This summary is based on the fourth quarter fiscal 2008 earnings call conducted by Starbucks Corp. (SBUX) on November 10, 2008.
Management:
Chairman, President and CEO: Howard Schultz
Outgoing EVP and CFO: Peter Bocian
CFO: Troy Alstead
President Global Development: Arthur I. Rubinfield
Director of IR: JoAnne DeGrande
Key Investor Issues:
- Quarter-to-quarter consolidated net revenues firmed 3% from $2.4 billion to $2.5 billion.
- Q4 EPS were 1 cent versus 21 cents in the year ago quarter.
- The 2009 CapEx was reduced to $700 million due to lower International segment store opening targets.
Full Year Financial Highlights:
- The consolidated net revenues increased 10% to $10.4 billion versus $9.4 billion for fiscal 2007.
- Company-operated retail revenues in fiscal 2008 rose 10% to $8.8 billion from $8.0 billion in fiscal 2007.
- The increase was due to the opening of 681 net new company-operated stores, offset by a 3 percent decline in comparable store sales for the 12-month period.
- The weakness in consolidated comparable store sales was driven by the U.S. segment, which posted comparable store sales of negative 5%.
- Partially offsetting this was positive 2% comparable store sales in the International segment for the year.
- Specialty revenues grew 14% for the year to $1.6 billion from $1.4 billion in fiscal 2007.
- Operating income for fiscal 2008 decreased to $504 million, compared with $1.1 billion for fiscal 2007.
- Operating margin compression was primarily due to lower revenues; in addition, restructuring charges associated with the store closures and right-sizing of the business and support organization accounted for approximately 40 percent of the decrease.
- Excluding restructuring charges and other transformation strategy costs, non-GAAP operating margin for fiscal year 2008 was 8.1%.
- Net earnings totaled $315.5 million for fiscal 2008, versus $672.6 million in fiscal 2007.
- The management reported that EPS for the year were 43 cents compared with EPS of 87 cents in fiscal 2007.
- For the full year 2008, restructuring charges and other transformation costs impacted EPS by approximately 28 cents per share.
- Excluding these charges, non-GAAP EPS for fiscal year 2008 was 71 cents per share.
Fourth Quarter Fiscal 2008 Financial Highlights:
Consolidated net revenues increased 3 percent to $2.5 billion for the fourth quarter of 2008, compared with $2.4 billion for the fourth quarter of 2007.
- For the 13-week period ended September 28, 2008, Starbucks reported net income of $5.4 million.
- This included $105.1 million of restructuring charges and other transformation strategy costs.
- Net income was $158.5 million for the same period a year ago.
- Earnings per share for the quarter were 1 cent, compared with 21 cents per share earned in the prior year period.
- The company estimates that restructuring charges and costs associated with the execution of its transformation agenda impacted Q4 2008 EPS by approximately 9 cents per share.
- The majority of these costs consist of charges associated with company actions announced in July of 2008 to close approximately 600 company-operated stores in the U.S. and 61 company-operated stores in Australia, and reduce approximately 1,000 open and filled positions.
- Excluding the restructuring charges and other transformation costs, fourth-quarter fiscal 2008 non-GAAP net income was $71.0 million and non-GAAP EPS for fiscal fourth quarter 2008 was 10 cents per share.
The three-percent growth in consolidated net revenues in the fourth quarter 2008 was heavily influenced by the U.S. business, which contributed 75 percent of total net revenues.
- The company’s lower than expected revenue growth was driven by an 8% decrease in U.S. comparable store sales for the quarter due to both deteriorating traffic trends in the U.S., and a decline in the average value per transaction.
- For the quarter, U.S. total net revenues increased by $17.3 million, or 1%, to $1.9 billion mainly due to increased revenues from licensed stores.
- Revenues from U.S. company-operated retail stores declined slightly to $1.7 billion for the 13 weeks ended September 28, 2008 versus the same period of last year.
- This was primarily due to the decline in comparable stores sales more than offsetting revenue growth from new stores.
- International total net revenues expanded 13%, or $61.8 million, to $533.6 million for the quarter as the company continued to expand its store presence in its 45 markets outside the U.S., with the majority of new store openings being international licensed stores.
- Overall, comparable store sales for the International segment were flat for the fourth quarter, primarily resulting from a decline in traffic in the U.K. along with continued softer sales in Canada during the period.
- Global Consumer Products Group (CPG) total net revenues declined by 4%, or $4.6 million, to $105.0 million for the fourth quarter fiscal 2008
- The decline was due primarily to decreased revenues from packaged coffee sales in the U.S. market.
The management advised that many of the company’s operating expenses are fixed in nature.
- As a result, the softness in U.S. revenues during the fourth quarter impacted nearly all consolidated and U.S. segment operating expense line items when viewed as a percentage of sales.
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Restructuring charges and other transformation costs negatively impacted the company’s operating income and operating margin in both the U.S. and International business segments.
- Consolidated cost of sales including occupancy costs increased 360 basis points to 47.3% of total net revenues for the 13 weeks ended September 28, 2008 versus 43.7% in the corresponding period in fiscal 2007.
- The increase was primarily due to higher distribution costs, inventory write-downs, and higher rent expenses as a percentage of revenues.
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Store operating expenses as a percentage of related company-operated retail revenues rose 350 basis points to 44.5% in the quarter from 41.0% for the prior year period.
- The increase was primarily due to higher payroll expenditures as a percentage of revenues in the U.S. business, as well as impairment provisions for under-performing stores in the U.S. and International markets.
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General and administrative expenses as a percentage of total net revenues improved 130 basis points to 3.8% for the fourth quarter 2008, from 5.1% for the corresponding period of fiscal 2007.
- The improvement was primarily due to lower payroll-related expenses.
- Restructuring charges totaled $99.2 million in the fourth quarter.
- Of that amount, $38.6 million was related to executing on the decision to close approximately 600 underperforming U.S. company-operated stores.
- The total
lease exit costs are now expected to be up to $170 million.
- This revised estimate compares with the previously disclosed range of $120 million to $140 million, initially reported on July 1, 2008.
- During fourth quarter fiscal 2008, the first 205 of these stores were closed.
- The approximately 400 remaining U.S. store closures are now expected to occur by the end of fiscal 2009 and the remaining lease exit costs are expected to be recognized during that time period.
- The restructuring charges recognized during the fourth quarter also included the closure of 61 company-operated stores in Australia, and costs associated with the reduction in positions within Starbucks leadership structure and non-store organization which includes severance costs and impairment charges related to corporate real estate the company no longer plans to occupy.
Consolidated operating income was $14.2 million for the 13-week period ended September 28, 2008, compared with operating income of $248.0 million in the comparable prior year period.
- Operating margin was 0.6% of total net revenues for the fourth quarter fiscal 2008 versus 10.2 percent for the same period a year ago.
- Margin compression was primarily due to softer revenues; restructuring charges of $99.2 million recognized in the fourth quarter of fiscal 2008 added 390 basis points of the decrease.
- For fourth quarter, the U.S. segment produced operating income of $51.1 million, compared with $224.6 million for the same period a year ago.
- Operating margin was 2.7% of related revenues for the fourth quarter fiscal 2008 compared with 12.1 percent in the corresponding period of fiscal 2007.
- This decrease was primarily driven by softer revenues due to weak traffic; in addition, restructuring charges of $43.2 million recognized in the period had a 230-basis-point impact on operating margin.
- International operating income decreased to $2.6 million for the fourth quarter 2008, with the related operating margin contracting to 0.5% of related revenues, from 10.8 percent in the fourth quarter of fiscal 2007.
- The primary reason for this decline was softer revenues due to weak traffic; in addition, $19.2 million in restructuring charges impacted the operating margin by 360 basis points.
- Operating income for the CPG segment was $63.3 million for the 13 weeks ended September 28, 2008 and operating margin increased 340 basis points to 60.3% of related revenues from 56.9% for the prior year period.
- The margin improvement was primarily due to the mix of revenue being less weighted toward the initial sale of coffee and tea products to Starbucks distributor, which have related cost of sales expenses, and more toward revenue profit sharing earned on the distributor’s sales to retailers.
Income tax for the company for quarter was a benefit of $6.6 million, compared with an expense of $88.3 million for the same period a year ago.
- The fourth quarter of fiscal 2008 included an adjustment to arrive at the full-year tax rate, the impact of which was significant as a percentage of the small amount of pretax loss.
- This resulted in a tax benefit that exceeded the amount of pretax loss.
The company’s financial position and liquidity remain strong and the company is committed to its current capital structure and ratings.
- The management reported that operations continue to produce solid operating cash flows.
- The actions the company has taken as part of its transformation strategy implemented during fiscal 2008, along with reduced CapEx from fewer store openings during fiscal 2009, are expected to aid the company to generate higher free cash flow going forward.
- At fiscal year end 2008, the company had $271 million available for short-term borrowings under its combined credit facility and commercial paper program.
- The management continues to have access to short-term debt instruments within its overall capital strategy.
- For fiscal 2008, cash flow from operations was $1.3 billion, flat with fiscal 2007, while CapEx for fiscal 2008 declined to $985 million versus $1.1 billion for the previous year.
