusted risk-free rate takes into consideration interest rates we pay on our unsecured long-term bonds as well as quoted interest rates obtained from financial institutions.
Total lease costs recorded as rent and other occupancy costs include fixed operating lease costs, variable lease costs and short-term lease costs. Most of our real estate leases require we pay certain expenses, such as CAM costs, real estate taxes and other executory costs, of which the fixed portion is included in operating lease costs. We recognize operating lease costs on a straight-line basis over the lease term. In addition to the above costs, variable lease costs also include amounts based on a percentage of gross sales in excess of specified levels and are recognized when probable and are not included in determining the present value of our lease liability. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. A significant majority of our leases are related to our company-operated stores, and their related costs are recorded within store operating expenses.
The ROU asset is measured at the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, initial direct costs, and any tenant improvement allowances received. For operating leases, ROU assets are reduced over the lease term by the recognized straight-line lease expense less the amount of accretion of the lease liability determined using the effective interest method. For finance leases, ROU assets are amortized on a straight-line basis over the shorter of the useful life of the leased asset or the lease term. Interest expense on each finance lease liability is recognized utilizing the effective interest method. ROU assets are tested for impairment in the same manner as long-lived assets. Additionally, we monitor for events or changes in circumstances that may require a reassessment of one of our leases and determine if a remeasurement is required.
The components of lease costs (in millions):
| Quarter Ended | |||||
| Dec 29, 2019 | |||||
Operating lease costs(1) | $ | 373.1 | |||
| Variable lease costs | 228.8 | ||||
| Short-term lease costs | 8.3 | ||||
| Total lease costs | $ | 610.2 | |||
(1)Operating lease costs includes an immaterial amount of sublease income.
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The following table includes supplemental information (in millions):
| Quarter Ended | |||||
| Dec 29, 2019 | |||||
| Cash paid related to operating lease liabilities | $ | 368.9 | |||
Operating lease liabilities arising from obtaining ROU assets(1) | 226.4 | ||||
| Dec 29, 2019 | |||||
| Weighted-average remaining operating lease term | 9.0 years | ||||
| Weighted-average operating lease discount rate | 2.5 | % | |||
(1)Excludes the initial impact of adoption. See Note 1, Summary of Significant Accounting Policies for additional information.
Finance lease assets are recorded in property, plant and equipment, net with the corresponding lease liabilities included in accrued liabilities and other long-term liabilities on the consolidated balance sheet. Finance leases were immaterial as of December 29, 2019.
Minimum future maturities of operating lease liabilities (in millions):
| Fiscal Year Ending | Dec 29, 2019 | ||||
| 2020 excluding the quarter ended December 29, 2019) | $ | 1,099.2 | |||
| 2021 | 1,393.3 | ||||
| 2022 | 1,285.7 | ||||
| 2023 | 1,155.5 | ||||
| 2024 | 1,023.4 | ||||
| Thereafter | 4,151.1 | ||||
| Total lease payments | 10,108.2 | ||||
| Less imputed interest | (1,127.6) | ||||
| Total | $ | 8,980.6 | |||
As of December 29, 2019, we have entered into operating leases that have not yet commenced of $517.1 million, primarily related to real estate leases. These leases will commence between fiscal year 2020 and fiscal year 2025 with lease terms of 3 years to 20 years.
Previous Lease Guidance Disclosures
Rent expense under operating lease agreements under the previous lease guidance, which excludes certain amounts required under the new guidance, for the quarter ended December 30, 2018 (in millions):
| Dec 30, 2018 | |||||
| Minimum rent | 350.8 | ||||
| Contingent rent | 55.7 | ||||
| Total | $ | 406.5 | |||
As previously reported in our Annual Report on Form 10-K, the minimum future rental payments under non-cancelable operating leases and lease financing arrangements under the previous lease guidance as of September 29, 2019 (in millions):
| Fiscal Year Ending | Operating Leases | Lease Financing Arrangements | |||||||||
| 2020 | $ | 1,432.9 | $ | 5.2 | |||||||
| 2021 | 1,342.2 | 5.2 | |||||||||
| 2022 | 1,247.4 | 5.0 | |||||||||
| 2023 | 1,124.3 | 5.0 | |||||||||
| 2024 | 996.4 | 4.9 | |||||||||
| Thereafter | 4,087.7 | 42.6 | |||||||||
| Total minimum lease payments | $ | 10,230.9 | $ | 67.9 | |||||||
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Note 10: Deferred Revenue
Our deferred revenue primarily consists of the up-front prepaid royalty from Nestlé, for which we have continuing performance obligations to support the Global Coffee Alliance and our unredeemed stored value card liability and unredeemed loyalty points (“Stars”) associated with our loyalty program.
At December 29, 2019, the current and long-term deferred revenue related to the Nestlé up-front payment was $176.5 million and $6.6 billion, respectively. During the quarters ended December 29, 2019 and December 30, 2018, we recognized $44.2 million and $44.1 million in current and long-term deferred revenue, respectively, related to amortization of the up-front payment.
Changes in our deferred revenue balance related to our stored value cards and loyalty program (in millions):
| Total | |||||
| Stored value cards and loyalty program at September 29, 2019 | $ | 1,113.7 | |||
| Revenue deferred - card activations, card reloads and Stars earned | 3,507.5 | ||||
| Revenue recognized - card and Stars redemptions and breakage | (3,061.9) | ||||
Other(1) | 1.7 | ||||
| Stored value cards and loyalty program at December 29, 2019(2) | $ | 1,561.0 | |||
(1)“Other” primarily consists of changes in the stored value cards and loyalty program balance resulting from foreign currency translation.
(2)Approximately $1,460.9 million of this amount is current.
Note 11: Equity
Changes in AOCI by component, net of tax (in millions):
| Quarter Ended | Available-for-Sale Debt Securities | Cash Flow Hedges | Net Investment Hedges | Translation Adjustment and Other | Total | ||||||||||||||||||||||||
| December 29, 2019 | |||||||||||||||||||||||||||||
| Net gains/(losses) in AOCI, beginning of period | $ | 3.9 | $ | 11.0 | $ | (10.1) | $ | (508.1) | $ | (503.3) | |||||||||||||||||||
| Net gains/(losses) recognized in OCI before reclassifications | (0.1) | 25.8 | 17.7 | 76.1 | 119.5 | ||||||||||||||||||||||||
| Net (gains)/losses reclassified from AOCI to earnings | 0.1 | (6.1) | (2.4) | — | (8.4) | ||||||||||||||||||||||||
| Other comprehensive income/(loss) attributable to Starbucks | — | 19.7 | 15.3 | 76.1 | 111.1 | ||||||||||||||||||||||||
| Cumulative effect of accounting adoption | (0.7) | 3.0 | 2.5 | — | 4.8 | ||||||||||||||||||||||||
| Net gains/(losses) in AOCI, end of period | $ | 3.2 | $ | 33.7 | $ | 7.7 | $ | (432.0) | $ | (387.4) | |||||||||||||||||||
| December 30, 2018 | |||||||||||||||||||||||||||||
| Net gains/(losses) in AOCI, beginning of period | $ | (4.9) | $ | 17.7 | $ | 19.6 | $ | (362.7) | $ | (330.3) | |||||||||||||||||||
| Net gains/(losses) recognized in OCI before reclassifications | 1.7 | (7.3) | (16.3) | 1.6 | (20.3) | ||||||||||||||||||||||||
| Net (gains)/losses reclassified from AOCI to earnings | 0.3 | 7.1 | — | — | 7.4 | ||||||||||||||||||||||||
| Other comprehensive income/(loss) attributable to Starbucks | 2.0 | (0.2) | (16.3) | 1.6 | (12.9) | ||||||||||||||||||||||||
| Net gains/(losses) in AOCI, end of period | $ | (2.9) | $ | 17.5 | $ | 3.3 | $ | (361.1) | $ | (343.2) | |||||||||||||||||||
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Impact of reclassifications from AOCI on the consolidated statements of earnings (in millions):
| Quarter Ended | ||||||||||||||||||||
| AOCI Components | Amounts Reclassified from AOCI | Affected Line Item in the Statements of Earnings | ||||||||||||||||||
| Dec 29, 2019 | Dec 30, 2018 | |||||||||||||||||||
| Gains/(losses) on available-for-sale debt securities | $ | (0.2) | $ | 0.5 | Interest income and other, net | |||||||||||||||
| Gains/(losses) on cash flow hedges | 7.6 | (8.6) | ||||||||||||||||||
| Gains/(losses) on net investment hedges | 3.3 | — | Interest income and other, net | |||||||||||||||||
| 10.7 | (8.1) | Total before tax | ||||||||||||||||||
| (2.3) | 0.7 | Tax (expense)/benefit | ||||||||||||||||||
| $ | 8.4 | $ | (7.4) | Net of tax | ||||||||||||||||
In addition to 2.4 billion shares of authorized common stock with $0.001 par value per share, the Company has authorized 7.5 million shares of preferred stock, none of which was outstanding as of December 29, 2019.
During the quarter ended December 29, 2019, we repurchased 13.0 million shares of common stock for $1.1 billion. As of December 29, 2019, 16.2 million shares remained available for repurchase under current authorizations.
In September 2018, we entered into accelerated share repurchase agreements (“ASR agreements”) with third-party financial institutions totaling $5.0 billion, effective October 1, 2018. We made a $5.0 billion upfront payment to the financial institutions and received an initial delivery of 72.0 million shares. In March 2019, we received an additional 4.9 million shares upon the completion of the program based on a volume-weighted average share price (less discount) of $65.03.
During the first quarter of fiscal 2020, our Board of Directors declared a quarterly cash dividend to shareholders of $0.41 per share to be paid on February 21, 2020 to shareholders of record as of the close of business on February 6, 2020.
Note 12: Employee Stock Plans
As of December 29, 2019, there were 45.8 million shares of common stock available for issuance pursuant to future equity-based compensation awards and 12.3 million shares available for issuance under our employee stock purchase plan.
Stock-based compensation expense recognized in the consolidated statements of earnings (in millions):
| Quarter Ended | |||||||||||
| Dec 29, 2019 | Dec 30, 2018 | ||||||||||
| Options | $ | 1.7 | $ | 8.3 | |||||||
| Restricted Stock Units (“RSUs”) | 88.6 | 88.9 | |||||||||
| Total stock-based compensation expense | $ | 90.3 | $ | 97.2 | |||||||
Stock option and RSU transactions from September 29, 2019 through December 29, 2019 (in millions):
| Stock Options | RSUs | ||||||||||
| Options outstanding/Nonvested RSUs, September 29, 2019 | 15.2 | 8.9 | |||||||||
| Granted | — | 3.5 | |||||||||
| Options exercised/RSUs vested | (0.8) | (2.9) | |||||||||
| Forfeited/expired | — | (0.3) | |||||||||
| Options outstanding/Nonvested RSUs, December 29, 2019 | 14.4 | 9.2 | |||||||||
| Total unrecognized stock-based compensation expense, net of estimated forfeitures, as of December 29, 2019 | $ | 3.3 | $ | 294.9 | |||||||
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Note 13: Earnings per Share
Calculation of net earnings per common share (“EPS”) — basic and diluted (in millions, except EPS):
| Quarter Ended | |||||||||||
| Dec 29, 2019 | Dec 30, 2018 | ||||||||||
| Net earnings attributable to Starbucks | $ | 885.7 | $ | 760.6 | |||||||
| Weighted average common shares outstanding (for basic calculation) | 1,180.4 | 1,242.0 | |||||||||
| Dilutive effect of outstanding common stock options and RSUs | 10.6 | 11.4 | |||||||||
| Weighted average common and common equivalent shares outstanding (for diluted calculation) | 1,191.0 | 1,253.4 | |||||||||
| EPS — basic | $ | 0.75 | $ | 0.61 | |||||||
| EPS — diluted | $ | 0.74 | $ | 0.61 | |||||||
Potential dilutive shares consist of the incremental common shares issuable upon the exercise of outstanding stock options (both vested and non-vested) and unvested RSUs, calculated using the treasury stock method. The calculation of dilutive shares outstanding excludes out-of-the-money stock options (i.e., such options’ exercise prices were greater than the average market price of our common shares for the period) because their inclusion would have been antidilutive. As of December 29, 2019, we had no out-of-the-money stock options, compared to 0.2 million as of December 30, 2018.
Note 14: Commitments and Contingencies
Legal Proceedings
On April 13, 2010, an organization named Council for Education and Research on Toxics (“Plaintiff”) filed a lawsuit in the Superior Court of the State of California, County of Los Angeles, against the Company and certain other defendants who manufacture, package, distribute or sell brewed coffee. The lawsuit is Council for Education and Research on Toxics v. Starbucks Corporation, et al. On May 9, 2011, the Plaintiff filed an additional lawsuit in the Superior Court of the State of California, County of Los Angeles, against the Company and additional defendants who manufacture, package, distribute or sell packaged coffee. The lawsuit is Council for Education and Research on Toxics v. Brad Barry LLC, et al.. Both cases have since been consolidated and now include nearly eighty defendants, which constitute the great majority of the coffee industry in California. Plaintiff alleges that the Company and the other defendants failed to provide warnings for their coffee products of exposure to the chemical acrylamide as required under California Health and Safety Code section 25249.5, the California Safe Drinking Water and Toxic Enforcement Act of 1986, better known as Proposition 65. Plaintiff seeks equitable relief, including providing warnings to consumers of coffee products, as well as civil penalties in the amount of the statutory maximum of two thousand five hundred dollars per day per violation of Proposition 65. The Plaintiff asserts that every consumed cup of coffee, absent a compliant warning, is equivalent to a violation under Proposition 65.
The Company, as part of a joint defense group organized to defend against the lawsuit, disputes the claims of the Plaintiff. Acrylamide is not added to coffee but is present in all coffee in small amounts (parts per billion) as a byproduct of the coffee bean roasting process. The Company has asserted multiple affirmative defenses. Trial of the first phase of the case commenced on September 8, 2014, and was limited to three affirmative defenses shared by all defendants. On September 1, 2015, the trial court issued a final ruling adverse to defendants on all Phase 1 defenses. Trial of the second phase of the case commenced in the fall of 2017. On May 7, 2018, the trial court issued a ruling adverse to defendants on the Phase 2 defense, the Company's last remaining defense to liability. On June 22, 2018, the California Office of Environmental Health Hazard Assessment (OEHHA) proposed a new regulation clarifying that cancer warnings are not required for coffee under Proposition 65. The case was set to proceed to a third phase trial on damages, remedies and attorneys' fees on October 15, 2018. However, on October 12, 2018, the California Court of Appeal granted the defendants request for a stay of the Phase 3 trial.
On June 3, 2019, the Office of Administrative Law (OAL) approved the coffee exemption regulation. The regulation became effective on October 1, 2019. On June 24, 2019, the Court of Appeal lifted the stay of the litigation. A status conference before the trial judge to discuss the motions that each party has filed is scheduled for March 23, 2020. At this stage of the proceedings, Starbucks believes that the likelihood that the Company will ultimately incur a loss in connection with this litigation is remote. Accordingly, no loss contingency was recorded for this matter.
Starbucks is party to various other legal proceedings arising in the ordinary course of business, including certain employment litigation cases that have been certified as class or collective actions, but, except as noted above, is not currently a party to any legal proceeding that management believes could have a material adverse effect on our consolidated financial position, results of operations or cash flows.
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Note 15: Segment Reporting
Segment information is prepared on the same basis that our ceo, who is our Chief Operating Decision Maker, manages the segments, evaluates financial results, and makes key operating decisions.
Consolidated revenue mix by product type (in millions):
| Quarter Ended | |||||||||||||||||||||||
| Dec 29, 2019 | Dec 30, 2018 | ||||||||||||||||||||||
Beverage(1) | $ | 4,260.9 | 60 | % | $ | 3,926.0 | 59 | % | |||||||||||||||
Food(2) | 1,281.4 | 18 | % | 1,188.9 | 18 | % | |||||||||||||||||
Other(3) | 1,554.8 | 22 | % | 1,517.8 | 23 | % | |||||||||||||||||
| Total | $ | 7,097.1 | 100 | % | $ | 6,632.7 | 100 | % | |||||||||||||||
(1)Beverage represents sales within our company-operated stores.
(2)Food includes sales within our company-operated stores as well as products sales to our licensees.
(3)“Other” primarily consists of packaged and single-serve coffees and teas, royalty and licensing revenues, serveware, beverage-related ingredients, and ready-to-drink beverages, among other items.
The table below presents financial information for our reportable operating segments and Corporate and Other segment (in millions):
Quarter Ended
| Americas | International | Channel Development | Corporate and Other | Total | |||||||||||||||||||||||||
| December 29, 2019 | |||||||||||||||||||||||||||||
| Total net revenues | $ | 5,010.9 | $ | 1,571.1 | $ | 494.6 | $ | 20.5 | $ | 7,097.1 | |||||||||||||||||||
| Depreciation and amortization expenses | 189.2 | 126.6 | 0.3 | 34.9 | 351.0 | ||||||||||||||||||||||||
| Income from equity investees | — | 30.9 | 43.0 | — | 73.9 | ||||||||||||||||||||||||
| Operating income/(loss) | $ | 1,098.8 | $ | 275.9 | $ | 175.5 | $ | (330.4) | $ | 1,219.8 | |||||||||||||||||||
| December 30, 2018 | |||||||||||||||||||||||||||||
Total net revenues(1) | $ | 4,612.5 | $ | 1,504.0 | $ | 504.6 | $ | 11.6 | $ | 6,632.7 | |||||||||||||||||||
| Depreciation and amortization expenses | 166.9 | 127.0 | — | 39.5 | 333.4 | ||||||||||||||||||||||||
| Income from equity investees | — | 26.4 | 41.4 | — | 67.8 | ||||||||||||||||||||||||
| Operating income/(loss) | $ | 968.7 | $ | 230.0 | $ | 175.8 | $ | (358.8) | $ | 1,015.7 | |||||||||||||||||||
(1)Prior period amounts have been restated to reflect the fourth quarter fiscal 2019 realigned Starbucks operating segment reporting structure.
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Note 16: Subsequent Event
In late January 2020, we closed more than half of our stores in China and continue to monitor and modify the operating hours of all of our stores in the market in response to the outbreak of the coronavirus. This is expected to be temporary. Given the dynamic nature of these circumstances, the duration of business disruption, reduced customer traffic and related financial impact cannot be reasonably estimated at this time but are expected to materially affect our International segment and consolidated results for the second quarter and full year of fiscal 2020.
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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 herein are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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,” “project,” “seek,” “should,” “will,” “would,” and similar expressions intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These statements include statements relating to trends in or expectations relating to the expected effects of our initiatives, strategies and plans, as well as trends in or expectations regarding our financial results and long-term growth model and drivers, our focus on accelerating growth in high-returning businesses, the conversion of several market operations to fully licensed models, expanding our licensing to Nestlé of our consumer packaged goods and Foodservice businesses and its effects on our Channel Development segment results, tax rates, business opportunities and expansion, strategic acquisitions, expenses, dividends, share repurchases, commodity costs and our mitigation strategies, liquidity, cash flow from operations, use of cash and cash requirements, investments, borrowing capacity and use of proceeds, repatriation of cash to the U.S., the likely issuance of additional debt and the applicable interest rate, the impact of the coronavirus outbreak on our financial results, the expected effects of new accounting pronouncements and the estimated impact of changes in U.S. tax law, including on tax rates, investments funded by these changes, and potential outcomes and effects of legal proceedings. Such statements are based on currently available operating, financial and competitive information and are subject to various risks and uncertainties. Actual future results and trends may differ materially depending on a variety of factors, including, but not limited to: fluctuations in U.S. and international economies and currencies; our ability to preserve, grow and leverage our brands; the ability of our business partners and third-party providers to fulfill their responsibilities and commitments; potential negative effects of incidents involving food or beverage-borne illnesses, tampering, adulteration, contamination or mislabeling; potential negative effects of material breaches of our information technology systems to the extent we experience a material breach; material failures of our information technology systems; costs associated with, and the successful execution of, the company's initiatives and plans, including the integration of the East China business and the successful expansion of our Global Coffee Alliance with Nestlé our ability to obtain financing on acceptable terms; the acceptance of the company's products by our customers and evolving consumer preferences and tastes; changes in the availability and cost of labor; the impact of competition; inherent risks of operating a global business; the prices and availability of coffee, dairy and other raw materials; the effect of legal proceedings; the effects of the coronavirus outbreak; the effects of changes in tax laws and related guidance and regulations that may be implemented and other risks detailed in our filings with the SEC, including in Part I Item IA “Risk Factors” in the 10-K.
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, contained in the 10-K.
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Introduction and Overview
Starbucks is the premier coffee roaster and retailer of specialty coffee with operations in 82 markets around the world. As of December 29, 2019, Starbucks had over 31,000 company-operated and licensed stores, an increase of 6% from the prior year. Additionally, we sell a variety of consumer-packaged goods, or CPG, primarily through the Global Coffee Alliance established with Nestlé and other partnerships and joint ventures. Our financial results and long-term growth model will continue to be driven by new store openings, comparable store sales and margin management. Comparable store sales represent company-operated stores open for 13 months or longer and exclude the impact of foreign currency translation. During the quarter ended December 29, 2019, our global comparable store sales grew 5%.
We have three reportable operating segments: Americas, International, and Channel Development. Non-reportable operating segments and unallocated corporate expenses are reported within Corporate and Other.
In late January 2020, we closed more than half of our stores in China and continue to monitor and modify the operating hours of all of our stores in the market in response to the outbreak of the coronavirus and in an effort to help ensure the health and safety of our partners (employees) and our customers. This is expected to be temporary. Given the dynamic nature of these circumstances, the duration of business disruption, reduced customer traffic and related financial impact cannot be reasonably estimated at this time but are expected to materially affect our International segment and consolidated results for the second quarter and full year of fiscal 2020.
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 store closures, unless otherwise noted.
Comparable Store Sales
Starbucks comparable store sales for the first quarter of fiscal 2020:
| Quarter Ended Dec 29, 2019 | |||||||||||||||||
Sales Growth | Change in Transactions | Change in Ticket | |||||||||||||||
| Consolidated | 5% | 2% | 3% | ||||||||||||||
| Americas | 6% | 2% | 3% | ||||||||||||||
| International | 1% | (1)% | 2% | ||||||||||||||
Refer to our Quarterly Store Data, also included in Item 2 of Part I of this 10-Q, for additional information on our company operated and licensed store portfolio.
Results of Operations (in millions)
Revenues
| Quarter Ended | |||||||||||||||||||||||
| Dec 29, 2019 | Dec 30, 2018 | $ Change | % Change | ||||||||||||||||||||
| Company-operated stores | $ | 5,780.7 | $ | 5,370.3 | $ | 410.4 | 7.6 | % | |||||||||||||||
| Licensed stores | 792.0 | 737.1 | 54.9 | 7.4 | |||||||||||||||||||
| Other | 524.4 | 525.3 | (0.9) | (0.2) | |||||||||||||||||||
| Total net revenues | $ | 7,097.1 | $ | 6,632.7 | $ | 464.4 | 7.0 | % | |||||||||||||||
Quarter ended December 29, 2019 compared with quarter ended December 30, 2018
Total net revenues for the first quarter of fiscal 2020 increased $464 million, primarily due to increased revenues from company-operated stores ($410 million). The growth in company-operated stores revenues was driven by a 5% increase in comparable store sales ($245 million) and incremental revenues from 919 net new Starbucks® company-operated store openings, or a 6% increase, over the past 12 months ($236 million). Partially offsetting these increases were the conversions of our retail businesses in Thailand, France, and the Netherlands to fully licensed markets during fiscal 2019 ($92 million).
Licensed stores revenue growth also contributed to the increase in total net revenues ($55 million), driven by increased product and royalty revenues from our licensees ($39 million), primarily resulting from the opening of 1,008 net new Starbucks® licensed stores, or a 7% increase, over the past 12 months, and the conversions of our retail businesses in Thailand, France, and the Netherlands to fully licensed markets ($21 million).
Other revenues decreased $1 million, primarily due to lapping prior year product sales related to the Tazo brand transition agreement, partially offset by expansion through the Global Coffee Alliance.
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Operating Expenses
| Quarter Ended | |||||||||||||||||||||||||||||
| Dec 29, 2019 | Dec 30, 2018 | $ Change | Dec 29, 2019 | Dec 30, 2018 | |||||||||||||||||||||||||
As a % of Total Net Revenues | |||||||||||||||||||||||||||||
| Cost of sales | $ | 2,236.4 | $ | 2,175.8 | $ | 60.6 | 31.5 | % | 32.8 | % | |||||||||||||||||||
| Store operating expenses | 2,821.5 | 2,586.8 | 234.7 | 39.8 | 39.0 | ||||||||||||||||||||||||
| Other operating expenses | 101.8 | 97.6 | 4.2 | 1.4 | 1.5 | ||||||||||||||||||||||||
| Depreciation and amortization expenses | 351.0 | 333.4 | 17.6 | 4.9 | 5.0 | ||||||||||||||||||||||||
| General and administrative expenses | 434.2 | 448.0 | (13.8) | 6.1 | 6.8 | ||||||||||||||||||||||||
| Restructuring and impairments | 6.3 | 43.2 | (36.9) | 0.1 | 0.7 | ||||||||||||||||||||||||
| Total operating expenses | 5,951.2 | 5,684.8 | 266.4 | 83.9 | 85.7 | ||||||||||||||||||||||||
| Income from equity investees | 73.9 | 67.8 | 6.1 | 1.0 | 1.0 | ||||||||||||||||||||||||
| Operating income | $ | 1,219.8 | $ | 1,015.7 | $ | 204.1 | 17.2 | % | 15.3 | % | |||||||||||||||||||
| Store operating expenses as a % of company-operated store revenues | 48.8 | % | 48.2 | % | |||||||||||||||||||||||||
Quarter ended December 29, 2019 compared with quarter ended December 30, 2018
Cost of sales as a percentage of total net revenues decreased 130 basis points for the first quarter of fiscal 2020, primarily due to supply chain efficiencies (approximately 90 basis points).
Store operating expenses as a percentage of total net revenues increased 80 basis points for the first quarter of fiscal 2020. Store operating expenses as a percentage of company-operated store revenues increased 60 basis points, primarily due to growth in wages and benefits (approximately 170 basis points), largely in the Americas segment, partially offset by sales leverage.
Other operating expenses increased $4 million for the first quarter of fiscal 2020, primarily due to incremental costs to develop and grow the Global Coffee Alliance ($5 million).
General and administrative expenses decreased $14 million, primarily due to lapping the 2018 U.S stock award granted in the third quarter of fiscal 2018, which was funded by savings from the Tax Act and vested in the third quarter of fiscal 2019 ($23 million), partially offset by incremental strategic investments in technology.
Restructuring and impairment expenses decreased $37 million, primarily due to lapping prior year severance costs ($24 million) and asset impairments in the U.S ($10 million) and lower costs associated with the closure of certain company-operated stores ($4 million).
Income from equity investees increased $6 million, primarily due to improved comparable store sales from our joint venture operations in South Korea and higher income from our North American Coffee Partnership joint venture.
The combination of these changes resulted in an overall increase in operating margin of 190 basis points for the first quarter of fiscal 2020.
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Other Income and Expenses
| Quarter Ended | |||||||||||||||||||||||||||||
| Dec 29, 2019 | Dec 30, 2018 | $ Change | Dec 29, 2019 | Dec 30, 2018 | |||||||||||||||||||||||||
As a % of Total Net Revenues | |||||||||||||||||||||||||||||
| Operating income | $ | 1,219.8 | $ | 1,015.7 | $ | 204.1 | 17.2 | % | 15.3 | % | |||||||||||||||||||
| Interest income and other, net | 15.9 | 24.8 | (8.9) | 0.2 | 0.4 | ||||||||||||||||||||||||
| Interest expense | (91.9) | (75.0) | (16.9) | (1.3) | (1.1) | ||||||||||||||||||||||||
| Earnings before income taxes | 1,143.8 | 965.5 | 178.3 | 16.1 | 14.6 | ||||||||||||||||||||||||
| Income tax expense | 258.5 | 205.1 | 53.4 | 3.6 | 3.1 | ||||||||||||||||||||||||
| Net earnings including noncontrolling interests | 885.3 | 760.4 | 124.9 | 12.5 | 11.5 | ||||||||||||||||||||||||
| Net earnings/(loss) attributable to noncontrolling interests | (0.4) | (0.2) | (0.2) | — | — | ||||||||||||||||||||||||
| Net earnings attributable to Starbucks | $ | 885.7 | $ | 760.6 | $ | 125.1 | 12.5 | % | 11.5 | % | |||||||||||||||||||
| Effective tax rate including noncontrolling interests | 22.6 | % | 21.2 | % | |||||||||||||||||||||||||
Quarter ended December 29, 2019 compared with quarter ended December 30, 2018
Interest expense increased $17 million primarily due to additional interest incurred on long-term debt issued in May 2019.
The effective tax rate for the quarter ended December 29, 2019 was 22.6% compared to 21.2% for the same quarter in fiscal 2019. The increase was primarily due to lapping the release of income tax reserves related to the settlement of a U.S. tax examination (approximately 350 basis points), lower stock-based compensation excess tax benefit (approximately 220 basis points), lapping the impact of foreign derived intangible income primarily related to our Nestlé transaction (approximately 130 basis points) and lapping other immaterial true-ups. These unfavorable impacts were partially offset by the impact of changes in indefinite reinvestment assertions for certain foreign subsidiaries in the first quarter of fiscal 2019 (approximately 810 basis points).
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Segment Information
Results of operations by segment (in millions):
Americas
| Quarter Ended | |||||||||||||||||||||||||||||
| Dec 29, 2019 | Dec 30, 2018 | $ Change | Dec 29, 2019 | Dec 30, 2018 | |||||||||||||||||||||||||
As a % of Americas Total Net Revenues | |||||||||||||||||||||||||||||
| Net revenues: | |||||||||||||||||||||||||||||
| Company-operated stores | $ | 4,471.0 | $ | 4,092.2 | $ | 378.8 | 89.2 | % | 88.7 | % | |||||||||||||||||||
| Licensed stores | 537.3 | 514.6 | 22.7 | 10.7 | 11.2 | ||||||||||||||||||||||||
| Other | 2.6 | 5.7 | (3.1) | 0.1 | 0.1 | ||||||||||||||||||||||||
| Total net revenues | 5,010.9 | 4,612.5 | 398.4 | 100.0 | 100.0 | ||||||||||||||||||||||||
| Cost of sales | 1,388.4 | 1,351.3 | 37.1 | 27.7 | 29.3 | ||||||||||||||||||||||||
| Store operating expenses | 2,214.4 | 1,983.1 | 231.3 | 44.2 | 43.0 | ||||||||||||||||||||||||
| Other operating expenses | 42.5 | 44.5 | (2.0) | 0.8 | 1.0 | ||||||||||||||||||||||||
| Depreciation and amortization expenses | 189.2 | 166.9 | 22.3 | 3.8 | 3.6 | ||||||||||||||||||||||||
| General and administrative expenses | 72.4 | 75.1 | (2.7) | 1.4 | 1.6 | ||||||||||||||||||||||||
| Restructuring and impairments | 5.2 | 22.9 | (17.7) | 0.1 | 0.5 | ||||||||||||||||||||||||
| Total operating expenses | 3,912.1 | 3,643.8 | 268.3 | 78.1 | 79.0 | ||||||||||||||||||||||||
| Operating income | $ | 1,098.8 | $ | 968.7 | $ | 130.1 | 21.9 | % | 21.0 | % | |||||||||||||||||||
| Store operating expenses as a % of company-operated store revenues | 49.5 | % | 48.5 | % | |||||||||||||||||||||||||
Quarter ended December 29, 2019 compared with quarter ended December 30, 2018
Revenues
Americas total net revenues for the first quarter of fiscal 2020 increased $398 million, or 9%, primarily driven by a 6% increase in comparable store sales ($230 million) and 243 net new Starbucks® company-operated store openings, or a 2% increase, over the past 12 months ($139 million). Also contributing were higher product sales to and royalty revenues from our licensees ($24 million), primarily resulting from comparable store sales growth and the opening of 307 net new Starbucks® licensed stores, or a 4% increase, over the past 12 months.
Operating Margin
Americas operating income for the first quarter of fiscal 2020 increased 13% to $1,098.8 million, compared to $968.7 million in the first quarter of fiscal 2019. Operating margin increased 90 basis points to 21.9%, primarily driven by sales leverage (approximately 240 basis points), supply chain efficiencies (approximately 130 basis points) and decreased restructuring costs related to the closure of certain U.S. and Canada company-operated stores (approximately 40 basis points). Partially offsetting these were higher partner costs (approximately 200 basis points), primarily growth in wages and benefits and to a lesser extent, investments in store labor hours, as well as higher occupancy costs.
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International
| Quarter Ended | |||||||||||||||||||||||||||||
| Dec 29, 2019 | Dec 30, 2018 | $ Change | Dec 29, 2019 | Dec 30, 2018 | |||||||||||||||||||||||||
| As a % of International Total Net Revenues | |||||||||||||||||||||||||||||
| Net revenues: | |||||||||||||||||||||||||||||
| Company-operated stores | $ | 1,309.7 | $ | 1,278.1 | $ | 31.6 | 83.4 | % | 85.0 | % | |||||||||||||||||||
| Licensed stores | 254.7 | 222.5 | 32.2 | 16.2 | 14.8 | ||||||||||||||||||||||||
| Other | 6.7 | 3.4 | 3.3 | 0.4 | 0.2 | ||||||||||||||||||||||||
| Total net revenues | 1,571.1 | 1,504.0 | 67.1 | 100.0 | 100.0 | ||||||||||||||||||||||||
| Cost of sales | 488.5 | 462.7 | 25.8 | 31.1 | 30.8 | ||||||||||||||||||||||||
| Store operating expenses | 607.1 | 603.7 | 3.4 | 38.6 | 40.1 | ||||||||||||||||||||||||
| Other operating expenses | 35.9 | 31.3 | 4.6 | 2.3 | 2.1 | ||||||||||||||||||||||||
| Depreciation and amortization expenses | 126.6 | 127.0 | (0.4) | 8.1 | 8.4 | ||||||||||||||||||||||||
| General and administrative expenses | 67.2 | 69.3 | (2.1) | 4.3 | 4.6 | ||||||||||||||||||||||||
| Restructuring and impairments | 0.8 | 6.4 | (5.6) | 0.1 | 0.4 | ||||||||||||||||||||||||
| Total operating expenses | 1,326.1 | 1,300.4 | 25.7 | 84.4 | 86.5 | ||||||||||||||||||||||||
| Income from equity investees | 30.9 | 26.4 | 4.5 | 2.0 | 1.8 | ||||||||||||||||||||||||
| Operating income | $ | 275.9 | $ | 230.0 | $ | 45.9 | 17.6 | % | 15.3 | % | |||||||||||||||||||
| Store operating expenses as a % of company-operated store revenues | 46.4 | % | 47.2 | % | |||||||||||||||||||||||||
Quarter ended December 29, 2019 compared with quarter ended December 30, 2018
Revenues
International total net revenues for the first quarter of fiscal 2020 increased $67 million, or 4%, primarily driven by 676 net new Starbucks® company-operated store openings, or a 12% increase, over the past 12 months ($97 million). Also contributing were increased product sales to and royalty revenues from licensees ($16 million), primarily resulting from the opening of 701 net new licensed stores, or an 11% increase, over the past 12 months, and a 1% increase in comparable company-operated store sales ($15 million). These increases were partially offset by the conversions of our retail businesses in Thailand, France, and the Netherlands ($71 million).
Operating Margin
International operating income for the first quarter of fiscal 2020 increased 20% to $276 million, compared to $230 million in the first quarter of fiscal 2019. Operating margin increased 230 basis points to 17.6%, primarily driven by sales leverage (approximately 80 basis points), supply chain efficiencies (approximately 70 basis points), the conversions of our retail businesses in Thailand, France, and the Netherlands to fully licensed markets (approximately 60 basis points) and lower restructuring costs (approximately 30 basis points), partially offset by product mix shift (approximately 40 basis points) and strategic investments (approximately 30 basis points).
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Channel Development
| Quarter Ended | |||||||||||||||||||||||||||||
| Dec 29, 2019 | Dec 30, 2018 | $ Change | Dec 29, 2019 | Dec 30, 2018 | |||||||||||||||||||||||||
| As a % of Channel Development Total Net Revenues | |||||||||||||||||||||||||||||
| Net revenues | $ | 494.6 | $ | 504.6 | $ | (10.0) | |||||||||||||||||||||||
| Cost of sales | 338.8 | 348.4 | (9.6) | 68.5 | % | 69.0 | % | ||||||||||||||||||||||
| Other operating expenses | 20.6 | 18.6 | 2.0 | 4.2 | 3.7 | ||||||||||||||||||||||||
| Depreciation and amortization expenses | 0.3 | — | 0.3 | 0.1 | — | ||||||||||||||||||||||||
| General and administrative expenses | 2.4 | 3.2 | (0.8) | 0.5 | 0.6 | ||||||||||||||||||||||||
| Total operating expenses | 362.1 | 370.2 | (8.1) | 73.2 | 73.4 | ||||||||||||||||||||||||
| Income from equity investees | 43.0 | 41.4 | 1.6 | 8.7 | 8.2 | ||||||||||||||||||||||||
| Operating income | $ | 175.5 | $ | 175.8 | $ | (0.3) | 35.5 | % | 34.8 | % | |||||||||||||||||||
Quarter ended December 29, 2019 compared with quarter ended December 30, 2018
Revenues
Channel Development total net revenues for the first quarter of fiscal 2020 decreased $10 million, or 2%, primarily due to lapping prior year product sales to Unilever as a result of the sale and transition of the Tazo brand ($22 million), partially offset by expansion through the Global Coffee Alliance.
Operating Margin
Channel Development operating income for the first quarter of fiscal 2020 was flat at $176 million, compared to the first quarter of fiscal 2019. Operating margin increased 70 basis points to 35.5%, primarily driven by lapping prior year Nestlé transaction costs (approximately 100 basis points), distribution efficiencies (approximately 50 basis points), and favorable business mix shift (approximately 30 basis points), partially offset by incremental costs to develop and grow the Global Coffee Alliance (approximately 100 basis points).
Corporate and Other
| Quarter Ended | |||||||||||||||||||||||
| Dec 29, 2019 | Dec 30, 2018 | $ Change | % Change | ||||||||||||||||||||
| Net revenues: | |||||||||||||||||||||||
| Other | 20.5 | 11.6 | 8.9 | 76.7 | |||||||||||||||||||
| Total net revenues | 20.5 | 11.6 | 8.9 | 76.7 | |||||||||||||||||||
| Cost of sales | 20.7 | 13.4 | 7.3 | 54.5 | |||||||||||||||||||
| Other operating expenses | 2.8 | 3.2 | (0.4) | (12.5) | |||||||||||||||||||
| Depreciation and amortization expenses | 34.9 | 39.5 | (4.6) | (11.6) | |||||||||||||||||||
| General and administrative expenses | 292.2 | 300.4 | (8.2) | (2.7) | |||||||||||||||||||
| Restructuring and impairments | 0.3 | 13.9 | (13.6) | nm | |||||||||||||||||||
| Total operating expenses | 350.9 | 370.4 | (19.5) | (5.3) | |||||||||||||||||||
| Operating loss | $ | (330.4) | $ | (358.8) | $ | 28.4 | (7.9) | % | |||||||||||||||
Corporate and Other primarily consists of our unallocated corporate expenses, as well as Evolution Fresh. Unallocated corporate expenses include corporate administrative functions that support the operating segments but are not specifically attributable to or managed by any segment and are not included in the reported financial results of the operating segments.
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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 | Stores open as of | ||||||||||||||||||||||
| Dec 29, 2019 | Dec 30, 2018 | Dec 29, 2019 | Dec 30, 2018 | ||||||||||||||||||||
| Americas | |||||||||||||||||||||||
| Company-operated stores | 46 | 87 | 10,020 | 9,777 | |||||||||||||||||||
| Licensed stores | 90 | 106 | 8,183 | 7,876 | |||||||||||||||||||
| Total Americas | 136 | 193 | 18,203 | 17,653 | |||||||||||||||||||
| International | |||||||||||||||||||||||
| Company-operated stores | 199 | 188 | 6,059 | 5,839 | |||||||||||||||||||
| Licensed stores | 204 | 172 | 7,533 | 6,373 | |||||||||||||||||||
| Total International | 403 | 360 | 13,592 | 12,212 | |||||||||||||||||||
| Corporate and Other | |||||||||||||||||||||||
| Licensed stores | — | (12) | — | — | |||||||||||||||||||
| Total Corporate and Other | — | (12) | — | — | |||||||||||||||||||
| Total Company | 539 | 541 | 31,795 | 29,865 | |||||||||||||||||||
Financial Condition, Liquidity and Capital Resources
Investment Overview
Our cash and investments totaled $3.3 billion as of December 29, 2019 and $3.0 billion as of September 29, 2019. 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 government treasury securities (foreign and domestic) and corporate debt securities. As of December 29, 2019, approximately $2.0 billion of cash was held in foreign subsidiaries.
Borrowing Capacity
Our $2.0 billion unsecured 5-year revolving credit facility (the “2018 credit facility”) and our $1.0 billion unsecured 364-day credit facility (the “364-day credit facility”) are available for working capital, capital expenditures and other corporate purposes, including acquisitions and share repurchases.
The 2018 credit facility, of which $150 million may be used for issuances of letters of credit, is currently set to mature on October 25, 2022. We have the option, subject to negotiation and agreement with the related banks, to increase the maximum commitment amount by an additional $500 million. Borrowings under the credit facility will bear interest at a variable rate based on LIBOR, and, for U.S. dollar-denominated loans under certain circumstances, a Base Rate (as defined in the credit facility), in each case plus an applicable margin. The applicable margin is based on the better of (i) the Company's long-term credit ratings assigned by Moody's and Standard & Poor's rating agencies and (ii) the Company's fixed charge coverage ratio, pursuant to a pricing grid set forth in the five-year credit agreement. The current applicable margin is 0.910% for Eurocurrency Rate Loans and 0.000% (nil) for Base Rate Loans.
The 364-day credit facility, of which no amount may be used for issuances of letters of credit, is currently set to mature on October 21, 2020. We have the option, subject to negotiation and agreement with the related banks, to increase the maximum commitment amount by an additional $500 million. Borrowings under the credit facility will bear interest at a variable rate based on LIBOR, and, for U.S. dollar-denominated loans under certain circumstances, a Base Rate (as defined in the credit facility), in each case plus an applicable margin. The applicable margin is 0.920% for Eurocurrency Rate Loans and 0.000% (nil) for Base Rate Loans.
Both credit facilities contain 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 December 29, 2019, we had no borrowings outstanding and were in compliance with all applicable covenants related to our credit facilities.
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Under our commercial paper program, we may issue unsecured commercial paper notes up to a maximum aggregate amount outstanding at any time of $3.0 billion, with individual maturities that may vary but not exceed 397 days from the date of issue. Amounts outstanding under the commercial paper program are required to be backstopped by available commitments under our 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 December 29, 2019, we had borrowings of $497.9 million outstanding, net of unamortized discount, under our commercial paper program.
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.
The indentures under which all of our Senior Notes were issued require us to maintain compliance with certain covenants, including limits on future liens and sale and leaseback transactions on certain material properties. As of December 29, 2019, 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 invest in our core businesses, including capital expenditures, new product innovations, related marketing support and partner and digital investments, return cash to shareholders through common stock cash dividend payments and share repurchases, as well as other new business opportunities related to our core and developing businesses. Further, we may use our available cash resources to make proportionate capital contributions to our investees. We may also seek strategic acquisitions to leverage existing capabilities and further build our business in support of our growth-at-scale agenda. 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 future cash flows generated from operations and existing cash and investments both domestically and internationally combined with our ability to leverage our balance sheet through the issuance of debt will be sufficient to finance capital requirements for our core businesses as well as shareholder distributions for the foreseeable future. Significant new joint ventures, acquisitions and/or other new business opportunities may require additional outside funding. We have borrowed funds and continue to believe we have the ability to do so at reasonable interest rates; however, additional borrowings would result in increased interest expense in the future. In this regard, we may incur additional debt, within targeted levels, as part of our plans to fund our capital programs, including cash returns to shareholders through dividends and share repurchases.
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. We do not anticipate the need for repatriated funds to the U.S. to satisfy domestic liquidity needs.
During the first quarter of fiscal 2020, our Board of Directors declared a quarterly cash dividend to shareholders of $0.41 per share to be paid on February 21, 2020 to shareholders of record as of the close of business on February 6, 2020.
We repurchased 13.0 million shares of common stock for $1.1 billion during the first quarter ended December 29, 2019 under our ongoing share repurchase program. As of December 29, 2019, 16.2 million shares remained available for repurchase under current authorizations.
Other than normal operating expenses, cash requirements for the remainder of fiscal 2020 are expected to consist primarily of capital expenditures for investments in our new and existing stores and our supply chain and corporate facilities. Total capital expenditures for fiscal 2020 are expected to be approximately $1.8 billion.
Cash Flows
Cash provided by operating activities was $1.8 billion for the first quarter of fiscal 2020, compared to $2.4 billion for the same period in fiscal 2019. The change was primarily due to the timing of tax payments and refunds.
Cash used by investing activities for the first quarter of fiscal 2020 totaled $0.4 billion, compared to cash used by investing activities of $0.5 billion for the same period in fiscal 2019. The change was primarily driven by lower purchases of investments.
Cash used by financing activities for the first quarter of fiscal 2020 and fiscal 2019 totaled $1.1 billion and $5.9 billion, respectively. The change was primarily due to higher repurchases of our common stock under accelerated share repurchase agreements in fiscal 2019.
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Contractual Obligations
In Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 10-K, we disclosed that we had $28.2 billion in total contractual obligations as of September 29, 2019. There have been no material changes to our total obligations during the period covered by this 10-Q outside of the normal course of our business.
Off-Balance Sheet Arrangements
There has been no material change in our off-balance sheet arrangements discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 10-K.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1, Summary of Significant Accounting Policies, 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.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that material information required to be disclosed in our periodic reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures are also designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer as appropriate, to allow timely decisions regarding required disclosure.
During the first quarter of fiscal 2020, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of the disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this report (December 29, 2019).
Effective September 30, 2019, we adopted the new lease accounting guidance. Please refer to Note 1 Summary of Significant Accounting Policies, for additional information regarding the impacts of the adoption. As a result, we implemented a new accounting system and modified existing reporting systems, processes and internal controls over leases to assist us in the application of the new accounting guidance. There were no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most recently completed fiscal quarter that materially affected or are reasonably likely to materially affect internal control over financial reporting.
The certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 are filed as exhibits 31.1 and 31.2 to this 10-Q.
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PART II — OTHER INFORMATION
Item 1.Legal Proceedings
See Note 14, Commitments and Contingencies, to the consolidated financial statements included in Item 1 of Part I of this 10-Q for information regarding certain legal proceedings in which we are involved.
Item 1A.Risk Factors
There have been no material changes to the risk factors previously disclosed in the 10-K, other than the addition of the text below.
Our financial condition and results of operations for fiscal 2020 are expected to be adversely affected by the recent coronavirus outbreak.
In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China. In late January 2020, in response to intensifying efforts to contain the spread of this coronavirus, we closed more than half of our stores in China and we continue to monitor or modify the operating hours of all of our stores in the market. While the store closures and modified operating hours are expected to be temporary, the duration of the business disruption, reduced customer traffic and related financial impact cannot be reasonably estimated at this time but are expected to materially affect our International segment and consolidated results for second quarter and full year of fiscal 2020. At the time of this filing, the outbreak has been largely concentrated in China, although cases have been confirmed in other countries. The extent to which the coronavirus impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others.
Information regarding repurchases of our common stock during the quarter ended December 29, 2019:
| Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2) | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(3) | |||||||||||||||||||||||
Period(1) | ||||||||||||||||||||||||||
| September 30, 2019 - October 27, 2019 | 2,316,535 | $ | 85.82 | 2,316,535 | 26,849,464 | |||||||||||||||||||||
| October 28, 2019 - November 24, 2019 | 4,552,866 | 83.08 | 4,552,866 | 22,296,598 | ||||||||||||||||||||||
| November 25, 2019 - December 29, 2019 | 6,130,000 | 86.60 | 6,130,000 | 16,166,598 | ||||||||||||||||||||||
| Total | 12,999,401 | $ | 85.23 | 12,999,401 | ||||||||||||||||||||||
(1)Monthly information is presented by reference to our fiscal months during the first quarter of fiscal 2020.
(2)Share repurchases are conducted under our ongoing share repurchase program announced in September 2001, which has no expiration date.
(3)This column includes the total number of shares available for repurchase under the Company's ongoing share repurchase program. Shares under our ongoing share repurchase program may be repurchased in open market transactions, including pursuant to a trading plan adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, or through privately negotiated transactions. The timing, manner, price and amount of repurchases will be determined at our discretion and the share repurchase program may be suspended, terminated or modified at any time for any reason.
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Item 6.Exhibits
| Incorporated by Reference | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Exhibit No. | Exhibit Description | Form | File No. | Date of Filing | Exhibit Number | Filed Herewith | |||||||||||||||||||||||||||||||||||||||||||||||
| 10-Q | 0-20322 | 04/28/2015 | 3.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 8-K | 0-20322 | 06/05/2018 | 3.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| — | — | — | — | X | |||||||||||||||||||||||||||||||||||||||||||||||||
| — | — | — | — | X | |||||||||||||||||||||||||||||||||||||||||||||||||
| — | — | — | — | X | |||||||||||||||||||||||||||||||||||||||||||||||||
| — | — | — | — | X | |||||||||||||||||||||||||||||||||||||||||||||||||
| — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| 101 | The following financial statements from the Company's 10-Q for the fiscal quarter ended December 29, 2019, formatted in iXBRL: (i) Consolidated Statements of Earnings, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Equity and (vi) Notes to Consolidated Financial Statements | — | — | — | — | X | |||||||||||||||||||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted in iXBRL and contained in Exhibit 101) | — | — | — | — | X | |||||||||||||||||||||||||||||||||||||||||||||||
* Furnished herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
January 28, 2020
| STARBUCKS CORPORATION | |||||||||||
| By: | /s/ Patrick J. Grismer | ||||||||||
| Patrick J. Grismer | |||||||||||
| executive vice president, chief financial officer | |||||||||||
Signing on behalf of the registrant and as principal financial officer | |||||||||||
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