Starbucks Corporation 10-K Summary: Fiscal Year Ended October 2, 2005
Business Context and Reporting Period
This Annual Report on Form 10-K covers the fiscal year ended October 2, 2005 (52 weeks). Starbucks Corporation operates primarily through Company-operated retail stores and "Specialty Operations" (licensing, foodservice, and branded products). The company's strategy focuses on rapid expansion of retail locations, growth in specialty channels, and brand leverage. As of the fiscal year-end, the company operated 6,000 Company-operated stores and held interests in over 4,200 licensed stores globally.
Key Financial Metrics
| Metric | Fiscal 2005 | Fiscal 2004 |
|---|---|---|
| Total Net Revenues | $6,369.3 million | $5,294.2 million |
| Operating Income | $780.6 million | $606.6 million |
| Net Earnings | $494.5 million | $389.0 million |
| Diluted EPS | $0.61 | $0.47 |
| Operating Margin | 12.3% | 11.5% |
| Cash from Operating Activities | $923.6 million | $858.5 million |
| Short-term Borrowings | $277.0 million | $0 |
| Long-term Debt | $2.9 million | $3.6 million |
| Working Capital | ($17.7 million) | $604.6 million |
Material Changes vs. Prior Period
- Revenue Growth: Total net revenues increased 20% (23% on a 52-week comparable basis) driven by the opening of 735 new Company-operated stores and 8% global comparable store sales growth.
- Profitability: Net earnings rose 27% to $494.5 million. Operating margin expanded to 12.3% due to revenue leverage over fixed costs.
- Store Expansion: Total Company-operated stores grew from 5,265 to 6,000. Licensed stores increased significantly, with 937 new licensed stores opened globally.
- Liquidity Shift: Working capital turned negative ($17.7 million deficit) primarily due to the sale of securities to fund $1.1 billion in share repurchases and the utilization of a new $500 million revolving credit facility ($277 million borrowed).
- Acquisitions: The company acquired 100% of operations in Germany and Chile, and 51% of Southern China operations, changing accounting methods from cost to consolidation. It also acquired Ethos Brands for $8 million.
Guidance, Outlook, and Risks
- Guidance: Management expects fiscal 2006 net revenue growth of approximately 20% and comparable store sales growth in the range of 3% to 7%. Capital expenditures are projected between $700 million and $725 million.
- Outlook: The company plans to open approximately 1,800 new stores in fiscal 2006. Long-term goals include 15,000 stores in the U.S. and 15,000 internationally.
- Key Risks:
- Commodity Prices: Significant volatility in green coffee and dairy prices could impact margins. The company holds $375 million in fixed-price coffee purchase commitments.
- Health Pandemics: A regional or global pandemic could severely disrupt the "third place" business model.
- International Expansion: Risks include currency fluctuations, political instability, and the challenge of managing rapid growth in emerging markets like China.
- Accounting Changes: Adoption of SFAS 123R (share-based payment) in fiscal 2006 is expected to reduce diluted EPS by approximately $0.09.
Investor Verification Checklist
- Comparable Store Sales: Verify the sustainability of the 8% global comparable store sales growth, particularly in the U.S. market (9% growth).
- Commodity Hedging: Review the exposure to rising coffee and dairy costs given the shift from fixed-price to price-to-be-fixed contracts for future periods.
- Share Repurchases: Assess the impact of the $1.1 billion share buyback program on liquidity and the remaining 22 million shares authorized for repurchase.
- International Margins: Monitor the International segment's operating margin (8.4%) as it expands into new markets with higher initial operating costs.
- Legal Proceedings: Track the status of the FLSA class-action lawsuits regarding store manager overtime classification.