e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended October 2, 2005 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to . |
Commission File Number: 0-20322
Starbucks Corporation
(Exact name of registrant as specified in its charter)
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Washington
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91-1325671 |
(State or other jurisdiction of
incorporation or organization) |
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(IRS Employer
Identification No.) |
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2401 Utah Avenue South
Seattle, Washington 98134 |
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98134
(Zip Code) |
(Address of principal executive offices)
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(Registrant’s telephone number, including area code):
(206) 447-1575
Securities Registered Pursuant to Section 12(b) of the
Act: None
Securities Registered Pursuant to Section 12(g) of the
Act:
Common Stock, $0.001 Par Value Per Share
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
registrant’s 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. o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange
Act): Yes þ No 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 registrant’s most recently completed second fiscal
quarter, based upon the closing sale price of the
registrant’s common stock on April 1, 2005 as reported
on the National Market tier of The NASDAQ Stock Market, Inc. was
$19,997,624,194.
As of December 14, 2005, there were 764,103,540 shares
of the registrant’s Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the
registrant’s Annual Meeting of Shareholders to be held on
February 8, 2006 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 2, 2005
TABLE OF CONTENTS
PART I
General
Starbucks Corporation (together with its subsidiaries,
“Starbucks” or the “Company”), formed in
1985, 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 bottled
Frappuccino® coffee drinks and Starbucks DoubleShot®
espresso drink and a line of superpremium ice creams. All
channels outside the Company-operated retail stores are
collectively known as “Specialty Operations.” The
Company’s objective is to establish Starbucks as the most
recognized and respected brand 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.
Segment Financial Information
Starbucks has two operating segments, United States and
International, each of which includes Company-operated retail
stores and Specialty Operations. Information about Starbucks
total net 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 to the consolidated financial statements included
in Item 8 of this Annual Report on Form 10-K
(“Form 10-K” or “Report”).
The following table shows the Company’s revenue components
for the fiscal year ended October 2, 2005:
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% of Total | |
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% of Specialty | |
Revenues |
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Net 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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6 |
% |
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42 |
% |
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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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10 |
% |
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68 |
% |
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Foodservice and other:
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Foodservice
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4 |
% |
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29 |
% |
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Other initiatives
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1 |
% |
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3 |
% |
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Total foodservice and other
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5 |
% |
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32 |
% |
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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1
Company-operated Retail Stores
The Company’s 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 experience, 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 in existing markets primarily by opening additional stores
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 735 new Company-operated stores
during the fiscal year ended October 2, 2005 (“fiscal
2005”). Starbucks Company-operated retail stores, including
11 Seattle’s Best Coffee® (“SBC”) stores and
2 Hear Music retail stores, accounted for 85% of total net
revenues during fiscal 2005.
The following table summarizes total Company-operated retail
store data for the periods indicated:
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Net Stores Opened During | |
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the Fiscal Year Ended | |
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Stores Open as of | |
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Oct 2, 2005 | |
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Oct 3, 2004 | |
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(52 Wks) | |
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(53 Wks) | |
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Oct 2, 2005 | |
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Oct 3, 2004 | |
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United States
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574 |
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514 |
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4,867 |
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4,293 |
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International:
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United Kingdom
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45 |
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49 |
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467 |
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422 |
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Canada
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62 |
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56 |
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434 |
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372 |
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Thailand
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14 |
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11 |
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63 |
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49 |
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Australia
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14 |
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4 |
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58 |
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44 |
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Germany(1)
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9 |
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10 |
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44 |
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35 |
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Singapore
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(3 |
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– |
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32 |
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35 |
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China(1)
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18 |
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3 |
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24 |
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6 |
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Chile(1)
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1 |
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8 |
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10 |
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9 |
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Ireland
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1 |
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– |
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1 |
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– |
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Total International
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161 |
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141 |
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1,133 |
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972 |
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Total Company-operated
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735 |
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655 |
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6,000 |
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5,265 |
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(1) |
International store data has been adjusted for the acquisitions
of the Germany, Southern China and Chile operations by
reclassifying historical information from Licensed stores to
Company-operated stores. |
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 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 2005, the Company operated approximately
1,100 drive-thru locations.
2
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 Company’s 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 2,850 stores and 950 stores, respectively, carry a
selection of prepared sandwiches and salads.
In addition to providing a selection of compact discs in
Company-operated stores, the Company has created new and
convenient ways for consumers to discover, experience and
acquire all genres of music through Starbucks Hear
Musictm
media bars, a service that offers custom CD burning at select
Starbucks retail locations in Seattle, Washington and Austin,
Texas, and the Starbucks Hear
Musictm
Coffeehouse, a first-of-its-kind music store in Santa Monica,
California. The Company has plans to open two additional Hear
Music Coffeehouses in Miami, Florida and San Antonio, Texas
in fiscal 2006.
The Company’s retail sales mix by product type during
fiscal 2005 was as follows: 77% beverages, 15% food, 4%
whole bean coffees and 4% coffee-making equipment and other
merchandise.
Specialty Operations
Specialty Operations strive to develop the Company’s 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 establishing
relationships with prominent third parties that share the
Company’s values and commitment to quality. These
relationships take various forms, including licensing
arrangements, foodservice accounts and other initiatives related
to the Company’s core businesses. In certain situations,
Starbucks has an equity ownership interest in licensee
operations. During fiscal 2005, 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
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, CDs 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 Company-operated store managers and employees.
Starbucks opened 596 new licensed retail stores in the United
States during fiscal 2005, and as of October 2, 2005,
operated 2,435 licensed stores. During fiscal 2005, Starbucks
opened 341 new International licensed stores, including the
first stores in Jordan and The Bahamas. At October 2, 2005,
the Company’s International operating segment had a total
of 1,806 licensed retail stores. Product sales to and royalty
and license fee revenues from U.S. and International licensed
retail stores accounted for 42% of specialty revenues in fiscal
2005.
3
At fiscal year end 2005, 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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572 |
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Spain |
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39 |
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United States |
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2,435 |
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China
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185 |
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Saudi Arabia |
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38 |
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Canada |
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118 |
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Taiwan
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153 |
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Greece |
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38 |
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Mexico |
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60 |
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South Korea
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133 |
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United Arab Emirates |
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37 |
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Hawaii |
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51 |
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Philippines
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83 |
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Kuwait |
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32 |
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Puerto Rico |
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11 |
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Malaysia
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62 |
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Turkey |
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24 |
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Peru |
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6 |
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New Zealand
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41 |
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Switzerland |
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21 |
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The Bahamas |
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2 |
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Indonesia
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32 |
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France |
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16 |
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Lebanon |
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10 |
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Austria |
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9 |
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Qatar |
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8 |
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Bahrain |
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8 |
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Cyprus |
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7 |
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Oman |
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4 |
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Jordan |
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4 |
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UK |
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2 |
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Total
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1,261 |
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Total |
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297 |
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Total |
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2,683 |
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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 Seattle’s 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.
In International markets, Starbucks also has licensing
arrangements with other grocery and warehouse club stores. By
the end of fiscal 2005, the Company’s coffees and teas were
available in approximately 31,300 grocery and warehouse club
stores, with 30,000 in the United States and 1,300 in
International markets. Revenues from this category comprised 24%
of specialty revenues in fiscal 2005.
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
bottled Frappuccino® coffee drinks and Starbucks
DoubleShot® espresso drink. The Starbucks Ice Cream
Partnership with Dreyer’s 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. The Company introduced a
coffee liqueur product nationally during the fiscal second
quarter of 2005, and will launch a coffee and cream liqueur
product in fiscal 2006 in restaurants, bars and retail outlets
where premium distilled spirits are sold. 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 Company’s
equity investee, President Starbucks Coffee
4
Taiwan Ltd. In fiscal 2006, the Company plans to enter 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 2005.
Foodservice
The Company sells whole bean and ground coffees, including the
Starbucks, Seattle’s 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.
Beginning in fiscal 2003, the Company transitioned the majority
of its direct distribution accounts to SYSCO Corporation’s
and
U.S. Foodservice’stm
national broadline distribution network and aligned foodservice
sales, customer service and support resources with those of
SYSCO Corporation and U.S. Foodservice. Starbucks and
Seattle’s Best Coffee are the only superpremium
national-brand coffees actively promoted by SYSCO Corporation.
The Company’s total worldwide foodservice operations had
approximately 15,500 accounts at fiscal year end 2005, and
revenues from these accounts comprised 29% of total specialty
revenues.
Other Initiatives
Included in this category is the Company’s 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 Starbucks Hear Music’s innovative partnerships
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 Company’s website at Starbucks.com/hearmusic.
The Company also maintains a website at Starbucks.com where
customers may purchase, register or reload Starbucks stored
value cards, as well as apply for the Starbucks Card
Duettotm
Visa® (the “Duetto Card”), issued through the
Company’s agreement with Chase Bank USA, N.A. and Visa. The
Duetto Card is a first-of-its-kind card, combining the
functionality of a credit card with the convenience of a
reloadable Starbucks Card. Additionally, the website contains
information about the Company’s coffee products, brewing
equipment and store locations. Collectively, the operations of
these other initiatives accounted for 3% of specialty revenues
in fiscal 2005.
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 to its retail stores. 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
5
purchase. Supply and price can be affected by multiple factors
in the producing countries, including weather, and 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 2,
2005, the Company had $375 million in fixed-price purchase
commitments which, together with existing inventory, is expected
to provide an adequate supply of green coffee through fiscal
2006. 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
2005, green coffee commodity prices increased significantly.
Since then, commodity prices have moderated 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. The Company
therefore expects to return to its previous practice of entering
into price-to-be-fixed purchase contracts to meet at least some
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 Company’s 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. Fluid milk is purchased from
multiple suppliers who have processing facilities near
concentrations of 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 significantly in
fiscal 2004. Although the Company’s dairy costs rose only
slightly in fiscal 2005 compared to fiscal 2004, Starbucks
profitability could be adversely affected should prices increase
significantly. Management continues to monitor published dairy
prices on the related commodities markets, but cannot predict
with any certainty future prices to be paid for dairy products.
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.
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 Company’s menu of
ready-to-drink beverages, are purchased from several specialty
manufacturers,
6
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 Company’s logos and trademarks, are produced
and distributed through contracts with a number of different
suppliers.
Competition
The Company’s 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, 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 Company’s whole bean coffees compete directly against
specialty coffees sold through supermarkets, specialty retailers
and a growing number of specialty coffee stores. Both the
Company’s 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 that may serve as substitutes
for the Company’s coffees. 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 more
than 150 additional countries throughout the world. Rights to
the trademarks and service marks in the United States are
generally held by a wholly owned affiliate of the Company and
are used by the Company under license. Some of the
Company’s trademarks, including Starbucks®, the
Starbucks logo, Frappuccino®, Seattle’s 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.
7
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 $10.5 million,
$8.3 million and $5.4 million during fiscal 2005, 2004
and 2003, 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 Company’s net revenues and
profits are realized during the first quarter of the fiscal
year, which includes the December holiday season. In addition,
quarterly results are affected by the timing of the opening of
new stores, and the Company’s 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 2, 2005, the Company employed approximately
115,000 people worldwide. In the United States, Starbucks
employed approximately 97,500 people, with 91,200 in
Company-operated retail stores and the remainder in the
Company’s administrative and regional offices, and store
development, roasting and warehousing operations. Approximately
17,500 employees were employed in International Company-operated
retail stores, regional support facilities, roasting and
warehousing operations. At fiscal year end, employees at 10 of
the Company’s 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 www.starbucks.com/aboutus/investor.asp or at
www.sec.gov as soon as reasonably practicable after these
materials are filed with or furnished to the SEC. The
Company’s corporate governance policies, ethics code and
Board of Directors’ committee charters are also posted
within this section of the website. The information on the
Company’s 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 where 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 2005
CSR Annual Report will be available online at
www.starbucks.com/csr beginning February 8,
8
2006. To request a printed copy of the report, which will be
available in late March 2006, 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. 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 Company’s 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.
• 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 Company’s 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
Company’s 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 market’s 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.
• Starbucks is highly dependent on the financial
performance of its United States operating segment.
The Company’s financial performance is highly dependent on
its United States operating segment, which comprised 84% of
consolidated total net revenues in fiscal 2005. Any substantial
or sustained decline in these operations, if not offset by
increased financial performance elsewhere, could materially
adversely affect the Company’s business and financial
results. Declines in financial performance of the Company’s
United States operating segment could arise from, among other
things:
|
|
|
|
• |
failing to meet annual targets for net store openings; |
|
|
• |
declines in actual or estimated comparable store sales growth
rates and expectations (commonly referred to as “same store
sales” growth); |
|
|
• |
negative trends in operating expenses, including increased labor
costs; |
|
|
• |
higher coffee, dairy or other commodity costs; |
9
|
|
|
|
• |
opening less productive stores and cannibalizing existing stores
with new stores; |
|
|
• |
shifts in sales mix toward lower-margin products; |
|
|
• |
higher costs associated with maintaining and refurbishing the
Company’s existing base of Company-operated retail stores; |
|
|
• |
the impact of initiatives by competitors and increased
competition generally; and |
|
|
• |
failing to consistently provide high quality products and
innovate new products and business processes to retain the
Company’s existing customer base and attract new customers. |
• Starbucks is subject to a number of
significant risks that might cause the Company’s actual
results to vary materially from its forecasts, targets, or
projections, including:
|
|
|
|
• |
declines in actual or estimated comparable store sales growth
rates and expectations; |
|
|
• |
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; |
|
|
• |
failing to continue to increase net revenues and operating
income in either or both of Starbucks United States and
International operating segments; |
|
|
• |
failing to penetrate and expand into emerging International
markets, such as China; |
|
|
• |
failure of newly-opened stores to generate expected financial
results; |
|
|
• |
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; |
|
|
• |
failing to integrate, leverage and generate expected rates of
return on investments, including expansion of existing
businesses and expansion through domestic and foreign
acquisitions; |
|
|
• |
failing to generate sufficient future positive operating cash
flows and, if necessary, secure adequate external financing to
fund its growth; |
|
|
• |
declines in general consumer demand for specialty coffee
products; |
|
|
• |
lack of customer acceptance of new products; |
|
|
• |
lack of customer acceptance of Starbucks products in new markets; |
|
|
• |
increases in the price of high quality arabica coffee,
dairy products, and other consumables, and the Company’s
inability to obtain a sufficient supply of such commodities and
consumables as its business grows; |
|
|
• |
failing to manage the impact of any adverse publicity regarding
the Company’s business practices or the health effects of
consuming its products; |
|
|
• |
increased labor costs, including significant increases in
worker’s compensation insurance premiums and health care
benefits; |
|
|
• |
litigation against Starbucks, particularly any class action
litigation; |
10
|
|
|
|
• |
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; |
|
|
• |
unanticipated changes in executive management; |
|
|
• |
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 |
|
|
• |
interruptions in service by common carriers that ship goods
within the Company’s distribution channels. |
• The Company’s 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 Company’s products and
its brand equity could diminish significantly if 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.
• Effectively managing the Company’s rapid
growth is challenging.
The Company’s long-term goal is to open approximately
15,000 Starbucks stores in the United States and at least
15,000 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 (excluding fiscal 2006, when Starbucks
begins recording the effect of stock compensation as an expense
using the modified prospective transition method). 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 Company’s 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 Company’s 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.
• The loss of key personnel or any difficulty
recruiting and retaining qualified personnel could jeopardize
the Company’s ability to meet its growth targets.
The success of the Company’s 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 of these key employees
might jeopardize the Company’s ability to meet its growth
targets.
11
• 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, 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 Company’s whole bean
coffees compete directly against specialty coffees sold through
supermarkets, specialty retailers and a growing number of
specialty coffee stores. Some of the Company’s competitors
in these whole bean specialty coffee distribution channels have
greater financial and marketing resources than Starbucks. Both
the Company’s 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 and build
market share in the specialty coffee market and the coffee
market generally, it could harm the Company’s business and
financial results.
• Adverse public or medical opinions about the
health effects of consuming the Company’s products could
harm its business.
Some of the Company’s products contain significant amounts
of caffeine, dairy products, sugar and other active compounds,
the health effects of which are not fully understood or are the
subject of increasing public scrutiny. A number of research
studies have concluded or suggested that excessive consumption
of caffeine 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
Company’s products, or negative publicity or litigation
arising from other health risks such as obesity, could
significantly reduce the demand for the Company’s beverages
and food products.
• Significant increases in the market price or
decreases in availability of high quality arabica coffee could
harm the Company’s business and financial results.
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 Company’s 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 Company’s business and
financial results.
12
• Starbucks is increasingly dependent on the
success of its International operating segment in order to
achieve its growth targets.
The Company’s future growth depends increasingly on the
growth and operations of its International operating segment.
Some or all of the Company’s 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 Company’s 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 Company’s 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
Company’s 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
Company’s International operations are also subject to
additional inherent risks of conducting business abroad, such as:
|
|
|
|
• |
foreign currency exchange rate fluctuations; |
|
|
• |
changes or uncertainties in economic, social and political
conditions in the Company’s markets; |
|
|
• |
interpretation and application of laws and regulations; |
|
|
• |
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; |
|
|
• |
import or other business licensing requirements; |
|
|
• |
the enforceability of intellectual property and contract rights; |
|
|
• |
limitations on the repatriation of funds and foreign currency
exchange restrictions; |
|
|
• |
lower levels of consumer spending on a per capita basis
than in the United States; |
|
|
• |
difficulty in staffing, developing and managing foreign
operations due to distance, language and cultural
differences; and |
|
|
• |
local laws that make it more expensive and complex to negotiate
with, retain or terminate employees. |
• The China market is important to the
Company’s long-term growth prospects — doing
business there and in other developing countries can be
challenging.
Starbucks expects the People’s Republic of China to be one
of its largest markets outside of the United States. Any
significant or prolonged deterioration in U.S.-China relations
might adversely affect the Company’s China business. The
Company’s growing investments in its China operations will
increase the Company’s exposure in this market.
Many of the risks and uncertainties of doing business in China
are solely within the control of the Chinese government.
China’s government regulates the business conducted by
Starbucks through its subsidiaries, joint ventures and
authorized licensees by restricting the scope of the
Company’s foreign investments within China and the food and
beverage, retail, wholesale and distribution business conducted
within China. Although
13
management believes it has structured the Company’s 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 China’s
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 Company’s
affiliates could be subject to fines and other financial
penalties or forced to cease operations entirely. Moreover, it
could adversely affect the Company’s business if it is
unable to enforce its intellectual property and contract rights
in China’s courts.
Additionally, Starbucks plans to enter selected markets in other
developing countries (such as Russia, India and Brazil) 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.
• Failure of the Company’s internal control
over financial reporting could harm its business and financial
results.
The management of Starbucks is responsible for establishing and
maintaining adequate 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 Company’s transactions; providing
reasonable assurance that transactions are recorded as necessary
for preparation of the financial statements; providing
reasonable assurance that receipts and expenditures of the
Company’s assets 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 Company’s financial
statements would be prevented or detected. The Company’s
rapid growth and entry into new, globally dispersed markets will
place significant additional pressure on the Company’s
system of internal control over financial reporting. Any failure
to maintain an effective system of internal control over
financial reporting could limit the Company’s ability to
report its financial results accurately and timely or to detect
and prevent fraud.
14
Item 1B. Unresolved
Staff Comments
Not applicable.
The following table shows properties used by Starbucks in
connection with its roasting and distribution operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Size | |
|
Owned or | |
|
|
Location |
|
in Square Feet | |
|
Leased | |
|
Purpose |
|
|
| |
|
| |
|
|
Kent, WA
|
|
|
332,000 |
|
|
|
Owned |
|
|
Roasting and distribution |
Kent, WA
|
|
|
285,000 |
|
|
|
Leased |
|
|
Warehouse |
Renton, WA
|
|
|
125,000 |
|
|
|
Leased |
|
|
Warehouse |
York County, PA
|
|
|
365,000 |
|
|
|
Owned |
|
|
Roasting and distribution |
York County, PA
|
|
|
297,000 |
|
|
|
Owned |
|
|
Warehouse |
Carson Valley, NV
|
|
|
360,000 |
|
|
|
Owned |
|
|
Roasting and distribution |
Portland, OR
|
|
|
80,000 |
|
|
|
Leased |
|
|
Warehouse |
Basildon, United Kingdom
|
|
|
141,000 |
|
|
|
Leased |
|
|
Warehouse and distribution |
Amsterdam, Netherlands
|
|
|
94,000 |
|
|
|
Leased |
|
|
Roasting and distribution |
The Company leases approximately 935,000 square feet of two
buildings located in Seattle, Washington for corporate
administrative offices and has options to lease approximately
100,000 additional square feet in both buildings.
As of October 2, 2005, Starbucks had a total of 6,000
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.
15
|
|
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 2005.
Executive Officers of the Registrant
The executive officers of the Company are as follows:
|
|
|
|
|
|
|
Name |
|
Age | |
|
Position |
|
|
| |
|
|
Howard Schultz
|
|
|
52 |
|
|
chairman of the Board of Directors |
James L. Donald
|
|
|
51 |
|
|
president, chief executive officer and director |
James C. Alling
|
|
|
44 |
|
|
president, Starbucks Coffee U.S. |
Martin Coles
|
|
|
50 |
|
|
president, Starbucks Coffee International |
Michael Casey
|
|
|
60 |
|
|
executive vice president, chief financial officer and chief
administrative officer |
Paula E. Boggs
|
|
|
46 |
|
|
executive vice president, general counsel and secretary |
Dorothy J. Kim
|
|
|
43 |
|
|
executive vice president, Supply Chain Operations |
David A. Pace
|
|
|
46 |
|
|
executive vice president, Partner Resources |
Howard Schultz is the founder of the Company and the
chairman of the board. From the Company’s 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 Company’s
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 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 Albertson’s,
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
16
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.
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.
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.
17
PART II
|
|
Item 5. |
Market for the Registrant’s Common Equity, Related
Shareholder Matters and Issuer Purchases of Equity
Securities |
The following table provides information regarding repurchases
by the Company of its common stock during the 13-week period
ended October 2, 2005, as adjusted to give effect to the
Company’s two-for-one stock split completed on
October 21, 2005:
Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number | |
|
Maximum | |
|
|
|
|
|
|
of Shares | |
|
Number of | |
|
|
|
|
|
|
Purchased as | |
|
Shares That | |
|
|
Total | |
|
Average | |
|
Part of Publicly | |
|
May Yet Be | |
|
|
Number of | |
|
Price | |
|
Announced | |
|
Purchased | |
|
|
Shares | |
|
Paid per | |
|
Plans or | |
|
Under the Plans | |
Period(1) |
|
Purchased | |
|
Share | |
|
Programs(2) | |
|
or Programs(2) | |
|
|
| |
|
| |
|
| |
|
| |
Jul 4, 2005 - Jul 31, 2005
|
|
|
6,705,000 |
|
|
$ |
25.69 |
|
|
|
6,705,000 |
|
|
|
18,516,080 |
|
Aug 1, 2005 - Aug 28, 2005
|
|
|
4,144,002 |
|
|
$ |
25.41 |
|
|
|
4,144,002 |
|
|
|
14,372,078 |
|
Aug 29, 2005 - Oct 2, 2005
|
|
|
2,276,550 |
|
|
$ |
24.00 |
|
|
|
2,276,550 |
|
|
|
22,095,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
13,125,552 |
|
|
$ |
25.31 |
|
|
|
13,125,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Monthly information is presented by reference to the
Company’s fiscal months during the fourth quarter of fiscal
2005. |
|
(2) |
The Company’s share repurchase program is conducted under
authorizations made from time to time by the Company’s
Board of Directors. The shares reported in the table are covered
by Board authorizations to repurchase shares of common stock, as
adjusted to give effect for the two-for-one stock split
completed on October 21, 2005, as follows: 18 million
shares announced on September 23, 2004; and 20 million
shares announced on May 5, 2005. On September 22,
2005, the Board authorized the repurchase of 10 million
shares. Shares remaining for repurchase relate only to the
authorizations announced on May 5, 2005 and
September 22, 2005. Neither of these authorizations has an
expiration date. |
18
SHAREHOLDER INFORMATION
Market Information and Dividend Policy
The Company’s common stock is traded on the National Market
tier 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
Company’s common stock as reported by Nasdaq for each
quarter during the last two fiscal years. These prices have been
adjusted to give effect to the Company’s two-for-one stock
split completed on October 21, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
High | |
|
Low | |
|
|
| |
|
| |
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 |
|
|
|
|
|
|
|
|
October 3, 2004:
|
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$ |
23.94 |
|
|
$ |
21.29 |
|
|
Third Quarter
|
|
|
22.09 |
|
|
|
18.62 |
|
|
Second Quarter
|
|
|
19.48 |
|
|
|
16.15 |
|
|
First Quarter
|
|
|
16.50 |
|
|
|
14.40 |
|
|
|
|
|
|
|
|
As of December 1, 2005, the Company had approximately
13,900 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.
19
|
|
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 “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations,” “Risk Factors,” and the
Company’s consolidated financial statements and notes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oct 2, 2005 | |
|
Oct 3, 2004 | |
|
Sept 28, 2003 | |
|
Sept 29, 2002 | |
|
Sep 30, 2001 | |
As of and for the Fiscal Year Ended(1) |
|
(52 Wks) | |
|
(53 Wks) | |
|
(52 Wks) | |
|
(52 Wks) | |
|
(52 Wks) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
RESULTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail
|
|
$ |
5,391,927 |
|
|
$ |
4,457,378 |
|
|
$ |
3,449,624 |
|
|
$ |
2,792,904 |
|
|
$ |
2,229,594 |
|
|
Specialty:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing
|
|
|
673,015 |
|
|
|
565,798 |
|
|
|
409,551 |
|
|
|
311,932 |
|
|
|
240,665 |
|
|
|
Foodservice and other
|
|
|
304,358 |
|
|
|
271,071 |
|
|
|
216,347 |
|
|
|
184,072 |
|
|
|
178,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty
|
|
|
977,373 |
|
|
|
836,869 |
|
|
|
625,898 |
|
|
|
496,004 |
|
|
|
419,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
6,369,300 |
|
|
|
5,294,247 |
|
|
|
4,075,522 |
|
|
|
3,288,908 |
|
|
|
2,648,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
780,615 |
|
|
|
606,587 |
|
|
|
420,850 |
|
|
|
313,304 |
|
|
|
277,745 |
|
Internet-related investment
losses(2)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,940 |
|
Gain on sale of
investment(3)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
13,361 |
|
|
|
— |
|
Net earnings
|
|
$ |
494,467 |
|
|
$ |
388,973 |
|
|
$ |
265,355 |
|
|
$ |
210,463 |
|
|
$ |
178,794 |
|
Net earnings per common share —
diluted(4)
|
|
$ |
0.61 |
|
|
$ |
0.47 |
|
|
$ |
0.33 |
|
|
$ |
0.26 |
|
|
$ |
0.23 |
|
Cash dividends per share
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital(5)
|
|
$ |
(17,662 |
) |
|
$ |
604,636 |
|
|
$ |
335,767 |
|
|
$ |
328,777 |
|
|
$ |
165,045 |
|
Total assets
|
|
|
3,514,065 |
|
|
|
3,386,541 |
|
|
|
2,776,112 |
|
|
|
2,249,435 |
|
|
|
1,807,746 |
|
Short-term
borrowings(6)
|
|
|
277,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Long-term debt (including current portion)
|
|
|
3,618 |
|
|
|
4,353 |
|
|
|
5,076 |
|
|
|
5,786 |
|
|
|
6,483 |
|
Shareholders’ equity
|
|
$ |
2,090,634 |
|
|
$ |
2,470,211 |
|
|
$ |
2,068,689 |
|
|
$ |
1,712,456 |
|
|
$ |
1,366,355 |
|
|
STORE INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage change in comparable store
sales:(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
9 |
% |
|
|
11 |
% |
|
|
9 |
% |
|
|
7 |
% |
|
|
5 |
% |
|
International
|
|
|
6 |
% |
|
|
6 |
% |
|
|
7 |
% |
|
|
1 |
% |
|
|
3 |
% |
|
Consolidated
|
|
|
8 |
% |
|
|
10 |
% |
|
|
8 |
% |
|
|
6 |
% |
|
|
5 |
% |
Stores opened during the
year:(8)(9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated stores
|
|
|
574 |
|
|
|
514 |
|
|
|
506 |
|
|
|
503 |
|
|
|
498 |
|
|
|
Licensed stores
|
|
|
596 |
|
|
|
417 |
|
|
|
315 |
|
|
|
264 |
|
|
|
268 |
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated stores
|
|
|
161 |
|
|
|
141 |
|
|
|
124 |
|
|
|
117 |
|
|
|
151 |
|
|
|
Licensed stores
|
|
|
341 |
|
|
|
272 |
|
|
|
256 |
|
|
|
293 |
|
|
|
291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,672 |
|
|
|
1,344 |
|
|
|
1,201 |
|
|
|
1,177 |
|
|
|
1,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores open at year
end:(9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States(10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated stores
|
|
|
4,867 |
|
|
|
4,293 |
|
|
|
3,779 |
|
|
|
3,209 |
|
|
|
2,706 |
|
|
|
Licensed stores
|
|
|
2,435 |
|
|
|
1,839 |
|
|
|
1,422 |
|
|
|
1,033 |
|
|
|
769 |
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated stores
|
|
|
1,133 |
|
|
|
972 |
|
|
|
831 |
|
|
|
707 |
|
|
|
590 |
|
|
|
Licensed stores
|
|
|
1,806 |
|
|
|
1,465 |
|
|
|
1,193 |
|
|
|
937 |
|
|
|
644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,241 |
|
|
|
8,569 |
|
|
|
7,225 |
|
|
|
5,886 |
|
|
|
4,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
(1) |
The Company’s fiscal year ends on the Sunday closest to
September 30. |
|
(2) |
During fiscal 2001, the Company recognized losses of
$2.9 million for impairments of Internet-related
investments determined to be other-than-temporary. |
|
(3) |
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. |
|
(4) |
Earnings per share data for fiscal years presented above have
been restated to reflect the two-for-one stock splits in fiscal
2006 and 2001. |
|
(5) |
Working capital deficit as of October 2, 2005 was primarily
due to lower investments from the sale of securities to fund
common stock repurchases and increased current liabilities from
short term borrowings under the revolving credit facility. See
(6) below. |
|
(6) |
In August 2005, the Company entered into a $500 million
five-year revolving credit facility and had borrowings of
$277 million outstanding as of October 2, 2005. |
|
(7) |
Includes only Starbucks Company-operated retail stores open
13 months or longer. Comparable store sales percentage for
fiscal 2004 excludes the extra sales week. |
|
(8) |
Store openings are reported net of closures. |
|
(9) |
International store information has been adjusted for the fiscal
2005 acquisitions of Germany, Southern China and Chile licensed
operations by reclassifying historical information from Licensed
stores to Company-operated stores. |
|
|
(10) |
United States stores open at fiscal 2003 year end included
43 SBC and 21 Torrefazione Italia Company- operated stores and
74 SBC franchised stores. |
|
|
Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
General
Starbucks Corporation’s fiscal year ends on the Sunday
closest to September 30. The fiscal years ended on
October 2, 2005 and September 28, 2003, 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 2, 2005, all areas of
Starbucks business, from U.S. and International Company-operated
retail operations to the Company’s specialty businesses,
delivered strong financial performance. Starbucks believes the
Company’s ability to achieve the balance between growing
its core business and building the foundation for future growth
is the key to increasing long-term shareholder value. Starbucks
fiscal 2005 performance reflects the Company’s continuing
commitment to achieving this balance.
The primary driver of the Company’s revenue growth
continues to be the opening of new retail stores, both
Company-operated and licensed, in pursuit of the Company’s
objective to establish Starbucks as the most recognized and
respected brand in the world. Starbucks opened 1,672 new stores
in fiscal 2005 and plans to open approximately 1,800 in fiscal
2006. With a presence in 37 countries, management continues to
believe that the Company’s long-term goal of 15,000
Starbucks retail locations throughout the United States and at
least 15,000 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
21
customers. The strategy is to increase comparable store sales by
continuously improving the level of customer service,
introducing innovative products and improving the speed of
service through training, technology and process improvement.
Global comparable store sales for Company-operated markets
increased by 8%, making fiscal 2005 the 14th consecutive
year with comparable store sales growth of five percent or
greater. Comparable store sales for fiscal 2006 are expected to
be in the range of three to seven percent.
In licensed retail operations, Starbucks leverages the expertise
of local partners and shares its operating and store development
experience to help licensees improve the profitability of
existing stores and build new stores. Internationally, the
Company’s strategy is to selectively increase its equity
stake in licensed international operations as these markets
develop.
The combination of more retail stores, higher revenues from
existing stores and growth in other business channels in both
the United States and International operating segments resulted
in a 20% increase in total net revenues for the 52 weeks of
fiscal 2005, compared to the 53 weeks of fiscal 2004.
Excluding the impact of the extra week in fiscal 2004, total net
revenues increased 23%. Both of these revenue growth measures
were at or above the Company’s three to five year target of
approximately 20%.
The Company’s International operations delivered improved
operating results, primarily due to leverage gained on most
operating expenses distributed over an expanded revenue base. In
recent fiscal years, the Company made substantial infrastructure
investments in corporate and regional support facilities and
personnel, as well as established more efficient distribution
networks. Such investments have been and will continue to be
necessary to support the Company’s planned international
expansion, which is now realizing substantial benefit from this
foundation. Since both additional International and
U.S. retail stores can leverage existing support
organizations and facilities, the Company’s infrastructure
can be expanded more slowly than the rate of revenue growth and
generate margin improvement. In fiscal 2005, operating income as
a percentage of total net revenues increased to 12.3% from 11.5%
in fiscal 2004, and net earnings increased by 27%, compared to
fiscal 2004. These results demonstrated the Company’s
ability to improve operating margin while at the same time
making strategic investments in the core retail business and in
emerging specialty channels.
Acquisitions
During fiscal 2005, Starbucks increased its equity ownership in
its licensed operations in Germany, Southern China and Chile, to
100%, 51% and 100%, respectively, for a combined purchase price
of $41 million. Previously, the Company owned less than 20%
in each of these operations, which were accounted for under the
cost method. These increases in equity ownership resulted in a
change of accounting method, from the cost method to the
consolidation method, on the respective dates of acquisition.
This accounting change also included adjusting previously
reported information for the Company’s proportionate share
of net losses in Germany, Southern China and Chile. The
cumulative effect of the accounting change for previously
reported information resulted in a reduction of net earnings of
$0.1 million for the 39 weeks ended July 3, 2005,
and a reduction of retained earnings of $4.0 million prior
to fiscal 2005.
In April 2005, Starbucks acquired substantially all of the
assets of Ethos Brands, LLC, (“Ethos”), a privately
held bottled water company based in Santa Monica, California,
for $8 million. The earnings of Ethos are included in the
accompanying consolidated financial statements from the date of
acquisition.
22
RESULTS OF OPERATIONS — FISCAL 2005 COMPARED TO
FISCAL 2004
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
Company’s consolidated statements of earnings (amounts
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oct 2, 2005 | |
|
% of | |
|
Oct 3, 2004 | |
|
% of | |
|
Sept 28, 2003 | |
|
% of | |
Fiscal Year Ended |
|
(52 Wks) | |
|
Revenues | |
|
(53 Wks) | |
|
Revenues | |
|
(52 Wks) | |
|
Revenues | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
STATEMENTS OF EARNINGS DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail
|
|
$ |
5,391,927 |
|
|
|
84.7 |
% |
|
$ |
4,457,378 |
|
|
|
84.2 |
% |
|
$ |
3,449,624 |
|
|
|
84.6 |
% |
|
Specialty:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing
|
|
|
673,015 |
|
|
|
10.5 |
|
|
|
565,798 |
|
|
|
10.7 |
|
|
|
409,551 |
|
|
|
10.1 |
|
|
|
Foodservice and other
|
|
|
304,358 |
|
|
|
4.8 |
|
|
|
271,071 |
|
|
|
5.1 |
|
|
|
216,347 |
|
|
|
5.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty
|
|
|
977,373 |
|
|
|
15.3 |
|
|
|
836,869 |
|
|
|
15.8 |
|
|
|
625,898 |
|
|
|
15.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
6,369,300 |
|
|
|
100.0 |
|
|
|
5,294,247 |
|
|
|
100.0 |
|
|
|
4,075,522 |
|
|
|
100.0 |
|
Cost of sales including occupancy costs
|
|
|
2,605,212 |
|
|
|
40.9 |
|
|
|
2,191,440 |
|
|
|
41.4 |
|
|
|
1,681,434 |
|
|
|
41.3 |
|
Store operating expenses
|
|
|
2,165,911 |
|
|
|
40.2 |
(1) |
|
|
1,790,168 |
|
|
|
40.2 |
(1) |
|
|
1,379,574 |
|
|
|
40.0 |
(1) |
Other operating expenses
|
|
|
197,024 |
|
|
|
20.2 |
(2) |
|
|
171,648 |
|
|
|
20.5 |
(2) |
|
|
141,346 |
|
|
|
22.6 |
(2) |
Depreciation and amortization expenses
|
|
|
340,169 |
|
|
|
5.3 |
|
|
|
289,182 |
|
|
|
5.5 |
|
|
|
244,671 |
|
|
|
6.0 |
|
General and administrative expenses
|
|
|
357,114 |
|
|
|
5.6 |
|
|
|
304,293 |
|
|
|
5.7 |
|
|
|
244,550 |
|
|
|
6.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal operating expenses
|
|
|
5,665,430 |
|
|
|
88.9 |
|
|
|
4,746,731 |
|
|
|
89.7 |
|
|
|
3,691,575 |
|
|
|
90.6 |
|
Income from equity investees
|
|
|
76,745 |
|
|
|
1.2 |
|
|
|
59,071 |
|
|
|
1.1 |
|
|
|
36,903 |
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
780,615 |
|
|
|
12.3 |
|
|
|
606,587 |
|
|
|
11.5 |
|
|
|
420,850 |
|
|
|
10.3 |
|
Interest and other income, net
|
|
|
15,829 |
|
|
|
0.2 |
|
|
|
14,140 |
|
|
|
0.2 |
|
|
|
11,622 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
796,444 |
|
|
|
12.5 |
|
|
|
620,727 |
|
|
|
11.7 |
|
|
|
432,472 |
|
|
|
10.6 |
|
Income taxes
|
|
|
301,977 |
|
|
|
4.7 |
|
|
|
231,754 |
|
|
|
4.4 |
|
|
|
167,117 |
|
|
|
4.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
494,467 |
|
|
|
7.8 |
% |
|
$ |
388,973 |
|
|
|
7.3 |
% |
|
$ |
265,355 |
|
|
|
6.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 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. Net revenues are expected to grow
approximately 20% in fiscal 2006 compared to fiscal 2005.
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,
23
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 735 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. Management believes increased
customer traffic continues to be driven by new product
innovation, continued popularity of core products, a high level
of customer satisfaction and improved speed of service through
enhanced technology, training and execution at retail stores.
The increase in the average value per transaction was primarily
due to a beverage price increase in October 2004 in the
Company’s U.S. and Canadian markets.
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 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 937 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 Company’s 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 (expenses associated with the
Company’s 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
Company’s emerging entertainment business and to support
the growth of Seattle’s Best Coffee licensed café
operations.
24
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 735 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 bottled Frappuccino®
coffee drinks and Starbucks DoubleShot® espresso drink, and
improved operating results from international investees,
particularly in Japan and Korea, mainly as a result of new store
openings.
Operating income increased 29% to $781 million in the
52-week period of fiscal 2005, from $607 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. The effective tax rate for fiscal 2006 is
expected to be approximately 38%, with quarterly variations.
25
Operating Segments
Segment information is prepared on the same basis that the
Company’s management reviews financial information for
operational decision-making purposes. The following tables
summarize the Company’s results of operations by segment
for fiscal 2005 and 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% of | |
|
|
|
|
|
|
United | |
|
|
|
Inter- | |
|
|
|
Total | |
|
|
|
|
United | |
|
States | |
|
Inter- | |
|
national | |
|
Unallocated | |
|
Net | |
|
|
52 Weeks Ended October 2, 2005 |
|
States | |
|
Revenue | |
|
national | |
|
Revenue | |
|
Corporate | |
|
Revenue | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail
|
|
$ |
4,539,455 |
|
|
|
85.1 |
% |
|
$ |
852,472 |
|
|
|
82.4 |
% |
|
$ |
— |
|
|
|
— |
% |
|
$ |
5,391,927 |
|
|
Specialty:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing
|
|
|
514,932 |
|
|
|
9.7 |
|
|
|
158,083 |
|
|
|
15.3 |
|
|
|
— |
|
|
|
— |
|
|
|
673,015 |
|
|
|
Foodservice and other
|
|
|
280,073 |
|
|
|
5.2 |
|
|
|
24,285 |
|
|
|
2.3 |
|
|
|
— |
|
|
|
— |
|
|
|
304,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty
|
|
|
795,005 |
|
|
|
14.9 |
|
|
|
182,368 |
|
|
|
17.6 |
|
|
|
— |
|
|
|
— |
|
|
|
977,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
5,334,460 |
|
|
|
100.0 |
|
|
|
1,034,840 |
|
|
|
100.0 |
|
|
|
— |
|
|
|
— |
|
|
|
6,369,300 |
|
Cost of sales including occupancy costs
|
|
|
2,086,707 |
|
|
|
39.1 |
|
|
|
518,505 |
|
|
|
50.1 |
|
|
|
— |
|
|
|
— |
|
|
|
2,605,212 |
|
Store operating expenses
|
|
|
1,848,836 |
|
|
|
40.7 |
(1) |
|
|
317,075 |
|
|
|
37.2 |
(1) |
|
|
— |
|
|
|
— |
|
|
|
2,165,911 |
|
Other operating expenses
|
|
|
162,793 |
|
|
|
20.5 |
(2) |
|
|
34,231 |
|
|
|
18.8 |
(2) |
|
|
— |
|
|
|
— |
|
|
|
197,024 |
|
Depreciation and amortization expenses
|
|
|
250,415 |
|
|
|
4.7 |
|
|
|
56,705 |
|
|
|
5.5 |
|
|
|
33,049 |
|
|
|
0.5 |
|
|
|
340,169 |
|
General and administrative expenses
|
|
|
85,362 |
|
|
|
1.6 |
|
|
|
53,069 |
|
|
|
5.1 |
|
|
|
218,683 |
|
|
|
3.4 |
|
|
|
357,114 |
|
Income from equity investees
|
|
|
45,579 |
|
|
|
0.9 |
|
|
|
31,166 |
|
|
|
3.0 |
|
|
|
— |
|
|
|
— |
|
|
|
76,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income/(loss)
|
|
$ |
945,926 |
|
|
|
17.7 |
% |
|
$ |
86,421 |
|
|
|
8.4 |
% |
|
$ |
(251,732 |
) |
|
|
(3.9 |
)% |
|
$ |
780,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% of | |
|
|
|
|
|
|
United | |
|
|
|
Inter- | |
|
|
|
Total | |
|
|
|
|
United | |
|
States | |
|
Inter- | |
|
national | |
|
Unallocated | |
|
Net | |
|
|
53 Weeks Ended October 3, 2004 |
|
States | |
|
Revenue | |
|
national | |
|
Revenue | |
|
Corporate | |
|
Revenue | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail
|
|
$ |
3,800,367 |
|
|
|
84.6 |
% |
|
$ |
657,011 |
|
|
|
81.8 |
% |
|
$ |
— |
|
|
|
— |
% |
|
$ |
4,457,378 |
|
|
Specialty:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing
|
|
|
436,981 |
|
|
|
9.7 |
|
|
|
128,817 |
|
|
|
16.0 |
|
|
|
— |
|
|
|
— |
|
|
|
565,798 |
|
|
|
Foodservice and other
|
|
|
253,502 |
|
|
|
5.7 |
|
|
|
17,569 |
|
|
|
2.2 |
|
|
|
— |
|
|
|
— |
|
|
|
271,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty
|
|
|
690,483 |
|
|
|
15.4 |
|
|
|
146,386 |
|
|
|
18.2 |
|
|
|
— |
|
|
|
— |
|
|
|
836,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
4,490,850 |
|
|
|
100.0 |
|
|
|
803,397 |
|
|
|
100.0 |
|
|
|
— |
|
|
|
— |
|
|
|
5,294,247 |
|
Cost of sales including occupancy costs
|
|
|
1,782,584 |
|
|
|
39.7 |
|
|
|
408,856 |
|
|
|
50.9 |
|
|
|
— |
|
|
|
— |
|
|
|
2,191,440 |
|
Store operating expenses
|
|
|
1,546,871 |
|
|
|
40.7 |
(1) |
|
|
243,297 |
|
|
|
37.0 |
(1) |
|
|
— |
|
|
|
— |
|
|
|
1,790,168 |
|
Other operating expenses
|
|
|
144,853 |
|
|
|
21.0 |
(2) |
|
|
26,795 |
|
|
|
18.3 |
(2) |
|
|
— |
|
|
|
— |
|
|
|
171,648 |
|
Depreciation and amortization expenses
|
|
|
210,448 |
|
|
|
4.7 |
|
|
|
46,196 |
|
|
|
5.8 |
|
|
|
32,538 |
|
|
|
0.6 |
|
|
|
289,182 |
|
General and administrative expenses
|
|
|
80,221 |
|
|
|
1.8 |
|
|
|
48,206 |
|
|
|
6.0 |
|
|
|
175,866 |
|
|
|
3.3 |
|
|
|
304,293 |
|
Income from equity investees
|
|
|
37,453 |
|
|
|
0.8 |
|
|
|
21,618 |
|
|
|
2.7 |
|
|
|
— |
|
|
|
— |
|
|
|
59,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income/(loss)
|
|
$ |
763,326 |
|
|
|
17.0 |
% |
|
$ |
51,665 |
|
|
|
6.4 |
% |
|
$ |
(208,404 |
) |
|
|
(3.9 |
)% |
|
$ |
606,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Shown as a percentage of related Company-operated retail
revenues. |
|
(2) |
Shown as a percentage of related total specialty revenues. |
26
United States
The Company’s United States operations (“United
States”) represent 84% of Company-operated retail revenues,
81% of total specialty revenues and 84% of total net revenues.
United States operations sells coffee and other beverages, whole
bean coffees, complementary food, coffee brewing equipment and
merchandise primarily through Company-operated retail stores.
Specialty Operations within the United States include licensed
retail stores and other licensing operations, foodservice
accounts and other initiatives related to the Company’s
core business.
United States total net revenues increased 19% to
$5.3 billion for the fiscal year ended 2005, compared to
$4.5 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 21%.
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 574 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. Management believes increased customer
traffic continues to be driven by new product innovation,
continued popularity of core products, a high level of customer
satisfaction and improved speed of service through enhanced
technology, training and execution at retail stores.
Total United States specialty revenues increased 15% to
$795 million for the fiscal year ended 2005, compared to
$690 million in the 53-week period of fiscal 2004.
Excluding the impact of the extra week in fiscal 2004, United
States specialty revenues increased 18%. United States licensing
revenues increased 18% to $515 million, compared to
$437 million for the 53-week period of fiscal 2004.
Excluding the impact of the extra week in fiscal 2004, United
States licensing revenues increased 20%, primarily 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 24% to
$946 million for the fiscal year ended 2005, from
$763 million for the fiscal year ended 2004. Operating
margin increased to 17.7% of related revenues from 17.0% in the
53-week period of fiscal 2004. The increase was primarily due to
leverage from strong revenue growth, partially offset by higher
retail store operating expenses primarily due to higher
payroll-related expenditures to facilitate ongoing retail store
revenue growth.
International
The Company’s international operations
(“International”) represent the remaining 16% of
Company-operated retail revenues, 19% of total specialty
revenues and 16% of total net revenues. International operations
sells 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, Singapore, China, Chile
and Ireland. Specialty Operations in International primarily
include retail store licensing operations in more than 25 other
countries and foodservice accounts in Canada and the United
Kingdom. Certain of the Company’s International operations
are in various early stages of development that
27
necessitate a more extensive support organization, relative to
the current levels of revenue and operating income, than in the
United States.
International total net revenues increased 29% to
$1.0 billion for the fiscal year ended 2005, compared to
$803 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 161 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 25% to
$182 million for the fiscal year ended 2005, compared to
$146 million for the 53-week period of fiscal 2004.
Excluding the impact of the extra week in fiscal 2004,
International specialty revenues increased 27%. International
licensing revenues increased 23% to $158 million for the
fiscal year ended 2005, compared to $129 million in the
53-week period of fiscal 2004. Excluding the impact of the extra
week in 2004, International licensing revenues increased 25%,
primarily due to higher product sales and royalty revenues from
opening 341 new licensed retail stores in the last
12 months, volume driven growth in the Canadian grocery and
warehouse club businesses, and, to a lesser extent, the launch
of new ready-to-drink coffee beverages in Japan and Taiwan.
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 $86 million for
the fiscal year ended 2005, compared to $52 million in the
53-week period of fiscal 2004. Operating margin increased to
8.4% of related revenues from 6.4% in the 53-week period of
fiscal 2004, primarily due to leverage gained on most fixed
costs distributed over an expanded revenue base.
Unallocated Corporate
Unallocated corporate expenses pertain to certain functions,
such as executive management, accounting, administration, tax,
treasury and information technology infrastructure, that support
but are not specifically attributable to the Company’s
operating segments, and include related depreciation and
amortization expenses. 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.
28
RESULTS OF OPERATIONS — FISCAL 2004 COMPARED TO
FISCAL 2003
Consolidated Results of Operations
Net revenues for the fiscal year ended 2004 increased 30% to
$5.3 billion from $4.1 billion for the 52-week period
of fiscal 2003. Net revenues increased 27% when calculated on a
comparative 52-week basis for both fiscal 2004 and 2003.
During the fiscal year ended 2004, Starbucks derived 84% of
total net revenues from its Company-operated retail stores.
Company-operated retail revenues increased 29% to
$4.5 billion for the fiscal year ended 2004, from
$3.4 billion for the 52-week period of fiscal 2003.
Company-operated retail revenues increased 27% when calculated
on a comparative 52-week basis for both fiscal 2004 and 2003.
This increase was primarily due to the opening of 634 new
Company-operated retail stores in the last 12 months and
comparable store sales growth of 10%. The increase in comparable
store sales was due to a 9% increase in the number of customer
transactions and a 1% increase in the average value per
transaction. Comparable store sales growth percentages were
calculated excluding the extra week of fiscal 2004.
The Company derived the remaining 16% of total net revenues from
its Specialty Operations. Specialty revenues, which include
licensing revenues and foodservice and other revenues, increased
34% to $837 million for the fiscal year ended 2004, from
$626 million for the 52-week period of fiscal 2003.
Excluding the impact of the extra sales week in fiscal 2004,
total specialty revenues increased 31% to $820 million.
Licensing revenues increased 38% to $566 million for the
fiscal year ended 2004, from $410 million for the 52-week
period of fiscal 2003. The increase was due to higher product
sales and royalty revenues from the addition of 710 new licensed
retail stores in the last 12 months and growth in the
grocery and warehouse club businesses. The growth in the grocery
and warehouse club businesses was a result of expanded
agreements with Kraft Foods, Inc., which included the addition
of six new Starbucks coffees along with a selection of
Tazo® teas, and the acquisition of Seattle Coffee Company
in the fourth quarter of fiscal 2003.
Foodservice and other revenues increased 25% to
$271 million for the fiscal year ended 2004, from
$216 million for the 52-week period of fiscal 2003. The
increase was primarily attributable to the growth in new and
existing foodservice accounts, which benefited from the July
2003 acquisition of Seattle Coffee Company.
Cost of sales including occupancy costs increased to 41.4% of
total net revenues in fiscal 2004, from 41.3% in fiscal 2003.
The increase was primarily due to higher dairy and green coffee
commodity costs, partially offset by leverage gained on
occupancy costs, which are primarily fixed expenses.
Store operating expenses as a percentage of Company-operated
retail revenues increased to 40.2% in fiscal 2004, from 40.0% in
fiscal 2003, primarily due to higher marketing expenditures for
holiday and new product promotions, as well as increased costs
to maintain retail stores and equipment due to sustained high
traffic levels.
Other operating expenses (expenses associated with the
Company’s Specialty Operations) decreased to 20.5% of
specialty revenues in fiscal 2004, compared to 22.6% in fiscal
2003. The decrease was primarily due to leverage gained on
payroll-related expenditures distributed over an expanded
revenue base.
Depreciation and amortization expenses increased to
$289 million in fiscal 2004, from $245 million in
fiscal 2003. The increase was primarily due to a net increase of
634 new Company-operated retail stores in the last
12 months and higher depreciation expenses associated with
shortened estimated useful lives of equipment deployed in the
Company’s foodservice operations. As a percentage of total
net revenues, depreciation and amortization decreased to 5.5%
for the 53 weeks ended October 3, 2004, from 6.0% for
the corresponding
29
52-week fiscal 2003 period, primarily due to the leverage of
fixed depreciation expenses from the extra sales week in 2004.
General and administrative expenses increased to
$304 million in fiscal 2004, compared to $245 million
in fiscal 2003, primarily due to higher payroll-related
expenditures. As a percentage of total net revenues, general and
administrative expenses decreased to 5.7% for the 53 weeks
ended October 3, 2004, from 6.0% for the 52 weeks
ended September 28, 2003.
Income from equity investees was $59 million in fiscal
2004, compared to $37 million in fiscal 2003. The increase
was primarily due to volume-driven operating results for The
North American Coffee Partnership, which produces bottled
Frappuccino® coffee drinks and Starbucks DoubleShot®
coffee drink, and improved profitability of Starbucks Coffee
Japan, Ltd. (“Starbucks Japan”). The July 2003
increase in the Company’s ownership interest from 5% to 50%
in the Taiwan and Shanghai licensed operations also contributed
to the growth.
Operating income increased 44% to $607 million in fiscal
2004, from $421 million in fiscal 2003. The operating
margin increased to 11.5% of total net revenues in fiscal 2004,
compared to 10.3% in fiscal 2003, primarily due to leverage
gained on most fixed operating costs distributed over an
expanded revenue base, partially offset by higher dairy and
green coffee commodity costs.
Net interest and other income, which primarily consists of
interest income, increased to $14 million in fiscal 2004,
from $12 million in fiscal 2003. The growth was a result of
interest income earned on higher cash and liquid investment
balances during fiscal 2004, compared to the prior year.
Income taxes for the 53 weeks ended October 3, 2004,
resulted in an effective tax rate of 37.3%, compared to 38.6% in
fiscal 2003. The lower effective tax rate was primarily due to
improved operating results as fewer nondeductible losses were
generated from international markets, which are in various
phases of development.
30
Operating Segments
Segment information is prepared on the same basis that the
Company’s management reviews financial information for
operational decision-making purposes. The following tables
summarize the Company’s results of operations by segment
for fiscal 2004 and 2003 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% of | |
|
|
|
|
|
|
United | |
|
|
|
Inter- | |
|
|
|
Total | |
|
|
|
|
United | |
|
States | |
|
Inter- | |
|
national | |
|
Unallocated | |
|
Net | |
|
|
53 Weeks Ended October 3, 2004 |
|
States | |
|
Revenue | |
|
national | |
|
Revenue | |
|
Corporate | |
|
Revenue | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail
|
|
$ |
3,800,367 |
|
|
|
84.6 |
% |
|
$ |
657,011 |
|
|
|
81.8 |
% |
|
$ |
— |
|
|
|
— |
% |
|
$ |
4,457,378 |
|
|
Specialty:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing
|
|
|
436,981 |
|
|
|
9.7 |
|
|
|
128,817 |
|
|
|
16.0 |
|
|
|
— |
|
|
|
— |
|
|
|
565,798 |
|
|
|
Foodservice and other
|
|
|
253,502 |
|
|
|
5.7 |
|
|
|
17,569 |
|
|
|
2.2 |
|
|
|
— |
|
|
|
— |
|
|
|
271,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty
|
|
|
690,483 |
|
|
|
15.4 |
|
|
|
146,386 |
|
|
|
18.2 |
|
|
|
— |
|
|
|
— |
|
|
|
836,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
4,490,850 |
|
|
|
100.0 |
|
|
|
803,397 |
|
|
|
100.0 |
|
|
|
— |
|
|
|
— |
|
|
|
5,294,247 |
|
Cost of sales including occupancy costs
|
|
|
1,782,584 |
|
|
|
39.7 |
|
|
|
408,856 |
|
|
|
50.9 |
|
|
|
— |
|
|
|
— |
|
|
|
2,191,440 |
|
Store operating expenses
|
|
|
1,546,871 |
|
|
|
40.7 |
(1) |
|
|
243,297 |
|
|
|
37.0 |
(1) |
|
|
— |
|
|
|
— |
|
|
|
1,790,168 |
|
Other operating expenses
|
|
|
144,853 |
|
|
|
21.0 |
(2) |
|
|
26,795 |
|
|
|
18.3 |
(2) |
|
|
— |
|
|
|
— |
|
|
|
171,648 |
|
Depreciation and amortization expenses
|
|
|
210,448 |
|
|
|
4.7 |
|
|
|
46,196 |
|
|
|
5.8 |
|
|
|
32,538 |
|
|
|
0.6 |
|
|
|
289,182 |
|
General and administrative expenses
|
|
|
80,221 |
|
|
|
1.8 |
|
|
|
48,206 |
|
|
|
6.0 |
|
|
|
175,866 |
|
|
|
3.3 |
|
|
|
304,293 |
|
Income from equity investees
|
|
|
37,453 |
|
|
|
0.8 |
|
|
|
21,618 |
|
|
|
2.7 |
|
|
|
— |
|
|
|
— |
|
|
|
59,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income/(loss)
|
|
$ |
763,326 |
|
|
|
17.0 |
% |
|
$ |
51,665 |
|
|
|
6.4 |
% |
|
$ |
(208,404 |
) |
|
|
(3.9 |
)% |
|
$ |
606,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% of | |
|
|
|
|
|
|
United | |
|
|
|
Inter- | |
|
|
|
Total | |
|
|
|
|
United | |
|
States | |
|
Inter- | |
|
national | |
|
Unallocated | |
|
Net | |
|
|
52 Weeks Ended September 28, 2003 |
|
States | |
|
Revenue | |
|
national | |
|
Revenue | |
|
Corporate | |
|
Revenue | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail
|
|
$ |
2,965,618 |
|
|
|
85.4 |
% |
|
$ |
484,006 |
|
|
|
80.3 |
% |
|
$ |
— |
|
|
|
— |
% |
|
$ |
3,449,624 |
|
|
Specialty:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing
|
|
|
301,175 |
|
|
|
8.7 |
|
|
|
108,376 |
|
|
|
18.0 |
|
|
|
— |
|
|
|
— |
|
|
|
409,551 |
|
|
|
Foodservice and other
|
|
|
205,659 |
|
|
|
5.9 |
|
|
|
10,688 |
|
|
|
1.7 |
|
|
|
— |
|
|
|
— |
|
|
|
216,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty
|
|
|
506,834 |
|
|
|
14.6 |
|
|
|
119,064 |
|
|
|
19.7 |
|
|
|
— |
|
|
|
— |
|
|
|
625,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
3,472,452 |
|
|
|
100.0 |
|
|
|
603,070 |
|
|
|
100.0 |
|
|
|
— |
|
|
|
— |
|
|
|
4,075,522 |
|
Cost of sales including occupancy costs
|
|
|
1,358,836 |
|
|
|
39.1 |
|
|
|
322,598 |
|
|
|
53.5 |
|
|
|
— |
|
|
|
— |
|
|
|
1,681,434 |
|
Store operating expenses
|
|
|
1,199,020 |
|
|
|
40.4 |
(1) |
|
|
180,554 |
|
|
|
37.3 |
(1) |
|
|
— |
|
|
|
— |
|
|
|
1,379,574 |
|
Other operating expenses
|
|
|
119,960 |
|
|
|
23.7 |
(2) |
|
|
21,386 |
|
|
|
18.0 |
(2) |
|
|
— |
|
|
|
— |
|
|
|
141,346 |
|
Depreciation and amortization expenses
|
|
|
173,747 |
|
|
|
5.0 |
|
|
|
38,818 |
|
|
|
6.4 |
|
|
|
32,106 |
|
|
|
0.8 |
|
|
|
244,671 |
|
General and administrative expenses
|
|
|
45,007 |
|
|
|
1.3 |
|
|
|
44,352 |
|
|
|
7.4 |
|
|
|
155,191 |
|
|
|
3.8 |
|
|
|
244,550 |
|
Income from equity investees
|
|
|
28,484 |
|
|
|
0.8 |
|
|
|
8,419 |
|
|
|
1.4 |
|
|
|
— |
|
|
|
— |
|
|
|
36,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income/(loss)
|
|
$ |
604,366 |
|
|
|
17.4 |
% |
|
$ |
3,781 |
|
|
|
0.6 |
% |
|
$ |
(187,297 |
) |
|
|
(4.6 |
)% |
|
$ |
420,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Shown as a percentage of related Company-operated retail
revenues. |
|
(2) |
Shown as a percentage of related total specialty revenues. |
31
United States
United States total net revenues increased 29% to
$4.5 billion for the fiscal year ended 2004, compared to
$3.5 billion for the 52-week period of fiscal 2003.
Excluding the impact of the extra sales week in fiscal 2004,
United States total net revenues increased 27% to
$4.4 billion. United States Company-operated retail
revenues increased 28% to $3.8 billion for the fiscal year
ended 2004, compared to $3.0 billion for the 52-week period
of fiscal 2003, primarily due to the opening of 514 new
Company-operated retail stores in the last 12 months and
comparable store sales growth of 11%. The increase in comparable
store sales was due to a 10% increase in the number of customer
transactions and a 1% increase in the average value per
transaction. Excluding the impact of the extra sales week in
fiscal 2004, United States Company-operated retail revenues
increased 26% to $3.7 billion.
Total United States specialty revenues increased 36% to
$690 million for the fiscal year ended 2004, compared to
$507 million in the 52-week period of fiscal 2003.
Excluding the impact of the extra sales week in fiscal 2004,
United States specialty revenues increased 33% to
$676 million. United States licensing revenues increased
45% to $437 million, compared to $301 million for the
52-week period of fiscal 2003. The increase was primarily due to
volume-driven growth in the grocery and warehouse club
businesses as a result of expanded agreements with Kraft Foods
Inc., which included the addition of six new Starbucks coffees
along with a selection of Tazo® teas. In addition, product
sales and royalty revenues increased as a result of opening 417
new licensed retail stores in the last 12 months.
Foodservice and other revenues increased 23% to
$254 million from $206 million in fiscal 2003, due to
both the addition of new and existing Starbucks and Seattle
Coffee Company foodservice accounts.
United States operating income increased by 26% to
$763 million for the fiscal year ended 2004, from
$604 million for the fiscal year ended 2003. Operating
margin decreased to 17.0% of related revenues from 17.4% in the
52-week period of fiscal 2003, primarily due to higher dairy and
green coffee commodity costs, as well as higher payroll-related
expenditures to support the Company’s ongoing retail store
growth. These increases were partially offset by leverage gained
on fixed occupancy costs distributed over an expanded revenue
base.
International
International total net revenues increased 33% to
$803 million for the fiscal year ended 2004, compared to
$603 million for the 52-week period of fiscal 2003.
Excluding the impact of the extra sales week in fiscal 2004,
International total net revenues increased 31%. International
Company-operated retail revenues increased 36% to
$657 million for the fiscal year ended 2004, compared to
$484 million for the 52-week period of fiscal 2003. The
increase was primarily due to the opening of 120 new
Company-operated retail stores in the last 12 months, the
weakening of the U.S. dollar against both the British pound
sterling and Canadian dollar, and comparable store sales growth
of 6%. The increase in comparable store sales resulted from a 5%
increase in the number of customer transactions and a 1%
increase in the average value per transaction. Excluding the
impact of the extra sales week in fiscal 2004, International
Company-operated retail revenues increased 33% to
$644 million.
Total International specialty revenues increased 23% to
$146 million for the fiscal year ended 2004, compared to
$119 million for the 52-week period of fiscal 2003.
Excluding the impact of the extra sales week in fiscal 2004,
International specialty revenues increased 21% to
$144 million. The increase was primarily due to higher
product sales and royalty revenues from opening 293 new licensed
retail stores in the last 12 months, partially offset by
proportionate eliminations of sales to equity investees in which
the Company increased its ownership interest in late fiscal 2003.
32
International operating income increased to $52 million for
the fiscal year ended 2004, compared to $4 million in the
52-week period of fiscal 2003. Operating margin increased to
6.4% of related revenues from 0.6% in the 52-week period of
fiscal 2003, primarily due to leverage gained on most fixed
costs distributed over an expanded revenue base.
Unallocated Corporate
Unallocated corporate expenses increased to $208 million
for the fiscal year ended 2004, from $187 million in the
52-week period of fiscal 2003, primarily due to higher
provisions for incentive compensation based on the
Company’s performance and other payroll-related
expenditures. Total unallocated corporate expenses as a
percentage of total net revenues decreased to 3.9% for the
fiscal year ended 2004, compared to 4.6% for the 52-week period
of fiscal 2003.
LIQUIDITY AND CAPITAL RESOURCES
The following table represents components of the Company’s
most liquid assets (in thousands):
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
Oct 2, 2005 | |
|
Oct 3, 2004 | |
|
|
| |
|
| |
Cash and cash equivalents
|
|
$ |
173,809 |
|
|
$ |
145,053 |
|
Short-term investments — available-for-sale
|
|
|
95,379 |
|
|
|
483,157 |
|
Short-term investments — trading securities
|
|
|
37,848 |
|
|
|
24,799 |
|
Long-term investments — available-for-sale securities
|
|
|
60,475 |
|
|
|
135,179 |
|
|
|
|
|
|
|
|
Total
|
|
$ |
367,511 |
|
|
$ |
788,188 |
|
|
|
|
|
|
|
|
Starbucks has reclassified its auction rate securities of
$154.1 million, previously classified in “Cash and
cash equivalents,” as “Short-term
investments — available-for-sale securities” on
the consolidated balance sheet as of October 3, 2004. The
Company had historically classified these securities as cash
equivalents based on management’s ability to liquidate its
holdings during the predetermined interest rate reset auctions,
which generally occurred within 90 days of acquiring the
securities. Although management had determined the risk of
failure of an auction process to be remote, the definition of a
cash equivalent in Statement of Financial Accounting Standards
No. 95, “Statement of Cash Flows,” required
reclassification to short-term investments. The Company has made
corresponding adjustments to its consolidated statement of cash
flows for the prior fiscal years of 2004 and 2003 to reflect the
gross purchases, sales and maturities of auction rate securities
as investing activities rather than as a component of cash and
cash equivalents. There was no impact on previously reported
cash flows from operating activities as a result of the
reclassification.
The Company manages its cash, cash equivalents and liquid
investments in order to internally fund operating needs. The
$421 million decline in total cash and cash equivalents and
liquid investments from October 3, 2004 to October 2,
2005, was nearly all due to the sale of securities to fund
common stock repurchases. The Company intends to use its
available cash resources, including any borrowings under its
revolving credit facility described below, 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,
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 investments, as well as borrowing capacity
under the revolving credit facility, should be sufficient to
finance capital requirements for its core businesses
33
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 2006 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 for additional share repurchases, if any. For
fiscal 2006, management expects capital expenditures to be in
the range of $700 million to $725 million, related to
opening approximately 850 Company-operated stores on a global
basis, remodeling certain existing stores and enhancing its
production capacity and information systems.
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 scheduled to expire in August 2010 and
is available for working capital, capital expenditures and other
corporate purposes, which may include acquisitions and share
repurchases. The Company may request an increase up to an
additional $500 million under the credit facility, provided
there is no existing default, which would increase total
availability to $1 billion.
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
Company’s performance under specified financial criteria.
The Facility contains provisions that require the Company to
maintain compliance with certain covenants, including the
maintenance of certain financial ratios. As of October 2,
2005, the Company was in compliance with each of these
covenants. There were borrowings of $277 million
outstanding under the Facility as of October 2, 2005, with
a weighted average contractual interest rate of 4.0%.
Cash provided by operating activities totaled $924 million
in fiscal 2005 and was generated primarily by net earnings of
$494 million and noncash depreciation and amortization
expenses of $367 million.
Cash used by investing activities totaled $221 million in
fiscal 2005. Net capital additions to property, plant and
equipment used $644 million, primarily from opening 735 new
Company-operated retail stores and remodeling certain existing
stores. Gross capital additions for fiscal 2005 were
$668 million and were offset by impairment provisions and
foreign currency translation adjustments totaling
$24 million. During fiscal 2005, the Company increased its
equity ownership in its licensed operations in Germany, Southern
China and Chile and also acquired substantially all of the
assets of Ethos Brands, LLC, which together used
$22 million, net of cash acquired. Partially offsetting
these uses of cash, the net activity in the Company’s
portfolio of available-for-sale securities provided
$452 million for the fiscal year ended October 2, 2005.
Cash used by financing activities in fiscal 2005 totaled
$674 million. During fiscal 2005, the Company repurchased
45 million shares of its common stock at an average price
of $25.26 per share, using $1.1 billion. 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. The
total remaining amount of shares authorized for repurchase as of
October 2, 2005 was 22 million. Partially offsetting
cash used for share repurchases were borrowings of
$277 million under the Facility and $164 million of
proceeds from the exercise of employee stock options and the
sale of the Company’s common stock from employee stock
purchase plans. As options granted are exercised, the Company
will continue to receive proceeds (financing activity) and a tax
deduction (operating activity); however, the amounts and the
timing cannot be predicted.
34
The following table summarizes the Company’s contractual
obligations and borrowings as of October 2, 2005, and the
timing and effect that such commitments are expected to have on
the Company’s liquidity and capital requirements in future
periods (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period | |
|
|
| |
|
|
|
|
Less Than | |
|
|
|
More Than | |
Contractual Obligations |
|
Total | |
|
1 Year | |
|
1-3 Years | |
|
3-5 Years | |
|
5 Years | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Debt
obligations(1)
|
|
$ |
280,618 |
|
|
$ |
277,748 |
|
|
$ |
1,537 |
|
|
$ |
1,127 |
|
|
$ |
206 |
|
Operating lease
obligations(2)
|
|
|
3,097,493 |
|
|
|
423,564 |
|
|
|
804,055 |
|
|
|
690,838 |
|
|
|
1,179,036 |
|
Purchase obligations
|
|
|
384,588 |
|
|
|
279,076 |
|
|
|
82,887 |
|
|
|
20,449 |
|
|
|
2,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
3,762,699 |
|
|
$ |
980,388 |
|
|
$ |
888,479 |
|
|
$ |
712,414 |
|
|
$ |
1,181,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Debt amounts include principal maturities only. The amount due
in less than one year includes $277 million of short term
borrowings under the Facility. |
|
(2) |
Amounts include the direct lease obligations, excluding any
taxes, insurance and other related expenses. |
Starbucks expects to fund these commitments primarily with
operating cash flows generated in the normal course of business.
Off-Balance Sheet Arrangement
The Company has unconditionally guaranteed the repayment of
certain Japanese yen-denominated bank loans and related interest
and fees of an unconsolidated equity investee, Starbucks Coffee
Japan, Ltd. (“Starbucks Japan”). The guarantees
continue until the loans, including accrued interest and fees,
have been paid in full, with the final loan amount due in 2014.
The maximum amount is limited to the sum of unpaid principal and
interest amounts, as well as other related expenses. These
amounts will vary based on fluctuations in the yen foreign
exchange rate. As of October 2, 2005, the maximum amount of
the guarantees was approximately $9.0 million. Since there
has been no modification of these loan guarantees subsequent to
the Company’s adoption of Financial Accounting Standards
Board (“FASB”) Interpretation No. 45,
“Guarantor’s 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 Company’s 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. The Company establishes an accrual for estimated
warranty costs at the time of sale, based on historical
experience. The following table summarizes the activity related
to product warranty reserves during fiscal 2005 and 2004 (in
thousands):
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
Oct 2, 2005 | |
|
Oct 3, 2004 | |
|
|
| |
|
| |
Balance at beginning of fiscal year
|
|
$ |
3,091 |
|
|
$ |
2,227 |
|
Provision for warranties issued
|
|
|
7,494 |
|
|
|
5,093 |
|
Warranty claims
|
|
|
(8,827 |
) |
|
|
(4,229 |
) |
|
|
|
|
|
|
|
Balance at end of fiscal year
|
|
$ |
1,758 |
|
|
$ |
3,091 |
|
|
|
|
|
|
|
|
35
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, which was approved in May 2005 by the
Company’s Board of Directors. 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
does not allow for 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 Company’s 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 Company’s revenue, expense and capital
purchasing activities is transacted in U.S. dollars.
However, because a portion of the Company’s 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
Company’s 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 2, 2005, 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
a hedge of its net investment in Starbucks Japan. These
contracts expire within 31 months.
Based on the foreign exchange contracts outstanding as of
October 2, 2005, a 10% devaluation of the U.S. dollar
as compared to the level of foreign exchange rates for
currencies under contract as of October 2, 2005, would
result in a reduced fair value of these derivative financial
instruments of approximately $11.3 million, of which
$4.6 million may reduce the Company’s 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 $11.3 million, of which $5.8 million may
increase the Company’s 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 Company’s foreign investment, future
foreign currency royalty fee payments and product purchases that
would occur within the hedging period.
36
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 Company’s 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 Company’s 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/(loss).” 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 2005, and determined that such a
change would not have a significant effect on the fair value of
these instruments.
SEASONALITY AND QUARTERLY RESULTS
The Company’s business is subject to seasonal fluctuations.
Historically, significant portions of the Company’s net
revenues and profits were, and may continue to be realized
during the first quarter of the Company’s fiscal year,
which includes the December holiday season. In addition,
quarterly results are affected by the timing of the opening of
new stores, and the Company’s rapid growth may conceal the
impact of other seasonal influences. Because of the seasonality
of the Company’s 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 Company’s
financial condition and results, and require management’s
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 and accounting for self insurance reserves to be the most
critical in understanding the judgments that are involved in
preparing its consolidated financial statements.
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
Company’s trademarks. Upon indication that the carrying
values of such assets may not be
37
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.
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.
NEW ACCOUNTING STANDARDS
In November 2005, the FASB issued Staff Position
No. FAS 115-1, “The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments” (“FSP 115-1”). FSP 115-1
provides accounting guidance for identifying and recognizing
other-than-temporary impairments of debt and equity securities,
as well as cost method investments in addition to disclosure
requirements. FSP 115-1 is effective for reporting periods
beginning after December 15, 2005, and earlier application
is permitted. The Company has adopted this new pronouncement in
its fourth quarter of fiscal 2005. The adoption of
FSP 115-1 did not have an impact on the Company’s
consolidated financial statements. The required disclosures are
presented in Notes 4 and 7 of this Report.
In March 2005, the FASB issued Interpretation No. 47,
“Accounting for Conditional Asset Retirement Obligations,
an interpretation of FASB Statement No. 143”
(“FIN 47”). FIN 47 requires the recognition
of a liability for the fair value of a legally-required
conditional asset retirement obligation when incurred, if the
liability’s fair value can be reasonably estimated.
FIN 47 also clarifies when an entity would have sufficient
information to reasonably estimate the fair value of an asset
retirement obligation. FIN 47 is effective for fiscal years
ending after December 15, 2005, or no later than Starbucks
fiscal fourth quarter of 2006. The Company has not yet
determined the impact of adoption on its consolidated statement
of earnings and balance sheet.
In December 2004, the FASB issued SFAS No. 123R,
“Share-Based Payment” (“SFAS 123R”), a
revision of SFAS 123. SFAS 123R will require Starbucks
to, among other things, measure all employee stock-based
compensation awards using a fair value method and record the
expense in the Company’s consolidated financial statements.
The provisions of SFAS 123R, as amended by SEC Staff
Accounting Bulletin No. 107, “Share-Based
Payment,” are effective no later than the beginning of the
next fiscal year that begins after June 15, 2005. Starbucks
will adopt the new requirements using the modified prospective
transition method in
38
its first fiscal quarter of 2006, which ends January 1,
2006. In addition to the recognition of expense in the financial
statements, under SFAS 123R, any excess tax benefits
received upon exercise of options will be presented as a
financing activity inflow rather than as an adjustment of
operating activity as currently presented. Based on its current
analysis and information, management has determined that the
impact of adopting SFAS 123R will result in a reduction of
net earnings and expects diluted earnings per share to be
reduced by approximately $0.09 on a full year basis for fiscal
2006.
In December 2004, the FASB issued Staff Position
No. FAS 109-1, “Application of
SFAS No. 109, Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities provided by the
American Jobs Creation Act of 2004”
(“FSP 109-1”). FSP 109-1 states that
qualified domestic production activities should be accounted for
as a special deduction under SFAS No. 109,
“Accounting for Income Taxes,” and not be treated as a
rate reduction. The provisions of FSP 109-1 are effective
immediately. The Company will qualify for a benefit beginning in
fiscal 2006, which is not expected to be material to the
Company’s consolidated financial statements.
In December 2004, the FASB issued Staff Position
No. FAS 109-2, “Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation Act of 2004”
(“FSP 109-2”). The American Jobs Creation Act
allows a special one-time dividends received deduction on the
repatriation of certain foreign earnings to a U.S. taxpayer
(repatriation provision), provided certain criteria are met. The
law allows the Company to make an election to repatriate
earnings through fiscal 2006. FSP 109-2 provides accounting
and disclosure guidance for the repatriation provision. Although
FSP 109-2 was effective upon its issuance, it allows
companies additional time beyond the enactment date to evaluate
the effects of the provision on its plan for investment or
repatriation of unremitted foreign earnings. The Company
continues to evaluate the impact of the new Act to determine
whether it will repatriate foreign earnings and the impact, if
any, this pronouncement will have on its consolidated financial
statements. As of October 2, 2005, the Company has not made
an election to repatriate earnings under this provision. The
Company may or may not elect to repatriate earnings in fiscal
2006. Earnings under consideration for repatriation range from
$0 to $75 million and the related income tax effects range
from $0 to $5 million. As provided in FSP 109-2,
Starbucks has not adjusted its tax expense or deferred tax
liability to reflect the repatriation provision.
In November 2004, the FASB issued Statement No. 151,
“Inventory Costs, an amendment of ARB No. 43,
Chapter 4” (“SFAS 151”). SFAS 151
clarifies that abnormal inventory costs such as costs of idle
facilities, excess freight and handling costs, and wasted
materials (spoilage) are required to be recognized as
current period charges. The provisions of SFAS 151 are
effective for fiscal years beginning after June 15, 2005.
The adoption of SFAS 151 in fiscal 2006 is not expected to
have a significant impact on the Company’s consolidated
balance sheet or statement of earnings.
|
|
Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk |
The information required by this item is incorporated by
reference to the section entitled “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations — Commodity Prices, Availability and
General Risk Conditions” and “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations — Financial Risk Management” in
Item 7 of this Report.
39
|
|
Item 8. |
Financial Statements and Supplementary Data |
CONSOLIDATED STATEMENTS OF EARNINGS
In thousands, except earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
Oct 2, 2005 | |
|
Oct 3, 2004 | |
|
Sept 28, 2003 | |
|
|
| |
|
| |
|
| |
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated retail
|
|
$ |
5,391,927 |
|
|
$ |
4,457,378 |
|
|
$ |
3,449,624 |
|
|
Specialty:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing
|
|
|
673,015 |
|
|
|
565,798 |
|
|
|
409,551 |
|
|
|
Foodservice and other
|
|
|
304,358 |
|
|
|
271,071 |
|
|
|
216,347 |
|
|
|
|
|
|
|
|
|
|
|
|
Total specialty
|
|
|
977,373 |
|
|
|
836,869 |
|
|
|
625,898 |
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
6,369,300 |
|
|
|
5,294,247 |
|
|
|
4,075,522 |
|
|
Cost of sales including occupancy costs
|
|
|
2,605,212 |
|
|
|
2,191,440 |
|
|
|
1,681,434 |
|
Store operating expenses
|
|
|
2,165,911 |
|
|
|
1,790,168 |
|
|
|
1,379,574 |
|
Other operating expenses
|
|
|
197,024 |
|
|
|
171,648 |
|
|
|
141,346 |
|
Depreciation and amortization expenses
|
|
|
340,169 |
|
|
|
289,182 |
|
|
|
244,671 |
|
General and administrative expenses
|
|
|
357,114 |
|
|
|
304,293 |
|
|
|
244,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal operating expenses
|
|
|
5,665,430 |
|
|
|
4,746,731 |
|
|
|
3,691,575 |
|
|
Income from equity investees
|
|
|
76,745 |
|
|
|
59,071 |
|
|
|
36,903 |
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
780,615 |
|
|
|
606,587 |
|
|
|
420,850 |
|
|
Interest and other income, net
|
|
|
15,829 |
|
|
|
14,140 |
|
|
|
11,622 |
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
796,444 |
|
|
|
620,727 |
|
|
|
432,472 |
|
|
Income taxes
|
|
|
301,977 |
|
|
|
231,754 |
|
|
|
167,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
494,467 |
|
|
$ |
388,973 |
|
|
$ |
265,355 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share — basic
|
|
$ |
0.63 |
|
|
$ |
0.49 |
|
|
$ |
0.34 |
|
Net earnings per common share — diluted
|
|
$ |
0.61 |
|
|
$ |
0.47 |
|
|
$ |
0.33 |
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
789,570 |
|
|
|
794,347 |
|
|
|
781,505 |
|
|
|
Diluted
|
|
|
815,417 |
|
|
|
822,930 |
|
|
|
803,296 |
|
See Notes to Consolidated Financial Statements.
40
CONSOLIDATED BALANCE SHEETS
In thousands, except share data
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
Oct 2, 2005 | |
|
Oct 3, 2004 | |
|
|
| |
|
| |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
173,809 |
|
|
$ |
145,053 |
|
|
Short-term investments — available-for-sale securities
|
|
|
95,379 |
|
|
|
483,157 |
|
|
Short-term investments — trading securities
|
|
|
37,848 |
|
|
|
24,799 |
|
|
Accounts receivable, net of allowances of $3,079 and $2,231,
respectively
|
|
|
190,762 |
|
|
|
140,226 |
|
|
Inventories
|
|
|
546,299 |
|
|
|
422,663 |
|
|
Prepaid expenses and other current assets
|
|
|
94,429 |
|
|
|
71,347 |
|
|
Deferred income taxes, net
|
|
|
70,808 |
|
|
|
63,650 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,209,334 |
|
|
|
1,350,895 |
|
Long-term investments — available-for-sale securities
|
|
|
60,475 |
|
|
|
135,179 |
|
Equity and other investments
|
|
|
201,461 |
|
|
|
167,740 |
|
Property, plant and equipment, net
|
|
|
1,842,019 |
|
|
|
1,551,416 |
|
Other assets
|
|
|
72,893 |
|
|
|
85,561 |
|
Other intangible assets
|
|
|
35,409 |
|
|
|
26,800 |
|
Goodwill
|
|
|
92,474 |
|
|
|
68,950 |
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$ |
3,514,065 |
|
|
$ |
3,386,541 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
220,975 |
|
|
$ |
199,346 |
|
|
Accrued compensation and related costs
|
|
|
232,354 |
|
|
|
208,927 |
|
|
Accrued occupancy costs
|
|
|
44,496 |
|
|
|
29,231 |
|
|
Accrued taxes
|
|
|
78,293 |
|
|
|
62,959 |
|
|
Short-term borrowings
|
|
|
277,000 |
|
|
|
— |
|
|
Other accrued expenses
|
|
|
198,082 |
|
|
|
123,684 |
|
|
Deferred revenue
|
|
|
175,048 |
|
|
|
121,377 |
|
|
Current portion of long-term debt
|
|
|
748 |
|
|
|
735 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,226,996 |
|
|
|
746,259 |
|
Deferred income taxes, net
|
|
|
— |
|
|
|
21,770 |
|
Long-term debt
|
|
|
2,870 |
|
|
|
3,618 |
|
Other long-term liabilities
|
|
|
193,565 |
|
|
|
144,683 |
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
|
Common stock ($0.001 par value) and additional
paid-in-capital — authorized,
1,200,000,000 shares; issued and outstanding, 767,442,110
and 794,811,688 shares, respectively, (includes 3,394,200
common stock units in both periods)
|
|
|
90,968 |
|
|
|
956,685 |
|
|
Other additional paid-in-capital
|
|
|
39,393 |
|
|
|
39,393 |
|
|
Retained earnings
|
|
|
1,939,359 |
|
|
|
1,444,892 |
|
|
Accumulated other comprehensive income
|
|
|
20,914 |
|
|
|
29,241 |
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
2,090,634 |
|
|
|
2,470,211 |
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$ |
3,514,065 |
|
|
$ |
3,386,541 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
41
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
Oct 2, 2005 | |
|
Oct 3, 2004 | |
|
Sept 28, 2003 | |
|
|
| |
|
| |
|
| |
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
494,467 |
|
|
$ |
388,973 |
|
|
$ |
265,355 |
|
Adjustments to reconcile net earnings to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
367,207 |
|
|
|
314,047 |
|
|
|
266,258 |
|
|
Provision for impairments and asset disposals
|
|
|
20,157 |
|
|
|
13,568 |
|
|
|
7,784 |
|
|
Deferred income taxes, net
|
|
|
(31,253 |
) |
|
|
(3,770 |
) |
|
|
(6,767 |
) |
|
Equity in income of investees
|
|
|
(49,633 |
) |
|
|
(31,801 |
) |
|
|
(21,320 |
) |
|
Distributions of income from equity investees
|
|
|
30,919 |
|
|
|
38,328 |
|
|
|
28,966 |
|
|
Tax benefit from exercise of nonqualified stock options
|
|
|
109,978 |
|
|
|
63,405 |
|
|
|
36,590 |
|
|
Net accretion of discount and amortization of premium on
marketable securities
|
|
|
10,097 |
|
|
|
11,603 |
|
|
|
5,996 |
|
|
Cash provided/(used) by changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(49,311 |
) |
|
|
(24,977 |
) |
|
|
(8,384 |
) |
|
|
Inventories
|
|
|
(121,618 |
) |
|
|
(77,662 |
) |
|
|
(64,768 |
) |
|
|
Accounts payable
|
|
|
9,717 |
|
|
|
27,948 |
|
|
|
24,990 |
|
|
|
Accrued compensation and related costs
|
|
|
22,711 |
|
|
|
54,929 |
|
|
|
42,132 |
|
|
|
Deferred revenue
|
|
|
53,276 |
|
|
|
47,590 |
|
|
|
30,732 |
|
|
|
Other operating assets and liabilities
|
|
|
56,894 |
|
|
|
36,356 |
|
|
|
8,554 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
923,608 |
|
|
|
858,537 |
|
|
|
616,118 |
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of available-for-sale securities
|
|
|
(643,488 |
) |
|
|
(887,969 |
) |
|
|
(481,050 |
) |
|
Maturity of available-for-sale securities
|
|
|
469,554 |
|
|
|
170,789 |
|
|
|
218,787 |
|
|
Sale of available-for-sale securities
|
|
|
626,113 |
|
|
|
452,467 |
|
|
|
141,009 |
|
|
Acquisitions, net of cash acquired
|
|
|
(21,583 |
) |
|
|
(7,515 |
) |
|
|
(69,928 |
) |
|
Net additions to equity investments, other investments and other
assets
|
|
|
(7,915 |
) |
|
|
(64,747 |
) |
|
|
(47,259 |
) |
|
Net additions to property, plant and equipment
|
|
|
(643,989 |
) |
|
|
(412,537 |
) |
|
|
(377,983 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities
|
|
|
(221,308 |
) |
|
|
(749,512 |
) |
|
|
(616,424 |
) |
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
163,555 |
|
|
|
137,590 |
|
|
|
107,183 |
|
|
Borrowings under revolving credit facility
|
|
|
277,000 |
|
|
|
— |
|
|
|
— |
|
|
Principal payments on long-term debt
|
|
|
(735 |
) |
|
|
(722 |
) |
|
|
(710 |
) |
|
Repurchase of common stock
|
|
|
(1,113,647 |
) |
|
|
(203,413 |
) |
|
|
(75,710 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided/(used) by financing activities
|
|
|
(673,827 |
) |
|
|
(66,545 |
) |
|
|
30,763 |
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
283 |
|
|
|
3,111 |
|
|
|
3,278 |
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
28,756 |
|
|
|
45,591 |
|
|
|
33,735 |
|
CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
145,053 |
|
|
|
99,462 |
|
|
|
65,727 |
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$ |
173,809 |
|
|
$ |
145,053 |
|
|
$ |
99,462 |
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
1,060 |
|
|
$ |
370 |
|
|
$ |
265 |
|
|
Income taxes
|
|
$ |
227,812 |
|
|
$ |
172,759 |
|
|
$ |
140,107 |
|
See Notes to Consolidated Financial Statements.
42
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 29, 2002
|
|
|
776,457,184 |
|
|
$ |
776 |
|
|
$ |
890,264 |
|
|
$ |
39,393 |
|
|
$ |
790,564 |
|
|
$ |
(8,541 |
) |
|
$ |
1,712,456 |
|
|
Net earnings
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
265,355 |
|
|
|
— |
|
|
|
265,355 |
|
|
Unrealized holding losses, net
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,426 |
) |
|
|
(4,426 |
) |
|
Translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
27,241 |
|
|
|
27,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
288,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options, including tax benefit of $35,547
|
|
|
16,039,208 |
|
|
|
16 |
|
|
|
129,092 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
129,108 |
|
|
Sale of common stock, including tax benefit of $1,043
|
|
|
1,486,680 |
|
|
|
1 |
|
|
|
14,664 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
14,665 |
|
|
Repurchase of common stock
|
|
|
(6,598,000 |
) |
|
|
(6 |
) |
|
|
(75,704 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(75,710 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 28, 2003
|
|
|
787,385,072 |
|
|
$ |
787 |
|
|
$ |
958,316 |
|
|
$ |
39,393 |
|
|
$ |
1,055,919 |
|
|
$ |
14,274 |
|
|
$ |
2,068,689 |
|
|
Net earnings
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
388,973 |
|
|
|
— |
|
|
|
388,973 |
|
|
Unrealized holding losses, net
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,925 |
) |
|
|
(4,925 |
) |
|
Translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
19,892 |
|
|
|
19,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
403,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
$ |
1,444,892 |
|
|
$ |
29,241 |
|
|
$ |
2,470,211 |
|
|
Net earnings
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
494,467 |
|
|
|
— |
|
|
|
494,467 |
|
|
Unrealized holding gains, net
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
350 |
|
|
|
350 |
|
|
Translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(8,677 |
) |
|
|
(8,677 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
486,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
$ |
1,939,359 |
|
|
$ |
20,914 |
|
|
$ |
2,090,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended October 2, 2005, October 3,
2004, and September 28, 2003
|
|
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 sells
coffee and tea products and licenses its trademark through other
channels and, through certain of its equity investees, Starbucks
also produces and sells bottled Frappuccino® coffee drinks
and Starbucks DoubleShot® espresso drink and a line of
superpremium ice creams. All channels outside the
Company-operated retail stores are collectively known as
“Specialty Operations.” The Company’s objective
is to establish Starbucks as the most recognized and respected
brand 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.
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 Corporation’s fiscal year ends on the Sunday
closest to September 30. The fiscal years ended on
October 2, 2005 and September 28, 2003, 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 year’s balances have
been made to conform to the current format. Specifically,
Starbucks has reclassified its auction rate securities of
$154.1 million, previously classified in “Cash and
cash equivalents,” as “Short-term
investments — available-for-sale securities” on
the consolidated balance sheet as of October 3, 2004. The
Company had historically classified these securities as cash
equivalents based on management’s ability to liquidate its
holdings during the predetermined interest rate reset auctions,
which generally occurred within 90 days of acquiring the
securities. Although management had determined the risk of
failure of an auction process to be remote, the definition of a
cash equivalent in Statement of Financial Accounting Standards
(“SFAS”) No. 95, “Statement of Cash
Flows” (“SFAS 95”), requires
reclassification to short-term investments.
The Company has made corresponding adjustments to its
consolidated statement of cash flows for the fiscal years ended
2004 and 2003 to reflect the gross purchases, sales and
maturities of auction rate securities as investing activities
rather than as a component of cash and cash equivalents. There
was no impact on
44
previously reported net earnings, cash flows from operating
activities or shareholders’ equity as a result of this
reclassification.
Additionally, the Company has reclassified its distributions
received from equity investees on the consolidated statement of
cash flows, from investing activities to operating activities,
for the fiscal years ended 2004 and 2003. These distributions
represented returns on the underlying equity investments, and
therefore have been reclassified to be in accordance with the
provisions of SFAS 95. There was no impact on the
previously reported consolidated statements of earnings or
consolidated balance sheets as a result of this reclassification.
Collectively, these adjustments increased net cash used by
investing activities in the consolidated statements of cash
flows by $91.0 million and $96.5 million for the
fiscal years ended 2004 and 2003, respectively.
Estimates and Assumptions
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America 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.
Cash Management
The Company’s 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 Company’s 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, 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 Company’s 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 Company’s investments in
marketable debt and equity securities, as
45
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 Company’s carrying value deemed to be other than
temporary are charged against 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 derivative’s 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
derivative’s 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.
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 in other comprehensive income.
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 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 2, 2005 and October 3, 2004, inventory
reserves were $8.3 million and $5.7 million,
respectively.
46
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 Company’s 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 Company’s trademarks. Based on the
impairment tests performed, there was no impairment of goodwill
in fiscal 2005, 2004 and 2003. 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 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
$21.2 million, $18.8 million and $15.9 million in
fiscal 2005, 2004 and 2003, 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
47
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 2, 2005, and
October 3, 2004, these reserves were $91.6 million and
$77.6 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 for licensees
accounted for under the equity method, based on the
Company’s percentage ownership. Additionally, consolidated
revenues are recognized net of any discounts, returns,
allowances and sales incentives, including coupon redemptions
and rebates.
Retail Revenues
Company-operated retail store revenues are recognized when
payment is tendered at the point of sale. Revenues from stored
value cards are recognized upon redemption. Until the redemption
of stored value cards, outstanding customer balances on these
cards are included in “Deferred revenue” on the
consolidated balance sheets.
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.
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 of advertising
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.
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 $87.7 million,
$67.2 million and $49.6 million in fiscal 2005, 2004
and 2003, respectively. As of October 2, 2005, and
October 3, 2004,
48
$11.8 million and $5.8 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.
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.
Stock-based Compensation
The Company maintains several stock equity incentive plans under
which incentive stock options and nonqualified stock options may
be granted to employees, consultants and nonemployee directors.
Starbucks accounts for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board
(“APB”) Opinion No. 25, “Accounting for
Stock Issued to Employees,” and related interpretations.
Accordingly, because the grant price equals the market price on
the date of grant, no compensation expense is recognized by the
Company for stock options issued to employees.
49
If compensation cost for the Company’s stock options had
been recognized based upon the estimated fair value on the grant
date under the fair value methodology allowed by
SFAS No. 123 “Accounting for Stock-Based
Compensation” (“SFAS 123”), as amended, the
Company’s net earnings and earnings per share would have
been as follows (in thousands, except earnings per share):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
Oct 2, 2005 | |
|
Oct 3, 2004 | |
|
Sept 28, 2003 | |
|
|
| |
|
| |
|
| |
Net earnings
|
|
$ |
494,467 |
|
|
$ |
388,973 |
|
|
$ |
265,355 |
|
Deduct: stock-based compensation expense, net of tax
|
|
|
(58,742 |
) |
|
|
(45,056 |
) |
|
|
(37,436 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$ |
435,725 |
|
|
$ |
343,917 |
|
|
$ |
227,919 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share — basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
0.63 |
|
|
$ |
0.49 |
|
|
$ |
0.34 |
|
|
Deduct: stock-based compensation expense, net of tax
|
|
|
(0.08 |
) |
|
|
(0.06 |
) |
|
|
(0.05 |
) |
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$ |
0.55 |
|
|
$ |
0.43 |
|
|
$ |
0.29 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share — diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
0.61 |
|
|
$ |
0.47 |
|
|
$ |
0.33 |
|
|
Deduct: stock-based compensation expense, net of tax
|
|
|
(0.08 |
) |
|
|
(0.05 |
) |
|
|
(0.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$ |
0.53 |
|
|
$ |
0.42 |
|
|
$ |
0.29 |
|
|
|
|
|
|
|
|
|
|
|
The above pro forma information regarding net income and
earnings per share has been determined as if the Company had
accounted for its employee stock options under the fair value
method. The fair value for these stock options was estimated at
the date of grant using a Black-Scholes option pricing model
with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
Employee Stock Options |
|
|
|
Fiscal Year Ended |
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Expected life (years)
|
|
1 - 6 |
|
1 - 6 |
|
2 - 5 |
Expected volatility
|
|
23% - 43% |
|
22% - 50% |
|
37% - 55% |
Risk-free interest rate
|
|
2.4% - 4.2% |
|
1.1% - 4.5% |
|
0.9% - 4.0% |
Expected dividend yield
|
|
0.00% |
|
0.00% |
|
0.00% |
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Plans |
|
|
|
Fiscal Year Ended |
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Expected life (years)
|
|
0.25 - 3 |
|
0.25 - 3 |
|
0.25 - 3 |
Expected volatility
|
|
20% - 40% |
|
19% - 43% |
|
30% - 50% |
Risk-free interest rate
|
|
1.9% - 3.5% |
|
0.9% - 2.3% |
|
0.9% - 2.3% |
Expected dividend yield
|
|
0.00% |
|
0.00% |
|
0.00% |
|
|
|
The Company’s valuations are based upon a multiple option
valuation approach, and forfeitures are recognized as they
occur. The Black-Scholes 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, including the expected stock-price
volatility. The Company’s 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
50
stock options under these plans unless there is an increase,
above the grant price, in the market price of the Company’s
stock. Such an increase in stock price would benefit all
shareholders commensurately.
For option grants made in November 2003 and thereafter, the
Company may provide for immediate vesting for optionees who have
attained at least 10 years of service and are age 55
or older. For purposes of the pro forma presentation of
stock-based compensation expense, the Company currently
amortizes the expense over the related vesting period with
acceleration of expense upon retirement. When the Company adopts
SFAS No. 123R, “Share-Based Payment”
(“SFAS 123R”) in its first quarter of fiscal
2006, the accounting treatment for retirement features will
change. Expense for awards made prior to adoption of
SFAS 123R will continue to be amortized over the vesting
period until retirement, at which point any remaining
unrecognized expense will be immediately recognized. For awards
made on or after October 3, 2005, the related expense will
be 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.
As required by SFAS 123, the Company has determined that
the weighted average estimated fair values of options granted
during fiscal 2005, 2004 and 2003 were $8.10, $5.30 and
$4.15 per share, respectively.
Foreign Currency Translation
The Company’s 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/(loss).
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 Company’s assets and liabilities.
Stock Split
On October 21, 2005, the Company effected a two-for-one
stock split of its $0.001 par value common stock for
holders of record on October 3, 2005. All applicable share
and per-share data in these consolidated financial statements
and related disclosures have been retroactively adjusted to give
effect to this stock split.
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 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.” See Note 13
for additional information.
51
Recent Accounting Pronouncements
In November 2005, the FASB issued Staff Position
No. FAS 115-1, “The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments” (“FSP 115-1”). FSP 115-1
provides accounting guidance for identifying and recognizing
other-than-temporary impairments of debt and equity securities,
as well as cost method investments in addition to disclosure
requirements. FSP 115-1 is effective for reporting periods
beginning after December 15, 2005, and earlier application
is permitted. The Company has adopted this new pronouncement in
its fourth quarter of fiscal 2005. The adoption of
FSP 115-1 did not have an impact on the Company’s
consolidated financial statements. The required disclosures are
presented in Notes 4 and 7 of this Report.
In March 2005, the FASB issued Interpretation No. 47,
“Accounting for Conditional Asset Retirement Obligations,
an interpretation of FASB Statement No. 143”
(“FIN 47”). FIN 47 requires the recognition
of a liability for the fair value of a legally-required
conditional asset retirement obligation when incurred, if the
liability’s fair value can be reasonably estimated.
FIN 47 also clarifies when an entity would have sufficient
information to reasonably estimate the fair value of an asset
retirement obligation. FIN 47 is effective for fiscal years
ending after December 15, 2005, or no later than Starbucks
fiscal fourth quarter of 2006. The Company has not yet
determined the impact of adoption on its consolidated statement
of earnings and balance sheet.
In December 2004, the FASB issued SFAS 123R, a revision of
SFAS 123. SFAS 123R will require Starbucks to, among
other things, measure all employee stock-based compensation
awards using a fair value method and record the expense in the
Company’s consolidated financial statements. The provisions
of SFAS 123R, as amended by SEC Staff Accounting
Bulletin No. 107, “Share-Based Payment,” are
effective no later than the beginning of the next fiscal year
that begins after June 15, 2005. Starbucks will adopt the
new requirements using the modified prospective transition
method in its first fiscal quarter of 2006, which ends
January 1, 2006. In addition to the recognition of expense
in the financial statements, under SFAS 123R, any excess
tax benefits received upon exercise of options will be presented
as a financing activity inflow rather than as an adjustment of
operating activity as currently presented. Based on its current
analysis and information, management has determined that the
impact of adopting SFAS 123R will result in a material
reduction of net earnings and diluted earnings per share.
In December 2004, the FASB issued Staff Position
No. FAS 109-1, “Application of
SFAS No. 109, Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities provided by the
American Jobs Creation Act of 2004”
(“FSP 109-1”). FSP 109-1 states that
qualified domestic production activities should be accounted for
as a special deduction under SFAS No. 109,
“Accounting for Income Taxes,” and not be treated as a
rate reduction. The provisions of FSP 109-1 are effective
immediately. The Company will qualify for a benefit beginning in
fiscal 2006, which is not expected to be material to the
Company’s consolidated financial statements.
In December 2004, the FASB issued Staff Position
No. FAS 109-2, “Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation Act of 2004”
(“FSP 109-2”). The American Jobs Creation Act
allows a special one-time dividends received deduction on the
repatriation of certain foreign earnings to a U.S. taxpayer
(repatriation provision), provided certain criteria are met. The
law allows the Company to make an election to repatriate
earnings through fiscal 2006. FSP 109-2 provides accounting
and disclosure guidance for the repatriation provision. Although
FSP 109-2 was effective upon its issuance, it allows
companies additional time beyond the enactment date to evaluate
the effects of the provision on its plan for investment or
repatriation of unremitted foreign earnings. The Company
continues to evaluate the impact of the new Act to determine
whether it will repatriate foreign earnings and the impact, if
any, this pronouncement will have on its consolidated financial
statements. As of October 2,
52
2005, the Company has not made an election to repatriate
earnings under this provision. The Company may or may not elect
to repatriate earnings in fiscal 2006. Earnings under
consideration for repatriation range from $0 to $75 million
and the related income tax effects range from $0 to
$5 million. As provided in FSP 109-2, Starbucks has
not adjusted its tax expense or deferred tax liability to
reflect the repatriation provision.
In November 2004, the FASB issued Statement No. 151,
“Inventory Costs, an amendment of ARB No. 43,
Chapter 4” (“SFAS 151”). SFAS 151
clarifies that abnormal inventory costs such as costs of idle
facilities, excess freight and handling costs, and wasted
materials (spoilage) are required to be recognized as
current period charges. The provisions of SFAS 151 are
effective for fiscal years beginning after June 15, 2005.
The adoption of SFAS 151 in fiscal 2006 is not expected to
have a significant impact on the Company’s consolidated
balance sheet or statement of earnings.
|
|
Note 2: |
Business Acquisitions |
In November 2004, Starbucks increased its equity ownership from
18% to 100% for its licensed operations in Germany. As a result,
management determined that a change in accounting method, from
the cost method to the consolidation method, was necessary and
included adjusting previously reported information for the
Company’s proportionate share of net losses of 18% as
required by APB No. 18, “The Equity Method of
Accounting for Investments in Common Stock.” The cumulative
effect of the accounting change for prior periods resulted in a
reduction of retained earnings of $3.6 million as of
October 3, 2004. See Note 19 in the Company’s
2004 10-K/A for additional information.
In April 2005, Starbucks acquired substantially all of the
assets of Ethos Brands, LLC, (such assets, “Ethos”), a
privately held bottled water company based in Santa Monica,
California, for $8 million. The earnings of Ethos are
included in the accompanying consolidated financial statements
from the date of acquisition.
In July 2005, Starbucks increased its equity ownership in its
licensed operations in Southern China and Chile, to 51% and
100%, respectively, for purchase prices totaling
$15 million, of which $10 million was payable as of
October 2, 2005. Previously, Starbucks owned less than 20%
in each of these operations, which were accounted for under the
cost method. These increases in equity ownership resulted in a
change of accounting method, from the cost method to the
consolidation method, on the respective dates of acquisition.
This accounting change also included adjusting previously
reported information for the Company’s proportionate share
of net losses in Southern China and Chile.
53
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 resulted in reductions of net earnings of
$0.1 million for the 39 weeks ended July 3, 2005,
and $0.3 million and $0.1 million for the fiscal years
ended October 3, 2004, and September 28, 2003,
respectively (in thousands, except earnings per share):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan 2, | |
|
April 3, | |
|
July 3, | |
|
July 3, | |
|
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
Fiscal Period Ended |
|
(13 Weeks) | |
|
(13 Weeks) | |
|
(13 Weeks) | |
|
(39 Weeks) | |
|
|
| |
|
| |
|
| |
|
| |
Net earnings, as previously reported
|
|
$ |
144,753 |
|
|
$ |
100,536 |
|
|
$ |
125,575 |
|
|
$ |
370,864 |
|
Effect of change to equity method
|
|
|
(43 |
) |
|
|
(54 |
) |
|
|
(47 |
) |
|
|
(144 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings, as restated for Southern China and Chile
acquisitions
|
|
$ |
144,710 |
|
|
$ |
100,482 |
|
|
$ |
125,528 |
|
|
$ |
370,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share — basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$ |
0.18 |
|
|
$ |
0.13 |
|
|
$ |
0.16 |
|
|
$ |
0.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As restated for Southern China and Chile acquisitions
|
|
$ |
0.18 |
|
|
$ |
0.13 |
|
|
$ |
0.16 |
|
|
$ |
0.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share — diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$ |
0.17 |
|
|
$ |
0.12 |
|
|
$ |
0.16 |
|
|
$ |
0.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As restated for Southern China and Chile acquisitions
|
|
$ |
0.17 |
|
|
$ |
0.12 |
|
|
$ |
0.16 |
|
|
$ |
0.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the effects of the investment
accounting change on net earnings and earnings per share for the
periods indicated (in thousands, except earnings per
share):
|
|
|
|
|
|
|
|
|
|
|
|
Oct 3, 2004 | |
|
Sept 28, 2003 | |
Fiscal Year Ended |
|
(53 Weeks) | |
|
(52 Weeks) | |
|
|
| |
|
| |
Net earnings, as previously reported
|
|
$ |
389,272 |
|
|
$ |
265,493 |
|
Effect of change to equity method
|
|
|
(299 |
) |
|
|
(138 |
) |
|
|
|
|
|
|
|
Net earnings, as restated for Southern China and Chile
acquisitions
|
|
$ |
388,973 |
|
|
$ |
265,355 |
|
|
|
|
|
|
|
|
Net earnings per common share — basic:
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$ |
0.49 |
|
|
$ |
0.34 |
|
|
|
|
|
|
|
|
|
As restated for Southern China and Chile acquisitions
|
|
$ |
0.49 |
|
|
$ |
0.34 |
|
|
|
|
|
|
|
|
Net earnings per common share — diluted:
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
$ |
0.47 |
|
|
$ |
0.33 |
|
|
|
|
|
|
|
|
|
As restated for Southern China and Chile acquisitions
|
|
$ |
0.47 |
|
|
$ |
0.33 |
|
|
|
|
|
|
|
|
54
|
|
Note 3: |
Cash and Cash Equivalents |
Cash and cash equivalents consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
Oct 2, 2005 | |
|
Oct 3, 2004 | |
|
|
| |
|
| |
Operating funds and interest bearing deposits
|
|
$ |
62,221 |
|
|
$ |
65,734 |
|
Money market funds
|
|
|
111,588 |
|
|
|
79,319 |
|
|
|
|
|
|
|
|
Total
|
|
$ |
173,809 |
|
|
$ |
145,053 |
|
|
|
|
|
|
|
|
|
|
Note 4: |
Short-term and Long-term Investments |
The Company’s short-term and long-term investments consist
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross | |
|
Gross | |
|
|
|
|
|
|
Unrealized | |
|
Unrealized | |
|
|
|
|
Amortized | |
|
Holding | |
|
Holding | |
|
|
October 2, 2005 |
|
Cost | |
|
Gains | |
|
Losses | |
|
Fair 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross | |
|
Gross | |
|
|
|
|
|
|
Unrealized | |
|
Unrealized | |
|
|
|
|
Amortized | |
|
Holding | |
|
Holding | |
|
|
October 3, 2004 |
|
Cost | |
|
Gains | |
|
Losses | |
|
Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
Short-term investments — available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local government obligations
|
|
$ |
436,754 |
|
|
$ |
20 |
|
|
$ |
(583 |
) |
|
$ |
436,191 |
|
|
U.S. government agency obligations
|
|
|
6,655 |
|
|
|
— |
|
|
|
(4 |
) |
|
|
6,651 |
|
|
Corporate debt securities
|
|
|
27,275 |
|
|
|
— |
|
|
|
— |
|
|
|
27,275 |
|
|
Asset-backed securities
|
|
|
13,020 |
|
|
|
50 |
|
|
|
(30 |
) |
|
|
13,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
483,704 |
|
|
$ |
70 |
|
|
$ |
(617 |
) |
|
$ |
483,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments — trading securities
|
|
|
24,769 |
|
|
|
|
|
|
|
|
|
|
|
24,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$ |
508,473 |
|
|
|
|
|
|
|
|
|
|
$ |
507,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments — available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local government obligations
|
|
$ |
130,810 |
|
|
$ |
67 |
|
|
$ |
(348 |
) |
|
$ |
130,529 |
|
|
Corporate debt securities
|
|
|
4,000 |
|
|
|
— |
|
|
|
— |
|
|
|
4,000 |
|
|
Asset-backed securities
|
|
|
658 |
|
|
|
— |
|
|
|
(8 |
) |
|
|
650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term investments
|
|
$ |
135,468 |
|
|
$ |
67 |
|
|
$ |
(356 |
) |
|
$ |
135,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For available-for-sale securities, proceeds from sales were
$626 million, $452 million and $141 million, in
fiscal years 2005, 2004 and 2003, respectively. Gross realized
gains from sales were $0.1 million, $0.2 million and
$0.3 million in fiscal years 2005, 2004 and 2003,
respectively, and gross realized losses from sales were
$1.7 million in 2005 and $0.4 million in 2004. There
were no gross realized losses in 2003.
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):
Consecutive monthly unrealized losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater Than or Equal | |
|
|
Less Than 12 Months | |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
Consecutive monthly unrealized losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater Than or |
|
|
Less Than 12 Months | |
|
Equal to 12 Months |
|
|
| |
|
|
|
|
Gross | |
|
|
|
Gross |
|
|
|
|
Unrealized | |
|
|
|
Unrealized |
|
|
|
|
Holding | |
|
|
|
Holding |
|
Fair |
October 3, 2004 |
|
Losses | |
|
Fair Value | |
|
Losses |
|
Value |
|
|
| |
|
| |
|
|
|
|
|
State and local government obligations
|
|
$ |
(931 |
) |
|
$ |
376,318 |
|
|
$ |
— |
|
|
$ |
— |
|
|
U.S. government agency obligations
|
|
|
(4 |
) |
|
|
6,651 |
|
|
|
— |
|
|
|
— |
|
|
Asset-backed securities
|
|
|
(38 |
) |
|
|
7,097 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
(973 |
) |
|
$ |
390,066 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized holding losses of $0.4 million for less
than twelve months and $0.7 million for greater than or
equal to twelve months as of October 2, 2005, pertain to 30
and 31 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.
Additional factors considered by management as of
October 2, 2005, 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.”
U.S. government agency obligations
These securities are obligations of an agency of the
U.S. government and are rated “AAA.” 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.
Asset-backed securities
These securities are guaranteed by an agency of the
U.S. government or have a “AAA” credit rating.
Additionally, these securities would not be settled at a price
less than the par value of the investment, which is the
equivalent of the amount due at maturity.
There were no realized losses recorded for other than temporary
impairments during fiscal 2005, 2004 or 2003.
Trading securities are comprised mainly of marketable equity
mutual funds that approximate a portion of the Company’s
liability under the Management Deferred Compensation Plan, a
defined contribution plan. The corresponding deferred
compensation liability of $47.3 million in fiscal 2005 and
$32.7 million in fiscal 2004 is included in “Accrued
compensation and related costs” on the consolidated balance
sheets. In fiscal years 2005 and 2004, the changes in net
unrealized holding gains in the trading portfolio included in
earnings were $2.4 million and $1.1 million,
respectively.
Long-term investments generally mature in less than three years.
57
|
|
Note 5: |
Derivative Financial Instruments |
Cash Flow Hedges
Starbucks, which include 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 hedge
monthly forecasted revenue transactions denominated in Japanese
yen and Canadian dollars, as well as forecasted inventory
purchases denominated in U.S. dollars, euros and Swiss
francs, for foreign operations. Additionally, the Company has
swap contracts to hedge a portion of its forecasted
U.S. fluid milk purchases. The effect of these swaps will
fix the price paid by Starbucks for the monthly volume of milk
purchases covered under the contracts on less than 5% of its
forecasted U.S. fluid milk purchases in fiscal 2006.
The Company had accumulated net derivative losses of
$4.5 million, net of taxes, in other comprehensive income
as of October 2, 2005, related to cash flow hedges. Of this
amount, $4.1 million of net derivative losses will be
reclassified into earnings within 12 months. No cash flow
hedges were discontinued during the fiscal years 2005, 2004 and
2003. Current contracts will expire within 12 months.
Net Investment Hedges
Net investment derivative instruments hedge the Company’s
equity method investment in Starbucks Coffee Japan, Ltd. to
minimize foreign currency exposure to fluctuations in the
Japanese yen. The Company had accumulated net derivative gains
of $3.3 million, net of taxes, in other comprehensive
income as of October 2, 2005, related to net investment
derivative hedges. Current contracts expire within
31 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 2, 2005 | |
|
Oct 3, 2004 | |
|
Sept 28, 2003 | |
|
|
| |
|
| |
|
| |
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassified losses into total net revenues
|
|
$ |
(843 |
) |
|
$ |
(1,488 |
) |
|
$ |
(1,719 |
) |
|
Reclassified losses into cost of sales
|
|
|
(4,535 |
) |
|
|
(761 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Net reclassified losses — cash flow hedges
|
|
|
(5,378 |
) |
|
|
(2,249 |
) |
|
|
(1,719 |
) |
Net reclassified gains — net investment hedges
|
|
|
1,058 |
|
|
|
673 |
|
|
|
1,446 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
(4,320 |
) |
|
$ |
(1,576 |
) |
|
$ |
(273 |
) |
|
|
|
|
|
|
|
|
|
|
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
Oct 2, 2005 | |
|
Oct 3, 2004 | |
|
|
| |
|
| |
Coffee:
|
|
|
|
|
|
|
|
|
|
Unroasted
|
|
$ |
319,745 |
|
|
$ |
233,903 |
|
|
Roasted
|
|
|
56,231 |
|
|
|
46,070 |
|
Other merchandise held for sale
|
|
|
109,094 |
|
|
|
81,565 |
|
Packaging and other supplies
|
|
|
61,229 |
|
|
|
61,125 |
|
|
|
|
|
|
|
|
Total
|
|
$ |
546,299 |
|
|
$ |
422,663 |
|
|
|
|
|
|
|
|
58
As of October 2, 2005, the Company had committed to
fixed-price purchase contracts for green coffee totaling
$375 million. The Company believes, based on relationships
established with its suppliers in the past, the risk of
nondelivery on such purchase commitments is remote.
|
|
Note 7: |
Equity and Other Investments |
The Company’s equity and other investments consist of the
following (in thousands):
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
Oct 2, 2005 | |
|
Oct 3, 2004 | |
|
|
| |
|
| |
Equity method investments
|
|
$ |
189,735 |
|
|
$ |
158,726 |
|
Cost method investments
|
|
|
8,920 |
|
|
|
6,208 |
|
Other investments
|
|
|
2,806 |
|
|
|
2,806 |
|
|
|
|
|
|
|
|
Total
|
|
$ |
201,461 |
|
|
$ |
167,740 |
|
|
|
|
|
|
|
|
Equity Method
The Company’s equity investees and ownership interests are
as follows:
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
Oct 2, 2005 | |
|
Oct 3, 2004 | |
|
|
| |
|
| |
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 Coffee Japan, Ltd.
|
|
|
40.1 |
% |
|
|
40.1 |
% |
Coffee Partners Hawaii
|
|
|
5.0 |
% |
|
|
5.0 |
% |
Karstadt Coffee
GmbH(1)
|
|
|
— |
|
|
|
18.0 |
% |
Sur-Andino Café
S.A.(1)
|
|
|
— |
|
|
|
15.0 |
% |
Coffee Concepts (Southern China)
Limited(1)
|
|
|
— |
|
|
|
5.0 |
% |
|
|
|
|
|
(1) |
During fiscal 2005, Starbucks acquired all or a majority of the
equity interests in these entities, which were previously
accounted for under the cost method. From the respective dates
of acquisition, the consolidation method of accounting was
applied, and for previously reported information, the equity
method of accounting was applied to record the Company’s
proportionate share of net losses. See Note 2 for
additional information. |
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
bottled Frappuccino® coffee drinks and Starbucks
DoubleShot® coffee drink. The Starbucks Ice Cream
Partnership with Dreyer’s Grand Ice Cream, Inc.,
59
develops and distributes superpremium ice creams. The remaining
entities, including Coffee Partners Hawaii, which is a general
partnership, 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.”
The goodwill is evaluated for impairment in accordance with
APB No. 18. No impairment was recorded during fiscal
years 2005, 2004 or 2003.
The Company’s share of income and losses is included in
“Income from equity investees” on the consolidated
statements of earnings. Also included is the Company’s
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 $86.1 million,
$80.7 million and $71.9 million in fiscal years 2005,
2004 and 2003, respectively. Related costs of sales, net of
eliminations, were $43.3 million, $41.2 million and
$37.5 million in fiscal years 2005, 2004 and 2003,
respectively. As of October 2, 2005 and October 3,
2004, there were $16.7 million and $15.5 million of
accounts receivable, respectively, on the consolidated balance
sheets from equity investees related to product sales and store
license fees.
As of October 2, 2005, the aggregate market value of the
Company’s investment in Starbucks Coffee Japan, Ltd., was
approximately $174.8 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, Puerto Rico,
Mexico, Cyprus and Greece. As of October 2, 2005, and
October 3, 2004, 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 2005 or 2004. During fiscal 2003, $2.0 million in
other than temporary impairment was recorded for the
Company’s equity interest in its licensed retail stores in
Israel, which were fully closed by the end of fiscal 2003.
Starbucks has the ability to acquire additional interests in
some of its cost method investees at certain intervals.
Depending on the Company’s 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 recorded at their estimated fair values. As of
October 2, 2005, and October 3, 2004, management
determined that the estimated fair values of each investment
exceeded the related carrying values (no unrealized fair value
losses). There were no realized losses generated from other than
temporary impairment during 2005, 2004 or 2003.
60
|
|
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 2, 2005 | |
|
Oct 3, 2004 | |
|
|
| |
|
| |
Land
|
|
$ |
13,833 |
|
|
$ |
13,118 |
|
Buildings
|
|
|
68,180 |
|
|
|
66,468 |
|
Leasehold improvements
|
|
|
1,947,963 |
|
|
|
1,605,907 |
|
Store equipment
|
|
|
646,792 |
|
|
|
530,798 |
|
Roasting equipment
|
|
|
168,934 |
|
|
|
152,949 |
|
Furniture, fixtures and other
|
|
|
476,372 |
|
|
|
415,307 |
|
|
|
|
|
|
|
|
|
|
|
3,322,074 |
|
|
|
2,784,547 |
|
Less accumulated depreciation and amortization
|
|
|
(1,625,564 |
) |
|
|
(1,326,266 |
) |
|
|
|
|
|
|
|
|
|
|
1,696,510 |
|
|
|
1,458,281 |
|
Work in progress
|
|
|
145,509 |
|
|
|
93,135 |
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$ |
1,842,019 |
|
|
$ |
1,551,416 |
|
|
|
|
|
|
|
|
|
|
Note 9: |
Other Intangible Assets and Goodwill |
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. As of
October 3, 2004, indefinite-lived intangibles were
$24.3 million and definite-lived intangibles, which
collectively had a remaining weighted average useful life of
approximately eight years, were $2.5 million, net of
accumulated amortization of $1.3 million. The increase in
indefinite-lived intangibles was primarily due to trademarks
acquired from Ethos. Amortization expense for definite-lived
intangibles was $0.8 million, $0.5 million and
$0.4 million during fiscal 2005, 2004 and 2003,
respectively.
The following table summarizes the estimated amortization
expense for each of the next five fiscal years (in
thousands):
|
|
|
|
|
Fiscal Year Ending |
|
|
|
|
|
2006
|
|
$ |
962 |
|
2007
|
|
|
861 |
|
2008
|
|
|
400 |
|
2009
|
|
|
343 |
|
2010
|
|
|
317 |
|
|
|
|
|
Total
|
|
$ |
2,883 |
|
|
|
|
|
61
The following table summarizes goodwill by operating segment
(in thousands):
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
Oct 2, 2005 | |
|
Oct 3, 2004 | |
|
|
| |
|
| |
United States
|
|
$ |
61,502 |
|
|
$ |
60,540 |
|
International
|
|
|
30,972 |
|
|
|
8,410 |
|
|
|
|
|
|
|
|
Total
|
|
$ |
92,474 |
|
|
$ |
68,950 |
|
|
|
|
|
|
|
|
During fiscal 2005, the United States operating segment acquired
substantially all of the assets of Ethos, and the International
operating segment increased its equity ownership in its licensed
operations in Germany, Southern China and Chile.
|
|
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 scheduled to expire in August 2010 and
is available for working capital, capital expenditures and other
corporate purposes, which may include acquisitions and share
repurchases. The Company may request an increase up to an
additional $500 million under the credit facility, provided
there is no default, which would increase total availability to
$1 billion.
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
Company’s performance under specified financial criteria.
The Facility contains provisions that require the Company to
maintain compliance with certain covenants, including the
maintenance of certain financial ratios. As of October 2,
2005, the Company was in compliance with each of these
covenants. There were borrowings of $277 million
outstanding under the Facility as of October 2, 2005, with
no outstanding letters of credit, and the weighted average
contractual interest rate was 4.0%.
In September 1999, Starbucks purchased the land and building
comprising its York County, Pennsylvania, roasting plant and
distribution facility. The total purchase price was
$12.9 million. In connection with this purchase, the
Company assumed loans totaling $7.7 million from the York
County Industrial Development Corporation. The remaining
maturities of these loans range from five to six years, with
interest rates from 0.0% to 2.0%.
Interest expense was $1.3 million, $0.4 million and
$0.3 million in fiscal 2005, 2004 and 2003, respectively.
Scheduled principal payments on long-term debt are as follows
(in thousands):
|
|
|
|
|
Fiscal Year Ending |
|
|
|
|
|
2006
|
|
$ |
748 |
|
2007
|
|
|
762 |
|
2008
|
|
|
775 |
|
2009
|
|
|
790 |
|
2010
|
|
|
337 |
|
Thereafter
|
|
|
206 |
|
|
|
|
|
Total principal payments
|
|
$ |
3,618 |
|
|
|
|
|
62
|
|
Note 11: |
Other Long-term Liabilities |
The Company’s other long-term liabilities consist of the
following (in thousands):
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
Oct 2, 2005 | |
|
Oct 3, 2004 | |
|
|
| |
|
| |
Deferred rent liabilities
|
|
$ |
166,182 |
|
|
$ |
136,552 |
|
Minority interest liabilities
|
|
|
11,153 |
|
|
|
1,802 |
|
Other
|
|
|
16,230 |
|
|
|
6,329 |
|
|
|
|
|
|
|
|
Total
|
|
$ |
193,565 |
|
|
$ |
144,683 |
|
|
|
|
|
|
|
|
The deferred rent liabilities as of October 2, 2005 and
October 3, 2004, 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.
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 2, 2005, Starbucks had less than 100% ownership in
Coffee Concepts (Southern China) Ltd. (referred to as the
Southern China operations in Note 2) as well as in Chengdu
Starbucks Coffee Company Limited and Urban Coffee Opportunities,
LLC. As of October 3, 2004 the minority interest liability
was only for 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 guarantees (see
Note 18), donation commitments, hedging instruments and the
long-term portion of capital lease obligations.
Rental expense under operating lease agreements was as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
Oct 2, 2005 | |
|
Oct 3, 2004 | |
|
Sept 28, 2003 | |
|
|
| |
|
| |
|
| |
Minimum rentals — retail stores
|
|
$ |
340,474 |
|
|
$ |
285,250 |
|
|
$ |
240,016 |
|
Minimum rentals — other
|
|
|
43,532 |
|
|
|
28,108 |
|
|
|
22,983 |
|
Contingent rentals
|
|
|
32,910 |
|
|
|
24,638 |
|
|
|
12,274 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
416,916 |
|
|
$ |
337,996 |
|
|
$ |
275,273 |
|
|
|
|
|
|
|
|
|
|
|
Minimum future rental payments under noncancelable operating
lease obligations as of October 2, 2005, are as follows
(in thousands):
|
|
|
|
|
Fiscal Year Ending |
|
|
|
|
|
2006
|
|
$ |
423,564 |
|
2007
|
|
|
412,146 |
|
2008
|
|
|
391,909 |
|
2009
|
|
|
363,347 |
|
2010
|
|
|
327,491 |
|
Thereafter
|
|
|
1,179,036 |
|
|
|
|
|
Total minimum lease payments
|
|
$ |
3,097,493 |
|
|
|
|
|
63
The Company has subleases related to certain of its operating
lease agreements. During fiscal 2005, 2004 and 2003, the Company
recognized sublease income of $4.3 million,
$4.0 million and $3.2 million, respectively.
The Company had capital lease obligations of $2.6 million
and $0.3 million as of October 2, 2005 and
October 3, 3004, respectively. At October 2, 2005, the
current portion of the total obligation was $0.8 million
and was included in “Other accrued expenses” and the
remaining long-term portion of $1.8 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.
|
|
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 15 million shares of preferred stock, none of
which was outstanding at October 2, 2005.
Under the Company’s authorized share repurchase program,
Starbucks acquired 45.1 million shares at an average price
of $25.26 for a total cost of $1.1 billion in fiscal 2005.
Starbucks acquired 10.0 million shares at an average price
of $20.43 for a total cost of $203.4 million during fiscal
2004. During fiscal 2005, the Starbucks Board of Directors
authorized additional repurchases of 30 million shares of
the Company’s common stock, and as of October 2, 2005,
there were 22.1 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
Company’s 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
Company’s 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.
64
Comprehensive income, net of related tax effects, is as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
Oct 2, 2005 | |
|
Oct 3, 2004 | |
|
Sept 28, 2003 | |
|
|
| |
|
| |
|
| |
Net earnings
|
|
$ |
494,467 |
|
|
$ |
388,973 |
|
|
$ |
265,355 |
|
|
Unrealized holding gains/(losses) on available-for-sale
securities, net of tax benefit/(provision) of $889, $618 and
($53) in 2005, 2004 and 2003, respectively
|
|
|
(1,482 |
) |
|
|
(1,005 |
) |
|
|
142 |
|
|
Unrealized holding losses on cash flow hedges, net of tax
benefit of $2,268, $2,801 and $804 in 2005, 2004 and 2003,
respectively
|
|
|
(3,861 |
) |
|
|
(4,769 |
) |
|
|
(1,369 |
) |
|
Unrealized holding gains/(losses) on net investment hedges, net
of tax benefit/(provision) of ($609), $328 and $1,903 in 2005,
2004 and 2003, respectively
|
|
|
1,037 |
|
|
|
(558 |
) |
|
|
(3,241 |
) |
|
Reclassification adjustment for losses realized in net income,
net of tax benefit of $2,751, $832 and $41 in 2005, 2004 and
2003, respectively
|
|
|
4,656 |
|
|
|
1,407 |
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain/(loss)
|
|
|
350 |
|
|
|
(4,925 |
) |
|
|
(4,426 |
) |
Translation adjustment
|
|
|
(8,677 |
) |
|
|
19,892 |
|
|
|
27,241 |
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$ |
486,140 |
|
|
$ |
403,940 |
|
|
$ |
288,170 |
|
|
|
|
|
|
|
|
|
|
|
The unfavorable translation adjustment change during fiscal year
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 changes
during fiscal years 2004 and 2003 of $19.9 million and
$27.2 million, respectively, were primarily due to the
weakening of the U.S. dollar against several currencies,
such as the British pound sterling, Euro, Canadian dollar and
Japanese yen.
The components of accumulated other comprehensive income, net of
tax, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
Oct 2, 2005 | |
|
Oct 3, 2004 | |
|
|
| |
|
| |
Net unrealized holding losses on available-for-sale securities
|
|
$ |
(651 |
) |
|
$ |
(523 |
) |
Net unrealized holding losses on hedging instruments
|
|
|
(7,786 |
) |
|
|
(8,264 |
) |
Translation adjustment
|
|
|
29,351 |
|
|
|
38,028 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
$ |
20,914 |
|
|
$ |
29,241 |
|
|
|
|
|
|
|
|
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
The Company maintains several equity incentive plans under which
it may grant nonqualified stock options, incentive stock
options, restricted stock, restricted stock units or stock
appreciation rights to employees, consultants and nonemployee
directors. Stock options have been granted at prices at or above
the fair market value on the date of grant. Options vest and
expire according to terms established at the grant date.
65
The following summarizes all stock option transactions from
September 29, 2002, through October 2, 2005 (no
restricted stock, restricted stock units or stock appreciation
rights were outstanding for any of these periods):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
|
|
|
Weighted | |
|
|
|
|
Average | |
|
Shares | |
|
Average | |
|
|
Shares | |
|
Exercise | |
|
Subject to | |
|
Exercise | |
|
|
Subject to | |
|
Price per | |
|
Exercisable | |
|
Price per | |
|
|
Options | |
|
Share | |
|
Options | |
|
Share | |
|
|
| |
|
| |
|
| |
|
| |
Outstanding, September 29, 2002
|
|
|
80,919,606 |
|
|
$ |
6.78 |
|
|
|
41,951,196 |
|
|
$ |
5.54 |
|
|
Granted
|
|
|
19,075,460 |
|
|
|
10.55 |
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(16,039,208 |
) |
|
|
5.85 |
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(5,824,966 |
) |
|
|
8.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 28, 2003
|
|
|
78,130,892 |
|
|
|
7.74 |
|
|
|
41,777,388 |
|
|
|
6.28 |
|
|
Granted
|
|
|
18,435,240 |
|
|
|
15.62 |
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(15,416,982 |
) |
|
|
7.11 |
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(4,315,930 |
) |
|
|
11.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, October 3, 2004
|
|
|
76,833,220 |
|
|
|
9.52 |
|
|
|
53,378,230 |
|
|
|
7.93 |
|
|
Granted
|
|
|
15,627,550 |
|
|
|
27.17 |
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(16,169,992 |
) |
|
|
8.08 |
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(3,831,872 |
) |
|
|
17.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, October 2, 2005
|
|
|
72,458,906 |
|
|
$ |
13.22 |
|
|
|
51,311,418 |
|
|
$ |
10.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 2, 2005, there were 78.4 million shares
of common stock available for issuance pursuant to future stock
option grants. Additional information regarding options
outstanding as of October 2, 2005, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
|
|
|
|
|
| |
|
Options Exercisable | |
|
|
|
|
|
|
Weighted | |
|
|
|
| |
|
|
|
|
|
|
Average | |
|
Weighted | |
|
|
|
Weighted | |
|
|
|
|
|
|
Remaining | |
|
Average | |
|
|
|
Average | |
|
|
Range of |
|
|
|
Contractual | |
|
Exercise | |
|
|
|
Exercise | |
|
|
Exercise Prices |
|
Shares | |
|
Life (Years) | |
|
Price | |
|
Shares | |
|
Price | |
|
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
$ 2.42 - $ 6.56 |
|
|
17,717,470 |
|
|
|
2.51 |
|
|
$ |
5.01 |
|
|
|
17,717,470 |
|
|
$ |
5.01 |
|
|
|
6.64 - 10.30 |
|
|
12,918,498 |
|
|
|
5.69 |
|
|
|
8.78 |
|
|
|
12,520,126 |
|
|
|
8.75 |
|
|
|
10.32 - 15.20 |
|
|
13,242,074 |
|
|
|
6.84 |
|
|
|
10.79 |
|
|
|
10,145,556 |
|
|
|
10.71 |
|
|
|
15.23 - 27.00 |
|
|
15,660,776 |
|
|
|
8.30 |
|
|
|
16.53 |
|
|
|
7,461,918 |
|
|
|
15.42 |
|
|
|
27.32 - 30.57 |
|
|
12,920,088 |
|
|
|
9.14 |
|
|
|
27.39 |
|
|
|
3,466,348 |
|
|
|
27.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 2.42 - $30.57 |
|
|
72,458,906 |
|
|
|
6.30 |
|
|
$ |
13.22 |
|
|
|
51,311,418 |
|
|
$ |
10.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Plans
The Company has an employee stock purchase plan which provides
that eligible employees may contribute up to 10% of their base
earnings toward the quarterly purchase of the Company’s
common stock. The employee’s purchase price is 85% of the
lesser of the fair market value of the stock on the first
business day or the last business day of the quarterly offering
period. Employees may purchase shares having a fair market value
of up to $25,000 (measured as of the first day of each quarterly
offering period for each calendar year). No
66
compensation expense is recorded in connection with the plan.
The total number of shares issuable under the plan is
32.0 million. There were 1,527,880 shares issued under
the plan during fiscal 2005 at prices ranging from $20.07 to
$21.96. There were 1,959,184 shares issued under the plan
during fiscal 2004 at prices ranging from $10.77 to $18.96.
There were 1,424,092 shares issued under the plan during
fiscal 2003 at prices ranging from $8.66 to $10.43. Since
inception of the plan, 14.8 million shares have been
purchased, leaving 17.2 million shares available for future
issuance. Of the approximately 55,100 employees eligible to
participate, approximately 18,800 were participants in the plan
as of October 2, 2005.
Starbucks also has a Save-As-You-Earn (“SAYE”) plan in
the United Kingdom that allows eligible U.K. employees to save
toward the purchase of the Company’s common stock. The
employee’s purchase price is 85% of the fair value of the
stock on the first business day of a three-year offering period.
No compensation expense was recorded in connection with the plan
during fiscal years 2005, 2004 or 2003. The total number of
shares issuable under the plan is 1.2 million. There were
25,382 shares issued under the plan during fiscal 2005 at
$7.93. There were 8,960 shares issued under the plan during
fiscal 2004 at prices ranging from $7.07 to $9.48. There were
62,588 shares issued under the plan during fiscal 2003 at
prices ranging from $5.66 to $6.01. No shares had been issued
prior to fiscal 2003 and 1.1 million shares remain
available for future issuance. During fiscal 2004, the Company
suspended future offerings under this employee stock purchase
plan, with the last offering made in December 2002 and maturing
in February 2006.
During fiscal 2004, the Company introduced a U.K. Share
Incentive Plan to replace the U.K. SAYE plan. This employee
stock purchase plan allows eligible U.K. employees to purchase
shares of common stock through payroll deductions during
six-month offering periods at the lesser of the fair market
value of the stock at the beginning or at the end of the
offering period. The Company will award one matching share for
each six shares purchased by the employee under the plan. No
compensation expense was recorded in connection with the plan.
The total number of shares issuable under the plan is
1.4 million, of which 10,732 shares were issued during
fiscal 2005 at prices ranging from $19.46 to $24.76. There were
no shares issued prior to fiscal 2005, leaving 1,389,268
available for future issuance.
Deferred Stock Plan
Starbucks has a deferred stock plan for certain key employees
that enables participants in the plan to defer receipt of
ownership of common shares from the exercise of nonqualified
stock options. The minimum deferral period is five years. As of
October 2, 2005, receipt of 3,394,200 shares was
deferred under the terms of this plan. The rights to receive
these shares, represented by common stock units, are included in
the calculation of basic and diluted earnings per share as
common stock equivalents.
Defined Contribution Plans
Starbucks maintains voluntary defined contribution plans
covering eligible employees as defined in the plan documents.
Participating employees may elect to defer and contribute a
portion of their compensation to the plans up to limits stated
in the plan documents, not to exceed the dollar amounts set by
applicable laws. For employees in the United States and Canada,
the Company matched 25% to 150% of each employee’s eligible
contribution based on years of service, up to a maximum of the
first 4% of each employee’s compensation. The
Company’s matching contributions to all plans were
approximately $12.4 million, $9.8 million and
$6.8 million in fiscal years 2005, 2004 and 2003,
respectively.
67
A reconciliation of the statutory federal income tax rate with
the Company’s effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
Oct 2, 2005 | |
|
Oct 3, 2004 | |
|
Sept 28, 2003 | |
|
|
| |
|
| |
|
| |
Statutory rate
|
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
State income taxes, net of federal income tax benefit
|
|
|
3.9 |
|
|
|
3.5 |
|
|
|
3.6 |
|
Other, net
|
|
|
(1.0 |
) |
|
|
(1.2 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
37.9 |
% |
|
|
37.3 |
% |
|
|
38.6 |
% |
|
|
|
|
|
|
|
|
|
|
The provision for income taxes consists of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
Oct 2, 2005 | |
|
Oct 3, 2004 | |
|
Sept 28, 2003 | |
|
|
| |
|
| |
|
| |
Current taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
273,178 |
|
|
$ |
188,647 |
|
|
$ |
140,138 |
|
|
State
|
|
|
51,949 |
|
|
|
36,383 |
|
|
|
25,448 |
|
|
Foreign
|
|
|
14,106 |
|
|
|
10,193 |
|
|
|
8,489 |
|
Deferred taxes, net
|
|
|
(37,256 |
) |
|
|
(3,469 |
) |
|
|
(6,958 |
) |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
301,977 |
|
|
$ |
231,754 |
|
|
$ |
167,117 |
|
|
|
|
|
|
|
|
|
|
|
U.S. income and foreign withholding taxes have not been
provided on approximately $86.4 million of cumulative
undistributed earnings of foreign subsidiaries and equity
investees. The Company intends to reinvest these earnings for
the foreseeable future. If these amounts were distributed to the
United States, in the form of dividends or otherwise, the
Company would be subject to additional U.S. income taxes.
Because of the availability of U.S. foreign tax credits,
the determination of the amount of unrecognized deferred income
tax liabilities on these earnings is not practicable.
In December 2004, the FASB issued Staff Position
No. FAS 109-1, “Application of
SFAS No. 109, Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities provided by the
American Jobs Creation Act of 2004”
(“FSP 109-1”). FSP 109-1 states that
qualified domestic production activities should be accounted for
as a special deduction under SFAS No. 109,
“Accounting for Income Taxes,” and not be treated as a
rate reduction. The provisions of FSP 109-1 are effective
immediately. The Company will qualify for a benefit beginning in
fiscal 2006, which is not expected to be material to the
Company’s financial statements.
In December 2004, the FASB issued Staff Position
No. FAS 109-2, “Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation Act of 2004”
(“FSP 109-2”). The American Jobs Creation Act
allows a special one-time dividends received deduction on the
repatriation of certain foreign earnings to a U.S. taxpayer
(repatriation provision), provided certain criteria are met. The
law allows the Company to make an election to repatriate
earnings through 2006. FSP 109-2 provides accounting and
disclosure guidance for the repatriation provision. Although
FSP 109-2 was effective upon its issuance, it allows
companies additional time beyond the enactment date to evaluate
the effects of the provision on its plan for investment or
repatriation of unremitted foreign earnings. The Company
continues to evaluate the impact of the new Act to determine
whether it will repatriate foreign earnings and the impact, if
any, this pronouncement will have on its consolidated financial
statements. As of October 2, 2005, the Company has not made
an election to repatriate earnings under this provision. The
Company may or may not
68
elect to repatriate earnings in fiscal 2006. Earnings under
consideration for repatriation range from $0 to $75 million
and the related income tax effects range from $0 to
$5 million. As provided in FSP 109-2, Starbucks has
not adjusted its tax expense or deferred tax liability to
reflect the repatriation provision.
The tax effect of temporary differences and carryforwards that
comprise significant portions of deferred tax assets and
liabilities is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
Oct 2, 2005 | |
|
Oct 3, 2004 | |
|
|
| |
|
| |
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Accrued occupancy costs
|
|
$ |
31,247 |
|
|
$ |
27,006 |
|
|
Accrued compensation and related costs
|
|
|
43,890 |
|
|
|
37,333 |
|
|
Other accrued expenses
|
|
|
20,199 |
|
|
|
14,918 |
|
|
Foreign tax credits
|
|
|
15,708 |
|
|
|
17,514 |
|
|
Other
|
|
|
13,990 |
|
|
|
16,769 |
|
|
|
|
|
|
|
|
|
Total
|
|
|
125,034 |
|
|
|
113,540 |
|
|
Valuation allowance
|
|
|
(8,078 |
) |
|
|
(929 |
) |
|
|
|
|
|
|
|
Total deferred tax asset, net of valuation allowance
|
|
|
116,956 |
|
|
|
112,611 |
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
(32,314 |
) |
|
|
(58,512 |
) |
|
Other
|
|
|
(11,600 |
) |
|
|
(12,219 |
) |
|
|
|
|
|
|
|
|
Total
|
|
|
(43,914 |
) |
|
|
(70,731 |
) |
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$ |
73,042 |
|
|
$ |
41,880 |
|
|
|
|
|
|
|
|
The Company will establish a valuation allowance if it is more
likely than not that these items will either expire before the
Company is able to realize their benefits, or that future
deductibility is uncertain. Periodically, the valuation
allowance is reviewed and adjusted based on management’s
assessments of realizable deferred tax assets. The valuation
allowance as of October 2, 2005 was related to capital loss
carryforwards and net operating losses of consolidated foreign
subsidiaries. The valuation allowance as of October 2, 2004
related solely to net operating losses of consolidated foreign
subsidiaries. The net change in the total valuation allowance
for the years ended October 2, 2005, and October 3,
2004, was an increase of $7.1 million and a decrease of
$8.4 million, respectively.
As of October 2, 2005, the Company has foreign tax credit
carryforwards of $15.7 million with expiration dates
between fiscal years 2011 and 2014. As of the end of fiscal
2005, the Company also has capital loss carryforwards of
$12.3 million, with $11.1 million and
$1.2 million expiring in fiscal years 2006 and 2011,
respectively.
Taxes currently payable of $41.5 million and
$29.2 million are included in “Accrued taxes” on
the consolidated balance sheets as of October 2, 2005, and
October 3, 2004, respectively.
The Company has established, and periodically reviews and
re-evaluates, an estimated contingent tax liability to provide
for the possibility of unfavorable outcomes in tax matters.
Contingent tax liabilities totaled $33.1 million as of
October 2, 2005, and are included in “Accrued income
taxes.” These liabilities are provided for in accordance
with the requirements of SFAS No. 5, “Accounting
for Contingencies.” The Company believes its contingent tax
liabilities are adequate in the event the tax positions are not
ultimately upheld.
69
|
|
Note 16: |
Earnings per Share |
The following table represents the calculation of net earnings
per common share — basic and diluted (in thousands,
except earnings per share):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
Oct 2, 2005 | |
|
Oct 3, 2004 | |
|
Sept 28, 2003 | |
|
|
| |
|
| |
|
| |
Net earnings
|
|
$ |
494,467 |
|
|
$ |
388,973 |
|
|
$ |
265,355 |
|
|
Weighted average common shares and common stock units
outstanding (for basic calculation)
|
|
|
789,570 |
|
|
|
794,347 |
|
|
|
781,505 |
|
|
Dilutive effect of outstanding common stock options
|
|
|
25,847 |
|
|
|
28,583 |
|
|
|
21,791 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common and common equivalent shares outstanding
(for diluted calculation)
|
|
|
815,417 |
|
|
|
822,930 |
|
|
|
803,296 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share — basic
|
|
$ |
0.63 |
|
|
$ |
0.49 |
|
|
$ |
0.34 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common and common equivalent share —
diluted
|
|
$ |
0.61 |
|
|
$ |
0.47 |
|
|
$ |
0.33 |
|
|
|
|
|
|
|
|
|
|
|
Options with exercise prices greater than the average market
price were not included in the computation of diluted earnings
per share. These options totaled 13.7 million,
0.3 million and 1.3 million in fiscal years 2005, 2004
and 2003, respectively.
|
|
Note 17: |
Related Party Transactions |
In April 2001, certain members of the Board of Directors and
other investors, organized as The Basketball Club of Seattle,
LLC (“The Basketball Club”), purchased the franchises
for The Seattle Supersonics and The Seattle Storm basketball
teams. An executive officer of the Company and member of the
Board of Directors, Howard Schultz, owns a controlling interest
in The Basketball Club. Starbucks paid approximately
$0.8 million, $0.8 million and $0.7 million
during fiscal years 2005, 2004 and 2003, respectively, for team
sponsorships and ticket purchases. Terms of the team sponsorship
agreements did not change as a result of the related party
relationship.
Prior to January 2003, a former member of the Company’s
Board of Directors served as a board member of, and owned an
indirect interest in, a privately held company that provides
Starbucks with in-store music services. Starbucks paid
$0.7 million to the privately held company for music
services during fiscal year 2003 while the related party
relationship existed.
In June 2005, a member of the Company’s Board of Directors
was appointed president and chief financial officer of Oracle
Corporation. Starbucks had a pre-existing business relationship
with Oracle related to financial systems and systems consulting
at the time of the appointment and Starbucks continued to make
payments for supplies and services subsequent to June 2005 in
the ordinary course of business. These payments totaled
approximately $2.6 million since the inception of the
related party relationship through October 2, 2005. The
Board member’s employment relationship with Oracle ended on
November 15, 2005.
|
|
Note 18: |
Commitments and Contingencies |
The Company has unconditionally guaranteed the repayment of
certain Japanese yen-denominated bank loans and related interest
and fees of an unconsolidated equity investee, Starbucks Coffee
Japan, Ltd. The guarantees continue until the loans, including
accrued interest and fees, have been paid in full, with the
final loan amount due in 2014. The maximum amount is limited to
the sum of unpaid principal and interest
70
amounts, as well as other related expenses. These amounts will
vary based on fluctuations in the yen foreign exchange rate. As
of October 2, 2005, the maximum amount of the guarantees
was approximately $9.0 million. Since there has been no
modification of these loan guarantees subsequent to the
Company’s adoption of FASB Interpretation No. 45,
“Guarantor’s Accounting and Disclosure Requirements
for Guarantees, Including Indebtedness of Others,”
Starbucks has applied the disclosure provisions only and has not
recorded the guarantee on its consolidated balance sheet.
During fiscal 2005, Starbucks entered into commitments under
which it unconditionally guaranteed its proportionate share, or
50%, of bank line of credit borrowings of certain unconsolidated
equity investees. The Company’s maximum exposure under
these commitments is approximately $4.8 million, excluding
interest and other related costs, and the majority of these
commitments expire in 2007. As of October 2, 2005, the
Company recorded $2.7 million to “Equity and other
investments” and “Other long-term liabilities” on
the consolidated balance sheet for the fair value of the
guarantee arrangements.
Coffee brewing and espresso equipment sold to customers through
Company-operated and licensed retail stores, as well as
equipment sold to the Company’s 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. The Company establishes an accrual for estimated
warranty costs at the time of sale, based on historical
experience.
The following table summarizes the activity related to product
warranty reserves during fiscal years 2005 and 2004 (in
thousands):
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
Oct 2, 2005 | |
|
Oct 3, 2004 | |
|
|
| |
|
| |
Balance at beginning of fiscal year
|
|
$ |
3,091 |
|
|
$ |
2,227 |
|
Provision for warranties issued
|
|
|
7,494 |
|
|
|
5,093 |
|
Warranty claims
|
|
|
(8,827 |
) |
|
|
(4,229 |
) |
|
|
|
|
|
|
|
Balance at end of fiscal year
|
|
$ |
1,758 |
|
|
$ |
3,091 |
|
|
|
|
|
|
|
|
Legal Proceedings
On June 3, 2004, two current employees of the Company filed
a lawsuit, entitled Sean Pendlebury and Laurel
Overton v. Starbucks Coffee Company, in the
U.S. District Court for the Southern District of Florida
claiming the Company violated requirements of the Fair Labor
Standards Act (FLSA). The suit alleges that the Company
misclassified its retail store managers as exempt from the
overtime provisions of the FLSA and that the managers are
therefore entitled to overtime compensation for any week in
which they worked more than 40 hours during the past three
years. Plaintiffs seek to represent themselves and all similarly
situated U.S. current and former store managers of the
Company. Plaintiffs seek reimbursement for an unspecified amount
of unpaid overtime compensation, liquidated damages,
attorney’s fees and costs. Plaintiffs also filed on
June 3, 2004 a motion for conditional collective action
treatment and court-supervised notice to additional putative
class members under the opt-in procedures in section 16(b)
of the FLSA. On January 3, 2005, the district court entered
an order authorizing nationwide notice of the lawsuit to all
current and former store managers employed by the Company during
the past three years. The Company filed a motion for summary
judgment as to the claims of the named plaintiffs on
September 24, 2004. The court denied that motion because
this case is in the early stages of discovery, but the court
noted that the Company may resubmit this motion at a later date.
Starbucks believes that the plaintiffs are properly classified
as exempt under the federal wage laws and that a loss in this
case is unlikely. Due to the early status of this case, the
Company cannot estimate the possible loss to the Company, if
any. No trial date currently is set. The Company intends to
vigorously defend the lawsuit.
71
On March 11, 2005, a former employee of the Company filed a
lawsuit, entitled James Falcon v. Starbucks Corporation
and Does 1 through 100, in the U.S. District Court for
the Southern District of Texas claiming that the Company
violated requirements of the FLSA. Specifically, the plaintiff
claims that the Company misclassified its retail assistant store
managers as exempt from the overtime provisions of the FLSA and
that the assistant managers are therefore entitled to overtime
compensation for any week in which they worked more than
40 hours during the past three years. On August 18,
2005, the plaintiff amended his complaint to include allegations
that he and other retail assistant store managers were not paid
overtime compensation for all hours worked in excess of forty
(40) hours in a work week after they were re-classified as
non-exempt employees in September 2002. In both claims,
Plaintiff seeks to represent himself and a putative class of all
current and former assistant store managers employed by the
Company in the United States from March 11, 2002 until the
present. He also seeks, on behalf of himself and the class,
reimbursement for an unspecified amount of unpaid overtime
compensation, liquidated damages, injunctive relief, and
attorney’s fees and costs. On September 13, 2005, the
plaintiff filed a motion for conditional collective action
treatment and court-supervised notice to all putative class
members under the opt-in procedures in section 16(b) of the
FLSA. On November 29, 2005, the court entered an order
authorizing notice to the class of the existence of the lawsuit
and their opportunity to join as plaintiffs. The Company has a
policy requiring that all non-exempt partners, including
assistant store managers, be paid for all hours worked,
including any hours worked in excess of 40 per week. The
Company also believes that this policy is, and at all relevant
times has been, communicated and followed consistently. Further,
the Company believes that the plaintiff and other assistant
store managers were properly classified as exempt under the FLSA
prior to September 2002. At this early stage of the case, the
Company cannot estimate the possible loss to the Company, if
any, and believes that a loss in this case is unlikely. No trial
date has been set. The Company intends to vigorously defend the
lawsuit.
The Company is party to various other legal proceedings arising
in the ordinary course of its business, but it is not currently
a party to any legal proceeding that management believes would
have a material adverse effect on the consolidated financial
position or results of operations of the Company.
|
|
Note 19: |
Segment Reporting |
Segment information is prepared on the same basis that the
Company’s management reviews financial information for
operational decision making purposes. Starbucks segment
reporting is based on two distinct, geographically defined
operating segments: United States and International.
United States
The Company’s United States operations (“United
States”) represent 84% of total retail revenues, 81% of
specialty revenues and 84% of total net revenues.
Company-operated retail stores sell coffee and other beverages,
whole bean coffees, complementary food, coffee brewing equipment
and merchandise. Activities outside the Company-operated retail
stores within the United States include: licensed operations,
foodservice accounts and other initiatives related to the
Company’s core businesses.
International
The Company’s International operations
(“International”) represent the remaining 16% of
retail revenues, 19% of specialty revenues and 16% of total net
revenues. International sells 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, Singapore, China,
Chile and Ireland, as well as through retail store licensing
operations and foodservice accounts in these and more than 20
other countries. International operations are in various early
stages of development and have country-specific
72
regulatory requirements that necessitate a more extensive
support organization, relative to the current levels of revenue
and operating income, than in the United States.
The accounting policies of the operating segments are the same
as those described in the summary of significant accounting
policies in Note 1. Operating income represents earnings
before “Interest and other income, net” and
“Income taxes.” Allocations of portions of corporate
overhead, interest or income taxes to the segments are not
significant. Identifiable assets by segment are those assets
used in the Company’s operations in each segment.
Unallocated corporate assets include cash and investments,
unallocated assets of the corporate headquarters and roasting
facilities, deferred taxes and certain other intangibles.
Management evaluates performance of segments based on net
revenues and operating expenses.
73
The table below presents information by operating segment for
the fiscal years noted (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United | |
|
|
|
Unallocated | |
|
|
|
|
States(1) | |
|
International(1) | |
|
Corporate(2) | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
Fiscal 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$ |
5,334,460 |
|
|
$ |
1,034,840 |
|
|
$ |
— |
|
|
$ |
6,369,300 |
|
Earnings/(loss) before income taxes
|
|
|
945,926 |
|
|
|
86,421 |
|
|
|
(235,903 |
) |
|
|
796,444 |
|
Depreciation and amortization
|
|
|
250,415 |
|
|
|
56,705 |
|
|
|
33,049 |
|
|
|
340,169 |
|
Income from equity investees
|
|
|
45,579 |
|
|
|
31,166 |
|
|
|
— |
|
|
|
76,745 |
|
Equity method investments
|
|
|
28,364 |
|
|
|
161,371 |
|
|
|
— |
|
|
|
189,735 |
|
Identifiable assets
|
|
|
1,633,721 |
|
|
|
605,750 |
|
|
|
1,274,594 |
|
|
|
3,514,065 |
|
Net impairment and disposition losses
|
|
|
16,513 |
|
|
|
4,199 |
|
|
|
477 |
|
|
|
21,189 |
|
Net capital expenditures
|
|
|
439,874 |
|
|
|
116,211 |
|
|
|
87,904 |
|
|
|
643,989 |
|
|
Fiscal 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$ |
4,490,850 |
|
|
$ |
803,397 |
|
|
$ |
— |
|
|
$ |
5,294,247 |
|
Earnings/(loss) before income taxes
|
|
|
763,326 |
|
|
|
51,665 |
|
|
|
(194,264 |
) |
|
|
620,727 |
|
Depreciation and amortization
|
|
|
210,448 |
|
|
|
46,196 |
|
|
|
32,538 |
|
|
|
289,182 |
|
Income from equity investees
|
|
|
37,453 |
|
|
|
21,618 |
|
|
|
— |
|
|
|
59,071 |
|
Equity method investments
|
|
|
14,367 |
|
|
|
144,359 |
|
|
|
— |
|
|
|
158,726 |
|
Identifiable assets
|
|
|
1,349,864 |
|
|
|
483,949 |
|
|
|
1,552,728 |
|
|
|
3,386,541 |
|
Net impairment and disposition losses
|
|
|
13,205 |
|
|
|
5,408 |
|
|
|
152 |
|
|
|
18,765 |
|
Net capital expenditures
|
|
|
314,118 |
|
|
|
66,030 |
|
|
|
32,389 |
|
|
|
412,537 |
|
|
Fiscal 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$ |
3,472,452 |
|
|
$ |
603,070 |
|
|
$ |
— |
|
|
$ |
4,075,522 |
|
Earnings/(loss) before income taxes
|
|
|
604,366 |
|
|
|
3,781 |
|
|
|
(175,675 |
) |
|
|
432,472 |
|
Depreciation and amortization
|
|
|
173,747 |
|
|
|
38,818 |
|
|
|
32,106 |
|
|
|
244,671 |
|
Income from equity investees
|
|
|
28,484 |
|
|
|
8,419 |
|
|
|
— |
|
|
|
36,903 |
|
Equity method investments
|
|
|
16,919 |
|
|
|
118,085 |
|
|
|
— |
|
|
|
135,004 |
|
Identifiable assets
|
|
|
1,221,758 |
|
|
|
383,493 |
|
|
|
1,170,861 |
|
|
|
2,776,112 |
|
Net impairment and disposition losses
|
|
|
11,173 |
|
|
|
3,752 |
|
|
|
972 |
|
|
|
15,897 |
|
Net capital expenditures
|
|
|
250,238 |
|
|
|
23,077 |
|
|
|
104,668 |
|
|
|
377,983 |
|
|
|
|
(1) |
For purposes of internal management and segment reporting,
licensed operations in Hawaii and Puerto Rico are included in
the International segment to conform with the organizational
alignment of the Company. |
|
(2) |
Unallocated corporate includes certain general and
administrative expenses, related depreciation and amortization
expenses and amounts included in “Interest and other
income, net” on the accompanying consolidated statements of
earnings. |
74
The tables below represent information by geographic area (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
Oct 2, 2005 | |
|
Oct 3, 2004 | |
|
Sept 28, 2003 | |
|
|
| |
|
| |
|
| |
Net revenues from external customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
5,346,967 |
|
|
$ |
4,501,287 |
|
|
$ |
3,480,164 |
|
|
Foreign countries
|
|
|
1,022,333 |
|
|
|
792,960 |
|
|
|
595,358 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
6,369,300 |
|
|
$ |
5,294,247 |
|
|
$ |
4,075,522 |
|
|
|
|
|
|
|
|
|
|
|
No customer accounts for 10% or more of the Company’s
revenues. Revenues from foreign countries are based on the
geographic location of the customers and consist primarily of
revenues from the United Kingdom and Canada, which together
account for approximately 79% of foreign net revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
Oct 2, 2005 | |
|
Oct 3, 2004 | |
|
Sept 28, 2003 | |
|
|
| |
|
| |
|
| |
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
1,915,218 |
|
|
$ |
1,739,913 |
|
|
$ |
1,604,546 |
|
|
Foreign countries
|
|
|
389,513 |
|
|
|
299,740 |
|
|
|
264,007 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2,304,731 |
|
|
$ |
2,039,653 |
|
|
$ |
1,868,553 |
|
|
|
|
|
|
|
|
|
|
|
Assets attributed to foreign countries are based on the country
in which those assets are located.
|
|
Note 20: |
Quarterly Financial Information (unaudited) |
Summarized quarterly financial information in fiscal 2005 and
2004 is as follows (in thousands, except earnings per
share):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
2005 quarter:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$ |
1,589,544 |
|
|
$ |
1,518,716 |
|
|
$ |
1,601,799 |
|
|
$ |
1,659,241 |
|
|
$ |
6,369,300 |
|
|
Operating income
|
|
|
227,191 |
|
|
|
157,299 |
|
|
|
199,585 |
|
|
|
196,540 |
|
|
|
780,615 |
|
|
Net earnings
|
|
|
144,710 |
|
|
|
100,482 |
|
|
|
125,528 |
|
|
|
123,747 |
|
|
|
494,467 |
|
|
Net earnings per common share — diluted
|
|
$ |
0.17 |
|
|
$ |
0.12 |
|
|
$ |
0.16 |
|
|
$ |
0.16 |
|
|
$ |
0.61 |
|
|
2004 quarter:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$ |
1,281,191 |
|
|
$ |
1,241,068 |
|
|
$ |
1,318,691 |
|
|
$ |
1,453,297 |
|
|
$ |
5,294,247 |
|
|
Operating income
|
|
|
174,526 |
|
|
|
123,707 |
|
|
|
153,105 |
|
|
|
155,249 |
|
|
|
606,587 |
|
|
Net earnings
|
|
|
110,000 |
|
|
|
78,833 |
|
|
|
97,537 |
|
|
|
102,603 |
|
|
|
388,973 |
|
|
Net earnings per common share — diluted
|
|
$ |
0.13 |
|
|
$ |
0.10 |
|
|
$ |
0.12 |
|
|
$ |
0.12 |
|
|
$ |
0.47 |
|
|
75
AUDITORS’ REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Starbucks
Corporation
Seattle, Washington
We have audited the accompanying consolidated balance sheets of
Starbucks Corporation and subsidiaries (the “Company”)
as of October 2, 2005, and October 3, 2004, and the
related consolidated statements of earnings, shareholders’
equity and cash flows for each of the three fiscal years in the
period ended October 2, 2005. These financial statements
are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Starbucks Corporation and subsidiaries as of October 2,
2005, and October 3, 2004, and the results of their
operations and their cash flows for each of the three fiscal
years in the period ended October 2, 2005, in conformity
with accounting principles generally accepted in the United
States of America.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Company’s internal control over
financial reporting as of October 2, 2005, based on
criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
December 16, 2005 expressed an unqualified opinion on
management’s assessment of the effectiveness of the
Company’s internal control over financial reporting and an
unqualified opinion of the effectiveness of the Company’s
internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
December 16, 2005
76
AUDITORS’ REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Starbucks
Corporation
Seattle, Washington
We have audited management’s assessment, included in the
accompanying Report of Management on Internal Control over
Financial Reporting, that Starbucks Corporation and subsidiaries
(the “Company”) maintained effective internal control
over financial reporting as of October 2, 2005, based on
criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company’s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management’s
assessment and an opinion on the effectiveness of the
Company’s internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A company’s internal control over financial reporting is a
process designed by, or under the supervision of, the
company’s principal executive and principal financial
officers, or persons performing similar functions, and effected
by the company’s board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, management’s assessment that the Company
maintained effective internal control over financial reporting
as of October 2, 2005, is fairly stated, in all material
respects, based on criteria established in Internal
Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of October 2, 2005, based on criteria
established in Internal
77
Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the fiscal year
ended October 2, 2005 of the Company and our report dated
December 16, 2005 expressed an unqualified opinion on those
financial statements.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
December 16, 2005
78
|
|
Item 9. |
Changes in and Disagreements with Independent Registered
Public Accounting Firm on Accounting and Financial
Disclosure |
Not applicable.
|
|
Item 9A. |
Controls and Procedures |
Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and
with the participation of the Company’s management,
including the chief executive officer and the chief financial
officer, of the effectiveness of the design and operation of the
disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). Based
upon that evaluation, the Company’s chief executive officer
and chief financial officer concluded that the Company’s
disclosure controls and procedures are effective, as of the end
of the period covered by this Report (October 2, 2005), in
ensuring that material information relating to Starbucks
Corporation, including its consolidated subsidiaries, required
to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
SEC rules and forms. There were no changes in the Company’s
internal control over financial reporting during the quarter
ended October 2, 2005, that have materially affected, or
are reasonably likely to materially affect, the Company’s
internal control over financial reporting.
Report of Management on Internal Control over Financial
Reporting
The management of Starbucks is responsible for establishing and
maintaining adequate internal control over financial reporting.
Internal control over financial reporting is a process to
provide reasonable assurance regarding the reliability of our
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 our transactions; providing reasonable assurance
that transactions are recorded as necessary for preparation of
our financial statements; providing reasonable assurance that
receipts and expenditures of company assets are made in
accordance with management authorization; and providing
reasonable assurance that unauthorized acquisition, use or
disposition of company assets that could have a material effect
on our 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 our financial
statements would be prevented or detected.
Management conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework
and criteria established in Internal Control —
Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission. This evaluation
included review of the documentation of controls, evaluation of
the design effectiveness of controls, testing of the operating
effectiveness of controls and a conclusion on this evaluation.
Based on this evaluation, management concluded that the
Company’s internal control over financial reporting was
effective as of October 2, 2005. Management’s
assessment of the effectiveness of our internal control over
financial reporting as of October 2, 2005 has been audited
by Deloitte & Touche LLP, an independent registered
public accounting firm, as stated in their report which is
included in Item 8 of this Report.
|
|
Item 9B. |
Other Information |
None.
79
PART III
As used in this Part III, “Starbucks” and the
“Company” mean Starbucks Corporation.
|
|
Item 10. |
Directors and Executive Officers of the Registrant |
The information required by this item regarding the
Company’s directors is incorporated herein by reference to
the sections entitled “PROPOSAL 1 — ELECTION
OF DIRECTORS” and “EXECUTIVE COMPENSATION —
Section 16(a) Beneficial Ownership Reporting
Compliance” in the Company’s definitive Proxy
Statement for the Annual Meeting of Shareholders to be held on
February 8, 2006 (the “Proxy Statement”).
Information regarding the Company’s executive officers is
set forth in Item 4 of Part 1 of this Report under the
caption “Executive Officers of the Registrant.”
The Company adopted a code of ethics applicable to its chief
executive officer, chief financial officer, controller and other
finance leaders, which is a “code of ethics” as
defined by applicable rules of the Securities and Exchange
Commission. This code is publicly available on the
Company’s website at
www.starbucks.com/aboutus/corporate — governance.asp.
If the Company makes any amendments to this code other than
technical, administrative or other non-substantive amendments,
or grants any waivers, including implicit waivers, from a
provision of this code to the Company’s chief executive
officer, chief financial officer or controller, the Company will
disclose the nature of the amendment or waiver, its effective
date and to whom it applies on its website or in a report on
Form 8-K filed with the Securities and Exchange Commission.
|
|
Item 11. |
Executive Compensation |
The information required by this item is incorporated by
reference to the section entitled “EXECUTIVE
COMPENSATION” in the Proxy Statement.
|
|
Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters |
The information required by this item is incorporated by
reference to the sections entitled “BENEFICIAL OWNERSHIP OF
COMMON STOCK” and “EXECUTIVE COMPENSATION —
Equity Compensation Plan Information” in the Proxy
Statement.
|
|
Item 13. |
Certain Relationships and Related Transactions |
The information required by this item is incorporated by
reference to the section entitled “EXECUTIVE
COMPENSATION — Certain Relationships and Related
Transactions” in the Proxy Statement.
|
|
Item 14. |
Principal Accountant Fees and Services |
The information required by this item is incorporated by
reference to the sections entitled “Independent Registered
Public Accounting Firm Fees” and “Policy on Audit
Committee Pre-Approval of Audit and Permissible Non-Audit
Services of the Independent Registered Public Accounting
Firm” in the Proxy Statement.
80
PART IV
|
|
Item 15. |
Exhibits and Financial Statement Schedules |
(a) The following documents are filed as a part of this
Form 10-K:
The following financial statements are included in Part II,
Item 8 of this Form 10-K:
|
|
|
|
• |
Consolidated Statements of Earnings for the fiscal years ended
October 2, 2005, October 3, 2004, and
September 28, 2003; |
|
|
• |
Consolidated Balance Sheets as of October 2, 2005, and
October 3, 2004; |
|
|
• |
Consolidated Statements of Cash Flows for the fiscal years ended
October 2, 2005, October 3, 2004, and
September 28, 2003; |
|
|
• |
Consolidated Statements of Shareholders’ Equity for the
fiscal years ended October 2, 2005, October 3, 2004,
and September 28, 2003; |
|
|
• |
Notes to Consolidated Financial Statements; and |
|
|
• |
Reports of Independent Registered Public Accounting Firm |
|
|
2. |
Financial Statement Schedules |
Financial statement schedules are omitted because they are not
required or are not applicable, or the required information is
provided in the consolidated financial statements or notes
described in Item 15(a)(1) above.
The Exhibits listed in the Index to Exhibits, which appears
immediately following the signature page and is incorporated
herein by reference, are filed as part of this Form 10-K.
81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
|
|
|
|
|
|
Starbucks Corporation
|
|
December 16, 2005
|
|
By: |
|
/s/ James L. Donald
James
L. Donald
president and chief executive officer |
POWER OF ATTORNEY
Know all persons by these presents, that each person whose
signature appears below constitutes and appoints Howard Schultz,
James L. Donald and Michael Casey, and each of them, as such
person’s true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for such person
and in such person’s name, place and stead, in any and all
capacities, to sign any and all amendments to this Report, and
to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as
such person might or could do in person, hereby ratifying and
confirming that all said attorneys-in-fact and agents, or any of
them or their or such person’s substitute or substitutes,
may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
By: |
|
/s/ Howard Schultz
Howard
Schultz |
|
chairman of the Board of Directors |
|
December 16, 2005 |
|
By: |
|
/s/ James L. Donald
James
L. Donald |
|
president and chief executive officer, director |
|
December 16, 2005 |
|
By: |
|
/s/ Michael Casey
Michael
Casey |
|
executive vice president, chief financial officer and chief
administrative officer (principal financial officer and
principal accounting officer) |
|
December 16, 2005 |
|
By: |
|
/s/ Barbara Bass
Barbara
Bass |
|
director |
|
December 16, 2005 |
82
|
|
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
By: |
|
/s/ Howard Behar
Howard
Behar |
|
director |
|
December 16, 2005 |
|
By: |
|
/s/ William W. Bradley
William
W. Bradley |
|
director |
|
December 16, 2005 |
|
By: |
|
/s/ Mellody Hobson
Mellody
Hobson |
|
director |
|
December 16, 2005 |
|
By: |
|
/s/ Olden Lee
Olden
Lee |
|
director |
|
December 16, 2005 |
|
By: |
|
/s/ Gregory B. Maffei
Gregory
B. Maffei |
|
director |
|
December 16, 2005 |
|
By: |
|
/s/ James G. Shennan
Jr.
James
G. Shennan Jr. |
|
director |
|
December 16, 2005 |
|
By: |
|
/s/ Javier G. Teruel
Javier
G. Teruel |
|
director |
|
December 16, 2005 |
|
By: |
|
/s/ Myron E.
Ullman III
Myron
E. Ullman III |
|
director |
|
December 16, 2005 |
|
By: |
|
/s/ Craig E. Weatherup
Craig
E. Weatherup |
|
director |
|
December 16, 2005 |
83
INDEX TO EXHIBITS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference | |
|
|
|
|
|
|
| |
|
|
Exhibit | |
|
|
|
|
|
Date of | |
|
Exhibit | |
|
Filed | |
Number | |
|
Exhibit Description |
|
Form |
|
File No. |
|
First Filing | |
|
Number | |
|
Herewith | |
| |
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
3 |
.1 |
|
Restated Articles of Incorporation of Starbucks Corporation |
|
10-Q |
|
0-20322 |
|
|
05/16/01 |
|
|
|
3 |
.1 |
|
|
|
|
|
3 |
.1.1 |
|
Articles of Amendment to Restated Articles of Incorporation of
Starbucks Corporation |
|
8-K |
|
0-20322 |
|
|
09/22/05 |
|
|
|
3 |
.1 |
|
|
|
|
|
3 |
.2 |
|
Amended and Restated Bylaws of Starbucks Corporation |
|
10-Q |
|
0-20322 |
|
|
02/04/04 |
|
|
|
3 |
.1 |
|
|
|
|
|
10 |
.1* |
|
Starbucks Corporation Amended and Restated Key Employee Stock
Option Plan — 1994 |
|
10-K |
|
0-20322 |
|
|
12/23/03 |
|
|
|
10 |
.1 |
|
|
|
|
|
10 |
.2* |
|
Starbucks Corporation Amended and Restated 1989 Stock Option
Plan for Non-Employee Directors |
|
10-K |
|
0-20322 |
|
|
12/23/03 |
|
|
|
10 |
.2 |
|
|
|
|
|
10 |
.3 |
|
Starbucks Corporation 1991 Company-Wide Stock Option Plan, as
amended and restated through November 20, 2003 |
|
10-K |
|
0-20322 |
|
|
12/23/03 |
|
|
|
10 |
.3 |
|
|
|
|
|
10 |
.3.1 |
|
Starbucks Corporation 1991 Company-Wide Stock Option
Plan — Rules of the UK Sub-Plan, as amended and
restated through November 20, 2003 |
|
10-K |
|
0-20322 |
|
|
12/23/03 |
|
|
|
10 |
.3.1 |
|
|
|
|
|
10 |
.4* |
|
Starbucks Corporation Employee Stock Purchase Plan —
1995 as amended and restated through June 30, 2000 |
|
10-K |
|
0-20322 |
|
|
12/22/00 |
|
|
|
10 |
.4 |
|
|
|
|
|
10 |
.5 |
|
Amended and Restated Lease, dated as of January 1, 2001,
between First and Utah Street Associates, L.P. and Starbucks
Corporation |
|
10-K |
|
0-20322 |
|
|
12/20/01 |
|
|
|
10 |
.5 |
|
|
|
|
|
10 |
.6* |
|
Starbucks Corporation Executive Management Bonus Plan |
|
8-K |
|
0-20322 |
|
|
11/22/04 |
|
|
|
10 |
.1 |
|
|
|
|
|
10 |
.7* |
|
Starbucks Corporation Management Deferred Compensation Plan |
|
S-8 |
|
333-65181 |
|
|
10/01/98 |
|
|
|
4 |
.1 |
|
|
|
|
|
10 |
.8* |
|
Starbucks Corporation 1997 Deferred Stock Plan |
|
10-K |
|
0-20322 |
|
|
12/23/99 |
|
|
|
10 |
.17 |
|
|
|
|
|
10 |
.9 |
|
Starbucks Corporation UK Share Save Plan |
|
10-K |
|
0-20322 |
|
|
12/23/03 |
|
|
|
10 |
.9 |
|
|
|
|
|
10 |
.10* |
|
Starbucks Corporation Directors Deferred Compensation Plan, as
amended and restated effective September 29, 2003 |
|
10-K |
|
0-20322 |
|
|
12/23/03 |
|
|
|
10 |
.10 |
|
|
|
|
84
|
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Incorporated by Reference | |
|
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| |
|
|
Exhibit | |
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|
Date of | |
|
Exhibit | |
|
Filed | |
Number | |
|
Exhibit Description |
|
Form |
|
File No. |
|
First Filing | |
|
Number | |
|
Herewith | |
| |
|
|
|
|
|
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| |
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| |
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| |
|
10 |
.11* |
|
Letter Agreement dated as of May 6, 2003, between Starbucks
Corporation and Howard Behar |
|
10-K |
|
0-20322 |
|
|
12/23/03 |
|
|
|
10 |
.11 |
|
|
|
|
|
10 |
.12 |
|
Starbucks Corporation UK Share Incentive Plan |
|
S-8 |
|
333-114090 |
|
|
03/31/04 |
|
|
|
10 |
.1 |
|
|
|
|
|
10 |
.13* |
|
Starbucks Corporation 2005 Long-Term Equity Incentive Plan |
|
8-K |
|
0-20322 |
|
|
02/10/05 |
|
|
|
10 |
.1 |
|
|
|
|
|
10 |
.14* |
|
2005 Key Employee Sub-Plan to the Starbucks Corporation 2005
Long-Term Equity Incentive Plan |
|
8-K |
|
0-20322 |
|
|
02/10/05 |
|
|
|
10 |
.2 |
|
|
|
|
|
10 |
.15* |
|
2005 Non-Employee Director Sub-Plan to the Starbucks Corporation
2005 Long-Term Equity Incentive Plan |
|
8-K |
|
0-20322 |
|
|
02/10/05 |
|
|
|
10 |
.3 |
|
|
|
|
|
10 |
.16* |
|
Stock Option Grant Agreement for Purchase of Stock under the
2005 Key Employee Sub-Plan to the Starbucks Corporation 2005
Long-Term Equity Incentive Plan |
|
8-K |
|
0-20322 |
|
|
02/10/05 |
|
|
|
10 |
.4 |
|
|
|
|
|
10 |
.17* |
|
Stock Option Grant Agreement for Purchase of Stock under the
2005 Non-Employee Director Sub-Plan to the Starbucks Corporation
2005 Long-Term Equity Incentive Plan |
|
8-K |
|
0-20322 |
|
|
02/10/05 |
|
|
|
10 |
.5 |
|
|
|
|
|
10 |
.18* |
|
Letter Agreement dated as of February 11, 2005 by and among
the Company, the Schultz Irrevocable Trust and the Howard D.
Schultz Irrevocable Trust |
|
10-Q |
|
0-20322 |
|
|
02/16/05 |
|
|
|
10 |
.1 |
|
|
|
|
|
10 |
.19* |
|
Letter Agreement dated March 30, 2005 between Starbucks
Corporation and James L. Donald |
|
8-K/A |
|
0-20322 |
|
|
04/07/05 |
|
|
|
10 |
.1 |
|
|
|
|
|
10 |
.20* |
|
Letter Agreement dated May 25, 2005 between Starbucks
Corporation and Michael Casey |
|
8-K |
|
0-20322 |
|
|
05/27/05 |
|
|
|
10 |
.1 |
|
|
|
|
|
10 |
.21* |
|
Letter Agreement dated May 25, 2005 between Starbucks
Corporation and David A. Pace |
|
8-K |
|
0-20322 |
|
|
05/27/05 |
|
|
|
10 |
.2 |
|
|
|
|
|
10 |
.22 |
|
2005 Company-Wide Sub-Plan to the Starbucks Corporation 2005
Long-Term Equity Incentive Plan |
|
10-Q |
|
0-20322 |
|
|
08/10/05 |
|
|
|
10 |
.1 |
|
|
|
|
|
10 |
.23 |
|
Stock Option Grant Agreement for Purchase of Stock under the
2005 Company-Wide Sub-Plan to the Starbucks Corporation 2005
Long-Term Equity Incentive Plan |
|
10-Q |
|
0-20322 |
|
|
08/10/05 |
|
|
|
10 |
.2 |
|
|
|
|
85
|
|
|
|
|
|
|
|
|
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|
Incorporated by Reference | |
|
|
|
|
|
|
| |
|
|
Exhibit | |
|
|
|
|
|
Date of | |
|
Exhibit | |
|
Filed | |
Number | |
|
Exhibit Description |
|
Form |
|
File No. |
|
First Filing | |
|
Number | |
|
Herewith | |
| |
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
10 |
.24 |
|
Credit Agreement dated August 12, 2005 among Starbucks
Corporation, Bank of America, N.A., as Administrative Agent,
Swing Line Lender and L/ C Issuer, Wachovia Bank N.A. and
Citibank, N.A., as Co-Documentation Agents, Banc of America
Securities LLC and Wells Fargo Bank, N.A., as Joint Lead
Arrangers and Joint Book Managers, Wells Fargo Bank, N.A., as
Syndication Agent, and the other Lenders party thereto |
|
8-K |
|
0-20322 |
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|
08/15/05 |
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|
|
10 |
.1 |
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|
|
|
|
21 |
|
|
Subsidiaries of Starbucks Corporation |
|
— |
|
— |
|
|
— |
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|
|
— |
|
|
|
X |
|
|
23 |
|
|
Consent of Independent Registered Public Accounting Firm |
|
— |
|
— |
|
|
— |
|
|
|
— |
|
|
|
X |
|
|
31 |
.1 |
|
Certification of Principal Executive Officer Pursuant to
Rule 13a-14 of the Securities Exchange Act of 1934, As
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 |
|
— |
|
— |
|
|
— |
|
|
|
— |
|
|
|
X |
|
|
31 |
.2 |
|
Certification of Principal Financial Officer Pursuant to
Rule 13a-14 of the Securities Exchange Act of 1934, As
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 |
|
— |
|
— |
|
|
— |
|
|
|
— |
|
|
|
X |
|
|
32 |
.1 |
|
Certification of Principal Executive Officer Pursuant to
18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
|
— |
|
— |
|
|
— |
|
|
|
— |
|
|
|
X |
|
|
32 |
.2 |
|
Certification of Principal Financial Officer Pursuant to
18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
|
— |
|
— |
|
|
— |
|
|
|
— |
|
|
|
X |
|
|
|
* |
Denotes a compensatory plan, contract or arrangement, in which
the Company’s directors or executive officers may
participate. |
86