Business Context and Reporting Period
Company: Starbucks Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: 13 weeks ended December 27, 1998 (First Quarter of Fiscal 1999)
Business Overview: The Company operates retail stores (85% of revenue) and specialty sales operations (15% of revenue), including wholesale, licensing, and direct response sales. The fiscal year ends on the Sunday closest to September 30.
Key Financial Metrics
| Metric (in thousands) | Q1 1999 (13 Weeks) | Q1 1998 (13 Weeks) |
|---|---|---|
| Net Revenues | $405,638 | $321,325 |
| Operating Income | $41,177 | $33,481 |
| Net Earnings | $26,733 | $20,955 |
| Diluted EPS | $0.29 | $0.23 |
| Operating Cash Flow | $97,340 | $66,051 |
| Cash & Short-term Investments | $184,464 | N/A |
| Working Capital | $171,854 | N/A |
Margins: Cost of sales and related occupancy costs were 45.9% of net revenues (up from 45.5%). Operating margin was approximately 10.1%.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 26% to $406 million. Retail sales grew 25% driven by 105 new store openings (97 in North America, 8 in the UK) and a 3% increase in comparable store sales. Specialty sales grew 36% due to grocery category expansion and licensee sales.
- Profitability: Net earnings increased 28% to $26.7 million. The effective tax rate decreased to 38.0% from 39.8% due to non-deductible losses from a prior business combination.
- Expense Trends: Store operating expenses as a percentage of retail sales increased slightly to 35.8% due to the higher cost structure of UK stores. General and administrative expenses decreased as a percentage of revenue to 5.0% due to lower professional fees.
- Interest Expense: Interest and other expense dropped to $0.2 million from $0.8 million following the conversion of convertible subordinated debentures to equity in the prior fiscal year.
Guidance, Outlook, and Risks
- Capital Expenditures: Management expects capital expenditures for the remainder of fiscal 1999 to be approximately $220 million, including costs for new stores, production capacity, and acquisitions.
- Store Expansion: The Company and its licensees plan to open at least 400 new stores in North America and 100 in international markets during fiscal 1999. Long-term goals include 2,500 North American stores by 2000.
- Acquisitions: The Company announced the acquisition of Pasqua Inc. (closing Q2 1999) and completed the acquisition of Tazo, L.L.C. (January 20, 1999).
- Year 2000 Compliance: The Company has spent $0.7 million on Y2K remediation and expects to spend an additional $1.2 million. Management believes systems are compliant, but risks remain regarding third-party suppliers.
- Market Risks: Significant exposure to green coffee price fluctuations. The Company holds $92 million in fixed-price purchase commitments and uses futures contracts to hedge. Foreign currency exposure exists but is currently unhedged.
Investor Verification Checklist
- Verify the impact of the new Kraft Foods licensing agreement on future specialty sales margins and transition costs.
- Monitor the integration and financial performance of the Tazo and Pasqua Inc. acquisitions.
- Assess the sufficiency of the $92 million fixed-price coffee purchase commitments against potential market price spikes.
- Review the execution of the $220 million capital expenditure plan and its effect on cash flow.
- Confirm the status of Year 2000 remediation for critical third-party suppliers.