Starbucks Corporation — Form 10-Q Summary
Reporting period: Unaudited third quarter (13 weeks) and year to date (39 weeks) ended June 28, 2009; comparable periods ended June 29, 2008. Fiscal 2009 ends September 27, 2009. Filed August 4, 2009.
Financial performance
| Metric | Q3 2009 | Q3 2008 | 39 weeks 2009 | 39 weeks 2008 |
|---|---|---|---|---|
| Revenue | $2,403.9 million | $2,574.0 million | $7,352.4 million | $7,867.6 million |
| Operating income (loss) | $204.0 million | $(21.6) million | $362.6 million | $489.7 million |
| Operating margin | 8.5% | (0.8)% | 4.9% | 6.2% |
| Net earnings (loss) | $151.5 million | $(6.7) million | $240.8 million | $310.1 million |
| Diluted EPS | $0.20 | $(0.01) | $0.32 | $0.42 |
| Operating cash flow | Not separately presented | Not separately presented | $1,016.7 million | $1,078.7 million |
| Capital expenditures | Not separately presented | Not separately presented | $344.2 million | $733.9 million |
- Q3 revenue fell 6.6% year over year, mainly because of lower company-operated retail sales. Company-operated retail revenue was $2,013.8 million, down 7.6%; licensing revenue rose 7.0%, while foodservice and other revenue fell 20.8%.
- Consolidated comparable-store sales declined 5% in Q3 (U.S. down 6%; International down 2%). For the 39-week period, comparable-store sales declined 8% in the U.S. and 3% internationally.
- Q3 operating income rebounded from a loss, principally reflecting much lower restructuring charges and cost-saving and store-efficiency measures. Management attributed about 440 basis points of the operating-margin improvement to lower restructuring charges. Year-to-date operating income and net earnings nevertheless declined.
- Q3 net margin was 6.3%, versus (0.3)% a year earlier; year-to-date net margin was 3.3%, versus 3.9%. The Q3 effective tax rate was 30.3%, partly reflecting retroactive tax credits.
- Cash provided by operations decreased $62 million year over year for the 39 weeks. Investing activities used $310.3 million; financing activities used $681.5 million, including $713.1 million of net repayments of commercial paper and short-term borrowings. Cash increased $22.2 million to $292.0 million.
Balance sheet and liquidity
- At June 28, 2009, total assets were $5.33 billion, current assets $1.72 billion, and current liabilities $1.56 billion. Shareholders’ equity was $2.82 billion.
- Total debt was $549.8 million, down from $1.26 billion at September 28, 2008; short-term borrowings and commercial paper were zero at quarter-end, compared with $713.0 million at fiscal year-end. Long-term debt was primarily $549.3 million of 6.25% senior notes due 2017.
- Cash and liquid investments were reported at $337 million. The company had $986 million of remaining capacity under its combined $1 billion commercial-paper and revolving-credit facilities, after $14 million of outstanding letters of credit. It was in compliance with debt covenants.
- Moody’s downgraded Starbucks’ short- and long-term ratings in May 2009; the short-term downgrade made commercial paper less liquid and more expensive. Management said operating cash flow and revolving-credit capacity should fund the business for the foreseeable future.
- $55.9 million of auction-rate securities remained illiquid following auction failures. The company said it intended and was able to hold them until recovery and did not expect the situation to materially affect its funding needs.
Material changes, outlook and risks
- Management said the recession, weaker consumer discretionary spending, competition, and prior rapid store expansion continued to pressure sales. Cost reductions of about $370 million had been achieved in the first three quarters, including about $175 million in Q3; the fiscal 2009 target was approximately $550 million.
- Restructuring charges were $51.6 million in Q3 and $279.2 million year to date, versus $167.7 million in both comparable 2008 periods. Approximately $663.3 million of total restructuring costs were expected. By quarter-end, 676 U.S. stores, 61 Australian stores, and 28 other international stores had closed under announced actions.
- For fiscal 2009, Starbucks expected a net reduction of about 30 stores globally, capital expenditures of approximately $550 million, operating cash flow above $1 billion, and free cash flow above $500 million. It expected to reach the $550 million cost-reduction target, including about $180 million in Q4, and borrow less than $50 million under its credit facility for the remainder of the year.
- The annual goodwill review produced a $7 million impairment for the Hawaii retail reporting unit, reflecting weaker-than-expected operating prospects, particularly in travel. Management warned further deterioration could result in additional impairments.
- In the California tip-pooling case, a prior trial-court award of approximately $87 million plus interest was reversed by the Court of Appeal. Plaintiffs sought California Supreme Court review; the company described loss as reasonably possible rather than probable and recorded no accrual.
- Key operating risks include coffee, dairy and other input costs and availability, foreign-exchange movements, execution of restructuring and cost initiatives, economic conditions, competition, and legal proceedings. Management cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether comparable-store sales and revenue trends improved or weakened after Q3, especially in the U.S., U.K. and Canada.
- Whether the company achieved its fiscal 2009 cost-reduction, store-closure, cash-flow and capital-expenditure targets, and the ongoing costs and benefits of restructuring.
- Liquidity and borrowing capacity, credit-rating developments, and progress toward recovering the $55.9 million in illiquid auction-rate securities.
- Developments in the California tip-pooling litigation and any potential financial exposure; also monitor for further goodwill impairment.
- Results are interim and unaudited; management stated they are not necessarily indicative of full-year performance.