Business Context and Reporting Period
Company: Starbucks Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 28, 2003 (13 weeks)
Business Overview: Starbucks operates company-operated and licensed retail stores globally, selling coffee, tea, and related products. The company also engages in specialty operations including licensing, foodservice, and grocery sales. The fiscal year ends on the Sunday closest to September 30.
Key Financial Metrics
| Metric | Q1 2004 (Ended Dec 28, 2003) | Q1 2003 (Ended Dec 29, 2002) |
|---|---|---|
| Total Net Revenues | $1,281.2 million | $1,003.5 million |
| Operating Income | $175.5 million | $120.8 million |
| Net Earnings | $110.8 million | $78.4 million |
| Diluted EPS | $0.27 | $0.20 |
| Operating Margin | 13.7% | 12.0% |
| Cash and Cash Equivalents | $448.3 million | $251.5 million (End of period) |
| Net Cash Provided by Operating Activities | $378.7 million | $233.7 million |
| Long-Term Debt | $4.2 million | $4.4 million |
| Working Capital | $434.7 million | $337.7 million |
Material Changes vs. Prior Period
- Revenue Growth: Total net revenues increased 27.7% year-over-year, driven by the opening of 670 new company-operated stores and 704 new licensed stores in the last 12 months, alongside a 10% increase in comparable store sales.
- Profitability: Net earnings rose 41.4% to $110.8 million. Operating income increased 45.3%, with operating margins expanding from 12.0% to 13.7% due to leverage on fixed costs and supply chain efficiencies.
- Segment Performance:
- United States: Revenues grew 26.9% to $1.1 billion; operating income increased 27.4% to $216.7 million.
- International: Revenues grew 32.3% to $190.6 million. The segment turned profitable, reporting operating income of $11.0 million compared to a loss of $1.4 million in the prior year.
- Acquisition Impact: The acquisition of Seattle Coffee Company in the prior fiscal year contributed to growth in grocery and foodservice revenues.
- Cash Flow: Operating cash flow increased significantly to $378.7 million, aided by a $72.5 million increase in deferred revenue from Starbucks Card balances.
Guidance, Outlook, and Risks
- Full Year Targets (Fiscal 2004): Management targets opening 1,300 new global retail stores, increasing total net revenues by approximately 20%, and growing earnings per share by 20-25%.
- Comparable Store Sales: Targeted growth of 3-7% for stores open 13+ months, though Q1 saw 10% growth which management notes is not sustainable long-term.
- Capital Expenditures: Expected to range between $450 million and $475 million for fiscal 2004, representing 10-15% growth over the prior year.
- Key Risks:
- Commodity Prices: Significant volatility in coffee and dairy prices. The company has $391.4 million in fixed-price purchase commitments for green coffee.
- Foreign Exchange: Exposure to currency fluctuations, particularly the Japanese yen, Canadian dollar, and Euro. A 10% devaluation of the USD could reduce derivative fair value by approximately $20.5 million.
- Seasonality: A significant portion of revenue and profit is realized in the first quarter due to the holiday season.
- Contingencies: The company guarantees approximately $12.3 million of yen-denominated loans for an unconsolidated equity investee in Japan and $42,000 for a facility in China.
Investor Verification Checklist
- Verify the sustainability of the 10% comparable store sales growth rate versus the 3-7% long-term target.
- Monitor the impact of rising coffee and dairy commodity prices on cost of sales, given the fixed-price purchase commitments expire in 2004-2005.
- Assess the execution of the 1,300 new store opening plan for fiscal 2004 and associated capital expenditure requirements.
- Review the continued profitability trajectory of the International segment, which recently turned profitable.
- Track the utilization of the $391.4 million in green coffee purchase commitments to ensure supply chain stability.