This summary is based on the first quarter fiscal 2009 earnings call conducted by Starbucks Inc. (SBUX) on January 28, 2009.
Management:
Chairman, President and CEO: Howard Schultz
CFO: Troy Alstead
President of U.S Business: Cliff Burrows
Director of IR: JoAnn DeGrande
Key Investor Issues:
- Q1 U.S. revenues declined 6% to $2 billion versus the year ago quarter.
- International segment fell 8% to $496 million during the quarter.
- An additional 300 company operated stores to be closed in 2009.
First Quarter Financial Highlights:
The management highlighted some of the symptoms which have contributed to an all time low in consumer confidence and the worst holiday shopping season in the U.S. since 1969.
- In the U.S., the unemployment rate has risen 7.2%, a 15-year high.
- The unemployment in is reportedly California approaching 10%.
- Jobless claims were at the highest level since 1982 and continue escalating.
- The rate of home foreclosures across the U.S. has more than doubled in the last two years.
- In Western Europe and in the U.K. retailers experienced their worst December in 14 years.
There were 195 net new store openings for the quarter.
- This was significantly less than in the first quarter of fiscal 2008.
- The company ended the quarter with more than 16,000 stores globally.
- Consolidated net revenues were $2.6 billion dollars in Q1, down 6% year-over-year.
The U.S. Business:
- Total U.S. net revenues for the quarter decreased by 6% to $2.0 billion from $2.1 billion a year ago.
- Company operated retail revenues declined 7% to $1.8 billion dollars for the quarter, primarily due to a 10% decline in comparable store sales.
- As a percentage of total U.S. revenues, U.S. cost of sales, including occupancy cost, increased to 43.9% versus 41.1% in the comparable period a year ago.
- The enhanced beverage quality standards implemented in Q2 last year and cost associated with new product introductions were the primary drivers of the year-over-year rise in cost of sales.
- Occupancy cost also contributed to the higher cost, primarily the result of de-leveraging to softer sales.
- The U.S. store operating expenses as a percentage of related U.S. retail revenues increased 300 basis points to 43.5%, the majority related to loss sales leverage.
- Also impacting sale operating expenses was the October leadership conference.
- U.S. operating income was $134 million for the quarter, down from $311 million dollars during the same period in 2008.
- The operating margin decline to 6.7% of related revenues from 14.6% a year ago.
- Sales de-leverage was the leading contributor to the margin compression, reflected primarily in store operating and occupancy expenses.
- The $54 million in restructuring charges directly related to the U.S. segment contributed approximately one-third or 270 basis points of the margin decline.
- Despite the difficult economic environment, Starbucks sold more than $26 million new Starbucks cards.
- Cards overall were loaded with nearly $560 million dollars, an 8% increase over last year.
- The management is confident that the Starbucks card brings incremental business into stores
- The company reported success with third party channels such a Costco, which activated more than five million cards during the holiday season.
- Positive progress has been recorded from customer response to the new Starbucks gold card.
- Program members, now more than 500,000, average 15 visits per month and spend about 10% more per visit than non-members.
- The U.S. business began to implement targeted cost savings initiatives in Q1 through labor optimization, waste reduction and supply chain efficiencies.
- From a planning perspective, this quarter the company focused on a simplified promotional calendar designed to both drive traffic and incrementality.
International Business:
- International total net revenues declined 8% to $496 million in the first quarter of 2009.
- The decline reflects the impact of further deterioration in global economy as well as the weakening of many currencies against the U.S. dollar year-over-year.
- Company operated retail revenues decreased 10% to $414 million.
- This was primarily a result of unfavorable foreign currency exchange due to the strengthening U.S. dollar against the British pound and the Canadian dollar.
- Weak comparable store sales also contributed to the year-over-year decline.
- Comparable store sales were down 3%, primarily driven by further softness in sales in the U.K. and Canada.
- The two markets represented 77% of international same store sales in the first quarter.
- International operating income decreased to $12.9 million in the first quarter compared with $54.1 million a year ago.
- Operating margin was 2.6% versus 10.0% a year ago, with the impairment charges contributing 320 basis points of the decline.
- The company continues to look for opportunities to provide the Starbuck’s experience through international channels, such as the CPG and food service operations.
- The management had success with market entries in Portugal and Bulgaria.
- The newer markets, including Russia and Argentina, are also performing well.
- Russia continues to have one of the highest average ticket rates and Argentina is recording some of the highest transaction volumes in the system.
- In China, the company celebrated its 10-year anniversary.
- The management reported good growth in spite of the slowing economy, reflected in positive comp store sales.
- The company currently has approximately 350 locations in 26 cities in mainland China and 700 locations in greater China, which includes Hong Kong and Taiwan.
- The Chinese business is now posting margin improvement driven in part by initiatives to address labor optimization and waste.
- Considerable weakness in certain international markets, especially the U.K. and Canada has been noted.
CPG:
- CPG total net revenues rose 14% to $114.3 million in the first quarter of 2009.
- The increase was mainly due to increased sales in the U.S. to package coffee to Kraft.
- Operating income for CPG was $52 million in the first quarter compared with $51 million in the same period a year ago.
- The operating margin contracted 520 basis points to 45.1% of related revenues, primarily due to the impact of higher coffee commodity costs on higher sales volume of packaged coffee to Kraft.
Increasingly, the management is viewing the CPG business as central to its overall business strategy.
- The business is enabling packaged coffee, tea, and ready-to-drink businesses to leverage existing markets and brand awareness.
- The business is also providing the company with channels and access to customers that have been unreachable.
- In the first quarter, the company expanded packaged coffee into Ireland and launched Starbucks coffee in Switzerland through its expanded relationship with Kraft in Europe.
- Switzerland is the first country in continental Europe to benefit from the expanded relationship.
The company advised that it has 90% market share in the ready-to-drink coffee category.
- The category is reportedly a $1.3 billion dollar market in the U.S.
- The company’s branded products accounted for approximately $7.00 in every $10 dollars spent in the ready-to-drink coffee category.
- Through the North American coffee partnership, a JV between Starbucks and Pepsi, Starbucks double shot energy coffee drinks have become top performers in the ready-to-drink energy coffee sub-category since launch in June of 2008.
- The company has also joined Unilever and Pepsi in their PLP partnership and with them management is now expanding national distribution of Tazo Tea ready-to-drink beverages.
The company is expanding its franchising program with Seattle’s Best coffee.
