01—Abstract
Summary
Summary of the 10-K filed December 23, 1999. Cited figures are marked; the original filing is the authoritative source.
Starbucks' fiscal 1999 10-K (fiscal year ended October 3, 1999, a 53-week year) shows a company in rapid expansion with strong profitability.
Net revenues rose 28% to $1.68 billiona, driven by 460 new Company-operated stores and a 6% comparable store sales increase. Net earnings grew 49% to $101.7 million, and diluted EPS rose to $0.54 from $0.37. Operating margin improved to 9.3% from 8.3%, and gross margin edged up to 55.9%.
Retail stores generated about 85% of revenue, with specialty operations (wholesale, Kraft grocery licensing, joint ventures, and direct-to-consumer) making up the remaining 15%. The balance sheet remains conservative. Shareholders' equity reached $961 millionb, long-term debt was nearly eliminated at $9 million, and cash plus short-term investments totaled $118 million.
Operating cash flow was $211 millionc against $262 million in capital expenditures, funded largely by the company's own cash generation and option exercises. Management plans at least 400 new company-operated stores and roughly $300 million in fiscal 2000 capital spending, with at least 350 North American and 50 U.K. openings, and expects the tax rate to hold near 38%.
Key risks flagged in the filing include coffee price volatility (partly hedged with about $84 milliond in fixed-price purchase commitments), rising competition, cannibalization from clustered stores that could pressure comparable store sales, and rising labor costs that pushed store operating expenses to 38.2% of retail revenue. Year 2000 remediation cost about $1.4 million to date, with roughly $2 million more expected, and management described the worst-case scenario as supplier-driven disruption rather than internal system failure.
02—Key points
Key Highlights
- Revenue grew 28% to $1.68 billion (fiscal 1999), with retail sales up 29% to $1.42 billion and specialty revenues up 25% to $257 million.
- Net earnings rose 49% to $101.7 million; diluted EPS was $0.54 versus $0.37 a year earlier.
- Operating income increased 43% to $156.7 million, lifting operating margin to 9.3% from 8.3%.
- Store footprint reached 2,498 total stores at year-end, including 2,135 Company-operated stores in North America and the U.K.; 460 stores were opened during the year.
- Balance sheet is strong: shareholders' equity of $961 million, long-term debt of only $9 million, and $118 million in cash and short-term investments.
- Fiscal 2000 plan calls for at least 400 new Company-operated stores and about $300 million in capital expenditures.
- Main risks include coffee price volatility, cannibalization of existing stores as clustering increases, rising labor costs, and intensifying competition.
03—Questions
Frequently Asked Questions
How fast is Starbucks growing, and is profitability keeping pace?
Revenue grew 28% in fiscal 1999 to $1.68 billion, and net earnings grew faster, up 49% to $101.7 million. Operating margin improved about one point to 9.3%, helped by lower G&A as a share of revenue (5.3% versus 5.9%) and a gross margin increase to 55.9%. Growth is driven mainly by new stores, with a 6% comparable store sales increase adding to it.
What is the main risk to margins and comparable store sales?
Labor costs are the most visible pressure: store operating expenses rose to 38.2% of retail revenue, reflecting higher hourly wages and a mix shift toward labor-intensive handcrafted beverages. Management also warned that cannibalization from clustered new stores and increased competition could continue to weigh on comparable store sales growth. Coffee price volatility is partly mitigated by about $84 million of fixed-price green coffee commitments, but the company says it may not be able to pass through rising coffee costs in full.
How well capitalized is the company to fund its expansion?
Starbucks is largely self-funding. Operating cash flow was $211 million in fiscal 1999 against $262 million in capital additions, and the company also drew on option exercises and tax benefits. Long-term debt was almost fully retired (about $9 million, mostly low-interest York County loans assumed with a plant purchase), and management believes existing cash and cash generation are enough through fiscal 2000 absent expansion well beyond plan.
What did the filing say about Year 2000 readiness?
Starbucks spent about $1.4 million on Year 2000 work through fiscal 1999 and expects to spend about $2 million more. Its internal MIS-supported systems were identified, evaluated, and remediated, and a Year 2000 event room was set up for the rollover. The main exposure it identified is third-party suppliers and infrastructure (power, ports, trucking), not its own systems. About 93% of critical suppliers responded, and the company bought extra inventory and built contingency plans.
What growth opportunities beyond company-operated stores does Starbucks have?
Specialty operations are a growing 15% of revenue. Growth vectors include the Kraft licensing agreement for U.S. grocery distribution (expected to reach national distribution by mid-fiscal 2000), the Pepsi joint venture for bottled Frappuccino (about 200,000 outlets), the Dreyer's ice cream joint venture (21,000+ supermarkets), international licensing (184 stores abroad, with new markets like China and South Korea), and direct-to-consumer sales through the catalog and starbucks.com. The company also plans at least 200 new licensed stores in fiscal 2000.
04—Continue