10-QPeriod: Q2 FY2005

STARBUCKS CORP Quarterly Report for Q2 Ended Jan 2, 2005

Filed February 16, 2005For Securities:SBUX

Summary

Starbucks Corporation reported strong financial performance for the first quarter of fiscal year 2005, ending January 2, 2005. Total net revenues grew by a significant 24% to $1.59 billion, driven by robust expansion of both company-operated and licensed stores, along with a 10% increase in comparable store sales. This growth was supported by a 6% rise in customer transactions and a 4% increase in average transaction value, the latter partly due to a beverage price increase in October 2004. Profitability also improved, with operating income increasing by 30% to $227.2 million and operating margin expanding to 14.3% from 13.6% year-over-year, demonstrating the company's ability to leverage its infrastructure and manage costs effectively despite rising commodity prices. The company continued its aggressive store opening strategy, adding 642 new company-operated stores and 740 licensed stores in the last 12 months, reinforcing its long-term global expansion goals. International operations showed particularly strong growth, with net revenues up 32% and operating margin improving significantly, reflecting successful expansion and operational leverage. While the company faces ongoing commodity cost pressures, particularly for dairy and green coffee, it is actively managing these through pricing strategies and hedging programs, such as a new milk futures contract. Investors should note a restatement of prior period financial statements related to lease accounting practices, which has been corrected and is not expected to impact future operations. The company projects continued strong revenue and EPS growth in the coming years.

Key Highlights

  • 1Total net revenues increased 24% to $1.59 billion for the 13 weeks ended January 2, 2005.
  • 2Comparable store sales grew by 10%, driven by a 6% increase in transactions and a 4% increase in average transaction value.
  • 3Operating income rose 30% to $227.2 million, with operating margin improving to 14.3% from 13.6%.
  • 4The company opened 642 new company-operated stores and 740 licensed stores in the past 12 months, continuing aggressive global expansion.
  • 5International revenue surged 32%, with operating margin improving to 7.9% from 5.6%.
  • 6The company experienced a restatement of prior financial statements due to lease accounting corrections but has implemented remediation.
  • 7Starbucks plans to open approximately 1,500 new stores globally in fiscal year 2005.

Frequently Asked Questions

Starbucks' revenue growth was primarily driven by the opening of new retail stores (both company-operated and licensed) and a strong 10% increase in comparable store sales. The increase in comparable store sales was a result of a 6% rise in customer transactions and a 4% increase in the average transaction value, the latter partly due to a beverage price increase implemented in October 2004.

Starbucks is managing rising commodity costs through a combination of strategies, including price increases on beverages, as seen in October 2004. For dairy costs, the company has begun hedging a portion of its U.S. fluid milk purchases through a swap contract and intends to expand this hedging program. For green coffee, they utilize fixed-price purchase commitments to secure supply and bring cost certainty.

Starbucks restated its financial statements for prior periods due to incorrect accounting for tenant improvement allowances and rent holidays under operating leases, which did not comply with GAAP. The company has corrected its accounting methods and implemented remediation. While this led to adjustments in past financial figures, it is not expected to materially impact future operations or the company's growth trajectory.

Starbucks remains committed to aggressive global expansion. They plan to open approximately 1,500 new stores globally in fiscal year 2005, including around 550 company-operated and 525 licensed locations in the United States, and approximately 100 company-operated and 325 licensed stores in international markets.