Business Context and Reporting Period
Company: Starbucks Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: 13 weeks and 26 weeks ended March 29, 1998 (Fiscal Year 1998)
Business Overview: Starbucks operates Company-operated retail stores, specialty sales (wholesale, licensees, joint ventures), and direct response operations. Approximately 86% of net revenues are derived from Company-operated retail stores.
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended Mar 29, 1998 |
13 Weeks Ended Mar 30, 1997 |
26 Weeks Ended Mar 29, 1998 |
26 Weeks Ended Mar 30, 1997 |
|---|---|---|---|---|
| Net Revenues | $289,606 | $214,915 | $606,558 | $454,057 |
| Operating Income | $22,428 | $13,992 | $56,947 | $35,299 |
| Net Earnings | $15,135 | $9,643 | $37,239 | $24,033 |
| Diluted EPS | $0.17 | $0.12 | $0.42 | $0.30 |
| Cash & Equivalents | $107,938 (as of Mar 29, 1998) | |||
| Working Capital | $180,430 (as of Mar 29, 1998) | |||
| Long-Term Debt | $0 (Convertible debentures converted to equity) |
Margins (13 Weeks):
- Cost of Sales & Occupancy: 45.0% of Net Revenues (down from 46.1%)
- Operating Margin: 7.7% of Net Revenues (up from 6.5%)
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 35% for the quarter and 34% for the six-month period, driven by a 34% increase in retail sales and a 48% increase in specialty sales.
- Store Expansion: The Company opened 74 new Company-operated stores in the quarter and 193 in the six-month period, ending with 1,462 stores in continental North America.
- Comparable Store Sales: Increased 7% for the quarter and 6% for the six-month period, attributed to higher transaction values and frequency.
- Debt Reduction: Interest expense dropped significantly ($0.1M vs $1.8M for the quarter) due to the conversion of $165 million in convertible subordinated debentures to common stock in the first quarter of fiscal 1998.
- Cash Flow: Net cash provided by operating activities increased to $77.2 million for the six months ended March 29, 1998, compared to $56.7 million in the prior year.
Guidance, Outlook, and Risks
Acquisition of Seattle Coffee Company
On April 29, 1998, Starbucks agreed to acquire Seattle Coffee Holdings Limited (UK) for approximately 1.8 million shares of common stock. The transaction is expected to close by May 1998.
- Impact on EPS: Expected dilution of $0.06 in 1998 and $0.05 in 1999 from ongoing operations.
- One-Time Charges: Anticipated after-tax charges of approximately $0.14 per share in the third fiscal quarter of 1998.
Capital Expenditures and Expansion
Management expects capital expenditures for the remainder of fiscal 1998 to be approximately $115 million (excluding the Seattle Coffee acquisition). The Company plans to open at least 350 new stores in continental North America during fiscal 1998.
Risks and Contingencies
- Coffee Prices: Green coffee prices remain high. The Company has $55 million in fixed-price purchase commitments and uses futures contracts to hedge price risk. Future margins may be impacted if sales price increases cannot offset rising costs.
- Cannibalization: Aggressive clustering of stores in existing markets may lead to cannibalization of existing store sales.
- Seasonality: Results are heavily influenced by the December holiday season; quarterly results may not be indicative of full-year performance.
Investor Verification Checklist
- Debt Conversion: Verify the full conversion of convertible subordinated debentures and the resulting increase in share count (87.3 million shares outstanding as of May 1, 1998).
- Acquisition Terms: Confirm the closing of the Seattle Coffee Company acquisition and the specific accounting treatment (pooling of interests).
- Coffee Hedging: Review the effectiveness of futures contracts in offsetting rising green coffee costs, given the $55 million in fixed-price commitments.
- Capital Allocation: Monitor actual capital expenditures against the $115 million guidance for the remainder of fiscal 1998.
- Comparable Store Sales: Track the sustainability of the 7% comparable store sales growth amidst increased store density and competition.