Business Context and Reporting Period
Company: Starbucks Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: April 3, 2005 (13 weeks) and 26 weeks
Business Overview: Starbucks operates company-operated and licensed retail stores globally, selling coffee, beverages, and food. The company also engages in specialty operations including licensing, foodservice, and product sales. The reporting period covers the first half of fiscal year 2005.
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended Apr 3, 2005 |
13 Weeks Ended Mar 28, 2004 (Restated) |
26 Weeks Ended Apr 3, 2005 |
26 Weeks Ended Mar 28, 2004 (Restated) |
|---|---|---|---|---|
| Total Net Revenues | $1,518,716 | $1,241,068 | $3,108,260 | $2,522,259 |
| Operating Income | $157,353 | $123,759 | $384,587 | $298,420 |
| Net Earnings | $100,536 | $78,885 | $245,289 | $189,020 |
| Diluted EPS | $0.24 | $0.19 | $0.59 | $0.46 |
| Operating Margin | 10.3% | 10.0% | 12.4% | 11.8% |
| Cash & Equivalents | $177,142 | $145,053 | $177,142 | $145,053 |
| Total Liquid Assets | $843,386 | $788,188 | $843,386 | $788,188 |
| Long-Term Debt | $3,246 | $3,618 | $3,246 | $3,618 |
Note: Prior year figures have been restated due to lease accounting corrections (see Material Changes).
Material Changes vs. Prior Period
- Revenue Growth: Total net revenues increased 22% for the 13-week period and 23% for the 26-week period compared to the prior year. Growth was driven by the opening of 669 new company-operated stores in the last 12 months and comparable store sales growth of 7% (13 weeks) and 9% (26 weeks).
- Profitability: Net earnings increased 27% (13 weeks) and 30% (26 weeks). Operating margins expanded due to revenue leverage over fixed costs, despite higher store operating expenses and dairy costs.
- Segment Performance:
- United States: Revenues up 21% (13 weeks) and 22% (26 weeks). Operating income increased 13% and 19% respectively.
- International: Revenues up 31% (13 weeks) and 31% (26 weeks). Operating income improved significantly, rising from $8 million to $17 million (13 weeks) and $19 million to $37 million (26 weeks) due to cost leverage.
- Restatement of Financial Statements: The company restated prior period financials to correct accounting for tenant improvement allowances and rent holidays. This resulted in a reduction of previously reported net earnings for the comparable 2004 periods by $603,000 (13 weeks) and $1.3 million (26 weeks).
Guidance, Outlook, and Risks
- Outlook: Management targets annual revenue growth of approximately 20% and earnings per share growth of 20-25% for the next three to five years. Comparable store sales growth is targeted at 3% to 7% long-term.
- Capital Expenditures: Expected to range between $600 million and $650 million for fiscal 2005, primarily for opening approximately 650 new company-operated stores and remodeling existing ones.
- Share Repurchases: The company repurchased 6.5 million shares for $334.7 million during the 26-week period. On May 5, 2005, the Board authorized an additional 10 million shares for repurchase.
- Commodity Risks: Green coffee and fluid milk prices are volatile. While the company has $333 million in fixed-price coffee contracts, rising commodity costs could impact profitability if not passed to consumers. The company has initiated hedging for a portion of fluid milk purchases.
- Legal Proceedings: A class-action lawsuit (Pendlebury v. Starbucks) alleges misclassification of store managers regarding overtime pay. The company believes a loss is unlikely but cannot estimate potential damages. Trial is set for early 2006.
- Accounting Changes: Adoption of SFAS 123R (Share-Based Payment) is required by fiscal 2006, which will reduce net earnings by recognizing stock-based compensation expense.
Investor Verification Checklist
- Restatement Impact: Verify the specific adjustments made to prior year comparables regarding lease accounting (tenant improvement allowances and rent holidays) to ensure accurate year-over-year trend analysis.
- Comparable Store Sales: Confirm the 7% (13 weeks) and 9% (26 weeks) comparable store sales growth figures, as this is a primary driver of organic revenue expansion.
- Commodity Hedging: Review the extent of fixed-price coffee contracts ($333 million) versus the shift to price-to-be-fixed contracts due to market conditions, and assess exposure to rising dairy costs.
- Legal Exposure: Monitor the status of the FLSA class-action lawsuit regarding store manager overtime classification.
- Capital Allocation: Track the execution of the $600-$650 million capital expenditure plan and the pace of share repurchases under the new 10 million share authorization.