Starbucks 2007 Annual Report Download - page 22

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
Starbucks Corporation’s fiscal year ends on the Sunday closest to September 30. Some fiscal years include
53 weeks. The fiscal years ended on September 30, 2007, October 1, 2006 and October 2, 2005, all included
52 weeks. All references to store counts, including data for new store openings, are reported net of related store
closures.
Management Overview
Fiscal 2007 — The Year in Review
Starbucks achieved solid performance in fiscal 2007 — meeting its targets for store openings, revenue growth,
comparable store sales growth, and earnings per share — despite a challenging economic and operating environ-
ment, and significant cost increases from dairy. The Company completed the fiscal year with encouraging trends
and momentum in its International business but faced increasing challenges in its U.S. business. While U.S. com-
parable store sales were within the Company’s stated target range, it was accomplished through two price increases
which offset flat-to-negative transaction count trends in the U.S. business. The pressure on traffic is consistent with
similar trends reported across both the retail and restaurant industry. Management believes that the combination of
the economic slowdown and the price increases implemented in fiscal 2007 to help mitigate significant cost
pressures have impacted the frequency of customer visits to Starbucks stores.
Consolidated net revenues for fiscal year 2007 increased 21% to $9.4 billion. Company-operated retail revenues in
fiscal 2007 rose 21% to $8.0 billion, predominantly due to the opening of 1,342 stores and comparable store sales
growth of 5%. The increase in comparable store sales was due to a 4% increase in the average value per transaction
and 1% growth in the number of customer transactions. The Company opened a total of 2,571 new company-
operated and licensed stores during the year, with 70% in the U.S. and 30% in International markets, to end the year
with over 15,000 stores.
For fiscal 2007, operating income increased to $1.1 billion, while operating margin contracted 30 basis points to
11.2% of total net revenues. Margin compression was due to higher costs of sales including occupancy costs as a
percentage of total net revenues due to a shift in sales to higher cost products and higher distribution costs, rent
expense and dairy costs. These cost pressures were offset in part by leveraging general and administrative expenses,
store operating expenses, and other operating expenses as a percentage of total net revenues.
Net earnings rose to $673 million in fiscal 2007 from $564 million for the previous year. Diluted earnings per share
for fiscal 2007 increased to $0.87 compared to $0.71 a year ago. Excluding the cumulative effect of adopting FIN 47
in the fiscal fourth quarter of 2006, earnings grew 16% and diluted earnings per share increased 19%.
Fiscal 2008 — The View Ahead
Throughout fiscal 2007, Starbucks experienced a consistent weakening in its U.S. business, exiting the year with a
negative trend in transactions. Management recognizes that it faces a more challenging environment from an
economic, operational and competitive standpoint entering fiscal 2008. In response to those challenges, manage-
ment intends to focus in the following key areas:
• Better operational excellence at the store level;
• More meaningful innovation to continue to differentiate the store experience; and
• Increased efficiencies and effectiveness in the general and administrative infrastructure, to become more
capable of navigating through the fluctuations in the external environment.
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