Starbucks Corporation — Q3 FY2010 Form 10-Q
Reporting period: The 13 weeks ended June 27, 2010; year-to-date figures cover 39 weeks. Fiscal 2010 includes 53 weeks, with the additional week in Q4. Dollar amounts are in millions except per-share data.
Financial results
| Metric | Q3 FY2010 | Q3 FY2009 | 39 weeks FY2010 | 39 weeks FY2009 |
|---|---|---|---|---|
| Revenue | $2,612.0 | $2,403.9 | $7,869.4 | $7,352.4 |
| Operating income | $327.7 | $204.0 | $1,020.1 | $362.6 |
| Operating margin | 12.5% | 8.5% | 13.0% | 4.9% |
| Net earnings attributable to Starbucks | $207.9 | $151.5 | $666.7 | $240.8 |
| Diluted EPS | $0.27 | $0.20 | $0.87 | $0.32 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $1,375.4 | $1,016.7 |
- Q3 revenue rose 8.7%; company-operated retail revenue increased 8.6%, and specialty revenue increased 9.0%. Comparable store sales grew 9%, reflecting 6% more transactions and a 3% increase in average transaction value. U.S. store traffic rose 6%.
- Q3 operating margin expanded 400 basis points. Management attributed improvement to sales leverage and operating efficiencies; lower restructuring charges contributed about 130 basis points. Higher marketing spending partly offset gains.
- For the 39 weeks, revenue increased 7.0% and operating margin expanded 810 basis points. Net earnings benefited from reduced restructuring costs; the period also included an accounting gain tied to obtaining control of the former France joint venture.
- Cost of sales and occupancy costs fell to 41.2% of revenue in Q3 from 43.4%; year to date, the ratio was 41.8% versus 44.7%. Management cited supply-chain savings and sales leverage. Year-to-date general and administrative expense increased to $408.6 from $319.8, largely reflecting higher performance-based compensation.
Liquidity, debt and capital allocation
- At June 27, 2010, cash and cash equivalents were $1,125.2; short-term investments were $269.9. The company reported approximately $1.4 billion in cash and short-term investments, versus $666 million at September 27, 2009.
- Current assets were $2,610.9 and current liabilities $1,726.6. Long-term debt was $549.4, principally $550 million of 6.25% Senior Notes due 2017. No short-term borrowings were outstanding; $985 million of capacity remained under the combined commercial-paper program and revolving credit facility.
- Year-to-date investing cash outflow was $690.0, including $459.1 of purchases of available-for-sale securities and $285.6 of net property and equipment additions. Financing cash outflow was $140.3, including $169.1 of share repurchases and $74.8 of dividends paid.
- The company repurchased 6.7 million shares in Q3 for approximately $173 million; 14.6 million shares remained authorized. The quarterly dividend was increased to $0.13 per share, subject to board approval; management targeted a payout ratio of 35%–40% of net income.
Outlook, commentary and risks
- FY2010 outlook: mid-single-digit revenue growth and comparable-store-sales growth over the comparable 52-week period; approximately 250 net new stores, primarily licensed; significant operating-margin improvement versus FY2009; about $1.7 billion in operating cash flow and $450 million in capital expenditures.
- Management said recent U.S. operating improvements and positive international trends supported sales leverage and profitability. Growth initiatives included Starbucks VIA Ready Brew and Seattle’s Best Coffee distribution; related marketing spending weighed on margins.
- Management estimated a FY2010 effective tax rate of 34%–35%. Results are not necessarily indicative of the full year, and seasonality, store openings and closures affect quarterly comparisons.
- Key exposures include coffee, dairy and other commodity prices and availability; foreign-exchange movements; execution of business initiatives; economic conditions; and competition. The $45 million auction-rate-securities portfolio remained less liquid due to auction failures, though the company did not expect this to impair its ability to fund needs. Derivatives were used to manage currency and certain commodity exposures.
- Store rationalization begun in FY2008 had closed 913 stores cumulatively; remaining planned closures were international. Q3 restructuring charges were $20.4, with $93.4 of related accrued liability at quarter-end.
- The filing disclosed inadvertent issuance of unregistered shares under prior employee stock plans. About 4.7 million shares were issued in the last four fiscal quarters for approximately $54 million in proceeds. Starbucks said the shares were already treated as outstanding, creating no additional dilution, and potential rescission liability, if any, was believed immaterial. The filing notes possible rescission claims and regulatory penalties.
- Management reported no legal proceeding believed likely to materially adversely affect consolidated financial position or results. Disclosure controls were concluded effective; no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether comparable-store-sales growth and operating-margin gains persist, especially as marketing costs and other operating expenses evolve.
- How much of year-to-date earnings improvement reflects sustainable operations versus lower restructuring charges and the France acquisition accounting gain.
- Liquidity and valuation developments in auction-rate securities, and exposure to coffee, dairy, foreign exchange and other market risks.
- Progress against FY2010 revenue, store-opening, operating-cash-flow and capital-expenditure outlook, noting the extra fiscal week.
- Resolution of the unregistered-share matter and any resulting rescission claims or regulatory consequences.