How strong is Starbucks' underlying growth beyond the one-time Internet investment losses?

Underlying growth was strong. Revenues grew 29%, comparable store sales rose 9% (5% more transactions and 4% higher average ticket), and operating income grew 35%. The Internet write-downs of $58.8 million were non-recurring in nature but depressed reported net income and EPS.

Why did reported net earnings fall despite higher operating income?

Net earnings fell 7% to $94.6 million because of the $58.8 million Internet-related investment losses, which reduced EPS by about $0.22. The effective tax rate also rose to 41.1%, partly because a valuation allowance was set up against the write-down losses.

What are the main risks to future growth?

Management cites cannibalization as stores cluster in existing markets, increased competition from supermarkets, restaurants and specialty chains, rising labor and occupancy costs, and volatile green coffee prices. The company's ability to raise menu prices to offset coffee cost increases may be limited, and it has about $84 million in fixed-price coffee purchase commitments.

How is Starbucks funding its expansion?

Expansion is funded mainly from operating cash flow. Operating cash flow of $318.6 million covered most of the $316.5 million in capex. Management expects fiscal 2001 capex of about $390 million and believes existing cash plus operations are sufficient through fiscal 2001, though faster expansion or new joint ventures could require outside funding.

Does Starbucks pay dividends, and how is the balance sheet positioned?

Starbucks has never paid a cash dividend and intends to retain earnings for growth. The balance sheet is conservative, with total long-term debt of about $7.2 million, shareholders' equity of $1.15 billion, and working capital of $146.6 million.

SBUX 10-K FY2000 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed December 22, 2000. Cited figures are marked; the original filing is the authoritative source.

Starbucks' fiscal 2000 10-K (year ended October 1, 2000) shows a company still in rapid expansion mode, with total net revenues up 29% to $2.17 billion^a and comparable store sales up 9%.

The company opened 490 company-operated stores and ended the year with 3,501 total stores (2,619 company-operated), while systemwide retail sales reached $2.3 billion^b, up 38%. Operating income rose 35% to $212.3 million, and gross margin edged up to 56.0% of revenues, though store operating expenses and labor costs rose as a share of retail revenue. Reported earnings were weaker than the operating story.

Net earnings fell 7% to $94.6 million^c, or $0.49 diluted EPS, because of $58.8 million in Internet-related investment write-downs (living.com, Talk City, Cooking.com, Kozmo.com, about $0.22 per share) and a higher effective tax rate of 41.1%. Excluding those losses, diluted EPS would have been about $0.71. Cash flow from operations was strong at $318.6 million, but capital expenditures of $316.5 million were largely self-funded, and the company plans roughly $390 million of capex in fiscal 2001 with at least 525 new company-operated stores.

The balance sheet is conservative, with $132 million^d in cash and short-term investments, minimal debt of about $7 million, and shareholders' equity of $1.15 billion. Management flagged cannibalization from clustered stores and competition as possible headwinds to future comparable store sales growth. The company has never paid a cash dividend and intends to keep reinvesting earnings in growth.

02—Key points

Key Highlights

Total net revenues rose 29% to $2.17 billion, driven by 490 new company-operated stores and 9% comparable store sales growth.
Net earnings declined 7% to $94.6 million ($0.49 diluted EPS) due to $58.8 million in Internet-related investment write-downs; excluding these, diluted EPS would be about $0.71.
Operating income increased 35% to $212.3 million, and operating margin improved to 9.8% of revenues from 9.3%.
Gross margin expanded slightly to 56.0%, helped by lower green coffee costs and beverage price increases, partly offset by higher occupancy costs.
Store count reached 3,501 worldwide (2,619 company-operated), with a plan for at least 525 company-operated and 575 licensed openings in fiscal 2001.
Operating cash flow of $318.6 million funded most of the $316.5 million in capital expenditures; the balance sheet carries minimal debt (about $7 million) and $132 million in cash and short-term investments.
Effective tax rate rose to 41.1% due to a valuation allowance on Internet investment losses; management expects about 37% in fiscal 2001.

03—Questions

Frequently Asked Questions

How strong is Starbucks' underlying growth beyond the one-time Internet investment losses?
Underlying growth was strong. Revenues grew 29%, comparable store sales rose 9% (5% more transactions and 4% higher average ticket), and operating income grew 35%. The Internet write-downs of $58.8 million were non-recurring in nature but depressed reported net income and EPS.
Why did reported net earnings fall despite higher operating income?
Net earnings fell 7% to $94.6 million because of the $58.8 million Internet-related investment losses, which reduced EPS by about $0.22. The effective tax rate also rose to 41.1%, partly because a valuation allowance was set up against the write-down losses.
What are the main risks to future growth?
Management cites cannibalization as stores cluster in existing markets, increased competition from supermarkets, restaurants and specialty chains, rising labor and occupancy costs, and volatile green coffee prices. The company's ability to raise menu prices to offset coffee cost increases may be limited, and it has about $84 million in fixed-price coffee purchase commitments.
How is Starbucks funding its expansion?
Expansion is funded mainly from operating cash flow. Operating cash flow of $318.6 million covered most of the $316.5 million in capex. Management expects fiscal 2001 capex of about $390 million and believes existing cash plus operations are sufficient through fiscal 2001, though faster expansion or new joint ventures could require outside funding.
Does Starbucks pay dividends, and how is the balance sheet positioned?
Starbucks has never paid a cash dividend and intends to retain earnings for growth. The balance sheet is conservative, with total long-term debt of about $7.2 million, shareholders' equity of $1.15 billion, and working capital of $146.6 million.

04—Continue

← View all 10-K filings