<PAGE 1>
- -------------------------------------------------------------
UNITED STATES
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 29, 1998
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
(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] NO [ ]
As of May 1, 1998, there were 87,334,030 shares of the
Registrant's Common Stock outstanding.
- -----------------------------------------------------------
<PAGE 2>
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 . 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk . . . . . . . . . . . . . . 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of
Security Holders. . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K. . . . . . . 14
Signature. . . . . . . . . . . . . . . . . . . . . . . 14
2
<PAGE 3>
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
March 29, March 30, March 29, March 30,
1998 1997 1998 1997
(13 Weeks) (13 Weeks) (26 Weeks) (26 Weeks)
(unaudited) (unaudited)
- --------------------------------------------------------------------------
Net revenues $289,606 $214,915 $606,558 $454,057
Cost of sales and related
occupancy costs 130,320 99,149 274,064 214,705
Store operating expenses 92,021 69,226 187,623 139,327
Other operating expenses 8,492 6,931 18,022 14,713
Depreciation and amortization 17,038 12,381 32,812 23,856
General and administrative
expenses 19,307 13,236 37,090 26,157
- --------------------------------------------------------------------------
Operating income 22,428 13,992 56,947 35,299
Interest and other income 2,329 3,520 4,486 7,415
Interest expense (150) (1,834) (884) (3,638)
- --------------------------------------------------------------------------
Earnings before income taxes 24,607 15,678 60,549 39,076
Income taxes 9,472 6,035 23,310 15,043
- --------------------------------------------------------------------------
Net earnings $15,135 $9,643 $37,239 $24,033
==========================================================================
Net earnings per common share -
basic $0.17 $0.12 $0.44 $0.31
==========================================================================
Net earnings per common and
common equivalent share -
diluted $0.17 $0.12 $0.42 $0.30
==========================================================================
Weighted average common shares
outstanding - basic 87,059 78,127 85,376 77,925
Weighted average common and
common equivalent shares
outstanding - diluted 89,738 88,403 89,609 88,421
<FN>
See notes to consolidated financial statements
3
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STARBUCKS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except numbers of shares)
March 29, September 28,
1998 1997
(unaudited)
- ----------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 107,938 $ 70,126
Short-term investments 44,402 83,504
Accounts and notes receivable 34,066 30,524
Inventories 128,279 119,526
Prepaid expenses and other
current assets 9,893 8,763
Deferred income taxes, net 5,813 4,164
- ----------------------------------------------------------------------
Total current assets 330,391 316,607
Joint ventures and other equity investments 33,818 34,464
Property, plant and equipment, net 532,483 483,259
Deposits and other assets 14,336 16,342
- ----------------------------------------------------------------------
Total $ 911,028 $ 850,672
======================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 59,415 $ 46,324
Checks drawn in excess of bank balances 20,968 25,807
Accrued compensation and related costs 30,564 25,894
Accrued occupancy costs 14,850 12,184
Other accrued expenses 24,164 28,820
- ----------------------------------------------------------------------
Total current liabilities 149,961 139,029
Deferred income taxes, net 15,058 12,784
Capital lease and other obligations 1,313 2,009
Convertible subordinated debentures 0 165,020
Shareholders' equity:
Common stock, no par value -- 150,000,000
shares authorized; 87,288,320 (includes
424,275 common stock units) and
79,058,754 shares, respectively,
issued and outstanding 563,950 386,877
Retained earnings including
cumulative translation adjustment
of $(2,643) and $(1,603), respectively,
and net unrealized holding (loss) gain
on investments of $(343) and $63,
respectively 180,746 144,953
- ----------------------------------------------------------------------
Total shareholders' equity 744,696 531,830
- ----------------------------------------------------------------------
Total $ 911,028 $ 850,672
======================================================================
<FN>
See notes to consolidated financial statements
4
<PAGE 5>
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
- ----------------------------------------------------------------------
March 29, March 30,
1998 1997
(26 Weeks) (26 Weeks)
(unaudited)
- ----------------------------------------------------------------------
Operating activities:
Net earnings $ 37,239 $ 24,033
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 36,479 26,583
Deferred income taxes, net 881 1,015
Equity in losses of investees 177 2,176
Cash provided/(used) by changes in
operating assets and liabilities:
Accounts and notes receivable (3,546) (3,757)
Inventories (8,784) 1,955
Prepaid expenses and other
current assets (1,138) (1,677)
Accounts payable 12,863 2,953
Accrued compensation and
related costs 4,636 4,200
Accrued occupancy costs 2,666 1,939
Other accrued expenses (4,288) (2,739)
- ----------------------------------------------------------------------
Net cash provided by operating activities 77,185 56,681
Investing activities:
Purchase of short-term investments (47,140) (107,010)
Maturity of short-term investments 85,640 76,760
Sale of investments 5,137 9,747
Investments in joint ventures and
equity securities (6,131) (11,581)
Distributions from joint venture 1,400 0
Additions to property, plant
and equipment (85,952) (69,569)
Additions to deposits and other assets (1,351) (3,116)
- ----------------------------------------------------------------------
Net cash used by investing activities (48,397) (104,769)
Financing activities:
(Decrease)/increase in cash provided by checks
drawn in excess of bank balances (4,867) 3,546
Proceeds from sale of common stock
under employee stock purchase plan 2,020 684
Exercise of stock options 8,609 5,388
Tax benefit from exercise of non-qualified
stock options 4,408 3,597
Payments on capital lease obligations (1,091) (525)
- ---------------------------------------------------------------------
Net cash provided by financing activities 9,079 12,690
- ---------------------------------------------------------------------
Balance, carried forward 37,867 (35,398)
(Continued on next page)
5
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Balance, brought forward 37,867 (35,398)
Effect of exchange rate changes
on cash and cash equivalents (55) (4)
- -----------------------------------------------------------------------
Net (decrease)/increase in cash and 37,812 (35,402)
cash equivalents
Cash and cash equivalents:
Beginning of the period 70,126 126,215
- ----------------------------------------------------------------------
End of the period $107,938 $ 90,813
======================================================================
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 3,632 $ 3,614
Income taxes 18,756 11,259
Net unrealized holding (loss)/gain (406) 1,044
on investments
Conversion of convertible debt into common
stock, net of unamortized issue costs and
accrued interest 162,036 0
Common stock tendered in settlement of stock
options exercised 4,859 0
<FN>
See notes to consolidated financial statements
6
<PAGE 7>
STARBUCKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the 13 Weeks and 26 Weeks Ended March 29, 1998 and
March 30, 1997
NOTE 1. FINANCIAL STATEMENT PREPARATION:
The consolidated financial statements as of March 29, 1998 and
September 28, 1997 and for the 13-week and 26-week periods
ended March 29, 1998 and March 30, 1997 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 29, 1998 and March 30,
1997 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
September 28, 1997, is derived from the Company's audited
consolidated financial statements and notes thereto contained
in the Company's Annual Report to Shareholders and incorporated
by reference into the Company's Annual Report on Form 10-K for
the year ended September 28, 1997, 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 periods
ended March 29, 1998 are not necessarily indicative of the
results of operations that may be achieved for the entire
fiscal year ending September 27, 1998.
NOTE 2. SUBSEQUENT EVENT:
As of April 29, 1998, Starbucks has agreed to acquire all of the
equity interests of Seattle Coffee Holdings Limited
(d/b/a Seattle Coffee Company) of the United Kingdom in exchange
for approximately 1.8 million shares of Starbucks common stock in
a business combination transaction that will be accounted for as a
pooling of interests. The transaction is scheduled to close by the
end of May 1998.
This transaction is expected to result in dilution to Starbucks
after-tax earnings per share from ongoing operations of
approximately $0.06 in 1998 and $0.05 in 1999 as the Company
continues the aggressive growth plan initiated by Seattle
Coffee Company in the United Kingdom and builds the foundation
for expansion into Europe. It is also expected to result in
one-time transaction and other related after-tax charges of
approximately $0.14 per share in the third fiscal quarter of 1998.
NOTE 3. EARNINGS PER SHARE:
The computation of basic earnings per share, in accordance with
Statement of Financial Accounting Standards ("SFAS") 128
"Earnings per Share," is based on the weighted average number
of common shares and common stock units outstanding during the
period. The computation of diluted earnings per share, in
accordance with SFAS 128, includes the dilutive effect of
common stock equivalents consisting of certain shares subject
to stock options. The computation of diluted earnings per
share also assumes conversion of the Company's convertible
subordinated debentures using the "if converted" method, when
such securities are dilutive, with net income adjusted for the
after-tax interest expense and amortization of issuance costs
applicable to these debentures. The convertible subordinated
debentures were converted to equity in the first quarter of
fiscal 1998.
NOTE 4. DEFERRED STOCK PLAN:
During the first quarter of fiscal 1998, the Company adopted a
Deferred Stock Plan for certain key employees that enables
participants in the plan to defer receipt of ownership of
common shares from the exercise of non-qualified stock options.
The minimum deferral period is five years. During the first
quarter of fiscal 1998, receipt of 424,275 shares was deferred under the
terms of this plan. The rights to receive these shares, represented
by common stock units, are included in the calculation of basic and
diluted earnings per share as common stock equivalents.
7
<PAGE 8>
NOTE 5. INVENTORIES:
Inventories consist of the following (in thousands):
March 29, September 28,
1998 1997
- ----------------------------------------------------------------------
Coffee:
Unroasted $ 77,436 $ 65,197
Roasted 13,405 13,932
Other merchandise held for sale 30,589 33,168
Packaging and other supplies 6,849 7,229
- ---------------------------------------------------------------------
$ 128,279 $ 119,526
====================================================================
As of March 29, 1998, the Company had fixed price purchase
commitments for green coffee totaling approximately $55
million.
The Company, from time to time, enters into futures contracts
to hedge price-to-be-established coffee purchase commitments
with the objective of minimizing cost risk due to market
fluctuations. The Company does not hold or issue derivative
instruments for trading purposes. In accordance with SFAS 80
"Accounting for Futures Contracts," these futures contracts
meet the hedge criteria and are accounted for as hedges. Gains
and losses are calculated based on the difference between the
cost basis and the market value of the coffee contracts.
Accordingly, gains and losses are deferred and recognized as
adjustments to the carrying amount of coffee inventory when
purchased, and recognized in results of operations as coffee
products are sold. The market risk related to coffee futures
is substantially offset by changes in the cost of coffee
purchased. The aggregate commitment underlying the Company's
futures contracts and deferred losses from the hedged coffee
were immaterial as of March 29, 1998. Such losses in fair
value, if realized, would be offset by lower costs of coffee
purchased during the remainder of fiscal 1998 and 1999.
NOTE 6. PROPERTY, PLANT, AND EQUIPMENT:
Property, plant, and equipment are recorded at cost and consist
of the following (in thousands):
March 29, September 28,
1998 1997
- --------------------------------------------------------------------
Land $ 3,602 $ 3,602
Building 8,338 8,338
Leasehold improvements 396,479 350,173
Roasting and store equipment 188,831 167,547
Furniture, fixtures and other 59,044 47,378
- --------------------------------------------------------------------
656,294 577,038
Less accumulated depreciation
and amortization (176,524) (143,339)
- --------------------------------------------------------------------
479,770 433,699
Construction in process 52,713 49,560
- --------------------------------------------------------------------
$ 532,483 $ 483,259
====================================================================
8
<PAGE 9>
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 which follow, including anticipated store
openings, planned capital expenditures, and trends in or
expectations regarding the Company's operations, 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 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 impact of competition, the effect of legal
proceedings and other risks detailed herein and in the
Company's annual and quarterly reports filed with the
Securities and Exchange Commission.
General
The Company's fiscal year ends on the Sunday closest to
September 30. Fiscal years ending on September 27, 1998 and
September 28, 1997 each include 52 weeks. The fiscal year
ending on October 3, 1999 will include 53 weeks.
Management's discussion and analysis of financial condition and
results of operations that follows does not include combined
financial information related to the planned acquisition of
Seattle Coffee Holdings Limited (See "Seattle Coffee Company"
below).
During the 26-week period ending March 29, 1998, Starbucks
Corporation ("Starbucks" or the "Company") derived
approximately 86% of net revenues from its Company-operated
retail stores. The Company's specialty sales operations, which
include product sales to and royalties and fees from licensees
and joint ventures, as well as sales to wholesale customers and
grocery stores, accounted for approximately 13% of net
revenues. Direct response operations accounted for the
remainder of net revenues.
RESULTS OF OPERATIONS -- FOR THE 13 WEEKS ENDED MARCH 29, 1998,
COMPARED TO THE 13 WEEKS ENDED MARCH 30, 1997
Revenues. Net revenues for the 13 weeks ended March 29, 1998,
increased 35% to $289.6 million from $214.9 million for the
corresponding period in fiscal 1997. Retail sales increased 34%
to $247.8 million from $185.1 million due primarily to the
opening of new retail stores combined with an increase in
comparable store sales (sales from stores open 13 months or
longer) of 7% for the period. The increase in comparable store
sales resulted from an increase in the average dollar value per
transaction combined with an increase in the number of
transactions. During the 13 weeks ended March 29, 1998, the
Company opened 74 stores in continental North America. The
Company ended the period with 1,462 Company-operated stores in
continental North America.
As part of 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. This cannibalization, as well as
increased competition and other factors, has and may continue
to put downward pressure on the Company's comparable store
sales growth.
Specialty sales revenues increased 48% to $37.8 million for the
13 weeks ended March 29, 1998, compared to $25.5 million for
the corresponding period in fiscal 1997. Specialty sales
growth was broad-based across numerous categories, including
sales to the Company's joint ventures and licensees, a chain of
wholesale clubs, business dining accounts and grocery sales.
Starbucks sells roasted coffee to its
9
<PAGE 10>
joint venture with Pepsi-Cola Company, a division of PepsiCo,
Inc., (the "North American Coffee Partnership") for use in the
manufacture of its bottled Frappuccino(TM) beverage. The
Company also sells coffee extract to Dreyer's Grand Ice Cream,
Inc. ("Dreyer's") for use in the manufacture of Starbucks
branded ice cream sold by the Company's joint venture with
Dreyer's (the "Ice Cream Joint Venture"). During the 13 weeks
ended March 29, 1998, licensees (including those in which the
Company is a joint venture partner) opened seven stores in
continental North America and 12 stores in the Pacific Rim.
The Company ended the period with 110 licensed stores in
continental North America and 38 licensed stores in the Pacific
Rim. Direct response sales decreased 8% to $4.0 million for
the 13 weeks ended March 29, 1998, compared to $4.4 million for
the corresponding period in fiscal 1997.
Cost and Expenses. Cost of sales and related occupancy costs
as a percentage of net revenues decreased to 45.0% for the 13
weeks ended March 29, 1998, from 46.1% for the corresponding
period in fiscal 1997. This decrease as a percentage of net
revenues was primarily the result of prior year sales price
increases effected during March and May of 1997 partially
offset by higher green coffee costs. Cost of sales continue to
reflect the higher cost of coffees purchased during the
sustained increase in green coffee costs which began in
December 1996.
Store operating expenses as a percentage of retail sales
decreased to 37.1% for the 13 weeks ended March 29, 1998, from
37.4% for the corresponding period in fiscal 1997. The
decrease was due to lower regional overhead, store preopening,
and advertising costs partially offset by higher payroll-
related expenditures.
Other operating expenses (expenses associated with the
Company's operations other than North American retail, as well
as the Company's share of joint venture profits and losses)
decreased to 2.9% of net revenues for the 13 weeks ended March
29, 1998, from 3.2% for the corresponding period in fiscal
1997. The decrease was due primarily to improved results of
both the Company's North American Coffee Partnership and Ice
Cream Joint Venture partially offset by higher payroll
expenditures.
General and administrative expenses as a percentage of net
revenues were 6.7% for the 13 weeks ended March 29, 1998,
compared to 6.2% for the same period in fiscal 1997. This
increase was primarily due to systems-related expenditures and
research and development expenses.
Interest and other income for the 13 weeks ended March 29, 1998
was $2.3 million compared to $3.5 million for the corresponding
period in fiscal 1997. The decrease in interest and other
income is due to lower average investment balances.
Interest expense for the 13 weeks ended March 29, 1998 was $0.1
million compared to $1.8 million for the corresponding period
in fiscal 1997 due to the conversion of the Company's
convertible subordinated debentures to common stock during the
first quarter of fiscal 1998.
Income Taxes. The Company's effective tax rate for the 13
weeks ended March 29, 1998 and March 30, 1997 was 38.5%. The
Company expects the effective tax rate to be significantly
higher in the third quarter of fiscal 1998 due to certain one-
time expenses related to the planned Seattle Coffee Company
transaction which are not tax-deductible (See "Seattle
Coffee Company" below).
RESULTS OF OPERATIONS -- FOR THE 26 WEEKS ENDED MARCH 29, 1998,
COMPARED TO THE 26 WEEKS ENDED MARCH 30, 1997
Revenues. Net revenues for the 26 weeks ended March 29, 1998,
increased 34% to $606.6 million from $454.1 million for the
corresponding period in fiscal 1997. Retail sales increased 33%
to $518.7 million from $390.4 million due primarily to the
opening of new retail stores combined with an increase in
comparable store sales (sales from stores open 13 months or longer)
of 6% for the period. The increase in comparable store sales resulted
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 29, 1998, the Company opened
193 stores in continental North America.
10
<PAGE 11>
Specialty sales revenues increased 51% to $76.3 million for the
26 weeks ended March 29, 1998, compared to $50.5 million for
the corresponding period in fiscal 1997. Specialty sales growth
was broad-based across numerous categories, including sales to
licensees and joint ventures, a chain of wholesaleclubs, business
dining accounts, multi-unit retailers, and office coffee distributors.
During the 26 weeks ended March 29, 1998, licensees
(including those in which the Company is a joint venture partner)
opened 18 stores in continental North America and 21 stores in the
Pacific Rim. Direct response sales decreased 12% to $11.6 million
for the 26 weeks ended March 29, 1998, compared to $13.1 million for
the corresponding period in fiscal 1997.
Costs and Expenses. Cost of sales and related occupancy costs
as a percentage of net revenues decreased to 45.2% for the 26
weeks ended March 29, 1998, from 47.3% for the corresponding
period in fiscal 1997. This decrease was primarily the result
of the March and May 1997 sales price increases partially
offset by higher green coffee costs.
Store operating expenses as a percentage of retail sales
increased to 36.2% from 35.7% for the corresponding period
in fiscal 1997. The increase was due to higher payroll-related
costs partially offset by lower advertising expenditures.
Other operating expenses as a percentage of net revenues were
3.0% for the 26 weeks ended March 29, 1998, compared to 3.2%
for the corresponding period in fiscal 1997. The decrease was
due primarily to improved results of the Company's North
American Coffee Partnership and Ice Cream Joint Venture.
General and administrative expenses increased to 6.1% for the
26 weeks ended March 29, 1998, compared to 5.8% for the same
period in fiscal 1997. This increase was due primarily to
systems-related expenses.
Interest and other income for the 26 weeks ended March 29, 1998
was $4.5 million compared to $7.4 million for the corresponding
period in 1997. The decrease in interest and other income was
due primarily to lower average investment balances.
Interest expense for the 26 weeks ended March 29, 1998 was $0.9
million compared to $3.6 million for the corresponding period
in fiscal 1997 due to the conversion of the Company's
convertible subordinated debentures to common stock during the
first quarter of fiscal 1998.
Income Taxes. The Company's effective tax rate for the 26
weeks ended March 29, 1998 and March 30, 1997 was 38.5%. The
Company expects the effective tax rate to be significantly
higher in the third quarter of fiscal 1998 due to certain one-
time expenses related to the planned Seattle Coffee Company
transaction which are not tax-deductible (See "Seattle
Coffee Company" below).
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the period with $152.3 million in total cash
and investments and working capital of $180.4 million. Cash
and cash equivalents increased by $37.8 million for the 26 weeks
ended March 29, 1998 to $107.9 million.
Cash provided by operating activities totaled $77.2 million for
the first 26 weeks of fiscal 1998 resulting primarily from net
earnings before non-cash charges of $74.8 million.
Cash used by investing activities for the first 26 weeks of
fiscal 1998 totaled $48.4 million. This included capital
additions to property, plant and equipment of $86.0 million
related to opening 193 new Company-operated stores, purchasing
roasting and packaging equipment, enhancing information systems
and remodeling certain existing stores. The Company's
investing activities in marketable debt securities during the
26-week period provided $43.6 million. During the 26-week
period ending March 29, 1998, the Company made equity
investments of $6.1 million in its North American Coffee
Partnership and international joint ventures and
11
<PAGE 12>
received $1.4 million in distributions from its Ice Cream Joint
Venture. The Company invested excess cash primarily in short-
term, investment-grade marketable debt securities.
Cash provided from financing activities for the first 26 weeks
of fiscal 1998 totaled $9.1 million. The exercise of employee
stock options and the related income tax benefit available to
the Company upon exercise of these options provided
approximately $13.0 million. A decrease in checks drawn in
excess of bank balances used $4.9 million. Cash requirements
for the remainder of fiscal 1998, 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 and its licensees plan to open a
total of at least 350 new stores in continental North America
during fiscal 1998. The Company also anticipates making
additional expenditures for enhancing its production capacity
and information systems and remodeling certain existing stores.
While there can be no assurance that current expectations will
be realized, management expects capital expenditures for the
remainder of fiscal 1998 to be approximately $115 million
excluding the effects of the planned acquisition of Seattle
Coffee Company.
Management currently anticipates additional cash requirements
of approximately $6 million for its domestic and international
joint ventures during the remainder of fiscal 1998.
Management believes that existing cash and investments plus
cash generated from operations should be sufficient to finance
capital requirements for the remainder of fiscal 1998. Longer
term, the Company expects to reach its goal of at least 2000
stores in continental North America by the end of the year 2000
and 500 stores in Asia and 500 stores in Europe by the end of
2003 using cash flow generated from operations supplemented by
additional debt or equity financing, if necessary.
COFFEE PRICES AND AVAILABILITY AND GENERAL RISK CONDITIONS
Green coffee commodity prices are subject to substantial price
fluctuations, generally caused by multiple factors including
weather, political and economic conditions in certain coffee-
producing countries and 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 agreements
establishing export quotas or restricting coffee supplies
worldwide. During fiscal 1997, worldwide green coffee
commodity prices increased significantly and remained high
relative to historical levels through the second fiscal quarter
of 1998. In response, the Company effected sales price
increases last fiscal year on its whole bean coffees and its
coffee beverages to mitigate the effects of increases in its
costs of supply. Because the Company had existing inventories
and fixed-price purchase commitments for some of its green
coffee requirements at the time of these sales price increases,
the Company's margins during the first two quarters of fiscal
1998 were favorably impacted by these sales price increases
relative to the corresponding periods of fiscal 1997. However,
cost of sales is increasingly impacted by the higher cost
coffees purchased during the sustained rise in coffee costs.
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 March 29, 1998, the Company had approximately $55 million
in fixed price purchase commitments which, together with
existing inventory, is expected to meet a substantial portion
of its remaining fiscal 1998 green coffee requirements. The
Company believes, based on relationships established with its
suppliers in the past, that the risk of non-delivery on such
purchase commitments is remote.
To further reduce its exposure to rising coffee costs, the
Company, from time to time, enters into futures contracts to
hedge price-to-be-established coffee purchase commitments. The
specific risks associated with these activities are described
below in Item 3 "Quantitative and Qualitative Disclosures about
Market Risk." Because the Company uses the moving average cost
method for its coffee inventories, the cost of sales in future
periods will be impacted by future
12
<PAGE 13>
receipts under these fixed-price commitments as well as price-
to-be-established contracts and currently uncontracted
purchases. The Company's ability to raise sales prices in
response to future increases in coffee prices may be limited.
In addition to fluctuating coffee prices, management believes
that the Company's future results of operations and earnings
could be significantly impacted by 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 ability
to hire, train and retain qualified personnel, and the
Company's ability to obtain adequate capital to finance its
planned expansion.
SEATTLE COFFEE COMPANY
As of April 29, 1998, Starbucks has agreed to acquire all of the
equity interests of Seattle Coffee Holdings Limited
(d/b/a Seattle Coffee Company) of the United Kingdom in exchange
for approximately 1.8 million shares of Starbucks common stock
in a business combination transaction that will be accounted for
as a pooling of interests. The transaction is scheduled to close
by the end of May 1998.
This transaction is expected to result in dilution to Starbucks
after-tax earnings per share from ongoing operations of
approximately $0.06 in 1998 and $0.05 in 1999 as the Company
continues the aggressive growth plan initiated by Seattle
Coffee Company in the United Kingdom and builds the foundation
for expansion into Europe. It is also expected to result in
one-time transaction and other related after-tax
charges of approximately $0.14 per share in the third fiscal
quarter of 1998.
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 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company maintains investment portfolio holdings of various
issuers, types and maturities. These securities are classified
as available-for-sale, and are recorded on the balance sheet at
fair value, with unrealized gains or losses reported as a
separate component of retained earnings. The Company does not
hedge its interest rate exposures.
The Company is subject to foreign currency exchange rate
exposure, primarily related to its retail operations in Canada.
Historically, this exposure has had a minimal impact on the
Company. At the present time, the Company does not hedge
foreign currency risk, but may hedge known transaction exposure
in the future.
The Company, from time to time, enters into futures contracts
to hedge price-to-be-established coffee purchase commitments
with the objective of minimizing cost risk due to market
fluctuations. The aggregate commitment underlying the Company's
futures contracts and deferred losses from the hedged coffee
were immaterial as of March 29, 1998. Such losses in fair
value, if realized, would be offset by lower costs of coffee
purchased during the remainder of fiscal 1998 and 1999.
13
<PAGE 14>
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 management 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 5, 1998 for the purposes of electing three Class 2
directors to serve until the Annual Meeting of Shareholders for
fiscal year 2000 and ratifying the selection of Deloitte &
Touche LLP as the Company's independent auditors for fiscal
1998. All proposals were approved.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
11 Statement re: computation of per share earnings
27 Financial data schedule
27.Q296 Financial data schedule Q2 96 Restated under FAS 128
27.Q396 Financial data schedule Q3 96 Restated under FAS 128
27.FY96 Financial data schedule FY 96 Restated under FAS 128
27.Q197 Financial data schedule Q1 97 Restated under FAS 128
27.Q297 Financial data schedule Q2 97 Restated under FAS 128
27.Q397 Financial data schedule Q3 97 Restated under FAS 128
27.FY97 Financial data schedule FY 97 Restated under FAS 128
(b) Forms 8-K:
No reports on Form 8-K were filed by the Company during the
13-week period ended March 29, 1998.
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: May 12, 1998 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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<PAGE 15>
STARBUCKS CORPORATION
---------------------
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
Three Months Ended Six Months Ended
March 29, March 30, March 29, March 30,
1998 1997 1998 1997
(13 Weeks) (13 Weeks) (26 Weeks) (26 Weeks)
- --------------------------------------------------------------------------
NET EARNINGS PER COMMON SHARE CALCULATION
- -BASIC:
Net earnings $ 15,135 $ 9,643 $ 37,239 $ 24,033
=========================================================================
Weighted average common shares calculation-basic:
Weighted average number of
common shares and common
stock units outstanding 87,059 78,127 85,376 77,925
=========================================================================
Net earnings per common share
-basic $ 0.17 $ 0.12 $ 0.44 $ 0.31
=========================================================================
NET EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE CALCULATION
- -DILUTED(1):
Net earnings calculation:
Net earnings $ 15,135 $ 9,643 $ 37,239 $ 24,033
Add after tax interest
expense on Debentures 0 1,075 348 2,151
Add after tax amortization
of issuance costs related
to the Debentures 0 89 30 178
- -------------------------------------------------------------------------
Adjusted net earnings $ 15,135 $ 10,807 $ 37,617 $ 26,362
=========================================================================
Weighted average common and
common equivalent shares calculation- diluted:
Weighted average number of
common shares and common
stock units outstanding 87,059 78,127 85,376 77,925
Dilutive effect of outstanding
common stock options 2,679 3,178 2,829 3,398
Assuming conversion of
Convertible Subordinated
Debentures 0 7,098 1,404 7,098
- -------------------------------------------------------------------------
Weighted average common and
common equivalent shares
- diluted 89,738 88,403 89,609 88,421
=========================================================================
Net earnings per common and
common equivalent share
- diluted $ 0.17 $ 0.12 $ 0.42 $ 0.30
=========================================================================
- -------------------
<FN>
(1) Diluted earnings per share assumes conversion of the
Company's convertible subordinated debentures using the "if
converted' method, when such securities are dilutive, with
income adjusted for the after-tax interest expense and
amortization applicable to these debentures.
15