Starbucks Corporation — Fiscal 2009 Form 10-K
Business context and reporting period. Starbucks roasts and sells coffee, beverages, food and related products through Company-operated stores and specialty channels, including licensed stores, packaged goods and foodservice. This filing covers the 52-week fiscal year ended September 27, 2009; fiscal 2008 was also 52 weeks. Fiscal 2010 is expected to include 53 weeks. The US, International and Global Consumer Products Group (CPG) segments contributed 73%, 19% and 8% of fiscal 2009 revenue, respectively. The US foodservice business was reassigned to CPG in the fourth quarter, and comparative segment data were revised.
Financial performance and liquidity
| Metric | Fiscal 2009 | Fiscal 2008 |
|---|---|---|
| Net revenue | $9.775 billion | $10.383 billion |
| Operating income | $562.0 million | $503.9 million |
| Operating margin | 5.7% | 4.9% |
| Net earnings | $390.8 million | $315.5 million |
| Diluted EPS | $0.52 | $0.43 |
| Cash from operations | $1.389 billion | $1.259 billion |
| Capital expenditures | $445.6 million | $984.5 million |
| Cash and liquid investments | $666.1 million | $322.3 million |
| Short-term borrowings | $0 | $713.0 million |
| Total debt | $549.5 million | $1.263 billion |
Revenue declined 5.9%, primarily from a 6% comparable-store-sales decline: transactions fell 4% and average transaction value fell 2%. Company-operated retail generated 83.7% of revenue; specialty operations generated 16.3%. Cost reductions and store-level efficiencies lifted operating income despite lower sales and higher restructuring charges. Fiscal 2009 restructuring charges were $332.4 million, versus $266.9 million in 2008; reported EPS was reduced by approximately $0.28 in each year by restructuring and, in 2008, other transformation costs.
Cash from operations less capital expenditures was approximately $943 million. Operating cash flow and lower capital spending enabled Starbucks to repay $713.1 million of net short-term borrowings and increase cash. At year-end, current assets were $2.036 billion and current liabilities were $1.581 billion. The company reported $549.3 million of long-term debt, principally $550 million of 6.25% senior notes due in 2017. Its $1 billion combined revolving credit and commercial-paper capacity had $985.9 million available, net of letters of credit; the company was in compliance with debt covenants.
Contractual obligations totaled $5.633 billion, including $4.389 billion of operating lease payments. Available-for-sale securities included $55.7 million of auction-rate securities whose auctions had failed, limiting liquidity; management said this did not materially threaten funding needs.
Material changes versus the prior period
- Net revenue fell from $10.383 billion to $9.775 billion, while operating income rose 11.5% and operating margin improved from 4.9% to 5.7%.
- Net earnings increased 23.9%, from $315.5 million to $390.8 million. Fiscal 2009’s 30.1% effective tax rate benefited from retroactive tax credits and an employment-tax audit settlement; management expected a 34%–35% rate in fiscal 2010.
- US comparable sales declined 6% in 2009 versus 5% in 2008; International comparable sales declined 2% versus 2% growth. US segment revenue fell 5.7%; International revenue fell 8.7%, including unfavorable currency effects. CPG revenue was nearly flat, up 0.3%.
- Starbucks closed nearly all of the approximately 800 targeted US Company-operated stores, 61 Australian stores and 41 other international stores by year-end. Remaining international closures were expected by the end of fiscal 2010. Company-operated stores decreased by 385 net during 2009.
- The company reported $580 million of cost-structure reductions for 2009, including store portfolio rationalization, workforce reductions, in-store efficiencies and supply-chain improvements. The fiscal 2009 statements also included $224.4 million of impairment and disposition losses and a $7 million goodwill impairment related to Hawaii operations.
- Fourth-quarter revenue was $2.422 billion versus $2.515 billion a year earlier; operating income was $199.4 million versus $14.2 million, and net earnings were $150.0 million versus $5.4 million. These quarterly results include restructuring charges.
Outlook, risks and contingencies
For fiscal 2010, management expected low-to-mid-single-digit revenue growth, supported by modestly positive comparable sales, the additional fiscal week and approximately 100 net new US and 200 net new international stores, primarily licensed. It expected significant improvement in consolidated operating margin, operating cash flow of approximately $1.4 billion and capital expenditures of $500 million–$550 million. Management cautioned that it did not expect the difficult consumer environment to change significantly during fiscal 2010.
Management cited progress in customer satisfaction and highlighted Starbucks VIA Ready Brew as a product innovation intended to expand sales through stores and CPG channels. Key risks include weak consumer spending and store traffic, intense price competition, commodity and labor cost volatility, foreign-exchange movements, reliance on the US segment and key international markets, and execution of restructuring, innovation and growth plans. Coffee supply and availability are also exposed to weather, political and economic conditions; approximately $238 million of green-coffee purchase commitments, together with inventory, was expected to cover fiscal 2010 needs.
The company disclosed $49.1 million of gross unrecognized tax benefits and $109.7 million of other contractual obligations in addition to debt, leases and purchase obligations. A California tip-pooling lawsuit seeking approximately $87 million in restitution was reversed in Starbucks’ favor by the state Court of Appeal; the California Supreme Court denied review, and the trial court was directed to dismiss the case. Management said other ordinary-course legal proceedings were not expected to materially affect consolidated financial position or results. Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether comparable-store sales and customer traffic recover, particularly in the US, and whether planned cost savings can be sustained without harming customer experience.
- Progress and remaining cash costs of international store closures, restructuring and lease exits; compare actual charges and closures with management’s expectations.
- Fiscal 2010 revenue, margin, cash-flow and capital-spending performance against the stated outlook, including the effect of the 53rd week and licensed-store mix.
- Liquidity and refinancing capacity, covenant compliance, the $550 million senior notes, and the timing or recovery of the $55.7 million of illiquid auction-rate securities.
- Exposure to coffee, dairy, labor and currency costs, as well as the status of tax audits, unrecognized tax benefits and any material legal developments.