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.
Oct 3, 2004 Sept 28, 2003 Sept 29, 2002 Sept 30, 2001 Oct 1, 2000
As of and for the fiscal year ended(1) (53 Wks) (52 Wks) (52 Wks) (52 Wks) (52 Wks)
- --------------------------------------- -------- -------- -------- -------- --------
RESULTS OF OPERATIONS DATA
Net revenues:
Company-operated retail $4,457,378 $3,449,624 $2,792,904 $2,229,594 $1,823,607
Specialty:
Licensing 565,798 409,551 311,932 240,665 189,411
Foodservice and other 271,071 216,347 184,072 178,721 164,596
---------- ---------- ---------- ---------- ----------
Total specialty 836,869 625,898 496,004 419,386 354,007
---------- ---------- ---------- ---------- ----------
Total net revenues 5,294,247 4,075,522 3,288,908 2,648,980 2,177,614
---------- ---------- ---------- ---------- ----------
Operating income 610,117 424,713 316,338 280,219 212,190
Internet-related investment losses(2) -- -- -- 2,940 58,792
Gain on sale of investment(3) -- -- 13,361 -- --
Net earnings $ 391,775 $ 268,346 $ 212,686 $ 180,335 $ 94,502
Net earnings per common share - diluted(4) $ 0.95 $ 0.67 $ 0.54 $ 0.46 $ 0.24
Cash dividends per share -- -- -- -- --
BALANCE SHEET DATA
Working capital $ 585,505 $ 315,326 $ 310,048 $ 148,661 $ 146,568
Total assets 3,328,168 2,729,746 2,214,392 1,783,470 1,435,026
Long-term debt (including current portion) 4,353 5,076 5,786 6,483 7,168
Shareholders' equity $2,486,755 $2,082,427 $1,723,189 $1,374,865 $1,148,212
STORE OPERATING DATA
Percentage change in comparable store sales(5)
United States 11% 9% 7% 5% 9%
International 6% 7% 1% 3% 12%
Consolidated 10% 8% 6% 5% 9%
Stores opened during the year:(6)(7)
United States
Company-operated stores 514 506 503 498 388
Licensed stores 417 315 264 268 342
International
Company-operated stores 120 99 113 151 103
Licensed stores 293 281 297 291 170
---------- ---------- ---------- ---------- ----------
Total 1,344 1,201 1,177 1,208 1,003
---------- ---------- ---------- ---------- ----------
Stores open at year end:(7)
United States(8)
Company-operated stores 4,293 3,779 3,209 2,706 2,208
Licensed stores 1,839 1,422 1,033 769 501
International
Company-operated stores 922 802 703 590 439
Licensed stores 1,515 1,222 941 644 353
---------- ---------- ---------- ---------- ----------
Total 8,569 7,225 5,886 4,709 3,501
---------- ---------- ---------- ---------- ----------
(1) The Company's fiscal year ends on the Sunday closest to September 30.
(2) During fiscal 2001 and 2000, the Company recognized losses of $2.9 million
and $58.8 million, respectively, for impairments of Internet-related
investments determined to be other than temporary.
(3) On October 10, 2001, the Company sold 30,000 of its shares of Starbucks
Coffee Japan, Ltd. at approximately $495 per share, net of related costs,
which resulted in a gain of $13.4 million.
(4) Earnings per share data for fiscal years presented above have been
restated to reflect the two-for-one stock split in fiscal 2001.
(5) Includes only Starbucks Company-operated retail stores open 13 months or
longer. Comparable store sales percentage for fiscal 2004 excludes the
extra sales week.
(6) Store openings are reported net of closures.
(7) International store information has been adjusted for the 100% acquisition
of the Singapore operations by reclassifying historical information from
Licensed stores to Company-operated stores.
(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.
The fiscal year ended on October 3, 2004, included 53 weeks, with the 53rd week
falling in the fiscal fourth quarter. Fiscal years 2003 and 2002 each had 52
weeks. Fiscal year 2005 will have 52 weeks.
MANAGEMENT OVERVIEW
During the fiscal year ended October 3, 2004, all areas of Starbucks business,
from U.S. and international Company-operated retail operations to the Company's
specialty businesses, delivered strong financial performance, and innovation was
prevalent throughout the Company's operations. Starbucks believes the Company's
ability to achieve the balance between growing the core business and building
the foundation for future growth is the key to increasing shareholder value.
Starbucks fiscal 2004 performance provides a strong example of the Company's
commitment to achieve this balance.
Historically, the primary driver of the Company's revenue growth has been the
opening of new retail stores, both Company-operated and licensed, in pursuit of
the Company's objective to establish Starbucks as the most recognized and
respected brand in the world. With a presence today in more than 30 countries,
management believes that the Company's long-term goal of operating 15,000
Starbucks retail locations throughout the United States and at least 15,000
stores in International markets is achievable.
In addition to opening new retail stores, Starbucks is targeting to increase
revenues generated at new and existing Company-operated stores by attracting new
customers and increasing the frequency of visits by current customers. The
strategy is to increase first year average store sales and comparable store
sales by continuously improving the level of customer service, maintaining a
steady stream of product innovation and improving the speed of service through
training, technology and process improvement. For U.S. Company-operated stores
opened in fiscal 2004, first year sales volumes are currently estimated at
greater than $800,000 as a result of these efforts. Comparable store sales for
Company-operated markets increased by 10%, making fiscal 2004 the 13th
consecutive year with comparable store sales growth of 5% or greater.
In licensed retail operations, Starbucks shares operating and store development
experience to help licensees improve the profitability of existing stores and
build new stores, which generate additional royalty income and product sales.
The Company's strategy is to selectively increase its equity stake as
International markets develop.
The combination of more retail stores, higher revenues from existing stores, and
growth in other business channels in both the United States and International
operating segments resulted in a 29.9% increase in total net revenues for the 53
weeks of fiscal 2004, compared to the 52 weeks of fiscal 2003. Excluding the
impact of the extra sales week in fiscal 2004, total net revenues increased
27.3%. Both of these revenue growth measures were above the Company's three to
five year target of approximately 20%.
Since additional retail stores can leverage existing support organizations and
facilities, the Company's infrastructure can be expanded more slowly than the
rate of revenue growth and generate margin improvement. In fiscal 2004,
operating income as a percentage of total net revenues increased to 11.5% from
10.4% in fiscal 2003, and net earnings increased by 46.0%, compared to fiscal
2003. These results demonstrated the Company's ability to improve operating
margin despite pressures from rising dairy and green coffee commodity costs
throughout the fiscal year. The Company's International operations delivered a
full year of positive operating results, primarily due to leverage gained on
most operating expenses distributed over an expanded revenue base. In recent
fiscal years, the Company made substantial infrastructure investments in
corporate and regional support facilities and personnel, as well as established
more efficient distribution networks. Such investments were necessary to support
the Company's planned international expansion, which is now realizing
substantial benefit from this foundation.
Management believes that comparable store sales growth of the level achieved
during fiscal 2004 is not sustainable over the long term. However, management
believes that new store development opportunities on a global basis are
sufficient for the Company to maintain a high level of unit growth and that the
execution of the current retail operating strategy can continue to increase
first year average store sales and comparable stores sales. These revenue growth
opportunities, coupled with continuous focus on controlling both operating and
capital costs, should allow Starbucks to continue to modestly improve margins
and achieve annual revenue growth of approximately 20% and annual earnings per
share growth of 20%-25% for the next three to five years.
2
ACQUISITIONS
In July 2004, Starbucks acquired 100% of its licensed operations in Singapore
and acquired 49.9% of its licensed operations in Malaysia, for a combined total
of approximately $12.1 million. Previously, the Company did not have any equity
ownership interests in these entities. The results of operations for Singapore
are included in the accompanying consolidated financial statements from the date
of acquisition. For its investment in Malaysia, management applied the equity
method of accounting from the date of acquisition, since the Company is able to
exert significant influence over the investee's operating and financial
policies.
In July 2003, the Company acquired Seattle Coffee Company ("SCC"), which
includes the Seattle's Best Coffee(R) and Torrefazione Italia(R) brands, from
AFC Enterprises, Inc. for $70 million in cash. The results of operations of SCC
are included in the accompanying consolidated financial statements from the date
of acquisition.
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, the Company reflected a
change in accounting method during fiscal 2003, from the cost method to the
equity method, in the consolidated financial statements.
RESULTS OF OPERATIONS - FISCAL 2004 COMPARED TO FISCAL 2003
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:
Oct 3, 2004 Sept 28, 2003 Sept 29, 2002
Fiscal year ended (53 Wks) (52 Wks) (52 Wks)
- ----------------- -------- -------- --------
STATEMENTS OF EARNINGS DATA
Net revenues:
Company-operated retail 84.2% 84.6% 84.9%
Specialty:
Licensing 10.7 10.1 9.5
Foodservice and other 5.1 5.3 5.6
----- ----- -----
Total specialty 15.8 15.4 15.1
----- ----- -----
Total net revenues 100.0 100.0 100.0
Cost of sales including occupancy costs 41.5 41.4 41.0
Store operating expenses(1) 40.2 40.0 39.7
Other operating expenses(2) 20.5 22.6 21.4
Depreciation and amortization expenses 5.3 5.8 6.3
General and administrative expenses 5.7 6.0 7.1
Income from equity investees 1.1 0.9 1.0
Operating income 11.5 10.4 9.6
Interest and other income, net 0.3 0.3 0.3
Gain on sale of investment 0.0 0.0 0.4
----- ----- -----
Earnings before income taxes 11.8 10.7 10.3
Income taxes 4.4 4.1 3.8
----- ----- -----
Net earnings 7.4% 6.6% 6.5%
===== ===== =====
(1) Shown as a percentage of related Company-operated retail revenues.
(2) Shown as a percentage of related total specialty revenues.
CONSOLIDATED RESULTS OF OPERATIONS
Net revenues for the fiscal year ended 2004 increased 29.9% to $5.3 billion from
$4.1 billion for the 52-week period of fiscal 2003. Net revenues increased 27.3%
when calculated on a comparative 52-week basis for both fiscal 2004 and 2003.
During the fiscal year ended 2004, Starbucks derived 84% of total net revenues
from its Company-operated retail stores. Company-operated retail revenues
increased 29.2% to $4.5 billion for the fiscal year ended 2004, from $3.4
billion for the 52-week period of fiscal 2003. Company-operated retail revenues
increased 26.7% when calculated on a comparative 52-week basis for both fiscal
2004 and 2003. This increase was primarily due to the opening of 634 new
Company-operated retail stores during the previous 12 months and comparable
store sales growth of 10%. The increase in comparable store sales was due to a
9% increase in the number of customer transactions and a 1% increase in the
average value per transaction. Comparable store sales growth percentages were
calculated excluding the extra week of fiscal 2004. Management believes
increased
3
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 16% of total net revenues from its Specialty
Operations. Specialty revenues, which include licensing revenues and foodservice
and other revenues, increased 33.7% to $837 million for the fiscal year ended
2004, from $626 million for the 52-week period of fiscal 2003. Excluding the
impact of the extra sales week in fiscal 2004, total specialty revenues
increased 31.0% to $820 million.
Licensing revenues, which are derived from retail store licensing arrangements,
grocery and warehouse club licensing, and certain other branded-product licensed
operations, increased 38.2% to $566 million for the fiscal year ended 2004, from
$410 million for the 52-week period of fiscal 2003. The increase was due to
higher product sales and royalty revenues from the addition of 710 new licensed
retail stores during the previous 12 months and growth in the grocery and
warehouse club businesses. The growth in the grocery and warehouse club
businesses was a result of expanded agreements with Kraft Foods, Inc., including
the addition of six new Starbucks coffees along with a selection of Tazo(R)
teas, and the acquisition of Seattle Coffee Company in the fourth quarter of
fiscal 2003.
Foodservice and other revenues increased 25.3% to $271 million for the fiscal
year ended 2004, from $216 million for the 52-week period of fiscal 2003. The
increase was primarily attributable to the growth in new and existing
foodservice accounts, which benefited from the July 2003 acquisition of Seattle
Coffee Company.
Cost of sales and related occupancy costs increased to 41.5% of total net
revenues in fiscal 2004, from 41.4% in fiscal 2003. The increase was primarily
due to higher dairy and green coffee commodity costs, partially offset by
leverage gained on occupancy costs, which are primarily fixed expenses.
Store operating expenses as a percentage of Company-operated retail revenues
increased to 40.2% in fiscal 2004, from 40.0% in fiscal 2003, primarily due to
higher marketing expenditures for holiday and new product promotions, as well as
increased costs to maintain retail stores and equipment due to sustained high
traffic levels.
Other operating expenses (expenses associated with the Company's Specialty
Operations) decreased to 20.5% of specialty revenues in fiscal 2004, compared to
22.6% in fiscal 2003. The decrease was primarily due to leverage gained on
payroll-related expenditures distributed over an expanded revenue base.
Depreciation and amortization expenses increased to $280 million in fiscal 2004,
from $238 million in fiscal 2003. The increase was primarily due to a net
increase of 634 new Company-operated retail stores during the previous 12 months
and higher depreciation expenses associated with shortened estimated useful
lives of equipment deployed in the Company's foodservice operations. As a
percentage of total net revenues, depreciation and amortization decreased to
5.3% for the 53 weeks ended October 3, 2004, from 5.8% for the corresponding
52-week fiscal 2003 period, primarily due to the leverage of fixed depreciation
expenses from the extra sales week in 2004.
General and administrative expenses increased to $304 million in fiscal 2004,
compared to $245 million in fiscal 2003, primarily due to higher payroll-related
expenditures. As a percentage of total net revenues, general and administrative
expenses decreased to 5.7% for the 53 weeks ended October 3, 2004, from 6.0% for
the 52 weeks ended September 28, 2003.
Operating income increased 43.7% to $610 million in fiscal 2004, from $425
million in fiscal 2003. The operating margin increased to 11.5% of total net
revenues in fiscal 2004, compared to 10.4% in fiscal 2003, primarily due to
leverage gained on most fixed operating costs distributed over an expanded
revenue base, partially offset by higher dairy and green coffee commodity costs.
Income from equity investees was $61 million in fiscal 2004, compared to $38
million in fiscal 2003. The increase was primarily due to volume-driven
operating results for The North American Coffee Partnership, which produces
bottled Frappuccino(R) and Starbucks DoubleShot(R) coffee drinks, and improved
profitability of Starbucks Coffee Japan, Ltd. ("Starbucks Japan"). The July 2003
increase in the Company's ownership interest from 5% to 50% in the Taiwan and
Shanghai licensed operations also contributed to the growth.
Net interest and other income, which primarily consists of interest income,
increased to $14 million in fiscal 2004, from $12 million in fiscal 2003. The
growth was a result of interest income earned on higher cash and liquid
investment balances during fiscal 2004, compared to the prior year.
Income taxes for the 53 weeks ended October 3, 2004, resulted in an effective
tax rate of 37.2%, compared to 38.5% in fiscal 2003. The lower effective tax
rate was primarily due to improved operating results as fewer nondeductible
losses were generated from international markets, which are in various phases of
development.
4
OPERATING SEGMENTS
Segment information is prepared on the same basis that the Company's management
reviews financial information for operational decision-making purposes.
The following tables summarize the Company's results of operations by segment
for fiscal 2004 and 2003 (in thousands):
% of % of % of
United Inter- Total
United States Inter- national Unallocated Net
53 weeks ended October 3, 2004 States Revenue national Revenue Corporate Revenue Consolidated
- ------------------------------ ------ ------- -------- ------- --------- ------- ------------
Net revenues:
Company-operated retail $3,800,367 84.6% $657,011 81.8% $ -- -- % $4,457,378
Specialty:
Licensing 436,981 9.7 128,817 16.0 -- -- 565,798
Foodservice and other 253,502 5.7 17,569 2.2 -- -- 271,071
---------- ---- -------- ---- --------- ---- ----------
Total specialty 690,483 15.4 146,386 18.2 -- -- 836,869
---------- ---- -------- ---- --------- ---- ----------
Total net revenues 4,490,850 100.0 803,397 100.0 -- -- 5,294,247
Cost of sales and related occupancy costs 1,789,502 39.8 409,152 50.9 -- -- 2,198,654
Store operating expenses 1,546,871 40.7(1) 243,297 37.0(1) -- -- 1,790,168
Other operating expenses 144,853 21.0(2) 26,795 18.3(2) -- -- 171,648
Depreciation and amortization expenses 201,703 4.5 45,783 5.7 32,538 0.6 280,024
General and administrative expenses 80,221 1.8 48,206 6.0 175,866 3.3 304,293
Income from equity investees 37,453 0.8 23,204 2.9 -- -- 60,657
---------- ---- -------- ---- --------- ---- ----------
Operating income/(loss) $ 765,153 17.0% $ 53,368 6.6% $(208,404) (3.9)% $ 610,117
========== ==== ======== === ========= ==== ==========
% of % of % of
United Inter- Total
United States Inter- national Unallocated Net
52 weeks ended September 28, 2003 States Revenue national Revenue Corporate Revenue Consolidated
- --------------------------------- ------ ------- -------- ------- --------- ------- ------------
Net revenues:
Company-operated retail $2,965,618 85.4% $484,006 80.3% $ -- -- % $3,449,624
Specialty:
Licensing 301,175 8.7 108,376 18.0 -- -- 409,551
Foodservice and other 205,659 5.9 10,688 1.7 -- -- 216,347
---------- ---- -------- ---- --------- ---- ----------
Total 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 0.8 237,807
General and administrative expenses 45,007 1.3 44,352 7.4 155,191 3.8 244,550
Income from equity investees 28,484 0.8 9,912 1.6 -- -- 38,396
---------- ---- -------- ---- --------- ---- ----------
Operating income/(loss) $ 606,544 17.5% $ 5,466 0.9% $(187,297) (4.6)% $ 424,713
========== ==== ======== === ========= ==== ==========
(1) Shown as a percentage of related Company-operated retail revenues.
(2) Shown as a percentage of related total specialty revenues.
UNITED STATES
The Company's United States operations ("United States") represent 85% of
Company-operated retail revenues, 83% of total specialty revenues and 85% of
total net revenues. United States operations sell coffee and other beverages,
whole bean coffees, complementary food, coffee brewing equipment and merchandise
primarily through Company-operated retail stores. Specialty Operations within
the United States include licensed retail stores and other licensing operations,
foodservice accounts and other initiatives related to the Company's core
businesses.
United States total net revenues increased by $1.0 billion, or 29.3%, to $4.5
billion for the fiscal year ended 2004, compared
5
to $3.5 billion for the 52-week period of fiscal 2003. Excluding the impact of
the extra sales week in fiscal 2004, United States total net revenues increased
26.8% to $4.4 billion. United States Company-operated retail revenues increased
by $835 million, or 28.1%, to $3.8 billion for the fiscal year ended 2004,
compared to $3.0 billion for the 52-week period of fiscal 2003, primarily due to
the opening of 514 new Company-operated retail stores during the previous 12
months and comparable store sales growth of 11%. The increase in comparable
store sales was due to a 10% increase in the number of customer transactions and
a 1% increase in the average value per transaction. 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. Excluding the impact of the extra sales week in fiscal 2004,
United States Company-operated retail revenues increased 25.7% to $3.7 billion.
Total United States specialty revenues increased $184 million, or 36.2%, to $690
million for the fiscal year ended 2004, compared to $507 million in the 52-week
period of fiscal 2003. Excluding the impact of the extra sales week in fiscal
2004, United States specialty revenues increased 33.4% to $676 million. United
States licensing revenues increased $136 million, or 45.1%, to $437 million,
compared to $301 million for the 52-week period of fiscal 2003. The increase was
primarily due to volume-driven growth in the grocery and warehouse club
businesses as a result of expanded agreements with Kraft Foods Inc., including
the addition of six new Starbucks coffees along with a selection of Tazo(R)
teas. In addition, product sales and royalty revenues increased as a result of
opening 417 new licensed retail stores during the previous 12 months.
Foodservice and other revenues increased $48 million, or 23.3%, to $254 million
from $206 million in fiscal 2003, due to both the addition of new and existing
Starbucks and Seattle Coffee Company foodservice accounts.
United States operating income increased by 26.1% to $765 million for the fiscal
year ended 2004, from $607 million for the fiscal year ended 2003. Operating
margin decreased to 17.0% of related revenues from 17.5% in the 52-week period
of fiscal 2003, primarily due to higher dairy and green coffee commodity costs,
as well as higher payroll-related expenditures to support the Company's
accelerated retail store growth. These increases were partially offset by
leverage gained on fixed occupancy costs distributed over an expanded revenue
base.
INTERNATIONAL
The Company's international operations ("International") represent the remaining
15% of Company-operated retail revenues, 17% of total specialty revenues and 15%
of total net revenues. International sells coffees and other beverages, whole
bean coffees, complementary food, coffee brewing equipment and merchandise
through Company-operated retail stores in Canada, the United Kingdom, Thailand,
Australia and Singapore, as well as through retail store licensing operations
and foodservice accounts in these and more than 20 other countries.
International operations are in various early stages of development and have
country-specific regulatory requirements that necessitate a more extensive
support organization, relative to the current levels of revenue and operating
income, than in the United States.
International total net revenues increased $200 million, or 33.2%, to $803
million for the fiscal year ended 2004, compared to $603 million for the 52-week
period of fiscal 2003. Excluding the impact of the extra sales week in fiscal
2004, International total net revenues increased 30.6%. International
Company-operated retail revenues increased $173 million, or 35.7%, to $657
million for the fiscal year ended 2004, compared to $484 million for the 52-week
period of fiscal 2003. The increase was primarily due to the opening of 120 new
Company-operated retail stores during the previous 12 months, the weakening of
the U.S. dollar against both the British pound sterling and Canadian dollar, and
comparable store sales growth of 6%. The increase in comparable store sales
resulted from a 5% increase in the number of customer transactions and a 1%
increase in the average value per transaction. Excluding the impact of the extra
sales week in fiscal 2004, International Company-operated retail revenues
increased 33.0% to $644 million.
Total International specialty revenues increased $27 million, or 22.9%, to $146
million for the fiscal year ended 2004, compared to $119 million for the 52-week
period of fiscal 2003. Excluding the impact of the extra sales week in fiscal
2004, International specialty revenues increased 20.6% to $144 million. The
increase was primarily due to higher product sales and royalty revenues from
opening 293 new licensed retail stores during the previous 12 months, partially
offset by proportionate eliminations of sales to equity investees in which the
Company increased its ownership interest in late fiscal 2003.
International operating income increased to $53 million for the fiscal year
ended 2004, compared to $5 million in the 52-week period of fiscal 2003.
Operating margin increased to 6.6% of related revenues from 0.9% in the 52-week
period of fiscal 2003, primarily due to leverage gained on most fixed costs
distributed over an expanded revenue base.
6
UNALLOCATED CORPORATE
Unallocated corporate expenses pertain to certain functions, such as executive
management, accounting, administration, tax, treasury and information technology
infrastructure, that support but are not specifically attributable to the
Company's operating segments and include related depreciation and amortization
expenses. Unallocated corporate expenses increased to $208 million for the
fiscal year ended 2004, from $187 million in the 52-week period of fiscal 2003,
primarily due to higher provisions for incentive compensation based on the
Company's performance and other payroll-related expenditures. Total unallocated
corporate expenses as a percentage of total net revenues decreased to 3.9% for
the fiscal year ended 2004, compared to 4.6% for the 52-week period of fiscal
2003.
RESULTS OF OPERATIONS - FISCAL 2003 COMPARED TO FISCAL 2002
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 fiscal 2002 period. During the fiscal
year ended 2003, Starbucks derived 85% of total net revenues from its
Company-operated retail stores. Company-operated retail revenues increased 23.5%
to $3.4 billion for the fiscal year ended 2003, from $2.8 billion for the
corresponding fiscal 2002 period. This increase was due primarily to the opening
of 602 new Company-operated retail stores during the previous 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.
The Company derived the remaining 15% of total net revenues from its Specialty
Operations. Specialty revenues, which include licensing revenues and foodservice
and other 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 fiscal
2002 period.
Licensing revenues, which are derived from retail store licensing arrangements,
grocery and warehouse club licensing and certain other branded-product licensed
operations, increased 31.3% to $409.6 million for the fiscal year ended 2003,
from $311.9 million for the corresponding fiscal 2002 period. The increase was
due to higher product sales and royalty revenues from opening 599 new licensed
retail stores during the previous 12 months and growth in the licensed grocery
and warehouse club businesses.
Foodservice and other revenues increased 17.5% to $216.3 million for the fiscal
year ended 2003, from $184.1 million for the corresponding fiscal 2002 period.
The increase was primarily attributable to broader distribution and growth in
new and existing foodservice accounts.
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 a 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 Company-operated 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 eligible to
participate in 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 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 during the previous 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 fiscal 2002 period due to higher
payroll-related expenditures and costs related to the acquisition of Seattle
Coffee Company. General and
7
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 distributed 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%-owned
partnership with the Pepsi-Cola Company, from expanded ready-to-drink 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 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, as well as 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 taxed in the United States had higher pretax
earnings and International operations generated greater nondeductible losses
during fiscal 2003 than fiscal 2002.
8
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 % of
United Inter- Total
United States Inter- national Unallocated Net
52 weeks ended September 28, 2003 States Revenue national Revenue Corporate Revenue Consolidated
- --------------------------------- ------ ------- -------- ------- --------- ------- ------------
Net revenues:
Company-operated retail $2,965,618 85.4% $484,006 80.3% $ -- -- % $3,449,624
Specialty:
Licensing 301,175 8.7 108,376 18.0 -- -- 409,551
Foodservice and other 205,659 5.9 10,688 1.7 -- -- 216,347
---------- ---- -------- ---- --------- ---- ----------
Total 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 0.8 237,807
General and administrative expenses 45,007 1.3 44,352 7.4 155,191 3.8 244,550
Income from equity investees 28,484 0.8 9,912 1.6 -- -- 38,396
---------- ---- -------- ---- --------- ---- ----------
Operating income/(loss) $ 606,544 17.5% $ 5,466 0.9% $(187,297) (4.6)% $ 424,713
========== ==== ======== === ========= ==== ==========
% of % of % of
United Inter- Total
United States Inter- national Unallocated Net
52 weeks ended September 29, 2002 States Revenue national Revenue Corporate Revenue Consolidated
- --------------------------------- ------ ------- -------- ------- --------- ------- ------------
Net revenues:
Company-operated retail $2,425,163 85.7% $367,741 79.8% $ -- -- % $2,792,904
Specialty:
Licensing 227,711 8.1 84,221 18.3 -- -- 311,932
Foodservice and other 175,379 6.2 8,693 1.9 -- -- 184,072
---------- ---- -------- ---- --------- ---- ----------
Total 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 0.9 205,557
General and administrative expenses 33,928 1.2 35,007 7.6 165,646 5.0 234,581
Income from equity investees 19,182 0.7 14,263 3.1 -- -- 33,445
---------- ---- -------- ---- --------- ---- ----------
Operating income/(loss) $ 506,885 17.9% $ 3,835 0.8% $(194,382) (5.9)% $ 316,338
========== ==== ======== === ========= ==== ==========
(1) Shown as a percentage of related Company-operated retail revenues.
(2) Shown as a percentage of related total specialty revenues.
UNITED STATES
United States total net revenues increased by $644.2 million, or 22.8%, to $3.5
billion in fiscal year 2003 from $2.8 billion in fiscal 2002. United States
Company-operated 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.
Total United States specialty revenues increased $103.7 million, or 25.7%, to
$506.8 million in fiscal 2003, compared to $403.1 million in fiscal 2002. United
States licensing revenues increased $73.5 million, or 32.3%, to $301.1 million
in fiscal
9
2003. The increase was primarily due to higher product sales and royalty
revenues as a result of opening 315 new licensed retail stores during the
previous 12 months and growth in the grocery and warehouse club businesses.
United States foodservice and other revenues increased $30.3 million, or 17.3%,
to $205.7 million in fiscal 2003, due to broader distribution and growth in new
and existing foodservice accounts.
United States operating income increased 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 distributed over an expanding revenue base.
INTERNATIONAL
International total net revenues increased $142.4 million, or 30.9%, to $603.1
million in fiscal 2003, from $460.7 million for the corresponding fiscal 2002
period. International Company-operated 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 U.K.
market.
Total International specialty revenues increased $26.1 million, or 28.1%, to
$119.1 million in fiscal 2003, from $92.9 million in fiscal 2002. The increase
was primarily due to higher product sales and royalty revenues from opening 284
new licensed retail stores during the previous 12 months.
International operating income increased 42.5% to $5.5 million in fiscal 2003,
from $3.8 million in fiscal 2002. Operating margin increased to 0.9% of related
revenues from 0.8% in the corresponding fiscal 2003 period, 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.
UNALLOCATED CORPORATE
Unallocated corporate expenses decreased to $187.3 million in fiscal 2003, from
$194.4 million in fiscal 2002, primarily due to an $18.0 million litigation
settlement in fiscal 2002, partially offset by higher payroll-related
expenditures in fiscal 2003. Total unallocated corporate expenses as a
percentage of total net revenues decreased from 5.9% in fiscal 2002 to 4.6% in
fiscal 2003.
LIQUIDITY AND CAPITAL RESOURCES
The following table represents components of the Company's most liquid assets
(in thousands):
Fiscal year ended Oct 3, 2004 Sept 28, 2003
- ----------------- ----------- -------------
Cash and cash equivalents $299,128 $200,907
Short-term investments - available-for-sale and trading securities 353,881 149,104
Long-term investments - available-for-sale securities 135,179 136,159
-------- --------
Total cash, cash equivalents and liquid investments $788,188 $486,170
======== ========
The Company manages its cash, cash equivalents and liquid investments in order
to internally fund operating needs. Cash and cash equivalents increased by $98
million for the fiscal year ended 2004, to $299 million. The Company ended the
period with $788 million in total cash, cash equivalents and liquid investments.
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
market conditions, Starbucks may acquire additional shares of its common stock.
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 for the foreseeable future. Significant new joint
ventures, acquisitions or other new business opportunities may require outside
funding.
Other than normal operating expenses, cash requirements for fiscal 2005 are
expected to consist primarily of capital expenditures related to new
Company-operated retail stores, as well as for the remodeling and refurbishment
of existing Company-operated retail stores. Management expects capital
expenditures in fiscal 2005 to be in the range of $600 million to $650 million.
Cash provided by operating activities totaled $794 million in fiscal 2004 and
was generated primarily by net earnings of $392
10
million and noncash depreciation and amortization expenses of $305 million.
Cash used by investing activities totaled $632 million in fiscal 2004. Net
capital additions to property, plant and equipment used $386 million, primarily
from opening 634 new Company-operated retail stores and remodeling certain
existing stores. Gross capital additions for fiscal 2004 were $434 million and
were offset by the change in disposal and impairment provisions and foreign
currency translation adjustments totaling $48 million. The net activity in the
Company's portfolio of available-for-sale securities during fiscal 2004 used
$212 million. Excess cash was invested in investment-grade securities. During
fiscal 2004, the Company made additional equity investments of its proportionate
share in a number of its International investees and acquired a 49.9% interest
in its Malaysia licensed operations for a combined total of $65 million,
excluding the effects of foreign currency fluctuations.
Cash used by financing activities in fiscal 2004 totaled $67 million. During
fiscal 2004, the Company repurchased 5 million shares of its common stock at an
average price of $40.85 per share, using $203 million of cash. 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
October 3, 2004, 19 million additional shares were authorized for repurchase.
The exercise of employee stock options and the sale of the Company's common
stock from employee stock purchase plans provided $138 million. As options
granted under the Company's stock plans are exercised, the Company will continue
to receive proceeds and a tax deduction; however, the amounts and the timing
cannot be predicted.
The following table summarizes the Company's contractual obligations and
borrowings as of October 3, 2004, 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 $ 4,353 $ 735 $ 1,510 $ 1,565 $ 543
Operating lease obligations 2,609,036 355,079 661,407 572,407 1,020,143
Purchase obligations 283,379 188,884 89,720 4,775 --
---------- ---------- ---------- ---------- ----------
Total $2,896,768 $ 544,698 $ 752,637 $ 578,747 $1,020,686
========== ========== ========== ========== ==========
Starbucks expects to fund these commitments primarily with operating cash flows
generated in the normal course of business.
OFF-BALANCE SHEET ARRANGEMENT
The Company has unconditionally guaranteed the repayment of certain Japanese
yen-denominated bank loans and related interest and fees of an unconsolidated
equity investee, Starbucks Coffee Japan, Ltd. 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 October 3, 2004, the maximum amount of the
guarantees was approximately $10.6 million. Since there has been no modification
of these loan guarantees subsequent to the Company's adoption of FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indebtedness of Others," Starbucks has applied the
disclosure provisions only and has not recorded the guarantee in its statement
of financial position.
PRODUCT WARRANTIES
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 to 24 months. The Company
establishes an accrual 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 2004 and 2003 (in thousands):
Fiscal year ended Oct 3, 2004 Sept 28, 2003
- ----------------- ----------- -------------
Balance at beginning of fiscal year $ 2,227 $ 1,842
Provision for warranties issued 5,093 2,895
Warranty claims (4,229) (2,510)
------- -------
Balance at end of fiscal year $ 3,091 $ 2,227
======= =======
COMMODITY 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
11
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 October 3, 2004, the Company had $271.7
million in fixed-price purchase commitments which, together with existing
inventory, is expected to provide an adequate supply of green coffee through
calendar 2005. The Company believes, based on relationships established with its
suppliers in the past, the risk of nondelivery on such purchase commitments is
low.
During fiscal 2004, fluid milk prices in the United States, which closely follow
the monthly Class I fluid milk base price as calculated by the U.S. Department
of Agriculture, reached an all-time high. Should dairy costs remain at current
levels or continue to rise, the Company's profitability could be adversely
affected. While management continues to monitor published dairy prices on the
related commodities markets, management cannot predict with any certainty the
future prices to be paid for dairy products.
In addition to fluctuating commodity prices, management believes that the
Company's future results of operations and earnings could be significantly
impacted by other factors, such as increased competition within the specialty
coffee industry, the Company's ability to find optimal store locations at
favorable lease rates, increased costs associated with opening and operating
retail stores and the Company's continued ability to hire, train and retain
qualified personnel, as well as 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 October 3, 2004.
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
is transacted in U.S. 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
sterling, 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 October 3, 2004, 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 and product purchases. In addition, Starbucks had forward
foreign exchange contracts that qualify as a hedge of its net investment in
Starbucks Japan. These contracts expire within 31 months.
Based on the foreign exchange contracts outstanding as of October 3, 2004, a 10%
devaluation of the U.S. dollar as compared to the level of foreign exchange
rates for currencies under contract as of October 3, 2004, would result in a
reduced fair value of these derivative financial instruments of approximately
$20.7 million, of which $14.0 million may reduce the Company's future net
earnings. Conversely, a 10% appreciation of the U.S. dollar would result in an
increase in the fair value of these instruments of approximately $18.1 million,
of which $12.6 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 in the dollar value of the
Company's foreign investment, future foreign currency royalty fee payments and
product purchases that would occur 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 approximate a portion of
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.
12
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 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 2004, and determined that such a change would not have a material effect
on the fair value of these instruments.
SEASONALITY AND QUARTERLY RESULTS
The Company's business is subject to seasonal fluctuations. Significant portions
of the Company's net revenues and profits are realized during the first quarter
of the Company's fiscal year, which includes the December holiday season. In
addition, quarterly results are affected by the timing of the opening of new
stores, and the Company's rapid growth may conceal the impact of other seasonal
influences. Because of the seasonality of the Company's business, results for
any quarter are not necessarily indicative of the results that may be achieved
for the full fiscal year.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
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 values 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
values 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
In December 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46 Revised, "Consolidation of Variable Interest Entities - an
Interpretation of ARB No. 51" ("FIN 46R"), which provided, among other things,
immediate deferral of the application of FIN 46 for entities that did not
originally qualify as special purpose entities, and provided additional scope
exceptions for joint ventures with business operations and franchises. The
Company's adoption of FIN 46R did not have an impact on its consolidated
financial statements.
In December 2003, the issued Staff Accounting Bulletin No. 104, "Revenue
Recognition" ("SAB 104"), rescinded the accounting guidance contained in SAB
101, "Revenue Recognition in Financial Statements," and incorporated the body of
previously issued guidance related to multiple-element revenue arrangements. The
Company's adoption of SAB 104 did not have an impact on its consolidated
financial statements.
In March 2004, the FASB ratified Emerging Issues Task Force ("EITF") Issue No.
03-1, "The Meaning of Other-Than-Temporary Impairment and its Application to
Certain Investments" ("EITF 03-1"), but delayed the recognition and measurement
provisions of EITF 03-1 in September 2004. For reporting periods beginning after
June 15, 2004, only the
13
disclosure requirements for available-for-sale securities and cost method
investments are required. The Company's adoption of the requirements in the
fiscal fourth quarter of 2004 did not have a significant impact on the Company's
disclosures.
In July 2004, the FASB issued EITF Issue No. 02-14, "Whether an Investor Should
Apply the Equity Method of Accounting to Investments Other Than Common Stock"
("EITF 02-14"). EITF 02-14 requires application of the equity method of
accounting when an investor is able to exert significant influence over
operating and financial policies of an investee through ownership of common
stock or in-substance common stock. EITF 02-14 is effective for reporting
periods beginning after September 15, 2004. The adoption of EITF 02-14 will not
have a significant impact on the Company's consolidated financial position or
results of operations.
14
CONSOLIDATED STATEMENTS OF EARNINGS
In thousands, except earnings per share
Fiscal year ended Oct 3, 2004 Sept 28, 2003 Sept 29, 2002
- ----------------- ----------- ------------- -------------
Net revenues:
Company-operated retail $ 4,457,378 $ 3,449,624 $ 2,792,904
Specialty:
Licensing 565,798 409,551 311,932
Foodservice and other 271,071 216,347 184,072
----------- ------------- -------------
Total specialty 836,869 625,898 496,004
----------- ------------- -------------
Total net revenues 5,294,247 4,075,522 3,288,908
Cost of sales including occupancy costs 2,198,654 1,685,928 1,350,011
Store operating expenses 1,790,168 1,379,574 1,109,782
Other operating expenses 171,648 141,346 106,084
Depreciation and amortization expenses 280,024 237,807 205,557
General and administrative expenses 304,293 244,550 234,581
----------- ------------- -------------
Subtotal operating expenses 4,744,787 3,689,205 3,006,015
Income from equity investees 60,657 38,396 33,445
----------- ------------- -------------
Operating income 610,117 424,713 316,338
Interest and other income, net 14,140 11,622 9,300
Gain on sale of investment -- -- 13,361
----------- ------------- -------------
Earnings before income taxes 624,257 436,335 338,999
Income taxes 232,482 167,989 126,313
----------- ------------- -------------
Net earnings $ 391,775 $ 268,346 $ 212,686
=========== ============= =============
Net earnings per common share - basic $ 0.99 $ 0.69 $ 0.55
Net earnings per common share - diluted $ 0.95 $ 0.67 $ 0.54
Weighted average shares outstanding:
Basic 397,173 390,753 385,575
Diluted 411,465 401,648 397,526
See Notes to Consolidated Financial Statements.
15
CONSOLIDATED BALANCE SHEETS
In thousands, except share data
Fiscal year ended Oct 3, 2004 Sept 28, 2003
- ----------------- ----------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 299,128 $ 200,907
Short-term investments - available-for-sale securities 329,082 128,905
Short-term investments - trading securities 24,799 20,199
Accounts receivable, net of allowances of $2,231 and $4,809, respectively 140,226 114,448
Inventories 422,663 342,944
Prepaid expenses and other current assets 71,347 55,173
Deferred income taxes, net 81,240 61,453
----------- -------------
Total current assets 1,368,485 924,029
Long-term investments - available-for-sale securities 135,179 136,159
Equity and other investments 171,747 144,257
Property, plant and equipment, net 1,471,446 1,384,902
Other assets 85,561 52,113
Other intangible assets 26,800 24,942
Goodwill 68,950 63,344
----------- -------------
TOTAL ASSETS $ 3,328,168 $ 2,729,746
=========== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 199,346 $ 168,984
Accrued compensation and related costs 208,927 152,608
Accrued occupancy costs 65,873 56,179
Accrued taxes 63,038 54,934
Other accrued expenses 123,684 101,800
Deferred revenue 121,377 73,476
Current portion of long-term debt 735 722
----------- -------------
Total current liabilities 782,980 608,703
Deferred income taxes, net 46,683 33,217
Long-term debt 3,618 4,354
Other long-term liabilities 8,132 1,045
Shareholders' equity:
Common stock and additional paid-in capital - authorized, 600,000,000
shares; issued and outstanding, 397,405,844 and 393,692,536 shares,
respectively, (includes 1,697,100 common stock units in both periods) 956,685 959,103
Other additional paid-in-capital 39,393 39,393
Retained earnings 1,461,458 1,069,683
Accumulated other comprehensive income 29,219 14,248
----------- -------------
Total shareholders' equity 2,486,755 2,082,427
----------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,328,168 $ 2,729,746
=========== =============
See Notes to Consolidated Financial Statements.
16
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
Fiscal year ended Oct 3, 2004 Sept 28, 2003 Sept 29, 2002
- ----------------- ----------- ------------- -------------
OPERATING ACTIVITIES
Net earnings $ 391,775 $ 268,346 $ 212,686
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 304,820 259,271 221,141
Gain on sale of investment -- -- (13,361)
Provision for impairments and asset disposals 13,568 7,784 26,852
Deferred income taxes, net (3,073) (5,932) (6,088)
Equity in income of investees (33,387) (22,813) (19,584)
Tax benefit from exercise of nonqualified stock options 63,405 36,590 44,199
Net accretion of discount and amortization of premium on marketable 11,603 5,996 --
securities
Cash provided/(used) by changes in operating assets and liabilities:
Inventories (77,662) (64,768) (41,379)
Prepaid expenses and other current assets (16,621) (12,861) (12,460)
Accounts payable 27,948 24,990 5,463
Accrued compensation and related costs 54,929 42,132 24,087
Accrued occupancy costs 8,900 4,293 15,343
Deferred revenue 47,590 30,732 15,321
Other accrued expenses 16,465 9,471 31,900
Other operating assets and liabilities (16,412) (16,784) (26,435)
----------- ------------- -------------
Net cash provided by operating activities 793,848 566,447 477,685
INVESTING ACTIVITIES
Purchase of available-for-sale securities (566,645) (323,331) (339,968)
Maturity of available-for-sale securities 163,814 180,687 78,349
Sale of available-for-sale securities 190,748 88,889 144,760
Acquisitions, net of cash acquired (7,515) (69,928) --
Net additions to equity, other investments and other assets (64,747) (47,259) (15,841)
Distributions from equity investees 38,328 28,966 22,834
Net additions to property, plant and equipment (386,176) (357,282) (375,474)
----------- ------------- -------------
Net cash used by investing activities (632,193) (499,258) (485,340)
FINANCING ACTIVITIES
Proceeds from issuance of common stock 137,590 107,183 107,467
Principal payments on long-term debt (722) (710) (697)
Repurchase of common stock (203,413) (75,710) (52,248)
----------- ------------- -------------
Net cash provided/(used) by financing activities (66,545) 30,763 54,522
Effect of exchange rate changes on cash and cash equivalents 3,111 3,278 1,560
----------- ------------- -------------
Net increase in cash and cash equivalents 98,221 101,230 48,427
CASH AND CASH EQUIVALENTS
Beginning of period 200,907 99,677 51,250
----------- ------------- -------------
End of period $ 299,128 $ 200,907 $ 99,677
=========== ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 370 $ 265 $ 303
Income taxes $ 172,759 $ 140,107 $ 105,339
See Notes to Consolidated Financial Statements.
17
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
In thousands, except share data
Accumulated
Common Stock Additional Other
--------------------- Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income/(Loss) Total
----------- ------ ---------- ---------- ------------- ----------
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
Net earnings -- -- -- 391,775 -- 391,775
Unrealized holding losses, net -- -- -- -- (4,925) (4,925)
Translation adjustment -- -- -- -- 19,896 19,896
----------
Comprehensive income 406,746
----------
Exercise of stock options,
including tax benefit of $62,415 7,708,491 7 172,025 -- -- 172,032
Sale of common stock,
including tax benefit of $990 984,072 1 28,962 -- -- 28,963
Repurchase of common stock (4,979,255) (5) (203,408) -- -- (203,413)
----------- ------ ---------- ---------- ------------- ----------
Balance, October 3, 2004 397,405,844 $ 397 $ 995,681 $1,461,458 $ 29,219 $2,486,755
=========== ====== ========== ========== ============= ==========
See Notes to Consolidated Financial Statements.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended October 3, 2004, September 28, 2003, and September 29, 2002
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(R) coffee drinks and a line of superpremium ice creams.
These nonretail 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 include wholly owned subsidiaries and
investees controlled by the Company.
Investments in entities that 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
year ended on October 3, 2004, included 53 weeks. The fiscal years ended
September 28, 2003, and September 29, 2002, each included 52 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. The Company
maintains cash and cash equivalent balances with financial institutions that
exceed federally insured limits. The Company has not experienced any losses
related to these balances, and management believes its credit risk to be
minimal.
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 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 of 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. Management reviews several
factors to determine whether a loss is other than temporary, such as the length
of time a security is in an unrealized loss position, extent to which fair value
is less than amortized cost, the impact of changing interest rates in the short
and long term and the Company's intent and ability to hold the security for a
period of time sufficient to allow for any anticipated recovery in fair value.
Realized gains and losses are accounted for on the specific identification
method. Purchases and sales are recorded on a trade date basis.
19
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 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. Declines in fair value below the Company's carrying value
deemed to be other than temporary are charged against earnings. 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 or derecognized cash flow hedges are immediately settled
with counterparties, and the related accumulated derivative gains or losses are
recognized into net earnings 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" ("SFAS 142"). 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 in June 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.
If the nonamortization provision of SFAS 142 had been applied to fiscal 2002,
net earnings would have been $214.7 million, as compared to actual net earnings
of $212.7 million. 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. Definite-lived intangibles, which mainly consist of
contract-based patents and
20
copyrights, are amortized over their estimated useful lives. For further
information on goodwill and other intangible assets, see Note 9.
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 values of the assets to projected future cash flows in
addition to other quantitative and qualitative analyses. Upon indication that
the carrying values 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,
including a wholly owned captive insurance entity and participation in a
reinsurance pool, to provide for the potential liabilities for workers'
compensation, general liability, property insurance, director and officers'
liability insurance, vehicle liability and employee healthcare 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 October 3, 2004, and September 28, 2003, these reserves were $77.6 million
and $51.6 million, respectively, and were included in "Accrued compensation and
related costs" and "Other accrued expenses" on the consolidated balance sheets.
Revenue Recognition
Company-operated 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 consist primarily of product
sales to customers other than through Company-operated retail stores, as well as
royalties and other fees generated from licensing operations. Sales of coffee,
tea and related products are generally recognized upon shipment to customers,
depending on contract terms. Initial nonrefundable development fees required
under licensing agreements are recognized upon substantial performance of
services for new market business development activities, such as initial
business, real estate and store development planning, as well as providing
operational materials and functional training courses for opening new licensed
retail markets. Additional store licensing fees are recognized when new licensed
stores are opened. Royalty revenues based upon a percentage of reported sales
and other continuing fees, such as marketing and service fees, are recognized on
a monthly basis when earned. Arrangements involving multiple elements and
deliverables are individually evaluated for revenue recognition. Cash payments
received in advance of product or service delivery 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. Total advertising expenses, recorded in "Store operating
expenses" and "Other operating expenses" on the accompanying consolidated
statements of earnings totaled $68.3 million, $49.5 million and $25.6 million in
2004, 2003 and 2002, 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 nonqualified stock options may be granted to employees, consultants
and nonemployee 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.
If compensation cost for the Company's stock options had been recognized based
upon the estimated fair value on the grant date under the fair value methodology
allowed by SFAS No. 123 "Accounting for Stock-Based Compensation," ("SFAS 123")
as amended, the Company's net earnings and earnings per share would have been as
follows (in thousands, except
21
earnings per share):
Fiscal year ended Oct 3, 2004 Sept 28, 2003 Sept 29, 2002
- ----------------- ----------- ------------- -------------
Net earnings $ 391,775 $ 268,346 $ 212,686
Deduct: stock-based compensation expense determined under fair
value method, net of tax 45,056 37,436 37,447
----------- ------------- -------------
Pro forma net income $ 346,719 $ 230,910 $ 175,239
=========== ============= =============
Net earnings per common share - basic::
As reported $ 0.99 $ 0.69 $ 0.55
=========== ============= =============
Pro forma $ 0.87 $ 0.59 $ 0.45
=========== ============= =============
Net earnings per common share - diluted:
As reported $ 0.95 $ 0.67 $ 0.54
=========== ============= =============
Pro forma $ 0.85 $ 0.58 $ 0.44
=========== ============= =============
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 ended 2004 2003 2002
- ----------------- ------------- ------------- -------------
Expected life (years) 1 - 6 2 - 5 2 - 5
Expected volatility 22% - 50% 37% - 55% 43% - 54%
Risk-free interest rate 1.10% - 4.52% 0.92% - 4.01% 1.63% - 4.96%
Expected dividend yield 0.00% 0.00% 0.00%
Employee Stock Purchase Plans
-----------------------------------------------
Fiscal year ended 2004 2003 2002
- ----------------- ------------- ------------- -------------
Expected life (years) 0.25 - 3 0.25 - 3 0.25
Expected volatility 19% - 43% 30% - 50% 33% - 51%
Risk-free interest rate 0.93% - 2.3% 0.87% - 2.25% 1.93% - 2.73%
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 123, the Company has determined that the weighted average
estimated fair values of options granted during fiscal 2004, 2003 and 2002 were
$10.60, $8.31 and $6.48 per share, respectively.
Foreign Currency Translation
The Company's international operations generally 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 for the temporary differences between
the financial reporting basis and the tax basis of the Company's assets and
liabilities.
22
Earnings per Share
The computation of basic earnings per share is based on the weighted average
number of shares and common stock units that were 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 December 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46 Revised, "Consolidation of Variable Interest Entities - an
Interpretation of ARB No. 51" ("FIN 46R"), which provided, among other things,
immediate deferral of the application of FIN 46 for entities that did not
originally qualify as special purpose entities, and provided additional scope
exceptions for joint ventures with business operations and franchises. The
Company's adoption of FIN 46R did not have an impact on its consolidated
financial statements.
In December 2003, the issued Staff Accounting Bulletin No. 104, "Revenue
Recognition" ("SAB 104"), rescinded the accounting guidance contained in SAB
101, "Revenue Recognition in Financial Statements," and incorporated the body of
previously issued guidance related to multiple-element revenue arrangements. The
Company's adoption of SAB 104 did not have an impact on its consolidated
financial statements.
In March 2004, the FASB ratified Emerging Issues Task Force ("EITF") Issue No.
03-1, "The Meaning of Other-Than-Temporary Impairment and its Application to
Certain Investments" ("EITF 03-1"), but delayed the recognition and measurement
provisions of EITF 03-1 in September 2004. For reporting periods beginning after
June 15, 2004, only the disclosure requirements for available-for-sale
securities and cost method investments are required. The Company's adoption of
the requirements in the fiscal fourth quarter of 2004 did not have a significant
impact on the Company's disclosures.
In July 2004, the FASB issued EITF Issue No. 02-14, "Whether an Investor Should
Apply the Equity Method of Accounting to Investments Other Than Common Stock"
("EITF 02-14"). EITF 02-14 requires application of the equity method of
accounting when an investor is able to exert significant influence over
operating and financial policies of an investee through ownership of common
stock or in-substance common stock. EITF 02-14 is effective for reporting
periods beginning after September 15, 2004. The adoption of EITF 02-14 will not
have a significant impact on the Company's consolidated financial position or
results of operations.
NOTE 2: ACQUISITIONS
In July 2004, Starbucks acquired 100% of its licensed operations in Singapore
and acquired 49.9% of its licensed operations in Malaysia, for a combined total
of approximately $12.1 million. Previously, the Company did not have any equity
ownership interests in these entities. The results of operations for Singapore
are included in the accompanying consolidated financial statements from the date
of acquisition. For its investment in Malaysia, management applied the equity
method of accounting from the date of acquisition, since the Company is able to
exert significant influence over the investee's operating and financial
policies. See Note 7 for additional information on equity method investments.
Also, see Note 18 for information on the Company's 100% acquisition of its
licensed operations in Germany in fiscal 2005.
In July 2003, the Company acquired Seattle Coffee Company ("SCC"), which
includes the Seattle's Best Coffee(R) and Torrefazione Italia(R) brands, from
AFC Enterprises, Inc., for $70 million in cash. The results of operations of SCC
are included in the accompanying consolidated financial statements from the date
of acquisition.
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, the Company reflected a
change in accounting method during fiscal 2003, from the cost method to the
equity method, in the consolidated financial statements.
NOTE 3: CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following (in thousands):
Fiscal year ended Oct 3, 2004 Sept 28, 2003
- ----------------- ----------- -------------
Operating funds and interest bearing deposits $ 219,809 $ 187,118
Money market funds 79,319 13,789
----------- -------------
Total $ 299,128 $ 200,907
=========== =============
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
October 3, 2004 Cost Gains Losses Value
- --------------- --------- ---------- ---------- --------
Short-term investments - available-for-sale securities:
State and local government obligations $ 309,954 $ 20 $ (583) $309,391
U.S. government agency obligations 6,655 -- (4) 6,651
Asset-backed securities 13,020 50 (30) 13,040
--------- ---------- ---------- --------
Total $ 329,629 $ 70 $ (617) $329,082
========== ==========
Short-term investments - trading securities 24,769 24,799
--------- --------
Total short-term investments $ 354,398 $353,881
========= ========
Long-term investments - available-for-sale securities:
State and local government obligations $ 130,810 $ 67 $ (348) $130,529
Corporate debt securities 4,000 -- -- 4,000
Asset-backed securities 658 -- (8) 650
--------- ---------- ---------- --------
Total long-term investments $ 135,468 $ 67 $ (356) $135,179
========= ========== ========== ========
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
September 28, 2003 Cost Gains Losses Value
- ------------------ --------- ---------- ---------- --------
Short-term investments - available-for sale securities:
U.S. 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
Asset-backed securities 4,804 14 (69) 4,749
--------- ---------- ---------- --------
Total long-term investments $ 135,825 $ 435 $ (101) $136,159
========= ========== ========== ========
For available-for-sale securities, proceeds from sales were $190.7 million,
$88.9 million and $144.8 million, in fiscal years 2004, 2003 and 2002,
respectively. Gross realized gains from the sales were $0.2 million in 2004 and
$0.3 million in 2003, and gross realized losses from the sales were $0.4 million
in 2004. There were no gross realized gains in 2002 and no gross realized losses
in 2003 or 2002.
Short-term and long-term investments with unrealized losses as of October 3,
2004, consist of the following (in thousands):
Gross
Unrealized Fair
Less than 12 months: Losses Value
- -------------------- ---------- --------
State and local government obligations $ (931) $376,318
U.S. government agency obligations (4) 6,651
Asset-backed securities (38) 7,097
---------- --------
Total $ (973) $390,066
========== ========
The $1.0 million of gross unrealized losses as of October 3, 2004, which
pertains to 184 securities, was generated within the past 12 months and was
primarily caused by changes in interest rates. There were no realized losses
generated from other-than-temporary impairment for these securities during 2004,
2003 or 2002.
Trading securities are comprised mainly of marketable equity mutual funds that
approximate a portion of the Company's liability under the Management Deferred
Compensation Plan, a defined contribution plan. The corresponding deferred
compensation liability of $32.7 million in fiscal 2004 and $20.4 million in
fiscal 2003 is included in "Accrued compensation and related costs" on the
accompanying consolidated balance sheets. In fiscal years 2004 and 2003, the
changes in net unrealized holding gains in the trading portfolio included in
earnings were $1.1 million and $1.8 million, respectively.
Long-term investments generally mature in less than three years.
24
NOTE 5: DERIVATIVE FINANCIAL INSTRUMENTS
Cash Flow Hedges
Starbucks and its subsidiaries, which include entities that use their local
currency as their functional currency, enter into cash flow derivative
instruments to hedge portions of anticipated revenue streams and purchases.
Current contracts hedge forecasted transactions denominated in Japanese yen and
Canadian dollars, as well as in U.S. dollars for foreign operations. During
fiscal years 2004, 2003 and 2002, derivative gains (losses) of ($1.5) million,
($1.7) million, and $2.9 million were reclassified to revenues, respectively.
For hedges of foreign-denominated purchases, derivative losses of $0.8 million
were reclassified into cost of sales during fiscal 2004. There were no similar
transactions reclassified into cost of sales in prior years.
The Company had accumulated net derivative losses of $3.9 million, net of taxes,
in other comprehensive income ("OCI") as of October 3, 2004, related to cash
flow hedges. Of this amount, $2.5 million of net derivative losses will be
reclassified into earnings within 12 months. No significant cash flow hedges
were discontinued during fiscal years 2004, 2003 or 2002. Current contracts will
expire within 24 months.
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 31 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 $0.7 million, $1.4
million and $1.8 million during fiscal years 2004, 2003 and 2002, respectively.
In addition, the Company had accumulated net derivative losses of $4.3 million,
net of taxes, in OCI as of October 3, 2004.
NOTE 6: INVENTORIES
Inventories consist of the following (in thousands):
Fiscal year ended Oct 3, 2004 Sept 28, 2003
- ----------------- ----------- -------------
Coffee:
Unroasted $ 233,903 $ 167,674
Roasted 46,070 41,475
Other merchandise held for sale 81,565 83,784
Packaging and other supplies 61,125 50,011
----------- -------------
Total $ 422,663 $ 342,944
=========== =============
As of October 3, 2004, the Company had committed to fixed-price purchase
contracts for green coffee totaling $271.7 million. The Company believes, based
on relationships established with its suppliers in the past, the risk of
nondelivery 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 Oct 3, 2004 Sept 28, 2003
- ----------------- ----------- -------------
Equity method investments $ 152,511 $ 134,341
Cost method investments 16,430 7,210
Other investments 2,806 2,706
----------- -------------
Total $ 171,747 $ 144,257
=========== =============
25
Equity Method
The Company's equity investees and ownership interests are as follows:
Fiscal year ended Oct 3, 2004 Sept 28, 2003
- ----------------- ----------- -------------
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% 50.0%
Starbucks Coffee Switzerland AG 50.0% 50.0%
Starbucks Coffee Espana, S.L. 50.0% 50.0%
President Starbucks Coffee Taiwan Ltd. 50.0% 50.0%
Shanghai President Coffee Co. 50.0% 50.0%
Starbucks Coffee France SAS 50.0% 50.0%
Berjaya Starbucks Coffee Company Sdn. Bhd. 49.9% --
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(R) coffee drinks.
The Starbucks Ice Cream Partnership with Dreyer's Grand Ice Cream, Inc.,
develops and distributes superpremium ice creams. The remaining entities operate
licensed Starbucks retail stores, including Coffee Partners Hawaii, which is a
general partnership.
During fiscal 2004, Starbucks acquired an equity interest in its licensed
operations of Malaysia. 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 $24.3 million more than the underlying
equity in net assets due to acquired goodwill, which is not subject to
amortization in accordance with SFAS 142. The goodwill is evaluated for
impairment in accordance with APB Opinion No. 18, "The Equity Method of
Accounting for Investments in Common Stock." No impairment was recorded during
fiscal years 2004 or 2003. For additional information on acquisitions, see Note
2.
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 $75.2 million, $68.0 million and $67.7 million in
fiscal years 2004, 2003 and 2002, respectively. Related costs of sales, net of
eliminations, were $37.5 million, $35.7 million and $37.9 million in fiscal
years 2004, 2003 and 2002, respectively.
As of October 3, 2004, the aggregate market value of the Company's investment in
Starbucks Coffee Japan, Ltd., was approximately $149.9 million based on its
available quoted market price.
Cost Method
The Company has equity interests in entities to develop Starbucks licensed
retail stores in certain Chinese markets and in Puerto Rico, Germany, Mexico,
Chile, Cyprus and Greece. As of October 3, 2004, management determined that the
estimated fair value of each cost method investment exceeded its carrying value
as part of the formal adoption of the impairment provisions of EITF 03-1.
Starbucks has the ability to acquire additional interests in some of its cost
method investees at certain intervals. Depending on the Company's total
percentage of ownership interest and its ability to exercise significant
influence over financial and operating policies, additional investments may
require the retroactive application of the equity method of accounting.
Other Investments
Starbucks has investments in privately held equity securities that are recorded
at their estimated fair values.
26
NOTE 8: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and consist of the following
(in thousands):
Fiscal year ended Oct 3, 2004 Sept 28, 2003
- ----------------- ----------- -------------
Land $ 13,118 $ 11,414
Buildings 66,468 64,427
Leasehold improvements 1,497,941 1,311,024
Roasting and store equipment 683,747 613,825
Furniture, fixtures and other 415,307 375,854
----------- -------------
2,676,581 2,376,544
Less accumulated depreciation and amortization (1,298,270) (1,049,810)
----------- -------------
1,378,311 1,326,734
Work in progress 93,135 58,168
----------- -------------
Property, plant and equipment, net $ 1,471,446 $ 1,384,902
=========== =============
NOTE 9: OTHER INTANGIBLE ASSETS AND GOODWILL
As of October 3, 2004, indefinite-lived intangibles were $24.3 million and
definite-lived intangibles, which collectively had a remaining weighted average
useful life of approximately eight years, were $2.5 million, net of accumulated
amortization of $1.3 million. 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. Amortization expense for
definite-lived intangibles was $0.5 million and $0.4 million during fiscal 2004
and 2003, respectively.
The following table summarizes the estimated amortization expense for each of
the next five fiscal years (in thousands):
Fiscal year ending
2005 $ 536
2006 606
2007 647
2008 782
2009 908
------
Total $3,479
======
During fiscal 2004 and 2003, goodwill increased by approximately $6.1 million
for the acquisition of licensed operations in Singapore and $43.3 million for
the acquisition of the Seattle Coffee Company, respectively. No impairment was
recorded during fiscal 2004 or 2003.
The following table summarizes goodwill by operating segment (in thousands):
Fiscal year ended Oct 3, 2004 Sept 28, 2003
- ----------------- ----------- -------------
United States $ 60,540 $ 60,965
International 8,410 2,379
----------- -------------
Total $ 68,950 $ 63,344
=========== =============
The reduction in goodwill assigned to the United States operating segment during
fiscal 2004 reflects a net decrease for Seattle Coffee Company, primarily from
adjustments to values estimated in the initial purchase price allocation. The
increase in goodwill assigned to the International operating segment during
fiscal 2004 relates to the acquisition of licensed operations in Singapore,
partially offset by fluctuations in foreign exchange rates.
NOTE 10: LONG-TERM DEBT
In September 1999, Starbucks 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 five to six
years, with interest rates from 0.0% to 2.0%.
27
Scheduled principal payments on long-term debt are as follows (in thousands):
Fiscal year ending
- ------------------
2005 $ 735
2006 748
2007 762
2008 775
2009 790
Thereafter 543
------------
Total principal payments $ 4,353
============
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 Oct 3, 2004 Sept 28, 2003 Sept 29, 2002
- ----------------- ----------- ------------- -------------
Minimum rentals - retail stores $ 283,351 $ 237,742 $ 200,827
Minimum rentals - other 28,064 22,887 19,143
Contingent rentals 24,638 12,274 5,415
--------- --------- ---------
Total $ 336,053 $ 272,903 $ 225,385
========= ========= =========
Minimum future rental payments under noncancelable lease obligations as of
October 3, 2004, are as follows (in thousands):
Fiscal year ending
- ------------------
2005 $ 355,079
2006 340,360
2007 321,047
2008 299,601
2009 272,806
Thereafter 1,020,143
------------
Total minimum lease payments $ 2,609,036
============
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 October 3, 2004.
During fiscal 2004, the Starbucks Board of Directors authorized an additional
program for the repurchase of up to 9.0 million shares of the Company's common
stock and also 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 5.0 million shares at an average price of $40.85 for a total cost of
$203.4 million in fiscal 2004. Starbucks acquired 3.3 million shares at an
average price of $22.95 for a total cost of $75.7 million during fiscal 2003. As
of October 3, 2004, there were approximately 18.6 million remaining 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.
28
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 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 Oct 3, 2004 Sept 28, 2003 Sept 29, 2002
- ----------------- ----------- ------------- -------------
Net earnings $ 391,775 $ 268,346 $ 212,686
Unrealized holding gains/(losses) on
available-for-sale securities,
net of tax benefit/(provision) of $618,
($53) and ($231) in 2004, 2003 and 2002,
respectively (1,005) 142 394
Unrealized holding gains/(losses) on cash
flow hedges, net of tax benefit/(provision)
of $2,801, $804 and ($1,066) in 2004, 2003
and 2002, respectively (4,769) (1,369) 1,815
Unrealized holding losses on net
investment hedges, net of tax benefit of
$328, $1,903 and $415 in 2004, 2003 and
2002, respectively (558) (3,241) (706)
Reclassification adjustment for
(gains)/losses realized in net income,
net of tax benefit/(provision) of ($832),
($41) and $1,769 in 2004, 2003 and 2002,
respectively 1,407 42 (3,012)
--------- --------- ---------
Net unrealized loss (4,925) (4,426) (1,509)
Translation adjustment 19,896 27,255 (1,664)
--------- --------- ---------
Total comprehensive income $ 406,746 $ 291,175 $ 209,513
========= ========= =========
The favorable translation adjustment changes during fiscal years 2004 and 2003
of $19.9 million and $27.3 million, respectively, were primarily due to the
weakening of the U.S. dollar against several currencies, such as the British
pound sterling, Euro, Canadian dollar and Japanese yen. The unfavorable
translation adjustment change of ($1.7) million in fiscal 2002 was primarily due
to the strengthening of the U.S. dollar against the Japanese yen.
NOTE 13: EMPLOYEE STOCK AND BENEFIT PLANS
Stock Option Plans
The Company maintains several stock option plans under which it may grant
incentive stock options and nonqualified stock options to employees, consultants
and nonemployee 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 September 30, 2001,
through October 3, 2004:
Weighted Weighted
Average Shares Average
Shares Exercise Subject to Exercise
Subject to Price Exercisable Price
Options per Share Options per Share
------- --------- ------- ---------
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
Granted 9,217,620 31.23
Exercised (7,708,491) 14.21
Cancelled (2,157,965) 23.75
---------- -------- ---------- ---------
Outstanding, October 3, 2004 38,416,610 $ 19.05 26,689,115 $ 15.85
========== ======== ========== =========
29
As of October 3, 2004, there were 21.1 million shares of common stock available
for issuance pursuant to future stock option grants. Additional information
regarding options outstanding as of October 3, 2004, 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
--------------- ------ ----------- ----- ------ -----
$ 4.14 - $ 9.20 6,115,368 2.33 $ 8.16 6,115,368 $ 8.16
9.21 - 14.80 9,934,624 5.66 12.99 9,062,892 12.81
15.51 - 20.19 5,046,033 6.17 19.77 4,600,521 19.88
20.25 - 30.25 9,072,745 7.84 21.46 4,866,404 21.24
30.46 - 46.02 8,247,840 9.17 31.32 2,043,930 30.46
------- ------- ---------- ---- -------- ---------- -------
$ 4.14 - $ 46.02 38,416,610 6.47 $ 19.05 26,689,115 $ 15.85
------- ------- ---------- ---- -------- ---------- -------
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 toward 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 979,592 shares issued under
the plan during fiscal 2004 at prices ranging from $21.53 to $37.93. 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. Since inception of the plan, 6.6
million shares have been purchased, leaving 9.4 million shares available for
future issuance. Of the 54,623 employees eligible to participate, 14,253 were
participants in the plan as of October 3, 2004.
Starbucks has an additional employee stock purchase plan that allows eligible
U.K. employees to save toward the purchase of the Company's common stock. 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 years 2004, 2003 or 2002. The
total number of shares issuable under the plan is 600,000. There were 4,480
shares issued under the plan during fiscal 2004 at prices ranging from $14.13 to
$18.95. 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 564,226 shares remain available for future issuance. During fiscal
2004, the Company suspended future offerings under this employee stock purchase
plan, with the last offering made in December 2002 and maturing in February
2006. A new employee stock purchase plan, the UK Share Incentive Plan, was
introduced during fiscal 2004 and will allow eligible U.K. employees to purchase
shares of common stock through payroll deductions during six-month offering
periods at the lesser of the fair market value of the stock at the beginning or
at the end of the offering period. The Company will award one matching share for
each six shares purchased under the plan. The total number of shares issuable
under the plan is 700,000, of which no shares were issued as of October 3, 2004.
Deferred Stock Plan
Starbucks 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 nonqualified stock options. The minimum deferral period is five
years. As of October 3, 2004, 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 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 $9.8
million, $6.8 million and $3.1 million in fiscal years 2004, 2003 and 2002,
respectively.
30
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 Oct 3, 2004 Sept 28, 2003 Sept 29, 2002
- ----------------- ----------- ------------- -------------
Statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit 3.5 3.6 3.4
Valuation allowance change/Other, net (1.3) (0.1) (1.1)
----- ----- -----
Effective tax rate 37.2% 38.5% 37.3%
===== ===== =====
The provision for income taxes consists of the following (in thousands):
Fiscal year ended Oct 3, 2004 Sept 28, 2003 Sept 29, 2002
- ----------------- ----------- ------------- -------------
Currently payable:
Federal $ 188,647 $ 140,138 $ 109,154
State 36,383 25,448 16,820
Foreign 10,218 8,523 5,807
Deferred taxes, net (2,766) (6,120) (5,468)
--------- --------- ---------
Total $ 232,482 $ 167,989 $ 126,313
========= ========= =========
U.S. income and foreign withholding taxes have not been provided on
approximately $42.8 million of cumulative nondistributed earnings of foreign
subsidiaries and equity investees. The Company intends to reinvest these
earnings for the foreseeable future. If these amounts were distributed to the
United States, in the form of dividends or otherwise, the Company would be
subject to additional U.S. income taxes. Because of the availability of U.S.
foreign tax credits, the determination of the amount of unrecognized deferred
income tax liabilities on these earnings is not practicable.
The Company is currently evaluating the impact on its consolidated financial
position and disclosures from new U.S. tax legislation, the American Jobs
Creation Act of 2004 ("American Jobs Creation Act"), signed into law on October
22, 2004. The new law allows a deduction of 85% of repatriated qualified foreign
earnings in either fiscal year 2005 or fiscal year 2006. Any impact from this
legislation has not been reflected in the amounts shown as reinvested for the
foreseeable future.
The tax effect of temporary differences and carryforwards that comprise
significant portions of deferred tax assets and liabilities is as follows (in
thousands):
Fiscal year ended Oct 3, 2004 Sept 28, 2003
- ----------------- ----------- -------------
Deferred tax assets:
Equity and other investments $ 10,766 $ 17,576
Capital loss carryforwards 4,223 4,578
Accrued occupancy costs 19,683 15,706
Accrued compensation and related costs 31,057 20,533
Other accrued expenses 21,194 22,410
Foreign tax credits 17,514 14,103
Other 9,185 7,084
----------- ----------
Total 113,622 101,990
Valuation allowance (8,334) (13,685)
----------- ----------
Total deferred tax asset, net of valuation allowance 105,288 88,305
Deferred tax liabilities:
Property, plant and equipment (58,512) (49,419)
Other (12,219) (10,650)
----------- ----------
Total (70,731) (60,069)
----------- ----------
Net deferred tax asset $ 34,557 $ 28,236
=========== ==========
The Company will establish a valuation allowance if it is more likely than not
that 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 October 3, 2004,
and September 28, 2003, were related to nondeductible losses from investments in
foreign equity investees and wholly owned foreign subsidiaries. The net change
in the total valuation allowance for the years ended October 3, 2004, and
September 28, 2003, was a decrease of $5.4 million and an increase of $7.0
million, respectively.
As of October 3, 2004, the Company has foreign tax credit carryforwards of $17.5
million with expiration dates between fiscal years 2005 and 2009. Effective in
fiscal 2005, the American Jobs Creation Act extends the carryforward periods by
an additional five years, to fiscal years 2010 and 2014. As of the end of fiscal
2004, the Company also has capital loss carryforwards of $11.1 million expiring
in 2006.
31
Taxes currently payable of $29.3 million and $30.5 million are included in
"Accrued taxes" on the accompanying consolidated balance sheets as of October 3,
2004, and September 28, 2003, respectively.
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 Oct 3, 2004 Sept 28, 2003 Sept 29, 2002
- ----------------- ----------- ------------- -------------
Net earnings $391,775 $268,346 $212,686
Weighted average common shares and
common stock units outstanding 397,173 390,753 385,575
-------- -------- --------
Net earnings per common share - basic $ 0.99 $ 0.69 $ 0.55
======== ======== ========
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 Oct 3, 2004 Sept 28, 2003 Sept 29, 2002
- ----------------- ----------- ------------- -------------
Net earnings $391,775 $268,346 $212,686
Weighted average common shares and
common stock units outstanding 397,173 390,753 385,575
Dilutive effect of outstanding common stock options 14,292 10,895 11,951
-------- -------- --------
Weighted average common and common equivalent
shares outstanding 411,465 401,648 397,526
-------- -------- --------
Net earnings per common share - diluted $ 0.95 $ 0.67 $ 0.54
======== ======== ========
Options with exercise prices greater than the average market price were not
included in the computation of diluted earnings per share. These options totaled
0.2 million, 0.6 million and 1.8 million in fiscal years 2004, 2003 and 2002,
respectively.
NOTE 16: RELATED PARTY TRANSACTIONS
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 and member of the Board of
Directors, Howard Schultz, owns a controlling interest in the Basketball Club.
Starbucks paid approximately $0.8 million, $0.7 million and $0.7 million during
fiscal years 2004, 2003 and 2002, respectively, for team sponsorships and ticket
purchases. Terms of the team sponsorship agreements did not change as a result
of the related party relationship.
Prior to January 2003, a former 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 and $3.0 million to the privately held company for music services
during fiscal years 2003 and 2002, respectively, while the related party
relationship existed.
NOTE 17: COMMITMENTS AND CONTINGENCIES
The Company has unconditionally guaranteed the repayment of certain Japanese
yen-denominated bank loans and related interest and fees of an unconsolidated
equity investee, Starbucks Coffee Japan, Ltd. 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 October 3, 2004, the maximum amount of the
guarantees was approximately $10.6 million. Since there has been no modification
of these loan guarantees subsequent to the Company's adoption of FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indebtedness of Others," Starbucks has applied the
disclosure provisions only and has not recorded the guarantee in its statement
of financial position.
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 to 24 months. The Company
establishes an accrual for estimated warranty costs at the time of sale, based
on historical experience.
32
The following table summarizes the activity related to product warranty reserves
during fiscal years 2004 and 2003 (in thousands):
Fiscal year ended Oct 3, 2004 Sept 28, 2003
- ----------------- ----------- -------------
Balance at beginning of fiscal year $ 2,227 $ 1,842
Provision for warranties issued 5,093 2,895
Warranty claims (4,229) (2,510)
------- --------
Balance at end of fiscal year $ 3,091 $ 2,227
======= ========
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: SUBSEQUENT EVENT
In November 2004, Starbucks increased its equity ownership from 18% to 100% for
its licensed operations in Germany. For these operations, management determined
that a change in accounting method, from the cost method to the consolidation
method, will be required. This accounting change will include adjusting
previously reported information for the Company's proportionate share of net
losses of 18% as required by APB Opinion No. 18, "The Equity Method of
Accounting for Investments in Common Stock," in the Company's fiscal first
quarter of 2005.
As shown in the table below, the cumulative effect of the accounting change for
financial results previously reported under the cost method will result in
reductions of net earnings of $1.3 million, $1.4 million and $0.9 million for
the fiscal years ended October 3, 2004, September 28, 2003, and September 29,
2002, respectively (in thousands, except earnings per share):
Fiscal year ended Oct 3, 2004 Sept 28, 2003 Sept 29, 2002
- ----------------- ----------- ------------- -------------
Net earnings, previously reported $ 391,775 $ 268,346 $ 212,686
Effect of change to equity method (1,287) (1,355) (928)
----------- ----------- -----------
Net earnings, as restated $ 390,488 $ 266,991 $ 211,758
=========== =========== ===========
Net earnings per common share - basic:
Previously reported $ 0.99 $ 0.69 $ 0.55
=========== =========== ===========
As restated $ 0.98 $ 0.68 $ 0.55
=========== =========== ===========
Net earnings per common share - diluted:
Previously reported $ 0.95 $ 0.67 $ 0.54
=========== =========== ===========
As restated $ 0.95 $ 0.66 $ 0.53
=========== =========== ===========
The following table summarizes the effects of the investment accounting change
on net earnings and earnings per share for the periods indicated (in thousands,
except earnings per share):
Dec 28, 2003 Mar 28, 2004 Jun 27, 2004 Oct 3, 2004
(13 Wks Ended) (13 Wks Ended) (13 Wks Ended) (14 Wks Ended)
-------------- -------------- -------------- --------------
Fiscal period ended
Net earnings, previously reported $ 110,811 $ 79,488 $ 98,104 $ 103,372
Effect of change to equity method (368) (337) (296) (286)
----------- ----------- ----------- -----------
Net earnings, as restated $ 110,443 $ 79,151 $ 97,808 $ 103,086
=========== =========== =========== ===========
Net earnings per common share - basic:
Previously reported $ 0.28 $ 0.20 $ 0.25 $ 0.26
=========== =========== =========== ===========
As restated $ 0.28 $ 0.20 $ 0.25 $ 0.26
=========== =========== =========== ===========
Net earnings per common share - diluted:
Previously reported $ 0.27 $ 0.19 $ 0.24 $ 0.25
=========== =========== =========== ===========
As restated $ 0.27 $ 0.19 $ 0.24 $ 0.25
=========== =========== =========== ===========
33
NOTE 19: SEGMENT REPORTING
Segment information is prepared on the same basis that the Company's management
reviews financial information for operational decision making purposes.
Starbucks segment reporting is based on two distinct, geographically defined
operating segments: United States and International.
United States
The Company's United States operations ("United States") represent 85% of total
retail revenues, 83% 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. Nonretail
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
15% of retail revenues, 17% 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,
Australia and Singapore, as well as through retail store licensing operations
and foodservice accounts in these and more than 20 other countries.
International operations are in various early stages of development and have
country-specific regulatory requirements that necessitate a more extensive
support organization, relative to the current levels of revenue and operating
income, than in the United States.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies 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 net
revenues and operating expenses.
The table below presents information by operating segment (in thousands):
United Unallocated
Fiscal year ended States(1) International(1) Corporate(2) Total
- ----------------- ---------- ---------------- ------------ -----
Fiscal 2004:
Total net revenues $ 4,490,850 $ 803,397 $ -- $ 5,294,247
Earnings/(loss) before
income taxes 765,153 53,368 (194,264) 624,257
Depreciation and amortization 201,703 45,783 32,538 280,024
Income from equity investees 37,453 23,204 -- 60,657
Equity method investments 14,367 138,144 -- 152,511
Identifiable assets 1,273,807 484,043 1,570,318 3,328,168
----------- ----------- ----------- -----------
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 506,885 3,835 (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
----------- ----------- ----------- -----------
(1) For purposes of internal management and segment reporting, licensed
operations in Hawaii and Puerto Rico are included in the International segment.
(2) Unallocated corporate includes certain general and administrative expenses,
related depreciation and amortization expenses and amounts included in "Interest
and other income, net" and "Gain on sale of investment" on the accompanying
consolidated statements of earnings.
34
The tables below represent information by geographic area (in thousands):
Fiscal year ended Oct 3, 2004 Sept 28, 2003 Sept 29, 2002
----------- ------------- -------------
Net revenues from external customers:
United States $4,501,287 $3,480,164 $2,830,650
Foreign countries 792,960 595,358 458,258
---------- ---------- ----------
Total $5,294,247 $4,075,522 $3,288,908
========== ========== ==========
Revenues from foreign countries are based on the geographic location of the
customers and consist primarily of revenues from the United Kingdom and Canada,
which together account for approximately 81% of foreign net revenues. No
customer accounts for 10% or more of the Company's revenues.
Fiscal year ended Oct 3, 2004 Sept 28, 2003 Sept 29, 2002
----------- ------------- -------------
Long-lived assets:
United States $1,663,856 $1,544,300 $1,202,652
Foreign countries 295,827 261,417 239,097
---------- ---------- ----------
Total $1,959,683 $1,805,717 $1,441,749
========== ========== ==========
Assets attributed to foreign countries are based on the country in which those
assets are located.
NOTE 20: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information in fiscal 2004 and 2003 is as follows
(in thousands, except earnings per share):
First Second Third Fourth
----- ------ ----- ------
2004 quarter:
Net revenues $1,281,191 $1,241,068 $1,318,691 $1,453,297
Operating income 175,520 124,521 153,807 156,269
Net earnings 110,811 79,488 98,104 103,372
Net earnings per common share - diluted $ 0.27 $ 0.19 $ 0.24 $ 0.25
---------- ---------- ---------- ----------
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
---------- ---------- ---------- ----------
35
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.
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 independent
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
group 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
president and executive vice president,
chief executive officer chief financial officer and chief
administrative officer
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 October 3, 2004, and
September 28, 2003, and the related consolidated statements of earnings,
shareholders' equity and cash flows for the years ended October 3, 2004,
September 28, 2003, and September 29, 2002. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 October 3, 2004,
and September 28, 2003, and the results of its operations and its cash flows for
the years ended October 3, 2004, September 28, 2003, and September 29, 2002, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
December 7, 2004
36
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
---- ---
October 3, 2004:
Fourth Quarter $ 47.88 $ 42.57
Third Quarter 44.18 37.23
Second Quarter 38.95 32.30
First Quarter 33.00 28.80
------- -------
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
------- -------
As of December 2, 2004, the Company had 13,095 shareholders of record. Starbucks
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 October 3, 2004, may be obtained
without charge by accessing the Investor Relations section of the Company's
website at www.starbucks.com/aboutus/investor.asp, at www.sec.gov or by making a
request to Investor Relations via the address, phone number or website listed
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
www.starbucks.com/aboutus/investor.asp, at www.sec.gov or by making a request to
Investor Relations via the address, phone number or website listed below.
INVESTOR RELATIONS
Investor Relations -- M/S S-FP1
Starbucks Corporation
PO Box 34067
Seattle, WA 98124-1067
(206) 447-1575, ext. 87118
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 2004 CSR Annual Report will be available online at
www.starbucks.com/csr beginning February 9, 2005. To request a printed copy of
the report, which will be available in late March 2005, please call
1-800-23-LATTE (1-800-235-2883) or email your request to info@starbucks.com.
37