Starbucks Corporation 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended April 1, 2007 (13 weeks) and the year-to-date period ended April 1, 2007 (26 weeks). Starbucks operates three reportable segments: United States, International, and the Global Consumer Products Group (CPG). The company continues to focus on opening new retail stores and increasing comparable store sales through improved customer service and product innovation.
Key Financial Metrics
| Metric | 13 Weeks Ended Apr 1, 2007 |
13 Weeks Ended Apr 2, 2006 |
26 Weeks Ended Apr 1, 2007 |
26 Weeks Ended Apr 2, 2006 |
|---|---|---|---|---|
| Total Net Revenues | $2,255.6 million | $1,885.8 million | $4,611.3 million | $3,819.9 million |
| Operating Income | $241.0 million | $201.9 million | $560.7 million | $481.7 million |
| Net Earnings | $150.8 million | $127.3 million | $355.8 million | $301.5 million |
| Diluted EPS | $0.19 | $0.16 | $0.46 | $0.38 |
| Operating Margin | 10.7% | 10.7% | 12.2% | 12.6% |
| Cash from Operations (26 wks) | $737.8 million | |||
| Capital Expenditures (26 wks) | $507.2 million | |||
| Short-term Borrowings | $847.0 million (as of Apr 1, 2007) |
Material Changes vs. Prior Period
- Revenue Growth: Total net revenues increased 19.6% for the quarter and 20.7% year-to-date, driven by the opening of 1,279 new company-operated stores in the last 12 months and global comparable store sales growth of 4% (quarter) and 5% (YTD).
- Profitability: Net earnings rose 18.5% for the quarter and 18.0% YTD. Operating margins remained flat at 10.7% for the quarter but decreased slightly to 12.2% YTD (from 12.6%) due to higher costs of sales and occupancy costs.
- Cost Pressures: Cost of sales including occupancy costs increased to 41.9% of revenues for the quarter (from 40.3%) due to higher rent in new markets, increased distribution costs, and a shift to higher-cost products.
- Share Repurchases: The company repurchased 17.9 million shares for an accrual-based cost of $594 million during the 26-week period, utilizing cash and borrowings.
Guidance, Outlook, and Risks
- Guidance: Management expects consolidated total net revenue growth of approximately 20% for fiscal 2007. Comparable store sales growth is targeted between 3% and 7% for the fiscal year. Capital expenditures are expected to range from $950 million to $1.0 billion.
- Outlook: The company plans to open approximately 2,400 new stores globally in fiscal 2007. Modest improvement in operating margins is expected in the second half of the fiscal year, particularly in the fourth quarter.
- Risks and Contingencies:
- Legal Proceedings: Significant class action lawsuits are pending regarding overtime compensation for store managers (FLSA) and tip pooling practices in California. The company cannot estimate potential losses but intends to defend vigorously.
- Commodity Prices: Exposure to fluctuations in coffee and dairy prices remains a key risk, managed through hedging strategies.
- Foreign Exchange: A 10% devaluation of the U.S. dollar could reduce the fair value of derivative instruments by approximately $50 million.
Investor Verification Checklist
- Verify the sustainability of comparable store sales growth (4% Q1, 5% YTD) amidst rising commodity and labor costs.
- Monitor the impact of pending class action lawsuits regarding employee classification and tip pooling on future liabilities.
- Assess the effectiveness of cost management strategies as operating margins face pressure from higher occupancy and distribution costs.
- Review the execution of the aggressive store opening plan (2,400 stores planned for fiscal 2007) and its impact on capital expenditures.
- Track the utilization of the $1 billion credit facility and commercial paper program, particularly given the $847 million outstanding balance.