Starbucks Posts Strong Third Quarter Fiscal 2009 Results

Starbucks continues to make good progress on its fiscal 2009 target to reduce its cost structure by $500 million. In Q309, the company delivered approximately $175 million in cost savings, exceeding the company’s Q3 target of $150 million.

22 Jul 2009 Starbucks has reported that consolidated company revenues for Q309 were $2.4 billion, compared to $2.6 billion in Q308. The sales decline resulted primarily from a five percent decline in comparable store sales.

Restructuring charges, nearly all due to previously announced store closures, impacted operating income and operating margin in Q309 by $51.6 million and 210 basis points, respectively. As a result, Q309 operating income totaled $204.0 million, representing an operating margin of 8.5 percent, compared to an operating loss of $21.6 million, and an operating margin of negative 0.8 percent in Q308. On a non-GAAP basis (excluding restructuring charges), Q309 operating income totaled $255.6 million, representing an operating margin of 10.6 percent, compared to non-GAAP operating income of $177.6 million and a non-GAAP operating margin of 6.9 percent in Q308. Non-GAAP results in Q308 exclude $199.2 million of restructuring charges specifically related to asset impairments for 600 underperforming company-operated stores in the U.S., and transformation-related costs.

Net earnings in Q309 totaled $151.5 million, compared to a net loss of $6.7 million in Q308, and diluted EPS for Q309 was $0.20, compared to $(0.01) in Q308. Non-GAAP net earnings totaled $179.9 million, and non-GAAP EPS was $0.24 for Q309, compared to non-GAAP net earnings of $115.8 million and non-GAAP EPS of $0.16 in Q308. Non-GAAP results for Q308 exclude approximately $0.17 per share in restructuring charges and transformation-related costs.

Starbucks continues to make good progress on its fiscal 2009 target to reduce its cost structure by $500 million. In Q309, the company delivered approximately $175 million in cost savings, exceeding the company’s Q3 target of $150 million, resulting in year-to-date cost savings of approximately $370 million. Starbucks now expects to deliver cost savings of approximately $180 million in Q409, for a full year total of approximately $550 million in cost savings in fiscal 2009, exceeding its initial target.

Restructuring charges of $51.6 million for the quarter were nearly all due to lease exit and other costs associated with the closure of U.S. and International company-operated stores. Starbucks actions to rationalize its global store portfolio have included the announcements (in July 2008 and January 2009) of plans to close approximately 800 company-operated stores in the U.S., restructure the company’s business in Australia, and close approximately 100 additional International company-operated stores. Since those announcements, 676 U.S. stores, 61 stores in Australia and 28 other International stores have been closed. The remaining U.S. store closures are expected to occur by September 27, 2009, Starbucks fiscal year end, while the remaining International store closures are expected to be completed by mid-year fiscal 2010. Related lease exit costs are expected to be recognized concurrently with the actual closures.

For Q309, U.S. total net revenues were $1.8 billion compared to $1.9 billion in Q308, with the decline due to decreased revenues from company-operated retail stores. U.S. comparable store sales declined six percent, due to a four percent decline in the number of transactions and a two percent decrease in the average value per transaction. Specialty revenues declined 4.7 percent to $207.0 million, driven by lower foodservice revenues primarily related to softness in the hospitality industry.

U.S. operating income for Q309 was $204.6 million, compared to an operating loss of $27.8 million for the same period a year ago. Operating margin was 11.2 percent of related revenues in Q309 compared to negative 1.4 percent in the corresponding period of fiscal 2008. This increase was driven by significantly lower restructuring charges recorded in the period, as well as a significant reduction in store operating expenses and cost of sales including occupancy costs.

Excluding restructuring charges, U.S. non-GAAP operating margin in Q309 was 13.4 percent compared to non-GAAP operating margin of 8.8 percent for the same period a year ago, which excludes restructuring charges and transformation-related costs. As a percent of total revenues, store operating expenses decreased 240 basis points to 37.0 percent, primarily due to the effect of labor efficiency initiatives. Additionally, cost of sales including occupancy costs improved by 210 basis points to 41.0 percent during Q309, due to lower dairy commodity costs and the implementation of operational improvements designed to minimize waste.

International total net revenues were $477.4 million in Q309 compared to $535.6 million in Q308, with the decline primarily due to the impact of a stronger U.S. dollar relative to the British pound and Canadian dollar. Also contributing to the decrease in International revenues was a two percent decline in comparable store sales, due to a one percent decline in the number of transactions and a two percent decrease in the average value per transaction.

International operating income was $34.4 million in Q309 compared to $35.5 million for the same period a year ago, with the related operating margin expanding 60 basis points to 7.2 percent of total revenues, from 6.6 percent in Q308. Excluding restructuring charges, non-GAAP operating margin for Q309 improved to 8.1 percent compared to non-GAAP operating margin of 6.7 percent for the same period a year ago, which excludes transformation-related costs. This increase was driven by reductions in G&A expenses and lower occupancy costs.

Global Consumer Products Group (CPG) total net revenues increased by 17.2 percent to $106.3 million in Q309, due primarily to higher coffee sales to a grocery distribution partner.

Operating income for the CPG segment improved to $49.2 million in Q309, a one percent increase over the $48.7 million reported in Q308. Operating margin decreased 740 basis points to 46.3 percent of related revenues from 53.7 percent for the prior year period. This decrease was due primarily to lower income from equity investees largely related to expenses associated with the dissolution of the previous ice cream partnership, increased marketing expenses for ready-to-drink products in Japan, and higher green coffee costs.

"The transformation of Starbucks business - including the success of our consumer-facing initiatives and the permanent changes to our cost structure - is delivering improvements in comparable store sales trends and is beginning to be reflected in our financial performance,” said Howard Schultz, chairman, president and ceo. “The entire Starbucks organization is committed to continually improving our customer experience as the roadmap to renewed growth and increasing profitability. At the same time, we will continue to innovate and differentiate, two perennial hallmarks of the Starbucks brand,” added Schultz.

“Excellent execution throughout our organization contributed significantly to our performance this quarter,” commented Troy Alstead, executive vice president and cfo. “Our store partners have embraced the cost disciplines and efficiency initiatives that are enabling us to expand our operating margin. In doing this, they have also delivered increased service speed, measurably improved customer service, customer satisfaction, and an overall enhanced Starbucks Experience.”