01—Abstract
Summary
Summary of the 10-K filed December 20, 2001. Cited figures are marked; the original filing is the authoritative source.
Starbucks' fiscal 2001 (52 weeks ended September 30, 2001) showed strong top-line and earnings growth despite a difficult backdrop.
Total net revenues rose 22% to $2.65 billiona from $2.18 billion, driven by 647 new company-operated stores and 5% comparable store sales growth. Net earnings more than doubled to $181.2 million from $94.6 million, and diluted EPS rose to $0.46 from $0.24. The comparison is flattered by $58.8 million of Internet-related investment write-downs in fiscal 2000; fiscal 2001 included only $2.9 million of such losses.
Operating income grew 32% to $281.1 millionb, with operating margin expanding to 10.6% from 9.7%, helped by lower green coffee costs and procurement savings, partly offset by higher store labor and occupancy costs. The balance sheet remained conservative. Shareholders' equity reached $1.38 billion, and the company ended the year with $220.5 million in cash and short-term investments and only about $6.5 million of long-term debt.
Operating cash flow was $460.8 millionc against $384.2 million of capital expenditures, leaving room to fund the planned opening of at least 625 company-operated stores in fiscal 2002, with capex guided to $450–$475 million. The company also authorized a $60 million share repurchase program, of which $49.8 million had been used by year-end.
Key risks flagged in the filing include volatile green coffee prices, with $283.8 milliond of fixed-price purchase commitments, rising occupancy and labor costs, cannibalization from store clustering that may pressure comparable store sales, and a moderately negative effect from the September 11 attacks on the Specialty Operations, which derive about 9% of revenue from travel and hospitality. A pending California class action alleging misclassification of store managers as exempt employees is at an early stage, and its financial impact cannot yet be predicted.
02—Key points
Key Highlights
- Total net revenues grew 22% to $2.65 billion, with retail revenues up 22% to $2.23 billion and specialty revenues up 18% to $419 million.
- Net earnings more than doubled to $181.2 million ($0.46 diluted EPS) from $94.6 million ($0.24) in fiscal 2000, which included $58.8 million of Internet-related investment losses.
- Operating margin expanded to 10.6% from 9.7%, as cost of sales and related occupancy fell to 42.0% of revenues from 44.2%, mainly on lower green coffee costs.
- Comparable store sales rose 5% (2% transactions, 3% average ticket), and the company opened 647 new company-operated stores, ending the year with 2,971 North American company-operated stores.
- Systemwide retail sales reached $3.0 billion, up 31%, with 4,709 total stores at year-end, including 1,443 licensed stores across North America and international markets.
- Balance sheet is strong: $220.5 million in cash and short-term investments, roughly $6.5 million of long-term debt, and $1.38 billion of shareholders' equity; operating cash flow was $460.8 million.
- Fiscal 2002 plans call for at least 625 company-operated store openings, capex of $450–$475 million, and a $60 million buyback program with $49.8 million already used.
03—Questions
Frequently Asked Questions
How much did Starbucks grow its revenue and earnings in fiscal 2001?
Total net revenues rose 22% to $2.65 billion from $2.18 billion. Net earnings rose to $181.2 million from $94.6 million, and diluted EPS rose to $0.46 from $0.24. The prior-year base was depressed by $58.8 million in Internet-related investment losses, so the earnings gain overstates underlying growth somewhat.
What is driving Starbucks' growth, and is it sustainable?
Growth comes mainly from opening new company-operated stores (647 in fiscal 2001) and from comparable store sales growth of 5%. Specialty channels such as grocery, foodservice, and licensed stores also contributed. Management warned that cannibalization from store clustering and competition could pressure comparable sales. The plan to open at least 625 stores in fiscal 2002 signals continued reliance on expansion.
What are the main risks to Starbucks' profitability?
The main risks are coffee price volatility, since green coffee trades at a premium and prices can spike, and the company's ability to pass increases through to customers is limited. Other risks include rising occupancy and labor costs, the cost of hiring and retaining staff, store-site availability, and competition. The September 11 attacks also weighed on the Specialty Operations segment. The company holds $283.8 million of fixed-price coffee purchase commitments to mitigate near-term supply and cost risk.
Does Starbucks face any material legal exposure?
Two purported class actions filed in California in mid-2001 allege that store managers were improperly classified as exempt under state wage-and-hour law. The cases are at a very early stage, and the company says their financial impact cannot be predicted. Management says it is not party to any other proceeding expected to have a material adverse effect.
What happened with the Starbucks Japan joint venture?
In October 2001, Starbucks sold 30,000 of its Starbucks Coffee Japan shares for $15 million, booking a $13 million gain, and the Japanese subsidiary then completed an IPO in Japan. Starbucks' ownership fell from 50% to 40.1%. The offering produced a $39 million credit to shareholders' equity, and the company will now account for its remaining stake through equity-method joint venture income.
04—Continue