Starbucks Corporation 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report on Form 10-Q for Starbucks Corporation for the 13-week and 39-week periods ended July 3, 2005. The company operates primarily through company-operated retail stores and specialty businesses (licensing, foodservice) in the United States and International markets. The fiscal year ends on the Sunday closest to September 30.
Key Financial Metrics
| Metric | 13 Weeks Ended July 3, 2005 | 39 Weeks Ended July 3, 2005 |
|---|---|---|
| Total Net Revenues | $1,601.8 million | $4,710.1 million |
| Net Earnings | $125.6 million | $370.9 million |
| Diluted EPS | $0.31 | $0.90 |
| Operating Income | $199.6 million | $584.2 million |
| Operating Margin | 12.5% | 12.4% |
| Cash from Operating Activities | N/A | $758.9 million |
| Cash and Cash Equivalents | $130.1 million | $130.1 million |
| Total Debt (Current + Long-term) | $3.8 million | $3.8 million |
Material Changes vs. Prior Period
- Revenue Growth: Total net revenues increased 21% for the quarter and 23% year-to-date compared to the prior year periods. This was driven by the opening of 713 new company-operated stores in the last 12 months and comparable store sales growth of 7% (quarter) and 8% (year-to-date).
- Profitability: Net earnings increased 29% for both the quarter and year-to-date periods. Operating margins improved to 12.5% (quarter) and 12.4% (year-to-date) from 11.6% and 11.8% respectively in the prior year.
- Segment Performance: United States revenues grew 20% (quarter) and 21% (year-to-date). International revenues grew 32% (quarter) and 31% (year-to-date), aided by favorable foreign currency exchange rates.
- Restatement: Prior year financial statements were restated due to changes in accounting for operating leases (tenant improvement allowances and rent holidays). This adjustment reduced previously reported net earnings for the comparable prior periods.
Guidance, Outlook, and Risks
- Capital Expenditures: Management expects fiscal 2005 capital expenditures to be at the low end of the $600 million to $650 million range. Fiscal 2006 guidance is set between $700 million and $725 million to support opening approximately 850 new company-operated stores globally.
- Store Openings: The company plans to open approximately 1,500 new stores globally in fiscal 2005 and 1,800 in fiscal 2006.
- Share Repurchases: The company repurchased 16 million shares for $807 million during the 39-week period. As of July 3, 2005, 12.6 million shares remained authorized for repurchase.
- Commodity Risks: Green coffee and fluid milk prices remain volatile. While the company has $261 million in fixed-price coffee contracts, it expects to return to price-to-be-fixed contracts as commodity prices rise, reducing cost predictability.
- Legal Proceedings: A class-action lawsuit regarding the classification of store managers under the Fair Labor Standards Act (FLSA) is ongoing. The company believes a loss is unlikely but cannot estimate potential damages.
- Accounting Changes: Adoption of SFAS 123R (Share-Based Payment) in fiscal 2006 will require expensing stock-based compensation, which will reduce future net earnings.
Investor Verification Checklist
- Verify the impact of the lease accounting restatement on year-over-year growth comparisons.
- Monitor the execution of the aggressive store opening plan (1,500 stores in FY2005) and associated capital expenditure requirements.
- Assess the exposure to rising commodity costs (coffee and milk) as fixed-price contracts expire and the company shifts to floating-price contracts.
- Review the status of the FLSA class-action lawsuit and potential liability exposure.
- Track the adoption of SFAS 123R and its specific impact on reported earnings in the first quarter of fiscal 2006.