e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
þ ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Fiscal Year Ended
October 1, 2006
OR
o 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
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(State or other jurisdiction of
incorporation or organization)
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(IRS Employer Identification
No.)
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2401 Utah Avenue South
Seattle, Washington 98134
(Address of principal
executive offices, zip code)
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(REGISTRANTS TELEPHONE
NUMBER, INCLUDING AREA CODE):
(206) 447-1575
SECURITIES REGISTERED PURSUANT
TO SECTION 12(G) OF THE ACT:
Common Stock, $0.001 Par
Value Per Share
SECURITIES REGISTERED PURSUANT
TO SECTION 12(B) OF THE ACT:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 if disclosure of delinquent filers
pursuant to Item 405 of Regulation of S-K is not contained
herein, and will not be contained, to the best of the
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
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
The aggregate market value of the voting stock held by
non-affiliates of the registrant as of the last business day of
the registrants most recently completed second fiscal
quarter, based upon the closing sale price of the
registrants common stock on March 31, 2006 as
reported on the National Market tier of The NASDAQ Stock Market,
Inc. was $28.2 billion.
As of December 8, 2006, there were 754,857,728 shares
of the registrants Common Stock outstanding.
DOCUMENTS INCORPORATED BY
REFERENCE
Portions of the definitive Proxy Statement for the
registrants Annual Meeting of Shareholders to be held on
March 21, 2007 have been incorporated by reference into
Part III of this Annual Report on
Form 10-K.
STARBUCKS
CORPORATION
FORM 10-K
For the Fiscal Year Ended
October 1, 2006
PART I
Item 1.
Business
GENERAL
Starbucks Corporation (together with its subsidiaries,
Starbucks or the Company) was formed in
1985. Starbucks purchases and roasts high-quality whole bean
coffees and sells them, along with fresh, rich-brewed coffees,
Italian-style espresso beverages, cold blended beverages, a
variety of complementary food items, coffee-related accessories
and equipment, a selection of premium teas and a line of compact
discs, primarily through Company-operated retail stores.
Starbucks also sells coffee and tea products and licenses its
trademark through other channels and, through certain of its
equity investees, Starbucks produces and sells
ready-to-drink
beverages which include, among others, bottled
Frappuccino®
coffee drinks and Starbucks
DoubleShot®
espresso drinks, and a line of superpremium ice creams. All
channels outside the Company-operated retail stores are
collectively known as Specialty Operations. The
Companys objective is to establish Starbucks as one of the
most recognized and respected brands in the world. To achieve
this goal, the Company plans to continue rapid expansion of its
retail operations, to grow its Specialty Operations and to
selectively pursue other opportunities to leverage the Starbucks
brand through the introduction of new products and the
development of new channels of distribution. The Companys
brand portfolio includes superpremium
Tazo®
teas, Starbucks Hear
Music®
compact discs, Seattles Best
Coffee®
and Torrefazione
Italia®
coffee.
SEGMENT
FINANCIAL INFORMATION
Beginning in the fiscal fourth quarter of 2006, the Company
increased its reporting segments from two to three to include a
Global Consumer Products Group (CPG) segment in
addition to the United States and International segments. This
additional operating segment reflects the culmination of
internal management realignments in fiscal 2006, and the
successful development and launch of certain branded products in
the United States and internationally commencing in fiscal 2005
and continuing throughout fiscal 2006. Additionally, with the
100% acquisition of the Companys operations in Hawaii in
fiscal 2006 and the shift in internal management of this market
to the United States, these operations have been moved from the
International segment into the United States segment. Segment
information for all prior periods presented has been revised to
reflect these changes.
The United States and International segments both include
Company-operated retail stores and certain components of
Specialty Operations. Specialty operations within the United
States include licensed retail stores, foodservice accounts and
other initiatives related to the Companys core business.
International specialty operations primarily include retail
store licensing operations in more than 25 countries and
foodservice accounts in Canada and the United Kingdom. The CPG
segment includes the Companys grocery and warehouse club
business as well as branded products operations worldwide.
Information about Starbucks revenues, earnings before income
taxes, depreciation and amortization, income from equity
investees, equity method investments, identifiable assets, net
impairment and disposition losses and capital expenditures by
segment is included in Note 19 Segment
Reporting to the consolidated financial statements
included in Item 8 of this Annual Report on
Form 10-K
(Form 10-K
or Report).
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2
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STARBUCKS
CORPORATION, FORM 10-K
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REVENUE
COMPONENTS
The following table shows the Companys revenue components
for the fiscal year ended October 1, 2006:
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% of
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% of
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Total Net
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Specialty
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REVENUES
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Revenues
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Revenues
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Company-operated retail
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85%
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Specialty:
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Licensing:
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Retail stores
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7%
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45%
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Grocery and warehouse club
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4%
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24%
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Branded products
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<1%
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2%
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Total licensing
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11%
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71%
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Foodservice and other:
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Foodservice
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4%
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27%
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Other initiatives
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<1%
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2%
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Total foodservice and other
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4%
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29%
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Total specialty
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15%
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100%
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Total net revenues
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100%
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COMPANY-OPERATED
RETAIL STORES
The Companys retail goal is to become the leading retailer
and brand of coffee in each of its target markets by selling the
finest quality coffee and related products and by providing each
customer a unique Starbucks Experience. The Starbucks
Experience, or third place after home and work, is built
upon superior customer service as well as clean and
well-maintained Company-operated retail stores that reflect the
personalities of the communities in which they operate, thereby
building a high degree of customer loyalty. Starbucks strategy
for expanding its retail business is to increase its market
share primarily by opening additional stores in existing markets
and to open stores in new markets where the opportunity exists
to become the leading specialty coffee retailer. In support of
this strategy, Starbucks opened 1,040 new Company-operated
stores during the fiscal year ended October 1, 2006
(fiscal 2006). Starbucks Company-operated retail
stores, including 11 Seattles Best
Coffee®
(SBC) stores and 4 Hear Music retail stores,
accounted for 85% of total net revenues during fiscal 2006.
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STARBUCKS
CORPORATION, FORM 10-K
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3
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The following table summarizes total Company-operated retail
store data for the periods indicated:
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Net Stores Opened
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During the
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Fiscal Year Ended
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Stores Open as of
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Oct 1, 2006
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Oct 2, 2005
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Oct 1, 2006
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Oct 2, 2005
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United
States (1)
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810
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580
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5,728
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4,918
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International:
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United Kingdom
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47
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45
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514
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467
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Canada
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74
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62
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508
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434
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Thailand
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22
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14
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85
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63
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Australia
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25
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14
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83
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58
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Germany
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24
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9
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68
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44
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China
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14
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18
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38
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24
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Singapore
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5
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(3
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37
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32
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Puerto
Rico (1)
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6
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5
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17
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11
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Chile
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6
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1
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16
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10
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Ireland
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7
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1
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8
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1
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Total International
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230
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166
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1,374
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1,144
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Total Company-operated
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1,040
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746
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7,102
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6,062
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(1)
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International store data has been
adjusted for the acquisitions of the Puerto Rico and Hawaii
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.
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Starbucks retail stores are typically located in high-traffic,
high-visibility locations. Because the Company can vary the size
and format, its stores are located in or near a variety of
settings, including downtown and suburban retail centers, office
buildings and university campuses. While the Company selectively
locates stores in shopping malls, it focuses on locations that
provide convenient access for both pedestrians and drivers. With
the flexibility in store size and format, the Company also
locates retail stores in select rural and off-highway locations
to serve a broader array of customers outside major metropolitan
markets and further expand brand awareness. To provide a greater
degree of access and convenience for nonpedestrian customers,
the Company has increased development of Drive-Thru retail
stores. At the end of fiscal 2006, the Company operated
approximately 1,600 Drive-Thru locations.
All Starbucks stores offer a choice of regular and decaffeinated
coffee beverages, a broad selection of Italian-style espresso
beverages, cold blended beverages, iced shaken refreshment
beverages, a selection of teas and distinctively packaged
roasted whole bean coffees. Starbucks stores also offer a
selection of fresh pastries and other food items, sodas, juices,
bottled water, coffee-making equipment and accessories, a
selection of compact discs, games and seasonal novelty items.
Each Starbucks store varies its product mix depending upon the
size of the store and its location. Larger stores carry a broad
selection of the Companys whole bean coffees in various
sizes and types of packaging, as well as an assortment of coffee
and espresso-making equipment and accessories such as coffee
grinders, coffee filters, storage containers, travel tumblers
and mugs. Smaller Starbucks stores and kiosks typically sell a
full line of coffee beverages, a limited selection of whole bean
coffees and a few accessories such as travel tumblers and logo
mugs. In the United States and in International markets,
approximately 3,800 stores and 1,300 stores, respectively, carry
a selection of prepared sandwiches and salads. Starbucks
continues to expand its food warming program in select markets
in the United States, with approximately 640 stores as of
October 1, 2006 providing warm food items including
breakfast sandwiches.
The Companys retail sales mix by product type during
fiscal 2006 was as follows: 77% beverages, 15% food, 3% whole
bean coffees and 5% coffee-making equipment and other
merchandise.
SPECIALTY
OPERATIONS
Specialty Operations strive to develop the Companys brands
outside the Company-operated retail store environment through a
number of channels. Starbucks strategy is to reach customers
where they work, travel, shop and dine by
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STARBUCKS
CORPORATION, FORM 10-K
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establishing relationships with prominent third parties that
share the Companys values and commitment to quality. These
relationships take various forms, including licensing
arrangements, foodservice accounts and other initiatives related
to the Companys core businesses. In certain situations,
Starbucks has an equity ownership interest in licensee
operations. During fiscal 2006, specialty revenues (which
include royalties and fees from licensees, as well as product
sales derived from Specialty Operations) accounted for 15% of
total net revenues.
Licensing
Retail stores
In its licensed retail store operations, the Company leverages
the expertise of its local partners and shares Starbucks
operating and store development experience. Licensee partners
are typically master concessionaires, which can provide improved
access to desirable retail space, or prominent retailers with
in-depth market knowledge and access. As part of these
arrangements, Starbucks receives license fees and royalties and
sells coffee, tea, compact discs and related products for resale
in licensed locations. Employees working in licensed retail
locations are required to follow Starbucks detailed store
operating procedures and attend training classes similar to
those given to employees in Company-operated stores.
During fiscal 2006, 733 new Starbucks licensed retail stores
were opened in the United States and, as of October 1,
2006, the Companys licensees operated 3,168 stores. During
fiscal 2006, 426 new International licensed stores were opened.
At October 1, 2006, the Companys International
operating segment had a total of 2,170 licensed retail stores.
Product sales to and royalty and license fee revenues from U.S.
and International licensed retail stores accounted for 45% of
specialty revenues in fiscal 2006.
At fiscal year end 2006, Starbucks total licensed retail stores
by region and specific location were as follows:
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Asia Pacific
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Europe/Middle East/Africa
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Americas
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Japan
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650
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Spain
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55
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United States
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3,168
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China
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223
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Turkey
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51
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Canada
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178
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Taiwan
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175
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Greece
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50
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Mexico
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101
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South Korea
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174
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Saudi Arabia
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46
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Peru
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9
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Philippines
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98
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United Arab Emirates
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44
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The Bahamas
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5
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Malaysia
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71
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Kuwait
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36
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New Zealand
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45
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Switzerland
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27
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Indonesia
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45
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France
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26
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Austria
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11
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Lebanon
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11
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Bahrain
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8
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Qatar
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8
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Cyprus
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7
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UK
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6
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Jordan
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5
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Oman
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4
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Ireland
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1
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Total
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1,481
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Total
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396
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Total
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3,461
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Licensing
Grocery and warehouse club
In grocery and warehouse club stores throughout the United
States, the Company sells a selection of
Starbucks®
whole bean and ground coffees, as well as Seattles Best
Coffee and Torrefazione Italia branded coffees and a selection
of premium
Tazo®
teas through a licensing relationship with Kraft Foods Inc.
(Kraft). Kraft manages all distribution, marketing,
advertising and promotion of these products. In International
markets, Starbucks also has licensing arrangements with other
grocery and warehouse club stores. By the end of fiscal 2006,
the Companys coffees and teas were available in
approximately 31,900 grocery and warehouse club stores, with
30,000 in the United States and 1,900 in International markets.
Revenues from this category comprised 24% of specialty revenues
in fiscal 2006.
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STARBUCKS
CORPORATION, FORM 10-K
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5
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Licensing
Branded products
The Company has licensed the rights to produce and distribute
Starbucks branded products to two partnerships in which the
Company holds 50% equity interests. The North American Coffee
Partnership with the Pepsi-Cola Company develops and distributes
ready-to-drink
beverages which include, among others, bottled
Frappuccino®
coffee drinks and Starbucks
DoubleShot®
espresso drinks. The Starbucks Ice Cream Partnership with
Dreyers Grand Ice Cream, Inc., develops and distributes
superpremium ice creams.
Starbucks and Jim Beam Brands Co., a unit of Fortune Brands,
Inc., manufacture and market Starbucks-branded premium coffee
liqueur products in the United States and Canada. The Company
introduced a coffee liqueur product nationally during the fiscal
second quarter of 2005, and launched a coffee and cream liqueur
product in the second quarter of fiscal 2006 in restaurants,
bars and retail outlets where premium distilled spirits are
sold. During the fiscal fourth quarter of 2006, the Company
launched
Starbuckstm
Coffee Liqueur and Cream Liqueur in Canada. The Company does not
and will not sell the liqueur products in its Company-operated
or licensed retail stores.
In September 2005, the Company launched Starbucks
Discoveriestm,
a
ready-to-drink
chilled cup coffee beverage in refrigerated cases of convenience
stores in Japan, through a manufacturing and distribution
agreement with Suntory Limited, and in Taiwan, through separate
co-packing and distribution agreements with Uni-President
Enterprises Corporation and the Companys equity investee,
President Starbucks Coffee Taiwan Ltd. In fiscal 2006, the
Company entered the
ready-to-drink
coffee category in South Korea through a licensing agreement
with Dong Suh Foods Corporation to import bottled Starbucks
Frappuccino®
coffee drinks produced in the United States.
Collectively, the revenues from these branded products accounted
for 2% of specialty revenues in fiscal 2006.
Foodservice
The Company sells whole bean and ground coffees, including the
Starbucks, Seattles Best Coffee and Torrefazione Italia
brands, as well as a selection of premium
Tazo®
teas, to institutional foodservice companies that service
business, industry, education and healthcare accounts, office
coffee distributors, hotels, restaurants, airlines and other
retailers. The majority of the Companys direct
distribution accounts are with SYSCO Corporations and
U.S. Foodservicestm
national broadline distribution networks and Starbucks
foodservice sales, customer service and support resources are
aligned with those of SYSCO Corporation and
U.S. Foodservice. Starbucks and Seattles Best Coffee
are the only superpremium national-brand coffees actively
promoted by SYSCO Corporation. The Companys total
worldwide foodservice operations had approximately 16,200
accounts at fiscal year end 2006, and revenues from these
accounts comprised 27% of total specialty revenues.
Other
Initiatives
Included in this category is the Companys emerging
entertainment business, which encompasses multiple music and
technology based initiatives designed to appeal to new and
existing Starbucks customers. Among these initiatives are
strategic marketing and co-branding arrangements, such as the
24-hour
Starbucks Hear
Musictm
digital music channel 75 available to all XM Satellite
Radio subscribers, and the availability of wireless broadband
Internet service in Company-operated retail stores located in
the United States and Canada. Additionally, the entertainment
business includes the innovative partnerships of Starbucks Hear
Music with other music labels for the production, marketing and
distribution of both exclusive and nonexclusive music, music
programming for Starbucks stores worldwide, and CD sales through
the Companys website at Starbucks.com/hearmusic. In the
first quarter of fiscal 2007, Starbucks and
Apple®
announced the availability of the Starbucks Hear Music catalog
on the
iTunes®
Store, giving iTunes users the ability to preview, buy and
download a wide variety of popular Starbucks Hear
Music®
titles.
The Company has a strategic agreement with Chase Bank USA, N.A.
and Visa to issue the Starbucks Card
Duettotm
Visa®
(the Duetto Card) in the United States, and a
similar arrangement with Royal Bank of Canada and Visa Canada
Association to issue the Duetto Card in Canada. The Duetto Card
is a
first-of-its-kind
card, combining the functionality
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6
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STARBUCKS
CORPORATION, FORM 10-K
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of a credit card with the convenience of a reloadable Starbucks
Card. Through these arrangements, Starbucks primarily receives
commissions for each activated customer account and payments
based on credit card usage.
Collectively, the operations of these other initiatives
accounted for 2% of specialty revenues in fiscal 2006.
PRODUCT
SUPPLY
Starbucks is committed to selling only the finest whole bean
coffees and coffee beverages. To ensure compliance with its
rigorous coffee standards, Starbucks controls its coffee
purchasing, roasting and packaging, and the distribution of
coffee used in its operations.
The Company purchases green coffee beans from coffee-producing
regions around the world and custom roasts them to its exacting
standards for its many blends and single origin coffees.
The supply and price of coffee are subject to significant
volatility. Although most coffee trades in the commodity market,
coffee of the quality sought by the Company tends to trade on a
negotiated basis at a substantial premium above commodity coffee
prices, depending upon the supply and demand at the time of
purchase. Supply and price can be affected by multiple factors
in the producing countries, including weather, political and
economic conditions. In addition, green coffee prices have been
affected in the past, and may be affected in the future, by the
actions of certain organizations and associations that have
historically attempted to influence prices of green coffee
through agreements establishing export quotas or by restricting
coffee supplies.
The Company depends upon its relationships with coffee
producers, outside trading companies and exporters for its
supply of green coffee. With green coffee commodity prices at
relatively low levels in recent years, the Company has used
fixed-price purchase commitments in order to secure an adequate
supply of quality green coffee, bring greater certainty to the
cost of sales in future periods, and promote sustainability by
paying a fair price to coffee producers. As of October 1,
2006, the Company had $546 million in fixed-price purchase
commitments which, together with existing inventory, is expected
to provide an adequate supply of green coffee through fiscal
2007. The Company believes, based on relationships established
with its suppliers, the risk of non-delivery on such purchase
commitments is remote. During the first few months of fiscal
2006, green coffee commodity prices increased moderately. Since
then, commodity prices have stabilized but still remain above
the historically low levels experienced in recent years. Based
on its market experience, the Company believes that fixed-price
purchase commitments are less likely to be available on
favorable terms when commodity prices are high. If prices were
to move higher during fiscal 2007, Starbucks would likely return
to its previous practice of entering into
price-to-be-fixed
purchase contracts to meet a large part of its demand. These
types of contracts state the quality, quantity and delivery
periods but allow the price of green coffee over a market index
to be established after contract signing. The Company believes
that, through a combination of fixed-price and
price-to-be-fixed
contracts it will be able to secure an adequate supply of
quality green coffee. However, an increased use of
price-to-be-fixed
contracts instead of fixed-price contracts would decrease the
predictability of coffee costs in future periods.
During fiscal 2004, Starbucks established the Starbucks Coffee
Agronomy Company S.R.L., a wholly owned subsidiary located in
Costa Rica, to reinforce the Companys leadership role in
the coffee industry and to help ensure sustainability and future
supply of high-quality green coffees from Central America.
Staffed with agronomists and sustainability experts, this
first-of-its-kind
Farmer Support Center is designed to proactively respond to
changes in coffee producing countries that impact farmers and
the supply of green coffee.
In addition to coffee, the Company also purchases significant
amounts of dairy products to support the needs of its
Company-operated retail stores. Dairy prices in the United
States, which closely follow the monthly Class I fluid milk
base price as calculated by the U.S. Department of
Agriculture, rose in both fiscal 2004 and 2005, then declined in
2006. Should prices rise significantly in the future, Starbucks
profitability could be adversely affected. In the United States,
the Company purchases substantially all of its fluid milk
requirements from two dairy suppliers. The Company believes,
based on relationships established with these suppliers, that
the risk of non-delivery of enough fluid milk to support its
U.S. retail business is remote.
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STARBUCKS
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7
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The Company also purchases a broad range of paper and plastic
products, such as cups, lids, napkins, straws, shopping bags and
corrugated paper boxes from several companies to support the
needs of its retail stores as well as its manufacturing and
distribution operations. The cost of these materials is
dependent in part upon commodity paper and plastic resin costs,
but the Company believes it mitigates the effect of short-term
raw material price fluctuations through strategic relationships
with key suppliers. In the United States, the Company is
contractually required to purchase all of its cups, lids, straws
and cutlery from a single supplier. Any material interruption in
the supply of these products to the Company, if not offset by
sufficient purchases from other suppliers, could materially
adversely affect the Companys supply chain and its ability
to serve its U.S. retail customers. The Company believes,
based on its relationship with this supplier, that the risk of
non-delivery of enough of these products to support its
U.S. retail business is remote.
Products other than whole bean coffees and coffee beverages sold
in Starbucks retail stores are obtained through a number of
different channels. Beverage ingredients, other than coffee and
milk, including leaf teas and the Companys menu of
ready-to-drink
beverages, are purchased from several specialty manufacturers,
usually under long-term supply contracts. Food products, such as
fresh pastries and lunch items, are generally purchased from
both regional and local sources. Coffee-making equipment, such
as drip and French press coffeemakers, espresso machines and
coffee grinders, are generally purchased directly from their
manufacturers. Coffee-related accessories, including items
bearing the Companys logos and trademarks, are produced
and distributed through contracts with a number of different
suppliers.
COMPETITION
The Companys primary competitors for coffee beverage sales
are restaurants, specialty coffee shops and doughnut shops. In
almost all markets in which the Company does business, there are
numerous competitors in the specialty coffee beverage business,
and management expects this situation to continue. Although
competition in the beverage market is currently fragmented,
competition is increasing, particularly from competitors in the
quick-service restaurant sector who are focusing on growing the
specialty coffee part of their business. A major competitor with
substantially greater financial, marketing and operating
resources than the Company could enter this market at any time
and compete directly against Starbucks.
The Companys whole bean coffees compete directly against
specialty coffees sold through supermarkets, specialty retailers
and a growing number of specialty coffee stores. Both the
Companys whole bean coffees and its coffee beverages
compete indirectly against all other coffees on the market. The
Company believes that its customers choose among retailers
primarily on the basis of product quality, service and
convenience, and, to a lesser extent, on price.
Starbucks believes that supermarkets are the most competitive
distribution channel for specialty whole bean coffee, in part
because supermarkets offer customers a variety of choices
without having to make a separate trip to a specialty coffee
store. A number of coffee manufacturers are distributing premium
coffee products in supermarkets. Regional specialty coffee
companies also sell whole bean coffees in supermarkets.
In addition to the competition generated by supermarket sales of
coffee, Starbucks competes for whole bean coffee sales with
franchise operators and independent specialty coffee stores. In
virtually every major metropolitan area where Starbucks operates
and expects to expand, there are local or regional competitors
with substantial market presence in the specialty coffee
business. Starbucks Specialty Operations also face significant
competition from established wholesale and mail order suppliers,
some of whom have greater financial and marketing resources than
the Company.
Starbucks faces intense competition from both restaurants and
other specialty retailers for suitable sites for new stores and
qualified personnel to operate both new and existing stores.
There can be no assurance that Starbucks will be able to
continue to secure adequate sites at acceptable rent levels or
that the Company will be able to attract a sufficient number of
qualified personnel.
PATENTS,
TRADEMARKS, COPYRIGHTS AND DOMAIN NAMES
The Company owns
and/or has
applied to register numerous trademarks and service marks in the
United States and in nearly 180 additional countries throughout
the world. Rights to the trademarks and service marks in the
United
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STARBUCKS
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States are generally held by a wholly owned affiliate of the
Company and are used by the Company under license. Some of the
Companys trademarks, including
Starbucks®,
the Starbucks logo,
Frappuccino®,
Seattles Best
Coffee®
and
Tazo®
are of material importance to the Company. The duration of
trademark registrations varies from country to country. However,
trademarks are generally valid and may be renewed indefinitely
as long as they are in use
and/or their
registrations are properly maintained.
The Company owns numerous copyrights for items such as product
packaging, promotional materials, in-store graphics and training
materials. The Company also holds patents on certain products,
systems and designs. In addition, the Company has registered and
maintains numerous Internet domain names, including
Starbucks.com and Starbucks.net.
RESEARCH
AND DEVELOPMENT
Starbucks research and development efforts are led by food
scientists, engineers, chemists and culinarians in the Research
and Development department. This team is responsible for the
technical development of food and beverage products and new
equipment. The Company spent approximately $6.5 million,
$6.2 million and $4.7 million during fiscal 2006, 2005
and 2004, respectively, on technical research and development
activities, in addition to customary product testing and product
and process improvements in all areas of its business.
SEASONALITY
AND QUARTERLY RESULTS
Starbucks business is subject to seasonal fluctuations.
Significant portions of the Companys net revenues and
profits are realized during the first quarter of the 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
business, results for any quarter are not necessarily indicative
of the results that may be achieved for the full fiscal year.
EMPLOYEES
As of October 1, 2006, the Company employed approximately
145,800 people worldwide. In the United States, Starbucks
employed approximately 123,600 people, with 116,100 in
Company-operated retail stores and the remainder in the
Companys administrative and regional offices, and store
development, roasting and warehousing operations. Approximately
22,200 employees were employed in International, with 21,200 in
Company-operated retail stores and the remainder in the
Companys regional support facilities and roasting and
warehousing operations. At fiscal year end, employees at nine of
the Companys Canadian stores were represented by a union.
Starbucks believes its current relations with its employees are
good.
AVAILABLE
INFORMATION
Starbucks
Form 10-K
reports, along with all other reports and amendments filed with
or furnished to the Securities and Exchange Commission
(SEC), are publicly available free of charge on the
Investor Relations section of Starbucks website at
http://investor.starbucks.com or at www.sec.gov as soon as
reasonably practicable after these materials are filed with or
furnished to the SEC. The Companys corporate governance
policies, ethics code and Board of Directors committee
charters are also posted within this section of the website. The
information on the Companys website is not part of this or
any other report Starbucks files with, or furnishes to, the SEC.
Starbucks demonstrates its commitment to corporate social
responsibility (CSR) by conducting its business in
ways that produce social, environmental and economic benefits to
the communities in which Starbucks operates. The Company aligns
its principles for social responsibility with its overall
strategy and business operations. As a result, Starbucks
believes it delivers benefits to the Company and its
stakeholders partners, customers, suppliers,
shareholders, community members and others while
distinguishing Starbucks as a leader within the coffee industry.
Providing open communication and transparency helps the Company
be accountable to its stakeholders. To support this goal,
Starbucks publishes a CSR Annual Report. Starbucks fiscal 2006
CSR Annual Report will be available online at
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9
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www.starbucks.com/csr beginning March 14, 2007. To request
a printed copy of the report, which will be available in late
March 2007, please call
1-800-23-LATTE
(1-800-235-2883)
or email your request to info@starbucks.com.
Item 1A. Risk
Factors
This Annual Report on
Form 10-K
includes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These
forward-looking statements generally are identified by words
such as believe, expect,
anticipate, estimate,
intend, strategy, may,
will likely and similar words or phrases. 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. Investors should not
place undue reliance on the forward-looking statements, which
speak only as of the date of this Report. Starbucks is under no
obligation to update or alter any forward-looking statements,
whether as a result of new information, future events or
otherwise. These forward-looking statements are all based on
currently available operating, financial and competitive
information and are subject to various risks and uncertainties.
The Companys actual future results and trends may differ
materially depending on a variety of factors including, but not
limited to, the risks and uncertainties discussed below. The
risks below are not the only ones the Company faces. Additional
risks and risks that management currently considers immaterial
may also have an adverse effect on the Company.
A
regional or global health pandemic could severely affect
Starbucks business.
A health pandemic is a disease that spreads rapidly and widely
by infection and affects many individuals in an area or
population at the same time. If a regional or global health
pandemic were to occur, depending upon its duration and
severity, the Companys business could be severely
affected. Starbucks has positioned itself as a third
place between home and work where people can gather
together for human connection. Customers might avoid public
gathering places in the event of a health pandemic, and local,
regional or national governments might limit or ban public
gatherings to halt or delay the spread of disease. A regional or
global health pandemic might also adversely impact the
Companys business by disrupting or delaying production and
delivery of materials and products in its supply chain and by
causing staffing shortages in its stores. The impact of a health
pandemic on Starbucks might be disproportionately greater than
on other companies that depend less on the gathering of people
together for the sale, use or license of their products and
services.
Market
expectations for Starbucks financial performance are
high.
Management believes the price of Starbucks stock reflects high
market expectations for its future operating results. In
particular, any failure to meet the markets high
expectations for Starbucks comparable store sales growth rates,
earnings per share and new store openings could cause the market
price of Starbucks stock to drop rapidly and sharply.
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Starbucks
is subject to a number of significant risks that might cause the
Companys actual results to vary materially from its
forecasts, targets, or projections, including:
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declines in actual or estimated comparable store sales growth
rates and expectations;
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failing to meet annual targets for store openings, as a result
of delays in store openings or failing to identify and secure
sufficient real estate locations;
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negative trends in operating expenses or failing to continue to
increase net revenues and operating income in any or all of
Starbucks United States, International and CPG operating
segments;
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failing to penetrate and expand into emerging International
markets, such as China;
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opening less productive stores and cannibalizing existing stores
with new stores;
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higher costs associated with maintaining and refurbishing the
Companys existing base of Company-operated retail stores;
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STARBUCKS
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failing to anticipate, appropriately invest in and effectively
manage the human, information technology and logistical
resources necessary to support the growth of its business,
including managing the costs associated with such resources;
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failing to integrate, leverage and generate expected rates of
return on investments, including expansion of existing
businesses and expansion through domestic and foreign
acquisitions;
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failing to generate sufficient future positive operating cash
flows and, if necessary, secure adequate external financing to
fund its growth;
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declines in general consumer demand for specialty coffee
products;
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failing to meet customer demand efficiently during peak periods;
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lack of customer acceptance of new products;
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lack of customer acceptance of Starbucks products in new markets;
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failing to consistently provide high quality products and
innovate new products and business processes to retain the
Companys existing customer base and attract new customers;
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increases in the price of high quality arabica coffee,
dairy products, fuel, energy or other consumables, and the
Companys inability to obtain a sufficient supply of such
commodities and consumables as its business grows;
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failing to manage the impact of any adverse publicity regarding
the Companys business practices or the health effects of
consuming its products;
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increased labor costs, including significant increases in health
care benefits and workers compensation insurance costs;
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litigation against Starbucks, particularly any class action
litigation;
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unfavorable general economic conditions in the markets in which
Starbucks operates, including, but not limited to, changes in
interest rates, unemployment rates, disposable income and other
events or factors that adversely affect consumer spending;
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unanticipated changes in executive management;
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any material interruption in the Companys supply chain,
such as material interruption of roasted coffee supply due to
the casualty loss of any of the Companys roasting plants,
or material interruption in the supply of fluid milk or paper
and plastic products such as cups, lids, napkins, straws,
shopping bags and corrugated paper boxes, in each case due to
the inability of one or more key suppliers to fulfill the
Companys requirements;
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the impact of initiatives by competitors and increased
competition generally;
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failing to manage the impact on Starbucks business of factors
such as labor discord, war, terrorism, political instability in
certain markets and natural disasters; and
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interruptions in service by common carriers that ship goods
within the Companys distribution channels.
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The
Companys success depends substantially on the value of the
Starbucks brand.
Starbucks believes it has built an excellent reputation globally
for the quality of its products, for delivery of a consistently
positive consumer experience and for its corporate social
responsibility programs. The Starbucks brand has been highly
rated in several global brand value studies. Management believes
it must preserve and grow the value of the Starbucks brand to be
successful in the future, particularly outside of North America,
where the Starbucks brand is less well known. Brand value is
based in part on consumer perceptions as to a variety of
subjective qualities, and can be damaged badly even by isolated
business incidents that degrade consumer trust, particularly if
the incidents receive considerable publicity or result in
litigation. Consumer demand for the Companys products and
its brand equity could diminish significantly if
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STARBUCKS
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11
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Starbucks fails to preserve the quality of its products, is
perceived to act in an unethical or socially irresponsible
manner or fails to deliver a consistently positive consumer
experience in each of its markets.
Starbucks
is highly dependent on the financial performance of its United
States operating segment.
The Companys financial performance is highly dependent on
its United States operating segment, which comprised 79% of
consolidated total net revenues in fiscal 2006. Any substantial
or sustained decline in these operations, if not offset by
increased financial performance elsewhere, could materially
adversely affect the Companys business and financial
results.
Starbucks
is increasingly dependent on the success of its International
operating segment in order to achieve its growth
targets.
The Companys future growth depends increasingly on the
growth and operations of its International operating segment.
Some or all of the Companys International market business
units (MBUs), which Starbucks generally defines by
the countries or regions in which they operate, may not be
successful in their operations or in achieving expected growth.
Starbucks may find business partners who do not share its
cultural, marketing or operating philosophies or who are unable
to operate the MBU profitably. Some factors that will be
critical to the success of International MBUs are different than
those affecting the Companys U.S. stores and
licensees. Tastes naturally vary by region, and consumers in new
international markets into which Starbucks and its licensees
expand may not embrace Starbucks products to the same extent as
consumers in the Companys existing markets. Occupancy
costs and store operating expenses are also sometimes higher
internationally than in the United States due to higher rents
for prime store locations or costs of compliance with
country-specific regulatory requirements. Because many of the
Companys International operations are in an early phase of
development, operating expenses as a percentage of related
revenues are often higher, compared to U.S. operations. The
Companys International operations are also subject to
additional inherent risks of conducting business abroad, such as:
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foreign currency exchange rate fluctuations;
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changes or uncertainties in economic, social and political
conditions in the Companys markets;
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interpretation and application of laws and regulations;
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restrictive actions of foreign or United States governmental
authorities affecting trade and foreign investment, including
protective measures such as export and customs duties and
tariffs and restrictions on the level of foreign ownership;
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import or other business licensing requirements;
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the enforceability of intellectual property and contract rights;
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limitations on the repatriation of funds and foreign currency
exchange restrictions;
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lower levels of consumer spending on a per capita basis
than in the United States;
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difficulty in staffing, developing and managing foreign
operations due to distance, language and cultural
differences; and
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local laws that make it more expensive and complex to negotiate
with, retain or terminate employees.
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The China
market is important to the Companys long-term growth
prospects doing business there and in other
developing countries can be challenging.
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Starbucks expects the Peoples Republic of China to be its
largest market outside of the United States. Any significant or
prolonged deterioration in
U.S.-China
relations might adversely affect the Companys China
business. The Companys growing investments in its China
operations will increase the Companys exposure in this
market.
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STARBUCKS
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Many of the risks and uncertainties of doing business in China
are solely within the control of the Chinese government.
Chinas government regulates the business conducted by
Starbucks through its subsidiaries, joint ventures and
authorized licensees by restricting the scope of the
Companys foreign investments within China and the food and
beverage, retail, wholesale and distribution business conducted
within China. Although management believes it has structured the
Companys China operations to comply with local laws, there
are substantial uncertainties regarding the interpretation and
application of laws and regulations and the enforceability of
intellectual property and contract rights in China. If
Chinas governmental authorities were ultimately to
conclude that Starbucks has not complied with one or more
existing or future laws or regulations, or if their
interpretations of those laws or regulations were to change over
time, the Companys affiliates could be subject to fines
and other financial penalties or forced to cease operations
entirely. Moreover, it could adversely affect the Companys
business if it is unable to enforce its intellectual property
and contract rights in Chinas courts.
Additionally, Starbucks plans to enter selected markets in other
developing countries (such as Russia and India) as an important
part of the projected growth of the International operating
segment. Some of those markets pose legal and business
challenges similar to the China market, such as substantial
uncertainty regarding the interpretation and application of laws
and regulations and the enforceability of intellectual property
and contract rights.
Effectively
managing the Companys rapid growth is
challenging.
The Companys long-term goal is to open approximately
20,000 Starbucks stores in the United States and at least 20,000
stores in International markets. Starbucks expects annual total
net revenue growth of approximately 20% and annual earnings per
share growth of approximately
20-25% for
the next three to five year period. Effectively managing growth
on this scale is challenging, particularly as Starbucks expands
into new markets internationally, and it becomes increasingly
difficult to ensure a consistent supply of high quality raw
materials, to hire sufficient numbers of key employees to meet
the Companys growth targets, to maintain an effective
system of internal controls for a globally dispersed enterprise
and to train employees worldwide to deliver a consistently high
quality product and customer experience. Achieving the
Companys growth targets is also dependent on its ability
to open more new stores in the current year as well as future
years than it opened in prior years.
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The loss
of key personnel or difficulties recruiting and retaining
qualified personnel could jeopardize the Companys ability
to meet its growth targets.
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The success of the Companys efforts to grow its business
depends on the contributions and abilities of key executive and
operating officers and other personnel. Starbucks must continue
to recruit, retain and motivate management and operating
personnel sufficient to maintain its current business and
support its projected growth. A shortage or loss of these key
employees might jeopardize the Companys ability to meet
its growth targets.
Starbucks
faces intense competition in the specialty coffee
market.
There are numerous competitors in almost every market in which
Starbucks operates and in which it expects to expand in both the
specialty coffee beverage business and the specialty whole bean
coffee business. This is especially true in the major
metropolitan areas where Starbucks operates and expects to
expand, in virtually all of which there are local or regional
competitors with substantial collective market presence.
Although competition in the specialty coffee beverage market is
currently fragmented, competition is increasing, particularly
from competitors in the quick-service restaurant sector who are
focusing on growing the specialty coffee beverage part of their
businesses. A major competitor with substantially greater
financial, marketing and operating resources than Starbucks
could enter this market at any time and compete directly against
Starbucks. The Companys whole bean coffees compete
directly against specialty coffees sold through supermarkets,
specialty retailers and a growing number of specialty coffee
stores. Some of the Companys competitors in these whole
bean specialty coffee distribution channels have greater
financial and marketing resources than Starbucks. Both the
Companys whole bean coffees and its coffee beverages
compete indirectly against all other coffees on the market.
Starbucks also faces well-established competitors in many
international markets. If Starbucks fails to maintain
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13
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and build market share in the specialty coffee market and the
coffee market generally, it could harm the Companys
business and financial results.
Adverse
public or medical opinions about the health effects of consuming
the Companys products could harm its business.
Some of the Companys products contain caffeine, dairy
products, sugar and other active compounds, the health effects
of which are the subject of increasing public scrutiny,
including the suggestion that excessive consumption of caffeine,
dairy products, sugar and other active compounds can lead to a
variety of adverse health effects. There has also been greater
public awareness that sedentary lifestyles, combined with
excessive consumption of high-calorie foods, have led to a
rapidly rising rate of obesity. Particularly in the United
States, there is increasing consumer awareness of health risks,
including obesity, due in part to increasing publicity and
attention from health organizations, as well as increased
consumer litigation based on alleged adverse health impacts of
consumption of various food products. While Starbucks has a
variety of beverage and food items that are low in caffeine and
calories, an unfavorable report on the health effects of
caffeine or other compounds present in the Companys
products, or negative publicity or litigation arising from other
health risks such as obesity, could significantly reduce the
demand for the Companys beverages and food products.
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Significant
increases in the market price or decreases in availability of
high quality arabica coffee could harm the Companys
business and financial results.
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The supply and price of coffee are subject to significant
volatility. Although most coffee trades in the commodity market,
high-altitude arabica coffee of the quality sought by
Starbucks tends to trade on a negotiated basis at a substantial
premium above commodity coffee prices, depending on the supply
and demand at the time of purchase. Supply and price can be
affected by multiple factors in the producing countries,
including weather, political and economic conditions. In
addition, green coffee prices have been affected in the past,
and may be affected in the future, by the actions of certain
organizations and associations that have historically attempted
to influence prices of green coffee through agreements
establishing export quotas or restricting coffee supplies. Any
significant increase in the market price or any significant
decrease in the availability of high quality arabica
coffee could adversely affect the Companys business
and financial results. Starbucks also purchases large quantities
of dairy products particularly milk. Any significant
increase in the market price or decrease in availability of
dairy products could harm the Companys business and
financial results.
Failure
of the Companys internal control over financial reporting
could harm its business and financial results.
The management of Starbucks is responsible for establishing and
maintaining effective internal control over financial reporting.
Internal control over financial reporting is a process to
provide reasonable assurance regarding the reliability of
financial reporting for external purposes in accordance with
accounting principles generally accepted in the United States of
America. Internal control over financial reporting includes
maintaining records that in reasonable detail accurately and
fairly reflect the Companys transactions; providing
reasonable assurance that transactions are recorded as necessary
for preparation of the financial statements; providing
reasonable assurance that receipts and expenditures are made in
accordance with management authorization; and providing
reasonable assurance that unauthorized acquisition, use or
disposition of the Company assets that could have a material
effect on the financial statements would be prevented or
detected on a timely basis. Because of its inherent limitations,
internal control over financial reporting is not intended to
provide absolute assurance that a misstatement of the
Companys financial statements would be prevented or
detected. The Companys rapid growth and entry into new,
globally dispersed markets will place significant additional
pressure on the Companys system of internal control over
financial reporting. Any failure to maintain an effective system
of internal control over financial reporting could limit the
Companys ability to report its financial results
accurately and timely or to detect and prevent fraud.
Item 1B. Unresolved
Staff Comments
Not applicable.
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STARBUCKS
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Item 2. Properties
The following table shows properties used by Starbucks in
connection with its roasting and distribution operations:
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Approximate Size
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Owned or
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Location
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in Square Feet
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Leased
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Purpose
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Kent, WA
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332,000
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Owned
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Roasting and distribution
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Kent, WA
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402,000
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Leased
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Warehouse
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Renton, WA
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125,000
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Leased
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Warehouse
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York County, PA
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365,000
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Owned
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Roasting and distribution
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York County, PA
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297,000
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Owned
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Warehouse
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York County, PA
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42,000
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Leased
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Warehouse
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Carson Valley, NV
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360,000
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Owned
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Roasting and distribution
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Portland, OR
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80,000
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Leased
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Warehouse
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Basildon, United Kingdom
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141,000
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Leased
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Warehouse and distribution
|
Amsterdam, Netherlands
|
|
|
94,000
|
|
|
Leased
|
|
Roasting and distribution
|
|
|
The Company leases approximately 1,000,000 square feet of
office space and owns a 200,000 square foot office building
in Seattle, Washington for corporate administrative purposes.
As of October 1, 2006, Starbucks had more than 7,100
Company-operated retail stores, of which nearly all are located
in leased premises. The Company also leases space in
approximately 120 additional locations for regional, district
and other administrative offices, training facilities and
storage, not including certain seasonal retail storage locations.
Item 3. Legal
Proceedings
See discussion of Legal Proceedings in Note 18 to the
consolidated financial statements included in Item 8 of
this Report.
Item 4. Submission
of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during
the fiscal fourth quarter of 2006.
EXECUTIVE
OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
|
Howard Schultz
|
|
|
53
|
|
|
chairman of the Board of Directors
|
James L. Donald
|
|
|
52
|
|
|
president, chief executive officer
and director
|
James C. Alling
|
|
|
45
|
|
|
president, Starbucks Coffee
U.S.
|
Martin Coles
|
|
|
51
|
|
|
president, Starbucks Coffee
International
|
Gerardo I. Lopez
|
|
|
47
|
|
|
senior vice president; president,
Global Consumer Products
|
Michael Casey
|
|
|
61
|
|
|
executive vice president, chief
financial officer and chief administrative officer
|
Paula E. Boggs
|
|
|
47
|
|
|
executive vice president, general
counsel and secretary
|
Dorothy J. Kim
|
|
|
44
|
|
|
executive vice president, Supply
Chain Operations
|
David A. Pace
|
|
|
47
|
|
|
executive vice president, Partner
Resources
|
|
|
Howard Schultz is the founder of the Company and the
chairman of the board. From the Companys inception in 1985
to June 2000, he served as chairman of the board and chief
executive officer. From June 2000 to February 2005,
Mr. Schultz also held the title of chief global strategist.
From 1985 to June 1994, Mr. Schultz was the Companys
president. From January 1986 to July 1987, Mr. Schultz was
the chairman of the board, chief executive officer and president
of Il Giornale Coffee Company, a predecessor to the Company.
From September 1982 to December 1985, Mr. Schultz was the
director
|
|
STARBUCKS
CORPORATION, FORM 10-K
|
15
|
of retail operations and marketing for Starbucks Coffee Company,
a predecessor to the Company. Mr. Schultz also serves on
the board of directors of DreamWorks Animation SKG, Inc.
James L. Donald joined Starbucks in October 2002 and has
been president and chief executive officer and a director of the
Company since April 2005. From October 2004 to April 2005,
Mr. Donald served as ceo designate. Prior to that,
Mr. Donald served as president, North America from the time
he joined the Company in October 2002. From October 1996 to
October 2002, Mr. Donald served as chairman, president and
ceo of Pathmark Stores, Inc. and prior to that time he held a
variety of senior management positions with Albertsons,
Inc., Safeway, Inc., and Wal-Mart Stores, Inc.
James C. Alling joined Starbucks in September 1997 as
senior vice president, Grocery and was promoted to president,
Starbucks Coffee U.S. in October 2004. Mr. Alling held
a number of positions as senior vice president from September
1997 until November 2003, when he was promoted to executive vice
president, Business and Operations United States.
Prior to joining Starbucks, Mr. Alling held several senior
positions at Nestlé from 1985 to 1997 and served as vice
president and general manager of several divisions, including
ground coffee.
Martin Coles joined Starbucks in April 2004 as president,
Starbucks Coffee International. Prior to joining Starbucks,
Mr. Coles served as an executive vice president of Reebok
International, Ltd. from December 2001 to February 2004,
including as president and chief executive officer of the
Reebok®
brand from June 2002 to February 2004 and executive vice
president of Global Operating Units from December 2001 to May
2002. From February 2001 to December 2001, Mr. Coles was
senior vice president, International Operations for Gateway,
Inc. From February 2000 to January 2001, Mr. Coles was
president and chief executive officer of Letsbuyit.com. From
September 1992 to February 2000, Mr. Coles held several
executive level general management, sales and operations
positions for NIKE Inc.s Global and European operations.
Gerardo I. Lopez joined Starbucks in October 2004 as
senior vice president; president, Global Consumer Products.
Prior to joining Starbucks, Mr. Lopez was an executive with
the Handleman Entertainment Resources division of Handleman
Company, serving as president from November 2001 to September
2004 and as senior vice president and general manager from May
2000 to November 2001. From April 1997 to May 2000,
Mr. Lopez was an executive with International Home Foods,
Inc. serving as president of its International division from
April 1999 to May 2000 and as senior vice president and general
manager of its SouthWest Brands division from April 1997 to
April 1999. Previously, Mr. Lopez held positions of
increasing responsibility with Frito-Lay, Inc., Pepsi-Cola
Company and The Procter & Gamble Company.
Mr. Lopez serves on the board of directors of TXU Corp.
Michael Casey joined Starbucks in August 1995 as senior
vice president and chief financial officer and was promoted to
executive vice president, chief financial officer and chief
administrative officer in September 1997. Prior to joining
Starbucks, Mr. Casey served as executive vice president and
chief financial officer of Family Restaurants, Inc. from its
inception in 1986. During his tenure there, he also served as a
director from 1986 to 1993, and as president and chief executive
officer of its El Torito Restaurants, Inc. subsidiary from 1988
to 1993. Mr. Casey serves on the board of directors of The
Nasdaq Stock Market, Inc.
Paula E. Boggs joined Starbucks in September 2002 as
executive vice president, general counsel and secretary. Prior
to joining Starbucks, Ms. Boggs served as vice president,
legal, for products, operations and information technology at
Dell Computer Corporation from 1997 to 2002. From 1995 to 1997,
Ms. Boggs was a partner with the law firm of Preston
Gates & Ellis. Ms. Boggs served in several roles
at the Pentagon, White House and U.S. Department of Justice
between 1984 and 1995.
Dorothy J. Kim joined Starbucks in November 1995 and was
promoted to executive vice president, Supply Chain Operations in
December 2004. From April 2003 to December 2004, Ms. Kim
was senior vice president, Global Logistics, Planning and
Procurement. From April 2002 to April 2003, Ms. Kim was
vice president, Supply Chain and Coffee Operations, Logistics,
and from October 2000 to April 2002, Ms. Kim was vice
president, Supply Chain and Coffee Operations, Finance and
Systems. Prior to becoming a vice president, Ms. Kim held
several positions in retail planning and operations.
|
|
16
|
STARBUCKS
CORPORATION, FORM 10-K
|
David A. Pace joined Starbucks in July 2002 as executive
vice president of Partner Resources. From 2000 to 2002,
Mr. Pace was the president of i2 Technologies. From
1999 to 2000 Mr. Pace served as the chief human resources
officer for HomeGrocer.com. From 1995 to 1999, he served as
senior vice president of human resources for Tricon Restaurants
International (now YUM! Brands, Inc.).
There are no family relationships between any directors or
executive officers of the Company.
PART II
|
|
Item 5.
|
Market
for the Registrants Common Equity, Related Shareholder
Matters and Issuer Purchases of Equity Securities
|
SHAREHOLDER
INFORMATION
MARKET
INFORMATION AND DIVIDEND POLICY
The Companys common stock is traded on the Global Select
Market of The NASDAQ Stock Market, Inc. (NASDAQ),
under the symbol SBUX. The following table shows the
quarterly high and low closing sale prices per share of the
Companys common stock as reported by NASDAQ for each
quarter during the last two fiscal years:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
|
October 1, 2006:
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
38.02
|
|
|
$
|
29.55
|
|
Third Quarter
|
|
|
39.63
|
|
|
|
34.93
|
|
Second Quarter
|
|
|
37.63
|
|
|
|
30.24
|
|
First Quarter
|
|
|
31.96
|
|
|
|
24.91
|
|
October 2, 2005:
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
26.35
|
|
|
$
|
23.08
|
|
Third Quarter
|
|
|
28.13
|
|
|
|
22.78
|
|
Second Quarter
|
|
|
30.80
|
|
|
|
24.79
|
|
First Quarter
|
|
|
31.94
|
|
|
|
23.53
|
|
|
|
As of December 8, 2006, the Company had approximately
16,653 shareholders of record. Starbucks has never paid any
dividends on its common stock. The Company presently intends to
retain earnings for use in its business and to repurchase shares
of common stock and, therefore, does not anticipate paying a
cash dividend in the near future.
The following table provides information regarding repurchases
by the Company of its common stock during the
13-week
period ended October 1, 2006:
ISSUER
PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Purchased as
|
|
|
Shares that May
|
|
|
|
Total
|
|
|
Average
|
|
|
Part of Publicly
|
|
|
Yet Be
|
|
|
|
Number of
|
|
|
Price
|
|
|
Announced
|
|
|
Purchased
|
|
|
|
Shares
|
|
|
Paid per
|
|
|
Plans or
|
|
|
Under the Plans
|
|
Period (1)
|
|
Purchased
|
|
|
Share
|
|
|
Programs (2)
|
|
|
or
Programs (2)
|
|
|
|
|
July 3, 2006
July 30, 2006
|
|
|
6,601,624
|
|
|
$
|
34.54
|
|
|
|
6,601,624
|
|
|
|
29,440,530
|
|
July 31, 2006
August 27, 2006
|
|
|
7,262,404
|
|
|
|
30.87
|
|
|
|
7,262,404
|
|
|
|
22,178,126
|
|
August 28, 2006
October 1, 2006
|
|
|
690,000
|
|
|
|
31.48
|
|
|
|
690,000
|
|
|
|
21,488,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
14,554,028
|
|
|
|
32.57
|
|
|
|
14,554,028
|
|
|
|
|
|
|
|
|
|
(1)
|
Monthly information is presented by reference to the
Companys fiscal months during the fourth quarter of fiscal
2006.
|
|
(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 Board authorizations to repurchase shares of common stock, as
follows: 20 million shares publicly announced on
May 5, 2005, 10 million shares publicly announced on
September 22, 2005 and 25 million shares publicly
announced August 2, 2006. Shares remaining for repurchase
relate to the August 2, 2006 authorization, which has no
expiration date.
|
|
|
STARBUCKS
CORPORATION, FORM 10-K
|
17
|
Item 6. Selected
Financial Data
In thousands, except
earnings per share and store operating data
The following selected financial data are derived from the
consolidated financial statements of the Company. The data below
should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of
Operations, Risk Factors, and the
Companys consolidated financial statements and notes. In
particular, see Note 1 to the consolidated financial
statements included in Item 8 of this Report for a
description of accounting changes that materially affect the
comparability of the data presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oct 1, 2006
|
|
|
Oct 2, 2005
|
|
|
Oct 3, 2004
|
|
|
Sept 28, 2003
|
|
|
Sept 29, 2002
|
|
AS OF AND FOR THE FISCAL YEAR
ENDED (1)
|
|
(52 Wks)
|
|
|
(52 Wks)
|
|
|
(53 Wks)
|
|
|
(52 Wks)
|
|
|
(52 Wks)
|
|
|
|
|
RESULTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail
|
|
$
|
6,583,098
|
|
|
$
|
5,391,927
|
|
|
$
|
4,457,378
|
|
|
$
|
3,449,624
|
|
|
$
|
2,792,904
|
|
Specialty:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing
|
|
|
860,676
|
|
|
|
673,015
|
|
|
|
565,798
|
|
|
|
409,551
|
|
|
|
311,932
|
|
Foodservice and other
|
|
|
343,168
|
|
|
|
304,358
|
|
|
|
271,071
|
|
|
|
216,347
|
|
|
|
184,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty
|
|
|
1,203,844
|
|
|
|
977,373
|
|
|
|
836,869
|
|
|
|
625,898
|
|
|
|
496,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
7,786,942
|
|
|
|
6,369,300
|
|
|
|
5,294,247
|
|
|
|
4,075,522
|
|
|
|
3,288,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
893,952
|
|
|
|
780,518
|
|
|
|
606,494
|
|
|
|
420,672
|
|
|
|
313,301
|
|
Gain on sale of
investment (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,361
|
|
Earnings before cumulative effect
of change in accounting principle
|
|
|
581,473
|
|
|
|
494,370
|
|
|
|
388,880
|
|
|
|
265,177
|
|
|
|
210,460
|
|
Cumulative effect of accounting
change for FIN 47,
net of
taxes (3)
|
|
|
17,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
564,259
|
|
|
$
|
494,370
|
|
|
$
|
388,880
|
|
|
$
|
265,177
|
|
|
$
|
210,460
|
|
Earnings per common share before
cumulative effect of change in accounting
principle diluted
|
|
$
|
0.73
|
|
|
$
|
0.61
|
|
|
$
|
0.47
|
|
|
$
|
0.33
|
|
|
$
|
0.26
|
|
Cumulative effect of accounting
change for FIN 47,
net of taxes per common share
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common
share diluted
|
|
$
|
0.71
|
|
|
$
|
0.61
|
|
|
$
|
0.47
|
|
|
$
|
0.33
|
|
|
$
|
0.26
|
|
Cash dividends per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital (4)
|
|
$
|
(405,832
|
)
|
|
$
|
(17,662
|
)
|
|
$
|
604,636
|
|
|
$
|
335,767
|
|
|
$
|
328,777
|
|
Total assets
|
|
|
4,428,941
|
|
|
|
3,513,693
|
|
|
|
3,386,266
|
|
|
|
2,775,931
|
|
|
|
2,249,432
|
|
Short-term
borrowings (5)
|
|
|
700,000
|
|
|
|
277,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt (including current
portion)
|
|
|
2,720
|
|
|
|
3,618
|
|
|
|
4,353
|
|
|
|
5,076
|
|
|
|
5,786
|
|
Shareholders equity
|
|
$
|
2,228,506
|
|
|
$
|
2,090,262
|
|
|
$
|
2,469,936
|
|
|
$
|
2,068,507
|
|
|
$
|
1,712,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STORE INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage change in comparable
store
sales (6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
7
|
%
|
|
|
9
|
%
|
|
|
11
|
%
|
|
|
9
|
%
|
|
|
7
|
%
|
International
|
|
|
8
|
%
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
7
|
%
|
|
|
1
|
%
|
Consolidated
|
|
|
7
|
%
|
|
|
8
|
%
|
|
|
10
|
%
|
|
|
8
|
%
|
|
|
6
|
%
|
Stores opened during the
year: (7)(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated stores
|
|
|
810
|
|
|
|
580
|
|
|
|
521
|
|
|
|
514
|
|
|
|
507
|
|
Licensed stores
|
|
|
733
|
|
|
|
596
|
|
|
|
417
|
|
|
|
315
|
|
|
|
264
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated stores
|
|
|
230
|
|
|
|
166
|
|
|
|
144
|
|
|
|
126
|
|
|
|
118
|
|
Licensed stores
|
|
|
426
|
|
|
|
330
|
|
|
|
262
|
|
|
|
246
|
|
|
|
288
|
|
|
|
Total
|
|
|
2,199
|
|
|
|
1,672
|
|
|
|
1,344
|
|
|
|
1,201
|
|
|
|
1,177
|
|
|
|
|
|
18
|
STARBUCKS
CORPORATION, FORM 10-K
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oct 1, 2006
|
|
|
Oct 2, 2005
|
|
|
Oct 3, 2004
|
|
|
Sept 28, 2003
|
|
|
Sept 29, 2002
|
|
AS OF AND FOR THE FISCAL YEAR
ENDED (1)
|
|
(52 Wks)
|
|
|
(52 Wks)
|
|
|
(53 Wks)
|
|
|
(52 Wks)
|
|
|
(52 Wks)
|
|
|
|
|
Stores open at year
end:(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated stores
|
|
|
5,728
|
|
|
|
4,918
|
|
|
|
4,338
|
|
|
|
3,817
|
|
|
|
3,239
|
|
Licensed stores
|
|
|
3,168
|
|
|
|
2,435
|
|
|
|
1,839
|
|
|
|
1,422
|
|
|
|
1,033
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated stores
|
|
|
1,374
|
|
|
|
1,144
|
|
|
|
978
|
|
|
|
834
|
|
|
|
708
|
|
Licensed stores
|
|
|
2,170
|
|
|
|
1,744
|
|
|
|
1,414
|
|
|
|
1,152
|
|
|
|
906
|
|
|
|
Total
|
|
|
12,440
|
|
|
|
10,241
|
|
|
|
8,569
|
|
|
|
7,225
|
|
|
|
5,886
|
|
|
|
|
|
|
(1)
|
|
The Companys fiscal year ends
on the Sunday closest to September 30.
|
|
(2)
|
|
On October 10, 2001, the
Company sold 30,000 of its shares of Starbucks Coffee Japan,
Ltd. at approximately $495 per share, net of related costs,
which resulted in a gain of $13.4 million.
|
|
(3)
|
|
As discussed in Note 1
Asset Retirement Obligations under the Notes to
Consolidated Financial Statements included in Item 8,
Financial Statements and Supplementary Data of this
Form 10-K,
Starbucks adopted FASB Interpretation No. 47,
Accounting for Conditional Asset Retirement
Obligations an interpretation of FASB Statement
No. 143 at the end of the fourth fiscal quarter of
2006.
|
|
(4)
|
|
Working capital deficit as of
October 1, 2006 was primarily due to increased current
liabilities from short term borrowings under the revolving
credit facility. See (5) below.
|
|
(5)
|
|
In August 2006, the Company
increased its borrowing capacity under the five-year revolving
credit facility to $1 billion and had borrowings of
$700 million outstanding as of October 1, 2006.
|
|
(6)
|
|
Includes only Starbucks
Company-operated retail stores open 13 months or longer.
Comparable store sales percentage for fiscal 2004 excludes the
extra sales week.
|
|
(7)
|
|
Store openings are reported net of
closures.
|
|
(8)
|
|
International store information has
been adjusted for the fiscal 2006 acquisitions of Hawaii and
Puerto Rico and fiscal 2005 acquisitions of Germany, Southern
China and Chile licensed operations by reclassifying historical
information from Licensed stores to Company-operated stores.
United States store information was also adjusted to align with
the Hawaii operations segment change by reclassifying historical
information from International Company-operated stores to the
United States.
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results
of Operations
|
GENERAL
Starbucks Corporations fiscal year ends on the Sunday
closest to September 30. The fiscal years ended on
October 1, 2006 and October 2, 2005, included
52 weeks. The fiscal year ended October 3, 2004,
included 53 weeks, with the 53rd week falling in the
fiscal fourth quarter.
MANAGEMENT
OVERVIEW
During the fiscal year ended October 1, 2006, the
Companys focus on execution in all areas of its business,
from U.S. and International Company-operated retail operations
to the Companys specialty businesses, delivered strong
financial performance. Management believes that its ability to
achieve the balance between growing the core business and
building the foundation for future growth is the key to
increasing long-term shareholder value. Starbucks fiscal 2006
performance reflects the Companys continuing commitment to
achieving this balance.
The primary driver of the Companys revenue growth
continues to be the opening of new retail stores, both
Company-operated and licensed, in pursuit of the Companys
objective to establish Starbucks as one of the most recognized
and respected brands in the world. Starbucks opened 2,199 new
stores in fiscal 2006 and plans to open approximately 2,400 in
fiscal 2007. With a presence in 37 countries, serving customers
more than 40 million times per week, management
|
|
STARBUCKS
CORPORATION, FORM 10-K
|
19
|
continues to believe that the Companys long-term goal of
approximately 20,000 Starbucks retail locations throughout the
United States and at least 20,000 stores in International
markets is achievable.
In addition to opening new retail stores, Starbucks works to
increase revenues generated at new and existing Company-operated
stores by attracting new customers and increasing the frequency
of visits by current customers. The strategy is to increase
comparable store sales by continuously improving the level of
customer service, introducing innovative products and improving
speed with service through training, technology and process
improvement.
Global comparable store sales for Company-operated markets
increased by 7%, making fiscal 2006 the 15th consecutive
year with comparable store sales growth of 5% or greater.
Comparable store sales growth for fiscal 2007 is expected to be
in the 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 January 2006, the Company increased
its equity ownership from 5% to 100% in its operations in Hawaii
and Puerto Rico, and subsequent to the end of fiscal 2006
purchased a 90% stake in its previously-licensed operations in
Beijing, China.
The combination of more retail stores, comparable store sales
growth of 7% and growth in other business channels in the U.S.,
International, and CPG operating segments resulted in a 22%
increase in total net revenues for fiscal 2006, compared to
fiscal 2005. The Company expects revenue growth of approximately
20% in fiscal 2007, consistent with its three to five year
revenue growth target.
Operating income as a percentage of total net revenues decreased
to 11.5% in fiscal 2006 from 12.3% in fiscal 2005, due to the
recognition of stock-based compensation. Net earnings increased
by 14% in fiscal 2006, compared to fiscal 2005. Reported
operating margin and net earnings include the effects of
stock-based compensation in fiscal 2006, while stock-based
compensation expense was not included in the Companys
consolidated financial results in fiscal 2005.
ACQUISITIONS
In January 2006, Starbucks increased its equity ownership to
100% in its operations in Hawaii and Puerto Rico and applied the
consolidation method of accounting from the acquisition date.
Previously the Company owned 5% of both Coffee Partners Hawaii
and Café del Caribe in Puerto Rico. Because Coffee Partners
Hawaii was a general partnership, the equity method of
accounting was previously applied. Retroactive application of
the equity method of accounting for the Puerto Rico investment,
which was previously accounted for under the cost method,
resulted in a reduction of retained earnings of
$0.5 million as of April 2, 2006. The cumulative
effect of the accounting change for financial results previously
reported under the cost method and as restated in this report
under the equity method reduced net earnings by $97 thousand for
the fiscal year ended October 2, 2005 and $93 thousand for
the fiscal year ended October 2, 2004. Previously reported
earnings per share amounts were not impacted.
On October 18, 2006, the Company acquired 90% equity
ownership of the licensed operations of 61 Starbucks retail
stores in Beijing and Tianjin, China (See Note 20
Subsequent Event).
|
|
20
|
STARBUCKS
CORPORATION, FORM 10-K
|
RESULTS
OF OPERATIONS FISCAL 2006 COMPARED TO FISCAL
2005
The following table presents the consolidated statement of
earnings as well as the percentage relationship to total net
revenues, unless otherwise indicated, of items included in the
Companys consolidated statements of earnings (amounts
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oct 1, 2006
|
|
|
% of
|
|
|
Oct 2, 2005
|
|
|
% of
|
|
|
Oct 3, 2004
|
|
|
% of
|
|
FISCAL YEAR ENDED
|
|
(52 Wks)
|
|
|
Revenues
|
|
|
(52 Wks)
|
|
|
Revenues
|
|
|
(53 Wks)
|
|
|
Revenues
|
|
|
|
STATEMENTS OF EARNINGS
DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail
|
|
$
|
6,583,098
|
|
|
|
84.5
|
%
|
|
$
|
5,391,927
|
|
|
|
84.7
|
%
|
|
$
|
4,457,378
|
|
|
|
84.2
|
%
|
Specialty:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing
|
|
|
860,676
|
|
|
|
11.1
|
|
|
|
673,015
|
|
|
|
10.5
|
|
|
|
565,798
|
|
|
|
10.7
|
|
Foodservice and other
|
|
|
343,168
|
|
|
|
4.4
|
|
|
|
304,358
|
|
|
|
4.8
|
|
|
|
271,071
|
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty
|
|
|
1,203,844
|
|
|
|
15.5
|
|
|
|
977,373
|
|
|
|
15.3
|
|
|
|
836,869
|
|
|
|
15.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
7,786,942
|
|
|
|
100.0
|
|
|
|
6,369,300
|
|
|
|
100.0
|
|
|
|
5,294,247
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales including occupancy
costs
|
|
|
3,178,791
|
|
|
|
40.8
|
|
|
|
2,605,212
|
|
|
|
40.9
|
|
|
|
2,191,440
|
|
|
|
41.4
|
|
Store operating expenses
|
|
|
2,687,815
|
|
|
|
40.8
|
(1)
|
|
|
2,165,911
|
|
|
|
40.2
|
(1)
|
|
|
1,790,168
|
|
|
|
40.2
|
(1)
|
Other operating expenses
|
|
|
260,087
|
|
|
|
21.6
|
(2)
|
|
|
197,024
|
|
|
|
20.2
|
(2)
|
|
|
171,648
|
|
|
|
20.5
|
(2)
|
Depreciation and amortization
expenses
|
|
|
387,211
|
|
|
|
5.0
|
|
|
|
340,169
|
|
|
|
5.3
|
|
|
|
289,182
|
|
|
|
5.5
|
|
General and administrative expenses
|
|
|
473,023
|
|
|
|
6.1
|
|
|
|
357,114
|
|
|
|
5.6
|
|
|
|
304,293
|
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal operating expenses
|
|
|
6,986,927
|
|
|
|
89.7
|
|
|
|
5,665,430
|
|
|
|
88.9
|
|
|
|
4,746,731
|
|
|
|
89.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from equity investees
|
|
|
93,937
|
|
|
|
1.2
|
|
|
|
76,648
|
|
|
|
1.2
|
|
|
|
58,978
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
893,952
|
|
|
|
11.5
|
|
|
|
780,518
|
|
|
|
12.3
|
|
|
|
606,494
|
|
|
|
11.5
|
|
Interest and other income, net
|
|
|
12,291
|
|
|
|
0.1
|
|
|
|
15,829
|
|
|
|
0.2
|
|
|
|
14,140
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
906,243
|
|
|
|
11.6
|
|
|
|
796,347
|
|
|
|
12.5
|
|
|
|
620,634
|
|
|
|
11.7
|
|
Income taxes
|
|
|
324,770
|
|
|
|
4.1
|
|
|
|
301,977
|
|
|
|
4.7
|
|
|
|
231,754
|
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before cumulative effect
of change in accounting principle
|
|
|
581,473
|
|
|
|
7.5
|
%
|
|
|
494,370
|
|
|
|
7.8
|
%
|
|
|
388,880
|
|
|
|
7.3
|
%
|
Cumulative effect of accounting
change for FIN 47, net of taxes
|
|
|
17,214
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
564,259
|
|
|
|
7.2
|
%
|
|
$
|
494,370
|
|
|
|
7.8
|
%
|
|
$
|
388,880
|
|
|
|
7.3
|
%
|
|
|
|
|
|
(1)
|
|
Shown as a percentage of related
Company-operated retail revenues.
|
|
(2)
|
|
Shown as a percentage of related
total specialty revenues.
|
CONSOLIDATED
RESULTS OF OPERATIONS
Net revenues for the fiscal year ended 2006 increased 22% to
$7.8 billion from $6.4 billion for fiscal 2005, 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 fiscal year ended 2006, Starbucks derived 85% of
total net revenues from its Company-operated retail stores.
Company-operated retail revenues increased 22% to
$6.6 billion for the fiscal year ended 2006, from
$5.4 billion for fiscal 2005. This increase was primarily
due to the opening of 1,040 new Company-operated retail stores
in the last 12 months and comparable store sales growth of
7% in fiscal 2006. The increase in comparable store sales was
due to a 5% increase in the number of customer transactions and
a 2% increase in the average value per transaction. Management
believes increased customer traffic continues to be driven by
sustained popularity of core products, new product innovation
and a high level of customer satisfaction.
|
|
STARBUCKS
CORPORATION, FORM 10-K
|
21
|
The Company derived the remaining 15% of total net revenues from
channels outside the Company-operated retail stores,
collectively known as Specialty Operations.
Specialty revenues, which include licensing revenues and
foodservice and other revenues, increased 23% to
$1.2 billion for the fiscal year ended 2006, from
$977 million for fiscal 2005.
Licensing revenues, which are derived from retail store
licensing arrangements, as well as grocery, warehouse club and
certain other branded product operations, increased 28% to
$861 million for fiscal 2006, from $673 million for
fiscal 2005. The increase is primarily due to higher product
sales and royalty revenues from the opening of 1,159 new
licensed retail stores in the last 12 months and, to a
lesser extent, growth in the licensed grocery and warehouse club
business.
Foodservice and other revenues increased 13% to
$343 million for fiscal 2006, from $304 million for
fiscal 2005. Foodservice and other revenues increased primarily
due to growth in new and existing U.S. foodservice accounts.
Cost of sales including occupancy costs decreased slightly to
40.8% of total net revenues for fiscal 2006, from 40.9% in
fiscal 2005. The decrease was primarily due to fixed rent costs
in fiscal 2006 being distributed over an expanded revenue base,
as well as increased occupancy costs in fiscal 2005 resulting
from intensified store maintenance activities. These favorable
items, combined with lower dairy costs, offset higher green
coffee costs for fiscal 2006.
Store operating expenses as a percentage of Company-operated
retail revenues increased to 40.8% for fiscal 2006 from 40.2%
for fiscal 2005. The increase was due to the recognition of
stock-based compensation expense and to higher provisions for
incentive compensation.
Other operating expenses, which are expenses associated with the
Companys Specialty Operations, increased to 21.6% of
specialty revenues in fiscal 2006, compared to 20.2% in fiscal
2005. The increase was primarily due to the recognition of
stock-based compensation expense as well as higher
payroll-related expenditures to support the expanding licensed
store operations, both in the U.S. and in existing and new
international markets.
Depreciation and amortization expenses increased to
$387 million in fiscal 2006, from $340 million in
fiscal 2005. The increase of $47 million was due to the
opening of 1,040 new Company-operated retail stores in the last
12 months. As a percentage of total net revenues,
depreciation and amortization decreased to 5.0% for fiscal 2006,
from 5.3% for fiscal 2005.
General and administrative expenses increased to
$473 million in fiscal 2006, compared to $357 million
in fiscal 2005. The increase was due to higher payroll-related
expenditures from the recognition of stock-based compensation
expense, additional employees to support continued global
growth, and higher professional fees in support of global
systems infrastructure development. As a percentage of total net
revenues, general and administrative expenses increased to 6.1%
for fiscal 2006, from 5.6% for fiscal 2005.
Income from equity investees increased to $94 million in
fiscal 2006, compared to $77 million in fiscal 2005. The
increase was primarily due to favorable volume-driven operating
results for The North American Coffee Partnership, which
produces
ready-to-drink
beverages which include, among others, bottled
Frappuccino®
coffee drinks and Starbucks
DoubleShot®
espresso drinks, as well as improved operating results from
international investees, including Korea and Japan, mainly as a
result of new store openings.
Operating income increased 15% to $894 million in fiscal
2006, from $781 million in fiscal 2005. The operating
margin decreased to 11.5% of total net revenues in fiscal 2006,
compared to 12.3% in fiscal 2005, due to the recognition of
stock-based compensation expense.
Net interest and other income, which primarily consists of
interest income, decreased to $12 million in fiscal 2006,
from $16 million in fiscal 2005. The decrease was primarily
due to higher interest expense on the Companys revolving
credit facility, as well as lower interest income earned due to
lower average investment balances, offset in part by the
recognition of $4.4 million of income on unredeemed stored
value card balances in fiscal 2006. There was no income
recognized on unredeemed stored value card balances in fiscal
2005.
Income taxes for fiscal 2006 resulted in an effective tax rate
of 35.8%, compared to 37.9% in fiscal 2005. The decline in the
effective tax rate was due to the reversal of a valuation
allowance in fiscal 2006 that had been established in fiscal
2005,
|
|
22
|
STARBUCKS
CORPORATION, FORM 10-K
|
the settlement in the third quarter of fiscal 2006 of a
multi-year income tax audit in a foreign jurisdiction for which
the Company had established a contingent liability, and to
increased effectiveness of the Companys long-term tax
planning strategies. The effective tax rate for fiscal 2007 is
expected to be approximately 38%, with quarterly variations.
OPERATING
SEGMENTS
Segment information is prepared on the same basis that the
Companys management reviews financial information for
operational decision-making purposes. Beginning in the fiscal
fourth quarter of 2006, the Company increased its reporting
segments from two to three to include a Global CPG segment in
addition to the United States and International segments. This
additional operating segment reflects the culmination of
internal management realignments in fiscal 2006, and the
successful development and launch of certain branded products in
the United States and internationally commencing in fiscal 2005
and continuing throughout fiscal 2006. Additionally, with the
100% acquisition of the Companys operations in Hawaii in
fiscal 2006 and the shift in internal management of this market
to the United States, these operations have been moved from the
International segment into the United States segment. Segment
information for all prior periods presented has been revised to
reflect these changes.
The following tables summarize the Companys results of
operations by segment for fiscal 2006 and 2005 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52 Weeks Ended
|
|
|
52 Weeks Ended
|
|
|
|
|
|
|
|
|
|
|
Oct 1, 2006
|
|
Oct 2, 2005
|
|
% Change
|
|
|
Oct 1, 2006
|
|
|
Oct 2, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of
|
|
UNITED STATES
|
|
|
|
|
|
|
|
|
U.S. Total Net Revenues
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail
|
|
$
|
5,495,240
|
|
$
|
4,539,455
|
|
|
21.1
|
%
|
|
|
88.9
|
%
|
|
|
89.1
|
%
|
Specialty:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing
|
|
|
369,155
|
|
|
277,987
|
|
|
32.8
|
|
|
|
6.0
|
|
|
|
5.4
|
|
Foodservice and other
|
|
|
314,162
|
|
|
280,073
|
|
|
12.2
|
|
|
|
5.1
|
|
|
|
5.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty
|
|
|
683,317
|
|
|
558,060
|
|
|
22.4
|
|
|
|
11.1
|
|
|
|
10.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
6,178,557
|
|
|
5,097,515
|
|
|
21.2
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Cost of sales including occupancy
costs
|
|
|
2,374,485
|
|
|
1,944,356
|
|
|
|
|
|
|
38.4
|
|
|
|
38.1
|
|
Store operating expenses
|
|
|
2,280,044
|
|
|
1,848,836
|
|
|
|
|
|
|
41.5
|
(1)
|
|
|
40.7
|
(1)
|
Other operating expenses
|
|
|
190,624
|
|
|
150,712
|
|
|
|
|
|
|
27.9
|
(2)
|
|
|
27.0
|
(2)
|
Depreciation and amortization
expenses
|
|
|
284,625
|
|
|
250,339
|
|
|
|
|
|
|
4.6
|
|
|
|
4.9
|
|
General and administrative expenses
|
|
|
93,754
|
|
|
85,362
|
|
|
|
|
|
|
1.5
|
|
|
|
1.7
|
|
Income from equity investees
|
|
|
151
|
|
|
592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
955,176
|
|
$
|
818,502
|
|
|
16.7
|
%
|
|
|
15.5
|
%
|
|
|
16.1
|
%
|
|
|
|
|
|
(1)
|
|
Shown as a percentage of related
Company-operated retail revenues.
|
|
(2)
|
|
Shown as a percentage of related
total specialty revenues.
|
|
|
STARBUCKS
CORPORATION, FORM 10-K
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52 Weeks Ended
|
|
|
52 Weeks Ended
|
|
|
|
Oct 1, 2006
|
|
Oct 2, 2005
|
|
% Change
|
|
|
Oct 1, 2006
|
|
|
Oct 2, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of International
|
|
INTERNATIONAL
|
|
|
|
|
|
|
|
|
Total Net Revenues
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail
|
|
$
|
1,087,858
|
|
$
|
852,472
|
|
|
27.6
|
%
|
|
|
83.5
|
%
|
|
|
83.4
|
%
|
Specialty:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing
|
|
|
186,050
|
|
|
145,736
|
|
|
27.7
|
|
|
|
14.3
|
|
|
|
14.2
|
|
Foodservice and other
|
|
|
29,006
|
|
|
24,285
|
|
|
19.4
|
|
|
|
2.2
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty
|
|
|
215,056
|
|
|
170,021
|
|
|
26.5
|
|
|
|
16.5
|
|
|
|
16.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
1,302,914
|
|
|
1,022,493
|
|
|
27.4
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Cost of sales including occupancy
costs
|
|
|
625,008
|
|
|
511,761
|
|
|
|
|
|
|
48.0
|
|
|
|
50.1
|
|
Store operating expenses
|
|
|
407,771
|
|
|
317,075
|
|
|
|
|
|
|
37.5
|
(1)
|
|
|
37.2
|
(1)
|
Other operating expenses
|
|
|
50,900
|
|
|
32,061
|
|
|
|
|
|
|
23.7
|
(2)
|
|
|
18.9
|
(2)
|
Depreciation and amortization
expenses
|
|
|
66,800
|
|
|
56,705
|
|
|
|
|
|
|
5.1
|
|
|
|
5.5
|
|
General and administrative expenses
|
|
|
78,337
|
|
|
53,069
|
|
|
|
|
|
|
6.0
|
|
|
|
5.2
|
|
Income from equity investees
|
|
|
34,370
|
|
|
30,477
|
|
|
|
|
|
|
2.6
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
108,468
|
|
$
|
82,299
|
|
|
31.8
|
%
|
|
|
8.3
|
%
|
|
|
8.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of
|
|
GLOBAL CONSUMER PRODUCTS GROUP
|
|
|
|
|
|
|
|
|
CPG Total Net Revenues
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing
|
|
$
|
305,471
|
|
$
|
249,292
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty
|
|
|
305,471
|
|
|
249,292
|
|
|
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
305,471
|
|
|
249,292
|
|
|
22.5
|
%
|
|
|
100.0
|
|
|
|
100.0
|
|
Cost of sales
|
|
|
179,298
|
|
|
149,095
|
|
|
|
|
|
|
58.7
|
|
|
|
59.8
|
|
Other operating expenses
|
|
|
18,563
|
|
|
14,251
|
|
|
|
|
|
|
6.1
|
|
|
|
5.7
|
|
Depreciation and amortization
expenses
|
|
|
108
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from equity investees
|
|
|
59,416
|
|
|
45,579
|
|
|
|
|
|
|
19.4
|
|
|
|
18.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
166,918
|
|
$
|
131,449
|
|
|
27.0
|
%
|
|
|
54.6
|
%
|
|
|
52.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of
|
|
UNALLOCATED CORPORATE
|
|
|
|
|
|
|
|
|
|
Total Net Revenues
|
|
|
|
Depreciation and amortization
expenses
|
|
$
|
35,678
|
|
|
$
|
33,049
|
|
|
|
|
|
|
0.4
|
%
|
|
|
0.5
|
%
|
General and administrative expenses
|
|
|
300,932
|
|
|
|
218,683
|
|
|
|
|
|
|
3.9
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(336,610
|
)
|
|
$
|
(251,732
|
)
|
|
|
|
|
|
(4.3
|
)%
|
|
|
(3.9
|
)%
|
|
|
|
|
|
(1)
|
|
Shown as a percentage of related
Company-operated retail revenues.
|
|
(2)
|
|
Shown as a percentage of related
total specialty revenues.
|
United
States
The Companys United States operations (United
States) represent 83% of Company-operated retail revenues,
57% of total specialty revenues and 79% of total net revenues.
United States operations sell coffee and other beverages, whole
bean coffees, complementary food, coffee brewing equipment and
merchandise primarily through Company-operated retail stores.
Specialty Operations within the United States include licensed
retail stores, foodservice accounts and other initiatives
related to the Companys core business.
|
|
24
|
STARBUCKS
CORPORATION, FORM 10-K
|
United States total net revenues increased 21% to
$6.2 billion for the fiscal year ended 2006, compared to
$5.1 billion for fiscal 2005.
United States Company-operated retail revenues increased 21% to
$5.5 billion for the fiscal year ended 2006, compared to
$4.5 billion for fiscal 2005. United States
Company-operated retail revenues increased primarily due to the
opening of 810 new Company-operated retail stores in the last
12 months and comparable store sales growth of 7% for
fiscal 2006. The increase in comparable store sales was due to a
5% increase in the average value per transaction and a 2%
increase in the number of customer transactions. Management
believes increased customer traffic continues to be driven by
new product innovation, continued popularity of core products
and a high level of customer satisfaction.
Total United States specialty revenues increased 22% to
$683 million for the fiscal year ended 2006, compared to
$558 million in fiscal 2005. United States licensing
revenues increased 33% to $369 million, compared to
$278 million for fiscal 2005. United States licensing
revenues increased due to increased product sales and royalty
revenues as a result of opening 733 new licensed retail stores
in the last 12 months. Foodservice and other revenues
increased 12% to $314 million from $280 million for
fiscal 2005. United States foodservice and other revenues
increased primarily due to growth in new and existing
foodservice accounts.
United States operating income increased 17% to
$955 million for the fiscal year ended 2006, from
$819 million for the fiscal year ended 2005. Operating
margin decreased to 15.5% of related revenues from 16.1% in
fiscal 2005. The decrease was due to the recognition of
stock-based compensation expense.
International
The Companys International operations
(International) represent the remaining 17% of
Company-operated retail revenues and 18% of total specialty
revenues as well as 17% of total net revenues. International
operations sell coffee and other beverages, whole bean coffees,
complementary food, coffee brewing equipment and merchandise
through Company-operated retail stores in the United Kingdom,
Canada, Thailand, Australia, Germany, China, Singapore, Puerto
Rico, Chile and Ireland. Specialty Operations in International
primarily include retail store licensing operations in more than
25 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, such as
China. The Companys International operations are in
various 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 27% to
$1.3 billion for the fiscal year ended 2006, compared to
$1.0 billion for fiscal 2005. International
Company-operated retail revenues increased 28% to
$1.1 billion for the fiscal year ended 2006, compared to
$852 million for fiscal 2005. International
Company-operated revenues increased due to the opening of 230
new Company-operated retail stores in the last 12 months,
comparable store sales growth of 8% for fiscal 2006, and the
weakening of the U.S. dollar against the Canadian dollar.
The increase in comparable store sales resulted from a 5%
increase in the number of customer transactions and a 3%
increase in the average value per transaction.
Total International specialty revenues increased 26% to
$215 million for the fiscal year ended 2006, compared to
$170 million for fiscal 2005. International licensing
revenues increased 28% to $186 million for the fiscal year
ended 2006, compared to $146 million in fiscal 2005.
International licensing revenues increased due to higher product
sales and royalty revenues from opening 426 new licensed retail
stores in the last 12 months. International foodservice and
other revenues increased 19% to $29 million for the fiscal
year ended 2006, compared to $24 million in fiscal 2005.
International foodservice and other revenues increased primarily
due to growth in the total number of foodservice accounts.
International operating income increased to $108 million
for the fiscal year ended 2006, compared to $82 million in
fiscal 2005. Operating margin increased to 8.3% of related
revenues from 8.0% in fiscal 2005, primarily due to lower cost
of sales including occupancy costs due to leverage gained from
fixed costs distributed over an expanded revenue base, as
|
|
STARBUCKS
CORPORATION, FORM 10-K
|
25
|
well as lower dairy costs. These improvements were partially
offset by higher store operating expenses and other operating
expenses due to higher payroll-related expenditures primarily to
support global expansion as well as the recognition of
stock-based compensation expense.
Global
Consumer Products Group
The Companys CPG segment represents 25% of total specialty
revenues and 4% of total net revenues. CPG operations sell a
selection of whole bean and ground coffees as well as a
selection of premium
Tazo®
teas through licensing arrangements with Kraft and other grocery
and warehouse club stores in United States and international
markets. CPG operations also produce and sell
ready-to-drink
beverages which include, among others, bottled
Frappuccino®
coffee drinks and Starbucks
DoubleShot®
espresso drinks, and
Starbucks®
superpremium ice creams, through its joint venture partnerships,
and
Starbuckstm
Coffee and Cream Liqueurs through a marketing and distribution
agreement. Through other manufacturing, distribution and
co-packing agreements, the Company produces and sells
ready-to-drink
products in international locations.
CPG total net revenues increased 23% to $305 million for
the fiscal year ended 2006, compared to $249 million for
fiscal 2005, primarily due to volume growth in the licensed
grocery and warehouse club business as well as sales of
ready-to-drink
coffee beverages introduced in Japan, Taiwan and Korea in the
fall of 2005.
CPG operating income increased to $167 million for the
fiscal year ended 2006, compared to $131 million for fiscal
2005. Operating margin increased to 54.6% of related revenues,
from 52.7% in fiscal 2005, primarily due to higher income from
the Companys equity investees and lower cost of sales as a
percentage of revenues. The increase in equity investee income
was primarily due to volume-driven results for The North
American Coffee Partnership, which produces
ready-to-drink
beverages which include, among others, bottled
Frappuccino®
coffee drinks and Starbucks
Doubleshot®
espresso drinks. Lower cost of sales was due to a sales mix
shift to products with higher gross margins.
Unallocated
Corporate
Unallocated corporate expenses pertain to corporate
administrative functions that support but are not specifically
attributable to the Companys operating segments, and
include related depreciation and amortization expenses.
Unallocated corporate expenses increased to $337 million
for the fiscal year ended 2006, from $252 million in fiscal
2005. The increase was due to higher payroll-related
expenditures from the recognition of stock-based compensation
expense and to additional employees, as well as higher
professional fees primarily in support of global systems
infrastructure development. Total unallocated corporate expenses
as a percentage of total net revenues were 4.3% for the fiscal
year ended 2006, compared to 3.9% for fiscal 2005.
RESULTS
OF OPERATIONS FISCAL 2005 COMPARED TO FISCAL
2004
CONSOLIDATED
RESULTS OF OPERATIONS
Net revenues for the fiscal year ended 2005 increased 20% to
$6.4 billion from $5.3 billion for the
53-week
period of fiscal 2004, driven by increases in both
Company-operated retail revenues and specialty operations. Net
revenues increased 23% when calculated on a comparative
52-week
basis for both fiscal 2005 and 2004.
During the fiscal year ended 2005, Starbucks derived 85% of
total net revenues from its Company-operated retail stores.
Company-operated retail revenues increased 21% to
$5.4 billion for the fiscal year ended 2005, from
$4.5 billion for the
53-week
period of fiscal 2004. Company-operated retail revenues
increased 23% when calculated on a comparative
52-week
basis for both fiscal 2005 and 2004. This increase was primarily
due to the opening of 746 new Company-operated retail stores in
the last 12 months and comparable store sales growth of 8%
for the 52 weeks ended October 2, 2005. The increase
in comparable store sales was due to a 4% increase in the number
of customer transactions and a 4% increase in the average value
per transaction. Comparable store sales growth percentages were
calculated excluding the extra week of fiscal 2004. The increase
in the average value per transaction was primarily due to a
beverage price increase in October 2004 in the Companys
U.S. and Canadian markets.
|
|
26
|
STARBUCKS
CORPORATION, FORM 10-K
|
The Company derived the remaining 15% of total net revenues from
channels outside the Company-operated retail stores. Specialty
revenues, which include licensing revenues and foodservice and
other revenues, increased 17% to $977 million for the
fiscal year ended 2005, from $837 million for the
53-week
period of fiscal 2004. Excluding the impact of the extra week in
fiscal 2004, total specialty revenues increased 19%.
Licensing revenues, which are derived from retail store
licensing arrangements, as well as grocery, warehouse club and
certain other branded-product licensed operations, increased 19%
to $673 million for the
52-week
period of 2005, from $566 million for the
53-week
period of fiscal 2004. Excluding the impact of the extra week in
fiscal 2004, total licensing revenues increased 21%, primarily
due to higher product sales and royalty revenues from the
opening of 926 new licensed retail stores in the last
12 months.
Foodservice and other revenues increased 12% to
$304 million for the
52-week
period of fiscal 2005, from $271 million for the
53-week
period of fiscal 2004. Excluding the impact of the extra week in
fiscal 2004, foodservice and other revenues increased 15%,
primarily attributable to growth in new and existing U.S. and
International foodservice accounts and, to a lesser extent,
growth in the Companys emerging entertainment business.
Cost of sales including occupancy costs decreased to 40.9% of
total net revenues in the
52-week
period of fiscal 2005, from 41.4% in the
53-week
period of 2004. The decrease was primarily due to higher average
revenue per retail transaction, offset in part by higher initial
costs associated with the continued expansion of a lunch program
in Company-operated retail stores. Approximately 3,800
Company-operated stores had the lunch program at the end of
fiscal 2005, compared to approximately 2,600 at the end of
fiscal 2004.
Store operating expenses as a percentage of Company-operated
retail revenues were 40.2% for both the
52-week
period of fiscal 2005 and the
53-week
period of fiscal 2004, primarily due to higher average revenue
per retail transaction in fiscal 2005, offset by higher
payroll-related expenditures, as well as higher maintenance and
repair expenditures to ensure a consistent Starbucks
Experience in existing stores. In order to facilitate
ongoing retail store revenue growth, the Company opened a higher
number of Drive Thru locations over the past year and extended
store operating hours, which contributed to the higher
payroll-related expenditures.
Other operating expenses, which are expenses associated with the
Companys Specialty Operations, decreased to 20.2% of
specialty revenues in the
52-week
period of fiscal 2005, compared to 20.5% in the
53-week
period of fiscal 2004. The decrease was primarily due to lower
expenditures within the grocery, warehouse club and foodservice
businesses, partially offset by higher payroll-related
expenditures to support the Companys emerging
entertainment business and to support the growth of
Seattles Best Coffee licensed café operations.
Depreciation and amortization expenses increased to
$340 million in the
52-week
period of fiscal 2005, from $289 million in the
53-week
period of fiscal 2004. The increase was primarily from the
opening of 746 new Company-operated retail stores in the last
12 months. As a percentage of total net revenues,
depreciation and amortization decreased to 5.3% for the
52 weeks ended October 2, 2005, from 5.5% for the
corresponding
53-week
fiscal 2004 period.
General and administrative expenses increased to
$357 million in the
52-week
period of fiscal 2005, compared to $304 million in the
53-week
period of fiscal 2004. The increase was primarily due to higher
payroll-related expenditures in support of both domestic and
international business growth and increased charitable donations
to support multi-year corporate commitments. As a percentage of
total net revenues, general and administrative expenses
decreased to 5.6% for the 52 weeks ended October 2,
2005, from 5.7% for the 53 weeks ended October 3, 2004.
Income from equity investees increased to $77 million in
the 52-week
period of fiscal 2005, compared to $59 million in the
53-week
period of fiscal 2004. The increase was primarily due to
volume-driven operating results for The North American Coffee
Partnership, which produces
ready-to-drink
beverages which include, among others, bottled
Frappuccino®
coffee drinks and Starbucks
DoubleShot®
espresso drinks, and improved operating results from
international investees, particularly in Japan and Korea, mainly
as a result of new store openings.
|
|
STARBUCKS
CORPORATION, FORM 10-K
|
27
|
Operating income increased 29% to $781 million in the
52-week
period of fiscal 2005, from $606 million in the
53-week
period of fiscal 2004. The operating margin increased to 12.3%
of total net revenues in the
52-week
period of fiscal 2005, compared to 11.5% in the
53-week
period of fiscal 2004, primarily due to strong revenue growth.
Net interest and other income, which primarily consists of
interest income, increased to $16 million in the
52-week
period of fiscal 2005, from $14 million in the
53-week
period of fiscal 2004. The increase was primarily due to higher
interest income earned due to higher interest rates in fiscal
2005 compared to fiscal 2004 and to foreign exchange gains in
fiscal 2005 compared to losses in fiscal 2004. Partially
offsetting these increases were higher realized losses on sales
of
available-for-sale
securities. Starbucks funded the majority of its share
repurchases during fiscal 2005 through sales of its
available-for-sale
securities.
Income taxes for the 52 weeks ended October 2, 2005,
resulted in an effective tax rate of 37.9%, compared to 37.3% in
fiscal 2004. The effective tax rate differs from the statutory
rate of 35% due to a variety of factors, including state income
taxes, the impact from foreign operations, tax credits and other
provision adjustments.
OPERATING
SEGMENTS
Segment information is prepared on the same basis that the
Companys management reviews financial information for
operational decision-making purposes. The following tables
summarize the Companys results of operations by segment
for fiscal 2005 and 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52 Weeks
|
|
53 Weeks
|
|
|
|
|
52 Weeks
|
|
|
53 Weeks
|
|
|
|
Ended
|
|
Ended
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
Oct 2, 2005
|
|
Oct 3, 2004
|
|
% Change
|
|
|
Oct 2, 2005
|
|
|
Oct 3, 2004
|
|
|
|
|
|
|
|
|
|
|
|
As a % of U.S.
|
|
UNITED STATES
|
|
|
Total Net Revenues
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail
|
|
$
|
4,539,455
|
|
$
|
3,800,367
|
|
|
19.4
|
%
|
|
|
89.1
|
%
|
|
|
89.1
|
%
|
Specialty:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing
|
|
|
277,987
|
|
|
211,269
|
|
|
31.6
|
|
|
|
5.4
|
|
|
|
5.0
|
|
Foodservice and other
|
|
|
280,073
|
|
|
253,502
|
|
|
10.5
|
|
|
|
5.5
|
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty
|
|
|
558,060
|
|
|
464,771
|
|
|
20.1
|
|
|
|
10.9
|
|
|
|
10.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
5,097,515
|
|
|
4,265,138
|
|
|
19.5
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales including occupancy
costs
|
|
|
1,944,356
|
|
|
1,642,745
|
|
|
|
|
|
|
38.1
|
|
|
|
38.5
|
|
Store operating expenses
|
|
|
1,848,836
|
|
|
1,546,871
|
|
|
|
|
|
|
40.7
|
(1)
|
|
|
40.7
|
(1)
|
Other operating expenses
|
|
|
150,712
|
|
|
122,335
|
|
|
|
|
|
|
27.0
|
(2)
|
|
|
26.3
|
(2)
|
Depreciation and amortization
expenses
|
|
|
250,339
|
|
|
209,586
|
|
|
|
|
|
|
4.9
|
|
|
|
4.9
|
|
General and administrative expenses
|
|
|
85,362
|
|
|
80,221
|
|
|
|
|
|
|
1.7
|
|
|
|
1.9
|
|
Income from equity investees
|
|
|
592
|
|
|
564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
818,502
|
|
$
|
663,944
|
|
|
23.3
|
%
|
|
|
16.1
|
%
|
|
|
15.6
|
%
|
|
|
|
|
|
(1)
|
|
Shown as a percentage of related
Company-operated retail revenues.
|
|
(2)
|
|
Shown as a percentage of related
total specialty revenues.
|
|
|
28
|
STARBUCKS
CORPORATION, FORM 10-K
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52 Weeks
|
|
53 Weeks
|
|
|
|
|
52 Weeks
|
|
|
53 Weeks
|
|
|
|
Ended
|
|
Ended
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
Oct 2, 2005
|
|
Oct 3, 2004
|
|
% Change
|
|
|
Oct 2, 2005
|
|
|
Oct 3, 2004
|
|
|
|
|
|
|
|
|
|
|
|
As a % of International
|
|
INTERNATIONAL
|
|
|
Total Net Revenues
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail
|
|
$
|
852,472
|
|
$
|
657,011
|
|
|
29.8
|
%
|
|
|
83.4
|
%
|
|
|
82.8
|
%
|
Specialty:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing
|
|
|
145,736
|
|
|
119,325
|
|
|
22.1
|
|
|
|
14.2
|
|
|
|
15.0
|
|
Foodservice and other
|
|
|
24,285
|
|
|
17,569
|
|
|
38.2
|
|
|
|
2.4
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty
|
|
|
170,021
|
|
|
136,894
|
|
|
24.2
|
|
|
|
16.6
|
|
|
|
17.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
1,022,493
|
|
|
793,905
|
|
|
28.8
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales including occupancy
costs
|
|
|
511,761
|
|
|
403,870
|
|
|
|
|
|
|
50.1
|
|
|
|
50.9
|
|
Store operating expenses
|
|
|
317,075
|
|
|
243,297
|
|
|
|
|
|
|
37.2
|
(1)
|
|
|
37.0
|
(1)
|
Other operating expenses
|
|
|
32,061
|
|
|
26,795
|
|
|
|
|
|
|
18.9
|
(2)
|
|
|
19.6
|
(2)
|
Depreciation and amortization
expenses
|
|
|
56,705
|
|
|
46,196
|
|
|
|
|
|
|
5.5
|
|
|
|
5.8
|
|
General and administrative expenses
|
|
|
53,069
|
|
|
48,206
|
|
|
|
|
|
|
5.2
|
|
|
|
6.1
|
|
Income from equity investees
|
|
|
30,477
|
|
|
20,961
|
|
|
|
|
|
|
3.0
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
82,299
|
|
$
|
46,502
|
|
|
77.0
|
%
|
|
|
8.0
|
%
|
|
|
5.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of CPG
|
|
GLOBAL CONSUMER PRODUCTS GROUP
|
|
|
Total Net Revenues
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing
|
|
$
|
249,292
|
|
$
|
235,204
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Total specialty
|
|
|
249,292
|
|
|
235,204
|
|
|
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
249,292
|
|
|
235,204
|
|
|
6.0
|
%
|
|
|
100.0
|
|
|
|
100.0
|
|
Cost of sales
|
|
|
149,095
|
|
|
144,825
|
|
|
|
|
|
|
59.8
|
|
|
|
61.6
|
|
Other operating expenses
|
|
|
14,251
|
|
|
22,518
|
|
|
|
|
|
|
5.7
|
|
|
|
9.6
|
|
Depreciation and amortization
expenses
|
|
|
76
|
|
|
862
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
Income from equity investees
|
|
|
45,579
|
|
|
37,453
|
|
|
|
|
|
|
18.2
|
|
|
|
15.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
131,449
|
|
$
|
104,452
|
|
|
25.8
|
%
|
|
|
52.7
|
%
|
|
|
44.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of
|
|
UNALLOCATED CORPORATE
|
|
|
|
|
|
|
|
|
|
Total Net Revenues
|
|
|
|
Depreciation and amortization
expenses
|
|
$
|
33,049
|
|
|
$
|
32,538
|
|
|
|
|
|
|
0.5
|
%
|
|
|
0.6
|
%
|
General and administrative expenses
|
|
|
218,683
|
|
|
|
175,866
|
|
|
|
|
|
|
3.4
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(251,732
|
)
|
|
$
|
(208,404
|
)
|
|
|
|
|
|
(3.9
|
)%
|
|
|
(3.9
|
)%
|
|
|
|
|
|
(1)
|
|
Shown as a percentage of related
Company-operated retail revenues.
|
|
(2)
|
|
Shown as a percentage of related
total specialty revenues.
|
|
|
STARBUCKS
CORPORATION, FORM 10-K
|
29
|
United
States
United States total net revenues increased 20% to
$5.1 billion for the fiscal year ended 2005, compared to
$4.3 billion for the
53-week
period of fiscal 2004. Excluding the impact of the extra week in
fiscal 2004, United States total net revenues increased 22%.
United States Company-operated retail revenues increased 19% to
$4.5 billion for the fiscal year ended 2005, compared to
$3.8 billion for the
53-week
period of fiscal 2004. Excluding the impact of the extra week in
fiscal 2004, United States Company-operated retail revenues
increased 22%, primarily due to the opening of 580 new
Company-operated retail stores in the last 12 months and
comparable store sales growth of 9% for the
52-week
period of fiscal 2005. The increase in comparable store sales
was due to a 5% increase in the average value per transaction,
including 3% attributable to a beverage price increase in
October 2004, and a 4% increase in the number of customer
transactions.
Total United States specialty revenues increased 20% to
$558 million for the fiscal year ended 2005, compared to
$465 million in the
53-week
period of fiscal 2004. Excluding the impact of the extra week in
fiscal 2004, United States specialty revenues increased 23%.
United States licensing revenues increased 32% to
$278 million, compared to $211 million for the
53-week
period of fiscal 2004. Excluding the impact of the extra week in
fiscal 2004, United States licensing revenues increased 35%, due
to increased product sales and royalty revenues as a result of
opening 596 new licensed retail stores in the last
12 months. Foodservice and other revenues increased 10% to
$280 million from $254 million for the
53-week
period of fiscal 2004. Excluding the impact of the extra week in
fiscal 2004, United States foodservice and other revenues
increased 13%, primarily due to growth in new and existing
foodservice accounts, as well as growth in the emerging
entertainment business.
United States operating income increased by 23% to
$819 million for the fiscal year ended 2005, from
$664 million for the fiscal year ended 2004. Operating
margin increased to 16.1% of related revenues from 15.6% in the
53-week
period of fiscal 2004. The increase was primarily due to
leverage from strong revenue growth.
International
International total net revenues increased 29% to
$1.0 billion for the fiscal year ended 2005, compared to
$794 million for the
53-week
period of fiscal 2004. Excluding the impact of the extra week in
fiscal 2004, International total net revenues increased 31%.
International Company-operated retail revenues increased 30% to
$852 million for the fiscal year ended 2005, compared to
$657 million for the
53-week
period of fiscal 2004. Excluding the impact of the extra week in
fiscal 2004, International Company-operated revenues increased
32%, primarily due to the opening of 166 new Company-operated
retail stores in the last 12 months, comparable store sales
growth of 6% for the
52-week
period of fiscal 2005, and the weakening of the U.S. dollar
against both the Canadian dollar and British pound sterling. The
increase in comparable store sales resulted from a 4% increase
in the number of customer transactions and a 2% increase in the
average value per transaction.
Total International specialty revenues increased 24% to
$170 million for the fiscal year ended 2005, compared to
$137 million for the
53-week
period of fiscal 2004. Excluding the impact of the extra week in
fiscal 2004, International specialty revenues increased 26%.
International licensing revenues increased 22% to
$146 million for the fiscal year ended 2005, compared to
$119 million in the
53-week
period of fiscal 2004. Excluding the impact of the extra week in
2004, International licensing revenues increased 24%, due to
higher product sales and royalty revenues from opening 330 new
licensed retail stores in the last 12 months. International
foodservice and other revenues increased 38% to $24 million
for the fiscal year ended 2005, compared to $18 million in
the 53-week
period of fiscal 2004. Excluding the impact of the extra week in
2004, international foodservice and other revenues increased
41%, primarily due to growth in new and existing foodservice
accounts.
International operating income increased to $82 million for
the fiscal year ended 2005, compared to $47 million in the
53-week
period of fiscal 2004. Operating margin increased to 8.0% of
related revenues from 5.9% in the
53-week
period of fiscal 2004, primarily due to leverage gained on most
fixed costs distributed over an expanded revenue base.
|
|
30
|
STARBUCKS
CORPORATION, FORM 10-K
|
Global
Consumer Products Group
CPG total net revenues increased 6% to $249 million for the
fiscal year ended 2005, compared to $235 million for the
53-week
period of fiscal 2004, due to the national rollout of the
Starbuckstm
Coffee Liqueur during the fiscal second quarter of 2005 and
growth in the licensed grocery and warehouse club business.
CPG operating income increased by 26% to $131 million for
the fiscal year ended 2005, compared to $104 million for
the 53-week
period of fiscal 2004. Operating margin increased to 52.7% of
related revenues from 44.4% in fiscal 2004, primarily due to
lower other operating expenses from reduced expenditures within
the grocery and warehouse club channels and higher equity
investee income from volume-driven operating results for The
North American Coffee Partnership, which produces
ready-to-drink
beverages which include, among others, bottled
Frappuccino®
coffee drinks and Starbucks
DoubleShot®
espresso drinks.
Unallocated
Corporate
Unallocated corporate expenses increased to $252 million
for the fiscal year ended 2005, from $208 million in the
53-week
period of fiscal 2004, primarily due to increased charitable
commitments as well as higher payroll-related expenditures.
Total unallocated corporate expenses as a percentage of total
net revenues remained unchanged at 3.9% for the fiscal year
ended 2005 and the
53-week
period of fiscal 2004.
LIQUIDITY
AND CAPITAL RESOURCES
Components of the Companys most liquid assets are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
FISCAL YEAR ENDED
|
|
Oct 1, 2006
|
|
|
Oct 2, 2005
|
|
|
|
Cash and cash equivalents
|
|
$
|
312,606
|
|
|
$
|
173,809
|
|
Short-term investments
available-for-sale
securities
|
|
|
87,542
|
|
|
|
95,379
|
|
Short-term investments
trading securities
|
|
|
53,496
|
|
|
|
37,848
|
|
Long-term investments
available-for-sale
securities
|
|
|
5,811
|
|
|
|
60,475
|
|
|
|
Total cash, cash equivalents and
liquid investments
|
|
$
|
459,455
|
|
|
$
|
367,511
|
|
|
|
The Company manages its cash, cash equivalents and liquid
investments in order to internally fund operating needs and pay
down short-term borrowings. The $92 million increase in
total cash and cash equivalents and liquid investments from
October 2, 2005 to October 1, 2006, was primarily due
to strong operating cash flows.
The Company intends to use its cash and liquid investments,
including any borrowings under its $1 billion revolving
credit facility, to invest in its core businesses and other new
business opportunities related to its core businesses. The
Company may use its available cash resources to make
proportionate capital contributions to its equity method and
cost method investees, as well as purchase larger ownership
interests in selected equity method investees and licensed
operations, particularly in international markets. Depending on
market conditions, Starbucks may repurchase shares of its common
stock under its authorized share repurchase program. Management
believes that strong cash flow generated from operations,
existing cash and liquid investments, as well as borrowing
capacity under the revolving credit facility, should be
sufficient to finance capital requirements for its core
businesses for the foreseeable future. Significant new joint
ventures, acquisitions, share repurchases
and/or other
new business opportunities may require additional outside
funding.
Other than normal operating expenses, cash requirements for
fiscal 2007 are expected to consist primarily of capital
expenditures for new Company-operated retail stores and the
remodeling and refurbishment of existing Company-operated retail
stores, as well as potential increased investments in
International licensees and for additional share repurchases, if
any. Management expects capital expenditures to be in the range
of $950 million to $1.0 billion in fiscal 2007,
primarily driven by new store development and existing store
renovations.
|
|
STARBUCKS
CORPORATION, FORM 10-K
|
31
|
Cash provided by operating activities totaled $1.1 billion
for fiscal 2006. Net earnings provided $564 million and
noncash depreciation and amortization expenses further increased
cash provided by operating activities by $413 million. In
addition, an increase in accrued taxes payable due to the timing
of payments provided $133 million.
Cash used by investing activities for fiscal 2006 totaled
$841 million. Net capital additions to property, plant and
equipment used $771 million, primarily from opening 1,040
new Company-operated retail stores and remodeling certain
existing stores. During fiscal 2006, the Company used
$92 million for acquisitions, net of cash acquired. In
addition, the net activity in the Companys portfolio of
available-for-sale
securities provided $61 million.
Cash used by financing activities for fiscal 2006 totaled
$155 million. Cash used to repurchase shares of the
Companys common stock totaled $854 million. This
amount includes the effect of the net change in unsettled trades
from October 2, 2005. Share repurchases, up to the limit
authorized by the Board of Directors, are at the discretion of
management and depend on market conditions, capital requirements
and other factors. Approximately 21.5 million shares
remained available for repurchase as of October 1, 2006.
The Company had net borrowings under its credit facility of
$423 million during fiscal 2006, which consisted of
additional gross borrowings of $1.4 billion offset by gross
principal repayments of $993 million. Management increased
the Companys borrowing capacity under its credit facility
during the fiscal fourth quarter of 2006, from $500 million
to $1.0 billion, as provided in the original credit
facility. As of October 1, 2006, a total of
$700 million was outstanding under the facility.
Partially offsetting cash used for share repurchases were
proceeds of $159 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.
The following table summarizes the Companys contractual
obligations and borrowings as of October 1, 2006, and the
timing and effect that such commitments are expected to have on
the Companys liquidity and capital requirements in future
periods (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PAYMENTS DUE BY PERIOD
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
1 3
|
|
|
3 5
|
|
|
More than
|
|
CONTRACTUAL OBLIGATIONS
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
Debt
obligations (1)
|
|
$
|
740,480
|
|
|
$
|
738,405
|
|
|
$
|
1,660
|
|
|
$
|
415
|
|
|
$
|
|
|
Operating lease
obligations (2)
|
|
|
3,892,938
|
|
|
|
531,634
|
|
|
|
1,013,312
|
|
|
|
861,271
|
|
|
|
1,486,721
|
|
Purchase
obligations (3)
|
|
|
619,862
|
|
|
|
440,720
|
|
|
|
153,044
|
|
|
|
21,761
|
|
|
|
4,337
|
|
|
|
Total
|
|
$
|
5,253,280
|
|
|
$
|
1,710,759
|
|
|
$
|
1,168,016
|
|
|
$
|
883,447
|
|
|
$
|
1,491,058
|
|
|
|
|
|
|
(1)
|
|
Debt amounts include principal
maturities and expected interest payments. Rates utilized to
determine interest payments for variable rate debt are based on
an estimate of future interest rates. The amount due in less
than one year includes $700 million of short term
borrowings under the facility.
|
|
(2)
|
|
Amounts include the direct lease
obligations, excluding any taxes, insurance and other related
expenses.
|
|
(3)
|
|
Purchase obligations include
agreements to purchase goods or services that are enforceable
and legally binding on Starbucks and that specify all
significant terms. Purchase obligations relate primarily to
green coffee and other commodities.
|
Starbucks expects to fund these commitments primarily with
operating cash flows generated in the normal course of business,
as well as ongoing borrowings under the facility.
OFF-BALANCE
SHEET ARRANGEMENT
The Company has unconditionally guaranteed the repayment of
certain Japanese yen-denominated bank loans and related interest
and fees of an unconsolidated equity investee, Starbucks Coffee
Japan, Ltd. (Starbucks Japan). The guarantees
continue until the loans, including accrued interest and fees,
have been paid in full, with the final loan amount
|
|
32
|
STARBUCKS
CORPORATION, FORM 10-K
|
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 October 1, 2006, the
maximum amount of the guarantees was approximately
$6.0 million. Since there has been no modification of these
loan guarantees subsequent to the Companys adoption of
Financial Accounting Standards Board (FASB)
Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including
Indebtedness of Others, Starbucks has applied the
disclosure provisions only and has not recorded the guarantees
on its balance sheet.
PRODUCT
WARRANTIES
Coffee brewing and espresso equipment sold to customers through
Company-operated and licensed retail stores, as well as
equipment sold to the Companys licensees for use in retail
licensing operations, are under warranty for defects in
materials and workmanship for a period ranging from 12 to
24 months. Effective fiscal 2006, the Company elected to
discontinue repairing brewing machines and instead offer an
exchange to customers as a general right of return for any of
its products. As a result, Starbucks maintains a sales return
allowance based on historical patterns to reduce related
revenues for estimated future product returns. Prior to fiscal
2006, the Company established an accrual for estimated warranty
costs at the time of sale, also based on historical experience.
Product warranty costs and changes to the related accrual were
not significant for the periods ended October 1, 2006 and
October 2, 2005.
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 this
Form 10-K.
FINANCIAL
RISK MANAGEMENT
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
The majority of the Companys revenue, expense and capital
purchasing activities are transacted in U.S. dollars.
However, because a portion of the Companys operations
consists of activities outside of the United States, the Company
has transactions in other currencies, primarily the Canadian
dollar, British pound sterling, euro and Japanese yen. Under the
Companys umbrella risk management policy, the Company
frequently evaluates its foreign currency exchange risk by
monitoring market data and external factors that may influence
exchange rate fluctuations. As a result, Starbucks may engage in
transactions involving various derivative instruments, with
maturities generally not exceeding five years, to hedge assets,
liabilities, revenues and purchases denominated in foreign
currencies.
As of October 1, 2006, the Company had forward foreign
exchange contracts that qualify as cash flow hedges under
Statement of Financial Accounting Standard (SFAS)
No. 133, Accounting for Derivative Instruments and
Hedging Activities, to hedge a portion of anticipated
international revenue and product purchases. In addition,
Starbucks had forward foreign exchange contracts that qualify as
hedges of its net investment in Starbucks Japan, an equity
method investment, as well as the Companys net investments
in its Canadian and U.K. subsidiaries. These contracts expire
within 33 months.
|
|
STARBUCKS
CORPORATION, FORM 10-K
|
33
|
Based on the foreign exchange contracts outstanding as of
October 1, 2006, a 10% devaluation of the U.S. dollar
as compared to the level of foreign exchange rates for
currencies under contract as of October 1, 2006, would
result in a reduced fair value of these derivative financial
instruments of approximately $44 million, of which
$22 million may reduce the Companys future earnings.
Conversely, a 10% appreciation of the U.S. dollar would
result in an increase in the fair value of these instruments of
approximately $38 million, of which $20 million may
increase the Companys future earnings. Consistent with the
nature of the economic hedges provided by these foreign exchange
contracts, increases or decreases in their fair value would be
mostly offset by corresponding decreases or increases in the
dollar value of the Companys foreign investment, future
foreign currency royalty fee payments and product purchases that
would occur within the hedging period.
EQUITY
SECURITY PRICE RISK
The Company has minimal exposure to price fluctuations on equity
mutual funds within its trading portfolio. The trading
securities approximate a portion of the Companys liability
under the Management Deferred Compensation Plan
(MDCP). A corresponding liability is included in
Accrued compensation and related costs on the
consolidated balance sheets. These investments are recorded at
fair value with unrealized gains and losses recognized in
Interest and other income, net in the consolidated
statements of earnings. The offsetting changes in the MDCP
liability are recorded in General and administrative
expenses.
INTEREST
RATE RISK
The Companys
available-for-sale
securities comprise a diversified portfolio consisting mainly of
fixed income instruments. The primary objectives of these
investments are to preserve capital and liquidity.
Available-for-sale
securities are investment grade and are recorded on the balance
sheet at fair value with unrealized gains and losses reported as
a separate component of Accumulated other comprehensive
income. The Company does not hedge the interest rate
exposure on its
available-for-sale
securities. The Company performed a sensitivity analysis based
on a 10% change in the underlying interest rate of its interest
bearing financial instruments, including its short-term
borrowings and long-term debt, as of the end of fiscal 2006, and
determined that such a change would not have a significant
effect on the fair value of these instruments.
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.
APPLICATION
OF CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that management believes
are both most important to the portrayal of the Companys
financial condition and results, and require managements
most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters
that are inherently uncertain. Judgments and uncertainties
affecting the application of those policies may result in
materially different amounts being reported under different
conditions or using different assumptions.
Starbucks considers its policies on impairment of long-lived
assets, accounting for self insurance reserves, stock-based
compensation and accounting for operating leases to be the most
critical in understanding the judgments that are involved in
preparing its consolidated financial statements.
|
|
34
|
STARBUCKS
CORPORATION, FORM 10-K
|
IMPAIRMENT
OF LONG-LIVED ASSETS
When facts and circumstances indicate that the carrying values
of long-lived assets may be impaired, an evaluation of
recoverability is performed by comparing the carrying values of
the assets to projected future cash flows, in addition to other
quantitative and qualitative analyses. For goodwill and other
intangible assets, impairment tests are performed annually and
more frequently if facts and circumstances indicate goodwill
carrying values exceed estimated reporting unit fair values and
if indefinite useful lives are no longer appropriate for the
Companys trademarks. Upon indication that the carrying
values of such assets may not be recoverable, the Company
recognizes an impairment loss as a charge against current
operations. Property, plant and equipment assets are grouped at
the lowest level for which there are identifiable cash flows
when assessing impairment. Cash flows for retail assets are
identified at the individual store level. Long-lived assets to
be disposed of are reported at the lower of their carrying
amount or fair value, less estimated costs to sell. Judgments
made by the Company related to the expected useful lives of
long-lived assets and the ability of the Company to realize
undiscounted cash flows in excess of the carrying amounts of
such assets are affected by factors such as the ongoing
maintenance and improvements of the assets, changes in economic
conditions and changes in operating performance. As the Company
assesses the ongoing expected cash flows and carrying amounts of
its long-lived assets, these factors could cause the Company to
realize material impairment charges.
STOCK-BASED
COMPENSATION
Starbucks accounts for stock-based compensation in accordance
with the fair value recognition provisions of SFAS 123R.
The Company uses the Black-Scholes-Merton option pricing model
which requires the input of highly subjective assumptions. These
assumptions include estimating the length of time employees will
retain their stock options before exercising them
(expected term), the estimated volatility of the
Companys common stock price over the expected term and the
number of options that will ultimately not complete their
vesting requirements (forfeitures). Changes in the
subjective assumptions can materially affect the estimate of
fair value of stock-based compensation and consequently, the
related amount recognized on the consolidated statements of
earnings.
OPERATING
LEASES
Starbucks leases retail stores, roasting and distribution
facilities and office space under operating leases. The Company
provides for an estimate of asset retirement obligation
(ARO) expense at the lease inception date for
operating leases with requirements to remove leasehold
improvements at the end of the lease term. Estimating AROs
involves subjective assumptions regarding both the amount and
timing of actual future retirement costs. Future actual costs
could differ significantly from amounts initially estimated. In
addition, the large number of operating leases, and the
significant number of international markets in which the Company
has operating leases, adds administrative complexity to the
calculation of ARO expense as well as to the other technical
accounting requirements of operating leases such as contingent
rent.
SELF
INSURANCE RESERVES
The Company uses a combination of insurance and self-insurance
mechanisms, including a wholly owned captive insurance entity
and participation in a reinsurance pool, to provide for the
potential liabilities for workers compensation, healthcare
benefits, general liability, property insurance, director and
officers liability insurance and vehicle liability.
Liabilities associated with the risks that are retained by the
Company are not discounted and are estimated, in part, by
considering historical claims experience, demographic factors,
severity factors and other actuarial assumptions. The estimated
accruals for these liabilities, portions of which are calculated
by third party actuarial firms, could be significantly affected
if future occurrences and claims differ from these assumptions
and historical trends.
RECENT
ACCOUNTING PRONOUNCEMENTS
In July 2006, the FASB issued Interpretation No. 48
(FIN 48), Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement
No. 109, which seeks to reduce the diversity in
practice associated with the accounting
|
|
STARBUCKS
CORPORATION, FORM 10-K
|
35
|
and reporting for uncertainty in income tax positions. This
Interpretation prescribes a comprehensive model for the
financial statement recognition, measurement, presentation and
disclosure of uncertain tax positions taken or expected to be
taken in income tax returns. FIN 48 is effective for fiscal
years beginning after December 15, 2006 and the Company
will adopt the new requirements in its fiscal first quarter of
2008. The cumulative effects, if any, of adopting FIN 48
will be recorded as an adjustment to retained earnings as of the
beginning of the period of adoption. The Company has not yet
determined the impact, if any, of adopting FIN 48 on its
consolidated financial statements.
In September 2006, the FASB issued SFAS 157, Fair
Value Measurements (SFAS 157), which
defines fair value, establishes a framework for measuring fair
value in GAAP, 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 fiscal years
beginning after November 15, 2006, and the Company will
adopt the new requirements in fiscal 2008. The adoption of
SAB 108 is not currently expected to have a significant
impact on the Companys consolidated financial statements.
Item 7A. Quantitative
and Qualitative Disclosures About Market Risk
The information required by this item is incorporated by
reference to the section entitled Managements
Discussion and Analysis of Financial Condition and Results of
Operations Commodity Prices, Availability and
General Risk Conditions and Managements
Discussion and Analysis of Financial Condition and Results of
Operations Financial Risk Management in
Item 7 of this Report.
|
|
36
|
STARBUCKS
CORPORATION, FORM 10-K
|
Item 8. Financial
Statements and Supplementary Data
CONSOLIDATED
STATEMENTS OF EARNINGS
In
thousands, except earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL YEAR ENDED
|
|
Oct 1, 2006
|
|
|
Oct 2, 2005
|
|
|
Oct 3, 2004
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail
|
|
$
|
6,583,098
|
|
|
$
|
5,391,927
|
|
|
$
|
4,457,378
|
|
Specialty:
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing
|
|
|
860,676
|
|
|
|
673,015
|
|
|
|
565,798
|
|
Foodservice and other
|
|
|
343,168
|
|
|
|
304,358
|
|
|
|
271,071
|
|
|
|
|
|
|
|
Total specialty
|
|
|
1,203,844
|
|
|
|
977,373
|
|
|
|
836,869
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
7,786,942
|
|
|
|
6,369,300
|
|
|
|
5,294,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales including occupancy
costs
|
|
|
3,178,791
|
|
|
|
2,605,212
|
|
|
|
2,191,440
|
|
Store operating expenses
|
|
|
2,687,815
|
|
|
|
2,165,911
|
|
|
|
1,790,168
|
|
Other operating expenses
|
|
|
260,087
|
|
|
|
197,024
|
|
|
|
171,648
|
|
Depreciation and amortization
expenses
|
|
|
387,211
|
|
|
|
340,169
|
|
|
|
289,182
|
|
General and administrative expenses
|
|
|
473,023
|
|
|
|
357,114
|
|
|
|
304,293
|
|
|
|
|
|
|
|
Subtotal operating expenses
|
|
|
6,986,927
|
|
|
|
5,665,430
|
|
|
|
4,746,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from equity investees
|
|
|
93,937
|
|
|
|
76,648
|
|
|
|
58,978
|
|
|
|
|
|
|
|
Operating income
|
|
|
893,952
|
|
|
|
780,518
|
|
|
|
606,494
|
|
Interest and other income, net
|
|
|
12,291
|
|
|
|
15,829
|
|
|
|
14,140
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
906,243
|
|
|
|
796,347
|
|
|
|
620,634
|
|
Income taxes
|
|
|
324,770
|
|
|
|
301,977
|
|
|
|
231,754
|
|
|
|
|
|
|
|
Earnings before cumulative effect
of change in accounting principle
|
|
|
581,473
|
|
|
|
494,370
|
|
|
|
388,880
|
|
Cumulative effect of accounting
change for FIN 47, net of taxes
|
|
|
17,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
564,259
|
|
|
$
|
494,370
|
|
|
$
|
388,880
|
|
|
|
|
|
|
|
Per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before cumulative effect
of change in accounting principle basic
|
|
$
|
0.76
|
|
|
$
|
0.63
|
|
|
$
|
0.49
|
|
Cumulative effect of accounting
change for FIN 47, net of taxes
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings basic
|
|
$
|
0.74
|
|
|
$
|
0.63
|
|
|
$
|
0.49
|
|
|
|
|
|
|
|
Earnings before cumulative effect
of change in accounting principle diluted
|
|
$
|
0.73
|
|
|
$
|
0.61
|
|
|
$
|
0.47
|
|
Cumulative effect of accounting
change for FIN 47, net of taxes
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings diluted
|
|
$
|
0.71
|
|
|
$
|
0.61
|
|
|
$
|
0.47
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
766,114
|
|
|
|
789,570
|
|
|
|
794,347
|
|
Diluted
|
|
|
792,556
|
|
|
|
815,417
|
|
|
|
822,930
|
|
|
|
See Notes to Consolidated Financial Statements.
|
|
STARBUCKS
CORPORATION, FORM 10-K
|
37
|
CONSOLIDATED
BALANCE SHEETS
In
thousands, except share data
|
|
|
|
|
|
|
|
|
FISCAL YEAR ENDED
|
|
Oct 1, 2006
|
|
|
Oct 2, 2005
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
312,606
|
|
|
$
|
173,809
|
|
Short-term investments
available-for-sale
securities
|
|
|
87,542
|
|
|
|
95,379
|
|
Short-term investments
trading securities
|
|
|
53,496
|
|
|
|
37,848
|
|
Accounts receivable, net of
allowances of $3,827 and $3,079, respectively
|
|
|
224,271
|
|
|
|
190,762
|
|
Inventories
|
|
|
636,222
|
|
|
|
546,299
|
|
Prepaid expenses and other current
assets
|
|
|
126,874
|
|
|
|
94,429
|
|
Deferred income taxes, net
|
|
|
88,777
|
|
|
|
70,808
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,529,788
|
|
|
|
1,209,334
|
|
Long-term investments
available-for-sale
securities
|
|
|
5,811
|
|
|
|
60,475
|
|
Equity and other investments
|
|
|
219,093
|
|
|
|
201,089
|
|
Property, plant and equipment, net
|
|
|
2,287,899
|
|
|
|
1,842,019
|
|
Other assets
|
|
|
186,917
|
|
|
|
72,893
|
|
Other intangible assets
|
|
|
37,955
|
|
|
|
35,409
|
|
Goodwill
|
|
|
161,478
|
|
|
|
92,474
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,428,941
|
|
|
$
|
3,513,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
340,937
|
|
|
$
|
220,975
|
|
Accrued compensation and related
costs
|
|
|
288,963
|
|
|
|
232,354
|
|
Accrued occupancy costs
|
|
|
54,868
|
|
|
|
44,496
|
|
Accrued taxes
|
|
|
94,010
|
|
|
|
78,293
|
|
Short-term borrowings
|
|
|
700,000
|
|
|
|
277,000
|
|
Other accrued expenses
|
|
|
224,154
|
|
|
|
198,082
|
|
Deferred revenue
|
|
|
231,926
|
|
|
|
175,048
|
|
Current portion of long-term debt
|
|
|
762
|
|
|
|
748
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,935,620
|
|
|
|
1,226,996
|
|
Long-term debt
|
|
|
1,958
|
|
|
|
2,870
|
|
Other long-term liabilities
|
|
|
262,857
|
|
|
|
193,565
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,200,435
|
|
|
|
1,423,431
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Common stock ($0.001 par
value) and additional
paid-in-capital
authorized, 1,200,000,000 shares; issued and outstanding,
756,602,071 and 767,442,110 shares, respectively, (includes
3,394,200 common stock units in both periods)
|
|
|
756
|
|
|
|
767
|
|
Additional paid-in capital
|
|
|
|
|
|
|
90,201
|
|
Other additional
paid-in-capital
|
|
|
39,393
|
|
|
|
39,393
|
|
Retained earnings
|
|
|
2,151,084
|
|
|
|
1,938,987
|
|
Accumulated other comprehensive
income
|
|
|
37,273
|
|
|
|
20,914
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,228,506
|
|
|
|
2,090,262
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
4,428,941
|
|
|
$
|
3,513,693
|
|
|
|
See Notes to Consolidated Financial Statements.
|
|
38
|
STARBUCKS
CORPORATION, FORM 10-K
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
In
thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL YEAR ENDED
|
|
Oct 1, 2006
|
|
|
Oct 2, 2005
|
|
|
Oct 3, 2004
|
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
564,259
|
|
|
$
|
494,370
|
|
|
$
|
388,880
|
|
Adjustments to reconcile net
earnings to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of accounting
change for FIN 47, net of taxes
|
|
|
17,214
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
412,625
|
|
|
|
367,207
|
|
|
|
314,047
|
|
Provision for impairments and asset
disposals
|
|
|
19,622
|
|
|
|
19,464
|
|
|
|
17,948
|
|
Deferred income taxes, net
|
|
|
(84,324
|
)
|
|
|
(31,253
|
)
|
|
|
(3,770
|
)
|
Equity in income of investees
|
|
|
(60,570
|
)
|
|
|
(49,537
|
)
|
|
|
(31,707
|
)
|
Distributions of income from equity
investees
|
|
|
49,238
|
|
|
|
30,919
|
|
|
|
38,328
|
|
Stock-based compensation
|
|
|
105,664
|
|
|
|
|
|
|
|
|
|
Tax benefit from exercise of stock
options
|
|
|
1,318
|
|
|
|
109,978
|
|
|
|
63,405
|
|
Excess tax benefit from exercise of
stock options
|
|
|
(117,368
|
)
|
|
|
|
|
|
|
|
|
Net amortization of premium on
securities
|
|
|
2,013
|
|
|
|
10,097
|
|
|
|
11,603
|
|
Cash provided/(used) by changes in
operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
(85,527
|
)
|
|
|
(121,618
|
)
|
|
|
(77,662
|
)
|
Accounts payable
|
|
|
104,966
|
|
|
|
9,717
|
|
|
|
27,948
|
|
Accrued compensation and related
costs
|
|
|
54,424
|
|
|
|
22,711
|
|
|
|
54,929
|
|
Accrued taxes
|
|
|
132,725
|
|
|
|
14,435
|
|
|
|
7,677
|
|
Deferred revenue
|
|
|
56,547
|
|
|
|
53,276
|
|
|
|
47,590
|
|
Other operating assets and
liabilities
|
|
|
(41,193
|
)
|
|
|
(6,851
|
)
|
|
|
3,702
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
1,131,633
|
|
|
|
922,915
|
|
|
|
862,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of
available-for-sale
securities
|
|
|
(639,192
|
)
|
|
|
(643,488
|
)
|
|
|
(887,969
|
)
|
Maturity of
available-for-sale
securities
|
|
|
269,134
|
|
|
|
469,554
|
|
|
|
170,789
|
|
Sale of
available-for-sale
securities
|
|
|
431,181
|
|
|
|
626,113
|
|
|
|
452,467
|
|
Acquisitions, net of cash acquired
|
|
|
(91,734
|
)
|
|
|
(21,583
|
)
|
|
|
(7,515
|
)
|
Net purchases of equity, other
investments and other assets
|
|
|
(39,199
|
)
|
|
|
(7,915
|
)
|
|
|
(64,747
|
)
|
Net additions to property, plant
and equipment
|
|
|
(771,230
|
)
|
|
|
(643,296
|
)
|
|
|
(416,917
|
)
|
|
|
|
|
|
|
Net cash used by investing
activities
|
|
|
(841,040
|
)
|
|
|
(220,615
|
)
|
|
|
(753,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common
stock
|
|
|
159,249
|
|
|
|
163,555
|
|
|
|
137,590
|
|
Excess tax benefit from exercise of
stock options
|
|
|
117,368
|
|
|
|
|
|
|
|
|
|
Net borrowings under revolving
credit facility
|
|
|
423,000
|
|
|
|
277,000
|
|
|
|
|
|
Principal payments on long-term debt
|
|
|
(898
|
)
|
|
|
(735
|
)
|
|
|
(722
|
)
|
Repurchase of common stock
|
|
|
(854,045
|
)
|
|
|
(1,113,647
|
)
|
|
|
(203,413
|
)
|
|
|
|
|
|
|
Net cash used by financing
activities
|
|
|
(155,326
|
)
|
|
|
(673,827
|
)
|
|
|
(66,545
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
3,530
|
|
|
|
283
|
|
|
|
3,110
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
|
138,797
|
|
|
|
28,756
|
|
|
|
45,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH
EQUIVALENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
173,809
|
|
|
|
145,053
|
|
|
|
99,462
|
|
|
|
|
|
|
|
End of period
|
|
$
|
312,606
|
|
|
$
|
173,809
|
|
|
$
|
145,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
10,576
|
|
|
$
|
1,060
|
|
|
$
|
370
|
|
Income taxes
|
|
$
|
274,134
|
|
|
$
|
227,812
|
|
|
$
|
172,759
|
|
|
|
See Notes to Consolidated Financial Statements.
|
|
STARBUCKS
CORPORATION, FORM 10-K
|
39
|
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY
In
thousands, except share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
COMMON STOCK
|
|
|
Paid-in
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income/(Loss)
|
|
|
Total
|
|
|
|
Balance, September 28, 2003
|
|
|
787,385,072
|
|
|
$
|
787
|
|
|
$
|
958,316
|
|
|
$
|
39,393
|
|
|
$
|
1,055,737
|
|
|
$
|
14,274
|
|
|
$
|
2,068,507
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
388,880
|
|
|
|
|
|
|
|
388,880
|
|
Unrealized holding losses, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,925
|
)
|
|
|
(4,925
|
)
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,892
|
|
|
|
19,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
403,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options,
including tax benefit of $62,415
|
|
|
15,416,982
|
|
|
|
16
|
|
|
|
172,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172,032
|
|
Sale of common stock, including tax
benefit of $990
|
|
|
1,968,144
|
|
|
|
2
|
|
|
|
28,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,963
|
|
Repurchase of common stock
|
|
|
(9,958,510
|
)
|
|
|
(10
|
)
|
|
|
(203,403
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(203,413
|
)
|
|
|
|
|
|
|
Balance, October 3, 2004
|
|
|
794,811,688
|
|
|
$
|
795
|
|
|
$
|
955,890
|
|
|
$
|
39,393
|
|
|
$
|
1,444,617
|
|
|
$
|
29,241
|
|
|
$
|
2,469,936
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
494,370
|
|
|
|
|
|
|
|
494,370
|
|
Unrealized holding gains, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
350
|
|
|
|
350
|
|
Translation adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,677
|
)
|
|
|
(8,677
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
486,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options,
including tax benefit of $108,428
|
|
|
16,169,992
|
|
|
|
16
|
|
|
|
239,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
239,028
|
|
Sale of common stock, including tax
benefit of $1,550
|
|
|
1,563,964
|
|
|
|
1
|
|
|
|
34,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,505
|
|
Repurchase of common stock
|
|
|
(45,103,534
|
)
|
|
|
(45
|
)
|
|
|
(1,139,205
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,139,250
|
)
|
|
|
|
|
|
|
Balance, October 2, 2005
|
|
|
767,442,110
|
|
|
$
|
767
|
|
|
$
|
90,201
|
|
|
$
|
39,393
|
|
|
$
|
1,938,987
|
|
|
$
|
20,914
|
|
|
$
|
2,090,262
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
564,259
|
|
|
|
|
|
|
|
564,259
|
|
Unrealized holding gains, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,767
|
|
|
|
1,767
|
|
Translation adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,592
|
|
|
|
14,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
580,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
107,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107,738
|
|
Exercise of stock options,
including tax benefit of $116,762
|
|
|
13,222,729
|
|
|
|
13
|
|
|
|
235,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
235,285
|
|
Sale of common stock, including tax
benefit of $1,924
|
|
|
1,544,634
|
|
|
|
2
|
|
|
|
42,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,651
|
|
Repurchase of common stock
|
|
|
(25,607,402
|
)
|
|
|
(26
|
)
|
|
|
(475,860
|
)
|
|
|
|
|
|
|
(352,162
|
)
|
|
|
|
|
|
|
(828,048
|
)
|
|
|
|
|
|
|
Balance, October 1, 2006
|
|
|
756,602,071
|
|
|
$
|
756
|
|
|
$
|
|
|
|
$
|
39,393
|
|
|
$
|
2,151,084
|
|
|
$
|
37,273
|
|
|
$
|
2,228,506
|
|
|
|
See Notes to Consolidated Financial Statements.
|
|
40
|
STARBUCKS
CORPORATION, FORM 10-K
|
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Fiscal
years ended October 1, 2006, October 2, 2005, and
October 3, 2004
Note 1:
Summary of Significant Accounting Policies
Description
of Business
Starbucks Corporation (together with its subsidiaries,
Starbucks or the Company) purchases and
roasts high-quality whole bean coffees and sells them, along
with fresh, rich-brewed coffees, Italian-style espresso
beverages, cold blended beverages, a variety of complementary
food items, coffee-related accessories and equipment, a
selection of premium teas and a line of compact discs, primarily
through its Company-operated retail stores. Starbucks also sells
coffee and tea products and licenses its trademark through other
channels and, through certain of its equity investees, Starbucks
produces and sells
ready-to-drink
beverages which include, among others, bottled
Frappuccino®
coffee drinks and Starbucks
DoubleShot®
espresso drinks, and a line of superpremium ice creams. All
channels outside the Company-operated retail stores are
collectively known as Specialty Operations. The
Companys objective is to establish Starbucks as one of the
most recognized and respected brands in the world. To achieve
this goal, the Company plans to continue rapid expansion of its
retail operations, to grow its Specialty Operations and to
selectively pursue other opportunities to leverage the Starbucks
brand through the introduction of new products and the
development of new channels of distribution. The Companys
brand portfolio includes superpremium
Tazo®
teas, Starbucks Hear
Music®
compact discs, Seattles Best
Coffee®
and Torrefazione
Italia®
coffee.
Principles
of Consolidation
The consolidated financial statements reflect the financial
position and operating results of Starbucks, which include
wholly owned subsidiaries and investees controlled by the
Company.
Investments in entities that the Company does not control, but
has the ability to exercise significant influence over operating
and financial policies, are accounted for under the equity
method. Investments in entities in which Starbucks does not have
the ability to exercise significant influence are accounted for
under the cost method.
All significant intercompany transactions have been eliminated.
Fiscal
Year End
Starbucks Corporations fiscal year ends on the Sunday
closest to September 30. The fiscal years ended on
October 1, 2006 and October 2, 2005, included
52 weeks. The fiscal year ended October 3, 2004,
included 53 weeks, with the 53rd week falling in the
fiscal fourth quarter.
Reclassifications
Certain reclassifications of prior years balances have
been made to conform to the current format.
Estimates
and Assumptions
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America (GAAP) requires management to make estimates
and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Actual results may differ
from these estimates.
Cash and
Cash Equivalents
The Company considers all highly liquid instruments with a
maturity of three months or less at the time of purchase to be
cash equivalents. The Company maintains cash and cash equivalent
balances with financial institutions that exceed federally
insured limits. The Company has not experienced any losses
related to these balances, and management believes its credit
risk to be minimal.
|
|
STARBUCKS
CORPORATION, FORM 10-K
|
41
|
Cash
Management
The Companys cash management system provides for the
reimbursement of all major bank disbursement accounts on a daily
basis. Checks issued but not presented for payment to the bank
are reflected as a reduction of cash and cash equivalents on the
consolidated financial statements.
Short-term
and Long-term Investments
The Companys short-term and long-term investments consist
primarily of investment-grade marketable debt securities as well
as bond and equity mutual funds, all of which are classified as
trading or
available-for-sale.
Trading securities are recorded at fair value with unrealized
holding gains and losses included in net earnings.
Available-for-sale
securities are recorded at fair value, and unrealized holding
gains and losses are recorded, net of tax, as a separate
component of accumulated other comprehensive income.
Available-for-sale
securities with remaining maturities of less than one year and
those identified by management at time of purchase for funding
operations in less than one year are classified as short-term,
and all other
available-for-sale
securities are classified as long-term. Unrealized losses are
charged against net earnings when a decline in fair value is
determined to be other than temporary. Management reviews
several factors to determine whether a loss is other than
temporary, such as the length of time a security is in an
unrealized loss position, the extent to which fair value is less
than amortized cost, the impact of changing interest rates in
the short and long term, the financial condition and near term
prospects of the issuer and the Companys intent and
ability to hold the security for a period of time sufficient to
allow for any anticipated recovery in fair value. Realized gains
and losses are accounted for on the specific identification
method. Purchases and sales are recorded on a trade date basis.
Fair
Value of Financial Instruments
The carrying value of cash and cash equivalents approximates
fair value because of the short-term maturity of those
instruments. The fair value of the Companys investments in
marketable debt and equity securities, as well as bond and
equity mutual funds, is based upon the quoted market price on
the last business day of the fiscal year. For equity securities
of companies that are privately held, or where an observable
quoted market price does not exist, the Company estimates fair
value using a variety of valuation methodologies. Such
methodologies include comparing the security with securities of
publicly traded companies in similar lines of business, applying
revenue multiples to estimated future operating results for the
private company and estimating discounted cash flows for that
company. Declines in fair value below the Companys
carrying value deemed to be other than temporary are charged
against net earnings. For further information on investments,
see Notes 4 and 7. The carrying value of short-term and
long-term debt approximates fair value.
Derivative
Instruments
The Company manages its exposure to various risks within the
consolidated financial statements according to an umbrella risk
management 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.
The Company follows SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended
and interpreted, which requires that all derivatives be recorded
on the balance sheet at fair value. For a cash flow hedge, the
effective portion of the derivatives gain or loss is
initially reported as a component of other comprehensive income
(OCI) and subsequently reclassified into net
earnings when the hedged exposure affects net earnings. For a
net investment hedge, the effective portion of the
derivatives gain or loss is reported as a component of OCI.
Cash flow hedges related to anticipated transactions are
designated and documented at the inception of each hedge by
matching the terms of the contract to the underlying
transaction. The Company classifies the cash flows from hedging
transactions in the same categories as the cash flows from the
respective hedged items. Once established, cash flow hedges are
generally not removed until maturity unless an anticipated
transaction is no longer likely to occur. Discontinued or
derecognized cash flow hedges are immediately settled with
counterparties, and the related accumulated derivative gains or
losses are recognized into net earnings in Interest and
other income, net on the consolidated statements of
earnings.
|
|
42
|
STARBUCKS
CORPORATION, FORM 10-K
|
Forward contract effectiveness for cash flow hedges is
calculated by comparing the fair value of the contract to the
change in value of the anticipated transaction using forward
rates on a monthly basis. For net investment hedges, the
spot-to-spot
method is used to calculate effectiveness. Under this method,
the change in fair value of the forward contract attributable to
the changes in spot exchange rates (the effective portion) is
reported as a component of OCI. The remaining change in fair
value of the forward contract (the ineffective portion) is
reclassified into net earnings. Any ineffectiveness is
recognized immediately in Interest and other income,
net on the consolidated statements of earnings.
Allowance
for doubtful accounts
Allowance for doubtful accounts is calculated based on
historical experience, customer credit risk and application of
the specific identification method.
Inventories
Inventories are stated at the lower of cost (primarily moving
average cost) or market. The Company records inventory reserves
for obsolete and slow-moving items and for estimated shrinkage
between physical inventory counts. Inventory reserves are based
on inventory turnover trends, historical experience and
application of the specific identification method. As of
October 1, 2006 and October 2, 2005, inventory
reserves were $10.5 million and $8.3 million,
respectively.
Property,
Plant and Equipment
Property, plant and equipment are carried at cost less
accumulated depreciation. Depreciation of property, plant and
equipment, which includes assets under capital leases, is
provided on the straight-line method over estimated useful
lives, generally ranging from two to seven years for equipment
and 30 to 40 years for buildings. Leasehold improvements
are amortized over the shorter of their estimated useful lives
or the related lease life, generally 10 years. For leases
with renewal periods at the Companys option, Starbucks
generally uses the original lease term, excluding renewal option
periods to determine estimated useful lives. If failure to
exercise a renewal option imposes an economic penalty to
Starbucks, management may determine at the inception of the
lease that renewal is reasonably assured and include the renewal
option period in the determination of appropriate estimated
useful lives. The portion of depreciation expense related to
production and distribution facilities is included in Cost
of sales including occupancy costs on the consolidated
statements of earnings. The costs of repairs and maintenance are
expensed when incurred, while expenditures for refurbishments
and improvements that significantly add to the productive
capacity or extend the useful life of an asset are capitalized.
When assets are retired or sold, the asset cost and related
accumulated depreciation are eliminated with any remaining gain
or loss reflected in net earnings.
Goodwill
and Other Intangible Assets
Goodwill and other intangible assets are tested for impairment
annually in June and more frequently if facts and circumstances
indicate goodwill carrying values exceed estimated reporting
unit fair values and if indefinite useful lives are no longer
appropriate for the Companys trademarks. Based on the
impairment tests performed, there was no impairment of goodwill
in fiscal 2006, 2005 and 2004. Definite-lived intangibles, which
mainly consist of contract-based patents and copyrights, are
amortized over their estimated useful lives. For further
information on goodwill and other intangible assets, see
Note 9.
Long-lived
Assets
When facts and circumstances indicate that the carrying values
of long-lived assets may be impaired, an evaluation of
recoverability is performed by comparing the carrying values of
the assets to projected future cash flows in addition to other
quantitative and qualitative analyses. Upon indication that the
carrying values of such assets may not be recoverable, the
Company recognizes an impairment loss by a charge against
current operations. Property, plant and equipment assets
|
|
STARBUCKS
CORPORATION, FORM 10-K
|
43
|
are grouped at the lowest level for which there are identifiable
cash flows when assessing impairment. Cash flows for retail
assets are identified at the individual store level.
The Company recognized net impairment and disposition losses of
$19.6 million, $19.5 million and $17.9 million in
fiscal 2006, 2005 and 2004, respectively, primarily from
renovation and remodeling activity and, to a lesser extent, from
underperforming Company-operated retail stores, in the normal
course of business. Depending on the underlying asset that is
impaired, these losses may be recorded in any one of the
operating expense lines on the consolidated statements of
earnings: for retail operations, these losses are recorded in
Store operating expenses; for Specialty Operations,
these losses are recorded in Other operating
expenses; and for all other operations, these losses are
recorded in either Cost of sales including occupancy
costs or General and administrative expenses.
Insurance
Reserves
The Company uses a combination of insurance and self-insurance
mechanisms, including a wholly owned captive insurance entity
and participation in a reinsurance pool, to provide for the
potential liabilities for workers compensation, healthcare
benefits, general liability, property insurance, director and
officers liability insurance and vehicle liability.
Liabilities associated with the risks that are retained by the
Company are not discounted and are estimated, in part, by
considering historical claims experience, demographic factors,
severity factors and other actuarial assumptions. The estimated
accruals for these liabilities, portions of which are calculated
by third party actuarial firms, could be significantly affected
if future occurrences and claims differ from these assumptions
and historical trends. As of October 1, 2006, and
October 2, 2005, these reserves were $113.2 million
and $91.6 million, respectively, and were included in
Accrued compensation and related costs and
Other accrued expenses on the consolidated balance
sheets.
Revenue
Recognition
Consolidated revenues are presented net of intercompany
eliminations for wholly owned subsidiaries and investees
controlled by the Company and for licensees accounted for under
the equity method, based on the Companys percentage
ownership. Additionally, consolidated revenues are recognized
net of any discounts, returns, allowances and sales incentives,
including coupon redemptions and rebates.
Stored
Value Cards
Revenues from the Companys stored value cards, such as the
Starbucks Card, are recognized when tendered for payment, or
upon redemption. Outstanding customer balances are included in
Deferred revenue on the consolidated balance sheets.
There are no expiration dates on the Companys stored value
cards, and Starbucks does not charge any service fees that cause
a decrement to customer balances.
While the Company will continue to honor all stored value cards
presented for payment, management may determine the likelihood
of redemption to be remote for certain card balances due to,
among other things, long periods of inactivity. In these
circumstances, to the extent management determines there is no
requirement for remitting card balances to government agencies
under unclaimed property laws, card balances may be recognized
in the consolidated statements of earnings in Income and
other income, net. For the fiscal year ended
October 1, 2006, income recognized on unredeemed stored
value card balances was $4.4 million. There was no income
recognized on unredeemed stored value card balances during the
fiscal years ended October 2, 2005 or October 3, 2004.
Retail
Revenues
Company-operated retail store revenues are recognized when
payment is tendered at the point of sale. Starbucks maintains a
sales return allowance, based on historical patterns, to reduce
retail revenues for estimated future product returns, including
defective brewing equipment, related to sales in the normal
course of business. Retail store revenues are reported net of
sales, use or other transaction taxes that are collected from
customers and remitted to taxing authorities.
|
|
44
|
STARBUCKS
CORPORATION, FORM 10-K
|
Specialty
Revenues
Specialty revenues consist primarily of product sales to
customers other than through Company-operated retail stores, as
well as royalties and other fees generated from licensing
operations. Sales of coffee, tea and related products are
generally recognized upon shipment to customers, depending on
contract terms. Shipping charges billed to customers are also
recognized as revenue, and the related shipping costs are
included in Cost of sales including occupancy costs
on the consolidated statements of earnings.
Specific to retail store licensing arrangements, initial
nonrefundable development fees are recognized upon substantial
performance of services for new market business development
activities, such as initial business, real estate and store
development planning, as well as providing operational materials
and functional training courses for opening new licensed retail
markets. Additional store licensing fees are recognized when new
licensed stores are opened. Royalty revenues based upon a
percentage of reported sales and other continuing fees, such as
marketing and service fees, are recognized on a monthly basis
when earned. For certain licensing arrangements, where the
Company intends to acquire an ownership interest, the initial
nonrefundable development fees are deferred to Other
long-term liabilities until acquisition, at which point
the fees are reflected as a reduction of the Companys
investment.
Other arrangements involving multiple elements and deliverables
as well as upfront fees are individually evaluated for revenue
recognition. Cash payments received in advance of product or
service delivery are recorded as deferred revenue.
Advertising
The Company expenses most advertising costs as they are
incurred, except for certain production costs that are expensed
the first time the advertising campaign takes place and
direct-response advertising, which is capitalized and amortized
over its expected period of future benefits. Direct-response
advertising consists primarily of customer acquisition expenses
including applications for customers to apply for the Starbucks
Card
Duettotm
Visa®.
These capitalized costs are amortized over the life of the
credit card which is estimated to be three years.
Total advertising expenses, recorded in Store operating
expenses, Other operating expenses and
General and administrative expenses on the
consolidated statements of earnings, totaled $95.4 million,
$87.7 million and $67.2 million in fiscal 2006, 2005
and 2004, respectively. As of October 1, 2006, and
October 2, 2005, $19.2 million and $11.8 million,
respectively, of capitalized advertising costs were recorded in
Prepaid expenses and other current assets on the
consolidated balance sheets.
Store
Preopening Expenses
Costs incurred in connection with the
start-up and
promotion of new store openings are expensed as incurred.
Operating
Leases
Starbucks leases retail stores, roasting and distribution
facilities and office space under operating leases. Most lease
agreements contain tenant improvement allowances, rent holidays,
lease premiums, rent escalation clauses
and/or
contingent rent provisions. For purposes of recognizing
incentives, premiums and minimum rental expenses on a
straight-line basis over the terms of the leases, the Company
uses the date of initial possession to begin amortization, which
is generally when the Company enters the space and begins to
make improvements in preparation of intended use.
For tenant improvement allowances and rent holidays, the Company
records a deferred rent liability in Accrued occupancy
costs and Other long-term liabilities on the
consolidated balance sheets and amortizes the deferred rent over
the terms of the leases as reductions to rent expense on the
consolidated statements of earnings.
For premiums paid upfront to enter a lease agreement, the
Company records a deferred rent asset in Prepaid expenses
and other current assets and Other assets on
the consolidated balance sheets and then amortizes the deferred
rent over the terms of the leases as additional rent expense on
the consolidated statements of earnings.
|
|
STARBUCKS
CORPORATION, FORM 10-K
|
45
|
For scheduled rent escalation clauses during the lease terms or
for rental payments commencing at a date other than the date of
initial occupancy, the Company records minimum rental expenses
on a straight-line basis over the terms of the leases on the
consolidated statements of earnings.
Certain leases provide for contingent rents, which are
determined as a percentage of gross sales in excess of specified
levels. The Company records a contingent rent liability in
Accrued occupancy costs on the consolidated balance
sheets and the corresponding rent expense when specified levels
have been achieved or when management determines that achieving
the specified levels during the fiscal year is probable.
Asset
Retirement Obligations Change in Accounting
Principle
On October 1, 2006, Starbucks adopted FASB Interpretation
No. 47 (FIN 47), Accounting for
Conditional Asset Retirement Obligations an
interpretation of FASB Statement No. 143, which
requires the recognition of a liability for the fair value of a
legally required conditional asset retirement obligation when
incurred, if the liabilitys fair value can be reasonably
estimated. The Companys asset retirement obligation
(ARO) liabilities are primarily associated with the
disposal of leasehold improvements which, at the end of a lease,
the Company may be contractually obligated to remove in order to
restore the facility back to a condition specified in the lease
agreement. The Company estimates the fair value of these
liabilities based on current store closing costs, accretes that
current cost forward to the date of estimated ARO removal, and
discounts the future cost back as if it were performed at the
inception of the lease. At the inception of such a lease, the
Company records the ARO liability and also records a related
capital asset in an amount equal to the estimated fair value of
the liability. The ARO liability is accreted to its future
value, with the accretion expense recognized as operating
expense. The capitalized asset is depreciated on a straight-line
basis over the useful life of the asset, which generally mirrors
the life of the leasehold improvement. Upon ARO removal, any
difference between the actual retirement costs incurred and the
recorded estimated ARO liability is recognized as an operating
gain or loss in the consolidated statement of earnings. In
future periods, the Company may make adjustments to the ARO
liability as a result of the availability of new information,
changes in labor costs and other factors. The estimate of the
ARO liability is based on a number of assumptions requiring
managements judgment, including store closing costs, cost
inflation rates and discount rates.
The initial impact of adopting FIN 47 resulted in a charge
of $27.1 million, with a related tax benefit of
$9.9 million, for a net expense of $17.2 million, or
$0.02 per diluted share. The net amount was recorded as a
cumulative effect of a change in accounting principle on the
consolidated statement of earnings. FIN 47 requires that
the cumulative approach to adoption be used rather than
retrospectively revising prior year financial statements. The
adoption increased Property, plant and equipment,
net, by $15.5 million, increased Other
long-term liabilities for AROs by $34.2 million,
increased Other assets for deferred tax assets by
$6.8 million, and decreased Equity and other
investments by $5.3 million. The following table
presents, on a pro forma basis, what the ARO liability would
have been had FIN 47 been in effect during fiscal 2005 and
2004. These pro forma amounts are estimated based upon the
information, assumptions and interest rates used to measure the
ARO liability recognized upon adoption of FIN 47 as of
October 1, 2006 (in millions):
|
|
|
|
|
|
|
Pro forma ARO liability,
October 2, 2005
|
|
$
|
29.2
|
|
Pro forma ARO liability,
October 3, 2004
|
|
|
25.2
|
|
Pro forma ARO liability,
September 28, 2003
|
|
|
20.9
|
|
|
|
Stock-based
Compensation Change in Accounting
Principle
The Company maintains several equity incentive plans under which
it may grant non-qualified stock options, incentive stock
options, restricted stock or stock appreciation rights to
employees, non-employee directors and consultants. The Company
also has employee stock purchase plans (ESPP).
Prior to the October 3, 2005 adoption of the
SFAS No. 123(R), Share-Based Payment
(SFAS 123R), Starbucks accounted for
stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board
|
|
46
|
STARBUCKS
CORPORATION, FORM 10-K
|
(APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations.
Accordingly, because the stock option grant price equaled the
market price on the date of grant, and any purchase discounts
under the Companys stock purchase plans were within
statutory limits, no compensation expense was recognized by the
Company for stock-based compensation. As permitted by
SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123), stock-based
compensation was included as a pro forma disclosure in the notes
to the consolidated financial statements.
Effective October 3, 2005, the beginning of Starbucks first
fiscal quarter of 2006, the Company adopted the fair value
recognition provisions of SFAS 123R, using the
modified-prospective transition method. Under this transition
method, stock-based compensation expense was recognized in the
consolidated financial statements for granted, modified, or
settled stock options and for expense related to the ESPP, since
the related purchase discounts exceeded the amount allowed under
SFAS 123R for non-compensatory treatment. Compensation
expense recognized included the estimated expense for stock
options granted on and subsequent to October 3, 2005, based
on the grant date fair value estimated in accordance with the
provisions of SFAS 123R, and the estimated expense for the
portion vesting in the period for options granted prior to, but
not vested as of October 3, 2005, based on the grant date
fair value estimated in accordance with the original provisions
of SFAS 123. Results for prior periods have not been
restated, as provided for under the modified-prospective method.
Total stock-based compensation expense recognized in the
consolidated statement of earnings for fiscal 2006 was
$105.0 million before income taxes and consisted of stock
option and ESPP expense of $94.8 million and
$10.2 million, respectively. The related total tax benefit
was $36.1 million for fiscal 2006. Capitalized stock-based
compensation at October 1, 2006 was $2.1 million, and
was included in Property, plant and equipment, net
and Inventories on the consolidated balance sheet.
Prior to the adoption of SFAS 123R, Starbucks presented all
tax benefits resulting from the exercise of stock options as
operating cash inflows in the consolidated statements of cash
flows, in accordance with the provisions of the Emerging Issues
Task Force (EITF) Issue No
00-15,
Classification in the Statement of Cash Flows of the
Income Tax Benefit Received by a Company upon Exercise of a
Nonqualified Employee Stock Option. SFAS 123R
requires the benefits of tax deductions in excess of the tax
effect of the compensation cost recognized for those options to
be classified as financing cash inflows rather than operating
cash inflows, on a prospective basis. This amount is shown as
Excess tax benefit from exercise of stock options on
the consolidated statement of cash flows.
In November 2005, the FASB issued Staff Position
No. FAS 123(R)-3,
Transition Election Related to Accounting for the Tax
Effects of Share-Based Payment Awards
(FSP 123R-3).
The Company has elected to adopt the alternative transition
method provided in FSP 123R-3 for calculating the tax effects of
stock-based compensation under SFAS 123R. The alternative
transition method includes simplified methods to establish the
beginning balance of the additional
paid-in-capital
pool (APIC pool) related to the tax effects of
stock-based compensation, and for determining the subsequent
impact on the APIC pool and consolidated statements of cash
flows of the tax effects of stock-based compensation awards that
are outstanding upon adoption of SFAS 123R.
For option grants made in November 2003 and thereafter, the
Company may provide for immediate vesting upon retirement for
optionees who have attained at least 10 years of service
and are age 55 or older. Prior to adoption of
SFAS 123R, the Company amortized the expense over the
related vesting period with acceleration of expense upon
retirement. With the adoption of SFAS 123R, the accounting
treatment for retirement features changed. Expense for awards
made prior to adoption of SFAS 123R is still amortized over
the vesting period until retirement, at which point any
remaining unrecognized expense is immediately recognized. For
awards made on or after October 3, 2005, the related
expense is recognized either from grant date through the date
the employee reaches the years of service and age requirements,
or from grant date through the stated vesting period, whichever
is shorter.
|
|
STARBUCKS
CORPORATION, FORM 10-K
|
47
|
The following table shows the effect on net earnings and
earnings per share had compensation cost been recognized based
upon the estimated fair value on the grant date of stock
options, and ESPP, in accordance with SFAS 123, as amended
by SFAS No. 148 Accounting for Stock-Based
Compensation Transition and Disclosure (in
thousands, except earnings per share):
|
|
|
|
|
|
|
|
|
FISCAL YEAR ENDED
|
|
Oct 2, 2005
|
|
|
Oct 3, 2004
|
|
|
|
Net earnings
|
|
$
|
494,370
|
|
|
$
|
388,880
|
|
Deduct: stock-based compensation
expense determined under fair value method, net of tax
|
|
|
(58,742
|
)
|
|
|
(45,056
|
)
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
435,628
|
|
|
$
|
343,824
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$
|
0.63
|
|
|
$
|
0.49
|
|
Deduct: stock-based compensation
expense determined under fair value method, net of tax
|
|
|
(0.08
|
)
|
|
|
(0.06
|
)
|
|
|
|
|
|
|
Basic pro forma
|
|
$
|
0.55
|
|
|
$
|
0.43
|
|
|
|
|
|
|
|
Diluted as reported
|
|
$
|
0.61
|
|
|
$
|
0.47
|
|
Deduct: stock-based compensation
expense determined under fair value method, net of tax
|
|
|
(0.08
|
)
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
Diluted pro forma
|
|
$
|
0.53
|
|
|
$
|
0.42
|
|
|
|
Disclosures for the year ended October 1, 2006 are not
presented because the amounts are recognized in the consolidated
financial statements.
The fair value of stock awards was estimated at the date of
grant using the Black-Scholes-Merton (BSM) option
valuation model with the following weighted average assumptions
for the 52 weeks ended October 1, 2006,
October 2, 2005 and 53 weeks ended October 3,
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMPLOYEE STOCK OPTIONS
|
|
ESPP
|
|
|
|
|
2005
|
|
2004
|
|
|
|
2005
|
|
2004
|
FISCAL YEAR ENDED
|
|
2006
|
|
(Pro Forma)
|
|
(Pro Forma)
|
|
2006
|
|
(Pro Forma)
|
|
(Pro Forma)
|
|
|
Expected term (in years)
|
|
4.4
|
|
3.7
|
|
3.7
|
|
0.25 3.0
|
|
0.25 3.0
|
|
0.25 3.0
|
Expected stock price volatility
|
|
29%
|
|
33%
|
|
42%
|
|
22% 50%
|
|
20% 40%
|
|
19% 43%
|
Risk-free interest rate
|
|
4.4%
|
|
3.5%
|
|
2.5%
|
|
2.3% 5.0%
|
|
1.9% 3.5%
|
|
0.9% 2.3%
|
Expected dividend yield
|
|
0.0%
|
|
0.0%
|
|
0.0%
|
|
0.0%
|
|
0.0%
|
|
0.0%
|
Estimated fair value per option
granted
|
|
$9.59
|
|
$8.10
|
|
$5.30
|
|
$6.60
|
|
$5.05
|
|
$3.38
|
|
|
The expected term of the options represents the estimated period
of time until exercise and is based on historical experience of
similar awards, giving consideration to the contractual terms,
vesting schedules and expectations of future employee behavior.
For 2006, expected stock price volatility is based on a
combination of historical volatility of the Companys stock
and the one-year implied volatility of its traded options, for
the related vesting periods. Prior to the adoption of
SFAS 123R, expected stock price volatility was estimated
using only historical volatility. The risk-free interest rate is
based on the implied yield available on U.S. Treasury
zero-coupon issues with an equivalent remaining term. The
Company has not paid dividends in the past and does not plan to
pay any dividends in the near future.
The BSM option valuation model was developed for use in
estimating the fair value of traded options, which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions, particularly for the expected term and expected
stock price volatility. The Companys employee stock
options have characteristics significantly different from those
of traded options, and changes in the subjective input
assumptions can materially affect the fair value estimate.
Because Company stock options do not trade on a secondary
exchange, employees do not derive a benefit from holding stock
options unless there is an increase, above the grant price, in
the market price of the Companys stock. Such an increase
in stock price would benefit all shareholders commensurately.
See Note 14 for additional details.
|
|
48
|
STARBUCKS
CORPORATION, FORM 10-K
|
Foreign
Currency Translation
The Companys international operations generally use their
local currency as their functional currency. Assets and
liabilities are translated at exchange rates in effect at the
balance sheet date. Income and expense accounts are translated
at the average monthly exchange rates during the year. Resulting
translation adjustments are recorded as a separate component of
Accumulated other comprehensive income.
Income
Taxes
The Company computes income taxes using the asset and liability
method, under which deferred income taxes are provided for the
temporary differences between the financial reporting basis and
the tax basis of the Companys assets and liabilities. The
Company establishes, and periodically reviews and re-evaluates,
an estimated contingent tax liability to provide for the
possibility of unfavorable outcomes in tax matters in accordance
with the requirements of SFAS No. 5, Accounting
for Contingencies (SFAS 5).
Earnings
per Share
The computation of basic earnings per share is based on the
weighted average number of shares and common stock units that
were outstanding during the period. The computation of diluted
earnings per share includes the dilutive effect of common stock
equivalents consisting of certain shares subject to stock
options.
Common
Stock Share Repurchases
The Company is allowed to repurchase shares of its common stock
under a program authorized by its Board of Directors including
pursuant to a contract, instruction or written plan meeting the
requirements of
Rule 10b5-1(c)(1)
of the Securities Exchange Act of 1934. Share repurchases are
not displayed separately as treasury stock on the consolidated
balance sheets or consolidated statements of shareholders
equity in accordance with the Washington Business Corporation
Act. Instead, the par value of repurchased shares is deducted
from Common stock and the remaining excess
repurchase price over par value is deducted from
Additional paid-in capital and from Retained
earnings, once additional paid-in capital is depleted. See
Note 13 for additional information.
Recent
Accounting Pronouncements
In July 2006, the FASB issued Interpretation No. 48
(FIN 48), Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement
No. 109, which seeks to reduce the diversity in
practice associated with the accounting and reporting for
uncertainty in income tax positions. This Interpretation
prescribes a comprehensive model for the financial statement
recognition, measurement, presentation and disclosure of
uncertain tax positions taken or expected to be taken in income
tax returns. FIN 48 is effective for fiscal years beginning
after December 15, 2006, and the Company will adopt the new
requirements in its fiscal first quarter of 2008. The cumulative
effects, if any, of adopting FIN 48 will be recorded as an
adjustment to retained earnings as of the beginning of the
period of adoption. The Company has not yet determined the
impact, if any, of adopting FIN 48 on its consolidated
financial statements.
In September 2006, the FASB issued SFAS 157, Fair Value
Measurements (SFAS 157), which defines fair
value, establishes a framework for measuring fair value in GAAP,
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
|
|
STARBUCKS
CORPORATION, FORM 10-K
|
49
|
financial statement errors using both an income statement and
cumulative balance sheet approach. SAB 108 is effective for
fiscal years beginning after November 15, 2006, and the
Company will adopt the new requirements in fiscal 2008. The
adoption of SAB 108 is not currently expected to have a
significant impact on the Companys consolidated financial
statements.
Note 2: Business
Acquisitions
In January 2006, Starbucks increased its equity ownership to
100% in its operations in Hawaii and Puerto Rico and applied the
consolidation method of accounting from the acquisition date.
Previously the Company owned 5% of both Coffee Partners Hawaii
and Café del Caribe in Puerto Rico. Because Coffee Partners
Hawaii was a general partnership, the equity method of
accounting was previously applied. Retroactive application of
the equity method of accounting for the Puerto Rico investment,
which was previously accounted for under the cost method,
resulted in a reduction of retained earnings of
$0.5 million as of April 2, 2006. Previously reported
earnings per share amounts were not impacted as a result of this
acquisition.
As shown in the tables below, the cumulative effect of the
accounting change for financial results previously reported
under the cost method and as restated in this report under the
equity method reduced net earnings by $97 thousand for the
fiscal year ended October 2, 2005 and $93 thousand for the
fiscal year ended October 2, 2004 (in thousands):
|
|
|
|
|
|
|
|
|
FISCAL YEAR ENDED
|
|
Oct 2, 2005
|
|
|
Oct 3, 2004
|
|
|
|
Net earnings, as previously reported
|
|
$
|
494,467
|
|
|
$
|
388,973
|
|
Effect of change to equity method
|
|
|
(97
|
)
|
|
|
(93
|
)
|
|
|
Net earnings, as restated for
Puerto Rico acquisition
|
|
$
|
494,370
|
|
|
$
|
388,880
|
|
|
|
Note 3: Cash
and Cash Equivalents
Cash and cash equivalents consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
FISCAL YEAR ENDED
|
|
Oct 1, 2006
|
|
|
Oct 2, 2005
|
|
|
|
Operating funds and interest
bearing deposits
|
|
$
|
84,943
|
|
|
$
|
62,221
|
|
Money market funds
|
|
|
227,663
|
|
|
|
111,588
|
|
|
|
Total
|
|
$
|
312,606
|
|
|
$
|
173,809
|
|
|
|
Note 4: Short-term
and Long-term Investments
The Companys short-term and long-term investments consist
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
|
|
Unrealized
|
|
Unrealized
|
|
|
|
|
|
Amortized
|
|
Holding
|
|
Holding
|
|
|
Fair
|
OCTOBER 1, 2006
|
|
Cost
|
|
Gains
|
|
Losses
|
|
|
Value
|
|
|
Short-term investments
available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local government
obligations
|
|
$
|
75,379
|
|
$
|
9
|
|
$
|
(332
|
)
|
|
$
|
75,056
|
U.S. government agency
obligations
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
10,000
|
Corporate debt securities
|
|
|
2,488
|
|
|
|
|
|
(2
|
)
|
|
|
2,486
|
|
|
|
|
|
|
Total
|
|
|
87,867
|
|
$
|
9
|
|
$
|
(334
|
)
|
|
|
87,542
|
|
|
|
|
|
|
Short-term investments
trading securities
|
|
|
55,265
|
|
|
|
|
|
|
|
|
|
53,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
143,132
|
|
|
|
|
|
|
|
|
$
|
141,038
|
|
|
Long-term investments
available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local government
obligations
|
|
$
|
5,893
|
|
$
|
|
|
$
|
(82
|
)
|
|
$
|
5,811
|
|
|
|
|
50
|
STARBUCKS
CORPORATION, FORM 10-K
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
|
|
Unrealized
|
|
Unrealized
|
|
|
|
|
|
Amortized
|
|
Holding
|
|
Holding
|
|
|
Fair
|
OCTOBER 2, 2005
|
|
Cost
|
|
Gains
|
|
Losses
|
|
|
Value
|
|
|
Short-term investments
available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local government
obligations
|
|
$
|
47,960
|
|
$
|
1
|
|
$
|
(179
|
)
|
|
$
|
47,782
|
Mutual funds
|
|
|
25,000
|
|
|
34
|
|
|
|
|
|
|
25,034
|
U.S. government agency
obligations
|
|
|
11,327
|
|
|
|
|
|
(21
|
)
|
|
|
11,306
|
Corporate debt securities
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
4,000
|
Asset-backed securities
|
|
|
7,373
|
|
|
|
|
|
(116
|
)
|
|
|
7,257
|
|
|
|
|
|
|
Total
|
|
|
95,660
|
|
$
|
35
|
|
$
|
(316
|
)
|
|
|
95,379
|
|
|
|
|
|
|
Short-term investments
trading securities
|
|
|
35,376
|
|
|
|
|
|
|
|
|
|
37,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
131,036
|
|
|
|
|
|
|
|
|
$
|
133,227
|
|
|
Long-term investments
available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local government
obligations
|
|
$
|
61,236
|
|
$
|
7
|
|
$
|
(768
|
)
|
|
$
|
60,475
|
|
|
For
available-for-sale
securities, proceeds from sales were $431 million,
$626 million and $452 million, in fiscal years 2006,
2005 and 2004, respectively. Gross realized gains from sales
were $3.8 million, $0.1 million and $0.2 million
in fiscal years 2006, 2005 and 2004, respectively. Gross
realized losses from sales were $0.1 million,
$1.7 million and $0.4 million in fiscal years 2006,
2005 and 2004, respectively.
The following tables present the length of time
available-for-sale
securities were in continuous unrealized loss positions but were
not deemed to be
other-than-temporarily
impaired (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GREATER THAN OR
|
CONSECUTIVE MONTHLY UNREALIZED LOSSES
|
|
LESS THAN 12 MONTHS
|
|
EQUAL TO 12 MONTHS
|
|
|
Gross
|
|
|
|
|
Gross
|
|
|
|
|
|
Unrealized
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Holding
|
|
|
Fair
|
|
Holding
|
|
|
Fair
|
OCTOBER 1, 2006
|
|
Losses
|
|
|
Value
|
|
Losses
|
|
|
Value
|
|
|
State and local government
obligations
|
|
$
|
|
|
|
$
|
|
|
$
|
(414
|
)
|
|
$
|
49,960
|
Corporate debt securities
|
|
|
(2
|
)
|
|
|
2,486
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(2
|
)
|
|
$
|
2,486
|
|
$
|
(414
|
)
|
|
$
|
49,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GREATER THAN OR
|
CONSECUTIVE MONTHLY UNREALIZED LOSSES
|
|
LESS THAN 12 MONTHS
|
|
EQUAL TO 12 MONTHS
|
|
|
Gross
|
|
|
|
|
Gross
|
|
|
|
|
|
Unrealized
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Holding
|
|
|
Fair
|
|
Holding
|
|
|
Fair
|
OCTOBER 2, 2005
|
|
Losses
|
|
|
Value
|
|
Losses
|
|
|
Value
|
|
|
State and local government
obligations
|
|
$
|
(371
|
)
|
|
$
|
49,527
|
|
$
|
(576
|
)
|
|
$
|
43,699
|
U.S. government agency
obligations
|
|
|
(21
|
)
|
|
|
11,306
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
(34
|
)
|
|
|
3,467
|
|
|
(82
|
)
|
|
|
3,790
|
|
|
Total
|
|
$
|
(426
|
)
|
|
$
|
64,300
|
|
$
|
(658
|
)
|
|
$
|
47,489
|
|
|
Gross unrealized holding losses of $2 thousand for less than
twelve months and $0.4 million for greater than or equal to
twelve months as of October 1, 2006, pertain to 3 and 23
fixed income securities, respectively, and were primarily caused
by interest rate increases. Since Starbucks has the ability and
intent to hold these securities until a recovery of fair value,
which may be at maturity, and because the unrealized losses were
primarily due to higher interest rates, the Company does not
consider these securities to be
other-than-temporarily
impaired.
|
|
STARBUCKS
CORPORATION, FORM 10-K
|
51
|
Additional factors related to
other-than-temporary
impairment considered by management as of October 1, 2006,
included the following, by category:
State and
local government obligations
The contractual terms of these securities do not permit the
issuer to settle at a price less than the par value of the
investment, which is the equivalent of the amount due at
maturity. These securities had a minimum credit rating of
A, and an average credit rating above AA.
Corporate
debt obligations
The contractual terms of these securities do not permit the
issuer to settle at a price less than the par value of the
investment, which is the equivalent of the amount due at
maturity. These securities had a minimum and average credit
rating of A.
There were no realized losses recorded for other than temporary
impairments during fiscal years 2006, 2005 or 2004.
Trading securities are comprised mainly of marketable equity
mutual funds that approximate a portion of the Companys
liability under the Management Deferred Compensation Plan, a
defined contribution plan. The corresponding deferred
compensation liability of $64.6 million in fiscal 2006 and
$47.3 million in fiscal 2005 is included in Accrued
compensation and related costs on the consolidated balance
sheets. In fiscal years 2006 and 2005, the changes in net
unrealized holding gains/losses in the trading portfolio
included in earnings were a net loss of $4.2 million and a
net gain of $2.4 million, respectively.
Long-term investments generally mature in less than three years.
Note 5: Derivative
Financial Instruments
Cash Flow
Hedges
Starbucks, which includes subsidiaries that use their local
currency as their functional currency, enters into cash flow
derivative instruments to hedge portions of anticipated revenue
streams and inventory purchases. Current forward contracts,
which comprise the majority of the Companys derivative
instruments, hedge monthly forecasted revenue transactions
denominated in Japanese yen and Canadian dollars, as well as
forecasted inventory purchases denominated primarily in
U.S. dollars for foreign operations. The Company also has
swap contracts to hedge a small portion of its forecasted
U.S. fluid milk purchases and futures contracts to hedge
the variable price component for certain of its
price-to-be-fixed
green coffee purchase contracts.
The Company had accumulated net derivative losses of
$3.2 million, net of taxes, in other comprehensive income
as of October 1, 2006, related to cash flow hedges. Of this
amount, $1.8 million of net derivative losses pertain to
hedging instruments that will be dedesignated within
12 months and will also continue to experience fair value
changes before affecting earnings. For the
52-week
period ended October 1, 2006, net fair value losses of
$0.1 million were recognized into net earnings for
derecognized cash flow hedges. No cash flow hedges were
discontinued and no ineffectiveness was recognized during the
52-week
period ended October 2, 2005. Current contracts will expire
within 24 months.
Net
Investment Hedges
Net investment derivative instruments are used to hedge the
Companys equity method investment in Starbucks Coffee
Japan, Ltd. as well as the Companys net investments in its
Canadian and United Kingdom subsidiaries, to minimize foreign
currency exposure. The Company applies the
spot-to-spot
method for these forward foreign exchange contracts, and under
this method the change in fair value of the forward contracts
attributable to the changes in spot exchange rates (the
effective portion) is reported in other comprehensive income.
The remaining change in fair value of the forward contract (the
ineffective portion) is reclassified into earnings in
Interest and other income, net. The Company had
|
|
52
|
STARBUCKS
CORPORATION, FORM 10-K
|
accumulated net derivative losses of $3.2 million, net of
taxes, in other comprehensive income as of October 1, 2006,
related to net investment derivative hedges. Current contracts
expire within 33 months.
The following table presents the net gains and losses
reclassified from other comprehensive income into the
consolidated statements of earnings during the periods indicated
for cash flow and net investment hedges (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oct 1, 2006
|
|
|
Oct 2, 2005
|
|
|
Oct 3, 2004
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassified gains/(losses) into
total net revenues
|
|
$
|
1,489
|
|
|
$
|
(843
|
)
|
|
$
|
(1,488
|
)
|
Reclassified losses into cost of
sales
|
|
|
(7,698
|
)
|
|
|
(4,535
|
)
|
|
|
(761
|
)
|
|
|
|
|
|
|
Net reclassified
losses cash flow hedges
|
|
|
(6,209
|
)
|
|
|
(5,378
|
)
|
|
|
(2,249
|
)
|
Net reclassified gains
net investment hedges
|
|
|
3,754
|
|
|
|
1,058
|
|
|
|
673
|
|
|
|
Total
|
|
$
|
(2,455
|
)
|
|
$
|
(4,320
|
)
|
|
$
|
(1,576
|
)
|
|
|
Note 6: Inventories
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
FISCAL YEAR ENDED
|
|
Oct 1, 2006
|
|
|
Oct 2, 2005
|
|
|
|
Coffee:
|
|
|
|
|
|
|
|
|
Unroasted
|
|
$
|
328,051
|
|
|
$
|
319,745
|
|
Roasted
|
|
|
80,199
|
|
|
|
56,231
|
|
Other merchandise held for sale
|
|
|
146,345
|
|
|
|
109,094
|
|
Packaging and other supplies
|
|
|
81,627
|
|
|
|
61,229
|
|
|
|
Total
|
|
$
|
636,222
|
|
|
$
|
546,299
|
|
|
|
As of October 1, 2006, the Company had committed to
fixed-price purchase contracts for green coffee totaling
$546 million. The Company believes, based on relationships
established with its suppliers in the past, the risk of
non-delivery on such purchase commitments is remote. Other
merchandise held for sale includes, among other items, brewing
equipment, serveware and tea.
Note 7: Equity
and Other Investments
The Companys equity and other investments consist of the
following (in thousands):
|
|
|
|
|
|
|
|
|
FISCAL YEAR ENDED
|
|
Oct 1, 2006
|
|
|
Oct 2, 2005
|
|
|
|
Equity method investments
|
|
$
|
205,004
|
|
|
$
|
189,876
|
|
Cost method investments
|
|
|
11,283
|
|
|
|
8,407
|
|
Other investments
|
|
|
2,806
|
|
|
|
2,806
|
|
|
|
Total
|
|
$
|
219,093
|
|
|
$
|
201,089
|
|
|
|
|
|
STARBUCKS
CORPORATION, FORM 10-K
|
53
|
Equity
Method
The Companys equity investees and ownership interests are
as follows:
|
|
|
|
|
|
|
|
|
FISCAL YEAR ENDED
|
|
Oct 1, 2006
|
|
|
Oct 2, 2005
|
|
|
|
The North American Coffee
Partnership
|
|
|
50.0
|
%
|
|
|
50.0
|
%
|
Starbucks Ice Cream Partnership
|
|
|
50.0
|
|
|
|
50.0
|
|
Starbucks Coffee Korea Co.,
Ltd.
|
|
|
50.0
|
|
|
|
50.0
|
|
Starbucks Coffee Austria GmbH
|
|
|
50.0
|
|
|
|
50.0
|
|
Starbucks Coffee Switzerland AG
|
|
|
50.0
|
|
|
|
50.0
|
|
Starbucks Coffee España, S.L.
|
|
|
50.0
|
|
|
|
50.0
|
|
President Starbucks Coffee Taiwan
Ltd.
|
|
|
50.0
|
|
|
|
50.0
|
|
Shanghai President Coffee Co.
|
|
|
50.0
|
|
|
|
50.0
|
|
Starbucks Coffee France SAS
|
|
|
50.0
|
|
|
|
50.0
|
|
Berjaya Starbucks Coffee Company
Sdn. Bhd.
|
|
|
49.9
|
|
|
|
49.9
|
|
Starbucks Brasil Comercio de Cafes
Ltda.
|
|
|
49.0
|
|
|
|
|
|
Starbucks Coffee Japan, Ltd.
|
|
|
40.1
|
|
|
|
40.1
|
|
Coffee Partners
Hawaii (1)
|
|
|
|
|
|
|
5.0
|
|
|
|
|
|
|
(1)
|
|
In January 2006, Starbucks acquired
all of the equity interests in this entity. Previously the
Company owned 5% of Coffee Partners Hawaii and accounted for it
under the equity method of accounting because it was a general
partnership. From the date of acquisition, the consolidation
method of accounting was applied.
|
The Company has licensed the rights to produce and distribute
Starbucks branded products to two partnerships in which the
Company holds 50% equity interests. The North American Coffee
Partnership with the Pepsi-Cola Company develops and distributes
Frappuccino®
bottled beverages and Starbucks
DoubleShot®
espresso drinks. The Starbucks Ice Cream Partnership with
Dreyers Grand Ice Cream, Inc., develops and distributes
superpremium ice creams. The remaining entities operate licensed
Starbucks retail stores.
During fiscal 2004, Starbucks acquired an equity interest in its
licensed operations of Malaysia. During fiscal 2003, Starbucks
increased its ownership of its licensed operations in Austria,
Shanghai, Spain, Switzerland and Taiwan. The carrying amount of
these investments was $24.3 million more than the
underlying equity in net assets due to acquired goodwill, which
is not subject to amortization in accordance with
SFAS No. 142 Goodwill and Other Intangible
Assets. Goodwill is evaluated for impairment in accordance
with APB Opinion No. 18, The Equity Method of
Accounting for Investments in Common Stock. No impairment
was recorded during fiscal years 2006, 2005 or 2004.
The Companys share of income and losses is included in
Income from equity investees on the consolidated
statements of earnings. Also included is the Companys
proportionate share of gross margin resulting from coffee and
other product sales to, and royalty and license fee revenues
generated from equity investees. Revenues generated from these
related parties, net of eliminations, were $94.2 million,
$86.1 million and $80.7 million in fiscal years 2006,
2005 and 2004, respectively. Related costs of sales, net of
eliminations, were $47.5 million, $43.3 million and
$41.2 million in fiscal years 2006, 2005 and 2004,
respectively. As of October 1, 2006 and October 2,
2005, there were $17.7 million and $16.7 million of
accounts receivable, respectively, on the consolidated balance
sheets from equity investees related to product sales and store
license fees.
As of October 1, 2006, the aggregate market value of the
Companys investment in Starbucks Coffee Japan, Ltd., was
approximately $234.1 million based on its available quoted
market price.
Cost
Method
The Company has equity interests in entities to develop
Starbucks licensed retail stores in Hong Kong, Mexico, Cyprus
and Greece. As of October 1, 2006, and October 2,
2005, management determined that the estimated fair values of
each cost method investment exceeded the related carrying values
(no unrealized fair value losses). There were no realized losses
recorded for
other-than-temporary
impairments during fiscal years 2006, 2005 or 2004.
|
|
54
|
STARBUCKS
CORPORATION, FORM 10-K
|
Starbucks has the ability to acquire additional interests in
some of its cost method investees at certain intervals.
Depending on the Companys total percentage of ownership
interest and its ability to exercise significant influence over
financial and operating policies, additional investments may
require the retroactive application of the equity method of
accounting.
Other
Investments
Starbucks has investments in privately held equity securities,
that are also accounted for under the cost method, whose
carrying values approximate fair value. There were no realized
losses generated from
other-than-temporary
impairment during fiscal 2006, 2005 or 2004.
Note 8: Property,
Plant and Equipment
Property, plant and equipment are recorded at cost and consist
of the following (in thousands):
|
|
|
|
|
|
|
|
|
FISCAL YEAR ENDED
|
|
Oct 1, 2006
|
|
|
Oct 2, 2005
|
|
|
|
Land
|
|
$
|
32,350
|
|
|
$
|
13,833
|
|
Buildings
|
|
|
109,129
|
|
|
|
68,180
|
|
Leasehold improvements
|
|
|
2,436,503
|
|
|
|
1,947,963
|
|
Store equipment
|
|
|
784,444
|
|
|
|
646,792
|
|
Roasting equipment
|
|
|
197,004
|
|
|
|
168,934
|
|
Furniture, fixtures and other
|
|
|
523,275
|
|
|
|
476,372
|
|
|
|
|
|
|
|
|
|
|
4,082,705
|
|
|
|
3,322,074
|
|
Less accumulated depreciation and
amortization
|
|
|
(1,969,804
|
)
|
|
|
(1,625,564
|
)
|
|
|
|
|
|
|
|
|
|
2,112,901
|
|
|
|
1,696,510
|
|
Work in progress
|
|
|
174,998
|
|
|
|
145,509
|
|
|
|
Property, plant and equipment, net
|
|
$
|
2,287,899
|
|
|
$
|
1,842,019
|
|
|
|
Note 9: Other
Intangible Assets and Goodwill
As of October 1, 2006, indefinite-lived intangibles were
$34.1 million and definite-lived intangibles, which
collectively had a remaining weighted average useful life of
approximately eight years, were $3.9 million, net of
accumulated amortization of $3.4 million. As of
October 2, 2005, indefinite-lived intangibles were
$31.6 million and definite-lived intangibles, which
collectively had a remaining weighted average useful life of
approximately six years, were $3.8 million, net of
accumulated amortization of $2.1 million. The increase in
indefinite-lived intangibles was primarily due to ongoing
trademark activity. Amortization expense for definite-lived
intangibles was $1.2 million, $0.8 million and
$0.5 million during fiscal 2006, 2005 and 2004,
respectively.
The following table summarizes, as of October 1, 2006, the
estimated amortization expense for each of the next five fiscal
years (in thousands):
|
|
|
|
|
FISCAL YEAR ENDING
|
|
|
|
2007
|
|
$
|
1,046
|
|
2008
|
|
|
578
|
|
2009
|
|
|
480
|
|
2010
|
|
|
457
|
|
2011
|
|
|
403
|
|
|
|
Total
|
|
$
|
2,964
|
|
|
|
|
|
STARBUCKS
CORPORATION, FORM 10-K
|
55
|
The following table summarizes goodwill by operating segment
(in thousands):
|
|
|
|
|
|
|
|
|
FISCAL YEAR ENDED
|
|
Oct 1, 2006
|
|
|
Oct 2, 2005
|
|
|
|
United States
|
|
$
|
125,976
|
|
|
$
|
51,802
|
|
International
|
|
|
25,802
|
|
|
|
30,972
|
|
Global CPG
|
|
|
9,700
|
|
|
|
9,700
|
|
|
|
Total
|
|
$
|
161,478
|
|
|
$
|
92,474
|
|
|
|
During fiscal 2006, the United States operating segment
increased its equity ownership in its licensed operations in
Hawaii. During fiscal 2006, the International operating segment
increased its equity ownership in its licensed operations in
Puerto Rico and made adjustments reducing goodwill upon the
finalization of the purchase price of its Southern China
operations, for which it acquired majority ownership in the
fiscal fourth quarter of 2005. The goodwill associated with the
Global CPG segment consists of portions allocated from the
Companys fiscal 1999 acquisition of Tazo Tea Company and
fiscal 2003 acquisition of Seattle Coffee Company, the parent
company of Seattles Best Coffee LLC and Torrefazione
Italia LLC.
Note 10: Long-term
Debt and 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.
The interest rate for borrowings under the facility ranges from
0.150% to 0.275% over LIBOR or an alternate base rate, which is
the greater of the bank prime rate or the Federal Funds Rate
plus 0.50%. The specific spread over LIBOR will depend upon the
Companys performance under specified financial criteria.
As of October 1, 2006, the Company had $700 million
outstanding, as well as a letter of credit of $11.9 million
which reduces the borrowing capacity under the credit facility.
For the fiscal year ended October 1, 2006, the Company had
additional borrowings of $1.4 billion under the facility
and made principal repayments of $993 million. As of
October 2, 2005, the Company had $277 million
outstanding, with no letters of credit. The weighted average
contractual interest rates at October 1, 2006 and
October 2, 2005 were 5.5% and 4.0% respectively. The
facility contains provisions that require the Company to
maintain compliance with certain covenants, including the
maintenance of certain financial ratios. As of October 1,
2006 and October 2, 2005, the Company was in compliance
with each of these covenants.
In September 1999, Starbucks purchased the land and building
comprising its York County, Pennsylvania roasting plant and
distribution facility for a total purchase price of
$12.9 million. At the time of purchase, the Company assumed
related loans totaling $7.7 million from the York County
Industrial Development Corporation. As of October 1, 2006,
the Company had $2.7 million outstanding. The remaining
maturities of these loans range from four to five years, with
interest rates from 0.0% to 2.0%.
Interest expense, net of interest capitalized, was
$8.4 million, $1.3 million and $0.4 million in
fiscal 2006, 2005 and 2004, respectively. In fiscal 2006,
$2.7 million of interest expense was capitalized for new
store construction and included in Property, plant and
equipment, net, on the consolidated balance sheet. No
interest was capitalized in fiscal 2005 or 2004.
|
|
56
|
STARBUCKS
CORPORATION, FORM 10-K
|
Scheduled principal payments on long-term debt are as follows
(in thousands):
|
|
|
|
|
FISCAL YEAR ENDING
|
|
|
|
|
|
2007
|
|
$
|
762
|
|
2008
|
|
|
776
|
|
2009
|
|
|
789
|
|
2010
|
|
|
337
|
|
2011
|
|
|
56
|
|
|
|
Total principal payments
|
|
$
|
2,720
|
|
|
|
Note 11: Other
Long-term Liabilities
The Companys other long-term liabilities consist of the
following (in thousands):
|
|
|
|
|
|
|
|
|
FISCAL YEAR ENDED
|
|
Oct 1, 2006
|
|
|
Oct 2, 2005
|
|
|
|
Deferred rent
|
|
$
|
203,903
|
|
|
$
|
166,182
|
|
Asset retirement obligations
|
|
|
34,271
|
|
|
|
|
|
Minority interest
|
|
|
10,739
|
|
|
|
11,153
|
|
Other
|
|
|
13,944
|
|
|
|
16,230
|
|
|
|
Total
|
|
$
|
262,857
|
|
|
$
|
193,565
|
|
|
|
The deferred rent liabilities as of October 1, 2006 and
October 2, 2005, 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 liabilities represent the estimated fair value
of the Companys future costs of removing leasehold
improvements at the termination of leases related to certain of
its leased stores and administrative facilities. The Company
adopted this new accounting requirement on the last day of
fiscal 2006, as discussed in more detail in Note 1.
For operations accounted for under the consolidation method, but
in which Starbucks owns less than 100% of the equity interests,
long-term liabilities are maintained for the collective
ownership interests of minority shareholders. As of
October 1, 2006 and October 2, 2005, Starbucks had
less than 100% ownership in Coffee Concepts (Southern China)
Ltd. as well as in Chengdu Starbucks Coffee Company Limited and
Urban Coffee Opportunities, LLC.
The other remaining long-term liabilities generally include
obligations to be settled or paid for one year beyond each
respective fiscal year end, for items such as hedging
instruments, guarantees (see Note 18), donation commitments
and the long-term portion of capital lease obligations.
Note 12: Leases
Rental expense under operating lease agreements was as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL YEAR ENDED
|
|
Oct 1, 2006
|
|
|
Oct 2, 2005
|
|
|
Oct 3, 2004
|
|
|
|
Minimum rentals retail
stores
|
|
$
|
406,329
|
|
|
$
|
340,474
|
|
|
$
|
285,250
|
|
Minimum rentals other
|
|
|
52,367
|
|
|
|
43,532
|
|
|
|
28,108
|
|
Contingent rentals
|
|
|
40,113
|
|
|
|
32,910
|
|
|
|
24,638
|
|
|
|
Total
|
|
$
|
498,809
|
|
|
$
|
416,916
|
|
|
$
|
337,996
|
|
|
|
|
|
STARBUCKS
CORPORATION, FORM 10-K
|
57
|
Minimum future rental payments under noncancelable operating
lease obligations as of October 1, 2006, are as follows
(in thousands):
|
|
|
|
|
FISCAL YEAR ENDING
|
|
|
|
|
|
2007
|
|
$
|
531,634
|
|
2008
|
|
|
520,553
|
|
2009
|
|
|
492,759
|
|
2010
|
|
|
452,859
|
|
2011
|
|
|
408,412
|
|
Thereafter
|
|
|
1,486,721
|
|
|
|
Total minimum lease payments
|
|
$
|
3,892,938
|
|
|
|
The Company has subleases related to certain of its operating
lease agreements. During fiscal 2006, 2005 and 2004, the Company
recognized sublease income of $5.7 million,
$4.3 million and $4.0 million, respectively.
The Company had capital lease obligations of $4.1 million
and $2.6 million as of October 1, 2006 and
October 2, 2005, respectively. As of October 1, 2006,
the current portion of the total obligation was
$1.7 million and was included in Other accrued
expenses and the remaining long-term portion of
$2.4 million was included in Other long-term
liabilities on the consolidated balance sheet. Capital
lease obligations expire at various dates, with the latest
maturity in 2020. Assets held under capital leases are included
in Property, plant and equipment, net, on the
consolidated balance sheets.
Note 13: 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 October 1, 2006.
Under the Companys authorized share repurchase program,
Starbucks acquired 25.6 million shares at an average price
of $32.34 for a total accrual-based cost of $828 million in
fiscal 2006. The related cash amount used to repurchase shares
in fiscal 2006 totaled $854 million. The difference between
the two amounts represents the effect of the net change in
unsettled trades totaling $26 million from October 2,
2005. Starbucks acquired 45.1 million shares at an average
price of $25.26 for a total cost of $1.1 billion during
fiscal 2005. During fiscal 2006, the Starbucks Board of
Directors authorized additional repurchases of 25 million
shares of the Companys common stock, and as of
October 1, 2006, there were 21.5 million remaining
shares authorized for repurchase. Share repurchases were funded
through cash, cash equivalents,
available-for-sale
securities and borrowings under the revolving credit facility
and were part of the Companys active capital management
program.
Comprehensive
Income
Comprehensive income includes all changes in equity during the
period, except those resulting from transactions with
shareholders and subsidiaries of the Company. It has two
components: net earnings and other comprehensive income.
Accumulated other comprehensive income reported on the
Companys consolidated balance sheets consists of foreign
currency translation adjustments and the unrealized gains and
losses, net of applicable taxes, on
available-for-sale
securities and on derivative instruments designated and
qualifying as cash flow and net investment hedges.
|
|
58
|
STARBUCKS
CORPORATION, FORM 10-K
|
Comprehensive income, net of related tax effects, is as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL YEAR ENDED
|
|
Oct 1, 2006
|
|
|
Oct 2, 2005
|
|
|
Oct 3, 2004
|
|
|
|
Net earnings
|
|
$
|
564,259
|
|
|
$
|
494,370
|
|
|
$
|
388,880
|
|
Unrealized holding gains/(losses)
on
available-for-sale
securities, net of tax benefit/(provision) of ($1,298), $889 and
$618 in 2006, 2005 and 2004, respectively
|
|
|
2,164
|
|
|
|
(1,482
|
)
|
|
|
(1,005
|
)
|
Unrealized holding losses on cash
flow hedges, net of tax benefit of $1,646, $2,268 and $2,801 in
2006, 2005 and 2004, respectively
|
|
|
(2,803
|
)
|
|
|
(3,861
|
)
|
|
|
(4,769
|
)
|
Unrealized holding gains/(losses)
on net investment hedges, net of tax benefit/(provision) of
($21), ($609) and $328 in 2006, 2005 and 2004, respectively
|
|
|
35
|
|
|
|
1,037
|
|
|
|
(558
|
)
|
Reclassification adjustment for net
(gains)/losses realized in net earnings for
available-for-sale
securities, net of tax provision/(benefit) of $1,060, ($812) and
($127) in 2006, 2005 and 2004, respectively
|
|
|
(1,767
|
)
|
|
|
1,354
|
|
|
|
207
|
|
Reclassification adjustment for net
losses realized in net earnings for cash flow hedges, net of tax
benefit of $2,430, $1,939 and $705 in 2006, 2005 and 2004,
respectively
|
|
|
4,138
|
|
|
|
3,302
|
|
|
|
1,200
|
|
|
|
|
|
|
|
Net unrealized gain/(loss)
|
|
|
1,767
|
|
|
|
350
|
|
|
|
(4,925
|
)
|
Translation adjustment
|
|
|
14,592
|
|
|
|
(8,677
|
)
|
|
|
19,892
|
|
|
|
Total comprehensive income
|
|
$
|
580,618
|
|
|
$
|
486,043
|
|
|
$
|
403,847
|
|
|
|
The favorable translation adjustment change during fiscal 2006
of $14.6 million was primarily due to the weakening of the
U.S. dollar against the British pound sterling, euro and
Canadian dollar. The unfavorable translation adjustment change
during fiscal 2005 of $8.7 million was primarily due to the
strengthening of the U.S. dollar against the euro, British
pound sterling and Japanese yen. The favorable translation
adjustment change during fiscal 2004 of $19.9 million was
primarily due to the weakening of the U.S. dollar against
several currencies, such as the British pound sterling, euro,
Australian dollar and Canadian dollar.
The components of accumulated other comprehensive income, net of
tax, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
FISCAL YEAR ENDED
|
|
Oct 1, 2006
|
|
|
Oct 2, 2005
|
|
|
|
Net unrealized holding losses on
available-for-sale
securities
|
|
$
|
(254
|
)
|
|
$
|
(651
|
)
|
Net unrealized holding losses on
hedging instruments
|
|
|
(6,416
|
)
|
|
|
(7,786
|
)
|
Translation adjustment
|
|
|
43,943
|
|
|
|
29,351
|
|
|
|
Accumulated other comprehensive
income
|
|
$
|
37,273
|
|
|
$
|
20,914
|
|
|
|
As of October 1, 2006, the translation adjustment of
$43.9 million was net of tax provisions of
$7.3 million. As of October 2, 2005, the translation
adjustment of $29.4 million was net of tax provisions of
$5.5 million.
Note 14: Employee
Stock and Benefit Plans
Stock
Option Plans
Stock options to purchase the Companys common stock are
granted at prices at or above the fair market value on the date
of grant. Options generally become exercisable in three or four
equal installments beginning a year from the date of grant and
generally expire 10 years 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 each stock option granted is estimated on the
date of grant using the BSM option valuation model. The
assumptions used to calculate the fair value of options granted
are evaluated and revised, as necessary, to reflect market
conditions and the Companys experience. Options granted
are valued using the multiple option valuation approach, and the
resulting expense is recognized using the graded, or
accelerated, attribution method, consistent with the multiple
option valuation approach. Compensation expense is recognized
only for those options expected to vest, with forfeitures
|
|
STARBUCKS
CORPORATION, FORM 10-K
|
59
|
estimated at the date of grant based on the Companys
historical experience and future expectations. Prior to the
adoption of SFAS 123R, the effect of forfeitures on the pro
forma expense amounts was recognized as the forfeitures occurred.
The following summarizes all stock option transactions from
September 28, 2003, through October 1, 2006 (no
restricted stock, restricted stock units or stock appreciation
rights were outstanding for any of these periods):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
Weighted Average
|
|
|
Aggregate
|
|
|
Shares Subject to
|
|
|
Exercise Price
|
|
Remaining
|
|
|
Intrinsic Value
|
|
|
Options
|
|
|
per Share
|
|
Contractual Life
|
|
|
(In thousands)
|
|
|
Outstanding, September 28, 2003
|
|
|
78,130,892
|
|
|
|
$ 7.74
|
|
|
6.7
|
|
|
|
$550,420
|
Granted
|
|
|
18,435,240
|
|
|
|
15.62
|
|
|
|
|
|
|
|
Exercised
|
|
|
(15,416,982
|
)
|
|
|
7.11
|
|
|
|
|
|
|