Business Context and Reporting Period
Company: Starbucks Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: January 1, 2006 (13 weeks)
Business Overview: Starbucks operates company-operated and licensed retail stores globally, selling coffee, beverages, and food. The company also engages in specialty operations including licensing, foodservice, and other branded product sales. The fiscal year ends on the Sunday closest to September 30.
Key Financial Metrics
| Metric (in thousands) | Q1 2006 | Q1 2005 |
|---|---|---|
| Total Net Revenues | $1,934,092 | $1,589,544 |
| Operating Income | $279,881 | $227,191 |
| Net Earnings | $174,190 | $144,710 |
| Diluted EPS | $0.22 | $0.17 |
| Operating Margin | 14.5% | 14.3% |
| Net Cash from Operating Activities | $609,317 | $413,660 |
| Cash and Cash Equivalents (End of Period) | $251,435 | $314,520 |
| Short-term Borrowings | $105,000 | $277,000 |
| Total Assets | $3,711,505 | $3,514,065 |
Material Changes vs. Prior Period
- Revenue Growth: Total net revenues increased 22% to $1.93 billion, driven by a 20% increase in company-operated retail revenues and a 33% increase in specialty operations. Comparable store sales grew 7% globally.
- Profitability: Net earnings rose 20% to $174 million. Operating margin improved to 14.5% from 14.3%, aided by lower cost of sales and store operating expenses as a percentage of revenue.
- Accounting Change: The company adopted SFAS 123R (Share-Based Payment) effective October 3, 2005. This resulted in the recognition of $22.8 million in stock-based compensation expense in Q1 2006, whereas no such expense was recognized in the prior year period.
- Debt Reduction: Short-term borrowings decreased significantly from $277 million to $105 million due to net repayments of $172 million on the revolving credit facility.
- Share Repurchases: The company repurchased 4.3 million shares for $121 million during the quarter.
Guidance, Outlook, and Risks
- Store Expansion: Starbucks plans to open approximately 1,800 new stores globally in fiscal 2006 (700 company-operated and 600 licensed in the U.S.; 150 company-operated and 350 licensed internationally).
- Capital Expenditures: Management expects fiscal 2006 capital expenditures to range between $700 million and $725 million.
- Revenue Outlook: Net revenues are expected to grow approximately 20% in fiscal 2006 compared to fiscal 2005.
- Tax Rate: The effective tax rate for fiscal 2006 is estimated to approximate 38%.
- Risks and Contingencies:
- Legal Proceedings: Two class-action lawsuits regarding Fair Labor Standards Act (FLSA) compliance (overtime pay for store managers) are pending. The company believes a loss is unlikely but cannot estimate potential damages.
- Commodity Prices: Exposure to coffee and dairy price fluctuations is managed through hedging, but volatility remains a risk.
- Foreign Currency: A 10% devaluation of the U.S. dollar could reduce the fair value of derivative instruments by approximately $23.2 million.
Investor Verification Checklist
- Verify the impact of the new SFAS 123R accounting standard on future quarters' earnings and cash flow classification.
- Monitor the status of the FLSA class-action lawsuits regarding store manager overtime classification.
- Track the execution of the 1,800 new store opening plan and its effect on capital expenditure burn rates.
- Assess the sustainability of the 7% comparable store sales growth in the context of rising commodity costs.
- Review the company's strategy regarding the repatriation of foreign earnings under the American Jobs Creation Act, as no election has been made yet.