Starbucks Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and first half ended March 28, 2010 (13 and 26 weeks, respectively). Dollar figures are in millions unless noted. Fiscal 2010 includes a 53rd week in the fourth quarter; interim results may not indicate full-year results.
Business context and financial performance
| Metric | 13 weeks ended Mar. 28, 2010 | 13 weeks ended Mar. 29, 2009 | 26 weeks ended Mar. 28, 2010 | 26 weeks ended Mar. 29, 2009 |
|---|---|---|---|---|
| Net revenue | $2,534.7 | $2,333.3 | $5,257.4 | $4,948.5 |
| Operating income | $339.8 | $40.9 | $692.4 | $158.6 |
| Operating margin | 13.4% | 1.8% | 13.2% | 3.2% |
| Net earnings attributable to Starbucks | $217.3 | $25.0 | $458.8 | $89.3 |
| Diluted EPS | $0.28 | $0.03 | $0.60 | $0.12 |
- Revenue rose 8.6% for the quarter and 6.2% for the half. Comparable store sales increased 7% and 6%, respectively. Quarterly comparable-sales growth reflected a 4% increase in average transaction value and 3% higher transaction count; U.S. traffic increased 3%.
- Management attributed improved results to sales leverage, supply-chain and labor efficiencies, lower product and occupancy costs, and reduced restructuring charges. U.S. and International operating margins improved; International quarterly revenue also benefited from currency translation and consolidation of the France business.
- General and administrative expense increased to $139.0 million for the quarter from $104.3 million, primarily reflecting higher performance-based compensation. First-half net interest income and other included approximately $21 million of gains on trading securities, substantially offset by compensation-plan expense, and a gain related to the France acquisition.
Cash flow, liquidity and debt
- First-half operating cash flow was $957.8 million, up from $715.4 million. Capital expenditures were $184.5 million, down from $236.9 million; investing cash outflow was $529.8 million, including purchases of available-for-sale securities.
- Cash and cash equivalents were $1,086.0 million at March 28, 2010; short-term investments totaled $207.9 million. Management reported $1.3 billion of cash and short-term investments, no short-term borrowings, and $985 million of available capacity under the $1 billion combined commercial-paper and revolving-credit program.
- Total debt was $549.4 million, principally $549.3 million of 6.25% Senior Notes due 2017. The company reported compliance with debt and credit-facility covenants.
- Current assets were $2,490.4 million and current liabilities $1,646.6 million. The balance sheet included $51.2 million of auction-rate securities (ARS); continuing auction failures limit their liquidity, though management did not expect a material effect on funding needs.
Material changes, outlook and risks
- Operating margin increased 11.6 percentage points in the quarter; management said lower restructuring charges accounted for about 620 basis points of the increase. Quarterly restructuring charges were $7.9 million versus $152.1 million a year earlier. In the first half, charges were $26.2 million versus $227.6 million.
- The store-rationalization program had closed 909 stores cumulatively. Starbucks closed 15 stores in the second quarter and expected to complete remaining closures by fiscal year-end, mostly internationally.
- Fiscal 2010 outlook: mid-single-digit revenue growth over the comparable 52-week period, with high-single-digit growth including the extra week; approximately 300 net new stores, primarily licensed; significant operating-margin improvement; and approximately 35% CPG segment margin. Management forecast at least $1.5 billion of operating cash flow and about $500 million of capital expenditures. It targeted a dividend payout ratio of 35%–40% of net income, subject to Board approval.
- The Board initiated a quarterly dividend of $0.10 per share, paid April 23, 2010, and authorized an additional 15 million shares for repurchase. No shares were repurchased in the quarter.
- Key exposures include coffee, dairy and other commodity prices and availability, foreign currency movements, economic conditions, competition, and execution of initiatives. The filing reported no material changes to previously disclosed risk factors or market-risk exposures. Approximately $324 million of green-coffee commitments comprised fixed-price and price-to-be-fixed contracts.
- Management said ordinary-course legal proceedings were not expected to have a material adverse effect. A California employment-screening case remained pending after an appellate ruling against the plaintiffs; Starbucks opposed an effort to amend the complaint. Guarantees to unconsolidated investees had maximum exposures of $10.0 million combined.
- Management concluded disclosure controls were effective at quarter-end and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether comparable-sales growth, including transaction trends and pricing, persists and supports the margin recovery.
- How much of earnings improvement is repeatable versus lower restructuring charges, foreign-exchange effects, and the France-related gain.
- Progress against full-year revenue, margin, store-opening, cash-flow, capital-expenditure, and tax-rate expectations; management estimated a 34%–35% effective tax rate.
- Commodity-cost and currency exposure, and the liquidity and valuation of the ARS portfolio.
- Future dividend decisions, repurchase activity, and any material developments in litigation, guarantees, or remaining store closures.