STARBUCKS CORP Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)
Our fiscal year ends on the Sunday closest to
September 30. All references to store counts, including data for new store openings, are reported net of related store closures, unless otherwise noted. Fiscal year 2022 included 52 weeks. Fiscal year 2021 included 53 weeks, with the 53rd week falling in the fourth fiscal quarter, and fiscal year 2020 included 52 weeks; comparable store sale percentages below are calculated excluding the 53rd week.
Discussion of our financial condition and results of operations for the year ended
We have three reportable operating segments: 1)
North America, which is inclusive of the U.S.and Canada; 2) International, which is inclusive of China, Japan, Asia Pacific, Europe, Middle East, Africa, Latin Americaand the Caribbean; and 3) Channel Development. Non-reportable operating segments and unallocated corporate expenses are reported within Corporate and Other. Our financial results and long-term growth model will continue to be driven by new store openings, comparable store sales and margin management. We believe these key operating metrics are useful to investors because management uses these metrics to assess the growth of our business and the effectiveness of our marketing and operational strategies. Throughout this MD&A, we commonly discuss the following key operating metrics: •New store openings and store count •Comparable store sales •Operating margin Starbucksresults for fiscal 2022 demonstrate the resiliency and strength of our brand. Consolidated revenues increased 11% to $32.3 billionin fiscal 2022 compared to $29.1 billionin fiscal 2021, primarily driven by strength in our U.S.business and growth in our International segment excluding China, partially offset by the impact of the extra week in fiscal 2021 ( $496 million) and unfavorable foreign currency translation. For both the North Americasegment and U.S. market, comparable store sales increased 12% for fiscal 2022 compared to an increase of 22% and 21% for the North Americasegment and the U.S. market, respectively, in fiscal 2021. Average ticket for the North Americasegment and the U.S. market grew 7% and 8%, respectively, primarily driven by strategic pricing and increased demand for food items in our U.S. market. The segment also experienced higher costs, primarily related to investments and growth in labor including enhanced store partner wages as well as increased spend on new partner training. Also contributing were inflationary pressures on commodities and our supply chain. In fiscal 2022, we announced our Reinvention Plan in the U.S. market to increase efficiency while elevating the partner and customer experience. We believe the investments in partner wages and training will increase retention and productivity while the acceleration of purpose-built store concepts and innovations in technologies will provide additional convenience and connection with our customers. For the International segment, comparable store sales decreased by 9% for fiscal 2022 compared to an increase of 16% in fiscal 2021, driven by comparable store sales decline of 24% in our Chinamarket. During the third and fourth quarters of fiscal 2022, our Chinamarket experienced COVID-19 pandemic related restrictions in multiple cities that severely impacted customer mobility. Outside of China, strong growth in our major International markets, driven by product innovation and increasing digital capabilities, partially offset the unfavorability in our Chinamarket. Revenue for our Channel Development segment increased $250 million, or 16%, when compared with fiscal 2021, driven by higher product sales to and royalty revenue from the Global Coffee Allianceand growth in our global ready-to-drink business. Operating margin decreased 520 basis points to 44.3%, primarily due to a decline in our North American Coffee Partnershipjoint venture income due to inflationary pressures and supply chain constraints as well as business mix shift. Despite COVID-19 induced business interruptions, especially in our Chinamarket, we have seen the strength and resilience of our brand as well as strong customer demand across our portfolio. We expect inflationary pressures on commodities and supply chain to continue to a lesser extent in fiscal 2023, relative to the impact on our business and financial metrics, including operating margin, as compared to fiscal 2022. We anticipate that these should be offset by benefits from pricing decisions as well as from increased sales leverage and higher productivity driven by our Reinvention Plan. Absent significant and prolonged COVID-19 relapses or global economic disruptions, and based on the current trend of our business operations and our focused efforts on the Reinvention Plan, we are confident in the strength of our brand and strategy for sustainable, profitable growth over the long-term. 26
• Total net income increased by 11% to reach
•Consolidated operating income decreased to
$4.6 billionin fiscal 2022 compared to $4.9 billionin fiscal 2021. Fiscal 2022 operating margin was 14.3% compared to 16.8% in fiscal 2021. Operating margin contraction of 250 basis points was primarily due to investments and growth in labor, including enhanced retail store partner wages (approximately 290 basis points) as well as increased spend on new partner training and support costs (approximately 80 basis points). Also contributing were inflationary pressures on commodities and our supply chain (approximately 270 basis points), sales deleverage related to COVID-19 pandemic related impacts in our Chinamarket (approximately 110 basis points), business mix shift (approximately 60 basis points) and lower government subsidies (approximately 60 basis points). These increases were partially offset by sales leverage across markets outside of China(approximately 390 basis points) and strategic pricing, primarily in North America(approximately 320 basis points). •Diluted earnings per share ("EPS") for fiscal 2022 decreased to $2.83, compared to EPS of $3.54in fiscal 2021. The decrease was primarily driven by lapping the prior year $0.56gain, net of estimated taxes, on the divestiture of our South Koreajoint venture and $0.10related to the extra week in fiscal 2021. Also contributing were investments in labor and inflationary pressures on commodities and our supply chain, partially offset by growth in comparable store sales and lower restructuring costs.
• Capital expenditures have been
$6.3 billionto our shareholders in fiscal 2022 through share repurchases and dividends. We returned $2.1 billionin fiscal 2021 through dividends. In April 2022, we announced a temporary suspension of our share repurchase program to allow us to augment investments in our stores and partners. We resumed our share repurchase program in the first quarter of fiscal 2023.
Acquisitions and disposals
See Note 2 , Acquisitions,
OPERATING RESULTS – FISCAL 2022 COMPARED TO FISCAL 2021
Consolidated operating results (in millions):
Revenues Oct 2, Oct 3, % Fiscal Year Ended 2022 2021 Change Net revenues: Company-operated stores
$ 26,576.1 $ 24,607.08.0 % Licensed stores 3,655.5 2,683.6 36.2 Other 2,018.7 1,770.0 14.1 Total net revenues $ 32,250.3 $ 29,060.611.0 % Total net revenues increased $3.2 billion, or 11%, over fiscal 2021, primarily due to higher revenues from company-operated stores ( $2.0 billion). The growth in company-operated store revenue was driven by an 8% increase in comparable store sales ( $1.8 billion) attributed to a 5% increase in average ticket and 2% increase in comparable transactions. Also contributing were the incremental revenues from 1,120 net new Starbuckscompany-operated store openings, or a 7% increase, over the past 12 months ( $1.0 billion). Partially offsetting these increases was the impact of the extra week in fiscal 2021 ( $496 million) and unfavorable foreign currency translation ( $368 million). Licensed stores revenue increased $972 million, primarily driven by higher product and equipment sales to and royalty revenues from our licensees ( $922 million) and the conversion of our Koreamarket from a joint venture to a fully licensed market in the fourth quarter of fiscal 2021 ( $187 million). Partially offsetting these increases were unfavorable foreign currency translation ( $81 million) and the impact of the extra week in fiscal 2021 ( $57 million). Other revenues increased $249 million, primarily due to higher product sales and royalty revenue in the Global Coffee Alliance( $216 million) and growth in our ready-to-drink business ( $44 million). Partially offsetting these increases was the impact of the extra week in fiscal 2021 ( $23 million). 27
Table of Contents Operating Expenses Oct 2, Oct 3, Oct 2, Oct 3, Fiscal Year Ended 2022 2021 2022 2021 As a % of Total Net Revenues
Product and distribution costs
32.0 % 30.1 % Store operating expenses 13,561.8 11,930.9 42.1 41.1 Other operating expenses 461.5 359.5 1.4 1.2 Depreciation and amortization expenses 1,447.9 1,441.7 4.5 5.0 General and administrative expenses 2,032.0 1,932.6 6.3 6.7 Restructuring and impairments 46.0 170.4 0.1 0.6 Total operating expenses 27,866.6 24,573.8 86.4 84.6 Income from equity investees 234.1 385.3 0.7 1.3 Operating income
$ 4,617.8 $ 4,872.114.3 % 16.8 % Store operating expenses as a % of related revenues 51.0 % 48.5 % Product and distribution costs as a percentage of total net revenues increased 190 basis points, primarily due to higher supply chain costs due to inflationary pressures. Store operating expenses as a percentage of total net revenues increased 100 basis points. Store operating expenses as a percentage of company-operated store revenues increased 250 basis points, primarily due to investments and growth in labor, including enhanced retail store partner wages (approximately 320 basis points) as well as increased spend on new partner training and support costs (approximately 90 basis points). Also contributing were lower temporary government subsidies (approximately 70 basis points). These increases were partially offset by sales leverage. Other operating expenses increased $102 million, primarily due to lapping a change in estimate relating to a transaction cost accrual ( $23 million), higher support costs for our growing North Americaand International licensed stores ( $22 million), transaction costs associated with our Russiamarket exit ( $20 million) and strategic investments in technology and other initiatives ( $15 million).
Depreciation and amortization expense as a percentage of total net revenue decreased by 50 basis points, primarily due to sales leverage.
General and administrative expenses increased
Restructuring and impairment expenses decreased
$124 million, primarily due to lower costs incurred related to our Reinvention Plan in the current year compared to prior year's North Americastore portfolio optimization, including lower accelerated lease right-of-use asset amortization costs ( $84 million) and asset impairment charges ( $68 million), partially offset by higher professional fees and higher severance costs ( $27 million). Income from equity investees decreased $151 million, primarily due to the conversion of our Koreamarket from a joint venture to a fully licensed market in the fourth quarter of fiscal 2021 ( $140 million) and lower income from our North American Coffee Partnershipjoint venture ( $18 million).
The combination of these changes resulted in an overall decline in operating margin of 250 basis points in fiscal year 2022 compared to fiscal year 2021.
Table of Contents Other Income and Expenses Oct 2, Oct 3, Oct 2, Oct 3, Fiscal Year Ended 2022 2021 2022 2021 As a % of Total Net Revenues Operating income
$ 4,617.8 $ 4,872.114.3 % 16.8 % Net gain resulting from divestiture of certain operations - 864.5 - 3.0 Interest income and other, net 97.0 90.1 0.3 0.3 Interest expense (482.9) (469.8) (1.5) (1.6) Earnings before income taxes 4,231.9 5,356.9 13.1 18.4 Income tax expense 948.5 1,156.6 2.9 4.0 Net earnings including noncontrolling interests 3,283.4 4,200.3 10.2 14.5 Net earnings/(loss) attributable to noncontrolling interests 1.8 1.0 0.0 0.0 Net earnings attributable to Starbucks $ 3,281.6 $ 4,199.310.2 % 14.5 % Effective tax rate including noncontrolling interests 22.4 % 21.6 %
The net gain resulting from the disposal of certain activities decreased
due to the cancellation of the sale of our stake in our
Interest expense increased
The effective tax rate for fiscal 2022 was 22.4% compared to 21.6% for fiscal 2021. The increase was due to lapping a prior year remeasurement of deferred tax assets due to an enacted foreign corporate rate change (approximately 130 basis points) and lapping the release of income tax reserves upon expiration of statute of limitations (approximately 70 basis points), partially offset by the release of valuation allowances recorded against deferred tax assets of a certain international jurisdiction (approximately 120 basis points). See Note 14 , Income Taxes, for further discussion. The Inflation Reduction Act was enacted on
August 16, 2022, and includes a new 15% minimum tax on "adjusted financial statement income" beginning with the Company's fiscal year 2024, and a new 1% excise tax on stock repurchases after December 31, 2022. While these tax law changes have no immediate effect and are not expected to have a material impact on our future financial results, we will continue to evaluate its impact as further information becomes available. 29
Operating results by segment (in millions):
North AmericaOct 2, Oct 3, Oct 2, Oct 3, Fiscal Year Ended 2022 2021 2022 2021 As a % of North America Total Net Revenues Net revenues: Company-operated stores $ 21,214.2 $ 18,737.390.8 % 91.6 % Licensed stores 2,150.5 1,702.2 9.2 8.3 Other 6.1 8.4 0.0 0.0 Total net revenues 23,370.8 20,447.9 100.0 100.0 Product and distribution costs 6,677.2 5,453.8 28.6 26.7 Store operating expenses 10,860.0 9,359.5 46.5 45.8 Other operating expenses 202.1 166.0 0.9 0.8 Depreciation and amortization expenses 808.4 753.9 3.5 3.7 General and administrative expenses 303.3 300.0 1.3 1.5 Restructuring and impairments 33.3 155.4 0.1 0.8 Total operating expenses 18,884.3 16,188.6 80.8 79.2 Operating income $ 4,486.5 $ 4,259.319.2 % 20.8 % Revenues North Americatotal net revenues for fiscal 2022 increased $2.9 billion, or 14%, primarily due to a 12% increase in comparable store sales ( $2.2 billion) driven by a 7% increase in average ticket and a 5% increase in transaction. Also contributing to these increases were the performance of net new company-operated store openings over the past 12 months ( $628 million) and higher product and equipment sales to and royalty revenues from our licensees ( $487 million), primarily due to business recovery from the impact of the COVID-19 pandemic. These increases were partially offset by the impact of the extra week in fiscal 2021 ( $427 million). Operating Margin North Americaoperating income for fiscal 2022 increased 5% to $4.5 billion, compared to $4.3 billionin fiscal 2021. Operating margin decreased 160 basis points to 19.2%, primarily due to investments and growth in labor, including enhanced retail store partner wages (approximately 350 basis points) as well as increased spend on new partner training and support costs (approximately 120 basis points). Also contributing were inflationary pressures on commodities and our supply chain (approximately 350 basis points). These were partially offset by strategic pricing (approximately 400 basis points) and sales leverage. 30
Table of Contents International Oct 2, Oct 3, Oct 2, Oct 3, Fiscal Year Ended 2022 2021 2022 2021 As a % of International Total Net Revenues Net revenues: Company-operated stores
$ 5,361.9 $ 5,869.777.3 % 84.8 % Licensed stores 1,505.0 981.4 21.7 14.2 Other 73.2 70.5 1.1 1.0 Total net revenues 6,940.1 6,921.6 100.0 100.0 Product and distribution costs 2,357.7 2,187.3 34.0 31.6 Store operating expenses 2,701.8 2,571.4 38.9 37.2 Other operating expenses 191.4 147.3 2.8 2.1 Depreciation and amortization expenses 513.0 544.7 7.4 7.9 General and administrative expenses 345.3 360.5 5.0 5.2 Total operating expenses 6,109.2 5,811.2 88.0 84.0 Income from equity investees 2.3 135.3 0.0 2.0 Operating income $ 833.2 $ 1,245.712.0 % 18.0 % Revenues International total net revenues for fiscal 2022 increased $19 million, or 0.3%, primarily due to higher product sales to and royalty revenues from our licensees ( $435 million), mainly due to continuing business improvement from the COVID-19 pandemic. Additionally, there were 765 net new Starbuckscompany-operated stores, or a 11% increase over the past 12 months ( $406 million). Also contributing to the increase was the conversion of our Koreamarket from a joint venture to a fully licensed market in the fourth quarter of fiscal 2021 ( $187 million). These were partially offset by a 9% decline in comparable store sales ( $459 million), driven by a 5% decrease in customer transactions and a 4% decrease in average ticket, primarily attributable to COVID-19 related restrictions in Chinaand lapping the prior-year value-added-tax benefit in China, unfavorable foreign currency translation ( $436 million) and the impact of the extra week in fiscal 2021 ( $127 million).
International operating income for fiscal 2022 decreased 33% to
$833.2 million, compared to $1.2 billionin fiscal 2021. Operating margin decreased 600 basis points to 12.0%, primarily due to sales deleverage related to COVID-19 pandemic impacts in our Chinamarket (approximately 460 basis points), investments and growth in retail store partner wages and benefits (approximately 140 basis points), lower temporary government subsidies (approximately 100 basis points), higher commodity and supply chain costs due to inflationary pressures (approximately 90 basis points) and strategic initiatives (approximately 90 basis points). These decreases were partially offset by sales leverage across markets outside of China. 31
Table of Contents Channel Development Oct 2, Oct 3, Oct 2, Oct 3, Fiscal Year Ended 2022 2021 2022 2021 As a % of Channel Development Total Net Revenues Net revenues
$ 1,843.6 $ 1,593.6Product and distribution costs 1,194.2 1,011.2 64.8 % 63.5 % Other operating expenses 51.6 31.3 2.8 2.0 Depreciation and amortization expenses 0.1 1.2 0.0 0.1 General and administrative expenses 12.2 10.8 0.7 0.7 Total operating expenses 1,258.1 1,054.5 68.2 66.2 Income from equity investees 231.8 250.0 12.6 15.7 Operating income $ 817.3 $ 789.144.3 % 49.5 % Revenues Channel Development total net revenues for fiscal 2022 increased $250 million, or 16%, compared to fiscal 2021, primarily due to higher Global Coffee Allianceproduct sales and royalty revenue ( $216 million) and growth in our ready-to-drink business ( $44 million). These increases were partially offset by the impact of the extra week in fiscal 2021 ( $21 million).
Channel Development operating income for fiscal 2022 increased 4% to
$817 million, compared to $789 millionin fiscal 2021. Operating margin decreased 520 basis points to 44.3%, primarily due to a decline in our North American Coffee Partnershipjoint venture income due to inflationary pressures and supply chain constraints (approximately 340 basis points) and business mix shift (approximately 170 basis points). 32
Table of Contents Corporate and Other Oct 2, Oct 3, % Fiscal Year Ended 2022 2021 Change Net revenues: Other
$ 95.8 $ 97.5(1.7) % Total net revenues 95.8 97.5 (1.7) Product and distribution costs 88.3 86.4
Other operating expenses 16.4 14.9
Depreciation and amortization expenses 126.4 141.9
General and administrative expenses 1,371.2 1,261.3
Restructuring and impairments 12.7 15.0 (15.3) Total operating expenses 1,615.0 1,519.5 6.3 Operating loss
$ (1,519.2) $ (1,422.0)6.8 % Corporate and Other primarily consists of our unallocated corporate expenses and 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. In the fourth quarter of fiscal 2022, we sold our Evolution Fresh brand and business. Corporate and Other operating loss increased to $1.5 billionfor fiscal 2022, or 7%, compared to $1.4 billionin fiscal 2021. This increase was primarily driven by incremental investments in technology ( $84 million), increased support costs to address labor market conditions ( $36 million) and increased partner wages and benefits ( $31 million). These increases were partially offset by lower performance-based compensation ( $62 million).
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Overview of cash and investments
Our cash and investments were
$3.5 billionand $6.9 billionas of October 2, 2022and October 3, 2021, respectively. We actively manage our cash and investments in order to internally fund operating needs, make scheduled interest and principal payments on our borrowings, make acquisitions and return cash to shareholders through common stock cash dividend payments and share repurchases. Our investment portfolio primarily includes highly liquid available-for-sale securities, including corporate debt securities, government treasury securities (domestic and foreign) and commercial paper as well as principal-protected structured deposits. As of October 2, 2022, approximately $2.7 billionof cash and short-term investments were held in foreign subsidiaries.
Credit facilities and commercial paper
Our total contractual borrowing capacity for general corporate purposes was
Revolving lines of credit
$3.0 billionunsecured 5-year revolving credit facility (the "2021 credit facility"), of which $150 millionmay be used for issuances of letters of credit, is currently set to mature on September 16, 2026. The 2021 credit facility is available for working capital, capital expenditures and other corporate purposes, including acquisitions and share repurchases. We have the option, subject to negotiation and agreement with the related banks, to increase the maximum commitment amount by an additional $1.0 billion. Borrowings under the 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 Company's long-term credit ratings assigned by Moody's and Standard & Poor'srating agencies. The 2021 credit facility contains alternative interest rate provisions specifying rate calculations to be used at such time LIBOR ceases to be available as a benchmark due to reference rate reform. The "Base Rate" of interest is the highest of (i) the Federal Funds Rate plus 0.500%, (ii) Bank of America's prime rate, and (iii) the Eurocurrency Rate (as defined in the credit facility) plus 1.000%. As of October 2, 2022, we had no borrowings under the 2021 credit facility.
Under our commercial paper program, we may issue unsecured commercial paper notes up to a maximum aggregate amount outstanding at any time of
$3.0 billion, with individual maturities that may vary but not exceed 397 days from the date of issue. Amounts outstanding under the commercial paper program are required to be backstopped by available commitments under the 33
2021 credit facility discussed above. The proceeds from borrowings under our commercial paper program may be used for working capital needs, capital expenditures and other corporate purposes, including, but not limited to, business expansion, payment of cash dividends on our common stock and share repurchases. As of
October 2, 2022, we had $175.0 millionoutstanding under our commercial paper program. Credit Facilities in Japan
In addition, we maintain credit facilities denominated in Japanese yen which are available for working capital requirements and capital expenditures in our Japanese market.
•A ¥5 billion, or
$34.6 million, facility is currently set to mature on December 31, 2022. Borrowings under the credit facility are subject to terms defined within the facility and will bear interest at a variable rate based on TIBOR plus an applicable margin of 0.400%.
• 10 billion yen, or
See Note 9, Debt, to the consolidated financial statements included in Item 8 of Part II of this 10-K for more details on the components of our long-term debt.
Our ability to incur new liens and conduct sale and leaseback transactions on certain material properties is subject to compliance with terms of the indentures under which the long-term notes were issued. As of
October 2, 2022, we were in compliance with all applicable covenants.
Use of money
We expect to use our available cash and investments, including, but not limited to, additional potential future borrowings under the credit facilities, commercial paper program and the issuance of debt to support and invest in our core businesses, including investing in new ways to serve our customers and supporting our store partners, repaying maturing debts, as well as returning cash to shareholders through common stock cash dividend payments and discretionary share repurchases and investing in new business opportunities related to our core and developing businesses. 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. Acquisitions may include increasing our ownership interests in our investees. Any decisions to increase such ownership interests will be driven by valuation and fit with our ownership strategy. We believe that net future cash flows generated from operations and existing cash and investments both domestically and internationally, combined with our ability to leverage our balance sheet through the issuance of debt, will be sufficient to finance capital requirements for our core businesses as well as shareholder distributions for at least the next 12 months. We are currently not aware of any trends or demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, our liquidity increasing or decreasing in any material way that will impact our capital needs during or beyond the next 12 months. We regularly review our cash positions and our determination of partial indefinite reinvestment of foreign earnings. In the event we determine that all or another portion of such foreign earnings are no longer indefinitely reinvested, we may be subject to additional foreign withholding taxes and
U.S.state income taxes, which could be material. We currently do not anticipate the need for repatriated funds to the U.S.to satisfy domestic liquidity needs. See
Note 14 , Income Taxes, for details.
During each of the first three quarters of fiscal 2021, we declared a cash dividend to shareholders of
$0.45per share. During the fourth quarter of fiscal 2021, and for each of the first three quarters of fiscal 2022, we declared a cash dividend of $0.49per share. Dividends are generally paid in the quarter following the declaration date. Cash returned to shareholders through dividends in fiscal 2022 and 2021 totaled $2.3 billionand $2.1 billion, respectively. During the fourth quarter of fiscal 2022, we declared a cash dividend of $0.53per share to be paid on November 25, 2022, with an expected payout of approximately $608.3 million. During the first quarter of fiscal 2022, we resumed our share repurchase program which had been temporarily suspended in March 2020. During the fiscal year ended October 2, 2022, we repurchased 36.3 million shares of common stock for $4.0 billionon the open market. On March 15, 2022, we announced that our Board authorized the repurchase of up to an additional 40 million shares under our ongoing share repurchase program. On April 4, 2022, we announced a temporary suspension of our share repurchase program to allow us to augment investments in our stores and partners. Repurchases pursuant to this program were last made on April 1, 2022. As of October 2, 2022, 52.6 million shares remained available for repurchase under current authorizations. We have resumed our share repurchase program in the first quarter of fiscal 2023. 34
In addition to operating expenses, cash requirements for fiscal 2023 are expected to consist primarily of capital expenditures for investments in our new and existing stores, supply chain and corporate facilities. Total capital expenditures for fiscal 2023 are expected to be approximately
The following table summarizes current and long-term material cash requirements as of
October 2, 2022, which we expect to fund primarily with operating cash flows (in millions): Material Cash Requirements Less than 1 1 - 3 3 - 5 More than Total Year Years Years 5 Years
Operating lease obligations(1)
$ 2,729.2 $ 2,121.4 $ 3,539.6Debt obligations Principal payments 15,038.4 1,000.0 3,088.4 1,000.0 9,950.0 Interest payments 6,499.8 487.3 865.2 725.3 4,422.0 Purchase obligations(2) 1,354.5 1,030.1 324.4 - - Other obligations(3) 401.6 125.0 118.7 84.6 73.3 Total $ 33,158.0 $ 4,115.9 $ 7,125.9 $ 3,931.3 $ 17,984.9(1)Amounts include direct lease obligations, excluding any taxes, insurance and other related expenses. (2)Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on Starbucksand that specify all significant terms. Green coffee purchase commitments comprise 99% of total purchase obligations. (3)Other obligations include other long-term liabilities primarily consisting of long-term income taxes payable, asset retirement obligations and equity investment capital commitments.
Cash flows generated by operating activities were
Cash used in investing activities totaled
$2.1 billionfor fiscal 2022, compared to $0.3 billionfor fiscal 2021. The change was primarily driven by lapping the net proceeds from the divestiture of our ownership interest in our South Koreajoint venture and an increase in spend on capital expenditures. Cash used in financing activities for fiscal 2022 totaled $5.6 billion, compared to cash provided by financing activities of $3.7 billionfor fiscal 2021. The change was primarily due to resuming our share repurchase program, partially offset by net proceeds from issuance of long-term debt.
PRICE OF RAW MATERIALS, AVAILABILITY AND GENERAL CONDITIONS OF RISK
Commodity price risk represents
Starbucksprimary 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 impacts our results of operations, and we expect commodity prices, particularly coffee, to impact future results of operations. For additional details see Product Supply in Item 1 , as well as Risk Factors in Item 1A of this 10-K. FINANCIAL RISK MANAGEMENT Market risk is defined as the risk of losses due to changes in commodity prices, foreign currency exchange rates, equity security prices and interest rates. We manage our exposure to various market-based risks according to a market price risk management policy. Under this policy, market-based risks are quantified and evaluated for potential mitigation strategies, such as entering into hedging transactions. The market price risk management policy governs how hedging instruments may be used to mitigate risk. Risk limits are set annually and speculative trading activities are prohibited. We also monitor and limit the amount of associated counterparty credit risk, which we consider to be low. We use interest rate swap agreements and treasury locks to primarily hedge against changes in benchmark interest rates related to anticipated debt issuances. We also use cross-currency swaps and foreign exchange debt instruments to hedge against changes in the fair value of our fixed-rate debt and foreign exchange exposure of net investments in Japan. Excluding interest rate hedging instruments, cross currency swaps and foreign currency debt, hedging instruments generally do not have maturities in excess of three years. Refer to Note 1 , Summary of Significant Accounting Policies and Estimates, and Note 3 , Derivative Financial Instruments, to the consolidated financial statements included in Item 8 of Part II of this 10-K for further discussion of our hedging instruments. 35
The sensitivity analyses disclosed below provide only a limited, point-in-time view of the market risk of the financial instruments discussed. The actual impact of the respective underlying rates and price changes on the financial instruments may differ significantly from those shown in the sensitivity analyses.
Commodity Price Risk
We purchase commodity inputs, primarily coffee, dairy products, diesel, cocoa, sugar and other commodities, that are used in our operations and are subject to price fluctuations that impact our financial results. We use a combination of pricing features embedded within supply contracts, such as fixed-price and price-to-be-fixed contracts for coffee purchases, and financial derivatives to manage our commodity price risk exposure. The following table summarizes the potential impact as of
October 2, 2022to Starbucksfuture net earnings and other comprehensive income ("OCI") from changes in commodity prices. The information provided below relates only to the hedging instruments and does not represent the corresponding changes in the underlying hedged items (in millions): Increase/(Decrease) to Net Earnings
Increase/(decrease) in OCI
10% Increase in 10% Decrease in 10% Increase in 10% Decrease in Underlying Rate Underlying Rate Underlying Rate Underlying Rate Commodity hedges $ 3.0 $ (3.0) $ 74 $ (74)
Risk of change
The majority of our revenue, expense and capital purchasing activities are transacted in
U.S.dollars. However, because a portion of our operations consists of activities outside of the U.S., we have transactions in other currencies, primarily the Chinese renminbi, Japanese yen, Canadian dollar, British pound, South Korean won and euro. To reduce cash flow volatility from foreign currency fluctuations, we enter into derivative instruments to hedge portions of cash flows of anticipated intercompany royalty payments, inventory purchases, intercompany borrowing and lending activities and certain other transactions in currencies other than the functional currency of the entity that enters into the arrangements, as well as the translation risk of certain balance sheet items. The volatility in the foreign exchange market may lead to significant fluctuation in foreign currency exchange rates and adversely impact our financial results in the case of weakening foreign currencies relative to the U.S.dollar. The following table summarizes the potential impact as of October 2, 2022to Starbucksfuture net earnings and other comprehensive income from changes in the fair value of these derivative financial instruments due to a change in the value of the U.S.dollar as compared to foreign exchange rates. The information provided below relates only to the hedging instruments and does not represent the corresponding changes in the underlying hedged items (in millions): Increase/(Decrease) to Net Earnings
Increase/(decrease) in OCI
10% Increase in 10% Decrease in 10% Increase in
10% Decrease of
Underlying Rate Underlying Rate Underlying Rate Underlying Rate Foreign currency hedges $ 46 $ (46) $ 155 $ (155) Equity Security Price Risk
We have minimal exposure to equity mutual fund and exchange-traded fund price fluctuations within our marketable equity portfolio. Marketable equity securities are carried at fair value and approximate a portion of our liability under our Deferred Executive Compensation Plan (“MDCP”). Portfolio gains and losses and the change in our MDCP liabilities are recognized in our Consolidated Statements of Income.
We performed a sensitivity analysis based on a 10% change in the prices of the underlying shares of our investments at
Table of Contents Interest Rate Risk Long-term Debt We utilize short-term and long-term financing and may use interest rate hedges to manage our overall interest expense related to our existing fixed-rate debt, as well as to hedge the variability in cash flows due to changes in benchmark interest rates related to anticipated debt issuances. See Note 3 , Derivative Financial Instruments and Note 9 , Debt, to the consolidated financial statements included in Item 8 of Part II of this 10-K for further discussion of our interest rate hedge agreements and details of the components of our long-term debt, respectively, as of
October 2, 2022.
The following table summarizes the impact of a change in interest rates on
Change in Fair Value 100 Basis Point Increase in 100 Basis Point Decrease in Fair Value Underlying Rate Underlying Rate Long-term debt(1) $ 13,052 $ 1,100 $ (1,100)
(1) The published amount is net of
Our available-for-sale securities comprise a diversified portfolio consisting mainly of investment-grade debt securities. The primary objective of these investments is to preserve capital and liquidity. Available-for-sale securities are recorded on the consolidated balance sheets at fair value with unrealized gains and losses reported as a component of accumulated other comprehensive income. We do not hedge the interest rate exposure on our investments. We performed a sensitivity analysis based on a 100 basis point change in the underlying interest rate of our available-for-sale securities as of
October 2, 2022and determined that such a change would not have a significant impact on the fair value of these instruments.
CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are those that management believes are the most important to the portrayal of our financial condition and results and require the most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain, especially in light of the current economic environment due to the COVID-19 pandemic. Judgments and uncertainties may result in materially different amounts being reported under different conditions or using different assumptions.
Our significant accounting estimates are described in more detail in
Note 1 , Summary of Significant Accounting Policies and Estimates, to the consolidated financial statements included in Item 8 of Part II of this 10-K. We consider financial reporting and disclosure practices and accounting policies quarterly to ensure that they provide accurate and transparent information relative to the current economic and business environment. During the past five fiscal years, we have not made any material changes to the accounting methodologies used to assess the areas discussed below, unless noted otherwise. We believe that our significant accounting estimates involve a higher degree of judgment and/or complexity for the reasons discussed below: 37
Property, plant and equipment and other assets with a finite useful life
We evaluate property, plant and equipment, operating lease right-of-use ("ROU") assets and other finite-lived assets for impairment when facts and circumstances indicate that the carrying values of such assets may not be recoverable. When evaluating for impairment, we first compare the carrying value of the asset to the asset's estimated future undiscounted cash flows. If the estimated undiscounted future cash flows are less than the carrying value of the asset, we determine if we have an impairment loss by comparing the carrying value of the asset to the asset's estimated fair value and recognize an impairment charge when the asset's carrying value exceeds its estimated fair value. The adjusted carrying amount of the asset becomes its new cost basis and is depreciated over the asset's remaining useful life. Long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For company-operated store assets, the impairment test is performed at the individual store asset group level, which is inclusive of property, plant and equipment and lease ROU assets. The fair value of a store's assets is estimated using a discounted cash flow model. For other long-lived assets, fair value is determined using an approach that is appropriate based on the relevant facts and circumstances, which may include discounted cash flows, comparable transactions or comparable company analyses. Our impairment calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values. Key assumptions used in estimating future cash flows and asset fair values include projected revenue growth and operating expenses, as well as forecasting asset useful lives and selecting an appropriate discount rate. For company-operated stores, estimates of revenue growth and operating expenses are based on internal projections and consider the store's historical performance, the local market economics and the business environment impacting the store's performance. The discount rate is selected based on what we believe a buyer would assume when determining a purchase price for the store. The fair value of a store's ROU asset is estimated considering what a market participant would pay to lease the asset for its highest and best use. These estimates are subjective and our ability to realize future cash flows and asset fair values is affected by factors such as ongoing maintenance and improvement of the assets, changes in economic conditions and changes in operating performance. In fiscal 2022, we announced our Reinvention Plan in the U.S. market to increase efficiency while elevating the partner and customer experience. As a result of the restructuring efforts in connection with the Reinvention Plan, we recorded an immaterial impairment charge on our consolidated statements of earnings during the fiscal year ended
October 2, 2022. Future impairment charges attributed to our Reinvention Plan are not expected to be material. In fiscal 2021, we substantially completed our plan to reposition our North Americastore portfolio, primarily in dense metropolitan markets by pursuing strategic store closures and focusing on new store formats that better cater to changing customer tastes and preferences. During fiscal year 2021, we recorded approximately $155.4 millionto restructuring and impairments on our consolidated statements of earnings. These totals included $53.1 millionrelated to disposal and impairment of company-operated store assets and $89.5 millionprimarily associated with accelerated amortization of ROU lease assets and other lease costs due to store closures prior to the end of contractual lease terms. As this restructuring plan was substantially completed in fiscal 2021, we did not recognize any material restructuring and impairment amounts related to this plan during the fiscal year ended October 2, 2022.
Asset impairment charges are discussed in Note 1, Summary of Significant Accounting Policies and Estimates, to the Consolidated Financial Statements included in Item 8 of Part II of this 10-K.
We evaluate goodwill and indefinite-lived intangible assets for impairment annually during our third fiscal quarter, or more frequently if an event occurs or circumstances change that would indicate impairment may exist. When evaluating these assets for impairment, we may first perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. If we do not perform a qualitative assessment, or if we determine that it is not more likely than not that the fair value of the reporting unit exceeds its carrying amount, we calculate the estimated fair value of the reporting unit using discounted cash flows or a combination of discounted cash flow and market approaches. When assessing goodwill for impairment, our decision to perform a qualitative impairment assessment for an individual reporting unit is influenced by a number of factors, inclusive of the carrying value of the reporting unit's goodwill, the significance of the excess of the reporting unit's estimated fair value over carrying value at the last quantitative assessment date, the amount of time in between quantitative fair value assessments and the date of acquisition. If we perform a quantitative assessment of an individual reporting unit's goodwill, our impairment calculations contain uncertainties because they require management to make assumptions and to apply judgment when estimating future cash flows and asset fair values, including projected revenue growth and operating expenses related to existing businesses, product innovation and new store concepts, as well as utilizing valuation multiples of similar publicly traded companies and selecting an appropriate discount rate. Estimates of revenue growth and operating expenses are based on internal projections considering the reporting unit's past performance 38
and forecasted growth, including assumptions regarding business recovery post COVID-19, strategic initiatives, local market economics and the local business environment impacting the reporting unit's performance. The discount rate is selected based on the estimated cost of capital for a market participant to operate the reporting unit in the region. These estimates, as well as the selection of comparable companies and valuation multiples used in the market approaches are highly subjective, and our ability to realize the future cash flows used in our fair value calculations is affected by factors such as the success of strategic initiatives, changes in economic conditions, changes in our operating performance and changes in our business strategies, including retail initiatives and international expansion. Our goodwill impairment assessments were not significantly altered as a result of the COVID-19 pandemic. We continue to believe the fair value of each of our reporting units is significantly in excess of its carrying value, and absent a sustained multi-year global decline in our business in key markets such as the
U.S.and China, we do not anticipate incurring significant goodwill impairment in the next 12 months. Our fiscal 2022 annual goodwill impairment testing, which was completed in the third fiscal quarter, resulted in an estimated fair value of our reporting units where a quantitative assessment was performed, was in excess of carrying value of approximately $95 billionfor the business units where a quantitative analysis on impairment was performed. When assessing indefinite-lived intangible assets for impairment, where we perform a qualitative assessment, we evaluate if changes in events or circumstances have occurred that indicate that impairment may exist. If we do not perform a qualitative impairment assessment or if changes in events and circumstances indicate that a quantitative assessment should be performed, management is required to calculate the fair value of the intangible asset group. The fair value calculation includes estimates of revenue growth, which are based on past performance and internal projections for the intangible asset group's forecasted growth, including assumptions regarding business recovery post COVID-19, and royalty rates, which are adjusted for our particular facts and circumstances. The discount rate is selected based on the estimated cost of capital that reflects the risk profile of the related business. These estimates are highly subjective, and our ability to achieve the forecasted cash flows used in our fair value calculations is affected by factors such as the success of strategic initiatives, changes in economic conditions, changes in our operating performance and changes in our business strategies, including retail initiatives and international expansion. We do not anticipate recording significant impairment charges in the next 12 months. Definite-lived intangible asset impairment charges are discussed in Note 8 , Other Intangible Assets and Goodwill, to the consolidated financial statements included in Item 8 of Part II of this 10-K.
We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the respective tax bases of our assets and liabilities. Deferred tax assets and liabilities are measured using current enacted tax rates expected to apply to taxable income in the years in which we expect the temporary differences to reverse. We routinely evaluate the likelihood of realizing the benefit of our deferred tax assets and may record a valuation allowance if, based on all available evidence, we determine that some portion of the tax benefit will not be realized. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies and results of operations. In projecting future taxable income, we consider historical results and incorporate assumptions about the amount of future state, federal and foreign pre-tax operating income adjusted for items that do not have tax consequences. Our assumptions regarding future taxable income are consistent with the plans and estimates we use to manage our underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income/(loss). In addition, our income tax returns are periodically audited by domestic and foreign tax authorities. These audits include review of our tax filing positions, such as the timing and amount of deductions taken and the allocation of income between tax jurisdictions. We evaluate our exposures associated with our various tax filing positions and recognize a tax benefit only if it is more likely than not that the tax position will be sustained upon examination by the relevant taxing authorities, including resolutions of any related appeals or litigation processes, based on the technical merits of our position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. For uncertain tax positions that do not meet this threshold, we record a related liability. We adjust our unrecognized tax benefit liability and income tax expense in the period in which the uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position or when new information becomes available. As discussed in Note 14 , Income Taxes, to the consolidated financial statements included in Item 8 of Part II of this 10-K, we do not expect a significant amount of the Company's gross unrecognized tax benefits to be recognized by the end of fiscal 2023 for reasons such as a lapse of the statute of limitations or resolution of examinations with tax authorities. We have generated income in certain foreign jurisdictions that may be subject to additional foreign withholding taxes and
U.S.state income taxes. We regularly review our plans for reinvestment or repatriation of unremitted foreign earnings. The possibility exists that foreign earnings declared as indefinitely reinvested may be repatriated as our plans are based on our estimated working and other capital needs in jurisdictions where our earnings are generated. While we do not expect to 39
repatriate cash to the
U.S.to satisfy domestic liquidity needs, if these amounts were distributed to the U.S., in the form of dividends or otherwise, we may be subject to additional foreign withholding taxes and U.S.state income taxes, which could be material. Our income tax expense, deferred tax assets and liabilities for unrecognized tax benefits reflect management's best assessment of estimated current and future taxes to be paid. Deferred tax asset valuation allowances and our liabilities for unrecognized tax benefits require significant management judgment regarding applicable statutes and their related interpretation, the status of various income tax audits and our particular facts and circumstances. Although we believe that the judgments and estimates discussed herein are reasonable, actual results, including forecasted business performance, could differ, and we may be exposed to losses or gains that could be material. To the extent we prevail in matters for which a liability has been established or are required to pay amounts in excess of our established liability, our effective income tax rate in a given financial statement period could be materially affected.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 , Summary of Significant Accounting Policies and Estimates, to the consolidated financial statements included in Item 8 of Part II of this 10-K for a detailed description of recent accounting pronouncements.
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