STARBUCKS CORP quarterly report, Q3 FY2007

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 1, 2007. The company operates three reportable segments: United States, International, and the Global Consumer Products Group (CPG). The fiscal year ends on the Sunday closest to September 30.

Key Financial Metrics

Metric (in thousands) 13 Weeks Ended July 1, 2007 39 Weeks Ended July 1, 2007
Total Net Revenues $2,359,245 $6,970,562
Operating Income $245,214 $805,912
Net Earnings $158,343 $514,135
Diluted EPS $0.21 $0.66
Operating Margin 10.4% 11.6%
Cash and Cash Equivalents $172,789 $172,789 (Balance Sheet)
Commercial Paper Outstanding $880,000 $880,000
Net Cash Provided by Operating Activities N/A $1,039,840

Material Changes vs. Prior Period

  • Revenue Growth: Total net revenues increased 20.1% for the 13-week period and 20.5% for the 39-week period compared to the prior year. Growth was driven by the opening of 1,956 new stores in the first three quarters and comparable store sales growth of 4% (quarterly) and 5% (year-to-date).
  • Profitability: Net earnings increased 8.8% for the quarter and 15.0% year-to-date. Operating margins declined slightly (10.4% vs. 10.9% quarterly) due to higher costs of sales, including occupancy costs and rising dairy prices, partially offset by expense leverage.
  • Segment Performance:
    • United States: Revenues up 18.3% (quarterly); operating margin decreased to 13.8% due to higher dairy costs and rent.
    • International: Revenues up 28.1% (quarterly); operating margin decreased to 7.5% due to investment in emerging markets and higher store renovation costs.
    • CPG: Revenues up 23.9% (quarterly); operating margin decreased to 48.1% due to lower sales volumes in the North American Coffee Partnership.
  • Capital Allocation: The company repurchased 20.3 million shares for $671 million during the 39-week period. As of July 1, 2007, $880 million in commercial paper was outstanding, with no borrowings under the $1 billion revolving credit facility.

Guidance, Outlook, and Risks

  • Store Openings: Starbucks plans to open at least 2,400 net new stores in fiscal 2007 (approx. 1,700 in the U.S. and 700 licensed; 300 international company-operated and 400 licensed).
  • Comparable Store Sales: Expected to be in the target range of 3% to 7% for fiscal 2007.
  • Revenue Outlook: Consolidated total net revenue growth is expected to be approximately 20% for fiscal 2007.
  • Tax Rate: The effective tax rate is expected to be approximately 37% for the full fiscal year 2007.
  • 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) and tip pooling practices in California.
  • Recent Financing: On August 7, 2007, the company entered into a new $400 million, 364-day credit facility to support share repurchases and general corporate purposes.

Investor Verification Checklist

  • Verify the impact of rising dairy and coffee commodity costs on future gross margins.
  • Monitor the progress of the $671 million share repurchase program and the utilization of the new $400 million credit facility.
  • Review the status of pending class-action lawsuits regarding employee overtime (FLSA) and tip pooling in California.
  • Assess the sustainability of International segment margins given the heavy investment in emerging markets (China, Brazil, Russia).
  • Confirm the adoption timeline and financial impact of new accounting standards (FIN 48, SFAS 157, SFAS 159) in future filings.