Starbucks Corporation 10-Q Summary
Business Context and Reporting Period
This filing covers the quarterly period ended June 28, 1998 (13 weeks) and the nine-month period ended June 28, 1998 (39 weeks). Starbucks Corporation is a specialty coffee roaster and retailer. A material event during this period was the acquisition of Seattle Coffee Holdings Limited on May 28, 1998, accounted for as a pooling of interests. As of August 1, 1998, there were 89,104,244 shares of common stock outstanding.
Key Financial Metrics
| Metric | 13 Weeks Ended June 28, 1998 | 13 Weeks Ended June 29, 1997 | 39 Weeks Ended June 28, 1998 | 39 Weeks Ended June 29, 1997 |
|---|---|---|---|---|
| Net Revenues | $334.4 million | $244.2 million | $951.0 million | $700.7 million |
| Operating Income | $16.9 million | $22.6 million | $71.8 million | $56.9 million |
| Net Earnings | $7.9 million | $14.2 million | $42.8 million | $37.3 million |
| Diluted EPS | $0.09 | $0.17 | $0.47 | $0.45 |
| Cash from Operations | N/A | N/A | $101.5 million | $77.3 million |
| Cash & Equivalents | $91.4 million | $70.1 million | $91.4 million | $127.2 million (Beg) |
| Working Capital | $161.8 million | N/A | $161.8 million | N/A |
Debt & Liquidity: Convertible subordinated debentures were fully converted to common stock in the first quarter of fiscal 1998, reducing interest expense significantly. Total cash and investments stood at $125.1 million.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 37% in the quarter and 36% year-to-date, driven by a 34% increase in retail sales (new store openings and 7% comparable store sales growth) and a 68% increase in specialty sales.
- Profitability Decline: Despite revenue growth, Net Earnings dropped 44% in the quarter ($7.9M vs $14.2M) due to $8.9 million in merger expenses and other one-time transaction costs related to the Seattle Coffee acquisition.
- Expense Ratios: Cost of sales as a percentage of revenue increased to 43.4% (quarter) due to higher green coffee costs, partially offset by prior price increases. Store operating expenses rose to 39.4% of retail sales, impacted by transaction costs.
- Tax Rate: The effective tax rate spiked to 58.4% for the quarter (vs. 39.2% prior year) due to non-deductible merger costs. Management expects a forward rate of approximately 38.5%.
Guidance, Outlook, and Risks
- Expansion Plans: The Company plans to open at least 350 new stores in continental North America for fiscal 1998. Long-term goals include 2,000 stores in North America by 2000, and 500 each in Asia and Europe by 2003.
- Capital Expenditures: Management expects approximately $50 million in capital expenditures for the remainder of fiscal 1998, focused on new stores, production capacity, and information systems.
- Coffee Price Risk: Green coffee prices remain volatile. The Company has $101 million in fixed-price purchase commitments to cover remaining fiscal 1998 and a substantial portion of fiscal 1999 needs. Margins may be pressured if costs rise faster than sales prices.
- Accounting Changes: The filing notes the upcoming implementation of SFAS 133 regarding derivative instruments, effective for fiscal years beginning after June 15, 1999, though no significant impact is expected.
Investor Verification Checklist
- Verify the sustainability of comparable store sales growth (7% in Q3) given management's warning about store cannibalization in clustered markets.
- Confirm the impact of the Seattle Coffee acquisition on future operating margins once one-time transaction costs are removed.
- Monitor green coffee commodity prices and the Company's ability to pass cost increases to consumers without dampening demand.
- Review the execution of the 350-store opening plan for fiscal 1998 against the $50 million remaining capital expenditure budget.
- Assess the effectiveness of the grocery channel expansion, which drove significant specialty sales growth but also increased marketing costs.