Starbucks Raises Outlook as Turnaround Signs Mount

Seattle, Nov. 5 - Starbucks Corporation today reported financial results for its fourth quarter and fiscal year ended September 27, 2009 and increased its FY10 earnings outlook based on improving same store sales trends and the increasing impact of its cost savings efforts.

Fiscal Fourth Quarter 2009 Highlights:

• Comparable store sales trends improved in U.S. and International segments on both sequential quarter and year-over-year basis.
• Consolidated same store sales improved to negative 1% from negative 5% in the previous quarter.
• Operating margin improved 760 basis points to 8.2%.
• Non-GAAP operating margin improved 570 basis points to 10.4%.
• EPS of $0.20 compared to $0.01 in Q408
• Non-GAAP EPS increased to $0.24, a 140% increase from $0.10 in the prior year period.

Full Fiscal Year 2009 Highlights:

• Cost savings initiatives delivered full-year savings of approximately $580 million, exceeding target by $30 million.
• Operating margin improved 80 basis points to 5.7%.
• Non-GAAP operating margin improved 110 basis points to 9.2%.
• EPS increased 21% to $0.52 from $0.43 in the prior year; Non-GAAP EPS increased 13% to $0.80 from $0.71 in the prior year.
• Operating cash flow totaled $1.4 billion and free cash flow exceeded $900 million.

“Starbucks strong performance in Q4 and fiscal 2009 overall is the result of our successful efforts to improve our customer and partner experiences, the initiatives and innovations we have introduced over the past 18 months and the significant, permanent changes we have made to our cost structure,” said Howard Schultz, chairman, president and ceo. “We are seeing broad-based improvement across our global business, and are cautiously optimistic about the upcoming holiday period,” added Schultz.

“Improving top line trends, coupled with a disciplined operational focus in both our stores and our support organization, position us well for long-term, profitable growth,” commented Troy Alstead, executive vice president and cfo. “As a result, we are increasing our non-GAAP EPS outlook for fiscal year 2010 to a range of 15% to 20% growth over fiscal 2009.”

¹ Adjustments include restructuring charges in 2008 and 2009, plus other transformation charges in 2008. See the Reconciliation of Selected GAAP Measures to Non-GAAP Measures at the end of this document for further detail.

Consolidated company revenues for Q409 were $2.4 billion, compared to $2.5 billion in Q408. The revenue decline resulted primarily from the impact of foreign currency translation related to the strengthening of the U.S. dollar compared to UK and Canadian currencies, 385 net fewer company-operated stores open in Q409 compared to Q408, and a 1% decline in consolidated comparable store sales.

Non-GAAP Q409 operating income totaled $252.6 million, representing non-GAAP operating margin expansion of 570 basis points to 10.4%. This improvement was driven by cost savings initiatives implemented throughout the organization, culminating in Q409 savings of approximately $210 million. The majority of these savings are the result of in-store operating improvements focused on labor efficiencies and reduced product waste, and lower non-store support costs. These improvements were partially offset by higher general and administrative expenses, related to higher performance-based compensation expenses in the quarter. Results for both years exclude restructuring charges as well as other transformation charges in fiscal 2008.

Restructuring Charges

Restructuring charges of $53.2 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 included 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. At the end of fiscal 2009, nearly all of the approximately 800 U.S. stores, 61 stores in Australia and 40 stores in other International markets had been closed. The remaining International store closures 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.

NOTE: The U.S. foodservice business, which was previously reported within U.S. specialty revenues in the U.S. segment, is now reported in the CPG segment, as a result of recent internal management realignments within the U.S. and CPG business units.

Net revenues were $1.7 billion in Q409 compared to $1.8 billion in Q408, with the decline due to decreased revenues from fewer company-operated retail stores. U.S. comparable store sales declined 1%, due to a decrease in the number of transactions.

Non-GAAP U.S. operating income for Q409 was $206.8 million compared to $79.5 million for the same period a year ago. Non-GAAP operating margin expanded to 12.0% in Q409 compared to 4.4% in the corresponding period of fiscal 2008. The margin increase was driven by the implementation of initiatives to increase labor efficiency and reduce product waste, as well as lower non-store support costs. Lower dairy commodity costs also contributed to the operating margin improvement.

Net revenues were $513.6 million in Q409 compared to $533.6 million in Q408, with the decline primarily due to the impact of a stronger U.S. dollar relative to the British pound and Canadian dollar.

Non-GAAP operating income increased to $45.2 million in Q409 compared to $21.8 million for the same period a year ago, with the related non-GAAP operating margin expanding 470 basis points to 8.8% from 4.1% in Q408. The margin increase was driven by lower cost of sales including occupancy costs primarily related to controlled discretionary spending, and to operational improvements to reduce food and dairy waste.

NOTE: The U.S. foodservice business, which was previously reported within U.S. specialty revenues in the U.S. segment, is now reported in the CPG segment, as a result of recent internal management realignments within the U.S. and CPG business units.

Net revenues were $188.1 million in Q409 compared to $191.1 million in Q408. This decrease was due to lower foodservice revenues caused by continued softness in the hospitality industry, partially offset by higher revenues from packaged coffee.

Operating income for the CPG segment improved to $92.8 million in Q409 from $84.0 million in Q408, reflecting growth of 10%. Operating margin increased 530 basis points to 49.3% of net revenues, with the improvement due primarily to reduced expenses in the U.S. foodservice business and lower marketing expenses compared to Q408, which included the launch of ready-to-drink products in Japan. Higher income from equity investees also contributed to the year-over-year improvement.

For fiscal 2009, consolidated net revenues decreased 6% to $9.8 billion from $10.4 billion in fiscal 2008, predominantly due to lower U.S. company-operated retail revenues. Company-operated retail revenues in fiscal 2009 declined 7% to $8.2 billion from $8.8 billion in fiscal 2008, primarily due to a 6% decline in comparable store sales, and the effects of a stronger U.S. dollar relative to the British pound and Canadian dollar. The decline in consolidated comparable store sales was driven by a 6% decline in the U.S. segment.

Non-GAAP operating income was $894.4 million and non-GAAP operating margin was 9.2%, an expansion of 110 basis points from the prior year. This improvement was primarily due to operational changes designed to improve labor efficiency and reduce product waste in company-operated stores, and to lower non-store support costs. Cost savings initiatives for the full year delivered approximately $580 million, exceeding the original target by approximately $180 million.

The higher level of actual savings was largely due to earlier than expected results from the initiatives that were put in place over the course of the year.

Liquidity

Starbucks strong operating cash flow of $1.4 billion, combined with lower capital expenditures due to disciplined store growth during the year, resulted in free cash flow of over $900 million for fiscal 2009. The company had no short term debt at the end of the year, and had cash and liquid investments totaling more than $650 million.

Fiscal 2010 Targets

Starbucks has set the following financial and operational targets for fiscal 2010:

• The company is targeting revenue growth in the low-to-mid single digits, driven by modestly positive comparable store sales, a 53rd fiscal week, and approximately 300 planned net new stores.
• Starbucks is targeting approximately 100 net new stores in the U.S. and approximately 200 net new stores in International markets. Both the U.S. and International net new additions are expected to be primarily licensed stores.
• Starbucks outlook on the U.S. operating margin has further improved; the company is now targeting full-year operating margin improvements for both the U.S. segment and the International segment (excluding restructuring charges) of 200 to 250 basis points. The CPG segment margin is expected to remain in its current range of 35% to 40%. The cumulative result of these expected margins is a consolidated non-GAAP operating margin that is anticipated to reach double digits.
• The company now expects non-GAAP EPS growth in the range of 15% to 20% from FY09 non-GAAP EPS of $0.80, excluding $0.02 to $0.03 of expected restructuring charges, and including approximately $0.02 to $0.03 of additional EPS from the extra week in the fiscal fourth quarter, as fiscal 2010 is a 53-week year for Starbucks.
• Starbucks expects to see little net impact from commodities, with higher dairy prices being offset by slightly favorable coffee prices.
• The company is currently expecting an effective tax rate in the range of 34% to 35%.
• Capital expenditures are expected to be in the range of $500 million to $550 million. Approximately half of this amount will be allocated to renovations and store equipment upgrades, one quarter to systems upgrades, and one quarter to new stores and other capital investments.
• Starbucks expects cash flow from operations to be approximately $1.4 billion, and free cash flow of approximately $900 million.

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Segment Results

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

⁽¹⁾ International store data has been adjusted for the acquisition of retail store locations in Quebec and Atlantic Canada from former licensees Coffee Vision, Inc. and Coffee Vision Atlantic, Inc., by reclassifying historical information from Licensed Stores to Company-operated Stores.

Non-GAAP Disclosure

In addition to the GAAP results provided in this release, the company provides non-GAAP operating income, non-GAAP operating margin, non-GAAP earnings per share (non-GAAP EPS), as well as free cash flow. 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 GAAP measure most directly comparable to free cash flow is cash flow from operations (or net cash provided by operating activities).

The non-GAAP financial measures provided in this release for fiscal 2009, other than free cash flow, exclude restructuring charges, primarily related to company-operated store closures and the impacts of workforce reductions. The non-GAAP financial measures provided in this release for fiscal 2008 exclude restructuring charges, primarily related to company-operated store closures and the impacts of workforce reductions, and costs related to the company’s transformation efforts during fiscal 2008 consisting primarily of charges related to slowing the pace of U.S. store openings and the associated termination of future site commitments, related inventory and store assets. Free cash flow is defined as cash flow from operations less capital expenditures (or net additions to property, plant and equipment). 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 other than free cash flow, management excludes each of those items mentioned above 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.