10-QPeriod: Q3 FY2006

STARBUCKS CORP Quarterly Report for Q3 Ended Apr 2, 2006

Filed May 12, 2006For Securities:SBUX

Summary

Starbucks Corporation reported strong financial performance for the second quarter of fiscal year 2006, with total net revenues increasing by 24.2% to $1.89 billion compared to the same period last year. This growth was primarily driven by a 24.6% rise in company-operated retail revenues, fueled by the opening of 874 new stores and a 10% increase in comparable store sales. Specialty operations also saw robust growth, with licensing revenues up 25.5% and foodservice and other revenues up 13.8%. Profitability improved, with operating income growing 28.4% and net earnings increasing by 26.7% to $127.3 million. The company successfully managed its cost of sales and occupancy costs, which decreased as a percentage of revenue, contributing to a higher operating margin. The company reaffirmed its commitment to expanding its global store base, with plans to open at least 1,800 new stores in fiscal year 2006, and continues to focus on improving in-store customer experience and product innovation.

Key Highlights

  • 1Total net revenues grew 24.2% year-over-year to $1.89 billion for the 13 weeks ended April 2, 2006.
  • 2Company-operated retail revenue increased by 24.6% driven by new store openings and a 10% rise in comparable store sales.
  • 3Specialty revenues, including licensing and foodservice, grew 21.8% to $286 million.
  • 4Net earnings rose 26.7% to $127.3 million, with diluted EPS of $0.16.
  • 5Operating margin improved to 10.7% from 10.4% in the prior year's comparable period.
  • 6Starbucks opened 424 net new stores globally in the quarter, contributing to a total of 11,225 stores worldwide.
  • 7The company plans to open at least 1,800 new stores globally in fiscal year 2006.

Frequently Asked Questions

Starbucks' primary growth strategy continues to be the opening of new retail stores, both company-operated and licensed, globally. They also focus on increasing revenue at existing stores by attracting new customers and improving customer visit frequency through enhanced service, product innovation, and operational efficiency.

The adoption of SFAS 123R in fiscal year 2006 requires Starbucks to recognize stock-based compensation expense. This resulted in higher general and administrative expenses and store operating expenses compared to the prior year. For the 13 weeks ended April 2, 2006, stock-based compensation expense was $27.8 million before income taxes.

Starbucks plans to open at least 1,800 new stores globally in fiscal year 2006. This includes approximately 700 company-operated and 600 licensed stores in the United States, and approximately 150 company-operated and 350 licensed stores internationally.

Internationally, Starbucks is selectively increasing its equity stake in licensed operations as markets develop, as demonstrated by the acquisition of 100% ownership in Hawaii and Puerto Rico operations in January 2006. The company is also investing in emerging markets like China, which requires higher support infrastructure relative to current revenue and income, impacting international segment expenses and operating margin in the short term.