BA 530 Employee Retention and Company Success Starbucks believes that the compensation paid to executive officers should be closely aligned with the performance of the company on both a short-term and a long-term basis, and that such compensation will assist the company in attracting and retaining key executives, which is critical to long-term success. Thus, compensation for executive officers consists of three components: annual base salary, annual incentive bonus, and long-term incentive compensation.
Annual base salaries for executive officers are reviewed annually or at the time of promotion or other change in responsibilities. Initial salary and increases in salary are based on evaluation of such factors as the level of responsibility, individual performance, level of pay both of the executive in question and other similarly situated executives, and a comparator group companies’ pay levels. The annual incentive bonus for executive officers, except for the Chief Executive Officer and Chairman, is dependent on both company performance and individual performance during the prior fiscal year.
Once objective performance measure or measures, bonus target percentages and other terms and conditions of awards are determined by the Committee, target bonus amounts are then expressed as a percentage of base salary and are established according to the overall intended competitive position and competitive survey data for comparable positions in comparator group companies. After the end of the fiscal year, the Committee determines the extent to which the performance goals were achieved, and approved and recommended the amount of the award to be paid to each participant.
The total bonus award is determined according to the level of achievement of both the objective performance and individual performance goals. The Chief Executive Officer and Chairman’s incentive is based 100% on company performance. Long-term incentive compensation for executive officers is comprised of stock options awards. The determination of the size of stock option grants to executive officers is based on such considerations as the value of total direct compensation for comparable positions in comparator group companies, Company and individual performance against the strategic plan for the prior fiscal year, the number and value of stock ptions previously granted to the executive officer, the allocation of overall share usage attributed to executive officers and the relative proportion of long-term incentives within the total compensation mix. This plan is designed to align executive officers’ interests with those of shareholders by rewarding outstanding performance and providing long-term incentives. Starbucks’ revenue growth plan continues to center on the opening of new retail stores, both Company-operated and licensed, in the pursuit of it’s objective to establish itself as one of the most recognized and respected brands in the world.
Starbucks opened 2,199 new stores in fiscal 2006 and plans to open approximately 2,400 in fiscal 2007. With a presence in 37 countries, serving customers more than 40 million times per week, management continues to believe that the Company’s long-term goal of approximately 20,000 Starbucks retail locations throughout the United States and at least 20,000 stores in International markets is achievable. For the 13-week period ended December 31, 2006, global comparable store sales for Company-operated markets increased by 6%. Comparable store sales growth for the remainder of fiscal 2007 is expected to be in the target range of 3% to 7%.
In addition to opening new retail stores, Starbucks works to increase revenues generated at new and existing Company-operated stores by attracting new customers and increasing the frequency of visits by current customers. The strategy is to increase comparable store sales by continuously improving the level of customer service, introducing innovative products and improving speed of service through training, technology and process improvement. Internationally, the Company’s strategy is to selectively increase its equity stake in licensed international operations as these markets develop.
In January 2006, the Company increased its equity ownership from 5% to 100% in its operations in Hawaii and Puerto Rico, and subsequent to the end of fiscal 2006 purchased a 90% stake in its previously-licensed operations in Beijing, China. The combination of more retail stores, comparable store sales growth of 7% and growth in other business channels in the U. S. , International, and CPG operating segments resulted in a 22% increase in total net revenues for fiscal 2006, compared to fiscal 2005. The Company expects revenue growth of approximately 20% in fiscal 2007, consistent with its three to five year revenue growth target.
Operating income as a percentage of total net revenues decreased to 11. 5% in fiscal 2006 from 12. 3% in fiscal 2005, due to the recognition of stock-based compensation. Net earnings increased by 14% in fiscal 2006, compared to fiscal 2005. Reported operating margin and net earnings include the effects of stock-based compensation in fiscal 2006, while stock-based compensation expense was not included in the Company’s consolidated financial results in fiscal 2005. There are several types of risk that the Company is subject to.
A health pandemic could severely affect Starbucks business due to individuals wishing to avoid public gathering places. It could also adversely affect business due to staffing shortages in stores and production and delivery of products. Another risk for this company is market expectations for Starbucks financial performance are high, so any failure to meet those expectations could cause the market price of stock to drop rapidly. The company is also exposed to market risk related to foreign currency exchange rates, equity security prices and changes in interest rates.
Because a portion of the Company’s operations is outside of the United States, it has transactions in other currencies. Starbucks frequently evaluates its foreign currency exchange risk and engages in transactions to hedge assets, liabilities, revenues and purchases denominated in foreign currencies. The company has minimal exposure to price fluctuations on equity mutual funds within its trading portfolio. The interest rate risk is also minimal due to the company does not hedge the interest rate exposure on its available-for-sale securities.
Income taxes for fiscal 2006 resulted in an effective tax rate of 35. 8%, compared to 37. 9% in fiscal 2005. The decline in the effective tax rate was due to the reversal of a valuation allowance in fiscal 2006 that had been established in fiscal 2005, the settlement in the third quarter of fiscal 2006 of a multi-year income tax audit in a foreign jurisdiction for which the Company had established a contingent liability, and to increased effectiveness of the Company’s long-term tax planning strategies. The effective tax rate for fiscal 2007 is expected to be approximately 38%, with quarterly variations.
Segment information is prepared on the same basis that the Company’s management reviews financial information for operational decision-making purposes. Beginning in the fiscal fourth quarter of 2006, the Company increased its reporting segments from two to three to include a Global CPG segment in addition to the United States and International segments. This additional operating segment reflects the culmination of internal management realignments in fiscal 2006, and the successful development and launch of certain branded products in the United States and internationally commencing in fiscal 2005 and continuing throughout fiscal 2006.
Additionally, with the 100% acquisition of the Company’s operations in Hawaii in fiscal 2006 and the shift in internal management of this market to the United States, these operations have been moved from the International segment into the United States segment. Segment information for all prior periods presented has been revised to reflect these changes. . During the fiscal year ended October 1, 2006, the Company’s focus on execution in all areas of its business, from U. S. and International Company-operated retail operations to the Company’s specialty businesses, delivered strong financial performance.
Management believes that its ability to achieve the balance between growing the core business and building the foundation for future growth is the key to increasing long-term shareholder value. Starbucks fiscal 2006 performance reflects the Company’s continuing commitment to achieving this balance. Global comparable store sales for Company-operated markets increased by 7%, making fiscal 2006 the 15th consecutive year with comparable store sales growth of 5% or greater. Comparable store sales growth for fiscal 2007 is expected to be in the range of 3% to 7%.
Mean Earnings Estimates, as published on First Call, have identified a Mean Recommendation of 1. 9 and Mean Future 5 Yr Growth Rate of 22 for Starbucks. Starbucks has succeeded in continually meeting their financial and development goals year after year. This continued success with the core business of opening stores has allowed the company to develop strong future growth and performance expectations. The long-term outlook for this company is that it would continue to be successful through its years of growth involving opening stores.
The continuous improvement of store sales, level of customer service, and introduction of innovative products will be the determinant of continued success if market saturation of stores would occur. I would not hesitate to buy stock in this company. Works Cited “Asset. ” The Oxford American College Dictionary. 2001. Clark, Taylor. Starbucked. New York: Little, Brown, 2007. Energy Information Administration, Official Energy Statistics from the U. S. Government. “Crude Oil”. Dec. 2006.
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