e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended December 30, 2007
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number: 0-20322
STARBUCKS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
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Washington
(State or Other Jurisdiction of
Incorporation or Organization)
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91-1325671
(IRS Employer
Identification No.) |
2401 Utah Avenue South, Seattle, Washington 98134
(Address of principal executive offices)
(206) 447-1575
(Registrants Telephone Number, including Area Code)
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer
þ
Accelerated filer o
Non-accelerated
filer o
Smaller reporting company o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act):
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
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Title
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Shares Outstanding as of February 4, 2008 |
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Common Stock, par value $0.001 per share
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725.1 million |
STARBUCKS CORPORATION
FORM 10-Q
For the Quarterly Period Ended December 30, 2007
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
STARBUCKS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in millions, except earnings per share)
(unaudited)
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13 Weeks Ended |
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December 30, |
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December 31, |
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2007 |
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2006 |
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Net revenues: |
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Company-operated retail |
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$ |
2,351.5 |
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$ |
2,006.8 |
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Specialty: |
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Licensing |
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304.8 |
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253.9 |
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Foodservice and other |
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111.3 |
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95.0 |
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Total specialty |
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416.1 |
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348.9 |
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Total net revenues |
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2,767.6 |
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2,355.7 |
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Cost of sales including occupancy costs |
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1,186.0 |
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984.8 |
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Store operating expenses |
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927.3 |
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772.0 |
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Other operating expenses |
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85.7 |
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70.9 |
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Depreciation and amortization expenses |
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133.2 |
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110.2 |
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General and administrative expenses |
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125.9 |
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116.8 |
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Total operating expenses |
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2,458.1 |
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2,054.7 |
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Income from equity investees |
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23.6 |
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18.7 |
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Operating income |
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333.1 |
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319.7 |
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Interest income and other, net |
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10.7 |
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13.5 |
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Interest expense |
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(17.1 |
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(7.0 |
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Earnings before income taxes |
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326.7 |
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326.2 |
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Income taxes |
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118.6 |
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121.2 |
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Net earnings |
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$ |
208.1 |
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$ |
205.0 |
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Net earnings per common share basic |
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$ |
0.28 |
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$ |
0.27 |
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Net earnings per common share diluted |
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$ |
0.28 |
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$ |
0.26 |
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Weighted average shares outstanding: |
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Basic |
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731.6 |
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758.1 |
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Diluted |
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744.9 |
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782.8 |
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See Notes to Condensed Consolidated Financial Statements.
1
STARBUCKS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
(unaudited)
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December 30, |
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September 30, |
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2007 |
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2007 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
349.3 |
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$ |
281.3 |
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Short-term investments available-for-sale securities |
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113.2 |
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83.8 |
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Short-term investments trading securities |
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72.9 |
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73.6 |
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Accounts receivable, net |
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316.2 |
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287.9 |
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Inventories |
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580.9 |
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691.7 |
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Prepaid expenses and other current assets |
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144.7 |
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148.8 |
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Deferred income taxes, net |
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160.4 |
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129.4 |
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Total current assets |
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1,737.6 |
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1,696.5 |
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Long-term investments available-for-sale securities |
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21.0 |
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Equity and other investments |
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270.3 |
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258.9 |
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Property, plant and equipment, net |
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2,993.0 |
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2,890.4 |
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Other assets |
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247.0 |
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219.4 |
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Other intangible assets |
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42.4 |
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42.1 |
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Goodwill |
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216.1 |
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215.6 |
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TOTAL ASSETS |
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$ |
5,506.4 |
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$ |
5,343.9 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Commercial paper and short-term borrowings |
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$ |
529.5 |
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$ |
710.3 |
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Accounts payable |
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340.8 |
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390.8 |
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Accrued compensation and related costs |
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341.9 |
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332.3 |
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Accrued occupancy costs |
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78.1 |
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74.6 |
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Accrued taxes |
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187.6 |
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92.5 |
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Other accrued expenses |
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261.8 |
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257.4 |
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Deferred revenue |
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512.7 |
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296.9 |
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Current portion of long-term debt |
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0.8 |
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0.8 |
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Total current liabilities |
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2,253.2 |
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2,155.6 |
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Long-term debt |
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550.0 |
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550.1 |
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Other long-term liabilities |
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450.0 |
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354.1 |
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Total liabilities |
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3,253.2 |
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3,059.8 |
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Shareholders equity: |
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Common stock ($0.001 par value) authorized, 1,200.0
shares; issued and outstanding, 727.6 and 738.3
shares, respectively (includes 3.4 common stock units
in both periods) |
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0.7 |
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0.7 |
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Other additional paid-in-capital |
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39.4 |
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39.4 |
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Retained earnings |
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2,148.6 |
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2,189.4 |
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Accumulated other comprehensive income |
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64.5 |
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54.6 |
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Total shareholders equity |
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2,253.2 |
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2,284.1 |
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
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$ |
5,506.4 |
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$ |
5,343.9 |
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See Notes to Condensed Consolidated Financial Statements.
2
STARBUCKS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions and unaudited)
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13 Weeks Ended |
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December 30, |
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December 31, |
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2007 |
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2006 |
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OPERATING ACTIVITIES: |
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Net earnings |
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$ |
208.1 |
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$ |
205.0 |
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Adjustments to reconcile net earnings to net cash provided by operating activities: |
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Depreciation and amortization |
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139.9 |
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116.1 |
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Provision for impairments and asset disposals |
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4.9 |
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3.5 |
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Deferred income taxes, net |
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(22.1 |
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(21.3 |
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Equity in income of investees |
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(11.0 |
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(9.0 |
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Distributions of income from equity investees |
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9.2 |
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18.8 |
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Stock-based compensation |
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24.3 |
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24.4 |
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Tax benefit from exercise of stock options |
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1.1 |
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3.4 |
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Excess tax benefit from exercise of stock options |
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(3.0 |
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(29.6 |
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Net amortization of (discount)/premium on securities |
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(0.1 |
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0.2 |
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Cash provided/(used) by changes in operating assets and liabilities: |
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Inventories |
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111.9 |
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91.3 |
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Accounts payable |
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(42.6 |
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(64.2 |
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Accrued taxes |
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124.6 |
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109.8 |
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Deferred revenue |
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215.6 |
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191.2 |
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Other operating assets and liabilities |
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46.8 |
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38.8 |
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Net cash provided by operating activities |
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807.6 |
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678.4 |
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INVESTING ACTIVITIES: |
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Purchase of available-for-sale securities |
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(41.9 |
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(148.4 |
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Maturity of available-for-sale securities |
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115.2 |
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Sale of available-for-sale securities |
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33.8 |
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Acquisitions, net of cash acquired |
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(47.3 |
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Net purchases of equity, other investments and other assets |
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(2.1 |
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(15.7 |
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Net additions to property, plant and equipment |
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(263.6 |
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(270.6 |
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Net cash used by investing activities |
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(273.8 |
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(366.8 |
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FINANCING ACTIVITIES: |
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Repayments of commercial paper |
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(21,910.3 |
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Proceeds from issuance of commercial paper |
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21,729.5 |
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Repayments of short-term borrowings |
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(359.0 |
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Proceeds from short-term borrowings |
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24.0 |
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Proceeds from issuance of common stock |
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21.6 |
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65.5 |
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Excess tax benefit from exercise of stock options |
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3.0 |
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29.6 |
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Principal payments on long term debt |
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(0.2 |
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(0.2 |
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Repurchase of common stock |
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(311.3 |
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(115.2 |
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Net cash used by financing activities |
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(467.7 |
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(355.3 |
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Effect of exchange rate changes on cash and cash equivalents |
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1.9 |
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2.0 |
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Net increase/(decrease) in cash and cash equivalents |
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68.0 |
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(41.7 |
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CASH AND CASH EQUIVALENTS: |
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Beginning of period |
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281.3 |
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312.6 |
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End of period |
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$ |
349.3 |
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$ |
270.9 |
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
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Cash paid during the period for: |
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Interest, net of capitalized interest |
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$ |
8.6 |
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$ |
8.3 |
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Income taxes |
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$ |
16.4 |
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$ |
40.6 |
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See Notes to Condensed Consolidated Financial Statements.
3
STARBUCKS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 13 Weeks Ended December 30, 2007 and December 31, 2006
(unaudited)
Note 1: Summary of Significant Accounting Policies
Financial Statement Preparation
The unaudited condensed consolidated financial statements as of December 30, 2007, and for the
13-week periods ended December 30, 2007 and December 31, 2006, have been prepared by Starbucks
Corporation (Starbucks or the Company) under the rules and regulations of the Securities and
Exchange Commission (the SEC). In the opinion of management, the financial information for the
13-week periods December 30, 2007 and December 31, 2006 reflects all adjustments and accruals,
which are of a normal recurring nature, necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods.
The financial information as of September 30, 2007 is derived from the Companys audited
consolidated financial statements and notes for the fiscal year ended September 30, 2007 (fiscal
2007), included in Item 8 in the Fiscal 2007 Annual Report on Form 10-K (the 10-K). The
information included in this Form 10-Q should be read in conjunction with managements discussion
and analysis and notes to the financial statements in the 10-K.
The results of operations for the 13-week period ended December 30, 2007, are not necessarily
indicative of the results of operations that may be achieved for the entire fiscal year ending
September 28, 2008 (fiscal 2008).
Certain reclassifications of prior years balances have been made to conform to the current format,
including reclassifications from Other operating expenses to General and administrative
expenses on the consolidated statements of earnings.
Income Taxes
On October 1, 2007, the Company adopted Financial Accounting Standards Board (FASB)
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income tax
positions recognized in the financial statements in accordance with Statement of Financial
Accounting Standard (SFAS) No. 109. Under FIN 48, the Company may recognize the tax benefit from
an uncertain tax position only if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the technical merits of the position.
The tax benefits recognized in the financial statements from such a position should be measured
based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate
settlement. FIN 48 also provides guidance on measurement, classification, interest and penalties
associated with tax positions, and income tax disclosures.
The cumulative effects of applying FIN 48 have been recorded as a decrease of $1.7 million and $1.6
million, respectively, to the Companys fiscal 2008 opening retained earnings and paid-in capital.
The Company also recorded an increase of $28.5 million to current income tax assets, an increase of
$12.2 million to long-term income tax assets, a decrease of $24.6 million to current tax
liabilities and an increase of $68.6 million to long-term tax liabilities. As of October 1, 2007,
the Company had $69.9 million of gross unrecognized tax benefits of which $27.6 million, if
recognized, would affect the effective tax rate. The Company recognizes interest and penalties
related to income tax matters in income tax expense. Accrued interest expense upon adoption was
$11.4 million, before benefit of federal tax deduction.
Starbucks is currently under routine audit by the IRS for fiscal year 2005 and by various state
taxing jurisdictions for fiscal years 2003 through 2006. The Company is no longer subject to U.S.
federal or state examination for years before fiscal year 2004, with the exception of nine states.
The Company is subject to income tax in many jurisdictions outside the United States, none of which
are individually material to the consolidated financial statements.
4
There is a reasonable possibility that the unrecognized tax benefits will change within the next 12
months, but the Company does not expect this change to be material to the consolidated financial
statements.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157), which
defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective
for financial statements issued for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. Early adoption is permitted. Starbucks must adopt these new
requirements no later than its first fiscal quarter of 2009. Starbucks has not yet determined the
effect on the Companys consolidated financial statements, if any, upon adoption of SFAS 157, or if
it will adopt the requirements prior to the first fiscal quarter of 2009.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). SFAS 159 permits companies to choose to measure many financial
instruments and certain other items at fair value. SFAS 159 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, or Starbucks first fiscal quarter of
2009. Early adoption is permitted. Starbucks has not yet determined if it will elect to apply any
of the provisions of SFAS 159 or what the effect of adoption of the statement would have, if any,
on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations
(SFAS 141R), which replaces SFAS No. 141. SFAS 141R establishes principles and requirements for
how an acquirer recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any resulting goodwill, and any noncontrolling interest in the
acquiree. The Statement also provides for disclosures to enable users of the financial statements
to evaluate the nature and financial effects of the business combination. SFAS 141R is effective
for financial statements issued for fiscal years beginning after December 15, 2008, or Starbucks
first fiscal quarter of 2010 and must be applied prospectively to business combinations completed
on or after that date. The Company will evaluate how the new requirements could impact the
accounting for any acquisitions completed beginning in fiscal 2010 and beyond, and the potential
impact on the Companys consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements an amendment of Accounting Research Bulletin No. 51 (SFAS 160), which establishes
accounting and reporting standards for noncontrolling interests (minority interests) in
subsidiaries. SFAS 160 clarifies that a noncontrolling interest in a subsidiary should be
accounted for as a component of equity separate from the parents equity. SFAS 160 is effective
for financial statements issued for fiscal years beginning after December 15, 2008, or Starbucks
first fiscal quarter of 2010 and must be applied prospectively, except for the presentation and
disclosure requirements, which will apply retrospectively. The Company is currently evaluating the
potential impact of the adoption of SFAS 160 on the Companys consolidated financial statements.
Note 2: Derivative Financial Instruments
The Company may engage in transactions involving various derivative instruments, with maturities
generally not longer than five years, to hedge interest rates, commodity prices, and foreign
currency denominated revenues, purchases, assets and liabilities.
Cash Flow Hedges
The Company and certain subsidiaries enter into cash flow derivative instruments to hedge portions
of anticipated revenue streams and inventory purchases in currencies other than the entitys
functional currency. Outstanding forward contracts, which comprise the majority of the Companys
derivative instruments, hedge monthly forecasted revenue transactions denominated in Japanese yen
and Canadian dollars, as well as forecasted inventory purchases denominated primarily in
U.S. dollars for foreign operations. The Company uses futures contracts to hedge the variable price
component for a small portion of its price-to-be-fixed green coffee purchase contracts.
In addition, the Company entered into, dedesignated and settled forward interest rate contracts
during the fiscal fourth quarter of 2007 to hedge movements in interest rates prior to issuance of
$550 million of 6.25% Senior Notes.
5
The resulting net losses accumulated in other comprehensive income in fiscal 2007 from these
contracts will be recorded to Interest expense on the consolidated statement of earnings over the
remaining life of the Senior Notes.
The Company had accumulated net derivative losses of $14.8 million, net of taxes, in other
comprehensive income as of December 30, 2007, related to cash flow hedges. Of this amount, $5.8
million of net derivative losses pertain to hedging instruments that will be dedesignated within 12
months and will also continue to experience fair value changes before affecting earnings. No cash
flow hedges were discontinued and no ineffectiveness was recognized during the 13-week periods
ended December 30, 2007 and December 31, 2006. Outstanding contracts will expire within 33 months.
Net Investment Hedges
Net investment derivative instruments are used to hedge the Companys equity method investment in
Starbucks Coffee Japan, Ltd. (Starbucks Japan) as well as the Companys net investments in its
Canadian, United Kingdom (UK), and Chinese subsidiaries, to minimize foreign currency exposure.
The Company had accumulated net derivative losses of $12.7 million, net of taxes, in other
comprehensive income as of December 30, 2007, related to net investment derivative hedges.
Outstanding contracts expire within 26 months.
The following table presents the net gains and losses reclassified from other comprehensive income
into the consolidated statements of earnings during the periods indicated for cash flow and net
investment hedges (in millions):
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
|
Dec 30, |
|
Dec 31, |
|
|
2007 |
|
2006 |
|
|
|
Cash flow hedges: |
|
|
|
|
|
|
|
|
Reclassified gains/(losses) into total net revenues |
|
$ |
(0.6 |
) |
|
$ |
0.3 |
|
Reclassified losses into cost of sales |
|
|
(2.3 |
) |
|
|
(1.0 |
) |
Reclassified losses into interest expense |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
Net reclassified losses cash flow hedges |
|
|
(3.1 |
) |
|
|
(0.7 |
) |
Net reclassified gains net investment hedges |
|
|
1.2 |
|
|
|
1.3 |
|
|
|
|
Total |
|
$ |
(1.9 |
) |
|
$ |
0.6 |
|
|
|
|
Other Derivatives
Starbucks entered into foreign currency forward contracts that are not designated as hedging
instruments for accounting purposes to mitigate the translation risk of certain balance sheet
items. For the 13-week period ended December 30, 2007, these forward contracts resulted in net
gains of $1.2 million. These gains were largely offset by the financial impact of translating
foreign currency denominated payables and receivables, which are also recognized in Interest
income and other, net. No similar contracts were held as of December 31, 2006.
Note 3: Inventories
Inventories consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec 30, |
|
|
Sept 30, |
|
|
Dec 31, |
|
|
|
2007 |
|
|
2007 |
|
|
2006 |
|
Coffee: |
|
|
|
|
|
|
|
|
|
|
|
|
Unroasted |
|
$ |
279.4 |
|
|
$ |
339.5 |
|
|
$ |
273.2 |
|
Roasted |
|
|
81.7 |
|
|
|
88.6 |
|
|
|
76.4 |
|
Other merchandise held for sale |
|
|
138.2 |
|
|
|
175.5 |
|
|
|
125.4 |
|
Packaging and other supplies |
|
|
81.6 |
|
|
|
88.1 |
|
|
|
72.3 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
580.9 |
|
|
$ |
691.7 |
|
|
$ |
547.3 |
|
|
|
|
|
|
|
|
|
|
|
Other merchandise held for sale includes, among other items, brewing equipment, retail media and
serveware.
6
As of December 30, 2007, the Company had committed to purchasing green coffee totaling $553 million
under fixed-price contracts and an estimated $33 million under price-to-be-fixed contracts. The
Company believes, based
on relationships established with its suppliers in the past, the risk of non-delivery on such
purchase commitments is remote.
Note 4: Property, Plant and Equipment
Property, plant and equipment are recorded at cost and consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
Dec 30, |
|
|
Sept 30, |
|
|
|
2007 |
|
|
2007 |
|
Land |
|
$ |
57.0 |
|
|
$ |
56.2 |
|
Buildings |
|
|
172.8 |
|
|
|
161.7 |
|
Leasehold improvements |
|
|
3,277.2 |
|
|
|
3,103.1 |
|
Store equipment |
|
|
1,052.7 |
|
|
|
1,002.3 |
|
Roasting equipment |
|
|
212.8 |
|
|
|
208.8 |
|
Furniture, fixtures and other |
|
|
579.7 |
|
|
|
559.1 |
|
|
|
|
|
|
|
|
|
|
|
5,352.2 |
|
|
|
5,091.2 |
|
Less: accumulated depreciation and amortization |
|
|
(2,545.4 |
) |
|
|
(2,416.1 |
) |
|
|
|
|
|
|
|
|
|
|
2,806.8 |
|
|
|
2,675.1 |
|
Work in progress |
|
|
186.2 |
|
|
|
215.3 |
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
2,993.0 |
|
|
$ |
2,890.4 |
|
|
|
|
|
|
|
|
Note 5: Debt
Revolving Credit Facility and Commercial Paper Program
The Company has a $1 billion unsecured credit facility (the facility) with various banks, of
which $100 million may be used for issuances of letters of credit. The facility is available for
working capital, capital expenditures and other corporate purposes, which may include acquisitions
and share repurchases. The facility is currently set to terminate in August 2011. The interest rate
for borrowings under the facility ranges from 0.11% to 0.27% over LIBOR or an alternate base rate,
which is the greater of the bank prime rate or the Federal Funds Rate plus 0.50%. The specific
spread over LIBOR will depend upon the Companys long-term credit ratings assigned by Moodys and
Standard and Poors rating agencies and the Companys coverage ratio.
As of December 30, 2007 and September 30, 2007, the Company had no borrowings under this credit
facility.
The Company also has a commercial paper program (the program) under which the Company may issue
unsecured commercial paper notes, up to a maximum aggregate amount outstanding at any time of
$1 billion, with individual maturities that may vary, but not exceed 397 days from the date of
issue. The program is backstopped by the Companys revolving credit facility, and the combined
borrowing limit is $1 billion for the program and the facility. The Company may issue commercial
paper from time to time, and the proceeds of the commercial paper financing will be used for
working capital, capital expenditures and other corporate purposes, which may include acquisitions
and share repurchases.
As of December 30, 2007, the Company had $529.5 million in borrowing outstanding under the program
with a weighted average interest rate of 5.2%. As of September 30, 2007, the Company had
$710.3 million in borrowings outstanding under the program with a weighted average interest rate of
5.4%.
As of December 30, 2007, the Company had $13.1 million in letters of credit outstanding under the
revolving credit facility, leaving a total of $456.9 million in remaining borrowing capacity under
the combined revolving credit facility and commercial paper program. As of September 30, 2007,
letters of credit outstanding totaled $12.9 million.
Long-term Debt
In August 2007, the Company issued $550 million of 6.25% Senior Notes (the notes) due in August
2017, in an underwritten registered public offering. Interest is payable semi-annually on February
15 and August 15 of each year, commencing February 15, 2008.
7
Interest Expense
Interest expense, net of interest capitalized, was $17.1 million and $7.0 million for the 13 weeks
ended December 30, 2007 and December 31, 2006 respectively. For the 13 weeks ended December 30,
2007 and December 31, 2006, $1.4 million and $0.8 million, respectively, of interest expense was
capitalized.
Note 6: Other Long-term Liabilities
The Companys other long-term liabilities consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
Dec 30, |
|
|
Sep 30, |
|
|
|
2007 |
|
|
2007 |
|
Deferred rent |
|
$ |
290.1 |
|
|
$ |
271.7 |
|
Unrecognized tax benefits |
|
|
72.5 |
|
|
|
|
|
Asset retirement obligations |
|
|
46.2 |
|
|
|
43.7 |
|
Minority interest |
|
|
18.6 |
|
|
|
17.3 |
|
Other |
|
|
22.6 |
|
|
|
21.4 |
|
|
|
|
|
|
|
|
Total |
|
$ |
450.0 |
|
|
$ |
354.1 |
|
|
|
|
|
|
|
|
Deferred rent liabilities represent amounts for tenant improvement allowances, rent escalation
clauses and rent holidays related to certain operating leases. The Company amortizes deferred rent
over the terms of the leases as reductions to rent expense on the consolidated statements of
earnings.
Unrecognized tax benefits represent the estimated long-term portion of the Companys gross
unrecognized tax benefits including interest upon the adoption of FIN 48. See Note 1 for additional
information. As required under FIN 48, the cumulative impact of adopting the new accounting
requirements were recorded as an adjustment to the opening balance of retained earnings and the
related balance sheet impacts to assets and liabilities were recorded on a prospective basis only.
Asset retirement obligations represent the estimated fair value of the Companys future costs of
removing leasehold improvements at the termination of leases for certain stores and administrative
facilities.
Minority interest represents the collective ownership interests of minority shareholders for
operations accounted for under the consolidation method, in which Starbucks owns less than 100% of
the equity interest.
The other remaining long-term liabilities generally include obligations to be settled or paid for
one year beyond each period presented, for items such as hedging instruments, guarantees, and the
long-term portion of capital lease obligations.
Note 7: Shareholders Equity
In addition to 1.2 billion shares of authorized common stock with $0.001 par value per share, the
Company has authorized 7.5 million shares of preferred stock, none of which was outstanding at
December 30, 2007.
Under the Companys authorized share repurchase program, Starbucks acquired 12.2 million shares at
an average price of $24.12 for a total accrual-based cost of $295.3 million during the 13-week
period ended December 30, 2007. The related cash amount used to repurchase shares for the 13-week
period ended December 30, 2007 totaled $311.3 million. The difference between the two amounts
represents the effect of the net change in unsettled trades totaling $16.0 million from September
30, 2007. Starbucks acquired 3.6 million shares at an average price of $36.04 for a total
accrual-based cost of $129.5 million during the 13-week period ended December 31, 2006. The related
cash amount used to repurchase shares for the 13-week period ended December 31, 2006 totaled
$115.2 million. The difference between the two amounts represents the effect of the net change in
unsettled trades totaling $14.3 million from October 1, 2006. Share repurchases were funded through
cash, cash equivalents, available-for-sale securities, borrowings under the commercial paper
program and revolving credit facility and proceeds from sale of the notes, and were part of the
Companys active capital management program. As of December 30, 2007, a total of up to 1.3 million
shares remained available for repurchase, under the current authorization. On January 29, 2008,
Starbucks Board of Directors authorized the repurchase of up to 5 million additional shares of the
Companys common stock.
8
Comprehensive Income
Comprehensive income includes all changes in equity during the period, except those resulting from
transactions with shareholders and subsidiaries of the Company. It has two components: net earnings
and other comprehensive income. Accumulated other comprehensive income reported on the Companys
consolidated balance sheets consists of foreign currency translation adjustments and the unrealized
gains and losses, net of applicable taxes, on available-for-sale securities and on derivative
instruments designated and qualifying as cash flow and net investment hedges.
Comprehensive income, net of related tax effects, is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
|
|
Dec 30, |
|
|
Dec 31, |
|
|
|
2007 |
|
|
2006 |
|
Net earnings |
|
$ |
208.1 |
|
|
$ |
205.0 |
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains on available-for-sale securities |
|
|
|
|
|
|
0.1 |
|
Unrealized holding gains/(losses) on cash flow hedging instruments |
|
|
(0.9 |
) |
|
|
5.5 |
|
Unrealized holding losses on net investment hedging instruments |
|
|
(0.6 |
) |
|
|
(0.1 |
) |
Reclassification adjustment for net losses realized in net earnings for cash flow hedges |
|
|
1.1 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
Net unrealized gains/(losses) |
|
|
(0.4 |
) |
|
|
6.3 |
|
Translation adjustment |
|
|
10.4 |
|
|
|
5.2 |
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
218.1 |
|
|
$ |
216.5 |
|
|
|
|
|
|
|
|
The favorable translation adjustment change for the 13-week period ended December 30, 2007 of $10.4
million was primarily due to the weakening of the U.S. dollar against the euro, Canadian dollar and
Japanese yen. The favorable translation adjustment change for the 13-week period ended December 31,
2006 of $5.2 million was primarily due to the weakening of the U.S. dollar against several
currencies including the euro and British pound sterling, offset in part by the strengthening of
the U.S. dollar against the Canadian dollar.
The components of accumulated other comprehensive income, net of tax, as presented on the
consolidated balance sheets were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Dec 30, |
|
|
Sept 30, |
|
|
|
2007 |
|
|
2007 |
|
Net unrealized holding losses on hedging instruments |
|
$ |
(27.5 |
) |
|
$ |
(27.1 |
) |
Translation adjustment |
|
|
92.0 |
|
|
|
81.7 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
$ |
64.5 |
|
|
$ |
54.6 |
|
|
|
|
|
|
|
|
As of December 30, 2007, the translation adjustment of $92.0 million was net of tax provisions of
$6.9 million. As of September 30, 2007, the translation adjustment of $81.7 million was net of tax
provisions of $7.3 million.
Note 8: Stock-Based Compensation
The Company maintains several equity incentive plans under which it may grant non-qualified stock
options, incentive stock options, restricted stock, restricted stock units (RSUs), or stock
appreciation rights to employees, non-employee directors and consultants. The Company issues new
shares of common stock upon exercise of stock options and the vesting of RSUs. As of December 30,
2007, there were 46.7 million shares of common stock available for issuance pursuant to future
equity-based compensation awards. The Company also has employee stock purchase plans (ESPP).
Stock options to purchase the Companys common stock are granted at the fair market value of the
stock on the date of grant. The majority of options become exercisable in four equal installments
beginning a year from the date of grant and generally expire 10 years from the date of grant.
Certain options granted prior to October 1, 2006 become exercisable in three equal installments
beginning a year from the date of grant. Options granted to non-employee directors generally vest
over one to three years. Nearly all outstanding stock options are non-qualified stock options.
9
The fair value of stock awards was estimated at the date of grant using the Black-Scholes-Merton
option valuation model. The following table presents the weighted average assumptions used to value
stock options, along with the related weighted average grant price for the 13-week periods ended
December 30, 2007 and December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Options Granted During the Period |
|
|
13 Weeks Ended |
|
|
Dec 30, 2007 |
|
Dec 31, 2006 |
Expected term (in years) |
|
|
4.8 |
|
|
|
4.7 |
|
Expected stock price volatility |
|
|
29.0 |
% |
|
|
29.1 |
% |
Risk-free interest rate |
|
|
3.5 |
% |
|
|
4.6 |
% |
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
Weighted average grant price |
|
$ |
22.88 |
|
|
$ |
36.78 |
|
|
|
|
|
|
|
|
|
|
Estimated fair value per option granted |
|
$ |
7.10 |
|
|
$ |
12.04 |
|
The assumptions used to calculate the fair value of stock awards granted are evaluated and revised,
as necessary, to reflect market conditions and the Companys experience.
The following represents total stock based compensation expense recognized in the consolidated
financial statements (in millions):
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
|
|
Dec 30, 2007 |
|
|
Dec 31, 2006 |
|
Stock option expense |
|
$ |
21.1 |
|
|
$ |
21.5 |
|
ESPP expense |
|
|
3.2 |
|
|
|
2.9 |
|
|
|
|
|
|
|
|
Total stock-based compensation expense
on the consolidated statements of
earnings |
|
|
24.3 |
|
|
|
24.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total related tax benefit |
|
|
8.1 |
|
|
|
8.4 |
|
Stock-based compensation capitalized
in the current fiscal period, as
included in Property, plant and
equipment, net and Inventories on
the consolidated balance sheets |
|
|
0.7 |
|
|
|
0.5 |
|
The following summarizes all stock option transactions from September 30, 2007 through December 30,
2007 (in millions except per share and contractual life amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Weighted |
|
|
|
|
|
|
|
|
Average |
|
Average |
|
|
|
|
Shares |
|
Exercise |
|
Remaining |
|
Aggregate |
|
|
Subject to |
|
Price |
|
Contractual |
|
Intrinsic |
|
|
Options |
|
per Share |
|
Life (Years) |
|
Value |
Outstanding, September 30, 2007 |
|
|
65.5 |
|
|
$ |
20.97 |
|
|
|
6.2 |
|
|
$ |
507.5 |
|
Granted |
|
|
13.3 |
|
|
|
22.88 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(0.9 |
) |
|
|
10.64 |
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled |
|
|
(1.0 |
) |
|
|
30.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 30, 2007 |
|
|
76.9 |
|
|
|
21.29 |
|
|
|
6.7 |
|
|
|
298.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 30, 2007 |
|
|
49.4 |
|
|
|
17.50 |
|
|
|
5.3 |
|
|
|
298.1 |
|
Vested and expected to vest, December 30, 2007 |
|
|
70.6 |
|
|
|
20.61 |
|
|
|
6.4 |
|
|
|
298.3 |
|
The aggregate intrinsic value in the table above is the amount by which the market value of the
underlying stock at close on the last business day of the period indicated exceeded the exercise
price of outstanding options. The aggregate intrinsic value is before applicable income taxes and
represents the amount optionees would have realized if all in-the-money options had been exercised.
The closing market value of the Companys stock on December 28, 2007 was $20.13. As of December
30, 2007, total unrecognized stock-based compensation expense related to nonvested stock options
was approximately $156 million, before income taxes, and is expected to be recognized over a
weighted average period of approximately 25 months.
10
Note 9: Earnings Per Share
The following table represents the calculation of net earnings per common share basic and diluted
(in millions, except earnings per share):
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
|
Dec 30, |
|
Dec 31, |
|
|
2007 |
|
2006 |
Net earnings |
|
$ |
208.1 |
|
|
$ |
205.0 |
|
Weighted average common shares and common stock units
outstanding (for basic calculation) |
|
|
731.6 |
|
|
|
758.1 |
|
Dilutive effect of outstanding common stock options |
|
|
13.3 |
|
|
|
24.7 |
|
|
|
|
Weighted average common and common equivalent shares outstanding
(for diluted calculation) |
|
|
744.9 |
|
|
|
782.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share basic |
|
$ |
0.28 |
|
|
$ |
0.27 |
|
Net earnings per common and common equivalent share diluted |
|
$ |
0.28 |
|
|
$ |
0.26 |
|
Potential dilutive shares consist of the incremental common shares issuable upon the exercise of
outstanding stock options (both vested and non-vested) and unvested RSUs using the treasury stock
method. Potential dilutive shares are excluded from the computation of earnings per share if their
effect is antidilutive. The number of antidilutive options and RSUs totaled 38.1 million and 5.5
million for the 13-week periods ended December 30, 2007 and December 31, 2006, respectively.
Note 10: Commitments and Contingencies
Guarantees
The Company has unconditionally guaranteed the repayment of certain Japanese yen-denominated bank
loans and related interest and fees of an unconsolidated equity investee, Starbucks Japan. The
guarantees continue until the loans, including accrued interest and fees, have been paid in full,
with the final loan amount due in 2014. The maximum amount is limited to the sum of unpaid
principal and interest amounts, as well as other related expenses. These amounts will vary based on
fluctuations in the yen foreign exchange rate. As of December 30, 2007, the maximum amount of the
guarantees was approximately $4.9 million. Since there has been no modification of these loan
guarantees subsequent to the Companys adoption of FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, Starbucks has applied the disclosure provisions only and has not recorded
the guarantee on its consolidated balance sheet.
Starbucks has commitments under which it unconditionally guarantees its proportionate share of
certain borrowings of unconsolidated equity investees. The Companys maximum exposure under these
commitments is approximately $14.3 million, excluding interest and other related costs, and these
commitments expire between 2008 and 2012. As of December 30, 2007, the Company had a total of
$3.2 million in Equity and other investments and Other long-term liabilities on the
consolidated balance sheet for the fair value of the guarantee arrangements.
11
Legal Proceedings
On June 3, 2004, two then-current employees of the Company filed a lawsuit, entitled Sean
Pendlebury and Laurel Overton v. Starbucks Coffee Company, in the U.S. District Court for the
Southern District of Florida claiming the Company violated requirements of the Fair Labor Standards
Act (FLSA). The suit alleges that the Company misclassified its retail store managers as exempt
from the overtime provisions of the FLSA, and that each manager therefore is entitled to overtime
compensation for any week in which he or she worked more than 40 hours during the three years
before joining the suit as a plaintiff, and for as long as they remain a manager thereafter.
Plaintiffs seek to represent themselves and all similarly situated U.S. current and former store
managers of the Company. Plaintiffs seek reimbursement for an unspecified
amount of unpaid overtime compensation, liquidated damages, attorneys fees and costs. Plaintiffs
also
filed on June 3, 2004 a motion for conditional collective action treatment and
court-supervised notice to additional putative class members under the opt-in procedures in
section 16(b) of the FLSA. On January 3, 2005, the district court entered an order authorizing
nationwide notice of the lawsuit to all current and former store managers employed by the Company
during the three years before the suit was filed. The Companys initial motion for summary judgment
was denied without prejudice. The Company plans to file another motion for summary judgment with
the court. Starbucks believes that the plaintiffs are properly classified as exempt under the
federal wage laws. The Company cannot estimate the possible loss to the Company, if any, and
believes that a loss in this case is unlikely. There is currently no trial date. The Company
intends to vigorously defend the lawsuit.
On October 8, 2004, a former hourly employee of the Company filed a lawsuit in San Diego County
Superior Court entitled Jou Chau v. Starbucks Coffee Company. The lawsuit alleges that the Company
violated the California Labor Code by allowing shift supervisors to receive tips. More
specifically, the lawsuit alleges that since shift supervisors direct the work of baristas, they
qualify as agents of the Company and are therefore excluded from receiving tips under California
Labor Code Section 351, which prohibits employers and their agents from collecting or receiving
tips left by patrons for other employees. The lawsuit further alleges that because the tipping
practices violate the Labor Code, they also are unfair practices under the California Unfair
Competition Law. In addition to recovery of an unspecified amount of tips distributed to shift
supervisors, the lawsuit seeks penalties under California Labor Code Section 203 for willful
failure to pay wages due. Plaintiff also seeks attorneys fees and costs. On March 30, 2006, the
Court issued an order certifying the case as a class action, with the plaintiff representing a
class of all persons employed as baristas in the state of California since October 8, 2000. In
March 2007, notice of action was sent to approximately 120,000 potential members of the class. The
Company cannot estimate the possible loss to the Company, if any. Trial is currently set for
February 2008. The Company believes its practices comply with California law, and the Company
intends to vigorously defend the lawsuit.
On March 11, 2005, a former employee of the Company filed a lawsuit, entitled James Falcon v.
Starbucks Corporation and Does 1 through 100, in the U.S. District Court for the Southern District
of Texas claiming that the Company violated requirements of the FLSA. Specifically, the plaintiff
claims that the Company misclassified its retail assistant store managers as exempt from the
overtime provisions of the FLSA and that each assistant manager therefore is entitled to overtime
compensation for any week in which he or she worked more than 40 hours during the three years
before joining the suit as a plaintiff, and for as long as they remain an assistant manager
thereafter. On August 18, 2005, the plaintiff amended his complaint to include allegations that he
and other retail assistant store managers were not paid overtime compensation for all hours worked
in excess of 40 hours in a work week after they were re-classified as non-exempt employees in
September 2002. In both claims, Plaintiff seeks to represent himself and a putative class of all
current and former assistant store managers employed by the Company in the United States from
March 11, 2002 until the present. He also seeks, on behalf of himself and the class, reimbursement
for an unspecified amount of unpaid overtime compensation, liquidated damages, injunctive relief,
and attorneys fees and costs. On September 13, 2005, the plaintiff filed a motion for conditional
collective action treatment and court-supervised notice to all putative class members under the
opt-in procedures in section 16(b) of the FLSA. On November 29, 2005, the court entered an order
authorizing notice to the class of the existence of the lawsuit and their opportunity to join as
plaintiffs. The Company has a policy requiring that all non-exempt partners, including assistant
store managers, be paid for all hours worked, including any hours worked in excess of 40 per week.
The Company also believes that this policy is, and at all relevant times has been, communicated and
followed consistently. Further, the Company believes that the plaintiff and other assistant store
managers were properly classified as exempt under the FLSA prior to September 2002. The Company
cannot estimate the possible loss to the Company, if any. Trial is currently set for February 2008. The Company intends to vigorously defend the
lawsuit.
12
On June 30, 2005, three individuals, Erik Lords, Hon Yeung, and Donald Brown filed a lawsuit in
Orange County Superior Court, California. The lawsuit alleges that the Company violated the
California Labor Code section 432.8 by asking job applicants to disclose at the time of application
convictions for marijuana related offenses more than two years old. Plaintiffs also seek attorneys
fees and costs. On November 1, 2007, the Court issued an order certifying the case as a class
action, with the plaintiffs representing a class
of all persons who have applied for employment with Starbucks Coffee Company in California since
June 23, 2004 who cannot claim damages in excess of $200. On November 15, 2007, the court denied
the Companys motion for summary judgment. Starbucks has appealed the denial of its motion for
summary judgment and the California Court of Appeals has agreed to hear the Companys appeal. The
Company cannot estimate the possible loss to the Company, if any. No trial date has been set. The
Company believes its employment application complies with California law, and the Company intends
to vigorously defend the lawsuit.
The Company is party to various other legal proceedings arising in the ordinary course of its
business, but it is not currently a party to any legal proceeding that management believes would
have a material adverse effect on the consolidated financial position or results of operations of
the Company.
Note 11: Segment Reporting
Segment information is prepared on the basis that the Companys management reviews financial
information for operational decision making purposes. The tables below present information by
operating segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United |
|
|
|
|
|
|
|
|
|
Unallocated |
|
|
13 Weeks Ended |
|
States |
|
International |
|
Global CPG |
|
Corporate (1) |
|
Total |
December 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail |
|
$ |
1,890.3 |
|
|
$ |
461.2 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,351.5 |
|
Specialty: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing |
|
|
137.9 |
|
|
|
66.3 |
|
|
|
100.6 |
|
|
|
|
|
|
|
304.8 |
|
Foodservice and other |
|
|
98.0 |
|
|
|
13.3 |
|
|
|
|
|
|
|
|
|
|
|
111.3 |
|
Total specialty |
|
|
235.9 |
|
|
|
79.6 |
|
|
|
100.6 |
|
|
|
|
|
|
|
416.1 |
|
Total net revenues |
|
|
2,126.2 |
|
|
|
540.8 |
|
|
|
100.6 |
|
|
|
|
|
|
|
2,767.6 |
|
Operating income/(loss) |
|
|
310.9 |
|
|
|
54.1 |
|
|
|
50.6 |
|
|
|
(82.5 |
) |
|
|
333.1 |
|
Earnings/(loss) before income taxes |
|
|
317.9 |
|
|
|
58.2 |
|
|
|
50.6 |
|
|
|
(100.0 |
) |
|
|
326.7 |
|
Depreciation and amortization |
|
|
98.4 |
|
|
|
25.7 |
|
|
|
|
|
|
|
9.1 |
|
|
|
133.2 |
|
Income from equity investees |
|
|
0.4 |
|
|
|
12.1 |
|
|
|
11.1 |
|
|
|
|
|
|
|
23.6 |
|
Net impairment and disposition losses |
|
|
3.7 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
4.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail |
|
$ |
1,660.3 |
|
|
$ |
346.5 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,006.8 |
|
Specialty: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing |
|
|
113.3 |
|
|
|
49.9 |
|
|
|
90.7 |
|
|
|
|
|
|
|
253.9 |
|
Foodservice and other |
|
|
86.3 |
|
|
|
8.7 |
|
|
|
|
|
|
|
|
|
|
|
95.0 |
|
Total specialty |
|
|
199.6 |
|
|
|
58.6 |
|
|
|
90.7 |
|
|
|
|
|
|
|
348.9 |
|
Total net revenues |
|
|
1,859.9 |
|
|
|
405.1 |
|
|
|
90.7 |
|
|
|
|
|
|
|
2,355.7 |
|
Operating income/(loss) |
|
|
325.1 |
|
|
|
33.1 |
|
|
|
41.6 |
|
|
|
(80.1 |
) |
|
|
319.7 |
|
Earnings/(loss) before income taxes |
|
|
326.8 |
|
|
|
33.5 |
|
|
|
41.6 |
|
|
|
(75.7 |
) |
|
|
326.2 |
|
Depreciation and amortization |
|
|
81.4 |
|
|
|
20.5 |
|
|
|
|
|
|
|
8.3 |
|
|
|
110.2 |
|
Income from equity investees |
|
|
|
|
|
|
8.0 |
|
|
|
10.7 |
|
|
|
|
|
|
|
18.7 |
|
Net impairment and disposition losses |
|
|
2.5 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
3.5 |
|
|
|
|
(1) |
|
Unallocated Corporate includes expenses pertaining to corporate administrative
functions that support the operating segments but are not specifically attributable to or
managed by any segment and are not included in the reported financial results of the operating
segments. These unallocated corporate expenses include certain general and administrative
expenses, related depreciation and amortization expenses and amounts included in Interest
income and other, net and Interest expense on the consolidated statements of earnings. |
13
The table below represents information by geographic area (in millions):
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
|
Dec 30, |
|
Dec 31, |
|
|
2007 |
|
2006 |
Net revenues from external customers: |
|
|
|
|
|
|
|
|
United States |
|
$ |
2,214.1 |
|
|
$ |
1,944.7 |
|
Other countries |
|
|
553.5 |
|
|
|
411.0 |
|
|
|
|
Total |
|
$ |
2,767.6 |
|
|
$ |
2,355.7 |
|
|
|
|
No customer accounts for 10% or more of the Companys revenues. Revenues are shown based on the
geographic location of the customers. Revenues from countries other than the United States consist
primarily of revenues from the UK and Canada, which together account for approximately 71% of net
revenues from other countries for the 13 weeks ended December 30, 2007.
14
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements herein, including anticipated store openings, trends in or expectations
regarding Starbucks Corporations initiatives and plans, earnings per share, cash flow requirements
and capital expenditures all constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are based on currently available
operating, financial and competitive information and are subject to various risks and
uncertainties. Actual future results and trends may differ materially depending on a variety of
factors, including, but not limited to, coffee, dairy and other raw materials prices and
availability, successful implementation of the Companys transformation plan, successful execution
of internal performance and expansion plans, fluctuations in United States and international
economies and currencies, ramifications from the war on terrorism, or other international events or
developments, the impact of competitors initiatives, the effect of legal proceedings, and other
risks detailed herein, including those described in Part II Item 1A. Risk Factors in this Form
10-Q, and in Starbucks Corporations other filings with the SEC, including the Item 1A. Risks
Factors section of the 10-K.
A forward-looking statement is neither a prediction nor a guarantee of future events or
circumstances, and those future events or circumstances may not occur. Users should not place undue
reliance on the forward-looking statements, which speak only as of the date of this report. The
Company is under no obligation to update or alter any forward-looking statements, whether as a
result of new information, future events or otherwise.
This information should be read in conjunction with the consolidated financial statements and the
notes included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial
statements and notes, and Managements Discussion and Analysis of Financial Condition and Results
of Operations, contained in the 10-K.
General
Starbucks Corporations fiscal year ends on the Sunday closest to September 30. All references to
store counts, including data for new store openings, are reported net of related store closures.
Management Overview
Fiscal 2008 First Quarter in Review
|
|
|
Operating income increased 4% to $333.1 million in the first fiscal quarter of 2008, from
$319.7 million in the prior year quarter. |
|
|
|
|
Operating margin contracted 160 basis points to 12.0% from 13.6% in the prior year, driven
by weakness in the U.S. segment. |
|
|
|
|
U.S. segment operating margin declined 290 basis points to 14.6% from 17.5% in the prior
year, due to higher cost of sales and occupancy costs, and an increase in store operating
expenses, as a percent of revenues. |
|
|
|
|
Weakness in U.S. segment was offset in part by improvement in the International and CPG
segments, as well as leverage on Corporate general and administrative expenses. |
Recent Developments
In early January 2008, the Company announced an organizational restructure and shifting of business
strategy to address the downturn in the U.S. segment and capitalize on its substantial
international opportunities. Over the coming months, management will focus on building a long-term
model to realize a transformation agenda and drive long-term shareholder value. This agenda
includes particular focus on delivering what customers want and expect, and providing the Companys
partners with the tools to help them exceed customers expectations. It is expected that this focus
will enable the Company to offer a renewed Starbucks Experience to customers, while systematically
building the foundation for strong, sustainable growth in fiscal 2009 and beyond.
15
In the second fiscal quarter, the Company will unveil additional details of the transformation
plan, including innovations that are expected to reassert the Companys coffee leadership, redefine
the in-store experience and introduce core brand-building initiatives. To ensure discipline around
execution and profitability, the Company has slowed the pace of store growth in the U.S. to
approximately 1,175 stores for this fiscal year, down from a revised target of 1,600 stores. To
capitalize on Starbucks substantial international opportunities, the Company increased the store
opening target in international markets to approximately 975 stores. By reducing the number of
openings in the U.S., the Company expects to optimize resources and potentially reduce
cannibalization of existing stores. Given these efforts, management now views fiscal 2008 as a
year of refocus and renewal for Starbucks. In light of the ongoing implementation of the
transformation agenda, and the expected continued macroeconomic weakness in the U.S., the Company
expects low double-digit EPS expansion in fiscal 2008.
When Starbucks reports fiscal second quarter 2008 earnings on April 30, 2008 the Company plans to
provide longer term financial targets by which Starbucks and the financial community can measure
the Companys performance. Because the transformation agenda will include near term changes that
will significantly impact the Companys U.S. retail stores, Starbucks will no longer report
comparable store sales metrics, as they will not be an effective indicator of the Companys
performance.
Operating Segment Overview
Starbucks has three reportable operating segments: United States, International and CPG.
The United States and International segments both include Company-operated retail stores, licensed
retail stores and foodservice operations. The United States segment is the Companys largest
segment, generating over 75% of total revenues, and has been operating significantly longer than
the International segment and has developed deeper awareness of, and attachment to, the Starbucks
brand and stores among its customer base. As a result, the United States segment currently has
significantly more stores, and higher total revenues than the International segment. Average sales
per store are also higher in the United States due to various factors including length of time in
market and local income levels. Further, certain market costs, particularly occupancy costs, are
lower in the United States segment compared to the average for the International segment, which
comprises a more diverse group of operations. As a result of the relative strength of the brand in
the United States segment, the number of stores, the higher unit volumes, and the lower market
costs, the United States segment has a higher operating margin than the less-developed
International segment.
The Companys International store base continues to increase rapidly and Starbucks is achieving a
growing contribution from established international markets while at the same time investing in
emerging markets, such as China. The Companys newer international markets require a more extensive
support organization, relative to the current levels of revenue and operating income.
The CPG segment includes the Companys grocery and warehouse club business as well as branded
products operations worldwide. The CPG segment operates primarily through joint ventures and
licensing arrangements with large consumer products business partners, most significantly The North
American Coffee Partnership with the Pepsi-Cola Company for distribution of ready-to-drink
beverages, and with Kraft Foods Inc. for distribution of packaged coffees and teas. This operating
model allows the CPG segment to leverage the business partners existing infrastructures and to
extend the Starbucks brand in an efficient way. Most of the customer revenues from the
ready-to-drink and packaged coffee channels are recognized as revenues by the joint venture or
licensed business partner, not by the CPG segment, and the proportionate share of the results of
the Companys joint ventures are included on a net basis in Income from equity investees on the
consolidated statements of earnings. As a result, the CPG segment reflects relatively lower
revenues, a modest cost structure, and a resulting higher operating margin, compared to the
Companys other two reporting segments, which consist primarily of retail stores.
Expenses pertaining to corporate administrative functions that support the operating segments but
are not specifically attributable to or managed by any segment are not included in the reported
financial results of the operating segments. These unallocated corporate expenses include certain
general and administrative expenses, related depreciation and amortization expenses and amounts
included in Interest income and other, net and Interest expense on the consolidated statements
of earnings.
16
Results of Operations for the 13 Weeks Ended December 30, 2007 and December 31, 2006
CONSOLIDATED RESULTS
The following table presents the consolidated statements of earnings as well as the percentage
relationship to total net revenues of items included in the Companys consolidated statements of
earnings (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
|
|
|
|
|
13 Weeks Ended |
|
|
|
Dec 30, |
|
|
Dec 31, |
|
|
% |
|
|
Dec 30, |
|
|
Dec 31, |
|
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of total net revenues |
|
STATEMENTS OF EARNINGS DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail |
|
$ |
2,351.5 |
|
|
$ |
2,006.8 |
|
|
|
17.2 |
% |
|
|
85.0 |
% |
|
|
85.2 |
% |
Specialty: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing |
|
|
304.8 |
|
|
|
253.9 |
|
|
|
20.0 |
|
|
|
11.0 |
|
|
|
10.8 |
|
Foodservice and other |
|
|
111.3 |
|
|
|
95.0 |
|
|
|
17.2 |
|
|
|
4.0 |
|
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty |
|
|
416.1 |
|
|
|
348.9 |
|
|
|
19.3 |
|
|
|
15.0 |
|
|
|
14.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
2,767.6 |
|
|
|
2,355.7 |
|
|
|
17.5 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales including occupancy costs |
|
|
1,186.0 |
|
|
|
984.8 |
|
|
|
20.4 |
|
|
|
42.9 |
|
|
|
41.8 |
|
Store operating expenses (1) |
|
|
927.3 |
|
|
|
772.0 |
|
|
|
20.1 |
|
|
|
33.5 |
|
|
|
32.8 |
|
Other operating expenses (2) |
|
|
85.7 |
|
|
|
70.9 |
|
|
|
20.9 |
|
|
|
3.1 |
|
|
|
3.0 |
|
Depreciation and amortization expenses |
|
|
133.2 |
|
|
|
110.2 |
|
|
|
20.9 |
|
|
|
4.8 |
|
|
|
4.7 |
|
General and administrative expenses |
|
|
125.9 |
|
|
|
116.8 |
|
|
|
7.8 |
|
|
|
4.5 |
|
|
|
5.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
2,458.1 |
|
|
|
2,054.7 |
|
|
|
19.6 |
|
|
|
88.8 |
|
|
|
87.2 |
|
Income from equity investees |
|
|
23.6 |
|
|
|
18.7 |
|
|
|
26.2 |
|
|
|
0.9 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
333.1 |
|
|
|
319.7 |
|
|
|
4.2 |
|
|
|
12.0 |
|
|
|
13.6 |
|
Interest income and other, net |
|
|
10.7 |
|
|
|
13.5 |
|
|
|
|
|
|
|
0.4 |
|
|
|
0.6 |
|
Interest expense |
|
|
(17.1 |
) |
|
|
(7.0 |
) |
|
|
|
|
|
|
(0.6 |
) |
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
326.7 |
|
|
|
326.2 |
|
|
|
0.2 |
|
|
|
11.8 |
|
|
|
13.8 |
|
Income taxes |
|
|
118.6 |
|
|
|
121.2 |
|
|
|
|
|
|
|
4.3 |
|
|
|
5.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
208.1 |
|
|
$ |
205.0 |
|
|
|
1.5 |
% |
|
|
7.5 |
% |
|
|
8.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As a percentage of related Company-operated retail revenues, store operating
expenses were 39.4% for the 13 weeks ended December 30, 2007, and 38.5% for the 13 weeks ended
December 31, 2006. |
|
(2) |
|
As a percentage of related total specialty revenues, other operating expenses were
20.6% for the 13 weeks ended December 30, 2007, and 20.3% for the 13 weeks ended December 31,
2006. |
Net revenues for the 13 weeks ended December 30, 2007, increased 17% to $2.8 billion from $2.4
billion for the corresponding period of fiscal 2007, driven by increases in both Company-operated
retail revenues and specialty operations.
During the 13-week period ended December 30, 2007, Starbucks derived 85% of total net revenues from
its Company-operated retail stores. Company-operated retail revenues increased 17% to $2.4 billion
for the 13 weeks ended December 30, 2007, from $2.0 billion for the same period in fiscal 2007. The
increase was primarily attributable to the opening of 1,362 new Company-operated retail stores in
the last 12 months. Also contributing were favorable foreign currency exchange for the Canadian
dollar and British pound sterling, and comparable store sales growth of 1% for the quarter. The
increase in comparable store sales was due to a 2% increase in the average value per transaction,
offset in part by a 1% decrease in the number of customer transactions.
17
The Company derived the remaining 15% of total net revenues from channels outside the
Company-operated retail stores, collectively known as specialty operations. Specialty revenues,
which include licensing revenues and foodservice and other revenues, increased 19% to $416.1 million for the 13 weeks ended December 30,
2007, from $348.9 million for the corresponding period of fiscal 2007.
Licensing revenues, which are derived from retail store licensing arrangements as well as grocery,
warehouse club and certain other branded-product operations, increased 20% to $304.8 million for
the 13 weeks ended December 30, 2007, from $253.9 million for the corresponding period of fiscal
2007. The increase was due to higher product sales and royalty revenues from the opening of 1,226
new licensed retail stores in the last 12 months and, to a lesser extent, an 11% increase in CPG
revenues due in turn to higher royalties and product sales in the international ready-to-drink
business.
Foodservice and other revenues increased 17% to $111.3 million for the 13 weeks ended December 30,
2007, from $95.0 million for the corresponding period of fiscal 2007. The increase was primarily
attributable to growth in new and existing accounts in the U.S. foodservice business.
Cost of sales including occupancy costs increased to 42.9% of total net revenues for the 13 weeks
ended December 30, 2007, compared to 41.8% for the corresponding period of fiscal 2007. The
increase was primarily due to increased dairy costs and a shift in sales to higher cost products.
Store operating expenses as a percentage of Company-operated retail revenues increased to 39.4% for
the 13 weeks ended December 30, 2007, from 38.5% for the corresponding period of fiscal 2007,
primarily due to higher payroll expenditures as a percentage of revenues in the U.S. segment,
driven by softer sales from U.S. company-operated stores and wage increases, partially offset by
the impact of labor optimization initiatives in the stores.
Other operating expenses (expenses associated with the Companys specialty operations) increased to
20.6% of total specialty revenues for the 13 weeks ended December 30, 2007, compared to 20.3% in
the corresponding period of fiscal 2007. The increase in expense was primarily due to higher
international payroll-related expenditures as a percentage of related revenues in support of the
continued expansion of the segment into new and existing markets.
Depreciation and amortization expenses increased to $133.2 million for the 13 weeks ended December
30, 2007, compared to $110.2 million for the corresponding period of fiscal 2007. The increase was
primarily due to the opening of 1,362 new Company-operated retail stores in the last 12 months. As
a percentage of total net revenues, depreciation and amortization expenses increased slightly to
4.8% for the 13 weeks ended December 30, 2007, from 4.7% for the corresponding period in fiscal
2007.
General and administrative expenses increased to $125.9 million for the 13 weeks ended December 30,
2007, compared to $116.8 million for the corresponding period of fiscal 2007. The increase was
primarily due to higher payroll-related expenditures in support of continued global growth. As a
percentage of total net revenues, general and administrative expenses decreased to 4.5% for the 13
weeks ended December 30, 2007, from 5.0% for the corresponding period of fiscal 2007.
Income from equity investees increased 26% to $23.6 million for the 13 weeks ended December 30,
2007, compared to $18.7 million for the corresponding period of fiscal 2007, primarily due to
higher equity income from international investees in the Asia-Pacific region.
Operating income increased 4% to $333.1 million for the 13 weeks ended December 30, 2007, compared
to $319.7 million for the corresponding period of fiscal 2007. Operating margin decreased to 12.0%
of total net revenues for the 13 weeks ended December 30, 2007, from 13.6% for the corresponding
period of fiscal 2007. Higher cost of sales including occupancy costs and store operating expenses
as a percentage of total net revenues were only partially offset by lower general and
administrative expenses as a percentage of revenues.
Interest expense increased to $17.1 million for the 13 weeks ended December 30, 2007, compared to
$7.0 million for the corresponding period of fiscal 2007 due to a higher level of borrowings
outstanding.
Income taxes for the 13 weeks ended December 30, 2007 resulted in an effective tax rate of 36.3%,
compared to 37.2% for the corresponding period of fiscal 2007.
18
Net earnings for the 13 weeks ended December 30, 2007, increased 2% to $208.1 million from $205.0
million for the corresponding period in fiscal 2007. Diluted earnings per share increased to $0.28
for the 13 weeks ended December 30, 2007, compared to $0.26 per share for the comparable period in
fiscal 2007.
SEGMENT RESULTS
Segment information is prepared on the basis that the Companys management reviews financial
information for operational decision-making purposes. The following tables summarize the Companys
results of operations by segment (in millions):
United States
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
13 Weeks Ended |
|
|
Dec 30, |
|
Dec 31, |
|
% |
|
Dec 30, |
|
Dec 31, |
|
|
2007 |
|
2006 |
|
Change |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of U.S. total net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revenues |
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail |
|
$ |
1,890.3 |
|
|
$ |
1,660.3 |
|
|
|
13.9 |
% |
|
|
88.9 |
% |
|
|
89.3 |
% |
Specialty: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing |
|
|
137.9 |
|
|
|
113.3 |
|
|
|
21.7 |
|
|
|
6.5 |
|
|
|
6.1 |
|
Foodservice and other |
|
|
98.0 |
|
|
|
86.3 |
|
|
|
13.6 |
|
|
|
4.6 |
|
|
|
4.6 |
|
|
|
|
|
|
|
|
|
|
Total specialty |
|
|
235.9 |
|
|
|
199.6 |
|
|
|
18.2 |
|
|
|
11.1 |
|
|
|
10.7 |
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
2,126.2 |
|
|
|
1,859.9 |
|
|
|
14.3 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales including occupancy costs |
|
|
872.9 |
|
|
|
731.1 |
|
|
|
19.4 |
|
|
|
41.1 |
|
|
|
39.3 |
|
Store operating expenses (1) |
|
|
764.9 |
|
|
|
648.4 |
|
|
|
18.0 |
|
|
|
36.0 |
|
|
|
34.9 |
|
Other operating expenses (2) |
|
|
59.0 |
|
|
|
52.2 |
|
|
|
13.0 |
|
|
|
2.8 |
|
|
|
2.8 |
|
Depreciation and amortization expenses |
|
|
98.4 |
|
|
|
81.4 |
|
|
|
20.9 |
|
|
|
4.6 |
|
|
|
4.4 |
|
General and administrative expenses |
|
|
20.5 |
|
|
|
21.7 |
|
|
|
(5.5 |
) |
|
|
1.0 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,815.7 |
|
|
|
1,534.8 |
|
|
|
18.3 |
|
|
|
85.4 |
|
|
|
82.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from equity investees |
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
310.9 |
|
|
$ |
325.1 |
|
|
|
(4.4 |
%) |
|
|
14.6 |
% |
|
|
17.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As a percentage of related Company-operated retail revenues, store operating
expenses were 40.5% for the 13 weeks ended December 30, 2007, and 39.1% for the 13 weeks ended
December 31, 2006. |
|
(2) |
|
As a percentage of related total specialty revenues, other operating expenses were
25.0% for the 13 weeks ended December 30, 2007, and 26.2% for the 13 weeks ended December 31,
2006. |
The United States operating segment (United States) sells coffee and other beverages,
complementary food, whole bean coffees, and coffee brewing equipment and merchandise primarily
through Company-operated retail stores. Specialty operations within the United States include
licensed retail stores, foodservice accounts and other initiatives related to the Companys core
business.
United States total net revenues increased 14% to $2.1 billion for the 13 weeks ended December 30,
2007, compared to $1.9 billion for the corresponding period of fiscal 2007.
United States Company-operated retail revenues increased 14% to $1.9 billion for the 13 weeks ended
December 30, 2007, compared to $1.7 billion for the corresponding period of fiscal 2007, primarily
due to the opening of 1,077 new Company-operated retail stores in the last 12 months. Comparable
store sales contracted 1% for the quarter due to a 3% decrease in the number of transactions
partially offset by a 2% increase in the average value per transaction, which includes the impact
of a price increase taken in late July 2007.
19
Total United States specialty revenues increased 18% to $235.9 million for the 13 weeks ended
December 30, 2007, compared to $199.6 million in the corresponding period of fiscal 2007. United
States licensing revenues increased 22% to $137.9 million, compared to $113.3 million for the
corresponding period of fiscal 2007, primarily due to higher product sales and royalty revenues as a result of opening 690 new licensed retail stores in
the last 12 months. United States foodservice and other revenues increased 14% to $98.0 million,
from $86.3 million in fiscal 2007, primarily due to growth in new and existing foodservice
accounts.
United States operating income declined 4% to $310.9 million for the 13 weeks ended December 30,
2007, compared to $325.1 million for the same period in fiscal 2007. Operating margin decreased to
14.6% of related revenues from 17.5% in the corresponding period of fiscal 2007. The decrease was
driven by higher cost of sales including occupancy costs and higher store operating expenses as a
percentage of total net revenues, partially offset by lower general and administrative expenses as
a percentage of revenues. Higher dairy costs contributed approximately 100 basis points to the
decline.
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
13 Weeks Ended |
|
|
Dec 30, |
|
Dec 31, |
|
% |
|
Dec 30, |
|
Dec 31, |
|
|
2007 |
|
2006 |
|
Change |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of International total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net revenues |
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail |
|
$ |
461.2 |
|
|
$ |
346.5 |
|
|
|
33.1 |
% |
|
|
85.3 |
% |
|
|
85.5 |
% |
Specialty: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing |
|
|
66.3 |
|
|
|
49.9 |
|
|
|
32.9 |
|
|
|
12.3 |
|
|
|
12.3 |
|
Foodservice and other |
|
|
13.3 |
|
|
|
8.7 |
|
|
|
52.9 |
|
|
|
2.5 |
|
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
Total specialty |
|
|
79.6 |
|
|
|
58.6 |
|
|
|
35.8 |
|
|
|
14.7 |
|
|
|
14.5 |
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
540.8 |
|
|
|
405.1 |
|
|
|
33.5 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales including occupancy
costs |
|
|
260.0 |
|
|
|
200.1 |
|
|
|
29.9 |
|
|
|
48.1 |
|
|
|
49.4 |
|
Store operating expenses (1) |
|
|
162.4 |
|
|
|
123.6 |
|
|
|
31.4 |
|
|
|
30.0 |
|
|
|
30.5 |
|
Other operating expenses (2) |
|
|
20.8 |
|
|
|
14.1 |
|
|
|
47.5 |
|
|
|
3.8 |
|
|
|
3.5 |
|
Depreciation and amortization
expenses |
|
|
25.7 |
|
|
|
20.5 |
|
|
|
25.4 |
|
|
|
4.8 |
|
|
|
5.1 |
|
General and administrative expenses |
|
|
29.9 |
|
|
|
21.7 |
|
|
|
37.8 |
|
|
|
5.5 |
|
|
|
5.4 |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
498.8 |
|
|
|
380.0 |
|
|
|
31.3 |
|
|
|
92.2 |
|
|
|
93.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from equity investees |
|
|
12.1 |
|
|
|
8.0 |
|
|
|
51.3 |
|
|
|
2.2 |
|
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
54.1 |
|
|
$ |
33.1 |
|
|
|
63.4 |
% |
|
|
10.0 |
% |
|
|
8.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As a percentage of related Company-operated retail revenues, store operating
expenses were 35.2% for the 13 weeks ended December 30, 2007, and 35.7% for the 13 weeks ended
December 31, 2006. |
|
(2) |
|
As a percentage of related total specialty revenues, other operating expenses were
26.1% for the 13 weeks ended December 30, 2007, and 24.1% for the 13 weeks ended December 31,
2006. |
The International operating segment (International) sells coffee and other beverages,
complementary food, whole bean coffees, and coffee brewing equipment and merchandise through
Company-operated retail stores in Canada, the United Kingdom (UK) and eight other markets.
Specialty operations in International primarily include retail store licensing operations in more
than 30 other countries and foodservice accounts, primarily in Canada and the UK. The Companys
International store base continues to increase rapidly and Starbucks is achieving a growing
contribution from established areas of the business while at the same time investing in emerging
markets and channels. Many of the Companys International operations are in early stages of
development that require a more extensive support organization, relative to the current levels of
revenue and operating income, than in the United States. This continuing investment is part of the
Companys long-term, balanced plan for profitable growth.
International total net revenues increased 33% to $540.8 million for the 13 weeks ended December
30, 2007, compared to $405.1 million for the corresponding period of fiscal 2007.
20
International Company-operated retail revenues increased 33% to $461.2 million for the 13 weeks
ended December 30, 2007, compared to $346.5 million for the corresponding period of fiscal 2007.
The increase was primarily due to the opening of 285 new Company-operated retail stores in the last
12 months, favorable foreign currency exchange for the Canadian dollar and British pound sterling,
and comparable store sales growth of 5% for the quarter. The increase in comparable store sales
resulted from a 3% increase in the number of customer transactions coupled with a 2% increase in
the average value per transaction.
Total International specialty revenues increased 36% to $79.6 million for the 13 weeks ended
December 30, 2007, compared to $58.6 million in the corresponding period of fiscal 2007. The
increase was primarily due to higher product sales and royalty revenues from opening 536 new
licensed retail stores in the last 12 months.
International operating income increased 63% to $54.1 million for the 13 weeks ended December 30,
2007, compared to $33.1 million in the corresponding period of fiscal 2007. Operating margin
increased to 10.0% of related revenues from 8.2% in the corresponding period of fiscal 2007,
primarily due to lower cost of sales including occupancy expenses partially due to lower occupancy
costs in the UK, and improved leverage on store operating expenses overall.
Global Consumer Products Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
13 Weeks Ended |
|
|
Dec 30, |
|
Dec 31, |
|
% |
|
Dec 30, |
|
Dec 31, |
|
|
2007 |
|
2006 |
|
Change |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of CPG total net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revenues |
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing |
|
$ |
100.6 |
|
|
$ |
90.7 |
|
|
|
10.9 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
Total specialty revenues |
|
|
100.6 |
|
|
|
90.7 |
|
|
|
10.9 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
53.1 |
|
|
|
53.6 |
|
|
|
(0.9 |
) |
|
|
52.8 |
|
|
|
59.1 |
|
Other operating expenses |
|
|
5.9 |
|
|
|
4.6 |
|
|
|
28.3 |
|
|
|
5.9 |
|
|
|
5.1 |
|
General and administrative expenses |
|
|
2.1 |
|
|
|
1.6 |
|
|
|
31.3 |
|
|
|
2.1 |
|
|
|
1.8 |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
61.1 |
|
|
|
59.8 |
|
|
|
2.2 |
|
|
|
60.7 |
|
|
|
65.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from equity investees |
|
|
11.1 |
|
|
|
10.7 |
|
|
|
3.7 |
|
|
|
11.0 |
|
|
|
11.8 |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
50.6 |
|
|
$ |
41.6 |
|
|
|
21.6 |
% |
|
|
50.3 |
% |
|
|
45.9 |
% |
|
|
|
|
|
|
|
|
|
The Global Consumer Products Group (CPG) sells a selection of whole bean and ground coffees and
premium Tazo® teas through licensing arrangements in United States and international
markets. CPG also produces and sells ready-to-drink beverages through its joint ventures and
marketing and distribution agreements. CPG General and administrative expenses, previously
included in Other operating expenses, are now presented separately.
CPG total net revenues increased 11% to $100.6 million for the 13 weeks ended December 30, 2007,
compared to $90.7 million for the corresponding period of fiscal 2007. The increase was due to
increased product sales and royalties in the international ready-to-drink business and increased
sales of packaged coffee and tea, both in international and U.S. markets.
CPG operating income increased 22% to $50.6 million for the 13 weeks ended December 30, 2007,
compared to $41.6 million in the corresponding period of fiscal 2007. Operating margin increased to
50.3% of related revenues, from 45.9% in fiscal 2007, primarily due to the mix of revenue being
less weighted toward initial sale of coffee and tea products, and more toward revenues
earned on the distributors sales to retailers, which do not have any corresponding cost of sales
to Starbucks.
21
Unallocated Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
13 Weeks Ended |
|
|
Dec 30, |
|
Dec 31, |
|
% |
|
Dec 30, |
|
Dec 31, |
|
|
2007 |
|
2006 |
|
Change |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of total net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revenues |
Depreciation and amortization expenses |
|
$ |
9.1 |
|
|
$ |
8.3 |
|
|
|
9.6 |
% |
|
|
0.3 |
% |
|
|
0.4 |
% |
General and administrative expenses |
|
|
73.4 |
|
|
|
71.8 |
|
|
|
2.2 |
|
|
|
2.7 |
|
|
|
3.0 |
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
$ |
(82.5 |
) |
|
$ |
(80.1 |
) |
|
|
3.0 |
% |
|
|
(3.0 |
%) |
|
|
(3.4 |
%) |
|
|
|
|
|
|
|
|
|
Unallocated corporate expenses pertain to corporate administrative functions that support but are
not specifically attributable to the Companys operating segments, and include related depreciation
and amortization expenses.
Total unallocated corporate expenses as a percentage of total net revenues decreased to 3.0% for
the 13 weeks ended December 30, 2007, from 3.4% for the corresponding period of 2007, primarily as
a result of leveraging of the Companys scale and infrastructure against global growth.
Liquidity and Capital Resources
The primary sources of the Companys liquidity are cash flows generated from retail store
operations and other business channels, borrowings under available commercial paper programs and
credit agreements, proceeds from the issuance of long-term debt securities and the Companys
existing cash and liquid investments, which were $535.4 million and $459.7 million as of
December 30, 2007 and September 30, 2007, respectively.
Components of the Companys most liquid assets are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec 30, |
|
Sept 30, |
|
|
2007 |
|
2007 |
Cash and cash equivalents |
|
|
$ |
349.3 |
|
|
|
$ |
281.3 |
|
Short-term investments available-for-sale securities |
|
|
|
113.2 |
|
|
|
|
83.8 |
|
Short-term investments trading securities |
|
|
|
72.9 |
|
|
|
|
73.6 |
|
Long-term investments available-for-sale securities |
|
|
|
|
|
|
|
|
21.0 |
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and liquid investments |
|
|
$ |
535.4 |
|
|
|
$ |
459.7 |
|
|
|
|
|
|
|
|
|
|
In order to hedge its liability under its Management Deferred Compensation Plan (MDCP), the
Company maintains a portfolio of unrestricted trading securities, the value of which was
$72.9 million as of December 30, 2007. In addition, unrestricted cash and liquid securities held
within the Companys wholly owned captive insurance company to fund claim payouts totaled
approximately $107.6 million as of December 30, 2007. The Company manages the balance of its cash
and liquid investments in order to internally fund operating needs and make scheduled interest and
principal payments on its borrowings.
In determining the appropriate capital structure for the Company, management considers, among other
things, how debt may reduce its total cost of capital when used to fund increased distributions to
shareholders in the form of stock repurchases. The Company also evaluates its degree of cash flow
risk and how much financial flexibility should be retained for future investment opportunities
given its high growth rate. The Companys key metrics for monitoring its capital structure are
leverage, measured as the ratio of debt to EBITDA, and coverage, measured as the ratio of EBITDA to
interest expense including rent expense. Both ratios are adjusted to capitalize operating leases.
The credit rating agencies, Moodys and Standard & Poors, currently rate the Companys commercial
paper P-2 and A-2, respectively, and its long-term debt Baa1 and BBB+, respectively.
The Company intends to use its cash and liquid investments, including any borrowings under its
revolving credit facility, commercial paper program and proceeds from the issuance of long term
debt securities, to invest in its core businesses and other new business opportunities related to
its core businesses. The Company may use its available cash resources to make proportionate capital
contributions to its equity method and cost method investees, as well as purchase larger ownership
interests in selected equity method investees and licensed operations, particularly in
international markets. Depending on market conditions, Starbucks may repurchase shares of its
common stock under its authorized share repurchase program. Management believes that strong cash
flow generated from operations, existing cash and liquid investments, as well as borrowing capacity
under the revolving credit facility and commercial paper program, should be sufficient to finance
capital requirements for its core businesses for the foreseeable future. Significant new joint
ventures, acquisitions, share repurchases and/or other new business opportunities may require
additional outside funding.
22
Other than normal operating expenses, cash requirements for fiscal 2008 are expected to consist
primarily of capital expenditures for new Company-operated retail stores, remodeling and
refurbishment of existing Company-operated retail stores, and construction of a new roasting and
distribution facility, as well as potential increased investments in International licensees and
for additional share repurchases, if any.
Cash provided by operating activities increased by $129.2 million to $807.6 million for the 13
weeks ended December 30, 2007 compared to the corresponding period of fiscal 2007. The increase
was primarily due to revenue growth, growth in deferred revenues for
Starbucks Cards, and increases in cash provided by changes in other current assets and liabilities. The growth in the balance sheet
amount for deferred revenues related to Starbucks Cards was due primarily to the holiday season.
Cash used by investing activities for the 13 weeks ended December 30, 2007 totaled $273.8 million.
Net capital additions to property, plant and equipment used $263.6 million, primarily from opening
378 new Company-operated retail stores and remodeling certain existing stores during the quarter.
In addition, the sale of available-for-sale securities provided $33.8 million.
Cash used by financing activities for the 13 weeks ended December 30, 2007 totaled $467.7 million.
Cash used to repurchase shares of the Companys common stock totaled $311.3 million. This amount
includes the effect of the net change in unsettled trades from September 30, 2007 of $16.0 million.
Share repurchases, up to the limit authorized by the Board of Directors, are at the discretion of
management and depend on market conditions, capital requirements and other factors. As of
December 30, 2007, a total of up to 1.3 million shares remained available for repurchase, under the
existing authorization. On January 29, 2008, Starbucks Board of Directors authorized the repurchase
of up to 5 million additional shares of the Companys common stock.
Net repayments of commercial paper were $180.8 million for the 13 weeks ended December 30, 2007. As
of December 30, 2007, a total of $529.5 million in borrowings were outstanding under the commercial
paper program and $13.1 million in letters of credit were outstanding under the credit facility,
leaving $456.9 million of capacity available under the $1 billion combined commercial paper program
and revolving credit facility.
The Companys credit facility contains provisions requiring the Company to maintain compliance with
certain covenants, including a minimum fixed charge coverage ratio which measures the Companys
ability to cover financing expenses. As of December 30, 2007 and September 30, 2007, the Company
was in compliance with each of these covenants. The $550 million of 6.25% Senior Notes, issued in
the fourth quarter of fiscal 2007, also require Starbucks to maintain compliance with certain
covenants, which limit future liens and sale and leaseback transactions on certain material
properties. As of December 30, 2007 and September 30, 2007, the Company was in compliance with each
of these covenants.
Partially offsetting cash used for share repurchases were proceeds of $21.6 million from the
exercise of employee stock options and the sale of the Companys common stock from employee stock
purchase plans. As options granted are exercised, the Company will continue to receive proceeds and
a tax deduction, but the amount and the timing of these cash flows cannot be reliably predicted as
option holders decisions to exercise options will be largely driven by movements in Starbucks
stock price.
Store Data
The following table summarizes the Companys retail store information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net stores opened during the |
|
|
|
|
13-week period ended |
|
Stores open as of |
|
|
Dec 30, |
|
Dec 31, |
|
Dec 30, |
|
Dec 31, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
United States: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated stores |
|
|
294 |
|
|
|
282 |
|
|
|
7,087 |
|
|
|
6,010 |
|
Licensed stores |
|
|
190 |
|
|
|
223 |
|
|
|
4,081 |
|
|
|
3,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
484 |
|
|
|
505 |
|
|
|
11,168 |
|
|
|
9,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated stores |
|
|
84 |
|
|
|
76 |
|
|
|
1,796 |
|
|
|
1,511 |
|
Licensed stores |
|
|
177 |
|
|
|
147 |
|
|
|
2,792 |
|
|
|
2,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
261 |
|
|
|
223 |
|
|
|
4,588 |
|
|
|
3,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
745 |
|
|
|
728 |
|
|
|
15,756 |
|
|
|
13,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
Starbucks plans to open approximately 2,150 net new stores on a global basis in fiscal 2008. In the United States,
Starbucks plans to open approximately 650 net new Company-operated locations and 525 net new licensed
locations. In International markets, Starbucks plans to open approximately 975 net new stores.
Contractual Obligations
There have been no material changes during the period covered by this report, outside of the
ordinary course of the Companys business, to the contractual obligations specified in the table of
contractual obligations included in the section Managements Discussion and Analysis of Financial
Condition and Results of Operations included in the 10-K.
Off-Balance Sheet Arrangement
The Company has unconditionally guaranteed the repayment of certain Japanese yen-denominated bank
loans and related interest and fees of an unconsolidated equity investee, Starbucks Coffee Japan,
Ltd. (Starbucks Japan). The guarantees continue until the loans, including accrued interest and
fees, have been paid in full, with the final loan amount due in 2014. The maximum amount is limited
to the sum of unpaid principal and interest amounts, as well as other related expenses. These
amounts will vary based on fluctuations in the yen foreign exchange rate. As of December 30, 2007,
the maximum amount of the guarantees was approximately $4.9 million. Since there has been no
modification of these loan guarantees subsequent to the Companys adoption of Financial Accounting
Standards Board (FASB) Interpretation No. 45, Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others, Starbucks has applied the
disclosure provisions only and has not recorded the guarantees on its consolidated balance sheet.
Commodity Prices, Availability and General Risk Conditions
Commodity price risk represents the Companys primary market risk, generated by its purchases of
green coffee and dairy products. The Company purchases, roasts and sells high quality whole bean
coffee and related products and risk arises from the price volatility of green coffee. In addition
to coffee, the Company also purchases significant amounts of dairy products to support the needs of
its Company-operated retail stores. The price and availability of these commodities directly
impacts the Companys results of operations and can be expected to impact its future results of
operations. For additional details see Product Supply in Item 1, as well as Risk Factors in
Item 1A of the 10-K.
Seasonality and Quarterly Results
The Companys business is subject to seasonal fluctuations, including fluctuations resulting from
the holiday season. The Companys cash flows from operations are considerably higher in the fiscal
first quarter than the remainder of the year. This is largely driven by cash received as Starbucks
Cards are purchased and loaded during the holiday season. Since revenues from the Starbucks Card
are recognized upon redemption and not when purchased, seasonal fluctuations on the consolidated
statements of earnings are much less pronounced. Quarterly results are affected by the timing of
the opening of new stores, and the Companys growth may conceal the impact of other seasonal
influences. For these reasons, results for any quarter are not necessarily indicative of the
results that may be achieved for the full fiscal year.
24
RECENT ACCOUNTING PRONOUNCEMENTS
On October 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48). See Note 1 to the
consolidated financial statements for additional details.
In September 2006, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 157,
Fair Value Measurements (SFAS 157), which defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and expands disclosures about fair
value measurements. SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is
permitted. Starbucks must adopt these new requirements no later than its first fiscal quarter of
2009. Starbucks has not yet determined the effect on the Companys consolidated financial
statements, if any, upon adoption of SFAS 157, or if it will adopt the requirements prior to the
first fiscal quarter of 2009.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). SFAS 159 permits companies to choose to measure many financial
instruments and certain other items at fair value. SFAS 159 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, or Starbucks first fiscal quarter of
2009. Early adoption is permitted. Starbucks has not yet determined if it will elect to apply any
of the provisions of SFAS 159 or what the effect of adoption of the statement would have, if any,
on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations
(SFAS 141R), which replaces SFAS No. 141. SFAS 141R establishes principles and requirements for
how an acquirer recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any resulting goodwill, and any noncontrolling interest in the
acquiree. The Statement also provides for disclosures to enable users of the financial statements
to evaluate the nature and financial effects of the business combination. SFAS 141R is effective
for financial statements issued for fiscal years beginning after December 15, 2008, or Starbucks
first fiscal quarter of 2010 and must be applied prospectively to business combinations completed
on or after that date. The Company will evaluate how the new requirements could impact the
accounting for any acquisitions completed beginning in fiscal 2010 and beyond, and the potential
impact on the Companys consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements an amendment of Accounting Research Bulletin No. 51 (SFAS 160), which establishes
accounting and reporting standards for noncontrolling interests (minority interests) in
subsidiaries. SFAS 160 clarifies that a noncontrolling interest in a subsidiary should be
accounted for as a component of equity separate from the parents equity. SFAS 160 is effective
for financial statements issued for fiscal years beginning after December 15, 2008, or Starbucks
first fiscal quarter of 2010 and must be applied prospectively, except for the presentation and
disclosure requirements, which will apply retrospectively. The Company is currently evaluating the
potential impact of the adoption of SFAS 160 on the Companys consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk related to commodity price, foreign currency exchange rates,
equity security prices and changes in interest rates.
Foreign Currency Exchange Risk
As of December 30, 2007, the Company had forward foreign exchange contracts that qualify as cash
flow hedges under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended and interpreted, to hedge portions of anticipated international revenue streams and
inventory purchases. In addition, Starbucks had forward foreign exchange contracts that qualify as
accounting hedges of its net investment in Starbucks Japan, as well as the Companys net
investments in its Canadian, UK, and Chinese subsidiaries, to minimize foreign currency exposure.
25
The Company also had forward foreign exchange contracts that are not designated as hedging
instruments for accounting purposes (free standing derivatives), but which largely offset the
financial impact of translating certain foreign currency denominated payables and receivables.
Increases or decreases in the fair value of these hedges are generally offset by corresponding
decreases or increases in the U.S. dollar value of the Companys foreign currency denominated
payables and receivables (i.e. hedged items) that would occur within the hedging period.
The following table summarizes the potential impact to the Companys future net earnings and other
comprehensive income (OCI) from changes in the fair value of these derivative financial
instruments due in turn to a change in the value of the U.S. dollar as compared to the level of
foreign exchange rates. The information provided below relates only to the hedging instruments and
does not represent the corresponding changes in the underlying hedged items (in millions):
December 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease) to Net Earnings |
|
Increase/(Decrease) to OCI |
|
|
10% Increase in |
|
10% Decrease in |
|
10% Increase in |
|
10% Decrease in |
|
|
Underlying Rate |
|
Underlying Rate |
|
Underlying Rate |
|
Underlying Rate |
Foreign currency hedges |
|
$ |
39 |
|
|
|
(50 |
) |
|
|
18 |
|
|
|
(22 |
) |
Interest Rate Risk, Commodity Price risk and Equity Security Price Risk
The following table summarizes the impact of a change in interest rates on the fair value of the
Companys debt (in millions):
December 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Fair Value |
|
|
|
|
|
|
100 Basis Point Increase in |
|
100 Basis Point Decrease in |
|
|
Fair Value |
|
Underlying Rate |
|
Underlying Rate |
Debt |
|
$ |
1,102 |
|
|
|
(43 |
) |
|
|
43 |
|
There has been no material change in the commodity price risk, equity security price risk, or other
interest rate risks discussed in Item 7A of the Companys 10-K.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that material
information required to be disclosed in the Companys periodic reports filed or submitted under the
Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and forms. Starbucks
disclosure controls and procedures are also designed to ensure that information required to be
disclosed in the reports the Company files or submits under the Exchange Act is accumulated and
communicated to the Companys management, including its principal executive officer and principal
financial officer as appropriate, to allow timely decisions regarding required disclosure.
During the quarter the Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including the principal executive officer and the
principal financial officer, of the effectiveness of the design and operation of the disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based
upon that evaluation, the Companys chief executive officer and chief financial officer concluded
that the Companys disclosure controls and procedures were effective, as of the end of the period
covered by this report (December 30, 2007).
During the first quarter of fiscal 2008, there were no changes in the Companys internal control
over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that
materially affected or are reasonably likely to materially affect internal control over financial
reporting.
The certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 are filed as exhibits
31.1 and 31.2, respectively, to this Quarterly Report on Form 10-Q.
26
PART II OTHER INFORMATION
Item 1. Legal Proceedings
See discussion of Legal Proceedings in Note 10 to the consolidated financial statements included in
Item 1 of Part I of this Report.
Item 1A. Risk Factors
Other than the addition of the risk factor below, there have been no material changes to the risk
factors disclosed under Item 1A. Risk Factors in the 10-K.
|
|
|
The Company may not be successful in implementing important new strategic initiatives,
which may have a material adverse impact on its business and financial results. |
On January 7, 2008, the Company announced that its chairman Howard Schultz would take on the
additional role of president and chief executive officer, replacing Jim Donald who left the
Company. The Company subsequently undertook the development and implementation of several
important strategic initiatives as part of a transformation plan designed to drive long-term
shareholder value and improve Starbucks results of operations, including:
|
|
|
improving the current state of the U.S. business by refocusing on the customer
experience in the stores, new products and store design elements, and new training and
tools for the Companys store partners to help them give customers a superior experience; |
|
|
|
|
slowing the Companys pace of U.S. store openings and closing a number of
underperforming U.S. store locations, enabling Starbucks to renew its focus on its
store-level unit economics; |
|
|
|
|
re-igniting the emotional attachment with customers and restoring the connections
customers have with Starbucks® coffee, brand, people and stores; |
|
|
|
|
re-aligning Starbucks organization and streamlining the management to better support
customer-focused initiatives and reallocating resources to key value drivers; and |
|
|
|
|
accelerating expansion and increasing the profitability of Starbucks outside the U.S.,
including redeployment of a portion of the capital originally earmarked for U.S. store
growth to the international business. |
There can be no assurance that the Company will be able to successfully implement its new strategic
initiatives or that its transformation plan will result in improved results of operations. If the
Company does not successfully implement its new strategic initiatives, or if its transformation
plan does not achieve its intended results, the Company may experience a material adverse impact on
its business and financial results.
27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information regarding repurchases by the Company of its common stock
during the 13-week period ended December 30, 2007:
ISSUER PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number |
|
Maximum |
|
|
|
|
|
|
|
|
|
|
of Shares |
|
Number of |
|
|
|
|
|
|
|
|
|
|
Purchased as |
|
Shares that May |
|
|
Total |
|
Average |
|
Part of Publicly |
|
Yet Be |
|
|
Number of |
|
Price |
|
Announced |
|
Purchased |
|
|
Shares |
|
Paid per |
|
Plans or |
|
Under the Plans |
Period (1) |
|
Purchased |
|
Share |
|
Programs(2) |
|
or Programs(2) |
October 1, 2007 October 28, 2007 |
|
|
5,000,000 |
|
|
$ |
26.58 |
|
|
|
5,000,000 |
|
|
|
8,518,707 |
|
October 29, 2007 November 25, 2007 |
|
|
2,420,488 |
|
|
|
22.79 |
|
|
|
2,420,488 |
|
|
|
6,098,219 |
|
November 26, 2007 December 30, 2007 |
|
|
4,826,091 |
|
|
|
22.23 |
|
|
|
4,826,091 |
|
|
|
1,272,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
12,246,579 |
|
|
|
|
|
|
|
12,246,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Monthly information is presented by reference to the Companys fiscal months during
the first quarter of fiscal 2008. |
|
(2) |
|
The Companys share repurchase program is conducted under authorizations made from
time to time by the Companys Board of Directors. The shares reported in the table are covered
by a Board authorization to repurchase 25 million shares of common stock publicly announced on
May 3, 2007. On January 29, 2008, Starbucks Board of Directors authorized the repurchase of up
to 5 million additional shares of the Companys common stock. Neither of these authorizations
has an expiration date. |
28
Item 6. Exhibits
(a) Exhibits:
|
|
|
|
|
|
|
|
|
|
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Incorporated by Reference |
|
|
Exhibit |
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Date of |
|
Exhibit |
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Filed |
No. |
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Exhibit Description |
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Form |
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File No. |
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First Filing |
|
Number |
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Herewith |
31.1
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Certification of Principal Executive
Officer Pursuant to Rule 13a-14 of the
Securities Exchange Act of 1934, As
Adopted Pursuant to Section 302 of the
Sarbanes Oxley Act of 2002
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X |
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31.2
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Certification of Principal Financial
Officer Pursuant to Rule 13a-14 of the
Securities Exchange Act of 1934, As
Adopted Pursuant to Section 302 of the
Sarbanes Oxley Act of 2002
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|
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X |
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32
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Certifications of Principal Executive
Officer and Principal Financial Officer
Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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X |
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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STARBUCKS CORPORATION
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February 8, 2008 |
By: |
/s/ Peter Bocian
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Peter Bocian |
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executive vice president, chief financial officer
and chief administrative officer
Signing on behalf of the registrant and as
principal financial officer |
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30