e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended December 28, 2008
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, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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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 2, 2009 |
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Common Stock, par value $0.001 per share
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734.6 million |
STARBUCKS CORPORATION
FORM 10-Q
For the Quarterly Period Ended December 28, 2008
Table of Contents
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
STARBUCKS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in millions, except earnings per share)
(unaudited)
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13 Weeks Ended |
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Dec 28, |
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Dec 30, |
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2008 |
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2007 |
Net revenues: |
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Company-operated retail |
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$ |
2,176.2 |
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$ |
2,351.5 |
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Specialty: |
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Licensing |
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334.3 |
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304.8 |
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Foodservice and other |
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104.7 |
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111.3 |
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Total specialty |
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439.0 |
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416.1 |
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Total net revenues |
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2,615.2 |
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2,767.6 |
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Cost of sales including occupancy costs |
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1,196.8 |
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1,186.0 |
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Store operating expenses |
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936.6 |
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927.3 |
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Other operating expenses |
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72.6 |
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85.7 |
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Depreciation and amortization expenses |
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134.3 |
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133.2 |
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General and administrative expenses |
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105.2 |
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125.9 |
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Restructuring charges |
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75.5 |
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Total operating expenses |
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2,521.0 |
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2,458.1 |
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Income from equity investees |
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23.5 |
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23.6 |
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Operating income |
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117.7 |
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333.1 |
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Interest income and other, net |
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(6.4 |
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10.7 |
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Interest expense |
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(13.0 |
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(17.1 |
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Earnings before income taxes |
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98.3 |
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326.7 |
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Income taxes |
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34.0 |
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118.6 |
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Net earnings |
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$ |
64.3 |
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$ |
208.1 |
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Net earnings per common share basic |
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$ |
0.09 |
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$ |
0.28 |
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Net earnings per common share diluted |
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$ |
0.09 |
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$ |
0.28 |
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Weighted average shares outstanding: |
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Basic |
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736.3 |
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731.6 |
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Diluted |
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739.1 |
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744.9 |
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See Notes to Condensed Consolidated Financial Statements.
3
STARBUCKS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
(unaudited)
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Dec 28, |
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Sep 28, |
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2008 |
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2008 |
ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
356.8 |
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$ |
269.8 |
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Short-term investments available-for-sale securities |
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3.0 |
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3.0 |
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Short-term investments trading securities |
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35.7 |
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49.5 |
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Accounts receivable, net |
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332.0 |
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329.5 |
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Inventories |
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590.4 |
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692.8 |
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Prepaid expenses and other current assets |
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159.7 |
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169.2 |
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Deferred income taxes, net |
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216.3 |
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234.2 |
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Total current assets |
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1,693.9 |
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1,748.0 |
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Long-term investments available-for-sale securities |
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80.0 |
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71.4 |
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Equity and cost investments |
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311.1 |
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302.6 |
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Property, plant and equipment, net |
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2,822.5 |
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2,956.4 |
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Other assets |
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294.2 |
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261.1 |
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Other intangible assets |
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66.8 |
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66.6 |
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Goodwill |
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261.9 |
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266.5 |
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TOTAL ASSETS |
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$ |
5,530.4 |
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$ |
5,672.6 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Commercial paper and short-term borrowings |
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$ |
290.2 |
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$ |
713.0 |
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Accounts payable |
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268.6 |
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324.9 |
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Accrued compensation and related costs |
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251.5 |
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253.6 |
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Accrued occupancy costs |
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124.9 |
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136.1 |
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Accrued taxes |
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112.3 |
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76.1 |
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Insurance reserves |
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145.3 |
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152.5 |
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Other accrued expenses |
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161.3 |
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164.4 |
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Deferred revenue |
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598.3 |
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368.4 |
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Current portion of long-term debt |
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0.6 |
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0.7 |
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Total current liabilities |
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1,953.0 |
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2,189.7 |
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Long-term debt |
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549.5 |
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549.6 |
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Other long-term liabilities |
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443.3 |
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442.4 |
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Total liabilities |
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2,945.8 |
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3,181.7 |
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Shareholders equity: |
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Common stock ($0.001 par value) authorized, 1,200.0
shares; issued and outstanding, 738.0 and 735.5
shares, respectively (includes 3.4 common stock units
in both periods) |
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0.7 |
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0.7 |
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Additional paid-in-capital |
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32.9 |
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Other additional paid-in-capital |
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39.4 |
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39.4 |
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Retained earnings |
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2,466.7 |
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2,402.4 |
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Accumulated other comprehensive income |
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44.9 |
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48.4 |
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Total shareholders equity |
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2,584.6 |
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2,490.9 |
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
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$ |
5,530.4 |
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$ |
5,672.6 |
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See Notes to Condensed Consolidated Financial Statements.
4
STARBUCKS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions, unaudited)
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13 Weeks Ended |
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Dec 28, |
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Dec 30, |
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2008 |
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2007 |
OPERATING ACTIVITIES: |
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Net earnings |
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$ |
64.3 |
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$ |
208.1 |
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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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141.0 |
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139.9 |
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Provision for impairments and asset disposals |
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65.3 |
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4.9 |
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Deferred income taxes, net |
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(1.9 |
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(22.1 |
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Equity in income of investees |
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(17.0 |
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(11.0 |
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Distributions of income from equity investees |
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16.1 |
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9.2 |
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Stock-based compensation |
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22.3 |
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24.3 |
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Tax benefit from exercise of stock options |
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0.3 |
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1.1 |
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Excess tax benefit from exercise of stock options |
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(5.6 |
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(3.0 |
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Other |
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14.1 |
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(0.1 |
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Cash provided/(used) by changes in operating assets and liabilities: |
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Inventories |
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99.1 |
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111.9 |
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Accounts payable |
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(41.8 |
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(42.6 |
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Accrued taxes |
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42.1 |
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124.6 |
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Deferred revenue |
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233.6 |
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215.6 |
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Other operating assets and liabilities |
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61.6 |
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46.8 |
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Net cash provided by operating activities |
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693.5 |
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807.6 |
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INVESTING ACTIVITIES: |
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Purchase of available-for-sale securities |
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(5.2 |
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(41.9 |
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Sale of available-for-sale securities |
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33.8 |
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Net purchases of equity, other investments and other assets |
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(5.3 |
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(2.1 |
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Net additions to property, plant and equipment |
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(172.6 |
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(263.6 |
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Net cash used by investing activities |
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(183.1 |
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(273.8 |
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FINANCING ACTIVITIES: |
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Repayments of commercial paper |
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(16,474.3 |
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(21,910.3 |
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Proceeds from issuance of commercial paper |
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16,201.4 |
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21,729.5 |
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Repayments of short-term borrowings |
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(512.0 |
) |
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Proceeds from short-term borrowings |
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362.0 |
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Proceeds from issuance of common stock |
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7.6 |
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21.6 |
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Excess tax benefit from exercise of stock options |
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5.6 |
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3.0 |
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Principal payments on long term debt |
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(0.2 |
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(0.2 |
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Repurchase of common stock |
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(311.3 |
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Other |
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(0.5 |
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Net cash used by financing activities |
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(410.4 |
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(467.7 |
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Effect of exchange rate changes on cash and cash equivalents |
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(13.0 |
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1.9 |
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Net increase in cash and cash equivalents |
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87.0 |
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68.0 |
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CASH AND CASH EQUIVALENTS: |
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Beginning of period |
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269.8 |
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281.3 |
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End of period |
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$ |
356.8 |
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$ |
349.3 |
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
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Net repayments of short-term borrowings for the period |
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$ |
(422.9 |
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$ |
(180.8 |
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Cash paid during the period for: |
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Interest, net of capitalized interest |
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$ |
4.3 |
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$ |
8.6 |
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Income taxes |
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5.3 |
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16.4 |
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See Notes to Condensed Consolidated Financial Statements.
5
STARBUCKS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 13 Weeks Ended December 28, 2008
(unaudited)
Note 1: Summary of Significant Accounting Policies
Financial Statement Preparation
The unaudited condensed consolidated financial statements as of December 28, 2008, and for the
13-week periods ended December 28, 2008 and December 30, 2007, 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 28, 2008 and December 30, 2007 reflects all adjustments and
accruals, which are of a normal recurring nature, necessary for a fair presentation of the
financial position, results of operations and cash flows for the interim periods.
The financial information as of September 28, 2008 is derived from the Companys audited
consolidated financial statements and notes for the fiscal year ended September 28, 2008 (fiscal
2008), included in Item 8 in the Fiscal 2008 Annual Report on Form 10-K (the 10-K). The
information included in this Quarterly Report on Form 10-Q (the 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 28, 2008 are not necessarily
indicative of the results of operations that may be achieved for the entire fiscal year ending
September 27, 2009 (fiscal 2009).
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair
value, establishes a framework for measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements. Starbucks adopted SFAS 157 for its financial
assets and liabilities effective September 29, 2008 (see Note 4 for additional disclosures). As
permitted by FSP-FAS 157-2, SFAS 157 is effective for nonfinancial assets and liabilities for
Starbucks first fiscal quarter of 2010. The Company continues to evaluate the potential impact of
the adoption of SFAS 157 related to its nonfinancial assets and liabilities.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities. SFAS 159 permits companies to choose to measure many financial instruments
and certain other items at fair value. Starbucks adopted SFAS 159 effective September 29, 2008 and
did not elect to measure any of its existing financial instruments or other items at fair value.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, which
replaces SFAS 141. SFAS 141R establishes principles and requirements for how an acquirer recognizes
and measures in its financial statements the identifiable assets acquired, the liabilities assumed,
any resulting goodwill, and any noncontrolling interest in the acquiree. SFAS 141R also provides
for disclosures to enable users of the financial statements to evaluate the nature and financial
effects of the business combination. SFAS 141R will be effective for Starbucks first fiscal quarter
of 2010 and must be applied prospectively to business combinations completed on or after that date.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements an amendment of Accounting Research Bulletin No. 51, which establishes accounting and
reporting standards for noncontrolling interests (minority interests) in subsidiaries. SFAS 160
clarifies that a noncontrolling interest in a subsidiary should be accounted for as a component of
equity separate from the parents equity. SFAS 160 will be effective for Starbucks first fiscal
quarter of 2010 and must be applied prospectively, except for the presentation and disclosure
requirements, which will apply retrospectively. The Company is currently evaluating the potential
impact that adoption of SFAS 160 may have on its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement No. 133, which requires enhanced disclosures about an
entitys derivative and hedging activities. SFAS 161 will be effective for Starbucks second fiscal
quarter of 2009.
6
Note 2: Restructuring Charges
In the first quarter of fiscal 2009, Starbucks continued to execute the restructuring efforts that
it began in fiscal 2008. Most significantly, Starbucks continued to close stores from the group of
approximately 600 underperforming US Company-operated stores announced for closure in July 2008.
The total amount of restructuring costs recognized in the first quarter was $75.5 million, and
additional lease exit costs are expected to be recognized throughout the balance of fiscal 2009 as
the Company closes the remainder of the approximately 600 stores.
US Store Closures Throughout the first quarter of fiscal 2009, the Company continued to execute
on its decision to close approximately 600 underperforming Company-operated stores in the US
market, as announced in July 2008. The Company closed 179 of these stores during the quarter,
bringing the total number of US closures under this restructuring effort to 384 stores to date. As
a result of the store closures, the Company recognized $53.7 million of restructuring charges in
the quarter. The Company expects to complete the remainder of these closures by the end of fiscal
2009, and recognize the remaining lease exit costs during that time.
Australia Store Closures During the first quarter of fiscal 2009, the Company continued to
negotiate lease termination agreements with landlords in its Australia market where 61
underperforming Company-operated stores had been closed in August 2008 as part of a market-specific
restructuring effort. A total of $2.0 million in restructuring charges were recognized in the
quarter. At the end of the first quarter of fiscal 2009, leases for two closed store locations
remained yet to be terminated with the landlords.
Rationalization of the Non-store Organization During the first quarter of fiscal 2009, Starbucks
recognized an $18.0 million valuation adjustment on corporate office facilities that were no longer
occupied or intended to be occupied by the Company.
Restructuring charges by type and a reconciliation of the associated accrued liability were as
follows (in millions):
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Lease Exit |
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Employee |
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and Other |
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Asset |
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Termination |
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Related Costs |
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Impairments |
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Costs |
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Total |
Total expected costs |
|
|
$ 161.7 |
|
|
|
$ 234.0 |
|
|
|
$ 20.0 |
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|
$ 415.7 |
|
Expenses recognized in Q1 fiscal 2009 (1) |
|
|
40.6 |
|
|
|
32.4 |
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|
|
2.5 |
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|
75.5 |
|
Costs incurred in Q1 fiscal 2009 (1) |
|
|
26.1 |
|
|
|
32.4 |
|
|
|
2.5 |
|
|
|
61.0 |
|
Costs incurred to date |
|
|
88.7 |
|
|
|
234.0 |
|
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|
20.0 |
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|
|
342.7 |
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Accrued liability as of September 28, 2008 |
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$ 48.0 |
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|
$ |
|
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$ 5.4 |
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|
|
$ 53.4 |
|
Costs incurred in Q1 fiscal 2009, excluding non-cash charges and credits (2) |
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|
34.9 |
|
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|
|
|
2.5 |
|
|
|
37.4 |
|
Cash payments in Q1 fiscal 2009 |
|
|
(40.9 |
) |
|
|
|
|
|
|
(2.5 |
) |
|
|
(43.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liability as of December 28, 2008 |
|
|
$ 42.0 |
|
|
|
$ |
|
|
|
$ 5.4 |
|
|
|
$ 47.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges by reportable segment were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated |
|
|
|
|
US |
|
International |
|
Corporate |
|
Total |
Total expected costs |
|
|
$ 337.9 |
|
|
|
$ 21.3 |
|
|
|
$ 56.5 |
|
|
|
$ 415.7 |
|
Expenses recognized in Q1 fiscal 2009 (1) |
|
|
54.4 |
|
|
|
2.0 |
|
|
|
19.1 |
|
|
|
75.5 |
|
Costs incurred in Q1 fiscal 2009 (1) |
|
|
39.9 |
|
|
|
2.0 |
|
|
|
19.1 |
|
|
|
61.0 |
|
Costs incurred to date |
|
|
265.6 |
|
|
|
21.2 |
|
|
|
55.9 |
|
|
|
342.7 |
|
|
|
|
(1) |
|
The difference between expenses recognized and costs
incurred within the quarter is due to a number of
termination agreements that were finalized in one quarter
for store closures to occur in a subsequent quarter. Such
termination fees are amortized on a straight-line basis
from the date of the termination agreement to the date of
closure. |
|
(2) |
|
Non-cash charges and credits for Lease Exit and Other
Related Costs represent deferred rent balances recognized
as expense credits at the cease-use date. |
Subsequent Event
On January 28, 2009, Starbucks announced additional actions designed to address the continuing
difficult global operating environment. The planned actions include closing approximately 300
additional underperforming Company-operated stores, approximately 200 in the
7
US and the remainder in international markets. These stores are in addition to the approximately
600 US and 61 Australian market store closures announced in July 2008. The majority of these
additional store closures are expected to occur during the remainder of fiscal 2009. The Company
anticipates that the store closures, combined with reduced new store openings for fiscal 2009 and
planned labor efficiency initiatives, could result in a reduction of as many as 6,000 store
positions over the course of fiscal 2009. Additionally, the Company plans a global workforce
reduction that will result in approximately 700 non-store partners being separated from the
Company. The aggregate pre-tax charges associated with the additional store closures and headcount
reductions are currently estimated to be up to approximately $230 million, the majority of which
are currently expected to be recognized over the balance of fiscal 2009.
Note 3: Derivative Financial Instruments
Cash Flow Hedges
The Company had accumulated net derivative gains of $8.0 million, net of taxes, in other
comprehensive income as of December 28, 2008, related to cash flow hedges. Of this amount,
$0.7 million of net derivative gains pertains 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 significant ineffectiveness was recognized during the
13 week periods ended December 28, 2008 and December 30, 2007. Outstanding contracts will expire
within 45 months.
Net Investment Hedges
The Company had accumulated net derivative losses of $15.4 million, net of taxes, in other
comprehensive income as of December 28, 2008, related to net investment derivative hedges.
Outstanding contracts expire within 26 months.
Other Comprehensive Income Cash Flow Hedges and Net Investment Hedges
The following table presents the net gains and losses reclassified from other comprehensive income
into the consolidated statements of earnings during the fiscal periods indicated for cash flow and
net investment hedges (in millions):
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
|
Dec 28, |
|
|
Dec 30, |
|
|
|
2008 |
|
2007 |
Cash flow hedges: |
|
|
|
|
|
|
|
|
Reclassified losses into total net revenues |
|
$ |
(0.8 |
) |
|
$ |
(0.6 |
) |
Reclassified gains/(losses) into cost of sales |
|
|
1.0 |
|
|
|
(2.3 |
) |
Reclassified losses into interest expense |
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
Net reclassified losses cash flow hedges |
|
|
|
|
|
|
(3.1 |
) |
Net investment hedges: |
|
|
|
|
|
|
|
|
Reclassified gains into interest income and other, net |
|
|
2.8 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
Total |
|
$ |
2.8 |
|
|
$ |
(1.9 |
) |
|
|
|
|
|
|
|
Other Derivatives
The Company enters into foreign currency forward contracts that are not designated as hedging
instruments for accounting purposes to mitigate the translation risk of certain balance sheet
items. For the 13-week periods ended December 28, 2008 and December 30, 2007, these forward
contracts resulted in net gains of $37.8 million and $1.2 million, respectively. These gains were
largely offset by the financial impact of translating foreign currency denominated payables and
receivables, which are also recognized in Interest income and other, net.
Note 4: Fair Value Measurements
The Company adopted SFAS 157 for its financial assets and liabilities effective September 29, 2008,
and will adopt SFAS 157 for nonfinancial assets and liabilities in the first fiscal quarter of
2010. The two-step adoption is in accordance with FSP-FAS 157-2, which allows for the delay of the
effective date of SFAS 157 for nonfinancial assets and liabilities. The Company continues to
evaluate the potential impact of the adoption of SFAS 157 fair value measurements related to its
property, plant and equipment, goodwill and other intangible assets.
8
SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements. SFAS 157 also
establishes a fair value hierarchy that prioritizes the inputs used to measure fair value:
|
l |
|
Level 1: Observable inputs that reflect unadjusted quoted prices for identical assets or
liabilities traded in active markets. |
|
|
l |
|
Level 2: Inputs other than quoted prices included within Level 1 that are observable for
the asset or liability, either directly or indirectly. |
|
|
l |
|
Level 3: Inputs that are generally unobservable. These inputs may be used with
internally developed methodologies that result in managements
best estimate of fair value. |
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the financial assets and liabilities measured at fair value on a
recurring basis at December 28, 2008 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec 28, |
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities |
|
$ |
35.7 |
|
|
$ |
35.7 |
|
|
$ |
|
|
|
$ |
|
|
Available-for-sale securities |
|
|
83.0 |
|
|
|
|
|
|
|
20.4 |
|
|
|
62.6 |
|
Derivatives |
|
|
50.1 |
|
|
|
|
|
|
|
50.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
168.8 |
|
|
$ |
35.7 |
|
|
$ |
70.5 |
|
|
$ |
62.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives |
|
$ |
35.1 |
|
|
$ |
2.0 |
|
|
$ |
33.1 |
|
|
$ |
|
|
Trading securities include mutual funds and exchange-traded-funds, which the Company holds as an
economic hedge against its liability under the Management Deferred Compensation Plan. For these
securities, the Company uses quoted prices in active markets for identical assets to determine
their fair value, and are thus considered to be Level 1 instruments.
Available-for-sale securities include corporate bonds and auction-rate securities (ARS)
collateralized by student loans substantially all of which are guaranteed by the United States
Department of Education. The Company uses observable direct and indirect inputs for corporate
bonds, which are considered Level 2 instruments. Level 3 securities are comprised solely of ARS,
all of which are considered to be illiquid due to the auction failures that began in mid-February
2008. The Company values ARS using an internally developed valuation model, whose inputs include
interest rate curves, credit and liquidity spreads, and effective maturity.
Derivative assets and liabilities include foreign currency forward contracts and coffee futures
contracts. Where applicable, the Company uses quoted prices in an active market for identical
derivative assets and liabilities that are traded in exchanges. These derivative assets and
liabilities are coffee futures contracts and are included in Level 1. Derivative assets and
liabilities included in Level 2 are over-the-counter currency forward contracts whose fair values
are estimated using industry-standard valuation models. Such models project future cash flows and
discount the future amounts to a present value using market-based observable inputs, including
interest rate curves, foreign exchange rates, forward and spot prices for currencies.
Changes in Level 3 Instruments Measured at Fair Value on a Recurring Basis
The following table presents the changes in Level 3 instruments measured on a recurring basis for
the 13 weeks ended December 28, 2008 (in millions):
|
|
|
|
|
|
|
Auction-rate Securities |
|
Beginning balance, September 28, 2008 |
|
|
$59.8 |
|
Total reduction in unrealized losses
included in other comprehensive income |
|
|
2.8 |
|
Purchases, issuances, and settlements |
|
|
|
|
Transfers in (out) of Level 3 |
|
|
|
|
|
|
|
|
Ending balance, December 28, 2008 |
|
|
$62.6 |
|
|
|
|
|
9
Financial Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Company measures certain financial assets, including its cost and equity method investments, at
fair value on a nonrecurring basis. These assets are recognized at fair value when they are deemed
to be other-than-temporarily impaired. During the 13 weeks ended December 28, 2008, the Company did
not record any other-than-temporary impairments for these financial assets.
Note 5: Inventories
Inventories consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec 28, |
|
Sep 28, |
|
Dec 30, |
|
|
2008 |
|
2008 |
|
2007 |
Coffee: |
|
|
|
|
|
|
|
|
|
|
|
|
Unroasted |
|
|
$ 310.1 |
|
|
|
$ 377.7 |
|
|
|
$ 279.4 |
|
Roasted |
|
|
86.9 |
|
|
|
89.6 |
|
|
|
81.7 |
|
Other merchandise held for sale |
|
|
96.9 |
|
|
|
120.6 |
|
|
|
138.2 |
|
Packaging and other supplies |
|
|
96.5 |
|
|
|
104.9 |
|
|
|
81.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
$ 590.4 |
|
|
|
$ 692.8 |
|
|
|
$ 580.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 28, 2008, the Company had committed to purchasing green coffee totaling $506 million
under fixed-price contracts and an estimated $56 million under price-to-be-fixed contracts. The
Company believes, based on relationships established with its suppliers in the past, the risk of
non-delivery on such purchase commitments is remote.
Note 6: Property, Plant and Equipment
Property, plant and equipment consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
Dec 28, 2008 |
|
|
Sep 28, 2008 |
|
|
|
|
Land |
|
|
$ 57.0 |
|
|
|
$ 59.1 |
|
Buildings |
|
|
249.0 |
|
|
|
217.7 |
|
Leasehold improvements |
|
|
3,278.8 |
|
|
|
3,363.1 |
|
Store equipment |
|
|
1,055.2 |
|
|
|
1,045.3 |
|
Roasting equipment |
|
|
222.6 |
|
|
|
220.7 |
|
Furniture, fixtures and other |
|
|
626.7 |
|
|
|
517.8 |
|
Work in progress |
|
|
145.6 |
|
|
|
293.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
5,634.9 |
|
|
|
5,717.3 |
|
Less accumulated depreciation and amortization |
|
|
(2,812.4 |
) |
|
|
(2,760.9 |
) |
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
$ 2,822.5 |
|
|
|
$ 2,956.4 |
|
|
|
|
|
|
|
|
|
|
Note 7: Debt
The Companys debt consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
Dec 28, |
|
Sep 28, |
|
|
2008 |
|
2008 |
Commercial paper program (weighted average interest rate of 2.3% and 3.4%, respectively) |
|
|
$ 140.2 |
|
|
|
$ 413.0 |
|
Revolving credit facility (weighted average interest rate of 3.3% and 3.5%, respectively) |
|
|
150.0 |
|
|
|
300.0 |
|
Current portion of long-term debt |
|
|
0.6 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
Short-term debt |
|
|
290.8 |
|
|
|
713.7 |
|
|
|
|
|
|
|
|
|
|
6.25% Senior Notes (due Aug 2017) |
|
|
549.2 |
|
|
|
549.2 |
|
Other long-term debt |
|
|
0.3 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
549.5 |
|
|
|
549.6 |
|
|
|
|
|
|
|
|
|
|
Total debt |
|
|
$ 840.3 |
|
|
|
$ 1,263.3 |
|
|
|
|
|
|
|
|
|
|
The estimated fair value of Starbucks $550 million of 6.25% Senior Notes was approximately $519
million as of December 28, 2008.
10
Note 8: Other Long-term Liabilities
The Companys other long-term liabilities consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
Dec 28, |
|
Sep 28, |
|
|
2008 |
|
2008 |
Deferred rent |
|
$ |
292.0 |
|
|
$ |
303.9 |
|
Unrecognized tax benefits |
|
|
63.7 |
|
|
|
60.4 |
|
Asset retirement obligations |
|
|
42.3 |
|
|
|
44.6 |
|
Minority interest |
|
|
18.3 |
|
|
|
18.3 |
|
Other |
|
|
27.0 |
|
|
|
15.2 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
443.3 |
|
|
$ |
442.4 |
|
|
|
|
|
|
|
|
|
|
Note 9: 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 28, 2008.
Share repurchase activity under the Companys publicly announced plans was as follows (in millions,
except for average price data):
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
|
Dec 28, 2008 |
|
Dec 30, 2007 |
|
|
|
|
Number of shares acquired |
|
|
|
|
|
|
12.2 |
|
Average price per share of acquired shares |
|
$ |
|
|
|
$ |
24.12 |
|
|
|
|
|
|
|
|
|
|
Total accrual-based cost of acquired shares |
|
$ |
|
|
|
$ |
295.3 |
|
Total cash-based cost of acquired shares |
|
$ |
|
|
|
$ |
311.3 |
|
Comprehensive Income
Comprehensive income, net of related tax effects, was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
|
Dec 28, 2008 |
|
Dec 30, 2007 |
|
|
|
|
Net earnings |
|
|
$ 64.3 |
|
|
|
$ 208.1 |
|
Unrealized holding gains on available-for-sale securities |
|
|
2.1 |
|
|
|
|
|
Unrealized holding gains/(losses) on cash flow hedging instruments |
|
|
17.6 |
|
|
|
(0.9 |
) |
Unrealized holding losses on net investment hedging instruments |
|
|
(2.4 |
) |
|
|
(0.6 |
) |
Reclassification adjustment for net (gains)/losses realized in
net earnings for cash flow hedges |
|
|
(0.4 |
) |
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
Net unrealized gain/(loss) |
|
|
16.9 |
|
|
|
(0.4 |
) |
Translation adjustment |
|
|
(20.4 |
) |
|
|
10.4 |
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
$ 60.8 |
|
|
|
$ 218.1 |
|
|
|
|
|
|
|
|
|
|
The unfavorable translation adjustment change during the 13-week period ended December 28, 2008 of
$20.4 million was primarily due to the strengthening of the US dollar against several currencies
including the Canadian dollar, euro, and Australian dollar, partially offset by a weakening of the
US dollar against the Japanese yen. The favorable translation adjustment change for the 13-week
period ended December 30, 2007 of $10.4 million was primarily due to the weakening of the US dollar
against the euro, Canadian dollar and Japanese yen.
11
The components of accumulated other comprehensive income, net of tax, were as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
Dec 28, 2008 |
|
Sep 30, 2008 |
Net unrealized losses on available-for-sale securities |
|
|
$ (2.0 |
) |
|
|
$ (4.1 |
) |
Net unrealized losses on hedging instruments |
|
|
(7.4 |
) |
|
|
(22.2 |
) |
Translation adjustment |
|
|
54.3 |
|
|
|
74.7 |
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
|
$ 44.9 |
|
|
|
$ 48.4 |
|
|
|
|
|
|
|
|
|
|
Note 10: Employee Stock Plans
The Company maintains several equity incentive plans under which it may grant non-qualified stock
options, incentive stock options, restricted stock, restricted stock units (RSUs), or stock
appreciation rights to employees, non-employee directors and consultants. As of December 28, 2008,
there were 18.7 million shares of common stock available for issuance pursuant to future
equity-based compensation awards. The Company also has employee stock purchase plans (ESPP).
The following table presents total stock-based compensation expense recognized in the consolidated
statements of earnings (in millions):
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
|
Dec 28, 2008 |
|
Dec 30, 2007 |
Stock option expense |
|
|
$ 16.4 |
|
|
|
$ 21.1 |
|
RSU expense |
|
|
3.4 |
|
|
|
|
|
ESPP expense |
|
|
2.5 |
|
|
|
3.2 |
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense |
|
|
$ 22.3 |
|
|
|
$ 24.3 |
|
|
|
|
|
|
|
|
|
|
Options
The following table presents the weighted average assumptions used to value stock options granted
during the period, along with the related weighted average grant price for the 13-week periods
ended December 28, 2008 and December 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
|
Dec 28, 2008 |
|
Dec 30, 2007 |
Expected term (in years) |
|
|
4.9 |
|
|
|
4.8 |
|
Expected stock price volatility |
|
|
44.4 |
% |
|
|
29.0 |
% |
Risk-free interest rate |
|
|
2.2 |
% |
|
|
3.5 |
% |
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
Weighted average grant price |
|
|
$ 8.65 |
|
|
|
$ 22.88 |
|
Estimated fair value per option granted |
|
|
$ 3.49 |
|
|
|
$ 7.10 |
|
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.
12
The following table summarizes all stock option transactions from September 29, 2008 through
December 28, 2008 (in millions, except per share and contractual life amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Weighted |
|
|
|
|
|
|
|
|
Average |
|
Average |
|
|
|
|
Shares |
|
Exercise |
|
Remaining |
|
Aggregate |
|
|
Subject to |
|
Price |
|
Contractual |
|
Intrinsic |
|
|
Options |
|
per Share |
|
Life (Years) |
|
Value |
Outstanding, September 28, 2008 |
|
|
63.0 |
|
|
$ |
20.96 |
|
|
|
5.7 |
|
|
$ |
114.9 |
|
Granted |
|
|
28.8 |
|
|
|
8.65 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(3.7 |
) |
|
|
5.51 |
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled |
|
|
(2.9 |
) |
|
|
23.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 28, 2008 |
|
|
85.2 |
|
|
|
17.35 |
|
|
|
7.1 |
|
|
|
32.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 28, 2008 |
|
|
43.2 |
|
|
|
20.12 |
|
|
|
4.9 |
|
|
|
12.3 |
|
Vested and expected to vest,
December 28, 2008 |
|
|
75.1 |
|
|
|
17.98 |
|
|
|
6.8 |
|
|
|
32.0 |
|
The closing market value of the Companys stock on December 26, 2008 was $9.35. As of December 28,
2008, total unrecognized stock-based compensation expense related to nonvested stock options was
approximately $117.1 million, before income taxes, and is expected to be recognized over a weighted
average period of approximately 3.2 years.
RSUs
The Company has both time-vested and performance-vested RSUs. Time-vested RSUs are awarded to
eligible employees and entitle the grantee to receive shares of common stock at the end of a
vesting period, subject solely to the employees continuing employment. The Companys
performance-vested RSUs are awarded to eligible employees and entitle the grantee to receive shares
of common stock if the Company achieves target earnings per share for the full fiscal year in the
year of award, and the grantee remains employed during the subsequent vesting period. The fair
value of RSUs is based on the closing price of Starbucks common stock on the award date. Expense
for performance-vested RSUs is recognized when it is probable the performance goal will be
achieved.
The following table summarizes all RSU transactions from September 29, 2008 through December 28,
2008 (in millions, except per share and contractual life amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Weighted |
|
|
|
|
|
|
|
|
Average |
|
Average |
|
|
|
|
Number |
|
Grant Date |
|
Remaining |
|
Aggregate |
|
|
of |
|
Fair Value |
|
Contractual |
|
Intrinsic |
|
|
Shares |
|
per Share |
|
Life (Years) |
|
Value |
Nonvested, September 28, 2008 |
|
|
2.0 |
|
|
$ |
17.36 |
|
|
|
2.5 |
|
|
$ |
30.5 |
|
Granted |
|
|
3.2 |
|
|
|
8.68 |
|
|
|
|
|
|
|
|
|
Vested |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled |
|
|
(0.1 |
) |
|
|
14.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested, December 28, 2008 |
|
|
5.1 |
|
|
|
12.03 |
|
|
|
2.3 |
|
|
|
47.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 28, 2008, total unrecognized stock-based compensation expense related to nonvested
RSUs was approximately $52.0 million, before income taxes, and is expected to be recognized over a
weighted average period of approximately 3.1 years.
13
Note 11: Earnings Per Share
The following table presents the calculation of net earnings per common share (EPS) basic and
diluted (in millions, except EPS):
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
|
Dec 28, |
|
Dec 30, |
|
|
2008 |
|
2007 |
Net earnings |
|
|
$ 64.3 |
|
|
|
$ 208.1 |
|
Weighted average common shares and common stock units
outstanding (for basic calculation) |
|
|
736.3 |
|
|
|
731.6 |
|
Dilutive effect of outstanding common stock options and RSUs |
|
|
2.8 |
|
|
|
13.3 |
|
|
|
|
|
|
|
|
|
|
Weighted average common and common equivalent shares
outstanding (for diluted calculation) |
|
|
739.1 |
|
|
|
744.9 |
|
|
|
|
|
|
|
|
|
|
EPS basic |
|
|
$ 0.09 |
|
|
|
$ 0.28 |
|
EPS diluted |
|
|
$ 0.09 |
|
|
|
$ 0.28 |
|
Potential dilutive shares consist of the incremental common shares issuable upon the exercise of
outstanding stock options (both vested and non-vested) and unvested RSUs, using the treasury stock
method. Potential dilutive shares are excluded from the computation of earnings per share if their
effect is antidilutive. The number of antidilutive options and RSUs totaled 62.9 million and 38.1
million for the 13-week periods ended December 28, 2008 and December 30, 2007, respectively.
Note 12: Commitments and Contingencies
Guarantees
The following table presents information on unconditional guarantees as of December 28, 2008 (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value estimate |
|
|
Maximum |
|
Year Guarantee |
|
recorded on |
|
|
Exposure |
|
Expires in |
|
Balance Sheet |
Japanese yen-denominated bank loans (Starbucks
Japan an unconsolidated equity investee) |
|
|
$ 4.5 |
|
|
|
2014 |
|
|
|
$ |
(1) |
Borrowings of other unconsolidated equity investees |
|
|
$ 17.0 |
|
|
|
2009 to 2012 |
|
|
|
$ 4.0 |
|
(1) |
|
Since there has been no modification of these loan guarantees subsequent to the
Companys adoption of FASB Interpretation No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,
Starbucks has applied the disclosure provisions only and has not recorded the guarantees on
its consolidated balance sheets. |
14
Legal Proceedings
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 February 28, 2008, the
court ruled against the Company in the liability phase of the trial and on March 20, 2008 the court
ordered the Company to pay approximately $87 million in restitution, plus interest. On December 8,
2008, the Company filed its initial appellate brief with the California Court of Appeals. Starbucks
believes that while the adverse ruling by the trial judge in this case makes the possibility of
loss somewhat more likely, the Company is only at the very beginning of the appellate process.
Starbucks believes that the likelihood that the Company will ultimately incur a loss in connection
with this litigation is reasonably possible rather than probable. The Company has not accrued any
loss related to this litigation.
On June 30, 2005, three individuals, Erik Lords, Hon Yeung, and Donald Brown filed a lawsuit in
Orange County Superior Court, California. The lawsuit alleges that the Company violated the
California Labor Code section 432.8 by asking job applicants to disclose at the time of application
convictions for marijuana related offenses more than two years old. Plaintiffs also seek attorneys
fees and costs. On November 1, 2007, the Court issued an order certifying the case as a class
action, with the plaintiffs representing a class of all persons who have applied for employment
with Starbucks Coffee Company in California since June 23, 2004 who cannot claim damages in excess
of $200. On November 15, 2007, the court denied the Companys motion for summary judgment.
Starbucks appealed the denial of its motion for summary judgment and the California Court of
Appeals issued a ruling on December 10, 2008 instructing the trial judge to enter summary judgment
against plaintiffs. The plaintiffs have appealed the appellate courts decision to the California
Supreme Court. The Company believes its employment application complies with California law, and
the Company intends to continue vigorously defending the lawsuit.
The Company is party to various other legal proceedings arising in the ordinary course of its
business, but it is not currently a party to any legal proceeding that management believes would
have a material adverse effect on the consolidated financial position or results of operations of
the Company.
Note 13: Segment Reporting
Segment information is prepared on the same basis that the Companys management reviews financial
information for operational decision making purposes. The tables below present information by
operating segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United |
|
|
|
|
|
|
|
|
|
Unallocated |
|
|
13 Weeks Ended |
|
States |
|
International |
|
Global CPG |
|
Corporate (1) |
|
Total |
December 28, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail revenues |
|
|
$ 1,761.8 |
|
|
|
$ 414.4 |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ 2,176.2 |
|
Licensing revenues |
|
|
150.9 |
|
|
|
69.1 |
|
|
|
114.3 |
|
|
|
|
|
|
|
334.3 |
|
Foodservice and other revenues |
|
|
92.5 |
|
|
|
12.2 |
|
|
|
|
|
|
|
|
|
|
|
104.7 |
|
Total net revenues |
|
|
2,005.2 |
|
|
|
495.7 |
|
|
|
114.3 |
|
|
|
|
|
|
|
2,615.2 |
|
Depreciation and amortization |
|
|
97.4 |
|
|
|
25.4 |
|
|
|
|
|
|
|
11.5 |
|
|
|
134.3 |
|
Income from equity investees |
|
|
0.5 |
|
|
|
11.9 |
|
|
|
11.1 |
|
|
|
|
|
|
|
23.5 |
|
Operating income/(loss) |
|
|
134.0 |
|
|
|
12.9 |
|
|
|
51.5 |
|
|
|
(80.7 |
) |
|
|
117.7 |
|
Earnings/(loss) before income taxes |
|
|
140.7 |
|
|
|
5.6 |
|
|
|
51.5 |
|
|
|
(99.5 |
) |
|
|
98.3 |
|
Net impairment and disposition losses |
|
|
30.9 |
|
|
|
16.4 |
|
|
|
|
|
|
|
18.0 |
|
|
|
65.3 |
|
December 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail revenues |
|
|
$ 1,890.3 |
|
|
|
$ 461.2 |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ 2,351.5 |
|
Licensing revenues |
|
|
137.9 |
|
|
|
66.3 |
|
|
|
100.6 |
|
|
|
|
|
|
|
304.8 |
|
Foodservice and other revenues |
|
|
98.0 |
|
|
|
13.3 |
|
|
|
|
|
|
|
|
|
|
|
111.3 |
|
Total net revenues |
|
|
2,126.2 |
|
|
|
540.8 |
|
|
|
100.6 |
|
|
|
|
|
|
|
2,767.6 |
|
Depreciation and amortization |
|
|
98.4 |
|
|
|
25.7 |
|
|
|
|
|
|
|
9.1 |
|
|
|
133.2 |
|
Income from equity investees |
|
|
0.4 |
|
|
|
12.1 |
|
|
|
11.1 |
|
|
|
|
|
|
|
23.6 |
|
Operating income/(loss) |
|
|
310.9 |
|
|
|
54.1 |
|
|
|
50.6 |
|
|
|
(82.5 |
) |
|
|
333.1 |
|
Earnings/(loss) before income taxes |
|
|
317.9 |
|
|
|
58.2 |
|
|
|
50.6 |
|
|
|
(100.0 |
) |
|
|
326.7 |
|
Net impairment and disposition losses |
|
|
3.7 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
4.9 |
|
(1) |
|
Unallocated Corporate includes expenses pertaining to corporate administrative
functions that support the operating segments but are not specifically attributable to
or managed by any segment and are not included in the reported financial results of the
operating segments. These unallocated corporate expenses include certain general and
administrative expenses, related depreciation and amortization expenses, restructuring
charges, and amounts included in Interest income and other, net and Interest expense
on the consolidated statements of earnings. |
15
Note 14: Subsequent Events
See Note 2 Subsequent Event.
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 statements regarding trends in or expectations relating to the
expected effects of the Companys restructuring and other initiatives and charges, expenses and
potential cost savings relating thereto, liquidity, other financial results, capital expenditures,
anticipated store openings and closings, and economic conditions in the US and other international
markets all constitute forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are based on currently available operating,
financial and competitive information and are subject to various risks and uncertainties. Actual
future results and trends may differ materially depending on a variety of factors, including, but
not limited to, coffee, dairy and other raw materials prices and availability, successful
implementation of the Companys transformation strategy, restructuring and other initiatives,
successful execution of internal performance and expansion plans, fluctuations in US and
international economies and currencies, the impact of competitors initiatives, the effect of legal
proceedings, and other risks detailed in Part I Item IA. Risk Factors in the Companys 10-K.
A forward-looking statement is neither a prediction nor a guarantee of future events or
circumstances, and those future events or circumstances may not occur. Users should not place undue
reliance on the forward-looking statements, which speak only as of the date of this report. The
Company is under no obligation to update or alter any forward-looking statements, whether as a
result of new information, future events or otherwise.
This information should be read in conjunction with the condensed consolidated financial statements
and the notes included in Item 1 of Part I of this 10-Q and the audited consolidated financial
statements and notes, and Managements Discussion and Analysis of Financial Condition and Results
of Operations, contained in the 10-K.
General
Starbucks Corporations fiscal year ends on the Sunday closest to September 30. All references to
store counts, including data for new store openings, are reported net of store closures.
Management Overview
Fiscal 2009 First Quarter in Review
In the first quarter of fiscal 2009, Starbucks continued to see an accelerated weakening in the
business environment and global economy,
including historic lows in consumer confidence. Like many retailers in this difficult environment,
Starbucks experienced further declines in comparable store sales in both its US and International
stores during the quarter. Consolidated comparable store sales declined by 9% for the first quarter
of fiscal 2009, with comparable store sales declines of 10% in the US and 3% in International for
the period. Management believes that the negative comparable store sales are in large part a
result of the ongoing global economic crisis and its effects on consumers discretionary spending,
although other factors within the Companys control, such as the historical pace of store openings
and store level execution, have also impacted the Companys recent performance.
16
Starbucks business is highly sensitive to increases and decreases in customer traffic. Increased
customer visits create sales leverage, meaning that fixed expenses, such as occupancy costs, are
spread across a greater revenue base, thereby improving operating margins. But the reverse is also
true sales de-leveraging creates downward pressure on margins. The softness in Company-operated
retail revenues during the first fiscal quarter of 2009 impacted nearly all consolidated and
segment operating expense line items when viewed as a percentage of sales.
In the first quarter of fiscal 2009, Starbucks continued to execute the restructuring efforts that
it began in fiscal 2008, to position the Company for long-term profitable growth given the ongoing
challenging economic environment. Most significantly, Starbucks continued to close stores in the
group of approximately 600 underperforming US Company-operated stores identified for closure in
July 2008. Given the continued weakening global consumer environment, Starbucks is striving for
more efficient operations and a lower cost structure while preserving the fundamental strengths and
values of the brand. The Companys solid balance sheet, strong cash flow generation, and healthy
liquidity provide it the financial flexibility to make difficult decisions management believes are
in the best long-term interest of the business.
As a result of the worsening economy and decreased customer traffic, as well as the costs
associated with the store closures, the Companys first quarter 2009 results were negatively
impacted in the following ways:
|
|
|
Consolidated operating income was $117.7 million for the first quarter in fiscal 2009
compared to $333.1 million in the prior year, and operating margin was 4.5% compared with
12.0% in the prior year. Approximately 290 basis points of the decrease in operating margin
was a result of restructuring charges, the large majority of which related to the US store
closures. Softness in revenues along with higher cost of sales including occupancy costs
and store operating expenses were also significant drivers in the
margin decline. |
|
|
|
|
EPS for the first quarter in fiscal 2009 was $0.09, compared to EPS of $0.28 earned in
the prior year. Restructuring charges impacted EPS by approximately $0.06 per share in the
first quarter. |
|
|
|
|
For the first quarter of fiscal 2009, cash flow from operations was $694 million,
compared with $808 million in the same period in fiscal 2008, while capital expenditures
for the first quarter of fiscal 2009 declined to $173 million versus $264 million for the
previous year period. Available operating cash flows were primarily used to reduce
short-term debt during the quarter to $290 million, down from $713 million at the beginning
of the quarter. |
Recent Developments and the View Ahead
Because of the ongoing difficult operating environment, the Company announced on January 28, 2009
plans to close additional underperforming Company-operated stores and rationalize the non-retail
support organization, and initiate additional cost reduction actions to those announced in December
2008. Of the approximately 300 additional Company-operated stores targeted for closure,
approximately 200 are in the US with the remainder in international markets. These stores are in
addition to the approximately 600 US and 61 Australian market store closures announced in July
2008. The majority of the new store closures are expected to occur during the remainder of fiscal
2009.
To align the Companys non-retail support organization with the current operating environment,
Starbucks plans a global workforce reduction that will result in approximately 700 non-store
partners (employees) being separated from the Company in the US and internationally. The aggregate
pre-tax charges associated with the additional store closures and
related store and non-retail support organization headcount reductions are
estimated to be up to approximately $230 million, and the majority of the expense is currently
expected to be recognized over the balance of fiscal 2009.
Also, Starbucks has further reduced its new store openings target for fiscal 2009 and capital
expenditures for fiscal 2009 are now expected to be approximately $600 million, a 14 percent
reduction from the Companys previous estimate of $700 million and
17
approximately 40% lower than fiscal 2008 capital expenditures of $985 million. The Company
currently estimates that the store base will grow by approximately 100 new stores in fiscal
2009, on a beginning base of 16,680 total Company-operated and licensed stores.
These cost reduction initiatives, combined with $400 million in targeted cost savings announced in
early December, increase Starbucks fiscal 2009 cost reduction target to $500 million. This target
consists of anticipated savings resulting from store closures, reduction of support staff and
infrastructure, supply chain efficiencies, store operations improvements and various other
initiatives across the business.
Results of Operations for the 13 Weeks Ended December 28, 2008 and December 30, 2007
Consolidated results of operations (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec 28, |
|
Dec 30, |
|
|
|
|
|
Dec 28, |
|
Dec 30, |
13 Weeks Ended |
|
2008 |
|
2007 |
|
% Change |
|
2008 |
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
% of Total |
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
STATEMENTS OF EARNINGS DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail |
|
$ |
2,176.2 |
|
$ |
2,351.5 |
|
|
(7.5 |
)% |
|
|
83.2 |
% |
|
|
85.0 |
% |
Specialty: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing |
|
|
334.3 |
|
|
304.8 |
|
|
9.7 |
|
|
|
12.8 |
|
|
|
11.0 |
|
Foodservice and other |
|
|
104.7 |
|
|
111.3 |
|
|
(5.9 |
) |
|
|
4.0 |
|
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty |
|
|
439.0 |
|
|
416.1 |
|
|
5.5 |
|
|
|
16.8 |
|
|
|
15.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
$ |
2,615.2 |
|
$ |
2,767.6 |
|
|
(5.5 |
)% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Starbucks derived 83% of total net revenues from its Company-operated retail stores during the 13
weeks ended December 28, 2008. The US segment contributed approximately 77% of total net revenues.
The decrease in consolidated net revenues in the first quarter 2009 was driven by a decrease in
consolidated comparable store sales of 9%. For the quarter, US total net revenues decreased by $121
million, or 6 percent, to $2.0 billion, mainly due to decreased revenues from Company-operated
retail stores. US comparable stores sales declined 10%, due to both a decrease in the volume of
transactions and in the average value per transaction. International total net revenues contracted
8 percent, or $45.1 million, to $495.7 million for the 13 weeks ended December 28, 2008 compared to
the same period last year, primarily due to the stronger US dollar relative to the British pound
and Canadian dollar. Also contributing to the decrease in international revenues was continued
weakness in the UK and Canada markets, both of which posted negative comparable store sales for the
quarter.
The Company derived the remaining 17% of total net revenues from licensing and foodservice channels
outside the Company-operated retail stores, collectively known as specialty operations.
Licensing revenues, which are derived from retail store licensing arrangements as well as grocery,
warehouse club and certain other branded-product operations, increased for the 13 weeks ended
December 28, 2008 compared to the corresponding period of fiscal 2008. The increase was primarily
due to higher product sales and royalty revenues in the US and International segments from the
opening of 853 new licensed stores in the last 12 months, and an increase in CPG revenues due
primarily to increased sales of packaged coffee and tea in the US.
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec 28, |
|
Dec 30, |
|
|
|
|
|
Dec 28, |
|
Dec 30, |
13 Weeks Ended |
|
2008 |
|
2007 |
|
% Change |
|
2008 |
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
% of Total |
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
Cost of sales including occupancy costs |
|
$ |
1,196.8 |
|
$ |
1,186.0 |
|
|
0.9 |
% |
|
|
45.8 |
% |
|
|
42.9 |
% |
Store operating expenses(1) |
|
|
936.6 |
|
|
927.3 |
|
|
1.0 |
|
|
|
35.8 |
|
|
|
33.5 |
|
Other operating expenses(2) |
|
|
72.6 |
|
|
85.7 |
|
|
(15.3 |
) |
|
|
2.8 |
|
|
|
3.1 |
|
Depreciation and amortization expenses |
|
|
134.3 |
|
|
133.2 |
|
|
0.8 |
|
|
|
5.1 |
|
|
|
4.8 |
|
General and administrative expenses |
|
|
105.2 |
|
|
125.9 |
|
|
(16.4 |
) |
|
|
4.0 |
|
|
|
4.5 |
|
Restructuring charges |
|
|
75.5 |
|
|
|
|
nm |
|
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
2,521.0 |
|
|
2,458.1 |
|
|
2.6 |
|
|
|
96.4 |
|
|
|
88.8 |
|
Income from equity investees |
|
|
23.5 |
|
|
23.6 |
|
|
(0.4 |
) |
|
|
0.9 |
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
117.7 |
|
$ |
333.1 |
|
|
(64.7 |
)% |
|
|
4.5 |
% |
|
|
12.0 |
% |
|
|
|
(1) |
|
As a percentage of related Company-operated retail
revenues, store operating expenses were 43.0% and 39.4%
for the quarters ended December 28, 2008 and December 30,
2007, respectively. |
|
(2) |
|
As a percentage of related total specialty revenues, other
operating expenses were 16.5% and 20.6% for the quarters
ended December 28, 2008 and December 30, 2007,
respectively. |
As discussed in the Management Overview section above, many of the Companys operating expenses are
fixed in nature. As a result, the softness in revenues during first quarter of fiscal 2009 impacted
nearly all consolidated as well as US and International segment operating expense line items when
viewed as a percentage of sales, and similarly pressured operating margins in the US and
International operating segments.
Cost of sales including occupancy costs increased primarily as a result of higher coffee usage due
to new quality standards, which began in the second quarter of fiscal 2008, and increased coffee
commodity costs. Higher distribution costs and higher beverage costs as a result of new product
innovations also contributed to the increase.
Store operating expenses as a percentage of Company-operated retail revenues increased primarily
due to higher payroll expenditures as a percentage of revenues and costs for the Companys North
America leadership conference held in New Orleans in October 2008. In addition, $23 million in
store impairment charges were recorded compared to $4 million in the prior year period, with the
increase due mostly to impairments in the UK market. Partially offsetting these increases were
savings from reduced headcount in the regional overhead support organization.
General and administrative expenses as a percentage of total revenues improved primarily due to
lower payroll-related expenses, due in part to the reduction in headcount as a result of the
decision in July 2008 to eliminate approximately 1,000 open and filled positions in its leadership
structure and its non-store organization.
Restructuring charges include lease exit and other costs associated with the plan announced in July
2008 to close approximately 600 Company-operated US stores. Of these, a total of 384 stores have
been closed as of the end of the first quarter of fiscal 2009. The remaining store closures in
this initial targeted group are expected to occur by the end of fiscal 2009, and the related lease
exit costs are expected to be recognized during that time frame. See Note 2 for further discussion.
Operating margin compression was primarily due to softer revenues and the restructuring charges
recognized in the first quarter of fiscal 2009.
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec 28, |
|
Dec 30, |
|
|
|
|
|
|
Dec 28, |
|
Dec 30, |
13 Weeks Ended |
|
2008 |
|
2007 |
|
|
% Change |
|
2008 |
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
Operating income |
|
$ |
117.7 |
|
|
$ |
333.1 |
|
|
|
(64.7 |
)% |
|
|
4.5 |
% |
|
|
12.0 |
% |
Interest income and other, net |
|
|
(6.4 |
) |
|
|
10.7 |
|
|
nm |
|
|
|
(0.2 |
) |
|
|
0.4 |
|
Interest expense |
|
|
(13.0 |
) |
|
|
(17.1 |
) |
|
|
(24.0 |
) |
|
|
(0.5 |
) |
|
|
(0.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
98.3 |
|
|
|
326.7 |
|
|
|
(69.9 |
) |
|
|
3.8 |
|
|
|
11.8 |
|
Income taxes |
|
|
34.0 |
|
|
|
118.6 |
|
|
|
(71.3 |
) |
|
|
1.3 |
|
|
|
4.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
64.3 |
|
|
$ |
208.1 |
|
|
|
(69.1 |
)% |
|
|
2.5 |
% |
|
|
7.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income and other, net, decreased primarily due to unrealized holding losses on the
Companys trading securities portfolio which approximates a portion of the Companys liability
under its Management Deferred Compensation Plan (MDCP). The MDCP liability also increases and
decreases with changes in investment performance, with this offsetting impact recorded in General
and administrative expenses on the consolidated statements of earnings. Interest expense decreased
due to a lower average balance of short-term borrowings during the first fiscal quarter of 2009
compared to the prior year period, and to a lower average short-term borrowing rate compared to the
first quarter of fiscal 2008.
Income taxes for the first quarter of fiscal 2009 resulted in an effective tax rate of 34.6%
compared to 36.3% for the same quarter in fiscal 2008. The lower rate is due to the higher
proportion of income earned in foreign jurisdictions which have lower tax rates, as well as an
increase in the effect of the domestic manufacturing deduction for manufacturing activities in the
US, due to the lower level of pretax earnings in the first quarter of fiscal 2009 compared to the
prior year.
Operating Segments
Segment information is prepared on the same basis that the Companys management reviews financial
information for operational decision-making purposes. The following tables summarize the Companys
results of operations by segment (in millions):
United States
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec 28, |
|
Dec 30, |
|
|
|
|
|
Dec 28, |
|
Dec 30, |
13 Weeks Ended |
|
2008 |
|
2007 |
|
% Change |
|
2008 |
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
As a % of US |
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Revenues |
Total net revenues |
|
$ |
2,005.2 |
|
$ |
2,126.2 |
|
|
(5.7 |
)% |
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
1,871.7 |
|
$ |
1,815.7 |
|
|
3.1 |
% |
|
|
93.3 |
% |
|
|
85.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
134.0 |
|
$ |
310.9 |
|
|
(56.9 |
)% |
|
|
6.7 |
% |
|
|
14.6 |
% |
Total net revenues decreased due to decreased retail revenues, partially offset by an
increase in specialty revenues. Company-operated retail revenues decreased primarily due to a 10%
decline in comparable store sales, partially offset by the addition of 51 new stores in the past 12
months. The Company-operated retail business continued to experience deteriorating trends in
transactions and ticket value during the quarter, largely driven by the US economic downturn.
Licensing revenues increased primarily due to higher product sales and royalty revenues as a result
of the net opening of 318 new licensed retail stores in the last 12 months.
Operating margin contracted primarily due to sales de-leveraging from softer revenues due to both
weak traffic and a lower average ticket, and restructuring charges of $54.4 million recorded during
the quarter. The operating margin was also impacted by higher cost of sales including occupancy
costs resulting primarily from higher coffee and distribution costs, and higher store operating
expenses due in part to the cost of the Companys North America leadership conference held in New
Orleans in October 2008. Restructuring charges during the quarter include the lease exit and other
costs associated with the plan announced in July 2008 to close
approximately 600 Company-operated stores.
20
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec 28, |
|
Dec 30, |
|
|
|
|
|
Dec 28, |
|
Dec 30, |
13 Weeks Ended |
|
2008 |
|
2007 |
|
% Change |
|
2008 |
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
As a % of |
|
|
|
|
|
|
|
|
|
|
|
|
International |
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Revenues |
Total net revenues |
|
$ |
495.7 |
|
$ |
540.8 |
|
|
(8.3 |
)% |
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
494.7 |
|
$ |
498.8 |
|
|
(0.8 |
)% |
|
|
99.8 |
% |
|
|
92.2 |
% |
Operating income |
|
$ |
12.9 |
|
$ |
54.1 |
|
|
(76.2 |
)% |
|
|
2.6 |
% |
|
|
10.0 |
% |
Total
net revenues decreased due to lower retail revenues. Company-operated retail revenue decreased due to the strengthening
of the US dollar against the British pound and the Canadian dollar, and a 3% decline in comparable
store sales, driven largely by the weakening economic environment in
Canada and the UK.
Operating margin contracted primarily due to higher store operating expenses due to increased store
impairment charges and higher cost of sales including occupancy costs, due in part to higher coffee
and distribution costs. Sales de-leveraging from softer revenues due to both weak traffic and a
lower average ticket also contributed to the contraction.
Global Consumer Products Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec 28, |
|
Dec 30, |
|
|
|
|
|
Dec 28, |
|
Dec 30, |
13 Weeks Ended |
|
2008 |
|
2007 |
|
% Change |
|
2008 |
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
As a % of CPG |
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Revenues |
Total specialty revenues |
|
$ |
114.3 |
|
$ |
100.6 |
|
|
13.6 |
% |
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
73.9 |
|
$ |
61.1 |
|
|
20.9 |
% |
|
|
64.7 |
% |
|
|
60.7 |
% |
Operating income |
|
$ |
51.5 |
|
$ |
50.6 |
|
|
1.8 |
% |
|
|
45.1 |
% |
|
|
50.3 |
% |
Total specialty revenues increased primarily due to increased sales of US packaged coffee to the
Companys distributor and higher royalties and product sales in the international ready-to-drink
business.
Contraction of operating margin was primarily due to higher coffee commodity costs, and a revenue
mix shift more weighted toward the initial sale of coffee to the Companys distributor and less
toward profit-sharing revenues earned on the distributors sales to retailers.
Unallocated Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec 28, |
|
Dec 30, |
|
|
|
|
|
Dec 28, |
|
Dec 30, |
|
13 Weeks Ended |
|
2008 |
|
2007 |
|
% Change |
|
2008 |
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of Total Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
Operating loss |
|
$ |
(80.7 |
) |
|
$ |
(82.5 |
) |
|
|
(2.2 |
)% |
|
|
(3.1 |
)% |
|
|
(3.0 |
)% |
Total unallocated corporate expenses remained relatively flat due to lower salaries and benefits
expense and lower professional fees, partially offset by restructuring charges incurred for
corporate office facilities that were no longer occupied or intended to be occupied by the Company
due to the reduction in positions within Starbucks leadership structure and non-store organization.
Financial Condition and Liquidity
The Companys existing cash and liquid investments were $395.5 million and $322.3 million as of
December 28, 2008 and September 28, 2008, respectively.
The Company manages the balance of its cash and liquid investments in order to internally fund
operating needs and make scheduled interest and principal payments on its borrowings.
21
Included in the cash and liquid investment balances are the following:
|
|
|
A portfolio of unrestricted trading securities, designed to hedge the Companys
liability under its MDCP. The value of this portfolio was $35.7 million and $49.5 million
as of December 28, 2008 and September 28, 2008, respectively. The decrease was primarily
driven by declines in market values of the underlying equity
funds. |
|
|
|
|
Unrestricted cash and liquid securities held within the Companys wholly owned captive
insurance company to fund claim payouts. The value of these unrestricted cash and liquid
securities was approximately $28.1 million and $35.6 million as of December 28, 2008 and
September 28, 2008, respectively. |
As described in more detail in Note 4 to the 10-Q, as of December 28, 2008, the Company had $83.0
million invested in available-for-sale securities, consisting primarily of auction rate securities.
While the ongoing auction failures will limit the liquidity of these investments for some period of
time, the Company does not believe the auction failures will materially impact its ability to fund
its working capital needs, capital expenditures or other business requirements.
Credit rating agencies currently rate the Companys borrowings as follows:
|
|
|
|
|
|
|
Description |
|
Standard & Poors |
|
Moodys |
Short-term debt |
|
|
A-2 |
|
|
P-2 |
Senior unsecured long term debt |
|
BBB |
|
Baa2 |
Outlook |
|
Stable |
|
Negative |
On January 29, 2009, Moodys Investors Service placed the Companys Baa2 senior unsecured long-term
rating and Prime-2 short-term rating on review for possible downgrade. The review was prompted by
the Companys announcement on January 28, 2009 that Starbucks continues to experience a substantial
decline in earnings and store traffic. Moodys review is expected to be completed within 90 days of
its announcement. On February 2, 2009, Standard & Poors Ratings Services announced its decision to
place the Companys A-2 short-term rating on CreditWatch with negative implications as a
consequence of its decision to review the Companys corporate credit rating in the near term. If
the rating outlook is changed from stable to negative, it will result in a short-term rating
downgrade from A-2 to A-3, which in turn could impact the Companys ability to place commercial
paper and would likely increase the Companys borrowing costs.
Management believes that cash flow from operations and the combined $1 billion in aggregate
short-term borrowing capacity under the Companys commercial paper program and its revolving credit
facility will be sufficient to fund the business for the foreseeable future. If the Company were
to lose access to the commercial paper markets due either to market disruptions or a short-term
ratings downgrade, management would expect to meet any short-term borrowing needs through
borrowings under the Companys existing credit facility which matures in 2011.
During the first quarter of fiscal 2009, the Company borrowed against the credit facility as
liquidity conditions in the commercial paper market deteriorated. During the quarter, cash flow
from operations allowed the Company to reduce its short-term debt from $713 million to $290
million. Borrowings under the credit facility declined by 50% to $150 million as of December 28,
2008 as compared to September 28, 2008 as conditions in the commercial paper market improved over
the course of the quarter.
The Companys credit facility contains provisions requiring Starbucks to maintain compliance with
certain covenants, including a minimum fixed charge coverage ratio. As of December 28, 2008 and
September 28, 2008, the Company was in compliance with each of these covenants. On October 31,
2008, the Company entered into an amendment to the credit facility to limit the short-term effects
on the fixed charge coverage ratio from the lease-related restructuring expenses related to the
store closure actions announced in July 2008. This amendment resulted in an increase in the
Companys borrowing cost of 0.10% to 0.40%. To accommodate the impact of the expected charges
related to the approximately 300 additional store closures announced on January 28, 2009 on the
coverage ratio, the Company expects to negotiate an additional amendment to the credit facility
which will likely further increase the cost to borrow under the credit facility.
22
The $550 million of 10-year 6.25% Senior Notes, issued in the fourth quarter of fiscal 2007, also
require Starbucks to maintain compliance with certain covenants that limit future liens and sale
and leaseback transactions on certain material properties. As of December 28, 2008 and September
28, 2008, the Company was in compliance with each of these covenants.
The Company expects to use its cash and liquid investments, including any borrowings under its
revolving credit facility and commercial paper program to invest in its core businesses, including
new beverage innovations, as well as 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. Any decisions to increase its
ownership interest in its equity method investees or licensed operations will be driven by
valuation and fit with the Companys ownership strategy and are likely to be infrequent.
Depending on market conditions and within the constraint of maintaining an appropriate capital
structure, Starbucks may repurchase shares of its common stock under its authorized share
repurchase program. Due to the current challenging operating and economic environment, the Company
continues to be conservative in its uses of cash, did not repurchase any shares in the first
quarter of fiscal 2009 and does not currently anticipate any share repurchases in the remaining
quarters of fiscal 2009. Management believes that cash flows generated from operations and existing
cash and liquid investments should be sufficient to finance capital requirements for its core
businesses for the foreseeable future, as well as to fund the cost of lease termination and
severance costs from the US and International store closures. As a result, the Company reduced its
short-term borrowings by $423 million during the first quarter of fiscal 2009, ending the quarter
with $290 million of short-term debt outstanding. For the remainder of fiscal 2009, the Company
expects short-term borrowings to remain close to the first quarter level. Significant new joint
ventures, acquisitions and/or other new business opportunities may require additional outside
funding.
Other than normal operating expenses, cash requirements for fiscal 2009 are expected to consist
primarily of capital expenditures for new Company-operated retail stores, remodeling and
refurbishment of existing Company-operated retail stores, and new equipment to support enhanced
quality standards and expanded offerings in the stores. Other capital expenditures in fiscal 2009
are expected to consist principally of investments in information technology systems and in the
Companys global supply chain operations. Total capital expenditures for fiscal 2009 are expected
to be approximately $600 million.
Cash provided by operating activities decreased by $114.1 million to $693.5 million for the first
quarter of fiscal 2009 compared to the corresponding period of fiscal 2008. The decrease was
primarily due to the lower earnings which also led to a decline in the balance in accrued taxes
year-over-year.
Cash used by investing activities for the 13 weeks ended December 28, 2008 totaled $183.1 million.
Net capital additions to property, plant and equipment used $172.6 million, primarily from opening
new Company-operated retail stores and remodeling certain existing stores during the first quarter
of fiscal 2009.
Cash used by financing activities for the 13 weeks ended December 28, 2008 totaled $410.4 million.
There were no repurchases of the Companys common stock during the quarter. Net repayments of
commercial paper were $272.9 million and net repayments under short-term borrowings under the
credit facility were $150.0 million for the quarter. As of December 28, 2008, a total of $290.3
million in borrowings were outstanding under the combined commercial paper program and revolving
credit facility, as well as $14.1 million in letters of credit which were outstanding under the
credit facility, leaving $695.6 million of capacity available under the $1 billion combined
commercial paper program and revolving credit facility.
23
Store Data
The following table summarizes the Companys retail store counts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net stores opened/(closed) during the |
|
|
|
|
|
13-week period ended |
|
Stores open as of |
|
|
Dec 28, |
|
Dec 30, |
|
Dec 28, |
|
Dec 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
United States: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated stores |
|
|
(100 |
) |
|
|
294 |
|
|
|
7,138 |
|
|
|
7,087 |
|
Licensed stores |
|
|
70 |
|
|
|
190 |
|
|
|
4,399 |
|
|
|
4,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30 |
) |
|
|
484 |
|
|
|
11,537 |
|
|
|
11,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated stores (1) |
|
|
69 |
|
|
|
90 |
|
|
|
2,048 |
|
|
|
1,833 |
|
Licensed stores (1) |
|
|
156 |
|
|
|
171 |
|
|
|
3,290 |
|
|
|
2,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
225 |
|
|
|
261 |
|
|
|
5,338 |
|
|
|
4,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
195 |
|
|
|
745 |
|
|
|
16,875 |
|
|
|
15,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) International store information has been adjusted for the fiscal 2008 acquisition
of assets and development rights for the Companys Quebec and Atlantic Canada Operations by
reclassifying historical information from Licensed stores to Company-operated stores.
Contractual Obligations
There have been no material changes during the period covered by this 10-Q, outside of the ordinary
course of the Companys business, to the contractual obligations specified in the table of
contractual obligations included in the section Managements Discussion and Analysis of Financial
Condition and Results of Operations included in the 10-K.
Off-Balance Sheet Arrangements
The Companys off-balance sheet arrangements relate to guarantees and are detailed in Note 12 to
the Consolidated Financial Statements in this Form 10-Q.
Commodity Prices, Availability and General Risk Conditions
Commodity price risk represents the Companys primary market risk, generated by its purchases of
green coffee and dairy products. The Company purchases, roasts and sells high quality whole bean
arabica coffee and related products and risk arises from the price volatility of green coffee. In
addition to coffee, the Company also purchases significant amounts of dairy products to support the
needs of its Company-operated retail stores. The price and availability of these commodities
directly impact the Companys results of operations and can be expected to impact its future
results of operations. For additional details see Product Supply in Item 1, as well as Risk
Factors in Item 1A of the 10-K.
Seasonality and Quarterly Results
The Companys business is subject to seasonal fluctuations, including fluctuations resulting from
the holiday season. The Companys cash flows from operations are considerably higher in the first
fiscal quarter than the remainder of the year. This is largely driven by cash received as Starbucks
Cards are purchased and loaded during the holiday season. Since revenues from the Starbucks Card
are recognized upon redemption and not when purchased, seasonal fluctuations on the consolidated
statements of earnings are much less pronounced. Quarterly results are affected by the timing of
the opening of new stores and the closing of existing stores. For these reasons, results for any
quarter are not necessarily indicative of the results that may be achieved for the full fiscal
year.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 to the Consolidated Financial Statements in this Form 10-Q.
24
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk related to changes in commodity prices, foreign currency
exchange rates, equity security prices and interest rates.
Foreign Currency Exchange Risk
As discussed in Note 5 to the Consolidated Financial Statements to the 10-K, Starbucks enters into
certain hedging transactions to help mitigate its exposure to foreign currency denominated
revenues, purchases, assets and liabilities.
The following table summarizes the potential impact to the Companys future net earnings and other
comprehensive income (OCI) from changes in the fair value of these derivative financial
instruments due in turn to a change in the value of the US dollar as compared to the level of
foreign exchange rates. The information provided below relates only to the hedging instruments and
does not represent the corresponding changes in the underlying hedged items (in millions):
December 28, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease) to Net Earnings |
|
Increase/(Decrease) to OCI |
|
|
10% Increase in |
|
10% Decrease in |
|
10% Increase in |
|
10% Decrease in |
|
|
Underlying Rate |
|
Underlying Rate |
|
Underlying Rate |
|
Underlying Rate |
Foreign currency hedges |
|
$ |
61 |
|
|
$ |
(61 |
) |
|
$ |
15 |
|
|
$ |
(19 |
) |
Commodity Price Risk, Equity Security Price Risk and Interest Rate Risk
There has been no material change in the commodity price risk, equity security price risk, or
interest rate risk discussed in Item 7A of the 10-K.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that material
information required to be disclosed in the Companys periodic reports filed or submitted under the
Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and forms. Starbucks
disclosure controls and procedures are also designed to ensure that information required to be
disclosed in the reports the Company files or submits under the Exchange Act is accumulated and
communicated to the Companys management, including its principal executive officer and principal
financial officer as appropriate, to allow timely decisions regarding required disclosure.
During the first quarter the Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including the principal executive officer and the
principal financial officer, of the effectiveness of the design and operation of the disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based
upon that evaluation, the Companys chief executive officer and chief financial officer concluded
that the Companys disclosure controls and procedures were effective, as of the end of the period
covered by this report (December 28, 2008).
During the first quarter of fiscal 2009, there were no changes in the Companys internal control
over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that
materially affected or are reasonably likely to materially affect internal control over financial
reporting.
The certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 are filed as exhibits
31.1 and 31.2, respectively, to this 10-Q.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
See discussion of Legal Proceedings in Note 12 to the Consolidated Financial Statements included in
Item 1 of Part I of this 10-Q.
25
Item 1A. Risk Factors
There have been no material changes to the risk factors previously disclosed in the 10-K.
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 28, 2008:
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 (2) |
|
Share |
|
Programs (3) |
|
or Programs (3) |
|
September 29, 2008 October 26, 2008 |
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
|
6,272,128 |
|
October 27, 2008 November 23, 2008 |
|
|
2,314,886 |
|
|
|
9.33 |
|
|
|
- |
|
|
|
6,272,128 |
|
November 24, 2008 December 28, 2008 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6,272,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,314,886 |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Monthly information is presented by reference to the Companys fiscal months during the
first quarter of fiscal 2009. |
(2) |
|
These amounts represent shares surrendered to the Company to pay the exercise price
and/or to satisfy tax withholding obligations in connection with stock swap exercises of
employee stock options. |
(3) |
|
The Companys share repurchase program is conducted under authorizations made from time
to time by the Companys Board of Directors. The Board of Directors initially authorized
the repurchase of 25 million shares of common stock (publicly announced on May 3, 2007) and
later authorized the repurchase of up to five million additional shares (publicly announced
on January 30, 2008). Neither of these authorizations has an
expiration date. |
26
Item 6. Exhibits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference |
|
|
Exhibit |
|
|
|
|
|
|
|
Date of |
|
Exhibit |
|
Filed |
No. |
|
Exhibit Description |
|
Form |
|
File No. |
|
First Filing |
|
Number |
|
Herewith |
3.2
|
|
Starbucks Corporation Amended and Restated Bylaws
|
|
8-K
|
|
0-20322
|
|
1/12/2009
|
|
|
3.2 |
|
|
|
10.1
|
|
Amendment No. 4 to Credit Agreement dated
October 31, 2008, among Starbucks Corporation,
Bank of America, N.A., as Administrative Agent
and the Lenders party thereto
|
|
8-K
|
|
0-20322
|
|
10/31/2008
|
|
|
10.1 |
|
|
|
10.2*
|
|
Form of Time Vested Restricted Stock Unit
Agreement (US) under 2005 Long-Term Equity
Incentive Plan
|
|
8-K
|
|
0-20322
|
|
11/7/2008
|
|
|
10.1 |
|
|
|
10.3*
|
|
Form of Time Vested Restricted Stock Unit
Agreement (International) under 2005 Long-Term
Equity Incentive Plan
|
|
8-K
|
|
0-20322
|
|
11/7/2008
|
|
|
10.2 |
|
|
|
10.4*
|
|
Form of Performance Based Restricted Stock Unit
Agreement under 2005 Long-Term Equity Incentive
Plan
|
|
8-K
|
|
0-20322
|
|
11/7/2008
|
|
|
10.3 |
|
|
|
10.5*
|
|
Letter Agreement dated November 6, 2008 between
Starbucks Corporation and Troy Alstead
|
|
8-K
|
|
0-20322
|
|
11/12/2008
|
|
|
10.1 |
|
|
|
10.6*
|
|
Starbucks Corporation Employee Stock Purchase
Plan 1995 as amended and restated
|
|
|
|
|
|
|
|
|
|
|
|
X |
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
USC. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X |
|
|
|
* |
|
Denotes a compensatory plan, contract or arrangement in which the Companys directors or executive
officers may participate. |
27
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 4, 2009 |
By: |
/s/ Troy Alstead
|
|
|
|
Troy Alstead |
|
|
|
executive vice president, chief financial officer
and chief administrative officer
Signing on behalf of the registrant and as
principal financial officer |
|
28