01—Abstract
Summary
Summary of the 10-K filed December 26, 1996. Cited figures are marked; the original filing is the authoritative source.
Starbucks Corporation's Form 10-K for the fiscal year ended September 29, 1996 describes a company that is vertically integrated in coffee sourcing, roasting, and retail, and is in a rapid expansion phase.
As of fiscal year-end, Starbucks operated 1,006 stores, of which 929 were company-operated across 21 U.S. states, the District of Columbia, and two Canadian provinces, and 75 were licensed in North America. Company-operated retail stores generated about 86%a of net revenues. The company plans at least 325 new North American stores in fiscal 1997, entry into at least three new major markets (including Phoenix and Miami), and its first international stores in Japan, Hawaii, and Singapore.
The filing's most important business-relevant points for investors are the growth strategy and the margin risk from green coffee costs. Management attributed margin pressure in fiscal 1995 and 1996 to the sell-through of higher-cost coffee inventory, and expected most of that inventory to be sold by the end of the first quarter of fiscal 1997. The company held roughly $47 millionb in fixed-price green coffee purchase commitments and stated it did not use hedging or futures contracts in fiscal 1996.
Diversification is also visible: specialty sales represented about 11%c of revenues, direct response about 3%, and licensing and royalties about 1%, with joint ventures with Pepsi (Frappuccino) and Dreyer's (ice cream) extending the brand beyond stores. The filing has limited financial detail because Items 5 through 8 (market data, selected financial data, MD&A, and financial statements) are incorporated by reference to the 1996 Annual Report to Shareholders, which was not reproduced in the content provided.
Investors evaluating financial performance should therefore review that annual report, which is attached as Exhibit 13. The filing also reports no material pending legal proceedings and a 16,600-employee workforce.
02—Key points
Key Highlights
- Store base of 1,006 at fiscal year-end 1996, including 929 company-operated stores in North America and 75 licensed stores
- Company-operated retail stores generated approximately 86% of net revenues, with specialty sales at about 11%, direct response at about 3%, and licensing at about 1%
- Plans to open at least 325 new North American stores in fiscal 1997 and enter at least three major new markets, including Phoenix and Miami
- International expansion began with two Tokyo stores via a SAZABY joint venture, with Hawaii and Singapore locations opening in early fiscal 1997
- Gross margins were pressured by sell-through of higher-cost green coffee inventory, which management expected to clear by the end of Q1 fiscal 1997
- Approximately $47 million in fixed-price green coffee purchase commitments as of September 29, 1996; no hedging or futures activity in fiscal 1996
- Common stock of about 77.8 million shares outstanding, with non-affiliate market value of roughly $2.6 billion as of December 1, 1996 on NASDAQ
03—Questions
Frequently Asked Questions
How is Starbucks generating its revenue, and how dependent is it on company-operated stores?
Company-operated retail stores account for about 86% of net revenues. Retail sales mix in fiscal 1996 was approximately 61% coffee beverages, 15% whole bean coffees, 16% food items, and 8% coffee-related hardware. The remaining revenue comes from specialty sales (about 11%, including royalties and sales to licensees and joint ventures), direct response (about 3%), and licensing (about 1%).
What is the main risk to Starbucks' margins?
The main risk the filing identifies is green coffee price volatility, which is driven by weather, political and economic conditions in producing countries, and actions by coffee organizations. Gross margins were hurt in fiscal 1995 and 1996 by selling through higher-cost inventory. The company used fixed-price purchase commitments (about $47 million at year-end) rather than hedging, and it did not use futures contracts in fiscal 1996.
What is the company's growth plan for the next year?
Starbucks and its licensees planned to open at least 325 new North American stores in fiscal 1997, enter at least three major new North American markets (including Phoenix and Miami), grow specialty sales and direct response operations, and expand internationally through joint ventures and licensees in Japan, Hawaii, and Singapore.
Does the 10-K include detailed financial results such as revenue, earnings, and margins?
No. Items 5 through 8, which cover market data, selected financial data, MD&A, and the financial statements, are incorporated by reference to the 1996 Annual Report to Shareholders. Investors need to review that report (Exhibit 13) for the detailed financial figures. This filing itself does not provide them in the content supplied.
Are there material legal or labor risks disclosed?
The company reported no legal proceedings it believes would have a material adverse effect. It employed about 16,600 people, with only five unionized stores in Vancouver, British Columbia. The company stated it had never experienced a strike or work stoppage and described its employee relations as excellent.
04—Continue