<PAGE> 1
- -------------------------------------------------------------------------------
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 30, 1996
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, 1996, there were 77,358,880 shares of the registrant's Common
Stock outstanding.
- -------------------------------------------------------------------------------
<PAGE> 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
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . 14
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . 15
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except earnings per share)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, July 2, June 30, July 2,
1996 1995 1996 1995
(13 Weeks) (13 Weeks) (39 Weeks) (39 Weeks)
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $176,950 $119,174 $500,095 $335,833
Cost of sales and related
occupancy costs 83,164 53,723 246,619 151,344
Store operating expenses 54,757 39,304 148,993 108,648
Other operating expenses 4,941 3,515 14,516 10,116
Depreciation and amortization 9,454 5,918 25,615 15,534
General and administrative
expenses 10,014 6,407 26,373 18,643
- -------------------------------------------------------------------------
Operating income 14,620 10,307 37,979 31,548
Interest income 2,829 1,917 7,944 5,273
Gain on sale of investment 0 0 9,201 0
Interest expense (1,960) (907) (6,919) (2,783)
- -------------------------------------------------------------------------
Earnings before income taxes 15,489 11,317 48,205 34,038
Income taxes 6,043 4,472 18,802 13,442
- -------------------------------------------------------------------------
Net earnings $9,446 $6,845 $29,403 $20,596
=========================================================================
Net earnings per common and
common equivalent share -
primary $0.12 $0.09 $0.39 $0.29
=========================================================================
Net earnings per common and
common equivalent share -
assuming full dilution $0.12 $0.09 $0.38 $0.29
=========================================================================
Weighted average common and
common equivalent shares
outstanding - primary 78,973 72,861 75,598 70,556
Weighted average common and
common equivalent shares
outstanding - assuming
full dilution 80,535 73,411 80,386 71,336
</TABLE>
See notes to consolidated financial statements
3
<PAGE> 4
STARBUCKS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
June 30, October 1,
1996 1995
- ----------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 139,944 $ 20,944
Short-term investments 89,860 41,507
Accounts and notes receivable (net of
allowance for doubtful accounts
of $302 and $242, respectively) 15,140 10,157
Inventories 76,949 123,657
Prepaid expenses and other
current assets 5,750 4,746
Deferred income taxes, net 4,853 4,644
- ----------------------------------------------------------------------
Total current assets 332,496 205,655
Joint ventures and equity investments 4,818 11,628
Property, plant and equipment, net 334,339 244,728
Deposits and other assets 8,542 6,167
- ----------------------------------------------------------------------
Total $ 680,195 $468,178
======================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 23,695 $28,668
Checks drawn in excess of bank balances 15,047 13,138
Accrued compensation and related costs 12,615 12,786
Accrued interest payable 1,229 650
Other accrued expenses 22,021 15,804
Income taxes payable 2,756 0
- ----------------------------------------------------------------------
Total current liabilities 77,363 71,046
Deferred income taxes, net 5,907 3,490
Capital lease obligation 1,018 1,013
Convertible subordinated debentures 165,020 80,398
Shareholders' equity:
Common Stock, no par value -- 150,000,000
shares authorized; 77,188,729 and
70,956,990 shares, respectively,
issued and outstanding 355,308 265,679
Retained earnings including
cumulative translation adjustment
of $(737) and $(435), respectively,
and net unrealized holding gain(loss)
on investments of $(40) and $34,
respectively 75,579 46,552
- ----------------------------------------------------------------------
Total shareholders' equity 430,887 312,231
- ----------------------------------------------------------------------
Total $ 680,195 $ 468,178
======================================================================
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 5
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
- ----------------------------------------------------------------------
June 30, July 2,
1996 1995
(39 Weeks) (39 Weeks)
- ----------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net earnings $ 29,403 $ 20,596
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 28,072 16,905
Deferred income taxes, net 2,208 (1,676)
Equity in losses of investees 1,166 709
Gain on sale of equity investment (9,201) 0
Cash provided (used) by changes in
operating assets and liabilities:
Accounts and notes receivable (4,985) (2,945)
Inventories 46,697 (31,843)
Prepaid expenses and other
current assets (1,007) (199)
Accounts payable (5,038) 8,844
Income taxes payable 2,808 5,475
Accrued compensation and
related costs (180) 3,060
Accrued interest payable 1,432 921
Other accrued expenses 5,720 7,005
- ----------------------------------------------------------------------
Net cash provided by operating activities 97,095 26,852
Investing activities:
Purchase of short-term investments (128,142) (133,791)
Sale of short-term investments 7,711 14,363
Maturity of short-term investments 71,956 46,110
Investments in joint ventures and
equity securities (5,690) (11,324)
Proceeds from sale of equity investments 20,535 0
Additions to property, plant
and equipment (116,471) (90,331)
Increase in deposits and other assets (876) (1,712)
- ----------------------------------------------------------------------
Net cash used by investing activities (150,977) (176,685)
Financing activities:
Increase(decrease) in cash provided by checks
drawn in excess of bank balances 1,904 (3,339)
Proceeds from sale of convertible
debentures 165,020 0
Debt issuance costs (4,041) 0
Proceeds from notes payable 0 19,000
Principal repayments of notes payable 0 (19,000)
Net proceeds from sale of common stock 0 163,873
Proceeds from sale of common stock
under employee stock purchase plan 1,241 0
Exercise of stock options and warrants 5,623 1,804
Tax benefit from exercise of non-qualified
stock options 3,705 2,878
Payments on capital lease obligation (266) 0
Payments on subscription notes receivable 0 320
Debt conversion costs (285) 0
- ----------------------------------------------------------------------
Net cash provided by financing activities 172,901 165,536
- ----------------------------------------------------------------------
Balance, carried forward 119,019 15,703
</TABLE>
(Continued on next page)
5
<PAGE 6>
<TABLE>
<S> <C> <C>
Balance, brought forward 119,019 15,703
Effect of exchange rate changes
on cash and cash equivalents (19) (6)
- ----------------------------------------------------------------------
Net increase in cash and cash equivalents 119,000 15,697
Cash and cash equivalents:
Beginning of the period 20,944 8,394
- ----------------------------------------------------------------------
End of the period $ 139,944 $ 24,091
======================================================================
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 5,586 $ 1,841
Income taxes 9,960 6,857
Noncash financing and investing transactions:
Capital lease obligation incurred 763 0
Net unrealized holding gain(loss)
on investments (66) 168
Conversions of convertible debt into common
stock, net of unamortized issue costs and
accrued interest 79,345 0
</TABLE>
See notes to consolidated financial statements
6
<PAGE> 7
STARBUCKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the 13 Weeks and 39 Weeks Ended June 30, 1996 and July 2, 1995
(UNAUDITED)
NOTE 1. FINANCIAL STATEMENT PREPARATION:
The consolidated financial statements as of June 30,
1996 and October 1, 1995 and for the 13-week and 39-week
periods ended June 30, 1996 and July 2, 1995 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 June 30, 1996 and July 2, 1995 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 1, 1995, is derived
from the Company's consolidated financial statements and
notes thereto contained in the Company's Annual Report
to Shareholders incorporated by reference in the
Company's Annual Report on Form 10-K for the year ended
October 1, 1995, 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 30, 1996, are not necessarily
indicative of the Company's results of operations for
the entire fiscal year ending September 29, 1996.
NOTE 2. CONVERSION OF DEBENTURES:
On April 12, 1996, the Company called for redemption its
4-1/2% Convertible Subordinated Debentures due 2003. In
total, approximately $80.5 million in principal amount
of the debentures was converted into the Company's
common stock prior to the redemption date, constituting
substantially all of the outstanding principal balance.
The total principal amount converted, net of unamortized
issue costs, accrued but unpaid interest, and costs of
conversion, was credited to common stock.
NOTE 3. EARNINGS PER SHARE:
Primary earnings per common and common equivalent share
equals net earnings divided by the weighted average
number of common shares outstanding, after giving effect
to dilutive stock options. Fully diluted earnings per
common and common equivalent share equals net earnings
plus after-tax interest and issuance cost amortization
incurred on the 4-1/2% convertible debentures for the 13-
and 39-week periods ended June 30, 1996 ($152,000 and
$1,332,000, respectively), divided by common shares
outstanding after giving effect to dilutive stock
options and, for the 13- and 39-week periods ended June
30, 1996, shares assumed to be issued on conversion of
the Company's convertible 4-1/2% debentures. The 4-1/2%
convertible debentures are not included in the fully
diluted earnings per share calculations for the 13- and
39-week periods ended July 2, 1995 because they are not
dilutive. The Company's 4-1/4% Subordinated Convertible
Debentures due 2002 are not included in the fully
diluted earnings per share calculation for the 13- and
39-week periods ended June 30, 1996 because they are not
dilutive; these debentures were issued in October 1995,
and had no impact on fiscal 1995 earnings per share.
7
<PAGE> 8
NOTE 4. INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, October 1,
1996 1995
- --------------------------------------------------------------
<S> <C> <C>
Coffee:
Unroasted $ 36,445 $ 75,975
Roasted 9,652 11,612
Other merchandise held for sale 27,112 32,731
Packaging and other supplies 3,740 3,339
- -------------------------------------------------------------
Total $ 76,949 $ 123,657
=============================================================
As of June 30, 1996, the Company had fixed price
purchase commitments for green coffee totaling
approximately $24 million.
NOTE 5. PROPERTY, PLANT, AND EQUIPMENT:
Property, plant, and equipment consist of the following
(in thousands):
</TABLE>
<TABLE>
<CAPTION>
June 30, October 1,
1996 1995
- --------------------------------------------------------------
<S> <C> <C>
Land $ 3,602 $ 3,602
Building 8,338 8,338
Leasehold improvements 227,036 162,948
Roasting and store equipment 113,878 82,490
Furniture, fixtures and other 35,992 24,602
- --------------------------------------------------------------
388,846 281,980
Less accumulated depreciation (78,282) (52,215)
- --------------------------------------------------------------
310,564 229,765
Construction in process 23,775 14,963
- --------------------------------------------------------------
Total $ 334,339 $ 244,728
==============================================================
</TABLE>
NOTE 6. NEW ACCOUNTING STANDARD:
In October 1995, the Financial Accounting Standards
Board issued Statement No. 123, Accounting for Stock-
Based Compensation. This pronouncement establishes the
accounting and reporting standards for stock-based
employee compensation plans, including stock purchase
plans, stock options, and stock appreciation rights.
This new standard defines a fair value-based method of
accounting for these equity instruments. This method
measures compensation cost based on the value of the
award and recognizes that cost over the service period.
Companies may elect to adopt this standard or to
continue accounting for these types of equity
instruments under current guidance, APB Opinion No. 25,
Accounting for Stock Issued to Employees. Companies
which elect to continue using the rules of Opinion 25
must make pro forma disclosures of net income and
earnings per share as if this new statement had been
applied. This new standard is required for fiscal years
beginning after December 15, 1995.
The Company is in the process of evaluating this
statement and its impact on the Company's financial
condition and results of operations.
8
<PAGE> 9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Starbucks Corporation ("Starbucks" or the "Company")
derives approximately 86% of net sales from its retail
store operations. The Company's specialty sales and
direct response (mail order) operations account for the
remainder of net sales.
The Company's fiscal year ends on the Sunday closest to
September 30. Fiscal years ending on September 29, 1996
and October 1, 1995 each include 52 weeks.
The following discussion contains forward-looking
statements that involve 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, impact of competition,
availability of financing, legal proceedings, and other
risks detailed in the Company's Securities and Exchange
Commission filings, including the Company's Annual
Report on Form 10-K for the year ended October 1, 1995.
RESULTS OF OPERATIONS -- FOR THE 13 WEEKS ENDED JUNE
30, 1996, COMPARED TO THE 13 WEEKS ENDED JULY 2, 1995
Revenues. Net sales for the 13 weeks ended June 30,
1996, increased 48% to $176,950,000 from $119,174,000
for the corresponding period in fiscal 1995. Retail
sales increased 48% to $153,212,000 from $103,719,000,
due 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. This
increase resulted primarily from an increase in the
average number of transactions combined with an increase
in the average dollar value per transaction. 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. The Company
anticipates that this cannibalization, as well as
increased competition and other factors, may continue to
put downward pressure on its comparable store sales
growth in future periods.
During the 13 weeks ended June 30, 1996, the Company
opened 64 Starbucks stores (including two replacement
stores) and converted five Coffee Connection stores to
Starbucks stores. Licensees opened nine stores. The
Company ended the period with 833 Company-operated
stores and 66 licensed stores.
Specialty sales increased 60% to $19,855,000 for the 13
weeks ended June 30, 1996, compared to $12,376,000 for
the corresponding period in fiscal 1995. Increased
sales to airlines, hotels, joint ventures, restaurants,
multi-unit retailers, and a chain of wholesale clubs
accounted for the majority of the increase in sales.
Direct response sales increased 26% to $3,883,000 for
the 13 weeks ended June 30, 1996, compared to $3,079,000
for the corresponding period in fiscal 1995.
Cost and Expenses. Cost of sales and related occupancy
costs as a percentage of net sales increased to 47.0%
for the 13 weeks ended June 30, 1996, from 45.1% for the
corresponding fiscal 1995 period. This increase was
primarily the result of higher green coffee costs as a
percentage of sales, partially offset by a shift in the
retail sales mix towards higher margin products.
Store operating expenses as a percentage of retail sales
decreased to 35.7% for the 13 weeks ended June 30, 1996,
from 37.9% for the corresponding period in fiscal 1995.
The 2.2% of retail sales improvement was due primarily
to lower advertising, preopening and payroll-related
costs as a percentage of retail sales.
Other operating expenses (those associated with
specialty sales and direct response as well as joint
ventures) as a percentage of net sales decreased to 2.8%
for the 13 weeks ended June 30, 1996, from 2.9% for the
corresponding period in fiscal 1995. Depreciation and
amortization as a percentage of net sales increased 0.3%
to 5.3% for the 13 weeks ended June 30, 1996. This
increase was due primarily to increased per-store
buildout costs in recent years relative to earlier
history.
9
<PAGE> 10
General and administrative expenses as a percentage of
net sales were 5.7% for the 13 weeks ended June 30,
1996, compared to 5.4% for the same period in fiscal
1995. This increase as a percentage of net sales was
due to higher rent expense related to the Company's
continued expansion of its corporate office space, as
well as to higher recruiting and relocation costs as a
percentage of net sales, partially offset by leverage on
administrative salaries.
Operating Income. Operating income for the 13 weeks
ended June 30, 1996 increased to $14,620,000 or 8.3% of
net sales from $10,307,000 or 8.6% of net sales for the
corresponding period in fiscal 1995. Operating income
as a percentage of net sales decreased due to lower
gross margins, and higher depreciation and amortization
and general and administrative expense as a percentage
of sales, partially offset by lower store operating
expenses as a percentage of sales.
Interest Income. Interest income for the 13 weeks
ended June 30, 1996 was $2,829,000 compared to
$1,917,000 for the corresponding period in fiscal 1995.
The increase in interest income is due primarily to
higher average investment balances.
Interest Expense. Interest expense for the 13 weeks
ended June 30, 1996 was $1,960,000 compared to $907,000
for the corresponding period in fiscal 1995. The
increase in interest expense is due to interest on the
Company's 4-1/4% convertible debentures issued in
October 1995, partially offset by the reduction in
interest on the Company's 4-1/2% convertible debentures
which converted to equity during the quarter.
Income Taxes. The Company's effective tax rate for the
13 weeks ended June 30, 1996 was 39.0% compared to 39.5%
for the corresponding period in fiscal 1995. This
decrease is due primarily to a decrease in the effective
state tax rate due to changes in the allocation and
apportionment factors.
RESULTS OF OPERATIONS -- FOR THE 39 WEEKS ENDED JUNE 30,
1996, COMPARED TO THE 39 WEEKS ENDED JULY 2, 1995
Revenues. Net sales for the 39 weeks ended June 30,
1996, increased 49% to $500,095,000 from $335,833,000
for the corresponding period in fiscal 1995. Retail
sales increased 49% to $431,243,000 from $288,726,000,
due to the addition of new retail stores combined with
an increase in comparable store sales of 6%. The
comparable store sales increases resulted primarily from
an increase in the number of transactions combined with
an increase in the average dollar value per transaction.
During the 39 weeks ended June 30, 1996, the Company
opened 211 Starbucks stores (including four replacement
stores), converted six Coffee Connection stores to
Starbucks stores, and closed one store. Licensees
opened 17 new stores. The Company anticipates at least
72 new Company-operated and licensed stores will be
opened during the remainder of fiscal 1996.
Specialty sales increased 54% to $54,495,000 for the 39
weeks ended June 30, 1996, compared to $35,356,000 for
the corresponding period in fiscal 1995. Increased
sales to airlines, hotels, a chain of wholesale clubs,
restaurants, and multi-unit retailers accounted for the
majority of the increase in sales. Direct response
sales increased 22% to $14,357,000 for the 39 weeks
ended June 30, 1996, compared to $11,751,000 for the
corresponding period in fiscal 1995.
Costs and Expenses. Cost of sales and related occupancy
costs as a percentage of net sales increased to 49.3%
for the 39 weeks ended June 30 1996, from 45.1% for the
corresponding fiscal 1995 period. This increase was
primarily the result of higher green coffee costs and
higher occupancy costs as a percentage of sales,
partially offset by a shift in the retail sales mix
towards higher margin products.
Store operating expenses as a percentage of retail sales
decreased to 34.5% from 37.6% for the corresponding
period in fiscal 1995. The 3.1% of retail sales
improvement reflects lower advertising, regional
overhead, payroll-related costs, and preopening expenses
as a percentage of retail sales.
Other operating expenses as a percentage of net sales
decreased 0.1% to 2.9%. Depreciation and amortization
as a percentage of net sales increased 0.5% to 5.1% for
the 39 weeks ended June 30, 1996. The increase in
depreciation and amortization is due primarily to
increased per-store buildout costs in recent years
relative to earlier history.
10
<PAGE> 11
General and administrative expenses as a percentage of
net sales were 5.3% for the 39 weeks ended June 30,
1996, compared to 5.6% for the same period in fiscal
1995. This decrease as a percentage of net sales was
due primarily to lower payroll-related costs which were
partially offset by higher rent expense from the
Company's expansion of its corporate office space.
Operating Income. Operating income for the 39 weeks
ended June 30, 1996 increased to $37,979,000 or 7.6% of
net sales from $31,548,000 or 9.4% of net sales for the
corresponding period in fiscal 1995. Operating income
as a percentage of net sales decreased due to lower
gross margins and higher depreciation and amortization
expense as a percentage of sales, partially offset by
lower store operating and general and administrative
expenses as a percentage of sales.
Interest Income. Interest income for the 39 weeks ended
June 30, 1996 was $7,944,000 compared to $5,273,000 for
the corresponding period in 1995. The increase in
interest income is due primarily to higher average
investment balances.
Gain on Sale of Investment. On March 31, 1995, the
Company invested $11.3 million in cash for shares of
Noah's New York Bagels, Inc. ("Noah's") Series B
Preferred Stock, representing approximately 20%
ownership in Noah's. On February 1, 1996, Noah's was
merged with Einstein Brothers Bagels, Inc. ("Einstein
Brothers"), a retailer operating primarily in the
Eastern United States. In exchange for its investment
in Noah's, the Company received $20.5 million in cash.
The Company realized a $9.2 million pre-tax gain ($5.6
million net of tax) on this transaction. Concurrently,
the Company purchased $1.8 million of Einstein Brothers
restricted common stock. This investment is accounted
for under the cost method.
Interest Expense. Interest expense for the 39 weeks
ended June 30, 1996 was $6,919,000 compared to
$2,783,000 for the corresponding period in fiscal 1995.
The increase in interest expense is due primarily to
interest on the Company's convertible debentures issued
in October 1995.
Income Taxes. The Company's effective tax rate for the
39 weeks ended June 30, 1996 was 39.0% compared to 39.5%
for the corresponding period in fiscal 1995. This
decrease is due primarily to a decrease in the effective
state tax rate due to changes in the allocation and
apportionment factors.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the period with $229.8 million in
total cash and investments. Working capital as of June
30, 1996 totaled $255.1 million compared to $134.6
million at October 1, 1995. The increase of $120.5
million was due primarily to proceeds from an October
1995 offering of 4-1/4% Convertible Subordinated
Debentures due 2002 which generated proceeds of $161.0
million, net of issuance costs. Cash provided by
operating activities totaled $97.1 million for the first
39 weeks of fiscal 1996. This was due primarily to net
income before non-cash charges and gains of $51.6
million and a decrease in inventories of $46.7 million,
primarily due to lower green coffee inventories.
Cash provided from financing activities for the first 39
weeks of fiscal 1996 totaled $172.9 million. This
includes the Company's October 1995 offering of
convertible debentures discussed above. Cash provided
from financing activities also included cash generated
in connection with the exercise of options to purchase
shares of the Company's common stock and the related
income tax benefit available to the Company upon
exercise of such options, as well as cash generated in
connection with the Company's employee stock purchase
plan. The Company may continue to receive proceeds and
a tax deduction as a result of its employees
participating in stock purchase and option plans;
however, neither the amounts nor the timing thereof can
be predicted.
11
<PAGE> 12
Cash used by investing activities for the first 39 weeks
of fiscal 1996 totaled $151.0 million. This included
capital expenditures (additions to property, plant and
equipment) of $116.5 million. Capital expenditures
included the costs to open 211 new Company-operated
stores, remodel certain existing stores, purchase
roasting and packaging equipment, expand existing office
space, and enhance existing information systems. The
Company received $20.5 million for the sale of its
investment in Noah's and concurrently purchased $1.8
million of common stock in Einstein Brothers. The
Company's wholly-owned subsidiary, Starbucks Coffee
International, Inc. ("SBI"), contributed $2.4 million to
its joint venture with SAZABY, Inc. ("SAZABY JV"). The
Company made equity investments of $1.2 million in its
50/50 joint venture with Pepsi-Cola Company ("Pepsi JV")
and $0.3 million in its joint venture with Dreyer's
Grand Ice Cream, Inc. ("Dreyer's JV") Excess cash was
invested in investment-grade marketable debt securities,
the majority of which are classified as cash
equivalents.
Future cash requirements, 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 also anticipates
remodeling certain existing stores and incurring
additional expenditures for enhancing its production
capacity and computer systems. Planned capital
expenditures for the remainder of fiscal 1996 are
estimated to be approximately $50 million.
The Company will also have cash requirements for the
Pepsi JV, Dreyer's JV and international expansion. In
addition, under the terms of the Company's corporate
office lease, the Company has agreed to provide
financing to the building owner to be used exclusively
for facilities and leasehold development costs to
accommodate the Company. During fiscal 1996, the
Company has provided approximately $2.5 million under
this agreement. During the remainder of fiscal 1996,
the Company intends to provide additional funds of
approximately $1.2 million under this agreement. The
maximum amount available under the agreement is $17
million. Any funds advanced by the Company will be
repaid with interest over a term not to exceed 20 years.
Management believes that it can obtain lower occupancy
costs as a result of this arrangement than through a
traditional lease of comparable office space.
Management believes that the existing cash and
investments plus cash generated from operations should
be sufficient to finance capital requirements for its
core businesses for the remainder of fiscal 1996 and
through fiscal 1997. Any new joint ventures or other
new business opportunities may require outside funding.
COFFEE PRICES AND AVAILABILITY AND GENERAL RISK CONDITIONS
The following important factors, among others, could
impact the Company's actual results and could cause such
results to differ materially from those expressed in the
Company's forward-looking statements. Green coffee
commodity prices are subject to substantial price
fluctuations, generally a result of reports of adverse
growing conditions in certain coffee-producing
countries. Due to green coffee commodity price
increases, the Company effected sales price increases
during fiscal 1994 and 1995 in its coffee beverages and
whole bean coffees to mitigate the effects of increases
in its costs of supply. Because the Company had
established fixed purchase prices for some of its supply
of green coffees, the Company's margins were favorably
impacted by such sales price increases during much of
fiscal 1995. During the latter part of fiscal 1995 and
the first nine months of fiscal 1996, gross margins were
negatively impacted relative to the prior year by the
sell-through of higher-cost coffee inventories.
The Company enters into fixed price purchase commitments
in order to secure an adequate supply of quality green
coffee and fix a cost for future periods. As of June
30, 1996 the Company had approximately $24 million in
fixed price purchase commitments which, together with
existing inventory, the Company believes will provide an
adequate supply of green coffee for the remainder of
fiscal 1996 and into fiscal 1997. The Company believes
that, based on relationships established with its
suppliers in the past, the risk of non-delivery on such
purchase commitments is remote.
In addition to fluctuating coffee prices, management
believes that in the future, the Company's 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,
the increased costs associated with opening and
operating retail stores in new markets, the Company's
continued ability to hire, train and retain qualified
personnel, and the Company's ability to obtain adequate
capital to finance its planned expansion.
12
<PAGE> 13
Due to the factors noted above, the Company's future
earnings and the prices of the Company's securities may
be subject to volatility. There can be no assurance
that the Company will continue to generate increases in
net sales and net earnings, or growth in comparable
store sales. Any variance in the factors noted above,
or other areas, from what is expected by investors could
have an immediate and adverse effect on the trading
price of Company's securities.
SEASONALITY AND QUARTERLY RESULTS
The Company's business is subject to seasonal
fluctuations. A significant portion of the Company's
net sales 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.
The Company's rapid growth may conceal the impact of
seasonal influences. Because of the seasonality of the
Company's business, results for the 39 weeks ended June
30, 1996, are not necessarily indicative of the results
that may be achieved for the full fiscal year ended
September 29, 1996.
NEW ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards
Board issued Statement No. 123, Accounting for Stock-
Based Compensation. This pronouncement establishes the
accounting and reporting standards for stock-based
employee compensation plans, including: stock purchase
plans, stock options, and stock appreciation rights.
This new standard defines a fair value-based method of
accounting for these equity instruments. This method
measures compensation cost based on the value of the
award and recognizes that cost over the service period.
Companies may elect to adopt this standard or to
continue accounting for these types of equity
instruments under current guidance, APB Opinion No. 25,
Accounting for Stock Issued to Employees. Companies
which elect to continue using the rules of Opinion 25
must make pro forma disclosures of net income and
earnings per share as if this new statement had been
applied. This new standard is required for fiscal years
beginning after December 15, 1995.
The Company is in the process of evaluating this
statement and its impact on the Company's financial
condition and results of operations.
13
<PAGE> 14
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 the
Company 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) Forms 8-K:
No reports on Form 8-K were filed by the Company during the
13-week period ended June 30, 1996.
14
<PAGE> 15
SIGNATURES
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 9, 1996 By: /s/ Michael Casey
-----------------------
Michael Casey
chief financial officer
Signing on behalf of the
registrant and as principal
financial officer
15
<PAGE> 16
STARBUCKS CORPORATION
---------------------
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, July 2, June 30, July 2,
1996 1995 1996 1995
(13 Weeks) (13 Weeks) (39 Weeks) (39 Weeks)
- -------------------------------------------------------------------------
NET EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE CALCULATION - PRIMARY:
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net earnings $9,446 $6,845 $29,403 $20,596
=========================================================================
Weighted average shares outstanding calculation - primary:
Weighted average number of
common shares outstanding 75,575 70,576 72,649 68,317
Dilutive effect of outstanding
common stock options 3,398 2,285 2,949 2,239
- -------------------------------------------------------------------------
Weighted average common and
common equivalent shares -
primary 78,973 72,861 75,598 70,556
=========================================================================
Net earnings per common and common
equivalent share - primary $0.12 $0.09 $0.39 $0.29
=========================================================================
NET EARNINGS PER COMMON AND COMMON EQUIVALENT
SHARE CALCULATION - ASSUMING FULL DILUTION:
Net earnings calculation:
Net earnings $9,446 $6,845 $29,403 $20,596
Add after tax interest expense:
on 4-1/2% Debentures 138 0 1,239 0
Add after tax amortization
of issuance costs:
related to 4-1/2% Debentures 14 0 93 0
- -------------------------------------------------------------------------
Net earnings -
assuming full dilution $9,598 $6,845 $30,735 $20,596
=========================================================================
Weighted average shares outstanding calculation - assuming full
dilution:
Weighted average number of
common shares outstanding 75,575 70,576 72,649 68,317
Dilutive effect of outstanding
common stock options 3,535 2,835 3,702 3,019
Assuming conversion of 4-1/2%
Convertible Subordinated
Debentures due 2003 1,425 0 4,035 0
- -------------------------------------------------------------------------
Weighted average common and
common equivalent shares
outstanding - assuming full
dilution 80,535 73,411 80,386 71,336
=========================================================================
Net earnings per common and
common equivalent share -
assuming full dilution $ 0.12 $ 0.09 $ 0.38 $ 0.29
=========================================================================
</TABLE>
16
<PAGE> 17
STARBUCKS CORPORATION
---------------------
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS (CONTINUED)
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, July 2, June 30, July 2,
1996 1995 1996 1995
(13 Weeks) (13 Weeks) (39 Weeks) (39 Weeks)
- -------------------------------------------------------------------------
ADDITIONAL FULLY DILUTED COMPUTATION (1):
<S> <C> <C> <C> <C>
Net earnings calculation:
Net earnings $9,446 $6,845 $29,403 $20,596
Add after tax interest expense:
on 4-1/2% Debentures 138 548 1,239 1,637
on 4-1/4% Debentures 1,067 0 2,961 0
Add after tax amortization
of issuance costs:
related to 4-1/2% Debentures 14 40 93 117
related to 4-1/4% Debentures 88 0 235 0
- -------------------------------------------------------------------------
Net earnings -
assuming full dilution $10,753 $7,433 $33,931 $22,350
=========================================================================
Weighted average shares outstanding calculation - assuming full
dilution:
Weighted average number of
common shares outstanding 75,575 70,576 72,649 68,317
Dilutive effect of outstanding
common stock options 3,535 2,835 3,702 3,019
Assuming conversion of 4-1/2%
Convertible Subordinated
Debentures due 2003 1,425 5,367 4,035 5,367
Assuming conversion of 4-1/4%
Convertible Subordinated
Debentures due 2002 7,098 0 6,525 0
- -------------------------------------------------------------------------
Weighted average common
and common equivalent
shares outstanding -
assuming full dilution 87,633 78,778 86,911 76,703
=========================================================================
Net earnings per common and
common equivalent share -
assuming full dilution $ 0.12 $ 0.09 $ 0.39 $ 0.29
=========================================================================
</TABLE>
- -------------------
(1) This calculation is submitted in accordance
with Regulation S-K item 601(b)(11) although not
required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution of
less than 3%.
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STARBUCKS CORPORATION THIRD QUARTER 1996 10-Q AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000887557
<NAME> STARBUCKS CORPORATION
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-29-1996
<PERIOD-START> OCT-02-1995
<PERIOD-END> JUN-30-1996
<CASH> 139,944
<SECURITIES> 89,860
<RECEIVABLES> 15,140
<ALLOWANCES> 302
<INVENTORY> 76,949
<CURRENT-ASSETS> 332,496
<PP&E> 412,621
<DEPRECIATION> 78,282
<TOTAL-ASSETS> 680,195
<CURRENT-LIABILITIES> 77,363
<BONDS> 165,020
0
0
<COMMON> 355,308
<OTHER-SE> 75,579
<TOTAL-LIABILITY-AND-EQUITY> 680,195
<SALES> 500,095
<TOTAL-REVENUES> 500,095
<CGS> 246,619
<TOTAL-COSTS> 246,619
<OTHER-EXPENSES> 215,497
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,919
<INCOME-PRETAX> 48,205
<INCOME-TAX> 18,802
<INCOME-CONTINUING> 29,403
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,403
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.38
</TABLE>
