Starbucks Corporation — Q2 FY2011 Form 10-Q
Reporting period: Fiscal second quarter and first half ended April 3, 2011 (13 and 26 weeks, respectively); comparisons are with periods ended March 28, 2010. Amounts are in millions except per-share data.
Business context
Management attributed growth to stronger comparable-store sales, traffic, and sales leverage, alongside expansion in licensed stores and consumer packaged goods (CPG). Starbucks completed the transition of packaged coffee and tea distribution from Kraft to an in-house direct model. It also announced a Green Mountain Coffee Roasters relationship for Starbucks- and Tazo-branded K-Cup products.
Financial performance
| Metric | Q2 FY2011 | Q2 FY2010 | First half FY2011 | First half FY2010 |
|---|---|---|---|---|
| Net revenue | $2,785.7 | $2,534.7 | $5,736.5 | $5,257.4 |
| Operating income | $376.1 | $339.8 | $878.0 | $692.4 |
| Operating margin | 13.5% | 13.4% | 15.3% | 13.2% |
| Net earnings attributable to Starbucks | $261.6 | $217.3 | $608.1 | $458.8 |
| Diluted EPS | $0.34 | $0.28 | $0.79 | $0.60 |
- Quarterly revenue rose 9.9%; diluted EPS increased 21%. Consolidated comparable-store sales grew 7%, reflecting 6% more transactions and a 1% higher average ticket. U.S. comps rose 7%; international comps rose 4%.
- First-half revenue increased 9.1%; operating income rose about 27% and Starbucks-attributable earnings rose about 33%.
- Q2 segment operating margins: U.S. 18.5% (up 70 basis points); International 11.8% (up 420 basis points); CPG 31.1% (down 920 basis points).
- Quarterly operating-margin improvement reflected sales leverage, partly offset by commodity costs (about 200 basis points) and higher salaries and benefits. CPG margin pressure reflected higher coffee costs and VIA marketing expenses.
Cash flow, balance sheet, and capital allocation
- First-half operating cash flow was $669.5, versus $957.8 a year earlier. Management cited inventory growth, partly associated with higher coffee costs, as the primary reason for the decline.
- Investing cash outflow was $139.1, compared with $529.8; capital expenditures were $239.1, up from $184.5. Financing cash outflow was $61.3, versus $69.1 of inflow, reflecting dividends and share repurchases.
- At April 3, cash and cash equivalents were $1,645.2; short-term investments totaled $282.3. Current assets were $3,540.3 and current liabilities $1,794.2.
- Long-term debt was $549.4, comprising $550 million of 6.25% Senior Notes. Starbucks also reported a $500 million unsecured credit facility and said it was in compliance with applicable covenants. The filing does not state the facility’s undrawn amount.
- Shareholders’ equity was $4,317.8. The company paid $194.3 in dividends and repurchased $60.5 of shares in the first half; 18.2 million shares remained authorized for repurchase. The declared quarterly dividend was $0.13 per share.
Outlook, risks, and notable items
- FY2011 outlook: revenue growth in the high single digits on a 52-week comparable basis, driven by mid-single-digit comparable-store sales growth; approximately 500 net new stores planned, including about 100 in the U.S. and 400 internationally, mostly licensed.
- Management expected consolidated operating margin to improve for the year, while higher commodity costs—especially coffee—were an offset. Starbucks said it had essentially locked in coffee costs for the remainder of FY2011. Planned FY2011 capital expenditures were $550–$600.
- Commodity prices and availability, foreign exchange, execution of initiatives, and economic conditions were identified as risks. Management said commodity costs continued to pressure results; hedging and fixed-price purchasing do not eliminate all exposure.
- Kraft dispute: Starbucks terminated the distribution arrangement effective March 1, 2011, asserting material breach; Kraft disputes that claim and seeks compensation that could include a premium of up to 35%. Courts denied Kraft’s requests to block termination, but arbitration remained pending and Starbucks could not estimate the range of possible outcomes.
- In April 2011, Borders’ bankruptcy led to closure of 225 Seattle’s Best Coffee locations and impairment charges on related assets. The filing also reports no material off-balance-sheet arrangements and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the Kraft arbitration results in compensation or other material costs; the company could not estimate potential outcomes.
- Whether comparable-store sales and sales leverage continue to offset coffee and other commodity inflation, including the effect on CPG margins.
- Progress toward the FY2011 revenue, store-opening, operating-margin, and capital-expenditure outlook, including the effect of Borders-related closures.
- Why operating cash flow declined year over year and whether inventory levels and working-capital needs normalize.
- The credit facility’s actual availability and any changes in debt, liquidity, or shareholder-return plans.