10-Q 1 e10-q.txt FORM 10-Q FOR THE PERIOD ENDED JULY 2, 2000. 1 -------------------------------------------------------------------------------- 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 July 2, 2000 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 14, 2000, there were 187,076,501 shares of the Registrant's Common Stock outstanding. ---------------------------------------------------------------------------- 2 STARBUCKS CORPORATION INDEX PART I. FINANCIAL INFORMATION
Page No. Item 1. Financial Statements .......................................... 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............... 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk ........................................... 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings ............................................. 13 Item 6. Exhibits and Reports on Form 8-K .............................. 13 Signature .............................................................. 14
2 3 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 July 2, June 27, July 2, June 27, 2000 1999 2000 1999 (13 Weeks) (13 Weeks) (39 Weeks) (39 Weeks) (unaudited) (unaudited) ------------------------------------------------------------------------------------------------------- Net revenues $ 555,546 $ 423,792 $1,587,226 $1,205,252 Cost of sales and related occupancy costs 241,126 185,020 702,777 541,276 ------------------------------------------------------------------------------------------------------- Gross margin 314,420 238,772 884,449 663,976 Joint venture income 4,339 360 11,555 25 Store operating expenses 185,515 137,625 518,971 382,074 Other operating expenses 17,629 13,400 55,569 37,516 Depreciation and amortization 33,260 25,214 94,501 70,848 General and administrative expenses 28,049 24,679 82,817 67,405 ------------------------------------------------------------------------------------------------------- Operating income 54,306 38,214 144,146 106,158 Interest and other income, net 1,555 1,520 5,211 5,658 ------------------------------------------------------------------------------------------------------- Earnings before income taxes 55,861 39,734 149,357 111,816 Income taxes 20,948 15,099 56,289 42,490 ------------------------------------------------------------------------------------------------------- Net earnings $ 34,913 $ 24,635 $ 93,068 $ 69,326 ======================================================================================================= Net earnings per common share - basic $ 0.19 $ 0.13 $ 0.50 $ 0.38 Net earnings per common share - diluted $ 0.18 $ 0.13 $ 0.48 $ 0.37 Weighted average shares outstanding: Basic 186,520 182,781 184,911 181,397 Diluted 193,881 191,336 192,099 188,614
See notes to consolidated financial statements 3 4 STARBUCKS CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
July 2, October 3, 2000 1999 (unaudited) --------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 67,436 $ 66,419 Short-term investments 56,127 51,367 Accounts receivable 63,149 47,646 Inventories 181,986 180,886 Prepaid expenses and other current assets 21,248 19,049 Deferred income taxes, net 26,146 21,133 --------------------------------------------------------------------------------- Total current assets 416,092 386,500 Joint ventures and other investments 108,794 68,060 Property, plant and equipment, net 882,475 760,289 Other assets 27,141 23,474 Goodwill, net 20,528 14,191 --------------------------------------------------------------------------------- Total $ 1,455,030 $ 1,252,514 ================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 75,225 $ 56,108 Checks drawn in excess of bank balances 52,481 63,811 Accrued compensation and related costs 71,295 43,872 Accrued occupancy costs 27,470 23,017 Accrued taxes 21,846 30,752 Other accrued expenses 40,340 33,153 Deferred revenue 11,280 484 --------------------------------------------------------------------------------- Total current liabilities 299,937 251,197 Deferred income taxes, net 35,627 32,886 Long-term debt 6,505 7,018 Minority interest 2,525 400 Shareholders' equity: Common stock - Authorized, 300,000,000; issued and outstanding, 186,787,690 and 183,282,095 shares, respectively, (includes 848,550 common stock units in both periods) 715,896 651,020 Retained earnings 407,007 313,939 Accumulated other comprehensive loss (12,467) (3,946) --------------------------------------------------------------------------------- Total shareholders' equity 1,110,436 961,013 --------------------------------------------------------------------------------- Total $ 1,455,030 $ 1,252,514 =================================================================================
See notes to consolidated financial statements 4 5 STARBUCKS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Nine Months Ended --------------------------------------------------------------------------------- July 2, June 27, 2000 1999 (39 Weeks) (39 Weeks) (unaudited) --------------------------------------------------------------------------------- Operating activities: Net earnings $ 93,068 $ 69,326 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 101,252 78,339 Provision for losses on asset disposals 2,462 -- Deferred income taxes, net 1,708 3,121 Equity in (income)/losses of investees (8,199) 987 Cash provided/(used) by changes in operating assets and liabilities: Net purchases of trading securities (1,107) -- Accounts receivable (15,073) 9,564 Inventories (218) (24,519) Prepaid expenses and other current assets (1,625) (8,891) Accounts payable 17,400 12,653 Accrued compensation and related costs 27,329 9,688 Accrued occupancy costs 4,421 3,909 Accrued taxes (8,950) 6,156 Minority interest 2,125 400 Deferred revenue 10,796 228 Other accrued expenses 6,552 7,553 --------------------------------------------------------------------------------- Net cash provided by operating activities 231,941 168,514 Investing activities: Purchase of investments (101,489) (111,447) Maturity of investments 44,750 78,553 Sale of investments 48,238 -- Purchases of businesses, net of cash acquired (12,889) (16,216) Investments in joint ventures and other investments (39,136) (16,301) Distributions from joint ventures 4,569 2,983 Additions to property, plant and equipment (223,766) (171,491) Additions to other assets (2,878) (6,950) --------------------------------------------------------------------------------- Net cash used by investing activities (282,601) (240,869) Financing activities: (Decrease)/increase in cash provided by checks drawn in excess of bank balances (11,331) 5,939 Proceeds from sale of common stock under employee stock purchase plan 7,470 4,994 Exercise of stock options 38,211 32,039 Tax benefit from exercise of non-qualified stock options 19,195 18,180 Payments on long-term debt (1,660) -- --------------------------------------------------------------------------------- Net cash provided by financing activities 51,885 61,152 --------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents (208) 486 --------------------------------------------------------------------------------- Net increase in cash and cash equivalents 1,017 (10,717) Cash and cash equivalents: Beginning of the period 66,419 101,663 --------------------------------------------------------------------------------- End of the period $ 67,436 $ 90,946 ================================================================================= Supplemental cash flow information: Cash paid during the period for: Interest $ 284 $ 135 Income taxes 1,858 20,870 Net unrealized holding(loss)/gain on investments (4,237) 30
See notes to consolidated financial statements 5 6 STARBUCKS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the 13 Weeks and 39 Weeks Ended July 2, 2000 and June 27, 1999 NOTE 1: FINANCIAL STATEMENT PREPARATION The consolidated financial statements as of July 2, 2000 and October 3, 1999 and for the 13-week and 39-week periods ended July 2, 2000 and June 27, 1999 have been prepared by Starbucks Corporation ("Starbucks" or the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). The financial information for the 13-week and 39-week periods ended July 2, 2000 and June 27, 1999 is unaudited, but, in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments and accruals) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of October 3, 1999, is derived from the Company's audited consolidated financial statements and notes thereto for the year ended October 3, 1999, 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 July 2, 2000 are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending October 1, 2000. NOTE 2: OTHER ITEMS On June 23, 2000, Starbucks purchased a 97% interest in its Thailand operations, which included 12 licensed stores, for approximately $5 million. NOTE 3: EARNINGS PER SHARE The computation of basic earnings per share is based on the weighted average number of shares and common stock units outstanding during the period. The computation of diluted earnings per share includes the dilutive effect of common stock equivalents consisting of certain shares subject to stock options. NOTE 4: INVENTORIES Inventories consist of the following (in thousands):
July 2, October 3, 2000 1999 ----------------------------------------------------------------- Coffee: Unroasted $ 79,914 $ 95,001 Roasted 27,896 28,065 Other merchandise held for sale 61,972 46,655 Packaging and other supplies 12,204 11,165 ----------------------------------------------------------------- $ 181,986 $ 180,886 =================================================================
6 7 As of July 2, 2000, the Company had fixed-price purchase commitments for green coffee totaling approximately $107 million. NOTE 5: PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are recorded at cost and consist of the following (in thousands):
July 2, October 3, 2000 1999 ---------------------------------------------------------------- Land $ 5,084 $ 5,084 Building 19,795 19,795 Leasehold improvements 700,236 591,640 Roasting and store equipment 343,389 273,612 Furniture, fixtures and other 152,397 130,223 ---------------------------------------------------------------- 1,220,901 1,020,354 Less accumulated depreciation and amortization (418,207) (320,982) ---------------------------------------------------------------- 802,694 699,372 Work in progress 79,781 60,917 ---------------------------------------------------------------- $ 882,475 $ 760,289 ================================================================
NOTE 6: 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 income and other comprehensive income. Accumulated other comprehensive income/(loss) reported on the Company's consolidated balance sheets consists of foreign currency translation adjustments and the unrealized gains and losses, net of applicable taxes, on available-for-sale securities. Comprehensive income, net of related tax effects, is as follows (in thousands):
Three months ended Nine months ended July 2, June 27, July 2, June 27, 2000 1999 2000 1999 ------------------------------------------------------------------------------------- Net income $ 34,913 $ 24,635 $ 93,068 $ 69,326 Translation adjustment (3,556) 1,847 (4,133) 2,811 Unrealized holding gains/ (losses), net (2,828) 9 (4,237) 30 Reclassification adjustment for net (gains)/losses realized in net income -- 155 (151) 217 -------- -------- -------- -------- Total comprehensive income $ 28,529 $ 26,646 $ 84,547 $ 72,384 =====================================================================================
7 8 NOTE 7: SEGMENT REPORTING The Company is organized into a number of business units. The Company's North American retail business sells primarily coffee beverages, whole bean coffees, and related merchandise through Company-operated retail stores in the United States and Canada. The Company also owns and operates retail stores in the United Kingdom and Thailand. The North American and International retail segments are managed by different presidents within the Company and are measured and evaluated separately by senior management. The Company also operates through several other business units, each of which is managed and evaluated independently. These other business units include domestic wholesale, domestic retail store licensing, grocery channel licensing, international retail store licensing and a direct-to-consumer business. The tables below present information by operating segment (in thousands):
Three months ended Nine months ended July 2, June 27, July 2, June 27, 2000 1999 2000 1999 ----------------------------------------------------------------------------------------------- REVENUES North American retail $ 443,334 $ 344,027 $ 1,273,923 $ 984,462 All other business units 117,832 84,962 329,208 230,326 Intersegment revenues (5,620) (5,197) (15,905) (9,536) ----------- ----------- ----------- ----------- Total revenues $ 555,546 $ 423,792 $ 1,587,226 $ 1,205,252 ===============================================================================================
------------------------------------------------------------------------------------------------------ OPERATING INCOME North American retail $ 60,698 $ 52,724 $ 178,728 $ 146,999 All other business units 27,370 15,164 66,568 39,900 Unallocated corporate expenses (33,519) (29,260) (100,815) (80,186) Intersegment eliminations (243) (414) (335) (555) Interest, net 1,555 1,520 5,211 5,658 --------- --------- --------- --------- Earnings before income taxes $ 55,861 $ 39,734 $ 149,357 $ 111,816 ======================================================================================================
NOTE 8: NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This standard, as amended, 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 accumulated other comprehensive income until the hedged item is recognized in earnings. The Company will adopt this standard in fiscal 2001. Given the Company's current operations, management does not expect that adoption of this standard will have a material impact on its financial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes the SEC Staff's views on applying generally accepted accounting principles to revenue recognition. The Company has reviewed the requirements of the bulletin and believes its current revenue recognition policies are in compliance with SAB 101. 8 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 herein, 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 various risks and uncertainties. Actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, coffee and other raw materials prices and availability, successful execution of internal performance and expansion plans, the impact of competition, the effect of legal proceedings, and other risks detailed herein and in the Company's annual and quarterly filings with the Securities and Exchange Commission. GENERAL During the 39-week period ending July 2, 2000, Starbucks Corporation ("Starbucks" or the "Company") derived approximately 84% of net revenues from its Company-operated retail stores. The remaining 16% of net revenues is derived from the Company's specialty operations, which include sales to wholesale accounts and licensees, royalty and license fee income, and sales through its direct-to-consumer business including its on-line store at www.starbucks.com. The Company's fiscal year ends on the Sunday closest to September 30. Fiscal year 1999 had 53 weeks. The fiscal year ending on October 1, 2000 will include 52 weeks. RESULTS OF OPERATIONS -- FOR THE 13 WEEKS ENDED JULY 2, 2000, COMPARED TO THE 13 WEEKS ENDED JUNE 27, 1999 REVENUES Net revenues for the 13 weeks ended July 2, 2000 increased 31% to $556 million from $424 million for the corresponding period in fiscal 1999. Retail revenues increased 31% to $467 million from $356 million primarily due to the opening of new retail stores plus an increase in comparable store sales of 10% for the period. The increase in comparable store sales (stores open for at least 13 months) resulted from a 5% increase in the number of transactions combined with a 5% increase in the average dollar value per transaction. During the 13 weeks ended July 2, 2000, the Company opened 109 stores in continental North America and 12 internationally. The Company ended the period with 2,341 Company-operated stores in continental North America and 148 Company-operated stores internationally. Specialty revenues increased 31% to $89 million for the 13 weeks ended July 2, 2000, compared to $68 million for the corresponding period in fiscal 1999. The increase in specialty revenues was primarily due to higher revenues from foodservice accounts, the national expansion of whole bean and ground coffee in supermarkets through a licensing agreement with Kraft, and increased revenues from retail store licensees. Licensees (including those in which the Company is a joint venture partner) opened 176 stores in continental North America and 42 stores in international markets. The Company ended the period with 438 licensed stores in continental North America and 288 licensed stores in international markets. SYSTEMWIDE RETAIL STORE REVENUES Systemwide retail store revenues, which include net revenues for both Company-operated and licensed retail stores, were $584 million for the third quarter of fiscal 2000, up 43% from $410 million in the third quarter of fiscal 1999 primarily due to the opening of 904 stores in the last 12 months. Systemwide retail store revenues provides a broader perspective of global brand sales; however, it excludes net revenues from non-retail channels. GROSS MARGIN Gross margin increased to 56.6% for the 13 weeks ended July 2, 2000 from 56.3% for the corresponding period in fiscal 1999. The improvement in gross margin was primarily due to lower green coffee costs and the impact of sales price increases on beverages sold at Company-operated retail stores, partially offset by higher occupancy costs at Company-operated retail stores. JOINT VENTURE INCOME Joint venture income was $4.3 million for the quarter just ended, up from $360,000 in the third quarter of fiscal 1999. The increase was primarily due to improved profitability from the Japanese retail store joint venture and the Company's Bottled Frappuccino(R) joint venture. 9 10 EXPENSES Store operating expenses as a percentage of retail revenues increased to 39.7% for the 13 weeks ended July 2, 2000, from 38.7% for the corresponding period in fiscal 1999. The increase was primarily due to higher regional overhead costs, higher advertising expenses and higher store labor costs, as a percentage of retail revenues. Other operating expenses (expenses associated with all operations other than Company-owned retail) were 19.8% of specialty revenues for the 13 weeks ended July 2, 2000, unchanged from the corresponding period in fiscal 1999. Higher payroll-related expenses required to accelerate the growth of the specialty businesses were offset by lower marketing expenses for the wholesale business. In the third quarter of fiscal 1999, the wholesale business had a special marketing promotion that was not repeated in fiscal 2000. General and administrative expenses as a percentage of net revenues were 5.0% for the 13 weeks ended July 2, 2000, compared to 5.8% for the corresponding period in fiscal 1999. The decrease was primarily due to leverage from the acceleration of revenue growth. INCOME TAXES The Company's effective tax rate for the 13 weeks ended July 2, 2000 was 37.5% compared to 38.0% for the corresponding period in fiscal 1999. The decrease was due to overall tax planning efforts and the reduction of losses by the Company's joint venture in Japan, which are not deductible for U.S. tax purposes. RESULTS OF OPERATIONS -- FOR THE 39 WEEKS ENDED JULY 2, 2000, COMPARED TO THE 39 WEEKS ENDED JUNE 27, 1999 REVENUES Net revenues for the 39 weeks ended July 2, 2000, increased 32% to $1.6 billion from $1.2 billion for the corresponding period in fiscal 1999. Retail revenues increased 31% to $1.3 billion from $1.0 billion primarily due to the opening of new retail stores plus an increase in comparable store sales of 9% for the period. The increase in comparable store sales resulted from a 5% increase in the number of transactions combined with a 4% increase in the average dollar value per transaction. During the 39 weeks ended July 2, 2000, the Company opened 311 stores in continental North America and 47 internationally. Specialty revenues increased 34% to $251 million for the 39 weeks ended July 2, 2000, compared to $188 million for the corresponding period in fiscal 1999. The increase in specialty revenues was primarily due to higher revenues from foodservice accounts, retail store licensees, and the grocery channel. Licensees (including those in which the Company is a joint venture partner) opened 265 stores in continental North America and 115 stores in international markets. SYSTEMWIDE RETAIL STORE REVENUES Systemwide retail store revenues were $1.6 billion for the nine months ended July 2, 2000, up 41% from $2.1 billion in the corresponding period in fiscal 1999 primarily due to the opening of 904 stores in the last 12 months. GROSS MARGIN Gross margin increased to 55.7% for the 39 weeks ended July 2, 2000 from 55.1% for the corresponding period in fiscal 1999. The improvement in gross margin was primarily due to lower green coffee costs and the impact of sales price increases on beverages sold at Company-operated retail stores, partially offset by higher occupancy costs at Company-operated retail stores. JOINT VENTURE INCOME Joint venture income was $11.6 million or 0.7% of net revenue during the 39 weeks ended July 2, 2000, up from less than 0.1% for the corresponding period in fiscal 1999. The increase was primarily due to the improved profitability from both the Starbucks Japanese retail store joint venture and the Company's Bottled Frappuccino(R) joint venture. 10 11 EXPENSES Store operating expenses as a percentage of retail revenues increased to 38.8% for the 39 weeks ended July 2, 2000, from 37.6% for the corresponding period in fiscal 1999. The increase was due to higher payroll-related expenditures as a percent of retail revenues resulting from an increase in average hourly wage rates and a continuing shift in sales to more labor-intensive handcrafted beverages. Other operating expenses were 22.2% of specialty revenues for the 39 weeks ended July 2, 2000, compared to 20.0% for the corresponding period in fiscal 1999. The increase was primarily due to higher payroll-related expenditures to accelerate the growth of the specialty businesses. General and administrative expenses as a percentage of net revenues were 5.2% for the 39 weeks ended July 2, 2000 compared to 5.6% for the corresponding period in fiscal 1999. The decrease was primarily due to leverage from the acceleration of revenue growth. INCOME TAXES The Company's effective tax rate for the 39 weeks ended July 2, 2000 was 37.7% compared to 38.0% for the corresponding period in fiscal 1999. The decrease was due to overall tax planning efforts and the reduction of losses by the Company's joint venture in Japan, which are not deductible for U.S. tax purposes. LIQUIDITY AND CAPITAL RESOURCES The Company ended the period with total cash and cash equivalents and short-term investments of $124 million and working capital of $116 million. Cash and cash equivalents increased by $1 million for the 39 weeks ended July 2, 2000 to $67 million. Cash provided by operating activities totaled $232 million for the first 39 weeks of fiscal 2000, resulting primarily from net earnings before non-cash charges of $190 million and a $45 million increase in accrued compensation and accounts payable. Cash used by investing activities for the first 39 weeks of fiscal 2000 totaled $283 million. This included capital additions to property, plant and equipment of $224 million related to opening 358 new Company-operated retail stores, remodeling certain existing stores, enhancing information systems and purchasing roasting and packaging equipment for the Company's roasting and distribution facilities. The Company used $25 million to make a minority investment in Kozmo.com, Inc., an internet-to-door delivery service for food, entertainment and convenience items and $10 million to make a minority investment in Cooking.com, a leading web-based retailer of cookware, accessories, and specialty foods and provider of information about cooking. The purchase of Tympanum, Inc. (d/b/a Hear Music) used $8 million and the purchase of Starbucks Thailand operations used $5 million. During the 39-week period ending July 2, 2000, the Company made equity investments of $4 million in its international joint ventures and received $5 million in distributions from its domestic joint ventures. The Company invested excess cash primarily in short-term, investment-grade marketable debt securities. The net activity in the Company's marketable securities portfolio during the 39-week period used $9 million. Cash provided by financing activities for the first 39 weeks of fiscal 2000 totaled $52 million. This included $65 million generated from the exercise of employee stock options, the related income tax benefit available to the Company upon exercise of such options, and cash generated from the Company's employee stock purchase plan. As options granted under the Company's stock option plans vest and are exercised, the Company will continue to receive proceeds and a tax deduction; however, neither the amounts nor timing can be predicted. This was offset by an $11 million decrease in checks outstanding. Cash requirements for the remainder of fiscal 2000, other than normal operating expenses, are expected to consist primarily of capital expenditures related to the addition of new Company-operated retail stores. The Company plans to open at least 450 Company-operated stores during fiscal 2000. The Company also anticipates incurring additional expenditures for enhancing its production capacity and information systems and remodeling certain existing stores. While there can be no assurance that current expectations will be realized, management expects capital expenditures for the remainder of fiscal 2000 to be approximately $90 million. 11 12 Management believes that existing cash and investments plus cash generated from operations should be sufficient to finance capital requirements for its core businesses through fiscal 2001. New joint ventures, other new business opportunities or store expansion rates substantially in excess of that presently planned may require outside funding. COFFEE PRICES AND AVAILABILITY AND GENERAL RISK CONDITIONS The supply and price of green (unroasted) coffee are subject to significant volatility. Although most coffee trades in the commodity market, coffee of the quality sought by the Company tends to trade on a negotiated basis at a substantial premium above commodity coffee prices, depending upon the supply and demand at the time of purchase. Supply and price can be affected by multiple factors in the producing countries, including weather, political and economic conditions. In addition, green coffee prices have been affected in the past, and may be affected in the future, by the actions of certain organizations and associations that have historically attempted to influence commodity prices of green coffee through agreements establishing export quotas or restricting coffee supplies worldwide. The Company's ability to raise sales prices in response to rising coffee prices may be limited and the Company's profitability could be adversely affected if coffee prices were to rise substantially. The Company enters into fixed-price purchase commitments in order to secure an adequate supply of quality green coffee and bring greater certainty to the cost of sales in future periods. As of July 2, 2000, the Company had approximately $107 million in fixed-price purchase commitments which, together with existing inventory, is expected to provide an adequate supply of green coffee for the remainder of fiscal 2000. 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 may, from time to time, enter 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 green coffee prices, management believes that the Company's future results of operations and earnings could be significantly impacted by other factors such as increased competition within the specialty coffee industry, the Company's ability to find optimal store locations at favorable lease rates, increased costs associated with opening and operating retail stores in new markets, increases in the cost of dairy products and the Company's continued ability to hire, train and retain qualified personnel. SEASONALITY AND QUARTERLY RESULTS The Company's business is subject to seasonal fluctuations. Significant portions of the Company's net revenues and profits are realized during the first quarter of the Company's fiscal year, which includes the December holiday season. In addition, quarterly results are affected by the timing of the opening of new stores, and the Company's rapid growth may conceal the impact of seasonal influences. Because of the seasonality of the Company's business and its overall growth, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. 12 13 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 either trading or available-for-sale. Trading securities are recorded on the balance sheet at fair value, with unrealized gains and losses included in earnings. Available-for-sale securities are recorded on the balance sheet at fair value, with unrealized gains or losses reported as a separate component of accumulated other comprehensive income. The Company does not hedge its interest rate exposure. 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 do so in the future. The Company may, from time to time, enter 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 No. 80 "Accounting for Futures Contracts," these futures contracts meet the hedge criteria and are accounted for as hedges. Accordingly, gains and losses are deferred and recognized as adjustments to the carrying value of the coffee inventory when purchased and recognized in results of operations as coffee products are sold. Gains and losses are calculated based on the difference between the cost basis and the market value of the coffee contracts. The market risk related to coffee futures is substantially offset by changes in the costs of coffee purchased. The Company has investments of $64 million (at cost) in equity instruments of public and private Internet and e-commerce companies. These investments are accounted for under the cost method since ownership is less than 20% and the Company does not exert significant influence over the operations of these companies. The Company regularly monitors and evaluates the carrying value of these investments. If the events and circumstances indicate that these assets might be permanently impaired, the Company would reduce the carrying value of the asset and record a non-cash impairment loss. To date, no such impairment has been recorded; however in recent months, companies in the Internet and e-commerce industries have experienced difficulties, including difficulties in raising proceeds to fund expansion or to continue operations. Because the companies in which Starbucks has invested are part of the Internet and e-commerce industries, the Company may conclude in future quarters that some of these investments have experienced other-than-temporary impairment. 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 Forms 8-K filed during the 39 weeks ended July 2, 2000: None 13 14 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 15, 2000 By:/S/ Michael Casey ---------------------------------- Michael Casey executive vice president and chief financial officer Signing on behalf of the registrant and as principal financial officer 14