Starbucks Corporation 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended April 2, 2006 (13 weeks) and the year-to-date period ended April 2, 2006 (26 weeks). Starbucks Corporation operates company-operated retail stores and specialty businesses (licensing, foodservice) globally. The company reported strong financial performance driven by new store openings and comparable store sales growth.
Key Financial Metrics
| Metric | 13 Weeks Ended Apr 2, 2006 |
13 Weeks Ended Apr 3, 2005 |
26 Weeks Ended Apr 2, 2006 |
26 Weeks Ended Apr 3, 2005 |
|---|---|---|---|---|
| Total Net Revenues | $1,885.8 million | $1,518.7 million | $3,819.9 million | $3,108.3 million |
| Operating Income | $201.9 million | $157.3 million | $481.7 million | $384.4 million |
| Net Earnings | $127.3 million | $100.5 million | $301.5 million | $245.1 million |
| Diluted EPS | $0.16 | $0.12 | $0.38 | $0.30 |
| Operating Margin | 10.7% | 10.4% | 12.6% | 12.4% |
| Cash & Equivalents | $202.7 million | $173.8 million (Oct 2005) | N/A | |
| Short-term Borrowings | $95.0 million | $277.0 million (Oct 2005) | N/A | |
| Net Cash from Operations (26 wks) | N/A | $762.0 million | $577.5 million |
Material Changes vs. Prior Period
- Revenue Growth: Total net revenues increased 24% for the quarter and 23% year-to-date, driven by the opening of 984 new stores in the first half of fiscal 2006 and comparable store sales growth of 10% (quarter) and 8% (YTD).
- Profitability: Net earnings rose 27% for the quarter and 23% YTD. Operating margins improved due to lower cost of sales as a percentage of revenue, partially offset by higher general and administrative expenses.
- Accounting Change: The company adopted SFAS 123(R) effective October 3, 2005, recognizing stock-based compensation expense. This resulted in $27.8 million in expense for the quarter and $50.6 million YTD, which was not present in the prior year's reported results.
- Acquisitions: In January 2006, Starbucks increased its equity ownership to 100% in its Hawaii and Puerto Rico operations, reclassifying them from licensed to company-operated.
- Liquidity: Short-term borrowings decreased significantly from $277 million to $95 million as the company repaid $182 million net under its revolving credit facility.
Guidance, Outlook, and Risks
- Store Openings: Management expects to open at least 1,800 new stores globally in fiscal 2006.
- Comparable Store Sales: Expected to grow in the range of 3% to 7% for the remainder of fiscal 2006.
- Capital Expenditures: Expected to be in the range of $750 million to $775 million for fiscal 2006.
- Effective Tax Rate: Estimated to approximate 38% for fiscal 2006.
- Risks: Key risks include fluctuations in coffee and dairy commodity prices, foreign currency exchange rates, and the impact of legal proceedings regarding employee classification (FLSA lawsuits).
- Share Repurchases: The company repurchased 6.1 million shares for $178 million during the 26-week period. Approximately 16.0 million shares remain authorized for repurchase.
Investor Verification Checklist
- Stock-Based Compensation Impact: Verify the specific impact of the new SFAS 123(R) adoption on future earnings, as this is a new recurring expense not present in prior year comparisons.
- Commodity Hedging: Review the effectiveness of hedging strategies against rising green coffee costs, which offset some margin improvements.
- Legal Contingencies: Monitor the status of the FLSA class-action lawsuits regarding store manager and assistant manager overtime classification, as potential liabilities are currently unquantified.
- International Expansion Costs: Assess the sustainability of operating margins in the International segment, where infrastructure investments are currently higher relative to revenue.
- Capital Allocation: Confirm the balance between capital expenditures for new stores and share repurchases given the remaining $16 million share authorization.