STARBUCKS CORP quarterly report, Q4 FY1997

Business Context and Reporting Period

Company: Starbucks Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 28, 1997 (13 weeks)
Business Overview: The Company operates Company-operated retail stores (86% of revenue), specialty sales operations including licensees and joint ventures (12% of revenue), and direct response operations. The fiscal year ends on the Sunday closest to September 30.

Key Financial Metrics

MetricQ1 1998 (13 Weeks)Q1 1997 (13 Weeks)
Net Revenues$316,952,000$239,142,000
Operating Income$34,519,000$21,307,000
Net Earnings$22,104,000$14,390,000
Diluted EPS$0.25$0.18
Operating Cash Flow$62,973,000$46,663,000
Cash and Cash Equivalents (End)$104,350,000$127,754,000
Total Cash and Investments$181,277,000N/A
Working Capital$177,072,000N/A
Convertible Debt$0$165,020,000

Margins: Cost of sales and related occupancy costs decreased to 45.4% of net revenues from 48.3% in the prior year. Operating margin improved significantly due to revenue growth and cost management.

Material Changes vs. Prior Period

  • Revenue Growth: Net revenues increased 33% to $317.0 million, driven by a 32% increase in retail sales and a 54% increase in specialty sales.
  • Store Expansion: The Company opened 119 new Company-operated stores in continental North America during the quarter, ending with 1,389 stores.
  • Comparable Store Sales: Increased 5%, driven by higher average transaction value and transaction volume.
  • Debt Reduction: The Company redeemed and converted its $165 million 4 1/4% Convertible Subordinated Debentures into common stock, eliminating interest expense associated with this debt.
  • Profitability: Net earnings increased 54% to $22.1 million, aided by the elimination of interest expense and favorable sales mix.

Guidance, Outlook, and Risks

Capital Expenditures: Management expects capital expenditures for the remainder of fiscal 1998 to be approximately $155 million, primarily for new store openings and production capacity enhancements.

Expansion Goals: The Company and its licensees plan to open at least 350 new stores in continental North America during fiscal 1998. The long-term goal is to reach at least 2,000 stores in continental North America by the end of the year 2000.

Risks and Contingencies:

  • Coffee Prices: Green coffee commodity prices remain high relative to historical levels. While the Company has fixed-price purchase commitments of approximately $44 million, future costs may rise if commodity prices remain elevated or increase further.
  • Cannibalization: Increased store clustering may lead to cannibalization of existing store sales.
  • Competition and Labor: Risks include increased competition, difficulty in finding optimal store locations, and challenges in hiring and retaining qualified personnel.
  • Seasonality: A significant portion of revenues and profits are realized in the first quarter due to the holiday season; quarterly results are not necessarily indicative of full-year performance.

Investor Verification Checklist

  • Verify the sustainability of the 5% comparable store sales growth amidst store cannibalization and rising coffee costs.
  • Confirm the execution of the $155 million capital expenditure plan for the remainder of fiscal 1998.
  • Monitor green coffee commodity prices and the Company's ability to pass cost increases to consumers without impacting volume.
  • Review the impact of the debt conversion on future interest expense and diluted share count.
  • Assess the performance of joint ventures (Pepsi and Ice Cream) which contributed to improved operating results.