UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON,Washington, D.C. 20549
FORM 10-Q
[X]x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 30, 2001March 31, 2002
OR
[ ]o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _____________period from ___ to ________________
Commission File Number 0-20322
STARBUCKS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Washington | 91-1325671 | |
(State 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
As of February 11,May 13, 2002, there were 382,339,078386,066,000 shares of the Registrant’s Common Stock outstanding.
STARBUCKS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Page No. | |||||
Item 1. Financial Statements | 3 | ||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 11 | ||||
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 18 | ||||
PART II. OTHER INFORMATION | |||||
Item 1. Legal Proceedings | 18 | ||||
Item 2. Changes in Securities and Use of Proceeds | 18 | ||||
Item 4. Submission of Matters to a Vote of Security Holders | 19 | ||||
Item 6. Exhibits and Reports on Form 8-K | 19 | ||||
Signature | 19 |
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except earnings per share data)share) Three Months Ended December 30, December 31, 2001 2000 (13 Weeks) (13 Weeks) (unaudited) Net revenues: Retail $ 682,265 $ 562,407 Specialty 123,070 104,980 Total net revenues 805,335 667,387 Cost of sales and related occupancy costs 337,029 292,220 Store operating expenses 260,490 209,690 Other operating expenses 30,325 21,786 Depreciation and amortization 50,301 37,562 General and administrative expenses 41,129 34,877 Income from equity investees 6,585 4,805 Operating income 92,646 76,057 Interest and other income, net 2,493 1,713 Gain on sale of investment 13,361 — Earnings before income taxes 108,500 77,770 Income taxes 40,145 28,775 Net earnings $ 68,355 $ 48,995 Net earnings per common share — basic $ 0.18 $ 0.13 Net earnings per common share — diluted $ 0.17 $ 0.12 Weighted average shares outstanding: Basic 380,807 377,290 Diluted 391,999 393,660
Three Months Ended | Six Months Ended | ||||||||||||||||
March 31, | April 1, | March 31, | April 1, | ||||||||||||||
2002 | 2001 | 2002 | 2001 | ||||||||||||||
(13 Weeks) | (13 Weeks) | (26 Weeks) | (26 Weeks) | ||||||||||||||
(unaudited) | (unaudited) | ||||||||||||||||
Net revenues: | |||||||||||||||||
Retail | $ | 664,262 | $ | 523,277 | $ | 1,346,527 | $ | 1,085,684 | |||||||||
Specialty | 118,955 | 106,011 | 242,025 | 210,991 | |||||||||||||
Total net revenues | 783,217 | 629,288 | 1,588,552 | 1,296,675 | |||||||||||||
Cost of sales and related occupancy costs | 320,081 | 271,178 | 657,110 | 563,398 | |||||||||||||
Store operating expenses | 270,986 | 208,608 | 531,476 | 418,298 | |||||||||||||
Other operating expenses | 33,543 | 23,785 | 63,868 | 45,571 | |||||||||||||
Depreciation and amortization | 49,972 | 38,597 | 100,273 | 76,159 | |||||||||||||
General and administrative expenses | 67,314 | 42,433 | 108,443 | 77,310 | |||||||||||||
Income from equity investees | 7,459 | 6,167 | 14,044 | 10,972 | |||||||||||||
Operating income | 48,780 | 50,854 | 141,426 | 126,911 | |||||||||||||
Interest and other income, net | 2,135 | 1,560 | 4,628 | 3,273 | |||||||||||||
Gain on sale of investment | — | — | 13,361 | — | |||||||||||||
Earnings before income taxes | 50,915 | 52,414 | 159,415 | 130,184 | |||||||||||||
Income taxes | 18,838 | 20,204 | 58,984 | 48,979 | |||||||||||||
Net earnings | $ | 32,077 | $ | 32,210 | $ | 100,431 | $ | 81,205 | |||||||||
Net earnings per common share — basic | $ | 0.08 | $ | 0.08 | $ | 0.26 | $ | 0.21 | |||||||||
Net earnings per common share — diluted | $ | 0.08 | $ | 0.08 | $ | 0.25 | $ | 0.21 | |||||||||
Weighted average shares outstanding: | |||||||||||||||||
Basic | 384,346 | 380,363 | 382,563 | 378,825 | |||||||||||||
Diluted | 397,861 | 395,701 | 394,917 | 394,679 |
See notes to consolidated financial statements
23
STARBUCKS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data) December 30, September 30, 2001 2001 (unaudited) ASSETS Current assets: Cash and cash equivalents $ 226,833 $ 113,237 Available-for-sale securities 72,771 101,399 Trading securities 9,060 5,913 Accounts receivable, net of allowances of $5,595 and $4,590, respectively 89,713 90,425 Inventories 176,972 221,253 Prepaid expenses and other current assets 36,530 29,829 Deferred income taxes, net 38,824 31,869 Total current assets 650,703 593,925 Equity and other investments 98,023 63,097 Property, plant and equipment, net 1,159,462 1,135,784 Other assets 35,220 31,868 Goodwill, net 21,038 21,845 Total $ 1,964,446 $ 1,846,519 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 84,525 $ 127,905 Checks drawn in excess of bank balances 58,242 61,987 Accrued compensation and related costs 85,886 81,458 Accrued occupancy costs 36,966 35,835 Accrued taxes 71,917 70,346 Other accrued expenses 51,490 40,117 Deferred revenue 49,342 26,919 Current portion of long-term debt 700 697 Total current liabilities 439,068 445,264 Deferred income taxes, net 18,990 19,133 Long-term debt 5,609 5,786 Minority interest 447 409 Shareholders’ equity: Common stock and additional paid-in capital – $0.001 par value; authorized, 600,000,000; issued and outstanding, 382,773,151 and 380,044,042 shares, respectively, (includes 1,697,100 common stock units in both periods) 821,615 791,622 Other additional paid-in capital 39,393 — Retained earnings 658,068 589,713 Accumulated other comprehensive loss (18,744 ) (5,408 ) Total shareholders’ equity 1,500,332 1,375,927 Total $ 1,964,446 $ 1,846,519
March 31, | September 30, | |||||||||
2002 | 2001 | |||||||||
(unaudited) | ||||||||||
ASSETS | ||||||||||
Current assets: | ||||||||||
Cash and cash equivalents | $ | 161,844 | $ | 113,237 | ||||||
Available-for-sale securities | 151,537 | 101,399 | ||||||||
Trading securities | 9,909 | 5,913 | ||||||||
Accounts receivable, net of allowance of $5,582 and $4,590, respectively | 85,971 | 90,425 | ||||||||
Inventories | 172,306 | 221,253 | ||||||||
Prepaid expenses and other current assets | 39,544 | 29,829 | ||||||||
Deferred income taxes, net | 40,691 | 31,869 | ||||||||
Total current assets | 661,802 | 593,925 | ||||||||
Equity and other investments | 98,581 | 63,097 | ||||||||
Property, plant and equipment, net | 1,195,397 | 1,135,784 | ||||||||
Other assets | 42,855 | 31,868 | ||||||||
Goodwill, net | 20,967 | 21,845 | ||||||||
Total | $ | 2,019,602 | $ | 1,846,519 | ||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||
Current liabilities: | ||||||||||
Accounts payable | $ | 99,600 | $ | 127,905 | ||||||
Checks drawn in excess of bank balances | 48,820 | 61,987 | ||||||||
Accrued compensation and related costs | 91,408 | 81,458 | ||||||||
Accrued occupancy costs | 42,037 | 35,835 | ||||||||
Accrued taxes | 30,679 | 70,346 | ||||||||
Other accrued expenses | 59,298 | 40,117 | ||||||||
Deferred revenue | 39,231 | 26,919 | ||||||||
Current portion of long-term debt | 703 | 697 | ||||||||
Total current liabilities | 411,776 | 445,264 | ||||||||
Deferred income taxes, net | 17,208 | 19,133 | ||||||||
Long-term debt | 5,424 | 5,786 | ||||||||
Other liabilities | 1,032 | 409 | ||||||||
Shareholders’ equity: | ||||||||||
Common stock and additional paid-in capital — $0.001 par value; authorized, 600,000,000; issued and outstanding, 386,521,346 and 380,044,042 shares, respectively, (includes 1,697,100 common stock units in both periods) | 874,984 | 791,622 | ||||||||
Other additional paid-in capital | 39,393 | — | ||||||||
Retained earnings | 690,144 | 589,713 | ||||||||
Accumulated other comprehensive loss | (20,359 | ) | (5,408 | ) | ||||||
Total shareholders’ equity | 1,584,162 | 1,375,927 | ||||||||
Total | $ | 2,019,602 | $ | 1,846,519 | ||||||
See notes to consolidated financial statements
34
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Three Months Ended December 30, December 31, 2001 2000 (13 Weeks) (13 Weeks) (unaudited) Operating activities: Net earnings $ 68,355 $ 48,995 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 54,024 40,664 Gain on sale of investment (13,361 ) — Provision for losses on asset disposals 2,684 9,542 Deferred income taxes, net (7,805 ) (47 ) Equity in income of investees (3,119 ) (2,822 ) Tax benefit from exercise of non-qualified stock options 9,170 10,198 Cash provided/(used) by changes in operating assets and liabilities: Net purchases of trading securities (2,674 ) (2,592 ) Accounts receivable 611 (1,959 ) Inventories 44,122 33,220 Prepaid expenses and other current assets (3,465 ) (5,092 ) Accounts payable (42,965 ) 10,611 Accrued compensation and related costs 4,509 251 Accrued occupancy costs 1,149 1,899 Accrued taxes 1,593 10,903 Minority interest 32 442 Deferred revenue 22,437 5,981 Other accrued expenses 11,343 876 Net cash provided by operating activities 146,640 161,070 Investing activities: Purchase of available-for-sale securities (70,764 ) (26,016 ) Maturity of available-for-sale securities — 36,000 Sale of available-for-sale securities 98,000 2,000 Changes to equity and other investments 842 (9,025 ) Proceeds from sale of equity investment 14,843 — Additions to property, plant and equipment (88,964 ) (78,972 ) Changes to other assets (3,685 ) 1,533 Net cash used by investing activities (49,728 ) (74,480 ) Financing activities: Increase/(decrease) in cash provided by checks drawn in excess of bank balances (3,745 ) 1,969 Proceeds from sale of common stock under employee stock purchase plan 3,644 2,773 Proceeds from exercise of stock options 19,008 15,494 Principal payments on long-term debt (173 ) (170 ) Repurchase of common stock (1,829 ) — Net cash provided by financing activities 16,905 20,066 Effect of exchange rate changes on cash and cash equivalents (221 ) (32 ) Net increase in cash and cash equivalents 113,596 106,624 Cash and cash equivalents: Beginning of the period 113,237 70,817 End of the period $ 226,833 $ 177,441 Supplemental cash flow information: Cash paid during the period for: Interest $ 27 $ 98 Income taxes 38,106 8,325
Six Months Ended | ||||||||||||
March 31, | April 1, | |||||||||||
2002 | 2001 | |||||||||||
(26 weeks) | (26 Weeks) | |||||||||||
(unaudited) | ||||||||||||
Operating activities: | ||||||||||||
Net earnings | $ | 100,431 | $ | 81,205 | ||||||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 107,866 | 82,727 | ||||||||||
Gain on sale of investment | (13,361 | ) | — | |||||||||
Provision for store remodels and losses on asset disposals | 6,971 | 12,508 | ||||||||||
Deferred income taxes, net | (11,557 | ) | (3,217 | ) | ||||||||
Equity in income of investees | (7,547 | ) | (3,572 | ) | ||||||||
Tax benefit from exercise of non-qualified stock options | 24,976 | 25,904 | ||||||||||
Cash provided/(used) by changes in operating assets and liabilities: | ||||||||||||
Net purchases of trading securities | (3,577 | ) | (3,022 | ) | ||||||||
Accounts receivable | 4,281 | 406 | ||||||||||
Inventories | 48,672 | 50,203 | ||||||||||
Prepaid expenses and other current assets | (6,761 | ) | (9,035 | ) | ||||||||
Accounts payable | (27,655 | ) | 12,581 | |||||||||
Accrued compensation and related costs | 10,071 | 13,270 | ||||||||||
Accrued occupancy costs | 6,220 | 3,460 | ||||||||||
Accrued taxes | (39,617 | ) | (7,676 | ) | ||||||||
Other liabilities | 610 | 798 | ||||||||||
Deferred revenue | 12,323 | (5,555 | ) | |||||||||
Other accrued expenses | 19,710 | 16,292 | ||||||||||
Net cash provided by operating activities | 232,056 | 267,277 | ||||||||||
Investing activities: | ||||||||||||
Purchase of available-for-sale securities | (159,894 | ) | (53,012 | ) | ||||||||
Maturity of available-for-sale securities | 106,260 | 62,000 | ||||||||||
Sale of available-for-sale securities | 2,000 | 2,000 | ||||||||||
Changes to equity and other investments | (4,212 | ) | (12,130 | ) | ||||||||
Proceeds from sale of equity investment | 14,843 | — | ||||||||||
Distributions from joint ventures | 8,158 | 4,099 | ||||||||||
Additions to property, plant and equipment | (183,607 | ) | (161,697 | ) | ||||||||
Changes to other assets | (11,690 | ) | (2,496 | ) | ||||||||
Net cash used by investing activities | (228,142 | ) | (161,236 | ) | ||||||||
Financing activities: | ||||||||||||
Decrease in cash provided by checks drawn in excess of bank balances | (13,167 | ) | (3,695 | ) | ||||||||
Proceeds from sale of common stock under employee stock purchase plan | 7,681 | 5,976 | ||||||||||
Proceeds from exercise of stock options | 52,534 | 36,455 | ||||||||||
Principal payments on long-term debt | (347 | ) | (320 | ) | ||||||||
Repurchase of common stock | (1,829 | ) | — | |||||||||
Net cash provided by financing activities | 44,872 | 38,416 | ||||||||||
Effect of exchange rate changes on cash and cash equivalents | (179 | ) | (94 | ) | ||||||||
Net increase in cash and cash equivalents | 48,607 | 144,363 | ||||||||||
Cash and cash equivalents: | ||||||||||||
Beginning of the period | 113,237 | 70,817 | ||||||||||
End of the period | $ | 161,844 | $ | 215,180 | ||||||||
Supplemental cash flow information: | ||||||||||||
Cash paid during the period for: | ||||||||||||
Interest | $ | 94 | $ | 262 | ||||||||
Income taxes | 86,038 | 38,658 |
See notes to consolidated financial statements
45
STARBUCKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the 13 Weeks and 26 Weeks Ended December 30,March 31, 2002 and April 1, 2001 andDecember 31, 2000
NOTE 1: FINANCIAL STATEMENT PREPARATION
The consolidated financial statements as of December 30,March 31, 2002 and April 1, 2001 and December 31, 2000 and for the 13-week periods and 26-week periods ended December 30,March 31, 2002 and April 1, 2001 and December 31, 2000 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 periods and 26-week periods ended December 30,March 31, 2002 and April 1, 2001 and December 31, 2000 is unaudited, but, in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments and accruals)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 September 30, 2001, is derived from the Company’s audited consolidated financial statements and notes thereto for the year ended September 30, 2001, 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 period and 26-week period ended December 30, 2001March 31, 2002 are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending September 29, 2002.
NOTE 2: REVENUE RECOGNITION
In most instances, 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 such cards are included in “Deferred revenue” on the accompanying consolidated balance sheets. Specialty revenues, consisting mainly of product sales, are generally recognized upon shipment to customers. Initial non-refundable fees required under licensing agreements are earned upon substantial performance of services. Royalty revenues based upon a percentage of sales and other continuing fees are recognized when earned. All revenues are recognized net of any discounts.
NOTE 3: NEW ACCOUNTING STANDARDS
In November 2001, the Financial Accounting Standards Board (FASB) Staff issued TopicEmerging Issues Task Force (EITF) No. D-103,01-14, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred.” This TopicIssue clarifies the FASB Staff’s position that all reimbursements received for incidental expenses incurred in conjunction with providing services as part of a company’s central on-going operations should be characterized as revenue in the income statement. The Company adopted TopicEITF No. D-103 as of01-14 on December 31, 2001, and doesit did not expect it to have a material impact on the Company’s consolidated results of operations.
NOTE 4: INVENTORIES
Inventories consist of the following (in thousands):
December 30, | September 30, | March 31, | September 30, | |||||||||||||||
2001 | 2001 | 2002 | 2001 | |||||||||||||||
Coffee: | Coffee: | Coffee: | ||||||||||||||||
Unroasted | $ | 81,198 | $ | 98,557 | Unroasted | $ | 73,140 | $ | 98,557 | |||||||||
Roasted | 19,925 | 33,958 | Roasted | 24,794 | 33,958 | |||||||||||||
Other merchandise held for sale | Other merchandise held for sale | 50,250 | 63,458 | Other merchandise held for sale | 46,108 | 63,458 | ||||||||||||
Packaging and other supplies | Packaging and other supplies | 25,599 | 25,280 | Packaging and other supplies | 28,264 | 25,280 | ||||||||||||
Total | Total | $ | 176,972 | $ | 221,253 | Total | $ | 172,306 | $ | 221,253 | ||||||||
As of December 30, 2001,March 31, 2002, the Company had fixed-price purchase commitments for green coffee totaling approximately $284.4$260.7 million.
56
NOTE 5: DERIVATIVE FINANCIAL INSTRUMENTS
The Company manages its exposure to foreign currency risk within the consolidated financial statements according to a hedging policy. Under the policy, the Company may engage in transactions involving various derivative instruments with maturities generally not longer than five years to hedge assets, liabilities, revenues and purchases denominated in foreign currencies.
The Company has several forward foreign exchange contracts that qualify as cash flow hedges under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” to hedge a portion of anticipated foreign currency denominated revenue. The Company also has a forward foreign exchange contract that qualifies as a hedge of a net investment in a foreign operation. These contracts expire within 1218 months and are intended to minimize certain foreign currency exposures that can be confidently identified and quantified.
For the 13 weeks and 26 weeks ended December 30,March 31, 2002 and April 1, 2001, and December 31, 2000, there was no ineffectiveness related to cash flow hedges. For net investment hedges, the spot-to-spot method is used by the Company to calculate effectiveness. As a result of using this method, net gains of $0.1 million and $0.3 million were recognized in earnings for the 13 weeks13-week and 26-week periods ended December 30,March 31, 2002, respectively, and a net gain of $0.5 million was recognized in earnings for both the 13-week and 26-week periods ended April 1, 2001. No gains were recognized during the 13 weeks ended December 31, 2000.
The Company had accumulated derivative gains related to cash flow and net investment hedges of $3.4$3.5 million, net of taxes, in other comprehensive income as of December 30, 2001.March 31, 2002, related to cash flow and net investment hedges. Of this amount, $2.1$1.8 million is expected to be reclassified into earnings within 12 months.
NOTE 6: EQUITY INVESTMENT TRANSACTIONS
On October 10, 2001, the Company sold 30,000 of its existing shares of Starbucks Coffee Japan, Ltd. (“Starbucks Japan”) at approximately $495 per share, net of related costs. In connection with this sale, the Company received cash proceeds of $14.8 million. The Company’s ownership interest in Starbucks Japan was reduced from 50.0% to 47.5% following the sale of the aforementioned shares. The Company recorded a gain from this sale of $13.4 million on the accompanying consolidated statement of earnings.
Also on October 10, 2001, Starbucks Japan issued 220,000 shares of common stock at approximately $495 per share, net of related costs, in an initial public offering in Japan. In connection with this offering, the Company’s ownership interest in Starbucks Japan was reduced from 47.5% to 40.1%. The Company recorded a credit to “Other additional paid-in capital” on the accompanying consolidated balance sheet of $39.4 million, reflecting the increase in value of its share of the net assets of Starbucks Japan related to the stock offering. As of December 30, 2001,March 31, 2002, the quoted closing price of Starbucks Japan shares was approximately $439.$206.
NOTE 7: PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost and consist of the following (in thousands):
December 30, | September 30, | March 31, | September 30, | ||||||||||||||
2001 | 2001 | 2002 | 2001 | ||||||||||||||
Land | $ | 6,023 | $ | 6,023 | Land | $ | 11,311 | $ | 6,023 | ||||||||
Buildings | 19,795 | 19,795 | |||||||||||||||
Building | Building | 30,461 | 19,795 | ||||||||||||||
Leasehold improvements | 1,030,780 | 960,732 | Leasehold improvements | 1,064,206 | 960,732 | ||||||||||||
Roasting and store equipment | 450,749 | 421,150 | Roasting and store equipment | 481,544 | 421,150 | ||||||||||||
Furniture, fixtures and other | 253,240 | 239,900 | Furniture, fixtures and other | 258,486 | 239,900 | ||||||||||||
1,760,587 | 1,647,600 | 1,846,008 | 1,647,600 | ||||||||||||||
Less accumulated depreciation and amortization | (654,432 | ) | (605,247 | ) | Less accumulated depreciation and amortization | (705,150 | ) | (605,247 | ) | ||||||||
1,106,155 | 1,042,353 | 1,140,858 | 1,042,353 | ||||||||||||||
Work in progress | 53,307 | 93,431 | Work in progress | 54,539 | 93,431 | ||||||||||||
Property, plant and equipment, net | $ | 1,159,462 | $ | 1,135,784 | Property, plant and equipment, net | $ | 1,195,397 | $ | 1,135,784 | ||||||||
67
NOTE 8: SHAREHOLDERS’ EQUITY
As part of its authorized share repurchase program initiated during September 2001, the Company may acquire up to $60.0 million of its common stock in the open market. Since the share repurchase program’s inception, the Company has acquired 3.5 million shares at a cost of $51.6 million. During the 1326 weeks ended December 30, 2001,March 31, 2002, the Company acquired 125,000 shares at a cost of $1.8 million.
NOTE 9: COMPREHENSIVE INCOME
Comprehensive income, net of related tax effects, is as follows (in thousands):
Three months ended | Three months ended | Six months ended | ||||||||||||||||||||||||
December 30, | December 31, | March 31, | April 1, | March 31, | April 1, | |||||||||||||||||||||
2001 | 2000 | 2002 | 2001 | 2002 | 2001 | |||||||||||||||||||||
Net earnings | Net earnings | $ | 68,355 | $ | 48,995 | Net earnings | $ | 32,077 | $ | 32,210 | $ | 100,431 | $ | 81,205 | ||||||||||||
Unrealized holding gains on cash flow hedging instruments | 1,240 | 483 | Unrealized holding gains on cash flow hedging instruments | 587 | 1,488 | 1,827 | 1,971 | |||||||||||||||||||
Unrealized holding gains on net investment hedge | 1,169 | — | Unrealized holding gains on net investment hedge | 136 | 886 | 1,305 | 886 | |||||||||||||||||||
Unrealized holding losses on available-for-sale investments | (38 | ) | (170 | ) | Unrealized holding gains (losses) on available-for-sale investments | 92 | 158 | 54 | (12 | ) | ||||||||||||||||
Reclassification adjustment for (gains)/losses realized in net earnings | (1,166 | ) | 14 | Reclassification adjustment for net (gains) losses realized in net earnings | (641 | ) | — | (1,807 | ) | 14 | ||||||||||||||||
Net unrealized gain | Net unrealized gain | 1,205 | 327 | Net unrealized gain | 174 | 2,532 | 1,379 | 2,859 | ||||||||||||||||||
Translation adjustment | Translation adjustment | (14,541 | ) | 1,513 | Translation adjustment | (1,789 | ) | (10,101 | ) | (16,330 | ) | (8,588 | ) | |||||||||||||
Total comprehensive income | Total comprehensive income | $ | 55,019 | $ | 50,835 | Total comprehensive income | $ | 30,462 | $ | 24,641 | $ | 85,480 | $ | 75,476 | ||||||||||||
NOTE 10: EARNINGS PER SHARE
The following table represents the calculation of net earnings per common share —- - basic (in thousands, except earnings per share data):
Three Months Ended | Three months ended | Six months ended | ||||||||||||||||||||||
December 30, | December 31, | March 31, | April 1, | March 31, | April 1, | |||||||||||||||||||
2001 | 2000 | 2002 | 2001 | 2002 | 2001 | |||||||||||||||||||
Net earnings | $ | 68,355 | $ | 48,995 | $ | 32,077 | $ | 32,210 | $ | 100,431 | $ | 81,205 | ||||||||||||
Weighted average common shares and common stock units outstanding | 380,807 | 377,290 | 384,346 | 380,363 | 382,563 | 378,825 | ||||||||||||||||||
Net earnings per common share–basic | $ | 0.18 | $ | 0.13 | ||||||||||||||||||||
Net earnings per common share — basic | $ | 0.08 | $ | 0.08 | $ | 0.26 | $ | 0.21 | ||||||||||||||||
8
The following table represents the calculation of net earnings per common and common equivalent share — diluted (in thousands, except per share data):
Three Months Ended | Three months ended | Six months ended | |||||||||||||||||||||||
December 30, | December 31, | March 31, | April 1, | March 31, | April 1, | ||||||||||||||||||||
2001 | 2000 | 2002 | 2001 | 2002 | 2001 | ||||||||||||||||||||
Net earnings | Net earnings | $ | 68,355 | $ | 48,995 | $ | 32,077 | $ | 32,210 | $ | 100,431 | $ | 81,205 | ||||||||||||
Weighted average shares outstanding calculation: | Weighted average shares outstanding calculation: | ||||||||||||||||||||||||
Weighted average common shares and common stock units outstanding | 380,807 | 377,290 | |||||||||||||||||||||||
Dilutive effect of outstanding common stock options | 11,192 | 16,370 | |||||||||||||||||||||||
Weighted average common shares and common stock units outstanding | 384,346 | 380,363 | 382,563 | 378,825 | |||||||||||||||||||||
Dilutive effect of outstanding common stock options | 13,515 | 15,338 | 12,354 | 15,854 | |||||||||||||||||||||
Weighted average common and common equivalent shares outstanding | Weighted average common and common equivalent shares outstanding | 391,999 | 393,660 | 397,861 | 395,701 | 394,917 | 394,679 | ||||||||||||||||||
Net earnings per common and common equivalent share-diluted | $ | 0.17 | $ | 0.12 | |||||||||||||||||||||
Net earnings per common and common equivalent share— diluted | $ | 0.08 | $ | 0.08 | $ | 0.25 | $ | 0.21 | |||||||||||||||||
7
Options with exercise prices greater than the average market price for the periods indicated were not included in the computation of diluted earnings per share. These options totaled 9.50.5 million and 0.3 million for the 13 weeks ended December 30, 2001. There were approximately 20,000 options excludedMarch 31, 2002 and April 1, 2001, respectively, and 8.8 million and 0.4 million for the 1326 weeks ended DecemberMarch 31, 2000.2002 and April 1, 2001, respectively.
NOTE 11: LEGAL PROCEEDINGS
On June 20, 2001, and July 2, 2001, two purported class action lawsuits against the Company entitledJames Carr, et.al. v. Starbucks CorporationandOlivia Shields, et.al. v. Starbucks Corporationwere filed in the Superior Courts of California, Alameda and Los Angeles Counties, respectively. Each lawsuit subsequently was removed to the United States District Court, Northern District of California and Central District of California, respectively. Each of the lawsuits was filed by two plaintiffs who are current or former store managers and assistant store managers on behalf of themselves and other similarly situated store managers, assistant store managers and retail management trainees. The lawsuits allegealleged that the Company improperly classified such employees as exempt under California’s wage and hour laws and seeksought damages, restitution, reclassification and attorneys fees and costs. On April 19, 2002, Starbucks has been vigorously investigatingannounced that it had reached an agreement to settle the lawsuits to fully resolve all claims brought by the plaintiffs without engaging in protracted litigation. Starbucks recorded an $18.0 million charge, which is included in “General and preparingadministrative expenses” on the accompanying consolidated statement of earnings, for the estimated payment of claims to defend this litigation while pursuing alternative dispute resolution possibilities with the plaintiffs. The parties are scheduledeligible class members, attorneys’ fees and costs, and costs to begin a mediation process during the second quarter of fiscal 2002. The outcome of such mediation and the financial impact of settlement or continued litigation of the case to the Company, if any, cannot be predicted.third-party claims administrator, as well as applicable employer payroll taxes.
In addition to the California lawsuits described above, the Company is party to various 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 financial position or results of operations of the Company.
NOTE 12: SEGMENT REPORTING
Starbucks is organized into a number of business units which correspond to the Company’s operating segments.
The Company’s North American Retail
North American Retail, business unitwhich represents over 90% of total retail revenues and almost 80% of total net revenues, sells coffee and other beverages, whole bean coffees, complementary food, hardware and merchandise through Company-operated retail stores in the United States and Canada.
The Company’s Business Alliances
Business Alliances, business unitwhich represents over 40% of total specialty revenues and approximately 7% of total net revenues, sells whole bean and ground coffees through foodservice accounts. In addition, Business Alliances sells coffee and related products for resale through North American retail store licensing agreements and receives license fees and royalties.
Starbucks operates through several other9
All Other Business Units
The remainder of the Company’s business units eachindividually represent less than 10% of which is managed and evaluated independently.total net revenues. These operations include International Retail (comprised of international Company-operated retail stores), international retail store licensing, grocery channel licensing, warehouse club accounts, direct-to-consumer marketing channels, joint ventures international Company-operated retail stores and other initiatives related to the Company’s core businesses. These business units are managed and evaluated independently and do not meet the quantitative thresholds of a reportable segment under Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information.”
Revenues from these segments include both sales to unaffiliated customers and sales between segments, which are accounted for on a basis consistent with sales to unaffiliated customers. IntersegmentSegment information has been prepared using a management approach that is consistent with the basis and manner in which the Company’s management internally reviews financial information for operational decision making purposes. However, intersegment revenues, consisting primarily of product sales to and from subsidiaries and equity method investees, and other intersegment transactions, which are included in the information presented below, have been eliminated on the accompanying consolidated financial statements.
8
The tables below present information by operating segment (in thousands):
Three Months Ended | Three months ended | Six months ended | ||||||||||||||||||||||
December 30, | December 31, | March 31, | April 1, | March 31, | April 1, | |||||||||||||||||||
2001 | 2000 | 2002 | 2001 | 2002 | 2001 | |||||||||||||||||||
REVENUES: | ||||||||||||||||||||||||
NET REVENUES: | ||||||||||||||||||||||||
North American Retail | $ | 633,855 | $ | 531,078 | $ | 616,618 | $ | 492,310 | $ | 1,250,473 | $ | 1,023,388 | ||||||||||||
Business Alliances | 53,975 | 48,589 | 53,374 | 48,305 | 107,349 | 96,894 | ||||||||||||||||||
All other business units | 133,199 | 96,111 | 126,814 | 101,967 | 260,013 | 198,078 | ||||||||||||||||||
Intersegment revenues | (15,694 | ) | (8,391 | ) | (13,589 | ) | (13,294 | ) | (29,283 | ) | (21,685 | ) | ||||||||||||
Total revenues | $ | 805,335 | $ | 667,387 | ||||||||||||||||||||
Total net revenues | $ | 783,217 | $ | 629,288 | $ | 1,588,552 | $ | 1,296,675 | ||||||||||||||||
EARNINGS BEFORE INCOME TAXES: | ||||||||||||||||||||||||
North American Retail | $ | 110,936 | $ | 92,409 | $ | 99,812 | $ | 73,891 | $ | 210,748 | $ | 166,300 | ||||||||||||
Business Alliances | 14,671 | 12,329 | 11,424 | 11,121 | 26,095 | 23,450 | ||||||||||||||||||
All other business units | 17,917 | 13,085 | 13,157 | 15,813 | 31,074 | 28,898 | ||||||||||||||||||
Unallocated corporate expenses | (50,411 | ) | (41,596 | ) | (75,799 | ) | (48,770 | ) | (126,210 | ) | (90,366 | ) | ||||||||||||
Intersegment eliminations | (467 | ) | (170 | ) | 186 | (1,201 | ) | (281 | ) | (1,371 | ) | |||||||||||||
Operating income | 92,646 | 76,057 | ||||||||||||||||||||||
Operating Income | 48,780 | 50,854 | 141,426 | 126,911 | ||||||||||||||||||||
Interest and other income, net | 2,493 | 1,713 | 2,135 | 1,560 | 4,628 | 3,273 | ||||||||||||||||||
Gain on sale of investment | 13,361 | — | — | — | 13,361 | — | ||||||||||||||||||
Earnings before income taxes | $ | 108,500 | $ | 77,770 | $ | 50,915 | $ | 52,414 | $ | 159,415 | $ | 130,184 | ||||||||||||
General and administrative expenses and certain depreciation and amortization expenses included in the “unallocated corporate expenses” line pertain to corporate functions that are not specifically attributable to the Company’s operating segments. The fiscal 2002 periods include the $18.0 million litigation settlement charge as described in Note 11.
The table below represents information by geographic area (in thousands):
Three months ended | Three months ended | Six months ended | ||||||||||||||||||||||
December 30, | December 31, | March 31, | April 1, | March 31, | April 1, | |||||||||||||||||||
2001 | 2000 | 2002 | 2001 | 2002 | 2001 | |||||||||||||||||||
REVENUES FROM EXTERNAL CUSTOMERS: | ||||||||||||||||||||||||
NET REVENUES FROM EXTERNAL CUSTOMERS: | ||||||||||||||||||||||||
United States | $ | 696,348 | $ | 583,135 | $ | 678,393 | $ | 551,461 | $ | 1,374,741 | $ | 1,134,596 | ||||||||||||
Foreign countries | 108,987 | 84,252 | 104,824 | 77,827 | 213,811 | 162,079 | ||||||||||||||||||
Total revenues | $ | 805,335 | $ | 667,387 | ||||||||||||||||||||
Total net revenues | $ | 783,217 | $ | 629,288 | $ | 1,588,552 | $ | 1,296,675 | ||||||||||||||||
Revenues from foreign countriesForeign revenues are classified based on the location of the customers and consist primarily of retail revenues from Canada and the United Kingdom as well as specialty revenues generated from product sales to international licensees.
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ITEM 2: | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements herein, including anticipated store and market openings, planned capital expenditures and trends in or expectations regarding Starbucks Corporation’s operations and financial results, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on currently available operating, financial and competitive information and are subject to various risks and uncertainties. Actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, coffee and other raw materials prices and availability, successful execution of internal performance and expansion plans, the effect of slowing United States and international economies, the economic ramifications of the September 11, 2001 terrorist attacks and the governmental response thereto, the impact of competition, the effect of legal proceedings and other risks detailed herein and in Starbucks Corporation’s other filings with the Securities and Exchange Commission.
GENERAL
During the 13-week period ended December 30, 2001, Starbucks Corporation (“Starbucks” or the “Company”) derived approximately 85% of net revenues from its Company-operated retail stores. The remaining 15% of net revenues is derived from the Company’s Specialty Operations, which include sales to wholesale channels and licensees, royalty and license fee income and sales through its direct-to-consumer business and its on-line store. The Company’sCorporation’s fiscal year ends on the Sunday closest to September 30. Fiscal year 2001 had 52 weeks. The fiscal year ending on September 29, 2002 will also include 52 weeks.
Starbucks Corporation (“Starbucks” or the “Company”) is organized into a number of business units which correspond to the Company’s operating segments:
North American Retail
North American Retail, which represents over 90% of total retail revenues and almost 80% of total net revenues, sells coffee and other beverages, whole bean coffees, complementary food, hardware and merchandise through Company-operated retail stores in the United States and Canada.
Business Alliances
Business Alliances, which represents over 40% of total specialty revenues and approximately 7% of total net revenues, sells whole bean and ground coffees through foodservice accounts. In addition, Business Alliances sells coffee and related products for resale through North American retail store licensing agreements and receives license fees and royalties.
At the beginning of fiscal 2001, Starbucks combined its foodservice and domestic retail store licensing operations to form Business Alliances. As a result of this internal reorganization and the manner in which the operations of foodservice and domestic retail store licensing are measured and evaluated as one combined business unit, the Company’s management determined that separate segment reporting of Business Alliances was appropriate under Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information,” (SFAS No. 131).
All Other Business Units
The remainder of the Company’s business units individually represent less than 10% of total net revenues. These include International Retail (comprised of international Company-operated retail stores), international retail store licensing, grocery channel licensing, warehouse club accounts, direct-to-consumer marketing channels, joint ventures and other initiatives related to the Company’s core businesses. These business units are managed and evaluated independently and do not meet the quantitative thresholds of a reportable segment under SFAS No. 131.
Segment information is prepared using a management approach that is consistent with the basis and manner in which the Company’s management internally reviews financial information for operational decision making purposes. However, intersegment transactions have been eliminated for Management’s Discussion & Analysis to comply with accounting principles generally accepted in the United States of America.
RESULTS OF OPERATIONS — FOR THE 13 WEEKS ENDED DECEMBER 30, 2001,MARCH 31, 2002, COMPARED TO THE 13 WEEKS ENDED DECEMBER 31, 2000APRIL 1, 2001
SYSTEMWIDE RETAIL STORE SALES
Systemwide retail store sales, which include net sales for both Company-operated and licensed retail stores, were $910$895 million for the firstsecond quarter of fiscal 2002, an increase of 26%32% from $722$679 million in the firstsecond quarter of fiscal 2001, primarily due to the opening of 1,2871,233 stores in the last 12 months. Systemwide retail store sales providesprovide a broad perspective of global brand sales; however, it excludesthey exclude net revenues from non-retail channels.
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REVENUES
During the 13-week period ended March 31, 2002, Starbucks derived approximately 83% of net revenues from its Company-operated retail stores. Retail revenues include North American Retail and International Retail business units. The remaining 17% of net revenues is derived from the Company’s Specialty Operations, which includes Business Alliances and all other non-retail business units.
The table below reconciles revenues by operating segment to revenues on the accompanying consolidated statements of earnings (in thousands):
Three Months Ended | |||||||||
March 31, | April 1, | ||||||||
2002 | 2001 | ||||||||
NET REVENUES: | |||||||||
North American Retail | $ | 616,618 | $ | 492,310 | |||||
International Retail | 47,644 | 30,967 | |||||||
Subtotal Retail revenues | 664,262 | 523,277 | |||||||
Business Alliances | 53,374 | 48,305 | |||||||
All other business units (excluding International Retail) | 79,170 | 71,000 | |||||||
Intersegment revenues | (13,589 | ) | (13,294 | ) | |||||
Subtotal Specialty revenues | 118,955 | 106,011 | |||||||
Total net revenues | $ | 783,217 | $ | 629,288 | |||||
TOTAL NET REVENUES
Net revenues for the 13 weeks ended December 30,March 31, 2001, increased 21%24% to $805$783.2 million from $667$629.3 million for the corresponding period in fiscal 2001.
REVENUES BY SEGMENT
North American Retail
North American Retail revenues increased 21%by $124.3 million, or 25%, to $682$616.6 million for the second quarter of fiscal 2002 from $562$492.3 million during the same period of fiscal 2001, primarily due to the opening of new Company-operated retail stores andplus an increase in comparable store sales of 2%7% for the period. The increase in comparable store sales resulted from an 8% increase in the number of transactions combined with a 1% decrease in the average dollar value per transaction. The continuing shift in sales mix to beverages and the absence of a price increase has resulted in a slight decrease in the average transaction value. During the 13 weeks ended March 31, 2002, Starbucks opened 124 North American Retail stores, ending the period with 3,278 stores. During fiscal 2002, Starbucks expects to open at least 525 North American Retail stores.
Business Alliances
Business Alliances revenues increased by $5.1 million, or 10%, to $53.4 million from $48.3 million, primarily due to opening of new licensed stores and the resulting increase in royalties from and product sales to those licensees. During the 13 weeks ended March 31, 2002, licensees opened 71 stores in continental North America, ending the period with 962 licensed stores. During fiscal 2002, the Company expects licensees to open at least 300 stores in North America.
All Other Business Units (including International Retail)
Revenues for all other business units increased by $24.5 million, or 28%, to $113.2 million from $88.7 million. This increase was mainly related to the growth in the number of international Company-operated and licensed stores. During the 13 weeks ended March 31, 2002, Starbucks opened 7 Company-operated stores in the United Kingdom, 3 in Australia, 1 in Thailand and 58 international licensed stores (included licensees in which the Company has an equity interest). As of March 31, 2002, there were 350 Company-operated stores and 778 licensed stores in international markets. During fiscal 2002, Starbucks expects to open at least 100 Company-operated stores and 275 licensed stores in international markets.
RESULTS OF OPERATIONS
Cost of sales and related occupancy costs decreased to 40.9% of net revenues for the second quarter of fiscal 2002 from 43.1% in fiscal 2001. The decrease was primarily due to the shift in sales mix to higher margin products and the continued benefit from lower green coffee costs, partially offset by the continuing trend of increased International Retail and North American Retail rent expense.
12
Store operating expenses as a percentage of retail revenues increased to 40.8% for the 13 weeks ended March 31, 2002, from 39.9% for the corresponding period in fiscal 2001. The increase was due to higher payroll-related expenditures for North American Retail employees.
Other operating expenses (expenses associated with non-retail operations) were 28.2% of specialty revenues for the 13 weeks ended March 31, 2002, compared to 22.4% for the corresponding period in fiscal 2001. The increase is a result of the continuing investment in support of both domestic and international licensee channels.
Depreciation and amortization expenses as a percentage of net revenues increased to 6.4% for the 13 weeks ended March 31, 2002, from 6.1% for the corresponding period in fiscal 2001. The increase is primarily due to computer and communication equipment upgrades in International Retail and North American Retail stores.
General and administrative expenses were $67.3 million for the 13 weeks ended March 31, 2002, compared to $42.4 million for the same period in fiscal 2001 primarily due to the $18 million litigation settlement charge in fiscal 2002, as well as higher payroll-related expenditures and professional fees.
Income from equity investees was $7.5 million for the second quarter of fiscal 2002, compared to $6.2 million in the second quarter of fiscal 2001. The increase was primarily due to improved profitability from the North American Coffee Partnership, the Company’s joint venture with the Pepsi-Cola Company, which experienced favorable results from extended product lines and manufacturing efficiencies, and to a lesser extent, from the Starbucks Ice Cream Partnership, the Company’s joint venture with Dreyer’s Grand Ice Cream, Inc., due to increased sales volumes as well as a price increase.
Operating income decreased 4% to $48.8 million from $50.9 million in the second quarter of fiscal 2001. The operating margin declined to 6.2% of total net revenues in the second quarter of fiscal 2002 compared to 8.1% in the same period in fiscal 2001 primarily due to the $18 million litigation settlement charge recorded during the second quarter of fiscal 2002, as well as other expenses discussed above. This decrease was partially offset by the improvement in cost of sales and related occupancy costs primarily due to the shift in sales mix to higher margin products and the continued benefit from lower green coffee costs.
RESULTS OF OPERATIONS BY SEGMENT
The table below reconciles results of operations on the accompanying consolidated statements of earnings to operating results by segment for the three months ended (in thousands):
March 31, 2002 | April 1, 2001 | |||||||||||||||||||||||
Consoli- | Inter- | Segment | Consoli- | Inter- | Segment | |||||||||||||||||||
dated | segment | Results | dated | segment | Results | |||||||||||||||||||
EARNINGS BEFORE INCOME TAXES: | ||||||||||||||||||||||||
North American Retail | $ | 101,826 | $ | (2,014 | ) | $ | 99,812 | $ | 73,891 | $ | — | $ | 73,891 | |||||||||||
Business Alliances | 11,663 | (239 | ) | 11,424 | 11,121 | — | 11,121 | |||||||||||||||||
All other business units | 11,090 | 2,067 | 13,157 | 14,612 | 1,201 | 15,813 | ||||||||||||||||||
Intersegment eliminations | — | 186 | 186 | — | (1,201 | ) | (1,201 | ) | ||||||||||||||||
Unallocated corporate expenses | (75,799 | ) | — | (75,799 | ) | (48,770 | ) | — | (48,770 | ) | ||||||||||||||
Operating Income | $ | 48,780 | $ | — | $ | 48,780 | $ | 50,854 | $ | — | $ | 50,854 | ||||||||||||
North American Retail
Operating income for North American Retail increased by 38% to $101.8 million from $73.9 million in the first quarter of fiscal 2001. The North American Retail operating margin increased to 16.5% of related revenues from 15% in the prior year, due to the shift in retail sales mix to higher margin products and lower green coffee costs, partially offset by higher payroll-related expenditures, rent expense and depreciation.
Business Alliances
Operating income for Business Alliances increased by 5% to $11.7 million from $11.1 million in fiscal 2001. The segment’s operating margin decreased to 21.9% of related revenues from 23.0% in the prior year, due to the development of internal resources to support geographic expansion of Business Alliances.
All Other Business Units
Operating income for all other business units decreased to $11.1 million from $14.6 million in fiscal 2001. The segment’s operating margin decreased to 9.8% of related revenues from 16.5% in the prior year, primarily due to increased International Retail rent, payroll-related expenditures, and higher operating expenses associated
13
with the development of internal resources to support the international expansion of the licensee channel. These increases were partially offset by lower green coffee costs.
General and administrative expenses and certain depreciation and amortization expenses included in the “unallocated corporate expenses” line pertain to corporate functions that are not specifically attributable to the Company’s operating segments. The 13 weeks ended March 31, 2002 includes the $18.0 million litigation settlement charge.
RESULTS OF OPERATIONS — FOR THE 26 WEEKS ENDED MARCH 31, 2002, COMPARED TO THE 26 WEEKS ENDED APRIL 1, 2001
SYSTEMWIDE RETAIL STORE SALES
Systemwide retail store sales were $1.8 billion for the 26 weeks ended March 31, 2002, an increase of 29% from $1.4 billion for the same period in fiscal 2001 primarily due to the opening of additional stores in the last 12 months.
REVENUES
During the 26-week period ended March 31, 2002, Starbucks derived approximately 85% of net revenues from its Company-operated retail stores. The remaining 15% of net revenues is derived from the Company’s Specialty Operations.
The table below reconciles revenues by operating segment to revenues on the accompanying consolidated statements of earnings (in thousands):
Six Months Ended | |||||||||
March 31, | April 1, | ||||||||
2002 | 2001 | ||||||||
NET REVENUES: | |||||||||
North American Retail | $ | 1,250,473 | $ | 1,023,388 | |||||
International Retail | 96,054 | 62,296 | |||||||
Subtotal Retail revenues | 1,346,527 | 1,085,684 | |||||||
Business Alliances | 107,349 | 96,894 | |||||||
All other business units (excluding International Retail) | 163,959 | 135,782 | |||||||
Intersegment revenues | (29,283 | ) | (21,685 | ) | |||||
Subtotal Specialty revenues | 242,025 | 210,991 | |||||||
Total net revenues | $ | 1,588,552 | $ | 1,296,675 | |||||
TOTAL NET REVENUES
Net revenues for the 26 weeks ended March 31, 2002, increased 23% to $1.6 billion from $1.3 billion for the corresponding period in fiscal 2001.
REVENUES BY SEGMENT
North American Retail
North American Retail revenues increased by $227.1 million, or 22%, to $1.3 billion from $1.0 billion, primarily due to the opening of new retail stores plus an increase in comparable store sales of 5% for the period. The increase in comparable store sales resulted from a 4%6% increase in the number of transactions partially offset bycombined with a 2%1% decrease in the average dollar value per transaction. RevenuesThe continuing shift in sales mix to beverages and the first quarter typically includeabsence of a higher percentage of sales of coffee and espresso-making equipment and accessories than during the remainder of the fiscal year. However, sales of these itemsprice increase resulted in the first fiscal quarter of 2002 were lower than in the previous year on a comparable store basis and contributed to theslight decrease in the average dollar value per transaction.transaction value. During the 1326 weeks ended December 30, 2001,March 31, 2002, Starbucks opened 183 Company-operated stores in continental307 North America, 36 in the United Kingdom and 8 in Australia. As of December 30, 2001, there were 3,154 Company-operated stores in continental North America and 339 in international markets. During fiscal 2002, Starbucks expects to open at least 525 Company-operated stores in North America and 100 in international markets.American Retail stores.
SpecialtyBusiness Alliances
Business Alliances revenues increased 17%by $10.5 million, or 11%, to $123$107.3 million forfrom $96.9 million, primarily due to opening of new licensed stores and the 13 weeks ended December 30, 2001, compared to $105 million for the corresponding period in fiscal 2001. Theresulting increase in specialty revenues was driven primarily by higher royalties from and product sales to our domesticthose licensees. During the 26 weeks ended March 31, 2002, licensees opened 153 stores in continental North America.
All Other Business Units (including International Retail)
Revenues related to all other business units increased by $54.3 million, or 31%, to $230.7 million from $176.4 million. This increase was mainly related to the growth in the number of international Company-operated and international retail store licenseeslicensed stores as well as higher revenuerevenues from the grocery channel and warehouse club accounts. Licensees (including thoseDuring the 26 weeks ended March 31, 2002, Starbucks opened 144 international licensed stores (included licensees in which the
14
Company has an equity interest) opened 86, 43 Company-operated stores in international marketsthe United Kingdom, 11 in Australia and 82 stores1 in continental North America. Starbucks ended the period with 891 licensed stores in continental North America and 720 licensed stores in international markets. During fiscal 2002, the Company expects to open at least 575 licensed stores globally.
10
EXPENSESRESULTS OF OPERATIONS
Cost of sales and related occupancy costs decreased to 41.8%41.4% of net revenues for fiscal 2002 from 43.8%43.4% in fiscal 2001. The decrease was primarily due to the continued benefit from lower green coffee costs, the shift in sales mix to higher margin products and centralized procurement efforts,the continued benefit from lower green coffee costs, partially offset by higher rent expense for both internationalInternational Retail and domestic retail stores.North American Retail.
Store operating expenses as a percentage of retail revenues increased to 38.2%39.5% for the 1326 weeks ended December 30, 2001,March 31, 2002, from 37.3%38.5% for the corresponding period in fiscal 2001. The increase was due to higher payroll-related expenditures resulting from higher average wage rates and the continuing shift in sales to more labor-intensive handcrafted beverages.
Other operating expenses (expenses associated with the Company’s Specialty Operations)non-retail operations) were 24.6%26.4% of specialty revenues for the 13 weeks ended December 30, 2001, compared to 20.8% for the corresponding period21.6% in fiscal 2001. The increase is attributed to the continuing growth of licensee channels, both domesticinternational and international,domestic, as the Company expands these businesses geographically and develops its internal resources to support them, as well as provisions for asset disposals, higher advertising expenditures for the Company’s direct-to-consumer catalog channel.channel and increased professional fees.
Depreciation and amortization expenses as a percentage of net revenues were 6.2%increased to 6.3% for the 1326 weeks ended December 30, 2001, compared to 5.6%March 31, 2002, from 5.9% for the corresponding period in fiscal 2001 due to system and equipment upgrades in North American Company-operated retailRetail and International Retail stores.
General and administrative expenses as a percentage of net revenues were 5.1% for the 13 weeks ended December 30, 2001$108.4 million in fiscal 2002 compared to 5.2% for the same period$77.3 million in fiscal 2001. The decreaseincrease is attributed to lower professional fees and a lower provision for obsolete computer software, partially offset byresult of the litigation settlement charge recorded in fiscal 2002 as well as higher payroll-related expenditures.
INCOME FROM EQUITY INVESTEES
Income from equity investees was $6.6$14.0 million for the first quarter of fiscal26 weeks ended March 31, 2002, compared to $4.8$11.0 million infor the first quarter ofcorresponding period in fiscal 2001. The increase was primarily due to improved profitability from the North American Coffee Partnership which experienced favorable resultsresulting from extended product lines and manufacturing efficiencies, as well as improvements in Starbucks Coffee Japan, Ltd. related to higher royalty rates and theadditional stores. The addition of Starbucks Coffee Korea Co.,Co, Ltd., as a new profitable joint venture.venture also contributed modestly to increased income for equity investments.
GAIN ON SALEOperating income increased 11% to $141.4 million for the 26 weeks ended March 31, 2002 compared to $126.9 million in the corresponding period in fiscal 2001. The operating margin declined to 8.9% of total net revenues from 9.8% in the same period in fiscal 2001 due to expenses as discussed above partially offset by cost of sales improvements.
RESULTS OF INVESTMENTOPERATIONS BY SEGMENT
On October 10, 2001,The table below reconciles results of operations on the Company sold 30,000accompanying consolidated statements of its sharesearnings to operating results by segment for the six months ended (in thousands):
March 31, 2002 | April 1, 2001 | |||||||||||||||||||||||
Consoli- | Inter- | Segment | Consoli- | Inter- | Segment | |||||||||||||||||||
dated | segment | Results | dated | segment | Results | |||||||||||||||||||
EARNINGS BEFORE INCOME TAXES: | ||||||||||||||||||||||||
North American Retail | $ | 213,736 | $ | (2,988 | ) | $ | 210,748 | $ | 166,300 | $ | — | $ | 166,300 | |||||||||||
Business Alliances | 26,587 | (492 | ) | 26,095 | 23,450 | — | 23,450 | |||||||||||||||||
All other business units | 27,313 | 3,761 | 31,074 | 27,527 | 1,371 | 28,898 | ||||||||||||||||||
Intersegment eliminations | — | (281 | ) | (281 | ) | — | (1,371 | ) | (1,371 | ) | ||||||||||||||
Unallocated corporate expenses | (126,210 | ) | — | (126,210 | ) | (90,366 | ) | — | (90,366 | ) | ||||||||||||||
Operating Income | $ | 141,426 | $ | — | $ | 141,426 | $ | 126,911 | $ | — | $ | 126,911 | ||||||||||||
North American Retail
Operating income for North American Retail increased 29% to $213.7 million for the 26 weeks ended March 31, 2002 compared to $166.3 million in the corresponding period in fiscal 2001. The North American Retail operating margin increased to 17.1% of Starbucks Coffee Japan, Ltd. (“Starbucks Japan”)related revenues from 16.2% in the prior year, due to the shift in retail sales mix to higher margin products and lower green coffee costs, partially offset by higher payroll-related expenditures, rent expense and depreciation.
15
Business Alliances
Operating income for Business Alliances increased 13% to $26.6 million from $23.5 million in fiscal 2001. The segment’s operating margin increased to 24.8% of related revenues from 24.2% in the prior year, due to cost of sales improvements partially offset by increased expenses related to the development of internal resources to support geographic expansion of Business Alliances.
All Other Business Units
Operating income for all other business units remained constant at approximately $495 per share, net$27 million. The segment’s operating margin decreased to 11.8% of related costs. In connection with this sale,revenues from 15.6% in the Company received proceeds of $14.8 million and recorded a gain of $13.4 million. The Company does not anticipate selling any of its remaining investment in Starbucks Japan.
INCOME TAXES
The Company’s effective tax rate for the 13 weeks ended December 30, 2001 was 37.0%, consistentprior year, primarily due to increased International Retail rent, higher operating expenses associated with the first quarterdevelopment of fiscal 2001. Management expectsinternal resources to support the tax rate to remain at 37.0% through fiscal 2002.international expansion of the licensee channel, and higher payroll-related expenditures. These increases were partially offset by cost of sales improvements.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the period with $309 million in total cash and cash equivalents and short-term investments.investments of $323.3 million. Working capital as of December 30, 2001,March 31, 2002, totaled $212$250.0 million compared to $185 million$214.3 as of December 31, 2000.April 1, 2001. Cash and cash equivalents increased by $114$48.6 million for the 1326 weeks ended December 30, 2001March 31, 2002 to $227$161.8 million. The Company intends to use its available cash resources to invest in its coreexisting businesses and other new business opportunities related to its core businesses.businesses and to complete the remaining $8.4 million of a previously authorized $60.0 million share repurchase program.
Cash provided by operating activities totaled $147$232.1 million for the first 1326 weeks of fiscal 2002, resulting primarily from net earnings and non-cash items of $110$207.8 million and an increasedecreases in deferred revenueinventory of $22 million related to the introduction of the Starbucks Card, a stored value card. Starbucks recognizes a deferred revenue liability for all stored value card balances that have not yet been redeemed.$48.7 million. The liability is relieved and revenue is recognized upon redemption of stored value cards at participating Starbucks locations. An additional $11 million dollars was contributed from an increase in other accrued expenses primarily due toprovided $19.7 million, $18 million of which was for the litigation settlement charge. Decreases in accounts payable and accrued taxes used $67.3 million resulting from differences in the timing of payment for purchases of available-for-sale securities.
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and payments.
Cash used by investing activities for the first 1326 weeks of fiscalended March 31, 2002, totaled $50$228.1 million. This included capital additions to property, plant and equipment of $89$183.6 million related to opening 227362 new Company-operated retail stores, purchasing land for the Company’s new roasting and distribution facility in Nevada, expanding the warehouse space at the roasting facility in York, Pennsylvania, remodeling certain existing stores and enhancing information systems. The Company invested excess cash primarily in short-term, investment-grade marketable debt securities. The net activity in the Company’s marketable securities portfolio during the 26-week period used $51.6 million. Proceeds from the sale of a portion of the Company’s shares in Starbucks Japan provided $15 million. The net activity in the Company’s available-for-sale portfolio during the 13-week period provided $27$14.8 million.
Cash provided by financing activities for the first 1326 weeks of fiscal 2002 totaled $17$44.9 million. This included $19$60.2 million generated fromby the exercise of employee stock options.options and by the Company’s employee stock purchase plan. As options granted under the Company’s stock option plans vest and are exercised, Starbucksthe Company will continue to receive proceeds and may receive a tax deduction; however, neither the amounts nor timing can be predicted. A decrease in checks not yet presented for payment used $13.2 million. On September 17, 2001, the Company announced a share repurchase program to acquire up to $60$60.0 million of the Company’s common stock from time to time on the open market. Share repurchases are at the discretion of management and depend on market conditions, capital requirements and such other factors as the Company may consider relevant. During the 13-week26-week period ending December 30, 2001,March 31, 2002, the Company had repurchased 125,000 shares, which used $2$1.8 million of cash. Since inception of the share repurchase program, Starbucks has repurchased 3.5 million shares using $51.6 million of the $60.0 million approved for the program.
Cash requirements for the remainder of fiscal 2002, other than normal operating expenses, are expected to consist primarily of capital expenditures related to the addition of new Company-operated retail stores. The Company plans to open at least 625 Company-operated stores during fiscal 2002. The Company also anticipates incurring additional expenditures for remodeling certain existing stores and enhancing its production capacity and information systems. While there can be no assurance that current expectations will be realized, management expects capital expenditures for the remainder of fiscal 2002 to be inapproximately $240 million, bringing the range of $360 milliontotal for fiscal 2002 to $385approximately $425 million.
Management believes that existing cash and investments plus cash generated from operations should be sufficient to finance capital requirements for its core businesses through fiscal 2002.for the foreseeable future. New joint ventures, other new business opportunities or store expansion rates substantially in excess of that presently planned may require outside funding.
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COFFEE PRICES AND AVAILABILITY AND GENERAL RISK CONDITIONS
The supply and price of coffee are subject to significant volatility. Although most coffee trades in the commodity market, coffee of the quality sought by the Company tends to trade on a negotiated basis at a substantial premium above commodity coffee prices, depending upon the supply and demand at the time of purchase. Supply and price can be affected by multiple factors in the producing countries, including weather, political and economic conditions. In addition, green coffee prices have been affected in the past, and may be affected in the future, by the actions of certain organizations and associations that have historically attempted to influence commodity prices of green coffee through agreements establishing export quotas or restricting coffee supplies worldwide. The Company’s ability to raise sales prices in response to rising coffee prices may be limited and the Company’s profitability could be adversely affected if coffee prices were to rise substantially.
The Company depends upon its relationships with outside trading companies and exporters for its supply of green coffee. Because world coffee prices have recently experienced 30-year lows, the Company is negotiating contracts with its suppliers at levels equal to prior years in order to encourage the continuing supply of high quality coffee in the future and has been successful in securing long-term contracts on this basis. The Company enters into fixed-price purchase commitments in order to secure an adequate supply of quality green coffee and bring greater certainty to the cost of sales in future periods. As of December 30, 2001,March 31, 2002, the Company had approximately $284$260.7 million in fixed-price purchase commitments which, together with existing inventory, is expected to provide an adequate supply of green coffee through 2002.2003. The Company believes, based on relationships established with its suppliers in the past, that the risk of non-delivery on such purchase commitments is low.
In addition to fluctuating coffee prices, management believes that 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, increased costs associated with opening and operating retail stores in new markets, increases in the cost of dairy products and the Company’s continued ability to hire, train and retain qualified personnel.
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SEASONALITY AND QUARTERLY RESULTS
The Company’s business is subject to seasonal fluctuations. Significant portions of the Company’s net revenues and profits are 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
Starbucks prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period (see Note 1 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K). Actual results could differ from those estimates.
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 policy on impairment of long-lived assets to be 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, including intangibles, may be impaired, an evaluation of recoverability is performed by comparing the carrying value of the assets to projected future cash flows in addition to other quantitative and qualitative analyses. Upon indication that the carrying value of such assets may not be recoverable, the Company
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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 a material impairment charge.
NEW ACCOUNTING STANDARDS
In November 2001, the Financial Accounting Standards Board (FASB) issued TopicEmerging Issues Task Force (EITF) No. D-103,01-14, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred.” This TopicIssue clarifies the FASB Staff’s position that all reimbursements received for incidental expenses incurred in conjunction with providing services as part of a company’s central on-going operations should be characterized as revenue in the income statement. The Company adopted TopicEITF No. D-103 as of01-14 on December 31, 2001, and doesit did not expect it to have a material impact on the Company’s consolidated results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the information to be disclosed under this Item 3 pursuant to Item 305 of Regulation S-K since the disclosure provided for the fiscal year ended September 30, 2001. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Risk Management” in the Company’s Fiscal 2001 Annual Report to Shareholders, which is incorporated by reference into Item 7A of the Company’s Annual Report on Form 10-K for the year ended September 30, 2001 and attached as Exhibit 13 thereto.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
OnAs previously reported in the Company’s Form 10-K for the fiscal year ended September 30, 2001 and the Company’s Form 10-Q for the period ended December 31, 2001, on June 20, 2001, and July 2, 2001, two purported class action lawsuits against the Company entitledJames Carr, et.al. v. Starbucks CorporationandOlivia Shields, et.al. v. Starbucks Corporationwere filed in the Superior Courts of California, Alameda and Los Angeles Counties, respectively. Each lawsuit subsequently was removed to the United States District Court, Northern District of California and Central District of California, respectively. Each of the lawsuits was filed by two plaintiffs who are current or former store managers and assistant store managers on behalf of themselves and other similarly situated store managers, assistant store managers and retail management trainees. The lawsuits allegealleged that the Company improperly classified such employees as exempt under California’s wage and hour laws and seeksought damages, restitution, reclassification and attorneys fees and costs. On April 19, 2002, Starbucks has been vigorously investigatingannounced that it had reached an agreement to settle the lawsuits to fully resolve all claims brought by the plaintiffs without engaging in protracted litigation. Starbucks recorded an $18.0 million charge, which is included in “General and preparingadministrative expenses” on the accompanying consolidated statement of earnings, for the estimated payment of claims to defend this litigation while pursuing alternative dispute resolution possibilities with the plaintiffs. The parties are scheduledeligible class members, attorneys’ fees and costs, and costs to begin a mediation process during the second quarter of fiscal 2002. The outcome of such mediation and the financial impact of settlement or continued litigation of the case to the Company, if any, cannot be predicted.third-party claims administrator, as well as applicable employer payroll taxes.
In addition to the California lawsuits described above, the Company is party to various 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 financial position or results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 8, 2002, the Board of Directors of the Company approved an amendment to the Amended and Restated Bylaws of the Company (i) to specify the business that may be brought properly before an Annual Meeting of Shareholders, and (ii) to require shareholders to provide notice of such business and nominations to the Board of Directors to the secretary of the Company prior to the Annual Meeting of Shareholders. A copy of the Amended and Restated Bylaws of the Company is attached hereto as Exhibit 3.2.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of shareholders of the Company held on February 26, 2002, the shareholders (i) elected three Class 3 directors to serve until the Annual Meeting of Shareholders to be held in early 2005, (ii) ratified the selection of the independent auditors for fiscal 2002, (iii) approved the material terms of the Company’s Executive Management Bonus Plan, (iv) rejected a shareholder proposal to declassify the Company’s Board of Directors, and (v) rejected a shareholder proposal to identify and label all food products manufactured or sold by the Company that may contain genetically modified ingredients.
The table below shows the results of the shareholders’ voting:
Votes in | Votes | Votes Withheld/ | Broker | ||||||||||||||
Favor | Against | Abstentions | Non-Votes | ||||||||||||||
Election of Class 3 Directors: | |||||||||||||||||
Barbara Bass | 332,397,798 | 0 | 3,217,810 | 0 | |||||||||||||
Craig J. Foley | 331,733,798 | 0 | 3,881,810 | 0 | |||||||||||||
Howard Schultz | 331,797,665 | 0 | 3,817,943 | 0 | |||||||||||||
Ratification of independent auditors | 330,613,789 | 3,438,858 | 1,562,961 | 0 | |||||||||||||
Approve the material terms of the Company’s Executive Management Bonus Plan | 322,329,448 | 9,681,415 | 3,604,745 | 0 | |||||||||||||
Shareholder proposal to declassify the Company’s Board of Directors | 84,197,037 | 151,411,461 | 4,062,615 | 95,944,495 | |||||||||||||
Shareholder proposal to identify and label all food products that may contain genetically modified ingredients | 15,844,775 | 213,374,022 | 10,452,316 | 95,944,495 |
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) | Exhibits: | |
3.2 Amended and Restated Bylaws of Starbucks Corporation | ||
(b) | Current Reports on Forms 8-K filed during the 13 weeks ended | |
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SIGNATURE
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: | By: | /s/ Michael Casey | |
Michael Casey executive vice president and chief financial officer | |||
Signing on behalf of the registrant and as principal financial officer |
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