Starbucks Corporation — Fiscal 2011 First-Quarter 10-Q
Reporting period: 13 weeks ended January 2, 2011; comparisons are to the 13 weeks ended December 27, 2009, except balance-sheet comparisons, which are to October 3, 2010. All dollar amounts are in millions unless stated otherwise.
Business context and results
Starbucks operates company-run stores and licensed businesses, alongside its Global Consumer Products Group (CPG). Management attributed the quarter’s performance to stronger comparable-store sales and improved operating efficiency, while identifying higher coffee costs as a significant pressure.
- Revenue rose 8.4% to $2,950.8. Company-operated retail revenue increased 6.9% to $2,451.3; specialty revenue increased 16.2% to $499.5.
- Global comparable-store sales increased 7%: U.S. sales rose 8% (transactions +6%, average ticket +2%); international sales rose 5% (transactions and average ticket each +2%).
- Operating income increased to $501.9 from $352.6; operating margin expanded to 17.0% from 13.0%. Management cited sales leverage, lower occupancy and store operating costs, fewer impairments, and no current-quarter restructuring charges.
- Net earnings attributable to Starbucks increased to $346.6 from $241.5. Diluted EPS rose to $0.45 from $0.32. The effective tax rate was 31.6%, compared with 34.1%.
Financial position, cash flow, and capital returns
- Cash and cash equivalents were $1,792.0 at January 2, 2011; short-term investments totaled $258.6. Cash plus short-term investments was approximately $2.05 billion, versus approximately $1.45 billion at October 3, 2010.
- Current assets were $3,400.4 and current liabilities $1,956.4. Long-term debt was $549.4, unchanged from October 3; the company also reported $550 million of 6.25% Senior Notes. Starbucks said it complied with applicable debt and credit-facility covenants.
- Operating cash flow was $673.6, down from $768.7. Management attributed the decrease primarily to higher inventory associated with higher coffee costs, partly offset by increased earnings.
- Investing cash outflow was $36.8, versus $100.0; capital expenditures were $128.9, versus $99.7. Financing cash outflow was $9.9, compared with inflow of $39.8, reflecting dividends and share repurchases.
- The company declared a $0.13-per-share quarterly dividend and repurchased 0.4 million shares for $11.8. Cash dividends paid during the quarter were $96.9.
Material changes and segment performance
- U.S. revenue grew 7% to $2,067.7; operating margin improved to 21.9% from 17.4%.
- International revenue grew 9% to $640.0; operating margin improved to 16.3% from 7.3%. Management reported record first-quarter international revenue, operating income, and margin.
- CPG revenue grew 12% to $195.2, but operating margin declined to 34.6% from 36.6%, primarily due to higher coffee costs, partly offset by supply-chain efficiencies.
- Other segment operating loss widened to $122.6 from $88.4. Higher corporate general and administrative expenses included increased charitable contributions; other operating expenses included impairment of certain long-lived assets.
- Revenue growth and stronger earnings were accompanied by lower operating cash flow. Inventory increased to $620.5 from $543.3 at fiscal year-end, including higher unroasted coffee inventory.
Outlook, risks, and contingencies
- For fiscal 2011, management expected mid-to-high-single-digit revenue growth on a 52-week comparable basis, driven by low-to-mid-single-digit comparable-store sales growth; continued consolidated margin improvement; and approximately 500 net new stores, about 100 in the U.S. and 400 internationally, mostly licensed.
- Full-year capital expenditures were forecast at $550–$600. Management estimated a 32%–33% full-year effective tax rate.
- Management expected higher coffee costs to continue affecting results, but said it had essentially locked in coffee costs for the remainder of fiscal 2011 through fixed-price purchase commitments. The filing also reports $477 million of fixed-price and an estimated $184 million of price-to-be-fixed green coffee commitments at quarter-end.
- Starbucks planned to end its packaged-coffee and tea licensing relationship with Kraft on March 1, 2011, alleging material breaches. Kraft disputes the allegations and seeks compensation, potentially including a premium of up to 35%. A court denied Kraft’s request to block termination, but Kraft appealed; the matter is in binding arbitration. Starbucks said it could not estimate the range of possible outcomes and acknowledged potentially material adverse outcomes.
- Starbucks had $37 million of auction-rate securities outstanding; ongoing auction failures limited their liquidity, though management did not expect this to impair funding needs materially. Management cited commodity prices and availability, foreign exchange, economic conditions, execution of initiatives, competition, and legal proceedings as risks. The filing reported no material changes to previously disclosed risk factors and no material off-balance-sheet arrangements.
- Quarterly results are seasonal: holiday Starbucks Card purchases support first-quarter operating cash flow, while revenue is recognized upon redemption. Management cautioned that quarterly results are not necessarily indicative of full-year results.
Key facts for investors to verify
- Whether comparable-store sales, traffic, and ticket growth continue, and whether margin gains persist as coffee costs rise.
- Progress against fiscal 2011 revenue, store-opening, margin, tax-rate, and capital-expenditure outlook.
- Cash conversion and inventory trends, including the timing and cost impact of coffee purchases.
- The outcome and potential financial exposure of the Kraft arbitration and the transition of packaged-coffee and tea distribution.
- Liquidity and valuation developments for auction-rate securities, alongside debt, covenant compliance, dividends, and share repurchases.