Business Context and Reporting Period
Company: Starbucks Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: January 2, 2005 (13 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 quarter of fiscal year 2005.
Key Financial Metrics
| Metric | Q1 2005 (13 Weeks) | Q1 2004 (13 Weeks) |
|---|---|---|
| Total Net Revenues | $1,589,544 | $1,281,191 |
| Operating Income | $227,234 | $174,661 |
| Net Earnings | $144,753 | $110,135 |
| Diluted EPS | $0.35 | $0.27 |
| Operating Margin | 14.3% | 13.6% |
| Cash and Cash Equivalents | $643,548 | $299,128 (Oct 3, 2004) |
| Net Cash from Operating Activities | $407,916 | $384,451 |
| Long-Term Debt | $3,433 | $3,618 |
Note: All figures in thousands except per share data and percentages.
Material Changes vs. Prior Period
- Revenue Growth: Total net revenues increased 24% year-over-year, driven by a 26% increase in company-operated retail revenues and a 15% increase in specialty revenues.
- Profitability: Net earnings rose 31% to $144.8 million. Operating income increased 30% to $227.2 million.
- Store Expansion: The company opened 141 new company-operated stores and 239 new licensed stores during the quarter. Total global store count reached 8,949.
- Comparable Store Sales: Comparable store sales grew 10% globally (11% in the U.S., 7% internationally), driven by increased transaction volume and average ticket size.
- Restatement: The company restated prior period financials (Q4 2004 and Q1 2004) due to an accounting error regarding leasehold improvements and rent holidays. This adjustment reclassified certain costs from depreciation to cost of sales and adjusted deferred rent liabilities.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Long-Term Targets: Management maintains a long-term goal of 15,000 retail locations in the U.S. and 15,000 internationally. They project annual revenue growth of approximately 20% and earnings per share growth of 20-25% over the next three to five years.
- Capital Expenditures: Expected capital expenditures for fiscal 2005 are projected to be between $600 million and $650 million, primarily for opening approximately 650 new company-operated stores.
- Stock Repurchases: No shares were repurchased during the quarter. Approximately 18.6 million shares remain authorized for repurchase.
Risks and Contingencies
- Commodity Prices: Significant volatility in green coffee and fluid milk prices poses a risk to profitability. The company has $458 million in fixed-price coffee purchase commitments.
- Legal Proceedings: A class-action lawsuit (Pendlebury v. Starbucks) alleges misclassification of store managers regarding overtime pay. The company intends to vigorously defend the suit but cannot estimate potential loss.
- Internal Controls: Management identified a material weakness in internal controls over financial reporting related to lease accounting. This led to the restatement of prior financial statements. Remediation efforts are underway.
- Accounting Changes: Adoption of SFAS 123R (Share-Based Payment) in late 2005 will require expensing stock options, which will reduce reported earnings.
Investor Verification Checklist
- Restatement Impact: Verify the full extent of the restatement on fiscal years 2002, 2003, and 2004 as disclosed in the upcoming 10-K/A.
- Internal Control Remediation: Monitor the company's progress in remedying the material weakness in internal controls over financial reporting.
- Commodity Hedging: Review the effectiveness of hedging strategies against rising coffee and dairy costs.
- Legal Exposure: Track the status of the FLSA class-action lawsuit regarding store manager overtime classification.
- Stock-Based Compensation: Assess the projected impact of SFAS 123R adoption on future earnings per share.