Business Context and Reporting Period
Company: Starbucks Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and nine months ended July 2, 2000 (Fiscal Year 2000)
Business Overview: Starbucks operates Company-owned retail stores in North America and internationally, alongside specialty operations including wholesale, licensing, and direct-to-consumer sales. Approximately 84% of net revenues are derived from Company-operated retail stores.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended July 2, 2000 |
9 Months Ended July 2, 2000 |
|---|---|---|
| Net Revenues | $555,546 | $1,587,226 |
| Gross Margin | $314,420 (56.6%) | $884,449 (55.7%) |
| Operating Income | $54,306 | $144,146 |
| Net Earnings | $34,913 | $93,068 |
| Diluted EPS | $0.18 | $0.48 |
| Cash from Operations | N/A | $231,941 |
| Cash & Equivalents | $67,436 | $67,436 |
| Short-term Investments | $56,127 | $56,127 |
| Long-term Debt | $6,505 | $6,505 |
| Working Capital | $116,155 | $116,155 |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 31% year-over-year for the quarter and 32% for the nine-month period, driven by the opening of new stores and a 10% increase in comparable store sales for the quarter.
- Profitability: Net earnings rose 42% for the quarter and 34% for the nine-month period. Gross margin improved to 56.6% (quarter) and 55.7% (nine months) due to lower green coffee costs and price increases, partially offset by higher occupancy costs.
- Joint Venture Income: Increased significantly to $4.3 million for the quarter (from $360,000) and $11.6 million for the nine months, primarily due to improved profitability in Japan and the Bottled Frappuccino joint venture.
- Expense Trends: Store operating expenses as a percentage of retail revenues increased slightly (39.7% vs 38.7% for the quarter) due to higher labor and advertising costs. General and administrative expenses decreased as a percentage of revenue due to leverage from revenue growth.
- Cash Flow: Operating cash flow for the nine months was $232 million, while investing activities used $283 million, primarily for capital expenditures ($224 million) related to opening 358 new stores and equipment purchases.
Guidance, Outlook, and Risks
- Expansion Plans: Management plans to open at least 450 Company-operated stores during fiscal 2000. Expected capital expenditures for the remainder of the fiscal year are approximately $90 million.
- Liquidity: Management believes existing cash, investments, and operating cash flow are sufficient to finance core business requirements through fiscal 2001. Significant expansion beyond current plans may require outside funding.
- Strategic Investments: The company made minority investments in Kozmo.com ($25 million) and Cooking.com ($10 million), and acquired Hear Music ($8 million) and Thailand operations ($5 million).
- Risks:
- Coffee Prices: Green coffee prices are volatile. The company has $107 million in fixed-price purchase commitments to mitigate risk.
- Market Risk: Exposure to foreign currency exchange rates (Canada/UK) and potential impairment of $64 million in internet/e-commerce equity investments due to industry difficulties.
- Competition & Operations: Risks include increased competition, lease rate fluctuations, and the ability to hire and retain qualified personnel.
Investor Verification Checklist
- Verify the sustainability of the 10% comparable store sales growth rate amidst rising labor and occupancy costs.
- Monitor the valuation and potential impairment risks associated with the $64 million portfolio of internet and e-commerce equity investments.
- Assess the impact of the $107 million fixed-price coffee purchase commitments if market prices for green coffee decline significantly.
- Track the execution of the plan to open 450 new stores and the associated capital expenditure requirements.
- Review the profitability trends of the Japanese retail joint venture and Bottled Frappuccino joint venture, which drove significant income increases.