How fast is Starbucks growing and what drove the revenue increase?

Net revenues grew 50% to $696.5 million in fiscal 1996, primarily from opening new company-operated stores (307 opened during the year) and a 7% comparable store sales increase. Specialty sales, including airline, hotel, and wholesale accounts, grew 63%.

Was fiscal 1996 profit growth driven by core operations?

Only partly. Net earnings of $42.1 million included a $9.2 million pre-tax gain from selling the Noah's investment. Operating income rose 42% to $57.0 million, but operating margin fell to 8.2% because of higher coffee costs and higher depreciation.

What is the outlook for coffee costs and margins?

Management expects most higher-cost green coffee bought after the 1994 Brazilian frost to be sold through by the end of the first quarter of fiscal 1997, which should improve cost of sales. The company had about $47 million in fixed-price purchase commitments and did not use hedging or futures in fiscal 1996, leaving it exposed to price volatility.

How is Starbucks financing its expansion and what is its debt position?

The company raised about $161 million net from 4 1/4% convertible subordinated debentures due 2002 in October 1995, and it had a $11.3 million Noah's investment sold for $20.6 million. Operating cash flow of $136.7 million and year-end cash plus short-term investments of $229.4 million covered most of fiscal 1996 capital spending of $161.8 million. Management believes existing resources suffice through fiscal 1997, though faster expansion may require outside funding.

What are the main risks investors should monitor?

Key risks include coffee price volatility, downward pressure on comparable store sales from store cannibalization and rising competition from supermarkets, national coffee brands, and well-capitalized entrants, difficulty securing store sites at acceptable rents, and the challenge of hiring and retaining staff. Management also notes that international expansion and new markets carry added costs.

SBUX 10-K FY1996 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K/A filed February 4, 1997. Cited figures are marked; the original filing is the authoritative source.

Starbucks Corporation's Form 10-K/A for the fiscal year ended September 29, 1996 shows a company in rapid expansion with strong top-line growth and improving profitability.

Net revenues rose 50% to $696.5 million^a (from $465.2 million), driven by new company-operated store openings (929 company-operated stores plus 75 licensed stores in North America at year-end) and a 7% comparable store sales increase. Net earnings grew 61% to $42.1 million, or $0.54 per fully-diluted share, though this figure includes a one-time $9.2 million pre-tax gain from the sale of the Noah's New York Bagels investment. Operating income increased to $57.0 million, but operating margin slipped to 8.2% from 8.6% as cost of sales rose to 48.2% of revenues on higher green coffee costs from the 1994 Brazilian frost.

Balance sheet strength improved meaningfully. Shareholders' equity reached $451.7 million, working capital rose to $238.5 million^b, and cash plus short-term investments totaled $229.4 million. The company issued $165 million of 4 1/4% convertible subordinated debentures due 2002 in October 1995, and most of the debentures' 1994 predecessor issue was converted into common stock.

Operating cash flow was $136.7 million^c, and capital expenditures of $161.8 million funded 307 new company-operated stores. Management guided to roughly $170 million in fiscal 1997 capital spending and expects cost of sales to improve as higher-cost coffee inventory is sold through by the end of the first quarter of fiscal 1997.

Investors should weigh the strong growth and balance sheet against key risks disclosed in the filing: comparable store sales growth is expected to face downward pressure from store cannibalization and rising competition, coffee price volatility remains a material exposure with no hedging activity in fiscal 1996, and the company has never paid a cash dividend, retaining earnings to fund expansion. Note that this document is an amendment, and much of the detailed financial and market information is incorporated by reference from the 1996 Annual Report exhibits.

02—Key points

Key Highlights

Net revenues increased 50% to $696.5 million in fiscal 1996, with retail sales up 49% to $600.1 million and specialty sales up 63% to $78.7 million.
Net earnings rose 61% to $42.1 million ($0.54 fully-diluted EPS), aided by a one-time $9.2 million pre-tax gain on the sale of the Noah's New York Bagels investment.
Operating income grew to $57.0 million, but operating margin declined to 8.2% from 8.6% due to higher green coffee costs; cost of sales rose to 48.2% of net revenues from 45.4%.
Comparable store sales increased 7% in fiscal 1996 (after 9% in fiscal 1995), though management warns of continued downward pressure from cannibalization and competition.
Store network reached 929 company-operated and 75 licensed stores in North America, with the first international stores opening in Tokyo; the company plans at least 325 new North American stores in fiscal 1997.
Shareholders' equity rose to $451.7 million and cash plus short-term investments totaled $229.4 million, with operating cash flow of $136.7 million.
The company has never paid cash dividends and plans to retain earnings; fiscal 1997 capital expenditures are expected to be about $170 million.

03—Questions

Frequently Asked Questions

How fast is Starbucks growing and what drove the revenue increase?
Net revenues grew 50% to $696.5 million in fiscal 1996, primarily from opening new company-operated stores (307 opened during the year) and a 7% comparable store sales increase. Specialty sales, including airline, hotel, and wholesale accounts, grew 63%.
Was fiscal 1996 profit growth driven by core operations?
Only partly. Net earnings of $42.1 million included a $9.2 million pre-tax gain from selling the Noah's investment. Operating income rose 42% to $57.0 million, but operating margin fell to 8.2% because of higher coffee costs and higher depreciation.
What is the outlook for coffee costs and margins?
Management expects most higher-cost green coffee bought after the 1994 Brazilian frost to be sold through by the end of the first quarter of fiscal 1997, which should improve cost of sales. The company had about $47 million in fixed-price purchase commitments and did not use hedging or futures in fiscal 1996, leaving it exposed to price volatility.
How is Starbucks financing its expansion and what is its debt position?
The company raised about $161 million net from 4 1/4% convertible subordinated debentures due 2002 in October 1995, and it had a $11.3 million Noah's investment sold for $20.6 million. Operating cash flow of $136.7 million and year-end cash plus short-term investments of $229.4 million covered most of fiscal 1996 capital spending of $161.8 million. Management believes existing resources suffice through fiscal 1997, though faster expansion may require outside funding.
What are the main risks investors should monitor?
Key risks include coffee price volatility, downward pressure on comparable store sales from store cannibalization and rising competition from supermarkets, national coffee brands, and well-capitalized entrants, difficulty securing store sites at acceptable rents, and the challenge of hiring and retaining staff. Management also notes that international expansion and new markets carry added costs.

04—Continue

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