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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 December 31, 2000
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
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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 February 9, 2001, there were 189,372,216 shares of the Registrant's Common
Stock outstanding.
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STARBUCKS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements. . . . . . . . . . . . . . . . . 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. . . . . . . . . . . . . . . . . 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . 15
Item 2. Changes in Securities and Use of Proceeds. . . . . . 15
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . 15
Signature. . . . . . . . . . . . . . . . . . . . . . . . . . 15
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except earnings per share)
Three Months Ended
December 31, January 2,
2000 2000
(13 Weeks) (13 Weeks)
(unaudited)
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Net revenues:
Retail $562,407 $440,785
Specialty 104,980 88,547
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Total net revenues 667,387 529,332
Cost of sales and related
occupancy costs 292,220 240,714
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Gross margin 375,167 288,618
Joint venture income 4,805 3,395
Store operating expenses 209,690 164,200
Other operating expenses 21,786 17,745
Depreciation and amortization 37,562 29,290
General and administrative expenses 34,877 26,145
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Operating income 76,057 54,633
Interest and other income, net 1,713 1,414
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Earnings before income taxes 77,770 56,047
Income taxes 28,775 21,298
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Net earnings $ 48,995 $ 34,749
===========================================================================
Net earnings per common share - basic $ 0.26 $ 0.19
Net earnings per common share - diluted $ 0.25 $ 0.18
Weighted average shares outstanding:
Basic 188,645 183,427
Diluted 196,830 189,340
See notes to consolidated financial statements
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STARBUCKS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, October 1,
2000 2000
(unaudited)
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ASSETS
Current assets:
Cash and cash equivalents $ 177,441 $ 70,817
Available-for-sale securities 44,593 57,573
Trading securities 5,695 3,763
Accounts receivable, net of allowances of
$3,741 and $2,941, respectively 78,349 76,385
Inventories 168,438 201,656
Prepaid expenses and other
current assets 22,417 20,321
Deferred income taxes, net 30,358 29,304
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Total current assets 527,291 459,819
Joint ventures 63,898 52,051
Other investments 3,832 3,788
Property, plant and equipment, net 960,383 930,759
Other assets 23,366 25,403
Goodwill, net 23,078 21,311
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Total $ 1,601,848 $ 1,493,131
======================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 84,281 $ 73,653
Checks drawn in excess of bank balances 58,301 56,332
Accrued compensation and related costs 82,036 75,250
Accrued occupancy costs 31,012 29,117
Accrued taxes 46,738 35,841
Other accrued expenses 34,692 35,053
Deferred revenue 3,449 7,320
Current portion of long-term debt 688 685
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Total current liabilities 341,197 313,251
Deferred income taxes, net 22,609 21,410
Long-term debt 6,310 6,483
Minority interest 4,030 3,588
Shareholders' equity:
Common stock and additional paid-in
capital - $0.001 par value; authorized,
300,000,000; issued and outstanding,
189,266,659 and 188,157,651 shares,
respectively, (includes 848,550 common
stock units in both periods) 779,337 750,872
Retained earnings 457,501 408,503
Accumulated other comprehensive loss (9,136) (10,976)
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Total shareholders' equity 1,227,702 1,148,399
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Total $ 1,601,848 $ 1,493,131
======================================================================
See notes to consolidated financial statements
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STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
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December 31, January 2,
2000 2000
(13 Weeks) (13 Weeks)
(unaudited)
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Operating activities:
Net earnings $ 48,995 $ 34,749
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 40,664 31,976
Provision for losses on asset disposals 9,542 613
Deferred income taxes, net (47) (2,240)
Equity in income of investees (2,822) (2,798)
Tax benefit from exercise of non-qualified
stock options 10,198 1,081
Cash provided/(used) by changes in
operating assets and liabilities:
Net purchases of trading securities (2,592) -
Accounts receivable (1,959) (765)
Inventories 33,220 24,692
Prepaid expenses and other
current assets (1,810) 1,656
Accounts payable 10,611 7,007
Accrued compensation and related costs 6,785 7,381
Accrued occupancy costs 1,899 2,625
Accrued taxes 10,903 9,625
Minority interest 442 -
Deferred revenue (3,851) 289
Other accrued expenses 2,589 (1,141)
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Net cash provided by operating activities 162,767 114,750
Investing activities:
Purchase of available-for-sale investments (26,016) (18,775)
Maturity of available-for-sale investments 36,000 10,000
Sale of available-for-sale investments 2,000 5,282
Purchases of businesses, net of cash acquired - (8,242)
Net investments in joint ventures (9,025) (1,103)
Purchase of other investments - (10,189)
Additions to property, plant and equipment (78,972) (65,988)
Additions to other assets (164) (3,682)
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Net cash used by investing activities (76,177) (92,697)
Financing activities:
Increase/(decrease) in cash provided by
checks drawn in excess of bank balances 1,969 (17,038)
Proceeds from sale of common stock under
employee stock purchase plan 2,773 2,544
Proceeds from exercise of stock options 15,494 4,144
Principal payments on long-term debt (170) (923)
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Net cash provided (used) by financing activities 20,066 (11,273)
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Effect of exchange rate changes
on cash and cash equivalents (32) 169
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Net increase in cash and cash equivalents 106,624 10,949
Cash and cash equivalents:
Beginning of the period 70,817 66,419
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End of the period $ 177,441 $ 77,368
======================================================================
Supplemental cash flow information: Cash paid during the period for:
Interest $ 98 $ 131
Income taxes 8,325 12,689
See notes to consolidated financial statements
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STARBUCKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the 13 Weeks Ended December 31, 2000 and
January 2, 2000
NOTE 1: FINANCIAL STATEMENT PREPARATION
The consolidated financial statements as of December 31, 2000 and January 2,
2000 and for the 13-week periods ended December 31, 2000 and January 2, 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 ended December
31, 2000 and January 2, 2000 is unaudited, but, in the opinion of management,
reflects all adjustments (consisting only of normal recurring adjustments and
accruals) necessary for a fair presentation of the financial position, results
of operations and cash flows for the interim periods.
The financial information as of October 1, 2000, is derived from the Company's
audited consolidated financial statements and notes thereto for the year ended
October 1, 2000, 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 ended December 31, 2000 are not
necessarily indicative of the results of operations that may be achieved for the
entire fiscal year ending September 30, 2001.
NOTE 2: OTHER EVENTS
On December 4, 2000, the Company entered into a 50/50 joint venture agreement
with Shinsegae Department Store Co. Ltd. to develop and operate licensed
Starbucks retail stores in Korea. The joint venture will be accounted for using
the equity method as the Company does not exercise control over the operating
and financial policies of the joint venture. The Company paid $8.4 million to
obtain its ownership share in the joint venture during the first quarter of
fiscal 2001.
NOTE 3: NEW ACCOUNTING STANDARDS
In September 2000, the Emerging Issues Task Force ("EITF") reached a consensus
regarding Issue 00-10, "Accounting for Shipping and Handling Fees and Costs,"
which requires any shipping and handling costs billed to customers in a sale
transaction to be classified as revenue. The Company adopted Issue 00-10 on
October 2, 2000. Issue 00-10 did not have a material impact on the Company's
consolidated financial statements.
NOTE 4: INVENTORIES
Inventories consist of the following (in thousands):
December 31, October 1,
2000 2000
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Coffee:
Unroasted $ 62,932 $ 90,807
Roasted 25,854 27,880
Other merchandise held for sale 55,140 59,420
Packaging and other supplies 24,512 23,549
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Total $ 168,438 $ 201,656
===================================================================
As of December 31, 2000, the Company had fixed-price purchase commitments for
green coffee totaling approximately $108 million.
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NOTE 5: DERIVATIVE FINANCIAL INSTRUMENTS
On October 2, 2000, the Company adopted SFAS 133, as amended by SFAS 138, which
requires that all derivatives be recorded on the balance sheet at fair value.
The accounting for changes in the fair value of derivative instruments depends
on the intended use and resulting designation. The Company designates its
derivatives based upon the criteria established by SFAS 133. For derivatives
designated as a fair value hedge, the gain or loss is recognized in earnings in
the period of change together with the offsetting loss or gain on the hedged
item attributed to the risk being hedged. For a derivative designated as a cash
flow hedge, the effective portion of the derivative's gain or loss is initially
reported as a component of other comprehensive income ("OCI") and subsequently
reclassified into earnings when the hedged exposure affects earnings. The
ineffective portion of the gain or loss is recognized immediately into earnings.
For a derivative not designated as a hedging instrument, the gain or loss is
recognized in earnings in the period of change. The Company classifies the cash
flows from hedging transactions in the same category as the cash flows from the
respective hedged items. The adoption of SFAS 133 did not have a material impact
on the Company's consolidated results of operations, financial position or cash
flows.
The Company implemented a hedging policy to manage exposure to foreign currency
risk within the consolidated financial statements. As part of that policy, the
Company may engage in transactions involving various derivative instruments,
with maturities not longer than five years, to hedge assets, liabilities,
revenues and purchases denominated in foreign currencies.
During the first quarter of fiscal 2001, the Company entered into forward
foreign exchange contracts that qualify as cash flow hedges under SFAS 133 to
hedge a portion of anticipated international revenue. These contracts expire
within 12 months and are intended to minimize certain foreign currency exposures
that can be confidently identified and quantified. In accordance with SFAS 133,
cash flow hedges related to anticipated transactions are designated and
documented at the inception of each hedge by matching the terms of the contract
to the underlying transaction. Once established, cash flow hedges are generally
not removed until maturity.
Forward contract effectiveness is calculated by comparing the fair value of the
contract to the change in value of the anticipated transaction using forward
rates on a monthly basis. Any ineffectiveness is recognized immediately in
"Interest and other income, net" on the accompanying consolidated statement of
earnings. No ineffectiveness was recognized in the first quarter of fiscal 2001.
The Company had accumulated derivative gains of $0.5 million, net of taxes, in
OCI as of December 31, 2000, which are expected to be reclassified into earnings
within 12 months.
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NOTE 6: PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost and consist of the following
(in thousands):
December 31, October 1,
2000 2000
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Land $ 5,084 $ 5,084
Building 19,795 19,795
Leasehold improvements 772,187 736,471
Roasting and store equipment 380,686 369,587
Furniture, fixtures and other 179,395 182,528
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1,357,147 1,313,465
Less accumulated depreciation
and amortization (484,991) (446,403)
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872,156 867,062
Work in progress 88,227 63,697
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Property, plant and equipment, net $ 960,383 $ 930,759
==================================================================
NOTE 7: CAPITAL TRANSACTIONS
On December 15, 2000, the Articles of Incorporation of the Company were amended
and restated to, among other things, change the par value of the Company's
common stock and preferred stock from no par value per share to $0.001 par value
per share. After the amendment and restatement, the Company had authorized
300,000,000 shares of common stock, $0.001 par value per share, and 7,500,000
shares of preferred stock, $0.001 par value per share. As a result of this
amendment and restatement, the dollar value of issued and outstanding shares of
common stock was $0.2 million as of December 31, 2000 and October 1, 2000.
Additional paid-in capital was $779.1 million and $750.7 million as of December
31, 2000 and October 1, 2000, respectively.
NOTE 8: COMPREHENSIVE INCOME
Comprehensive income includes all changes in equity during the period, except
those resulting from transactions with shareholders of the Company. It has two
components: net earnings and other comprehensive income. Accumulated other
comprehensive loss reported on the Company's consolidated balance sheets
consists of foreign currency translation adjustments and the unrealized gains
and losses, net of applicable taxes, on available-for-sale securities and on
derivative instruments designated and qualifying as cash flow hedges.
Comprehensive income, net of related tax effects, is as follows (in thousands):
Three months ended
December, 31 January 2,
2000 2000
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Net earnings $ 48,995 $ 34,749
Unrealized holding gains (losses) on
available-for-sale investments, net
of tax benefit (provision) of $100
and ($6,824), respectively (170) 11,133
Unrealized holding gains on cash flow
hedging instruments, net of tax
provision of $284 and $0, respectively 483 -
Reclassification adjustment for gains
realized in net earnings, net of tax
provision of $9 and $3, respectively 14 5
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Net unrealized gain 327 11,138
Translation adjustment 1,513 3,693
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Total comprehensive income $ 50,835 $ 49,580
================================================================
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NOTE 9: EARNINGS PER SHARE
The computation of basic earnings per share is based on the weighted average
number of shares and common stock units outstanding during the period. The
computation of diluted earnings per share includes the dilutive effect of common
stock equivalents consisting of certain shares subject to stock options.
The following table represents the calculation of net earnings per common share
- - basic (in thousands, except earnings per share data):
Three Months Ended
December 31, January 2,
2000 2000
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Net earnings $ 48,995 $ 34,749
Weighted average common shares and
common stock units outstanding 188,645 183,427
==============================================================
Net earnings per common share-basic $ 0.26 $ 0.19
==============================================================
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
December 31, January 2,
2000 2000
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Net earnings $ 48,995 $ 34,749
Weighted average shares outstanding
calculation:
Weighted average common shares
and common stock units outstanding 188,645 183,427
Dilutive effect of outstanding common
stock options 8,185 5,913
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Weighted average common and common
equivalent shares outstanding 196,830 189,340
==============================================================
Net earnings per common and
common equivalent share-diluted $ 0.25 $ 0.18
==============================================================
NOTE 10: SEGMENT REPORTING
The Company is organized into a number of business units. The Company's North
American retail business sells coffee beverages, whole bean coffees, and related
hardware and equipment through Company-operated retail stores in the United
States and Canada. The Company also owns and operates retail stores in the
United Kingdom, Thailand and Australia. These two retail segments are managed by
different presidents within the Company and are measured and evaluated
separately by senior management.
At the beginning of fiscal 2001, the Company 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 has determined that
separate segment reporting of Business Alliances is appropriate under SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information." All prior
period disclosures will be restated as if Business Alliances had always been a
separately reported segment.
The Company operates through several other business units, each of which is
managed and evaluated independently. These other business units include domestic
wholesale, grocery channel licensing, international licensing and a
direct-to-consumer business.
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The tables below present information by operating segment (in thousands):
Three months ended
December 31, January 2,
2000 2000
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REVENUES:
North American retail $531,078 $422,064
Business Alliances 48,589 40,509
All other business units 96,111 70,172
Intersegment revenues (8,391) (3,413)
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Total revenues $667,387 $529,332
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OPERATING INCOME:
North American retail $ 92,409 $ 63,747
Business Alliances 12,329 12,565
All other business units 13,085 10,094
Unallocated corporate expenses (41,596) (31,490)
Intersegment eliminations (170) (283)
Interest, net 1,713 1,414
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Earnings before income taxes $ 77,770 $ 56,047
================================================================
The table below represents information by geographic area (in thousands):
Three months ended
December 31, January 2,
2000 2000
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REVENUES FROM EXTERNAL CUSTOMERS:
United States $598,568 $472,877
Foreign countries 68,819 56,455
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Total revenues $667,387 $529,332
================================================================
Revenues from foreign countries are based on the location of the customers and
consist primarily of revenues from Canada and the United Kingdom.
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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 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 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 impact of
competition, the effect of legal proceedings, and other risks detailed herein
and in the Company's annual and quarterly filings with the Securities and
Exchange Commission.
GENERAL
During the 13-week period ending December 31, 2000, Starbucks Corporation
("Starbucks" or the "Company") derived approximately 84% of net revenues from
its Company-operated retail stores. The remaining 16% of net revenues is derived
from the Company's specialty operations, which include sales to wholesale
accounts and licensees, royalty and license fee income and sales through its
direct-to-consumer business and its on-line store. The Company's fiscal year
ends on the Sunday closest to September 30. Fiscal year 2000 had 52 weeks. The
fiscal year ending on September 30, 2001 will also include 52 weeks.
RESULTS OF OPERATIONS -- FOR THE 13 WEEKS ENDED DECEMBER 31, 2000, COMPARED TO
THE 13 WEEKS ENDED JANUARY 2, 2000
SYSTEMWIDE RETAIL STORE SALES
Systemwide retail store sales, which include net sales for both Company-operated
and licensed retail stores, were $722 million for the first quarter of fiscal
2001, an increase of 39% from $520 million in the first quarter of fiscal 2000
primarily due to the opening of 1,133 stores in the last 12 months. Systemwide
retail store sales provides a broader perspective of global brand sales;
however, it excludes net revenues from non-retail channels.
REVENUES
Net revenues for the 13 weeks ended December 31, 2000, increased 26% to $667
million from $529 million for the corresponding period in fiscal 2000. Retail
revenues increased 28% to $562 million from $441 million primarily due to the
opening of new retail stores plus an increase in comparable store sales of 10%
for the period. The increase in comparable store sales resulted from a 4%
increase in the number of transactions combined with a 6% increase in the
average dollar value per transaction. During the 13 weeks ended December 31,
2000, the Company opened 118 stores in continental North America and 14 in the
United Kingdom, 3 in Thailand, and 2 in Australia. The Company ended the period
with 2,564 Company-operated stores in continental North America and 192
Company-operated stores in international markets. During fiscal 2001, the
Company expects to open at least 450 Company-operated stores in North America
and 75 in international markets.
Specialty revenues increased 19% to $105 million for the 13 weeks ended December
31, 2000, compared to $89 million for the corresponding period in fiscal 2000.
The increase in specialty revenues was driven primarily by higher sales to
licensees and the grocery channel, and from the Company's commercial agreement
with Kozmo.com. Licensees (including those in which the Company is a joint
venture partner) opened 96 stores in continental North America and 83 stores in
international markets. The Company ended the period with 626 licensed stores in
continental North America and 435 licensed stores in international markets.
During fiscal 2001, the Company expects to open at least 575 licensed stores
globally.
GROSS MARGIN
Gross margin increased to 56.2% for the 13 weeks ended December 31, 2000 from
54.5% for the corresponding period in fiscal 2000. The positive impact on gross
margin of retail beverage sales price increases, lower green coffee costs and
lower dairy costs, was partially offset by higher international retail occupancy
costs.
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JOINT VENTURE INCOME
Joint venture income was $4.8 million for the first quarter of fiscal 2001,
compared to $3.4 million in the first quarter of fiscal 2000. The increase was
primarily due to improved operating income from Starbucks Coffee Japan Limited,
partially offset by a higher provision for Japanese income tax. Starbucks Coffee
Japan Limited fully utilized its net operating loss carryforwards during the
first quarter of fiscal 2001.
EXPENSES
Store operating expenses as a percentage of retail sales remained flat at 37.3%
for the 13 weeks ended December 31, 2000, compared to the first quarter of
fiscal 2000. Lower advertising and regional overhead expenses as a percentage of
retail revenues were offset by increased provisions for store remodels and
relocations and higher business taxes.
Other operating expenses (expenses associated with all operations other than
Company-owned retail) were 20.8% of specialty revenues for the 13 weeks ended
December 31, 2000, compared to 20.0% for the corresponding period in fiscal
2000. The increase is attributed to the growth of licensee channels, both
domestic and international, as the Company expands these businesses
geographically and develops its internal resources to support them. These
increases were partially offset by lower advertising expenses for the direct
response business and leverage gained from the revenue generated by the
Company's commercial agreement with Kozmo.com. The Company does not expect to
continue recording revenue from the current Kozmo.com relationship after
February 2001.
General and administrative expenses as a percentage of net revenues were 5.2%
for the 13 weeks ended December 31, 2000 compared to 4.9% for the same period in
fiscal 2000. Higher payroll-related expenditures and provisions for obsolete
computer software as a percentage of revenues were partially offset by a
one-time telephone refund.
INCOME TAXES
The Company's effective tax rate for the 13 weeks ended December 31, 2000 was
37.0% compared to 38.0% for the 13 weeks ended January 2, 2000. Management
expects the tax rate to remain at 37.0% for the remainder of fiscal 2001 due to
tax planning efforts.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the period with $228 million in total cash and short-term
investments and working capital of $186 million. Cash and cash equivalents
increased by $107 million for the 13 weeks ended December 31, 2000 to $177
million. Cash provided by operating activities totaled $163 million for the
first 13 weeks of fiscal 2001, resulting primarily from net earnings before
non-cash charges of $107 million and a decrease in inventories of $33 million.
Cash used by investing activities for the first 13 weeks of fiscal 2001 totaled
$76 million. This included capital additions to property, plant and equipment of
$79 million related to opening 137 new Company-operated retail stores, enhancing
information systems, purchasing roasting and packaging equipment for the
Company's roasting and distribution facilities, and remodeling certain existing
stores. During the 13-week period ended December 31, 2000, the Company made
equity investments of $9 million in its international joint ventures. The
Company invested excess cash primarily in short-term, investment-grade
marketable debt securities. The net activity in the Company's available-for-sale
portfolio during the 13-week period provided $12 million.
Cash provided by financing activities for the first 13 weeks of fiscal 2001
totaled $20 million. This included $15 million generated from the exercise of
employee stock options and $3 million generated from the Company's employee
stock purchase plan. As options granted under the Company's stock option plans
vest and are exercised, the Company will continue to receive proceeds and a tax
deduction; however, neither the amounts nor timing can be predicted.
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Cash requirements for the remainder of fiscal 2001, 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 450 Company-operated stores during fiscal 2001. 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 2001 to be
approximately $321 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 2001. New joint ventures, other new business
opportunities or store expansion rates substantially in excess of that presently
planned may require outside funding.
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 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 31, 2000, the Company had
approximately $108 million in fixed-price purchase commitments which, together
with existing inventory, is expected to provide an adequate supply of green
coffee for the majority of fiscal 2001. 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.
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.
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.
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NEW ACCOUNTING STANDARDS
In September 2000, the Emerging Issues Task Force ("EITF") reached a consensus
regarding Issue 00-10, "Accounting for Shipping and Handling Fees and Costs,"
which requires any shipping and handling costs billed to customers in a sale
transaction to be classified as revenue. The Company adopted Issue 00-10 on
October 2, 2000. Issue 00-10 did not have a material impact on the Company's
consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest rates,
equity security prices and foreign currency exchange rates.
INTEREST RATE RISK
The Company's available-for-sale portfolio consists mainly of diversified fixed
income instruments. The primary objectives of these investments are to preserve
capital and liquidity without significantly increasing risk to the Company.
Available-for-sale securities are of investment grade and are recorded on the
balance sheet at fair value with unrealized gains and losses reported as a
separate component of accumulated other comprehensive income. The Company
generally does not hedge its interest rate exposure.
EQUITY SECURITY PRICE RISK
The Company has minimal exposure to price fluctuations on equity mutual funds
within the trading portfolio. The trading securities are designated to
approximate the Company's liability under the Management Deferred Compensation
Plan ("MDCP"). A corresponding liability is included in "Accrued compensation
and related costs" on the accompanying consolidated balance sheets. These
investments are recorded at fair value with unrealized gains and losses
recognized in "Interest and other income, net." The offsetting changes in the
MDCP liability are recorded in "General and administrative expenses" on the
accompanying consolidated statements of earnings.
The Company also has equity investments in privately held Internet-related
companies. These investments are inherently risky as the products and services
supplied by these companies could be considered in the start-up or development
stages. The Company could lose its entire investment in these companies. These
investments are recorded on the accompanying consolidated balance sheet at a
fair value of $4 million as of December 31, 2000.
FOREIGN CURRENCY EXCHANGE RISK
The majority of the Company's revenue, expense and capital purchasing activities
are transacted in United States dollars. However, because a portion of the
Company's operations consists of activities outside of the United States, the
Company has transactions in other currencies, primarily the Canadian dollar,
British pound and Japanese yen. As part of its risk management strategy, the
Company frequently evaluates its foreign currency exchange risk by monitoring
market data and external factors that may influence exchange rate fluctuations.
As a result, the Company may engage in transactions involving various derivative
instruments, with maturities not to exceed five years, to hedge assets,
liabilities, revenues and purchases denominated in foreign currencies. During
the first quarter of fiscal 2001, the Company entered into forward foreign
exchange contracts that qualify as cash flow hedges under SFAS 133 to hedge a
portion of anticipated international revenue. These contracts expire within 12
months. The Company anticipates entering into derivative instruments designated
to hedge foreign currency exposure from net investments in foreign operations.
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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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On December 15, 2000, the Articles of Incorporation of the Company were amended
and restated to, among other things, change the par value of the Company's
common stock and preferred stock from no par value per share to $0.001 par value
per share. After the amendment and restatement, the Company had authorized
300,000,000 shares of common stock, $0.001 par value per share, and 7,500,000
shares of preferred stock, $0.001 par value per share.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Current Reports on Forms 8-K filed during the 13 weeks ended
December 31, 2000:
None
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: February 14, 2001 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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