SBUX

Business Context and Reporting Period

Company: Starbucks Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 30, 2001 (13 weeks)
Business Overview: Starbucks operates Company-operated retail stores and Specialty Operations (wholesale, licensing, direct-to-consumer). Approximately 85% of net revenues are derived from Company-operated retail stores. The fiscal year ends on the Sunday closest to September 30.

Key Financial Metrics

Note: All figures in millions unless otherwise noted. Data derived from Consolidated Statements of Earnings, Balance Sheets, and Cash Flows.

Material Changes vs. Prior Period

• Revenue Growth: Total net revenues increased 21% to $805.3 million. Retail revenues rose 21% to $682.3 million, driven by the opening of 183 new Company-operated stores in North America and 44 internationally, plus a 2% increase in comparable store sales.
• Comparable Store Sales: Increased 2% due to a 4% rise in transaction volume, partially offset by a 2% decrease in average transaction value (attributed to lower sales of equipment/accessories).
• Specialty Revenues: Increased 17% to $123.1 million, driven by higher royalties and product sales to licensees and growth in grocery/warehouse club channels.
• One-Time Gain: Net earnings included a $13.4 million gain from the sale of 30,000 shares of Starbucks Coffee Japan, Ltd. (Starbucks Japan).
• Expense Ratios: Cost of sales decreased to 41.8% of revenues (from 43.8%) due to lower green coffee costs. Store operating expenses increased to 38.2% of retail revenues (from 37.3%) due to higher wage rates and a shift to labor-intensive beverages.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Store Expansion: Management expects to open at least 525 Company-operated stores in North America and 100 internationally during fiscal 2002. Total planned openings for fiscal 2002 are at least 625 Company-operated stores.
• Capital Expenditures: Expected to range between $360 million and $385 million for the remainder of fiscal 2002, funding new stores, a new roasting facility in Nevada, and system enhancements.
• Liquidity: Management believes existing cash, investments, and operating cash flow are sufficient to finance capital requirements through fiscal 2002 without outside funding, barring significant deviations in expansion plans.
• Tax Rate: Effective tax rate of 37.0% is expected to remain consistent through fiscal 2002.

Risks and Contingencies

• Legal Proceedings: Two class-action lawsuits filed in California allege improper classification of store managers as exempt employees under wage and hour laws. Mediation is scheduled for the second quarter of fiscal 2002; financial impact is currently unpredictable.
• Commodity Prices: Coffee prices are volatile. While currently at 30-year lows, the Company has secured $284.4 million in fixed-price purchase commitments to ensure supply through 2002. Significant price increases could adversely affect profitability.
• External Factors: Risks include the economic impact of the September 11, 2001 terrorist attacks, competition, and the ability to hire and retain qualified personnel.

Investor Verification Checklist

• One-Time Gains: Verify the impact of the $13.4 million gain on the sale of Starbucks Japan shares on net earnings and EPS.
• Comparable Store Sales: Confirm the 2% increase in comparable store sales and the drivers (transaction volume vs. average ticket size).
• Deferred Revenue: Review the $22.4 million increase in deferred revenue related to the Starbucks Card (stored value) and its impact on future revenue recognition.
• Legal Exposure: Monitor the status of the California class-action lawsuits regarding employee classification and potential settlement costs.
• Coffee Commitments: Assess the $284.4 million in fixed-price green coffee purchase commitments against future market price fluctuations.
• Capital Allocation: Track actual capital expenditures against the $360-$385 million guidance for fiscal 2002.