SBUX

Starbucks Corporation 10-K Summary: Fiscal Year Ended October 1, 2006

Business Context and Reporting Period

This Annual Report on Form 10-K covers the fiscal year ended October 1, 2006 (52 weeks). Starbucks Corporation operates primarily through Company-operated retail stores, which accounted for 85% of total net revenues, and "Specialty Operations" (licensing, foodservice, and branded products), which accounted for 15%. Beginning in the fourth quarter of fiscal 2006, the Company reorganized its reporting segments from two to three: United States, International, and a new Global Consumer Products Group (CPG). The Company operates approximately 7,102 Company-operated stores and 5,338 licensed stores globally.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total net revenues increased 22% to $7.8 billion, driven by the opening of 1,040 new Company-operated stores and 7% comparable store sales growth.
• Margin Compression: Operating margin decreased to 11.5% from 12.3%. This decline is primarily attributed to the recognition of stock-based compensation expense under the new SFAS 123(R) standard, which was not expensed in fiscal 2005.
• Debt and Liquidity: Short-term borrowings increased significantly to $700 million (up from $277 million) as the Company utilized its revolving credit facility to fund share repurchases and capital expenditures. Working capital turned negative ($-405.8 million) due to these borrowings.
• Accounting Changes: The Company adopted SFAS 123(R) for stock-based compensation and FIN 47 for conditional asset retirement obligations. The cumulative effect of the FIN 47 adoption resulted in a net expense of $17.2 million.

Guidance, Outlook, and Risks

• Guidance: Management expects revenue growth of approximately 20% and comparable store sales growth in the range of 3% to 7% for fiscal 2007. Capital expenditures are projected to be between $950 million and $1.0 billion.
• Outlook: The Company plans to open approximately 2,400 new stores in fiscal 2007. Long-term goals include approximately 20,000 stores in the U.S. and 20,000 internationally.
• Risks: Key risks include volatility in green coffee and dairy prices, potential supply chain disruptions, intense competition in the specialty coffee market, and the challenges of managing rapid global expansion. The Company also faces litigation risks regarding employee classification (overtime) and tip pooling practices.
• Unusual Items: A $17.2 million cumulative effect charge related to the adoption of FIN 47 (Asset Retirement Obligations) impacted net earnings. Additionally, $105 million in stock-based compensation expense was recognized for the first time in the consolidated statements.

Investor Verification Checklist

• Stock-Based Compensation Impact: Verify the long-term impact of SFAS 123(R) adoption on future operating margins, as this was a significant one-time drag on fiscal 2006 profitability.
• Debt Utilization: Monitor the $700 million outstanding on the revolving credit facility and the Company's ability to service this debt while maintaining aggressive capital expenditure and share repurchase programs.
• Comparable Store Sales: Assess whether the 7% comparable store sales growth is sustainable given the Company's massive store footprint and increasing competition.
• Commodity Exposure: Review the $546 million in fixed-price green coffee purchase commitments and the potential for margin pressure if commodity prices rise significantly in fiscal 2007.
• Legal Contingencies: Track the status of class-action lawsuits regarding employee overtime and tip pooling, as these could result in significant liabilities.