Business Context and Reporting Period
Company: Starbucks Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 29, 2009 (Second Quarter of Fiscal 2009)
Business Overview: Starbucks operates a global network of company-operated and licensed retail stores, along with foodservice and consumer packaged goods (CPG) channels. The reporting period was significantly impacted by the global economic recession, resulting in negative comparable store sales and the execution of a major restructuring plan involving store closures and workforce reductions.
Key Financial Metrics
| Metric | 13 Weeks Ended Mar 29, 2009 | 26 Weeks Ended Mar 29, 2009 | 13 Weeks Ended Mar 30, 2008 | 26 Weeks Ended Mar 30, 2008 |
|---|---|---|---|---|
| Total Net Revenues | $2,333.3 million | $4,948.5 million | $2,526.0 million | $5,293.6 million |
| Operating Income | $40.9 million | $158.6 million | $178.2 million | $511.3 million |
| Net Earnings | $25.0 million | $89.3 million | $108.7 million | $316.8 million |
| Diluted EPS | $0.03 | $0.12 | $0.15 | $0.43 |
| Operating Margin | 1.8% | 3.2% | 7.1% | 9.7% |
| Cash from Operations (26 weeks) | $715.4 million (vs. $765.1 million prior year) | |||
| Capital Expenditures (26 weeks) | $236.9 million (vs. $505.1 million prior year) | |||
| Total Debt | $775.9 million (as of Mar 29, 2009) | |||
| Cash & Equivalents | $253.2 million (as of Mar 29, 2009) |
Material Changes vs. Prior Period
- Revenue Decline: Total net revenues decreased 7.6% for the quarter and 6.5% year-to-date. Company-operated retail revenues fell 8.5% and 7.9% respectively, driven by an 8% decline in US comparable store sales and a 3% decline internationally.
- Profitability Compression: Operating income dropped 77% for the quarter and 69% year-to-date. The operating margin contracted from 7.1% to 1.8% in the quarter, primarily due to $152.1 million in restructuring charges.
- Restructuring Charges: The company recognized $152.1 million in restructuring charges for the quarter (totaling $227.6 million year-to-date). These costs relate to the closure of approximately 800 underperforming US stores, international store closures, and workforce reductions.
- Debt Reduction: Short-term borrowings were reduced from $713.0 million at the start of the fiscal year to $226.0 million, utilizing strong operating cash flows.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Store Count: Revised full-year 2009 guidance expects a net addition of approximately 20 global stores. This includes a net reduction of ~425 US company-operated stores and a net addition of ~60 international company-operated stores.
- Cost Reductions: The company is on track to achieve $500 million in permanent cost reductions for fiscal 2009. Approximately $195 million has been achieved in the first half.
- Capital Expenditures: Full-year 2009 capital expenditures are expected to be approximately $600 million.
- Cash Flow: Fiscal 2009 cash from operations is estimated to exceed $1 billion, with free cash flow expected to exceed $500 million.
- Share Repurchases: The company suspended share repurchases in the first half of fiscal 2009 and does not anticipate resuming them in the remaining quarters due to the challenging economic environment.
Risks and Contingencies
- Credit Ratings: Standard & Poor's downgraded the short-term rating to A-3 and revised the long-term outlook to negative. Moody's placed the rating on review for possible downgrade. This has reduced liquidity in the commercial paper market, forcing reliance on the revolving credit facility.
- Litigation: A pending class-action lawsuit in California regarding tip pooling practices resulted in a trial court judgment of approximately $87 million against the company. The company has appealed and believes a loss is reasonably possible but not probable; no loss has been accrued.
- Liquidity of Investments: The company holds $62.6 million in auction-rate securities (ARS) classified as Level 3 assets, which are currently illiquid due to market failures, though management does not believe this impacts working capital needs.
Investor Verification Checklist
- Restructuring Execution: Verify the pace of store closures and the realization of the targeted $500 million in cost savings against the timeline.
- Comparable Store Sales: Monitor trends in US and International comparable store sales to assess if the 8% and 3% declines stabilize or worsen.
- Credit Facility Usage: Track the utilization of the $1 billion revolving credit facility given the downgrade in short-term credit ratings and reduced access to commercial paper.
- Legal Exposure: Follow the appellate process of the California tip-pooling lawsuit to determine potential financial impact.
- Commodity Costs: Assess the impact of coffee and dairy price volatility on margins, particularly as the company shifts product mix.