Starbucks Corporation 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended July 2, 2006 (13 weeks) and the year-to-date period ended July 2, 2006 (39 weeks). Starbucks Corporation operates primarily through company-operated retail stores and specialty operations (licensing and foodservice). The company reported strong growth driven by new store openings and comparable store sales increases in both U.S. and International segments.
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended July 2, 2006 | 39 Weeks Ended July 2, 2006 |
|---|---|---|
| Total Net Revenues | $1,963,673 | $5,783,587 |
| Operating Income | $214,573 | $696,314 |
| Net Earnings | $145,498 | $446,970 |
| Diluted EPS | $0.18 | $0.56 |
| Operating Margin | 10.9% | 12.0% |
| Cash from Operating Activities | N/A | $935,774 |
| Cash and Cash Equivalents | $215,739 | $215,739 |
| Short-term Borrowings | $200,000 | $200,000 |
| Long-term Debt | $2,300 | $2,300 |
Material Changes vs. Prior Period
- Revenue Growth: Total net revenues increased 22.6% for the quarter and 22.8% year-to-date compared to the prior year periods. This was driven by the opening of 955 new company-operated stores in the last 12 months and comparable store sales growth of 6% for the quarter.
- Profitability: Net earnings increased 15.9% for the quarter and 20.6% year-to-date. However, operating margins decreased slightly (from 12.5% to 10.9% for the quarter) primarily due to the recognition of stock-based compensation expense under the new SFAS 123R standard adopted in October 2005.
- Cost Structure: Cost of sales increased to 41.0% of revenues for the quarter due to higher green coffee costs. Store operating expenses increased due to higher payroll-related expenditures from stock-based compensation and employee benefits.
- Segment Performance: International revenues grew 36.5% for the quarter, outpacing U.S. growth of 19.9%. International operating income increased 55.2%.
Guidance, Outlook, and Risks
- Store Openings: Management expects to open at least 2,000 new stores globally in fiscal 2006, an increase from the previous target of 1,800.
- Comparable Store Sales: Expected to grow in the range of 3% to 7% for the remainder of fiscal 2006.
- Capital Expenditures: Expected to be approximately $800 million for fiscal 2006, with fiscal 2007 projected between $950 million and $1.0 billion.
- Share Repurchases: The company repurchased 11.1 million shares for $354 million during the 39-week period. As of August 2, 2006, the Board authorized an additional 25 million shares for repurchase.
- Risks: Key risks include fluctuations in coffee and dairy commodity prices, foreign currency exchange rates, and the impact of legal proceedings regarding employee classification (FLSA lawsuits). The company also faces uncertainty regarding the adoption of FIN 48 (Accounting for Uncertainty in Income Taxes) in fiscal 2008.
Investor Verification Checklist
- Verify the impact of the new SFAS 123R stock-based compensation accounting standard on future earnings and margins.
- Monitor green coffee commodity prices and the company's hedging strategies to assess cost of sales volatility.
- Review the status of pending FLSA class-action lawsuits regarding store manager and assistant manager overtime classification.
- Track the execution of the accelerated store opening plan (2,000 stores) and its effect on capital expenditures and cash flow.
- Assess the sustainability of International segment growth rates given the heavy investment in emerging markets.