Business Context and Reporting Period
Company: Starbucks Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: 13 weeks ended December 29, 2002 (Fiscal Q1 2003)
Business Overview: Starbucks operates Company-operated retail stores and specialty operations (licensing, foodservice, grocery). Approximately 85% of net revenues are derived from Company-operated retail stores.
Key Financial Metrics
| Metric | Q1 2003 (13 weeks) | Q1 2002 (13 weeks) |
|---|---|---|
| Total Net Revenues | $1,003.5 million | $805.3 million |
| Operating Income | $122.4 million | $92.6 million |
| Net Earnings | $79.97 million | $68.36 million |
| Diluted EPS | $0.20 | $0.17 |
| Operating Margin | 12.2% | 11.5% |
| Cash from Operations | $233.7 million | $146.6 million |
| Cash & Equivalents (End of Period) | $251.5 million | $168.6 million |
| Total Debt (Current + Long-term) | $5.6 million | Filing text does not provide clear prior period total debt |
Material Changes vs. Prior Period
- Revenue Growth: Total net revenues increased 25% year-over-year, driven by a 23% increase in North American Retail revenues and a 33% increase in Business Alliances revenues.
- Comparable Store Sales: Increased 9% entirely due to higher transaction volume.
- Store Expansion: Systemwide retail stores increased by 307 net stores to 6,193 total. North American Company-operated stores grew by 115.
- Profitability: Operating income rose 32.2% to $122.4 million. The operating margin improved to 12.2% from 11.5%.
- One-Time Items: The prior year period included a $13.4 million gain on the sale of an investment in Starbucks Coffee Japan, Ltd., which did not recur in the current period.
- Cost Structure: Cost of sales and occupancy costs remained at 41.8% of revenues. Store operating expenses as a percentage of retail revenues decreased slightly to 38.0% due to leverage from revenue growth.
Guidance, Outlook, and Risks
- Store Opening Guidance: Management expects to open at least 1,200 new stores for the fiscal year ending September 28, 2003 (approx. 525 Company-operated and 225 licensed in North America; 75 Company-operated and 375 licensed internationally).
- Capital Expenditures: Expected to be approximately $331 million for the remainder of fiscal 2003, primarily for new store openings, remodeling, and production capacity enhancements.
- Liquidity: Management believes existing cash, investments, and operating cash flow are sufficient to finance capital requirements through fiscal 2003.
- Stock Repurchases: The company repurchased 1.5 million shares for $29.9 million during the quarter. Approximately 6.4 million shares remain available under the current plan.
- Risks:
- Coffee Prices: Significant volatility in green coffee prices could adversely affect profitability. The company has $274.2 million in fixed-price purchase contracts to mitigate this through 2003.
- Legal Proceedings: A $18.0 million settlement for class action lawsuits was approved in December 2002; payments are expected in Q2 2003.
- Competition & Expansion: Risks include increased competition, fluctuating dairy prices, and the ability to find optimal store locations.
Investor Verification Checklist
- Coffee Price Hedging: Verify the sufficiency of the $274.2 million in fixed-price contracts against potential market price spikes for green coffee.
- Comparable Store Sales Quality: Confirm that the 9% increase in comparable store sales is sustainable and driven by volume rather than temporary pricing changes.
- Capital Expenditure Execution: Monitor the ability to open 1,200 new stores within the $331 million budget for the remainder of the fiscal year.
- Legal Settlement Impact: Track the cash outflow for the $18.0 million class action settlement expected in Q2 2003.
- Stock-Based Compensation: Note that reported earnings do not include fair-value stock-based compensation; pro-forma diluted EPS would be $0.18 versus the reported $0.20.