Business description of Starbucks-Corporation from last 10-k form
General
Starbucks is the premier roaster and retailer of specialty
coffee in the world. Starbucks Corporation was formed in 1985
and its common stock trades on the NASDAQ Global Select Market
(“NASDAQ”) under the symbol “SBUX.”
Starbucks (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, a selection of
premium teas, and beverage-related accessories and equipment,
primarily through Company-operated retail stores. Starbucks also
sells coffee and tea products and licenses its trademark through
other channels such as licensed retail stores and, through
certain of its licensees and equity investees, Starbucks
produces and sells a variety of
ready-to-drink
beverages. All channels outside the Company-operated retail
stores are collectively known as specialty operations.
The Company’s objective is to maintain Starbucks standing
as one of the most recognized and respected brands in the world.
To achieve this goal, the Company plans to continue disciplined
global expansion of its retail and licensed store base, to
introduce relevant new products in all its channels, and to
selectively develop new channels of distribution. The
Company’s Global Responsibility strategy and commitments
related to coffee and the communities it does business in, as
well as its focus on being an employer of choice, are also key
complements to its business strategies.
Segment
Financial Information
Starbucks has three reportable operating segments, and each
segment provided the indicated percentage of total net revenues
for fiscal year ended September 27, 2009 (“fiscal
2009”): United States (“US”) (73%), International
(19%) and Global Consumer Products Group (“CPG”) (8%).
In the fourth fiscal quarter of 2009, the Company changed the
composition of its reportable segments. The US foodservice
business, which was previously reported in the US segment, is
now reported in the CPG segment, as a result of internal
management realignments within the US and CPG businesses.
Segment information for all prior periods presented has been
revised to reflect this change.
The US and International segments both include Company-operated
retail stores and certain components of specialty operations.
Specialty operations within the US include licensed retail
stores and other initiatives related to the Company’s core
business. International specialty operations primarily consist
of retail store licensing operations in nearly 40 countries and
foodservice accounts in Canada and the United Kingdom
(“UK”). The International segment’s largest
markets, based on number of Company-operated and licensed retail
stores, are Canada, Japan and the UK. The CPG segment includes
packaged coffee and tea, and other branded products sold
worldwide through channels such as grocery stores, warehouse
clubs and convenience stores, and US foodservice accounts. CPG
operates a significant portion of its business through licensing
arrangements and joint ventures with large consumer products
business partners. This operating model leverages the business
partners’ existing infrastructures and as a result, the CPG
segment reflects relatively lower revenues, a modest cost
structure, and a resulting higher operating margin, compared to
the Company’s other two reporting segments, which consist
primarily of retail stores.
Financial information about Starbucks segments is included in
Note 18 to the consolidated financial statements included
in Item 8 of this Annual Report on
Form 10-K
(“10-K”
or “Report”).
Revenue
Components
Revenue components as a percentage of total net revenues and
related specialty revenues for the fiscal year ended
September 27, 2009:
Revenues
Company-operated retail
Specialty:
Licensing:
Retail stores
Packaged coffee and tea
Branded products
Total licensing
Foodservice and other:
Foodservice
Other initiatives
Total foodservice and other
Total specialty
Total net revenues
Company-operated
and Licensed Retail Store Summary as of September 27,
2009
Company-operated stores
Licensed stores
Total
Starbucks mix of Company-operated versus licensed stores in a
given market will vary based on several factors. Some of these
factors include the ability to access desirable local retail
space, the complexity and expected ultimate size of the market
for Starbucks, and the ability to leverage the Company’s
support infrastructure in an existing geographic region.
Company-operated
Retail Stores
The Company’s retail goal is to become the leading retailer
and brand of coffee in each of its target markets by selling the
finest quality coffee and related products, and by providing
each customer a unique Starbucks Experience. The
Starbucks Experience is built upon superior customer
service as well as clean and well-maintained Company-operated
retail stores that reflect the personalities of the communities
in which they operate, thereby building a high degree of
customer loyalty.
Starbucks disciplined strategy for expanding its global retail
business is to increase its market share by selectively opening
additional stores in existing markets, opening stores in new
markets, and increasing sales in existing stores, to support its
long term strategic objectives. Store growth in specific
existing markets will vary due to many factors, including the
maturity of the market.
As described in more detail in Management’s Discussion and
Analysis in this
10-K,
Starbucks has taken a number of actions in fiscal 2008 and 2009
to rationalize its store portfolio. These actions have included
plans (announced in July 2008 and January 2009) to close a
total of approximately 800 Company-operated stores in the US,
restructure its
Australia market, and close approximately 100 additional
Company-operated stores internationally. As of the end of fiscal
2009, nearly all of the approximately 800 US stores, 61 stores
in Australia and 41 stores in other International markets have
been closed. The remaining International closures are expected
to be completed by the end of fiscal 2010.
Starbucks Company-operated retail stores accounted for 84% of
total net revenues during fiscal 2009.
Summary of total Company-operated retail store data for the
periods indicated:
US(2)
International(3):
Canada
United Kingdom
China
Germany
Thailand
Singapore
Australia
Other
Total International
Total Company-operated
Starbucks retail stores are typically located in high-traffic,
high-visibility locations. Because the Company can vary the size
and format, its stores are located in or near a variety of
settings, including downtown and suburban retail centers, office
buildings and university campuses. The Company also locates
retail stores in select rural and off-highway locations to serve
a broader array of customers outside major metropolitan markets.
To provide a greater degree of access and convenience for
nonpedestrian customers, the Company continues to selectively
expand development of drive-thru retail stores. At the end of
fiscal 2009, the Company operated approximately 2,650 drive-thru
locations, representing approximately 35% of Company-operated
stores in the US and Canada combined.
Starbucks stores offer a choice of regular and decaffeinated
coffee beverages, a broad selection of Italian-style espresso
beverages, cold blended beverages, iced shaken refreshment
beverages, a selection of premium teas, distinctively packaged
roasted whole bean coffees, and its recently launched soluble
coffee Starbucks
VIAtm
Ready Brew (“VIA”). Starbucks stores also offer a
variety of fresh food items, including healthier choice
selections focusing on high-quality ingredients, nutritional
value and great flavor. Food items include pastries, prepared
breakfast and lunch sandwiches, oatmeal, and salads as well as
sodas, juices and bottled water. Starbucks continues to expand
its food warming program in the US and Canada, with
approximately three-quarters of the stores in these markets
providing warm food items, primarily breakfast sandwiches, as of
September 27, 2009. A selection of beverage-making
equipment and accessories are also sold in the stores. Each
Starbucks store varies its product mix depending upon the size
of the store and its location. Larger stores carry a broad
selection of the Company’s whole bean coffees in various
sizes and types of packaging, as well as coffee and
espresso-making equipment and accessories. Smaller Starbucks
stores and kiosks typically sell a full line of coffee
beverages, a limited selection of whole bean coffees and a
smaller selection of coffee and beverage-related accessories.
Retail sales mix by product type for Company-operated stores:
Fiscal Year Ended
Beverages
Food
Coffee-making equipment and other merchandise
Whole bean coffees
Total
Starbucks
Card
The Starbucks Card program is designed to increase customer
loyalty and the frequency of store visits by cardholders.
Starbucks cards can be used in all Company-operated and most
licensed stores in North America, and in a growing number of
international markets. The cards have no expiration date and do
not have any inactivity fees.
Specialty
Operations
Specialty operations strive to develop the Company’s brands
outside the Company-operated retail store environment through a
number of channels. Starbucks strategy is to reach customers
where they work, travel, shop and dine by establishing
relationships with prominent third parties that share the
Company’s values and commitment to quality. These
relationships take various forms, including licensing
arrangements, foodservice accounts and other initiatives related
to the Company’s core businesses. In certain situations,
Starbucks has an equity ownership interest in licensee
operations. During fiscal 2009, specialty revenues (which
include royalties and fees from licensees, as well as product
sales derived from specialty operations) accounted for 16% of
total net revenues.
Licensing —
Retail stores
In its licensed retail store operations which include the
Starbucks and Seattle’s Best Coffee brands, the Company
leverages the expertise of its local partners and shares the
Company’s operating and store development experience.
Licensee partners provide improved, and at times the only,
access to desirable retail space. Most licensees are prominent
retailers with in-depth market knowledge and access. As part of
these arrangements, Starbucks receives royalties and license
fees and sells coffee, tea and related products for resale in
licensed locations. Product sales to and royalty and license fee
revenues from US and International licensed retail stores
accounted for 50% of specialty revenues in fiscal 2009.
Employees working in licensed retail locations are required to
follow Starbucks detailed store operating procedures and attend
training classes similar to those given to employees in
Company-operated stores.
Starbucks total licensed retail stores by region and specific
location at fiscal year end 2009:
Japan
South Korea
China
Taiwan
Philippines
Malaysia
Indonesia
New Zealand
During fiscal 2009, net licensed store openings included 35 in
the US and 305 internationally.
Licensing —
Packaged coffee and tea
Through a licensing relationship with Kraft Foods, Inc.
(“Kraft”), the Company sells a selection of Starbucks
and Seattle’s Best Coffee branded packaged coffees and
Tazo®
teas in grocery and warehouse club stores throughout the US.
Kraft manages all distribution, marketing, advertising and
promotion of these products.
The Company sells packaged coffee and tea internationally both
directly to warehouse club stores, such as Costco Wholesale
Corporation, and to grocery stores through a licensing
relationship with Kraft in Canada, the UK and other European
countries.
The Company’s coffees and teas are available in
approximately 39,000 grocery and warehouse club stores, with
33,500 in the US and 5,500 in International markets. Revenues
from this category comprised 23% of specialty revenues in fiscal
2009.
Licensing —
Branded products
The Company licenses the rights to produce and market Starbucks
branded products through several partnerships both domestically
and internationally. Significant licensing agreements include:
Collectively, the revenues from these branded products accounted
for 4% of specialty revenues in fiscal 2009.
Foodservice
The Company sells whole bean and ground coffees, including the
Starbucks and Seattle’s Best Coffee brands, as well as a
selection of premium
Tazo®
teas, VIA and other related products, to institutional
foodservice companies that service business and industry,
education, healthcare, office coffee distributors, hotels,
restaurants, airlines and other retailers. The majority of the
Company’s sales in this channel come through national
broadline distribution networks with SYSCO Corporation, US
Foodservicetm,
and other distributors. The Company’s total foodservice
operations had over 21,000 accounts, primarily in the US, at
fiscal year end 2009. Revenues from foodservice accounts
comprised 23% of total specialty revenues in fiscal 2009.
Product
Supply
Starbucks is committed to selling only the finest whole bean
coffees and coffee beverages. To ensure compliance with its
rigorous coffee standards, Starbucks controls its coffee
purchasing, roasting and packaging, and the global distribution
of coffee used in its operations. The Company purchases green
coffee beans from coffee-producing regions around the world and
custom roasts them to its exacting standards for its many blends
and single origin coffees.
The supply and price of coffee are subject to significant
volatility. Although most coffee trades in the commodity market,
high-altitude arabica 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
prices of green coffee through agreements establishing export
quotas or by restricting coffee supplies.
To help ensure sustainability and future supply of high-quality
green coffees and to reinforce the Company’s leadership
role in the coffee industry, Starbucks operates Farmer Support
Centers in Costa Rica and Rwanda. The Farmer Support Centers are
staffed with agronomists and sustainability experts who work
with coffee farming communities to promote best practices in
coffee production designed to improve both coffee quality and
yields.
The Company buys coffee using fixed-price and
price-to-be-fixed
purchase commitments, depending on market conditions, to secure
an adequate supply of quality green coffee. As of
September 27, 2009, the Company had $238 million of
purchase commitments which, together with existing inventory, is
expected to provide an adequate supply of green coffee through
fiscal 2010.
The Company depends upon its relationships with coffee
producers, outside trading companies and exporters for its
supply of green coffee. The Company believes, based on
relationships established with its suppliers, the risk of
non-delivery on such purchase commitments is remote.
In addition to coffee, the Company also purchases significant
amounts of dairy products, particularly fluid milk, to support
the needs of its Company-operated retail stores. The
Company’s highest volume of dairy purchases are in the US,
Canada and the UK. For these markets, Starbucks purchases
substantially all of its fluid milk requirements from six dairy
suppliers. The Company believes, based on relationships
established with these suppliers, the risk of non-delivery of
sufficient fluid milk to support these retail businesses is
remote.
Products other than whole bean coffees and coffee beverages sold
in Starbucks retail stores are obtained through a number of
different channels. Beverage ingredients other than coffee and
milk, including leaf teas and the Company’s selection of
ready-to-drink
beverages, are purchased from several specialty suppliers,
usually under long-term supply contracts. Food products, such as
fresh pastries, breakfast sandwiches and lunch items, are
purchased from national, regional and local sources.
Coffee-making equipment, such as drip and coffee press
coffeemakers, espresso machines and coffee grinders, are
generally purchased directly from their manufacturers.
Beverage-related accessories, including items bearing the
Company’s logos and trademarks, are produced and
distributed through contracts with a number of different
suppliers. The Company also purchases a broad range of paper and
plastic products, such as cups and cutlery, from several
companies to support the needs of its retail stores as well as
its manufacturing and distribution operations. The Company
believes, based on relationships established with these
suppliers and manufacturers, the risk of non-delivery is remote.
Competition
The Company’s primary competitors for coffee beverage sales
are quick-service restaurants and specialty coffee shops. In
almost all markets in which the Company does business, there are
numerous competitors in the specialty coffee beverage business,
and management expects this situation to continue. The Company
believes that its customers choose among specialty coffee
retailers primarily on the basis of product quality, service and
convenience, as well as price. Starbucks has been experiencing
greater direct competition from large competitors in the US
quick-service restaurant sector and continues to face
competition from well-established companies in many
International markets and in the US ready-to-drink coffee
beverage market.
The Company’s whole bean coffees and ground packaged
coffees compete directly against specialty coffees sold through
supermarkets, club stores and specialty retailers. The
Company’s whole bean coffees, its coffee beverages, and its
recently launched soluble coffee VIA, compete indirectly against
all other coffees on the market. Starbucks specialty operations
face significant competition from established wholesale and mail
order suppliers, some of whom have greater financial and
marketing resources than the Company.
Starbucks also faces competition from both restaurants and other
specialty retailers for prime retail locations and qualified
personnel to operate both new and existing stores.
Patents,
Trademarks, Copyrights and Domain Names
The Company owns and has applied to register numerous trademarks
and service marks in the US and in many additional countries
throughout the world. Some of the Company’s trademarks,
including Starbucks, the Starbucks logo, Frappuccino,
Seattle’s Best Coffee and Tazo are of material importance
to the Company. The duration of trademark registrations varies
from country to country. However, trademarks are generally valid
and may be renewed indefinitely as long as they are in use
and/or their
registrations are properly maintained.
The Company owns numerous copyrights for items such as product
packaging, promotional materials, in-store graphics and training
materials. The Company also holds patents on certain products,
systems and designs. In addition, the Company has registered and
maintains numerous Internet domain names, including
“Starbucks.com”, “Starbucks.net”, and
“Seattlesbest.com.”
Research
and Development
Starbucks research and development teams are responsible for the
technical development of food and beverage products and new
equipment. The Company spent approximately $6.5 million,
$7.2 million and $7.0 million during fiscal 2009, 2008
and 2007, respectively, on technical research and development
activities, in addition to customary product testing and product
and process improvements in all areas of its business.
Seasonality
and Quarterly Results
The Company’s business is subject to seasonal fluctuations,
including fluctuations resulting from the holiday season. The
Company’s cash flows from operations are considerably
higher in the first fiscal quarter than the remainder of the
year. This is largely driven by cash received as Starbucks Cards
are purchased and loaded during the holiday season. Since
revenues from the Starbucks Card are recognized upon redemption
and not when purchased, seasonal fluctuations on the
consolidated statements of earnings are much less pronounced.
Quarterly results are affected by the timing of the opening of
new stores and the closing of existing stores. For these
reasons, results for any quarter are not necessarily indicative
of the results that may be achieved for the full fiscal year.
Employees
The Company employed approximately 142,000 people worldwide
as of September 27, 2009. In the US, Starbucks employed
approximately 111,000 people, with 105,000 in
Company-operated retail stores and the remainder in the
Company’s administrative and regional offices, and store
development, roasting and warehousing operations. Approximately
31,000 employees were employed outside of the US, with
30,000 in Company-operated retail stores and the remainder in
the Company’s regional support facilities and roasting and
warehousing operations. The number of the Company’s
employees represented by unions is not significant. Starbucks
believes its current relations with its employees are good.
Global
Responsibility
Starbucks is committed to being a deeply responsible company in
the communities where it does business around the world. The
Company’s focus is on ethically sourcing high-quality
coffee, reducing its environmental impacts and contributing
positively to communities. Starbucks Global Responsibility
strategy and commitments are integral to the Company’s
overall business strategy. As a result, Starbucks believes it
delivers benefits to the Company and its stakeholders, including
employees, business partners, customers, suppliers,
shareholders, community members and others. For an overview of
Starbucks Global Responsibility strategy and commitments, please
visit www.starbucks.com.
Available
Information
Starbucks
10-K
reports, along with all other reports and amendments filed with
or furnished to the Securities and Exchange Commission
(“SEC”), are publicly available free of charge on the
Investor Relations section of Starbucks website at
http://investor.starbucks.com
or at www.sec.gov as soon as reasonably practicable after these
materials
are filed with or furnished to the SEC. The Company’s
corporate governance policies, code of ethics and Board
committee charters and policies are also posted on the Investor
Relations section of Starbucks website at
http://investor.starbucks.com.
The information on the Company’s website is not part of
this or any other report Starbucks files with, or furnishes to,
the SEC.
Starbucks is including this Cautionary Statement to make
applicable and take advantage of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 (the
“Act”) for forward-looking statements. This
10-K
includes forward-looking statements within the meaning of the
Act. Forward-looking statements can be identified by the fact
that they do not relate strictly to historical or current facts.
They often include words such as “believes,”
“expects,” “anticipates,”
“estimates,” “intends,” “plans,”
“seeks” or words of similar meaning, or future or
conditional verbs, such as “will,” “should,”
“could,” “may,” “aims,”
“intends,” or “projects.” A forward-looking
statement is neither a prediction nor a guarantee of future
events or circumstances, and those future events or
circumstances may not occur. Investors should not place undue
reliance on the forward-looking statements, which speak only as
of the date of this Report. These forward-looking statements are
all based on currently available operating, financial and
competitive information and are subject to various risks and
uncertainties. The Company’s actual future results and
trends may differ materially depending on a variety of factors,
including, but not limited to, the risks and uncertainties
discussed below.
If any of the risks and uncertainties described in the
cautionary factors described below actually occurs, Starbucks
business, financial condition and results of operations could be
materially and adversely affected. The factors listed below are
not exhaustive. Other sections of this
10-K include
additional factors that could materially and adversely impact
Starbucks business, financial condition and results of
operations. Moreover, Starbucks operates in a very competitive
and rapidly changing environment. New factors emerge from time
to time and it is not possible for management to predict the
impact of all these factors on Starbucks business, financial
condition or results of operation or the extent to which any
factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking
statements. Given these risks and uncertainties, investors
should not rely on forward-looking statements as a prediction of
actual results. Any or all of the forward-looking statements
contained in this
10-K and any
other public statement made by Starbucks or its management may
turn out to be incorrect. Starbucks expressly disclaims any
obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or
otherwise.
The Company’s operating results have been in the past and
will continue to be subject to a number of factors, many of
which are largely outside the Company’s control. Any one or
more of the factors set forth below could adversely impact
Starbucks business, financial condition
and/or
results of operations:
There is no assurance that the Company will be able to implement
important strategic initiatives in accordance with its
expectations, which may result in a material adverse impact on
the Company’s business and financial results. These
strategic initiatives are designed to drive long-term
shareholder value and improve Starbucks results of operations,
and include:
As a retailer that is dependent upon consumer discretionary
spending, the Company’s results of operations are sensitive
to changes in macro-economic conditions. Starbucks customers may
have less money for discretionary purchases as a result of job
losses, foreclosures, bankruptcies, reduced access to credit and
falling home prices. Any resulting decreases in customer traffic
or average value per transaction will negatively impact the
Company’s
financial performance as reduced revenues result in sales
de-leveraging which creates downward pressure on margins. There
is also a risk that if negative economic conditions persist for
a long period of time, consumers may make long-lasting changes
to their discretionary purchasing behavior, including less
frequent discretionary purchases on a more permanent basis.
The Company’s failure to meet market expectations going
forward, particularly with respect to operating margins,
earnings per share, comparable store sales, and net revenues,
will likely result in a decline
and/or
increased volatility in the market price of Starbucks stock.
The Company’s financial performance is highly dependent on
its US operating segment, which comprised approximately
three-quarters of consolidated total net revenues in fiscal
2009. The Company continued to experience negative traffic in
its US stores in fiscal 2009, which adversely affected the
operating results of the US segment and the Company as a whole.
Although the US segment’s operating results improved in
fiscal 2009 compared to fiscal 2008 due to the Company’s
restructuring efforts, if improvements in its financial
performance do not continue, the Company’s business and
financial results will continue to be adversely affected.
The Company’s future growth increasingly depends on the
growth and sustained profitability of its International
operating segment. Some or all of the Company’s
International market business units (“MBUs”), which
Starbucks generally defines by the countries or regions in which
they operate, may not be successful in their operations or in
achieving expected growth, which ultimately requires achieving
consistent, stable net revenues and earnings. The performance of
the International operating segment may be adversely affected by
economic downturns in one or more of the Company’s large
MBUs. Additionally, some factors that will be critical to the
success of International MBUs are different than those affecting
the Company’s US stores and licensees. Tastes naturally
vary by region, and consumers in new international markets into
which Starbucks and its licensees expand may not embrace
Starbucks products to the same extent as consumers in the
Company’s existing markets. Occupancy costs and store
operating expenses are also sometimes higher internationally
than in the US due to higher rents for prime store locations or
costs of compliance with country-specific regulatory
requirements. Because many of the Company’s International
operations are in an early phase of development, operating
expenses as a percentage of related revenues are often higher
compared to US operations. The Company’s International
operations are also subject to additional inherent risks of
conducting business abroad, such as:
Moreover, many of the foregoing risks are particularly acute in
developing countries, which are important to the Company’s
long-term growth prospects.
Starbucks Canada, Japan and UK markets account for a significant
portion of the net revenues and profit contribution of the
Company’s International operating segment. Any significant
decline in the financial performance of one of these key markets
may have a material adverse impact on the results of operations
of the entire International operating segment, if not partially
or fully offset by positive financial performance from the other
two major markets.
A description of the general competitive conditions in which
Starbucks operates appears under “Competition” in
Item 1. In the US, the continued focus by one or more large
competitors in the quick-service restaurant sector on selling
high-quality specialty coffee beverages at a low cost has
attracted Starbucks customers and could, if the numbers become
large enough, adversely affect the Company’s sales and
results of operations. Similarly, continued competition from
well-established competitors in international markets could
hinder growth and adversely affect the Company’s sales and
results of operations in those markets. The Company faces
increased competition from larger well-known competitors which
have greater resources. Increasing competition from the US
packaged coffee and tea and
ready-to-drink
coffee beverage markets could adversely affect the profitability
of the CPG segment and the Company’s results of operations.
Given its premium brand, Starbucks may be impacted more severely
than its competitors by customers trading down to lower priced
coffee beverages and related products.
A health pandemic is a disease outbreak that spreads rapidly and
widely by infection and affects many individuals in an area or
population at the same time. If a regional or global health
pandemic were to occur, depending upon its duration and
severity, the Company’s business could be severely
affected. Starbucks has positioned itself as a third place
between home and work where people can gather together for human
connection. Customers might avoid public gathering places in the
event of a health pandemic, and local, regional or national
governments might limit or ban public gatherings to halt or
delay the spread of disease. A regional or global health
pandemic might also adversely impact the Company’s business
by disrupting or delaying production and delivery of materials
and products in its supply chain and by causing staffing
shortages in its stores. The impact of a health pandemic on
Starbucks might be disproportionately greater than on other
companies that depend less on the gathering of people together
for the sale, use or license of their products and services.
Starbucks believes it has built an excellent reputation globally
for the quality of its products, for delivery of a consistently
positive consumer experience and for its corporate social
responsibility programs. The Starbucks brand has been highly
rated in several global brand value studies. To be successful in
the future, particularly outside of US, where the Starbucks
brand is less well-known, management believes it must preserve,
grow and leverage the value of the Starbucks brand across its
sales channels. Brand value is based in part on consumer
perceptions as to a variety of subjective qualities. Even
isolated business incidents that erode consumer trust,
particularly if the incidents
receive considerable publicity or result in litigation, can
significantly reduce brand value. Consumer demand for the
Company’s products and its brand equity could diminish
significantly if Starbucks fails to preserve the quality of its
products, is perceived to act in an unethical or socially
irresponsible manner or fails to deliver a consistently positive
consumer experience in each of its markets.
The Company’s business strategy, including its plans for
new stores, foodservice, branded products and other initiatives,
relies significantly on a variety of licensee and partnership
relationships, particularly in its International markets.
Licensees are often authorized to use the Starbucks logo and
provide Starbucks-branded beverages, food and other products
directly to customers. The Company provides training and support
to, and monitors the operations of, these business partners, but
the product quality and service they deliver to Starbucks
customers may be diminished by any number of factors beyond the
Company’s control, including financial pressures.
Management believes customers expect the same quality of
products and service from the Company’s licensees as they
do from Starbucks and the Company strives to ensure customers
have the same experience whether they visit a Company-operated
or licensed store. Any shortcoming of a Starbucks business
partner, particularly an issue affecting the quality of the
service experience or the safety of beverages or food, may be
attributed by customers to Starbucks, thus damaging the
Company’s reputation and brand value and potentially
affecting the results of operations.
The Company’s products and in particular, its coffee and
tea products, are sourced from a wide variety of domestic and
international vendors. The Company relies on international
vendors to provide high quality product that comply with
applicable laws. The Company’s ability to find qualified
vendors who meet our standards and supply products in a timely
and efficient manner is a significant challenge, especially with
respect to goods sourced from outside the US. These issues could
negatively impact the Company’s business and profitability.
The Company’s success depends substantially on the
contributions and abilities of key executives and other
employees, and on its ability to recruit and retain high quality
employees to work in and manage Starbucks stores. Starbucks must
continue to recruit, retain and motivate management and other
employees sufficient to maintain its current business and
support its projected growth. A loss of key employees or a
significant shortage of high quality store employees could
jeopardize the Company’s ability to meet its financial
targets.
Effectively managing growth can be challenging, particularly as
Starbucks expands into new markets internationally, where it
must balance the need for flexibility and a degree of autonomy
for local management against the need for consistency with the
Company’s goals, philosophy and standards. Growth can make
it increasingly difficult to ensure a consistent supply of high
quality raw materials, to locate and hire sufficient numbers of
key employees to meet the Company’s financial targets, to
maintain an effective system of internal controls for a globally
dispersed enterprise and to train employees worldwide to deliver
a consistently high quality product and customer experience.
Some Starbucks products contain caffeine, dairy products, sugar
and other active compounds, the health effects of which are the
subject of increasing public scrutiny, including the suggestion
that excessive consumption of caffeine, dairy products, sugar
and other active compounds can lead to a variety of adverse
health effects. There has also been greater public awareness
that sedentary lifestyles, combined with excessive consumption
of high-calorie foods, have led to a rapidly rising rate of
obesity. Particularly in the US, there is increasing consumer
awareness of health
risks, including obesity, due in part to increasing publicity
and attention from health organizations, as well as increased
consumer litigation based on alleged adverse health impacts of
consumption of various food products. While Starbucks has a
variety of healthier choice beverage and food items, including
items that are low in caffeine and calories, an unfavorable
report on the health effects of caffeine or other compounds
present in the Company’s products, or negative publicity or
litigation arising from other health risks such as obesity,
could significantly reduce the demand for the Company’s
beverages and food products.
Similarly, instances or reports, whether true or not, of unclean
water supply, food-borne illnesses and food tampering have in
the past severely injured the reputations of companies in the
food processing, grocery and quick-service restaurant sectors
and could in the future affect the Company as well. Any report
linking Starbucks to the use of unclean water, food-borne
illnesses or food tampering could damage its brand value,
immediately and severely hurt sales of its beverages and food
products, and possibly lead to product liability claims. Clean
water is critical to the preparation of specialty coffee
beverages. The Company’s ability to ensure a clean water
supply to its stores is limited, particularly in some
International locations. If customers become ill from food-borne
illnesses, the Company could also be forced to temporarily close
some stores. In addition, instances of food-borne illnesses or
food tampering, even those occurring solely at the restaurants
or stores of competitors, could, by resulting in negative
publicity about the foodservice industry, adversely affect
Starbucks sales on a regional or global basis. A decrease in
customer traffic as a result of these health concerns or
negative publicity, or as a result of a temporary closure of any
of the Company’s stores, could materially harm the
Company’s business and results of operations.
Any reduction in cash flow relative to the level of the
Company’s financial obligations would result in an increase
in leverage. Any increase in leverage could lead to
deterioration in Starbucks credit ratings, which could limit the
availability of additional financing and increase its cost of
obtaining financing. In addition, an increase in leverage could
raise the likelihood of a financial covenant breach which in
turn could limit the Company’s access to existing funding
under its credit facility.
The Company’s ability to satisfy its operating lease
obligations and make payments of principal and interest on its
indebtedness depends on its future performance. Should the
Company experience deterioration in operating performance, it
will have less cash flow available to meet these obligations. In
addition, if such deterioration were to lead to the closure of
underperforming stores, the Company would need to fund the costs
of terminating store leases. If Starbucks is unable to generate
sufficient cash flow from operations in the future to satisfy
these financial obligations, it may be required to, among other
things:
Such measures might not be sufficient to enable Starbucks to
satisfy its financial obligations. In addition, any such
financing, refinancing or sale of assets might not be available
on economically favorable terms.
Starbucks relies heavily on information technology systems
across its operations, including for management of its supply
chain,
point-of-sale
processing in its stores, and various other processes and
transactions. The Company’s ability to effectively manage
its business and coordinate the production, distribution and
sale of its products depends significantly on the reliability
and capacity of these systems. The failure of these systems to
operate effectively, problems with transitioning to upgraded or
replacement systems, or a breach in security of these systems
could
cause delays in product sales and reduced efficiency of the
Company’s operations, and significant capital investments
could be required to remediate the problem.
Starbucks policies and procedures are designed to comply with
all applicable laws and regulations, including those imposed by
the SEC, NASDAQ, and foreign countries, as well as applicable
labor laws. Additional legal and regulatory requirements,
together with the fact that foreign laws occasionally conflict
with domestic laws, increase the complexity of the regulatory
environment in which the Company operates and the related cost
of compliance. Failure to comply with the various laws and
regulations may result in damage to Starbucks reputation, civil
and criminal liability, fines and penalties, increased cost of
regulatory compliance and restatements of the Company’s
financial statements.
None.
Properties used by Starbucks in connection with its roasting and
distribution operations:
Location
Purpose
Kent, WA
Renton, WA
York County, PA
Carson Valley, NV
Sandy Run, SC
Portland, OR
Basildon, United Kingdom
Amsterdam, Netherlands
The Company leases approximately 1.0 million square feet of
office space in Seattle, Washington for corporate administrative
purposes. Also in Seattle, Washington, the Company owns a
205,000 square foot office building (previously occupied by
the Company, but now leased to other parties) and an adjacent
285,000 square foot office building, which is currently
being marketed for lease.
As of September 27, 2009, Starbucks had more than 8,800
Company-operated retail stores, almost all of which are leased.
The Company also leases space in approximately 130 additional
locations for regional, district and other administrative
offices, training facilities and storage, not including certain
seasonal retail storage locations.
See discussion of Legal Proceedings in Note 17 to the
consolidated financial statements included in Item 8 of
this Report.
No matters were submitted to a vote of security holders during
the fourth fiscal quarter of 2009.
Executive
officers of the registrant
Executive officers of the Company:
Name
Position
Howard Schultz
Cliff Burrows
Martin Coles
John Culver
Michelle Gass
Arthur Rubinfeld
Annie Young-Scrivner
Troy Alstead
Paula E. Boggs
Peter D. Gibbons
Kalen Holmes
Olden Lee
Howard Schultz is the founder of Starbucks and serves as
the Company’s chairman, president and chief executive
officer. Mr. Schultz has served as chairman of the board
since the Company’s inception in 1985 and he resumed his
role as president and chief executive officer in January 2008.
From June 2000 to February 2005, Mr. Schultz held the title
of chief global strategist. From November 1985 to June 2000, he
served as chief executive officer. From November 1985 to June
1994, Mr. Schultz also served as president.
Cliff Burrows joined Starbucks in April 2001 and has
served as president, Starbucks Coffee US since March 2008.
Mr. Burrows served as president, Europe, Middle East and
Africa (EMEA) from April 2006 to March 2008. He served as vice
president and managing director, UK prior to April 2006. Prior
to joining Starbucks, Mr. Burrows served in various
management positions with Habitat Designs Limited, a furniture
and housewares retailer.
Martin P. Coles joined Starbucks in April 2004 as
president, Starbucks Coffee International, and, in July 2008,
reassumed this role, after having served as chief operating
officer from September 2007 to July 2008. Prior to joining
Starbucks, Mr. Coles served as an executive vice president
of Reebok International, Ltd. a sports and fitness products
company, from December 2001 to February 2004. Prior to joining
Reebok International, Ltd., Mr. Coles held several
executive level management sales and operations positions with
NIKE Inc., Letsbuyit.com and Gateway, Inc.
John Culver joined Starbucks in August 2002 and has
served as president, Global Consumer Products and Foodservice
since September 2009. Mr. Culver served as executive vice
president; president, Global Consumer Products, Foodservice and
Seattle’s Best Coffee from February 2009 to September 2009.
He previously served as senior vice president; president,
Starbucks Coffee Asia Pacific from January 2007 to February
2009, and vice president; general manager, Foodservice from
August 2002 to January 2007.
Michelle Gass joined Starbucks in 1996 and has served as
the Company’s president, Seattle’s Best Coffee since
September 2009. Ms. Gass served as senior vice president,
Marketing and Category from July 2008 to November 2008, and then
as executive vice president, Marketing and Category from
December 2008 to September 2009. Ms. Gass previously served
as senior vice president, Global Strategy, Office of the ceo
from January 2008 to July 2008, senior vice president, Global
Product and Brand from August 2007 to January 2008, senior vice
president, and U.S. Category Management from May 2004 to
August 2007. Ms. Gass served in a number of other positions
with Starbucks prior to 2004.
Arthur Rubinfeld rejoined Starbucks in February 2008 as
president, Global Development. Mr. Rubinfeld also serves as
president of AIRVISION LLC, an advisory firm specializing in
brand positioning that he founded in June 2002. From March 2006
to February 2008, Mr. Rubinfeld served as executive vice
president, Corporate Strategy and chief development officer at
Potbelly Sandwich Works. Prior to 2002, Mr. Rubinfeld held
several positions in Store Development at Starbucks.
Annie Young-Scrivner joined Starbucks in September 2009
as chief marketing officer. Prior to joining Starbucks,
Ms. Young-Scrivner served as Chief Marketing Officer and
Vice President of Sales for Quaker Foods and Snacks, a division
of PepsiCo, Inc. From October 2006 to November 2008, she served
as Region President of PepsiCo Foods for Greater China. From
2005 to 2006, Ms. Young-Scrivner served as Vice President
of Sales for PepsiCo Beverages in Greater China. She also served
in a number of other leadership roles at PepsiCo prior to 2005.
Troy Alstead joined Starbucks in 1992 and has served as
executive vice president, chief financial officer and chief
administrative officer since November 2008. Mr. Alstead
previously served as chief operating officer, Starbucks Greater
China from April 2008 to October 2008, senior vice president,
Global Finance and Business Operations from August 2007 to April
2008, and senior vice president, Corporate Finance from
September 2004 to August 2007. Mr. Alstead served in a
number of other senior positions with Starbucks prior to 2004.
Paula E. Boggs joined Starbucks in September 2002 as
executive vice president, general counsel and secretary. Prior
to joining Starbucks, Ms. Boggs served as vice president,
legal, for products, operations and information technology at
Dell Computer Corporation from 1997 to 2002. From 1995 to 1997,
Ms. Boggs was a partner with the law firm of Preston
Gates & Ellis (now K&L Gates). Ms. Boggs
served in several roles at the Pentagon, White House and US
Department of Justice between 1984 and 1995.
Peter D. Gibbons joined Starbucks in February 2007 and
has served as executive vice president, Global Supply Chain
Operations since July 2008. From February 2007 to July 2008,
Mr. Gibbons served as senior vice president, Global
Manufacturing Operations. From March 1999 to February 2007,
Mr. Gibbons was executive vice president, Supply Chain, of
The Glidden Company, a subsidiary of ICI Americas, Inc.
Kalen Holmes joined Starbucks in November 2009 as
executive vice president, Partner Resources. Prior to joining
Starbucks, Ms. Holmes served as HR General Manager for the
Entertainment and Devices division at Microsoft Corporation, a
worldwide provider of software, services and solutions, from
December 2007 to November 2009. From December 2005 to December
2007, Ms. Holmes was HR General Manager for
Microsoft’s Server and Tools Division. From September 2003
to December 2005, she served as HR General Manager for
Microsoft’s Corporate Staff business unit. Prior to 2003,
Ms. Holmes served as an HR leader at companies such as
Bristol-Myers Squibb Company, PepsiCo, Inc., Enron Corporation,
pcOrder.com, Inc., and Trilogy Inc., managing multiple
geographies and diverse business units.
Olden Lee has served as interim executive vice president,
Partner Resources since April 2009. Mr. Lee has been a
Starbucks director since June 2003. Mr. Lee undertook the
role of interim head of Partner Resources while the Company
searched for an executive vice president, Partner Resources.
Mr. Lee will continue with the Company on an interim basis
to assist Ms. Holmes and ensure a smooth transition. Prior
to serving in his current role, Mr. Lee worked with
PepsiCo, Inc. for 28 years in a variety of positions,
including serving as senior vice president of human resources of
its Taco Bell division and senior vice president and chief
personnel officer of its KFC division.
There are no family relationships among any directors or
executive officers of the Company.
SHAREHOLDER
INFORMATION
MARKET
INFORMATION AND DIVIDEND POLICY
The Company’s common stock is traded on NASDAQ, under the
symbol “SBUX.”
Quarterly high and low closing sale prices per share of the
Company’s common stock as reported by NASDAQ for each
quarter during the last two fiscal years:
September 27, 2009:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
September 28, 2008:
As of November 13, 2009, the Company had approximately
21,600 shareholders of record. This does not include
persons whose stock is in nominee or “street name”
accounts through brokers.
Starbucks has never paid any dividends on its common stock. Any
future decision to pay cash dividends will be at the discretion
of the Company’s Board of Directors and will be dependent
on the Company’s operating performance, financial
condition, capital expenditure requirements, and other such
factors that the Board of Directors considers relevant.
ISSUER
PURCHASES OF EQUITY SECURITIES
The following table provides information regarding repurchases
by the Company of its common stock during the 13-week period
ended September 27, 2009:
Period(1)
June 29, 2009 — July 26, 2009
July 27, 2009 — August 23, 2009
August 24, 2009 — September 27, 2009
Total
Performance
Comparison Graph
The following graph depicts the Company’s total return to
shareholders from October 3, 2004 through
September 27, 2009, relative to the performance of the
Standard & Poor’s 500 Index, the NASDAQ Composite
Index, and the Standard & Poor’s 500 Consumer
Discretionary Sector, a peer group that includes Starbucks. All
indices shown in the graph have been reset to a base of 100 as
of October 3, 2004, and assume an investment of $100 on
that date and the reinvestment of dividends paid since that
date. Starbucks has never paid a dividend on its common stock.
The stock price performance shown in the graph is not
necessarily indicative of future price performance.
Starbucks Corporation
S&P 500
NASDAQ Composite
S&P Consumer Discretionary
In
millions, except earnings per share and store
information
The following selected financial data are derived from the
consolidated financial statements of the Company. The data below
should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations,” “Risk Factors,” and the
Company’s consolidated financial statements and notes.
As of and for the Fiscal Year
Ended(1)
RESULTS OF OPERATIONS
Net revenues:
Company-operated retail
Specialty:
Licensing
Foodservice and other
Total specialty
Operating
income(2)
Earnings before cumulative effect of change in accounting
principle
Cumulative effect of accounting change for asset retirement
obligations, net of taxes
Net earnings
Earnings per common share before cumulative effect of change in
accounting principle — diluted (“EPS”)
Cumulative effect of accounting change for asset retirement
obligations, net of taxes — per common share
EPS — diluted
Net cash provided by operating activities
Capital expenditures (additions to property, plant and equipment)
BALANCE SHEET
Total assets
Short-term borrowings
Long-term debt (including current portion)
Shareholders’ equity
STORE INFORMATION
Percentage change in comparable store
sales(3)
United States
International
Consolidated
Net stores opened (closed) during the year:
Company — operated stores
Licensed stores
Stores open at year end:
Company-operated stores
Starbucks Corporation’s fiscal year ends on the Sunday
closest to September 30. The fiscal years ended on
September 27, 2009, September 28, 2008 and
September 30, 2007 all included 52 weeks. Starbucks
2010 fiscal year will include 53 weeks, with the
53rd week
falling in its fourth fiscal quarter. All references to store
counts, including data for new store openings, are reported net
of related store closures, unless otherwise noted.
Overview
Fiscal 2009 was a challenging year for Starbucks. The Company
was confronted with extraordinary economic and operating
challenges in addition to facing an increasingly competitive
landscape. Although the global economy has shown some signs of
improvement recently, management recognizes the difficult
economic situation that many consumers are still facing and does
not expect that to significantly change over the course of
fiscal 2010. This challenging economic environment has strained
consumer discretionary spending in the US and internationally,
which in turn has impacted Company revenues, comparable store
sales, operating income and operating margins. Starbucks
responded to this difficult environment with a more disciplined
focus on operations and the introduction of initiatives to
permanently improve the Company’s cost structure. The
result is an underlying business model that is less reliant on
high revenue growth to drive profitability, and that still
preserves the fundamental strengths and values of the Starbucks
brand. The primary initiatives in this strategy include
rationalizing the global Company-operated store portfolio,
right-sizing the non-retail support organization, and reducing
the Company’s cost structure, while renewing the focus on
service excellence in the stores and delivering relevant
innovation.
Starbucks actions to rationalize its global store portfolio have
included the planned closure of nearly 1,000 Company-operated
stores globally. At the end of fiscal 2009, nearly all of the
approximately 800 US Company-operated stores, 61 stores in
Australia and 41 Company-operated stores in other International
markets had been closed. The remaining International store
closures are expected to be completed by the end of fiscal 2010.
Initiatives targeting reductions in the Company’s cost
structure in fiscal 2009 proceeded as planned, with full-year
costs of $580 million removed from the Company’s cost
structure. These targeted cost reductions and associated
operational efficiency efforts, along with a more profitable
Company-operated store base, have moved Starbucks toward a more
sustainable business model, while preserving the fundamental
strengths and values of the brand. The operational efficiency
efforts are primarily focused on store level execution and
include improved staffing models and better management of waste
in coffee, dairy and food.
Starbucks actions to improve the customer experience have
resulted in a more focused effort toward in-store offerings, and
simplifying the demands on store partners (employees), while
concurrently raising already-high standards for beverage and
food offerings, customer service and the overall in-store
experience. The effects of these efforts have already been seen
in the Company’s improved customer satisfaction scores.
Starbucks has a renewed focus on relevant product innovation and
the disciplined expansion and leveraging of its existing
products and sales channels. For example, Starbucks
VIAtm
Ready Brew coffee was launched in fiscal 2009 and is designed to
capture a significant share of both the $21 billion global
instant coffee category and the single-serve market. The Company
intends to drive sales within the retail store base and CPG
channels, both in the US and internationally.
The Company continues to maintain a solid financial foundation,
with no short term debt outstanding at the end of fiscal 2009
and with cash and liquid investments totaling more than
$650 million. This solid financial position and continued
strong cash flow generation have provided Starbucks with the
financial flexibility to implement its restructuring efforts as
well as make ongoing investments in its core business.
Fiscal
2010 — The View Ahead
For fiscal 2010, the Company expects revenues to grow in the
low-to-mid
single digits compared to fiscal 2009, driven by modestly
positive comparable store sales, a
53rd
fiscal week, and approximately 100 planned net new
stores in the US and approximately 200 net new stores in
International markets. Both the US and International net new
additions are expected to be primarily licensed stores.
Given these revenue expectations, combined with the
Company’s reduced cost structure, in-store operating
efficiencies, and lower restructuring charges, Starbucks
currently expects significant improvement in its consolidated
operating margin in fiscal 2010. Operating cash flow for fiscal
2010 is currently expected to reach approximately
$1.4 billion and capital expenditures are expected to range
from $500 million to $550 million.
Operating
Segment Overview
Starbucks has three reportable operating segments: US,
International and CPG. The US foodservice business, which was
previously reported in the US segment, is now reported in the
CPG segment, as a result of internal management realignments
within the US and CPG businesses. Segment information for all
prior periods presented has been revised to reflect this change.
The US and International segments both include Company-operated
retail stores and licensed retail stores. Licensed stores
frequently have a higher operating margin than Company-operated
stores. Under the licensed model, Starbucks receives a reduced
share of the total store revenues, but this is more than offset
by the reduction in its share of costs as these are primarily
borne by the licensee. The International segment has a higher
relative share of licensed stores versus Company-operated
compared to the US segment; however, the US segment has been
operating significantly longer than the International segment
and has developed deeper awareness of, and attachment to, the
Starbucks brand and stores among its customer base. As a result,
the more mature US segment has significantly more stores, and
higher total revenues than the International segment. Average
sales per store are also higher in the US due to various factors
including length of time in market and local income levels.
Further, certain market costs, particularly occupancy costs, are
lower in the US segment compared to the average for the
International segment, which comprises a more diverse group of
operations. As a result of the relative strength of the brand in
the US segment, the number of stores, the higher unit volumes,
and the lower market costs, the US segment, despite its higher
relative percentage of Company-operated stores, has a higher
operating margin, excluding restructuring costs, than the
less-developed International segment.
The Company’s International store base continues to expand
and Starbucks has been focusing on achieving sustainable growth
from established international markets while at the same time
investing in emerging markets, such as China, Brazil and Russia.
The Company’s newer international markets require a more
extensive support organization, relative to the current levels
of revenue and operating income.
The CPG segment includes packaged coffee and tea, and other
branded products operations worldwide, and the US foodservice
business. For the packaged coffee and tea and branded products,
Starbucks operates primarily through licensing arrangements and
joint ventures with large consumer products business partners,
most significantly with Kraft for distribution of packaged
coffees and teas, and The North American Coffee Partnership with
the Pepsi-Cola Company for manufacturing and distribution of
ready-to-drink
beverages. This operating model allows the CPG segment to
leverage the business partners’ existing infrastructures
and to extend the Starbucks brand in an efficient way. Most of
the customer revenues from the packaged coffee and
ready-to-drink
products are recognized as revenues by the licensed or joint
venture business partner, not by the CPG segment. Royalties and
payments from our licensing agreements are recorded under
licensing revenue, and the proportionate share of the results of
the Company’s joint ventures are included, on a net basis,
in Income from equity investees on the consolidated statements
of earnings. The US foodservice business sells coffee and other
related products to institutional foodservice companies with the
majority of its sales through national broadline distribution
networks. The CPG segment reflects relatively lower revenues, a
modest cost structure, and a resulting higher operating margin,
compared to the Company’s other two reporting segments,
which consist primarily of retail stores.
Expenses pertaining to corporate administrative functions that
support the operating segments but are not specifically
attributable to or managed by any segment are not included in
the reported financial results of the operating segments. These
unallocated corporate expenses include certain general and
administrative expenses, related depreciation and amortization
expenses, corporate restructuring charges and amounts included
in Net interest income and other and Interest expense on the
consolidated statements of earnings.
Acquisitions
See Note 19 to the consolidated financial statements in
this 10-K.
RESULTS
OF OPERATIONS — FISCAL 2009 COMPARED TO FISCAL
2008
Financial
Highlights
Consolidated results of operations (in millions):
Total net revenues
Company-operated retail revenues decreased from fiscal 2008,
primarily attributable to a 6% decline in comparable store
sales, comprised of a 4% decline in transactions and a 2%
decline in the average value per transaction. Foreign currency
translation also contributed to the decline with the effects of
a stronger US dollar relative to the British pound and Canadian
dollar. The weakness in consolidated comparable store sales was
driven by the US segment, with a comparable store sales decline
of 6% for the year. The International segment experienced a 2%
decline in comparable store sales.
The Company derived 16% of total net revenues from channels
outside the Company-operated retail stores, collectively known
as specialty operations. The decrease in Foodservice and other
revenue was primarily due to the softness in the hospitality
industry.
Cost of sales including occupancy costs
Store operating expenses
Other operating expenses
Depreciation and amortization expenses
General and administrative expenses
Restructuring charges
Total operating expenses
Income from equity investees
Operating income
Supplemental ratios as a % of related revenues:
Cost of sales including occupancy costs decreased as a
percentage of revenues primarily due to the implementation of
in-store operational efficiencies designed to reduce product
waste, and due to lower dairy costs in the US, partially offset
by higher coffee costs.
Store operating expenses as a percentage of Company-operated
retail revenues decreased primarily due to reduced headcount and
spending in the regional support organization as a result of
Starbucks restructuring efforts, and the effect of initiatives
to improve store labor efficiencies.
Restructuring charges include lease exit and related costs
associated with the actions to rationalize the Company’s
global store portfolio and reduce the global cost structure. See
Note 2 to the consolidated financial statements for further
discussion.
Operating margin expansion was primarily due to the improved
labor efficiency and reduced product waste in Company-operated
stores, partially offset by increased restructuring charges.
Operating income
Interest income and other, net
Interest expense
Earnings before income taxes
Income taxes
Net earnings
Effective tax rate
Net interest income and other increased due primarily to the
impact of foreign currency fluctuations on certain balance sheet
amounts. Also contributing to the increase were lower unrealized
market value losses on the Company’s trading securities
portfolio compared to fiscal 2008. As described in more detail
in Note 3 to the consolidated financial statements, the
trading securities approximate a portion of the Company’s
liability under its Management Deferred Compensation Plan
(“MDCP”). The MDCP liability also increases and
decreases with changes in investment performance, with this
offsetting impact recorded in General and administrative
expenses on the consolidated statements of earnings. Interest
expense decreased due to a lower average balance of short term
borrowings and lower average short term borrowing rates in
fiscal 2009 compared to the prior year. At the end of fiscal
2009, the Company had no short term debt.
The relatively low 2009 effective tax rate was primarily due to
a tax benefit recognized for retroactive tax credits and an
income tax credit related to the settlement of an employment tax
audit in fiscal 2009. As a result of the audit settlement,
approximately $17 million of expense was recorded in Store
operating expenses, with an offsetting income tax credit and no
impact to net earnings. The effective tax rate for fiscal 2010
is expected to be in the range of 34% to 35%.
Operating
Segments
Segment information is prepared on the same basis that the
Company’s management reviews financial information for
operational decision making purposes. Starbucks has three
reportable operating segments: US, International and CPG.
Unallocated Corporate includes expenses pertaining to corporate
administrative functions that support the operating segments but
are not specifically attributable to or managed by any segment
and are not included in the reported financial results of the
operating segments. Operating income represents earnings before
Net interest income and other, Interest expense and Income taxes.
The US foodservice business, which was previously reported in
the US segment, is now reported in the CPG segment, as a result
of internal management realignments within the US and CPG
businesses. Segment information for all prior periods presented
has been revised to reflect this change.
The following tables summarize the Company’s results of
operations by segment for fiscal 2009 and 2008 (in
millions).
United
States
The US operating segment sells coffee and other beverages,
complementary food, whole bean coffees, and coffee brewing
equipment and merchandise primarily through Company-operated
retail stores. Specialty operations within the US include
licensed retail stores and other initiatives related to the
Company’s core business.
Total specialty
Company-operated retail revenues decreased year over year
primarily due to a 6% decrease in comparable store sales,
comprised of a 4% decrease in transactions, and a 2% decrease in
average value per transaction.
Total operating expenses
Income (loss) from equity investees
Operating margin expanded primarily due to lower store operating
expenses, lower cost of sales including occupancy costs, and
lower other operating expenses as a percentage of total
revenues. This improvement was primarily due to operational
changes designed to improve labor efficiency and reduce product
waste in Company-operated stores, and to lower non-store support
costs. Partially offsetting the favorability were higher
restructuring charges during the year. The Company incurred
higher lease exit and related costs due to the higher number of
actual store closures compared to the prior year period.
International
The International operating segment sells coffee and other
beverages, complementary food, whole bean coffees, and coffee
brewing equipment and merchandise through Company-operated
retail stores in Canada, the UK and several other markets.
Specialty operations primarily include retail store licensing
operations in nearly 40 other countries and foodservice
accounts, primarily in Canada and the UK. The Company’s
International store base continues to expand and Starbucks
expects to achieve a growing contribution from established areas
of the business while at the same time investing in emerging
markets and channels. Many of the Company’s International
operations are in early stages of development that require a
more extensive support organization, relative to the current
levels of revenue and operating income, than in the US. This
continuing investment is part of the Company’s long-term,
balanced plan for profitable growth.
Licensing
Foodservice and other
Total specialty
Company-operated retail revenues decreased primarily due to
unfavorable foreign currency exchange rates, particularly for
the British pound and Canadian dollar. Partially offsetting the
decrease were the net new store openings of 89 Company-operated
stores.
Specialty revenues decreased primarily due to continued softness
in the hospitality industry and unfavorable foreign currency
exchange rates.
Operating margin decreased primarily due to higher restructuring
charges and higher store operating expenses as a percentage of
total revenues. Restructuring charges of $27.0 million
recognized during the year had a 50 basis point impact on
operating margin compared to the prior year, due to the
previously announced store closures. Higher store operating
expenses as of percentage of Company-operated retail revenues
were driven by an increase in store impairment charges and a
decline in sales leverage impacting salaries and benefits.
Partially offsetting the decrease in operating margin were lower
other operating expenses due to headcount reductions in the
non-store support functions.
Global
Consumer Products Group
CPG’s licensing revenue is from selling a selection of
whole bean and ground coffees and premium
Tazo®
teas through licensing arrangements in US and international
markets, and also producing and selling a variety of
ready-to-drink
beverages through its joint ventures and marketing and
distribution agreements. The foodservice revenue is from the US
foodservice business, which sells coffee and other related
products to institutional foodservice companies with the
majority of its sales through national broadline distribution
networks.
Foodservice
Total specialty
Total net revenues increased primarily due to higher revenues
from packaged coffees, partially offset by lower foodservice
revenues caused by continued softness in the hospitality
industry.
Cost of sales
Growth of operating margin was primarily due to lower other
operating expenses in the foodservice business due to lower
compensation costs and lower marketing expenses.
Unallocated
Corporate
Unallocated corporate expenses pertain to corporate
administrative functions that support, but are not specifically
attributable to the Company’s operating segments.
Operating loss
Total unallocated corporate expenses increased primarily as a
result of restructuring charges incurred for corporate office
facilities that were no longer occupied by the Company due to
the reduction in positions within the non-store support
organization.
RESULTS
OF OPERATIONS — FISCAL 2008 COMPARED TO FISCAL
2007
Consolidated
results of operations (in millions):
Net revenues for the fiscal year ended 2008 increased due to
growth in both Company-operated retail revenues and specialty
operations.
During fiscal 2008, Starbucks derived 84% of total net revenues
from its Company-operated retail stores. Company-operated retail
revenues increased, primarily attributable to the opening of 681
new Company-operated retail stores in fiscal 2008, offset by
negative 3% comparable store sales for the same period. Revenue
growth was slower than in previous years due to a combination of
declining comparable store sales and a decrease in the number of
net new stores opened during fiscal 2008. The weakness in
consolidated comparable store sales was driven by the US
segment, which posted a comparable store sales decline of 5% for
the year. Partially offsetting this was 2% comparable store
sales growth in the International segment. Within fiscal 2008,
consolidated quarterly revenue growth decelerated each quarter
and comparable store sales declined each quarter, reflecting the
ongoing challenging economic conditions in the US.
The Company derived the remaining 16% of total net revenues from
specialty operations. Licensing revenues increased primarily due
to higher product sales and royalty revenues from the opening of
988 new licensed retail stores in fiscal 2008. The increase in
Foodservice and other revenues was primarily driven by growth in
new and existing accounts in the foodservice business in the US.
Operating income
Since many of the Company’s operating expenses are fixed in
nature, the softness in US revenues during fiscal 2008 impacted
nearly all consolidated and US segment operating expense line
items when viewed as a percentage of sales, and pressured
operating margins.
Cost of sales including occupancy costs increased primarily due
to higher distribution costs and higher rent expenses as a
percentage of revenues. Store operating expenses as a percentage
of Company-operated retail revenues increased primarily due to
higher payroll expenditures as a percentage of revenues coupled
with impairment provisions in the US business, primarily driven
by the slowdown in projected store openings. Depreciation and
amortization expenses increased primarily due to the opening of
681 new Company-operated retail stores in fiscal 2008. General
and administrative expenses decreased primarily due to lower
payroll-related expenses. Restructuring charges include asset
impairment, lease exit and severance costs. These costs are
associated with the closure of underperforming stores in the US
and Australia, and the rationalization of the Company’s
leadership structure and non-store organization.
Operating margin compression was primarily due to lower
revenues; in addition, restructuring charges accounted for
approximately 40% of the decrease.
Earnings before income taxes
Net earnings
Net interest income and other decreased due primarily to
unrealized market value losses on the Company’s trading
securities portfolio. The trading securities approximate a
portion of the Company’s liability under its MDCP plan. The
MDCP liability also increases and decreases with changes in
investment performance, with this offsetting impact recorded in
General and administrative expenses on the consolidated
statements of earnings. Interest expense increased due to the
Company’s issuance of $550 million of
10-year
6.25% Senior Notes in August of fiscal 2007.
Income taxes for fiscal 2008 resulted in an effective tax rate
of 31.3% compared to 36.3% for fiscal 2007. The lower rate was
due to the higher proportion of income earned in foreign
jurisdictions which have lower tax rates, as well as an increase
in the domestic manufacturing deduction for manufacturing
activities in the US.
Company-operated retail revenues increased primarily due to the
opening of 445 new Company-operated retail stores in fiscal
2008, partially offset by a 5% decrease in comparable store
sales for fiscal 2008. The US Company-operated retail business
continued to experience deteriorating trends in transactions
during the year, driven by the US economic slowdown. Licensing
revenues increased primarily due to higher product sales and
royalty revenues as a result of opening 438 new licensed retail
stores in fiscal 2008.
Total operating expenses
Operating income
Operating margin contracted significantly primarily due to
restructuring charges incurred and to softer revenues due to
weak traffic, as well as higher cost of sales including
occupancy costs and higher store operating expenses as a
percentage of revenues. Restructuring charges of
$210.9 million had a 280 basis point impact on the
operating margin. The increase in cost of sales including
occupancy costs was primarily due to higher distribution costs
and higher rent expenses as a percentage of revenues. Higher
store operating expenses was due to the softer sales, higher
payroll-related expenditures, and charges from canceling future
store sites and asset impairments.
Company-operated retail revenues increased due to the opening of
236 new Company-operated retail stores in fiscal 2008, favorable
foreign currency exchange rates, primarily on the Canadian
dollar, and comparable store sales growth of 2% for fiscal 2008.
In the fourth quarter of fiscal 2008, Company-operated retail
revenues grew at a slower rate
year-over-year
of 12% and comparable store sales were flat compared to the same
quarter in fiscal 2007, both driven by slowdowns in the UK and
Canada, due to the weakening global economy.
Specialty revenues increased primarily due to higher product
sales and royalty revenues from opening 550 new licensed retail
stores in fiscal 2008.
Total operating expenses
Operating income
Operating margin decreased primarily due to higher cost of sales
including occupancy costs driven by continued expansion of lunch
and warming programs in Canada, higher distribution costs, and
higher building maintenance expense due to store renovation
activities. In addition, restructuring charges of
$19.2 million recognized in fiscal 2008 had a 90 basis
point impact on the operating margin, nearly all due to the
closure of 61 Company-operated stores in Australia.
Total specialty
Foodservice revenues increased primarily due to growth in new
and existing foodservice accounts, and licensing revenue
increased due to higher royalties and product sales in the
international
ready-to-drink
business and increased sales of US packaged tea and
International club packaged coffee.
Growth of operating margin was primarily due to lower cost of
sales as a percentage of revenues, partially offset by lower
income from equity investees. Lower cost of sales was primarily
due to a sales mix shift to more profitable products.
Operating loss
Total unallocated corporate expenses remained relatively flat
due to lower payroll-related expenditures, which were offset by
restructuring charges incurred for corporate office facilities
that were no longer occupied by the Company due to the reduction
in positions within Starbucks leadership structure and non-store
organization.
FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company’s existing cash and liquid investments were
$666.1 million and $322.3 million as of
September 27, 2009 and September 28, 2008,
respectively.
The Company manages its cash and liquid investments in order to
internally fund operating needs and make scheduled interest and
principal payments on its borrowings.
Included in the cash and liquid investment balances are the
following:
As of September 27, 2009, the Company had
$92.7 million invested in
available-for-sale
securities. Included in
available-for-sale
securities were $55.7 million of auction rate securities
(“ARS”), compared with $59.8 million of ARS held
as of September 28, 2008, with the decrease due to calls of
individual securities. As described in more detail in
Note 3, while the ongoing auction failures will limit the
liquidity of these investments for some period of time, the
Company does not believe the auction failures will materially
impact its ability to fund its working capital needs, capital
expenditures or other business requirements.
Credit rating agencies currently rate the Company’s
borrowings as follows:
Description
Short-term debt
Senior unsecured long-term debt
Outlook
On August 28, 2009, Standard and Poor’s Ratings
Services revised its outlook on the Company’s credit
ratings to stable from negative based on improved credit metrics
and stabilizing performance. The rating agency also affirmed the
BBB corporate credit rating on the Company and raised the
short-term rating to
A-2 from
A-3 to
conform with the stable rating outlook. As a result of the
Moody’s
P-3
short-term rating issued in May 2009, commercial paper has
become less liquid and more expensive than borrowing under the
Company’s credit facility. Consequently, the Company
utilized its credit facility for almost all short-term borrowing
needs subsequent to May 2009. In the latter half of the year the
Company reduced its total short-term borrowings to a zero
balance due to strong operating cash flows and lower capital
spending on new Company-operated stores. Management is unlikely
to make significant use of its commercial paper program until
its Moody’s short-term ratings improve.
Despite limited access to the commercial paper markets,
management believes that cash flow from operations and its
existing cash and liquid investments, supplemented as needed by
the $1 billion in short-term borrowing capacity under the
Company’s revolving credit facility, will be sufficient to
finance capital requirements for its core businesses for the
foreseeable future, as well as to fund the cost of lease
termination and related costs from the remaining international
store closures. Significant new joint ventures, acquisitions
and/or other
new business opportunities may require additional outside
funding.
The Company’s credit facility contains provisions requiring
Starbucks to maintain compliance with certain covenants,
including a minimum fixed charge coverage ratio. On June 8,
2009, the credit facility was amended to more accurately reflect
the parties’ intent with respect to Amendment No. 4 to
the credit facility. Amendment No. 5 to the credit facility
did not impact the Company’s borrowing terms, facility
size, or covenant ratio, and was completed at minimal cost to
the Company. As of September 27, 2009 and
September 28, 2008, the Company was in compliance with each
of these covenants.
The $550 million of
10-year
6.25% Senior Notes, issued in fiscal 2007, also require
Starbucks to maintain compliance with certain covenants that
limit future liens and sale and leaseback transactions on
certain material properties. As of September 27, 2009 and
September 28, 2008, the Company was in compliance with each
of these covenants.
The Company generated strong operating cash flow during the year
ended September 27, 2009 and used its free cash flow to
reduce its short-term borrowings from $713.0 million at the
end of fiscal 2008 to a zero balance at the end of fiscal 2009
and to increase the balance of its cash and liquid investments.
The Company expects to use its cash and liquid investments,
including any borrowings under its credit facility and
commercial paper program, to invest in its core businesses,
including new beverage and product innovations, as well as 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. Any decisions to increase its ownership
interest in its equity method investees or licensed operations
will be driven by valuation and fit with the Company’s
ownership strategy and are likely to be infrequent.
Depending on market conditions and within the constraint of
maintaining an appropriate capital structure, Starbucks may
repurchase shares of its common stock under its authorized share
repurchase program. Starbucks
did not repurchase any shares in fiscal 2009 under the
Company’s share repurchase program; however, the Company
will continue to evaluate share repurchases and cash dividends
in the future as a use for excess cash generated by the business.
Other than normal operating expenses, cash requirements for
fiscal 2010 are expected to consist primarily of capital
expenditures for remodeling and refurbishment of, and equipment
upgrades for, existing Company-operated retail stores; systems
and technology investments in the stores and in the support
infrastructure; and new Company-operated retail stores. Total
capital expenditures for fiscal 2010 are expected to range from
$500 million to $550 million.
Cash provided by operating activities was $1.4 billion for
fiscal 2009 compared to $1.3 billion for fiscal 2008. Cash
used by investing activities for fiscal 2009 totaled
$421.1 million compared to $1.1 billion in fiscal
2008. The decrease was due to lower capital expenditures in
fiscal 2009 compared to fiscal 2008 due to opening significantly
fewer new Company-operated stores.
Cash used by financing activities for the year ended
September 27, 2009 totaled $642.2 million, with net
repayments of commercial paper and short-term borrowings under
the credit facility totaling $713.1 million. As of
September 27, 2009, a total of $14.1 million in
letters of credit were outstanding under the credit facility,
leaving $985.9 million of capacity available under the
$1 billion combined commercial paper program and revolving
credit facility.
The following table summarizes the Company’s contractual
obligations and borrowings as of September 27, 2009, and
the timing and effect that such commitments are expected to have
on the Company’s liquidity and capital requirements in
future periods (in millions):
Contractual
Obligations(1)
Debt
obligations(2)
Operating lease
obligations(3)
Purchase
obligations(4)
Other
obligations(5)
Starbucks expects to fund these commitments primarily with
operating cash flows generated in the normal course of business,
as well as ongoing borrowings under the combined commercial
paper program and revolving credit facility.
Off-Balance
Sheet Arrangement
The Company’s off-balance sheet arrangements relate to
certain guarantees and are detailed in Note 17 to the
consolidated financial statements in this
10-K.
COMMODITY
PRICES, AVAILABILITY AND GENERAL RISK CONDITIONS
Commodity price risk represents the Company’s primary
market risk, generated by its purchases of green coffee and
dairy products, among other things. The Company purchases,
roasts and sells high-quality whole bean arabica coffee
and related products and risk arises from the price volatility
of green coffee. In addition to coffee, the Company also
purchases significant amounts of dairy products to support the
needs of its Company-operated retail stores. The price and
availability of these commodities directly impacts the
Company’s results of operations and can be expected to
impact its future results of operations. For additional details
see Product Supply in Item 1, as well as Risk Factors in
Item 1A of this
10-K.
FINANCIAL
RISK MANAGEMENT
Market risk is defined as the risk of losses due to changes in
commodity prices, foreign currency exchange rates, equity
security prices, and interest rates. The Company manages its
exposure to various market-based risks according to an umbrella
risk management policy. Under this policy, market-based risks
are quantified and evaluated for potential mitigation
strategies, such as entering into hedging transactions. The
umbrella risk management policy governs the hedging instruments
the business may use and limits the risk to net earnings. The
Company also monitors and limits the amount of associated
counterparty credit risk. Additionally, this policy restricts,
among other things, the amount of market-based risk the Company
will tolerate before implementing approved hedging strategies
and prohibits speculative trading activity. In general, hedging
instruments do not have maturities in excess of five years.
The sensitivity analyses disclosed below provide only a limited,
point-in-time
view of the market risk of the financial instruments discussed.
The actual impact of the respective underlying rates and price
changes on the financial instruments may differ significantly
from those shown in the sensitivity analyses.
Commodity
Price Risk
The Company purchases commodity inputs, including coffee, dairy
products and diesel that are used in its operations and are
subject to price fluctuations that impact its financial results.
In addition to fixed-price contracts and
price-to-be-fixed
contracts for coffee purchases, the Company has entered into
commodity hedges to manage commodity price risk using financial
derivative instruments. The Company performed a sensitivity
analysis based on a 10% change in the underlying commodity
prices of its commodity hedges, as of the end of fiscal 2009,
and determined that such a change would not have a significant
effect on the fair value of these instruments.
Foreign
Currency Exchange Risk
The majority of the Company’s revenue, expense and capital
purchasing activities are transacted in US dollars. However,
because a portion of the Company’s operations consists of
activities outside of the US, the Company has transactions in
other currencies, primarily the Canadian dollar, British pound,
euro, and Japanese yen. As a result, Starbucks may engage in
transactions involving various derivative instruments to hedge
revenues, inventory purchases, assets, and liabilities
denominated in foreign currencies.
As of September 27, 2009, the Company had forward foreign
exchange contracts that hedge portions of anticipated
international revenue streams and inventory purchases. In
addition, Starbucks had forward foreign exchange contracts that
qualify as accounting hedges of its net investment in Starbucks
Japan, as well as the Company’s net investments in its
Canada subsidiary, to minimize foreign currency exposure.
The Company also had forward foreign exchange contracts that are
not designated as hedging instruments for accounting purposes
(free standing derivatives), but which largely offset the
financial impact of translating certain foreign currency
denominated payables and receivables. Increases or decreases in
the fair value of these hedges are generally offset by
corresponding decreases or increases in the US dollar value of
the Company’s foreign currency denominated payables and
receivables (i.e. “hedged items”) that would occur
within the hedging period.
The following table summarizes the potential impact to the
Company’s future net earnings and other comprehensive
income (“OCI”) from changes in the fair value of these
derivative financial instruments due in turn to a change in the
value of the US dollar as compared to the level of foreign
exchange rates. The information provided below relates only to
the hedging instruments and does not represent the corresponding
changes in the underlying hedged items (in millions):
September 27,
2009
Foreign currency hedges
Equity
Security Price Risk
The Company has minimal exposure to price fluctuations on equity
mutual funds and equity exchange-traded funds within its trading
portfolio. The trading securities approximate a portion of the
Company’s liability under the MDCP. A corresponding
liability is included in Accrued compensation and related costs
on the consolidated balance sheets. These investments are
recorded at fair value with unrealized gains and losses
recognized in Net interest income and other in the consolidated
statements of earnings. The offsetting changes in the MDCP
liability are recorded in General and administrative expenses.
The Company performed a sensitivity analysis based on a 10%
change in the underlying equity prices of its investments as of
the end of fiscal 2009, and determined that such a change would
not have a significant effect on the fair value of these
instruments.
Interest
Rate Risk
The Company utilizes short-term and long-term financing and may
use interest rate hedges to manage the effect of interest rate
changes on its existing debt as well as the anticipated issuance
of new debt. At the end of fiscal years 2009 and 2008, the
Company did not have any interest rate hedge agreements
outstanding.
The following table summarizes the impact of a change in
interest rates on the fair value of the Company’s debt
(in millions):
Debt
The Company’s
available-for-sale
securities comprise a diversified portfolio consisting mainly of
fixed income instruments. The primary objectives of these
investments are to preserve capital and liquidity. As of
September 27, 2009, the Company’s long-term
available-for-sale
securities included ARS. Please see Note 3 for further
information.
Available-for-sale
securities are recorded on the consolidated balance sheets at
fair value with unrealized gains and losses reported as a
component of Accumulated other comprehensive income. The Company
does not hedge the interest rate exposure on its
available-for-sale
securities. The Company performed a sensitivity analysis based
on a 100 basis point change in the underlying interest rate
of its
available-for-sale
securities as of the end of fiscal 2009, and determined that
such a change would not have a significant effect on the fair
value of these instruments.
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 asset impairment,
stock-based compensation, operating leases, self insurance
reserves and income taxes to be the most critical in
understanding the judgments that are involved in preparing its
consolidated financial statements.
Asset
Impairment
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
indefinite-lived intangible assets, impairment tests are
performed annually and more frequently if facts and
circumstances indicate carrying values exceed estimated fair
values and if indefinite useful lives are no longer appropriate
for the Company’s trademarks. Upon determination that the
carrying values of such assets are in excess of their estimated
fair values, the Company recognizes an impairment loss as a
charge against current operations. 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.
Stock-based
Compensation
Starbucks accounts for stock-based compensation in accordance
with fair value recognition provisions, under which the Company
uses the Black-Scholes-Merton option pricing model which
requires the input of subjective assumptions. These assumptions
include estimating the length of time employees will retain
their stock options before exercising them (“expected
term”), the estimated volatility of the Company’s
common stock price over the expected term and the number of
options that will ultimately not complete their vesting
requirements. Changes in the subjective assumptions could
materially affect the estimate of fair value of stock-based
compensation; however based on an analysis using changes in
certain assumptions that could be reasonably possible in the
near term, management believes the effect on the expense
recognized for fiscal 2009 would not have been material.
Operating
Leases
Starbucks leases retail stores, roasting and distribution
facilities and office space under operating leases. The Company
provides for an estimate of asset retirement obligation
(“ARO”) expense at the lease inception date for
operating leases with requirements to remove leasehold
improvements at the end of the lease term. Estimating AROs
involves subjective assumptions regarding both the amount and
timing of actual future retirement costs. Future actual costs
could differ significantly from amounts initially estimated. In
addition, the large number of operating leases and the
significant number of international markets in which the Company
has operating leases adds administrative complexity to the
calculation of ARO expense, as well as to the other technical
accounting requirements of operating leases such as contingent
rent. Estimating the cost of certain lease exit costs involves
subjective assumptions, including the time it would take to
sublease the leased location and the related potential sublease
income. The estimated accruals for these costs could be
significantly affected if future experience differs from that
used in the initial estimate.
Self
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 certain risks, including workers’
compensation, healthcare benefits, general liability, property
insurance, and director and officers’ liability insurance.
Liabilities associated with the risks that are retained by the
Company are not discounted and 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.
Income
Taxes
Starbucks recognizes deferred tax assets and liabilities based
on the differences between the financial statement carrying
amounts and the tax basis of assets and liabilities and accrues
for uncertain tax positions. Deferred tax assets and liabilities
are measured using current enacted tax rates in effect for the
years in which those temporary differences are expected to
reverse. Judgment is required in determining the provision for
income taxes and related accruals, deferred tax assets and
liabilities. These include establishing a valuation allowance
related to the ability to realize certain deferred tax assets.
Accounting for uncertain tax positions requires significant
judgments, including estimating the amount, timing and
likelihood of ultimate settlement. Although the Company believes
that its estimates are reasonable, actual results could differ
from these estimates.
RECENT
ACCOUNTING PRONOUNCEMENTS
See Note 1 to the consolidated financial statements in this
10-K.
The information required by this item is incorporated by
reference to the section entitled “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations — Commodity Prices, Availability and
General Risk Conditions” and “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations — Financial Risk Management” in
Item 7 of this Report.
STARBUCKS
CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(In Millions, except earnings per share)
CONSOLIDATED STATEMENTS OF EARNINGS
(In Millions, except earnings per share)
Total operating expenses
Earnings before income taxes
Income taxes
Net earnings
Per common share:
Net earnings — basic
Net earnings — diluted
Weighted average shares outstanding:
Basic
Diluted
See Notes to Consolidated Financial Statements.
STARBUCKS
CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments —
available-for-sale
securities
Short-term investments — trading securities
Accounts receivable, net
Inventories
Prepaid expenses and other current assets
Deferred income taxes, net
Total current assets
Long-term investments —
available-for-sale
securities
Equity and cost investments
Property, plant and equipment, net
Other assets
Other intangible assets
Goodwill
TOTAL ASSETS
Current liabilities:
Commercial paper and short-term borrowings
Accounts payable
Accrued compensation and related costs
Accrued occupancy costs
Accrued taxes
Insurance reserves
Other accrued expenses
Deferred revenue
Current portion of long-term debt
Total current liabilities
Long-term debt
Other long-term liabilities
Total liabilities
Shareholders’ equity:
Common stock ($0.001 par value) — authorized,
1,200.0 shares; issued and outstanding, 742.9 and
735.5 shares, respectively (includes 3.4 common stock units
in both periods)
Additional paid-in capital
Other additional
paid-in-capital
Retained earnings
Accumulated other comprehensive income
Total shareholders’ equity
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
STARBUCKS
CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
OPERATING ACTIVITIES:
Net earnings
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization
Provision for impairments and asset disposals
Deferred income taxes
Equity in income of investees
Distributions of income from equity investees
Stock-based compensation
Tax benefit from exercise of stock options
Excess tax benefit from exercise of stock options
Other
Cash provided/(used) by changes in operating assets and
liabilities:
Inventories
Accounts payable
Accrued taxes
Deferred revenue
Other operating assets
Other operating liabilities
Net cash provided by operating activities
INVESTING ACTIVITIES:
Purchase of
available-for-sale
securities
Maturities and calls of
available-for-sale
securities
Sales of
available-for-sale
securities
Acquisitions, net of cash acquired
Net purchases of equity, other investments and other assets
Additions to property, plant and equipment
Proceeds from sale of property, plant and equipment
Net cash used by investing activities
FINANCING ACTIVITIES:
Proceeds from issuance of commercial paper
Repayments of commercial paper
Proceeds from short-term borrowings
Repayments of short-term borrowings
Proceeds from issuance of common stock
Proceeds from issuance of long-term debt
Principal payments on long-term debt
Repurchase of common stock
Net cash used by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase/(decrease) in cash and cash equivalents
CASH AND CASH EQUIVALENTS:
Beginning of period
End of period
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Net change in short-term borrowings and commercial paper for the
period
Cash paid during the period for:
Interest, net of capitalized interest
Income taxes
STARBUCKS
CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In millions)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In millions)
Balance, October 1, 2006
Net earnings
Unrealized holding loss, net
Translation adjustment, net of tax
Comprehensive income
Stock-based compensation expense
Exercise of stock options, including tax benefit of $95.3
Sale of common stock, including tax provision of $0.1
Repurchase of common stock
Balance, September 30, 2007
Cumulative impact of adoption of accounting requirements for
uncertain tax positions
Unrealized holding gain, net
Exercise of stock options, including tax benefit of $8.4
Sale of common stock, including tax benefit of $0.1
Balance, September 28, 2008
Unrealized holding gains, net
Exercise of stock options, including tax benefit of $5.3
Balance, September 27, 2009
STARBUCKS
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Fiscal
Years ended September 27, 2009, September 28, 2008 and
September 30, 2007
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, a selection of premium teas, and beverage-related
accessories and equipment, primarily through its
Company-operated retail stores. Starbucks also sells coffee and
tea products and licenses its trademark through other channels
such as licensed stores, and through certain of its licensees
and equity investees, Starbucks produces and sells a variety of
ready-to-drink
beverages. All channels outside the Company-operated retail
stores are collectively known as specialty operations.
Additional details on the nature of the Company’s business
are in Item 1 of this
10-K.
Starbucks has three reportable operating segments: United States
(“US”), International and Global Consumer Products
Group (“CPG”). See Note 18 for additional details.
Principles
of Consolidation
The consolidated financial statements reflect the financial
position and operating results of Starbucks, including 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. Intercompany transactions and balances
have been eliminated.
Fiscal
Year End
Starbucks fiscal year ends on the Sunday closest to
September 30. The fiscal years ended on September 27,
2009, September 28, 2008 and September 30, 2007 all
included 52 weeks. Starbucks 2010 fiscal year will include
53 weeks, with the
53rd week
falling in its fourth fiscal quarter.
Subsequent
Events
The Company evaluated subsequent events and transactions for
potential recognition or disclosure in the financial statements
through November 20, 2009, the day the financial statements
were issued.
Estimates
and Assumptions
Preparing financial statements in conformity with accounting
principles generally accepted in the United States of America
(“GAAP”) requires management to make estimates and
assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Examples include, but are
not limited to, estimates for asset and goodwill impairments,
stock-based compensation forfeiture rates, and future asset
retirement obligations; assumptions underlying self-insurance
reserves; and the potential outcome of future tax consequences
of events that have been recognized in the financial statements.
Actual results and outcomes may differ from these estimates and
assumptions.
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
funding of all major bank disbursement accounts on a daily basis
as checks are presented for payment. Under this system,
outstanding checks are in excess of the cash balances at certain
banks, which creates book overdrafts. Book overdrafts are
presented as a current liability in Accounts payable on the
consolidated balance sheets.
Short-term
and Long-term Investments
The Company’s short-term and long-term investments consist
primarily of investment grade debt securities, equity mutual
funds, and equity exchange-traded funds, all of which are
classified as
available-for-sale
or trading. As of September 27, 2009, a substantial portion
of the Company’s
available-for-sale
investments consisted of auction rate securities, as described
in more detail in Note 3. 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 component of
accumulated other comprehensive income.
Available-for-sale
securities with remaining maturities of less than one year and
those identified by management at time of purchase for funding
operations in 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 and extent of the fair value
decline, the financial condition and near term prospects of the
issuer, and for equity investments, 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. For debt
securities, management also evaluates whether the Company has
the intent to sell or will likely be required to sell before its
anticipated recovery. Realized gains and losses are accounted
for on the specific identification method. Purchases and sales
are recorded on a trade date basis.
Fair
Value of Financial Instruments
The carrying value of cash and cash equivalents approximates
fair value because of the short-term maturity of those
instruments. The fair value of the Company’s investments in
marketable debt and equity securities, equity mutual funds and
equity exchange-traded funds, is based upon the quoted market
price on the last business day of the fiscal year. Where an
observable quoted market price for a security 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 and estimating discounted cash flows. See
Note 3 and 7 for additional information and Note 5 for
the methods used to measure fair value. The fair value of the
Company’s debt is estimated based on the quoted market
prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining
maturities. The carrying value of short-term debt approximates
fair value. The estimated fair value of Starbucks
$550 million of 6.25% Senior Notes was approximately
$591 million and $536 million as of September 27,
2009 and September 28, 2008, respectively.
Derivative
Instruments
The Company manages its exposure to various risks within the
consolidated financial statements according to an umbrella risk
management policy. Under this policy, Starbucks may engage in
transactions involving various derivative instruments, with
maturities generally not longer than five years, to hedge
interest rates, commodity prices, and foreign currency
denominated revenues, purchases, assets and liabilities.
The Company records all derivatives on the balance sheets 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. For discontinued or
dedesignated cash flow hedges, the related accumulated
derivative gains or losses are recognized in Net interest income
and other 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. Under this method,
the change in fair value of the forward contract attributable to
the changes in spot exchange rates (the effective portion) is
reported as a component of OCI. The remaining change in fair
value of the forward contract (the ineffective portion) is
reclassified into net earnings. Any ineffectiveness is
recognized immediately in Net interest income and other on the
consolidated statements of earnings.
The Company also enters into certain foreign currency forward
contracts and commodity swap and futures contracts that are not
designated as hedging instruments for accounting purposes. These
contracts are recorded at fair value, with the changes in fair
value recognized in Net interest income and other on the
consolidated statements of earnings.
See Note 5 for additional information on the Company’s
fair value measurements related to derivative instruments.
Allowance
for Doubtful Accounts
Allowance for doubtful accounts is calculated based on
historical experience, customer credit risk and application of
the specific identification method. As of September 27,
2009 and September 28, 2008, the allowance for doubtful
accounts was $5.0 million and $4.5 million,
respectively.
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. As of
September 27, 2009 and September 28, 2008, inventory
reserves were $21.1 million and $25.5 million,
respectively.
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. For leases
with renewal periods at the Company’s option, Starbucks
generally uses the original lease term, excluding renewal option
periods, to determine estimated useful lives. If failure to
exercise a renewal option imposes an economic penalty to
Starbucks, management may determine at the inception of the
lease that renewal is reasonably assured and include the renewal
option period in the determination of appropriate estimated
useful lives. The portion of depreciation expense related to
production and distribution facilities is included in Cost of
sales including occupancy costs on the 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
The Company tests its goodwill for impairment on an annual
basis, or more frequently if circumstances indicate reporting
unit carrying values exceed their fair values. Fair value is
estimated by projecting discounted cash flows from the reporting
unit in addition to other quantitative and qualitative analyses.
If the carrying amount of goodwill exceeds the implied estimated
fair value, an impairment charge to current operations is
recorded to reduce the carrying value to the implied estimated
fair value.
Starbucks conducted its annual test for its consolidated
entities in the third fiscal quarter, resulting in
$7 million of goodwill impairment in fiscal 2009 related to
the US operating segment’s Hawaii reporting unit, which is
comprised of retail store operations. The current and future
projected operating results for the Hawaii operations, which
were acquired in fiscal 2006, were lower than originally
anticipated due to the overall economic slowdown and its impact
on the travel industry in particular, resulting in a partial
impairment of the related goodwill. There was no impairment of
goodwill in fiscal 2008 and 2007.
Other
Intangible Assets
Other intangible assets consist primarily of trademarks with
indefinite lives which are tested for impairment annually or
more frequently if indefinite useful lives are no longer
appropriate. Definite-lived intangible assets, which mainly
consist of contract-based patents and copyrights, are amortized
over their estimated useful lives, and are tested for impairment
when facts and circumstances indicate that the carrying values
may not be recoverable. For further information on other
intangible assets, see Note 9. Based on the impairment
tests performed there was no impairment of other intangible
assets in fiscal 2009, 2008 and 2007.
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 undiscounted 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 compares the fair value of long-lived
assets to their carrying value and recognizes an impairment loss
by a charge to net earnings for the excess of carrying value
over fair value. The fair value of the assets is estimated using
the discounted future cash flows of the assets. 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.
The Company recognized net impairment and disposition losses of
$224.4 million, $325.0 million and $26.0 million
in fiscal 2009, 2008 and 2007, respectively, primarily due to
underperforming Company-operated retail stores. The net losses
in fiscal 2009 and 2008 include $129.2 million and
$201.6 million, respectively, of asset impairments related
to the US and International store closures and charges incurred
for office facilities no longer occupied by the Company due to
the reduction in positions within Starbucks leadership structure
and non-store organization. See Note 2 for further details.
Depending on the underlying asset that is impaired, these losses
may be recorded in any one of the operating expense lines on the
consolidated statements of earnings: for retail operations, the
net impairment and disposition losses are recorded in
Restructuring charges and Store operating expenses; for
specialty operations, these losses are recorded in Restructuring
charges and Other operating expenses; and for all other
operations, these losses are recorded in Cost of sales including
occupancy costs, General and administrative expenses, or
Restructuring charges.
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 certain risks, including workers’
compensation, healthcare benefits, general liability, property
insurance, and director and officers’ liability insurance.
Liabilities associated with the risks that are retained by the
Company are not discounted
and are estimated, in part, by considering historical claims
experience, demographic factors, severity factors and other
actuarial assumptions.
Revenue
Recognition
Consolidated revenues are presented net of intercompany
eliminations for wholly owned subsidiaries and investees
controlled by the Company and for licensees accounted for under
the equity method, based on the Company’s percentage
ownership. Additionally, consolidated revenues are recognized
net of any discounts, returns, allowances and sales incentives,
including coupon redemptions and rebates.
Stored
Value Cards
Revenues from the Company’s stored value cards, such as the
Starbucks Card, and gift certificates are recognized when
tendered for payment, or upon redemption. Outstanding customer
balances are included in Deferred revenue on the consolidated
balance sheets. There are no expiration dates on the
Company’s stored value cards or gift certificates, and
Starbucks does not charge any service fees that cause a
decrement to customer balances.
While the Company will continue to honor all stored value cards
and gift certificates presented for payment, management may
determine the likelihood of redemption to be remote for certain
card and certificate balances due to, among other things, long
periods of inactivity. In these circumstances, if management
also determines there is no requirement for remitting balances
to government agencies under unclaimed property laws, card and
certificate balances may then be recognized in the consolidated
statements of earnings in Net interest income and other. For the
fiscal years ended September 27, 2009, September 28,
2008 and September 30, 2007 income recognized on unredeemed
stored value card balances and gift certificates was
$26.0 million, $13.6 million and $12.9 million,
respectively.
Retail
Revenues
Company-operated retail store revenues are recognized when
payment is tendered at the point of sale. Starbucks maintains a
sales return allowance to reduce retail revenues for estimated
future product returns, including brewing equipment, based on
historical patterns. Retail store revenues are reported net of
sales, use or other transaction taxes that are collected from
customers and remitted to taxing authorities.
Specialty
Revenues
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. Shipping charges billed to customers are also
recognized as revenue, and the related shipping costs are
included in Cost of sales including occupancy costs on the
consolidated statements of earnings.
Specific to retail store licensing arrangements, initial
nonrefundable development fees 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. For certain licensing arrangements, where the
Company intends to acquire an ownership interest, the initial
nonrefundable development fees are deferred to Other long-term
liabilities on the consolidated balance sheets until
acquisition, at which point the fees are reflected as a
reduction of the Company’s investment.
Other arrangements involving multiple elements and deliverables
as well as upfront fees are individually evaluated for revenue
recognition. Cash payments received in advance of product or
service delivery are recorded in Deferred revenue until earned.
Advertising
The Company expenses most advertising costs as they are
incurred, except for certain production costs that are expensed
the first time the advertising campaign takes place and
direct-response advertising, which is capitalized and amortized
over its expected period of future benefits.
Advertising expenses, recorded in Store operating expenses,
Other operating expenses and General and administrative expenses
on the consolidated statements of earnings, totaled
$126.3 million, $129.0 million and $103.5 million
in fiscal 2009, 2008 and 2007, respectively. As of
September 27, 2009 and September 28, 2008,
$7.2 million and $8.8 million, respectively, of
capitalized advertising costs were recorded in Prepaid expenses
and other current assets, and Other assets on the consolidated
balance sheets.
Research
and Development
Starbucks expenses research and development costs as they are
incurred. The Company spent approximately $6.5 million,
$7.2 million and $7.0 million during fiscal 2009, 2008
and 2007, respectively, on technical research and development
activities, in addition to customary product testing and product
and process improvements in all areas of its business.
Store
Preopening Expenses
Costs incurred in connection with the
start-up and
promotion of new store openings are expensed as incurred.
Operating
Leases
Starbucks leases retail stores, roasting and distribution
facilities and office space under operating leases. Most lease
agreements contain tenant improvement allowances, rent holidays,
lease premiums, rent escalation clauses
and/or
contingent rent provisions. For purposes of recognizing
incentives, premiums and minimum rental expenses on a
straight-line basis over the terms of the leases, the Company
uses the date of initial possession to begin amortization, which
is generally when the Company enters the space and begins to
make improvements in preparation of intended use.
For tenant improvement allowances and rent holidays, the Company
records a deferred rent liability in Accrued occupancy costs and
Other long-term liabilities on the consolidated balance sheets
and amortizes the deferred rent over the terms of the leases as
reductions to rent expense on the consolidated statements of
earnings.
For premiums paid upfront to enter a lease agreement, the
Company records a deferred rent asset in Prepaid expenses and
other current assets and Other assets on the consolidated
balance sheets and then amortizes the deferred rent over the
terms of the leases as additional rent expense on the
consolidated statements of earnings.
For scheduled rent escalation clauses during the lease terms or
for rental payments commencing at a date other than the date of
initial occupancy, the Company records minimum rental expenses
on a straight-line basis over the terms of the leases on the
consolidated statements of earnings.
Certain leases provide for contingent rents, which are
determined as a percentage of gross sales in excess of specified
levels. The Company records a contingent rent liability in
Accrued occupancy costs on the consolidated balance sheets and
the corresponding rent expense when specified levels have been
achieved or when management determines that achieving the
specified levels during the fiscal year is probable.
When ceasing operations in Company-operated stores under
operating leases, in cases where the lease contract specifies a
termination fee due to the landlord, the Company records such
expense at the time written notice is given to the landlord. In
cases where terms, including termination fees, are yet to be
negotiated with the landlord, the Company will record the
expense upon signing of an agreement with the landlord. Finally,
in cases where the landlord does not allow the Company to
prematurely exit its lease, but allows for subleasing, the
Company estimates the fair value of any sublease income that can
be generated from the location and expenses the present value of
the excess of remaining lease payments to the landlord over the
projected sublease income at the cease-use date.
Asset
Retirement Obligations
Starbucks recognizes a liability for the fair value of required
asset retirement obligations (“ARO”) when such
obligations are incurred. The Company’s AROs are primarily
associated with leasehold improvements which, at the end of a
lease, the Company is contractually obligated to remove in order
to comply with the lease agreement. At the inception of a lease
with such conditions, the Company records an ARO liability and a
corresponding capital asset in an amount equal to the estimated
fair value of the obligation. The liability is estimated based
on a number of assumptions requiring management’s judgment,
including store closing costs, cost inflation rates and discount
rates, and is accreted to its projected future value over time.
The capitalized asset is depreciated using the convention for
depreciation of leasehold improvement assets. Upon satisfaction
of the ARO conditions, any difference between the recorded ARO
liability and the actual retirement costs incurred is recognized
as an operating gain or loss in the consolidated statements of
earnings. As of September 27, 2009 and September 28,
2008, the Company’s net ARO asset included in Net property,
plant and equipment was $15.1 million and
$18.5 million, respectively, while the Company’s net
ARO liability included in Other long-term liabilities was
$43.4 million and $44.6 million, as of the same
respective dates.
Stock-based
Compensation
The Company maintains several equity incentive plans under which
it may grant non-qualified stock options, incentive stock
options, restricted stock, restricted stock units
(“RSUs”) or stock appreciation rights to employees,
non-employee directors and consultants. The Company also has
employee stock purchase plans (“ESPP”). RSUs issued by
the Company are equivalent to nonvested shares under the
applicable accounting guidance. See Note 14 for additional
details.
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 component of
Accumulated other comprehensive income on the consolidated
balance sheets.
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 statement carrying
amounts and the tax basis of the Company’s assets and
liabilities. The Company will establish a valuation allowance
for deferred tax assets 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.
Starbucks adopted the new accounting requirements for uncertain
tax positions on the first day of the Company’s first
fiscal quarter of 2008. The cumulative impact of adopting the
new accounting requirements is shown in the consolidated
statements of shareholders’ equity. The Company recognizes
the tax benefit from an uncertain tax position only if it is
more likely than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical
merits of the position. The tax benefits recognized in the
financial statements from such a position are measured based on
the largest benefit that has a greater than 50% likelihood of
being realized upon ultimate settlement. The Company recognizes
interest and penalties related to income tax matters in income
tax expense. See Note 15 for additional details.
Earnings
per Share
Basic earnings per share is computed on the basis of the
weighted average number of shares and common stock units that
were outstanding during the period. Diluted earnings per share
includes the dilutive effect of common stock equivalents
consisting of certain shares subject to stock options and RSUs,
using the treasury stock method. Performance-based RSUs are
considered diluted when the related performance criterion has
been met.
Common
Stock Share Repurchases
The Company may repurchase shares of its common stock under a
program authorized by its Board of Directors including pursuant
to a contract, instruction or written plan meeting the
requirements of
Rule 10b5-1(c)(1)
of the Securities Exchange Act of 1934. In accordance with the
Washington Business Corporation Act, share repurchases are not
displayed separately as treasury stock on the consolidated
balance sheets or consolidated statements of shareholders’
equity. Instead, the par value of repurchased shares is deducted
from Common stock and the remaining excess repurchase price over
par value is deducted from Additional paid-in capital and from
Retained earnings, once additional paid-in capital is depleted.
See Note 13 for additional information.
Recent
Accounting Pronouncements
Starbucks adopted the new guidance issued by the Financial
Accounting Standards Board (“FASB”) for fair value
measurement for its financial assets and liabilities effective
September 29, 2008 (see Note 5 for additional
disclosures). The guidance defines fair value, establishes a
framework for measuring fair value in GAAP and expands
disclosures about fair value measurements. This guidance is
effective for nonfinancial assets and liabilities for Starbucks
first fiscal quarter of 2010. The Company believes that the
adoption of this new guidance for its nonfinancial assets and
liabilities will not have a material impact on its financial
statements.
In December 2007, the FASB issued authoritative guidance on
business combinations, establishing principles and requirements
for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities
assumed, any resulting goodwill, and any noncontrolling interest
in an acquiree. The guidance also provides for disclosures to
enable users of the financial statements to evaluate the nature
and financial effects of the business combination. This new
guidance will be effective for Starbucks first fiscal quarter of
2010 and must be applied prospectively to business combinations
completed in fiscal 2010 and beyond.
In December 2007, the FASB issued authoritative guidance on
accounting and reporting for noncontrolling interests in
subsidiaries. The guidance clarifies that a noncontrolling
interest in a subsidiary should be accounted for as a component
of equity separate from the parent’s equity. Starbucks will
apply the new guidance relating to noncontrolling interests
beginning in the first fiscal quarter of 2010 on a prospective
basis, except for the presentation and disclosure requirements,
which will be applied retrospectively. The adoption of this
guidance will not have a material impact on the Company’s
financial statements.
In June 2009, the FASB issued authoritative guidance on the
consolidation of variable interest entities (“VIE”),
which will be effective for Starbucks first fiscal quarter of
2011. The new guidance requires a qualitative approach to
identifying a controlling financial interest in a variable
interest entity, and requires ongoing assessment of whether an
entity is a VIE and whether an interest in a VIE makes the
holder the primary beneficiary of the VIE. The Company is
currently evaluating the impact that adoption may have on its
consolidated financial statements.
In fiscal 2009, Starbucks continued to execute its restructuring
efforts to position the Company for long-term profitable growth.
These efforts have been focused on both the global
Company-operated store base and the non-retail support
organization. Starbucks actions to rationalize its store
portfolio have included plans (announced in July 2008 and
January 2009) to close approximately 800 Company-operated
stores in the US, restructure its Australia market, and close
approximately 100 additional Company-operated stores
internationally. Since those announcements, nearly all of the
approximately 800 US stores, 61 stores in Australia and 41 in
other International markets have been closed.
US Store Closures — In fiscal 2009, the Company
closed 383 of the approximately 600 stores announced in July
2008, bringing the total number of US closures under this
restructuring action to 588 stores. The Company also closed 183
of the approximately 200 stores announced for closure in January
2009.
International Store Closures — During fiscal
2009, the Company closed 41 of the approximately 100 stores
announced for closure in January 2009. The Company expects to
complete the remaining closures in fiscal 2010, and will
recognize the associated lease exit costs concurrently with the
actual closures.
Workforce Reduction and Other Related Costs —
Workforce reductions related to store closures and non-store
support positions resulted in the recognition of
$19.0 million in employee termination costs in fiscal 2009.
In addition, in fiscal 2009, Starbucks recognized
$47.8 million of valuation adjustments on corporate office
facilities that were no longer intended to be occupied by the
Company.
Restructuring charges by type and a reconciliation of the
associated accrued liability (in millions):
Total expected costs
Expenses recognized in fiscal
2009(1)
Expenses recognized in fiscal
2008(1)
Costs incurred in fiscal
2009(1)
Costs incurred in fiscal
2008(1)
Costs incurred cumulative to date
Accrued liability as of September 30, 2007
Costs incurred in fiscal 2008, excluding non-cash charges and
credits(2)
Cash payments
Accrued liability as of September 28, 2008
Costs incurred in fiscal 2009, excluding non-cash charges and
credits(2)
Accrued liability as of September 27, 2009
Restructuring charges by reportable segment (in millions):
Short-term and long-term investments (in millions):
September 27, 2009
Short-term investments —
available-for-sale
securities:
Corporate debt securities
Government treasury securities
Total
Short-term investments — trading securities
Total short-term investments
Long-term investments —
available-for-sale
securities:
State and local government obligations
Total long-term investments
September 28, 2008
Corporate debt securities
Available-for-sale
securities
Proceeds from sales of
available-for-sale
securities were $5.0 million, $75.9 million and
$47.5 million and in fiscal years 2009, 2008 and 2007,
respectively. For fiscal years 2009, 2008 and 2007, there were
immaterial realized gains and losses on sales and maturities.
As of September 27, 2009, the Company’s long-term
available-for-sale
securities of $71.2 million included $55.7 million
invested in auction rate securities (“ARS”). As of
September 28, 2008, the Company’s long-term
available-for-sale
securities of $71.4 million included $59.8 million
invested in ARS. ARS have long-dated maturities but provide
liquidity through a Dutch auction process that resets the
applicable interest rate at pre-determined calendar intervals.
Due to the auction failures that began in February 2008, these
securities became illiquid and were classified as long-term
investments. The investment principal associated with the failed
auctions will not be accessible until:
The Company does not intend to sell the ARS, nor is it likely it
will be required to sell the ARS before their anticipated
recovery. The Company expects such recoveries to occur prior to
the contractual maturities. In fiscal 2009, one ARS was called
at par value of $7.4 million and one ARS was partially
called at par value of $0.6 million.
The Company had $2.1 million and $6.0 million of
accumulated unrealized losses on ARS as of the end of fiscal
2009 and 2008, respectively, determined to be temporary, which
is included in Accumulated other comprehensive income as a
reduction in shareholders’ equity. As of September 27,
2009, approximately $4.9 million in ARS were rated A/B2 by
Standard & Poor’s and Moody’s, respectively.
All of the remaining securities were rated investment grade or
higher by two or more of the following rating agencies:
Moody’s, Standard & Poor’s and Fitch
Ratings. The Company’s ARS are collateralized by portfolios
of student loans, substantially all of which are guaranteed by
the United States Department of Education.
The following table presents the length of time
available-for-sale
securities were in continuous unrealized loss positions but were
not determined to be
other-than-temporarily
impaired (in millions):
Consecutive
Monthly Unrealized Losses
State and local government obligations
Corporate debt securities
Gross unrealized holding losses on the state and local
obligations pertain to the Company’s eleven ARS. As
Starbucks does not intend to sell these securities, nor is it
likely it will be required to sell these securities before their
anticipated recovery, which may be at maturity, the Company does
not consider these securities to be
other-than-temporarily
impaired.
There were no realized losses recorded for other than temporary
impairments during fiscal years 2009, 2008 or 2007.
Trading
securities
Trading securities are comprised of marketable equity mutual
funds and equity exchange-traded funds that approximate a
portion of the Company’s liability under the Management
Deferred Compensation Plan (“MDCP”), a defined
contribution plan. The corresponding deferred compensation
liability of $68.3 million and $68.0 million in fiscal
2009 and 2008, respectively, is included in Accrued compensation
and related costs on the consolidated balance sheets. The
changes in net unrealized holding gains/losses in the trading
portfolio included in earnings for the years ended
September 27, 2009 and September 28, 2008 were a net
loss of $4.9 million and $14.5 million, respectively.
Cash
Flow Hedges
The Company and certain subsidiaries enter into cash flow
derivative instruments to hedge portions of anticipated revenue
streams and inventory purchases in currencies other than the
entity’s functional currency. Outstanding forward
contracts, which comprise the majority of the Company’s
derivative instruments, hedge monthly forecasted revenue
transactions denominated in Japanese yen and Canadian dollars,
as well as forecasted inventory purchases denominated in US
dollars for foreign operations. From time to time, the Company
also uses futures contracts to hedge the variable price
component for a small portion of its
price-to-be-fixed
green coffee purchase contracts.
The Company had net derivative losses of $3.9 million and
$9.2 million, net of taxes, in Accumulated OCI as of
September 27, 2009 and September 28, 2008,
respectively, related to cash flow hedges. Of the net derivative
losses accumulated as of September 28, 2009,
$0.9 million pertain to hedging instruments that will be
dedesignated within 12 months and will also continue to
experience fair value changes before affecting earnings.
Ineffectiveness from hedges that were discontinued in fiscal
years 2009 and 2008 was insignificant. Outstanding contracts
will expire within 36 months.
Net
Investment Hedges
Net investment derivative instruments are used to hedge the
Company’s equity method investment in Starbucks Coffee
Japan, Ltd. (“Starbucks Japan”) as well as the
Company’s net investments in its Canada, UK and China
subsidiaries, to minimize foreign currency exposure.
The Company had net derivative losses of $19.8 million and
$13.0 million, net of taxes, in Accumulated OCI as of
September 27, 2009 and September 28, 2008,
respectively, related to net investment derivative hedges.
Outstanding contracts will expire within 18 months.
Other
Derivatives
The Company enters into certain foreign currency forward
contracts that are not designated as hedging instruments to
mitigate the translation risk of certain balance sheet items.
These contracts are recorded at fair value, with the changes in
fair value recognized in Net interest income and other on the
consolidated statements of earnings. For the fiscal years 2009
and 2008, these forward contracts resulted in a net gain of
$20.0 million and a net loss $0.1 million,
respectively. These gains and losses were largely offset by the
financial impact of translating foreign currency denominated
payables and receivables, which are also recognized in Net
interest income and other.
In the third quarter of fiscal 2009, the Company entered into
certain swap and futures contracts that are not designated as
hedging instruments to mitigate the price uncertainty of a
portion of its future purchases of dairy products and diesel
fuel. These contracts are recorded at fair value, with the
changes in fair value recognized in Net interest income and
other on the consolidated statement of earnings. For the fiscal
year 2009, these swaps and futures contracts resulted in a net
loss of $0.6 million.
Fair values of derivative instruments on the consolidated
balance sheet as of September 27, 2009 (in millions):
Contract Type
Derivatives designated as hedging instrument for accounting
purposes:
Cash Flow Hedges:
Foreign Exchange
Net Investment Hedges:
Total derivatives designated as hedging instrument for
accounting purposes
Derivatives not designated as hedging instruments for
accounting purposes:
Commodity
Total derivatives not designated as hedging instruments for
accounting purposes
Total Derivatives
The following table presents the effect of derivative
instruments on the consolidated statements of earnings in fiscal
2009 (in millions):
Derivatives designated as hedging instruments for accounting
purposes:
Foreign
Exchange(1)
Interest
rate(2)
Foreign
Exchange(3)
Recognized in Earnings
The Company had the following outstanding derivative contracts
as of September 27, 2009, based on notional amounts:
The Company adopted the new fair value accounting guidance
related to financial assets and liabilities effective
September 29, 2008, and will adopt the new fair value
accounting guidance for nonfinancial assets and liabilities in
the first fiscal quarter of 2010. The new fair value accounting
guidance allows for this two-step adoption approach. The Company
continues to evaluate the potential impact of the adoption of
fair value measurements related to its property, plant and
equipment, goodwill and other intangible assets.
The guidance defines fair value, establishes a framework for
measuring fair value under GAAP and expands disclosures about
fair value measurements. It also establishes a fair value
hierarchy that prioritizes the inputs used to measure fair value:
Financial
Assets and Liabilities Measured at Fair Value on a Recurring
Basis (in millions):
Assets:
Trading securities
Available-for-sale
securities
Derivatives
Liabilities:
Trading securities include equity mutual funds and
exchange-traded funds. For these securities, the Company uses
quoted prices in active markets for identical assets to
determine their fair value, thus they are considered to be
Level 1 instruments.
Available-for-sale
securities include government treasury securities, corporate
bonds and ARS. For government treasury securities, the Company
uses quoted prices in active markets for identical assets to
determine their fair value, thus they are considered to be
Level 1 instruments. The Company uses observable
direct and indirect inputs for corporate bonds, which are
considered Level 2 instruments. Level 3 instruments
are comprised solely of ARS, all of which are considered to be
illiquid due to the auction failures that began in February
2008. The Company values ARS using an internally developed
valuation model, whose inputs include interest rate curves,
credit and liquidity spreads, and effective maturity.
Derivative assets and liabilities include foreign currency
forward contracts, commodity swaps and futures contracts. Where
applicable, the Company uses quoted prices in an active market
for identical derivative assets and liabilities that are traded
on exchanges. These derivative assets and liabilities are coffee
and dairy futures contracts, and are included in Level 1.
Derivative assets and liabilities included in Level 2 are
over-the-counter
currency forward contracts and commodity swaps whose fair values
are estimated using industry-standard valuation models. Such
models project future cash flows and discount the future amounts
to a present value using market-based observable inputs,
including interest rate curves and forward and spot prices for
currencies and commodities.
Changes
in Level 3 Instruments Measured at Fair Value on a
Recurring Basis (in millions):
Beginning balance, September 28, 2008
Total reduction in unrealized losses included in other
comprehensive income
Purchases, sales, issuances, and settlements
Transfers in (out) of Level 3
Ending balance, September 27, 2009
Financial
Assets and Liabilities Measured at Fair Value on a Nonrecurring
Basis
The Company measures certain financial assets, including its
cost and equity method investments, at fair value on a
nonrecurring basis. These assets are recognized at fair value
when they are deemed to be
other-than-temporarily
impaired.
Inventories consisted of the following (in millions):
Coffee:
Unroasted
Roasted
Other merchandise held for sale
Packaging and other supplies
Other merchandise held for sale includes, among other items,
serveware, tea and brewing equipment.
As of September 27, 2009, the Company had committed to
purchasing green coffee totaling $155 million under
fixed-price contracts and an estimated $84 million under
price-to-be-fixed
contracts. The Company believes, based on relationships
established with its suppliers in the past, the risk of
non-delivery on such purchase commitments is remote.
Equity and cost investments (in millions):
Equity method investments
Cost method investments
Equity
Method Investments
Equity investees and ownership interests by reportable operating
segment:
United States
StarCon, LLC
International
Starbucks Coffee Korea Co., Ltd.
Starbucks Coffee Austria GmbH
Starbucks Coffee Switzerland AG
Starbucks Coffee España, S.L
President Starbucks Coffee Taiwan Ltd.
Shanghai President Coffee Co.
Starbucks Coffee France SAS
Berjaya Starbucks Coffee Company Sdn. Bhd. (Malaysia)
Starbucks Brasil Comercio de Cafes Ltda.
Starbucks Coffee Japan, Ltd.
Starbucks Coffee Portugal Lda
CPG
The North American Coffee Partnership
Starbucks Ice Cream Partnership
StarCon, LLC was a joint venture formed in March 2007 with
Concord Music Group, Inc. (“Concord”). The Company
sold its 50% ownership interest to Concord in early fiscal 2009.
The International entities operate licensed Starbucks retail
stores. See Note 19 for a discussion of a transaction
affecting the Company’s ownership related to its markets in
France, Spain and Portugal. The Company also has licensed the
rights to produce and distribute Starbucks branded products to
two partnerships in which the Company holds 50% equity
interests. The North American Coffee Partnership with the
Pepsi-Cola Company develops and distributes bottled
Frappuccino®
beverages and Starbucks
DoubleShot®
espresso drinks. Starbucks Ice Cream Partnership developed and
distributed super premium ice creams, and was in the process of
being dissolved at the end of fiscal 2009. It was replaced by a
licensing agreement with Unilever for the manufacturing,
marketing and distribution of Starbucks super-premium ice cream
products in the US.
Prior to fiscal 2005, Starbucks acquired equity interest in its
licensed operations of Malaysia, 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 evaluated for
impairment annually. No impairments were recorded during fiscal
years 2009, 2008 or 2007.
The Company’s share of income and losses from its equity
method investments is included in Income from equity investees
on the consolidated statements of earnings. Also included in
this line item 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 $125.3 million, $128.1 million and
$107.9 million in fiscal years 2009, 2008 and 2007,
respectively. Related costs of sales, net of eliminations, were
$64.9 million, $66.2 million and $57.1 million in
fiscal years 2009, 2008 and 2007, respectively. As of
September 27, 2009 and September 28, 2008, there were
$37.6 million and $40.6 million of accounts
receivable, respectively, on the consolidated balance sheets
from equity investees primarily related to product sales and
store license fees.
As of September 27, 2009, the aggregate market value of the
Company’s investment in Starbucks Japan was approximately
$241 million, based on its available quoted market price.
Summarized combined financial information of the Company’s
equity method investees, which represent 100% of the
investees’ financial information (in millions):
Financial Position as of
Current assets
Noncurrent assets
Current liabilities
Noncurrent liabilities
Results of Operations for Fiscal Year Ended
Net revenues
Cost
Method Investments
The Company has equity interests in entities that develop and
operate Starbucks licensed retail stores in several global
markets. The value of these investments was $36.6 million
and $31.9 million as of September 27, 2009 and
September 28, 2008, respectively. Additionally, Starbucks
has investments in privately held equity securities unrelated to
Starbucks licensed retail stores. The value of these investments
was $2.5 million at September 27, 2009 and
$2.8 million at September 28, 2008. As of
September 27, 2009 and September 28, 2008, management
determined that the estimated fair values of each cost method
investment exceeded the related carrying values. In the third
quarter of fiscal 2009 Starbucks recognized a loss of
$0.3 million on one of the investments that is unrelated to
Starbucks licensed retail stores. There were no realized losses
recorded for
other-than-temporary
impairment of the Company’s cost method investments during
fiscal years 2008 or 2007.
Starbucks has the ability to acquire additional interests in
some of these 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.
Property, plant and equipment (in millions):
Land
Buildings
Leasehold improvements
Store equipment
Roasting equipment
Furniture, fixtures and other
Work in progress
Less accumulated depreciation and amortization
Other intangible assets (in millions):
Indefinite-lived intangibles
Definite-lived intangibles
Accumulated amortization
Definite-lived intangibles, net
Total other intangible assets
Definite-lived intangibles approximate remaining weighted
average useful life in years
Amortization expense for definite-lived intangibles was
$1.7 million, $1.5 million and $1.0 million
during fiscal 2009, 2008 and 2007, respectively.
Estimated amortization expense for each of the next five fiscal
years and thereafter, as of September 27, 2009
(in millions):
Fiscal Year Ending
2010
2011
2012
2013
2014
Thereafter
Changes in the carrying amount of goodwill by reportable
operating segment for the fiscal year ended September 27,
2009 (in millions):
Balance as of September 28, 2008
Purchase price adjustment of previous acquisitions
Impairment
Other
Balance as of September 27, 2009
The impairment of $7.0 million relates to the
Company’s Hawaii reporting unit as discussed further in
Note 1.
The decrease in goodwill of $1.2 million was due to
purchase price adjustments for property, plant and equipment
acquired as a part of the Coffee Vision, Inc. acquisition,
completed in the fourth quarter of fiscal 2008. The increase in
goodwill of $0.8 million included in Other was due to
foreign currency fluctuations.
Debt consisted of the following (in millions):
Commercial paper program (end of period weighted average
interest rate of 3.4)%
Revolving credit facility (end of period weighted average
interest rate of 3.5)%
Current portion of long-term debt
Short-term debt
6.25%
10-year
Senior Notes (due Aug 2017)
Other long-term debt
Long-term debt
Total debt
Revolving
Credit Facility and Commercial Paper Program
The Company has a $1 billion unsecured credit facility (the
“credit facility”) with various banks, of which
$100 million may be used for issuances of letters of
credit. The credit facility is available for working capital,
capital expenditures and other corporate purposes, which may
include acquisitions and share repurchases. The credit facility
is currently set to terminate in August 2011. On
October 31, 2008, the Company entered into an amendment to
its facility that, among other changes, increased the interest
rate range for borrowings under the credit facility to 0.21% to
0.67% over LIBOR or the greater of the bank prime rate or the
Federal Funds Rate plus 0.50%. The specific spread over LIBOR
will continue to depend upon the Company’s long-term credit
ratings assigned by Moody’s and Standard &
Poor’s rating agencies and the Company’s coverage
ratio. The credit facility contains provisions requiring the
Company to maintain compliance with certain covenants, including
a minimum fixed charge coverage ratio which measures the
Company’s ability to cover financing expenses.
Under the Company’s commercial paper program it may issue
unsecured commercial paper notes, up to a maximum aggregate
amount outstanding at any time of $1 billion, with
individual maturities that may vary, but not exceed
397 days from the date of issue. The program is backstopped
by the Company’s credit facility, and the combined
borrowing limit is $1 billion for the commercial paper
program and the credit facility. The Company may issue
commercial paper from time to time, and the proceeds of the
commercial paper financing will be used for working capital
needs, capital expenditures and other corporate purposes, which
may include acquisitions and share repurchases.
As of September 27, 2009, the Company also had
$14.1 million in letters of credit outstanding under the
credit facility, leaving a total of $985.9 million in
remaining borrowing capacity under the combined credit facility
and commercial paper program. As of September 28, 2008,
letters of credit totaling $15.9 million were outstanding.
Long-term
Debt
In August 2007, the Company issued $550 million of
6.25% Senior Notes (the “notes”) due in August
2017, in an underwritten registered public offering. Interest is
payable semi-annually on February 15 and August 15 of each year.
The notes require the Company to maintain compliance with
certain covenants, which limit future liens and sale and
leaseback transactions on certain material properties.
Other long term debt, totaling $0.1 million as of
September 27, 2009, matures in fiscal 2011.
Scheduled principal payments on long-term debt are as follows
(in millions):
Total principal payments
Interest
Expense
Interest expense, net of interest capitalized, was
$39.1 million, $53.4 million and $38.2 million in
fiscal 2009, 2008 and 2007, respectively. In fiscal 2009, 2008
and 2007, $2.9 million, $7.2 million and
$3.9 million, respectively, of interest was capitalized for
new store and other asset construction projects, and included in
Net property, plant and equipment on the consolidated balance
sheets.
Other long-term liabilities (in millions):
Deferred rent
Unrecognized tax benefits
Asset retirement obligations
Minority interest
Deferred rent liabilities represent amounts for tenant
improvement allowances, rent escalation clauses and rent
holidays related to certain operating leases. The Company
amortizes deferred rent over the terms of the leases as
reductions to rent expense on the consolidated statements of
earnings. Unrecognized tax benefits represent the estimated
long-term portion of the Company’s gross unrecognized tax
benefits including interest. See Notes 1 and 15 for
additional information. Asset retirement obligations represent
the estimated fair value of the Company’s
future costs of removing leasehold improvements at the
termination of leases for certain stores and administrative
facilities. Minority interest represents the collective
ownership interests of minority shareholders for operations
accounted for under the consolidation method, in which Starbucks
owns less than 100% of the equity interest. The other remaining
long-term liabilities generally include obligations to be
settled or paid for one year beyond each period presented, for
items such as hedging instruments and the long-term portion of
capital lease obligations.
In the fourth quarter of fiscal 2009 Starbucks determined that
there was an immaterial classification error in the lease
footnote of the 2008
10-K.
Amounts of $25.7 million and $22.7 million for the
fiscal years ended September 28, 2008 and
September 30, 2007, respectively, were incorrectly
classified as contingent rent that should have been classified
as minimum rentals. The total for rent expense under operating
leases was not impacted. The following table reflects the
corrected amounts for fiscal 2008 and 2007.
Rental expense under operating lease agreements (in
millions):
Minimum rentals
Contingent rentals
Minimum future rental payments under noncancelable operating
leases as of September 27, 2009 (in millions):
Total minimum lease payments
The Company has subleases related to certain of its operating
leases. During fiscal 2009, 2008 and 2007, the Company
recognized sublease income of $7.1 million,
$3.5 million and $3.6 million, respectively.
The Company had capital lease obligations of $7.8 million
and $6.7 million as of September 27, 2009 and
September 28, 2008, respectively. Capital lease obligations
expire at various dates, with the latest maturity in 2015. The
current portion of the total obligation is included in Other
accrued expenses and the remaining long-term portion is included
in Other long-term liabilities on the consolidated balance
sheets. Assets held under capital leases are included in Net
property, plant and equipment on the consolidated balance sheets.
The Company had $76.2 million and $91.1 million in
prepaid rent included in Prepaid expenses and other current
assets on the consolidated balance sheets as of
September 27, 2009 and September 28, 2008,
respectively.
In addition to 1.2 billion shares of authorized common
stock with $0.001 par value per share, the Company has
authorized 7.5 million shares of preferred stock, none of
which was outstanding at September 27, 2009.
Share repurchase activity was as follows (in millions, except
for average price data):
Number of shares acquired
Average price per share of acquired shares
Total accrual-based cost of acquired shares
Total cash-based cost of acquired shares
The difference between the accrual-based and cash-based cost of
acquired shares represents the effect of the net change in
unsettled trades from the prior fiscal year end.
As of September 27, 2009, 6.3 million shares remained
available for repurchase under current authorizations.
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
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 (in
millions):
Unrealized holding gains/(losses) on
available-for-sale
securities, net of tax (provision)/benefit of $(1.9), $2.4, and
($0.2) in 2009, 2008 and 2007, respectively
Unrealized holding gains/(losses) on cash flow hedging
instruments, net of tax (provision)/benefit of $(2.4), ($0.4)
and $7.5 in 2009, 2008 and 2007, respectively
Unrealized holding losses on net investment hedging instruments,
net of tax benefit of $4.0, $0.6 and $5.2 in 2009, 2008 and
2007, respectively
Reclassification adjustment for net losses realized in net
earnings for cash flow hedges, net of tax benefit of $0.8, $3.0
and $0.5 in 2009, 2008 and 2007, respectively
Net unrealized gain/(loss)
Translation adjustment, net of tax benefit of $6.0, $0.3 and
$— in 2009, 2008, and 2007, respectively
Total comprehensive income
The favorable translation adjustment change during fiscal 2009
of $15.2 million was primarily due to the weakening of the
US dollar against the Japanese yen, Australian dollar and the
euro. The unfavorable translation adjustment change during
fiscal 2008 of $7.0 million was primarily due to the
strengthening of the US dollar against several currencies
including the Australian dollar, Korean won and Canadian dollar.
The favorable translation adjustment change during fiscal 2007
of $37.7 million was primarily due to the weakening of the
US dollar against several currencies including the euro,
Canadian dollar and British pound.
Components of Accumulated other comprehensive income, net of tax
(in millions):
Net unrealized losses on
available-for-sale
securities
Net unrealized losses on hedging instruments
Translation adjustment
Accumulated other comprehensive income
As of September 27, 2009, the translation adjustment of
$89.9 million was net of tax provisions of
$1.0 million. As of September 28, 2008, the
translation adjustment of $74.7 million was net of tax
provisions of $7.0 million.
The Company maintains several equity incentive plans under which
it may grant non-qualified stock options, incentive stock
options, restricted stock, RSUs, or stock appreciation rights to
employees, non-employee directors and consultants. The Company
issues new shares of common stock upon exercise of stock options
and the vesting of RSUs. The Company also has employee stock
purchase plans (“ESPP”).
As of September 27, 2009, there were 38.2 million
shares of common stock available for issuance pursuant to future
equity-based compensation awards and 9.8 million shares
available for issuance under its ESPP plans.
Total stock based compensation and ESPP expense recognized in
the consolidated financial statements (in millions):
Stock option expense
RSU expense
ESPP expense
Total stock-based compensation expense on the consolidated
statements of earnings
Total related tax benefit
Stock-based compensation capitalized in the respective fiscal
year, as included in Net property, plant and equipment and
inventories on the consolidated balance sheets
Stock
Option Plans
Stock options to purchase the Company’s common stock are
granted at the fair market value of the stock on the date of
grant. The majority of options become exercisable in four equal
installments beginning a year from the date of grant and
generally expire 10 years from the date of grant, except
for options granted in the exchange program, described below,
which have a seven year life. Options granted to non-employee
directors generally vest over one to three years. Nearly all
outstanding stock options are non-qualified stock options.
The fair value of each stock option granted is estimated on the
grant date using the Black-Scholes-Merton (“BSM”)
option valuation model. The assumptions used to calculate the
fair value of options granted are evaluated and revised, as
necessary, to reflect market conditions and the Company’s
experience. Options granted are valued using the multiple option
valuation approach, and the resulting expense is recognized over
the requisite service period for each separately vesting portion
of the award. Compensation expense is recognized only for those
options expected to vest, with forfeitures estimated at the date
of grant based on the Company’s historical experience and
future expectations.
On March 18, 2009, Starbucks shareholders approved a
proposal to allow for a one-time stock option exchange program,
designed to provide eligible employees an opportunity to
exchange certain outstanding underwater stock
options for a lesser amount of new options to be granted with
lower exercise prices. Stock options eligible for exchange were
those with an exercise price per share greater than $19.00 that
were granted prior to December 1, 2007 under the
Company’s Amended and Restated 2005 Long-Term Equity
Incentive Plan (the “2005 Plan”), the Amended and
Restated Key Employee Stock Option Plan-1994 or the 1991
Company-Wide Stock Option Plan. On May 1, 2009 Starbucks
commenced the option exchange program, which expired on
May 29, 2009. A total of 14.3 million eligible stock
options were tendered by employees, representing 65% of the
total stock options eligible for exchange. On June 1, 2009,
the Company granted an aggregate of 4.7 million new stock
options in exchange for the eligible stock options surrendered.
The exercise price of the new stock options was $14.92, which
was the closing price of Starbucks common stock on June 1,
2009. The new stock options were granted under the 2005 Plan. No
incremental stock option expense was recognized for the exchange
because the fair value of the new options, using standard
employee stock option valuation techniques, was approximately
equal to the fair value of the surrendered options they replaced.
The fair value of stock option awards and ESPP shares was
estimated at the grant date with the following weighted average
assumptions for the fiscal years ended September 27, 2009,
September 28, 2008 and September 30, 2007 (excludes
options granted in the 2009 stock option exchange program
described above):
Expected term (in years)
Expected stock price volatility
Risk-free interest rate
Expected dividend yield
Weighted average grant price
Estimated fair value per option granted
The expected term of the options represents the estimated period
of time until exercise and is based on historical experience of
similar awards, giving consideration to the contractual terms,
vesting schedules and expectations of future employee behavior.
Expected stock price volatility is based on a combination of
historical volatility of the Company’s stock and the
one-year implied volatility of its traded options, for the
related vesting periods. The risk-free interest rate is based on
the implied yield available on US Treasury zero-coupon issues
with an equivalent remaining term. As the Company does not pay
dividends, the dividend yield is 0%. The amounts shown above for
the estimated fair value per option granted are before the
estimated effect of forfeitures, which reduce the amount of
expense recorded on the consolidated statement of earnings.
The BSM option valuation model was developed for use in
estimating the fair value of traded options, which have no
vesting restrictions and are fully transferable. 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 Starbucks stock options
do not trade on a secondary exchange, employees do not derive a
benefit from holding stock options unless there is an increase,
above the grant price, in the market price of the Company’s
stock. Such an increase in stock price would benefit all
shareholders commensurately.
Stock option transactions from October 1, 2006, through
September 27, 2009 (in millions, except per share and
contractual life amounts):
Outstanding, October 1, 2006
Granted
Exercised
Expired/forfeited
Outstanding, September 30, 2007
Outstanding, September 28, 2008
Granted under option exchange program
Cancelled under option exchange program
Outstanding, September 27, 2009
Exercisable, September 27, 2009
Vested and expected to vest, September 27, 2009
The aggregate intrinsic value in the table above is the amount
by which the market value of the underlying stock exceeded the
exercise price of outstanding options, is before applicable
income taxes and represents the amount optionees would have
realized if all
in-the-money
options had been exercised on the last business day of the
period indicated. The closing per share market value of the
Company’s stock on September 25, 2009 was $19.83.
As of September 27, 2009, total unrecognized stock-based
compensation expense, net of estimated forfeitures, related to
nonvested stock options was approximately $68 million,
before income taxes, and is expected to be recognized over a
weighted average period of approximately 2.7 years. The
total intrinsic value of stock options exercised was
$44 million, $50 million and $274 million during
the three fiscal years ended September 27, 2009. The total
fair value of options vested was $75 million,
$99 million and $28 million during fiscal years 2009,
2008 and 2007, respectively.
RSUs
The Company has both time-vested and performance-based RSUs.
Time-vested RSUs are awarded to eligible employees and entitle
the grantee to receive shares of common stock at the end of a
vesting period, subject solely to the employee’s continuing
employment. The Company’s performance-based RSUs are
awarded to eligible employees and entitle the grantee to receive
shares of common stock if the Company achieves specified
performance goals for the full fiscal year in the year of award
and the grantee remains employed during the subsequent vesting
period. The fair value of RSUs is based on the closing price of
Starbucks common stock on the award date. Expense for
performance-based RSUs is recognized when it is probable the
performance goal will be achieved.
Summary of all RSU transactions from October 1, 2006
through September 27, 2009 (in millions, except per
share and contractual life amounts):
Nonvested, October 1, 2006,
Vested
Forfeited/Cancelled
Nonvested, September 30, 2007
Nonvested, September 28, 2008
Nonvested, September 27, 2009
As of September 27, 2009, total unrecognized stock-based
compensation expense related to nonvested RSUs, net of estimated
forfeitures, was approximately $23 million, before income
taxes, which is expected to be recognized over a weighted
average period of approximately 2.4 years.
ESPP
The Company’s ESPP allows eligible employees to contribute
up to 10% of their base earnings toward the quarterly purchase
of the Company’s common stock, subject to an annual maximum
dollar amount. The ESPP for US employees was amended in March
2009 to change the employees’ purchase price to 95% of the
fair market value of the stock on the last business day of the
quarterly offering period. Prior to the amendment, the
employees’ purchase price was 85% of the lesser of the fair
market value of the stock on the first or last business day of
the quarterly offering period.
Summary of transactions under this ESPP from fiscal year 2007
through 2009 (shares in millions):
Issued during fiscal year 2007
Issued during fiscal year 2008
Issued during fiscal year 2009
Total number of shares issuable under the plan
Total number of shares issued since inception
Shares available for future issuance
Starbucks has an additional employee stock purchase plan in the
UK, which allows eligible UK 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 awards one matching share for each six shares purchased
under the plan. The Company did not initiate a new offering
period at the conclusion of the six-month offering period that
ended April 30, 2009, and does not plan to reactivate plan
offerings in the immediate future. The total number of shares
issuable under the plan is 1.4 million. As of
September 27, 2009, 1.3 million shares were available
for future issuance.
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
September 27, 2009, receipt of 3.4 million 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. No new initial deferrals are permitted
under this plan; the plan permits re-deferrals of previously
deferred shares.
Defined
Contribution Plans
Starbucks maintains voluntary defined contribution plans, both
qualified and non-qualified, covering eligible employees as
defined in the plan documents. Participating employees may elect
to defer and contribute a portion of their eligible compensation
to the plans up to limits stated in the plan documents, not to
exceed the dollar amounts set by applicable laws. Effective
beginning in plan year 2009, the Company changed to a fully
discretionary matching contribution, from one based on a fixed
schedule tied to participant contribution percentage and
employment tenure.
The Company’s matching contributions to all US and non-US
plans were $19.7 million, $25.3 million and
$20.1 million in fiscal years 2009, 2008 and 2007,
respectively.
Provision for income taxes (in millions):
Current taxes:
Federal
State
Foreign
Deferred taxes, net
Reconciliation of the statutory federal income tax rate with the
Company’s effective income tax rate:
Statutory rate
State income taxes, net of federal income tax benefit
Foreign earnings taxed at lower rates
Domestic production activity deduction
Credit resulting from employment audit
Other, net
US income and foreign withholding taxes have not been provided
on approximately $520 million of cumulative undistributed
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 US, in the form
of dividends or otherwise, the Company would be subject to
additional US income taxes. Determination of the amount of
unrecognized deferred income tax liabilities on these earnings
is not practicable because such liability, if any, is dependent
on circumstances existing if and when remittance occurs.
Tax effect of temporary differences and carryforwards that
comprise significant portions of deferred tax assets and
liabilities (in millions):
Deferred tax assets:
Asset retirement obligation asset
Asset impairments
Tax credits
Stock based compensation
Other
Valuation allowance
Total deferred tax asset, net of valuation allowance
Deferred tax liabilities:
Property, plant and equipment
Net deferred tax asset
Reported as:
Current deferred income tax asset
Long-term deferred income tax asset (included in Other assets)
The Company will establish a valuation allowance if either it is
more likely than not that the deferred tax asset will expire
before the Company is able to realize their benefits, or the
future deductibility is uncertain. Periodically, the valuation
allowance is reviewed and adjusted based on management’s
assessments of realizable deferred tax assets. The valuation
allowance as of September 27, 2009 and September 28,
2008 was related to net operating losses of consolidated foreign
subsidiaries. The net change in the total valuation allowance
for the years ended September 27, 2009, and
September 28, 2008, was an increase of $0.3 million
and $6.3 million, respectively.
As of September 27, 2009, the Company has foreign tax
credit carryforwards of $38.5 million with expiration dates
between fiscal years 2013 and 2019. As of the end of fiscal
2009, the Company also has capital loss carryforwards of
$1.1 million with expiration dates between fiscal years
2010 and 2014.
Taxes currently payable of $57.2 million and
$14.8 million are included in Accrued taxes on the
consolidated balance sheets as of September 27, 2009 and
September 28, 2008, respectively.
Uncertain
Tax Positions
As described in Note 1, on October 1, 2007, the first
day of the Company’s fiscal 2008, Starbucks adopted new
accounting requirements for uncertain tax positions. The
cumulative effects of the related changes were recorded as a
decrease of $1.7 million and $1.6 million,
respectively, to the Company’s fiscal 2008 opening balances
of retained earnings and additional paid-in capital. The Company
also recorded an increase of $28.5 million to current
income tax assets, an increase of $12.2 million to
long-term income tax assets, a decrease of $24.6 million to
current tax liabilities and an increase of $68.6 million to
long-term tax liabilities.
As of September 27, 2009, the Company had
$49.1 million of gross unrecognized tax benefits of which
$25.4 million, if recognized, would affect the effective
tax rate. The Company recognizes interest and penalties related
to income tax matters in income tax expense. As of
September 27, 2009 and September 28, 2008, the Company
had accrued interest and penalties of $9.9 million and
$9.1 million, respectively, before benefit of federal tax
deduction, recorded on its consolidated balance sheets.
The following table summarizes the activity related to the
Company’s unrecognized tax benefits from October 1,
2007 to September 27, 2009 (in millions):
Beginning balance
Increase related to prior year tax positions
Decrease related to prior year tax positions
Increase related to current year tax positions
Decrease related to current year tax positions
Decreases related to settlements with taxing authorities
Decreases related to lapsing of statute of limitations
Ending balance
Starbucks is currently under routine audit by various
jurisdictions outside the US as well as US state taxing
jurisdictions for fiscal years 2003 through 2008. The Company is
no longer subject to US federal or state examination for years
before fiscal year 2005, with the exception of three states. The
Company is subject to income tax in many jurisdictions outside
the US, none of which are individually material to the
consolidated financial statements.
There is a reasonable possibility that the unrecognized tax
benefits will change within the next 12 months, but the
Company does not expect this change to be material to the
consolidated financial statements.
Calculation of net earnings per common share
(“EPS”) — basic and diluted (in millions,
except EPS):
Weighted average common shares and common stock units
outstanding (for basic calculation)
Dilutive effect of outstanding common stock options and RSUs
Weighted average common and common equivalent shares outstanding
(for diluted calculation)
EPS — basic
Potential dilutive shares consist of the incremental common
shares issuable upon the exercise of outstanding stock options
(both vested and non-vested) and unvested RSUs, using the
treasury stock method. Potential dilutive shares are excluded
from the computation of earnings per share if their effect is
antidilutive. The number of antidilutive options totaled
16.6 million, 40.4 million and 10.4 million, in
fiscal years 2009, 2008 and 2007, respectively.
Guarantees
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 Japan.
The guarantees continue until the
loans, including accrued interest and fees, have been paid in
full. The Company’s maximum exposure under this commitment
is disclosed in the table below and is limited to the sum of
unpaid principal and interest, as well as other related
expenses. These amounts will vary based on fluctuations in the
yen foreign exchange rate.
Starbucks has commitments under which it unconditionally
guarantees its proportionate share of certain borrowings of
unconsolidated equity investees. The Company’s maximum
exposure under these commitments disclosed in the table below
excludes interest and other related costs. The fair value of
these guarantees is included in Equity and cost investments and
Other accrued expenses on the consolidated balance sheets.
The following table presents information on unconditional
guarantees as of September 27, 2009 (in millions):
Japanese yen-denominated bank loans
Borrowings of other unconsolidated equity investees
Legal
Proceedings
On October 8, 2004, a former hourly employee of the Company
filed a lawsuit in San Diego County Superior Court entitled
Jou Chau v. Starbucks Coffee Company. The lawsuit
alleged that the Company violated the California Labor Code by
allowing shift supervisors to receive tips. More specifically,
the lawsuit alleged that since shift supervisors direct the work
of baristas, they qualify as “agents” of the Company
and are therefore excluded from receiving tips under California
Labor Code Section 351, which prohibits employers and their
agents from collecting or receiving tips left by patrons for
other employees. The lawsuit further alleges that because the
tipping practices violated the Labor Code, they were unfair
practices under the California Unfair Competition Law. On
February 28, 2008, the trial court ruled against the
Company in the liability phase of the trial and on
March 20, 2008 the court ordered the Company to pay
approximately $87 million in restitution, plus interest.
The Company appealed the decision of the trial court and on
June 2, 2009 the California Court of Appeal reversed the
trial court’s judgment in its entirety and ruled in favor
of Starbucks. The Court of Appeal denied plaintiffs’
petition for rehearing and reaffirmed its ruling on July 2,
2009. The plaintiffs filed a petition for review with the
California Supreme Court on July 13, 2009. The California
Supreme Court denied plaintiffs’ petition for review. The
trial court has been ordered to enter judgment for Starbucks and
dismiss the case.
On June 30, 2005, three individuals, Erik Lords, Hon Yeung,
and Donald Brown filed a lawsuit in Orange County Superior
Court, California. The lawsuit alleged that the Company violated
the California Labor Code section 432.8 by asking job
applicants to disclose at the time of application convictions
for marijuana related offenses more than two years old. The
California Court of Appeal issued a ruling on December 10,
2008 instructing the trial judge to enter summary judgment
against plaintiffs and the California Supreme Court has rejected
the plaintiffs’ appeal. The matter is now back before the
trial court awaiting final dismissal.
The Company is party to various other 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.
Segment information is prepared on the same basis that the
Company’s management reviews financial information for
operational decision making purposes. Starbucks has three
reportable operating segments: US, International and CPG. In the
fourth fiscal quarter of 2009, the Company changed the
composition of its reportable segments. The US foodservice
business, which was previously reported in the US segment, is
now reported in the CPG segment, as a
result of internal management realignments within the US and CPG
businesses. Segment information for all prior periods presented
has been revised to reflect this change.
The Company’s US operations represent 80% of total
Company-operated retail revenues, 33% of total specialty
revenues and 73% of total net revenues for fiscal year 2009. US
operations sell coffee and other beverages, complementary food,
whole bean coffees, and coffee brewing equipment and merchandise
primarily through Company-operated retail stores. Specialty
operations within the US include licensed retail stores, and
other initiatives related to the Company’s core business.
The Company’s International operations represent the
remaining 20% of Company-operated retail revenues and 20% of
total specialty revenues as well as 19% of total net revenues
for fiscal year 2009. International operations sell coffee and
other beverages, complementary food, whole bean coffees, and
coffee brewing equipment and merchandise through
Company-operated retail stores in the UK, Canada and several
other markets. Specialty operations in International primarily
include retail store licensing operations in nearly 40 countries
and foodservice accounts, primarily in Canada and the UK. Many
of the Company’s International operations are in early
stages of development that require a more extensive support
organization, relative to the current levels of revenue and
operating income, than in the US.
The Company’s CPG segment represents 47% of total specialty
revenues and 8% of total net revenues for fiscal year 2009. CPG
operations sell a selection of whole bean and ground coffees as
well as a selection of premium
Tazo®
teas through licensing arrangements in US and international
markets. CPG operations also produce and sell
ready-to-drink
beverages which include, among others, bottled
Frappuccino®
beverages, Starbucks
DoubleShot®
espresso drinks, and
Discoveries®
chilled cup coffee, as well as
Starbucks®
super-premium ice creams through its marketing and distribution
agreements and joint ventures. The US foodservice business sells
coffee and other related products to institutional foodservice
companies with the majority of its sales through national
broadline distribution networks.
Unallocated Corporate includes expenses pertaining to corporate
administrative functions that support the operating segments but
are not specifically attributable to or managed by any segment
and are not included in the reported financial results of the
operating segments. These unallocated corporate expenses include
certain general and administrative expenses, related
depreciation and amortization expenses, restructuring charges
and amounts included in Net interest income and other and
Interest expense on the consolidated statements of earnings.
The Company’s revenue mix by product type was as follows
(in millions):
Beverage
Other(1)
The tables below represent information by geographic area (in
millions):
Net revenues from external customers:
Other countries
No customer accounts for 10% or more of the Company’s
revenues. Revenues are shown based on the geographic location of
the customers. Revenues from countries other than the US consist
primarily of revenues from Canada and the UK, which together
account for approximately 66% of net revenues from other
countries for fiscal 2009.
Long-lived assets:
Management evaluates the performance of its operating segments
based on net revenues and operating income. 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 Net
interest income and other, Interest expense and Income taxes.
Management does not evaluate the performance of its operating
segments using asset measures. The identifiable assets by
segment disclosed in this note are those assets specifically
identifiable with each segment and include net property, plant
and equipment, equity and cost investments, goodwill, and other
intangible assets. Corporate assets are primarily comprised of
cash and investments, assets of the corporate headquarters and
roasting facilities, and inventory. The methodology used to
identify specific assets with the segments in fiscal 2009 was
applied to the fiscal 2008 and 2007 amounts disclosed below.
The table below presents information by operating segment for
the fiscal years noted (in millions):
Fiscal 2009:
Net Revenues:
Company-operated retail
Specialty:
Licensing
Foodservice and other
Total specialty
Total net revenues
Depreciation and amortization
Income from equity investees
Operating income/(loss)
Equity method investments
Total assets
Net impairment and disposition losses
Fiscal 2008:
Income (loss) from equity investees
Fiscal 2007:
The table below reconciles the total of the reportable
segments’ operating income to the Company’s
consolidated earnings before income taxes (in millions):
On September 30, 2009, Starbucks acquired 100 percent
ownership of the Company’s business in France, converting
it from a 50% joint venture with Sigla S.A. (Grupo Vips) of
Spain to a Company-operated market. Starbucks simultaneously
sold its 50% ownership interests in the Spain and Portugal
markets to Grupo Vips, converting them to licensed markets.
2009:
Net revenues
Operating
income(1)
Net
earnings(1)
EPS — diluted
2008:
Operating
income/(loss)(2)
Net
earnings/(loss)(2)
To the Board of Directors and Shareholders of Starbucks
Corporation
Seattle, Washington
We have audited the accompanying consolidated balance sheets of
Starbucks Corporation and subsidiaries (the “Company”)
as of September 27, 2009 and September 28, 2008, and
the related consolidated statements of earnings,
shareholders’ equity, and cash flows for each of the three
years in the period ended September 27, 2009. 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
Starbucks Corporation and subsidiaries as of September 27,
2009 and September 28, 2008, and the results of their
operations and their cash flows for each of the three years in
the period ended September 27, 2009, in conformity with
accounting principles generally accepted in the United States of
America.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of
September 27, 2009, based on criteria established in
Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
and our report dated November 20, 2009 expressed an
unqualified opinion on the Company’s internal control over
financial reporting.
/s/ DELOITTE & TOUCHE LLP
November 20, 2009
Not applicable.
Disclosure
Controls and Procedures
The Company maintains disclosure controls and procedures that
are designed to ensure that material information required to be
disclosed in the Company’s periodic reports filed or
submitted under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), is recorded, processed,
summarized and reported within the time periods specified in the
SEC’s rules and forms. Starbucks disclosure controls and
procedures are also designed to ensure that information required
to be disclosed in the reports the Company files or submits
under the Exchange Act is accumulated and communicated to the
Company’s management, including its principal executive
officer and principal financial officer as appropriate, to allow
timely decisions regarding required disclosure.
During the fourth quarter of fiscal 2009 the Company carried out
an evaluation, under the supervision and with the participation
of the Company’s management, including the chief executive
officer and the chief financial officer, of the effectiveness of
the design and operation of the disclosure controls and
procedures, as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act. Based upon that evaluation, the
Company’s chief executive officer and chief financial
officer concluded that the Company’s disclosure controls
and procedures were effective, as of the end of the period
covered by this report (September 27, 2009).
During the fourth quarter of fiscal 2009, there were no changes
in the Company’s internal control over financial reporting
(as defined in
Rules 13a-15(f)
and
15d-15(f) of
the Exchange Act) that materially affected or are reasonably
likely to materially affect internal control over financial
reporting.
The certifications required by Section 302 of the
Sarbanes-Oxley Act of 2002 are filed as exhibits 31.1 and
31.2, respectively, to this
10-K.
Report of
Management on Internal Control over Financial
Reporting
The management of Starbucks is responsible for establishing and
maintaining adequate internal control over financial reporting.
Internal control over financial reporting is a process to
provide reasonable assurance regarding the reliability of the
Company’s financial reporting for external purposes in
accordance with accounting principles generally accepted in the
United States of America. Internal control over financial
reporting includes maintaining records that in reasonable detail
accurately and fairly reflect the Company’s transactions;
providing reasonable assurance that transactions are recorded as
necessary for preparation of the Company’s financial
statements; providing reasonable assurance that receipts and
expenditures are made in accordance with management
authorization; and providing reasonable assurance that
unauthorized acquisition, use or disposition of company assets
that could have a material effect on the Company’s
financial statements would be prevented or detected on a timely
basis. Because of its inherent limitations, internal control
over financial reporting is not intended to provide absolute
assurance that a misstatement of the Company’s financial
statements would be prevented or detected.
Management conducted an evaluation of the effectiveness of the
Company’s internal control over financial reporting based
on the framework and criteria established in Internal
Control — Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. This evaluation included review of the documentation
of controls, evaluation of the design effectiveness of controls,
testing of the operating effectiveness of controls and a
conclusion on this evaluation. Based on this evaluation,
management concluded that the Company’s internal control
over financial reporting was effective as of September 27,
2009.
The Company’s internal control over financial reporting as
of September 27, 2009, has been audited by
Deloitte & Touche LLP, an independent registered
public accounting firm, as stated in their report which is
included herein.
Report of
Independent Registered Public Accounting Firm
We have audited the internal control over financial reporting of
Starbucks Corporation and subsidiaries (the “Company”)
as of September 27, 2009, based on criteria established in
Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. The Company’s management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Report of
Management on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit.
We conducted our audit 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 effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed by, or under the supervision of, the
company’s principal executive and principal financial
officers, or persons performing similar functions, and effected
by the company’s board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of September 27, 2009, based on the criteria established in
Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the fiscal year
ended September 27, 2009, of the Company and our report
dated November 20, 2009 expressed an unqualified opinion on
those financial statements.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
November 20, 2009
As used in this Part III, “Starbucks” and the
“Company” mean Starbucks Corporation.
The information required by this item regarding the
Company’s directors is incorporated herein by reference to
the sections entitled “Proposal 1 — Election
Of Directors” and “Executive Compensation —
Section 16(a) Beneficial Ownership Reporting
Compliance” and “Corporate Governance
— Board Committees and Related Matters” in the
Company’s definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on March 24, 2010 (the
“Proxy Statement”). Information regarding the
Company’s executive officers is set forth in Item 4 of
Part 1 of this Report under the caption “Executive
Officers of the Registrant.”
The Company adopted a code of ethics applicable to its chief
executive officer, chief financial officer, controller and other
finance leaders, which is a “code of ethics” as
defined by applicable rules of the SEC. This code is publicly
available on the Company’s website at
www.starbucks.com/aboutus/corporate_governance.asp. If the
Company makes any amendments to this code other than technical,
administrative or other non-substantive amendments, or grants
any waivers, including implicit waivers, from a provision of
this code to the Company’s chief executive officer, chief
financial officer or controller, the Company will disclose the
nature of the amendment or waiver, its effective date and to
whom it applies on its website or in a report on
Form 8-K
filed with the SEC.
The information required by this item is incorporated by
reference to the sections entitled “Executive
Compensation” and “Corporate Governance —
Compensation Committee” in the Proxy Statement.
The information required by this item is incorporated by
reference to the sections entitled “Beneficial Ownership of
Common Stock” and “Executive Compensation —
Equity Compensation Plan Information” in the Proxy
Statement.
The information required by this item is incorporated by
reference to the section entitled “Executive
Compensation — Certain Relationships and Related
Transactions” and “Corporate Governance —
Affirmative Determinations Regarding Director Independence and
Other Matters” in the Proxy Statement.
The information required by this item is incorporated by
reference to the sections entitled “Independent Registered
Public Accounting Firm Fees” and “Policy on Audit
Committee Pre-Approval of Audit and Permissible Non-Audit
Services of the Independent Registered Public Accounting
Firm” in the Proxy Statement.
(a) The following documents are filed as a part of this
10-K:
The following financial statements are included in Part II,
Item 8 of this
10-K:
Financial statement schedules are omitted because they are not
required or are not applicable, or the required information is
provided in the consolidated financial statements or notes
described in Item 15(a)(1) above.
The Exhibits listed in the Index to Exhibits, which appears
immediately following the signature page and is incorporated
herein by reference, are filed as part of this
10-K.
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
STARBUCKS CORPORATION
/s/ Howard
Schultz
Howard Schultz
chairman, president and chief executive officer
POWER OF
ATTORNEY
Know all persons by these presents, that each person whose
signature appears below constitutes and appoints Howard Schultz
and Troy Alstead, and each of them, as such person’s true
and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for such person and in such
person’s name, place and stead, in any and all capacities,
to sign any and all amendments to this Report, and to file the
same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as
such person might or could do in person, hereby ratifying and
confirming that all said attorneys-in-fact and agents, or any of
them or their or such person’s substitute or substitutes,
may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this report has been signed below by the
following persons on behalf of the Registrant and in the
capacities indicated as of November 20, 2009.
Signature
Title
/s/ Troy
Alstead
/s/ Barbara
Bass
/s/ William
W. Bradley
/s/ Mellody
Hobson
/s/ Kevin
Johnson
/s/ Olden
Lee
/s/ Sheryl
Sandberg
/s/ James
G. Shennan Jr.
/s/ Javier
G. Teruel
/s/ Myron
E. Ullman III
/s/ Craig
E. Weatherup
Number
Exhibit Description
Form
File No.
First Filing
Herewith