10-QPeriod: Q1 FY2008

STARBUCKS CORP Quarterly Report for Q1 Ended Dec 30, 2007

Filed February 8, 2008For Securities:SBUX

Summary

Starbucks Corporation's fiscal first quarter 2008 report for the period ending December 30, 2007, shows a modest increase in net earnings to $208.1 million, a 1.5% rise from $205.0 million in the prior year's comparable quarter. Diluted earnings per share improved slightly to $0.28 from $0.26. Total net revenues grew by 17.5% to $2.77 billion, largely driven by the expansion of Company-operated retail stores, which increased by 1,362 over the last twelve months, and a 19.3% increase in specialty operations. Despite overall revenue growth, the U.S. segment experienced a decline in operating income and margin, primarily due to higher costs and softer sales, while the international segment showed strong growth in both revenue and operating income. Management acknowledged challenges in the U.S. market and announced a strategic shift in early 2008 to address these issues, including slowing U.S. store growth and focusing on enhancing the customer experience. The company expects low double-digit EPS expansion for fiscal 2008.

Key Highlights

  • 1Net earnings increased by 1.5% to $208.1 million for the quarter.
  • 2Total net revenues grew by 17.5% to $2.77 billion, driven by new store openings and specialty operations.
  • 3Operating income in the U.S. segment declined by 4.4% and its operating margin contracted significantly, signaling a challenging domestic market.
  • 4The International segment demonstrated robust growth with a 63.4% increase in operating income and an improved operating margin.
  • 5Starbucks announced a strategic shift and organizational restructure in early 2008 to address U.S. market challenges and accelerate international expansion.
  • 6The pace of U.S. store growth was intentionally slowed, while international store opening targets were increased.
  • 7The company plans to discontinue reporting comparable store sales metrics due to the impact of its transformation agenda.

Frequently Asked Questions

Starbucks reported a modest increase in net earnings to $208.1 million, up 1.5% from the prior year's quarter. Diluted earnings per share rose to $0.28 from $0.26. Total net revenues increased by 17.5% to $2.77 billion, primarily due to strong revenue growth in both Company-operated retail stores and specialty operations, largely fueled by the addition of new stores.

Revenue growth was primarily driven by the significant expansion of Starbucks' retail footprint, with 1,362 new Company-operated stores opened in the preceding twelve months. Specialty operations, which include licensing and foodservice, also contributed substantially with a 19.3% revenue increase.

The U.S. segment faced headwinds, with operating income declining by 4.4% and operating margins contracting by 290 basis points, attributed to higher costs and softer sales. In contrast, the International segment showed strong performance, with operating income surging by 63.4% and its operating margin improving, indicating successful expansion in global markets.

In response to the challenges in the U.S. market, Starbucks announced a major organizational restructure and business strategy shift in early 2008. Key elements include slowing U.S. store growth, closing underperforming stores, refocusing on the customer experience, and accelerating international expansion. Management expects fiscal 2008 to be a year of 'refocus and renewal'.