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SBUX > SEC Filings for SBUX > Form 10-Q on 2-May-2012All Recent SEC Filings

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Form 10-Q for STARBUCKS CORP


2-May-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995

Certain statements herein, including statements regarding trends in or expectations relating to the expected effects of our initiatives and plans, as well as trends in or expectations regarding earnings per share, revenues, operating income, operating margins, comparable store sales, sales leverage, expenses, dividends, share repurchases, other financial results, capital expenditures, scaling and expansion of international operations, including China, profitable growth opportunities, strategic acquisitions, changes to the organizational and leadership structures, commodity costs and our mitigation strategies, the transition from our distribution arrangement with Kraft to a direct distribution model, liquidity, cash flow from operations, anticipated store openings and closings, the health and growth of our business overall and of specific businesses or markets, benefits of recent initiatives, increased traffic to our stores, operational efficiencies, product innovation and distribution, tax rates, and economic conditions in the US and other international markets all constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on currently available operating, financial and competitive information and are subject to various risks and uncertainties. Actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, coffee, dairy and other raw materials prices and availability, successful execution of our initiatives, successful execution of internal plans, fluctuations in US and international economies and currencies, the impact of competitors' initiatives, the effect of legal proceedings, and other risks detailed in our filings with the SEC, including in Part I Item IA "Risk Factors" in the 10-K.


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A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. You should not place undue reliance on the forward-looking statements, which speak only as of the date of this report. We are under no obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

This information should be read in conjunction with the condensed consolidated financial statements and the notes included in Item 1 of Part I of this 10-Q and the audited consolidated financial statements and notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in the 10-K.

General

Our fiscal year ends on the Sunday closest to September 30. All references to store counts, including data for new store openings, are reported net of store closures, unless otherwise noted.

Overview

Starbucks results for the second quarter of fiscal 2012 demonstrate the combined strength of our business and the power of the Starbucks brand. Total net revenues increased 15% to $3.2 billion driven by global comparable store sales growth of 7%, comprised of a 6% increase in traffic and a 1% increase in average ticket. Also contributing to the revenue growth was an increase in revenues from our Channel Development segment (formerly "Consumer Products Group" segment) of 57%, driven by the launch of Starbucks- and Tazo-branded K-Cup® packs and the impact of the transition of packaged coffee to the direct distribution model in the second quarter of fiscal 2011. Diluted earnings per share increased 18% to $0.40, despite continued pressure from commodity costs, which negatively impacted operating income and operating margin by approximately $64 million and 200 basis points, respectively.

The Americas segment performed well for the second quarter with a 10% increase in revenues over the prior year, primarily due to strong comparable store sales growth of 8%, driven almost entirely by an increase in traffic of 7%. This growth in traffic demonstrates our continued focus on operational excellence, the continued success of our warming program, and the accelerating benefit of the My Starbucks RewardsTM program. This sales growth generated increased sales leverage, which helped to offset higher commodity costs. Looking forward, we expect to continue driving sales growth and profitability through continued store efficiency efforts, expanding our pipeline of new product offerings, accelerating new store development, and finding opportunities to increase revenues throughout all dayparts.

EMEA segment results reflect both the investments we have begun making as part of our transformation plan for the region, as well as the macro-economic headwinds we, and others, face there. This resulted in negative 1% comparable store sales and an operating loss of $5.5 million for the quarter. We expect these investments will result in improved operating performance as we progress on our plan towards mid-teens operating margin; however, this turnaround will take time to gain traction.


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CAP segment revenues increased 32%, driven by new store growth and comparable store sales growth of 18%. China continues to be the primary driver of the increase in revenues in the region and saw a 22% increase in comparable store sales for the quarter. This revenue growth contributed to operating income improvement of 59%. China continues to be a significant growth opportunity for Starbucks as we remain on track for our goal of 1,500 stores by 2015.

Our Channel Development segment represents another important, profitable growth opportunity for us. Channel Development results continued to be a solid contributor to overall revenue growth with a 57% increase in revenues largely resulting from sales of Starbucks- and Tazo-branded K-Cup® packs and our transition to a direct distribution model for packaged coffee, which occurred during the second quarter of fiscal 2011. High commodity costs continued to be a significant drag on operating margin; however, despite these higher costs, operating income increased $15 million to $82 million for the second quarter of fiscal 2012. We expect continued innovation and new product offerings such as Evolution Fresh juices, the Verismo® system by Starbucks, and Starbucks Refreshers TM beverages, will drive further growth and profitability within this segment.

Comparable Store Sales

Comparable store sales for the second quarter and the first two quarters of
fiscal 2012 are as follows:



                                              Quarter Ended Apr 1, 2012                                Two Quarters Ended Apr 1, 2012
                                   Sales             Change in            Change in          Sales               Change in              Change in
                                  Growth           Transactions            Ticket           Growth              Transactions             Ticket
Consolidated                            7 %                    6 %                 1 %             8 %                      7 %                  1 %
Americas                                8 %                    7 %                 1 %             8 %                      7 %                  1 %
EMEA                                   (1 %)                   0 %                 0 %             1 %                      1 %                  0 %
China / Asia Pacific                   18 %                   14 %                 4 %            19 %                     14 %                  4 %

Our comparable store sales represent the growth in revenue from company-operated stores open 13 months or longer. Comparable store sales exclude the effect of fluctuations in foreign currency exchange rates.

Fiscal 2012 - Financial Outlook for the Year

For fiscal year 2012, we expect revenue growth driven by mid-single-digit comparable store sales growth, net new store openings and strong growth in the Channel Development business. Licensed stores will comprise between one-half and two-thirds of new store openings in the Americas, EMEA and China / Asia Pacific regions.

We expect modest consolidated operating margin and EPS improvement compared to fiscal 2011, given our current revenue expectations, along with ongoing spend related to our expanding CPG in-house direct distribution model and higher commodity costs.

We expect increased capital expenditures in fiscal 2012 compared to fiscal 2011, reflecting additional investments in store renovations and in manufacturing capacity.

Results of Operations (in millions)

Revenues



                                                  Quarter Ended                         Two Quarters Ended
                                        Apr 1,        Apr 3,          %          Apr 1,        Apr 3,          %
                                         2012          2011        Change         2012          2011        Change
Company-operated stores                $ 2,521.2     $ 2,293.5         9.9 %    $ 5,253.0     $ 4,744.8        10.7 %
Licensed stores                            290.3         237.8        22.1          596.9         491.9        21.3
CPG, foodservice and other                 384.4         254.4        51.1          781.9         499.8        56.4

Total net revenues                     $ 3,195.9     $ 2,785.7        14.7 %    $ 6,631.8     $ 5,736.5        15.6 %

Total net revenues for the second quarter and the first two quarters of fiscal 2012 increased $410 million and $895 million, respectively, primarily driven by increased revenues from company-operated stores (contributing approximately $228 million and $508 million, respectively). An increase in comparable store sales was the primary driver of the increase in company-operated store revenues for both periods (approximately 7%, or $167 million, for the second quarter and approximately 8%, or $383 million, for the first two quarters).


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Also contributing to the increase in total net revenues was higher revenues from licensed stores of $53 million and $105 million, for the second quarter and first two quarters of fiscal 2012, respectively. These increases were primarily due to higher royalty revenues from and product sales to our licensees, resulting from improved comparable store sales and the opening of 359 net new licensed stores over the last 12 months.

CPG, foodservice and other revenue increased $130 million and $282 million, for the second quarter and first two quarters of fiscal 2012, respectively. These increases were primarily due to sales of Starbucks- and Tazo-branded K-Cup® packs launched in the CPG channel on November 1, 2012 (approximately $65 million for the second quarter and approximately $120 million for the first two quarters) and the impact of recognizing full revenue from packaged coffee and tea sales under the direct distribution model (approximately $30 million for the second quarter and approximately $76 million for the first two quarters).

Operating Expenses



                                                      Quarter Ended                                       Two Quarters Ended
                                      Apr 1,        Apr 3,       Apr 1,       Apr 3,        Apr 1,        Apr 3,       Apr 1,       Apr 3,
                                       2012          2011         2012         2011          2012          2011         2012         2011
                                                                      % of Total                                            % of Total
                                                                     Net Revenues                                          Net Revenues
Cost of sales including occupancy
costs                                $ 1,411.9     $ 1,171.2        44.2 %       42.0 %    $ 2,908.0     $ 2,363.5        43.8 %       41.2 %
Store operating expenses                 956.5         867.2        29.9         31.1        1,952.2       1,755.2        29.4         30.6
Other operating expenses                 105.3          98.9         3.3          3.6          212.0         189.0         3.2          3.3
Depreciation and amortization
expenses                                 137.1         129.0         4.3          4.6          271.9         256.7         4.1          4.5
General and administrative
expenses                                 206.9         181.6         6.5          6.5          398.4         366.8         6.0          6.4

Total operating expenses               2,817.7       2,447.9        88.2         87.9        5,742.5       4,931.2        86.6         86.0
Income from equity investees              52.2          38.3         1.6          1.4           97.1          72.7         1.5          1.3

Operating income                     $   430.4     $   376.1        13.5 %       13.5 %    $   986.4     $   878.0        14.9 %       15.3 %
Store operating expenses as a % of
related revenues                                                    37.9 %       37.8 %                                   37.2 %       37.0 %

Cost of sales including occupancy costs as a percentage of total net revenues increased 220 basis points and 260 basis points for the second quarter and first two quarters of fiscal 2012, respectively, primarily due to increased commodity costs (approximately 200 basis points for the second quarter and approximately 250 basis points for the first two quarters), mainly driven by higher coffee costs.

Store operating expenses as a percentage of total net revenues decreased 120 basis points for the second quarter and first two quarters of fiscal 2012, primarily due to increased Channel Development revenues and licensed stores revenues. Store operating expenses as a percentage of company-operated store revenues increased 10 basis points for the second quarter and 20 basis points for the first two quarters, primarily due to higher debit card transaction fees (approximately 20 basis points for both periods), offset by increased sales leverage.


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Other operating expenses as a percentage of total net revenues decreased 30 basis points for the second quarter and 10 basis points for the first two quarters of fiscal 2012, primarily driven by the absence of charges in fiscal 2012 related to the Seattle's Best Coffee store closures in Borders bookstores (approximately 40 basis points for both periods).

Income from equity investees increased $14 million for the second quarter and $24 million for the first two quarters of fiscal 2012, primarily due to improved performance from our joint venture operations.

Partially offsetting the decrease in operating margin from the other line items mentioned above was sales leverage resulting in lower depreciation and amortization expenses as a percentage of total revenues for both periods and lower general and administrative expenses as a percentage of total revenues for the first two quarters. The combination of these changes resulted in no change to operating margin for the second quarter and a decrease of 40 basis points for the first two quarters of fiscal 2012.


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Other Income and Expenses



                                                      Quarter Ended                                      Two Quarters Ended
                                      Apr 1,       Apr 3,       Apr 1,       Apr 3,        Apr 1,        Apr 3,       Apr 1,       Apr 3,
                                       2012         2011         2012         2011          2012          2011         2012         2011
                                                                     % of Total                                            % of Total
                                                                    Net Revenues                                          Net Revenues
Operating income                      $ 430.4      $ 376.1         13.5 %       13.5 %    $   986.4      $ 878.0         14.9 %       15.3 %
Interest income and other, net           35.3         19.9          1.1          0.7           58.5         34.2          0.9          0.6
Interest expense                         (8.8 )       (7.1 )       (0.3 )       (0.3 )        (17.4 )      (15.0 )       (0.3 )       (0.3 )

Earnings before income taxes            456.9        388.9         14.3         14.0        1,027.5        897.2         15.5         15.6
Income taxes                            146.8        126.5          4.6          4.5          335.2        287.3          5.1          5.0

Net earnings including
noncontrolling interests                310.1        262.4          9.7          9.4          692.3        609.9         10.4         10.6
Net earnings (loss) attributable to
noncontrolling interest                   0.2          0.8          0.0          0.0            0.4          1.8          0.0          0.0

Net earnings attributable to
Starbucks                             $ 309.9      $ 261.6          9.7 %        9.4 %    $   691.9      $ 608.1         10.4 %       10.6 %
Effective tax rate including
noncontrolling interest                                            32.1 %       32.5 %                                   32.6 %       32.0 %

For the second quarter and first two quarters of fiscal 2012, net interest income and other increased $15 million and $24 million, respectively. These increases were primarily driven by the recognition of income associated with unredeemed gifts cards due to a recent court ruling relating to state unclaimed property laws (approximately $29 million).

The effective tax rate for the quarter ended April 1, 2012 was 32.1% as compared to 32.5% for the same quarter in fiscal 2011. The decrease in the rate was primarily driven by increased income in certain foreign jurisdictions that have lower tax rates. The effective tax rate for the first two quarters ended April 1, 2012 was 32.6% as compared to 32.0% for the same period in fiscal 2011. The increase in the rate was due to a benefit recognized in fiscal 2011 from releasing certain tax reserves, partially offset by increased income in certain foreign jurisdictions with lower tax rates in fiscal 2012.


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Segment Information

Segment information is prepared on the same basis that our management reviews financial information for operational decision-making purposes. The following tables summarize the results of operations by segment (in millions):

Americas



                                                      Quarter Ended                                       Two Quarters Ended
                                      Apr 1,        Apr 3,       Apr 1,       Apr 3,        Apr 1,        Apr 3,       Apr 1,       Apr 3,
                                       2012          2011         2012         2011          2012          2011         2012         2011
                                                                    % of Americas                                         % of Americas
                                                                     Net Revenues                                          Net Revenues
Total net revenues                   $ 2,374.7     $ 2,164.8                               $ 4,953.2     $ 4,492.7
Cost of sales including occupancy
costs                                    941.6         845.6        39.7 %       39.1 %      1,948.3       1,721.5        39.3 %       38.3 %
Store operating expenses                 837.4         770.1        35.3         35.6        1,712.2       1,565.7        34.6         34.8
Other operating expenses                  18.7          18.7         0.8          0.9           39.2          36.6         0.8          0.8
Depreciation and amortization
expenses                                  97.2          98.1         4.1          4.5          194.3         196.3         3.9          4.4
General and administrative
expenses                                  18.9          14.1         0.8          0.7           35.3          27.4         0.7          0.6

Total operating expenses               1,913.8       1,746.6        80.6         80.7        3,929.3       3,547.5        79.3         79.0
Income from equity investees               2.1           1.7         0.1          0.1            2.1           1.7         0.0          0.0

Operating income                     $   463.0     $   419.9        19.5 %       19.4 %    $ 1,026.0     $   946.9        20.7 %       21.1 %
Store operating expenses as a % of
related revenues                                                    38.6 %       38.5 %                                   37.8 %       37.7 %

Revenues

Americas total net revenues for the second quarter and first two quarters of fiscal 2012 increased $210 million and $461 million, respectively, representing an increase of 10% over the same periods of fiscal 2011. These increases were primarily driven by increased revenues from company-operated stores (contributing approximately $167 million for the second quarter and $376 million for the first two quarters) and licensed stores (contributing approximately $42 million for the second quarter and $85 million for the first two quarters).

An increase in comparable store sales was the primary driver of the increase in company-operated store revenues for both periods (approximately 8%, or $152 million, for the second quarter and approximately 8%, or $347, million for the first two quarters). The increase in licensed store revenues was primarily due to increased royalty revenues from and product sales to licensees (approximately $35 million for the second quarter and $75 million for the first two quarters), resulting from improved comparable store sales and net new store openings.

Operating Expenses

Cost of sales including occupancy costs as a percentage of total net revenues increased 60 basis points and 100 basis points for the second quarter and first two quarters of fiscal 2012, respectively. These increases were primarily due to higher commodity costs (approximately 150 basis points for the second quarter and approximately 190 basis points for the first two quarters), mainly driven by higher coffee costs, partially offset by increased sales leverage on occupancy costs (approximately 90 basis points for the second quarter and approximately 80 basis points for the first two quarters).

Store operating expenses as a percentage of total net revenues decreased 30 basis points for the second quarter and 20 basis points for the first two quarters of fiscal 2012, primarily due to increased licensed stores revenues. Store operating expenses as a percentage of company-operated store revenues increased 10 basis points for the second quarter and first two quarters of fiscal 2012. These increases were primarily due to higher debit card transaction fees (approximately 20 basis points for both periods) and increased advertising and marketing expenses (approximately 20 basis points for both periods), partially offset by increased sales leverage.

Offsetting the decrease in operating margin from the other line items mentioned above was increased sales leverage on depreciation and amortization (approximately 40 basis points for the second quarter and approximately 50 basis points for the first two quarters). The combination of these changes contributed to an overall increase in operating margin of 10 basis points for the second quarter and a decrease of 40 basis points for the first two quarters of fiscal 2012.


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EMEA



                                                      Quarter Ended                                    Two Quarters Ended
                                      Apr 1,       Apr 3,      Apr 1,        Apr 3,       Apr 1,      Apr 3,      Apr 1,       Apr 3,
                                       2012         2011        2012          2011         2012        2011        2012         2011
                                                                     % of EMEA                                         % of EMEA
                                                                   Net Revenues                                       Net Revenues
Total net revenues                   $  272.4      $ 239.7                                $ 575.6     $ 498.8
Cost of sales including occupancy
costs                                   143.9        121.6        52.8 %        50.7 %      294.4       244.3        51.1 %       49.0 %
Store operating expenses                 91.9         77.4        33.7          32.3        185.7       154.2        32.3         30.9
Other operating expenses                  8.9          7.8         3.3           3.3         17.6        15.9         3.1          3.2
Depreciation and amortization
expenses                                 14.3         13.0         5.2           5.4         28.5        25.2         5.0          5.1
General and administrative
expenses                                 18.9         14.1         6.9           5.9         35.3        30.5         6.1          6.1

Total operating expenses                277.9        233.9       102.0          97.6        561.5       470.1        97.6         94.2
Income from equity investees              0.0          1.9         0.0           0.8          0.3         4.2         0.1          0.8

Operating income                     ($   5.5 )    $   7.7        (2.0 %)        3.2 %    $  14.4     $  32.9         2.5 %        6.6 %
Store operating expenses as a % of
related revenues                                                  39.4 %        37.2 %                               37.3 %       35.6 %

Revenues

EMEA total net revenues for the second quarter and first two quarters of fiscal 2012 increased 14%, or $33 million, and 15%, or $77 million, respectively, primarily driven by increased revenues from company-operated stores (contributing approximately $25 million for the second quarter and approximately $65 million for the first two quarters). The increase in company-operated store revenues was primarily due to the acquisition of the remaining interest in our previous joint venture operations in Switzerland and Austria in the fourth quarter of fiscal 2011 (approximately $26 million for the second quarter and approximately $55 million for the first two quarters).

Operating Expenses

Cost of sales including occupancy costs as a percentage of total net revenues increased 210 basis points for the second quarter and first two quarters of fiscal 2012. These increases were primarily driven by higher distribution costs related to the transition to a consolidated distribution center in the UK (approximately 220 basis points for the second quarter and approximately 180 basis points for the first two quarters) and higher commodity costs (approximately 40 basis points for the second quarter and approximately 50 basis points for the first two quarters).

Store operating expenses as a percentage of total net revenues increased 140 basis points for the second quarter and first two quarters of fiscal 2012. These increases were primarily driven by the loss of sales leverage and investments to . . .

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