Starbucks Corporation 10-Q Summary: Quarter Ended March 31, 2002
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for Starbucks Corporation for the 13-week and 26-week periods ended March 31, 2002. The company operates primarily through North American Retail stores, Business Alliances (licensing and foodservice), and international operations. The fiscal year ends on the Sunday closest to September 30.
Key Financial Metrics
| Metric | 13 Weeks Ended Mar 31, 2002 | 13 Weeks Ended Apr 1, 2001 | 26 Weeks Ended Mar 31, 2002 | 26 Weeks Ended Apr 1, 2001 |
|---|---|---|---|---|
| Total Net Revenues | $783.2 million | $629.3 million | $1,588.6 million | $1,296.7 million |
| Operating Income | $48.8 million | $50.9 million | $141.4 million | $126.9 million |
| Net Earnings | $32.1 million | $32.2 million | $100.4 million | $81.2 million |
| Diluted EPS | $0.08 | $0.08 | $0.25 | $0.21 |
| Operating Margin | 6.2% | 8.1% | 8.9% | 9.8% |
| Cash & Equivalents | $161.8 million (as of Mar 31, 2002) | |||
| Total Debt (Current + Long-term) | ||||
| Net Cash from Operations (6mo) | $232.1 million |
Material Changes vs. Prior Period
- Revenue Growth: Total net revenues increased 24% year-over-year for the quarter and 23% for the six-month period, driven by the opening of 1,233 new stores in the last 12 months and comparable store sales growth of 7% (quarter) and 5% (six months).
- Profitability Pressure: While net earnings grew 24% for the six-month period, operating income for the quarter declined 4% to $48.8 million. Operating margins compressed from 8.1% to 6.2% in the quarter.
- Legal Settlement: A significant $18.0 million charge was recorded in General and Administrative expenses to settle two California class-action lawsuits regarding employee classification. This charge materially impacted operating income and margins for the period.
- Cost of Sales: Cost of sales as a percentage of revenue improved (decreased) to 40.9% from 43.1%, aided by lower green coffee costs and a shift in sales mix to higher-margin beverages.
- Investment Activity: The company recorded a $13.4 million gain on the sale of a portion of its investment in Starbucks Coffee Japan, Ltd.
Guidance, Outlook, and Risks
- Store Expansion: Management expects to open at least 625 Company-operated stores during fiscal 2002. Licensees are expected to open at least 300 stores in North America and 275 internationally.
- Capital Expenditures: Total capital expenditures for fiscal 2002 are expected to be approximately $425 million, with $240 million anticipated for the remainder of the year. This includes new store openings, a new roasting facility in Nevada, and warehouse expansions.
- Liquidity: The company holds $323.3 million in cash and short-term investments. Management believes existing resources are sufficient to fund operations and expansion, though significant new joint ventures may require outside funding.
- Share Repurchase: The company has $8.4 million remaining under its $60.0 million authorized share repurchase program.
- Risks: Key risks include volatility in green coffee prices (though the company has $260.7 million in fixed-price commitments through 2003), rising labor and rent costs, and the ability to find optimal store locations. The company also faces risks related to the settlement of the California lawsuits and potential future litigation.
Investor Verification Checklist
- Verify the impact of the $18.0 million litigation settlement on future legal reserves and potential for similar claims in other jurisdictions.
- Monitor the sustainability of the 7% comparable store sales growth given the slight decrease in average transaction value.
- Assess the execution of the $425 million capital expenditure plan and its effect on future cash flows.
- Review the fixed-price coffee purchase commitments ($260.7 million) against current market commodity prices to evaluate cost protection.
- Track the progress of international expansion, which saw revenue growth of 28% but a decline in operating margin to 9.8%.