Starbucks Reports Record Second Quarter 2011 Results

Starbucks Corporation (NASDAQ: SBUX) today reported financial results for its fiscal second quarter ended April 3, 2011.

Fiscal Second Quarter 2011 Highlights:

• Total net revenues increased 10% to $2.8 billion
• Comparable store sales increased 7%, driven by a 6% increase in traffic and a 1% increase in average ticket
  • U.S. comparable store sales increased 7%, driven by a 6% increase in traffic and a 1% increase in average ticket
  • International comparable store sales increased 4%, driven by an increase in traffic
• Consolidated operating margin was 13.5%: up 10 basis points on a GAAP basis and down 20 basis points over the prior-year period’s non-GAAP results
  • U.S. operating margin improved to 18.5%: up 70 basis points on a GAAP basis and up 60 basis points over the prior-year period’s non-GAAP results
  • International operating margin improved to 11.8%: up 420 basis points on a GAAP basis and up 290 basis points over the prior-year period’s non-GAAP results
• EPS increased 21% to $0.34 in Q2 FY11 compared to $0.28 in Q2 FY10
• On March 1, Starbucks assumed direct management of its packaged coffee business
• On March 10, the company announced a strategic relationship with Green Mountain Coffee Roasters for the manufacturing, marketing, distribution and sale of Starbucks® coffee and Tazo® tea branded K-Cup® portion packs for use in the Keurig® Single-Cup Brewing system, making Starbucks the exclusive, licensed super-premium brand on the Keurig® platform
• The Board of Directors declared a $0.13 per share cash dividend to shareholders of record as of May 11, 2011, which will be paid on May 27, 2011

"Starbucks record fiscal second quarter results reflect solid performance and execution across all of our businesses,” said Howard Schultz, chairman, president and ceo. “Our sales, traffic and customer trends all point to the expanding power of the Starbucks business and brand. And our 40th anniversary celebration continues to resonate around the world, driving strong engagement among our partners and our customers. I saw this firsthand in China, where my visit this week confirmed how ideally-positioned Starbucks is to profitably grow its store presence across China in the years ahead,” added Schultz.

“The underlying health of our business has never been better and our fiscal second quarter results continue to demonstrate this strength,” commented Troy Alstead, cfo. “Customer traffic grew in both our U.S. and International segments and we continue to see improved profitability throughout the retail store business as operational improvements combined with revenue growth drive strong sales leverage. Our results for the quarter were even more significant when viewed in the context of the investments we made during the period and the charges related to Seattle’s Best Coffee store closures in Borders bookstores,” added Alstead. “We remain well positioned to deliver on our previously communicated fiscal 2011 outlook of 15% to 20% EPS growth compared to last year’s results despite dramatically higher commodity costs.”

Second Quarter Fiscal 2011 Summary

Consolidated net revenues were $2.8 billion for Q2 FY11, an increase of 10% over Q2 FY10. The increase was primarily due to a 7% increase in global comparable stores sales, comprised of a 6% increase in the number of transactions and a 1% increase in average ticket.

Operating income for Q2 FY11 totaled $376.1 million, representing operating margin expansion of 10 basis points to 13.5%. This improvement was primarily due to sales leverage, offset by higher commodity costs. The increase in commodity costs, primarily coffee, negatively impacted operating margin in the quarter by approximately 200 basis points and EPS by $0.04.

Change in Revenue Presentation

Concurrent with the change in our distribution method for packaged coffee and tea in the U.S., the company has revised the presentation of revenues this quarter. Non-retail licensing revenues have been reclassified on the consolidated financial statements to the renamed “CPG, foodservice and other” revenue line, which includes revenues from our direct sale of packaged coffee and tea as well as licensing revenues received under the previous distribution arrangement. The previous “Licensing” revenue line now includes only licensed store revenue and therefore has been renamed “Licensed stores.” Within the CPG segment, the previous “Licensing” revenue line has been renamed “CPG.” There was no impact to consolidated or segment net revenues from this change in presentation.

Q2 U.S. Segment Results

U.S. net revenues were $1.9 billion in Q2 FY11, an increase of 6% over Q2 FY10. The increase was due to a 7% increase in comparable store sales, comprised of a 6% increase in the number of transactions and a 1% increase in average ticket.

U.S. operating income for Q2 FY11 was $356.9 million compared to $322.7 million for the same period a year ago. Operating margin expanded to 18.5% in Q2 FY11 compared to 17.8% in the corresponding period of fiscal 2010. The margin expansion was primarily due to sales leverage, partially offset by higher coffee costs.

Q2 International Segment Results

International net revenues were $609.8 million in Q2 FY11, an increase of 15% over Q2 FY10. The increase was due to the impact of foreign currency exchange, a 4% increase in comparable store sales and an increase in licensed stores revenue. The 4% increase in comparable stores sales was the result of an increase in the number of transactions.

International operating income increased to $71.7 million in Q2 FY11, compared to $40.4 million for the same period a year ago, with the related operating margin expanding 420 basis points to 11.8% from 7.6% in Q2 FY10. The margin increase was primarily driven by sales leverage and the absence of restructuring charges in FY11, partially offset by higher coffee costs.

Q2 Global Consumer Products Group Segment Results

CPG net revenues were $204.7 million in Q2 FY11, an increase of 30% over Q2 FY10. The increase was primarily due to the transition of our packaged coffee and tea businesses to a direct model in the quarter, and the continued expansion of Starbucks VIA® Ready Brew in the CPG channel.

Operating income for the CPG segment was $63.6 million in Q2 FY11 compared to $63.5 million in Q2 FY10, with the operating margin decreasing to 31.1% of net revenues from 40.3% in the prior-year period, primarily due to higher coffee costs and to increased marketing costs incurred to support the continued expansion of Starbucks VIA® in the CPG channel.

YTD Financial Results

Fiscal 2011 Targets

Starbucks has updated the following fiscal 2011 targets:

• The company is now targeting high single-digit revenue growth based on a 52-week comparable year, driven by mid single-digit comparable store sales growth.
• The company now expects EPS of $1.46 to $1.48, reflecting the high end of its target range of 15% to 20% growth over fiscal 2010 non-GAAP EPS on a 52-week basis.
  • Included in the revised EPS target are higher commodity costs, which are now expected to have an unfavorable impact on EPS of approximately $0.22 for the full fiscal year. The additional $0.02 (compared to most recent guidance) reflects expected higher dairy and fuel prices.

Conference Call

Starbucks will be holding a conference call today at 2:00 p.m. Pacific Time, which will be hosted by Howard Schultz, chairman, president and ceo, Troy Alstead, cfo, and Jeff Hansberry, president – Global Consumer Products and Foodservice. The call will be broadcast live over the Internet and can be accessed at the company’s web site address of http://investor.starbucks.com. A replay of the call will be available via telephone through 9:00 p.m. Pacific Time on Friday, April 29, 2011 by calling 1-800-642-1687, reservation number 51273259. A replay of the call will also be available via the Investor Relations page on Starbucks.com through approximately 5:00 p.m. Pacific Time on Friday, May 27, 2011 at the following URL: http://investor.starbucks.com.

The company’s consolidated statements of earnings, operating segment results, and other additional information have been provided on the following pages in accordance with current year classifications. This information should be reviewed in conjunction with this press release. Please refer to the company’s Annual Report on Form 10-K for the fiscal year ended October 3, 2010 for additional information.

About Starbucks

Since 1971, Starbucks Coffee Company has been committed to ethically sourcing and roasting the highest quality arabica coffee in the world. Today, with stores around the globe, the company is the premier roaster and retailer of specialty coffee in the world. Through our unwavering commitment to excellence and our guiding principles, we bring the unique Starbucks Experience to life for every customer through every cup. To share in the experience, please visit us in our stores or online at www.starbucks.com.

Forward-Looking Statements

This release contains forward-looking statements relating to certain company initiatives and plans, as well as trends in or expectations regarding, earnings per share, revenues, operational improvements, sales leverage, operating margins, profits, comparable store sales, store openings and closings, restructuring charges, capital expenditures, growth opportunities, the strength of our business and brand, tax rate and commodity costs. These forward-looking statements are based on currently available operating, financial and competitive information and are subject to a number of significant risks and uncertainties. Actual future results may differ materially depending on a variety of factors including, but not limited to, coffee, dairy and other raw material prices and availability, costs associated with, and the successful execution of, the company’s initiatives, fluctuations in U.S. and international economies and currencies, the impact of competition, the effect of legal proceedings, and other risks detailed in the company filings with the Securities and Exchange Commission, including the “Risk Factors” section of Starbucks Annual Report on Form 10-K for the fiscal year ended October 3, 2010. The company assumes no obligation to update any of these forward-looking statements.

Segment Results

The tables below present reportable segment results net of intersegment eliminations (in millions):

Fiscal Second Quarter 2011 Store Data

The company’s store data for the periods presented are as follows:

Non-GAAP Disclosure

In addition to the GAAP results provided in this release, the company provides non-GAAP operating income, non-GAAP operating margin and non-GAAP earnings per share (non-GAAP EPS) for fiscal 2010. These non-GAAP financial measures are not in accordance with, or an alternative for, generally accepted accounting principles in the United States. The GAAP measure most directly comparable to non-GAAP operating income, non-GAAP operating margin, and non-GAAP earnings per share (non-GAAP EPS) are operating income, operating margin, and diluted net earnings per share, respectively.

The non-GAAP financial measures provided in this release exclude 2010 restructuring charges, primarily related to previously-announced company-operated store closures. The company’s management believes that providing these non-GAAP financial measures better enables investors to understand and evaluate the company’s historical and prospective operating performance. More specifically, for historical non-GAAP financial measures, management excludes restructuring charges because it believes that these costs do not reflect expected future operating expenses and do not contribute to a meaningful evaluation of the company’s future operating performance or comparisons to the company’s past operating performance.

These non-GAAP financial measures may have limitations as analytical tools, and these measures should not be considered in isolation or as a substitute for analysis of the company’s results as reported under GAAP. Other companies may calculate these non-GAAP financial measures differently than the company does, limiting the usefulness of those measures for comparative purposes.

© 2011 Starbucks Coffee Company. All rights reserved.