SBUX

Starbucks Corporation 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended June 29, 1997 (13 weeks) and the nine-month period ended June 29, 1997 (39 weeks). Starbucks Corporation operates primarily through Company-operated retail stores, which accounted for approximately 86% of net revenues, alongside specialty sales (wholesale, royalties, joint ventures) and direct response operations. The fiscal year ends on the Sunday closest to September 30.

Key Financial Metrics

Cash Flow (39 Weeks): Operating activities provided $77.4 million. Investing activities used $131.9 million, primarily for capital expenditures ($112.2 million) related to opening 254 new stores. Financing activities provided $19.1 million, largely from stock option exercises.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 37% for the quarter and 39% for the nine-month period compared to the prior year. Retail sales grew 37% (quarter) and 39% (nine months), driven by the opening of 89 new stores in the quarter and 254 in the nine-month period, plus a 6% increase in comparable store sales for the quarter.
• Margin Expansion: Cost of sales as a percentage of net revenues decreased to 42.4% (quarter) and 45.6% (nine months) from 47.0% and 49.3% respectively. This improvement was due to lower green coffee costs and sales price increases implemented in response to rising commodity costs.
• Expense Increases: Store operating expenses as a percentage of retail sales increased to 38.8% (quarter) due to higher advertising and payroll costs. General and administrative expenses rose slightly due to IT system upgrades and travel costs.
• Inventory Buildup: Inventories increased significantly to $109.9 million from $83.4 million at the prior year-end, reflecting strategic purchasing to secure supply.

Guidance, Outlook, and Risks

• Expansion Plans: Management plans to open at least 350 new stores in North America and 40 in the Pacific Rim during fiscal 1998. Estimated capital requirements for fiscal 1998 are $170 million to $200 million.
• Capital Expenditures: Expected capital expenditures for the remainder of fiscal 1997 are approximately $60 million.
• Coffee Price Risk: Green coffee commodity prices have increased significantly. While the company raised prices in March and May 1997, management warns that if prices remain high, margins may contract in fiscal 1998 as higher-cost inventory is sold. The company has $43.0 million in fixed-price purchase commitments.
• Competitive Pressure: Rapid expansion and clustering of stores may put downward pressure on comparable store sales growth. The company is also testing grocery store distribution in Chicago.
• Accounting Change: The company disclosed pro forma EPS under the new FAS 128 standard (Basic EPS $0.19/$0.50; Diluted EPS $0.18/$0.48 for the quarter/nine months), though adoption is not required until periods ending after December 15, 1997.

Investor Verification Checklist

• Verify the sustainability of the 6% comparable store sales growth given the company's warning about future downward pressure from clustering and competition.
• Monitor the impact of rising green coffee costs on gross margins in the upcoming fiscal 1998, as current margins benefited from price increases preceding the full cost impact.
• Assess the execution of the aggressive store opening plan (350+ stores in fiscal 1998) and the associated capital requirements ($170M-$200M).
• Review the outcome of the grocery store distribution test in Chicago, which could alter the revenue mix and cost structure.
• Confirm the company's ability to maintain liquidity given the significant cash outflow for inventory buildup and capital expenditures.