Starbucks Corporation — Q1 Fiscal 2010 Form 10-Q
Reporting period: 13 weeks ended December 27, 2009; comparable period ended December 28, 2008. Fiscal 2010 includes 53 weeks, with the additional week in Q4. Amounts are in millions except per-share data.
Financial performance
| Metric | Q1 FY2010 | Q1 FY2009 | Change |
|---|---|---|---|
| Net revenues | $2,722.7 | $2,615.2 | +4.1% |
| Operating income | $352.6 | $117.7 | +199.6% |
| Operating margin | 13.0% | 4.5% | +8.5 percentage points |
| Net earnings attributable to Starbucks | $241.5 | $64.3 | — |
| Diluted EPS | $0.32 | $0.09 | — |
| Cash provided by operations | $768.7 | $693.5 | +$75.2 |
| Capital expenditures | $99.7 | $172.6 | Lower by $72.9 |
- Company-operated retail revenue increased 5.4% to $2,292.9; specialty revenue declined 2.1% to $429.8.
- Comparable store sales rose 4% in both the U.S. and International markets. U.S. growth came from higher average transaction value; International growth came from more transactions.
- Cost of sales and occupancy declined to 42.1% of revenue from 45.8%; store operating expenses declined to 32.9% from 35.8%. General and administrative expense rose to $136.9 from $105.2, partly reflecting higher performance-based compensation.
- Cash and cash equivalents were $1,306.3 at quarter-end, and management reported $1.4 billion in cash and liquid investments. Total debt was $549.5, principally $549.3 of 6.25% senior notes due 2017; there were no short-term borrowings.
Material changes and notable items
- Management attributed the sharp operating improvement to cost reductions and operational initiatives, improved comparable sales, lower product costs and waste, labor efficiencies, and lower restructuring charges. Restructuring expense was $18.3 versus $75.5 and contributed about 220 basis points to year-over-year margin expansion.
- Q1 included an accounting gain of approximately $0.02 per share from acquiring control of the former France joint venture. The France transaction also contributed to International revenue growth through consolidation; foreign currency translation was another contributor.
- The company closed 21 stores during the quarter; 894 stores had been closed under the rationalization program since it began in FY2008. It expected remaining closures, mostly International, to be completed in FY2010. Expected total program costs were $641.5, with $617.7 incurred to date and a $95.2 accrued liability at quarter-end.
- Net interest income and other was $25.1 versus a $6.0 expense in the prior-year quarter, reflecting investment valuation movements and the France gain. Prior-year results included a $37.8 gain on nondesignated foreign-exchange forwards, largely offset by translation effects on related balances.
- Net cash increased by $706.5, to $1,306.3, during the quarter. Operating cash generation included seasonal Starbucks Card purchases and loads; the filing notes Q1 operating cash flows are typically higher due to the holiday season.
Liquidity, outlook, risks and contingencies
- Management forecast FY2010 revenue growth in the mid-single digits, supported by modestly positive comparable sales, the 53rd week, and approximately 300 net new stores, primarily licensed: about 100 in the U.S. and 200 internationally.
- Management expected significant improvement in consolidated operating margin versus FY2009 and meaningful improvement in International margin. Expected FY2010 operating cash flow was approximately $1.5 billion and capital expenditures approximately $500 million. The company planned investment in VIA Ready Brew, store refreshes and design, innovation, and growth opportunities.
- At quarter-end, $986 million of capacity remained under the combined $1 billion commercial-paper program and revolving credit facility, after $14 million of letters of credit. Starbucks was in compliance with its credit and senior-note covenants. Credit outlooks were Stable; ratings were A-2/P-3 for short-term debt and BBB/Baa3 for senior unsecured long-term debt.
- $53 million of auction-rate securities remained subject to limited liquidity because of auction failures. Management did not expect this to materially affect funding needs. The company also had $696 million notional in foreign-exchange contracts, $24 million in dairy contracts, and $4 million in diesel contracts.
- Commodity prices and availability, especially green coffee and dairy, foreign exchange, economic conditions, execution of initiatives, competition, and legal proceedings were identified as risks to results. Management reported no material change to previously disclosed risk factors or market risks.
- The former employee tip-pooling case was dismissed in Starbucks’ favor after the California Supreme Court denied review and final judgment was entered in December 2009. A separate California hiring-practices case remained subject to Starbucks’ opposition to plaintiffs’ effort to amend the complaint. Management said other ordinary-course proceedings were not expected to materially adversely affect the company.
- Management estimated a 34%–35% FY2010 effective tax rate, subject to quarterly variation. It also cautioned that quarterly results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether comparable-sales growth and cost efficiencies persist, and how much margin improvement reflects sustainable operations versus lower restructuring expense and the France-related gain.
- Execution of the mid-single-digit revenue-growth, approximately 300 net-new-store, $1.5 billion operating-cash-flow, and $500 million capital-spending outlook.
- International segment performance and remaining store closures, alongside continued softness in packaged-coffee licensing and foodservice channels.
- Liquidity and valuation of auction-rate securities, exposure to coffee and dairy costs and foreign exchange, and the effect of hedging gains or losses.
- Cash conversion and seasonal effects, including deferred revenue from Starbucks Cards; debt and covenant compliance; and developments in pending litigation and other contingencies.