Starbucks Corporation 10-K Summary: Fiscal Year Ended September 28, 2008
Business Context and Reporting Period
This filing covers the fiscal year ended September 28, 2008. Starbucks Corporation is the world's leading roaster and retailer of specialty coffee, operating through three segments: United States (76% of revenue), International (20%), and Global Consumer Products Group (4%). The company operates approximately 9,217 Company-operated retail stores globally. The fiscal year was defined by a significant transformation strategy initiated in January 2008, led by CEO Howard Schultz, to address deteriorating US retail performance and reinvigorate the brand.
Key Financial Metrics
| Metric | Fiscal 2008 | Fiscal 2007 |
|---|---|---|
| Total Net Revenues | $10,383.0 million | $9,411.5 million |
| Operating Income | $503.9 million | $1,053.9 million |
| Operating Margin | 4.9% | 11.2% |
| Net Earnings | $315.5 million | $672.6 million |
| Diluted EPS | $0.43 | $0.87 |
| Operating Cash Flow | $1,258.7 million | $1,331.2 million |
| Total Debt (Short & Long Term) | $1,263.3 million | $1,261.2 million |
| Working Capital | ($441.7 million) | ($459.1 million) |
Material Changes vs. Prior Period
- Revenue Growth: Total net revenues increased 10.3% to $10.38 billion, driven by the opening of 681 new Company-operated stores and growth in specialty operations. However, this growth was offset by a 5% decline in US comparable store sales.
- Profitability Decline: Operating income fell 52.2% and Net Earnings dropped 53.1%. The operating margin compressed from 11.2% to 4.9%.
- Restructuring Charges: The company incurred $266.9 million in pretax restructuring charges, primarily related to the closure of underperforming US stores, the restructuring of the Australia market, and a reduction of approximately 1,000 non-store positions.
- Comparable Store Sales: Consolidated comparable store sales declined 3%. The US segment saw a 5% decline, while the International segment grew 2%.
- Store Count: Net store openings slowed significantly. The US segment added 445 Company-operated stores (net of closures), down from 1,065 in the prior year. The company closed 205 underperforming US stores in fiscal 2008 as part of a plan to close approximately 600.
Guidance, Outlook, and Risks
Outlook for Fiscal 2009: Management expects a "very difficult economic environment" and anticipates negative comparable store sales for fiscal 2009 due to the global financial crisis and reduced consumer discretionary spending. Total revenues are expected to be relatively flat compared to fiscal 2008. Earnings will be impacted by an estimated $0.12 per share in costs related to lease terminations and severance from store closures, partially offset by a pre-tax benefit of $200-$210 million from the restructuring actions.
Strategic Actions: The company plans to be disciplined with new store openings, targeting a net decline of approximately 20 US Company-operated stores in fiscal 2009. International expansion will continue with approximately 700 net new stores, though with a more cautious approach in the UK and Western Europe.
Risks and Contingencies:
- Global Economic Crisis: The filing highlights severe risks from the global financial crisis, including potential job losses, foreclosures, and reduced access to credit, which directly impact consumer spending.
- Liquidity and Credit Ratings: Standard & Poor's and Moody's downgraded the company's long-term credit ratings in late 2008. The company has drawn $300 million on its credit facility as commercial paper market liquidity deteriorated.
- Commodity Prices: Green coffee and dairy prices remain volatile. The company increased the use of "price-to-be-fixed" contracts in fiscal 2008 due to high commodity prices, reducing cost predictability.
- Legal Proceedings: A significant class action lawsuit regarding tip pooling practices in California resulted in an $87 million restitution order in March 2008; the company has appealed and does not believe a loss is probable at this stage.
Investor Verification Checklist
- Restructuring Execution: Verify the pace of the planned 600 US store closures and the associated cost savings versus the one-time charges incurred.
- US Comparable Store Sales: Monitor quarterly trends in US traffic and average transaction value to assess the effectiveness of the "transformation" strategy.
- Liquidity Position: Review the company's ability to maintain its credit facility and commercial paper program amidst ongoing credit rating downgrades and market volatility.
- Commodity Hedging: Assess the impact of rising coffee and dairy costs on future margins, given the shift toward price-to-be-fixed contracts.
- International Growth: Evaluate the performance of key international markets (Canada, UK, Japan) which are critical to offsetting US weakness.