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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31,December 29, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ___ to ___
Commission File Number 0-20322
-----------------------------
STARBUCKS CORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-1325671
(StateState or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2401 Utah Avenue South, Seattle, Washington 98134
(Address of principal executive office, including zip code)
(206) 447-1575
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2)
has been subject to such filing requirements for the
past 90 days.
YES [X] NO [ ]
As of MayFebruary 1, 1996,1997, there were 75,687,78178,033,307 shares of
the registrant's Common Stock outstanding.
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STARBUCKS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements. . . . . . . . . . . . . . . . .33
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. . .10. . . . . . . . . . . . 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . .15
Item 4. Submission of Matters to a Vote of Security Holders.15
Item 5. Other Information. . . . . . . . . . . . . . . . . .1512
Item 6. Exhibits and Reports on Form 8-K.8-K.. . . . . . . . . . .1512
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . .1713
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except earnings per share)
Three Months Ended
Six Months Ended
MarchDecember 29, December 31, April 2, March 31, April 2,
1996 1995
1996 1995
(13 Weeks) (13 Weeks)
(26 Weeks) (26 Weeks)
- ----------------------------------------------------------------------------------------------------------------------------------------
Net sales $153,609 $101,113 $323,145 $216,659revenues $239,142 $169,537
Cost of sales and related
occupancy costs 76,938 45,639 163,456 97,622115,559 86,518
Store operating expenses 47,002 33,882 94,237 69,34370,101 47,234
Other operating expenses 3,788 2,875 9,575 6,6027,779 5,787
Depreciation and amortization 8,606 5,152 16,161 9,61611,476 7,555
General and administrative
expenses 9,720 6,489 16,358 12,23612,920 6,639
- ----------------------------------------------------------------------------------------------------------------------------------------
Operating income 7,555 7,076 23,358 21,24021,307 15,804
Interest and other income 2,857 2,371 5,116 3,357
Gain on sale of investment 9,201 0 9,201 03,895 2,258
Interest expense (2,709) (926) (4,959) (1,876)(1,804) (2,250)
- ----------------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 16,904 8,521 32,716 22,72123,398 15,812
Income taxes 6,513 3,391 12,759 8,9709,008 6,246
- ----------------------------------------------------------------------------------------------------------------------------------------
Net earnings $10,391 $5,130 $19,957 $13,751
=========================================================================$14,390 $9,566
===============================================================
Net earnings per common and
common equivalent share $0.14 $0.07 $0.27 $0.20
=========================================================================-
primary $0.18 $0.13
===============================================================
Net earnings per common and
common equivalent share -
fully diluted $0.18 $0.13
===============================================================
Weighted average common and
common equivalent shares
outstanding 74,429 72,325 74,400 69,406- primary 81,341 73,928
Weighted average common and
common equivalent shares
outstanding - fully diluted 88,439 79,415
See notes to consolidated financial statements
See notes to consolidated financial statements.
3
STARBUCKS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
March 31, October 1,
December 29, September 29,
1996 19951996
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ASSETS
ASSETS
Current assets:
Cash and cash equivalents $ 131,129 $20,944127,754 $ 126,215
Short-term investments 91,870 41,507121,522 103,221
Accounts and notes receivable (net of
allowance for doubtful accounts
of $225 and $242, respectively) 12,116 10,15718,356 17,621
Inventories 90,806 123,65763,410 83,370
Prepaid expenses and other
current assets 4,454 4,7466,899 6,534
Deferred income taxes, net 4,693 4,6442,943 2,580
- ----------------------------------------------------------------------------------------------------------------------------------
Total current assets 335,068 205,655340,884 339,541
Joint ventures and
equity investments 3,784 11,6283,118 4,401
Property, plant and
equipment, net 302,696 244,728394,140 369,477
Deposits and other assets 10,404 6,16714,629 13,194
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 651,952 $468,178
===================================================================752,771 $ 726,613
===============================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 19,769 $28,66829,827 $ 38,034
Checks drawn in excess of
bank balances 11,676 13,13823,050 16,241
Accrued compensation and
related costs 10,602 12,78615,744 15,001
Accrued interest payable 3,759 6501,212 3,004
Other accrued expenses 18,617 15,80429,847 26,068
Income taxes payable 980 06,609 2,743
- ---------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 65,403 71,046106,289 101,091
Deferred income taxes, net 5,073 3,4908,421 7,114
Capital lease obligation 766 1,0131,411 1,728
Convertible subordinated
debentures 244,981 80,398165,020 165,020
Shareholders' equity:
Common Stock, no par value
-- 150,000,000 shares
authorized; 71,394,05077,983,963
and 70,956,99077,583,868 shares,
respectively, issued
and outstanding 269,729 265,679366,773 361,309
Retained earnings
including cumulative
translation adjustment
of $(877)$(316) and $(435)$(776),
respectively, and net
unrealized holding gain(loss)gain on
investments of $(35)$1,702 and
$34,$2,046, respectively 66,000 46,552104,857 90,351
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Total shareholders' equity 335,729 312,231471,630 451,660
- ---------------------------------------------------------------------------------------------------------------------------------
Total $ 651,952 $468,178
==================================================================
752,771 $ 726,613
===============================================================
See notes to consolidated financial statements
4
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six
Three Months Ended
- ----------------------------------------------------------------------
March---------------------------------------------------------------
December 29, December 31, April 2,
1996 1995
(26(13 Weeks) (26(13 Weeks)
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Operating activities:
Net earnings $ 19,957 $13,75114,390 $ 9,566
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Depreciation and amortization 17,647 10,468
Loss on12,503 8,200
Provision for store remodels
and asset disposals 355 59127 592
Deferred income taxes, net 1,534 (50)1,159 1,249
Equity in losses of investees 550 334
Gain on sale of equity investment (9,201) 01,318 734
Cash provided (used) by changes in
operating assets and liabilities:
Accounts and notes receivable (1,962) (3,204)(733) 335
Inventories 32,833 (11,115)19,976 14,580
Prepaid expenses and other
current assets 289 (278)(362) 973
Accounts payable (9,000) 8,131(8,104) (8,177)
Income taxes payable 1,031 3,4743,860 4,048
Accrued compensation and
related costs (2,193) 1,537755 (3,076)
Accrued interest payable 3,109 15(1,792) 2,254
Other accrued expenses 2,681 3,0953,693 2,921
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Net cash provided by
operating activities 57,630 26,21746,790 34,199
Investing activities:
Purchase of short-term investments (89,930) (108,331)(51,442) (49,098)
Sale of short-term investments 3,488 7,741882 23,595
Maturity of short-term investments 35,966 8,36031,700 12,499
Investments in joint ventures and
equity securities (4,040) (11,000)
Proceeds from sale of equity investments 20,535 0(35) (1,500)
Additions to property, plant
and equipment (75,806) (56,032)(36,893) (38,347)
Increase in deposits and
other assets (638) (1,026)(1,578) (316)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing
activities (110,425) (160,288)(57,366) (53,167)
Financing activities:
DecreaseIncrease in cash provided by
checks drawn in excess of
bank balances (1,473) (6,771)6,823 927
Proceeds from sale of
convertible debentures 0 165,020 0
Debt issuance costs (4,040) 0 Proceeds from notes payable 0 10,000
Principal repayments of notes payable 0 (10,000)
Net proceeds from sale of common stock 0 163,873(4,019
Proceeds from sale of common
stock under employee stock
purchase plan 768 0684 375
Exercise of stock options and warrants 1,935 6862,868 587
Tax benefit from exercise of
non-qualified stock options 921 2,6031,912 246
Payments on capital lease
obligation (125) 0
- -------------------------------------------------------------------(217) (62)
--------------------------------------------------------------
Net cash provided by financing
activities 163,006 160,39112,070 163,074
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Balance, carried forward 110,211 26,320
1,494 144,106
(Continued on next page)
5
Balance, brought forward 110,211 26,3201,494 144,106
Effect of exchange rate changes
on cash and cash equivalents (26) (49)45 (36)
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and
cash equivalents 110,185 26,2711,539 144,070
Cash and cash equivalents:
Beginning of the period 126,215 20,944
8,394
- ---------------------------------------------------------------------------------------------------------------------------------
End of the period $ 131,129 $34,665
==================================================================127,754 $ 165,014
================================================================
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 1,895 $1,8413,555 $ 72
Income taxes 8,608 2,8852,071 354
Noncash financing and investing
transactions:
Net unrealized holding holding(loss)gain
on investments 113 93
Conversion(344) 28
Conversions of convertible debt into
common stock, net of unamortized
issue costs 426 0
and accrued interest 0 418
See notes to consolidated financial statements
6
STARBUCKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the 13 Weeks Ended December 29,1996 and
26 Weeks Ended March 31, 1996 and
April 2, 1995December 31,1995
(UNAUDITED)
NOTE 1. FINANCIAL STATEMENT PREPARATION:
The consolidated financial statements as of March 31,December 29,
1996 and October 1, 1995September 29, 1996 and for the 13-week and 26-week periods
ended March 31,December 29, 1996 and April 2,December 31, 1995 have been
prepared by Starbucks Corporation ("Starbucks" or the
"Company") pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). The
financial information for the 13-week and 26-week
periods ended March 31,December
29, 1996 and April 2,December 31, 1995 is unaudited, but, in the
opinion of management, reflects all adjustments (consisting
only of normal recurring adjustments and accruals) necessary
for a fair presentation of the financial position, results
of operations and cash flows for the interim periods. The
financial information as of October 1, 1995,September 29, 1996 is derived
from the Company's consolidated financial statements and
notes thereto contained in the Company's Annual Report to Shareholders
incorporated by reference in the Company's Annual Report on
Form 10-K10-K/A for the year ended October 1, 1995,September 29, 1996 and should
be read in conjunction with such financial statements.
Certain reclassifications of prior year's balances have been
made to conform to the current format.
The results of operations for the 13-week and 26-week periodsperiod ended
March 31, 1996,December 29,1996, are not necessarily indicative of the
Company's results of operations that may be achieved for the entire
fiscal year ending September 29, 1996.28, 1997.
NOTE 2. JOINT VENTURES AND EQUITY INVESTMENTS:
On March 31, 1995, the Company invested $11.3 million in cash for
shares of Noah's New York Bagels, Inc. ("Noah's") Series B
Preferred Stock, representing approximately 20% ownership in
Noah's. On February 1, 1996, Noah's was merged with Einstein
Brothers Bagels, Inc. ("Einstein Brothers"), a retailer operating
primarily in the Eastern United States. In exchange for its
investment in Noah's, the Company received $20.5 million in cash.
Concurrently, the Company purchased $1.8 million of Einstein
Brothers common stock. This investment will be accounted for
under the cost method. The Company realized a $9.2 million pre-
tax gain ($5.6 million net of tax) on this transaction.
During the second fiscal quarter, the Company modified its
50/50 joint venture agreement with Pepsi Cola Company to
revise the allocation of start-up risks and expenses
between the partners.
NOTE 3. EARNINGS PER SHARE:
EarningsThe computation of primary earnings per share is based on
the weighted average number of shares outstanding during the
period after considerationplus dilutive common stock equivalents consisting
primarily of certain shares subject to stock options. The
computation of fully-diluted
earnings per share assumes conversion of the dilutive
effect, if any, of stock options granted. The Company's
4-1/2%
Convertible Subordinated Debentures due 2003 and 4-1/4%
Convertible Subordinated Debentures due 2002 will be included in
fully diluted earnings per share,convertible subordinated debentures
using the "if converted" method, when such securities are
dilutive.
7dilutive, with net income adjusted for the after-tax
interest expense and amortization of issuance costs
applicable to these debentures.
NOTE 4.3. INVENTORIES:
Inventories consist of the following (in thousands):
March 31, October 1,December 29, September 29,
1996 19951996
- -----------------------------------------------------------------------------------------------------------------------------
Coffee:
Unroasted $ 49,33822,342 $ 75,97537,127
Roasted 8,517 11,61210,930 9,753
Other merchandise held for sale 28,419 32,73123,661 29,518
Packaging and other supplies 4,532 3,3396,477 6,972
- -------------------------------------------------------------
Total---------------------------------------------------------------
$ 90,80663,410 $ 123,657
=============================================================83,370
===============================================================
As of March 31,December 29, 1996, the Company had fixed price
purchase commitments for green coffee totaling
approximately $28$30 million.
7
NOTE 5.4. PROPERTY, PLANT, AND EQUIPMENT:
Property, plant, and equipment consist of the following
(in thousands):
March 31, October 1,December 29, September 29,
1996 19951996
- -----------------------------------------------------------------------------------------------------------------------------
Land $ 3,602 $ 3,602
Building 8,338 8,338
Leasehold improvements 210,869 162,948275,146 255,567
Roasting and store equipment 100,676 82,490135,995 120,575
Furniture, fixtures and other 30,383 24,60245,316 38,794
- --------------------------------------------------------------
353,868 281,980---------------------------------------------------------------
468,397 426,876
Less accumulated depreciation (68,277) (52,215)and
amortization (100,105) (88,003)
- --------------------------------------------------------------
285,591 229,765---------------------------------------------------------------
368,292 338,873
Construction in process 17,105 14,96325,848 30,604
- --------------------------------------------------------------
Total---------------------------------------------------------------
$ 302,696394,140 $ 244,728
==============================================================369,477
===============================================================
NOTE 6. NEW ACCOUNTING STANDARD:
In October 1995, the Financial Accounting Standards Board issued
Statement No. 123, Accounting for Stock-Based Compensation. This
pronouncement establishes the accounting and reporting standards
for stock-based employee compensation plans, including: stock
purchase plans, stock options, and stock appreciation rights.
This new standard defines a fair value-based method of accounting
for these equity instruments. This method measures compensation
cost based on the value of the award and recognizes that cost
over the service period. Companies may elect to adopt this
standard or to continue accounting for these types of equity
instruments under current guidance, APB Opinion No. 25,
Accounting for Stock Issued to Employees. Companies which elect
to continue using the rules of Opinion 25 must make pro forma
disclosures of net income and earnings per share as if this new
statement had been applied. This new standard is required for
fiscal years beginning after December 15, 1995.
The Company is in the process of evaluating this statement and
its impact on the Company's financial condition and results of
operations.
8
NOTE 7. SUBSEQUENT EVENTS:
On April 10, 1996, the Company called for redemption its 4-1/2%
Convertible Subordinated Debentures due 2003. In total,
approximately $80.5 million in principal was converted into the
Company's common stock prior to the redemption date, constituting
substantially all of the outstanding principal balance.
On April 30, 1996, the Company allowed its $30 million revolving
line of credit to expire. There had been no advances on the line
since November 1994.
9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
During the 13-week period ending December 29, 1996,
Starbucks Corporation ("Starbucks" or the "Company")
derivesderived approximately 86% of net salesrevenues from its
Company-operated retail store operations.stores. The Company's specialty
sales operations, which include royalties, fees and
mail orderproduct sales to wholesale customers, licensees, and
joint ventures, account for approximately 10% of net
revenues. Direct response operations account for the
remainder of net sales.revenues.
The Company's fiscal year ends on the Sunday closest to
September 30. Fiscal years ending on September 28, 1997
and September 29, 1996 and October 1,
1995 each include 52 weeks.
TheSome of the following discussion containsinformation, including anticipated
store openings, planned capital expenditures, and trends
in the Company's operations, are forward-looking
statements that
involvewhich are subject to risks and uncertainties.
Actual future results and trends may differ materially
depending on a variety of factors, including, but not
limited to, coffee and other raw materials prices and
availability, successful execution of internal
performance and expansion plans, impact of competition,
availability of financing, legal proceedings, and other
risks detailed herein and in the Company's Securities
and Exchange Commission filings, including the Company's
Annual Report on Form 10-K10-K/A for the year ended
October 1, 1995.September 29, 1996.
RESULTS OF OPERATIONS -- FOR THE 13 WEEKS ENDED
MARCH 31,DECEMBER 29, 1996, COMPARED TO THE 13 WEEKS ENDED
APRIL 2,DECEMBER 31, 1995
Revenues. Net salesrevenues for the 13 weeks ended March 31,December
29, 1996, increased 52%41% to $153,609,000$239.1 million from $101,113,000$169.5
million for the corresponding period in fiscal 1995.1996.
Retail sales increased 52%41% to $132,301,000$205.3 million from $86,894,000, primarily$145.7
million, due to the opening of new retail stores. Comparablestores
combined with an increase in comparable store sales
(sales from stores open 13 months or longer) increased by 8%of 3% for
the period. ThisThe increase in comparable store sales
resulted primarily from an increase in the average number of transactions combined with an increase in the
average dollar value per transaction. As part oftransactions.
The Company anticipates its expansion strategy of
clustering stores in existing markets, Starbucks has
experienced a certain level of cannibalization of existing stores
by new stores as the store concentration has increased. The
Company anticipates that this cannibalization, as well as
increased competition and other factors, may continue to put
downward pressure on its comparable store sales growth
in future periods.
During the 13 weeks ended March 31,December 29, 1996, the Company
opened 87
Starbucks93 stores (includingand licensees opened five licensed airport stores).stores in
continental North America. The Company opened stores in
the new markets of Phoenix, Arizona, Salt Lake City,
Utah and Calgary, Alberta. The Company ended the period
with 7711,022 Company-operated stores and 5780 licensed
airport stores.stores in continental North America.
Specialty sales revenues increased 58%51% to $18,024,000$25.0 million
for the 13 weeks ended March 31,December 29, 1996, compared to
$11,439,000$16.6 million for the corresponding period in fiscal
1995. Increased sales to
airlines, hotels, a chain of wholesale clubs, restaurants, and
several multi-unit retailers accounted for the majority of the1996. The increase in sales. Mail orderspecialty sales revenues was
broad-based across many industry categories, including
hotels, airlines, and multi-unit retailers. Direct
response revenues increased 18%22% to $3,284,000$8.8 million for the
13 weeks ended March 31,December 29, 1996, compared to $2,780,000$7.2
million for the corresponding period in fiscal 1995.1996.
Cost and Expenses. Cost of sales and related occupancy
costs as a percentage of net sales increasedrevenues decreased to 50.1%48.3%
for the 13 weeks ended March 31,December 29, 1996, from 45.1%compared to
51.0% for the corresponding period in fiscal 1995 period.1996. This
increasedecrease was primarily the result of higherlower green coffee costs and higher occupancy
costs as a percentage of sales, partially offset bynet revenues and a shift in the
retail sales mix towardstoward beverages, a higher margin
products. Figures for both years reflect
the cost of markouts (items that no longer meet the Company's
strict quality standards), which prior to fiscal 1996 were
included in store operating expenses.product category.
Store operating expenses as a percentage of retail sales
decreasedincreased to 35.5%34.1% for the 13 weeks ended March 31,December 29,
1996, from 39.0%32.4% for the corresponding period in fiscal
1995.1996. The 3.5% of
retail sales improvement1.7% increase was due primarily to higher
store labor and higher regional overhead costs,
partially offset by lower advertising employee benefits, regional overhead and preopening expensescosts as a
percentage of retail sales. The leverage achievedincrease in regional
overhead expense is the result of adding stores to existing
markets. Preopening expensesstore labor
costs as a percentage of retail sales have decreasedwas due in part to
a shift in the retail sales mix towards the more labor-
intensive beverage category. The increase in regional
overhead costs as a percentage of retail sales was due
to lower average preopeninghigher costs perassociated with opening three new
store and because sales are increasing at a faster rate thanmarkets during the 13-week period ending December 29,
1996 compared with the opening of no new store openings.
10markets during
the corresponding period in fiscal 1996.
Other operating expenses (those associated with the
Company's specialty sales and direct response
operations as well as the Company's share of profits
and losses of its joint ventures)as a percentage of net
salesrevenues decreased to 2.5%3.3% for the 13 weeks ended
March 31,December 29, 1996, from 2.8%3.4% for the corresponding
period in
9
fiscal 1995. The decrease was due
primarily to a modification in the allocation of start-up risks
and expenses between partners in the Company's 50/50 joint
venture with Pepsi-Cola Company, a division of PepsiCo, Inc.1996. Depreciation and amortization as a
percentage of net salesrevenues increased 0.5%0.3% to 5.6%4.8%
for the 13 weeks ended March 31,December 29, 1996.
This increase was due primarily to higher per-store build-out
costs.
General and administrative expenses as a percentage of
net salesrevenues were 6.3%5.4% for the 13 weeks ended March 31,December
29, 1996, compared to 6.4%3.9% for the same period in fiscal
1995.1996. This decreaseincrease was primarily due to higher payroll-
related costs and associated administrative occupancy
costs as a percentage of sales was due primarily to leverage on
administrative costs combined with cost containment measures
which the Company began implementing during the first quarter of
fiscal 1996.net revenues.
Operating Income. Operating income for the 13 weeks
ended March
31,December 29, 1996 increased to $7,555,000 or 4.9%$21.3 million (8.9%
of net salesrevenues) from $7,076,000 or 7.0%$15.8 million (9.3% of net
salesrevenues) for the corresponding period in fiscal 1995.1996.
Operating income as a percentage of net salesrevenues
decreased due to lower gross marginshigher general and higher depreciationadministrative and
amortization expense as a percentage of sales, partially offset
by lower store operating and other operating expenses as a percentage of sales.net
revenues, partially offset by lower cost of goods sold
and related occupancy costs as a percentage of net
revenues.
Interest and Other Income. Interest and other income
for the 13 weeks ended March
31,December 29, 1996 was $2,857,000$3.9
million compared to $2,371,000$2.3 million for the corresponding
period in fiscal 1995.1996. The increase in interest
income iswas due primarily
to higher average investment balances.
Gain on Sale of Investment. On March 31, 1995, the Company
invested $11.3 million in cash for shares of Noah's New York
Bagels, Inc. ("Noah's") Series B Preferred Stock, representing
approximately 20% ownership in Noah's. On February 1, 1996,
Noah's was merged with Einstein Brothers Bagels, Inc. ("Einstein
Brothers"), a retailer operating primarily in the Eastern United
States. In exchange for its investment in Noah's, the Company
received $20.5 million in cash. Concurrently, the Company
purchased $1.8 million of Einstein Brothers common stock. This
investment will be accounted for under the cost method. The
Company realized a $9.2 million pre-tax gain ($5.6 million net of
tax) on this transaction.
Interest Expense. Interest expense for the 13 weeks ended
March
31,December 29, 1996 was $2,709,000$1.8 million compared to $926,000$2.3 million
for the corresponding period in fiscal 1995.1996. The increase in interest
expense isdecrease
was due primarily to interest onthe conversion of the Company's convertible
debentures issued in October 1995.4-1/2%
Convertible Subordinated Debentures due 2003 to equity
during the third quarter of fiscal 1996.
Income Taxes. The Company's effective tax rate for the
13 weeks ended March 31,December 29, 1996 was 38.5% compared to 39.8% for the
corresponding period in fiscal 1995. The Company reduced its tax
rate in the second quarter to bring its year-to-date rate down to
39.0%, its expected effective rate for fiscal 1996.
RESULTS OF OPERATIONS -- FOR THE 26 WEEKS ENDED MARCH 31, 1996,
COMPARED TO THE 26 WEEKS ENDED APRIL 2, 1995
Revenues. Net sales for the 26 weeks ended March 31, 1996,
increased 49% to $323,145,000 from $216,659,000 for the
corresponding period in fiscal 1995. Retail sales increased 50%
to $278,032,000 from $185,007,000, primarily due to the addition
of new retail stores. Comparable store sales increased by 5%.
This increase resulted primarily from an increase in the
average dollar value per transaction combined with an increase
in the number of transactions.
During the 26 weeks ended March 31, 1996, the Company opened 155
Starbucks stores (including eight licensed airport stores and two
replacement stores), converted one Coffee Connection store to a
Starbucks store, and closed one store. The Company anticipates
opening at least 145 new Company-operated and licensed airport
stores during the remainder of fiscal 1996.
Specialty sales increased 51% to $34,640,000 for the 26 weeks
ended March 31, 1996, compared to $22,979,000 for the
corresponding period in fiscal 1995. Increased sales to hotels,
airlines, a chain of wholesale clubs, restaurants, and several
multi-unit retailers accounted for the majority of the increase
in sales. Mail order sales increased 21% to $10,473,000 for the
26 weeks ended March 31, 1996, compared to $8,673,000 for the
corresponding period in fiscal 1995.
Costs and Expenses. Cost of sales and related occupancy costs as
a percentage of net sales increased to 50.6% for the 26 weeks
ended March 31, 1996, from 45.1% for the corresponding fiscal
1995 period. This increase was primarily the result of higher
green coffee costs and higher occupancy costs as a percentage of
sales, partially offset by a shift in the retail sales mix
towards higher margin products.
11
Store operating expenses as a percentage of retail sales
decreased to 33.9% from 37.5% for the corresponding period in
fiscal 1995. The 3.6% of retail sales improvement reflects lower
regional overhead, advertising, employee benefits, and preopening
expenses as a percentage of retail sales.
Other operating expenses as a percentage of net sales remained
constant at 3.0%. Depreciation and amortization as a percentage
of net sales increased 0.6% to 5.0% for the 26 weeks ended March
31, 1996. The increase in depreciation and amortization is due
primarily to higher per-store build-out costs.
General and administrative expenses as a percentage of net sales
were 5.1% for the 26 weeks ended March 31, 1996, compared to 5.6%
for the same period in fiscal 1995. This decrease as a
percentage of sales was due primarily to leverage on
administrative costs combined with the implementation of cost
containment measures.
Operating Income. Operating income for the 26 weeks ended March
31, 1996 increased to $23,358,000 or 7.2% of net sales from
$21,240,000 or 9.8% of net sales for the corresponding period in
fiscal 1995. Operating income as a percentage of net sales
decreased due to lower gross margins and higher depreciation and
amortization expense as a percentage of sales, partially offset
by lower store operating and general and administrative expenses
as a percentage of sales.
Interest Income. Interest income for the 26 weeks ended March
31, 1996 was $5,116,000 compared to $3,357,000 for the
corresponding period in 1995. The increase in interest income is
due primarily to higher average investment balances.
Gain on Sale of Investment. The Company recorded a $9.2 million
($5.6 million net of taxes) gain on the sale of its investment in
Noah's New York Bagels, Inc.
Interest Expense. Interest expense for the 26 weeks ended March
31, 1996 was $4,959,000 compared to $1,876,000 for the
corresponding period in fiscal 1995. The increase in interest
expense is due primarily to interest on the Company's convertible
debentures issued in October 1995.
Income Taxes. The Company's effective tax rate for the 26 weeks
ended March 31, 1996 was 39.0% compared to
39.5% for the corresponding period in fiscal 1995. This1996. The
decrease iswas due primarily to a decrease in the effective state tax rate due to
changes in thestate tax
allocation and apportionment formulas.factors as well as the
implementation of tax-saving strategies. Management
expects the effective tax rate may increase as the
Company expands activities in higher tax jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the period with $223.0$249.3 million in
total cash and investments. Workingshort-term investments and working
capital as of March 31, 1996 totaled
$269.7 million compared to $134.6 million at October 1, 1995.
The increase of $135.1 million was due primarily to proceeds from
an October 1995 offering of 4-1/4% Convertible Subordinated
Debentures due 2002 which generated proceeds of approximately
$161 million, net of issuance costs.$234.6 million. Cash provided by operating
activities totaled $57.6$46.8 million for the first 26 weeksand resulted primarily
from net income before non-cash charges of fiscal
1996.$29.5 million
and a $20.0 million reduction in inventories.
Cash provided from financing activities for the first 2613
weeks of fiscal 19961997 totaled $163.0 million. This includes the Company's
October 1995 offering$12.1 million and included
an increase in cash provided by checks drawn in excess
of convertible debentures discussed above.
Cash provided from financing activities also included cash
generated in connection with the Company's employee stock
purchase plan, and withbank balances, the exercise of employee stock options to purchase
shares of the Company's common stock
and the related income tax benefit available to the
Company upon exercise of such options.
Theoptions, and cash
generated from the Company's employee stock purchase
plan. As options granted under the Company's stock
option plans vest, the Company will continue to receive
proceeds and a tax deduction as a result of its employees participating in stock purchase and
option
plans;exercises; however, neither the amounts nor the timing
thereof can be predicted.
12
Cash used by investing activities for the first 2613 weeks
of fiscal 19961997 totaled $110.4$57.4 million. This included
capital expenditures (additionsadditions to property, plant, and equipment)equipment of
$75.8 million. Capital expenditures included the costs$36.9 million related to open
147opening 93 new Company-operated
retail stores, remodelremodeling certain existing stores,
purchasepurchasing roasting and packaging equipment expandfor the
Company's roasting and distribution facilities,
enhancing information systems, and expanding existing
office space, and enhance
existing information systems.space. The Company received approximately
$20.5 million for the sale of its investmentinvested excess cash in Noah's and
concurrently purchased $1.8 million of common stock in Einstein
Brothers. The Company's wholly-owned subsidiary, Starbucks Coffee
International, Inc. ("SBI"), contributed $1.5 million to its
joint venture with SAZABY, Inc. The Company made equity
investments of $0.5 million in its 50/50 joint venture with
Pepsi-Cola Company and $0.2 million in its joint venture with
Dreyer's Grand Ice Cream, Inc. Excess cash was invested inshort-
term investment-grade marketable debt securities, the majority
of which are classified as cash equivalents.securities.
Future cash requirements, other than normal operating
expenses, are expected to consist primarily of capital
expenditures related to the addition of new company-operatedCompany-
operated retail stores. The Company also anticipates
remodeling certain existing stores and incurring
additional expenditures for enhancing its computerproduction
capacity
and information systems. PlannedWhile there can be no assurance
that current expectations will be realized, and plans
are subject to change upon further review, management
expects capital expenditures for the remainder of fiscal
1996 are estimated1997 to be approximately $95$135 million.
TheAlthough the Company will also havehad minimal cash requirements for
its joint venture partnerships with Pepsi-Cola Company, Dreyer's Grand Ice
Cream, Inc., and SAZABY Inc., a Japanese retailer and
restauranteur. The Company plans to open, through SBI's joint
venture partnership with SAZABY,ventures during the first Starbucks retail store
in Tokyo, Japan in13 weeks of fiscal
1997, the summerCompany currently anticipates additional cash
requirements of 1996.approximately $30 million for its
domestic joint ventures and
international expansion during the remainder of fiscal
1997. In addition, under the
10
terms of the Company's corporate office lease, the
Company has agreed to provide financing to the building
owner to be used exclusively for facilities and
leasehold development costs to accommodate the Company.
During the first 13 weeks of fiscal 1996,1997, the Company
expectsprovided approximately $1.2 million under this
agreement, bringing the total amount outstanding under
this agreement to $5.8 million as of December 29, 1996.
During the remainder of fiscal 1997, the Company intends
to provide additional funds of approximately $3.5$2.8
million under this agreement. The maximum amount
available under the agreement is $17 million. Any funds
advanced by the Company will be repaid with interest
over a term not to exceed 20 years.
Management believes that the existing cash and investments
plus cash generated from operations should be more than sufficient
to finance its capital requirements for the remainderits core businesses
through fiscal 1997. Any new joint ventures, other new
business opportunities, or store expansion rates
substantially in excess of fiscal
1996. The Company anticipates that it will seek additional funds
from public or private sources in fiscal 1997; however, there can
be no assurance that such funds will be available when needed or
be available on terms favorable to the Company.presently planned may
require outside funding.
COFFEE PRICES, AND AVAILABILITY, AND GENERAL RISK CONDITIONS
The following important factors, among others, could impact the
Company's actual results and could cause such results to differ
materially from those expressed in the Company's forward-looking
statements.
Green coffee commodity prices are subject to substantial
price fluctuations, generally a result of reports of
adverse growing conditions in certain coffee-producing
countries.
Duecountries or other supply-related concerns. 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, such as the
International Coffee Organization and the Association of
Coffee Producing Countries, which have historically
attempted to influence commodity prices of green coffee
through agreement establishing export quotas or
restricting coffee supplies worldwide. As a result of
Brazilian frosts during 1994 and the ensuing green
coffee commodity price increases, the Company effected sales price increaseshad
acquired higher cost coffees which negatively impacted
gross margins during fiscal 1994 and 1995 in its
coffee beverages and whole bean coffees to mitigate the effects1996. As of increases in its costs of supply. BecauseDecember 29,
1996, the Company had established fixed purchase prices for somesold most of its supply of green
coffees, the Company's margins were favorably impacted by such
sales price increases during much of fiscal 1995. During the
latter part of fiscal 1995 and the first half of fiscal 1996,
gross margins were negatively impacted relative to the prior year
by the sell-through ofthese higher-cost
coffee inventories. As the
Company continues to sell through these inventories for the
remainder of fiscal 1996, it expects gross margins will continue
to be negatively impacted relative to the prior year.coffees.
The Company has enteredenters into fixed price purchase commitments
in order to secure an adequate supply of quality green
coffee and fix a costcosts for future periods. As of March 31,December
29, 1996 the Company had approximately $28$30 million in
fixed price purchase commitments which, together with
existing inventory, the Company believes
willis expected to provide an adequate
supply of green coffee for the remaindera substantial portion of fiscal 1996 and into
fiscal 1997. The Company believes, that, based on
relationships established with its suppliers in the
past, that the risk of non-delivery on such purchase
commitments is remote.
13
In addition to fluctuating coffee prices, management
believes that in the future, the Company's future results of operations
and earnings could be significantly impacted by other
factors such as increased competition within the
specialty coffee industry, the Company's ability to find
optimal store locations at favorable lease rates, the
increased costs associated with opening and operating
retail stores in new markets, the Company's continued
ability to hire, train and retain qualified personnel,
and the Company's continued ability to obtain adequate capital to
finance its planned expansion.
Due to the factors noted above, the Company's future
earnings and the prices of the Company's securities may
be subject to volatility. There can be no assurance that
the Company will continue to generate increases in net
salesrevenues and net earnings, or growth in comparable store
sales. Any variance in the factors noted above, or other
areas, from what is expected by investors could have an
immediate and adverse effect on the trading priceprices of
the Company's securities.
SEASONALITY AND QUARTERLY RESULTS
The Company's business is subject to seasonal
fluctuations. A
significant portionSignificant portions of the Company's net
salesrevenues and profits are realized during the first
quarter of the Company's fiscal year, which includes the
December holiday season. In addition,
quarterlyQuarterly 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 the 26 weeks ended March 31,
1996,any quarter are not
necessarily indicative of the results that may be
achieved for the full fiscal year ended September 29, 1996.
NEW ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued
Statement No. 123, Accounting for Stock-Based Compensation. This
pronouncement establishes the accounting and reporting standards
for stock-based employee compensation plans, including: stock
purchase plans, stock options, and stock appreciation rights.
This new standard defines a fair value-based method of accounting
for these equity instruments. This method measures compensation
cost based on the value of the award and recognizes that cost
over the service period. Companies may elect to adopt this
standard or to continue accounting for these types of equity
instruments under current guidance, APB Opinion No. 25,
Accounting for Stock Issued to Employees. Companies which elect
to continue using the rules of Opinion 25 must make pro forma
disclosures of net income and earnings per share as if this new
statement had been applied. This new standard is required for
fiscal years beginning after December 15, 1995.
The Company is in the process of evaluating this statement and
its impact on the Company's financial condition and results of
operations.
14year.
11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to various legal proceedings
arising in the ordinary course of its business, but is
not currently a party to any legal proceeding that the
Company believes would have a material adverse effect on
the financial position or results of operations of the
Company.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the Company was held on
February 28, 1996 in Kent, Washington for the purposes of
electing six directors, approving an amendment to the Company's
Articles of Incorporation to increase the number of shares of
authorized common stock, no par value, from 100,000,000 to
150,000,000 shares, as well as ratifying the selection of the
independent public auditors for fiscal 1996. The table below
shows the results of the shareholders' voting:
Votes in Votes Broker
Favor Opposed Abstain Non-Votes
---------- ------- ------- ---------
Election of directors
Craig J. Foley 61,856,855 -- 1,484,315 7,816,338
Howard Schultz 61,764,018 -- 1,577,152 7,816,338
Adrian D.P. Bellamy 61,852,477 -- 1,488,693 7,816,338
Howard P. Behar 61,735,935 -- 1,605,235 7,816,338
Orin C. Smith 61,614,334 -- 1,726,836 7,816,338
Barbara Bass 61,832,613 -- 1,508,557 7,816,338
Approve amendment to
Articles of Incorporation
to increase number of
authorized shares of
common stock 62,087,876 952,787 300,507 7,816,338
Ratification of independent
auditors 62,991,487 141,573 208,110 7,816,338
The following members of the Board of Directors, who were not up
for re-election during the current year, have terms that expire
at the annual meeting for fiscal years 1996 and 1997:
Term expires at the
Director annual meeting for fiscal:
- ---------------------------------------------------------------
James G. Shennan, Jr. 1996
Jeffrey H. Brotman 1997
Arlen I. Prentice 1997
15
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
3.1 Restated Articles of Incorporation of Starbucks
Corporation
3.1.1 Articles of Amendment to the Restated Articles of
Incorporation of Starbucks Corporation dated
November 22, 1995
3.1.2 Articles of Amendment to the Restated Articles of
Incorporation of Starbucks Corporation dated
March 18, 1996
3.2 Amended and Restated Bylaws of Starbucks Corporation
10.21 Merger Agreement among Noah's New York Bagels, Inc.,
Shareholders and Certain Optionholders of Noah's New
York Bagels, Inc., Einstein Brothers Bagels, Inc.
and NNYB Acquisition Corporation dated January 22,
1996.
10.22 Amendment dated February 1, 1996 to Merger Agreement
among Noah's New York Bagels, Inc., Shareholders and
Certain Optionholders of Noah's New York Bagels,
Inc., Einstein Brothers Bagels, Inc. and NNYB
Acquisition Corporation dated January 22, 1996.
10.23 Master Licensing Agreement between the Company and
ARAMARK Food and Services Group, Inc. dated as of
January 30, 1996, as amended and restated May 7, 1996.
11 Statement re: computation of per share
earnings
27 Financial data schedule
(b) Forms 8-K:
No reports on Form 8-K were filed by the Company during the
13-week period ended March 31, 1996.
16December 29, 1996
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto
duly authorized.
STARBUCKS CORPORATION
Dated: May 13, 1996February 10, 1997 By: /s/ Michael Casey
----------------------
Michael Casey
senior vice president and
and chief financial officer
Signing on behalf of the
registrant and as principal
financial officer
1713
STARBUCKS CORPORATION
---------------------
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
Three Months Ended
Six Months Ended
MarchDecember 29, December 31, April 2, March 31, April 2,
1996 1995
1996 1995
(13 Weeks) (13 Weeks)
(26 Weeks) (26 Weeks)
- -----------------------------------------------------------------------------------------------------------------------------------------
NET EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE CALCULATION - PRIMARY:
EARNINGS PER SHARE CALCULATION:- ---------------------------------------------------------------
Net earnings $10,391 $5,130 $19,957 $13,751
=========================================================================$14,390 $9,566
===============================================================
Weighted average shares outstanding calculation:calculation - primary:
Weighted average number of
common shares outstanding 71,257 70,351 71,186 67,18777,725 71,115
Dilutive effect of outstanding
common stock options 3,172 1,974 3,214 2,2193,616 2,813
- ----------------------------------------------------------------------------------------------------------------------------------------
Weighted average common and
common equivalent shares outstanding 74,429 72,325 74,400 69,406
=========================================================================
Earnings-
primary 81,341 73,928
===============================================================
Net earnings per common and common
equivalent share - primary $ 0.140.18 $ 0.07 $ 0.27 $ 0.20
=========================================================================0.13
===============================================================
NET EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE CALCULATION ASSUMING CONVERSION OF CONVERTIBLE
SUBORDINATED DEBENTURES(1):-
FULLY DILUTED
Net earnings calculation:
Net earnings $ 10,391 $ 5,130 $ 19,957 $ 13,751$14,390 $9,566
Add after tax interest expense
on Debentures 1,615 546 2,994 1,093debentures 1,075 547
Add after tax amortization
of issuance costs related to
the Debentures 128debentures 89 39
226 79
- ----------------------------------------------------------------------------------------------------------------------------------------
Net earnings assuming
conversion of Debentures $ 12,134 $ 5,715 $ 23,177 $ 14,923
=========================================================================-
fully diluted $15,554 $10,152
===============================================================
Weighted average shares outstanding calculation:calculation -
fully diluted:
Weighted average number of
common shares outstanding 71,257 70,351 71,186 67,18777,725 71,115
Dilutive effect of outstanding
common stock options 3,172 1,974 3,214 2,2193,616 2,943
Assuming conversion of
4.5%
Convertible Subordinated
Debentures due 2003 5,331 5,367 5,340 5,367
Assuming conversion of 4.25%
Convertible Subordinated
Debentures due 2002debentures 7,098 0 6,240 05,357
- ----------------------------------------------------------------------------------------------------------------------------------------
Weighted average common and
common equivalent shares
outstanding 86,858 77,692 85,980 74,773
=========================================================================
Earnings- fully diluted 88,439 79,415
===============================================================
Net earnings per common and
common equivalent share -
fully diluted $ 0.140.18 $ 0.07 $ 0.27 $ 0.20
=========================================================================
- -------------------
(1) This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3%.
180.13
===============================================================
14