Starbucks Corporation — FY2011 Form 10-K
Business context and reporting period. Starbucks operates company-owned and licensed coffee shops and sells branded products through consumer packaged goods (CPG), foodservice, and other channels. This annual filing covers the 52 weeks ended October 2, 2011. The prior year ended October 3, 2010 and included 53 weeks, which affects comparisons. At year-end, Starbucks had 17,003 stores worldwide: 9,031 company-operated and 7,972 licensed.
Financial results and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net revenue | $11.700 billion | $10.707 billion |
| Operating income / margin | $1.729 billion / 14.8% | $1.419 billion / 13.3% |
| Net earnings attributable to Starbucks | $1.246 billion | $946 million |
| Diluted EPS | $1.62 | $1.24 |
| Cash from operations | $1.612 billion | $1.705 billion |
| Capital expenditures | $532 million | $441 million |
- Revenue rose 9.3%, operating income about 22%, net earnings about 32%, and diluted EPS about 31%. Consolidated comparable-store sales increased 8% (US 8%; International 5%).
- Company-operated stores generated $9.632 billion, or 82% of revenue; licensed stores $1.008 billion; CPG, foodservice and other $1.061 billion. Segment revenue was $8.038 billion US, $2.626 billion International, and $861 million CPG.
- Cost of sales, including occupancy, increased to 42.3% of revenue from 41.6%, principally reflecting coffee and other commodity inflation. Sales leverage and lower store operating expense ratios more than offset this pressure, expanding operating margin by 150 basis points.
- Operating cash flow decreased about 5%, primarily as inventory rose, partly due to higher coffee prices. Cash and cash equivalents were $1.148 billion; short-term investments were $903 million, for about $2.051 billion combined, versus $1.450 billion a year earlier. Current assets were $3.795 billion and current liabilities $2.076 billion.
- Long-term debt was $549.5 million, including the $550 million 6.25% senior notes due 2017. No credit-facility or commercial-paper borrowings were outstanding; the $500 million facility matures in November 2014. Total contractual obligations were $6.039 billion, including $4.058 billion of operating leases.
- Shareholder distributions included $556 million of repurchases and $390 million of dividends paid in FY2011. The fourth-quarter dividend of $0.17 per share was declared for payment in December 2011.
- Fourth-quarter FY2011 revenue was $3.032 billion, operating income $448 million, net earnings attributable to Starbucks $359 million, and diluted EPS $0.47. The comparable FY2010 quarter reported $2.838 billion, $399 million, $279 million, and $0.37, respectively.
Material changes and notable items
- Starbucks transitioned packaged coffee and tea distribution from Kraft to a direct model during FY2011. CPG revenue increased 22% to $861 million, but CPG operating margin declined to 31.7% from 37.0%, mainly from higher commodity costs and costs supporting direct distribution.
- FY2011 earnings included a $55 million gain from acquiring the remaining ownership interest in the Switzerland and Austria venture and a $30 million gain on sale of corporate real estate. Management said these gains contributed about $0.10 to diluted EPS; they should be distinguished from recurring operating performance.
- US operating margin rose to 19.4% from 17.1%, and International margin to 13.3% from 9.8%. International revenue benefited from comparable-store growth, new stores, and favorable foreign currency translation.
- US licensed-store count declined by 342 net, including the closure of 475 Seattle’s Best Coffee locations in Borders bookstores. The company recorded impairment of certain Seattle’s Best Coffee assets associated with Borders’ bankruptcy.
- Starbucks acquired the remaining 50% interest in its Switzerland and Austria venture for $65.5 million and increased ownership in its southern China business. In the first quarter of FY2012, it acquired Evolution Fresh for $30 million in cash.
Outlook, risks, and contingencies
- For FY2012, management expected moderate revenue growth, mid-single-digit comparable-store sales growth, and modest consolidated operating-margin and EPS improvement. The outlook anticipated continued higher commodity costs and spending to support direct CPG distribution.
- FY2012 capital expenditures were expected to be approximately $800–$900 million, including store renovations and manufacturing-capacity investment. Management expected an effective tax rate of about 33%.
- Key risks include volatile arabica coffee, dairy and other input costs; consumer-demand and competitive pressures; execution of international and CPG growth plans; foreign-exchange and supply-chain exposures; and dependence on the US segment for a substantial share of revenue and operating cash flow.
- The Kraft distribution dispute was in binding arbitration, with a trial expected in mid-2012. Starbucks said it could not estimate the range of outcomes; Kraft alleged compensation could be due if the agreement was terminated. The $750 million offer Starbucks previously made to Kraft was expressly described as not a proper basis for estimating the arbitration outcome.
- Other liquidity considerations include $28 million of illiquid auction-rate securities and approximately $987 million of undistributed foreign earnings intended to be reinvested; repatriation could trigger additional US taxes. Management stated that cash, investments, and expected operating cash flows were sufficient for foreseeable needs.
Most important facts for investors to verify
- Whether comparable-store momentum and sales leverage persisted after FY2011, especially given the 53-week prior-year comparison.
- Whether CPG’s direct-distribution transition delivers sustainable growth and margin recovery, net of incremental operating costs.
- The normalized earnings effect of the $55 million venture remeasurement gain and $30 million property-sale gain.
- The outcome and potential financial exposure from the Kraft arbitration, which the filing says could not yet be estimated.
- Whether higher coffee and other commodity costs can be offset through pricing, purchasing, and operating efficiencies.
- Cash generation relative to planned capital expenditures, dividends, repurchases, and substantial lease commitments.