Business Context and Reporting Period
Company: Starbucks Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: 13 weeks and 39 weeks ended June 29, 2003 (Fiscal Year 2003)
Business Overview: Starbucks operates Company-operated retail stores and specialty operations (licensing, foodservice, grocery). The company reported strong revenue growth driven by new store openings and comparable store sales increases, though margins faced pressure from rising green coffee costs.
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended June 29, 2003 |
13 Weeks Ended June 30, 2002 |
39 Weeks Ended June 29, 2003 |
39 Weeks Ended June 30, 2002 |
|---|---|---|---|---|
| Total Net Revenues | $1,036,776 | $835,158 | $2,994,508 | $2,423,710 |
| Operating Income | $106,114 | $87,203 | $312,517 | $227,640 |
| Net Earnings | $68,414 | $55,668 | $198,871 | $155,111 |
| Diluted EPS | $0.17 | $0.14 | $0.50 | $0.39 |
| Operating Margin | 10.2% | 10.4% | 10.4% | 9.4% |
| Cash & Equivalents (Balance Sheet) | $263,638 (as of June 29, 2003) | |||
| Net Cash from Operating Activities | N/A | $487,579 | $369,713 | |
| Long-Term Debt | $4,542 (as of June 29, 2003) |
Material Changes vs. Prior Period
- Revenue Growth: Total net revenues increased 24.1% for the quarter and 23.6% for the 39-week period. Retail revenues grew 23.3% (quarter) and 23.2% (39 weeks), driven by the opening of 525 new Company-operated stores in the last 12 months and 8% comparable store sales growth.
- Cost Pressures: Cost of sales and occupancy costs as a percentage of revenue increased to 41.1% (quarter) and 41.3% (39 weeks) from 40.4% and 41.0% respectively, primarily due to rising green coffee costs.
- Profitability: Operating income increased 21.7% for the quarter and 37.3% for the 39-week period. Net earnings increased 22.9% for the quarter and 28.2% for the 39-week period.
- Accounting Change: The company changed its accounting method for Austria and Switzerland licensed operations from the cost method to the equity method. This resulted in a $1.6 million reduction in net earnings for the prior quarter (Dec 2002) and restated prior year figures.
- Stock Repurchases: The company repurchased 2.8 million shares for $61.2 million during the 39-week period.
Guidance, Outlook, and Risks
- Store Expansion: Starbucks expects to open approximately 1,200 new stores for the fiscal year ending September 28, 2003. For fiscal 2004, the plan is to open approximately 1,300 new stores.
- Capital Expenditures: Management expects capital expenditures to be approximately $410 million for fiscal 2003 and in the range of $450 million to $475 million for fiscal 2004.
- Tax Rate: The effective tax rate for the 39-week period was 38.5%. Management expects this rate to hold for the remainder of fiscal 2003 and targets 38.0% for fiscal 2004.
- Subsequent Acquisitions: Following the reporting period, Starbucks acquired Seattle Coffee Company (SCC) for $72 million and increased ownership in Taiwan and Shanghai operations for $24 million.
- Risks: Key risks include volatility in green coffee prices (though the company has $218 million in fixed-price contracts through 2004), competition, and the ability to find optimal store locations. The company also faces potential integration costs from the SCC acquisition.
Investor Verification Checklist
- Coffee Price Exposure: Verify the impact of rising green coffee costs on future margins, despite existing fixed-price contracts.
- Comparable Store Sales: Confirm the sustainability of the 8% comparable store sales growth, which was driven almost entirely by transaction volume.
- Integration Costs: Monitor the fourth quarter for integration costs related to the $72 million Seattle Coffee Company acquisition.
- International Performance: Review the performance of international equity investees (Japan, Austria, Switzerland) which contributed to losses in the equity income line.
- Capital Allocation: Track the execution of the $410 million capital expenditure plan and the remaining $15.1 million share repurchase authorization.