This summary is based on the third quarter fiscal 2008 earnings call conducted by Starbucks Corp. (SBUX) on July 30, 2008.
Management:
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Chairman of the Board, President, Chief Executive Officer: Howard Schultz
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Chief Financial Officer, Executive Vice President, Chief Administrative Officer: Peter J. Bocian
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Director, Investor Relations: JoAnn DeGrande
Key Investors Issues
- Revenues were up 9% to $2.6 billion, from $2.4 billion a year ago.
- The firm realized a loss of $6.7 million or 1 cent a share, compared to earnings of $158.3 million or 21 cents a share in 2007.
- The firm reduced support organization by almost 1,000 positions.
Year to Date Highlights:
- Revenues increased12.9% to $7.8 billion.
- Net income dropped 40% to $310 million or 42 cents a share, from $514 million or 66 cents a share in 2007.
Third Quarter Highlights
Consolidated revenues were up 9% to $2.6 billion, from $2.4 billion a year ago, below expectations, driven mainly by continued slow traffic trends in the U.S. resulting in a mid-single-digit decline in total comps for the company.
- The firm reported a pretax operating loss of $21.6 million, compared to operating income of $245 million a year ago, with restructuring charges the largest driver behind this decline in operating income.
- Consolidated operating margin was negative 0.8% compared to 10.4% for the same period a year ago, with the margin compression due to the $168 million restructuring charges which accounted for 650 basis points of the decline.
- Also contributing to the margin pressure was higher cost of sales, including occupancy in both the U.S. and international businesses and higher store operating costs in the U.S.
- The firm realized a loss of $6.7 million or 1 cent a share, compared to earnings of $158.3 million or 21 cents a share in the prior year due to the impact of costs relates to transformation efforts.
Operating Segments:
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U.S. total net revenues increased by 6% to $1.9 billion as company-operated retail revenues rose 5% to $1.7 billion.
- In addition to continued softness in existing store sales, the slower ramp of revenues from new stores was a contributor.
- The combination of reducing new store openings and closing underperforming stores will provide the new and existing stores a better operating environment for revenue growth in the future.
Lower revenues driven by a mid-single-digit decline in U.S. comparable store sales negatively impacted nearly all of the P&L line items as a percentage of sales.
- U.S. cost of sales, including occupancy costs, as a percentage of total revenues increased 310 basis points to 43.4% compared to 40.3% in 2007.
- Aside from the traffic, higher distribution costs were also a factor, driven by the continued integration of stores into the centralized distribution model, which is expected to provide efficiencies and cost savings over time.
- U.S. store operating expenses increased 430 basis points to 45.8% of related U.S. retail revenues, compared to 41.5% a year ago.
- The primary driver of the increase was softer revenues, as well as costs associated with the termination of future site commitments and other in-store expenses related to transformation initiatives, namely espresso quality and brewed coffee reinvention.
U.S. operating income declined to a loss of $27.8 million, from income of $253.2 million in 2007.
- The operating margin was a negative 1.4% of related revenues, compared to 13.8% in the prior year corresponding period.
- The margin decline was driven by the restructuring charges taken in the quarter, which had an 860 basis point impact.
- Lost sales leverage drove the remainder of the year-over-year decline, along with higher store operating expenses and cost of sales, including occupancy, stemming from the U.S. store portfolio rationalization and transformation initiatives.
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International business total net revenues increased 24% to $536 million, from $432 million in the prior year as company-operated retail revenues increased 23% to $450 million.
- The increase in company operated retail revenues was due to the opening of 319 new company-operated retail stores in the last year, and favorable foreign currency exchange, primarily from the Canadian dollar.
- There was softness in traffic in the U.K. stores and slower sales momentum in Canada as well, as that market shows more signs of impact from the weak U.S. economy.
International operating income increased 9% to $36 million, compared to $33 million a year ago.
- Operating margin was 6.6%, down 90 basis points from 2007, with higher cost of sales and occupancy as the primary driver.
- Unfavorable dairy costs year over year were also a significant driver, primarily in the U.K.
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Global consumer products group had total net revenues increasing 4% to $91 million, primarily driven by higher sales of the ready-to-drink products in the Asia-Pacific market.
- Operating income rose 16% to $49 million, compared to $42 million in the same period a year ago.
- Operating margin expanded 560 basis points to 53.7% of related revenues due to the mix of revenue being less weighted toward the initial sale of coffee and tea products to Starbucks'' distributor and more toward profit-sharing revenues earned on the distributor sales to retailers.
Strategic Insights:
