Starbucks Corporation 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for Starbucks Corporation for the 13-week and 39-week periods ended June 27, 1999. The company operates primarily through Company-operated retail stores (84% of revenue) and specialty sales operations (16% of revenue), including wholesale, licensing, and direct response sales. The fiscal year ends on the Sunday closest to September 30.
Key Financial Metrics
| Metric | 13 Weeks Ended June 27, 1999 | 39 Weeks Ended June 27, 1999 |
|---|---|---|
| Net Revenues | $423.8 million | $1,205.3 million |
| Net Earnings | $24.6 million | $69.3 million |
| Diluted EPS | $0.13 | $0.37 |
| Operating Income | $38.2 million | $106.2 million |
| Operating Margin | 9.0% | 8.8% |
| Cash from Operations | N/A | $168.5 million |
| Cash & Short-term Investments | $149.4 million (Total) | $149.4 million (Total) |
| Working Capital | $162.1 million | $162.1 million |
| Debt | None reported (Convertible debentures converted in FY1998) | None reported |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 27% year-over-year for both the 13-week and 39-week periods. Retail sales grew 26% (13 weeks) and 25% (39 weeks), driven by new store openings and comparable store sales increases of 6% and 5%, respectively.
- Profitability: Net earnings surged 212% for the 13-week period ($24.6M vs $7.9M) and 62% for the 39-week period ($69.3M vs $42.8M). This was aided by a lower effective tax rate (38.0% vs 58.4% in the prior 13-week period) and the absence of merger expenses recorded in the prior year.
- Acquisitions: The company acquired Tazo, L.L.C. (tea) and Pasqua Inc. (coffee) in early 1999 for a total of $17.1 million. Approximately $13.8 million was recorded as goodwill.
- Store Count: The company opened 81 new stores in the quarter and 293 in the nine-month period, ending with 1,909 Company-operated stores in North America and 86 in the UK.
Guidance, Outlook, and Risks
- Expansion Plans: Management plans to open at least 400 new stores in North America and 130 internationally for the remainder of 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 $90 million, excluding major new initiatives. Total capital additions for the first 39 weeks were $175 million.
- Year 2000 Compliance: The company has spent $1.3 million on Y2K remediation and expects to spend an additional $0.9 million. Risks include potential disruptions from third-party suppliers or infrastructure failures.
- Market Risks: Significant exposure to green coffee price fluctuations. The company holds $101 million in fixed-price purchase commitments and uses futures contracts to hedge. Foreign currency exposure exists but has historically been minimal.
- Internet Strategy: Management intends to pursue business opportunities on the Internet, though specific capital requirements are not yet known.
Investor Verification Checklist
- Verify the sustainability of the 6% comparable store sales growth rate in the face of increased competition.
- Monitor the integration and performance of the Tazo and Pasqua acquisitions.
- Assess the impact of rising labor costs on store operating expenses, which increased as a percentage of retail sales.
- Review the status of Year 2000 compliance for critical third-party suppliers and infrastructure.
- Track the execution of the $90 million remaining capital expenditure budget for new store openings.