UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 March 30, 2003
OR
| o | 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 (IRS Employer Identification No.) |
2401 Utah Avenue South, Seattle, Washington 98134
(Address of principal executive offices)
(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 o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act):
Yes x No o
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Title | Shares Outstanding as of May 9, 2003 | |
|
|
||
| Common Stock, par value $0.001 per share | 390,533,005 |
STARBUCKS CORPORATION
FORM 10-Q
For the Quarterly Period Ended March 30, 2003
Table of Contents
| Page | ||||
| PART I. FINANCIAL INFORMATION | ||||
| Item 1 | Financial Statements: | |||
| Consolidated Statements of Earnings | 1 | |||
| Consolidated Balance Sheets | 2 | |||
| Consolidated Statements of Cash Flows | 3 | |||
| Notes to Consolidated Financial Statements | 4 | |||
| Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 11 | ||
| Item 3 | Quantitative and Qualitative Disclosures About Market Risk | 20 | ||
| Item 4 | Controls and Procedures | 21 | ||
| PART II. OTHER INFORMATION | ||||
| Item 1 | Legal Proceedings | 21 | ||
| Item 4 | Submission of Matters to a Vote of Security Holders | 21 | ||
| Item 6 | Exhibits and Reports on Form 8-K | 22 | ||
| Signatures | 23 | |||
| Certifications | 24 – 25 | |||
| Exhibit Index | E-1 | |||
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except earnings per share)
(unaudited)
| 13 Weeks Ended | 26 Weeks Ended | |||||||||||||||||
| March 30, | March 31, | March 30, | March 31, | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||
Net revenues: |
||||||||||||||||||
Retail |
$ | 809,317 | $ | 664,262 | $ | 1,658,803 | $ | 1,346,527 | ||||||||||
Specialty |
144,889 | 118,955 | 298,929 | 242,025 | ||||||||||||||
Total net revenues |
954,206 | 783,217 | 1,957,732 | 1,588,552 | ||||||||||||||
Cost of sales and related occupancy costs |
392,098 | 320,081 | 811,259 | 657,110 | ||||||||||||||
Store operating expenses |
331,612 | 270,986 | 654,588 | 531,476 | ||||||||||||||
Other operating expenses |
43,818 | 33,543 | 81,939 | 63,868 | ||||||||||||||
Depreciation and amortization expenses |
57,961 | 49,972 | 115,346 | 100,273 | ||||||||||||||
General and administrative expenses |
49,796 | 67,314 | 101,445 | 108,443 | ||||||||||||||
Income from equity investees |
6,604 | 7,105 | 13,248 | 13,056 | ||||||||||||||
Operating income |
85,525 | 48,426 | 206,403 | 140,438 | ||||||||||||||
Interest and other income, net |
1,239 | 2,135 | 5,735 | 4,628 | ||||||||||||||
Gain on sale of investment |
— | — | — | 13,361 | ||||||||||||||
Earnings before income taxes |
86,764 | 50,561 | 212,138 | 158,427 | ||||||||||||||
Income taxes |
34,713 | 18,838 | 81,681 | 58,984 | ||||||||||||||
Net earnings |
$ | 52,051 | $ | 31,723 | $ | 130,457 | $ | 99,443 | ||||||||||
Net earnings per common share - basic |
$ | 0.13 | $ | 0.08 | $ | 0.34 | $ | 0.26 | ||||||||||
Net earnings per common share - diluted |
$ | 0.13 | $ | 0.08 | $ | 0.33 | $ | 0.25 | ||||||||||
Weighted average shares outstanding: |
||||||||||||||||||
Basic |
389,713 | 384,346 | 389,186 | 382,563 | ||||||||||||||
Diluted |
399,622 | 397,861 | 399,427 | 394,917 | ||||||||||||||
See Notes to Consolidated Financial Statements.
1
STARBUCKS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| March 30, | September 29, | |||||||||
| 2003 | 2002 | |||||||||
| (unaudited) | ||||||||||
ASSETS |
||||||||||
Current assets: |
||||||||||
Cash and cash equivalents |
$ | 250,401 | $ | 99,677 | ||||||
Short-term investments - Available-for-sale securities |
240,111 | 217,302 | ||||||||
Short-term investments - Trading securities |
15,875 | 10,360 | ||||||||
Accounts receivable, net of allowances of $3,719 and $3,680, respectively |
103,142 | 97,573 | ||||||||
Inventories |
203,212 | 263,174 | ||||||||
Prepaid expenses and other current assets |
50,608 | 42,351 | ||||||||
Deferred income taxes, net |
43,621 | 42,206 | ||||||||
Total current assets |
906,970 | 772,643 | ||||||||
Equity and other investments |
111,275 | 102,929 | ||||||||
Property, plant and equipment, net |
1,329,905 | 1,265,756 | ||||||||
Other assets |
42,071 | 43,691 | ||||||||
Goodwill and other intangible assets |
30,706 | 29,764 | ||||||||
TOTAL ASSETS |
$ | 2,420,927 | $ | 2,214,783 | ||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||||
Current liabilities: |
||||||||||
Accounts payable |
$ | 144,831 | $ | 135,994 | ||||||
Accrued compensation and related costs |
117,601 | 105,899 | ||||||||
Accrued occupancy costs |
46,064 | 51,195 | ||||||||
Accrued taxes |
29,195 | 54,244 | ||||||||
Other accrued expenses |
87,585 | 72,289 | ||||||||
Deferred revenue |
67,524 | 42,264 | ||||||||
Current portion of long-term debt |
716 | 710 | ||||||||
Total current liabilities |
493,516 | 462,595 | ||||||||
Deferred income taxes, net |
27,421 | 22,496 | ||||||||
Long-term debt |
4,719 | 5,076 | ||||||||
Other long-term liabilities |
726 | 1,036 | ||||||||
Shareholders’ equity: |
||||||||||
Common stock and additional paid-in capital - Authorized, 600,000,000;
issued and outstanding, 391,467,077 and 388,228,592 shares,
respectively, (includes 1,697,100 common stock units in both periods) |
931,054 | 891,040 | ||||||||
Other additional paid-in-capital |
39,393 | 39,393 | ||||||||
Retained earnings |
932,186 | 801,728 | ||||||||
Accumulated other comprehensive loss |
(8,088 | ) | (8,581 | ) | ||||||
Total shareholders’ equity |
1,894,545 | 1,723,580 | ||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
$ | 2,420,927 | $ | 2,214,783 | ||||||
See Notes to Consolidated Financial Statements.
2
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
| 26 Weeks Ended | |||||||||||
| March 30, | March 31, | ||||||||||
| 2003 | 2002 | ||||||||||
OPERATING ACTIVITIES: |
|||||||||||
Net earnings |
$ | 130,457 | $ | 99,443 | |||||||
Adjustments to reconcile net earnings to net cash provided
by operating activities: |
|||||||||||
Depreciation and amortization |
124,761 | 107,866 | |||||||||
Gain on sale of investment |
— | (13,361 | ) | ||||||||
Provision for impairments and asset disposals |
(925 | ) | 6,971 | ||||||||
Deferred income taxes, net |
4,199 | (11,557 | ) | ||||||||
Equity in income of investees |
(4,930 | ) | (6,559 | ) | |||||||
Tax benefit from exercise of non-qualified stock options |
18,020 | 24,976 | |||||||||
Net accretion of discount and amortization of premium on
marketable securities |
2,648 | — | |||||||||
Cash provided/(used) by changes in operating assets and liabilities: |
|||||||||||
Inventories |
60,655 | 48,672 | |||||||||
Accounts receivable |
(5,376 | ) | 4,281 | ||||||||
Accounts payable |
6,997 | (27,654 | ) | ||||||||
Accrued occupancy |
(5,283 | ) | 10,071 | ||||||||
Accrued taxes |
(25,160 | ) | (39,617 | ) | |||||||
Other accrued expenses |
9,613 | 19,879 | |||||||||
Deferred revenue |
25,129 | 12,323 | |||||||||
Other operating assets and liabilities |
(2,258 | ) | (3,678 | ) | |||||||
Net cash provided by operating activities |
338,547 | 232,056 | |||||||||
INVESTING ACTIVITIES: |
|||||||||||
Purchase of available-for-sale securities |
(140,321 | ) | (159,894 | ) | |||||||
Maturity of available-for-sale securities |
62,401 | 106,260 | |||||||||
Sale of available-for-sale securities |
52,314 | 2,000 | |||||||||
Net additions to equity, other investments and other assets |
(2,897 | ) | (7,744 | ) | |||||||
Proceeds from sale of equity investment |
— | 14,843 | |||||||||
Additions to property, plant and equipment |
(182,011 | ) | (183,607 | ) | |||||||
Net cash used by investing activities |
(210,514 | ) | (228,142 | ) | |||||||
FINANCING ACTIVITIES: |
|||||||||||
Proceeds from issuance of common stock |
52,138 | 60,215 | |||||||||
Principal payments on long-term debt |
(350 | ) | (347 | ) | |||||||
Repurchase of common stock |
(30,144 | ) | (1,829 | ) | |||||||
Net cash provided by financing activities |
21,644 | 58,039 | |||||||||
Effect of exchange rate changes on cash and cash equivalents |
1,047 | (179 | ) | ||||||||
Net increase in cash and cash equivalents |
150,724 | 61,774 | |||||||||
CASH AND CASH EQUIVALENTS: |
|||||||||||
Beginning of period |
99,677 | 51,250 | |||||||||
End of the period |
$ | 250,401 | $ | 113,024 | |||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|||||||||||
Cash paid during the year for: |
|||||||||||
Interest |
$ | 140 | $ | 94 | |||||||
Income taxes |
$ | 85,171 | $ | 86,038 | |||||||
See Notes to Consolidated Financial Statements.
3
STARBUCKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the 13 Weeks and 26 Weeks Ended March 30, 2003 and March 31, 2002
Note 1: Financial Statement Preparation
The consolidated financial statements as of March 30, 2003, and March 31, 2002, and for the 13-week and 26-week periods ended March 30, 2003, and March 31, 2002, have been prepared by Starbucks Corporation (“Starbucks” or the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The financial information for the 13-week and 26-week periods ended March 30, 2003, and March 31, 2002, 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 29, 2002, is derived from the Company’s audited consolidated financial statements and notes thereto for the year ended September 29, 2002, included in Item 8 in the Fiscal 2002 Annual Report to Shareholders on Form 10-K, and should be read in conjunction with such financial statements.
Certain reclassifications of prior year’s balances have been made to conform to the current format.
The results of operations for the 13-week and 26-week periods ended March 30, 2003, are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending September 28, 2003.
Investment Accounting Change
In March 2003, Starbucks announced plans to acquire its licensed operations in Austria and Switzerland from its business partner, Bon appétit Group. This acquisition, which is expected to be completed in the Company’s fiscal third quarter, is not expected to significantly impact the Company’s fiscal 2003 financial results.
Due to the Company’s recent ability to exert significant influence over operating and financial policies, management determined that a change in accounting method, from the cost method to the equity method, was required. Accounting Principles Board (“APB”) Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock,” requires prior period information to be adjusted for the retroactive application of the equity method for the Company’s 19.5% share of net losses.
As shown in the table below, the change to the equity method resulted in a $1.6 million reduction of net earnings for the 13 weeks ended December 29, 2002, and reductions of net earnings for the effects of the accounting change prior to fiscal 2003 of $2.3 million and $0.8 million for the 52 weeks ended September 29, 2002 and September 30, 2001, respectively (in thousands, except earnings per share):
| 13 weeks ended | 52 weeks ended | 52 weeks ended | ||||||||||
| December 29, | September 29, | September 30, | ||||||||||
| 2002 | 2002 | 2001 | ||||||||||
Net earnings, previously reported |
$ | 79,973 | $ | 215,073 | $ | 181,210 | ||||||
Effect of change to equity method |
(1,567 | ) | (2,274 | ) | (784 | ) | ||||||
Net earnings, as restated |
$ | 78,406 | $ | 212,799 | $ | 180,426 | ||||||
Net earnings per common share – basic: |
||||||||||||
Previously reported |
$ | 0.21 | $ | 0.56 | $ | 0.48 | ||||||
As restated |
$ | 0.21 | $ | 0.55 | $ | 0.48 | ||||||
Net earnings per common share – diluted: |
||||||||||||
Previously reported |
$ | 0.20 | $ | 0.54 | $ | 0.46 | ||||||
As restated |
$ | 0.20 | $ | 0.54 | $ | 0.46 | ||||||
4
The following table summarizes the effects of the investment accounting change on net earnings and earnings per share for the periods indicated (in thousands, except earnings per share):
| 13 weeks ended | 26 weeks ended | |||||||||||||||||||
| December 30, | March 31, | June 30, | September 29, | March 31, | ||||||||||||||||
| 2001 | 2002 | 2002 | 2002 | 2002 | ||||||||||||||||
Net earnings, previously reported |
$ | 68,355 | $ | 32,077 | $ | 56,174 | $ | 58,467 | $ | 100,432 | ||||||||||
Effect of change to equity method |
(635 | ) | (354 | ) | (506 | ) | (779 | ) | (989 | ) | ||||||||||
Net earnings, as restated |
$ | 67,720 | $ | 31,723 | $ | 55,668 | $ | 57,688 | $ | 99,443 | ||||||||||
Net earnings per common share – basic: |
||||||||||||||||||||
Previously reported |
$ | 0.18 | $ | 0.08 | $ | 0.14 | $ | 0.15 | $ | 0.26 | ||||||||||
As restated |
$ | 0.18 | $ | 0.08 | $ | 0.14 | $ | 0.15 | $ | 0.26 | ||||||||||