01—Abstract
Summary
Summary of the 10-K filed December 10, 2004. Cited figures are marked; the original filing is the authoritative source.
Starbucks' fiscal 2004 (53 weeks ended October 3, 2004) was a strong year on every headline measure.
Total net revenues rose 29.9% to $5.29 billiona (27.3% on a comparable 52-week basis), and operating income grew 43.7% to $610 million, lifting operating margin to 11.5% from 10.4%. Net earnings increased 46.0% to $392 million, and diluted EPS reached $0.95 versus $0.67 a year earlier. Company-operated retail stores generated 84% of revenue, with comparable store sales up 10% (U.S. up 11%), the 13th consecutive year of comparable growth of 5% or more.
Management also set long-term targets of roughly 20% annual revenue growth and 20-25% annual EPS growth over the next three to five years, and said current comparable-store growth is not sustainable long term. The company opened 634 net new company-operated stores, ending the year with 5,215 (4,293 in the U.S.), and added 1,344 licensed stores, for 8,569 stores in total. Specialty operations grew 33.7% to $837 millionb, driven by the Kraft grocery partnership, licensing and foodservice.
Cash flow remained strong, with operating cash flow of $794 millionc against net capital expenditures of $386 million, and $788 million in cash and liquid investments. The company repurchased 5.0 million shares for $203 million and guided fiscal 2005 capital expenditures of $600-650 million.
Key risks flagged in the filing include rising dairy and green coffee costs, which pressured margins; a high valuation that leaves the stock vulnerable to sharp declines if expectations are missed; dependence on the U.S. retail business (72%d of revenue); the higher cost and execution risk of international expansion; and upcoming Sarbanes-Oxley Section 404 compliance. Leadership is also transitioning, with CEO Orin Smith retiring on March 31, 2005 and James Donald named CEO-designate.
02—Key points
Key Highlights
- Total net revenues up 29.9% to $5.29 billion; operating income up 43.7% to $610 million, with operating margin expanding to 11.5% from 10.4%
- Net earnings up 46.0% to $391.8 million; diluted EPS of $0.95 versus $0.67 in fiscal 2003
- Comparable store sales rose 10% (U.S. 11%), the 13th straight year of growth at or above 5%
- Store footprint reached 8,569 total stores, including 5,215 company-operated (634 net openings) and 3,354 licensed
- Strong cash generation: $794 million operating cash flow, $788 million in cash and liquid investments, and $203 million in share buybacks
- Long-term targets of about 20% annual revenue growth and 20-25% annual EPS growth over the next three to five years; 15,000 U.S. and 15,000+ international store goal
- Risk factors include commodity cost pressure (dairy at an all-time high, green coffee), U.S. concentration at 72% of revenue, and a CEO transition effective March 31, 2005
03—Questions
Frequently Asked Questions
How strong was Starbucks' fiscal 2004 financial performance?
Performance was very strong. Revenue rose 29.9% to $5.29 billion (27.3% on a 52-week basis), operating income rose 43.7% to $610 million, and net earnings rose 46.0% to $392 million. Operating margin improved to 11.5%, showing the company can grow earnings faster than revenue as it leverages its fixed cost base. Part of the revenue gain reflects the extra 53rd week, which added roughly 2 percentage points of growth.
What is driving Starbucks' growth?
Growth comes mainly from new store openings and rising sales at existing stores. The company opened 634 net new company-operated stores and 710 licensed stores, and comparable store sales rose 10%, driven by a 9% increase in transactions. Specialty revenue grew 33.7%, led by licensing and the Kraft grocery and warehouse club partnership. International operations also turned a profit, with operating income of $53 million versus $5 million the year before.
What are the main risks for investors?
The filing highlights several risks: rising dairy and green coffee costs that compress margins; a high stock valuation that could fall sharply if results disappoint; heavy reliance on U.S. retail (72% of revenue); execution risk in store growth and site selection; higher costs and currency exposure in international markets; and competition from supermarkets and restaurants. Management also said comparable store sales growth at this level is not sustainable long term.
What is management's outlook and capital plan?
Management targets roughly 20% annual revenue growth and 20-25% annual EPS growth over the next three to five years, with a long-term goal of 15,000 U.S. and at least 15,000 international stores. Capital expenditures for fiscal 2005 are expected to be $600-650 million, primarily for new stores and remodels. The company has no dividend, and about 18.6 million shares remain authorized for repurchase.
Are there any leadership changes or compliance issues to watch?
Yes. CEO Orin Smith plans to retire on March 31, 2005, and James L. Donald, currently president of North America, will succeed him as CEO. The company also said it is still working toward Sarbanes-Oxley Section 404 compliance, which will require management to assess internal controls and have auditors attest to that assessment in fiscal 2005. It had not yet completed that process, which may uncover deficiencies to remediate.
04—Continue