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 30, 2002
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
Washington (State or other Jurisdiction of Incorporation or Organization) |
91-1325671 (I.R.S. Employer 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 12, 2002, there were 388,340,847 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 |
12 | ||||||
| Item 3. |
Quantitative and Qualitative Disclosures
About Market Risk |
20 | ||||||
| PART II. OTHER INFORMATION | ||||||||
| Item 1. |
Legal Proceedings |
20 | ||||||
| Item 6. |
Exhibits and Reports on Form 8-K |
21 | ||||||
| Signature |
21 | |||||||
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except earnings per share)
| 13 Weeks Ended | 39 Weeks Ended | ||||||||||||||||
| June 30, | July 1, | June 30, | July 1, | ||||||||||||||
| 2002 | 2001 | 2002 | 2001 | ||||||||||||||
| (unaudited) | (unaudited) | ||||||||||||||||
Net revenues: |
|||||||||||||||||
Retail |
$ | 711,834 | $ | 558,920 | $ | 2,058,361 | $ | 1,644,604 | |||||||||
Specialty |
123,324 | 103,849 | 365,349 | 314,840 | |||||||||||||
Total net revenues |
835,158 | 662,769 | 2,423,710 | 1,959,444 | |||||||||||||
Cost of sales and related
occupancy costs |
337,401 | 271,350 | 994,511 | 834,748 | |||||||||||||
Store operating expenses |
291,445 | 226,614 | 822,921 | 644,912 | |||||||||||||
Other operating expenses |
29,269 | 22,695 | 93,137 | 68,266 | |||||||||||||
Depreciation and amortization expenses |
50,873 | 41,884 | 151,146 | 118,043 | |||||||||||||
General and administrative expenses |
46,997 | 35,651 | 155,440 | 112,961 | |||||||||||||
Income from equity investees |
8,536 | 6,732 | 22,580 | 17,704 | |||||||||||||
Operating income |
87,709 | 71,307 | 229,135 | 198,218 | |||||||||||||
Interest and other income, net |
1,456 | 2,910 | 6,084 | 6,183 | |||||||||||||
Gain on sale of investment |
— | — | 13,361 | — | |||||||||||||
Earnings before income taxes |
89,165 | 74,217 | 248,580 | 204,401 | |||||||||||||
Income taxes |
32,991 | 27,460 | 91,974 | 76,439 | |||||||||||||
Net earnings |
$ | 56,174 | $ | 46,757 | $ | 156,606 | $ | 127,962 | |||||||||
Net earnings per common share — basic |
$ | 0.14 | $ | 0.12 | $ | 0.41 | $ | 0.34 | |||||||||
Net earnings per common share — diluted |
$ | 0.14 | $ | 0.12 | $ | 0.39 | $ | 0.32 | |||||||||
Weighted average shares outstanding: |
|||||||||||||||||
Basic |
388,155 | 381,944 | 384,433 | 379,868 | |||||||||||||
Diluted |
401,191 | 394,482 | 397,179 | 394,617 | |||||||||||||
See notes to consolidated financial statements
3
STARBUCKS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
| June 30, | September 30, | ||||||||||
| 2002 | 2001 | ||||||||||
| (unaudited) | |||||||||||
ASSETS |
|||||||||||
Current assets: |
|||||||||||
Cash and cash equivalents |
$ | 209,143 | $ | 113,237 | |||||||
Available-for-sale securities |
206,827 | 101,399 | |||||||||
Trading securities |
10,446 | 5,913 | |||||||||
Accounts receivable, net of allowance of
$3,397 and $4,590, respectively |
93,770 | 90,425 | |||||||||
Inventories |
218,996 | 221,253 | |||||||||
Prepaid expenses and other current assets |
38,467 | 29,829 | |||||||||
Deferred income taxes, net |
41,043 | 31,869 | |||||||||
Total current assets |
818,692 | 593,925 | |||||||||
Equity and other investments |
108,249 | 63,097 | |||||||||
Property, plant and equipment, net |
1,224,154 | 1,135,784 | |||||||||
Other assets |
44,129 | 31,868 | |||||||||
Goodwill, net |
20,536 | 21,845 | |||||||||
Total |
$ | 2,215,760 | $ | 1,846,519 | |||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|||||||||||
Current liabilities: |
|||||||||||
Accounts payable |
$ | 121,993 | $ | 127,905 | |||||||
Checks drawn in excess of bank balances |
58,964 | 61,987 | |||||||||
Accrued compensation and related costs |
107,594 | 81,458 | |||||||||
Accrued occupancy costs |
42,525 | 35,835 | |||||||||
Accrued taxes |
19,104 | 70,346 | |||||||||
Other accrued expenses |
65,609 | 40,117 | |||||||||
Deferred revenue |
44,511 | 26,919 | |||||||||
Current portion of long-term debt |
706 | 697 | |||||||||
Total current liabilities |
461,006 | 445,264 | |||||||||
Deferred income taxes, net |
36,381 | 19,133 | |||||||||
Long-term debt |
5,254 | 5,786 | |||||||||
Other liabilities |
1,031 | 409 | |||||||||
Shareholders’ equity: |
|||||||||||
Common stock and additional paid-in
capital — $0.001 par value; authorized,
600,000,000; issued and outstanding,
390,216,497 and 380,044,042 shares,
respectively, (includes 1,697,100 common
stock units in both periods) |
933,164 | 791,622 | |||||||||
Other additional paid-in capital |
39,393 | — | |||||||||
Retained earnings |
746,319 | 589,713 | |||||||||
Accumulated other comprehensive loss |
(6,788 | ) | (5,408 | ) | |||||||
Total shareholders’ equity |
1,712,088 | 1,375,927 | |||||||||
Total |
$ | 2,215,760 | $ | 1,846,519 | |||||||
See notes to consolidated financial statements
4
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| 39 Weeks Ended | ||||||||||||
| June 30, | July 1, | |||||||||||
| 2002 | 2001 | |||||||||||
| (unaudited) | ||||||||||||
Operating activities: |
||||||||||||
Net earnings |
$ | 156,606 | $ | 127,962 | ||||||||
Adjustments to reconcile net earnings
to net cash provided by operating
activities: |
||||||||||||
Depreciation and amortization |
162,764 | 128,120 | ||||||||||
Gain on sale of investment |
(13,361 | ) | — | |||||||||
Provisions for asset impairment and
disposals |
19,324 | 12,506 | ||||||||||
Deferred income taxes, net |
10,310 | (6,335 | ) | |||||||||
Equity in income of investees |
(12,536 | ) | (7,541 | ) | ||||||||
Tax benefit from exercise of non-qualified
stock options |
43,260 | 29,686 | ||||||||||
Cash provided/(used) by changes in
operating assets and liabilities: |
||||||||||||
Net purchases of trading securities |
(4,860 | ) | (3,600 | ) | ||||||||
Accounts receivable |
(2,174 | ) | (18,075 | ) | ||||||||
Inventories |
2,970 | 11,772 | ||||||||||
Prepaid expenses and other
current assets |
(10,852 | ) | (9,051 | ) | ||||||||
Accounts payable |
(7,662 | ) | 21,662 | |||||||||
Accrued compensation and related costs |
25,628 | 19,627 | ||||||||||
Accrued occupancy costs |
6,615 | 5,114 | ||||||||||
Accrued taxes |
(51,501 | ) | 11,676 | |||||||||
Other liabilities |
616 | 849 | ||||||||||
Deferred revenue |
17,512 | 6,227 | ||||||||||
Other accrued expenses |
27,054 | 8,452 | ||||||||||
Net cash provided by operating activities |
369,713 | 339,051 | ||||||||||
Investing activities: |
||||||||||||
Purchase of available-for-sale securities |
(272,646 | ) | (137,105 | ) | ||||||||
Maturity of available-for-sale securities |
129,260 | 76,500 | ||||||||||
Sale of available-for-sale securities |
36,849 | 2,000 | ||||||||||
Changes to equity and other investments |
(5,277 | ) | (12,628 | ) | ||||||||
Proceeds from sale of equity investment |
14,843 | — | ||||||||||
Distributions from joint ventures |
12,141 | 12,011 | ||||||||||
Additions to property, plant and equipment |
(269,117 | ) | (255,498 | ) | ||||||||
Changes to other assets |
(15,879 | ) | (5,617 | ) | ||||||||
Net cash used by investing activities |
(369,826 | ) | (320,337 | ) | ||||||||
Financing activities: |
||||||||||||
Decrease in cash provided by checks
drawn in excess of bank balances |
(3,023 | ) | 9,660 | |||||||||
Proceeds from sale of common stock under
employee stock purchase plan |
11,743 | 9,244 | ||||||||||
Proceeds from exercise of stock options |
88,368 | 44,154 | ||||||||||
Principal payments on long-term debt |
(522 | ) | (513 | ) | ||||||||
Repurchase of common stock |
(1,829 | ) | — | |||||||||
Net cash provided by financing activities |
94,737 | 62,545 | ||||||||||
Effect of exchange rate changes
on cash and cash equivalents |
1,282 | (85 | ) | |||||||||
Net increase in cash and cash equivalents |
95,906 | 81,174 | ||||||||||
Cash and cash equivalents: |
||||||||||||
Beginning of the period |
113,237 | 70,817 | ||||||||||
End of the period |
$ | 209,143 | $ | 151,991 | ||||||||
Supplemental cash flow information: |
||||||||||||
Cash paid during the period for: |
||||||||||||
Interest |
$ | 200 | $ | 617 | ||||||||
Income taxes |
91,486 | 45,796 | ||||||||||
See notes to consolidated financial statements
5
STARBUCKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the 13 Weeks and 39 Weeks Ended June 30, 2002, and July 1, 2001
NOTE 1: FINANCIAL STATEMENT PREPARATION
The consolidated financial statements as of June 30, 2002, and July 1, 2001, and for the 13-week periods and 39-week periods ended June 30, 2002, and July 1, 2001, have been prepared by Starbucks Corporation (together with its subsidiaries, “Starbucks” or the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission. The financial information for the 13-week periods and 39-week periods ended June 30, 2002, and July 1, 2001, is unaudited, but, in the opinion of management, reflects all 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 30, 2001, is derived from the Company’s audited consolidated financial statements and notes thereto for the year ended September 30, 2001, 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 period and 39-week period ended June 30, 2002, are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending September 29, 2002.
NOTE 2: REVENUE RECOGNITION
In most instances, retail store revenues are recognized when payment is tendered at the point of sale. Revenues from stored value cards are recognized upon redemption. Until the redemption of stored value cards, outstanding customer balances on such cards are included in “Deferred revenue” on the accompanying consolidated balance sheets. Specialty revenues, consisting mainly of product sales, are generally recognized upon shipment to customers. Initial non-refundable fees required under licensing agreements are earned upon substantial performance of services. Royalty revenues based upon a percentage of sales and other continuing fees are recognized when earned. All revenues are recognized net of any discounts.
NOTE 3: NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires, among other things, the use of a nonamortization approach for purchased goodwill and certain intangibles. Goodwill and certain intangibles with indefinite lives will not be amortized into earnings but instead will be reviewed for impairment at least annually. Remaining intangibles with finite useful lives will continue to be amortized. As of June 30, 2002, the Company had goodwill and other intangible assets, net of accumulated amortization, of $20.5 million and $9.1 million, respectively, which would be subject to the transitional assessment provisions of SFAS No. 142. The Company’s management does not expect the adoption of SFAS No. 142 on September 30, 2002, to have a material impact on future results of operations or its financial position.
In November 2001, FASB issued Emerging Issues Task Force (“EITF”) No. 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred.” This Issue clarifies the FASB Staff’s position that all reimbursements received for incidental expenses incurred in conjunction with providing services as part of a company’s central on-going operations should be characterized as revenue in the income statement. The Company adopted EITF No. 01-14 on December 31, 2001, and it did not have a material impact on the Company’s consolidated results of operations.
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” which nullifies EITF No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires, among other things, that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred rather than when a company commits to such an activity and also establishes fair value as the objective for initial measurement of the liability. The Company will adopt SFAS No. 146 for exit or disposal activities that are initiated after December 31, 2002, and it is not expected to have a material impact on the Company’s results of operations, financial position or cash flows.
6
NOTE 4: INVENTORIES
Inventories consist of the following (in thousands):
| June 30, | September 30, | ||||||||
| 2002 | 2001 | ||||||||
Coffee: |
|||||||||
Unroasted |
$ | 110,380 | $ | 98,557 | |||||
Roasted |
33,548 | 33,958 | |||||||
Other merchandise held for sale |
45,631 | 63,458 | |||||||
Packaging and other supplies |
29,437 | 25,280 | |||||||
Total |
$ | 218,996 | $ | 221,253 | |||||
As of June 30, 2002, the Company had fixed-price purchase commitments for green coffee totaling approximately $240.3 million.
NOTE 5: DERIVATIVE FINANCIAL INSTRUMENTS
The Company manages its exposure to foreign currency risk within the consolidated financial statements according to a hedging policy. Under the policy, the Company may engage in transactions involving various derivative instruments with maturities generally not longer than five years to hedge assets, liabilities, revenues and purchases denominated in foreign currencies.
The Company has several forward foreign exchange contracts that qualify as cash flow hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” to hedge a portion of anticipated foreign currency denominated revenue. The Company also has forward foreign exchange contracts that qualify as hedges of a net investment in a foreign operation. These contracts expire within 22 months and are intended to minimize certain foreign currency exposures that can be confidently identified and quantified.
For the 13 weeks and 39 weeks ended June 30, 2002, and July 1, 2001, there was no ineffectiveness related to cash flow hedges. For net investment hedges, the spot-to-spot method is used by the Company to calculate effectiveness. As a result of using this method, net gains of $0.6 million and $0.9 million were recognized in earnings for the 13-week and 39-week periods ended June 30, 2002, respectively, and net gains of $0.3 million and $0.8 million were recognized in earnings during the 13-week and 39-week periods ended July 1, 2001, respectively.
The Company had accumulated derivative losses of $1.9 million, net of taxes, in other comprehensive income as of June 30, 2002, related to cash flow and net investment hedges. Of this amount, $0.6 million is expected to be reclassified into earnings within 12 months.
NOTE 6: EQUITY INVESTMENT TRANSACTIONS
On October 10, 2001, the Company sold 30,000 of its existing shares of Starbucks Coffee Japan, Ltd. (“Starbucks Japan”) at approximately $495 per share, net of related costs. In connection with this sale, the Company received cash proceeds of $14.8 million. The Company’s ownership interest in Starbucks Japan was reduced from 50.0% to 47.5% following the sale of the aforementioned shares. The Company recorded a gain from this sale of $13.4 million on the accompanying consolidated statement of earnings.
Also on October 10, 2001, Starbucks Japan issued 220,000 shares of common stock at approximately $495 per share, net of related costs, in an initial public offering in Japan. In connection with this offering, the Company’s ownership interest in Starbucks Japan was reduced from 47.5% to 40.1%. The Company recorded a credit to “Other additional paid-in capital” on the accompanying consolidated balance sheet of $39.4 million, reflecting the increase in value of its share of the net assets of Starbucks Japan related to the stock offering. As of June 30, 2002, the quoted closing price of Starbucks Japan shares was approximately $260.
7
NOTE 7: PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost and consist of the following (in thousands):
| June 30, | September 30, | |||||||
| 2002 | 2001 | |||||||
Land |
$ | 11,312 | $ | 6,023 | ||||
Building |
30,481 | 19,795 | ||||||
Leasehold improvements |
1,094,234 | 960,732 | ||||||
Roasting and store equipment |
499,350 | 421,150 | ||||||
Furniture, fixtures and other |
274,832 | |||||||