1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended April 1, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ___ to ___
Commission File Number 0-20322
-----------------------------
STARBUCKS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Washington 91-1325671
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2401 Utah Avenue South, Seattle, Washington 98134
(Address of Principal Executive Office, including Zip Code)
(206) 447-1575
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
As of May 11, 2001, there were 380,164,434 shares of the Registrant's Common
Stock outstanding.
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2
STARBUCKS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements ...................................... 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .......... 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ...................................... 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings ......................................... 16
Item 2. Changes in Securities and Use of Proceeds ................. 16
Item 4. Submission of Matters to a Vote of Security Holders ....... 16
Item 6. Exhibits and Reports on Form 8-K .......................... 17
Signature ......................................................... 17
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except earnings per share)
Three Months Ended Six Months Ended
April 1, April 2, April 1, April 2,
2001 2000 2001 2000
(13 Weeks) (13 Weeks) (26 Weeks) (26 Weeks)
(unaudited) (unaudited)
- -------------------------------------------------------------------------------------------------------
Net revenues:
Retail $ 523,277 $ 429,031 $1,085,684 $ 869,816
Specialty 106,011 77,637 210,991 166,184
- -------------------------------------------------------------------------------------------------------
Total net revenues 629,288 506,668 1,296,675 1,036,000
Cost of sales and related
occupancy costs 271,178 225,240 563,398 465,954
- -------------------------------------------------------------------------------------------------------
Gross margin 358,110 281,428 733,277 570,046
Joint venture income 6,167 3,821 10,972 7,216
Store operating expenses 208,608 169,257 418,298 333,457
Other operating expenses 23,785 20,212 45,571 37,957
Depreciation and amortization 38,597 31,951 76,159 61,241
General and administrative
expenses 42,433 28,622 77,310 54,767
- -------------------------------------------------------------------------------------------------------
Operating income 50,854 35,207 126,911 89,840
Interest and other income, net 1,560 2,242 3,273 3,656
- -------------------------------------------------------------------------------------------------------
Earnings before income taxes 52,414 37,449 130,184 93,496
Income taxes 20,204 14,043 48,979 35,341
- -------------------------------------------------------------------------------------------------------
Net earnings $ 32,210 $ 23,406 $ 81,205 $ 58,155
=======================================================================================================
Net earnings per common share -- basic $ 0.08 $ 0.06 $ 0.21 $ 0.16
Net earnings per common share -- diluted $ 0.08 $ 0.06 $ 0.21 $ 0.15
Weighted average shares outstanding:
Basic 380,363 369,570 378,825 368,212
Diluted 395,701 384,835 394,679 382,083
See notes to consolidated financial statements
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4
STARBUCKS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
April 1, October 1,
2001 2000
(unaudited)
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ASSETS
Current assets:
Cash and cash equivalents $ 215,180 $ 70,817
Available-for-sale securities 45,649 57,573
Trading securities 5,340 3,763
Accounts receivable, net of allowances of
$4,483 and $2,941, respectively 75,982 76,385
Inventories 151,368 201,656
Prepaid expenses and other
current assets 29,430 18,736
Deferred income taxes, net 35,074 29,304
- ------------------------------------------------------------------------------
Total current assets 558,023 458,234
Joint ventures 60,348 52,051
Other investments 1,948 3,788
Property, plant and equipment, net 997,585 930,759
Other assets 27,780 25,403
Goodwill, net 22,585 21,311
- ------------------------------------------------------------------------------
Total $ 1,668,269 $ 1,491,546
==============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 86,233 $ 73,653
Checks drawn in excess of bank balances 52,637 56,332
Accrued compensation and related costs 83,348 69,702
Accrued occupancy costs 32,641 29,117
Accrued taxes 28,186 35,841
Other accrued expenses 54,371 39,016
Deferred revenue 1,766 7,320
Current portion of long-term debt 691 685
- ------------------------------------------------------------------------------
Total current liabilities 339,873 311,666
Deferred income taxes, net 25,643 21,410
Long-term debt 6,157 6,483
Minority interest 4,386 3,588
Shareholders' equity:
Common stock and additional paid-in
Capital -- $0.001 par value; authorized,
600,000,000; issued and outstanding,
381,687,750 and 376,315,302 shares,
respectively, (includes 1,697,100 common
stock units in both periods) 819,207 750,872
Retained earnings 489,708 408,503
Accumulated other comprehensive loss (16,705) (10,976)
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Total shareholders' equity 1,292,210 1,148,399
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Total $ 1,668,269 $ 1,491,546
==============================================================================
See notes to consolidated financial statements
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STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
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April 1, April 2,
2001 2000
(26 Weeks) (26 Weeks)
(unaudited)
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Operating activities:
Net earnings $ 81,205 $ 58,155
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 82,727 67,594
Provision for store remodels
and losses on asset disposals 12,508 1,307
Deferred income taxes, net (3,217) 84
Equity in income of investees (3,572) (5,055)
Tax benefit from exercise of non-qualified
stock options 25,904 13,276
Cash provided/(used) by changes in
operating assets and liabilities:
Net purchases of trading securities (3,022) --
Accounts receivable 406 (10,814)
Inventories 50,203 29,882
Prepaid expenses and other
current assets (9,035) (638)
Accounts payable 12,581 8,140
Accrued compensation and related costs 13,270 18,301
Accrued occupancy costs 3,460 2,984
Accrued taxes (7,676) (18,954)
Minority interest 798 --
Deferred revenue (5,555) 14,470
Other accrued expenses 16,292 3,004
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Net cash provided by operating activities 267,277 181,736
Investing activities:
Purchase of available-for-sale investments (53,012) (55,314)
Maturity of available-for-sale investments 62,000 28,000
Sale of available-for-sale investments 2,000 35,524
Purchases of businesses, net of cash acquired -- (8,242)
Net investments in joint ventures (12,130) (2,998)
Purchases of other investments -- (35,189)
Distributions from joint ventures 4,099 4,556
Additions to property, plant and equipment (161,697) (148,005)
Additions to other assets (2,496) (3,986)
- -------------------------------------------------------------------------------
Net cash used by investing activities (161,236) (185,654)
Financing activities:
Decrease in cash provided by checks
drawn in excess of bank balances (3,695) (13,748)
Proceeds from sale of common stock under
employee stock purchase plan 5,976 5,020
Proceeds from exercise of stock options 36,455 32,853
Principal payments on long-term debt (320) (1,344)
- -------------------------------------------------------------------------------
Net cash provided by financing activities 38,416 22,781
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Effect of exchange rate changes
on cash and cash equivalents (94) (24)
- -------------------------------------------------------------------------------
Net increase in cash and cash equivalents 144,363 18,839
Cash and cash equivalents:
Beginning of the period 70,817 66,419
- -------------------------------------------------------------------------------
End of the period $ 215,180 $ 85,258
===============================================================================
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 262 $ 191
Income taxes 38,658 32,710
See notes to consolidated financial statements
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STARBUCKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the 13 Weeks and 26 Weeks Ended April 1, 2001 and April 2, 2000
NOTE 1: FINANCIAL STATEMENT PREPARATION
The consolidated financial statements as of April 1, 2001 and October 1, 2000
and for the 13-week and 26-week periods ended April 1, 2001 and April 2, 2000
have been prepared by Starbucks Corporation ("Starbucks" or the "Company")
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "SEC"). The financial information for the 13-week and 26-week periods ended
April 1, 2001 and April 2, 2000 is unaudited, but, in the opinion of management,
reflects all adjustments (consisting only of normal recurring adjustments and
accruals) necessary for a fair presentation of the financial position, results
of operations and cash flows for the interim periods.
The financial information as of October 1, 2000, is derived from the Company's
audited consolidated financial statements and notes thereto for the year ended
October 1, 2000, and should be read in conjunction with such financial
statements.
Certain reclassifications of prior year's balances have been made to conform to
the current format.
The results of operations for the 13-week and 26-week periods ended April 1,
2001 are not necessarily indicative of the results of operations that may be
achieved for the entire fiscal year ending September 30, 2001.
NOTE 2: NEW ACCOUNTING STANDARDS
In September 2000, the Emerging Issues Task Force ("EITF") reached a consensus
regarding Issue 00-10, "Accounting for Shipping and Handling Fees and Costs,"
which requires any shipping and handling costs billed to customers in a sale
transaction to be classified as revenue. The Company adopted Issue 00-10 on
October 2, 2000. Issue 00-10 did not have a material impact on the Company's
consolidated financial statements.
NOTE 3: INVENTORIES
Inventories consist of the following (in thousands):
April 1, October 1,
2001 2000
- -------------------------------------------------------------
Coffee:
Unroasted $ 48,172 $ 90,807
Roasted 27,021 27,880
Other merchandise held for sale 49,770 59,420
Packaging and other supplies 26,405 23,549
- -------------------------------------------------------------
Total $151,368 $201,656
=============================================================
As of April 1, 2001, the Company had fixed-price purchase commitments for green
coffee totaling approximately $167 million.
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NOTE 4: DERIVATIVE FINANCIAL INSTRUMENTS
The Company manages its exposure to foreign currency risk within the
consolidated financial statements according to a hedging policy. Under the
policy, the Company may engage in transactions involving various derivative
instruments with maturities generally not longer than five years, to hedge
assets, liabilities, revenues and purchases denominated in foreign currencies.
On October 2, 2000, the Company adopted Statement of Financial Accounting
Standards ("SFAS") 133, as amended and interpreted, which requires that all
derivatives be recorded on the balance sheet at fair value. The accounting for
changes in the fair value of derivative instruments depends on the intended use
and resulting designation. The Company designates its derivatives based upon the
criteria established by SFAS 133. For a derivative designated as a fair value
hedge, the gain or loss generated from the change in fair value is recognized in
earnings in the period of change together with the offsetting loss or gain on
the hedged item. For a derivative designated as a cash flow hedge, the effective
portion of the derivative's gain or loss is initially reported as a component of
other comprehensive income ("OCI") and subsequently reclassified into earnings
when the hedged exposure affects earnings. For a derivative designated as a net
investment hedge, the effective portion of the derivative's gain or loss is
reported as a component of the foreign currency translation adjustment, a
component of OCI. The ineffective portions of all derivatives are recognized
immediately into earnings. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in earnings in the period of change.
The Company classifies the cash flows from hedging transactions in the same
category as the cash flows from the respective hedged items. The adoption of
SFAS 133 did not have a material impact on the Company's consolidated results of
operations, financial position or cash flows.
During the 26-week period ended April 1, 2001, the Company entered into forward
foreign exchange contracts that qualify as cash flow hedges under SFAS 133 to
hedge a portion of anticipated international revenue. In accordance with SFAS
133, cash flow hedges related to anticipated transactions are designated and
documented at the inception of each hedge by matching the terms of the contract
to the underlying transaction. Once established, cash flow hedges are generally
not removed until maturity. The Company also entered into a forward foreign
exchange contract that qualifies as a hedge of a net investment in a foreign
operation. These contracts expire within 20 months and are intended to minimize
certain foreign currency exposures that can be confidently identified and
quantified.
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. Any ineffectiveness is
recognized immediately in "Interest and other income, net" on the accompanying
consolidated statement of earnings. There was no ineffectiveness related to cash
flow hedges for the 26-week period ended April 1, 2001. For net investment
hedges, the spot-to-spot method is used by the Company to calculate
effectiveness. As a result of using this method, a net gain of $0.5 million was
recognized in earnings during both the 13-week and 26-week periods ended April
1, 2001.
The Company had accumulated derivative gains of $2.9 million, net of taxes, in
OCI as of April 1, 2001 related to cash flow and net investment hedges. Of this
amount, $1.3 million is expected to be reclassified into earnings within 12
months.
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NOTE 5: PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost and consist of the following
(in thousands):
April 1, October 1,
2001 2000
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Land $ 5,084 $ 5,084
Building 19,795 19,795
Leasehold improvements 833,039 754,132
Roasting and store equipment 365,056 346,482
Furniture, fixtures and other 202,605 190,026
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1,425,579 1,315,519
Less accumulated depreciation
and amortization (520,078) (446,403)
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905,501 869,116
Work in progress 92,084 61,643
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Property, plant and equipment, net $ 997,585 $ 930,759
=======================================================================
NOTE 6: CAPITAL TRANSACTIONS
On March 20, 2001, the Board of Directors approved a two-for-one stock split of
its $0.001 par value common stock for holders of record on March 30, 2001. In
connection therewith, the Company amended and restated its Articles of
Incorporation to authorize the issuance of up to 600,000,000 shares of common
stock, $0.001 par value per share. Accordingly, outstanding shares, stock
options, and per share data presented herein have been retroactively restated
for all periods. Paid-in capital was $818.8 million and $750.5 million as of
April 1, 2001 and October 1, 2000, respectively.
NOTE 7: COMPREHENSIVE INCOME
Comprehensive income includes all changes in equity during the period, except
those resulting from transactions with shareholders of the Company. It has two
components: net earnings and other comprehensive income. Accumulated other
comprehensive loss reported on the Company's consolidated balance sheets
consists of foreign currency translation adjustments and the unrealized gains
and losses, net of applicable taxes, on available-for-sale securities and on
derivative instruments designated and qualifying as cash flow and net investment
hedges. Comprehensive income, net of related tax effects, is as follows (in
thousands):
Three months ended Six months ended
April 1, April 2, April 1, April 2,
2001 2000 2001 2000
- --------------------------------------------------------------------------------------
Net earnings $ 32,210 $ 23,406 $ 81,205 $ 58,155
Unrealized holding gains
(losses) on available-
for-sale investments 158 (12,547) (12) (1,409)
Unrealized holding gains
on cash flow hedges 1,488 -- 1,971 --
Unrealized holding gain
on net investment hedge 886 -- 886 --
Reclassification adjustment
for net (gains) losses
realized in net earnings -- (151) 14 (151)
- --------------------------------------------------------------------------------------
Net unrealized gain (loss) 2,532 (12,698) 2,859 (1,560)
Translation adjustment (10,101) (4,270) (8,588) (577)
- --------------------------------------------------------------------------------------
Total comprehensive income $ 24,641 $ 6,438 $ 75,476 $ 56,018
======================================================================================
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NOTE 8: EARNINGS PER SHARE
The computation of basic earnings per share is based on the weighted average
number of shares and common stock units outstanding during the period. The
computation of diluted earnings per share includes the dilutive effect of common
stock equivalents consisting of certain shares subject to stock options.
The following table represents the calculation of net earnings per common share
- -- basic (in thousands, except earnings per share data):
Three months ended Six months ended
April 1, April 2, April 1, April 2,
2001 2000 2001 2000
- ---------------------------------------------------------------------------------
Net earnings $ 32,210 $ 23,406 $ 81,205 $ 58,155
Weighted average common
shares and common stock
units outstanding 380,363 369,570 378,825 368,212
=================================================================================
Net earnings per common
share -- basic $ 0.08 $ 0.06 $ 0.21 $ 0.16
=================================================================================
The following table represents the calculation of net earnings per common and
common equivalent share -- diluted (in thousands, except per share data):
Three months ended Six months ended
April 1, April 2, April 1, April 2,
2001 2000 2001 2000
- ------------------------------------------------------------------------------
Net earnings $ 32,210 $ 23,406 $ 81,205 $ 58,155
Weighted average shares
outstanding calculation:
Weighted average common shares
and common stock units
outstanding 380,363 369,570 378,825 368,212
Dilutive effect of outstanding
common stock options 15,338 15,265 15,854 13,871
- ------------------------------------------------------------------------------
Weighted average common and
common equivalent shares
outstanding 395,701 384,835 394,679 382,083
==============================================================================
Net earnings per common
and common equivalent
share -- diluted $ 0.08 $ 0.06 $ 0.21 $ 0.15
==============================================================================
NOTE 9: SEGMENT REPORTING
The Company is organized into a number of business units. The Company's North
American retail business sells coffee beverages, whole bean coffees, and related
hardware and merchandise through Company-operated retail stores in the United
States and Canada.
At the beginning of fiscal 2001, the Company combined its foodservice and
domestic retail store licensing operations to form Business Alliances. As a
result of this internal reorganization and the manner in which the operations of
foodservice and domestic retail store licensing are measured and evaluated as
one combined business unit, the Company's management has determined that
separate segment reporting of Business Alliances is appropriate under SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information." All prior
period disclosures will be restated as if Business Alliances had always been a
separately reported segment.
The Company operates through several other business units, each of which is
managed and evaluated independently. These other business units include domestic
wholesale, grocery channel licensing, international Company-operated retail
stores, international licensing, a direct-to-consumer business, and other
ventures.
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The tables below present information by operating segment (in thousands):
Three months ended Six months ended
April 1, April 2, April 1, April 2,
2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------
REVENUES:
North American retail $ 492,310 $ 408,525 $1,023,388 $ 830,589
Business Alliances 48,305 37,780 96,894 78,289
All other business units 101,967 66,509 198,078 137,404
Intersegment revenues (13,294) (6,146) (21,685) (10,282)
- ----------------------------------------------------------------------------------------------------
Total revenues $ 629,288 $ 506,668 $1,296,675 $1,036,000
====================================================================================================
- ----------------------------------------------------------------------------------------------------
OPERATING INCOME:
North American retail $ 73,891 $ 54,307 $ 166,300 $ 118,060
Business Alliances 11,121 9,629 23,450 22,194
All other business units 15,813 6,978 28,898 17,066
Unallocated corporate expenses (48,770) (35,803) (90,366) (67,295)
Intersegment eliminations (1,201) 96 (1,371) (185)
Interest, net 1,560 2,242 3,273 3,656
- ----------------------------------------------------------------------------------------------------
Earnings before income taxes $ 52,414 $ 37,449 $ 130,184 $ 93,496
====================================================================================================
The table below represents information by geographic area (in thousands):
Three months ended Six months ended
April 1, April 2, April 1, April 2,
2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------
REVENUES FROM EXTERNAL CUSTOMERS:
United States $ 567,632 $ 452,264 $1,166,200 $ 925,141
Foreign countries 61,656 54,404 130,475 110,859
- ----------------------------------------------------------------------------------------------------
Total revenues $ 629,288 $ 506,668 $1,296,675 $1,036,000
====================================================================================================
Revenues from foreign countries are based on the location of the customers and
consist primarily of revenues from Canada and the United Kingdom.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements herein, including anticipated store openings, planned capital
expenditures and trends in or expectations regarding the operations of Starbucks
Corporation ("Starbucks" or the "Company"), constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are based on currently available operating, financial
and competitive information, and are subject to various risks and uncertainties.
Actual future results and trends may differ materially depending on a variety of
factors, including, but not limited to, coffee and other raw materials prices
and availability, successful execution of internal performance and expansion
plans, the impact of competition, the effect of legal proceedings, and other
risks detailed herein and in the Company's annual and quarterly filings with the
Securities and Exchange Commission.
GENERAL
During the 26-week period ending April 1, 2001, the Company derived
approximately 84% of net revenues from its Company-operated retail stores. The
remaining 16% of net revenues is derived from the Company's specialty
operations, which include sales to wholesale accounts and licensees, royalty and
fee income, and sales through its direct-to-consumer business and its on-line
store. The Company's fiscal year ends on the Sunday closest to September 30.
Fiscal year 2000 had 52 weeks. The fiscal year ending on September 30, 2001 will
also include 52 weeks.
RESULTS OF OPERATIONS -- FOR THE 13 WEEKS ENDED APRIL 1, 2001, COMPARED TO THE
13 WEEKS ENDED APRIL 2, 2000
SYSTEMWIDE RETAIL STORE SALES
Systemwide retail store sales, which include net sales for both Company-operated
and licensed retail stores, were $679 million for the second
quarter of fiscal 2001, an increase of 30% from $521 million in the second
quarter of fiscal 2000, primarily due to the opening of 554 stores in the last
12 months. Systemwide retail store sales provides a broader perspective of
global brand sales; however, it excludes net revenues from non-retail channels.
REVENUES
Net revenues for the 13 weeks ended April 1, 2001 increased 24% to $629 million
from $507 million for the corresponding period in fiscal 2000. Retail revenues
increased 22% to $523 million from $429 million, primarily due to the opening of
new retail stores plus an increase in comparable store sales of 6% for the
period. The increase in comparable store sales (stores open for at least 13
months) resulted from a 1% increase in the number of transactions combined with
a 5% increase in the average dollar value per transaction. During the 13 weeks
ended April 1, 2001, the Company opened 138 stores in continental North America,
24 in the United Kingdom, 4 in Australia and 2 in Thailand. The Company ended
the period with 2,702 Company-operated stores in continental North America and
222 Company-operated stores in international markets.
Specialty revenues increased 37% to $106 million for the 13 weeks ended April 1,
2001, compared to $78 million for the corresponding period in fiscal 2000. The
increase in specialty revenues was driven primarily by domestic and
international licensees, the Company's grocery channel, foodservice accounts,
and revenues from the remainder of a commercial agreement with Kozmo.com, Inc.
("Kozmo.com"). Licensees (including those in which the Company has an equity
interest) opened 86 stores in continental North America and 64 stores in
international markets. The Company ended the period with 712 licensed stores in
continental North America and 499 licensed stores in international markets.
GROSS MARGIN
Gross margin increased to 56.9% for the 13 weeks ended April 1, 2001 from 55.5%
for the corresponding period in fiscal 2000. The improvement in gross margin was
primarily due to the impact of beverage sales price increases, lower green
coffee costs, and leverage gained from the growth of non-product revenues such
as royalties and other fees, partially offset by higher retail occupancy costs.
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JOINT VENTURE INCOME
Joint venture income was $6.2 million for the second quarter of fiscal 2001,
compared to $3.8 million in the second quarter of fiscal 2000. The increase was
due to the improved profitability of both the North American Coffee Partnership
and Starbucks Coffee Japan Limited.
EXPENSES
Store operating expenses as a percentage of retail revenues increased to 39.9%
for the 13 weeks ended April 1, 2001, from 39.5% for the corresponding period in
fiscal 2000. The increase was primarily due to higher pre-opening and recruiting
expenses in the United Kingdom and other Company-owned international markets as
the Company continues to expand these markets and fill key positions within the
organization. In addition, retail revenues generated by the United Kingdom were
adversely affected by an unusually wet winter, regional fuel crisis and to a
lesser extent, increased competition.
Other operating expenses (expenses associated with all operations other than
Company-owned retail) were 22.4% of specialty revenues for the 13 weeks ended
April 1, 2001, compared to 26.0% for the corresponding period in fiscal 2000 due
to lower payroll-related and marketing expenditures.
Depreciation and amortization expenses were 6.1% of net revenues for the 13
weeks ended April 1, 2001, compared to 6.3% for the corresponding period in
fiscal 2000 because of increased royalties and fees from domestic and
international licensing activity.
General and administrative expenses as a percentage of net revenues were 6.7%
for the 13 weeks ended April 1, 2001, compared to 5.6% for the corresponding
period in fiscal 2000. The increase was primarily due to payroll-related
expenditures and non-insured expenses associated with the Nisqually earthquake
that occurred on February 28, 2001. There were no similar non-insured expenses
in fiscal 2000.
INTEREST AND OTHER INCOME, NET
Net interest and other income decreased to 0.2% of net revenues for the 13 weeks
ended April 1, 2001 from 0.4% of net revenues for the corresponding period in
fiscal 2000. The decrease was primarily due to the $2.0 million write-off of the
Company's remaining investment in Kozmo.com, which ceased its operations.
INCOME TAXES
The Company's effective tax rate was 38.5% for the 13 weeks ended April 1, 2001
compared to 37.5% in the corresponding period in fiscal 2000. The increase was
due to the establishment of a valuation allowance against capital losses that
management has determined may ultimately not be realizable for tax purposes.
Excluding the effect of these losses, the effective tax rate for the 13 weeks
ended April 1, 2001 was 37.0%. Management expects tax planning efforts to
maintain the effective tax rate at 37.0% for the remainder of fiscal 2001.
RESULTS OF OPERATIONS -- FOR THE 26 WEEKS ENDED APRIL 1, 2001, COMPARED TO THE
26 WEEKS ENDED APRIL 2, 2000
SYSTEMWIDE RETAIL STORE SALES
Systemwide retail store sales were $1.4 billion for the 26 weeks ended April 1,
2001, an increase of 35% from $1.0 billion for the same period in fiscal 2000
primarily due to the opening of additional stores in the last 12 months.
REVENUES
Net revenues for the 26 weeks ended April 1, 2001, increased 25% to $1.3 billion
from $1.0 billion for the corresponding period in fiscal 2000. Retail revenues
increased 25% to $1.1 billion from $870 million primarily due to the opening of
new retail stores plus an increase in comparable store sales of 8% for the
period. The increase in comparable store sales resulted from a 3% increase in
the number of transactions combined with a 5% increase in the average dollar
value per transaction. During the 26 weeks ended April 1, 2001, the Company
opened 256 stores in continental North America, 38 in the United Kingdom, 6 in
Australia and 5 in Thailand.
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Specialty revenues increased 27% to $211 million for the 26 weeks ended April 1,
2001, compared to $166 million for the corresponding period in fiscal 2000. The
increase in specialty revenues was driven primarily by higher revenues from
domestic and international licensees, the Company's grocery channel, the
remainder of the Company's commercial agreement with Kozmo.com, and foodservice
accounts. Licensees opened 182 stores in continental North America and 147
stores in international markets.
GROSS MARGIN
Gross margin increased to 56.6% for the 26 weeks ended April 1, 2001 from 55.0%
for the corresponding period in fiscal 2000. The improvement in gross margin was
primarily due to the impact of beverage sales price increases, lower green
coffee costs, and leverage gained from non-product revenues, partially offset by
higher international retail occupancy costs.
JOINT VENTURE INCOME
Joint venture income was $11.0 million for the 26 weeks ended April 1, 2001,
compared to $7.2 million for the corresponding period in fiscal 2000. The
increase was due to the improved profitability of both Starbucks Coffee Japan
Limited and the North American Coffee Partnership.
EXPENSES
Store operating expenses as a percentage of retail revenues increased to 38.5%
for the 26 weeks ended April 1, 2001, from 38.3% for the corresponding period in
fiscal 2000. The increase was due to higher business taxes and increased
provisions for store remodels and relocations, partially offset by lower
advertising expenditures as a percent of retail revenues.
Other operating expenses were 21.6% of specialty revenues for the 26 weeks ended
April 1, 2001, compared to 22.8% for the corresponding period in fiscal 2000.
The decrease was due to lower marketing and payroll-related expenditures,
primarily associated with the Company's direct-to-consumer programs.
General and administrative expenses as a percentage of net revenues were 6.0%
for the 26 weeks ended April 1, 2001 compared to 5.3% for the corresponding
period in fiscal 2000. This increase was primarily due to payroll-related
expenditures and non-insured expenses associated with the Nisqually earthquake.
There were no similar non-insured expenses in fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the period with total cash and cash equivalents and short-term
investments of $266 million and working capital of $218 million. Cash and cash
equivalents increased by $144 million for the 26 weeks ended April 1, 2001 to
$215 million. Cash provided by operating activities totaled $267 million for the
first 26 weeks of fiscal 2001, resulting primarily from net earnings before
non-cash charges of $196 million and a decrease in inventories of $50 million.
Cash used by investing activities for the first 26 weeks of fiscal 2001 totaled
$161 million. This included capital additions to property, plant and equipment
of $162 million related to opening 305 new Company-operated retail stores,
enhancing information systems, purchasing roasting and packaging equipment for
the Company's roasting and distribution facilities, and remodeling certain
existing stores. During the 26-week period ending April 1, 2001, the Company
made equity investments of $12 million in its international joint ventures and
received $4 million in distributions primarily from the North American Coffee
Partnership. The Company invested excess cash primarily in short-term,
investment-grade marketable debt securities. The net activity in the Company's
marketable securities portfolio during the 26-week period provided $11 million.
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Cash provided by financing activities for the first 26 weeks of fiscal 2001
totaled $38 million. This included $36 million generated from the exercise of
employee stock options and $6 million generated from the Company's employee
stock purchase plan. As options granted under the Company's stock option plans
vest and are exercised, the Company will continue to receive proceeds and may
receive a tax deduction; however, neither the amounts nor timing can be
predicted.
Cash requirements for the remainder of fiscal 2001, other than normal operating
expenses, are expected to consist primarily of capital expenditures related to
the addition of new Company-operated retail stores. The Company plans to open at
least 500 Company-operated stores in continental North America and 100
Company-operated stores in international markets during fiscal 2001. The Company
also anticipates incurring additional expenditures for enhancing its production
capacity and information systems and remodeling certain existing stores. While
there can be no assurance that current expectations will be realized, management
expects capital expenditures for the remainder of fiscal 2001 to be
approximately $248 million.
Management believes that existing cash and investments plus cash generated from
operations should be sufficient to finance capital requirements for its core
businesses through fiscal 2001. New joint ventures, other new business
opportunities or store expansion rates substantially in excess of that presently
planned may require outside funding.
COFFEE PRICES AND AVAILABILITY AND GENERAL RISK CONDITIONS
The supply and price of coffee are subject to significant volatility. Although
most coffee trades in the commodity market, coffee of the quality sought by the
Company tends to trade on a negotiated basis at a substantial premium above
commodity coffee prices, depending upon the supply and demand at the time of
purchase. Supply and price can be affected by multiple factors in the producing
countries, including weather, political and economic conditions. In addition,
green coffee prices have been affected in the past, and may be affected in the
future, by the actions of certain organizations and associations that have
historically attempted to influence commodity prices of green coffee through
agreements establishing export quotas or restricting coffee supplies worldwide.
The Company's ability to raise sales prices in response to rising coffee prices
may be limited and the Company's profitability could be adversely affected if
coffee prices were to rise substantially.
The Company enters into fixed-price purchase commitments in order to secure an
adequate supply of quality green coffee and bring greater certainty to the cost
of sales in future periods. As of April 1, 2001, the Company had approximately
$167 million in fixed-price purchase commitments which, together with existing
inventory, is expected to provide an adequate supply of green coffee for the
remainder of fiscal 2001. The Company believes, based on relationships
established with its suppliers in the past, that the risk of non-delivery on
such purchase commitments is remote.
In addition to fluctuating green coffee prices, management believes that the
Company's future results of operations and earnings could be significantly
impacted by other factors such as increased competition within the specialty
coffee industry, the Company's ability to find optimal store locations at
favorable lease rates, increased costs associated with opening and operating
retail stores in new markets, increases in the cost of dairy products and the
Company's continued ability to hire, train and retain qualified personnel.
SEASONALITY AND QUARTERLY RESULTS
The Company's business is subject to seasonal fluctuations. Significant portions
of the Company's net revenues and profits are realized during the first quarter
of the Company's fiscal year, which includes the December holiday season. In
addition, quarterly results are affected by the timing of the opening of new
stores, and the Company's rapid growth may conceal the impact of seasonal
influences. Because of the seasonality of the Company's business, results for
any quarter are not necessarily indicative of the results that may be achieved
for the full fiscal year.
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NEW ACCOUNTING STANDARDS
In September 2000, the Emerging Issues Task Force ("EITF") reached a consensus
regarding Issue 00-10, "Accounting for Shipping and Handling Fees and Costs,"
which requires any shipping and handling costs billed to customers in a sale
transaction to be classified as revenue. The Company adopted Issue 00-10 on
October 2, 2000. Issue 00-10 did not have material impact on the Company's
consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest rates,
equity security prices and foreign currency exchange rates.
INTEREST RATE RISK
The Company's diversified available-for-sale portfolio consists mainly of fixed
income instruments. The objectives of these investments are to preserve capital
and liquidity without significantly increasing risk to the Company.
Available-for-sale securities are of investment grade and are recorded on the
balance sheet at fair value with unrealized gains and losses reported as a
separate component of accumulated other comprehensive loss. The Company does not
hedge its interest rate exposure.
EQUITY SECURITY PRICE RISK
The Company has minimal exposure to price fluctuations on equity mutual funds
within the trading portfolio. The trading securities are designated to
approximate the Company's liability under the Management Deferred Compensation
Plan ("MDCP"). A corresponding liability is included in "Accrued compensation
and related costs" on the accompanying consolidated balance sheets. These
investments are recorded at fair value with unrealized gains and losses
recognized in "Interest and other income, net." The offsetting changes in the
MDCP liability are recorded in "General and administrative expenses" on the
accompanying consolidated statements of earnings.
The Company also has an equity investment in a privately held company that could
be considered to be in the start-up or development stages. The Company could
lose its entire investment because this type of company is inherently risky. The
investment is recorded on the accompanying consolidated balance sheet at a fair
value of $1.6 million as of April 1, 2001.
FOREIGN CURRENCY EXCHANGE RISK
The majority of the Company's revenue, expense and capital purchasing activities
are transacted in United States dollars. However, because a portion of the
Company's operations consists of activities outside of the United States, the
Company has transactions in other currencies, primarily the Canadian dollar,
British pound and Japanese yen. As part of its risk management strategy, the
Company frequently evaluates its foreign currency exchange risk by monitoring
market data and external factors that may influence exchange rate fluctuations.
As a result, the Company may engage in transactions involving various derivative
instruments, with maturities generally not exceeding five years, to hedge
assets, liabilities, revenues and purchases denominated in foreign currencies.
During the 26 weeks ended April 1, 2001, the Company entered into forward
foreign exchange contracts that qualify as cash flow hedges under SFAS 133 to
hedge a portion of anticipated international revenue. In addition, the Company
entered into a forward foreign exchange contract that qualifies as a hedge of a
net investment in a foreign operation. These contracts expire within 20 months.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to various legal proceedings arising in the ordinary
course of its business, but is not currently a party to any legal proceeding
that management believes would have a material adverse effect on the financial
position or results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 20, 2001, the Board of Directors approved a two-for-one stock split,
effected in the form of a stock dividend, of its $0.001 par value common stock
for holders of record on March 30, 2001. In connection therewith, the Company
amended and restated its Articles of Incorporation to authorize the issuance of
up to 600,000,000 shares of common stock, $0.001 par value per share.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of the Company was held on March 20, 2001 for
the purposes of (i) electing three Class 1 directors to serve until the Annual
Meeting of Shareholders to be held in early 2004 and (ii) ratifying the
selection of the independent auditors for fiscal 2001. All proposals were
approved. The table below shows the results of the shareholders' voting:
Votes in Votes Votes Withheld
Favor Against Abstentions
----------- ------------ --------------
Election of Directors
Class 1 Directors:
Gregory B. Maffei 165,435,930 0 1,482,287
Arlen I. Prentice 165,475,468 0 1,442,749
Orin C. Smith 165,312,637 0 1,605,580
Ratification of
independent auditors 166,081,340 192,329 644,548
Because all proposals were routine, there were no broker non-votes.
The following members of the Board of Directors, who were not up for re-election
during the current year, have terms that expire at the annual meeting of
shareholders to be held in early 2002 and 2003:
Term expires at the
Director annual meeting held in:
- -------------------------------------------------------------------------
Barbara Bass 2002
Craig J. Foley 2002
Howard Schultz 2002
Howard P. Behar 2003
James G. Shennan, Jr. 2003
Craig E. Weatherup 2003
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Starbucks Corporation Amended and Restated Articles of
Incorporation
(b) Current Reports on Forms 8-K filed during the 26 weeks ended April 1,
2001:
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STARBUCKS CORPORATION
Dated: May 15, 2001 By: /s/ Michael Casey
-----------------------------------
Michael Casey
executive vice president and
chief financial officer
Signing on behalf of the
registrant and as principal
financial officer
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- ------------
3.1 Starbucks Corporation Amended and Restated Articles of
Incorporation