Starbucks Corporation — FY2010 Form 10-K
Business context and period. Starbucks roasts and sells coffee, beverages and food through company-operated stores and specialty channels, including licensed stores, packaged products and foodservice. The fiscal year ended October 3, 2010 and included 53 weeks; FY2009 included 52 weeks. Company-operated retail generated 83.7% of FY2010 revenue. Starbucks reported U.S., International and Global Consumer Products Group (CPG) segments; Seattle’s Best Coffee was moved to “Other,” with prior periods reclassified.
Financial results and liquidity
| Metric | FY2010 | FY2009 |
|---|---|---|
| Net revenue | $10.707 billion | $9.775 billion |
| Operating income / margin | $1.419 billion / 13.3% | $562 million / 5.7% |
| Net earnings attributable to Starbucks | $945.6 million | $390.8 million |
| Diluted EPS | $1.24 | $0.52 |
| Operating cash flow | $1.705 billion | $1.389 billion |
| Capital expenditures | $440.7 million | $445.6 million |
- Revenue increased 9.5%. Global comparable-store sales rose 7% (U.S. 7%; International 6%), with transactions up 4% and average transaction value up 3%. The additional fiscal week contributed approximately $207 million of revenue.
- Operating margin improved 760 basis points. Management cited sales leverage and operational efficiencies; lower restructuring charges contributed about 290 basis points. Restructuring charges were $53 million, versus $332.4 million in FY2009.
- Cash and short-term investments totaled approximately $1.45 billion at year-end, versus $666 million a year earlier; the company reported no short-term debt. Long-term debt was $549.4 million, primarily 6.25% Senior Notes due 2017. Shareholders’ equity was $3.675 billion.
- Operating cash flow less capital expenditures was approximately $1.264 billion. Starbucks returned about $460 million to shareholders through FY2010 repurchases and dividends. It declared its first cash dividend during the year.
- Current assets were $2.756 billion and current liabilities $1.779 billion. Contractual obligations included $4.084 billion of operating lease payments and $790.8 million of debt principal and scheduled interest.
Material changes versus prior period
- Results rebounded from FY2009’s 6% comparable-store sales decline and $390.8 million net earnings. The U.S. segment’s operating income rose to $1.291 billion from $530.1 million; International rose to $225.2 million from $91.2 million. CPG operating income declined to $261.4 million from $281.8 million, with margin pressured by Starbucks VIA launch costs.
- Lower food, beverage and packaging costs, reduced waste, labor efficiencies and occupancy-cost leverage supported margin recovery. Higher performance-based compensation and marketing expenses partly offset these gains.
- Starbucks acquired full ownership of its France and Brazil operations, converting them to company-operated markets, and acquired the remaining interest in a U.S. joint venture. France-related accounting included a gain from remeasuring the previously held interest to fair value.
- The company repurchased 11.2 million shares for $285.6 million and paid $171 million in cash dividends. It ended the year with 16,858 company-operated and licensed stores; company-operated stores declined by 72 net.
Outlook, risks and unusual items
- For FY2011, management expected mid-to-high single-digit revenue growth on a 52-week comparable basis, driven by low-to-mid single-digit comparable-store sales growth; approximately 500 net new stores, mostly licensed; modest operating-margin improvement; and capital expenditures of $550–$600 million. It expected a 34%–35% effective tax rate.
- Starbucks notified Kraft in FY2011 that it was discontinuing their packaged coffee and tea licensing relationships. Discussions were ongoing, a commercial dispute was possible, and the company said it could not estimate the range of outcomes. Transition execution and growth of the consumer-products business are key uncertainties.
- Management said the store-portfolio and support-organization restructuring was essentially complete: 918 stores had been closed cumulatively, with no material future costs expected. FY2010 still included $53 million of restructuring charges.
- Principal risks include volatile arabica coffee and dairy costs, consumer demand and competition, execution of international and consumer-products growth, foreign exchange exposure, reliance on partners and suppliers, brand and food-safety risks, and lease obligations. The filing notes that the base coffee commodity price rose markedly in FY2010 and that hedging only partly mitigates input-cost risk.
- Liquidity is affected by $41 million of illiquid auction-rate securities, whose auctions had failed; management did not expect this to materially impair funding needs. The company replaced its expiring $1 billion credit facility after year-end with a $500 million facility and a linked commercial-paper limit, maturing in November 2014.
- Legal proceedings in the ordinary course were not considered likely to have a material adverse effect. The filing disclosed $68.4 million in gross unrecognized tax benefits. Deloitte issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- How much of FY2010’s revenue and earnings recovery is repeatable, given the extra week, France consolidation and improved comparable-store sales?
- Whether U.S. and International sales momentum and cost efficiencies continue, and whether CPG can recover margin while scaling VIA and transitioning away from Kraft.
- The financial and operational consequences of the Kraft licensing termination, including any dispute, transition costs or changes to distribution.
- How higher coffee and dairy costs, foreign exchange movements and the large operating-lease commitment could affect margins and cash generation.
- Whether FY2011 store-opening, revenue-growth, margin and capital-spending expectations are achieved; these are management forecasts, not guarantees.