Good afternoon, Starbucks investors,
We hope you are finding good health and prosperity in this new year.
We are happy to report that fiscal 2006 was an excellent year for Starbucks Corporation. Net sales increased a healthy 22 percent to $7.8 billion; operating income grew to $895 million, a 14 percent increase. While net earnings grew a respectable 14 percent, return on equity, which measures how many assets are created per dollar invested, rose to a very high 25 percent. We are hoping translate a high return of equity into more growth for Starbucks in the coming fiscal year. Each shared earned $0.73 in fiscal 2006, which is a 19 percent increase from last year.
In light of a bad economy, these high growth numbers are especially exciting. Though the cost of milk, coffee, and transportation are all on the rise, Starbucks has managed to maintain solid financial growth without passing the extra cost on to customers.
There are many things to celebrate from fiscal 2006, including the 35th anniversary of Starbucks. With the help of our stockholders, we are looking forward to celebrating many more great achievements.
Starbucks is a company that has a proven history of accomplishing great things. We have experienced 15 consecutive years of 5 percent or greater comparable store sales growth, and will continue this trend of stability and profitability by providing an outstanding product, amazing service, and the kind of store atmosphere that brings people together. We are focused on providing long-term value for shareholders while honoring the farmers and our people who make our success possible.
Starbucks is a leader in coffee expertise. We buy only the highest quality coffee and pay premium prices to support coffee-farming communities. Our baristas are trained to make that perfect coffee drink taste, and we know that sometimes the best complement to your morning is the perfect song. We were the first coffee company to offer CDs for purchase, and we will continue this trend of innovation to stay ahead of our competitors. In fiscal 2006 Starbucks continued to establish itself as a destination for inspired entertainment with the launch of a second debut artist, Sonya Kitchell, and new forays into film and books.
We are constantly experimenting with new drink recipes and food offerings, from indulgent treats to lower-fat and reduced-calorie choices for all customers’ tastes. This ensures that we will always be ahead of our competition and that customers will have new and different Starbucks products to enjoy. The unveiling of our highly popular cinnamon dolce latte, the introduction of a collection of four rare Black Apron Exclusives coffees and the launch of assorted tropical banana frappuccino blended beverages and frappuccino fruit blends exemplified our decades-long commitment to coffee expertise and product innovation.
In 2007, we expanded our line of packaged coffee offerings so that customers can enjoy the same delicious coffee they get in a coffee house at home. Africa Kitamu and Costa Rica Tarrazu are two new grounds, which are blended and roasted to meet the taste profiles preferred by grocery customers. These were key contributors in a year that saw sales for Starbucks and Seattle’s Best Coffee increase by double digits in the grocery club and mass merchant channels. We also expanded our lunch program to a total of 4,150 stores and introduced the ability to warm pastries and provide hot breakfast sandwiches to stores across the United States.
Speaking of expanding, we are continuing to expand the number of stores available and have created a large international presence. In 2006 Starbucks opened 2,199 new stores globally (ahead of our originally stated target of 1,800) at an average of six new stores per day, bringing our total to 12,440 stores in 37 countries.
With all this success in the workplace, we understand the importance of giving back to the community. During fiscal 2006, we continued to demonstrate that doing good makes good business sense. We have been a leader in corporate social responsibility by maintaining our standards of environmental stewardship, and supporting a higher standard of ethics by investing in an environment for our employees that supports their interest in volunteering in the community. During fiscal year 2007, Starbucks partners and customers in the United States and Canada volunteered 383,000 hours in support of thousands of local community organizations. Starbucks had donated millions of dollars to support worldwide education programs, such as the China Education Project, an organization dedicated to promoting philanthropy in Asia; and The Little Reading Program That Did, a campaign to encourage reading in schools.
Helping children get clean water has been a passion for Starbucks and its partners for many years. Every time a customer purchases a bottle of Ethos Water he or she shares that mission with us. For every bottle we sell, we donate $0.05 to the Ethos Water Fund. In 2006 The Starbucks Foundation announced Ethos Water Fund grants totaling $2.3 million for the development of humanitarian water programs in the Bensishangul Gumuz region of Ethiopia and in Sumatra, Indonesia. At Starbucks, we believe that together we can make the world’s water safe for everyone to drink.
As we look forward to 2007, Starbucks is ready to exceed customer and investor expectations by continuing its stellar growth into new markets. We will continue to innovate, create, donate and delight. So on behalf of all Starbucks’ partners, employees, and customers, we would like to personally thank you for your continued support.
Howard Schultz Jim Donald
Chariman President & Chief Executive Officer