e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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þ |
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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 31, 2006
OR
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o |
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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
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91-1325671 |
(State or Other Jurisdiction of
Incorporation or Organization)
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(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, or a non-accelerated filer. See definition of accelerated filer
and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
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 5, 2007 |
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Common Stock, par value $0.001 per share
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750,956,382 |
STARBUCKS CORPORATION
FORM 10-Q
For the Quarterly Period Ended December 31, 2006
Table of Contents
PART I FINANCIAL INFORMATION
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Item 1. |
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Financial Statements |
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except earnings per share)
(unaudited)
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13 Weeks Ended |
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December 31, |
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January 1, |
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2006 |
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2006 |
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Net revenues: |
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Company-operated retail |
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$ |
2,006,811 |
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$ |
1,627,983 |
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Specialty: |
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Licensing |
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253,922 |
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219,150 |
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Foodservice and other |
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94,990 |
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86,959 |
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Total specialty |
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348,912 |
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306,109 |
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Total net revenues |
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2,355,723 |
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1,934,092 |
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Cost of sales including occupancy costs |
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984,823 |
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778,038 |
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Store operating expenses |
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771,967 |
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622,166 |
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Other operating expenses |
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72,538 |
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59,148 |
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Depreciation and amortization expenses |
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110,196 |
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91,288 |
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General and administrative expenses |
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115,228 |
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123,325 |
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Subtotal operating expenses |
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2,054,752 |
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1,673,965 |
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Income from equity investees |
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18,753 |
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19,720 |
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Operating income |
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319,724 |
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279,847 |
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Interest and other income, net |
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6,439 |
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348 |
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Earnings before income taxes |
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326,163 |
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280,195 |
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Income taxes |
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121,211 |
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106,039 |
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Net earnings |
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$ |
204,952 |
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$ |
174,156 |
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Net earnings per common share basic |
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$ |
0.27 |
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$ |
0.23 |
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Net earnings per common share diluted |
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$ |
0.26 |
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$ |
0.22 |
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Weighted average shares outstanding: |
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Basic |
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758,088 |
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767,021 |
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Diluted |
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782,764 |
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792,949 |
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See Notes to Consolidated Financial Statements.
1
STARBUCKS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
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December 31, |
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October 1, |
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2006 |
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2006 |
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(unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
270,873 |
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$ |
312,606 |
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Short-term investments available-for-sale securities |
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103,184 |
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87,542 |
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Short-term investments trading securities |
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62,413 |
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53,496 |
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Accounts receivable, net of allowances of $4,558 and $3,827, respectively |
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227,823 |
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224,271 |
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Inventories |
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547,277 |
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636,222 |
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Prepaid expenses and other current assets |
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121,320 |
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126,874 |
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Deferred income taxes, net |
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96,646 |
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88,777 |
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Total current assets |
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1,429,536 |
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1,529,788 |
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Long-term investments available-for-sale securities |
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23,280 |
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5,811 |
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Equity and other investments |
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224,918 |
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219,093 |
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Property, plant and equipment, net |
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2,396,801 |
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2,287,899 |
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Other assets |
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205,724 |
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186,917 |
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Other intangible assets |
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39,469 |
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37,955 |
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Goodwill |
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207,906 |
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161,478 |
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TOTAL ASSETS |
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$ |
4,527,634 |
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$ |
4,428,941 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
275,691 |
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$ |
340,937 |
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Accrued compensation and related costs |
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289,005 |
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288,963 |
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Accrued occupancy costs |
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68,033 |
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54,868 |
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Accrued taxes |
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173,949 |
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94,010 |
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Short-term borrowings |
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365,000 |
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700,000 |
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Other accrued expenses |
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209,146 |
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224,154 |
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Deferred revenue |
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422,648 |
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231,926 |
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Current portion of long-term debt |
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765 |
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762 |
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Total current liabilities |
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1,804,237 |
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1,935,620 |
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Long-term debt |
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1,746 |
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1,958 |
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Other long-term liabilities |
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282,796 |
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262,857 |
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Total liabilities |
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2,088,779 |
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2,200,435 |
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Shareholders equity: |
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Common stock ($0.001 par value) authorized, 1,200,000,000; issued and
outstanding, 757,372,182 and 756,602,055 shares, respectively (includes
3,394,184 common stock units in both periods) |
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757 |
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756 |
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Other additional paid-in-capital |
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39,393 |
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39,393 |
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Retained earnings |
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2,349,918 |
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2,151,084 |
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Accumulated other comprehensive income |
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48,787 |
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37,273 |
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Total shareholders equity |
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2,438,855 |
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2,228,506 |
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
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$ |
4,527,634 |
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$ |
4,428,941 |
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See Notes to Consolidated Financial Statements.
2
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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13 Weeks Ended |
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December 31, |
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January 1, |
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2006 |
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2006 |
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OPERATING ACTIVITIES: |
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Net earnings |
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$ |
204,952 |
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$ |
174,156 |
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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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116,122 |
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97,744 |
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Provision for impairments and asset disposals |
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3,469 |
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3,751 |
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Deferred income taxes, net |
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(21,277 |
) |
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(26,291 |
) |
Equity in income of investees |
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(9,020 |
) |
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(12,451 |
) |
Distributions from equity investees |
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18,845 |
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5,769 |
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Stock-based compensation |
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24,363 |
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23,189 |
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Tax benefit from exercise of stock options |
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3,422 |
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|
110 |
|
Excess tax benefit from exercise of stock options |
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|
(29,618 |
) |
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(23,724 |
) |
Net amortization of premium on securities |
|
|
213 |
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|
545 |
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Cash provided/(used) by changes in operating assets and liabilities: |
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Inventories |
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91,293 |
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93,348 |
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Accounts payable |
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|
(64,241 |
) |
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|
(8,180 |
) |
Accrued taxes |
|
|
109,813 |
|
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|
127,118 |
|
Deferred revenue |
|
|
191,219 |
|
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|
134,205 |
|
Other operating assets and liabilities |
|
|
38,854 |
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|
19,573 |
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Net cash provided by operating activities |
|
|
678,409 |
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608,862 |
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INVESTING ACTIVITIES: |
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Purchase of available-for-sale securities |
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(148,362 |
) |
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(232,000 |
) |
Maturity of available-for-sale securities |
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|
115,165 |
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|
14,734 |
|
Sale of available-for-sale securities |
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|
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|
76,504 |
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Acquisition, net of cash acquired |
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(47,304 |
) |
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Net purchases of equity, other investments and other assets |
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(15,722 |
) |
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|
(4,893 |
) |
Net additions to property, plant and equipment |
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|
(270,547 |
) |
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(147,323 |
) |
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Net cash used by investing activities |
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(366,770 |
) |
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(292,978 |
) |
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FINANCING ACTIVITIES: |
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Proceeds from issuance of common stock |
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|
65,530 |
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44,412 |
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Excess tax benefit from exercise of stock options |
|
|
29,618 |
|
|
|
23,724 |
|
Net repayments of revolving credit facility |
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|
(335,000 |
) |
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|
(172,000 |
) |
Principal payments on long term debt |
|
|
(209 |
) |
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|
(186 |
) |
Repurchase of common stock |
|
|
(115,288 |
) |
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|
(134,301 |
) |
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Net cash used by financing activities |
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(355,349 |
) |
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|
(238,351 |
) |
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Effect of exchange rate changes on cash and cash equivalents |
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1,977 |
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|
93 |
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|
|
|
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Net increase/(decrease) in cash and cash equivalents |
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(41,733 |
) |
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77,626 |
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CASH AND CASH EQUIVALENTS: |
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Beginning of period |
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312,606 |
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173,809 |
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End of period |
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$ |
270,873 |
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$ |
251,435 |
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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 |
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$ |
8,318 |
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$ |
2,918 |
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Income taxes |
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$ |
40,570 |
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$ |
10,280 |
|
See Notes to Consolidated Financial Statements.
3
STARBUCKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the 13 Weeks Ended December 31, 2006, and January 1, 2006
Note 1: Summary of Significant Accounting Policies
Financial Statement Preparation
The unaudited consolidated financial statements as of December 31, 2006, and for the
13-week periods ended December 31, 2006, and January 1, 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 ended December 31, 2006, and January
1, 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 October 1, 2006, is derived from the Companys audited
consolidated financial statements and notes for the fiscal year ended October 1, 2006
(Fiscal 2006), included in Item 8 in the Fiscal 2006 Annual Report on Form 10-K
(together with Amendment No. 1 to the Fiscal 2006 Annual Report on Form 10-K/A, 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 31, 2006, are not
necessarily indicative of the results of operations that may be achieved for the
entire fiscal year ending September 30, 2007.
Reclassifications
Certain reclassifications of prior years balances have been made to conform to the
current format.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation
No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of
FASB Statement No. 109, which seeks to reduce the diversity in practice associated
with the accounting and reporting for uncertainty in income tax positions. This
Interpretation prescribes a comprehensive model for the financial statement
recognition, measurement, presentation and disclosure of uncertain tax positions taken
or expected to be taken in income tax returns. FIN 48 is effective for fiscal years
beginning after December 15, 2006, and the Company will adopt the new requirements in
its fiscal first quarter of 2008. The cumulative effects, if any, of adopting FIN 48
will be recorded as an adjustment to retained earnings as of the beginning of the
period of adoption. The Company has not yet determined the impact, if any, of adopting
FIN 48 on its consolidated financial statements.
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 September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements (SAB 108). The intent of SAB 108 is to reduce
diversity in practice for the method companies use to quantify financial statement
misstatements, including the effect of prior year uncorrected errors. SAB 108
establishes an approach that requires quantification of financial statement errors
using both an income statement and cumulative balance sheet approach. SAB 108 is
effective for annual financial statements for fiscal years ending after November 15,
2006. The adoption of SAB 108 is not currently expected to have a significant impact
on the Companys consolidated financial statements.
Note 2: Acquisition
In October 2006, the Company acquired from H&Q Asia Pacific and other shareholders,
100% equity ownership of High Grown Investment Group (Hong Kong) Limited, which in
turn owns 90% of Beijing Mei Da Coffee Co. Ltd. (Mei Da), the operator of 61
Starbucks retail stores in Beijing and Tianjin, China, and an authorized licensee of
Starbucks Coffee International. Beijing San Yuan Company continues to be a minority
shareholder of Mei Da. Due
4
to its majority ownership of these operations, Starbucks
applied the consolidation method of accounting subsequent to the date
of acquisition.
Note 3: Derivative Financial Instruments
Cash Flow Hedges
Starbucks, which includes subsidiaries that use their local currency as their
functional currency, enters into cash flow derivative instruments to hedge portions of
anticipated revenue streams and inventory purchases. Current 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 also has futures contracts to hedge the variable price
component for a small portion of its price-to-be-fixed green coffee purchase
contracts.
The Company had accumulated net derivative gains of $3.1 million, net of taxes, in
other comprehensive income as of December 31, 2006, related to cash flow hedges. Of
this amount, $1.8 million of net derivative gains 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 31, 2006 and
January 1, 2006. Current 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. as well as the Companys net investments in
its Canadian and United Kingdom subsidiaries, to minimize foreign currency exposure.
The Company applies the spot-to-spot method for these forward foreign exchange
contracts, and under this method the change in fair value of the forward contracts
attributable to the changes in spot exchange rates (the effective portion) is reported
in other comprehensive income. The remaining change in fair value of the forward
contract (the ineffective portion) is reclassified into earnings in Interest and
other income, net. The Company had accumulated net derivative losses of $3.4 million,
net of taxes, in other comprehensive income as of December 31, 2006, related to net
investment derivative hedges. Current contracts expire within 30 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 thousands):
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
|
|
December 31, |
|
|
January 1, |
|
|
|
2006 |
|
|
2006 |
|
Cash flow hedges: |
|
|
|
|
|
|
|
|
Reclassified gains into total net revenues |
|
$ |
308 |
|
|
$ |
421 |
|
Reclassified losses into cost of sales |
|
|
(1,027 |
) |
|
|
(1,636 |
) |
|
|
|
|
|
|
|
Net reclassified losses cash flow hedges |
|
|
(719 |
) |
|
|
(1,215 |
) |
Net reclassified gains net investment hedges |
|
|
1,337 |
|
|
|
423 |
|
|
|
|
|
|
|
|
Total |
|
$ |
618 |
|
|
$ |
(792 |
) |
|
|
|
|
|
|
|
Note 4: Inventories
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
October 1, |
|
|
January 1, |
|
|
|
2006 |
|
|
2006 |
|
|
2006 |
|
Coffee: |
|
|
|
|
|
|
|
|
|
|
|
|
Unroasted |
|
$ |
273,184 |
|
|
$ |
328,051 |
|
|
$ |
262,204 |
|
Roasted |
|
|
76,357 |
|
|
|
80,199 |
|
|
|
53,815 |
|
Other merchandise held for sale |
|
|
125,449 |
|
|
|
146,345 |
|
|
|
80,539 |
|
Packaging and other supplies |
|
|
72,287 |
|
|
|
81,627 |
|
|
|
56,092 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
547,277 |
|
|
$ |
636,222 |
|
|
$ |
452,650 |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, the Company had committed to fixed-price purchase
contracts for green coffee totaling $507 million. The Company believes, based on
relationships established with its suppliers in the past, the risk of non-delivery on
such purchase commitments is remote. Other merchandise held for sale includes, among
other
5
items, brewing equipment, serveware and tea.
Note 5: Property, Plant and Equipment
Property, plant and equipment are recorded at cost and consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
October 1, |
|
|
|
2006 |
|
|
2006 |
|
Land |
|
$ |
34,708 |
|
|
$ |
32,350 |
|
Buildings |
|
|
124,340 |
|
|
|
109,129 |
|
Leasehold improvements |
|
|
2,580,388 |
|
|
|
2,436,503 |
|
Store equipment |
|
|
850,075 |
|
|
|
784,444 |
|
Roasting equipment |
|
|
199,854 |
|
|
|
197,004 |
|
Furniture, fixtures and other |
|
|
539,241 |
|
|
|
523,275 |
|
|
|
|
|
|
|
|
|
|
|
4,328,606 |
|
|
|
4,082,705 |
|
Less: accumulated depreciation and amortization |
|
|
(2,076,546 |
) |
|
|
(1,969,804 |
) |
|
|
|
|
|
|
|
|
|
|
2,252,060 |
|
|
|
2,112,901 |
|
Work in progress |
|
|
144,741 |
|
|
|
174,998 |
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
2,396,801 |
|
|
$ |
2,287,899 |
|
|
|
|
|
|
|
|
Note 6: Short-term Borrowings
In August 2005, the Company entered into a $500 million unsecured five-year revolving
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. In August 2006, the Company increased its borrowing capacity under
the facility to $1 billion, as provided in the original credit facility. In December
of 2006, the Company extended the term of the facility by one year to August 2011.
The interest rate for borrowings under the facility ranges from 0.150% to 0.275% 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 performance under specified financial criteria.
As of December 31, 2006, the Company had $365 million outstanding, as well as a letter
of credit of $12.9 million which reduces the borrowing capacity under the credit
facility. As of October 1, 2006, the Company had $700 million outstanding, as well as
a letter of credit of $11.9 million. For the 13-week period ended December 31, 2006,
the Company had additional borrowings of $24 million under the facility and made
principal repayments of $359 million. The weighted average contractual interest rates
were 5.5% at both December 31, 2006 and October 1, 2006. The facility contains
provisions that require the Company to maintain compliance with certain covenants,
including the maintenance of certain financial ratios. As of December 31, 2006 and
October 1, 2006, the Company was in compliance with each of these covenants.
Interest expense, net of interest capitalized, was $7.0 million and $2.6 million for
the 13 weeks ended December 31, 2006 and January 1, 2006 respectively. For the 13
weeks ended December 31, 2006, $0.8 million of interest expense was capitalized. No
interest was capitalized for the 13 weeks ended January 1, 2006.
Note 7: Other Long-term Liabilities
The Companys other long-term liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
October 1, |
|
|
|
2006 |
|
|
2006 |
|
Deferred rent |
|
$ |
218,794 |
|
|
$ |
203,903 |
|
Asset retirement obligations |
|
|
37,187 |
|
|
|
34,271 |
|
Minority interest |
|
|
13,485 |
|
|
|
10,739 |
|
Other |
|
|
13,330 |
|
|
|
13,944 |
|
|
|
|
|
|
|
|
Total |
|
$ |
282,796 |
|
|
$ |
262,857 |
|
|
|
|
|
|
|
|
The deferred rent liabilities as of December 31, 2006 and October 1, 2006, 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.
6
Asset retirement obligations represent the estimated fair value of the Companys
future costs of removing leasehold improvements at the termination of leases related to
certain leased stores and administrative facilities.
Minority interest represents the long-term liabilities maintained for the collective
ownership interests of minority shareholders for operations accounted for under the
consolidation method, but 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 guarantees,
hedging instruments, donation commitments and the long-term portion of capital lease
obligations.
Note 8: 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 31, 2006.
Under the Companys authorized share repurchase program, Starbucks acquired 3.6
million shares at an average price of $36.04 for a total cost of $130 million for the
13-week period ended December 31, 2006. Starbucks acquired 4.3 million shares at an
average price of $28.10 for a total cost of $121 million during the 13-week period
ended January 1, 2006. During fiscal 2006, the Starbucks Board of Directors
authorized additional repurchases of 25 million shares of the Companys common stock,
and as of December 31, 2006, there were 17.9 million remaining shares authorized for
repurchase. Share repurchases were funded through cash, cash equivalents,
available-for-sale securities and borrowings under the revolving credit facility and
were part of the Companys active capital management program.
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 thousands):
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
|
|
December 31, |
|
|
January 1, |
|
|
|
2006 |
|
|
2006 |
|
Net earnings |
|
$ |
204,952 |
|
|
$ |
174,156 |
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains/(losses) on cash flow hedging instruments |
|
|
5,542 |
|
|
|
(1,268 |
) |
Unrealized holding gains/(losses) on net investment hedging instruments |
|
|
(108 |
) |
|
|
1,337 |
|
Unrealized holding gains/(losses) on available-for-sale securities |
|
|
78 |
|
|
|
(44 |
) |
Reclassification adjustment for net gains realized in net earnings for
available-for-sale securities |
|
|
|
|
|
|
(10 |
) |
Reclassification
adjustment for net losses realized in net earnings for cash flow hedges |
|
|
753 |
|
|
|
1,110 |
|
|
|
|
|
|
|
|
Net unrealized gain |
|
|
6,265 |
|
|
|
1,125 |
|
Translation adjustment |
|
|
5,249 |
|
|
|
(3,620 |
) |
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
216,466 |
|
|
$ |
171,661 |
|
|
|
|
|
|
|
|
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, such as the euro and British pound sterling, offset in
part by strengthening of the U.S. dollar against the Canadian dollar. The unfavorable
translation adjustment change for the 13-week period ended January 1, 2006, of $3.6
million was primarily due to the strengthening of the U.S dollar against several
currencies, such as the Japanese yen, euro and British pound sterling.
7
The components of accumulated other comprehensive income, net of tax, were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
October 1, |
|
|
|
2006 |
|
|
2006 |
|
Net unrealized holding losses on available-for-sale securities |
|
$ |
(176 |
) |
|
$ |
(254 |
) |
Net unrealized holding losses on hedging instruments |
|
|
(229 |
) |
|
|
(6,416 |
) |
Translation adjustment |
|
|
49,192 |
|
|
|
43,943 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
$ |
48,787 |
|
|
$ |
37,273 |
|
|
|
|
|
|
|
|
As of December 31, 2006, the translation adjustment of $49.2 million was net of
tax provisions of $7.8 million. As of October 1, 2006, the translation adjustment of
$43.9 million was net of tax provisions of $7.3 million.
Note 9: Stock-Based Compensation
Stock Options
Stock options to purchase the Companys common stock are granted at prices at or above
the fair market value 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 year. Nearly
all outstanding stock options are non-qualified stock options.
The fair value of stock awards was estimated at the date of grant using the
Black-Scholes-Merton option valuation model with the following weighted
average assumptions for the 13 weeks ended December 31, 2006 and January 1, 2006:
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Options |
13 weeks ended |
|
December 31, 2006 |
|
January 1, 2006 |
Expected term (in years) |
|
|
4.7 |
|
|
|
4.4 |
|
Expected stock price volatility |
|
|
29.1 |
% |
|
|
28.8 |
% |
Risk-free interest rate |
|
|
4.6 |
% |
|
|
4.4 |
% |
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
Estimated fair value per option granted |
|
$ |
12.04 |
|
|
$ |
9.46 |
|
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 summarizes all stock option transactions from October 1, 2006 through
December 31, 2006 (no restricted stock, restricted stock units or stock appreciation
rights were outstanding for any of these periods):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Weighted |
|
|
|
|
|
|
|
|
Average |
|
Average |
|
Aggregate |
|
|
Shares |
|
Exercise |
|
Remaining |
|
Intrinsic |
|
|
Subject to |
|
Price |
|
Contractual |
|
Value |
|
|
Options |
|
per Share |
|
Life |
|
(in thousands) |
Outstanding, October 1, 2006 |
|
|
69,419,871 |
|
|
$ |
16.83 |
|
|
|
6.2 |
|
|
$ |
1,196,209 |
|
Granted |
|
|
10,994,085 |
|
|
|
36.78 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(3,956,287 |
) |
|
|
13.59 |
|
|
|
|
|
|
|
|
|
Cancelled |
|
|
(579,017 |
) |
|
|
28.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2006 |
|
|
75,878,652 |
|
|
|
19.80 |
|
|
|
6.5 |
|
|
|
1,200,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2006 |
|
|
48,065,980 |
|
|
|
13.30 |
|
|
|
5.2 |
|
|
|
1,063,261 |
|
The aggregate intrinsic value in the table above is before applicable income
taxes and represents the amount optionees would have realized if all options had been
exercised on the last business day of the period indicated, based on the Companys
closing stock price on that day. As of December 31, 2006, total unrecognized
stock-based compensation expense related to nonvested stock options was approximately
$165 million, before income taxes, and is expected to be recognized over a weighted
average period of approximately 26 months.
8
The Company issues new shares of common stock upon exercise of stock options. As of
December 31, 2006, there were 57.9 million shares of common stock available for
issuance pursuant to future stock option grants.
Note 10: Earnings Per Share
The following table presents the calculation of net earnings per common share basic
and diluted (in thousands, except earnings per share):
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
|
|
December 31, |
|
|
January 1, |
|
|
|
2006 |
|
|
2006 |
|
Net earnings |
|
$ |
204,952 |
|
|
$ |
174,156 |
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and common stock units
outstanding (for basic calculation) |
|
|
758,088 |
|
|
|
767,021 |
|
Dilutive effect of outstanding common stock options |
|
|
24,676 |
|
|
|
25,928 |
|
|
|
|
|
|
|
|
Weighted average common and common equivalent shares
outstanding (for diluted calculation) |
|
|
782,764 |
|
|
|
792,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share basic |
|
$ |
0.27 |
|
|
$ |
0.23 |
|
Net earnings per common and common equivalent share diluted |
|
$ |
0.26 |
|
|
$ |
0.22 |
|
Potential dilutive shares consist of the incremental common shares issuable upon
the exercise of outstanding stock options (both vested and non-vested) using the
treasury stock method. These options are excluded from the computation of earnings
per share if their effect is antidilutive. The antidilutive options totaled 5.5
million and 14.7 million for the 13-week periods ended December 31, 2006 and January
1, 2006, respectively.
Note 11: Commitments and Contingencies
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. 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 31, 2006, the maximum
amount of the guarantees was approximately $6.0 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 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 $9.2 million, excluding interest and
other related costs, and these commitments expire between 2007 and 2012. As of
December 31, 2006, the Company recorded $3.6 million to Equity and other investments
and Other long-term liabilities on the consolidated balance sheet for the fair value
of the guarantee arrangements.
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 Company filed a motion for summary judgment as to the claims of the
named plaintiffs on September 24, 2004. The court denied that motion because this case
was in the early stages of discovery, but the court noted that the Company may
resubmit this motion at a later date. Starbucks believes that the plaintiffs are
properly classified as exempt
9
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. Trial is currently set for August 2007. 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. The size of
the class has yet to be determined. The Company cannot estimate the possible loss to
the Company, if any. Trial is currently set for May 2007. 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, and believes that a loss in this case is unlikely. No trial date
has been set. 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.
10
Note 12: 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 thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United |
|
|
|
|
|
|
|
|
|
Unallocated |
|
|
13 Weeks Ended |
|
States |
|
International |
|
Global CPG |
|
Corporate (1) |
|
Total |
December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail |
|
$ |
1,660,263 |
|
|
$ |
346,548 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,006,811 |
|
Specialty: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing |
|
|
113,309 |
|
|
|
49,864 |
|
|
|
90,749 |
|
|
|
|
|
|
|
253,922 |
|
Foodservice and other |
|
|
86,327 |
|
|
|
8,663 |
|
|
|
|
|
|
|
|
|
|
|
94,990 |
|
Total specialty |
|
|
199,636 |
|
|
|
58,527 |
|
|
|
90,749 |
|
|
|
|
|
|
|
348,912 |
|
Total net revenues |
|
|
1,859,899 |
|
|
|
405,075 |
|
|
|
90,749 |
|
|
|
|
|
|
|
2,355,723 |
|
Earnings/(loss) before income taxes |
|
|
326,738 |
|
|
|
33,538 |
|
|
|
41,601 |
|
|
|
(75,714 |
) |
|
|
326,163 |
|
Depreciation and amortization |
|
|
81,363 |
|
|
|
20,465 |
|
|
|
22 |
|
|
|
8,346 |
|
|
|
110,196 |
|
Income from equity investees |
|
|
|
|
|
|
8,024 |
|
|
|
10,729 |
|
|
|
|
|
|
|
18,753 |
|
Net impairment and disposition losses |
|
|
2,433 |
|
|
|
1,034 |
|
|
|
2 |
|
|
|
|
|
|
|
3,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail |
|
$ |
1,370,687 |
|
|
$ |
257,296 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,627,983 |
|
Specialty: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing |
|
|
96,283 |
|
|
|
42,309 |
|
|
|
80,558 |
|
|
|
|
|
|
|
219,150 |
|
Foodservice and other |
|
|
80,371 |
|
|
|
6,588 |
|
|
|
|
|
|
|
|
|
|
|
86,959 |
|
Total specialty |
|
|
176,654 |
|
|
|
48,897 |
|
|
|
80,558 |
|
|
|
|
|
|
|
306,109 |
|
Total net revenues |
|
|
1,547,341 |
|
|
|
306,193 |
|
|
|
80,558 |
|
|
|
|
|
|
|
1,934,092 |
|
Earnings/(loss) before income taxes |
|
|
298,482 |
|
|
|
33,823 |
|
|
|
42,577 |
|
|
|
(94,687 |
) |
|
|
280,195 |
|
Depreciation and amortization |
|
|
67,684 |
|
|
|
15,009 |
|
|
|
34 |
|
|
|
8,561 |
|
|
|
91,288 |
|
Income from equity investees |
|
|
124 |
|
|
|
7,778 |
|
|
|
11,818 |
|
|
|
|
|
|
|
19,720 |
|
Net impairment and disposition losses |
|
|
2,044 |
|
|
|
1,572 |
|
|
|
|
|
|
|
135 |
|
|
|
3,751 |
|
|
|
|
|
(1) |
|
Unallocated corporate includes certain general and administrative expenses,
related depreciation and amortization expenses and amounts included in Interest and
other income, net on the consolidated statements of earnings. |
The table below represents information by geographic area (in thousands):
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
|
|
December 31, |
|
|
January 1, |
|
|
|
2006 |
|
|
2006 |
|
Net revenues from external customers: |
|
|
|
|
|
|
|
|
United States |
|
$ |
1,944,684 |
|
|
$ |
1,624,867 |
|
Foreign countries |
|
|
411,039 |
|
|
|
309,225 |
|
|
|
|
|
|
|
|
Total |
|
$ |
2,355,723 |
|
|
$ |
1,934,092 |
|
|
|
|
|
|
|
|
No customer accounts for 10% or more of the Companys revenues. Revenues from
foreign countries are based on the geographic location of the customers and consist
primarily of revenues from the United Kingdom and Canada, which together account for
approximately 73% of foreign net revenues.
11
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 comparable store sales and revenue
growth, operating income as a percentage of total net revenues, effective tax rate,
cash flow requirements, capital expenditures and commodity costs, 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 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 and in Starbucks Corporations other filings with the
Securities and Exchange Commission (SEC), including the Item 1A. Risks Factors
section of the Starbucks Annual Report on Form 10-K for the fiscal year ended October
1, 2006.
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 Companys
Annual Report on Form 10-K for the fiscal year ended October 1, 2006.
General
Starbucks Corporations fiscal year ends on the Sunday closest to September 30. Fiscal
year 2006 had 52 weeks and the fiscal year ending on September 30, 2007 will also
include 52 weeks. All references to store counts, including data for new store
openings, are reported net of related store closures.
Management Overview
During the 13 weeks ended December 31, 2006, the Companys focus on execution in all
areas of its business, from U.S. and International Company-operated retail operations
to the Companys specialty businesses, delivered strong financial performance.
Management believes that its ability to achieve the balance between growing the core
business and building the foundation for future growth is the key to increasing
long-term shareholder value. Starbucks first quarter performance reflects the
Companys continuing commitment to achieving this balance.
The primary driver of the Companys revenue growth continues to be the opening of new
retail stores, both Company-operated and licensed, in pursuit of the Companys
objective to establish Starbucks as one of the most recognized and respected brands in
the world. Starbucks opened 728 new stores in the 13-week period ended December 31,
2006 and plans to open approximately 2,400 in fiscal 2007. With a presence in 39
countries, serving customers nearly 44 million times per week, management continues to
believe that the Companys long-term goal of approximately 20,000 Starbucks retail
locations throughout the United States and at least 20,000 stores in International
markets is achievable.
In addition to opening new retail stores, Starbucks works to increase revenues
generated at new and existing Company-operated stores by attracting new customers and
increasing the frequency of visits by current customers. The strategy is to increase
comparable store sales by continuously improving the level of customer service,
introducing innovative products and improving speed of service through training,
technology and process improvement.
For the 13-week period ended December 31, 2006, global comparable store sales for
Company-operated markets increased by 6%. Comparable store sales growth for the
remainder of fiscal 2007 is expected to be in the target range of 3% to 7%.
12
In licensed retail operations, Starbucks shares operating and store development
experience to help licensees improve the profitability of existing stores and build
new stores. Internationally, the Companys strategy is to selectively
increase its equity stake in licensed international operations as these markets
develop. In October 2006, the Company purchased a 90% stake in its
previously-licensed operations in Beijing and Tianjin, China.
The combination of more retail stores, comparable store sales growth of 6% and growth
in other business channels in the U.S., International and CPG operating segments
resulted in a 22% increase in total net revenues for the 13-week period ended December
31, 2006, compared to the same period of fiscal 2006. The Company expects consolidated
total net revenue growth of approximately 20% in fiscal 2007, consistent with its
three to five year revenue growth target.
For the 13-week period ended December 31, 2006, operating income as a percentage of
total net revenues decreased to 13.6% from a record high 14.5% in the same period of
fiscal 2006, due to higher cost of sales including occupancy costs and higher store
operating expenses, partially offset by lower general and administrative expenses. For
the second half of fiscal 2007, the Company expects modest improvement in operating
income as a percentage of total net revenues, compared to the same period in the prior
year. Net earnings increased by 18% in the 13-week period ended December 31, 2006,
compared to the same period in fiscal 2006.
Results of Operations for the 13 Weeks Ended December 31, 2006 and January 1, 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 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
|
13 Weeks Ended |
|
|
|
December 31, |
|
|
January 1, |
|
|
December 31, |
|
|
January 1, |
|
|
|
2006 |
|
|
2006 |
|
|
2006 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
As a % of total net revenues |
|
STATEMENTS OF EARNINGS DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail |
|
$ |
2,006,811 |
|
|
$ |
1,627,983 |
|
|
|
85.2 |
% |
|
|
84.2 |
% |
Specialty: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing |
|
|
253,922 |
|
|
|
219,150 |
|
|
|
10.8 |
|
|
|
11.3 |
|
Foodservice and other |
|
|
94,990 |
|
|
|
86,959 |
|
|
|
4.0 |
|
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty |
|
|
348,912 |
|
|
|
306,109 |
|
|
|
14.8 |
|
|
|
15.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
2,355,723 |
|
|
|
1,934,092 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales including occupancy costs |
|
|
984,823 |
|
|
|
778,038 |
|
|
|
41.8 |
|
|
|
40.2 |
|
Store operating expenses (1) |
|
|
771,967 |
|
|
|
622,166 |
|
|
|
32.8 |
|
|
|
32.2 |
|
Other operating expenses (2) |
|
|
72,538 |
|
|
|
59,148 |
|
|
|
3.0 |
|
|
|
3.0 |
|
Depreciation and amortization expenses |
|
|
110,196 |
|
|
|
91,288 |
|
|
|
4.7 |
|
|
|
4.7 |
|
General and administrative expenses |
|
|
115,228 |
|
|
|
123,325 |
|
|
|
4.9 |
|
|
|
6.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal operating expenses |
|
|
2,054,752 |
|
|
|
1,673,965 |
|
|
|
87.2 |
|
|
|
86.5 |
|
Income from equity investees |
|
|
18,753 |
|
|
|
19,720 |
|
|
|
0.8 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
319,724 |
|
|
|
279,847 |
|
|
|
13.6 |
|
|
|
14.5 |
|
Interest and other income, net |
|
|
6,439 |
|
|
|
348 |
|
|
|
0.2 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
326,163 |
|
|
|
280,195 |
|
|
|
13.8 |
|
|
|
14.5 |
|
Income taxes |
|
|
121,211 |
|
|
|
106,039 |
|
|
|
5.1 |
|
|
|
5.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
204,952 |
|
|
$ |
174,156 |
|
|
|
8.7 |
% |
|
|
9.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As a percentage of related Company-operated retail revenues, store
operating expenses were 38.5% for the 13 weeks ended December 31, 2006, and 38.2%
for the 13 weeks ended January 1, 2006. |
|
(2) |
|
As a percentage of related total specialty revenues, other
operating expenses were 20.8% for the 13 weeks ended December 31, 2006, and 19.3%
for the 13 weeks ended January 1, 2006. |
Net revenues for the 13 weeks ended December 31, 2006, increased 22% to $2.4
billion from $1.9 billion for the corresponding period of fiscal 2006, driven by
increases in both Company-operated retail revenues and specialty operations. Net
revenues are expected to grow approximately 20% in fiscal 2007 compared to fiscal
2006.
During the 13-week period ended December 31, 2006, Starbucks derived 85% of total net
revenues from its Company-operated retail stores. Company-operated retail revenues
increased 23% to $2.0 billion for the 13 weeks ended December 31, 2006, from $1.6
billion for the same period in fiscal 2006. The increase was primarily attributable to
the opening of 1,177 new Company-operated retail stores in the last 12 months and
comparable store
13
sales growth of 6% for the 13 weeks ended December 31, 2006. The
increase in comparable store sales was due to a 4% increase in the number of customer
transactions and a 2% increase in the average value per transaction. Management
believes increased traffic in Company-operated retail stores continues to be driven by
sustained popularity of core products, new product innovation and a high level of
customer satisfaction.
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 14% to $349 million for the 13 weeks ended December 31, 2006, from
$306 million for the corresponding period of fiscal 2006.
Licensing revenues, which are derived from retail store licensing arrangements, as
well as grocery, warehouse club and certain other branded-product operations,
increased 16% to $254 million for the 13 weeks ended December 31, 2006, from $219
million for the corresponding period of fiscal 2006. The increase was primarily due to
higher product sales and royalty revenues from the opening of 1,190 new licensed
retail stores in the last 12 months and, to a lesser extent, growth in the licensed
grocery and warehouse club business.
Foodservice and other revenues increased 9% to $95 million for the 13 weeks ended
December 31, 2006, from $87 million for the corresponding period of fiscal 2006. 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 41.8% of total net revenues for
the 13 weeks ended December 31, 2006, compared to 40.2% for the corresponding period
of fiscal 2006. The increase was primarily due to higher rent expense, a shift in
sales to higher cost products and increased distribution costs.
Store operating expenses as a percentage of Company-operated retail revenues increased
to 38.5% for the 13 weeks ended December 31, 2006, from 38.2% for the corresponding
period of fiscal 2006. This increase was primarily due to higher payroll expenditures
from an increase in the average hourly wage rate for retail store partners.
Other operating expenses (expenses associated with the Companys specialty operations)
increased to 20.8% of total specialty revenues for the 13 weeks ended December 31,
2006, compared to 19.3% in the corresponding period of fiscal 2006. The increase was
primarily due to increased payroll-related expenditures to support the growth in U.S.
and International licensed stores operations.
Depreciation and amortization expenses increased to $110 million for the 13 weeks
ended December 31, 2006, compared to $91 million for the corresponding period of
fiscal 2006. The increase was primarily due to the opening of 1,177 new
Company-operated retail stores in the last 12 months. As a percentage of total net
revenues, depreciation and amortization expenses were 4.7% for both periods.
General and administrative expenses decreased to $115 million for the 13 weeks ended
December 31, 2006, compared to $123 million for the corresponding period of fiscal
2006. This decrease was primarily due to higher charitable contributions in the prior
year and higher provisions for incentive compensation due to exceptional performance
in the prior year. These were partially offset by increased payroll-related
expenditures and higher professional fees in support of continued global growth and
systems infrastructure development in the current year. As a percentage of total net
revenues, general and administrative expenses decreased to 4.9% for the 13 weeks ended
December 31, 2006, from 6.4% for the corresponding period of fiscal 2006.
Income from equity investees decreased 5% to $19 million for the 13 weeks ended
December 31, 2006, compared to $20 million for the corresponding period of fiscal
2006. The decrease was primarily due to lower income as a result of lower sales
volumes for both the Starbucks Ice Cream Partnership and the North American Coffee
Partnership, which produces ready-to-drink beverages, including bottled
Frappuccino® coffee drinks and Starbucks DoubleShot® espresso
drinks.
Operating income increased 14% to $320 million for the 13 weeks ended December 31,
2006, compared to $280 million for the corresponding period of fiscal 2006. Operating
margin decreased to 13.6% of total net revenues for the 13 weeks ended December 31,
2006, compared to 14.5% for the corresponding period of fiscal 2006, primarily due to
higher cost of sales including occupancy costs and higher store operating expenses,
partially offset by lower general and administrative expenses.
Net interest and other income increased to $6.4 million for the 13 weeks ended
December 31, 2006, compared to $0.3 million in the corresponding period of fiscal
2006, primarily due to foreign exchange gains in the current year
14
compared to foreign exchange losses in the prior year.
Income taxes for the 13 weeks ended December 31, 2006, resulted in an effective tax
rate of 37.2%, compared to 37.8% for the corresponding period of fiscal 2006. The
Company currently estimates that its effective tax rate for fiscal year 2007 will
approximate 37%, with quarterly variations.
Net earnings for the 13 weeks ended December 31, 2006, increased 18% to $205 million
from $174 million for the same period of fiscal 2006. Diluted earnings per share also
increased by 18% to $0.26 for the 13 weeks ended December 31, 2006, compared to $0.22
per share for the comparable period in fiscal 2006.
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 thousands):
United States
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
13 Weeks Ended |
|
|
December 31, |
|
January 1, |
|
% |
|
December 31, |
|
January 1, |
|
|
2006 |
|
2006 |
|
Change |
|
2006 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of U.S. total net revenues |
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail |
|
$ |
1,660,263 |
|
|
$ |
1,370,687 |
|
|
|
21.1 |
% |
|
|
89.3 |
% |
|
|
88.6 |
% |
Specialty: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing |
|
|
113,309 |
|
|
|
96,283 |
|
|
|
17.7 |
|
|
|
6.1 |
|
|
|
6.2 |
|
Foodservice and other |
|
|
86,327 |
|
|
|
80,371 |
|
|
|
7.4 |
|
|
|
4.6 |
|
|
|
5.2 |
|
|
|
|
|
|
|
|
|
|
Total specialty |
|
|
199,636 |
|
|
|
176,654 |
|
|
|
13.0 |
|
|
|
10.7 |
|
|
|
11.4 |
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
1,859,899 |
|
|
|
1,547,341 |
|
|
|
20.2 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales including occupancy
costs |
|
|
731,121 |
|
|
|
587,446 |
|
|
|
|
|
|
|
39.3 |
|
|
|
38.0 |
|
Store operating expenses |
|
|
648,377 |
|
|
|
528,775 |
|
|
|
|
|
|
|
34.8 |
(1) |
|
|
34.1 |
(1) |
Other operating expenses |
|
|
52,125 |
|
|
|
44,107 |
|
|
|
|
|
|
|
2.8 |
(2) |
|
|
2.8 |
(2) |
Depreciation and amortization
expenses |
|
|
81,363 |
|
|
|
67,684 |
|
|
|
|
|
|
|
4.4 |
|
|
|
4.4 |
|
General and administrative expenses |
|
|
21,759 |
|
|
|
21,533 |
|
|
|
|
|
|
|
1.2 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
Subtotal operating expenses |
|
|
1,534,745 |
|
|
|
1,249,545 |
|
|
|
|
|
|
|
82.5 |
|
|
|
80.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from equity investees |
|
|
|
|
|
|
124 |
|
|
|
|
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
325,154 |
|
|
$ |
297,920 |
|
|
|
9.1 |
% |
|
|
17.5 |
% |
|
|
19.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As a percentage of related Company-operated retail revenues, store
operating expenses were 39.1% for the 13 weeks ended December 31, 2006, and 38.6%
for the 13 weeks ended January 1, 2006. |
|
(2) |
|
As a percentage of related total specialty revenues, other
operating expenses were 26.1% for the 13 weeks ended December 31, 2006, and 25.0%
for the 13 weeks ended January 1, 2006. |
The United States operating segment (United States) sells coffee and other
beverages, whole bean coffees, complementary food, 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 20% to $1.9 billion for the 13 weeks ended
December 31, 2006, compared to $1.5 billion for the corresponding period of fiscal
2006.
United States Company-operated retail revenues increased 21% to $1.7 billion for the
13 weeks ended December 31, 2006, compared to $1.4 billion for the corresponding
period of fiscal 2006, primarily due to the opening of 928 new Company-operated retail
stores in the last 12 months and comparable store sales growth of 6% for the quarter.
The increase in comparable store sales was due to a 3% increase in the number of
customer transactions and a 3% increase in the average value per transaction.
Total United States specialty revenues increased 13% to $200 million for the 13 weeks
ended December 31, 2006,
15
compared to $177 million in the corresponding period of fiscal 2006. United States
licensing revenues increased 18% to $113 million, compared to $96 million for the
corresponding period of fiscal 2006. The increase was primarily due to higher product
sales and royalty revenues as a result of opening 758 new licensed retail stores in
the last 12 months. United States foodservice and other revenues increased 7% to $86
million, from $80 million in fiscal 2006, primarily due to growth in new and existing
foodservice accounts.
United States operating income increased by 9% to $325 million for the 13 weeks ended
December 31, 2006, compared to $298 million for the same period in fiscal 2006.
Operating margin decreased to 17.5% of related revenues from a record high 19.3% in
the corresponding period of fiscal 2006, primarily due to higher cost of sales
including occupancy costs and higher store operating expenses. Cost of sales including
occupancy costs increased primarily due to a shift in sales to higher cost products,
higher rent expense and increased distribution costs. The impact from a shift in sales
reflects a growing percentage of sales from food in the past year, which have higher
cost of sales compared to core beverage offerings. Store operating expenses increased
primarily due to higher payroll expenditures from an increase in the average hourly
wage rate for retail store partners. The Company is partially offsetting these wage
increases through its October 2006 beverage and whole bean price increase.
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
13 Weeks Ended |
|
|
December 31, |
|
January 1, |
|
% |
|
December 31, |
|
January 1, |
|
|
2006 |
|
2006 |
|
Change |
|
2006 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of International total net revenues |
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail |
|
$ |
346,548 |
|
|
$ |
257,296 |
|
|
|
34.7 |
% |
|
|
85.6 |
% |
|
|
84.0 |
% |
Specialty: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing |
|
|
49,864 |
|
|
|
42,309 |
|
|
|
17.9 |
|
|
|
12.3 |
|
|
|
13.8 |
|
Foodservice and other |
|
|
8,663 |
|
|
|
6,588 |
|
|
|
31.5 |
|
|
|
2.1 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
Total specialty |
|
|
58,527 |
|
|
|
48,897 |
|
|
|
19.7 |
|
|
|
14.4 |
|
|
|
16.0 |
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
405,075 |
|
|
|
306,193 |
|
|
|
32.3 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales including occupancy
costs |
|
|
200,111 |
|
|
|
145,428 |
|
|
|
|
|
|
|
49.4 |
|
|
|
47.5 |
|
Store operating expenses |
|
|
123,590 |
|
|
|
93,391 |
|
|
|
|
|
|
|
30.5 |
(1) |
|
|
30.5 |
(1) |
Other operating expenses |
|
|
14,149 |
|
|
|
10,440 |
|
|
|
|
|
|
|
3.4 |
(2) |
|
|
3.4 |
(2) |
Depreciation and amortization
expenses |
|
|
20,465 |
|
|
|
15,009 |
|
|
|
|
|
|
|
5.1 |
|
|
|
4.9 |
|
General and administrative expenses |
|
|
21,711 |
|
|
|
16,187 |
|
|
|
|
|
|
|
5.4 |
|
|
|
5.3 |
|
|
|
|
|
|
|
|
|
|
Subtotal operating expenses |
|
|
380,026 |
|
|
|
280,455 |
|
|
|
|
|
|
|
93.8 |
|
|
|
91.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from equity investees |
|
|
8,024 |
|
|
|
7,778 |
|
|
|
|
|
|
|
2.0 |
|
|
|
2.5 |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
33,073 |
|
|
$ |
33,516 |
|
|
|
(1.3 |
%) |
|
|
8.2 |
% |
|
|
10.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As a percentage of related Company-operated retail revenues, store
operating expenses were 35.7% for the 13 weeks ended December 31, 2006, and 36.3%
for the 13 weeks ended January 1, 2006. |
|
(2) |
|
As a percentage of related total specialty revenues, other
operating expenses were 24.2% for the 13 weeks ended December 31, 2006, and 21.4%
for the 13 weeks ended January 1, 2006. |
The International operating segment (International) sells coffee and other
beverages, whole bean coffees, complementary food, coffee brewing equipment and
merchandise through Company-operated retail stores in Canada, the United Kingdom,
China, Thailand, Australia, Germany, Singapore, Puerto Rico, Chile and Ireland.
Specialty operations in International primarily include retail store licensing
operations in more than 25 other countries and foodservice accounts in Canada and the
United Kingdom. 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. During
the quarter ended December 31, 2006, the Company opened its first stores in Brazil and
Egypt. 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 32% to $405 million for the 13 weeks ended
December 31, 2006, compared to $306 million for the corresponding period of fiscal
2006.
16
International Company-operated retail revenues increased 35% to $347 million for the
13 weeks ended December 31, 2006, compared to $257 million for the corresponding
period of fiscal 2006. The increase was primarily due to the opening of 249 new
Company-operated retail stores in the last 12 months, comparable store sales growth of
8% for the quarter and favorable foreign currency exchange for both the British pound
sterling and Canadian dollar. The increase in comparable store sales resulted from a
6% increase in the number of customer transactions coupled with a 2% increase in the
average value per transaction.
Total International specialty revenues increased 20% to $59 million for the 13 weeks
ended December 31, 2006, compared to $49 million in the corresponding period of fiscal
2006. The increase was primarily due to higher product sales and royalty revenues from
opening 432 new licensed retail stores in the last 12 months and growth in new and
existing foodservice accounts.
International operating income decreased slightly to $33 million for the 13 weeks
ended December 31, 2006, compared to $34 million in the corresponding period of fiscal
2006. Operating margin decreased to 8.2% of related revenues from 10.9% in the
corresponding period of fiscal 2006, primarily due to higher cost of sales including
occupancy costs. The increase in cost of sales including occupancy costs was
primarily due to accounting corrections totaling $3.4 million, and to rising energy
and fuel prices.
Global Consumer Products Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
13 Weeks Ended |
|
|
December 31, |
|
January 1, |
|
% |
|
December 31, |
|
January 1, |
|
|
2006 |
|
2006 |
|
Change |
|
2006 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of CPG total net revenues |
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing |
|
$ |
90,749 |
|
|
$ |
80,558 |
|
|
|
12.7 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
Total specialty |
|
|
90,749 |
|
|
|
80,558 |
|
|
|
12.7 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
90,749 |
|
|
|
80,558 |
|
|
|
12.7 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
53,591 |
|
|
|
45,164 |
|
|
|
|
|
|
|
59.1 |
|
|
|
56.1 |
|
Other operating expenses |
|
|
6,264 |
|
|
|
4,601 |
|
|
|
|
|
|
|
6.9 |
|
|
|
5.7 |
|
Depreciation and amortization
expenses |
|
|
22 |
|
|
|
34 |
|
|
|
|
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
Subtotal operating expenses |
|
|
59,877 |
|
|
|
49,799 |
|
|
|
|
|
|
|
66.0 |
|
|
|
61.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from equity investees |
|
|
10,729 |
|
|
|
11,818 |
|
|
|
|
|
|
|
11.8 |
|
|
|
14.7 |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
41,601 |
|
|
$ |
42,577 |
|
|
|
(2.3 |
%) |
|
|
45.8 |
% |
|
|
52.9 |
% |
|
|
|
|
|
|
|
|
|
The Global Consumer Products Group (CPG) sells a selection of whole bean and
ground coffees as well as a selection of premium Tazo ® teas through licensing
arrangements in United States and international markets. CPG also produces and sells
ready-to-drink beverages which include, among others, bottled Frappuccino ®
coffee drinks, Starbucks DoubleShot ® espresso drinks, Discoveries
products, Starbucks ® superpremium ice creams and Starbucks Coffee
and Cream Liqueurs through its joint ventures and marketing and distribution
agreements.
CPG total net revenues increased 13% to $91 million for the 13 weeks ended December
31, 2006, compared to $81 million for the corresponding period of fiscal 2006. The
increase was primarily due to volume growth in both the U.S. and International
licensed grocery and warehouse club businesses.
CPG operating income decreased slightly to $42 million for the 13 weeks ended December
31, 2006, compared to $43 million for the corresponding period of fiscal 2006.
Operating margin decreased to 45.8% of related revenues, from 52.9% in fiscal 2006,
primarily due to higher cost of sales, lower income from the Companys equity
investees and higher other operating expenses. Cost of sales increased primarily due
to the timing of sales to the grocery channel. Income from equity investees declined
primarily due to decreased sales volumes for the Starbucks Ice Cream Partnership as
well as the North American Coffee Partnership, which produces ready-to-drink beverages
including Starbucks bottled Frappuccino® coffee drinks and Starbucks Doubleshot®
espresso drinks. Other operating expenses increased primarily due to higher marketing
expenditures in support of the development and expansion of the ready-to-drink
beverages in the Asia-Pacific region.
17
Unallocated Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
13 Weeks Ended |
|
|
December 31, |
|
January 1, |
|
% |
|
December 31, |
|
January 1, |
|
|
2006 |
|
2006 |
|
Change |
|
2006 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of total net revenues |
Depreciation and amortization
expenses |
|
$ |
8,346 |
|
|
$ |
8,561 |
|
|
|
|
|
|
|
0.4 |
% |
|
|
0.4 |
% |
General and administrative expenses |
|
|
71,758 |
|
|
|
85,605 |
|
|
|
|
|
|
|
3.0 |
|
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
$ |
(80,104 |
) |
|
$ |
(94,166 |
) |
|
|
14.9 |
% |
|
|
(3.4 |
%) |
|
|
(4.9 |
%) |
|
|
|
|
|
|
|
|
|
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.
Unallocated corporate expenses decreased to $80 million for the 13 weeks ended
December 31, 2006, compared to $94 million in the corresponding period of fiscal 2006.
The decrease was primarily due to higher charitable contributions in the prior year
and higher provisions for incentive compensation due to exceptional performance in the
prior year. These were partially offset by increased payroll-related expenditures and
higher professional fees in support of continued global growth and systems
infrastructure development in the current year. Total unallocated corporate expenses
as a percentage of total net revenues was 3.4% for the 13 weeks ended December 31,
2006 and 4.9% for the 13 weeks ended January 1, 2006.
Liquidity and Capital Resources
The following table represents components of the Companys most liquid assets (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
October 1, |
|
|
|
2006 |
|
|
2006 |
|
Cash and cash equivalents |
|
$ |
270,873 |
|
|
$ |
312,606 |
|
Short-term investments available-for-sale securities |
|
|
103,184 |
|
|
|
87,542 |
|
Short-term investments trading securities |
|
|
62,413 |
|
|
|
53,496 |
|
Long-term investments available-for-sale securities |
|
|
23,280 |
|
|
|
5,811 |
|
|
|
|
|
|
|
|
Total cash, cash equivalents and liquid investments |
|
$ |
459,750 |
|
|
$ |
459,455 |
|
|
|
|
|
|
|
|
The Company manages its cash and cash equivalents, and liquid investments in order to
internally fund operating needs and pay down short-term borrowings.
The Company intends to use its cash and liquid investments, including any borrowings
under its $1 billion revolving credit facility, 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, 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.
Other than normal operating expenses, cash requirements for fiscal 2007 are expected
to consist primarily of capital expenditures for new Company-operated retail stores
and the remodeling and refurbishment of existing Company-operated retail stores, as
well as potential increased investments in International licensees and for additional
share repurchases, if any. Management expects capital expenditures to be in the range
of $950 million to $1.0 billion in fiscal 2007, primarily driven by new store
development and existing store renovations.
Cash provided by operating activities totaled $678 million for the 13 weeks ended
December 31, 2006. Net earnings provided $205 million and growth in Starbucks Card
balances provided $191 million in deferred revenue. The growth in the balance sheet
amount for deferred revenue related to the Starbucks Card was due primarily to the
holiday season. In addition, noncash depreciation and amortization expenses further
increased cash provided by operating activities by $116 million, and an increase in
accrued taxes payable due to the timing of payments provided $110 million.
18
Cash used by investing activities for the 13 weeks ended December 31, 2006
totaled $367 million. Net capital additions to property, plant and equipment used $271
million, primarily from opening 358 new Company-operated retail stores and remodeling
certain existing stores during the quarter. This amount includes the effect of the net
change in non-cash capital accruals totaling $55 million. During the 13 weeks ended
December 31, 2006, the Company used $47 million, net of cash acquired, to purchase 90%
equity ownership in the Companys previously licensed operations in Beijing and
Tianjin, China. In addition, the net activity in the Companys portfolio of
available-for-sale securities used $33 million.
Cash used by financing activities for the 13 weeks ended December 31, 2006 totaled
$355 million. The Company made net repayments under its revolving credit facility of
$335 million during the 13 weeks ended December 31, 2006, which consisted of
additional gross borrowings of $24 million offset by gross principal repayments of
$359 million. Cash used to repurchase shares of the Companys common stock totaled
$115 million. This amount, and the effect of the net change in unsettled trades
totaling $15 million from October 1, 2006, together represent the total accrual-based
cost of the share repurchase program for the quarter. 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. Approximately
17.9 million shares remained available for repurchase as of December 31, 2006.
Partially offsetting cash used for share repurchases were proceeds of $66 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; however, the amounts and the timing
cannot be predicted.
Store Data
The following table summarizes the Companys retail store information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net stores opened during the |
|
|
|
|
13-week period ended |
|
Stores open as of |
|
|
December 31, |
|
January 1, |
|
December 31, |
|
January 1, |
|
|
2006 |
|
2006 |
|
2006 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated Stores(1) |
|
|
282 |
|
|
|
164 |
|
|
|
6,010 |
|
|
|
5,082 |
|
Licensed Stores |
|
|
223 |
|
|
|
198 |
|
|
|
3,391 |
|
|
|
2,633 |
|
|
|
|
|
|
|
|
|
505 |
|
|
|
362 |
|
|
|
9,401 |
|
|
|
7,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated Stores(1) |
|
|
76 |
|
|
|
60 |
|
|
|
1,511 |
|
|
|
1,262 |
|
Licensed Stores(1) |
|
|
147 |
|
|
|
138 |
|
|
|
2,256 |
|
|
|
1,824 |
|
|
|
|
|
|
|
|
|
223 |
|
|
|
198 |
|
|
|
3,767 |
|
|
|
3,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
728 |
|
|
|
560 |
|
|
|
13,168 |
|
|
|
10,801 |
|
|
|
|
|
|
|
|
|
(1) |
|
International store data has been adjusted for the acquisitions of the
Puerto Rico, Hawaii and Beijing operations by reclassifying historical
information from Licensed Stores to Company-operated Stores. United States store
data was also adjusted to align with the Hawaii operations segment change by
reclassifying historical information from International Company-operated stores
to the United States. |
Starbucks plans to open approximately 2,400 new stores on a global basis in
fiscal 2007. In the United States, Starbucks plans to open approximately 1,000
Company-operated locations and 700 licensed locations. In International markets,
Starbucks plans to open approximately 300 Company-operated stores and 400 licensed
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 Companys Fiscal 2006 Annual Report on Form 10-K.
19
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 31, 2006,
the maximum amount of the guarantees was approximately $6.0 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 Indebtedness of
Others, Starbucks has applied the disclosure provisions only and has not recorded the
guarantees on its balance sheet.
Commodity Prices, Availability and General Risk Conditions
The Company manages its exposure to various risks within the consolidated financial
statements according to an umbrella risk management policy. Under this policy,
market-based risks, including commodity costs and foreign currency exchange rates, are
quantified and evaluated for potential mitigation strategies, such as entering into
hedging transactions. Additionally, this policy restricts, among other things, the
amount of market-based risk the Company will tolerate before implementing approved
hedging strategies and prohibits speculative trading activity.
The Company purchases significant amounts of coffee and 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 Companys Form 10-K for
the fiscal year ended October 1, 2006.
Seasonality and Quarterly Results
The Companys business is subject to seasonal fluctuations. Significant portions of
the Companys net revenues and profits are realized during the first quarter of the
Companys fiscal year, which includes the holiday season. In addition, quarterly
results are affected by the timing of the opening of new stores, and the Companys
rapid growth may conceal the impact of other seasonal influences. Because of the
seasonality of the Companys business, results for any quarter are not necessarily
indicative of the results that may be achieved for the full fiscal year.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, which seeks
to reduce the diversity in practice associated with the accounting and reporting for
uncertainty in income tax positions. This Interpretation prescribes a comprehensive
model for the financial statement recognition, measurement, presentation and
disclosure of uncertain tax positions taken or expected to be taken in income tax
returns. FIN 48 is effective for fiscal years beginning after December 15, 2006 and
the Company will adopt the new requirements in its fiscal first quarter of 2008. The
cumulative effects, if any, of adopting FIN 48 will be recorded as an adjustment to
retained earnings as of the beginning of the period of adoption. The Company has not
yet determined the impact, if any, of adopting FIN 48 on its consolidated financial
statements.
In September 2006, the FASB issued SFAS 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 September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements (SAB 108). The intent of SAB 108 is to reduce
diversity in practice for the method companies use to quantify financial statement
misstatements, including the effect of prior year uncorrected errors. SAB 108
establishes an approach that requires quantification of financial statement errors
using both an income statement and a cumulative balance sheet
20
approach. SAB 108 is
effective for annual financial statements for fiscal years ending after November 15,
2006. The adoption of SAB 108 is not currently expected to have a significant impact
on the Companys consolidated financial
statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk related to foreign currency exchange rates,
equity security prices and changes in interest rates.
Foreign Currency Exchange Risk
As of December 31, 2006, the Company had forward foreign exchange contracts that
qualify as cash flow hedges under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, to hedge
portions of anticipated international revenue streams and inventory purchases. In
addition, Starbucks had forward foreign exchange contracts that qualify as hedges of
its net investment in Starbucks Coffee Japan, LTD, as well as the Companys net
investments in its Canadian and U.K. subsidiaries, to minimize foreign currency
exposure. These contracts expire within 33 months.
Consistent with the nature of the economic hedges provided by these foreign exchange
contracts, increases or decreases in their fair values would be mostly offset by
corresponding decreases or increases in the U.S. dollar value of the Companys foreign
investment, future foreign currency royalty fee payments and inventory purchases (i.e.
hedged items) that would occur within the hedging period. The information provided
below relates only to the hedging instruments and does not represent the corresponding
changes in the underlying hedged items.
Based on the foreign exchange contracts outstanding as of December 31, 2006, a 10%
devaluation of the U.S. dollar as compared to the level of foreign exchange rates for
currencies under contract as of December 31, 2006, would result in a reduced fair
value of these derivative financial instruments of approximately $45 million. Of this
total, approximately $23 million relates to cash flow hedges of revenue streams and
inventory purchases that may in turn reduce the Companys future net earnings. The
remaining $22 million relates to hedges of net investments in foreign operations that
may reduce future accumulated other comprehensive income on the consolidated balance
sheet since the underlying investments are not expected to be sold in the foreseeable
future.
Conversely, a 10% appreciation of the U.S. dollar would result in an increase in the
fair value of these instruments of approximately $39 million. Of this total,
approximately $21 million relates to cash flow hedges of revenue streams and inventory
purchases that may in turn increase the Companys future net earnings, while the
remaining $18 million relates to hedges of net investments in foreign operations that
may increase future accumulated other comprehensive income.
Equity Security Price Risk and Interest Rate Risk
There has been no material change in the equity security price risk or interest rate
risk discussed in Item 7A of the Companys Fiscal 2006 Annual Report on Form 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.
During the quarter the Company carried out an evaluation, under the supervision and
with the participation of the Companys management, including the chief executive
officer and the chief 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 31, 2006).
During the first quarter of fiscal 2007, 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.
21
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.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
See discussion of Legal Proceedings in Note 11 to the consolidated financial
statements included in Item 1 of this Report.
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 31, 2006:
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 2, 2006 October 29, 2006 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
21,488,126 |
|
October 30, 2006 November 26, 2006 |
|
|
449,936 |
|
|
|
36.46 |
|
|
|
449,936 |
|
|
|
21,038,190 |
|
November 27, 2006 December 31, 2006 |
|
|
3,145,235 |
|
|
|
35.98 |
|
|
|
3,145,235 |
|
|
|
17,892,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,595,171 |
|
|
|
36.04 |
|
|
|
3,595,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Monthly information is presented by reference to the Companys
fiscal months during the first quarter of fiscal 2007. |
|
(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 August 2, 2006. This
authorization has no expiration date. |
Item 6. Exhibits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference |
Exhibit |
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
Exhibit Description |
|
Form |
|
File No. |
|
Date of First Filing |
|
Exhibit Number |
|
Filed Herewith |
31.1
|
|
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
|
|
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
31.2
|
|
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
|
|
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
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
|
|
|
|
|
|
|
|
|
|
X |
22
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.
|
|
|
|
|
|
STARBUCKS CORPORATION
|
|
February 9, 2007 |
By: |
/s/ Michael Casey
|
|
|
|
Michael Casey |
|
|
|
executive vice president, chief financial officer
and chief administrative officer
Signing on behalf of the registrant and as principal
financial officer |
|
23
INDEX TO EXHIBITS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference |
Exhibit |
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
Exhibit Description |
|
Form |
|
File No. |
|
Date of First Filing |
|
Exhibit Number |
|
Filed Herewith |
31.1
|
|
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
|
|
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
31.2
|
|
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
|
|
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
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
|
|
|
|
|
|
|
|
|
|
X |
24