Starbucks Corporation (SBUX) - 10-K Summary
Business Context and Reporting Period
Company: Starbucks Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 2007 (Fiscal Year 2007)
Business Overview: Starbucks operates three reportable segments: United States, International, and Global Consumer Products Group (CPG). The company sells coffee, tea, and related products primarily through company-operated retail stores (85% of revenue) and specialty operations including licensing, foodservice, and branded products (15% of revenue). As of September 30, 2007, the company operated 8,505 company-operated stores globally and had approximately 172,000 employees.
Key Financial Metrics
| Metric | Fiscal 2007 | Fiscal 2006 | Change |
|---|---|---|---|
| Total Net Revenues | $9.41 billion | $7.79 billion | +21% |
| Operating Income | $1.05 billion | $894 million | +18% |
| Net Earnings | $673 million | $564 million | +19% |
| Diluted EPS | $0.87 | $0.71 | +23% |
| Operating Margin | 11.2% | 11.5% | -30 bps |
| Cash from Operations | $1.33 billion | $1.13 billion | +18% |
| Total Assets | $5.34 billion | $4.43 billion | +21% |
| Shareholders' Equity | $2.28 billion | $2.23 billion | +2% |
| Short-term Borrowings | $710 million | $700 million | +1% |
| Long-term Debt | $551 million | $3 million | Significant Increase |
Material Changes vs. Prior Period
- Revenue Growth: Driven by the opening of 1,342 new company-operated stores and 5% comparable store sales growth. Company-operated retail revenue rose 21% to $8.0 billion.
- Margin Compression: Operating margin decreased 30 basis points to 11.2%. This was primarily due to higher costs of sales, including a 10% increase in U.S. dairy costs (adding ~$20 million in expense), higher rent, and distribution costs.
- Debt Structure: In August 2007, the company issued $550 million of 6.25% Senior Notes due in 2017. Proceeds were used to repay short-term borrowings and fund share repurchases. Total long-term debt increased from $3 million to $551 million.
- Share Repurchases: The company repurchased 33.0 million shares for approximately $1.0 billion in fiscal 2007.
- Segment Performance:
- United States: Revenue up 19%; Operating margin declined to 14.6% from 15.5% due to cost pressures and flat-to-negative transaction trends offset by price increases.
- International: Revenue up 30%; Operating margin declined slightly to 8.1% from 8.3%.
- CPG: Revenue up 20%; Operating margin declined to 50.1% from 54.6% due to slower growth in equity investee income.
Guidance, Outlook, and Risks
Fiscal 2008 Guidance:
- Store Openings: Target of approximately 2,500 new stores.
- Comparable Store Sales: Growth range of 3% to 5%.
- Revenue Growth: Approximately 17% to 18%, targeting over $11 billion in total net revenue.
- Earnings Per Share: Range of $1.02 to $1.05 (17% to 21% growth).
Management Commentary: Management noted a challenging environment entering fiscal 2008, citing a weakening U.S. business with negative transaction trends driven by economic slowdown and price increases. The focus for 2008 is on operational excellence, meaningful innovation, and infrastructure efficiency.
Key Risks and Contingencies:
- Commodity Prices: Significant exposure to green coffee and fluid milk prices. Dairy costs rose materially in 2007; coffee prices are volatile.
- Competition: Increased competition from quick-service restaurants and established international competitors.
- Legal Proceedings: Several class-action lawsuits pending regarding overtime compensation (FLSA) and tip pooling practices in California. Management believes a loss is unlikely but cannot estimate potential liability.
- International Expansion: Risks associated with foreign currency fluctuations, political instability, and regulatory compliance in developing markets like China.
Investor Verification Checklist
- Transaction Trends: Verify the sustainability of U.S. comparable store sales growth given the reported flat-to-negative transaction count trends offset by price increases.
- Cost Inflation: Monitor the trajectory of dairy and coffee commodity prices and their impact on gross margins in fiscal 2008.
- Debt Service: Assess the impact of the new $550 million senior notes on interest expense and cash flow coverage ratios.
- Legal Exposure: Track the status of the California tip pooling and FLSA overtime class-action lawsuits for potential financial impact.
- International Margins: Evaluate the ability of the International segment to expand margins as it moves from early-stage development to maturity.