Starbucks Corporation 10-Q Summary
Business Context and Reporting Period
This filing covers the quarterly period ended March 28, 1999 (13 weeks) and the six-month period ended March 28, 1999 (26 weeks). Starbucks Corporation operates primarily through Company-operated retail stores (approx. 85% of revenue) and specialty sales operations (wholesale, licensing, direct response). The fiscal year ends on the Sunday closest to September 30; fiscal 1999 includes 53 weeks. A 2-for-1 stock split was effected on March 19, 1999, and all share data has been retroactively restated.
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended Mar 28, 1999 | 26 Weeks Ended Mar 28, 1999 |
|---|---|---|
| Net Revenues | $375,822 | $781,460 |
| Net Earnings | $17,957 | $44,691 |
| Operating Income | $26,767 | $67,945 |
| Operating Margin | 7.1% | 8.7% |
| Cash from Operating Activities | N/A | $121,586 |
| Cash & Short-Term Investments | $165,697 | $165,697 |
| Working Capital | $173,876 | $173,876 |
| Long-Term Debt | $0 | $0 |
Note: Long-term debt is zero as convertible subordinated debentures were converted to equity in fiscal 1998. Cash and short-term investments are derived from the balance sheet ($127,474 cash + $38,223 short-term investments).
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 27% year-over-year for both the 13-week and 26-week periods. Retail sales grew 26% (13 weeks) and 25% (26 weeks), driven by new store openings (115 stores in 13 weeks; 212 in 26 weeks) and comparable store sales increases of 6% and 5%, respectively.
- Profitability: Net earnings rose 29% for the 13-week period and 28% for the 26-week period. The effective tax rate decreased to 38.0% from 40.4% (13 weeks) and 40.0% (26 weeks) in the prior year.
- Acquisitions: The Company acquired Tazo, L.L.C. (tea) for $8.1 million and Pasqua Inc. (coffee) for $9.0 million in early 1999. These acquisitions added approximately $13.8 million in goodwill.
- Cost Structure: Cost of sales and occupancy costs remained stable at 45.2% of revenue for the 13-week period. Store operating expenses as a percentage of retail sales increased slightly due to higher wage rates and the impact of UK operations.
Guidance, Outlook, and Risks
- Expansion Plans: Management plans to open at least 400 new stores in North America and 130 internationally during fiscal 1999. Long-term goals include 2,500 North American stores by 2000 and 1,000 international stores by 2003.
- Capital Expenditures: Expected capital expenditures for the remainder of fiscal 1999 are approximately $150 million, excluding major new initiatives. This includes store openings, information systems, and production capacity enhancements.
- Year 2000 Compliance: The Company has spent $0.9 million on Y2K remediation and expects to spend an additional $1.1 million. Risks include potential disruptions from third-party suppliers or infrastructure failures.
- Market Risks: Significant exposure to green coffee price fluctuations. The Company holds $134 million in fixed-price purchase commitments and uses futures contracts to hedge. Foreign currency exposure exists primarily in Canada and the UK but is currently unhedged.
- Internet Strategy: Management intends to pursue Internet business opportunities, though specific capital requirements are not yet known.
Investor Verification Checklist
- Verify the impact of the Tazo and Pasqua acquisitions on future revenue streams and goodwill amortization charges.
- Monitor the execution of the 530 new store openings planned for fiscal 1999 and associated capital expenditure burn rate.
- Assess the effectiveness of hedging strategies against potential spikes in green coffee commodity prices.
- Review the status of Year 2000 compliance for critical third-party suppliers and infrastructure.
- Confirm the timeline and financial impact of the new Internet business initiatives.