The main objective of Management's Discussion and Analysis of Financial Condition and Results of Operations is to provide a view of how the management of a publicly-traded company presents and views their financial business. It determines whether the management's presentation is complete, bias-free, and comprehensive. It is encouraged to give complete explanations of the accounting policies so as to enable the investors to have a clear understanding of the effects of the accounting policies and to increase transparency.
According to the annual report pursuant of Starbucks Corporation item 7 of Form 10-K, for the fiscal year ended September 29, the Starbucks results of the impacts of constant efforts which were introduced to focus on the accelerating growth seen in the high-returning business and to bring several market operations to fully licensed models in the fiscal year 2019. These operations are based in Thailand, the Netherlands, and France. There was also a maximum positive impact observed after the licensing of most CPG and Foodservice businesses to Nestle in the fourth quarter.
The operating segment reporting structure was realigned to provide a better reflection of the cumulative effect of the continuous efforts made by the company. There are three reportable operating segments, which are the Americas, International, and Channel Development. The Starbucks Reserve Roastery & Tasting Rooms, several stores, and Princi operations are reported within the Americas and International. In contrast, the no-reportable operating segments and unallocated corporate expenses are detailed within the Corporate and Other. Some other changes which were made to improve the reviews of the results were the reclassification of occupancy cost of company-owned stores from sales cost to store operating expenses. After revision of the period financial information from before to establish consistency with the current period information. No impact on consolidated net revenues, total operating expenses, net earnings per share, or operating income was observed following these changes.
The following are the financial highlights of 2019 compared to those of 2018. Total net revenues increased from $24.7 billion to $26.5 billion by 7%. Capital expenditure decreased from $2 billion to $1.8 billion, $12 billion was returned to shareholders through share purchases and dividends, unlike in 2018, where $8.9 billion was returned. Consolidated operating income increased from $3.9 billion to $4.1 billion (writers, 2020). In contrast, the operating margin increased from 15.4% to 15.7%, which was boosted by employee investments and an increase in benefits and wages and licensing of the company's businesses.
Consolidated operating income revenues increased by 7%. This was due to increased revenues from 947 net of new store openings, an increase in an average ticket of 3% and a 2% increase in comparable transactions. Licensed store revenue registered an increase, which was mainly due to an increase in total net revenues following the high product and equipment sales and royalty revenues from licensed businesses (Corporate Finance Institute, 2020). Operating expenses in stores increased due to investments in-store partners funded from the Tax Act and increased wages and benefits. Sales cost also increased due to licensing of the Foodservice businesses and CPG due to cost-saving initiatives and leverage on sales cost which were increased
America's total net revenues increased by 9% following a 5% increase in comparable-store sales, a 3% increase in the new Starbucks company-operated stores, higher product sales, and royalty revenues due to licensing. Its operating margin decreased ten basis points due to high partner investments, increased wages and benefits, and tax payments. Sales cost increased due to food and beverage-related mix shifts. International total net revenues increased by 12% due to new company-operated stores, increased product sales, tax payments, and royalty revenues.
Unfavorable foreign currency translation also contributed to the increases. Operating margins decreased to 15.6% following the strategic investments and increased benefits and wages due to the cost-saving initiative and labor efficiencies. Channel development operating margins fell to 35% due to licensing of CPG and Foodservice businesses offset by business taxes. The revenues increased by 13% due to licensing and offset by growth in product revenue.
Corporate and Other consists of unallocated corporate expenses showed an increase of 10% in total net revenues following an increase in revenues from company-operated stores. Licensed store revenue increases also led to the overall net revenues increase. Depreciation and amortization expenses increased following the change of ownership in East China. Restructuring and impairment costs decreased due to closure and higher exit costs of some Starbucks company-operated stores (Sec.gov., 2020).
The cash and investment reduced from $9.2 billion to $3.0 billion due to the usage of the up-front prepaid royalty recounted with the Global Coffee Alliance for share repurchases. Starbucks manages cash and investments actively to internally fund operations. They also make acquisitions, return money to shareholders through everyday stock cash dividend payments, and share repurchases and make scheduled principled and interest payments on their borrowings. Their available-for-sale securities, including corporate debt and government treasury securities, are highly liquid and are clearly stated in their investment portfolio.
Starbucks maintains agreements such as a minimum fixed charge coverage ratio, which enables them to measure their ability to cover financing expenses hence a credit-free company. Critical accounting policies of Starbucks are majorly used by the management to portray financial conditions and results and are therefore required to be taken seriously. Some of the evaluations they consider are:
- Property, Plant and Equipment and Other Finite-Lived Assets
- Goodwill and Indefinite-Lived Intangible Assets
- Income Taxes
SEC.gov | HOME. Sec.gov. (2020). from https://www.sec.gov/.institute, c. (2020).
MD&A - What is the Management Discussion & Analysis. Corporate Finance Institute (2020). from https://corporatefinanceinstitute.com/resources/data/public-filings/mda-management-discussion-analysis/
Writers, f. (2020). from https://corporate.findlaw.com/finance/management-s-discussion-and-analysis-of-financial-condition-and.htm.
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