Starbucks Corporation 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 28, 2004 (13 weeks) and the year-to-date period (26 weeks). Starbucks Corporation operates company-operated retail stores and specialty businesses (licensing, foodservice) globally. The company reported strong performance driven by new store openings and significant comparable store sales growth.
Key Financial Metrics (13 Weeks Ended March 28, 2004)
| Metric | Current Period | Prior Year Period |
|---|---|---|
| Total Net Revenues | $1,241.1 million | $954.2 million |
| Operating Income | $124.5 million | $85.5 million |
| Net Earnings | $79.5 million | $52.0 million |
| Diluted EPS | $0.19 | $0.13 |
| Operating Margin | 10.0% | 9.0% |
| Cash and Cash Equivalents | $370.1 million | $250.4 million (end of prior period) |
| Long-Term Debt | $4.0 million | $4.4 million |
Material Changes vs. Prior Period
- Revenue Growth: Total net revenues increased 30.1% year-over-year. Company-operated retail revenues grew 29.8%, driven by the opening of 671 new stores in the last 12 months and a 12% increase in comparable store sales (the strongest quarterly gain in over ten years).
- Profitability: Net earnings surged 52.8% to $79.5 million. Operating income rose 45.6% to $124.5 million.
- Segment Performance:
- United States: Revenues increased 29.3%; operating income rose 30.2% to $173.6 million.
- International: Revenues increased 34.9%; the segment turned profitable with operating income of $8.4 million, compared to a loss of $3.8 million in the prior year.
- Cost Structure: Cost of sales remained stable at 41.1% of revenues. Store operating expenses decreased slightly as a percentage of retail revenues (40.6% vs 40.7%) due to leverage on fixed costs.
- Cash Flow: Net cash provided by operating activities for the 26-week period was $464.3 million, a significant increase from $338.5 million in the prior year.
Guidance, Outlook, and Risks
- Outlook: Management expects annual revenue growth of approximately 20% and annual earnings per share growth of 20-25%. The company targets 3-7% comparable store sales growth for the foreseeable future.
- Store Expansion: Starbucks plans to open approximately 1,300 new stores globally in fiscal 2004 (525 company-operated and 350 licensed in the US; 100 company-operated and 325 licensed internationally).
- Capital Expenditures: Expected to be approximately $475 million for fiscal 2004, primarily for new store openings and production capacity enhancements.
- Risks:
- Commodity Prices: Significant volatility in green coffee and dairy prices. The company has $388.5 million in fixed-price purchase commitments to mitigate this risk.
- Foreign Exchange: Exposure to fluctuations in the Japanese yen, Canadian dollar, and British pound. A 10% devaluation of the USD could reduce derivative fair value by approximately $19.7 million.
- Competition: Increased competition within the specialty coffee industry.
- Share Repurchases: The company repurchased 1.1 million shares for $40.7 million during the 26-week period. Approximately 13.5 million shares remain authorized for repurchase.
Investor Verification Checklist
- Verify the sustainability of the 12% comparable store sales growth, as management notes this specific level is not sustainable long-term.
- Monitor green coffee commodity prices and the adequacy of the $388.5 million in fixed-price contracts to cover supply through 2005.
- Review the International segment's profitability trajectory, noting the shift from loss to profit was aided by the exit of Israeli operations in the prior year.
- Assess the impact of foreign exchange rates on future earnings, given the significant exposure to the yen and pound.
- Confirm the execution of the 1,300 new store opening plan for fiscal 2004 and associated capital expenditure requirements.