Starbucks Corporation: Q1 Fiscal 2009 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the 13-week period ended December 28, 2008 (First Quarter of Fiscal 2009). Starbucks operates in a challenging global economic environment characterized by historic lows in consumer confidence. The Company is actively executing a restructuring plan initiated in Fiscal 2008 to close underperforming stores and reduce costs to align with the current market conditions.
Key Financial Metrics
| Metric | Q1 2009 (Dec 28) | Q1 2008 (Dec 30) | Change |
|---|---|---|---|
| Total Net Revenues | $2,615.2 million | $2,767.6 million | (5.5)% |
| Operating Income | $117.7 million | $333.1 million | (64.7)% |
| Operating Margin | 4.5% | 12.0% | -750 bps |
| Net Earnings | $64.3 million | $208.1 million | (69.1)% |
| Diluted EPS | $0.09 | $0.28 | (67.9)% |
| Cash from Operations | $693.5 million | $807.6 million | (14.1)% |
| Capital Expenditures | $172.6 million | $263.6 million | (34.5)% |
| Total Debt | $840.3 million | $1,263.3 million | (33.5)% |
| Cash & Equivalents | $356.8 million | $269.8 million | +32.2% |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated comparable store sales declined 9% (US: -10%, International: -3%) due to reduced customer traffic and lower transaction values driven by the global economic crisis.
- Restructuring Charges: The Company recognized $75.5 million in restructuring charges, primarily related to the closure of approximately 600 underperforming US stores announced in July 2008. This impacted operating margin by approximately 290 basis points.
- Cost Pressures: Cost of sales increased due to higher coffee commodity costs and new quality standards. Store operating expenses as a percentage of revenue increased due to sales de-leveraging and higher payroll expenditures.
- Debt Reduction: Short-term debt was significantly reduced from $713.0 million to $290.2 million using strong operating cash flows.
Guidance, Outlook, and Risks
- Subsequent Restructuring (Jan 28, 2009): The Company announced plans to close an additional 300 underperforming stores (approx. 200 in the US) and reduce the non-store workforce by approximately 700 positions. Estimated pre-tax charges for these actions are up to $230 million, expected to be recognized over the remainder of Fiscal 2009.
- Capital Expenditure Guidance: Full-year Fiscal 2009 capital expenditures are now estimated at $600 million, a 14% reduction from the previous estimate of $700 million.
- Store Growth: The Company expects the store base to grow by approximately 100 new stores in Fiscal 2009.
- Cost Savings Target: The total cost reduction target for Fiscal 2009 has been increased to $500 million.
- Credit Rating Risk: Moody's and Standard & Poor's have placed the Company's credit ratings on review for possible downgrade due to declining earnings and store traffic. A downgrade could impact commercial paper access and increase borrowing costs.
- Liquidity: Management believes cash flow from operations and existing borrowing capacity ($1 billion aggregate) are sufficient to fund operations and restructuring costs.
Investor Verification Checklist
- Verify the execution timeline and cost impact of the additional 300 store closures announced in January 2009.
- Monitor credit rating agency decisions (Moody's and S&P) regarding potential downgrades and their impact on borrowing costs.
- Track the effectiveness of the $500 million cost reduction initiative in stabilizing operating margins.
- Assess the liquidity status of the $62.6 million in auction-rate securities (Level 3 assets) held by the Company.
- Review the status of the Jou Chau v. Starbucks litigation regarding tip pooling, which carries a potential liability of approximately $87 million plus interest.