SBUX

Business Context and Reporting Period

Company: Starbucks Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: 13 weeks and 39 weeks ended June 27, 2004 (Fiscal Q3 2004)
Business Overview: Starbucks operates company-operated and licensed retail stores globally, selling coffee, tea, and related products. The company also engages in specialty operations including licensing, foodservice, and grocery/warehouse club sales.

Key Financial Metrics

Note: Cash and Working Capital figures represent the balance sheet position as of June 27, 2004, compared to the prior year-end or period end where applicable.

Material Changes vs. Prior Period

• Revenue Growth: Total net revenues increased 27.2% for the quarter and 28.3% for the year-to-date period. Growth was driven by the opening of 651 new company-operated stores and 727 new licensed stores in the last 12 months, alongside an 11% increase in comparable store sales.
• Profitability: Net earnings rose 43.5% for the quarter and 45.1% year-to-date. Operating margins expanded due to leverage on fixed costs and efficiencies in supply chain distribution, offsetting higher commodity costs for dairy and green coffee.
• Segment Performance:
  • United States: Revenues increased 27.5% (quarter) and 27.9% (YTD). Operating income grew 25.6% (quarter) and 27.1% (YTD).
  • International: Revenues increased 25.2% (quarter) and 30.5% (YTD). The segment returned to profitability with operating income of $13.7 million for the quarter, compared to a loss of $1.0 million in the prior year.
• Cash Flow: Net cash provided by operating activities was $600.7 million for the 39-week period, up from $487.6 million in the prior year. This was driven by net earnings and a $50.9 million increase in deferred revenue from Starbucks Card balances.

Guidance, Outlook, and Risks

• Store Expansion: Starbucks plans to open approximately 1,300 new stores globally in fiscal 2004 and expects to accelerate to approximately 1,500 new stores in fiscal 2005.
• Comparable Store Sales: Management targets 3-7% comparable store sales growth for the next three to five years. The company recently achieved 150 consecutive months of positive comparable store sales growth.
• Capital Expenditures: Expected to be approximately $475 million for fiscal 2004 and in the range of $600 million to $650 million for fiscal 2005.
• Share Repurchases: The company repurchased 2.2 million shares for $82.2 million during the 39-week period. Approximately 12.4 million shares remain authorized for repurchase.
• Risks and Contingencies:
  • Commodity Prices: Significant volatility in coffee and dairy prices poses a risk. As of June 27, 2004, the company had $281.3 million in fixed-price purchase commitments for green coffee.
  • Foreign Exchange: A 10% devaluation of the U.S. dollar could reduce the fair value of derivative instruments by approximately $22.9 million.
  • Guarantees: The company guarantees approximately $11.6 million in Japanese yen-denominated loans for an unconsolidated equity investee (Starbucks Coffee Japan, Ltd.).

Key Facts for Investor Verification

• Sustainability of Growth: Verify if the 11% comparable store sales growth is sustainable given management's long-term target of 3-7%.
• Commodity Hedging: Assess the adequacy of the $281.3 million fixed-price coffee contracts against potential future price spikes in green coffee and dairy.
• International Profitability: Monitor the International segment's ability to maintain positive operating margins as it continues to expand store count.
• Capital Allocation: Track the execution of the $475 million capital expenditure plan for fiscal 2004 and the pace of share repurchases.
• Deferred Revenue: Note the significant increase in deferred revenue ($50.9 million cash flow impact) from Starbucks Cards, which represents future revenue recognition.