01—Abstract
Summary
Summary of the 10-K/A filed April 24, 1997. Cited figures are marked; the original filing is the authoritative source.
Starbucks Corporation's filing is an amended Form 10-K/A for the fiscal year ended September 29, 1996 (FY1996).
Most financial content is incorporated by reference to the 1996 Annual Report (Exhibits 13.1 to 13.4, filed February 4, 1997), so this document itself contains limited hard financial figures. The business description shows a company that is vertically integrated and rapidly expanding: 1,006 stores at year-end, 929 of them Company-operated across 21 U.S. states, D.C., British Columbia and Ontario, with 75 licensed stores in North America and the first two stores in Tokyo. Company-operated retail stores generated about 86%a of net revenues, specialty sales about 11%, direct response about 3%, and licensing about 1%.
Management plans at least 325 new North American stores in fiscal 1997 and entry into at least three new major markets, including Phoenix and Miami. For investors, the key points are growth and margin dynamics. Management says gross margins were hurt in late FY1995 and throughout FY1996 by the sell-through of higher-cost coffee inventory, and expects that inventory to be largely cleared by the end of Q1 FY1997.
The company held roughly $47 millionb in fixed-price green coffee purchase commitments at year-end and said it did not use hedging or futures in FY1996, leaving it exposed to commodity volatility. International and partnership channels are expanding through joint ventures with Pepsi (Frappuccino ready-to-drink), Dreyer's (ice cream), SAZABY (Japan), a Hawaii MacNaughton venture, Bonvests (Singapore), and licensing deals with Host and ARAMARK. Risk factors cited include coffee price volatility, competition from supermarkets and national brands, intense competition for store sites and qualified personnel, and the cost of expansion.
Legal proceedings are described as ordinary-course matters with no expected material adverse effect. The filing also notes a 4 1/4%c convertible subordinated debenture due 2002 and a Seattle-area and Pennsylvania roasting footprint. Note that this is a 1997 document reflecting fiscal 1996 results; the financial statements themselves are not reproduced in this text, so the figures above should be verified against the Annual Report exhibits.
02—Key points
Key Highlights
- Store footprint of 1,006 stores at FY1996 year-end, 929 Company-operated in North America, with the first two Japan stores opened in Tokyo
- Company-operated stores produced about 86% of FY1996 net revenues; specialty sales about 11%, direct response about 3%, licensing about 1%
- Plan to open at least 325 new North American stores in fiscal 1997 and enter at least three major new markets (including Phoenix and Miami)
- Gross margins pressured in FY1995-FY1996 by sell-through of higher-cost coffee inventory; management expects it to be largely cleared by end of Q1 FY1997
- About $47 million in fixed-price green coffee purchase commitments at September 29, 1996; no hedging or futures activity in FY1996
- Growing partnership model: Pepsi joint venture (Frappuccino), Dreyer's ice cream JV, SAZABY (Japan), Hawaii and Singapore partners, Host and ARAMARK licensing
- Retail sales mix of about 61% coffee beverages, 15% whole bean, 16% food, 8% coffee hardware; no material pending legal proceedings disclosed
03—Questions
Frequently Asked Questions
How large was Starbucks' store network at the end of fiscal 1996?
Starbucks operated 1,006 stores on September 29, 1996: 929 Company-operated stores in 21 U.S. states, the District of Columbia, British Columbia and Ontario, plus 75 licensed stores in North America. The first two international stores opened in Tokyo in the fourth quarter of fiscal 1996.
What growth is management planning for fiscal 1997?
The company and its licensees intend to open at least 325 new stores in North America and enter at least three major new North American markets, including Phoenix, Arizona, and Miami, Florida. Additional stores are planned in Japan (ten to twelve) and Singapore (five) through partners.
What is the main risk to gross margins?
Green coffee is a volatile commodity. Margins were hurt in late fiscal 1995 and throughout fiscal 1996 by higher-cost inventory, which management expects to have sold through by the end of Q1 fiscal 1997. The company does not hedge extensively: it had about $47 million in fixed-price purchase commitments and did not use futures in fiscal 1996, so it may still face price exposure.
How does Starbucks generate revenue beyond its own stores?
Specialty sales (restaurants, airlines, offices, and similar customers, including royalties and product sales to licensees and joint ventures) accounted for about 11% of net revenues, direct response (catalog and America Online) about 3%, and licensed stores (Host airports, ARAMARK) about 1%. Joint ventures with Pepsi and Dreyer's extend the brand into bottled beverages and ice cream sold in grocery stores.
Are there any material legal or labor risks disclosed?
The company says it is party only to ordinary-course legal proceedings that it does not believe will have a material adverse effect. Only five of its 929 Company-operated stores (in Vancouver, B.C.) are unionized, and the company states it has never experienced a strike or work stoppage. Management also notes intense competition for store sites and qualified personnel.
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