e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended July 1, 2007
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number: 0-20322
STARBUCKS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
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Washington
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91-1325671 |
(State or Other Jurisdiction of
Incorporation or Organization)
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(IRS Employer
Identification No.) |
2401 Utah Avenue South, Seattle, Washington 98134
(Address of principal executive offices)
(206) 447-1575
(Registrants Telephone Number, including Area Code)
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act):
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
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Title
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Shares Outstanding as of August 6, 2007 |
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Common Stock, par value $0.001 per share
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746,293,550 |
STARBUCKS CORPORATION
FORM 10-Q
For the Quarterly Period Ended July 1, 2007
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
STARBUCKS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except earnings per share)
(unaudited)
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13 Weeks Ended |
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39 Weeks Ended |
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July 1, |
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July 2, |
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July 1, |
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July 2, |
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2007 |
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2006 |
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2007 |
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2006 |
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Net revenues: |
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Company-operated retail |
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$ |
2,010,772 |
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$ |
1,660,977 |
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$ |
5,940,288 |
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$ |
4,888,804 |
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Specialty: |
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Licensing |
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254,904 |
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216,267 |
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743,633 |
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637,771 |
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Foodservice and other |
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93,569 |
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86,429 |
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286,641 |
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257,012 |
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Total specialty |
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348,473 |
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302,696 |
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1,030,274 |
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894,783 |
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Total net revenues |
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2,359,245 |
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1,963,673 |
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6,970,562 |
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5,783,587 |
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Cost of sales including occupancy costs |
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1,003,881 |
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804,889 |
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2,933,450 |
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2,343,800 |
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Store operating expenses |
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819,212 |
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686,602 |
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2,372,164 |
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1,974,041 |
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Other operating expenses |
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76,507 |
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69,478 |
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224,706 |
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192,274 |
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Depreciation and amortization expenses |
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119,409 |
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98,539 |
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342,990 |
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284,335 |
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General and administrative expenses |
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119,525 |
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115,258 |
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360,857 |
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358,194 |
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Subtotal operating expenses |
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2,138,534 |
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1,774,766 |
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6,234,167 |
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5,152,644 |
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Income from equity investees |
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24,503 |
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25,666 |
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69,517 |
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65,371 |
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Operating income |
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245,214 |
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214,573 |
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805,912 |
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696,314 |
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Net interest and other (expense)/income |
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(2,241 |
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5,028 |
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3,606 |
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8,439 |
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Earnings before income taxes |
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242,973 |
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219,601 |
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809,518 |
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704,753 |
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Income taxes |
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84,630 |
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74,103 |
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295,383 |
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257,783 |
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Net earnings |
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$ |
158,343 |
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$ |
145,498 |
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$ |
514,135 |
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$ |
446,970 |
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Net earnings per common share basic |
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$ |
0.21 |
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$ |
0.19 |
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$ |
0.68 |
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$ |
0.58 |
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Net earnings per common share diluted |
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$ |
0.21 |
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$ |
0.18 |
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$ |
0.66 |
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$ |
0.56 |
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Weighted average shares outstanding: |
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Basic |
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744,473 |
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769,825 |
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751,694 |
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768,108 |
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Diluted |
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763,559 |
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798,259 |
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773,506 |
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795,285 |
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See Notes to Condensed Consolidated Financial Statements.
1
STARBUCKS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
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July 1, |
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October 1, |
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2007 |
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2006 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
172,789 |
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$ |
312,606 |
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Short-term investments available-for-sale securities |
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85,956 |
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87,542 |
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Short-term investments trading securities |
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71,278 |
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53,496 |
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Accounts receivable, net of allowances of $5,252 and $3,827, respectively |
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250,866 |
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224,271 |
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Inventories |
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657,466 |
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636,222 |
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Prepaid expenses and other current assets |
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128,370 |
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126,874 |
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Deferred income taxes, net |
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101,071 |
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88,777 |
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Total current assets |
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1,467,796 |
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1,529,788 |
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Long-term investments available-for-sale securities |
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15,980 |
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5,811 |
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Equity and other investments |
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242,460 |
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219,093 |
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Property, plant and equipment, net |
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2,686,969 |
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2,287,899 |
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Other assets |
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235,107 |
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186,917 |
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Other intangible assets |
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40,392 |
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37,955 |
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Goodwill |
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215,219 |
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161,478 |
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TOTAL ASSETS |
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$ |
4,903,923 |
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$ |
4,428,941 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Commercial paper and short-term borrowings |
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$ |
879,972 |
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$ |
700,000 |
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Accounts payable |
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314,583 |
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340,937 |
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Accrued compensation and related costs |
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324,915 |
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288,963 |
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Accrued occupancy costs |
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75,916 |
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54,868 |
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Accrued taxes |
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84,233 |
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94,010 |
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Other accrued expenses |
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233,313 |
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224,154 |
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Deferred revenue |
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309,714 |
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231,926 |
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Current portion of long-term debt |
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772 |
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762 |
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Total current liabilities |
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2,223,418 |
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1,935,620 |
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Long-term debt |
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1,356 |
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1,958 |
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Other long-term liabilities |
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323,364 |
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262,857 |
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Total liabilities |
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2,548,138 |
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2,200,435 |
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Shareholders equity: |
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Common stock ($0.001 par value) authorized, 1,200,000,000 shares;
issued and outstanding, 745,303,613 and 756,602,055 shares, respectively
(includes 3,394,184 common stock units in both periods) |
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745 |
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756 |
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Other additional paid-in-capital |
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39,393 |
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39,393 |
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Retained earnings |
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2,264,992 |
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2,151,084 |
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Accumulated other comprehensive income |
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50,655 |
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37,273 |
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Total shareholders equity |
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2,355,785 |
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2,228,506 |
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
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$ |
4,903,923 |
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$ |
4,428,941 |
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See Notes to Condensed Consolidated Financial Statements.
2
STARBUCKS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands and unaudited)
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39 Weeks Ended |
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July 1, |
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July 2, |
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2007 |
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2006 |
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OPERATING ACTIVITIES: |
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Net earnings |
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$ |
514,135 |
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$ |
446,970 |
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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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360,881 |
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303,210 |
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Provision for impairments and asset disposals |
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21,165 |
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12,017 |
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Deferred income taxes, net |
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(40,459 |
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(75,094 |
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Equity in income of investees |
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(38,621 |
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(40,989 |
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Distributions of income from equity investees |
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42,324 |
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37,499 |
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Stock-based compensation |
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78,530 |
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78,698 |
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Tax benefit from exercise of stock options |
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5,865 |
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|
908 |
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Excess tax benefit from exercise of stock options |
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(52,034 |
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(93,327 |
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Net amortization of premium on securities |
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604 |
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1,643 |
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Cash provided/(used) by changes in operating assets and liabilities: |
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Inventories |
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(16,734 |
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(6,672 |
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Accounts payable |
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(30,944 |
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27,549 |
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Accrued compensation and related costs |
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32,374 |
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58,535 |
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Accrued taxes |
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38,040 |
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|
85,308 |
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Deferred revenue |
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76,944 |
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|
60,085 |
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Other operating assets and liabilities |
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47,770 |
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39,434 |
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Net cash provided by operating activities |
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1,039,840 |
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|
935,774 |
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INVESTING ACTIVITIES: |
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Purchase of available-for-sale securities |
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(207,974 |
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(529,764 |
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Maturity of available-for-sale securities |
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162,212 |
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193,184 |
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Sale of available-for-sale securities |
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36,897 |
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291,878 |
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Acquisitions, net of cash acquired |
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(53,419 |
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(90,578 |
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Net purchases of equity, other investments and other assets |
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(48,363 |
) |
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(19,938 |
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Net additions to property, plant and equipment |
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(772,133 |
) |
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(522,348 |
) |
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Net cash used by investing activities |
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(882,780 |
) |
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(677,566 |
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FINANCING ACTIVITIES: |
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Repayments of commercial paper |
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(3,795,450 |
) |
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Proceeds from issuance of commercial paper |
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4,675,422 |
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Repayments of short-term borrowings |
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(1,370,000 |
) |
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(455,000 |
) |
Proceeds from short-term borrowings |
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670,000 |
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|
378,000 |
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Proceeds from issuance of common stock |
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|
136,603 |
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|
131,824 |
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Excess tax benefit from exercise of stock options |
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|
52,034 |
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|
93,327 |
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Principal payments on long-term debt |
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(592 |
) |
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|
(560 |
) |
Repurchase of common stock |
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(670,988 |
) |
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(367,771 |
) |
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Net cash used by financing activities |
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|
(302,971 |
) |
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(220,180 |
) |
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Effect of exchange rate changes on cash and cash equivalents |
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|
6,094 |
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|
3,902 |
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Net increase/(decrease) in cash and cash equivalents |
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|
(139,817 |
) |
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|
41,930 |
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CASH AND CASH EQUIVALENTS: |
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|
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Beginning of period |
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|
312,606 |
|
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|
173,809 |
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End of period |
|
$ |
172,789 |
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|
$ |
215,739 |
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
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Cash paid during the period for: |
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Interest |
|
$ |
25,372 |
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|
$ |
4,892 |
|
Income taxes |
|
$ |
294,624 |
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|
$ |
239,004 |
|
See Notes to Condensed Consolidated Financial Statements.
3
STARBUCKS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 13 Weeks and 39 Weeks Ended July 1, 2007, and July 2, 2006
(unaudited)
Note 1: Summary of Significant Accounting Policies
Financial Statement Preparation
The unaudited condensed consolidated financial statements as of July 1, 2007, and for the 13-week
periods and 39-week periods ended July 1, 2007, and July 2, 2006, have been prepared by Starbucks
Corporation (Starbucks or the Company) under the rules and regulations of the Securities and
Exchange Commission (the SEC). In the opinion of management, the financial information for the
13-week periods and 39-week periods ended July 1, 2007, and July 2, 2006, reflects all adjustments
and accruals, which are of a normal recurring nature, necessary for a fair presentation of the
financial position, results of operations and cash flows for the interim periods.
The financial information as of October 1, 2006, is derived from the Companys audited consolidated
financial statements and notes for the fiscal year ended October 1, 2006 (Fiscal 2006), included
in Item 8 in the Fiscal 2006 Annual Report on Form 10-K (together with Amendment No. 1 to the
Fiscal 2006 Annual Report on Form 10-K/A, the 10-K). The information included in this Form 10-Q
should be read in conjunction with managements discussion and analysis and notes to the financial
statements in the 10-K.
The results of operations for the 13-week period and 39-week period ended July 1, 2007, are not
necessarily indicative of the results of operations that may be achieved for the entire fiscal year
ending September 30, 2007.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN
48), which seeks to reduce the diversity in practice associated with the accounting and reporting
for uncertainty in income tax positions. This Interpretation prescribes a comprehensive model for
the financial statement recognition, measurement, presentation and disclosure of uncertain tax
positions taken or expected to be taken in income tax returns. FIN 48 is effective for fiscal years
beginning after December 15, 2006, and the Company will adopt the new requirements in its first
fiscal quarter of 2008. The cumulative effects, if any, of adopting FIN 48 will be recorded as an
adjustment to retained earnings as of the beginning of the period of adoption. The Company is
currently evaluating the impact, if any, of adopting FIN 48 on its consolidated financial
statements.
In September 2006, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 157,
Fair Value Measurements (SFAS 157), which defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and expands disclosures about fair
value measurements. SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is
permitted. Starbucks must adopt these new requirements no later than its first fiscal quarter of
2009. Starbucks has not yet determined the effect on the Companys consolidated financial
statements, if any, upon adoption of SFAS 157, or if it will adopt the requirements prior to the
first fiscal quarter of 2009.
In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, Considering the Effects
of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements
(SAB 108). The intent of SAB 108 is to reduce diversity in practice for the method companies use
to quantify financial statement misstatements, including the effect of prior year uncorrected
errors. SAB 108 establishes an approach that requires quantification of financial statement errors
using both an income statement and cumulative balance sheet approach. SAB 108 is effective for
annual financial statements for fiscal years ending after November 15, 2006. The adoption
4
of SAB 108 is not expected to have a significant impact on the Companys consolidated
financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). SFAS 159 permits companies to choose to measure many financial
instruments and certain other items at fair value. SFAS 159 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, or Starbucks first fiscal quarter of
2009. Early adoption is permitted. Starbucks has not yet determined if it will elect to apply any
of the provisions of SFAS 159 or what the effect of adoption of the statement would have, if any,
on its consolidated financial statements.
Note 2: Acquisition
In the first quarter of fiscal 2007, the Company purchased a 90% stake in its previously-licensed
operations in Beijing and Tianjin, China. Due to its majority ownership of these operations,
Starbucks applied the consolidation method of accounting subsequent to the date of acquisition.
Note 3: Derivative Financial Instruments
The Company manages its exposure to various risks within the consolidated financial
statements according to an umbrella risk policy. Under this policy, Starbucks may engage in
transactions involving various derivative instruments, with maturities generally not longer than
five years, to hedge assets, liabilities, revenues and purchases.
Cash Flow Hedges
Starbucks, which includes subsidiaries that use their local currency as their functional currency,
enters into cash flow derivative instruments to hedge portions of anticipated revenue streams and
inventory purchases. Current forward contracts, which comprise the majority of the Companys
derivative instruments, hedge monthly forecasted revenue transactions denominated in Japanese yen
and Canadian dollars, as well as forecasted inventory purchases denominated primarily in U.S.
dollars for foreign operations. The Company also has futures contracts to hedge the variable price
component for a small portion of its price-to-be-fixed green coffee purchase contracts.
The Company had accumulated net derivative losses of $2.9 million, net of taxes, in other
comprehensive income as of July 1, 2007, related to cash flow hedges. Of this amount, $1.5 million
of net derivative losses pertain to hedging instruments that will be dedesignated within 12 months
and will also continue to experience fair value changes before affecting earnings. There was no
significant ineffectiveness for cash flow hedges recognized during the 13-week and 39-week periods
ended July 1, 2007. No cash flow hedges were discontinued and no ineffectiveness was recognized
during the 13-week and 39-week periods ended July 2, 2006. Current contracts will expire within 27
months.
Net Investment Hedges
Net investment derivative instruments are used to hedge the Companys equity method investment in
Starbucks Coffee Japan, Ltd. (Starbucks Japan) as well as the Companys net investments in its
Canadian, United Kingdom, and Chinese subsidiaries, to minimize foreign currency exposure. The
Company applies the spot-to-spot method for these forward foreign exchange contracts, and under
this method the change in fair value of the forward contracts attributable to the changes in spot
exchange rates (the effective portion) is reported in other comprehensive income. The remaining
change in fair value of the forward contract (the ineffective portion) is reclassified into
earnings in Net interest and other (expense)/income. The Company had accumulated net derivative
losses of $6.0 million, net of taxes, in other comprehensive income as of July 1, 2007, related to
net investment derivative hedges. Current contracts expire within 33 months.
5
The following table presents the
net gains and losses reclassified from other comprehensive income
into the consolidated statements of earnings during the periods indicated for cash flow
and net investment hedges (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
39 Weeks Ended |
|
|
July 1, |
|
July 2, |
|
July 1, |
|
July 2, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
|
|
Cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassified gains into total net revenues |
|
$ |
475 |
|
|
$ |
169 |
|
|
$ |
1,465 |
|
|
$ |
1,041 |
|
Reclassified losses into cost of sales |
|
|
(38 |
) |
|
|
(1,924 |
) |
|
|
(1,113 |
) |
|
|
(5,492 |
) |
|
|
|
|
|
Net reclassified gains/(losses) cash flow hedges |
|
|
437 |
|
|
|
(1,755 |
) |
|
|
352 |
|
|
|
(4,451 |
) |
Net reclassified gains net investment hedges |
|
|
1,189 |
|
|
|
706 |
|
|
|
3,806 |
|
|
|
1,705 |
|
|
|
|
|
|
Total |
|
$ |
1,626 |
|
|
$ |
(1,049 |
) |
|
$ |
4,158 |
|
|
$ |
(2,746 |
) |
|
|
|
|
|
Other Derivatives
Starbucks entered into foreign currency forward contracts that are not designated as hedging
instruments for accounting purposes. These contracts are recorded at fair value, with the changes
in fair value recognized in Net interest and other (expense)/income on the consolidated
statements of earnings. For the 13-week and 39-week periods ended July 1, 2007, these forward
contracts resulted in net losses of $3.6 million and $5.9 million, respectively. These losses were
largely offset by the financial impact of translating certain foreign currency denominated payables and
receivables, which are also recognized in Net interest and other (expense)/income. No similar
contracts were held as of July 2, 2006.
Note 4: Inventories
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, |
|
|
October 1, |
|
|
July 2, |
|
|
|
2007 |
|
|
2006 |
|
|
2006 |
|
Coffee: |
|
|
|
|
|
|
|
|
|
|
|
|
Unroasted |
|
$ |
362,371 |
|
|
$ |
328,051 |
|
|
$ |
324,254 |
|
Roasted |
|
|
74,399 |
|
|
|
80,199 |
|
|
|
71,580 |
|
Other merchandise held for sale |
|
|
130,740 |
|
|
|
146,345 |
|
|
|
81,224 |
|
Packaging and other supplies |
|
|
89,956 |
|
|
|
81,627 |
|
|
|
80,301 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
657,466 |
|
|
$ |
636,222 |
|
|
$ |
557,359 |
|
|
|
|
|
|
|
|
|
|
|
Other merchandise held for sale includes, among other items, brewing equipment, serveware and tea.
As of July 1, 2007, the Company had committed to fixed-price purchase contracts for green coffee
totaling $374 million. The Company believes, based on relationships established with its suppliers
in the past, the risk of non-delivery on such purchase commitments is remote.
6
Note 5: Property, Plant and Equipment
Property, plant and equipment are recorded at cost and consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 1, |
|
|
October 1, |
|
|
|
2007 |
|
|
2006 |
|
Land |
|
$ |
39,992 |
|
|
$ |
32,350 |
|
Buildings |
|
|
147,134 |
|
|
|
109,129 |
|
Leasehold improvements |
|
|
2,930,396 |
|
|
|
2,436,503 |
|
Store equipment |
|
|
946,065 |
|
|
|
784,444 |
|
Roasting equipment |
|
|
205,854 |
|
|
|
197,004 |
|
Furniture, fixtures and other |
|
|
558,987 |
|
|
|
523,275 |
|
|
|
|
|
|
|
|
|
|
|
4,828,428 |
|
|
|
4,082,705 |
|
Less: accumulated depreciation and amortization |
|
|
(2,314,071 |
) |
|
|
(1,969,804 |
) |
|
|
|
|
|
|
|
|
|
|
2,514,357 |
|
|
|
2,112,901 |
|
Work in progress |
|
|
172,612 |
|
|
|
174,998 |
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
2,686,969 |
|
|
$ |
2,287,899 |
|
|
|
|
|
|
|
|
Note 6: Short-term Borrowings
In August 2005, the Company entered into a $500 million unsecured five-year revolving credit
facility (the facility) with various banks, of which $100 million may be used for issuances of
letters of credit. The facility is available for working capital, capital expenditures and other
corporate purposes, which may include acquisitions and share repurchases. In August 2006, the
Company increased its borrowing capacity under the facility to $1 billion, as provided in the
original credit facility. In December 2006, the Company extended the term of the facility by one
year to August 2011. The interest rate for borrowings under the facility ranges from 0.11% to 0.27%
over LIBOR or an alternate base rate, which is the greater of the bank prime rate or the Federal
Funds Rate plus 0.50%. The specific spread over LIBOR will depend upon the Companys performance
under specified financial criteria. The facility contains provisions requiring the Company to
maintain compliance with certain covenants, including the maintenance of certain financial ratios.
As of July 1, 2007 and October 1, 2006, the Company was in compliance with each of these covenants.
On March 27, 2007, the Company established a commercial paper program (the program). Under the
program, the Company may issue unsecured commercial paper notes, up to a maximum aggregate amount
outstanding at any time of $1 billion, with individual maturities that may vary, but not exceed 397
days from the date of issue. The program is backstopped by the Companys revolving facility, and
the combined borrowing limit is $1 billion for the program and the facility. Under the program, the
Company may issue commercial paper from time to time, and the proceeds of the commercial paper
financing will be used for working capital, capital expenditures and other corporate purposes,
which may include acquisitions and share repurchases.
As of July 1, 2007, the Company had no amount outstanding under the credit facility, although a
letter of credit of $12.9 million was outstanding, which reduces the borrowing capacity under the
credit facility. As of July 1, 2007, the Company had commercial paper outstanding totaling $880
million. As of October 1, 2006, the Company had $700 million outstanding under the credit
facility, as well as a letter of credit of $11.9 million. The weighted average contractual
interest rates were 5.4% at July 1, 2007 on commercial paper outstanding and 5.5% at October 1,
2006 on borrowings under the facility.
Interest expense, net of interest capitalized, was $10.9 million and $24.6 million for the 13 weeks
and 39 weeks ended July 1, 2007, respectively. Interest expense was $0.7 million and $5.1 million
for the 13 weeks and 39 weeks ended July 2, 2006, respectively. For the 13 weeks and 39 weeks ended
July 1, 2007, $1.1 million and $3.0 million, respectively, of interest expense was capitalized. No
interest was capitalized for the 13 weeks and 39 weeks ended July 2, 2006.
7
Note 7: Other Long-term Liabilities
The Companys other long-term liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 1, |
|
|
October 1, |
|
|
|
2007 |
|
|
2006 |
|
Deferred rent |
|
$ |
247,202 |
|
|
$ |
203,903 |
|
Asset retirement obligations |
|
|
41,993 |
|
|
|
34,271 |
|
Minority interest |
|
|
16,030 |
|
|
|
10,739 |
|
Other |
|
|
18,139 |
|
|
|
13,944 |
|
|
|
|
|
|
|
|
Total |
|
$ |
323,364 |
|
|
$ |
262,857 |
|
|
|
|
|
|
|
|
Deferred rent liabilities represent amounts for tenant improvement allowances, rent escalation
clauses and rent holidays related to certain operating leases. The Company amortizes deferred rent
over the terms of the leases as reductions to rent expense on the consolidated statements
of earnings.
Asset retirement obligations represent the estimated fair value of the Companys future costs of
removing leasehold improvements at the termination of leases for certain stores and administrative
facilities.
Minority interest represents the collective ownership interests of minority shareholders for
operations accounted for under the consolidation method, in which Starbucks owns less than 100% of
the equity interest.
The other remaining long-term liabilities generally include obligations to be settled or paid for
one year beyond each period presented, for items such as hedging instruments, guarantees, the
long-term portion of capital lease obligations and donation commitments.
Note 8: Shareholders Equity
In addition to 1.2 billion shares of authorized common stock with $0.001 par value per share, the
Company has authorized 7.5 million shares of preferred stock, none of which was outstanding at July
1, 2007.
Under the Companys authorized share repurchase program, Starbucks acquired 20.3 million shares at
a cost of $671 million, for an average price of $32.97 during the 39-week period ended July 1,
2007. Starbucks acquired 11.1 million shares at an average price of $32.03 for a total
accrual-based cost of $354 million during the 39-week period ended July 2, 2006. The related cash
amount used to repurchase shares for the 39-week period ended July 2, 2006 was $368 million. The
difference between the two amounts represents the effect of the net change in unsettled trades
totaling $14 million from October 2, 2005. There was no change in the amount of unsettled trades
from October 1, 2006 to July 1, 2007. Share repurchases were funded through cash, cash equivalents,
available-for-sale securities as well as borrowings under the revolving credit facility and
commercial paper program, and were part of the Companys active capital management program. On May
1, 2007, the Starbucks Board of Directors authorized the repurchase of up to 25 million additional
shares of the Companys common stock. As of July 1, 2007, a total of up to 26.1 million shares
remained available for repurchase, under the current and previous authorizations.
Comprehensive Income
Comprehensive income includes all changes in equity during the period, except those resulting from
transactions with shareholders and subsidiaries of the Company. It has two components: net earnings
and other comprehensive income. Accumulated other comprehensive income reported on the Companys
consolidated balance sheets consists of foreign currency translation adjustments and the
unrealized gains and losses, net of applicable taxes, on available-for-sale securities and on
derivative instruments designated and qualifying as cash flow and net investment hedges.
8
Comprehensive income, net of related tax effects, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
39 Weeks Ended |
|
|
July 1, |
|
July 2, |
|
July 1, |
|
July 2, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Net earnings |
|
$ |
158,343 |
|
|
$ |
145,498 |
|
|
$ |
514,135 |
|
|
$ |
446,970 |
|
|
Unrealized holding
(losses) on cash flow
hedging instruments |
|
|
(4,411 |
) |
|
|
(3,769 |
) |
|
|
(415 |
) |
|
|
(4,467 |
) |
Unrealized holding
(losses) on net
investment hedging
instruments |
|
|
(1,681 |
) |
|
|
(1,654 |
) |
|
|
(2,767 |
) |
|
|
(410 |
) |
Unrealized holding
gains on
available-for-sale
securities |
|
|
37 |
|
|
|
835 |
|
|
|
199 |
|
|
|
1,702 |
|
Reclassification
adjustment for net
(gains)/losses realized in net
earnings for
available-for-sale
securities |
|
|
|
|
|
|
(1,095 |
) |
|
|
1 |
|
|
|
(1,089 |
) |
Reclassification
adjustment for net
(gains)/losses realized
in net earnings for
cash flow hedges |
|
|
(413 |
) |
|
|
830 |
|
|
|
696 |
|
|
|
2,846 |
|
|
|
|
|
|
Net unrealized (loss) |
|
|
(6,468 |
) |
|
|
(4,853 |
) |
|
|
(2,286 |
) |
|
|
(1,418 |
) |
Translation adjustment |
|
|
6,746 |
|
|
|
15,586 |
|
|
|
15,668 |
|
|
|
17,416 |
|
|
|
|
|
|
Total comprehensive income |
|
$ |
158,621 |
|
|
$ |
156,231 |
|
|
$ |
527,517 |
|
|
$ |
462,968 |
|
|
|
|
|
|
The favorable translation adjustment change for the 13-week period ended July 1, 2007, of $6.7
million was primarily due to the weakening of the U.S. dollar against the Canadian dollar. The
favorable translation adjustment change for the 13-week period ended July 2, 2006, of $15.6 million
was primarily due to the weakening of the U.S. dollar against several currencies including the
euro, British pound sterling, Japanese yen and Canadian dollar.
The favorable translation adjustment change for the 39-week period ended July 1, 2007, of $15.7
million was primarily due to the weakening of the U.S. dollar against several currencies including
the euro and British pound sterling. The favorable translation adjustment change for the 39-week
period ended July 2, 2006, of $17.4 million was primarily due to the weakening of the U.S. dollar
against several currencies including the euro, British pound sterling, Canadian dollar and Korean
won.
The components of accumulated other comprehensive income, net of tax, as presented on the consolidated balance sheets were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 1, |
|
|
October 1, |
|
|
|
2007 |
|
|
2006 |
|
Net
unrealized holding (losses) on available-for-sale securities |
|
$ |
(54 |
) |
|
$ |
(254 |
) |
Net
unrealized holding (losses) on hedging instruments |
|
|
(8,902 |
) |
|
|
(6,416 |
) |
Translation adjustment |
|
|
59,611 |
|
|
|
43,943 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
$ |
50,655 |
|
|
$ |
37,273 |
|
|
|
|
|
|
|
|
As of July 1, 2007, the translation adjustment of $59.6 million was net of tax provisions of $7.8
million. As of October 1, 2006, the translation adjustment of $43.9 million was net of tax
provisions of $7.3 million.
9
Note 9: Stock-Based Compensation
Stock Options
Stock options to purchase the Companys common stock are granted at the fair market value of the
stock on the date of grant. The majority of options become exercisable in four equal installments
beginning a year from the date of grant and generally expire 10 years from the date of grant.
Certain options granted prior to October 1, 2006 become exercisable in three equal installments
beginning a year from the date of grant. Options granted to non-employee directors generally vest
over one year. Nearly all outstanding stock options are non-qualified stock options.
The fair value of stock awards was estimated at the date of grant using the Black-Scholes-Merton
option valuation model with the following weighted average assumptions for the 13-week and 39-week
periods ended July 1, 2007, and July 2, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Options Granted During the Period |
|
|
13 Weeks Ended |
|
39 Weeks Ended |
|
|
July 1, 2007 |
|
July 2, 2006 |
|
July 1, 2007 |
|
July 2, 2006 |
Expected term (in years) |
|
|
4.5 |
|
|
|
4.4 |
|
|
|
4.7 |
|
|
|
4.4 |
|
Expected stock price volatility |
|
|
26.6 |
% |
|
|
28.7 |
% |
|
|
29.0 |
% |
|
|
28.9 |
% |
Risk-free interest rate |
|
|
4.7 |
% |
|
|
5.0 |
% |
|
|
4.6 |
% |
|
|
4.4 |
% |
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value per option granted |
|
$ |
8.70 |
|
|
$ |
11.87 |
|
|
$ |
11.86 |
|
|
$ |
9.58 |
|
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.
For the 39-week periods ended July 1, 2007 and July 2, 2006, total pretax compensation cost
recognized for share-based payment plans was $78.5 million and $78.0 million, respectively, and the
total income tax benefit recognized in the consolidated statements of earnings from these
plans was $26.6 million for each period.
The following summarizes all stock option transactions from October 1, 2006 through July 1, 2007
(no restricted stock, restricted stock units or stock appreciation rights were outstanding for any
of these periods):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Weighted |
|
|
|
|
|
|
|
|
Average |
|
Average |
|
Aggregate |
|
|
Shares |
|
Exercise |
|
Remaining |
|
Intrinsic |
|
|
Subject to |
|
Price |
|
Contractual |
|
Value |
|
|
Options |
|
per Share |
|
Life |
|
(in thousands) |
Outstanding, October 1, 2006 |
|
|
69,419,871 |
|
|
$ |
16.83 |
|
|
|
6.2 |
|
|
$ |
1,196,209 |
|
Granted |
|
|
11,829,690 |
|
|
|
36.38 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(7,658,022 |
) |
|
|
13.20 |
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled |
|
|
(2,649,028 |
) |
|
|
30.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, July 1, 2007 |
|
|
70,942,511 |
|
|
|
19.97 |
|
|
|
6.1 |
|
|
|
613,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, July 1, 2007 |
|
|
45,263,707 |
|
|
|
13.60 |
|
|
|
4.7 |
|
|
|
593,216 |
|
Vested and expected to vest, July 1, 2007 |
|
|
69,069,845 |
|
|
|
19.56 |
|
|
|
6.0 |
|
|
|
613,318 |
|
The aggregate intrinsic value in the table above is the amount by which the market value of the
underlying stock exceeded the exercise price of outstanding options, is before applicable income
taxes and represents the amount optionees would have realized if all in-the-money options had been
exercised on the last business day of the period indicated. As of July 1, 2007, total unrecognized
stock-based compensation expense related to nonvested stock options was approximately $122 million,
before income taxes, and is expected to be recognized over a weighted average period of
approximately 24 months.
10
The Company issues new shares of common stock upon exercise of stock options. As of July 1, 2007,
there were 59.1 million shares of common stock available for issuance pursuant to future stock
option grants.
Note 10: Earnings Per Share
The following table presents the calculation of net earnings per common share basic and diluted
(in thousands, except earnings per share):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
39 Weeks Ended |
|
|
July 1, |
|
July 2, |
|
July 1, |
|
July 2, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Net earnings |
|
$ |
158,343 |
|
|
$ |
145,498 |
|
|
$ |
514,135 |
|
|
$ |
446,970 |
|
Weighted average common shares and
common stock units outstanding
(for basic calculation) |
|
|
744,473 |
|
|
|
769,825 |
|
|
|
751,694 |
|
|
|
768,108 |
|
Dilutive effect of outstanding
common stock options |
|
|
19,086 |
|
|
|
28,434 |
|
|
|
21,812 |
|
|
|
27,177 |
|
|
|
|
|
|
Weighted average common and common
equivalent shares outstanding (for
diluted calculation) |
|
|
763,559 |
|
|
|
798,259 |
|
|
|
773,506 |
|
|
|
795,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share basic |
|
$ |
0.21 |
|
|
$ |
0.19 |
|
|
$ |
0.68 |
|
|
$ |
0.58 |
|
Net earnings per common and common
equivalent share diluted |
|
$ |
0.21 |
|
|
$ |
0.18 |
|
|
$ |
0.66 |
|
|
$ |
0.56 |
|
Potential dilutive shares consist of the incremental common shares issuable upon the exercise of
outstanding stock options (both vested and non-vested) using the treasury stock method. These
options are excluded from the computation of earnings per share if their effect is antidilutive.
The antidilutive options totaled 21.7 million and 433 thousand for the 13-week periods ended July
1, 2007 and July 2, 2006, respectively. The antidilutive options totaled 9.6 million and 10.0
million for the 39-week periods ended July 1, 2007 and July 2, 2006, respectively.
Note 11: Commitments and Contingencies
Guarantees
The Company has unconditionally guaranteed the repayment of certain Japanese yen-denominated bank
loans and related interest and fees of an unconsolidated equity investee, Starbucks Japan. The
guarantees continue until the loans, including accrued interest and fees, have been paid in full,
with the final loan amount due in 2014. The maximum amount is limited to the sum of unpaid
principal and interest amounts, as well as other related expenses. These amounts will vary based on
fluctuations in the yen foreign exchange rate. As of July 1, 2007, the maximum amount of the
guarantees was approximately $5.1 million. Since there has been no modification of these loan
guarantees subsequent to the Companys adoption of FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indebtedness of Others, Starbucks
has applied the disclosure provisions only and has not recorded the guarantee on its consolidated balance sheet.
Starbucks has commitments under which it unconditionally guarantees its proportionate share of
certain borrowings of unconsolidated equity investees. The Companys maximum exposure under these
commitments is approximately $9.4 million, excluding interest and other related costs, and these
commitments expire between 2007 and 2012. As of July 1, 2007, the Company had a total of $3.6
million in Equity and other investments and Other long-term liabilities on the consolidated balance sheet for the fair value of the guarantee arrangements.
11
Legal Proceedings
On June 3, 2004, two then-current employees of the Company filed a lawsuit, entitled Sean
Pendlebury and Laurel Overton v. Starbucks Coffee Company, in the U.S. District Court for the
Southern District of Florida claiming the Company violated requirements of the Fair Labor Standards
Act (FLSA). The suit alleges that the Company misclassified its retail store managers as exempt
from the overtime provisions of the FLSA, and that each manager therefore is entitled to overtime
compensation for any week in which he or she worked more than 40 hours during the three years
before joining the suit as a plaintiff, and for as long as they remain a manager thereafter.
Plaintiffs seek to represent themselves and all similarly situated U.S. current and former store
managers of the Company. Plaintiffs seek reimbursement for an unspecified amount of unpaid overtime
compensation, liquidated damages, attorneys fees and costs. Plaintiffs also filed on June 3, 2004
a motion for conditional collective action treatment and court-supervised notice to additional
putative class members under the opt-in procedures in section 16(b) of the FLSA. On January 3,
2005, the district court entered an order authorizing nationwide notice of the lawsuit to all
current and former store managers employed by the Company during the three years before the suit
was filed. The Company filed a motion for summary judgment as to the claims of the named plaintiffs
on September 24, 2004. The court denied that motion because this case was in the early stages of
discovery, but the court noted that the Company may resubmit this motion at a later date. Starbucks
believes that the plaintiffs are properly classified as exempt under the federal wage laws. The
Company cannot estimate the possible loss to the Company, if any, and believes that a loss in this
case is unlikely. There is currently no trial date. The Company intends to vigorously defend the
lawsuit.
On October 8, 2004, a former hourly employee of the Company filed a lawsuit in San Diego County
Superior Court entitled Jou Chau v. Starbucks Coffee Company. The lawsuit alleges that the Company
violated the California Labor Code by allowing shift supervisors to receive tips. More
specifically, the lawsuit alleges that since shift supervisors direct the work of baristas, they
qualify as agents of the Company and are therefore excluded from receiving tips under California
Labor Code Section 351, which prohibits employers and their agents from collecting or receiving
tips left by patrons for other employees. The lawsuit further alleges that because the tipping
practices violate the Labor Code, they also are unfair practices under the California Unfair
Competition Law. In addition to recovery of an unspecified amount of tips distributed to shift
supervisors, the lawsuit seeks penalties under California Labor Code Section 203 for willful
failure to pay wages due. Plaintiff also seeks attorneys fees and costs. On March 30, 2006, the
Court issued an order certifying the case as a class action, with the plaintiff representing a
class of all persons employed as baristas in the state of California since October 8, 2000. In
March 2007, notice of action was sent to approximately 120,000 potential members of the class. The
Company cannot estimate the possible loss to the Company, if any. Trial is currently set for
December 2007. The Company believes its practices comply with California law, and the Company
intends to vigorously defend the lawsuit.
On March 11, 2005, a former employee of the Company filed a lawsuit, entitled James Falcon v.
Starbucks Corporation and Does 1 through 100, in the U.S. District Court for the Southern District
of Texas claiming that the Company violated requirements of the FLSA. Specifically, the plaintiff
claims that the Company misclassified its retail assistant store managers as exempt from the
overtime provisions of the FLSA and that each assistant manager therefore is entitled to overtime
compensation for any week in which he or she worked more than 40 hours during the three years
before joining the suit as a plaintiff, and for as long as they remain an assistant manager
thereafter. On August 18, 2005, the plaintiff amended his complaint to include allegations that he
and other retail assistant store managers were not paid overtime compensation for all hours worked
in excess of 40 hours in a work week after they were re-classified as non-exempt employees in
September 2002. In both claims, Plaintiff seeks to represent himself and a putative class of all
current and former assistant store managers employed by the Company in the United States from March
11, 2002 until the present. He also seeks, on behalf of himself and the class, reimbursement for an
unspecified amount of unpaid overtime compensation, liquidated damages, injunctive relief, and
attorneys fees and costs. On September 13, 2005, the plaintiff filed a motion for conditional
collective action treatment and court-supervised notice to all putative class members under the
opt-in procedures in section 16(b) of the FLSA. On November 29, 2005, the court entered an order
authorizing notice to the class of the existence of the lawsuit and
12
their opportunity to join as plaintiffs. The Company has a policy requiring that all non-exempt
partners, including assistant store managers, be paid for all hours worked, including any hours
worked in excess of 40 per week. The Company also believes that this policy is, and at all relevant
times has been, communicated and followed consistently. Further, the Company believes that the
plaintiff and other assistant store managers were properly classified as exempt under the FLSA
prior to September 2002. The Company cannot estimate the possible loss to the Company, if any, and
believes that a loss in this case is unlikely. No trial date has been set. The Company intends to
vigorously defend the lawsuit.
The Company is party to various other legal proceedings arising in the ordinary course of its
business, but it is not currently a party to any legal proceeding that management believes would
have a material adverse effect on the consolidated financial position or results of operations of
the Company.
Note 12: Segment Reporting
Segment information is prepared on the basis that the Companys management reviews financial
information for operational decision making purposes. The tables below present information by
operating segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United |
|
|
|
|
|
|
|
|
|
Unallocated |
|
|
13 Weeks Ended |
|
States |
|
International |
|
Global CPG |
|
Corporate (1) |
|
Total |
July 1, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail |
|
$ |
1,646,234 |
|
|
$ |
364,538 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,010,772 |
|
Specialty: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing |
|
|
110,130 |
|
|
|
57,653 |
|
|
|
87,121 |
|
|
|
|
|
|
|
254,904 |
|
Foodservice and other |
|
|
83,806 |
|
|
|
9,763 |
|
|
|
|
|
|
|
|
|
|
|
93,569 |
|
Total specialty |
|
|
193,936 |
|
|
|
67,416 |
|
|
|
87,121 |
|
|
|
|
|
|
|
348,473 |
|
Total net revenues |
|
|
1,840,170 |
|
|
|
431,954 |
|
|
|
87,121 |
|
|
|
|
|
|
|
2,359,245 |
|
Earnings/(loss) before income taxes |
|
|
254,037 |
|
|
|
35,534 |
|
|
|
41,937 |
|
|
|
(88,535 |
) |
|
|
242,973 |
|
Depreciation and amortization |
|
|
89,134 |
|
|
|
21,287 |
|
|
|
18 |
|
|
|
8,970 |
|
|
|
119,409 |
|
Income from equity investees |
|
|
|
|
|
|
11,909 |
|
|
|
12,594 |
|
|
|
|
|
|
|
24,503 |
|
Net impairment and disposition losses |
|
|
1,250 |
|
|
|
6,310 |
|
|
|
|
|
|
|
105 |
|
|
|
7,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail |
|
$ |
1,380,901 |
|
|
$ |
280,076 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,660,977 |
|
Specialty: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing |
|
|
96,266 |
|
|
|
49,665 |
|
|
|
70,336 |
|
|
|
|
|
|
|
216,267 |
|
Foodservice and other |
|
|
78,981 |
|
|
|
7,448 |
|
|
|
|
|
|
|
|
|
|
|
86,429 |
|
Total specialty |
|
|
175,247 |
|
|
|
57,113 |
|
|
|
70,336 |
|
|
|
|
|
|
|
302,696 |
|
Total net revenues |
|
|
1,556,148 |
|
|
|
337,189 |
|
|
|
70,336 |
|
|
|
|
|
|
|
1,963,673 |
|
Earnings/(loss) before income taxes |
|
|
226,190 |
|
|
|
29,240 |
|
|
|
39,101 |
|
|
|
(74,930 |
) |
|
|
219,601 |
|
Depreciation and amortization |
|
|
72,238 |
|
|
|
17,260 |
|
|
|
26 |
|
|
|
9,015 |
|
|
|
98,539 |
|
Income from equity investees |
|
|
|
|
|
|
10,109 |
|
|
|
15,557 |
|
|
|
|
|
|
|
25,666 |
|
Net impairment and disposition losses |
|
|
1,830 |
|
|
|
1,027 |
|
|
|
|
|
|
|
7 |
|
|
|
2,864 |
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United |
|
|
|
|
|
|
|
|
|
Unallocated |
|
|
39 Weeks Ended |
|
States |
|
International |
|
Global CPG |
|
Corporate (1) |
|
Total |
July 1, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail |
|
$ |
4,901,886 |
|
|
$ |
1,038,402 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,940,288 |
|
Specialty: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing |
|
|
328,229 |
|
|
|
158,722 |
|
|
|
256,682 |
|
|
|
|
|
|
|
743,633 |
|
Foodservice and other |
|
|
259,384 |
|
|
|
27,257 |
|
|
|
|
|
|
|
|
|
|
|
286,641 |
|
Total specialty |
|
|
587,613 |
|
|
|
185,979 |
|
|
|
256,682 |
|
|
|
|
|
|
|
1,030,274 |
|
Total net revenues |
|
|
5,489,499 |
|
|
|
1,224,381 |
|
|
|
256,682 |
|
|
|
|
|
|
|
6,970,562 |
|
Earnings/(loss) before income taxes |
|
|
850,729 |
|
|
|
91,356 |
|
|
|
121,197 |
|
|
|
(253,764 |
) |
|
|
809,518 |
|
Depreciation and amortization |
|
|
254,926 |
|
|
|
62,401 |
|
|
|
61 |
|
|
|
25,602 |
|
|
|
342,990 |
|
Income from equity investees |
|
|
|
|
|
|
32,849 |
|
|
|
36,668 |
|
|
|
|
|
|
|
69,517 |
|
Net impairment and disposition losses |
|
|
6,490 |
|
|
|
13,522 |
|
|
|
2 |
|
|
|
1,151 |
|
|
|
21,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail |
|
$ |
4,103,151 |
|
|
$ |
785,653 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,888,804 |
|
Specialty: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing |
|
|
274,000 |
|
|
|
134,699 |
|
|
|
229,072 |
|
|
|
|
|
|
|
637,771 |
|
Foodservice and other |
|
|
235,936 |
|
|
|
21,076 |
|
|
|
|
|
|
|
|
|
|
|
257,012 |
|
Total specialty |
|
|
509,936 |
|
|
|
155,775 |
|
|
|
229,072 |
|
|
|
|
|
|
|
894,783 |
|
Total net revenues |
|
|
4,613,087 |
|
|
|
941,428 |
|
|
|
229,072 |
|
|
|
|
|
|
|
5,783,587 |
|
Earnings/(loss) before income taxes |
|
|
756,111 |
|
|
|
82,638 |
|
|
|
119,706 |
|
|
|
(253,702 |
) |
|
|
704,753 |
|
Depreciation and amortization |
|
|
209,456 |
|
|
|
48,555 |
|
|
|
87 |
|
|
|
26,237 |
|
|
|
284,335 |
|
Income from equity investees |
|
|
151 |
|
|
|
27,012 |
|
|
|
38,208 |
|
|
|
|
|
|
|
65,371 |
|
Net impairment and disposition
losses/(gains) |
|
|
5,742 |
|
|
|
6,283 |
|
|
|
|
|
|
|
(8 |
) |
|
|
12,017 |
|
|
|
|
(1) |
|
Unallocated corporate includes certain general and administrative expenses, related
depreciation and amortization expenses and amounts included in Net interest and other
(expense)/income on the consolidated statements of earnings. |
The table below represents information by geographic area (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
39 Weeks Ended |
|
|
July 1, |
|
July 2, |
|
July 1, |
|
July 2, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Net revenues from external customers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
1,916,869 |
|
|
$ |
1,625,606 |
|
|
$ |
5,722,527 |
|
|
$ |
4,837,177 |
|
Foreign countries |
|
|
442,376 |
|
|
|
338,067 |
|
|
|
1,248,035 |
|
|
|
946,410 |
|
|
|
|
|
|
Total |
|
$ |
2,359,245 |
|
|
$ |
1,963,673 |
|
|
$ |
6,970,562 |
|
|
$ |
5,783,587 |
|
|
|
|
|
|
No customer accounts for 10% or more of the Companys revenues. Revenues from foreign countries are
based on the geographic location of the customers and consist primarily of revenues from the United
Kingdom and Canada, which together account for approximately 71% of foreign net revenues.
Note 13: Subsequent Event
On August 7, 2007, the Company entered into a credit agreement with the Bank of America, N.A. as
administrative agent, Citibank, N.A. and Goldman Sachs Bank USA, as syndication
agents, and other lenders. The
14
credit
agreement provides for a $400 million unsecured, revolving
364-day credit facility with a
maturity date of August 5, 2008. The Company intends to use the
364-day credit facility for general
corporate purposes, which may include share repurchases. This 364-day credit facility is in
addition to the Companys existing $1.0 billion unsecured five-year credit facility, which matures
in August 2011.
15
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements herein, including anticipated store openings, trends in or expectations
regarding Starbucks Corporations comparable store sales and revenue growth, effective tax rate, cash flow requirements and capital expenditures all
constitute forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Such statements are based on currently available operating, financial and
competitive information and are subject to various risks and uncertainties. Actual future results
and trends may differ materially depending on a variety of factors, including, but not limited to,
coffee, dairy and other raw materials prices and availability, successful execution of internal
performance and expansion plans, fluctuations in United States and international economies and
currencies, ramifications from the war on terrorism, or other international events or developments,
the impact of competitors initiatives, the effect of legal proceedings, and other risks detailed
herein and in Starbucks Corporations other filings with the SEC, including the Item 1A. Risks
Factors section of the 10-K.
A forward-looking statement is neither a prediction nor a guarantee of future events or
circumstances, and those future events or circumstances may not occur. Users should not place undue
reliance on the forward-looking statements, which speak only as of the date of this report. The
Company is under no obligation to update or alter any forward-looking statements, whether as a
result of new information, future events or otherwise.
This information should be read in conjunction with the consolidated financial statements
and the notes included in Item 1 of Part I of this Quarterly Report and the audited consolidated
financial statements and notes, and Managements Discussion and Analysis of Financial Condition and
Results of Operations, contained in the 10-K.
General
Starbucks Corporations fiscal year ends on the Sunday closest to September 30. Fiscal year 2006
had 52 weeks and the fiscal year ending on September 30, 2007 will also include 52 weeks. All
references to store counts, including data for new store openings, are reported net of related
store closures.
Management Overview
During both the 13 and 39 week periods ended July 1, 2007, the Companys continued focus on
execution in all areas of its business, from U.S. and International Company-operated retail
operations to the Companys specialty operations, delivered solid financial performance despite a
challenging environment which included significantly higher dairy costs in the U.S. business.
Management believes that its ability to achieve the balance between growing the core business and
building the foundation for future growth is the key to increasing long-term shareholder value.
Starbucks quarterly and year-to-date fiscal 2007 performance reflects the Companys ongoing
commitment to achieving this balance.
The primary driver of the Companys revenue growth continues to be the opening of new retail
stores, both Company-operated and licensed, in pursuit of the Companys objective to establish
Starbucks as one of the most recognized and respected brands in the world. Starbucks opened 1,956
new stores in the first three quarters of fiscal 2007 and plans to open at least 2,400 net new
stores in fiscal 2007.
In addition to opening new retail stores, Starbucks works to increase revenues generated at new and
existing Company-operated stores by attracting new customers and increasing the frequency of visits
by current customers. The strategy is to increase comparable store sales by continuously improving
the level of customer service, introducing innovative products and improving speed of service
through training, technology and process improvement.
16
Global comparable store sales for Company-operated markets increased by 4% for the 13-week period
ended July 1, 2007, and increased 5% over the first three quarters of fiscal 2007. Comparable store
sales growth for fiscal 2007 is expected to be in the target range of 3% to 7%.
In licensed retail operations, Starbucks shares operating and store development experience to help
licensees improve the profitability of existing stores and build new stores. Internationally, the
Companys strategy is to selectively increase its equity stake in licensed international operations
as these markets develop. In the first quarter of fiscal 2007, the Company purchased a 90% stake in
its previously-licensed operations in Beijing and Tianjin, China.
Starbucks has three reportable segments: United States, International and the Global Consumer
Products Group (CPG).
The United States and International segments both include Company-operated retail stores, licensed
retail stores and foodservice operations. The United States segment has been operating
significantly longer than the International segment and has developed deeper awareness of, and
attachment to, the Starbucks brand and stores among its customer base. As a result, the United
States segment has significantly more stores, higher average sales per store, and higher total
revenues than the International segment. Further, certain market costs, particularly occupancy
costs, are lower in the United States segment compared to the markets of the International segment.
As a result of the relative strength of the brand in the United States segment, the number of
stores, the higher unit volumes, and the lower market costs, the United States segment has a higher
operating margin than the less-developed International segment. The Company believes it has
achieved an appropriate level of annual new store openings
domestically, for the near term. The current pace of
openings of approximately 1,700 per year in the U.S. will allow the Company to continue to grow
revenues while limiting the degree of cannibalization of existing store sales caused by new stores.
Management continues to believe in and intends to capture the substantial opportunity to grow
in the U.S. market.
The Companys International store base continues to increase rapidly and Starbucks is achieving a
growing contribution from established international markets while at the same time investing in
emerging markets, such as China, Brazil and Russia. The Companys newer international markets
require a more extensive support organization, relative to the current levels of revenue and
operating income. The Companys ongoing investments in International infrastructure can be expected
to cause variability in quarterly operating margins for the International segment.
The CPG segment includes the Companys grocery and warehouse club business as well as branded
products operations worldwide. The CPG segment operates primarily through joint ventures and
licensing arrangements with large consumer products business partners, most significantly The North
American Coffee Partnership with the Pepsi-Cola Company for distribution of ready-to-drink
beverages, and with Kraft Foods Inc. for distribution of packaged coffees and teas. This operating
model allows the CPG segment to leverage the business partners existing infrastructures and to
extend the Starbucks brand in an efficient way. Most of the customer revenues from the
ready-to-drink and packaged coffee channels are recognized by the joint venture or licensed
business partner, not by the CPG segment, and the results of the Companys joint ventures are
included on a net basis in Income from equity investees on the consolidated statements
of earnings. As a result, the CPG segment reflects relatively lower revenues, a modest cost
structure, and a resulting higher operating margin, compared to the Companys other two reporting
segments, which consist primarily of retail stores.
The 20% increase in the Companys consolidated total net revenues for the 13-week period ended July
1, 2007, compared to the same period of fiscal 2006, was driven by the combination of more retail
stores, comparable store sales growth of 4% and growth in other business channels. The Company
expects consolidated total net revenue growth of approximately 20% in fiscal 2007.
17
Operating income as a percentage of total net revenues was 10.4% for the 13 weeks ended July 1,
2007 compared to 10.9% for the corresponding period ended July 2, 2006, due to higher cost of sales
including occupancy costs partially offset by leveraging general and administrative expenses, store
operating expenses, and other operating expenses as a percentage of total net revenues. Net
earnings increased by 9% in the 13-week period ended July 1, 2007, compared to the same period in
fiscal 2006.
18
Results of Operations for the 13 Weeks Ended July 1, 2007 and July 2, 2006
CONSOLIDATED RESULTS
The following table presents the consolidated statements of earnings as well as the
percentage relationship to total net revenues of items included in the Companys consolidated
statements of earnings (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
|
|
|
|
|
13 Weeks Ended |
|
|
|
July 1, |
|
|
July 2, |
|
|
% |
|
|
July 1, |
|
|
July 2, |
|
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of total net revenues |
|
STATEMENTS OF EARNINGS DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail |
|
$ |
2,010,772 |
|
|
$ |
1,660,977 |
|
|
|
21.1 |
% |
|
|
85.2 |
% |
|
|
84.6 |
% |
Specialty: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing |
|
|
254,904 |
|
|
|
216,267 |
|
|
|
17.9 |
|
|
|
10.8 |
|
|
|
11.0 |
|
Foodservice and other |
|
|
93,569 |
|
|
|
86,429 |
|
|
|
8.3 |
|
|
|
4.0 |
|
|
|
4.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty |
|
|
348,473 |
|
|
|
302,696 |
|
|
|
15.1 |
|
|
|
14.8 |
|
|
|
15.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
2,359,245 |
|
|
|
1,963,673 |
|
|
|
20.1 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales including occupancy costs |
|
|
1,003,881 |
|
|
|
804,889 |
|
|
|
|
|
|
|
42.6 |
|
|
|
41.0 |
|
Store operating expenses (1) |
|
|
819,212 |
|
|
|
686,602 |
|
|
|
|
|
|
|
34.7 |
|
|
|
35.0 |
|
Other operating expenses (2) |
|
|
76,507 |
|
|
|
69,478 |
|
|
|
|
|
|
|
3.2 |
|
|
|
3.5 |
|
Depreciation and amortization expenses |
|
|
119,409 |
|
|
|
98,539 |
|
|
|
|
|
|
|
5.1 |
|
|
|
5.0 |
|
General and administrative expenses |
|
|
119,525 |
|
|
|
115,258 |
|
|
|
|
|
|
|
5.1 |
|
|
|
5.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal operating
expenses |
|
|
2,138,534 |
|
|
|
1,774,766 |
|
|
|
20.5 |
|
|
|
90.7 |
|
|
|
90.4 |
|
Income from equity investees |
|
|
24,503 |
|
|
|
25,666 |
|
|
|
|
|
|
|
1.1 |
|
|
|
1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
245,214 |
|
|
|
214,573 |
|
|
|
14.3 |
|
|
|
10.4 |
|
|
|
10.9 |
|
Net interest and other (expense)/income |
|
|
(2,241 |
) |
|
|
5,028 |
|
|
|
|
|
|
|
(0.1 |
) |
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
242,973 |
|
|
|
219,601 |
|
|
|
10.6 |
|
|
|
10.3 |
|
|
|
11.2 |
|
Income taxes |
|
|
84,630 |
|
|
|
74,103 |
|
|
|
|
|
|
|
3.6 |
|
|
|
3.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
158,343 |
|
|
$ |
145,498 |
|
|
|
8.8 |
% |
|
|
6.7 |
% |
|
|
7.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As a percentage of related Company-operated retail revenues, store operating
expenses were 40.7% for the 13 weeks ended July 1, 2007, and 41.3% for the 13 weeks ended July
2, 2006. |
|
(2) |
|
As a percentage of related total specialty revenues, other operating expenses were
22.0% for the 13 weeks ended July 1, 2007, and 23.0% for the 13 weeks ended July 2, 2006. |
Net revenues for the 13 weeks ended July 1, 2007, increased 20% to $2.4 billion from $2.0 billion
for the corresponding period of fiscal 2006, driven by increases in both Company-operated retail
revenues and specialty operations. Net revenues are expected to grow approximately 20% in fiscal
2007 compared to fiscal 2006.
During the 13-week period ended July 1, 2007, Starbucks derived 85% of total net revenues from its
Company-operated retail stores. Company-operated retail revenues increased 21% to $2.0 billion for
the 13 weeks ended July 1, 2007, from $1.7 billion for the same period in fiscal 2006. The increase
was primarily attributable to the opening of 1,369 new Company-operated retail stores in the last
12 months and comparable store sales growth of 4% for the 13 weeks ended July 1, 2007. The increase
in comparable store sales was due to a 3% increase in the average value per transaction and a 1%
increase in the number of customer transactions.
The Company derived the remaining 15% of total net revenues from channels outside the
Company-operated retail stores, collectively known as specialty operations. Specialty revenues,
which include licensing revenues and
19
foodservice and other revenues, increased 15% to $348 million for the 13 weeks ended July 1, 2007,
from $303 million for the corresponding period of fiscal 2006.
Licensing revenues, which are derived from retail store licensing arrangements as well as grocery,
warehouse club and certain other branded-product operations, increased 18% to $255 million for the
13 weeks ended July 1, 2007, from $216 million for the corresponding period of fiscal 2006. The
increase was primarily due to higher product sales and royalty revenues from the opening of 1,243
new licensed retail stores in the last 12 months and a 24% increase in licensing revenues from the
Companys Global Consumer Products business.
Foodservice and other revenues increased 8% to $94 million for the 13 weeks ended July 1, 2007,
from $86 million for the corresponding period of fiscal 2006. The increase was primarily
attributable to growth in new and existing accounts in the U.S. foodservice business.
Cost of sales including occupancy costs increased to 42.6% of total net revenues for the 13 weeks
ended July 1, 2007, compared to 41.0% for the corresponding period of fiscal 2006. The increase was
primarily due to a shift in sales mix to higher cost products, the rise in dairy costs, and higher
rent expense.
Store operating expenses as a percentage of Company-operated retail revenues decreased to 40.7% for
the 13 weeks ended July 1, 2007, from 41.3% for the corresponding period of fiscal 2006, primarily
due to controlled discretionary spending.
Other operating expenses (expenses associated with the Companys specialty operations) decreased to
22.0% of total specialty revenues for the 13 weeks ended July 1, 2007, compared to 23.0% in the
corresponding period of fiscal 2006. The decline resulted primarily from lower marketing and
advertising costs in fiscal 2007.
Depreciation and amortization expenses increased to $119 million for the 13 weeks ended July 1,
2007, compared to $99 million for the corresponding period of fiscal 2006. The increase was
primarily due to the opening of 1,369 new Company-operated retail stores in the last 12 months. As
a percentage of total net revenues, depreciation and amortization expenses increased slightly to
5.1% for the 13 weeks ended July 1, 2007, from 5.0% for the corresponding period in fiscal 2006.
General and administrative expenses increased to $120 million for the 13 weeks ended July 1, 2007,
compared to $115 million for the corresponding period of fiscal 2006. The increase was primarily
due to higher payroll-related expenditures in support of continued global growth. As a percentage
of total net revenues, general and administrative expenses decreased to 5.1% for the 13 weeks ended
July 1, 2007, from 5.9% for the corresponding period of fiscal 2006.
Income from equity investees decreased 5% to $25 million for the 13 weeks ended July 1, 2007,
compared to $26 million for the corresponding period of fiscal 2006, primarily due to lower sales
volumes for The North American Coffee Partnership, which produces ready-to-drink beverages,
including Starbucks bottled Frappuccino® coffee drinks and Starbucks
DoubleShot®.
Operating income increased 14% to $245 million for the 13 weeks ended July 1, 2007, compared to
$215 million for the corresponding period of fiscal 2006. Operating margin decreased to 10.4% of
total net revenues for the 13 weeks ended July 1, 2007, from 10.9% for the corresponding period of
fiscal 2006. Higher cost of sales including occupancy costs were offset, in part, by leveraging
general and administrative expenses, store operating expenses, and other operating expenses.
Net interest and other was an expense of $2.2 million for the 13 weeks ended July 1, 2007, compared
to income of $5.0 million for the corresponding period of fiscal 2006, primarily due to a higher
level of borrowings outstanding.
20
Income taxes for the 13 weeks ended July 1, 2007, resulted in an effective tax rate of 34.8%,
compared to 33.7% for the corresponding period of fiscal 2006. The effective tax rate is expected
to be approximately 37% for the full fiscal year of 2007.
Net earnings for the 13 weeks ended July 1, 2007, increased 9% to $158 million from $145 million
for the corresponding period in fiscal 2006. Diluted earnings per share increased to $0.21 for the
13 weeks ended July 1, 2007, compared to $0.18 per share for the comparable period in fiscal 2006.
SEGMENT RESULTS
Segment information is prepared on the basis that the Companys management reviews financial
information for operational decision-making purposes. The following tables summarize the Companys
results of operations by segment (in thousands):
United States
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
13 Weeks Ended |
|
|
July 1, |
|
July 2, |
|
% |
|
July 1, |
|
July 2, |
|
|
2007 |
|
2006 |
|
Change |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of U.S. total net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revenues |
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail |
|
$ |
1,646,234 |
|
|
$ |
1,380,901 |
|
|
|
19.2 |
% |
|
|
89.5 |
% |
|
|
88.7 |
% |
Specialty: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing |
|
|
110,130 |
|
|
|
96,266 |
|
|
|
14.4 |
|
|
|
6.0 |
|
|
|
6.2 |
|
Foodservice and other |
|
|
83,806 |
|
|
|
78,981 |
|
|
|
6.1 |
|
|
|
4.5 |
|
|
|
5.1 |
|
|
|
|
|
|
|
|
|
|
Total specialty |
|
|
193,936 |
|
|
|
175,247 |
|
|
|
10.7 |
|
|
|
10.5 |
|
|
|
11.3 |
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
1,840,170 |
|
|
|
1,556,148 |
|
|
|
18.3 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales including occupancy costs |
|
|
742,232 |
|
|
|
600,597 |
|
|
|
|
|
|
|
40.3 |
|
|
|
38.6 |
|
Store operating expenses (1) |
|
|
682,595 |
|
|
|
582,505 |
|
|
|
|
|
|
|
37.1 |
|
|
|
37.4 |
|
Other operating expenses (2) |
|
|
51,785 |
|
|
|
50,964 |
|
|
|
|
|
|
|
2.8 |
|
|
|
3.3 |
|
Depreciation and amortization expenses |
|
|
89,134 |
|
|
|
72,238 |
|
|
|
|
|
|
|
4.8 |
|
|
|
4.6 |
|
General and administrative expenses |
|
|
21,214 |
|
|
|
24,510 |
|
|
|
|
|
|
|
1.2 |
|
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
Subtotal operating expenses |
|
|
1,586,960 |
|
|
|
1,330,814 |
|
|
|
19.2 |
|
|
|
86.2 |
|
|
|
85.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from equity investees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
253,210 |
|
|
$ |
225,334 |
|
|
|
12.4 |
% |
|
|
13.8 |
% |
|
|
14.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As a percentage of related Company-operated retail revenues, store operating
expenses were 41.5% for the 13 weeks ended July 1, 2007, and 42.2% for the 13 weeks ended July
2, 2006. |
|
(2) |
|
As a percentage of related total specialty revenues, other operating expenses were
26.7% for the 13 weeks ended July 1, 2007, and 29.1% for the 13 weeks ended July 2, 2006. |
The United States operating segment (United States) sells coffee and other beverages,
complementary food, whole bean coffees, and coffee brewing equipment and merchandise primarily
through Company-operated retail stores. Specialty operations within the United States include
licensed retail stores, foodservice accounts and other initiatives related to the Companys core
business.
United States total net revenues increased 18% to $1.8 billion for the 13 weeks ended July 1, 2007,
compared to $1.6 billion for the corresponding period of fiscal 2006.
21
United States Company-operated retail revenues increased 19% to $1.6 billion for the 13 weeks ended
July 1, 2007, compared to $1.4 billion for the corresponding period of fiscal 2006, primarily due
to the opening of 1,116 new Company-operated retail stores in the last 12 months and comparable
store sales growth of 4% for the quarter resulting from a 3% increase in the average value per
transaction and growth in transactions of less than 1%.
Total United States specialty revenues increased 11% to $194 million for the 13 weeks ended July 1,
2007, compared to $175 million in the corresponding period of fiscal 2006. United States licensing
revenues increased 14% to $110 million, compared to $96 million for the corresponding period of
fiscal 2006 primarily due to higher product sales and royalty revenues as a result of opening 777
new licensed retail stores in the last 12 months. United States foodservice and other revenues
increased 6% to $84 million, from $79 million in fiscal 2006, primarily due to growth in new and
existing foodservice accounts.
United States operating income increased 12% to $253 million for the 13 weeks ended July 1, 2007,
compared to $225 million for the same period in fiscal 2006. Operating margin decreased to 13.8% of
related revenues from 14.5% in the corresponding period of fiscal 2006. The decrease was due to
higher cost of sales including occupancy costs, primarily due to higher dairy costs, a shift in
sales mix to higher cost products such as food and merchandise, and higher rent expenses. Partially
offsetting these were lower other operating expenses, lower general and administrative expenses,
and lower store operating expenses as a percentage of total net revenues. The decline in both other
operating expenses and store operating expenses was primarily due to controlled discretionary
spending. General and administrative expenses were lower primarily due to decreased salary and
related benefits expense as well as lower professional fees.
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
13 Weeks Ended |
|
|
July 1, |
|
July 2, |
|
% |
|
July 1, |
|
July 2, |
|
|
2007 |
|
2006 |
|
Change |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of International total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net revenues |
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail |
|
$ |
364,538 |
|
|
$ |
280,076 |
|
|
|
30.2 |
% |
|
|
84.4 |
% |
|
|
83.1 |
% |
Specialty: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing |
|
|
57,653 |
|
|
|
49,665 |
|
|
|
16.1 |
|
|
|
13.3 |
|
|
|
14.7 |
|
Foodservice and other |
|
|
9,763 |
|
|
|
7,448 |
|
|
|
31.1 |
|
|
|
2.3 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
Total specialty |
|
|
67,416 |
|
|
|
57,113 |
|
|
|
18.0 |
|
|
|
15.6 |
|
|
|
16.9 |
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
431,954 |
|
|
|
337,189 |
|
|
|
28.1 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales including occupancy costs |
|
|
210,247 |
|
|
|
162,711 |
|
|
|
|
|
|
|
48.7 |
|
|
|
48.3 |
|
Store operating expenses (1) |
|
|
136,617 |
|
|
|
104,097 |
|
|
|
|
|
|
|
31.6 |
|
|
|
30.9 |
|
Other operating expenses (2) |
|
|
18,364 |
|
|
|
13,329 |
|
|
|
|
|
|
|
4.3 |
|
|
|
3.9 |
|
Depreciation and amortization
expenses |
|
|
21,287 |
|
|
|
17,260 |
|
|
|
|
|
|
|
4.9 |
|
|
|
5.1 |
|
General and administrative expenses |
|
|
24,861 |
|
|
|
20,795 |
|
|
|
|
|
|
|
5.8 |
|
|
|
6.2 |
|
|
|
|
|
|
|
|
|
|
Subtotal operating expenses |
|
|
411,376 |
|
|
|
318,192 |
|
|
|
29.3 |
|
|
|
95.3 |
|
|
|
94.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from equity investees |
|
|
11,909 |
|
|
|
10,109 |
|
|
|
|
|
|
|
2.8 |
|
|
|
3.0 |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
32,487 |
|
|
$ |
29,106 |
|
|
|
11.6 |
% |
|
|
7.5 |
% |
|
|
8.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As a percentage of related Company-operated retail revenues, store operating
expenses were 37.5% for the 13 weeks ended July 1, 2007, and 37.2% for the 13 weeks ended July
2, 2006. |
|
(2) |
|
As a percentage of related total specialty revenues, other operating expenses were
27.2% for the 13 weeks ended July 1, 2007, and 23.3% for the 13 weeks ended July 2, 2006. |
The International operating segment (International) sells coffee and other beverages,
complementary food, whole bean coffees, and coffee brewing equipment and merchandise through
Company-operated retail stores in Canada,
22
the United Kingdom, China, Thailand, Germany, Australia, Singapore, Puerto Rico, Chile and Ireland.
Specialty operations in International primarily include retail store licensing operations in more
than 25 other countries and foodservice accounts in Canada and the United Kingdom. The Companys
International store base continues to increase rapidly and Starbucks is achieving a growing
contribution from established areas of the business while at the same time investing in emerging
markets and channels. Many of the Companys International operations are in early stages of
development that require a more extensive support organization, relative to the current levels of
revenue and operating income, than in the United States. This continuing investment is part of the
Companys long-term, balanced plan for profitable growth.
International total net revenues increased 28% to $432 million for the 13 weeks ended July 1, 2007,
compared to $337 million for the corresponding period of fiscal 2006.
International Company-operated retail revenues increased 30% to $365 million for the 13 weeks ended
July 1, 2007, compared to $280 million for the corresponding period of fiscal 2006. The increase
was primarily due to the opening of 253 new Company-operated retail stores in the last 12 months,
comparable store sales growth of 7% for the quarter and favorable foreign currency exchange for the
British pound sterling. The increase in comparable store sales resulted from a 5% increase in the
number of customer transactions coupled with a 2% increase in the average value per transaction.
Total International specialty revenues increased 18% to $67 million for the 13 weeks ended July 1,
2007, compared to $57 million in the corresponding period of fiscal 2006. The increase was
primarily due to higher product sales and royalty revenues from opening 466 new licensed retail
stores in the last 12 months.
International operating income increased 12% to $32 million for the 13 weeks ended July 1, 2007,
compared to $29 million in the corresponding period of fiscal 2006. Operating margin decreased to
7.5% of related revenues from 8.6% in the corresponding period of fiscal 2006, primarily due to
increased costs associated with store renovation and maintenance expenses and higher rent expenses
as a percentage of total net revenues.
Global Consumer Products Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
13 Weeks Ended |
|
|
July 1, |
|
July 2, |
|
% |
|
July 1, |
|
July 2, |
|
|
2007 |
|
2006 |
|
Change |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of CPG total net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revenues |
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing |
|
$ |
87,121 |
|
|
$ |
70,336 |
|
|
|
23.9 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
Total specialty |
|
|
87,121 |
|
|
|
70,336 |
|
|
|
23.9 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
87,121 |
|
|
|
70,336 |
|
|
|
23.9 |
|
|
|
100.0 |
|
|
|
100.0 |
|
Cost of sales |
|
|
51,402 |
|
|
|
41,581 |
|
|
|
|
|
|
|
59.0 |
|
|
|
59.1 |
|
Other operating
expenses |
|
|
6,358 |
|
|
|
5,185 |
|
|
|
|
|
|
|
7.3 |
|
|
|
7.4 |
|
Depreciation and
amortization expenses |
|
|
18 |
|
|
|
26 |
|
|
|
|
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
Subtotal
operating
expenses |
|
|
57,778 |
|
|
|
46,792 |
|
|
|
23.5 |
|
|
|
66.3 |
|
|
|
66.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from equity
investees |
|
|
12,594 |
|
|
|
15,557 |
|
|
|
|
|
|
|
14.4 |
|
|
|
22.1 |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
41,937 |
|
|
$ |
39,101 |
|
|
|
7.3 |
% |
|
|
48.1 |
% |
|
|
55.6 |
% |
|
|
|
|
|
|
|
|
|
23
The Global Consumer Products Group (CPG) sells a selection of whole bean and ground coffees as
well as a selection of premium Tazo® teas through licensing arrangements in United
States and international markets. CPG also produces and sells ready-to-drink beverages which
include, among others, Starbucks bottled Frappuccino® coffee drinks, Starbucks
DoubleShot® espresso drinks, Discoveries products, Starbucks® superpremium
ice creams and Starbucks Coffee and Cream Liqueurs through its joint ventures and marketing and
distribution agreements.
CPG total net revenues increased 24% to $87 million for the 13 weeks ended July 1, 2007, compared
to $70 million for the corresponding period of fiscal 2006. The increase was primarily due to
increased sales of U.S. packaged coffee and tea as well as increased product sales and royalties in
the international ready-to-drink business.
CPG operating income increased by 7 percent to $42 million for the 13 weeks ended July 1, 2007,
compared to $39 million in the corresponding period of fiscal 2006. Operating margin decreased to
48.1% of related revenues, from 55.6% in fiscal 2006, primarily due to lower sales volumes for The
North American Coffee Partnership, which produces ready-to-drink beverages, including Starbucks
bottled Frappuccino® and Starbucks DoubleShot® in the U.S.
Unallocated Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
13 Weeks Ended |
|
|
July 1, |
|
July 2, |
|
% |
|
July 1, |
|
July 2, |
|
|
2007 |
|
2006 |
|
Change |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of total net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revenues |
Depreciation and amortization expenses |
|
$ |
8,970 |
|
|
$ |
9,015 |
|
|
|
|
|
|
|
0.4 |
% |
|
|
0.5 |
% |
General and administrative expenses |
|
|
73,450 |
|
|
|
69,953 |
|
|
|
|
|
|
|
3.1 |
|
|
|
3.5 |
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
$ |
(82,420 |
) |
|
$ |
(78,968 |
) |
|
|
4.4 |
% |
|
|
(3.5 |
%) |
|
|
(4.0 |
%) |
|
|
|
|
|
|
|
|
|
Unallocated corporate expenses pertain to corporate administrative functions that support but are
not specifically attributable to the Companys operating segments, and include related depreciation
and amortization expenses.
Total unallocated corporate expenses as a percentage of total net revenues decreased to 3.5% for
the 13 weeks ended July 1, 2007, from 4.0% for the corresponding period of 2006, primarily due to
disciplined expense management.
24
Results of Operations for the 39 Weeks Ended July 1, 2007 and July 2, 2006
CONSOLIDATED RESULTS
The following table presents the consolidated statements of earnings as well as the percentage
relationship to total net revenues of items included in the Companys consolidated
statements of earnings (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39 Weeks Ended |
|
|
|
|
|
|
39 Weeks Ended |
|
|
|
July 1, |
|
|
July 2, |
|
|
% |
|
|
July 1, |
|
|
July 2, |
|
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of total net revenues |
|
STATEMENTS OF EARNINGS DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail |
|
$ |
5,940,288 |
|
|
$ |
4,888,804 |
|
|
|
21.5 |
% |
|
|
85.2 |
% |
|
|
84.5 |
% |
Specialty: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing |
|
|
743,633 |
|
|
|
637,771 |
|
|
|
16.6 |
|
|
|
10.7 |
|
|
|
11.0 |
|
Foodservice and other |
|
|
286,641 |
|
|
|
257,012 |
|
|
|
11.5 |
|
|
|
4.1 |
|
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty |
|
|
1,030,274 |
|
|
|
894.783 |
|
|
|
15.1 |
|
|
|
14.8 |
|
|
|
15.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
6,970,562 |
|
|
|
5,783,587 |
|
|
|
20.5 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales including occupancy costs |
|
|
2,933,450 |
|
|
|
2,343,800 |
|
|
|
|
|
|
|
42.1 |
|
|
|
40.5 |
|
Store operating expenses (1) |
|
|
2,372,164 |
|
|
|
1,974,041 |
|
|
|
|
|
|
|
34.0 |
|
|
|
34.2 |
|
Other operating expenses (2) |
|
|
224,706 |
|
|
|
192,274 |
|
|
|
|
|
|
|
3.2 |
|
|
|
3.3 |
|
Depreciation and amortization expenses |
|
|
342,990 |
|
|
|
284,335 |
|
|
|
|
|
|
|
4.9 |
|
|
|
4.9 |
|
General and administrative expenses |
|
|
360,857 |
|
|
|
358,194 |
|
|
|
|
|
|
|
5.2 |
|
|
|
6.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal operating expenses |
|
|
6,234,167 |
|
|
|
5,152,644 |
|
|
|
21.0 |
|
|
|
89.4 |
|
|
|
89.1 |
|
Income from equity investees |
|
|
69,517 |
|
|
|
65,371 |
|
|
|
|
|
|
|
1.0 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
805,912 |
|
|
|
696,314 |
|
|
|
15.7 |
|
|
|
11.6 |
|
|
|
12.0 |
|
Net interest and other income |
|
|
3,606 |
|
|
|
8,439 |
|
|
|
|
|
|
|
0.0 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
809,518 |
|
|
|
704,753 |
|
|
|
14.9 |
|
|
|
11.6 |
|
|
|
12.2 |
|
Income taxes |
|
|
295,383 |
|
|
|
257,783 |
|
|
|
|
|
|
|
4.2 |
|
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
514,135 |
|
|
$ |
446,970 |
|
|
|
15.0 |
% |
|
|
7.4 |
% |
|
|
7.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As a percentage of related Company-operated retail revenues, store operating
expenses were 39.9% for the 39 weeks ended July 1, 2007, and 40.4% for the 39 weeks ended July
2, 2006. |
|
(2) |
|
As a percentage of related total specialty revenues, other operating expenses were
21.8% for the 39 weeks ended July 1, 2007, and 21.5% for the 39 weeks ended July 2, 2006. |
Net revenues for the 39 weeks ended July 1, 2007, increased 21% to $7.0 billion from $5.8 billion
for the corresponding period of fiscal 2006, driven by increases in both Company-operated retail
revenues and specialty operations. Net revenues are expected to grow approximately 20% in fiscal
2007 compared to fiscal 2006.
During the 39-week period ended July 1, 2007, Starbucks derived 85% of total net revenues from its
Company-operated retail stores. Company-operated retail revenues increased 22% to $5.9 billion for
the 39 weeks ended July 1, 2007, from $4.9 billion for the same period in fiscal 2006. The increase
was primarily attributable to the opening of 1,369 new Company-operated retail stores in the last
12 months and comparable store sales growth of 5% for the 39 weeks ended July 1, 2007. The increase
in comparable store sales was due to a 3% increase in the average value per transaction and a 2%
increase in the number of customer transactions.
The Company derived the remaining 15% of total net revenues from its specialty operations.
Specialty revenues, which include licensing revenues and foodservice and other revenues, increased
15% to $1.0 billion for the 39 weeks ended July 1, 2007, from $895 million for the corresponding
period of fiscal 2006.
25
Licensing revenues, which are derived from retail store licensing arrangements as well as grocery,
warehouse club and certain other branded-product operations, increased 17% to $744 million for the
39 weeks ended July 1, 2007, from $638 million for the corresponding period of fiscal 2006. The
increase was primarily due to higher product sales and royalty revenues from the opening of 1,243
new licensed retail stores in the last 12 months.
Foodservice and other revenues increased 12% to $287 million for the 39 weeks ended July 1, 2007,
from $257 million for the corresponding period of fiscal 2006. The increase was primarily
attributable to growth in new and existing accounts in the U.S. foodservice business.
Cost of sales including occupancy costs increased to 42.1% of total net revenues for the 39 weeks
ended July 1, 2007, compared to 40.5% for the corresponding period of fiscal 2006. The increase was
primarily due to a shift in sales mix to higher cost products, higher rent expense, as well as
increased distribution costs due to the Companys expanding store base and food programs.
Store operating expenses as a percentage of Company-operated retail revenues decreased to 39.9% for
the 39 weeks ended July 1, 2007, from 40.4% for the corresponding period of fiscal 2006. The
decrease was due to higher provisions for incentive compensation in the prior year due to
exceptionally strong performance as well as controlled discretionary spending in fiscal 2007. These
reductions were offset in part by higher payroll-related expenditures in the U.S. in fiscal 2007,
stemming from the Companys October 2006 wage increase for hourly store partners and the second
quarter salary increase for store management partners.
Other operating expenses, expenses associated with the Companys specialty operations, increased to
21.8% of total specialty revenues for the 39 weeks ended July 1, 2007, compared to 21.5% in the
corresponding period of fiscal 2006. The increase was primarily due to increased payroll-related
expenditures to support the growth in the International licensed stores operations.
Depreciation and amortization expenses increased to $343 million for the 39 weeks ended July 1,
2007, compared to $284 million for the corresponding period of fiscal 2006. The increase was
primarily due to the opening of 1,369 new Company-operated retail stores in the last 12 months. As
a percentage of total net revenues, depreciation and amortization expenses were 4.9% for both
periods.
General and administrative expenses increased to $361 million for the 39 weeks ended July 1, 2007,
compared to $358 million for the corresponding period of fiscal 2006. This increase was primarily
due to increased payroll-related expenditures and higher professional fees in support of continued
global growth and systems infrastructure development in the current year, partially offset by
unusually high charitable contributions in the prior year. As a percentage of total net revenues,
general and administrative expenses decreased to 5.2% for the 39 weeks ended July 1, 2007, from
6.2% for the corresponding period of fiscal 2006.
Income from equity investees increased 6% to $70 million for the 39 weeks ended July 1, 2007,
compared to $65 million for the corresponding period of fiscal 2006. The increase was primarily due
to higher equity income from international investees.
Operating income increased 16% to $806 million for the 39 weeks ended July 1, 2007, compared to
$696 million for the corresponding period of fiscal 2006. Operating margin decreased to 11.6% of
total net revenues for the 39 weeks ended July 1, 2007, compared to 12.0% for the corresponding
period of fiscal 2006, primarily due to higher cost of sales including occupancy costs, partially
offset by lower general and administrative expenses and store operating expenses as a percentage of
total net revenues.
Net interest and other income decreased to $3.6 million for the 39 weeks ended July 1, 2007,
compared to $8.4 million in the corresponding period of fiscal 2006. This decrease was primarily
due to increased interest expense due to a higher level of borrowings outstanding, partially offset
by foreign exchange gains in the current year compared to foreign exchange losses in the prior
year.
26
Income taxes for the 39 weeks ended July 1, 2007, resulted in an effective tax rate of 36.5%,
compared to 36.6% for the corresponding period of fiscal 2006. The effective tax rate is expected
to be approximately 37% for the full fiscal year of 2007.
Net earnings for the 39 weeks ended July 1, 2007, increased 15% to $514 million from $447 million
for the same period of fiscal 2006. Diluted earnings per share increased to $0.66 for the 39 weeks
ended July 1, 2007, compared to $0.56 per share for the comparable period in fiscal 2006.
SEGMENT RESULTS
Segment information is prepared on the basis that the Companys management reviews financial
information for operational decision-making purposes. The following tables summarize the Companys
results of operations by segment (in thousands):
United States
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39 Weeks Ended |
|
39 Weeks Ended |
|
|
July 1, |
|
July 2, |
|
% |
|
July 1, |
|
July 2, |
|
|
2007 |
|
2006 |
|
Change |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of U.S. total net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revenues |
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail |
|
$ |
4,901,886 |
|
|
$ |
4,103,151 |
|
|
|
19.5 |
% |
|
|
89.3 |
|
|
|
88.9 |
% |
Specialty: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing |
|
|
328,229 |
|
|
|
274,000 |
|
|
|
19.8 |
|
|
|
6.0 |
|
|
|
6.0 |
|
Foodservice and other |
|
|
259,384 |
|
|
|
235,936 |
|
|
|
9.9 |
|
|
|
4.7 |
|
|
|
5.1 |
|
|
|
|
|
|
|
|
|
|
Total specialty |
|
|
587,613 |
|
|
|
509,936 |
|
|
|
15.2 |
|
|
|
10.7 |
|
|
|
11.1 |
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
5,489,499 |
|
|
|
4,613,087 |
|
|
|
19.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales including occupancy costs |
|
|
2,181,310 |
|
|
|
1,757,307 |
|
|
|
|
|
|
|
39.7 |
|
|
|
38.1 |
|
Store operating expenses (1) |
|
|
1,984,763 |
|
|
|
1,679,368 |
|
|
|
|
|
|
|
36.2 |
|
|
|
36.4 |
|
Other operating expenses (2) |
|
|
155,930 |
|
|
|
143,180 |
|
|
|
|
|
|
|
2.8 |
|
|
|
3.1 |
|
Depreciation and amortization expenses |
|
|
254,926 |
|
|
|
209,456 |
|
|
|
|
|
|
|
4.7 |
|
|
|
4.5 |
|
General and administrative expenses |
|
|
66,624 |
|
|
|
69,630 |
|
|
|
|
|
|
|
1.2 |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
Subtotal operating expenses |
|
|
4,643,553 |
|
|
|
3,858,941 |
|
|
|
20.3 |
|
|
|
84.6 |
|
|
|
83.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from equity investees |
|
|
|
|
|
|
151 |
|
|
|
|
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
845,946 |
|
|
$ |
754,297 |
|
|
|
12.2 |
% |
|
|
15.4 |
% |
|
|
16.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As a percentage of related Company-operated retail revenues, store operating
expenses were 40.5% for the 39 weeks ended July 1, 2007, and 40.9% for the 39 weeks ended July
2, 2006. |
|
(2) |
|
As a percentage of related total specialty revenues, other operating expenses were
26.5% for the 39 weeks ended July 1, 2007, and 28.1% for the 39 weeks ended July 2, 2006. |
United States total net revenues increased 19% to $5.5 billion for the 39 weeks ended July 1, 2007,
compared to $4.6 billion for the corresponding period of fiscal 2006.
United States Company-operated retail revenues increased 19% to $4.9 billion for the 39 weeks ended
July 1, 2007, compared to $4.1 billion for the corresponding period of fiscal 2006, primarily due
to the opening of 1,116 new Company-operated retail stores in the last 12 months and comparable
store sales growth of 4% for the 39 weeks ended July 1, 2007. The increase in comparable store
sales was due to a 3% increase in the average value per transaction and a 1% increase in the number
of customer transactions.
27
Total United States specialty revenues increased 15% to $588 million for the 39 weeks ended July 1,
2007, compared to $510 million in the corresponding period of fiscal 2006. United States licensing
revenues increased 20% to $328 million, compared to $274 million for the corresponding period of
fiscal 2006. The increase was primarily due to higher product sales and royalty revenues as a
result of opening 777 new licensed retail stores in the last 12 months. United States foodservice
and other revenues increased 10% to $259 million, from $236 million in fiscal 2006, primarily due
to growth in new and existing foodservice accounts.
United States operating income increased by 12% to $846 million for the 39 weeks ended July 1,
2007, compared to $754 million for the same period in fiscal 2006. Operating margin decreased to
15.4% of related revenues from 16.4% in the corresponding period of fiscal 2006, primarily due to
higher cost of sales including occupancy costs. Cost of sales including occupancy costs increased
primarily due to a shift in sales mix to higher cost products such as food and merchandise,
increased distribution costs due to the expansion of the Companys store base and food programs,
and higher rent expense. Partially offsetting this was lower general and administrative expenses,
as well as lower other operating expense as a percentage of total net revenues, both due primarily
to controlled discretionary spending in fiscal 2007.
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39 Weeks Ended |
|
39 Weeks Ended |
|
|
July 1, |
|
July 2, |
|
% |
|
July 1, |
|
July 2, |
|
|
2007 |
|
2006 |
|
Change |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of International total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net revenues |
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail |
|
$ |
1,038,402 |
|
|
$ |
785,653 |
|
|
|
32.2 |
% |
|
|
84.8 |
% |
|
|
83.5 |
% |
Specialty: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing |
|
|
158,722 |
|
|
|
134,699 |
|
|
|
17.8 |
|
|
|
13.0 |
|
|
|
14.3 |
|
Foodservice and other |
|
|
27,257 |
|
|
|
21,076 |
|
|
|
29.3 |
|
|
|
2.2 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
Total specialty |
|
|
185,979 |
|
|
|
155,775 |
|
|
|
19.4 |
|
|
|
15.2 |
|
|
|
16.5 |
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
1,224,381 |
|
|
|
941,428 |
|
|
|
30.1 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales including occupancy costs |
|
|
599,542 |
|
|
|
452,955 |
|
|
|
|
|
|
|
49.0 |
|
|
|
48.1 |
|
Store operating expenses (1) |
|
|
387,401 |
|
|
|
294,673 |
|
|
|
|
|
|
|
31.6 |
|
|
|
31.3 |
|
Other operating expenses (2) |
|
|
49,282 |
|
|
|
35,145 |
|
|
|
|
|
|
|
4.0 |
|
|
|
3.7 |
|
Depreciation and amortization
expenses |
|
|
62,401 |
|
|
|
48,555 |
|
|
|
|
|
|
|
5.1 |
|
|
|
5.2 |
|
General and administrative expenses |
|
|
71,914 |
|
|
|
55,166 |
|
|
|
|
|
|
|
5.9 |
|
|
|
5.9 |
|
|
|
|
|
|
|
|
|
|
Subtotal operating expenses |
|
|
1,170,540 |
|
|
|
886,494 |
|
|
|
32.0 |
|
|
|
95.6 |
|
|
|
94.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from equity investees |
|
|
32,849 |
|
|
|
27,012 |
|
|
|
|
|
|
|
2.7 |
|
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
86,690 |
|
|
$ |
81,946 |
|
|
|
5.8 |
% |
|
|
7.1 |
% |
|
|
8.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As a percentage of related Company-operated retail revenues, store operating
expenses were 37.3% for the 39 weeks ended July 1, 2007, and 37.5% for the 39 weeks ended July
2, 2006. |
|
(2) |
|
As a percentage of related total specialty revenues, other operating expenses were
26.5% for the 39 weeks ended July 1, 2007, and 22.6% for the 39 weeks ended July 2, 2006. |
International total net revenues increased 30% to $1.2 billion for the 39 weeks ended July 1, 2007,
compared to $941 million for the corresponding period of fiscal 2006.
International Company-operated retail revenues increased 32% to $1.0 billion for the 39 weeks ended
July 1, 2007, compared to $786 million for the corresponding period of fiscal 2006. The increase
was primarily due to the opening of 253 new Company-operated retail stores in the last 12 months,
comparable store sales growth of 7% for the 39 weeks ended July 1, 2007 and favorable foreign
currency exchange for the British pound sterling. The increase in comparable store sales resulted
from a 5% increase in the number of customer transactions coupled with a 2% increase in the average
value per transaction.
28
Total International specialty revenues increased 19% to $186 million for the 39 weeks ended July 1,
2007, compared to $156 million in the corresponding period of fiscal 2006. The increase was
primarily due to higher product sales and royalty revenues from opening 466 new licensed retail
stores in the last 12 months and growth in new and existing foodservice accounts.
International operating income increased 6% to $87 million for the 39 weeks ended July 1, 2007,
compared to $82 million in the corresponding period of fiscal 2006. Operating margin decreased to
7.1% of related revenues from 8.7% in the corresponding period of fiscal 2006, primarily due to
higher cost of sales including occupancy costs, higher store operating expenses and higher other
operating expenses. The increase in cost of sales including occupancy costs was primarily due to
accounting corrections totaling $3.4 million in the first fiscal quarter of 2007, and to a shift in
sales to higher cost products such as food and merchandise. Higher store and other operating
expenses resulted from increased payroll-related expenditures to support continued rapid
international store growth.
Global Consumer Products Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39 Weeks Ended |
|
39 Weeks Ended |
|
|
July 1, |
|
July 2, |
|
% |
|
July 1, |
|
July 2, |
|
|
2007 |
|
2006 |
|
Change |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of CPG total net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revenues |
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing |
|
$ |
256,682 |
|
|
$ |
229,072 |
|
|
|
12.1 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
Total specialty |
|
|
256,682 |
|
|
|
229,072 |
|
|
|
12.1 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
256,682 |
|
|
|
229,072 |
|
|
|
12.1 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
152,598 |
|
|
|
133,538 |
|
|
|
|
|
|
|
59.5 |
|
|
|
58.3 |
|
Other operating
expenses |
|
|
19,494 |
|
|
|
13,949 |
|
|
|
|
|
|
|
7.6 |
|
|
|
6.1 |
|
Depreciation and
amortization expenses |
|
|
61 |
|
|
|
87 |
|
|
|
|
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
Subtotal
operating
expenses |
|
|
172,153 |
|
|
|
147,574 |
|
|
|
16.7 |
|
|
|
67.1 |
|
|
|
64.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from equity
investees |
|
|
36,668 |
|
|
|
38,208 |
|
|
|
|
|
|
|
14.3 |
|
|
|
16.7 |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
121,197 |
|
|
$ |
119,706 |
|
|
|
1.2 |
% |
|
|
47.2 |
% |
|
|
52.3 |
% |
|
|
|
|
|
|
|
|
|
CPG total net revenues increased 12% to $257 million for the 39 weeks ended July 1, 2007, compared
to $229 million for the corresponding period of fiscal 2006. The increase was primarily due to
higher product sales and royalties in the International ready-to-drink businesses as well as an
increase in product sales in both the U.S. and international packaged coffee and tea businesses
through grocery and warehouse club channels.
CPG operating income increased slightly to $121 million for the 39 weeks ended July 1, 2007,
compared to $120 million for the corresponding period of fiscal 2006. Operating margin decreased to
47.2% of related revenues, from 52.3% in fiscal 2006, primarily due to lower income from equity
investees and higher other operating expenses. Lower income from equity investees was due to
decreased sales volumes for The North American Coffee Partnership, which produces ready-to-drink
beverages, including Starbucks bottled Frappuccino® and Starbucks DoubleShot® in the U.S. Other
operating expenses increased primarily due to higher marketing expenditures to support continued
international expansion of ready-to-drink beverages.
29
Unallocated Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39 Weeks Ended |
|
39 Weeks Ended |
|
|
July 1, |
|
July 2, |
|
% |
|
July 1, |
|
July 2, |
|
|
2007 |
|
2006 |
|
Change |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of total net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revenues |
Depreciation and amortization expenses |
|
$ |
25,602 |
|
|
$ |
26,237 |
|
|
|
|
|
|
|
0.4 |
% |
|
|
0.5 |
% |
General and administrative expenses |
|
|
222,319 |
|
|
|
233,398 |
|
|
|
|
|
|
|
3.2 |
|
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
$ |
(247,921 |
) |
|
$ |
(259,635 |
) |
|
|
(4.5 |
%) |
|
|
(3.6 |
%) |
|
|
(4.5 |
%) |
|
|
|
|
|
|
|
|
|
Total unallocated corporate expenses as a percentage of total net revenues decreased to 3.6% for
the 39 weeks ended July 1, 2007, from 4.5% for the corresponding period of 2006. The decrease was
primarily due to higher provisions for incentive compensation in the prior year due to exceptional
performance and unusually high charitable contributions in the prior year.
Liquidity and Capital Resources
The following table represents components of the Companys most liquid assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 1, |
|
|
October 1, |
|
|
|
2007 |
|
|
2006 |
|
Cash and cash equivalents |
|
$ |
172,789 |
|
|
$ |
312,606 |
|
Short-term investments available-for-sale securities |
|
|
85,956 |
|
|
|
87,542 |
|
Short-term investments trading securities |
|
|
71,278 |
|
|
|
53,496 |
|
Long-term investments available-for-sale securities |
|
|
15,980 |
|
|
|
5,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and liquid investments |
|
$ |
346,003 |
|
|
$ |
459,455 |
|
|
|
|
|
|
|
|
The Company manages its cash and liquid investments in order to internally
fund operating needs and make scheduled payments on short-term borrowings.
The Company intends to use its cash and liquid investments, including any borrowings under its $1
billion commercial paper program, which is backstopped by the existing revolving credit facility,
and under its recently-announced $400 million, 364-day credit facility, to invest in its core
businesses and other new business opportunities related to its core businesses, repay short-term
indebtedness, selectively repurchase shares and for other general corporate purposes. The Company
may use its available cash resources to make proportionate capital contributions to its equity
method and cost method investees, as well as purchase larger ownership interests in selected equity
method investees and licensed operations, particularly in international markets. Management
believes that strong cash flow generated from operations, existing cash and liquid investments, as
well as borrowing capacity under the commercial paper program and the
364-day credit facility should
be sufficient to finance capital requirements for its core businesses for the foreseeable future.
Management is currently evaluating a range of alternatives for raising long-term financing to
enable Starbucks to pay down short-term debt and take advantage of opportunities for repurchasing
shares. Any funding would be consistent with the Companys capital structure strategy. In
determining the appropriate capital structure for the Company,
management considers, among other things, how additional
debt could reduce its cost of capital when used to fund increased distributions to shareholders in
the form of stock repurchases. The Company also evaluates its degree of cash flow risk and how much
financial flexibility should be retained for future investment opportunities given its high growth
rate.
Depending on available liquidity and market conditions, Starbucks may repurchase shares of its
common stock under its authorized share repurchase program. A portion of share repurchases in the
past have been funded using the Companys $1 billion credit facility. There were no outstanding
borrowings under the facility as of July 1, 2007,
30
although letters of credit given were $13 million as of July 1, 2007. The Company commenced using
its commercial paper program during its fiscal third quarter, and $880 million was outstanding as
of July 1, 2007. As of July 1, 2007, $107 million of capacity was available under the combined
facility and commercial paper program. On August 7, 2007, the
closing of the 364-day credit facility
provided an additional $400 million of liquidity, which can be used for share repurchases among
other uses. Significant new joint ventures, acquisitions, and/or other new business opportunities
may require additional outside funding.
Other than for normal operating expenses, cash requirements for the remainder of fiscal 2007 are
expected to consist primarily of capital expenditures for new Company-operated retail stores and
the remodeling and refurbishment of existing Company-operated retail stores, as well as potential
increased investments in International licensees and for additional share repurchases, if any.
Management expects capital expenditures to total approximately $1.0 billion in fiscal 2007,
primarily driven by new store development and existing store renovations.
Cash provided by operating activities totaled $1.0 billion for the 39 weeks ended July 1, 2007. Net
earnings provided $514 million and the effect of noncash depreciation and amortization expenses
further increased cash provided by operating activities by $361 million. In addition, growth in
Starbucks Card balances provided $77 million in deferred revenue.
Cash used by investing activities for the 39 weeks ended July 1, 2007 totaled $883 million. Net
capital additions to property, plant and equipment used $772 million, primarily from opening 1,016
new Company-operated retail stores and remodeling certain existing stores during the first three
quarters of fiscal 2007. This amount includes the effect of the net change in non-cash capital
accruals totaling $46 million. During the 39 weeks ended July 1, 2007, the Company used $53
million, net of cash acquired, to purchase 90% equity ownership in the Companys previously
licensed operations in Beijing and Tianjin, China and an additional 19% ownership in its South
China operations.
Cash used by financing activities for the 39 weeks ended July 1, 2007 totaled $303 million. Cash
used to repurchase shares of the Companys common stock totaled $671 million. Share repurchases
depend on available liquidity, market conditions, capital requirements for the Companys core
business and other factors. As of July 1, 2007, a total of up to 26.1 million shares remained
available for repurchase, under existing authorizations.
Partially offsetting cash used for share repurchases, net proceeds under the Companys commercial
paper program and revolving credit facility were $180 million during the 39 weeks ended July 1,
2007. In addition, there were proceeds of $137 million from the exercise of employee stock options
and the sale of the Companys common stock from employee stock purchase plans. As options granted
are exercised, the Company will continue to receive proceeds and a tax deduction; however, the
amounts and the timing cannot be predicted.
Store Data
The following table summarizes the Companys retail store information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net stores opened during the period |
|
|
|
|
13-week period |
|
39-week period |
|
Stores open as of |
|
|
July 1, |
|
July 2, |
|
July 1, |
|
July 2, |
|
July 1, |
|
July 2, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
United States: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated stores
(1) |
|
|
285 |
|
|
|
211 |
|
|
|
838 |
|
|
|
532 |
|
|
|
6,566 |
|
|
|
5,450 |
|
Licensed stores |
|
|
196 |
|
|
|
187 |
|
|
|
561 |
|
|
|
517 |
|
|
|
3,729 |
|
|
|
2,952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
481 |
|
|
|
398 |
|
|
|
1,399 |
|
|
|
1,049 |
|
|
|
10,295 |
|
|
|
8,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated stores
(1) |
|
|
60 |
|
|
|
44 |
|
|
|
178 |
|
|
|
158 |
|
|
|
1,613 |
|
|
|
1,360 |
|
Licensed stores (1) |
|
|
127 |
|
|
|
117 |
|
|
|
379 |
|
|
|
336 |
|
|
|
2,488 |
|
|
|
2,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
187 |
|
|
|
161 |
|
|
|
557 |
|
|
|
494 |
|
|
|
4,101 |
|
|
|
3,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
668 |
|
|
|
559 |
|
|
|
1,956 |
|
|
|
1,543 |
|
|
|
14,396 |
|
|
|
11,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
International store data has been adjusted for the acquisition of the Beijing
operations by reclassifying historical information from Licensed Stores to Company-operated
Stores. United States store data was also adjusted to align with the Hawaii operations segment
change by reclassifying historical information from International Company-operated stores to
the United States. |
31
Starbucks plans to open approximately 2,400 new stores on a global basis in fiscal 2007. In the
United States, Starbucks plans to open approximately 1,000 Company-operated locations and 700
licensed locations. In International markets, Starbucks plans to open approximately 300
Company-operated stores and 400 licensed stores.
Contractual Obligations
There have been no material changes during the period covered by this report, outside of the
ordinary course of the Companys business, to the contractual obligations specified in the table of
contractual obligations included in the section Managements Discussion and Analysis of Financial
Condition and Results of Operations included in the 10-K.
Off-Balance Sheet Arrangement
The Company has unconditionally guaranteed the repayment of certain Japanese yen-denominated bank
loans and related interest and fees of an unconsolidated equity investee, Starbucks Japan. The
guarantees continue until the loans, including accrued interest and fees, have been paid in full,
with the final loan amount due in 2014. The maximum amount is limited to the sum of unpaid
principal and interest amounts, as well as other related expenses. These amounts will vary based on
fluctuations in the yen foreign exchange rate. As of July 1, 2007, the maximum amount of the
guarantees was approximately $5.1 million. Since there has been no modification of these loan
guarantees subsequent to the Companys adoption of FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indebtedness of Others, Starbucks
has applied the disclosure provisions only and has not recorded the guarantees on its consolidated balance sheet.
Commodity Prices, Availability and General Risk Conditions
The Company manages its exposure to various risks
within the consolidated financial
statements according to an umbrella risk management policy. Under this policy, market-based risks,
including commodity costs and foreign currency exchange rates, are quantified and evaluated for
potential mitigation strategies, such as entering into hedging transactions. Additionally, this
policy restricts, among other things, the amount of market-based risk the Company will tolerate
before implementing approved hedging strategies and prohibits speculative trading activity.
The Company purchases significant amounts of coffee and dairy products to support the needs of its
Company-operated retail stores. The price and availability of these commodities directly impacts
the Companys results of operations and can be expected to impact its future results of operations.
For additional details see Product Supply in Item 1, as well as Risk Factors in Item 1A of the
10-K.
Seasonality and Quarterly Results
The Companys business is subject to seasonal fluctuations. Significant portions of the Companys
net revenues and profits are realized during the first quarter of the Companys fiscal year, which
includes the holiday season. In addition, quarterly results are affected by the timing of the
opening of new stores, and the Companys rapid growth may conceal the impact of other seasonal
influences. Because of the seasonality of the Companys business, results for any quarter are not
necessarily indicative of the results that may be achieved for the full fiscal year.
32
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes,
an interpretation of FASB Statement No. 109 (FIN 48), which seeks to reduce the diversity in
practice associated with the accounting and reporting for uncertainty in income tax positions. This
Interpretation prescribes a comprehensive model for the financial statement recognition,
measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken
in income tax returns. FIN 48 is effective for fiscal years beginning after December 15, 2006 and
the Company will adopt the new requirements in its first fiscal quarter of 2008. The cumulative
effects, if any, of adopting FIN 48 will be recorded as an adjustment to retained earnings as of
the beginning of the period of adoption. The Company is currently evaluating the impact, if any, of
adopting FIN 48 on its consolidated financial statements.
In September 2006, the FASB issued SFAS 157, Fair Value Measurements (SFAS 157), which defines
fair value, establishes a framework for measuring fair value in generally accepted accounting
principles and expands disclosures about fair value measurements. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. Early adoption is permitted. Starbucks must adopt these new requirements
no later than its first fiscal quarter of 2009. Starbucks has not yet determined the effect on the
Companys consolidated financial statements, if any, upon adoption of SFAS 157, or if it
will adopt the requirements prior to the first fiscal quarter of 2009.
In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, Considering the Effects
of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements
(SAB 108). The intent of SAB 108 is to reduce diversity in practice for the method companies use
to quantify financial statement misstatements, including the effect of prior year uncorrected
errors. SAB 108 establishes an approach that requires quantification of financial statement errors
using both an income statement and a cumulative balance sheet approach. SAB 108 is effective for
annual financial statements for fiscal years ending after November 15, 2006. The adoption of SAB
108 is not expected to have a significant impact on the Companys consolidated financial
statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). SFAS 159 permits companies to choose to measure many financial
instruments and certain other items at fair value. SFAS 159 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, or Starbucks first fiscal quarter of
2009. Early adoption is permitted. Starbucks has not yet determined if it will elect to apply any
of the provisions of SFAS 159 and what the effect of adoption of the statement would have, if any,
on its consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk related to foreign currency exchange rates, equity security
prices and changes in interest rates.
Foreign Currency Exchange Risk
As of July 1, 2007, the Company had forward foreign exchange contracts that qualify as cash flow
hedges under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, to hedge
portions of anticipated international revenue streams and inventory purchases. In addition,
Starbucks had forward foreign exchange contracts that qualify as accounting hedges of its net
investment in Starbucks Japan, as well as the Companys net investments in its Canadian, U.K., and
Chinese subsidiaries, to minimize foreign currency exposure. Starbucks also had forward foreign
exchange contracts that are not designated as hedging instruments for accounting purposes (free
standing derivatives), but which largely offset the financial impact
of translating certain foreign
currency denominated payables and receivables.
33
Consistent with the nature of the economic hedges provided by these foreign exchange contracts,
increases or decreases in their fair values would be mostly offset by corresponding decreases or
increases in the U.S. dollar value of the Companys foreign
investments, future foreign currency
royalty fee payments, inventory purchases, and foreign currency denominated payables and
receivables (i.e. hedged items) that would occur within the hedging period. The information
provided below relates only to the hedging instruments and does not represent the corresponding
changes in the underlying hedged items.
Based on the foreign exchange contracts outstanding as of July 1, 2007, a 10% devaluation of the
U.S. dollar as compared to the level of foreign exchange rates for currencies under contract as of
July 1, 2007, would result in a reduced fair value of these derivative financial instruments of
approximately $51 million. Of this total, approximately $30 million relates to cash flow hedges of
revenue streams and inventory purchases, and free standing derivatives that may in turn reduce the
Companys future net earnings. The remaining $21 million relates to hedges of net investments in
foreign operations that may reduce future accumulated other comprehensive income on the
consolidated balance sheet since the underlying investments are not expected to be sold in the
foreseeable future.
Conversely, a 10% appreciation of the U.S. dollar would result in an increase in the fair value of
these instruments of approximately $49 million. Of this total, approximately $32 million relates to
cash flow hedges of revenue streams and inventory purchases, and free standing derivatives that may
in turn increase the Companys future net earnings, while the remaining $17 million relates to
hedges of net investments in foreign operations that may increase future accumulated other
comprehensive income.
Equity Security Price Risk and Interest Rate Risk
There has been no material change in the equity security price risk or interest rate risk discussed
in Item 7A of the Companys 10-K.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that material
information required to be disclosed in the Companys periodic reports filed or submitted under the
Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and forms. Starbucks
disclosure controls and procedures are also designed to ensure that information required to be
disclosed in the reports the Company files or submits under the Exchange Act is accumulated and
communicated to the Companys management, including its principal executive officer and principal
financial officer as appropriate, to allow timely decisions regarding required disclosure.
During the quarter the Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including the chief executive officer and the chief
financial officer, of the effectiveness of the design and operation of the disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that
evaluation, the Companys chief executive officer and chief financial officer concluded that the
Companys disclosure controls and procedures were effective, as of the end of the period covered by
this report (July 1, 2007).
During the third quarter of fiscal 2007, there were no changes in the Companys internal control
over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that
materially affected or are reasonably likely to materially affect internal control over financial
reporting.
The certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 are filed as exhibits
31.1 and 31.2, respectively, to this Quarterly Report on Form 10-Q.
34
PART II OTHER INFORMATION
Item 1. Legal Proceedings
See discussion of Legal Proceedings in Note 11 to the consolidated financial statements included in
Item 1 of this Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information regarding repurchases by the Company of its common stock
during the 13-week period ended July 1, 2007:
ISSUER PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number |
|
Maximum |
|
|
|
|
|
|
|
|
|
|
of Shares |
|
Number of |
|
|
|
|
|
|
|
|
|
|
Purchased as |
|
Shares that May |
|
|
Total |
|
Average |
|
Part of Publicly |
|
Yet Be |
|
|
Number of |
|
Price |
|
Announced |
|
Purchased |
|
|
Shares |
|
Paid per |
|
Plans or |
|
Under the Plans |
Period (1) |
|
Purchased |
|
Share |
|
Programs(2) |
|
or Programs(2) |
April 2, 2007 April 29, 2007 |
|
|
2,454,300 |
|
|
$ |
31.18 |
|
|
|
2,454,300 |
|
|
|
26,138,212 |
|
April 30, 2007 May 27, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,138,212 |
|
May 28, 2007 July 1, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,138,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,454,300 |
|
|
|
31.18 |
|
|
|
2,454,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Monthly information is presented by reference to the Companys fiscal months
during the third quarter of fiscal 2007. |
|
(2) |
|
The Companys share repurchase program is conducted under authorizations made from
time to time by the Companys Board of Directors. The shares reported in the table are covered
by a Board authorization to repurchase 25 million shares of common stock, publicly announced
on August 2, 2006. On May 3, 2007, the Company announced that on May 1, 2007 its Board of
Directors authorized the repurchase of up to 25 million additional shares of the Companys
common stock. Neither of these authorizations has an expiration date. |
35
Item 6. Exhibits
(a) Exhibits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference |
|
|
Exhibit |
|
|
|
|
|
|
|
Date of |
|
Exhibit |
|
Filed |
No. |
|
Exhibit Description |
|
Form |
|
File No. |
|
First Filing |
|
Number |
|
Herewith |
10.1
|
|
Letter Agreement dated April 2, 2007
between Starbucks Corporation and Peter J.
Bocian
|
|
8-K
|
|
0-20322
|
|
4/3/07
|
|
|
10.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.1
|
|
Certification of Principal Executive
Officer Pursuant to Rule 13a-14 of the
Securities Exchange Act of 1934, As
Adopted Pursuant to Section 302 of the
Sarbanes Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.2
|
|
Certification of Principal Financial
Officer Pursuant to Rule 13a-14 of the
Securities Exchange Act of 1934, As
Adopted Pursuant to Section 302 of the
Sarbanes Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
Certifications of Principal Executive
Officer and Principal Financial Officer
Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X |
36
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
|
|
August 10, 2007 |
By: |
/s/ Michael Casey
|
|
|
|
Michael Casey |
|
|
|
executive vice president, chief financial officer
and chief administrative officer
Signing on behalf of the registrant and as
principal financial officer |
|
37
INDEX TO EXHIBITS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference |
|
|
Exhibit |
|
|
|
|
|
|
|
Date of |
|
Exhibit |
|
Filed |
No. |
|
Exhibit Description |
|
Form |
|
File No. |
|
First Filing |
|
Number |
|
Herewith |
10.1
|
|
Letter Agreement dated April 2, 2007
between Starbucks Corporation and Peter J.
Bocian
|
|
8-K
|
|
0-20322
|
|
4/3/07
|
|
|
10.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.1
|
|
Certification of Principal Executive
Officer Pursuant to Rule 13a-14 of the
Securities Exchange Act of 1934, As
Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.2
|
|
Certification of Principal Financial
Officer Pursuant to Rule 13a-14 of the
Securities Exchange Act of 1934, As
Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
Certifications of Principal Executive
Officer and Principal Financial Officer
Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X |
38