Business Context and Reporting Period
Company: Starbucks Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 28, 1997 (13 weeks)
Business Overview: The Company operates Company-operated retail stores (86% of revenue), specialty sales operations including licensees and joint ventures (12% of revenue), and direct response operations. The fiscal year ends on the Sunday closest to September 30.
Key Financial Metrics
| Metric | Q1 1998 (13 Weeks) | Q1 1997 (13 Weeks) |
|---|---|---|
| Net Revenues | $316,952,000 | $239,142,000 |
| Operating Income | $34,519,000 | $21,307,000 |
| Net Earnings | $22,104,000 | $14,390,000 |
| Diluted EPS | $0.25 | $0.18 |
| Operating Cash Flow | $62,973,000 | $46,663,000 |
| Cash and Cash Equivalents (End) | $104,350,000 | $127,754,000 |
| Total Cash and Investments | $181,277,000 | N/A |
| Working Capital | $177,072,000 | N/A |
| Convertible Debt | $0 | $165,020,000 |
Margins: Cost of sales and related occupancy costs decreased to 45.4% of net revenues from 48.3% in the prior year. Operating margin improved significantly due to revenue growth and cost management.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 33% to $317.0 million, driven by a 32% increase in retail sales and a 54% increase in specialty sales.
- Store Expansion: The Company opened 119 new Company-operated stores in continental North America during the quarter, ending with 1,389 stores.
- Comparable Store Sales: Increased 5%, driven by higher average transaction value and transaction volume.
- Debt Reduction: The Company redeemed and converted its $165 million 4 1/4% Convertible Subordinated Debentures into common stock, eliminating interest expense associated with this debt.
- Profitability: Net earnings increased 54% to $22.1 million, aided by the elimination of interest expense and favorable sales mix.
Guidance, Outlook, and Risks
Capital Expenditures: Management expects capital expenditures for the remainder of fiscal 1998 to be approximately $155 million, primarily for new store openings and production capacity enhancements.
Expansion Goals: The Company and its licensees plan to open at least 350 new stores in continental North America during fiscal 1998. The long-term goal is to reach at least 2,000 stores in continental North America by the end of the year 2000.
Risks and Contingencies:
- Coffee Prices: Green coffee commodity prices remain high relative to historical levels. While the Company has fixed-price purchase commitments of approximately $44 million, future costs may rise if commodity prices remain elevated or increase further.
- Cannibalization: Increased store clustering may lead to cannibalization of existing store sales.
- Competition and Labor: Risks include increased competition, difficulty in finding optimal store locations, and challenges in hiring and retaining qualified personnel.
- Seasonality: A significant portion of revenues and profits are realized in the first quarter due to the holiday season; quarterly results are not necessarily indicative of full-year performance.
Investor Verification Checklist
- Verify the sustainability of the 5% comparable store sales growth amidst store cannibalization and rising coffee costs.
- Confirm the execution of the $155 million capital expenditure plan for the remainder of fiscal 1998.
- Monitor green coffee commodity prices and the Company's ability to pass cost increases to consumers without impacting volume.
- Review the impact of the debt conversion on future interest expense and diluted share count.
- Assess the performance of joint ventures (Pepsi and Ice Cream) which contributed to improved operating results.