Starbucks Corporation 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report on Form 10-Q for Starbucks Corporation for the 13-week and 39-week periods ended July 1, 2007. The company operates three reportable segments: United States, International, and the Global Consumer Products Group (CPG). The fiscal year ends on the Sunday closest to September 30.
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended July 1, 2007 | 39 Weeks Ended July 1, 2007 |
|---|---|---|
| Total Net Revenues | $2,359,245 | $6,970,562 |
| Operating Income | $245,214 | $805,912 |
| Net Earnings | $158,343 | $514,135 |
| Diluted EPS | $0.21 | $0.66 |
| Operating Margin | 10.4% | 11.6% |
| Cash and Cash Equivalents | $172,789 | $172,789 (Balance Sheet) |
| Commercial Paper Outstanding | $880,000 | $880,000 |
| Net Cash Provided by Operating Activities | N/A | $1,039,840 |
Material Changes vs. Prior Period
- Revenue Growth: Total net revenues increased 20.1% for the 13-week period and 20.5% for the 39-week period compared to the prior year. Growth was driven by the opening of 1,956 new stores in the first three quarters and comparable store sales growth of 4% (quarterly) and 5% (year-to-date).
- Profitability: Net earnings increased 8.8% for the quarter and 15.0% year-to-date. Operating margins declined slightly (10.4% vs. 10.9% quarterly) due to higher costs of sales, including occupancy costs and rising dairy prices, partially offset by expense leverage.
- Segment Performance:
- United States: Revenues up 18.3% (quarterly); operating margin decreased to 13.8% due to higher dairy costs and rent.
- International: Revenues up 28.1% (quarterly); operating margin decreased to 7.5% due to investment in emerging markets and higher store renovation costs.
- CPG: Revenues up 23.9% (quarterly); operating margin decreased to 48.1% due to lower sales volumes in the North American Coffee Partnership.
- Capital Allocation: The company repurchased 20.3 million shares for $671 million during the 39-week period. As of July 1, 2007, $880 million in commercial paper was outstanding, with no borrowings under the $1 billion revolving credit facility.
Guidance, Outlook, and Risks
- Store Openings: Starbucks plans to open at least 2,400 net new stores in fiscal 2007 (approx. 1,700 in the U.S. and 700 licensed; 300 international company-operated and 400 licensed).
- Comparable Store Sales: Expected to be in the target range of 3% to 7% for fiscal 2007.
- Revenue Outlook: Consolidated total net revenue growth is expected to be approximately 20% for fiscal 2007.
- Tax Rate: The effective tax rate is expected to be approximately 37% for the full fiscal year 2007.
- Risks: Key risks include fluctuations in coffee and dairy commodity prices, foreign currency exchange rates, and the impact of legal proceedings regarding employee classification (FLSA) and tip pooling practices in California.
- Recent Financing: On August 7, 2007, the company entered into a new $400 million, 364-day credit facility to support share repurchases and general corporate purposes.
Investor Verification Checklist
- Verify the impact of rising dairy and coffee commodity costs on future gross margins.
- Monitor the progress of the $671 million share repurchase program and the utilization of the new $400 million credit facility.
- Review the status of pending class-action lawsuits regarding employee overtime (FLSA) and tip pooling in California.
- Assess the sustainability of International segment margins given the heavy investment in emerging markets (China, Brazil, Russia).
- Confirm the adoption timeline and financial impact of new accounting standards (FIN 48, SFAS 157, SFAS 159) in future filings.