Starbucks Profit Soars in Q2 as Customers Return

U.S. net revenues were $1.8 billion in Q2 FY10, an increase of 5% over Q2 FY09. The increase was due to a 7% increase in comparable store sales, comprised of a 3% increase in the number of transactions and a 5% increase in the average value per transaction.

22 Apr 2010 --- Starbucks has said that consolidated net revenues for Q2 FY10 were $2.5 billion, compared to $2.3 billion in Q2 FY09. The higher revenues were attributable to a 7% increase in comparable stores sales and the impact of foreign currency translation related to stronger Canadian and UK currencies, partially offset by a smaller store base. Specialty revenues were higher due to strong product sales to licensees, and to the launch of Starbucks VIA in the CPG channel.

Non-GAAP operating income for Q2 FY10 totaled $347.7 million, representing a non-GAAP operating margin expansion of 540 basis points to 13.7%. This improvement was primarily due to lower cost of sales including occupancy costs driven by lower food costs, supply chain efficiencies, and sales leverage on occupancy costs. Lower store operating expenses as a percentage of net revenues also contributed to the margin expansion and was driven primarily by increased sales leverage, the closure of underperforming company-operated stores, and increased labor productivity. Also contributing to the decline in store operating expenses as a percentage of net revenues were lower benefits-related expenses. These improvements were partially offset by higher general and administrative expenses due in part to higher performance-based compensation expenses in the quarter.

Restructuring charges of $7.9 million for the quarter were due to lease exit and other costs associated with the closure of company-operated stores. These closures were part of the company’s previously-announced global store portfolio rationalization, most of which was completed in fiscal 2009. Nearly all of the remaining store closures are in the International segment, and are expected to be completed by the end of fiscal 2010, with related lease exit costs expected to be recognized concurrently with the actual closures.

U.S. net revenues were $1.8 billion in Q2 FY10, an increase of 5% over Q2 FY09. The increase was due to a 7% increase in comparable store sales, comprised of a 3% increase in the number of transactions and a 5% increase in the average value per transaction, partially offset by the net closure of 299 underperforming company-operated stores over the last 12 months.

U.S. non-GAAP operating income for Q2 FY10 was $323.1 million compared to $179.7 million for the same period a year ago. Non-GAAP operating margin expanded to 17.8% in Q2 FY10 compared to 10.4% in the corresponding period of fiscal 2009. The margin expansion was primarily driven by lower store operating expenses, increased sales leverage, the closure of underperforming company-operated stores, and increased labor productivity. Also contributing to the decline in store operating expenses as a percentage of net revenues were lower benefits-related expenses. Lower cost of sales including occupancy as a percentage of net revenues also contributed to the improvement and was the result of lower food costs, supply chain efficiencies and sales leverage on occupancy costs.

.7 million in Q2 FY09, with the increase primarily driven by the impact of foreign currency translation related to stronger Canadian and UK currencies, a 7% increase in comparable store sales, and the effect of consolidating our previous joint venture operations in France. The increase in comparable store sales consisted of a 6% increase in the number of transactions and a 1% increase in the average value per transaction.

International non-GAAP operating income increased to $47.6 million in Q2 FY10, compared to $20.9 million for the same period a year ago, with the related non-GAAP operating margin expanding 410 basis points to 8.9% from 4.8% in Q2 FY09. The margin increase was primarily driven by lower cost of sales including occupancy costs as a percentage of net revenues, related to lower food costs and increased sales leverage on occupancy costs. Higher income from equity investees also contributed to the increase, due to the improved operating results of several of the company’s largest joint-venture markets.

Net revenues were $180.4 million in Q2 FY10 compared to $172.7 million in Q2 FY09. Operating income for the CPG segment was $67.8 million in Q2 FY10 compared to $63.0 million in Q2 FY09, while the operating margin expanded to 37.6% of net revenues from 36.5% in the prior-year period. Both the net revenue and the operating income increases were primarily due to the launch of Starbucks VIA in the CPG channel, and to higher Foodservice sales related to the launch of Seattle’s Best Coffee in Subway locations throughout the U.S.

“Starbucks second quarter results demonstrate the impact of innovation and the success of our efforts to dramatically transform our business over the last two years,” said Howard Schultz, chairman, president and ceo. “Much credit goes to our partners all around the world who continue to deliver an improved experience to our customers. In addition, new products like Starbucks VIA, the opening of exciting new stores in Asia, Europe and the U.S., and expanded distribution outside our retail stores all represent opportunities for future growth as we fulfill our pledge to bring the highest quality coffee to our customers,” added Schultz.

“Strong revenue growth, driven by significant improvement in comparable store sales growth, combined with continued financial discipline, enabled Starbucks to achieve record results in the quarter,” commented Troy Alstead, executive vice president and cfo. “We are pleased with the strong improvement in traffic in our U.S. stores, and consistent, sequential traffic growth in our International business. Our efforts to drive financial discipline and rigor throughout our decision making have led to a healthier business model, positioning the company for sustainable, profitable growth going forward. As a result of Starbucks strong year-to-date performance, we are increasing our non-GAAP EPS outlook for fiscal year 2010 to a range of $1.19 to $1.22, including approximately $0.04 from a 53rd week this fiscal year.”