EXHIBIT 13
SELECTED FINANCIAL DATA
In thousands, except earnings per share and store operating data
The following selected financial data have been derived from the consolidated
financial statements of Starbucks Corporation (the "Company"). The data set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the section "Certain
Additional Risks and Uncertainties" in the Company's annual report on Form 10-K
and the Company's consolidated financial statements and notes thereto.
Sept 28, 2003 Sept 29, 2002 Sept 30, 2001 Oct 1, 2000 Oct 3, 1999
As of and for the fiscal year ended (1) (52 Wks) (52 Wks) (52 Wks) (52 Wks) (53 Wks)
- --------------------------------------- -------- -------- -------- -------- --------
RESULTS OF OPERATIONS DATA
Net revenues:
Retail $3,449,624 $2,792,904 $2,229,594 $1,823,607 $1,423,389
Specialty 625,898 496,004 419,386 354,007 263,439
---------- ---------- ---------- ---------- ----------
Total net revenues 4,075,522 3,288,908 2,648,980 2,177,614 1,686,828
Operating income (2) 424,713 316,338 280,219 212,190 156,641
Internet-related investment losses (3) -- -- 2,940 58,792 --
Gain on sale of investment (3) -- 13,361 -- -- --
Net earnings (2) $ 268,346 $ 212,686 $ 180,335 $ 94,502 $ 101,623
Net earnings per common share - diluted (2)(4) $ 0.67 $ 0.54 $ 0.46 $ 0.24 $ 0.27
Cash dividends per share -- -- -- -- --
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA
Working capital $ 315,326 $ 310,048 $ 148,661 $ 146,568 $ 135,303
Total assets (2) 2,729,746 2,214,392 1,783,470 1,435,026 1,188,578
Long-term debt (including current portion) 5,076 5,786 6,483 7,168 7,691
Shareholders' equity (2) $2,082,427 $1,723,189 $1,374,865 $1,148,212 $ 960,887
---------- ---------- ---------- ---------- ----------
STORE OPERATING DATA (5)
Percentage change in comparable store sales: (6)
United States 9% 7% 5% 9% 6%
International 7% 1% 3% 12% 8%
Consolidated 8% 6% 5% 9% 6%
Stores opened during the year: (7)
United States
Company-operated stores 506 503 498 388 394
Licensed stores 315 264 268 342 42
International
Company-operated stores 96 111 149 96 53
Licensed stores 284 299 293 177 123
---------- ---------- ---------- ---------- ----------
Total 1,201 1,177 1,208 1,003 612
---------- ---------- ---------- ---------- ----------
Stores open at year end:
United States(8)
Company-operated stores 3,779 3,209 2,706 2,208 1,820
Licensed stores 1,422 1,033 769 501 159
International
Company-operated stores 767 671 560 411 315
Licensed stores 1,257 973 674 381 204
---------- ---------- ---------- ---------- ----------
Total 7,225 5,886 4,709 3,501 2,498
---------- ---------- ---------- ---------- ----------
(1) The Company's fiscal year ends on the Sunday closest to September 30. All
fiscal years presented include 52 weeks, except fiscal 1999, which
includes 53 weeks.
(2) Amounts have been retroactively adjusted for the effect of the application
of the equity method of accounting for the Company's additional equity
ownership interests in Austria, Shanghai, Spain, Switzerland and Taiwan.
See Notes to Consolidated Financial Statements (Note 2).
(3) See Notes to Consolidated Financial Statements (Notes 4 and 7).
(4) Earnings per share data for fiscal years presented above have been
restated to reflect the two-for-one stock splits in fiscal 2001 and 1999.
(5) Store operating data reflects Canada within the international category.
(6) Includes only Company-operated stores open 13 months or longer.
(7) Store openings are reported net of closures.
(8) United States stores open at fiscal 2003 year end include 43 Seattle's
Best Coffee ("SBC") and 21 Torrefazione Italia Company-operated stores and
74 SBC franchised stores.
1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Starbucks Corporation's fiscal year ends on the Sunday closest to September 30.
Fiscal years 2003, 2002 and 2001 each had 52 weeks. The fiscal year ending on
October 3, 2004, will include 53 weeks.
ACQUISITIONS
On July 14, 2003, the Company acquired Seattle Coffee Company ("SCC") from AFC
Enterprises, Inc. SCC includes the Seattle's Best Coffee(R) and Torrefazione
Italia(R) brands, which complement the Company's existing portfolio of products.
The results of operations of SCC are included in the accompanying consolidated
financial statements from the date of purchase. The $70 million all-cash
purchase transaction generated goodwill of approximately $43 million and
indefinite-lived intangibles, consisting of trade names and recipes, of
approximately $13 million. Pro forma results of operations have not been
provided, as the amounts were not deemed material to, the consolidated financial
statements of Starbucks.
During fiscal 2003, Starbucks increased its equity ownership to 50% for its
international licensed operations in Austria, Shanghai, Spain, Switzerland and
Taiwan, which enabled the Company to exert significant influence over their
operating and financial policies. For these operations, management determined
that a change in accounting method, from the cost method to the equity method,
was required. This accounting change included adjusting previously reported
information for the Company's proportionate share of net losses as required by
Accounting Principles Board Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock."
As shown in the table below, the cumulative effect of the accounting change to
the equity method resulted in reductions of net earnings of $2.4 million and
$0.9 million for the 52 weeks ended September 29, 2002, and September 30, 2001,
respectively (in thousands, except earnings per share):
52 weeks ended
--------------
Sept 29, 2002 Sept 30, 2001
------------- -------------
Net earnings, previously reported $ 215,073 $ 181,210
Effect of change to equity method (2,387) (875)
----------- -----------
Net earnings, as restated $ 212,686 $ 180,335
=========== ===========
Net earnings per common share - basic:
Previously reported $ 0.56 $ 0.48
=========== ===========
As restated $ 0.55 $ 0.47
=========== ===========
Net earnings per common share - diluted:
Previously reported $ 0.54 $ 0.46
=========== ===========
As restated $ 0.54 $ 0.46
=========== ===========
Additionally, a reduction of net earnings for the effects of the accounting
change prior to fiscal 2001 of $0.2 million was recorded.
RECLASSIFICATIONS
During the fiscal first quarter of 2004, the Company realigned its resources to
better manage its rapidly growing operations. In connection with this process,
classification of operating expenses within the consolidated statements of
earnings was evaluated using broad-based definitions of retail, specialty and
general and administrative functions. As a result, management determined that
certain functions not directly supporting retail or non-retail operations, such
as executive, administrative, finance and risk management overhead primarily
within international operations, would be more appropriately classified as
"General and administrative expenses" than as store or other operating expenses.
Accordingly, amounts in prior year periods have been reclassified to conform to
current year classifications.
2
RESULTS OF OPERATIONS - FISCAL 2003 COMPARED TO FISCAL 2002
The following table sets forth the percentage relationship to total net
revenues, unless otherwise indicated, of certain items included in the Company's
consolidated statements of earnings:
Sept 28, 2003 Sept 29, 2002 Sept 30, 2001
Fiscal year end (52 Wks) (52 Wks) (52 Wks)
- --------------- -------- -------- --------
STATEMENTS OF EARNINGS DATA
Net revenues:
Retail 84.6% 84.9% 84.2%
Specialty 15.4 15.1 15.8
----- ----- -----
Total net revenues 100.0 100.0 100.0
Cost of sales including occupancy 41.4 41.0 42.0
Store operating expenses (1) 40.0 39.7 38.9
Other operating expenses (2) 22.6 21.4 17.3
Depreciation and amortization expenses 5.8 6.3 6.2
General and administrative expenses 6.0 7.1 6.8
Income from equity investees 0.9 1.0 1.0
Operating income 10.4 9.6 10.6
Interest and other income, net 0.3 0.3 0.4
Internet-related investment losses 0.0 0.0 0.1
Gain on sale of investment 0.0 0.4 0.0
----- ----- -----
Earnings before income taxes 10.7 10.3 10.9
Income taxes 4.1 3.8 4.1
----- ----- -----
Net earnings 6.6% 6.5% 6.8%
----- ----- -----
(1) Shown as a percentage of retail revenues.
(2) Shown as a percentage of specialty revenues.
CONSOLIDATED RESULTS OF OPERATIONS
Net revenues for the fiscal year ended 2003 increased 23.9% to $4.1 billion from
$3.3 billion for the corresponding period in fiscal 2002. During the fiscal year
ended 2003, Starbucks derived approximately 85% of total net revenues from its
Company-operated retail stores. Retail revenues increased 23.5% to $3.4 billion
for the fiscal year ended 2003, from $2.8 billion for the corresponding period
of fiscal 2002. This increase was due primarily to the opening of 602 new
Company-operated retail stores in the last 12 months, comparable store sales
growth of 8% driven almost entirely by increased transactions and the July 2003
acquisition of 49 Seattle's Best Coffee and 21 Torrefazione Italia stores.
Management believes increased customer traffic continues to be driven by new
product innovation, continued popularity of core products, a high level of
customer satisfaction and improved speed of service through enhanced technology,
training and execution at retail stores.
The Company derived the remaining 15% of total net revenues from its Specialty
Operations. Specialty revenues increased $129.9 million, or 26.2%, to $625.9
million for the fiscal year ended 2003, from $496.0 million for the
corresponding period in fiscal 2002. Of the total growth, expanded Starbucks
retail licensing operations provided $70.3 million, or 54.1%, broader
distribution and additional accounts in foodservice provided $24.5 million, or
18.9%, and an increase in the grocery and warehouse club business provided $22.0
million, or 16.9%.
Cost of sales and related occupancy costs increased to 41.4% of total net
revenues in fiscal 2003, from 41.0% in fiscal 2002. The increase was primarily
due to higher green coffee costs and a shift in specialty revenue mix to lower
margin products. The Company's green coffee costs reached an historic low for
Starbucks in the second and third fiscal quarters of 2002 and have gradually
increased since then. These increases were partially offset by leverage gained
on fixed occupancy costs distributed over an expanded revenue base.
Store operating expenses as a percentage of retail revenues increased to 40.0%
in fiscal 2003, from 39.7% in fiscal 2002, primarily due to higher
payroll-related and advertising expenditures. Payroll-related costs have
increased primarily due to an increase in the number of partners who qualify for
the Company's medical and vacation benefits. Advertising expenditures increased
in fiscal 2003 due to promotions for new and existing products. These increases
were partially offset by lower provisions for asset impairment for international
Company-operated retail stores in 2003 as compared to the prior year.
Other operating expenses (expenses associated with the Company's Specialty
Operations) were 22.6% of specialty revenues
3
in fiscal 2003, compared to 21.4% in fiscal 2002, primarily due to higher
payroll-related expenditures to support the continued development of the
Company's foodservice distribution network and international infrastructure,
including regional offices and field personnel.
Depreciation and amortization expenses increased to $237.8 million in fiscal
2003, from $205.6 million in fiscal 2002, primarily due to opening 602
Company-operated retail stores in the last 12 months and the refurbishment of
existing Company-operated retail stores.
General and administrative expenses increased to $244.6 million in fiscal 2003,
compared to $234.6 million in fiscal 2002, which included an $18.0 million
charge for the litigation settlement of two California class action lawsuits.
Excluding the litigation charge, general and administrative expenses increased
$28.0 million from the comparable period in fiscal 2002 due to higher
payroll-related expenditures and costs related to the acquisition of Seattle
Coffee Company. General and administrative expenses as a percentage of total net
revenues decreased to 6.0% in fiscal 2003, compared to 7.1% in fiscal 2002.
Operating income increased 34.3% to $424.7 million in fiscal 2003, from $316.3
million in fiscal 2002. The operating margin increased to 10.4% of total net
revenues in fiscal 2003, compared to 9.6% in fiscal 2002 primarily due to
leverage gained on fixed costs spread over an expanding revenue base, partially
offset by higher green coffee costs, as discussed above.
Income from equity investees was $38.4 million in fiscal 2003, compared to $33.4
million in fiscal 2002. The increase was mainly attributable to continued strong
results by The North American Coffee Partnership, the Company's 50 percent owned
ready-to-drink partnership with the Pepsi-Cola Company, from expanded product
lines, lower direct costs and manufacturing efficiencies. Partially offsetting
this increase was the Company's proportionate share of the net losses of
Starbucks Japan, Ltd. ("Starbucks Japan") in fiscal 2003, compared to a net
profit in fiscal 2002, primarily due to lower average sales per store.
Net interest and other income, which primarily consists of interest income,
increased to $11.6 million in fiscal 2003, from $9.3 million in fiscal 2002. The
growth was a result of increased interest received on higher balances of cash,
cash equivalents and liquid securities during fiscal 2003, compared to the prior
year, and gains realized on market revaluations of the Company's trading
securities, compared to realized losses on this portfolio in the prior year.
The Company's effective tax rate for fiscal 2003 was 38.5% compared to 37.3% in
fiscal 2002 as a result of a shift in the composition of the Company's pretax
earnings in fiscal 2003. Operations based in the United States had higher pretax
earnings and comprised a higher proportion of consolidated pretax earnings
during fiscal 2003. In addition, international operations, which are in various
phases of development, generated greater nondeductible losses than anticipated.
Management expects the effective tax rate to be 38.0% for fiscal 2004.
OPERATING SEGMENTS
Segment information is prepared on the basis that Company's management
internally reviews financial information for operational decision making
purposes. Starbucks revised its segment reporting into two distinct,
geographically based operating segments: United States and International. This
change was in response to internal management realignments in the fiscal first
quarter of 2004 and management's evaluation of the requirements of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
United States
The Company's United States operations ("United States") represent 86% of retail
revenues, 81% of specialty revenues and 85% of total net revenues.
Company-operated retail stores sell coffee and other beverages, whole bean
coffees, complementary food, coffee brewing equipment and merchandise.
Non-retail activities within the United States include: licensed operations,
foodservice accounts and other initiatives related to the Company's core
businesses.
International
The Company's international operations ("International") represent the remaining
14% of retail revenues, 19% of specialty revenues and 15% of total net revenues.
International sells coffee and other beverages, whole bean coffees,
complementary food, coffee brewing equipment and merchandise through
Company-operated retail stores in Canada, the United Kingdom, Thailand and
Australia, as well as through licensed operations and foodservice accounts in
these and other countries. Because International operations are in an early
phase of development and have country-specific regulatory requirements, they
require a more extensive administrative support organization, compared to the
United States, to provide resources and respond to business needs in each
region.
4
SEGMENT RESULTS OF OPERATIONS
The following tables summarize the Company's results of operations by segment
for fiscal 2003 and 2002 (in thousands):
% of % of
United Inter-
United States Inter- national Unallocated
Fiscal year ended September 28, 2003 States Revenue national Revenue Corporate Consolidated
- ------------------------------------ ------ ------- -------- ------- --------- ------------
Net revenues:
Retail $2,965,618 85.4% $484,006 80.3% $ -- $3,449,624
Specialty 506,834 14.6 119,064 19.7 -- 625,898
---------- ----- -------- ----- ---------- ----------
Total net revenues 3,472,452 100.0 603,070 100.0 -- 4,075,522
Cost of sales and related occupancy costs 1,363,267 39.3 322,661 53.5 -- 1,685,928
Store operating expenses 1,199,020 40.4(1) 180,554 37.3(1) -- 1,379,574
Other operating expenses 119,960 23.7(2) 21,386 18.0(2) -- 141,346
Depreciation and amortization expenses 167,138 4.8 38,563 6.4 32,106 237,807
General and administrative expenses 45,007 1.3 44,352 7.4 155,191 244,550
Income from equity investees 28,484 0.8 9,912 1.6 -- 38,396
---------- ----- -------- ----- ---------- ----------
Operating income $ 606,544 17.5% $ 5,466 0.9% $ (187,297) $ 424,713
========== ===== ======== ===== ========== ==========
% of % of
United Inter-
United States Inter- national Unallocated
Fiscal year ended September 29, 2002 States Revenue national Revenue Corporate Consolidated
- ------------------------------------ ------ ------- -------- ------- --------- ------------
Net revenues:
Retail $2,425,163 85.7% $367,741 79.8% $ -- $2,792,904
Specialty 403,090 14.3 92,914 20.2 -- 496,004
---------- ----- -------- ----- --------- ----------
Total net revenues 2,828,253 100.0 460,655 100.0 -- 3,288,908
Cost of sales and related occupancy costs 1,114,535 39.4 235,476 51.1 -- 1,350,011
Store operating expenses 961,617 39.7(1) 148,165 40.3(1) -- 1,109,782
Other operating expenses 87,718 21.8(2) 18,366 19.8(2) -- 106,084
Depreciation and amortization expenses 142,752 5.0 34,069 7.4 28,736 205,557
General and administrative expenses 33,928 1.2 35,007 7.6 165,646 234,581
Income from equity investees 19,182 0.7 14,263 3.1 -- 33,445
---------- ----- -------- --- --------- ----------
Operating income $ 506,885 17.9% $ 3,835 0.8% $(194,382) $ 316,338
========== ===== ======== ===== ========= ==========
(1) Shown as a percentage of retail revenues.
(2) Shown as a percentage of specialty revenues.
United States
United States total net revenues increased by $644.2 million, or 22.8%, to $3.5
billion in fiscal 2003 from $2.8 billion in fiscal 2002. United States retail
revenues increased $540.5 million, or 22.3%, to $3.0 billion, primarily due to
the opening of 506 new Company-operated retail stores in fiscal 2003 and
comparable store sales growth of 9%. The increase in comparable store sales was
almost entirely due to higher transaction volume. Management believes increased
customer traffic continues to be driven by new product innovation, continued
popularity of core products, a high level of customer satisfaction and improved
speed of service through enhanced technology, training and execution at
Company-operated retail stores.
United States specialty revenues increased by $103.7 million, or 25.7%, to
$506.8 million in fiscal 2003. Of the total growth, expanded retail licensing
operations provided $50.0 million, or 48.2%, broader distribution and additional
accounts in foodservice provided $24.5 million, or 23.6%, and an increase in the
grocery and warehouse club business provided $22.0 million, or 21.2%.
Operating income for the United States increased by 19.7% to $606.5 million in
fiscal 2003, from $506.9 million in fiscal 2002. Operating margin decreased to
17.5% of related revenues from 17.9% in the prior year, primarily due to higher
green coffee costs and payroll-related expenditures, partially offset by fixed
occupancy costs spread over an expanding revenue base.
5
International
International total net revenues increased by $142.4 million, or 30.9%, to
$603.1 million in fiscal 2003, from $460.7 million in fiscal 2002. International
retail revenues increased $116.3 million, or 31.6%, to $484.0 million, primarily
due to the opening of 96 new Company-operated retail stores in fiscal 2003 and
comparable store sales growth of 7%. The increase in comparable store sales was
almost entirely due to higher transaction volume and reflects the improved
operational execution in the United Kingdom market.
International specialty revenues increased $26.1 million, or 28.1%, to $119.1
million in fiscal 2003, primarily due to the addition of 284 new licensed stores
and resulting increases in royalty revenues from and product sales to those
licensees.
Operating income for International increased by 42.5% to $5.5 million in fiscal
2003, from $3.8 million in fiscal 2002. International operating margin increased
to 0.9% in fiscal 2003, from 0.8% in fiscal 2002, primarily due to lower
provisions recorded for retail store asset impairment and disposals of $3.7
million in fiscal 2003 compared to $13.9 million in fiscal 2002. This was
partially offset by International's proportionate share of net losses in
Starbucks Japan and a shift in sales mix to lower margin products. Excluding
Canadian operations, operating losses increased by 11.1% to $18.5 million in
fiscal 2003, compared to an operating loss of $16.7 million in fiscal 2002.
Unallocated Corporate
Unallocated corporate expenses pertain to functions, such as executive
management, administration, tax, treasury and information technology
infrastructure, that are not specifically attributable to the Company's
operating segments and include related depreciation and amortization expenses.
Unallocated general and administrative expenses decreased to $155.2 million in
fiscal 2003, from $165.6 million in fiscal 2002, primarily due to an $18.0
million litigation settlement in fiscal 2002. Depreciation and amortization
expenses increased to $32.1 million in fiscal 2003, from $28.7 million in fiscal
2002, primarily due to expanded support facilities and capital spending for
information technology enhancements. Total unallocated corporate expenses as a
percentage of total net revenues decreased from 5.9% in fiscal 2002 to 4.6% in
fiscal 2003.
RESULTS OF OPERATIONS - FISCAL 2002 COMPARED TO FISCAL 2001
CONSOLIDATED RESULTS OF OPERATIONS
Net revenues for the fiscal year ended 2002 increased 24.2% to $3.3 billion from
$2.6 billion for the corresponding period in fiscal 2001. During the fiscal year
ended 2002, Starbucks derived approximately 85% of total net revenues from its
Company-operated retail stores. Retail revenues increased 25.3% to $2.8 billion
for the fiscal year ended 2002, from $2.2 billion for the corresponding period
of fiscal 2001. This increase was due primarily to the opening of 614 new
Company-operated retail stores in the last 12 months and comparable store sales
growth of 6%, driven almost entirely by increased transactions.
The Company derived the remaining 15% of total net revenues from its Specialty
Operations. Specialty revenues increased $76.6 million, or 18.3%, to $496.0
million for the fiscal year ended 2002, from $419.4 million for the
corresponding period in fiscal 2001. Of the total growth, expanded retail
licensing operations provided $54.1 million, or 70.6%, and an increase in the
grocery and warehouse club business provided $14.7 million, or 19.2%.
Cost of sales and related occupancy costs decreased to 41.0% of total net
revenues in fiscal 2002, from 42.0% in fiscal 2001. The decrease was primarily
due to a shift in sales mix to higher margin products, such as handcrafted
beverages, as well as lower green coffee costs. Improvements in cost of sales
were partially offset by higher occupancy costs due to increased repair and
maintenance activities on Company-operated retail stores and higher retail rent
expense.
Store operating expenses as a percentage of retail revenues increased to 39.7%
in fiscal 2002, from 38.9% in fiscal 2001, primarily due to higher
payroll-related expenditures due to the continuing shift in sales to more
labor-intensive handcrafted beverages as well as higher average wage rates.
Higher provisions for retail store asset impairment and disposals of $26.0
million in fiscal 2002 compared to $7.3 million in fiscal 2001 also contributed
to the unfavorable variance.
Other operating expenses (expenses associated with the Company's Specialty
Operations) were 21.4% of specialty revenues in fiscal 2002, compared to 17.3%
in fiscal 2001, primarily due to the continued development of the Company's
international infrastructure, including additional regional offices and
employees supporting global expansion, as well as higher advertising
expenditures from the Company's online initiatives for Starbucks.com.
Depreciation and amortization expenses increased to $205.6 million in fiscal
2002, from $163.5 million in fiscal 2001, primarily due to a net increase of 614
new Company-operated retail stores in the last 12 months.
6
General and administrative expenses increased to $234.6 million in fiscal 2002,
compared to $179.9 million in fiscal 2001. The increase was primarily due to an
$18.0 million charge for the litigation settlement of two California class
action lawsuits. Excluding the litigation charge, general and administrative
expenses increased over the comparable period in fiscal 2001 due to higher
payroll-related expenditures.
Operating income increased 12.9% to $316.3 million in fiscal 2002, from $280.2
million in fiscal 2001. The operating margin decreased to 9.6% of total net
revenues in fiscal 2002, compared to 10.6% in fiscal 2001, primarily due to
higher operating expenses partially offset by cost of sales improvements, as
discussed above.
Income from equity investees was $33.4 million in fiscal 2002, compared to $27.7
million in fiscal 2001. The increase was mainly attributable to improved
profitability of The North American Coffee Partnership as a result of increased
sales volume from extensions of its product line and expansion of geographic
distribution, as well as improvements in its cost of goods sold primarily due to
manufacturing efficiencies. Additionally, the net earnings of Starbucks Coffee
Korea Co., Ltd. improved as a result of an increase in retail stores to 53 in
fiscal 2002, compared to 24 in fiscal 2001. These increases were partially
offset by slightly lower contributions from Starbucks Japan due to lower
profitability as well as the reduction of the Company's ownership interest from
50.0% to 40.1% at the beginning of fiscal 2002.
Net interest and other income, which primarily consists of interest income,
decreased to $9.3 million in fiscal 2002, from $10.8 million in fiscal 2001,
primarily as a result of lower interest rates on cash, cash equivalents and
short-term securities.
Gain on sale of investment on the accompanying consolidated statements of
earnings is the result of the Company's sale of 30,000 of its shares of
Starbucks Japan on October 10, 2001, at approximately $495 per share, net of
related costs. In connection with this sale, the Company received cash proceeds
of $14.8 million and recorded a gain of $13.4 million. The Company's ownership
interest in Starbucks Japan was reduced from 50.0% to 47.5% following the sale
of the shares. 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 "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.
The Company's effective tax rate for fiscal 2002 was 37.3% compared to 37.4% in
fiscal 2001. The effective tax rate in fiscal 2001 was impacted by the
establishment of valuation allowances against deferred tax benefits resulting
from losses from investments in majority-owned foreign subsidiaries and
Internet-related investment losses. Management determined that a portion of
these losses may not be realizable for tax purposes within the allowable
carryforward period.
7
SEGMENT RESULTS OF OPERATIONS
The following tables summarize the Company's results of operations by segment
for fiscal 2002 and 2001 (in thousands):
% of % of
United Inter-
United States Inter- national Unallocated
Fiscal year ended September 29, 2002 States Revenue national Revenue Corporate Consolidated
- ------------------------------------ ------ ------- -------- -------- --------- ------------
Net revenues:
Retail $2,425,163 85.7% $357,741 79.8% $ -- $2,792,904
Specialty 403,090 14.3 92,914 20.2 -- 496,004
----------- ----- --------- ----- --------- ----------
Total net revenues 2,828,253 100.0 460,655 100.0 -- 3,288,908
Cost of sales and related occupancy costs 1,114,535 39.4 235,476 51.1 -- 1,350,011
Store operating expenses 961,617 39.7(1) 148,165 40.3(1) -- 1,109,782
Other operating expenses 87,718 21.8(2) 18,366 19.8(2) -- 106,084
Depreciation and amortization expenses 142,752 5.0 34,069 7.4 28,736 205,557
General and administrative expenses 33,928 1.2 35,007 7.6 165,646 234,581
Income from equity investees 19,182 0.7 14,263 3.1 -- 33,445
----------- ----- ------- ----- --------- ----------
Operating income $ 506,885 17.9% $ 3,835 0.8% $(194,382) $ 316,338
=========== ===== ======== ===== ========== ==========
% of % of
United Inter-
United States Inter- national Unallocated
Fiscal year ended September 30, 2001 States Revenue national Revenue Corporate Consolidated
- ------------------------------------ ------ ------- -------- ------- --------- ------------
Net revenues:
Retail $ 1,942,052 84.5% $ 287,542 82.1% $ -- $2,229,594
Specialty 356,511 15.5 62,875 17.9 -- 419,386
----------- ----- -------- ----- --------- ----------
Total net revenues 2,298,563 100.0 350,417 100.0 -- 2,648,980
Cost of sales and related occupancy costs 940,705 40.9 172,080 49.1 -- 1,112,785
Store operating expenses 755,175 38.9(1) 112,782 39.2(1) -- 867,957
Other operating expenses 67,239 18.9(2) 5,167 8.2(2) -- 72,406
Depreciation and amortization expenses 113,945 5.0 24,162 6.9 25,394 163,501
General and administrative expenses 33,289 1.4 30,160 8.6 116,403 179,852
Income from equity investees 12,668 0.6 15,072 4.3 -- 27,740
----------- ----- -------- ----- --------- ----------
Operating income $ 400,878 17.4% $ 21,138 6.0% $(141,797) $ 280,219
=========== ===== ======== ===== ========= ==========
(1) Shown as a percentage of retail revenues.
(2) Shown as a percentage of specialty revenues.
United States
United States total net revenues increased by $529.7 million, or 23.0%, to $2.8
billion in fiscal 2002 from $2.3 billion in fiscal 2001. United States retail
revenues increased $483.1 million, or 24.9%, to $2.4 billion, primarily due to
the opening of 503 new Company-operated retail stores in fiscal 2002 and
comparable store sales growth of 7%. The increase in comparable store sales was
almost entirely due to higher transaction volume. Management believes increased
customer traffic continues to be driven by new product innovation, customer
satisfaction and improved speed of service through enhanced technology, training
and execution at Company-operated retail stores.
United States specialty revenues increased by $46.6 million, or 13.1%, to $403.1
million in fiscal 2002. Of the total growth, expanded retail licensing
operations provided $25.4 million, or 54.5%, an increase in the grocery and
warehouse club business provided $14.7 million, or 31.5%, and broader
distribution and additional accounts in foodservice provided $4.3 million, or
9.2%.
Operating income for the United States increased by 26.4% to $506.9 million in
fiscal 2002, from $400.9 million in fiscal 2001. Operating margin increased to
17.9% of related revenues from 17.4% in the prior year, primarily due to a shift
in sales mix to higher margin products and lower green coffee costs, partially
offset by higher retail advertising and payroll-related
8
expenditures.
International
International total net revenues increased by $110.2 million, or 31.5%, to
$460.7 million in fiscal 2002, from $350.4 million in fiscal 2001. International
retail revenues increased $80.2 million, or 27.9%, to $367.7 million, primarily
due to the opening of 111 new Company-operated retail stores in fiscal 2002 and
comparable store sales growth of 1%. The increase in comparable store sales was
almost entirely due to higher transaction volume.
International specialty revenues increased $30.0 million, or 47.8%, to $92.9
million in fiscal 2002, primarily due to the addition of 299 new licensed stores
and resulting increases in royalty revenues from and product sales to those
licensees.
Operating income for International decreased to $3.8 million in fiscal 2002,
from $21.1 million in fiscal 2001. International operating margin was 0.8% in
fiscal 2002, compared to 6.0% in fiscal 2001, primarily due to higher occupancy
costs for Company-operated retail stores and increased provisions for asset
impairment, partially offset by lower green coffee costs. Excluding Canadian
operations, operating losses increased $17.9 million to $16.7 million in fiscal
2002, compared to operating income of $1.2 million in 2001.
Unallocated Corporate
Unallocated corporate expenses pertain to functions, such as executive
management, administration, tax, treasury and information technology
infrastructure, that are not specifically attributable to the Company's
operating segments and include related depreciation and amortization expenses.
Unallocated general and administrative expenses increased to $165.6 million in
fiscal 2002, from $116.4 million in fiscal 2001, primarily due to an $18.0
million litigation settlement charge for two California class action lawsuits
and higher payroll-related expenditures. Depreciation and amortization expenses
increased to $28.7 million in fiscal 2002, from $25.4 million in fiscal 2001,
primarily due to leasehold improvements and expanded space at the Company's
corporate offices.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $350.0 million in cash and cash equivalents and short-term
investments at the end of fiscal 2003. Working capital as of September 28, 2003,
totaled $315.3 million compared to $310.0 million as of September 29, 2002.
Total cash and cash equivalents and liquid investments increased by $158.8
million during fiscal 2003 to $486.2 million. The Company intends to use its
available cash resources to invest in its core businesses and other new business
opportunities related to its core businesses. The Company may use its available
cash resources to make proportionate capital contributions to its equity method
and cost method investees, depending on the operating conditions of these
entities. Depending on market conditions, Starbucks may acquire additional
shares of its common stock.
Cash provided by operating activities in fiscal 2003 totaled $566.4 million and
was generated primarily by net earnings of $268.3 million and non-cash
depreciation and amortization expenses of $259.3 million.
Cash used by investing activities in fiscal 2003 totaled $499.3 million. This
included net capital additions to property, plant and equipment of $357.3
million mainly related to opening 602 new Company-operated retail stores,
remodeling certain existing stores and purchasing land and constructing the
Company's new roasting and distribution facility in Carson Valley, Nevada. The
Company used $69.9 million of cash for the acquisition of the Seattle Coffee
Company. The net activity in the Company's marketable securities portfolio
during fiscal 2003 used $53.8 million of cash. Excess cash was invested
primarily in investment-grade securities. During fiscal 2003, the Company made
equity investments of $47.3 million in its international investees, excluding
the effects of foreign currency fluctuations, as Starbucks increased its
ownership stake in several international markets.
Cash provided by financing activities in fiscal 2003 totaled $30.8 million. This
included $107.2 million generated from the exercise of employee stock options
and the sale of the Company's common stock from employee stock purchase plans.
As options granted under the Company's stock plans are exercised, the Company
will continue to receive proceeds and a tax deduction; however, neither the
amounts nor the timing thereof can be predicted. During fiscal 2003, the Company
used $75.7 million to purchase 3.3 million shares of its common stock in
accordance with authorized repurchase plans. 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. As of September 28,
2003, there were approximately 14.6 million additional shares authorized for
repurchase.
Cash requirements in fiscal 2004, other than normal operating expenses, are
expected to consist primarily of capital expenditures related to the addition of
new Company-operated retail stores as Starbucks plans to open approximately 625
Company-operated stores, remodel certain existing stores and enhance its
production capacity and information systems. While there can be no assurance
that current expectations will be realized, management expects capital
expenditures in fiscal
9
2004 to be in the range of $450 million to $475 million.
Management believes that existing cash and investments as well as cash generated
from operations should be sufficient to finance capital requirements for its
core businesses through 2004. New joint ventures, other new business
opportunities or store expansion rates substantially in excess of those
presently planned may require outside funding.
The following table summarizes the Company's contractual obligations and
borrowings as of September 28, 2003, and the timing and effect that such
commitments are expected to have on the Company's liquidity and capital
requirements in future periods (in thousands):
Payments due by Period
--------------------------------------------------------------------
Less than 1 More than 5
Contractual obligations Total year 1-3 years 3-5 years years
- ----------------------- ----- ---- --------- --------- -----
Long-term debt obligations $ 5,076 $ 722 $ 1,483 $ 1,538 $ 1,333
Operating lease obligations 2,259,434 293,912 554,662 486,657 924,203
Purchase obligations 319,430 211,884 104,831 2,715 --
---------- -------- -------- -------- --------
Total $2,583,940 $506,518 $660,976 $490,910 $925,536
========== ======== ======== ======== ========
Starbucks expects to fund these commitments primarily with operating cash flows
generated in the normal course of business.
GUARANTEES OF INDEBTEDNESS OF OTHERS
In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 45 ("FIN No. 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," which elaborates on existing disclosure of most guarantees and
clarifies when a company must recognize an initial liability for the fair value
of obligations it assumes under guarantee agreements. The initial recognition
and measurement provisions apply on a prospective basis to guarantees issued or
modified after December 31, 2002. The Company adopted FIN No. 45 on September
30, 2002.
The Company has unconditionally guaranteed the repayment of certain
yen-denominated bank loans and related interest and fees of an unconsolidated
equity investee, Starbucks Coffee Japan, Ltd. There have been no modifications
or additions to the loan guarantee agreements since the Company's adoption of
FIN No. 45. The guarantees continue until the loans, including accrued interest
and fees, have been paid in full. The maximum amount is limited to the sum of
unpaid principal and interest amounts, as well as other related expenses. These
amounts will vary based on fluctuations in the yen foreign exchange rate. As of
September 28, 2003, the maximum amount of the guarantees was approximately $11.8
million.
Coffee brewing and espresso equipment sold to customers through Company-operated
and licensed retail stores as well as equipment sold to the Company's licensees
for use in retail licensing operations are under warranty for defects in
materials and workmanship for a period ranging from 12 months to 24 months. The
Company establishes a reserve for estimated warranty costs at the time of sale,
based on historical experience. The following table summarizes the activity
related to product warranty reserves during fiscal 2003 and 2002 (in thousands):
Fiscal year ended Sept 28, 2003 Sept 29, 2002
- ----------------- ------------- -------------
Balance at the beginning of the fiscal year $ 1,842 $ 1,090
Provision for warranties issued 2,895 3,128
Warranty claims (2,510) (2,376)
----------- ----------
Balance at the end of the fiscal year $ 2,227 $ 1,842
=========== ==========
COFFEE PRICES, 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
Starbucks 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 September 28, 2003, the Company had
approximately
10
$287.2 million in fixed-price purchase commitments which, together with existing
inventory, is expected to provide an adequate supply of green coffee through
calendar 2004. 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, fluctuating dairy prices, the Company's ability to find optimal store
locations at favorable lease rates, increased costs associated with opening and
operating retail stores and the Company's continued ability to hire, train and
retain qualified personnel, and other factors discussed under "Certain
Additional Risks and Uncertainties" in the "Business" section of the Company's
annual report on Form 10-K for the fiscal year ended September 28, 2003.
FINANCIAL RISK MANAGEMENT
The Company is exposed to market risk related to foreign currency exchange
rates, equity security prices and changes in interest rates.
FOREIGN CURRENCY EXCHANGE RISK
The majority of the Company's revenue, expense and capital purchasing activities
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, Euro 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, Starbucks may engage in transactions involving
various derivative instruments, with maturities generally not exceeding five
years, to hedge assets, liabilities, revenues and purchases denominated in
foreign currencies. As of September 28, 2003, the Company had forward foreign
exchange contracts that qualify as cash flow hedges under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," to hedge a
portion of anticipated international revenue. In addition, Starbucks had forward
foreign exchange contracts that qualify as a hedge of its net investment in
Starbucks Coffee Japan, Ltd. These contracts expire within 24 months.
Based on the foreign exchange contracts outstanding as of September 28, 2003, a
10% devaluation of the United States dollar as compared to the level of foreign
exchange rates for currencies under contract as of September 28, 2003, would
result in a reduction in the fair value of these derivative financial
instruments of approximately $17 million, of which $7 million may reduce the
Company's future net earnings. Conversely, a 10% appreciation of the United
States dollar would result in an increase in the fair value of these instruments
of approximately $6 million, of which $4 million may increase the Company's
future net earnings. Consistent with the nature of the economic hedges provided
by these foreign exchange contracts, increases or decreases in the fair value
would be mostly offset by corresponding decreases or increases, respectively, in
the dollar value of the Company's foreign investment and future foreign currency
royalty and license fee payments that would be received within the hedging
period.
EQUITY SECURITY PRICE RISK
The Company has minimal exposure to price fluctuations on equity mutual funds
within its 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.
INTEREST RATE RISK
The Company's diversified available-for-sale portfolios consist mainly of fixed
income instruments. The primary objectives of these investments are to preserve
capital and liquidity. 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/(loss)." The Company does not hedge its interest rate exposure. The
Company performed a sensitivity analysis based on a 10% change in the underlying
interest rate of its interest bearing financial instruments held at the end of
fiscal 2003 and determined that such a change would not have a material effect
on the fair value of these instruments.
SEASONALITY AND QUARTERLY RESULTS
11
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
Critical accounting policies are those that management believes are both most
important to the portrayal of the Company's financial condition and results, and
require management's most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain. Judgments and uncertainties affecting the application of
those policies may result in materially different amounts being reported under
different conditions or using different assumptions.
Starbucks considers its policies on impairment of long-lived assets 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 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. For goodwill and other
intangible assets, impairment tests are performed annually and more frequently
if facts and circumstances indicate goodwill carrying values exceed estimated
reporting unit fair values and if indefinite useful lives are no longer
appropriate for the Company's trademarks. Upon indication that the carrying
value of such assets may not be recoverable, the Company recognizes an
impairment loss as a charge against current operations. Property, plant and
equipment assets are grouped at the lowest level for which there are
identifiable cash flows when assessing impairment. Cash flows for retail assets
are identified at the individual store level. Long-lived assets to be disposed
of are reported at the lower of their carrying amount or fair value, less
estimated costs to sell. Judgments made by the Company related to the expected
useful lives of long-lived assets and the ability of the Company to realize
undiscounted cash flows in excess of the carrying amounts of such assets are
affected by factors such as the ongoing maintenance and improvements of the
assets, changes in economic conditions and changes in operating performance. As
the Company assesses the ongoing expected cash flows and carrying amounts of its
long-lived assets, these factors could cause the Company to realize material
impairment charges.
NEW ACCOUNTING STANDARDS
Starbucks adopted Statement of Financial Accounting Standard ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," on September 30, 2002. As a result, the
Company discontinued amortization of its goodwill and indefinite-lived
trademarks and determined that provisions for impairment were unnecessary.
Impairment tests will be performed on an annual basis and more frequently if
facts and circumstances indicate goodwill carrying values exceed estimated
reporting unit fair values and if indefinite useful lives are no longer
appropriate for the Company's trademarks. Had the nonamortization provision of
SFAS No. 142 been applied to fiscal 2002 and fiscal 2001, as shown in the
"Acquisitions" section, net earnings would have been $214.7 million and $182.2
million, respectively, compared to net earnings of $212.7 million and $180.3
million, respectively. Basic earnings per share for fiscal 2002 would have
increased to $0.56 per share from $0.55 per share, while diluted earnings per
share would have remained unchanged. Basic earnings per share for fiscal 2001
would have increased to $0.48 per share from $0.47 per share, while diluted
earnings per share would have remained unchanged. Definite-lived intangibles,
which mainly consist of patents and copyrights, will continue to be amortized
over their estimated useful lives.
In November 2002, the Emerging Issues Task Force reached a consensus regarding
Issue No. 02-16, "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor." Issue No. 02-16 provides guidance for
classification in the reseller's statement of earnings for various circumstances
under which cash consideration is received from a vendor by a reseller. The
provisions of Issue No. 02-16 apply to all agreements entered into or modified
after December 31, 2002. Issue No. 02-16 did not have a material impact on the
Company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amends SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 148 provides alternative
methods of transition for voluntary change to the fair value method of
accounting for stock-based compensation. In addition, SFAS No. 148 requires more
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. Starbucks adopted the annual and interim
disclosure requirements of SFAS No. 148 as of September 30, 2002.
12
In January 2003, FASB Interpretation No. 46 ("FIN No. 46"), "Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51," was issued. FIN No. 46 requires identification of a company's
participation in variable interest entities ("VIE"s), which are defined as
entities with a level of invested equity that is not sufficient to fund future
operations on a stand-alone basis, or whose equity holders lack certain
characteristics of a controlling financial interest. For identified VIEs, FIN
No. 46 sets forth a model to evaluate potential consolidation based on an
assessment of which party to the VIE, if any, bears a majority of the exposure
to its expected losses, or stands to gain from a majority of its expected
returns. FIN No. 46 further requires the disclosure of certain information
related to VIEs in which a company holds a significant variable interest.
FIN No. 46 was effective for new VIEs established or purchased subsequent to
January 31, 2003. For VIEs entered into prior to February 1, 2003, FIN No. 46
was originally effective for interim periods beginning after June 15, 2003. In
October 2003, the FASB deferred this effective date until interim or annual
periods ending after December 15, 2003. On December 17, 2003, the FASB elected
to immediately defer the application of FIN No. 46 for entities not previously
subject to special purpose entity guidance. Additionally, the FASB announced
that it will issue FIN No. 46R, "Consolidation of Variable Interest Entities - A
Modification of FASB Interpretation No. 46," before the end of December 2003,
which amends FIN No. 46 and, among other things, includes additional scope
exceptions for franchises and entities with business operations that meet
certain criteria.
The Company has equity ownership in several of its international licensed
operations that are currently not consolidated, but are accounted for under the
equity or cost method of accounting. Because the Company's equity and cost basis
investments in its joint ventures, franchises and licensed operations were not
subject to the original special purpose entity guidance referenced in the
previous paragraph, Starbucks has not consolidated any such entities as of
September 28, 2003. The Company's application of FIN No. 46, as modified and
interpreted, including the provisions in FIN No. 46R, is not expected to have an
impact on its consolidated financial statements or disclosures as of September
28, 2003.
In April 2003, SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities," was issued. In general, this statement
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133. This statement is effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. The adoption of SFAS No. 149 did not have an impact on the
Company's consolidated financial statements or disclosures.
In May 2003, SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity," ("SFAS No. 150") was issued,
which requires that certain financial instruments be accounted for as
liabilities. The financial instruments affected include mandatorily redeemable
stock, certain financial instruments that require or may require the issuer to
buy back some of its shares in exchange for cash or other assets, and certain
obligations that can be settled with shares of stock. SFAS No. 150 is effective
for all financial instruments entered into or modified after May 31, 2003, and
must be applied to the Company's existing financial instruments effective June
30, 2003, the beginning of the first fiscal period after June 15, 2003. The
adoption of SFAS No. 150 did not have an impact on the Company's consolidated
financial statements or disclosures.
13
CONSOLIDATED STATEMENTS OF EARNINGS
In thousands, except earnings per share
Fiscal year ended Sept 28, 2003 Sept 29, 2002 Sept 30, 2001
- ----------------- ------------- ------------- -------------
Net revenues:
Retail $3,449,624 $2,792,904 $2,229,594
Specialty 625,898 496,004 419,386
--------- --------- ---------
Total net revenues 4,075,522 3,288,908 2,648,980
Cost of sales including occupancy costs 1,685,928 1,350,011 1,112,785
Store operating expenses 1,379,574 1,109,782 867,957
Other operating expenses 141,346 106,084 72,406
Depreciation and amortization expenses 237,807 205,557 163,501
General and administrative expenses 244,550 234,581 179,852
Income from equity investees 38,396 33,445 27,740
--------- --------- ---------
Operating income 424,713 316,338 280,219
Interest and other income, net 11,622 9,300 10,768
Internet-related investment losses -- -- 2,940
Gain on sale of investment -- 13,361 --
--------- --------- ---------
Earnings before income taxes 436,335 338,999 288,047
Income taxes 167,989 126,313 107,712
--------- --------- ---------
Net earnings $ 268,346 $ 212,686 $ 180,335
--------- --------- ---------
Net earnings per common share - basic $ 0.69 $ 0.55 $ 0.47
Net earnings per common share - diluted $ 0.67 $ 0.54 $ 0.46
Weighted average shares outstanding:
Basic 390,753 385,575 380,566
Diluted 401,648 397,526 394,349
See Notes to Consolidated Financial Statements.
14
CONSOLIDATED BALANCE SHEETS
In thousands, except share data
Fiscal year ended Sept 28, 2003 Sept 29, 2002
- ----------------- ------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 200,907 $ 99,677
Short-term investments - Available-for-sale securities 128,905 217,302
Short-term investments - Trading securities 20,199 10,360
Accounts receivable, net of allowances of $4,809 and $3,680, respectively 114,448 97,573
Inventories 342,944 263,174
Prepaid expenses and other current assets 55,173 42,351
Deferred income taxes, net 61,453 42,206
---------- -----------
Total current assets 924,029 772,643
Long-term investments - Available-for-sale securities 136,159 --
Equity and other investments 144,257 102,537
Property, plant and equipment, net 1,384,902 1,265,756
Other assets 52,113 43,692
Other intangible assets 24,942 9,862
Goodwill 63,344 19,902
---------- -----------
TOTAL ASSETS $2,729,746 $ 2,214,392
---------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 168,984 $ 135,994
Accrued compensation and related costs 152,608 105,899
Accrued occupancy costs 56,179 51,195
Accrued taxes 54,934 54,244
Other accrued expenses 101,800 72,289
Deferred revenue 73,476 42,264
Current portion of long-term debt 722 710
---------- -----------
Total current liabilities 608,703 462,595
Deferred income taxes, net 33,217 22,496
Long-term debt 4,354 5,076
Other long-term liabilities 1,045 1,036
Shareholders' equity:
Common stock and additional paid-in capital - Authorized, 600,000,000
shares; issued and outstanding, 393,692,536 and 388,228,592 shares,
respectively, (includes 1,697,100 common stock units in both periods) 959,103 891,040
Other additional paid-in-capital 39,393 39,393
Retained earnings 1,069,683 801,337
Accumulated other comprehensive income/(loss) 14,248 (8,581)
---------- -----------
Total shareholders' equity 2,082,427 1,723,189
---------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,729,746 $ 2,214,392
---------- -----------
See Notes to Consolidated Financial Statements.
15
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
Fiscal year ended Sept 28, 2003 Sept 29, 2002 Sept 30, 2001
- ----------------- ------------- ------------- -------------
OPERATING ACTIVITIES:
Net earnings $ 268,346 $ 212,686 $180,335
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 259,271 221,141 177,087
Gain on sale of investment -- (13,361) --
Internet-related investment losses -- -- 2,940
Provision for impairments and asset disposals 7,784 26,852 11,044
Deferred income taxes, net (5,932) (6,088) (6,068)
Equity in income of investees (22,813) (19,584) (14,838)
Tax benefit from exercise of non-qualified stock options 36,590 44,199 30,899
Net accretion of discount and amortization of premium on marketable securities 5,996 -- --
Cash provided/(used) by changes in operating assets and liabilities:
Inventories (64,768) (41,379) (19,704)
Prepaid expenses and other current assets (12,861) (12,460) (10,919)
Accounts payable 24,990 5,463 54,117
Accrued compensation and related costs 42,132 24,087 12,098
Accrued occupancy costs 4,293 15,343 6,797
Deferred revenue 30,732 15,321 19,594
Other operating assets and liabilities (7,313) 5,465 12,923
--------- ---------- --------
Net cash provided by operating activities 566,447 477,685 456,305
INVESTING ACTIVITIES:
Purchase of available-for-sale securities (323,331) (339,968) (184,187)
Maturity of available-for-sale securities 180,687 78,349 93,500
Sale of available-for-sale securities 88,889 144,760 46,931
Purchase of Seattle Coffee Company, net of cash acquired (69,928) -- --
Net additions to equity, other investments and other assets (47,259) (15,841) (17,424)
Distributions from equity investees 28,966 22,834 16,863
Net additions to property, plant and equipment (357,282) (375,474) (384,215)
--------- ---------- --------
Net cash used by investing activities (499,258) (485,340) (428,532)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 107,183 107,467 59,639
Principal payments on long-term debt (710) (697) (685)
Repurchase of common stock (75,710) (52,248) (49,788)
--------- ---------- --------
Net cash provided by financing activities 30,763 54,522 9,166
Effect of exchange rate changes on cash and cash equivalents 3,278 1,560 (174)
--------- ---------- --------
Net increase in cash and cash equivalents 101,230 48,427 36,765
CASH AND CASH EQUIVALENTS:
Beginning of period 99,677 51,250 14,485
--------- ---------- --------
End of the period $ 200,907 $ 99,677 $ 51,250
--------- ---------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 265 $ 303 $ 432
Income taxes $ 140,107 $ 105,339 $ 47,690
See Notes to Consolidated Financial Statements.
16
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
In thousands, except share data
Accumulated
Additional Other
Common Stock Paid-In Retained Comprehensive
Shares Amount Capital Earnings Income/(Loss) Total
------------ ------ ------- -------- ------------- -----
Balance, October 1, 2000 376,315,302 $ 376 $ 750,496 $ 408,316 $ (10,976) $ 1,148,212
Net earnings - - - 180,335 - 180,335
Unrealized holding gains, net - - - - 2,087 2,087
Translation adjustment - - - - 3,481 3,481
---------
Comprehensive income 185,903
---------
Exercise of stock options,
including tax benefit of
$30,899 6,289,892 6 77,555 - - 77,561
Sale of common stock 813,848 1 12,976 - - 12,977
Repurchase of common stock (3,375,000) (3) (49,785) - - (49,788)
----------- --- ------- ------- ------ ---------
Balance, September 30, 2001 380,044,042 380 791,242 588,651 (5,408) 1,374,865
Net earnings - - - 212,686 - 212,686
Unrealized holding losses, net - - - - (1,509) (1,509)
Translation adjustment - - - - (1,664) (1,664)
---------
Comprehensive income 209,513
---------
Equity adjustment related to
equity Investee transaction - 39,393 - - 39,393
Exercise of stock options,
including tax benefit of
$44,199 9,830,136 10 135,465 - - 135,475
Sale of common stock 991,742 1 16,190 - - 16,191
Repurchase of common stock (2,637,328) (3) (52,245) - - (52,248)
----------- --- ------- ------- ------ ---------
Balance, September 29, 2002 388,228,592 388 930,045 801,337 (8,581) 1,723,189
Net earnings - - - 268,346 - 268,346
Unrealized holding losses, net - - - - (4,426) (4,426)
Translation adjustment - - - - 27,255 27,255
---------
Comprehensive income 291,175
---------
Exercise of stock options,
including tax benefit of
$35,547 8,019,604 8 129,100 - - 129,108
Sale of common stock,
including tax benefit of
$1,043 743,340 1 14,664 - - 14,665
Repurchase of common stock (3,299,000) (3) (75,707) - - (75,710)
----------- --- ------- ------- ------ ---------
Balance, September 28, 2003 393,692,536 $ 394 $ 998,102 $ 1,069,683 $ 14,248 $ 2,082,427
----------- --- ------- ------- ------ ---------
See Notes to Consolidated Financial Statements.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 28, 2003, September 29, 2002, and September 30, 2001
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Starbucks Corporation (together with its subsidiaries, "Starbucks" or the
"Company"), purchases and roasts high-quality whole bean coffees and sells them,
along with fresh, rich-brewed coffees, Italian-style espresso beverages, cold
blended beverages, a variety of complementary food items, coffee-related
accessories and equipment, a selection of premium teas and a line of compact
discs primarily through its Company-operated retail stores. Starbucks sells
coffee and tea products through other channels, and, through certain of its
equity investees, Starbucks also produces and sells bottled Frappuccino(R) and
Starbucks DoubleShot(TM) coffee drinks and a line of premium ice creams. These
non-retail channels are collectively known as "Specialty Operations." The
Company's objective is to establish Starbucks as the most recognized and
respected brand in the world. To achieve this goal, the Company plans to
continue rapid expansion of its retail operations, to grow its Specialty
Operations and to selectively pursue other opportunities to leverage the
Starbucks brand through the introduction of new products and the development of
new channels of distribution.
Principles of Consolidation
The consolidated financial statements reflect the financial position and
operating results of Starbucks, which includes wholly owned subsidiaries and
investees controlled by the Company.
Investments in entities which the Company does not control, but has the ability
to exercise significant influence over operating and financial policies, are
accounted for under the equity method. Investments in entities in which
Starbucks does not have the ability to exercise significant influence are
accounted for under the cost method.
All significant intercompany transactions have been eliminated.
Fiscal Year-End
The Company's fiscal year ends on the Sunday closest to September 30. The fiscal
years ended September 28, 2003, September 29, 2002, and September 30, 2001, each
included 52 weeks. The fiscal year ending on October 3, 2004, will include 53
weeks.
Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Actual results may differ from these
estimates.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with a maturity of three
months or less at the time of purchase to be cash equivalents.
Cash Management
The Company's cash management system provides for the reimbursement of all major
bank disbursement accounts on a daily basis. Checks issued but not presented for
payment to the bank are reflected as a reduction of cash and cash equivalents on
the accompanying consolidated financial statements.
Short-term and Long-term Investments
The Company's short-term and long-term investments consist primarily of
investment-grade marketable debt and equity securities as well as bond and
equity mutual funds, all of which are classified as trading or
available-for-sale. Trading securities are recorded at fair value with
unrealized holding gains and losses included in net earnings. Available-for-sale
securities are recorded at fair value, and unrealized holding gains and losses
are recorded, net of tax, as a separate component of accumulated other
comprehensive income. Available-for-sale securities with remaining maturities
less than one year are classified as short-term, and all other
available-for-sale securities are classified as long-term. Unrealized losses are
charged against net earnings when a decline in fair value is determined to be
other than temporary. Realized gains and losses are accounted for on the
specific identification method. Purchases and sales are recorded on a trade date
basis.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents approximates fair value because
of the short-term maturity of those instruments. The fair value of the Company's
investments in marketable debt and equity securities as well as bond and equity
mutual funds is based upon the quoted market price on the last business day of
the fiscal year. For equity securities of companies that are privately held, or
where an observable quoted market price does not exist, the Company estimates
fair
18
value using a variety of valuation methodologies. Such methodologies include
comparing the security with securities of publicly traded companies in similar
lines of business, applying revenue multiples to estimated future operating
results for the private company and estimating discounted cash flows for that
company. For further information on investments, see Notes 4 and 7. The carrying
value of long-term debt approximates fair value.
Derivative Instruments
The Company manages its exposure to foreign currency risk within the
consolidated financial statements according to a hedging policy. Under the
policy, Starbucks may engage in transactions involving various derivative
instruments with maturities generally not longer than five years, to hedge
assets, liabilities, revenues and purchases denominated in foreign currencies.
The Company follows Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended
and interpreted, which requires that all derivatives be recorded on the balance
sheet at fair value. For a cash flow hedge, the effective portion of the
derivative's gain or loss is initially reported as a component of other
comprehensive income ("OCI") and subsequently reclassified into net earnings
when the hedged exposure affects net earnings. For a net investment hedge, the
effective portion of the derivative's gain or loss is reported as a component of
OCI.
Cash flow hedges related to anticipated transactions are designated and
documented at the inception of each hedge by matching the terms of the contract
to the underlying transaction. The Company classifies the cash flows from
hedging transactions in the same categories as the cash flows from the
respective hedged items. Once established, cash flow hedges are generally not
removed until maturity unless an anticipated transaction is no longer likely to
occur. Discontinued cash flow hedges are immediately settled with
counterparties, and the related accumulated derivative gains or losses are
recognized in "Interest and other income, net" on the consolidated statements of
earnings.
Forward contract effectiveness for cash flow hedges is calculated by comparing
the fair value of the contract to the change in value of the anticipated
transaction using forward rates on a monthly basis. For net investment hedges,
the spot-to-spot method is used to calculate effectiveness. Any ineffectiveness
is recognized immediately in "Interest and other income, net" on the
accompanying consolidated statements of earnings.
Inventories
Inventories are stated at the lower of cost (primarily moving average cost) or
market. The Company records inventory reserves for obsolete and slow-moving
items and for estimated shrinkage between physical inventory counts. Inventory
reserves are based on inventory turnover trends, historical experience and
application of the specific identification method.
Property, Plant and Equipment
Property, plant and equipment are carried at cost less accumulated depreciation.
Depreciation of property, plant and equipment, which includes assets under
capital leases, is provided on the straight-line method over estimated useful
lives, generally ranging from two to seven years for equipment and 30 to 40
years for buildings. Leasehold improvements are amortized over the shorter of
their estimated useful lives or the related lease life, generally 10 years. The
portion of depreciation expense related to production and distribution
facilities is included in "Cost of sales and related occupancy costs" on the
accompanying consolidated statements of earnings. The costs of repairs and
maintenance are expensed when incurred, while expenditures for refurbishments
and improvements that significantly add to the productive capacity or extend the
useful life of an asset are capitalized. When assets are retired or sold, the
asset cost and related accumulated depreciation are eliminated with any
remaining gain or loss reflected in net earnings.
Goodwill and Other Intangible Assets
At the beginning of fiscal 2003, Starbucks adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." As a result, the Company discontinued amortization of
its goodwill and indefinite-lived trademarks and determined that provisions for
impairment were unnecessary. Impairment tests are performed annually on June 1
and more frequently if facts and circumstances indicate goodwill carrying values
exceed estimated reporting unit fair values and if indefinite useful lives are
no longer appropriate for the Company's trademarks. Had the nonamortization
provision of SFAS No. 142 been applied to fiscal 2002 and fiscal 2001, net
earnings would have been $214.7 million and $182.2 million, respectively, as
compared to net earnings, as shown in Note 2, of $212.7 million and $180.3
million, respectively. Basic earnings per share for fiscal 2002 would have
increased to $0.56 per share from $0.55 per share, while diluted earnings per
share would have remained unchanged. Basic earnings per share for fiscal 2001
would have increased to $0.48 per share from $0.47 per share, while diluted
earnings per share would have remained unchanged. Definite-lived intangibles,
which mainly consist of contract-based patents and copyrights, are amortized
over their estimated useful lives. For further information on goodwill and other
intangible assets, see Note 9.
19
Long-lived Assets
When facts and circumstances indicate that the carrying values of long-lived
assets may be impaired, an evaluation of recoverability is performed by
comparing the carrying 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 recognizes
an impairment loss by a charge against current operations. Property, plant and
equipment assets are grouped at the lowest level for which there are
identifiable cash flows when assessing impairment. Cash flows for retail assets
are identified at the individual store level.
Insurance Reserves
The Company uses a combination of insurance and self-insurance mechanisms to
provide for the potential liabilities for workers' compensation, general
liability, property insurance, director and officers' liability insurance,
vehicle liability and employee health care benefits. Liabilities associated with
the risks that are retained by the Company are estimated, in part, by
considering historical claims experience, demographic factors, severity factors
and other actuarial assumptions. The estimated accruals for these liabilities
could be significantly affected if future occurrences and claims differ from
these assumptions and historical trends. As of September 28, 2003, and September
29, 2002, these reserves were $51.6 million and $33.1 million, respectively, and
were included in "Accrued compensation and related costs" and "Other accrued
expenses" on the consolidated balance sheets.
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, which consist of sales of
coffee and tea products to customers other than through Company-operated retail
stores, are generally recognized upon shipment to customers, depending on
contract terms. 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.
Arrangements involving multiple elements and deliverables are individually
evaluated for revenue recognition. Cash payments received in advance of product
or service revenue are recorded as deferred revenue. Consolidated revenues are
net of all intercompany eliminations for wholly owned subsidiaries and for
licensees accounted for under the equity method based on the Company's
percentage ownership. All revenues are recognized net of any discounts.
Advertising
The Company expenses costs of advertising the first time the advertising
campaign takes place, except for direct-to-consumer advertising, which is
capitalized and amortized over its expected period of future benefit, generally
six to twelve months. The Company had no capitalized direct-to-consumer
advertising costs as of September 28, 2003, due to its exit from these business
activities. Net capitalized direct-to-consumer advertising costs were $0.8
million as of September 29, 2002, and are included in "Prepaid expenses and
other current assets" on the accompanying consolidated balance sheet. Total
advertising expenses, recorded in "Store operating expenses" and "Other
operating expenses," on the accompanying consolidated statements of earnings
totaled $49.5 million, $25.6 million and $28.8 million in 2003, 2002 and 2001,
respectively.
Store Preopening Expenses
Costs incurred in connection with the start-up and promotion of new store
openings are expensed as incurred.
Rent Expense
Certain of the Company's lease agreements provide for scheduled rent increases
during the lease terms or for rental payments commencing at a date other than
the date of initial occupancy. Minimum rental expenses are recognized on a
straight-line basis over the terms of the leases.
Stock-based Compensation
The Company maintains several stock option plans under which incentive stock
options and non-qualified stock options may be granted to employees, consultants
and non-employee directors. Starbucks accounts for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, because the grant price equals the market price on
the date of grant, no compensation expense is recognized by the Company for
stock options issued to employees.
In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure,"
which amends SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No.
148 provides alternative methods of transition for voluntary change to the fair
value method of accounting for stock-based compensation. In addition, SFAS No.
148 requires more prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the
20
method used on reported results. Starbucks adopted the annual and interim
disclosure requirements of SFAS No. 148 as of September 30, 2002.
Had compensation cost for the Company's stock options been recognized based upon
the estimated fair value on the grant date under the fair value methodology
allowed by SFAS No. 123, as amended by SFAS No. 148, the Company's net earnings
and earnings per share would have been as follows (in thousands, except earnings
per share):
Fiscal year ended Sept 28, 2003 Sept 29, 2002 Sept 30, 2001
------------- ------------- -------------
Net earnings $ 268,346 $ 212,686 $ 180,335
Deduct: stock-based compensation expense determined
under fair value method, net of tax 37,436 37,447 40,535
------------- ------------- -------------
Pro forma net income $ 230,910 $ 175,239 $ 139,800
------------- ------------- -------------
Earnings per share:
Basic - as reported $ 0.69 $ 0.55 $ 0.47
Basic - pro forma $ 0.59 $ 0.45 $ 0.37
Diluted - as reported $ 0.67 $ 0.54 $ 0.46
Diluted - pro forma $ 0.58 $ 0.44 $ 0.36
------------- ------------- -------------
The above pro forma information regarding net income and earnings per share has
been determined as if the Company had accounted for its employee stock options
under the fair value method. The fair value for these stock options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions:
Employee Stock Options
-----------------------------------------------
Fiscal year 2003 2002 2001
------------- ------------ ------------
Expected life (years) 2 - 5 2 - 5 2 - 5
Expected volatility 37 - 55% 43 - 54% 57%
Risk-free interest rate 0.92% - 4.01% 1.63 - 4.96% 2.37 - 5.90%
Expected dividend yield 0.00% 0.00% 0.00%
------------- ------------ ------------
Employee Stock Purchase Plans
-----------------------------------------------
Fiscal year 2003 2002 2001
------------- ------------ ------------
Expected life (years) 0.25 - 3 0.25 0.25
Expected volatility 30 - 50% 33 - 51% 41 - 49%
Risk-free interest rate 0.87 - 2.25% 1.93 - 2.73% 2.35 - 4.68%
Expected dividend yield 0.00% 0.00% 0.00%
------------- ------------ ------------
The Company's valuations are based upon a multiple option valuation approach,
and forfeitures are recognized as they occur. The Black-Scholes option valuation
model was developed for use in estimating the fair value of traded options,
which have no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions,
including the expected stock-price volatility. The Company's employee stock
options have characteristics significantly different from those of traded
options, and changes in the subjective input assumptions can materially affect
the fair value estimate. Because Company stock options do not trade on a
secondary exchange, employees can receive no value nor derive any benefit from
holding stock options under these plans without an increase, above the grant
price, in the market price of the Company's stock. Such an increase in stock
price would benefit all stockholders commensurately.
As required by SFAS No. 123, the Company has determined that the weighted
average estimated fair values of options granted during fiscal 2003, 2002 and
2001 were $8.31, $6.48 and $8.98 per share, respectively.
In applying SFAS No. 123, the impact of outstanding stock options granted prior
to 1996 has been excluded from the pro forma calculations; accordingly, the 2003
pro forma adjustments are not necessarily indicative of future period pro forma
adjustments.
Foreign Currency Translation
The Company's international operations use their local currency as their
functional currency. Assets and liabilities are translated at exchange rates in
effect at the balance sheet date. Income and expense accounts are translated at
the average monthly exchange rates during the year. Resulting translation
adjustments are recorded as a separate component of accumulated other
comprehensive income/(loss).
Income Taxes
The Company computes income taxes using the asset and liability method, under
which deferred income taxes are provided
21
for the temporary differences between the financial reporting basis and the tax
basis of the Company's assets and liabilities.
Stock Split
On April 27, 2001, the Company effected a two-for-one stock split of its $0.001
par value common stock for holders of record on March 30, 2001. All applicable
share and per-share data in these consolidated financial statements have been
restated to give effect to this stock split.
Earnings Per Share
The computation of basic earnings per share is based on the weighted average
number of shares and common stock units 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.
Recent Accounting Pronouncements
In November 2002, the Emerging Issues Task Force reached a consensus regarding
Issue No. 02-16, "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor." Issue No. 02-16 provides guidance for
classification in the reseller's statement of earnings for various circumstances
under which cash consideration is received from a vendor by a reseller. The
provisions of Issue No. 02-16 apply to all agreements entered into or modified
after December 31, 2002. Issue No. 02-16 did not have a material impact on the
Company's consolidated financial statements.
In January 2003, FASB Interpretation No. 46 ("FIN No. 46"), "Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51," was issued. FIN No. 46 requires identification of a company's
participation in variable interest entities ("VIE"s), which are defined as
entities with a level of invested equity that is not sufficient to fund future
operations on a stand-alone basis, or whose equity holders lack certain
characteristics of a controlling financial interest. For identified VIEs, FIN
No. 46 sets forth a model to evaluate potential consolidation based on an
assessment of which party to the VIE, if any, bears a majority of the exposure
to its expected losses, or stands to gain from a majority of its expected
returns. FIN No. 46 further requires the disclosure of certain information
related to VIEs in which a company holds a significant variable interest.
FIN No. 46 was effective for new VIEs established or purchased subsequent to
January 31, 2003. For VIEs entered into prior to February 1, 2003, FIN No. 46
was originally effective for interim periods beginning after June 15, 2003. In
October 2003, the FASB deferred this effective date until interim or annual
periods ending after December 15, 2003. On December 17, 2003, the FASB elected
to immediately defer the application of FIN No. 46 for entities not previously
subject to special purpose entity guidance. Additionally, the FASB announced
that it will issue FIN No. 46R, "Consolidation of Variable Interest Entities - A
Modification of FASB Interpretation No. 46," before the end of December 2003,
which amends FIN No. 46 and, among other things, includes additional scope
exceptions for franchises and entities with business operations that meet
certain criteria.
The Company has equity ownership in several of its international licensed
operations that are currently not consolidated, but are accounted for under the
equity or cost method of accounting. Because the Company's equity and cost basis
investments in its joint ventures, franchises and licensed operations were not
subject to the original special purpose entity guidance referenced in the
previous paragraph, Starbucks has not consolidated any such entities as of
September 28, 2003. The Company's application of FIN No. 46, as modified and
interpreted, including the provisions in FIN No. 46R, is not expected to have an
impact on its consolidated financial statements or disclosures as of September
28, 2003.
In April 2003, SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities," was issued. In general, this statement
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133. This statement is effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. The adoption of SFAS No. 149 did not have an impact on the
Company's consolidated financial statements or disclosures.
In May 2003, SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity," ("SFAS No. 150") was issued,
which requires that certain financial instruments be accounted for as
liabilities. The financial instruments affected include mandatorily redeemable
stock, certain financial instruments that require or may require the issuer to
buy back some of its shares in exchange for cash or other assets, and certain
obligations that can be settled with shares of stock. SFAS No. 150 is effective
for all financial instruments entered into or modified after May 31, 2003, and
must be applied to the Company's existing financial instruments effective June
30, 2003, the beginning of the first fiscal period after June 15, 2003. The
adoption of SFAS No. 150 did not have an impact on the Company's consolidated
financial statements or disclosures.
22
Reclassifications
During the fiscal first quarter of 2004, the Company realigned its resources to
better manage its rapidly growing operations. In connection with this process,
classification of operating expenses within the consolidated statements of
earnings was evaluated using broad-based definitions of retail, specialty and
general and administrative functions. As a result, management determined that
certain functions not directly supporting retail or non-retail operations, such
as executive, administrative, finance and risk management overhead primarily
within international operations, would be more appropriately classified as
"General and administrative expenses" than as store or other operating expenses.
Accordingly, amounts in prior year periods have been reclassified to conform to
current year classifications.
NOTE 2: ACQUISITIONS
On July 14, 2003, the Company acquired Seattle Coffee Company ("SCC") from AFC
Enterprises, Inc. SCC includes the Seattle's Best Coffee(R) and Torrefazione
Italia(R) brands, which complement the Company's existing portfolio of products.
The results of operations of SCC are included in the accompanying consolidated
financial statements from the date of purchase. The $70 million all-cash
purchase transaction generated goodwill of approximately $43 million and
indefinite-lived intangibles, consisting of trade names and recipes, of
approximately $13 million. Pro forma results of operations have not been
provided, as the amounts were deemed immaterial to the consolidated financial
statements of Starbucks.
During fiscal 2003, Starbucks increased its equity ownership to 50% of its
international licensed operations in Austria, Shanghai, Spain, Switzerland and
Taiwan, which enabled the Company to exert significant influence over their
operating and financial policies. For these operations, management determined
that a change in accounting method, from the cost method to the equity method,
was required. This accounting change included adjusting previously reported
information for the Company's proportionate share of net losses as required by
APB Opinion No. 18, "The Equity Method of Accounting for Investments in Common
Stock."
As shown in the table below, the cumulative effect of the accounting change to
the equity method resulted in reductions of net earnings of $2.4 million and
$0.9 million for the 52 weeks ended September 29, 2002, and September 30, 2001,
respectively. Additionally, a reduction of net earnings for the effects of the
accounting change prior to fiscal 2001 of $0.2 million was recorded (in
thousands, except earnings per share):
52 weeks ended
--------------------------------
Sept 29, 2002 Sept 30, 2001
-------------- -------------
Net earnings, previously reported $ 215,073 $ 181,210
Effect of change to equity method (2,387) (875)
-------------- -------------
Net earnings, as restated $ 212,686 $ 180,335
============== =============
Net earnings per common share - basic:
Previously reported $ 0.56 $ 0.48
============== =============
As restated $ 0.55 $ 0.47
============== =============
Net earnings per common share - diluted:
Previously reported $ 0.54 $ 0.46
============== =============
As restated $ 0.54 $ 0.46
============== =============
NOTE 3: CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following (in thousands):
Fiscal year ended Sept 28, 2003 Sept 29, 2002
------------- -------------
Operating funds and interest-bearing deposits $ 187,118 $ 88,697
Money market funds 13,789 10,980
------------- -------------
Total $ 200,907 $ 99,677
============= =============
23
NOTE 4: SHORT-TERM AND LONG-TERM INVESTMENTS
The Company's short-term and long-term investments consist of the following (in
thousands):
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
September 28, 2003 Cost Gains Losses Value
------------- -------------- ------------- ------------
Short-term investments - available-for-sale securities:
United States government agency obligations $ 3,672 $ 1 $ - $ 3,673
State and local government obligations 125,121 115 (4) 125,232
------------- -------------- ------------- ------------
Total $ 128,793 $ 116 $ (4) $ 128,905
Short-term investments - trading securities 21,268 20,199
------------- ------------
Total short-term investments $ 150,061 $ 149,104
------------- -------------- ------------- ------------
Long-term investments - available-for-sale securities:
State and local government obligations $ 131,021 $ 421 $ (32) $ 131,410
Mortgage-backed securities 4,804 14 (69) 4,749
------------- -------------- ------------- ------------
Total long-term investments $ 135,825 $ 435 $ (101) $ 136,159
------------- -------------- ------------- ------------
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
September 29, 2002 Cost Gains Losses Value
------------- -------------- ------------- ------------
Short-term investments - available-for-sale securities:
State and local government obligations $ 155,471 $ 244 $ (16) $ 155,699
United States government agency obligations 2,406 4 - 2,410
Mutual funds 32,000 211 - 32,211
Commercial paper 26,982 - - 26,982
------------- -------------- ------------- ------------
Total $ 216,859 $ 459 $ (16) $ 217,302
Short-term investments - trading securities 13,210 10,360
------------- ------------
Total short-term investments $ 230,069 $ 227,662
------------- -------------- ------------- ------------
For available-for-sale securities, proceeds from sales were $88.9 million,
$144.8 million and $46.9 million, in fiscal years 2003, 2002 and 2001,
respectively. Gross realized gains from the sales were $0.3 million and $1.7
million in 2003 and 2002, respectively. There were no gross realized losses in
2003 or 2002, and gross realized gains and losses were not material in 2001.
Long-term investments generally mature between one and three years.
During fiscal 2001, the Company recognized a loss of $0.9 million on its
investment in the common stock of Liveworld, Inc. (previously known as Talk
City, Inc.), due to impairments that were determined by management to be other
than temporary. There were no similar losses in fiscal 2003 or 2002.
Trading securities are comprised mainly of marketable equity mutual funds
designated to approximate the Company's liability under the Management Deferred
Compensation Plan, a defined contribution plan. The corresponding deferred
compensation liability of $20.4 million in fiscal 2003 and $10.4 million in
fiscal 2002 is included in "Accrued compensation and related costs" on the
accompanying consolidated balance sheets. In fiscal 2003 and 2002, the changes
in net unrealized holding gains (losses) in the trading portfolio included in
earnings were $1.8 million and ($1.3) million, respectively.
NOTE 5: DERIVATIVE FINANCIAL INSTRUMENTS
Cash Flow Hedges
Cash flow derivative instruments hedge portions of anticipated product and
royalty revenues denominated in Japanese yen and Canadian dollars. During fiscal
years 2003, 2002, and 2001, derivative gains (losses) of ($1.7) million, $2.9
million, and $1.7 million, respectively, were reclassified to revenues. As of
September 28, 2003, existing forward foreign exchange contracts had accumulated
net derivative losses of $0.4 million, net of taxes, in other comprehensive
income ("OCI") and will expire within 24 months. Of the amount in OCI, $0.3
million of net derivative losses will be reclassified into net earnings within
12 months. No significant cash flow hedges were discontinued during fiscal years
2003, 2002 or 2001.
Net Investment Hedges
Net investment derivative instruments hedge the Company's equity method
investment in Starbucks Coffee Japan, Ltd. These forward foreign exchange
contracts expire within 14 months and are intended to minimize foreign currency
exposure to fluctuations in the Japanese yen. As a result of using the
spot-to-spot method, the Company recognized net gains of $1.4 million, $1.8
million and $1.4 million during the fiscal years 2003, 2002 and 2001,
respectively. In addition, the Company
24
had accumulated net derivative losses of $3.8 million, net of taxes, in OCI as
of September 28, 2003.
NOTE 6: INVENTORIES
Inventories consist of the following (in thousands):
Fiscal year ended Sept 28, 2003 Sept 29, 2002
------------- -------------
Coffee:
Unroasted $ 167,674 $ 128,173
Roasted 41,475 35,770
Other merchandise held for sale 83,784 65,403
Packaging and other supplies 50,011 33,828
------------- -------------
Total $ 342,944 $ 263,174
------------- -------------
As of September 28, 2003, the Company had committed to fixed-price purchase
contracts for green coffee totaling approximately $287.2 million. 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.
NOTE 7: EQUITY AND OTHER INVESTMENTS
The Company's equity and other investments consist of the following (in
thousands):
Fiscal year ended Sept 28, 2003 Sept 29, 2002
------------- -------------
Equity method investments $ 134,341 $ 94,620
Cost method investments 7,210 5,715
Other investments 2,706 2,202
------------- -------------
Total $ 144,257 $ 102,537
------------- -------------
Equity Method
The Company's equity investees and ownership interests are as follows:
Fiscal year ended Sept 28, 2003 Sept 29, 2002
------------- -------------
The North American Coffee Partnership 50.0% 50.0%
Starbucks Ice Cream Partnership 50.0% 50.0%
Starbucks Coffee Korea Co., Ltd. 50.0% 50.0%
Starbucks Coffee Austria GmbH 50.0% 19.5%
Starbucks Coffee Switzerland AG 50.0% 19.5%
Starbucks Coffee Espana, S.L. 50.0% 18.0%
President Starbucks Coffee Taiwan Limited 50.0% 5.0%
Shanghai President Coffee Co. 50.0% 5.0%
Starbucks Coffee France SAS 50.0% -
Starbucks Coffee Japan, Ltd. 40.1% 40.1%
Coffee Partners Hawaii 5.0% 5.0%
------------- -------------
The Company has licensed the rights to produce and distribute Starbucks branded
products to two partnerships in which the Company holds a 50% equity interest.
The North American Coffee Partnership with the Pepsi-Cola Company develops and
distributes bottled Frappuccino(R) and Starbucks DoubleShot(TM) coffee drinks.
The Starbucks Ice Cream Partnership with Dreyer's Grand Ice Cream, Inc. develops
and distributes premium ice creams. The remaining entities in which the Company
is an equity investee operate licensed Starbucks retail stores, including Coffee
Partners Hawaii, which is a general partnership.
During fiscal 2003, Starbucks increased its ownership of its licensed operations
in Austria, Shanghai, Spain, Switzerland and Taiwan. The carrying amount of
these investments was $21.7 million more than the underlying equity in net
assets due to acquired goodwill, which is not subject to amortization in
accordance with SFAS No. 142. Goodwill will be evaluated for impairment in
accordance with APB Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock." For additional information on these equity
ownership increases, see Note 2.
On October 10, 2001, the Company sold 30,000 of its 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 and recorded a gain of $13.4 million on the accompanying consolidated
statement of earnings. The Company's ownership interest in Starbucks Japan was
reduced from 50.0% to 47.5% following the sale of the shares. 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
25
reduced from 47.5% to 40.1%. Starbucks recorded "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 September 28, 2003, the quoted
closing price of Starbucks Japan shares was approximately $153 per share.
The Company's share of income and losses is included in "Income from equity
investees" on the accompanying consolidated statements of earnings. Also
included is the Company's proportionate share of gross margin resulting from
coffee and other product sales to, and royalty and license fee revenues
generated from, equity investees. Revenues generated from these related parties,
net of eliminations, were $68.0 million, $67.7 million and $48.9 million in
fiscal 2003, 2002 and 2001, respectively. Related costs of sales, net of
eliminations, were $35.7 million, $37.9 million and $30.3 million in fiscal
2003, 2002 and 2001, respectively.
Cost Method
Starbucks has equity interests in entities to develop Starbucks retail stores in
other Chinese markets, Puerto Rico, Germany, Mexico, Chile and Greece. Starbucks
has the ability to acquire additional interests in its cost method investees at
certain intervals during each respective development period. Depending on the
Company's total percentage ownership interest and its ability to exercise
significant influence, additional investments may require the retroactive
application of the equity method of accounting.
Depending on investee operating conditions, Starbucks may contribute capital
resources to its equity method and cost method investees in proportion to the
Company's ownership.
Other Investments
Starbucks has investments in privately held equity securities that are recorded
at their estimated fair values.
NOTE 8: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and consist of the following
(in thousands):
Fiscal year ended Sept 28, 2003 Sept 29, 2002
------------- -------------
Land $ 11,414 $ 11,310
Buildings 64,427 30,961
Leasehold improvements 1,311,024 1,131,382
Roasting and store equipment 613,825 516,129
Furniture, fixtures and other 375,854 282,068
------------- -------------
2,376,544 1,971,850
Less accumulated depreciation and amortization (1,049,810) (814,427)
------------- -------------
1,326,734 1,157,423
Work in progress 58,168 108,333
------------- -------------
Property, plant and equipment, net $ 1,384,902 $ 1,265,756
------------- -------------
NOTE 9: OTHER INTANGIBLE ASSETS AND GOODWILL
As of September 28, 2003, indefinite-lived intangibles were $23.3 million and
definite-lived intangibles were $1.6 million, net of accumulated amortization of
$0.9 million. As of September 29, 2002, indefinite-lived intangibles were $8.9
million and definite-lived intangibles were $1.0 million, net of accumulated
amortization of $0.4 million. Indefinite-lived intangibles increased by $14.4
million during fiscal 2003, primarily due to the acquisition of Seattle Coffee
Company. During fiscal 2003 and 2002, amortization expense for definite-lived
intangibles was $0.4 million and $0.1 million, respectively. Amortization
expense is estimated to be $0.3 million for each of the next five fiscal years.
During fiscal 2003, goodwill increased by approximately $43.4 million primarily
due to the acquisition of the Seattle Coffee Company. There were no acquisitions
during fiscal 2002, and no impairment was recorded during fiscal 2003 or 2002.
The following table summarizes goodwill by operating segment (in thousands):
Fiscal year ended Sept 28, 2003 Sept 29, 2002
------------- -------------
United States $ 60,965 $ 17,705
International 2,379 2,197
------------- -------------
Total $ 63,344 $ 19,902
------------- -------------
26
NOTE 10: LONG-TERM DEBT
In September 1999, the Company purchased the land and building comprising its
York County, Pennsylvania, roasting plant and distribution facility. The total
purchase price was $12.9 million. In connection with this purchase, the Company
assumed loans totaling $7.7 million from the York County Industrial Development
Corporation. The remaining maturities of these loans range from 6 to 7 years,
with interest rates from 0.0% to 2.0%.
Scheduled principal payments on long-term debt are as follows (in thousands):
Fiscal year ending
2004 $ 722
2005 735
2006 748
2007 762
2008 776
Thereafter 1,333
-------------
Total principal payments $ 5,076
-------------
Starbucks has a $20.0 million unsecured revolving credit agreement with a bank,
which matures in March 2004. There have been no borrowings under this agreement.
NOTE 11: LEASES
The Company leases retail stores, roasting and distribution facilities and
office space under operating leases expiring through 2027. Most lease agreements
contain renewal options and rent escalation clauses. Certain leases provide for
contingent rentals based upon gross sales.
Rental expense under these lease agreements was as follows (in thousands):
Fiscal year ended Sept 28, 2003 Sept 29, 2002 Sept 30, 2001
------------- ------------- -------------
Minimum rentals - Retail $ 237,742 $ 200,827 $ 150,510
Minimum rentals - Other 22,887 19,143 16,033
Contingent rentals 12,274 5,415 4,018
------------- ------------- -------------
Total $ 272,903 $ 225,385 $ 170,561
------------- ------------- -------------
Minimum future rental payments under non-cancelable lease obligations as of
September 28, 2003, are as follows (in thousands):
Fiscal year ending
2004 $ 293,912
2005 284,401
2006 270,261
2007 253,944
2008 232,713
Thereafter 924,203
-------------
Total minimum lease payments $ 2,259,434
-------------
NOTE 12: SHAREHOLDERS' EQUITY
In addition to 600.0 million shares of authorized common stock with $0.001 par
value per share, the Company has authorized 7.5 million shares of preferred
stock, none of which was outstanding at September 28, 2003.
During fiscal 2003, the Starbucks Board of Directors authorized management to
repurchase shares under any of the Company's programs pursuant to a contract,
instruction or written plan meeting the requirements of Rule 10b5-1(c)(1) of the
Securities Exchange Act of 1934.
Pursuant to the Company's authorized share repurchase programs, Starbucks
acquired 3.3 million shares at an average price of $22.95 for a total cost of
$75.7 million during fiscal 2003, and acquired 2.6 million shares at an average
price of $19.81 for a total cost of $52.2 million in fiscal 2002. All share
repurchases were effected through either Morgan Stanley & Co. Incorporated or
Citigroup Global Markets, Inc. As of September 28, 2003, there were
approximately 14.6 million additional shares authorized for repurchase. Share
repurchases were funded through cash, cash equivalents and available-for-sale
securities and were primarily intended to help offset dilution from stock-based
compensation and employee stock purchase plans.
27
Comprehensive Income
Comprehensive income includes all changes in equity during the period, except
those resulting from transactions with shareholders and subsidiaries of the
Company. It has two components: net earnings and other comprehensive income.
Accumulated other comprehensive income/(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 and net investment hedges. Comprehensive income, net of
related tax effects, is as follows (in thousands):
Fiscal year ended Sept 28, 2003 Sept 29, 2002 Sept 30, 2001
------------- ------------- -------------
Net earnings $ 268,346 $ 212,686 $ 180,335
Unrealized holding gains on available for sale securities,
net of tax provision of $53, $231, and $434 in 2003,
2002, and 2001, respectively 142 394 738
Unrealized holding gains/(losses) on cash flow hedges, net of
tax benefit/(provision) of $804, ($1,066), and ($683) in
2003, 2002 and 2001, respectively (1,369) 1,815 1,163
Unrealized holding gains/(losses) on net investment hedges, net
of tax benefit/(provision) of $1,903, $415, and ($109) in
2003, 2002, and 2001, respectively (3,241) (706) 186
Reclassification adjustment for (gains)/losses realized in net
earnings, net of tax benefit/(provision) of ($41), $1,769,
and $0 in 2003, 2002, and 2001, respectively 42 (3,012) -
------------- ------------- -------------
Net unrealized gain/(loss) (4,426) (1,509) 2,087
------------- ------------- -------------
Translation adjustment 27,255 (1,664) 3,481
------------- ------------- -------------
Total comprehensive income $ 291,175 $ 209,513 $ 185,903
------------- ------------- -------------
Expanded foreign-currency based operations in Europe and Canada and the change
in value from translating foreign currency exchange rates to the United States
dollar have resulted in a favorable translation adjustment during fiscal 2003,
compared to an unfavorable translation adjustment in fiscal 2002.
NOTE 13: EMPLOYEE STOCK AND BENEFIT PLANS
Stock Option Plans
The Company maintains several stock option plans under which the Company may
grant incentive stock options and non-qualified stock options to employees,
consultants and non-employee directors. Stock options have been granted at
prices at or above the fair market value on the date of grant. Options vest and
expire according to terms established at the grant date.
The following summarizes all stock option transactions from October 1, 2000,
through September 28, 2003:
Weighted Weighted
Average Shares Average
Shares Exercise Subject to Exercise
Subject to Price Exercisable Price
Options Per Share Options Per Share
---------- --------- ---------- ---------
Outstanding, October 1, 2000 41,889,726 $ 9.55 20,330,740 $ 7.82
Granted 9,907,292 20.48
Exercised (6,289,892) 7.45
Cancelled (2,496,195) 14.22
---------- --------- ---------- ---------
Outstanding, September 30, 2001 43,010,931 12.13 24,407,135 9.16
Granted 10,262,709 15.79
Exercised (9,830,136) 9.29
Cancelled (2,983,701) 15.15
---------- --------- ---------- ---------
Outstanding, September 29, 2002 40,459,803 13.55 20,975,598 11.07
Granted 9,537,730 21.10
Exercised (8,019,604) 11.69
Cancelled (2,912,483) 17.90
---------- --------- ---------- ---------
Outstanding, September 28, 2003 39,065,446 $ 15.47 20,888,694 $ 12.55
---------- --------- ---------- ---------
28
As of September 28, 2003, there were 28.2 million shares of common stock
available for issuance pursuant to future stock option grants. Additional
information regarding options outstanding as of September 28, 2003, is as
follows:
- ---------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Life(Years) Price Shares Price
- -------------------------- ---------- ------------- --------------- ---------- -------------
$ 2.87 - $ 5.88 1,665,970 1.85 $ 4.83 1,665,970 $ 4.83
6.73 - 11.63 12,017,544 4.63 9.98 11,287,641 9.89
11.88 - 14.80 7,863,648 7.53 14.40 2,961,643 13.87
15.34 - 20.64 14,224,022 8.08 20.20 3,941,931 19.89
20.76 - 28.87 3,294,262 8.59 22.98 1,031,509 22.38
- ----------- ---------- ---------- ---- --------------- ---------- -------------
$ 2.87 - $ 28.87 39,065,446 6.69 $ 15.47 20,888,694 $ 12.55
- ----------- ---------- ---------- ---- --------------- ---------- -------------
Employee Stock Purchase Plans
The Company has an employee stock purchase plan which provides that eligible
employees may contribute up to 10% of their base earnings towards the quarterly
purchase of the Company's common stock. The employee's purchase price is 85% of
the lesser of the fair market value of the stock on the first business day or
the last business day of the quarterly offering period. Employees may purchase
shares having a fair market value of up to $25,000 (measured as of the first day
of each quarterly offering period for each calendar year). No compensation
expense is recorded in connection with the plan. The total number of shares
issuable under the plan is 16.0 million. There were 712,046 shares issued under
the plan during fiscal 2003 at prices ranging from $17.32 to $20.87. There were
991,742 shares issued under the plan during fiscal 2002 at prices ranging from
$12.58 to $19.81. There were 813,635 shares issued under the plan during fiscal
2001 at prices ranging from $12.70 to $18.28. Since inception of the plan, 5.7
million shares have been purchased, leaving 10.3 million shares available for
future issuance. Of the 42,666 employees eligible to participate, 11,184 were
participants in the plan as of September 28, 2003. Starbucks has an additional
employee stock purchase plan which allows eligible United Kingdom employees to
save towards the purchase of the Company's common stock. The plan is in
compliance with applicable tax laws in the United Kingdom. The employee's
purchase price is 85% of the fair value of the stock on the first business day
of a three-year offering period. No compensation expense was recorded in
connection with the plan during fiscal 2002. The total number of shares issuable
under the plan is 600,000. There were 31,294 shares issued under the plan during
fiscal 2003 at prices ranging from $11.33 to $12.02. No shares had been issued
prior to fiscal 2003 and 568,706 shares remain available for future issuance.
Deferred Stock Plan
The Company has a deferred stock plan for certain key employees that enables
participants in the plan to defer receipt of ownership of common shares from the
exercise of non-qualified stock options. The minimum deferral period is five
years. As of September 28, 2003, receipt of 1,697,100 shares was deferred under
the terms of this plan. The rights to receive these shares, represented by
common stock units, are included in the calculation of basic and diluted
earnings per share as common stock equivalents.
Defined Contribution Plans
Starbucks maintains voluntary defined contribution plans covering eligible
employees as defined in the plan documents. Participating employees may elect to
defer and contribute a portion of their compensation to the plans up to the plan
limits stated in the plan documents, not to exceed the dollar amounts set by
applicable laws. For employees in the United States and Canada, the Company
matched 25% to 150% of each employee's eligible contribution based on years of
service, up to a maximum of the first 4% of each employee's compensation.
The Company's matching contributions to all plans were approximately $6.8
million, $3.1 million and $1.6 million in fiscal 2003, 2002 and 2001,
respectively.
29
NOTE 14: INCOME TAXES
A reconciliation of the statutory federal income tax rate with the Company's
effective income tax rate is as follows:
Fiscal year ended Sept 28, 2003 Sept 29, 2002 Sept 30, 2001
------------- ------------- -------------
Statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit 3.6 3.4 3.8
Valuation allowance change from prior year 1.4 (0.6) 1.0
Other, net (1.5) (0.5) (2.4)
-------- -------- --------
Effective tax rate 38.5% 37.3% 37.4%
The provision for income taxes consists of the following (in thousands):
Fiscal year ended Sept 28, 2003 Sept 29, 2002 Sept 30, 2001
------------- ------------- -------------
Currently payable:
Federal $ 140,138 $ 109,154 $ 91,750
State 25,448 16,820 17,656
Foreign 8,523 5,807 3,198
Deferred tax asset, net (6,120) (5,468) (4,892)
------------- ------------- -------------
Total $ 167,989 $ 126,313 $ 107,712
------------- ------------- -------------
Deferred income taxes or tax benefits reflect the tax effect of temporary
differences between the amounts of assets and liabilities for financial
reporting purposes and amounts as measured for tax purposes. The Company will
establish a valuation allowance if it is more likely than not these items will
either expire before the Company is able to realize their benefits, or that
future deductibility is uncertain. Periodically, the valuation allowance is
reviewed and adjusted based on management's assessments of realizable deferred
tax assets. The valuation allowances as of September 28, 2003, and September 29,
2002, were related to losses from investments in foreign equity investees and
wholly owned foreign subsidiaries. The net change in the total valuation
allowance for the years ended September 28, 2003, and September 29, 2002, was an
increase of $7.0 million and a decrease of $2.3 million, respectively. The tax
effect of temporary differences and carryforwards that cause significant
portions of deferred tax assets and liabilities is as follows (in thousands):
Fiscal year ended Sept 28, 2003 Sept 29, 2002
------------- -------------
Deferred tax assets:
Equity and other investments $ 17,576 $ 15,270
Capital loss carry forwards 4,578 6,077
Accrued occupancy costs 15,706 14,597
Accrued compensation and related costs 20,533 12,726
Other accrued expenses 22,410 16,608
Foreign tax credits 14,103 10,199
Other 7,084 6,971
------------- -------------
Total 101,990 82,448
Valuation allowance (13,685) (6,720)
------------- -------------
Total deferred tax asset, net of valuation allowance 88,305 75,728
Deferred tax liabilities:
Property, plant and equipment (49,419) (50,819)
Other (10,650) (5,199)
------------- -------------
Total (60,069) (56,018)
------------- -------------
Net deferred tax asset $ 28,236 $ 19,710
------------- -------------
As of September 28, 2003, the Company had foreign tax credit carryforwards of
$14.1 million with expiration dates between fiscal years 2004 and 2008. The
Company also had capital loss carryforwards of $11.9 million expiring in 2006.
Taxes currently payable of $30.5 million and $32.8 million are included in
"Accrued taxes" on the accompanying consolidated balance sheets as of September
28, 2003, and September 29, 2002, respectively.
30
NOTE 15: EARNINGS PER SHARE
The following table represents the calculation of net earnings per common share
- - basic (in thousands, except earnings per share):
Fiscal year ended Sept 28, 2003 Sept 29, 2002 Sept 30, 2001
------------- ------------- -------------
Net earnings $ 268,346 $ 212,686 $ 180,335
Weighted average common shares and common stock
units outstanding 390,753 385,575 380,566
------------- ------------- -------------
Net earnings per common share - basic $ 0.69 $ 0.55 $ 0.47
------------- ------------- -------------
The following table represents the calculation of net earnings per common and
common equivalent share - diluted (in thousands, except earnings per share):
Fiscal year ended Sept 28, 2003 Sept 29, 2002 Sept 30, 2001
------------- ------------- -------------
Net earnings $ 268,346 $ 212,686 $ 180,335
Weighted average common shares and common stock
units outstanding 390,753 385,575 380,566
Dilutive effect of outstanding common stock options 10,895 11,951 13,783
------------- ------------- -------------
Weighted average common and common equivalent
Shares outstanding 401,648 397,526 394,349
------------- ------------- -------------
Net earnings per common share - basic $ 0.67 $ 0.54 $ 0.46
------------- ------------- -------------
Options with exercise prices greater than the average market price were not
included in the computation of diluted earnings per share. These options totaled
0.6 million, 1.8 million and 0.9 million in fiscal 2003, 2002 and 2001,
respectively.
NOTE 16: RELATED PARTY TRANSACTIONS
Prior to January 2003, a member of the Company's Board of Directors served as a
board member of, and owned an indirect interest in, a privately held company
that provides Starbucks with in-store music services. Starbucks paid $0.7
million, $3.0 million and $2.3 million to the privately held company for music
services during fiscal 2003, 2002 and 2001, respectively, while the related
party relationship existed.
In April 2001, three members of the Board of Directors and other investors,
organized as The Basketball Club of Seattle, LLC (the "Basketball Club"),
purchased the franchises for The Seattle Supersonics and The Seattle Storm
basketball teams. An executive officer of the Company, Howard Schultz, owns a
controlling interest in the Basketball Club. Starbucks paid approximately $0.7
million, $0.7 million and $0.3 million during fiscal 2003, 2002 and 2001,
respectively, for team sponsorships and ticket purchases while the related party
relationship existed. Terms of the team sponsorship agreements did not change as
a result of the related party relationship.
NOTE 17: COMMITMENTS AND CONTINGENCIES
The Company has unconditionally guaranteed the repayment of certain
yen-denominated bank loans and related interest and fees of an unconsolidated
equity investee, Starbucks Coffee Japan, Ltd. There have been no modifications
or additions to the loan guarantee agreements since the Company's adoption of
FIN No. 45. The guarantees continue until the loans, including accrued interest
and fees, have been paid in full. The maximum amount is limited to the sum of
unpaid principal and interest amounts, as well as other related expenses. These
amounts will vary based on fluctuations in the yen foreign exchange rate. As of
September 28, 2003, the maximum amount of the guarantees was approximately $11.8
million.
Coffee brewing and espresso equipment sold to customers through Company-operated
and licensed retail stores, as well as equipment sold to the Company's licensees
for use in retail licensing operations, are under warranty for defects in
materials and workmanship for a period ranging from 12 months to 24 months. The
Company establishes a reserve for estimated warranty costs at the time of sale,
based on historical experience. The following table summarizes the activity
related to product warranty reserves during fiscal 2003 and 2002 (in thousands):
Fiscal year ended Sept 28, 2003 Sept 29, 2002
------------- -------------
Balance at the beginning of the fiscal year $ 1,842 $ 1,090
Provision for warranties issued 2,895 3,128
Warranty claims (2,510) (2,376)
------------- -------------
Balance at the end of the fiscal year $ 2,227 $ 1,842
------------- -------------
31
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 consolidated
financial position or results of operations of the Company.
NOTE 18: SEGMENT REPORTING
Segment information is prepared on the basis that Company's management
internally reviews financial information for operational decision making
purposes. Starbucks revised its segment reporting into two distinct,
geographically based operating segments: United States and International. This
change was in response to internal management realignments in the fiscal first
quarter of 2004 and management's evaluation of the requirements of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
United States
The Company's United States operations ("United States") represent 86% of total
retail revenues, 81% of specialty revenues and 85% of total net revenues.
Company-operated retail stores sell coffee and other beverages, whole bean
coffees, complementary food, coffee brewing equipment and merchandise.
Non-retail activities within the United States include: licensed operations,
foodservice accounts and other initiatives related to the Company's core
businesses.
International
The Company's international operations ("International") represent the remaining
14% of retail revenues, 19% of specialty revenues and 15% of total net revenues.
International sells coffee and other beverages, whole bean coffees,
complementary food, coffee brewing equipment and merchandise through
Company-operated retail stores in Canada, the United Kingdom, Thailand and
Australia, as well as through licensed operations and foodservice accounts in
these and other countries. Because International operations are in the early
phase of development and have country-specific regulatory requirements, they
require a more extensive administrative support organization, as compared to the
United States, to provide resources and respond to business needs in each
region.
The accounting policies of the operating segments are the same as those
described in Note 1. Operating income represents earnings before "Interest and
other income, net," "Gain on sale of investment" and "Income taxes." No
allocations of corporate overhead, interest or income taxes are made to the
segments. Identifiable assets by segment are those assets used in the Company's
operations in each segment. Unallocated corporate assets include cash and
investments, unallocated assets of the corporate headquarters and roasting
facilities, deferred taxes and certain other intangibles. Management evaluates
performance of segments based on direct product sales and operating costs.
The table below presents information by operating segment (in thousands):
United Unallocated
Fiscal year ended States International Corporate Total
------------- ------------- ----------- -----------
Fiscal 2003:
Total net revenues $ 3,472,452 $ 603,070 $ - $ 4,075,522
Earnings/(loss) before income taxes 606,544 5,466 (175,675) 436,335
Depreciation and amortization 167,138 38,563 32,106 237,807
Income from equity investees 28,484 9,912 - 38,396
Equity method investments 16,919 117,422 - 134,341
Identifiable assets 1,161,512 383,324 1,184,910 2,729,746
------------- ------------- ----------- -----------
Fiscal 2002:
Total net revenues $ 2,828,253 $ 460,655 $ - $ 3,288,908
Earnings/(loss) before income taxes 506,829 3,891 (171,721) 338,999
Depreciation and amortization 142,752 34,069 28,736 205,557
Income from equity investees 19,182 14,263 - 33,445
Equity method investments 18,519 76,101 - 94,620
Identifiable assets 957,127 332,411 924,854 2,214,392
------------- ------------- ----------- -----------
Fiscal 2001:
Total net revenues $ 2,298,563 $ 350,417 $ - $ 2,648,980
Earnings/(loss) before income taxes 400,878 21,138 (133,969) 288,047
Depreciation and amortization 113,945 24,162 25,394 163,501
Income from equity investees 12,668 15,072 - 27,740
Equity method investments 21,652 35,043 - 56,695
Identifiable assets 901,680 245,169 636,621 1,783,470
------------- ------------- ----------- -----------
32
The tables below represent information by geographic area (in thousands):
Fiscal year ended Sept 28, 2003 Sept 29, 2002 Sept 30, 2001
------------- ------------- -------------
Net revenues from external customers:
United States $ 3,472,452 $ 2,828,253 $ 2,298,563
Foreign countries 603,070 460,655 350,417
------------- ------------- -------------
Total $ 4,075,522 $ 3,288,908 $ 2,468,980
------------- ------------- -------------
Revenues from foreign countries are based on the location of the customers and
consist primarily of retail revenues from the United Kingdom and Canada as well
as specialty revenues generated from product sales to international licensees.
No customer accounts for 10% or more of the Company's revenues.
Fiscal year ended Sept 28, 2003 Sept 29, 2002 Sept 30, 2001
------------- ------------- -------------
Long-lived assets:
United States $ 1,544,300 $ 1,202,652 $ 1,064,385
Foreign countries 261,417 239,097 187,146
------------- ------------- -------------
Total $ 1,805,717 $ 1,441,749 $ 1,251,531
------------- ------------- -------------
Assets attributed to foreign countries are based on the country in which those
assets are located.
NOTE 19: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information in fiscal 2003 and 2002 is as follows
(in thousands, except earnings per share):
First Second Third Fourth
-------------- -------------- -------------- --------------
2003 quarter:
Net revenues $ 1,003,526 $ 954,206 $ 1,036,776 $ 1,081,014
Operating income 120,834 85,494 106,019 112,366
Net earnings 78,363 52,031 68,356 69,596
Net earnings per common share - diluted $ 0.20 $ 0.13 $ 0.17 $ 0.17
-------------- -------------- -------------- --------------
2002 quarter:
Net revenues $ 805,335 $ 783,217 $ 835,158 $ 865,198
Operating income 92,000 48,444 87,091 88,803
Net earnings 67,709 31,741 55,556 57,680
Net earnings per common share - diluted $ 0.17 $ 0.08 $ 0.14 $ 0.14
-------------- -------------- -------------- --------------
33
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of Starbucks Corporation is responsible for the preparation and
integrity of the financial statements included in this Annual Report to
Shareholders. The financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America and
include amounts based on management's best estimates and judgments where
necessary. Financial information included elsewhere in this Annual Report is
consistent with these financial statements.
Management maintains a system of internal controls and procedures designed to
provide reasonable assurance that transactions are executed in accordance with
proper authorization, transactions are properly recorded in the Company's
records, assets are safeguarded, and accountability for assets is maintained.
The concept of reasonable assurance is based on the recognition that the cost of
maintaining the system of internal accounting controls should not exceed
benefits expected to be derived from the system. Internal controls and
procedures are periodically reviewed and revised, when appropriate, due to
changing circumstances and requirements. In addition, the Company's internal
audit department assesses the effectiveness and adequacy of internal controls on
a regular basis and recommends improvements when appropriate. Management
considers the internal auditors' and independent auditors' recommendations
concerning the Company's internal controls and takes steps to implement those
that are believed to be appropriate in the circumstances.
Independent auditors are appointed by the Company's Audit and Compliance
Committee of the Board of Directors and ratified by the Company's shareholders
to audit the financial statements in accordance with auditing standards
generally accepted in the United States of America and to independently assess
the fair presentation of the Company's financial position, results of operations
and cash flows. Their report appears in this Annual Report.
The Audit and Compliance Committee, all of whose members are outside directors,
is responsible for monitoring the Company's accounting and reporting practices.
The Audit and Compliance Committee meets periodically with management, the
independent auditors and the internal auditors, jointly and separately, to
review financial reporting matters as well as to ensure that each is properly
discharging its responsibilities. The independent auditors and the internal
auditors have full and free access to the Committee without the presence of
management to discuss the results of their audits, the adequacy of internal
accounting controls and the quality of financial reporting.
/s/ ORIN C. SMITH /s/ MICHAEL CASEY
ORIN C. SMITH MICHAEL CASEY
president and executive vice president,
chief executive officer chief financial officer and chief administrative officer
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Starbucks Corporation
Seattle, Washington
We have audited the accompanying consolidated balance sheets of Starbucks
Corporation and subsidiaries (the "Company") as of September 28, 2003, and
September 29, 2002, and the related consolidated statements of earnings,
shareholders' equity and cash flows for the years ended September 28, 2003,
September 29, 2002 and September 30, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of September 28,
2003, and September 29, 2002, and the results of its operations and its cash
flows for the years ended September 28, 2003, September 29, 2002, and September
30, 2001, in conformity with accounting principles generally accepted in the
United States of America.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Seattle, Washington
December 19, 2003
34
SHAREHOLDER INFORMATION
MARKET INFORMATION AND DIVIDEND POLICY
The Company's common stock is traded on the National Market tier of The Nasdaq
Stock Market, Inc. ("Nasdaq"), under the symbol "SBUX." The following table sets
forth the quarterly high and low closing sale prices per share of the common
stock as reported by Nasdaq for each quarter during the last two fiscal years.
HIGH LOW
---------- ---------
September 28, 2003:
Fourth Quarter $ 30.19 $ 24.55
Third Quarter 26.74 22.91
Second Quarter 26.28 19.80
First Quarter 23.93 20.36
---------- ---------
September 29, 2002:
Fourth Quarter $ 24.36 $ 18.63
Third Quarter 25.63 22.02
Second Quarter 24.07 19.51
First Quarter 19.91 14.56
---------- ---------
As of December 17, 2003, the Company had 12,137 shareholders of record. The
Company has never paid any dividends on its common stock. The Company presently
intends to retain earnings for use in its business and, therefore, does not
anticipate paying a cash dividend in the near future.
The Company's Securities and Exchange Commission filings, including the Annual
Report on Form 10-K for the fiscal year ended September 28, 2003, may be
obtained without charge by accessing the Investor Relations section of the
Company's website at http://www.starbucks.com/aboutus/investor.asp, at
www.sec.gov or by making a request to Investor Relations via the address, phone
number or email address below.
Quarterly information, as well as other current and historical information about
the Company, is available immediately upon its release, free of charge, by
accessing the Investor Relations section of the Company's website at
http://www.starbucks.com/aboutus/investor.asp, or by making a request to
Investor Relations via the address, phone number or email address below:
INVESTOR RELATIONS
Investor Relations -- M/S S-FP1
Starbucks Corporation
P.O. Box 34067
Seattle, WA 98124-1067
(206) 447-1575, ext. 87118
http://www.starbucks.com/aboutus/investor.asp
CORPORATE SOCIAL RESPONSIBILITY
Starbucks demonstrates its commitment to corporate social responsibility ("CSR")
by conducting its business in ways that produce social, environmental and
economic benefits to the communities where Starbucks operates. The Company
aligns its principles for social responsibility with its overall strategy and
business operations. As a result, Starbucks believes it delivers benefits to the
Company and its stakeholders - partners, customers, suppliers, shareholders,
community members and others - while distinguishing Starbucks as a leader within
the coffee industry.
Providing open communication and transparency helps the Company be accountable
to its stakeholders. To support this goal, Starbucks publishes a CSR Annual
Report. Starbucks fiscal 2003 CSR Annual Report is available online at
http://www.starbucks.com/csr. To request a printed copy of the report, call
1-800-23-LATTE (1-800-235-2883) or fax your request to 1-800-782-7286.
35