Starbucks Corporation 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 30, 2003 (13 weeks) and the year-to-date period ended March 30, 2003 (26 weeks). Starbucks Corporation operates retail stores and specialty coffee businesses globally. The fiscal year ends on the Sunday closest to September 30.
Key Financial Metrics
| Metric | 13 Weeks Ended Mar 30, 2003 | 26 Weeks Ended Mar 30, 2003 |
|---|---|---|
| Total Net Revenues | $954.2 million | $1,957.7 million |
| Operating Income | $85.5 million | $206.4 million |
| Net Earnings | $52.1 million | $130.5 million |
| Diluted EPS | $0.13 | $0.33 |
| Operating Margin | 9.0% | 10.5% |
| Cash and Cash Equivalents | $250.4 million (as of Mar 30, 2003) | |
| Working Capital | $413.5 million (as of Mar 30, 2003) | |
| Long-Term Debt | $4.7 million | |
| Net Cash Provided by Operating Activities | $338.5 million (26 weeks) |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 21.8% for the quarter and 23.2% year-to-date compared to the prior year, driven by new store openings and comparable store sales growth of 7% (quarter) and 8% (year-to-date) in North America.
- Profitability: Operating income increased significantly (76.6% for the quarter) primarily due to revenue growth and the absence of an $18.0 million litigation settlement charge recorded in the prior year.
- Expense Trends: General and administrative expenses decreased due to the prior year's litigation charge. Cost of sales increased slightly as a percentage of revenue due to higher green coffee and distribution costs, partially offset by lower dairy expenses.
- Accounting Change: The company retroactively applied the equity method of accounting for its investment in Austria and Switzerland operations, resulting in minor reductions to previously reported net earnings for prior periods.
Guidance, Outlook, and Risks
- Capital Expenditures: Management expects capital expenditures for the remainder of fiscal 2003 to range between $220 million and $240 million, focused on new store openings and facility enhancements.
- Store Expansion: The company expects to open approximately 1,200 new stores for the full fiscal year ending September 28, 2003.
- Acquisition: On April 16, 2003, Starbucks agreed to acquire Seattle Coffee Company (including Seattle's Best Coffee and Torrefazione Italia brands) for $72.0 million in cash. The transaction is expected to close in the fourth quarter.
- Risks: Key risks include volatility in green coffee prices and supply, competition, and the impact of global economic conditions. The company has fixed-price purchase contracts for approximately $286.0 million of green coffee to mitigate price risk through 2003.
- Stock Repurchase: The company repurchased 1.5 million shares for $30.1 million during the period. An additional program to repurchase up to 10.0 million shares was authorized in March 2003.
Investor Verification Checklist
- Verify the impact of the pending $72.0 million Seattle Coffee Company acquisition on future cash flows and integration costs.
- Monitor green coffee commodity prices and the sufficiency of the $286.0 million in fixed-price contracts against rising market rates.
- Review the sustainability of comparable store sales growth (7-8%) in the context of slowing economic conditions mentioned in the risk factors.
- Confirm the execution of the new 10.0 million share repurchase program and its effect on earnings per share.
- Assess the performance of international operations, which contributed to higher non-deductible losses affecting the effective tax rate.