-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PbEJRfN5X/YWiIXk8o+p326w7tKVTBTkgmC1Wj8HiXxrDnVSB+e53LwyUoLzpBWl bkrKBHuGXOMQIWHCFzsvvA== 0000829224-98-000013.txt : 19980813 0000829224-98-000013.hdr.sgml : 19980813 ACCESSION NUMBER: 0000829224-98-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980628 FILED AS OF DATE: 19980812 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: STARBUCKS CORP CENTRAL INDEX KEY: 0000829224 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING & DRINKING PLACES [5810] IRS NUMBER: 911325671 STATE OF INCORPORATION: WA FISCAL YEAR END: 0928 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20322 FILM NUMBER: 98683506 BUSINESS ADDRESS: STREET 1: P.O. BOX 34067 CITY: SEATTLE STATE: WA ZIP: 98124-1067 BUSINESS PHONE: 2064471575 MAIL ADDRESS: STREET 1: 2401 UTAH AVENUE SOUTH CITY: SEATTLE STATE: WA ZIP: 98134 10-Q 1 1998 3RD QUARTER 10-Q - -------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 28, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From ___ to ___ Commission File Number 0-20322 ----------------------------- STARBUCKS CORPORATION (Exact Name of Registrant as Specified in its Charter) Washington 91-1325671 (State or other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 2401 Utah Avenue South, Seattle, Washington 98134 (Address of Principal Executive Office, including Zip Code) (206) 447-1575 (Registrant's Telephone Number, including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] As of August 1, 1998, there were 89,104,244 shares of the Registrant's Common Stock outstanding. - -------------------------------------------------------------------- STARBUCKS CORPORATION INDEX PART I. FINANCIAL INFORMATION Page No. Item 1. Financial Statements. . . . . . . . . . . . . . . . . 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk. . . . . . . . . . . . . . . . . . 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . 15 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . 15 Signature. . . . . . . . . . . . . . . . . . . . . . . . . . 16 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS STARBUCKS CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except earnings per share)
Three Months Ended Nine Months Ended June 28, June 29, June 28, June 29, 1998 1997 1998 1997 (13 Weeks) (13 Weeks) (39 Weeks) (39 Weeks) (unaudited) (unaudited) - ------------------------------------------------------------------------- Net revenues $334,429 $244,241 $950,997 $700,665 Cost of sales and related occupancy costs 145,081 103,835 424,817 319,906 Store operating expenses 111,734 82,664 304,859 223,736 Other operating expenses 12,221 7,159 30,527 21,873 Depreciation and amortization 18,928 13,829 52,416 37,898 General and administrative expenses 20,588 14,186 57,678 40,342 Merger expenses 8,930 0 8,930 0 - ------------------------------------------------------------------------- Operating income 16,947 22,568 71,770 56,910 Interest and other income 2,176 2,605 6,662 10,065 Interest and other expense (114) (1,823) (1,193) (5,454) - ------------------------------------------------------------------------- Earnings before income taxes 19,009 23,350 77,239 61,521 Income taxes 11,110 9,151 34,421 24,194 - ------------------------------------------------------------------------- Net earnings $ 7,899 $14,199 $42,818 $37,327 ========================================================================= Net earnings per common share - basic $0.09 $0.18 $0.49 $0.47 ========================================================================= Net earnings per common and common equivalent share - diluted $0.09 $0.17 $0.47 $0.45 ========================================================================= Weighted average common shares outstanding - basic 89,069 79,679 87,547 79,335 Weighted average common and common equivalent shares outstanding - diluted 92,574 89,868 91,709 89,786
See notes to consolidated financial statements 3 STARBUCKS CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except numbers of shares)
June 28, September 28, 1998 1997 (unaudited) - ------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 91,351 $ 70,126 Short-term investments 33,789 83,504 Accounts and notes receivable 34,022 31,231 Inventories 151,830 119,767 Prepaid expenses and other current assets 10,275 8,763 Deferred income taxes, net 8,269 4,164 - -------------------------------------------------------------------- Total current assets 329,536 317,555 Joint ventures and other investments 37,138 34,464 Property, plant and equipment, net 567,548 488,791 Deposits and other assets 15,304 16,342 - -------------------------------------------------------------------- Total $ 949,526 $ 857,152 ==================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 60,576 $ 47,987 Checks drawn in excess of bank balances 22,015 28,582 Accrued compensation and related costs 34,927 25,894 Accrued occupancy costs 16,083 12,184 Other accrued expenses 34,173 28,820 - -------------------------------------------------------------------- Total current liabilities 167,774 143,467 Deferred income taxes, net 14,981 12,946 Capital lease and other obligations 1,040 2,009 Convertible subordinated debentures 0 165,020 Shareholders' equity: Common stock, no par value -- 150,000,000 shares authorized; 89,436,363 (includes 424,275 common stock units) and 80,559,023 shares, respectively, issued and outstanding 583,457 391,284 Retained earnings including cumulative translation adjustment of $(4,071) and $(1,511), respectively, and net unrealized holding (loss) gain on investments of $(347) and $63, respectively 182,274 142,426 - -------------------------------------------------------------------- Total shareholders' equity 765,731 533,710 - -------------------------------------------------------------------- Total $ 949,526 $ 857,152 ==================================================================== See notes to consolidated financial statements
4
STARBUCKS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Nine Months Ended - -------------------------------------------------------------------- June 28, June 29, 1998 1997 (39 Weeks) (39 Weeks) (unaudited) - -------------------------------------------------------------------- Operating activities: Net earnings $ 42,818 $ 37,327 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 58,312 42,252 Provision for store remodels and other charges 7,153 350 Deferred income taxes, net (1,814) 4,461 Equity in losses of investees 1,002 3,221 Cash provided/(used) by changes in operating assets and liabilities: Accounts and notes receivable (2,828) (430) Inventories (32,143) (26,751) Prepaid expenses and other current assets (1,523) (2,182) Accounts payable 11,919 12,400 Accrued compensation and related costs 8,953 4,705 Accrued occupancy costs 3,899 2,955 Other accrued expenses 5,709 (960) - -------------------------------------------------------------------- Net cash provided by operating activities 101,457 77,348 Investing activities: Purchase of short-term investments (51,410) (136,012) Maturity of short-term investments 98,925 134,265 Sale of investments 6,736 9,759 Investments in joint ventures and equity securities (10,424) (24,075) Distributions from joint venture 1,547 0 Additions to property, plant and equipment (143,904) (116,257) Additions to deposits and other assets (2,511) (3,605) - -------------------------------------------------------------------- Net cash used by investing activities (101,041) (135,925) Financing activities: (Decrease)/increase in cash provided by checks drawn in excess of bank balances (6,604) 4,866 Payments on capital lease obligations (1,380) (915) Proceeds from sale of common stock under employee stock purchase plan 3,240 1,425 Exercise of stock options 13,339 8,989 Tax benefit from exercise of non-qualified stock options 7,539 6,009 Proceeds from the sale of common stock 4,861 1,838 - -------------------------------------------------------------------- Net cash provided by financing activities 20,995 22,212 - -------------------------------------------------------------------- Balance, carried forward 21,411 (36,365) (Continued on next page) 5 Balance, brought forward 21,411 (36,365) Effect of exchange rate changes on cash and cash equivalents (186) (27) - -------------------------------------------------------------------- Net increase/(decrease) in cash and 21,225 (36,392) cash equivalents Cash and cash equivalents: Beginning of the period 70,126 127,165 - -------------------------------------------------------------------- End of the period $ 91,351 $ 90,773 ==================================================================== Supplemental cash flow information: Cash paid during the period for: Interest $ 4,100 $ 8,008 Income taxes 29,607 14,165 Net unrealized holding (loss) (410) (1,954) on investments Conversion of convertible debt into common stock, net of unamortized issue costs and accrued interest 162,036 0 Common stock tendered in settlement of stock options exercised 4,859 0 Conversion of compensatory stock options into common stock in connection with merger 1,158 0 See notes to consolidated financial statements
6 STARBUCKS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the 13 Weeks and 39 Weeks Ended June 28, 1998 and June 29, 1997 NOTE 1: FINANCIAL STATEMENT PREPARATION The consolidated financial statements as of June 28, 1998 and September 28, 1997 and for the 13-week and 39-week periods ended June 28, 1998 and June 29, 1997 have been prepared by Starbucks Corporation ("Starbucks" or the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). As described in Note 2, on May 28, 1998, the Company acquired all of the equity interests of Seattle Coffee Holdings Limited ("Seattle Coffee"). These consolidated financial statements have been prepared under the pooling of interests method of accounting and reflect the combined financial position and operating results of Starbucks and its wholly owned subsidiaries, including Seattle Coffee, for all periods presented. The financial information for the 13-week and 39-week periods ended June 28, 1998 and June 29, 1997 is unaudited, but, in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments and accruals) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of September 28, 1997, is derived from the Company's audited supplemental consolidated financial statements and notes thereto for the year ended September 28, 1997, included in the Company's Registration Statement on Form S-3 (Registration No. 333-58725) filed on July 8, 1998 and in the Company's Current Report on Form 8-K (Date of Report: July 9, 1998), and should be read in conjunction with such financial statements. Certain reclassifications of prior year's balances have been made to conform to the current format. The results of operations for the 13-week and 39-week periods ended June 28, 1998 are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending September 27, 1998. NOTE 2: SEATTLE COFFEE On May 28, 1998, the Company acquired all of the equity interests of Seattle Coffee, a United Kingdom roaster/retailer of specialty coffee, in exchange for 1,817,894 shares of Starbucks common stock. This business combination transaction (the "Transaction") has been accounted for as a pooling of interests for accounting and financial reporting purposes. The pooling-of-interests method of accounting is intended to present as a single interest, two or more common shareholders' interests which were previously independent; accordingly, the historical financial statements for the periods prior to the business combination are restated as though the companies had always been combined. The restated financial statements are adjusted to conform the accounting policies and fiscal reporting periods to Starbucks accounting policies and fiscal reporting periods. The Transaction resulted in one-time transaction and other related after-tax charges of $0.14 per share in the third quarter of fiscal 1998. The following table compares amounts previously reported by Starbucks prior to the Transaction with combined amounts for the third quarter of fiscal 1997 (in thousands, except earnings per share):
Starbucks Seattle Coffee Combined - --------------------------------------------------------------------- Q3 1997 Net revenues $ 242,190 $ 2,051 $ 244,241 Net earnings 14,616 (417) 14,199 Net earnings per share-diluted $ 0.18 $(0.01) $ 0.17 - ---------------------------------------------------------------------
7 NOTE 3: EARNINGS PER SHARE The computation of basic earnings per share, in accordance with Statement of Financial Accounting Standards ("SFAS") 128 "Earnings per Share," is based on the weighted average number of common shares and common stock units outstanding during the period. The computation of diluted earnings per share, in accordance with SFAS 128, includes the dilutive effect of common stock equivalents consisting of certain shares subject to stock options. The computation of diluted earnings per share also assumes conversion of the Company's convertible subordinated debentures using the "if converted" method, when such securities are dilutive, with net income adjusted for the after-tax interest expense and amortization of issuance costs applicable to these debentures. The convertible subordinated debentures were converted to equity in the first quarter of fiscal 1998. All periods presented have been calculated in accordance with SFAS 128. NOTE 4: DEFERRED STOCK PLAN During the first quarter of fiscal 1998, the Company adopted a Deferred Stock Plan for certain key employees that enables participants in the plan to defer receipt of ownership of common shares from the exercise of non- qualified stock options. The minimum deferral period is five years. During the first quarter of fiscal 1998, receipt of 424,275 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. NOTE 5: INVENTORIES Inventories consist of the following (in thousands): June 28, September 28, 1998 1997 - ------------------------------------------------------------------- Coffee: Unroasted $ 91,255 $ 65,296 Roasted 20,505 13,954 Other merchandise held for sale 31,915 33,253 Packaging and other supplies 8,155 7,264 - ------------------------------------------------------------------ $ 151,830 $ 119,767 ==================================================================
As of June 28, 1998, the Company had fixed price purchase commitments for green coffee totaling approximately $101 million. The Company, from time to time, enters into futures contracts to hedge price-to-be-established coffee purchase commitments with the objective of minimizing cost risk due to market fluctuations. The Company does not hold or issue derivative instruments for trading purposes. In accordance with SFAS 80 "Accounting for Futures Contracts," these futures contracts meet the hedge criteria and are accounted for as hedges. Gains and losses are calculated based on the difference between the cost basis and the market value of the coffee contracts. Accordingly, gains and losses are deferred and recognized as adjustments to the carrying amount of coffee inventory when purchased, and recognized in results of operations as coffee products are sold. The market risk related to coffee futures is substantially offset by changes in the cost of coffee purchased. The aggregate commitment underlying the Company's futures contracts and deferred losses from the hedged coffee were not significant as of June 28, 1998. Such losses in fair value, if realized, would be offset by lower costs of coffee purchased during the remainder of fiscal 1998 and 1999. 8 NOTE 6: NEW ACCOUNTING STANDARD In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities." This pronouncement will require the Company to recognize derivatives on its balance sheet at fair value. Changes in the fair values of derivatives that qualify as cash flow hedges will be recognized in comprehensive income until the hedged item is recognized in earnings. The Company expects that this new standard will not have a significant effect on its results of operations. SFAS 133 is effective for fiscal years beginning after June 15, 1999. NOTE 7: PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are recorded at cost and consist of the following (in thousands): June 28, September 28, 1998 1997 - -------------------------------------------------------------------- Land $ 3,602 $ 3,602 Building 8,338 8,338 Leasehold improvements 430,077 352,640 Roasting and store equipment 205,716 168,929 Furniture, fixtures and other 75,692 49,790 - ------------------------------------------------------------------ 723,425 583,299 Less accumulated depreciation and amortization (198,597) (144,068) - ------------------------------------------------------------------ 524,828 439,231 Work in progress 42,720 49,560 - ------------------------------------------------------------------ $ 567,548 $ 488,791 ==================================================================
9 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements which follow, including anticipated store openings, planned capital expenditures, and trends in or expectations regarding the Company's operations, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on currently available operating, financial and competitive information, and are subject to risks and uncertainties. Actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, coffee and other raw materials prices and availability, successful execution of internal performance and expansion plans, the impact of competition, the effect of legal proceedings and other risks detailed herein and in the Company's annual and quarterly reports filed with the Securities and Exchange Commission. GENERAL During the 39-week period ending June 28, 1998, Starbucks Corporation ("Starbucks" or the "Company") derived approximately 85% of net revenues from its Company-operated retail stores. The Company's specialty sales operations, which include product sales to and royalties and fees from licensees and joint ventures, as well as sales to wholesale customers and grocery stores, accounted for approximately 13% of net revenues. Direct response operations accounted for the remainder of net revenues. The Company's fiscal year ends on the Sunday closest to September 30. Fiscal years ending on September 27, 1998 and September 28, 1997 each include 52 weeks. The fiscal year ending on October 3, 1999 will include 53 weeks. SEATTLE COFFEE On May 28, 1998, the Company acquired all of the equity interests of Seattle Coffee Holdings Limited ("Seattle Coffee") a United Kingdom roaster/retailer of specialty coffee, in exchange for 1,817,894 shares of Starbucks common stock. This business combination transaction (the "Transaction") has been accounted for as a pooling of interests for accounting and financial reporting purposes. The pooling-of-interests method of accounting is intended to present as a single interest, two or more common shareholders' interests which were previously independent; accordingly, the historical financial statements for the periods prior to the business combination are restated as though the companies had always been combined. The restated financial statements are adjusted to conform the accounting policies and fiscal reporting periods to Starbucks accounting policies and fiscal reporting periods. The Transaction resulted in one-time transaction and other related after-tax charges of $0.14 per share in the third quarter of fiscal 1998. RESULTS OF OPERATIONS -- FOR THE 13 WEEKS ENDED JUNE 28, 1998, COMPARED TO THE 13 WEEKS ENDED JUNE 29, 1997 Revenues. Net revenues for the 13 weeks ended June 28, 1998, increased 37% to $334.4 million from $244.2 million for the corresponding period in fiscal 1997. Retail sales increased 34% to $283.5 million from $212.0 million due primarily to the opening of new retail stores combined with an increase in comparable store sales (sales from stores open 13 months or longer) of 7% for the period. The increase in comparable store sales resulted from an increase in the number of transactions combined with an increase in the average dollar value per transaction. During the 13 weeks ended June 28, 1998, the Company opened 80 stores in continental North America and 11 in the United Kingdom. The Company ended the period with 1,539 Company- 10 operated stores in continental North America and 64 Company-operated stores in the United Kingdom. As part of its expansion strategy of clustering stores in existing markets, Starbucks has experienced a certain level of cannibalization of existing stores by new stores as the store concentration has increased. This cannibalization, as well as increased competition and other factors, has and may continue to put downward pressure on the Company's comparable store sales growth. Specialty sales revenues increased 68% to $47.0 million for the 13 weeks ended June 28, 1998, compared to $27.9 million for the corresponding period in fiscal 1997. Specialty sales growth was driven primarily by new sales to the grocery channel, and increased sales to joint ventures and licensees, and a chain of wholesale clubs. Starbucks sells roasted coffee to its joint venture with Pepsi-Cola Company, a division of PepsiCo, Inc., (the "North American Coffee Partnership") for use in the manufacture of its bottled Frappuccino(TM) beverage. The Company also sells coffee extract to Dreyer's Grand Ice Cream, Inc. ("Dreyer's") for use in the manufacture of Starbucks branded ice cream sold by the Company's joint venture with Dreyer's (the "Ice Cream Joint Venture"). During the 13 weeks ended June 28, 1998, licensees (including those in which the Company is a joint venture partner) opened 13 stores in continental North America and 14 Pacific Rim stores. The Company ended the period with 122 licensed stores in continental North America and 53 licensed stores in the Pacific Rim. Direct response sales decreased 8% to $4.0 million for the 13 weeks ended June 28, 1998, compared to $4.3 million for the corresponding period in fiscal 1997. Cost and Expenses. Cost of sales and related occupancy costs as a percentage of net revenues increased to 43.4% for the 13 weeks ended June 28, 1998, from 42.5% for the corresponding period in fiscal 1997. One-time Transaction-related costs accounted for 0.5% of the increase in cost of sales and related occupancy expense as a percentage of net revenues. The remaining increase of 0.4% was primarily the result of higher green coffee costs partially offset by prior year sales price increases. Cost of sales continues to reflect the higher cost of coffees purchased during the period of high green coffee costs which began in January 1997 and extended through April 1998. Store operating expenses as a percentage of retail sales increased to 39.4% for the 13 weeks ended June 28, 1998, from 39.0% for the corresponding period in fiscal 1997. One-time Transaction-related costs increased store operating expenses by 1.7% of retail sales. This was partially offset by lower advertising costs. Other operating expenses (expenses associated with all operations other than Company-owned retail, as well as the Company's share of joint venture profits and losses) were 3.7% of total company net revenues for the 13 weeks ended June 28, 1998, compared to 2.9% for the corresponding period in fiscal 1997. The increase was due primarily to higher advertising and marketing costs related to the rollout of Starbucks coffee to grocery stores on the West Coast, partially offset by improved results of both the Company's North American Coffee Partnership and Ice Cream Joint Venture compared to the corresponding period in fiscal 1997. General and administrative expenses as a percentage of net revenues were 6.2% for the 13 weeks ended June 28, 1998, compared to 5.8% for the same period in fiscal 1997. This increase was primarily due to systems- related expenditures. Transaction-related costs totaling $15.6 million were comprised of $8.9 million in direct merger expenses and $6.6 million of other one-time costs associated with the integration of Seattle Coffee. Merger expenses consisted mainly of investment banking, legal and accounting fees for both parties to the Transaction. Other one-time costs were primarily related to asset write-offs due to the planned conversion of Seattle Coffee stores to Starbucks. Interest and other income for the 13 weeks ended June 28, 1998 was $2.2 million compared to $2.6 million for the corresponding period in fiscal 1997. The decrease in interest and other income was due to lower average investment balances. 11 Interest and other expense for the 13 weeks ended June 28, 1998 was $0.1 million compared to $1.8 million for the corresponding period in fiscal 1997 due to the conversion of the Company's convertible subordinated debentures to common stock during the first quarter of fiscal 1998. Income Taxes. The Company's effective tax rate for the 13 weeks ended June 28, 1998 was 58.4% compared to 39.2% for the corresponding period in fiscal 1997. The increase was due primarily to non-deductible merger costs. The Company expects the consolidated tax rate going forward to be approximately 38.5%. RESULTS OF OPERATIONS -- FOR THE 39 WEEKS ENDED JUNE 28, 1998, COMPARED TO THE 39 WEEKS ENDED JUNE 29, 1997 Revenues. Net revenues for the 39 weeks ended June 28, 1998, increased 36% to $951.0 million from $700.7 million for the corresponding period in fiscal 1997. Retail sales increased 34% to $811.7 million from $604.8 million due primarily to the opening of new retail stores combined with an increase in comparable store sales (sales from stores open 13 months or longer) of 6% for the period. The increase in comparable store sales resulted from an increase in the average dollar value per transaction combined with an increase in the number of transactions. During the 39 weeks ended June 28, 1998, the Company opened 273 stores in continental North America and 34 in the United Kingdom. Specialty sales revenues increased 58% to $123.8 million for the 39 weeks ended June 28, 1998, compared to $78.4 million for the corresponding period in fiscal 1997. Specialty sales growth was broad-based, including increased sales to joint ventures and licensees, sales to grocery stores and higher sales to all other specialty sales categories. During the 39 weeks ended June 28, 1998, licensees (including those in which the Company is a joint venture partner) opened 31 stores in continental North America and 36 stores in the Pacific Rim. Direct response sales decreased 11% to $15.6 million for the 39 weeks ended June 28, 1998, compared to $17.4 million for the corresponding period in fiscal 1997. Costs and Expenses. Cost of sales and related occupancy costs as a percentage of net revenues decreased to 44.7% for the 39 weeks ended June 28, 1998, from 45.7% for the corresponding period in fiscal 1997. This decrease of 1.0% was primarily the result of prior year sales price increases partially offset by higher green coffee costs. Store operating expenses as a percentage of retail sales increased to 37.6% from 37.0% for the corresponding period in fiscal 1997, due to the Transaction-related costs. Other operating expenses as a percentage of net revenues were 3.2% for the 39 weeks ended June 28, 1998, compared to 3.1% for the corresponding period in fiscal 1997. The increase was due primarily to higher grocery advertising expenses and higher payroll-related costs for the grocery and international businesses partially offset by improved results of the Company's North American Coffee Partnership and Ice Cream Joint Venture. General and administrative expenses increased to 6.1% for the 39 weeks ended June 28, 1998, compared to 5.8% for the same period in fiscal 1997. This increase was due primarily to systems-related expenses. Interest and other income for the 39 weeks ended June 28, 1998 was $6.7 million compared to $10.1 million for the corresponding period in 1997. The decrease in interest and other income was due primarily to lower average investment balances. Interest and other expense for the 39 weeks ended June 28, 1998 was $1.2 million compared to $5.5 million for the corresponding period in fiscal 1997 due to the conversion of the Company's convertible subordinated debentures to common stock during the first quarter of fiscal 1998. 12 Income Taxes. The Company's effective tax rate for the 39 weeks ended June 28, 1998 was 44.6% compared to 39.3% for the corresponding period in fiscal 1997. The increase was due primarily to non-deductible merger costs. LIQUIDITY AND CAPITAL RESOURCES The Company ended the period with $125.1 million in total cash and investments and working capital of $161.8 million. Cash and cash equivalents increased by $21.2 million for the 39 weeks ended June 28, 1998 to $91.4 million. Cash provided by operating activities totaled $101.5 million for the first 39 weeks of fiscal 1998 resulting primarily from net earnings before non-cash charges of $107.5 million. Cash used by investing activities for the first 39 weeks of fiscal 1998 totaled $101.0 million. This included capital additions to property, plant and equipment of $143.9 million related to opening 307 new Company-operated stores, purchasing roasting and packaging equipment, enhancing information systems and remodeling certain existing stores. Sales of marketable debt securities during the 39-week period provided $54.3 million. During the 39-week period ending June 28, 1998, the Company made equity investments of $10.4 million in its North American Coffee Partnership and international joint ventures and received $1.5 million in distributions from its Ice Cream Joint Venture. The Company invested excess cash primarily in short-term, investment-grade marketable debt securities. Cash provided from financing activities for the first 39 weeks of fiscal 1998 totaled $21.0 million. The exercise of employee stock options, the related income tax benefit available to the Company upon exercise of these options and employee stock purchases provided approximately $24.1 million. A decrease in checks drawn in excess of bank balances used $6.6 million. The sale of common stock by Seattle Coffee prior to the Transaction provided $4.9 million. Cash requirements for the remainder of fiscal 1998, other than normal operating expenses, are expected to consist primarily of capital expenditures related to the addition of new Company-operated retail stores. The Company and its licensees plan to open a total of at least 350 new stores in continental North America during fiscal 1998. The Company also anticipates making additional expenditures for enhancing its production capacity and information systems and remodeling certain existing stores. Management expects capital expenditures for the remainder of fiscal 1998 to be approximately $50 million. Management currently anticipates additional cash requirements of approximately $2 million for its domestic and international joint ventures during the remainder of fiscal 1998. Management believes that existing cash and investments plus cash generated from operations should be sufficient to finance capital requirements for the remainder of fiscal 1998 and through fiscal 1999, barring any major new initiatives. Longer term, the Company expects to reach its goal of at least 2000 stores in continental North America by the end of the year 2000 and 500 stores in Asia and 500 stores in Europe by the end of 2003, using cash flow generated from operations supplemented by additional debt or equity financing, if necessary. COFFEE PRICES AND AVAILABILITY AND GENERAL RISK CONDITIONS Green coffee commodity prices are subject to substantial price fluctuations, generally caused by multiple factors including weather, political and economic conditions in certain coffee-producing countries and other supply-related concerns. 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, such as the International Coffee Organization and the Association of Coffee Producing Countries, which have historically attempted to influence commodity prices of green coffee through agreements establishing export quotas or restricting coffee supplies worldwide. The Company's ability to raise sales prices in response to rising coffee prices may be limited and the Company's 13 profitability could be adversely affected if coffee prices were to rise substantially. During fiscal 1997, worldwide green coffee commodity prices increased significantly and remained high relative to historical levels through the second fiscal quarter of 1998. In response, the Company effected sales price increases during fiscal 1997 on its whole bean coffees and its coffee beverages to mitigate the effects of increases in its costs of supply. Because the Company had existing inventories and fixed-price purchase commitments for some of its green coffee requirements at the time of these sales price increases, the Company's gross margins during the first two quarters of fiscal 1998 were favorably impacted by these sales price increases relative to the corresponding periods of fiscal 1997. During the third quarter of fiscal 1998, the Company's gross margins were unfavorably impacted relative to the third quarter of fiscal 1997 as the Company passed the anniversaries of the sales price increases while cost of sales continued to reflect the higher cost of coffee. The Company enters into fixed price purchase commitments in order to secure an adequate supply of quality green coffee and bring greater certainty to the cost of sales in future periods. As of June 28, 1998, the Company had approximately $101 million in fixed price purchase commitments which, together with existing inventory, is expected to fulfill all of its remaining fiscal 1998 and a substantial portion of its fiscal 1999 green coffee requirements. The Company believes, based on relationships established with its suppliers in the past, that the risk of non-delivery on such purchase commitments is remote. To further reduce its exposure to rising coffee costs, the Company, from time to time, enters into futures contracts to hedge price-to-be-established coffee purchase commitments. The specific risks associated with these activities are described below in Item 3 "Quantitative and Qualitative Disclosures about Market Risk." In addition to fluctuating coffee prices, management believes that the Company's future results of operations and earnings could be significantly impacted by factors such as increased competition within the specialty coffee industry, the Company's ability to find optimal store locations at favorable lease rates, the increased costs associated with opening and operating retail stores in new markets and the Company's ability to hire, train and retain qualified personnel. SEASONALITY AND QUARTERLY RESULTS The Company's business is subject to seasonal fluctuations. Significant portions of the Company's net revenues and profits are realized during the first quarter of the Company's fiscal year, which includes the December holiday season. In addition, quarterly results are affected by the timing of the opening of new stores, and the Company's rapid growth may conceal the impact of seasonal influences. Because of the seasonality of the Company's business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. NEW ACCOUNTING STANDARD In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities." This pronouncement will require the Company to recognize derivatives on its balance sheet at fair value. Changes in the fair values of derivatives that qualify as cash flow hedges will be recognized in comprehensive income until the hedged item is recognized in earnings. The Company expects that this new standard will not have a significant effect on its results of operations. SFAS 133 is effective for fiscal years beginning after June 15, 1999. 14 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company maintains investment portfolio holdings of various issuers, types and maturities. These securities are classified as available-for-sale, and are recorded on the balance sheet at fair value, with unrealized gains or losses reported as a separate component of retained earnings. The Company does not hedge its interest rate exposures. The Company is subject to foreign currency exchange rate exposure, primarily related to its retail operations in Canada and the United Kingdom. Historically, this exposure has had a minimal impact on the Company. At the present time, the Company does not hedge foreign currency risk, but may hedge known transaction exposure in the future. The Company, from time to time, enters into futures contracts to hedge price-to-be-established coffee purchase commitments with the objective of minimizing cost risk due to market fluctuations. The aggregate commitment underlying the Company's futures contracts and deferred losses from the hedged coffee were not significant as of June 28, 1998. Such losses in fair value, if realized, would be offset by lower costs of coffee purchased during the remainder of fiscal 1998 and 1999. PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is a party to various legal proceedings arising in the ordinary course of its business, but is not currently a party to any legal proceeding that management believes would have a material adverse effect on the financial position or results of operations of the Company. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description 11 Statement re: computation of per share earnings 27 Financial Data Schedule (b) Current Reports on Form 8-K filed during the 13 weeks ended June 28, 1998: The Company filed a Current Report on Form 8-K (Date of Earliest Event Reported: April 29, 1998) announcing the acquisition of Seattle Coffee. The Company filed a Current Report on Form 8-K (Date of Earliest Event Reported: June 4, 1998) reporting the issuance of shares to certain of the equity interest holders of Seattle Coffee pursuant to Regulation S. The Company filed a Current Report on Form 8-K (Date of Report: July 9, 1998) containing the supplemental consolidated financial statements of Starbucks and its wholly owned subsidiaries, including Seattle Coffee, prepared under the pooling of interests method of accounting. 15 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STARBUCKS CORPORATION Dated: August 11, 1998 By: /s/ Michael Casey ---------------------- Michael Casey executive vice president and chief financial officer Signing on behalf of the registrant and as principal financial officer 16
STARBUCKS CORPORATION --------------------- EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS (IN THOUSANDS, EXCEPT EARNINGS PER SHARE) Three Months Ended Nine Months Ended June 28, June 29, June 28, June 29, 1998 1997 1998 1997 (13 Weeks) (13 Weeks) (39 Weeks) (39 Weeks) - ------------------------------------------------------------------------- NET EARNINGS PER COMMON SHARE CALCULATION - -BASIC: Net earnings $ 7,899 $ 14,199 $ 42,818 $ 37,327 ========================================================================= Weighted average common shares calculation-basic: Weighted average number of common shares and common stock units outstanding 89,069 79,679 87,547 79,335 ========================================================================= Net earnings per common share - basic $ 0.09 $ 0.18 $ 0.49 $ 0.47 ========================================================================= NET EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE CALCULATION - -DILUTED(1): Net earnings calculation: Net earnings $ 7,899 $ 14,199 $ 42,818 $ 37,327 Add after tax interest expense on Debentures 0 1,075 348 3,225 Add after tax amortization of issuance costs related to the Debentures 0 89 30 267 - ------------------------------------------------------------------------- Adjusted net earnings $ 7,899 $ 15,363 $ 43,196 $ 40,819 ========================================================================= Weighted average common and common equivalent shares calculation- diluted: Weighted average number of common shares and common stock units outstanding 89,069 79,679 87,547 79,335 Dilutive effect of outstanding common stock options 3,505 3,091 3,226 3,353 Assuming conversion of Convertible Subordinated Debentures 0 7,098 936 7,098 - ------------------------------------------------------------------------- Weighted average common and common equivalent shares - diluted 92,574 89,868 91,709 89,786 ========================================================================= Net earnings per common and common equivalent share - diluted $ 0.09 $ 0.17 $ 0.47 $ 0.45 ========================================================================= (1) Diluted earnings per share assumes conversion of the Company's convertible subordinated debentures using the "if converted" method, when such securities are dilutive, with income adjusted for the after-tax interest expense and amortization applicable to these debentures.
17 EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STARBUCKS CORPORATION THIRD QUARTER FISCAL 1998 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 9-MOS SEP-27-1998 SEP-29-1997 JUN-28-1998 91,351 33,789 34,517 495 151,830 329,536 766,145 198,597 949,526 167,774 1,040 0 0 583,457 182,274 949,526 950,997 950,997 424,817 424,817 454,410 0 1,193 77,239 34,421 42,818 0 0 0 42,818 0.49 0.47
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