Along with the red cups and good tidings that Starbucks (NASDAQ:SBUX) shares with customers in December, the company also distributes a brand new 10-K for investors.
The arrival of the 10-K also means that the annual report -- and the usual free beverage card given to shareholders -- is also right around the corner. While a cup of free coffee is definitely not a reason to invest in a company, it's a nice perk for shareholders, much like the free gum that Wrigley (NYSE:WWY) has handed out for years.
But what really matters are the company's performance and its future prospects. After finishing my first read through the 10-K, I noticed a few things that are worthy of investor consideration because of what they may portend for Starbucks.
While I'm still optimistic about Starbucks, investing in the company comes with undeniable risks. First and foremost is the high valuation, which only makes sense if Starbucks can continue to grow, but there are others worth considering in the company's 10-K. For example, I hadn't considered how a global or regional bird flu pandemic would impact Starbucks' business. Under such conditions, I doubt customers would be inclined to stand and wait in a confined space like Starbucks for any length of time. However, I think we can all agree that if there is a pandemic, Starbucks' share price will likely be the least of our worries.
A more Starbucks-specific risk is whether the company can keep up its tremendous growth rate. If you look at the company's store opening schedule over the last five years, you'll see a progression from 1,200 new stores in 2001 to 1,672 new stores over the past year. On average, 4.5 new Starbucks stores opened every single day last year. Many things in business can be reduced to a formula or a template, and Starbucks' franchise program has done this to a certain extent -- a little more than half of those new stores were opened by licensees. Still, an average of more than four stores a day is a bit mind-boggling. Next year, the company plans to add another 1,800 stores for a total 12,000 locations, bringing the company 40% of the way to its long-term target of 30,000 stores worldwide.
Getting to 30,000 stores not only means becoming as ubiquitous as McDonald's (NYSE:MCD), but also continuing to manage growth in a responsible and profitable manner. It also means that the international operations will become an increasingly important part of Starbucks' total business; investors should keep a closer eye on global numbers in future earnings reports.
There are also a number of bright points in the company's annual report, so I'll wrap up with one of them. After years of regular share dilution of 2%-3% in option grants, Starbucks put a large portion of the cash on its balance sheet to work, repurchasing 45 million shares for about $1.1 billion in fiscal 2005. Based on fiscal 2004's ending balance of diluted shares outstanding, these repurchases work out to approximately 5.4% of the company's outstanding shares. With Starbucks' strong operating cash flow, and a fair amount of cash still available on the balance sheet, it seems reasonable to assume that the company will continue to buy back shares as conditions warrant.
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Nathan Parmelee owns shares in Starbucks, but has no financial stake in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy
