01—Abstract
Summary
Summary of the 10-K/A filed December 21, 2006. Cited figures are marked; the original filing is the authoritative source.
Starbucks' fiscal 2006 (52 weeks ended October 1, 2006) was a year of strong top-line growth with margin pressure from the first recognition of stock-based compensation (SFAS 123R).
Total net revenues rose 22% to $7.79 billiona, driven by 2,199 new stores opened during the year and 7% global comparable store sales growth in Company-operated markets, the 15th consecutive year of comparable store sales growth of 5% or greater. Net earnings increased 14% to $564 million, while operating income rose 15% to $894 million, though operating margin fell to 11.5% from 12.3% due to stock-based compensation expense. Management guided to roughly 20% revenue growth, 3%-7% comparable store sales growth, approximately 2,400 new stores, and a 38% effective tax rate for fiscal 2007.
The filing shows a company with strong cash generation and balance sheet flexibility. Operating cash flow was $1.1 billionb, capital expenditures were $771 million net, and the company repurchased $854 million of stock while total cash and liquid investments reached $459 million. Borrowings under the revolving credit facility rose to $700 million outstanding against an expanded $1.0 billion facility, and management expects fiscal 2007 capital expenditures of $950 million to $1.0 billion.
The effective tax rate fell to 35.8% from 37.9%, aided by a valuation allowance reversal and a foreign tax audit settlement, which investors should weigh when assessing the quality of earnings growth. Segment results show the United States remains the core profit engine, generating $955 millionc of operating income on $6.18 billion of revenue.
International revenue grew 27% to $1.3 billiond with operating margin improving to 8.3%, though management notes these markets remain in early development and require heavier support investment. The new Global Consumer Products Group segment, which includes licensed grocery products and ready-to-drink beverages, posted a 55% operating margin, and the January 2006 Hawaii and Puerto Rico buyouts and the October 2006 Beijing/Tianjin acquisition (61 stores) signal continued consolidation of licensed operations.
02—Key points
Key Highlights
- Total net revenues increased 22% to $7.79 billion, with Company-operated retail revenues up 22% to $6.58 billion and specialty revenues up 23% to $1.20 billion.
- Net earnings rose 14% to $564.3 million, while operating income grew 15% to $893.9 million; operating margin declined to 11.5% from 12.3% due to first-time stock-based compensation expense.
- Store growth remained the main driver: 2,199 new stores opened in fiscal 2006 (1,040 Company-operated, 1,159 licensed), with plans for approximately 2,400 openings in fiscal 2007.
- Global comparable store sales rose 7% (5% transaction growth and 2% ticket growth), the 15th consecutive year at or above 5%; fiscal 2007 guidance is 3%-7%.
- Operating cash flow of $1.1 billion funded $771 million of net capital expenditures and $854 million of share repurchases, with $700 million drawn on a credit facility that was expanded to $1.0 billion.
- The effective tax rate fell to 35.8% from 37.9%, helped by a valuation allowance reversal and a foreign tax audit settlement; management guides to about 38% for fiscal 2007.
- A new Global Consumer Products Group segment reported $305 million in revenue and $167 million in operating income (54.6% margin), while the company acquired 90% of its Beijing and Tianjin licensed operations (61 stores) in October 2006.
03—Questions
Frequently Asked Questions
How much of Starbucks' fiscal 2006 growth came from new stores versus same-store sales?
Both contributed. Comparable store sales grew 7% globally, driven by a 5% increase in customer transactions and a 2% increase in average ticket value. Company-operated retail revenue growth of 22% also reflected 1,040 new Company-operated stores, so new-store expansion remained the primary driver of total revenue growth, while comparable sales added a meaningful contribution.
Why did operating margin decline even though revenue grew strongly?
Operating margin fell to 11.5% from 12.3% primarily because fiscal 2006 was the first year Starbucks recognized stock-based compensation expense under SFAS 123R. In fiscal 2005 this expense was not included in consolidated results. The charge hit store operating expenses, other operating expenses, and general and administrative expenses, and it is a recurring cost that will affect future comparisons.
What are the main risks and cash commitments investors should watch?
Key items include $3.9 billion in undiscounted operating lease obligations, $620 million in purchase obligations (mainly green coffee and other commodities), and $700 million in short-term borrowings under the revolving credit facility. Coffee and dairy price and availability directly affect results, and a 10% dollar move would change the fair value of foreign exchange hedges by about $44 million. The company also guarantees about $6.0 million of Starbucks Japan yen loans.
Is the tax rate decline sustainable?
Not entirely. The drop from 37.9% to 35.8% benefited from a one-time valuation allowance reversal and the settlement of a multi-year foreign tax audit, in addition to improved long-term tax planning. Management expects the fiscal 2007 effective tax rate to be about 38%, with quarterly variation, so earnings growth in fiscal 2007 will face a higher tax headwind.
What is management's outlook for fiscal 2007?
Management expects total net revenues to grow about 20%, comparable store sales to rise 3%-7%, and roughly 2,400 new stores to open. Capital expenditures are projected at $950 million to $1.0 billion, and the company may increase investments in international licensees and additional share repurchases. Management views the long-term targets of about 20,000 U.S. stores and at least 20,000 international stores as achievable.
04—Continue