<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 March 30, 1997
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 May 1, 1997, there were 78,349,612 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. . . . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . 13
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . 14
2
<PAGE 3>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except earnings per share)
<CAPTION>
Three Months Ended Six Months Ended
March 30, March 31, March 30, March 31,
1997 1996 1997 1996
(13 Weeks) (13 Weeks) (26 Weeks) (26 Weeks)
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $214,915 $153,609 $454,057 $323,145
Cost of sales and related
occupancy costs 99,149 76,938 214,705 163,456
Store operating expenses 69,226 47,002 139,327 94,237
Other operating expenses 6,931 3,788 14,713 9,575
Depreciation and amortization 12,381 8,606 23,856 16,161
General and administrative
expenses 13,236 9,720 26,157 16,358
- -------------------------------------------------------------------------
Operating income 13,992 7,555 35,299 23,358
Interest and other income 3,520 2,857 7,415 5,116
Gain on sale of investment 0 9,201 0 9,201
Interest expense (1,834) (2,709) (3,638) (4,959)
- -------------------------------------------------------------------------
Earnings before income taxes 15,678 16,904 39,076 32,716
Income taxes 6,035 6,513 15,043 12,759
- -------------------------------------------------------------------------
Net earnings $9,643 $10,391 $24,033 $19,957
=========================================================================
Net earnings per common and
common equivalent share -
primary $0.12 $0.14 $0.30 $0.27
=========================================================================
Net earnings per common and
common equivalent share -
fully diluted $0.12 $0.14 $0.30 $0.27
=========================================================================
Weighted average common and
common equivalent shares
outstanding - primary 81,306 73,680 81,316 73,794
Weighted average common and
common equivalent shares
outstanding - fully diluted 88,404 79,760 88,421 79,740
</TABLE>
See notes to consolidated financial statements
3
<PAGE 4>
<TABLE>
STARBUCKS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<CAPTION>
March 30, September 29,
1997 1996
- ------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 90,813 $126,215
Short-term investments 122,026 103,221
Accounts and notes receivable 21,378 17,621
Inventories 81,414 83,370
Prepaid expenses and other
current assets 8,211 6,534
Deferred income taxes, net 3,707 2,580
- ----------------------------------------------------------------------
Total current assets 327,549 339,541
Joint ventures and equity investments 13,806 4,401
Property, plant and equipment, net 413,955 369,477
Deposits and other assets 15,557 13,194
- ----------------------------------------------------------------------
Total $ 770,867 $726,613
======================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 40,997 $38,034
Checks drawn in excess of bank balances 19,788 16,241
Accrued compensation and related costs 19,202 15,001
Other accrued expenses 29,717 29,072
Income taxes payable 1,743 2,743
- ----------------------------------------------------------------------
Total current liabilities 111,447 101,091
Deferred income taxes, net 8,602 7,114
Capital lease and other obligations 1,522 1,728
Convertible subordinated debentures 165,020 165,020
Shareholders' equity:
Common stock, no par value -- 150,000,000
shares authorized; 78,266,991 and
77,583,868 shares, respectively,
issued and outstanding 370,978 361,309
Retained earnings including
cumulative translation adjustment
of $(818) and $(776), respectively,
and net unrealized holding gain
on investments of $1,002 and $2,046,
respectively 113,298 90,351
- ----------------------------------------------------------------------
Total shareholders' equity 484,276 451,660
- ----------------------------------------------------------------------
Total $ 770,867 $726,613
======================================================================
</TABLE>
See notes to consolidated financial statements
4
<PAGE 5>
<TABLE>
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Six Months Ended
- ----------------------------------------------------------------------
March 30, March31,
1997 1996
(26 Weeks) (26 Weeks)
- ----------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net earnings $ 24,033 $19,957
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 26,583 17,647
Deferred income taxes, net 1,015 1,534
Equity in losses of investees 2,176 550
Gain on sale of equity investment 0 (9,201)
Cash provided/(used) by changes in
operating assets and liabilities:
Accounts and notes receivable (3,757) (1,962)
Inventories 1,955 32,833
Prepaid expenses and other
current assets (1,677) 289
Accounts payable 2,953 (9,000)
Income taxes payable (999) 1,031
Accrued compensation and
related costs 4,200 (2,193)
Other accrued expenses 199 5,790
- -----------------------------------------------------------------------
Net cash provided by operating activities 56,681 57,275
Investing activities:
Purchase of short-term investments (107,010) (89,930)
Maturity of short-term investments 76,760 3,488
Sale of short-term investments 9,747 35,966
Investments in joint ventures and
equity securities (11,581) (4,040)
Proceeds from sale of equity investments 0 20,535
Additions to property, plant
and equipment (69,569) (75,451)
Increase in deposits and other assets (3,116) (638)
- ----------------------------------------------------------------------
Net cash used by investing activities (104,769) (110,070)
Financing activities:
Increase/(decrease) in cash provided by
checks drawn in excess of bank balances 3,546 (1,473)
Proceeds from sale of convertible
debentures 0 165,020
Debt issuance costs 0 (4,040)
Proceeds from sale of common stock
under employee stock purchase plan 684 768
Exercise of stock options 5,388 1,935
Tax benefit from exercise of non-qualified
stock options 3,597 921
Payments on capital lease and
other obligations (525) (125)
- ----------------------------------------------------------------------
Net cash provided by financing activities 12,690 163,006
- ----------------------------------------------------------------------
Balance, carried forward (35,398) 110,211
(Continued on next page)
5
<PAGE 6>
Balance, brought forward (35,398) 110,211
Effect of exchange rate changes
on cash and cash equivalents (4) (26)
- ---------------------------------------------------------------------
Net (decrease)/increase in cash and (35,402) 110,185
cash equivalents
Cash and cash equivalents:
Beginning of the period 126,215 20,944
- ---------------------------------------------------------------------
End of the period $ 90,813 $131,129
=====================================================================
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 3,614 $ 1,895
Income taxes 11,259 8,608
Noncash financing and investing transactions:
Obligation incurred on fixed asset addition 764 0
Net unrealized holding gain on investments 1,044 113
Conversion of convertible debt into
common stock, net of unamortized
issue costs 0 426
</TABLE>
See notes to consolidated financial statements
6
<PAGE 7>
STARBUCKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the 13 Weeks and 26 Weeks Ended March 30,1997 and
March 31, 1996
(UNAUDITED)
NOTE 1. FINANCIAL STATEMENT PREPARATION:
The consolidated financial statements as of March 30,
1997 and September 29, 1996 and for the 13-week and 26-
week periods ended March 30, 1997 and March 31, 1996
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, 1997
and March 31, 1996 is unaudited, but, in the opinion of
management, reflects all adjustments (consisting only
of normal recurring adjustments and accruals) necessary
for a fair presentation of the financial position,
results of operations and cash flows for the interim
periods. The financial information as of
September 29, 1996, 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/A for the year ended
September 29, 1996, 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, 1997, are not necessarily
indicative of the results of operations that may be
achieved for the entire fiscal year ending September
28, 1997.
NOTE 2. EARNINGS PER SHARE:
The computation of primary earnings per share is based
on the weighted average number of shares outstanding
during the period plus dilutive common stock
equivalents consisting primarily of certain shares
subject to stock options. The computation of fully
diluted earnings per share assumes conversion of the
Company's convertible subordinated debentures using the
"if converted" method, when such securities are
dilutive, with net income adjusted for the after-tax
interest expense and amortization of issuance costs
applicable to these debentures. See Note 5 for
discussion of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share."
NOTE 3. INVENTORIES:
<TABLE>
<CAPTION>
Inventories consist of the following (in thousands):
March 30, September 29,
1997 1996
- -------------------------------------------------------------------
<S> <C> <C>
Coffee:
Unroasted $ 41,546 $ 37,127
Roasted 8,453 9,753
Other merchandise held for sale 25,753 29,518
Packaging and other supplies 5,662 6,972
- ------------------------------------------------------------------
$ 81,414 $ 83,370
==================================================================
As of March 30, 1997, the Company had fixed price
purchase commitments for green coffee totaling
approximately $81.5 million.
</TABLE>
7
<PAGE 8>
<TABLE>
NOTE 4. PROPERTY, PLANT, AND EQUIPMENT:
<CAPTION>
Property, plant, and equipment consist of the following
(in thousands):
March 30, September 29,
1997 1996
- -------------------------------------------------------------------
<S> <C> <C>
Land $ 3,602 $ 3,602
Building 8,338 8,338
Leasehold improvements 301,660 255,567
Roasting and store equipment 145,310 120,575
Furniture, fixtures and other 49,832 38,794
- ------------------------------------------------------------------
508,742 426,876
Less accumulated depreciation
and amortization (113,319) (88,003)
- ------------------------------------------------------------------
395,423 338,873
Construction in process 18,532 30,604
- ------------------------------------------------------------------
$ 413,955 $ 369,477
==================================================================
</TABLE>
NOTE 5. NEW ACCOUNTING STANDARD:
In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share." This
pronouncement specifies the computation, presentation
and disclosure requirements for earnings per share
(EPS) and will supersede APB Opinion 15. The new
standard modifies the calculation of earnings per share
by replacing the computation of "Primary EPS" with
"Basic EPS" which excludes the dilutive effect of
common stock equivalents. Additionally, the standard
replaces "Fully Diluted EPS" with "Diluted EPS." The
calculation of common stock equivalents using the
treasury stock method is modified under Diluted EPS to
always utilize an average share price during the period
as compared to the APB Opinion 15 method which utilizes
the higher of average or ending stock price. The
standard becomes effective for financial statements for
both interim and annual periods ending after December
15, 1997. Early application is not permitted; however,
an entity is permitted to disclose pro forma EPS
computed using this standard in periods prior to
required adoption. Based on this new standard,
earnings per share for the 13- and 26- week periods
ending March 30, 1997 and March 31, 1996 would be as
follows:
<TABLE>
<CAPTION>
Pro forma earnings per share under FAS 128:
March 30, March 31, March 30, March 31,
1997 1996 1997 1996
(13 Weeks) (13 Weeks) (26 Weeks) (26 Weeks)
===========================================================================
<S> <C> <C> <C> <C>
Basic Earnings per share $ 0.12 $ 0.15 $ 0.31 $ 0.28
===========================================================================
Diluted Earnings per share $ 0.12 $ 0.14 $ 0.30 $ 0.27
===========================================================================
</TABLE>
8
<PAGE 9>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
During the 26-week period ending March 30, 1997,
Starbucks Corporation ("Starbucks" or the "Company")
derived approximately 86% of net revenues from its
Company-operated retail stores. The Company's
specialty sales operations, which include product sales
to and royalties and fees from wholesale customers,
licensees, and joint ventures, accounted for
approximately 11% of net revenues. Direct response
operations accounted for the remainder of net revenues.
The Company's fiscal year ends on the Sunday closest to
September 30. Fiscal years ending on September 28,
1997 and September 29, 1996 each include 52 weeks.
Some of the following information, including
anticipated store openings, planned capital
expenditures, and trends in the Company's operations,
are forward-looking statements which are subject to
risks and uncertainties. Actual future results and
trends may differ materially depending on a variety of
factors, including, but not limited to, coffee and
other raw materials prices and availability, successful
execution of internal performance and expansion plans,
impact of competition, availability of financing, legal
proceedings, and other risks detailed herein and in the
Company's Securities and Exchange Commission filings,
including the Company's Annual Report on
Form 10-K/A for the year ended September 29, 1996.
RESULTS OF OPERATIONS -- FOR THE 13 WEEKS ENDED MARCH
30, 1997, COMPARED TO THE 13 WEEKS ENDED MARCH 31, 1996
Revenues. Net revenues for the 13 weeks ended March
30, 1997, increased 40% to $214.9 million from $153.6
million for the corresponding period in fiscal 1996.
Retail sales increased 40% to $185.1 million from
$132.3 million 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 5% for
the period. The increase in comparable store sales
resulted primarily from an increase in the number of
transactions. The Company anticipates its expansion
strategy of clustering stores in existing markets, 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 March 30, 1997, the Company opened 72
stores in continental North America, including stores
in the major new markets of Miami, Florida and Detroit,
Michigan. The Company ended the period with 1,094
Company-operated stores in continental North America.
Specialty sales revenues increased 41% to $25.5 million
for the 13 weeks ended March 30, 1997, compared to
$18.0 million for the corresponding period in fiscal
1996. Increased sales to joint ventures, a chain of
membership warehouse clubs, office coffee distributors,
and business dining accounts made up the majority of
the increase in revenues. During the 13 weeks ended
March 30, 1997, licensees (including those in which the
Company is a joint venture partner) opened three stores
in continental North America and three stores in the
Pacific Rim. The Company ended the period with 83
licensed stores in continental North America and eight
licensed stores in the Pacific Rim.
Direct response sales increased 33% to $4.4 million for
the 13 weeks ended March 30, 1997, compared to $3.3
million for the corresponding period in fiscal 1996.
Cost and Expenses. Cost of sales and related occupancy
costs as a percentage of net revenues decreased to
46.1% for the 13 weeks ended March 30, 1997, from 50.1%
for the corresponding fiscal 1996 period. This
decrease as a percentage of net revenues was primarily
the result of lower green coffee costs.
Store operating expenses as a percentage of retail
sales increased to 37.4% for the 13 weeks ended March
30, 1997, from 35.5% for the corresponding period in
fiscal 1996. The 1.9% increase was due primarily to
higher store labor and higher advertising expenses as a
percentage of retail sales.
Other operating expenses (those associated with the
Company's specialty sales and direct response
operations as well as the Company's share of profits
and losses of its joint ventures) increased to 3.2% of
net revenues for the 13 weeks ended March 30, 1997,
from 2.5% for the corresponding period in fiscal 1996.
The increase was attributable primarily to an increase
in the Company's share of joint venture losses during
the period compared with the same period in fiscal
1996.
9
<PAGE 10>
Depreciation and amortization as a percentage of net
revenues increased 0.2% to 5.8% for the 13 weeks ended
March 30, 1997. General and administrative expenses as
a percentage of net revenues were 6.2% for the 13 weeks
ended March 30, 1997, compared to 6.3% for the same
period in fiscal 1996.
Interest and other income for the 13 weeks ended March
30, 1997 was $3.5 million compared to $2.9 million for
the corresponding period in fiscal 1996. The increase
in interest and other income is due to gains on sale of
investments, higher interest rates and higher average
investment balances. Interest expense for the 13 weeks
ended March 30, 1997 was $1.8 million compared to $2.7
million for the corresponding period in fiscal 1996.
The decrease was due primarily to the conversion of the
Company's 4-1/2% Convertible Subordinated Debentures
due 2003 to equity during the third quarter of fiscal
1996.
Income Taxes. The Company's effective tax rate for the
13 weeks ended March 30, 1997 was 38.5% which was
unchanged from the corresponding period in fiscal 1996.
RESULTS OF OPERATIONS -- FOR THE 26 WEEKS ENDED MARCH
30, 1997, COMPARED TO THE 26 WEEKS ENDED MARCH 31, 1996
Revenues. Net revenues for the 26 weeks ended March
30, 1997, increased 41% to $454.1 million from $323.1
million for the corresponding period in fiscal 1996.
Retail sales increased 40% to $390.4 million from
$278.0 million, due to the opening of new retail stores
combined with an increase in comparable store sales of
4% for the period. The increase in comparable store
sales resulted primarily from an increase in the number
of transactions. During the 26 weeks ended March 30,
1997, the Company opened 165 stores in continental
North America, including stores in the major new
markets of Phoenix, Arizona; Miami, Florida; and
Detroit, Michigan.
Specialty sales revenues increased 46% to $50.5 million
for the 26 weeks ended March 30, 1997, compared to
$34.6 million for the corresponding period in fiscal
1996. Increased sales to joint ventures, a chain of
membership warehouse clubs, office coffee distributors,
and hotels accounted for the majority of the increase
in revenues. During the 26 weeks ended March 30, 1997,
licensees (including those in which the Company is a
joint venture partner) opened eight stores in
continental North America and six stores in the Pacific
Rim.
Direct response sales increased 25% to $13.1 million
for the 26 weeks ended March 30, 1997, compared to
$10.5 million for the corresponding period in fiscal
1996.
Costs and Expenses. Cost of sales and related
occupancy costs as a percentage of net revenues
decreased to 47.3% for the 26 weeks ended March 30,
1997, from 50.6% for the corresponding period in fiscal
1996. This decrease was primarily the result of lower
green coffee costs as a percentage of net revenues.
Store operating expenses as a percentage of retail
sales increased to 35.7% from 33.9% for the
corresponding period in fiscal 1996. The 1.8% of
retail sales increase reflects higher payroll-related
expenses and regional overhead costs as a percentage of
retail sales. Regional overhead costs increased as a
percentage of retail sales due primarily to costs
incurred in conjunction with opening eight new markets
during the first six months of fiscal 1997, as compared
to two new market openings during the comparable period
in fiscal 1996.
Other operating expenses as a percentage of net
revenues increased to 3.2% for the 26 weeks ended March
30, 1997, from 3.0% for the corresponding period in
fiscal 1996. Consistent with second quarter results,
the increase was attributable primarily to an increase
in the Company's share of joint venture losses during
the period compared with the same period in fiscal
1996.
Depreciation and amortization as a percentage of net
revenues increased 0.3% to 5.3% for the 26 weeks ended
March 30, 1997. General and administrative expenses as
a percentage of net revenues were 5.8% for the 26 weeks
ended March 30, 1997, compared to 5.1% for the same
period in fiscal 1996. This increase as a percentage
of net revenues was due primarily to higher payroll-
related costs, which were tightly constrained during
the corresponding period in fiscal 1996.
10
<PAGE 11>
Interest income for the 26 weeks ended March 30, 1997
was $7.4 million compared to $5.1 million for the
corresponding period in 1996. The increase in interest
and other income was due primarily to higher average
investment balances and gains on sale of investments.
Interest expense for the 26 weeks ended March 30, 1997
was $3.6 million compared to $5.0 million for the
corresponding period in fiscal 1996. The decrease was
due primarily to the conversion of the Company's 4-1/2%
Convertible Subordinated Debentures due 2003 to equity
during the third quarter of fiscal 1996.
Income Taxes. The Company's effective tax rate for the
26 weeks ended March 30, 1997 was 38.5% compared to 39%
for the corresponding period in fiscal 1996. This
decrease is due primarily to changes in state tax
allocation and apportionment factors as well as tax-
saving strategies. Management expects the effective tax
rate may increase as the Company expands activities in
higher tax jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the period with $212.8 million in
total cash and investments and working capital of
$216.1 million. Cash provided by operating activities
totaled $56.7 million for the first 26 weeks of fiscal
1997 resulting primarily from net earnings before non-
cash charges of $53.8 million.
Cash provided from financing activities for the first
26 weeks of fiscal 1997 totaled $12.7 million. The
exercise of employee stock options and the related
income tax benefit available to the Company upon
exercise of these options provided approximately $9.0
million. An increase in checks drawn in excess of bank
balances provided an additional $3.5 million.
Cash used by investing activities for the first 26
weeks of fiscal 1997 totaled $104.8 million. This
included capital additions to property, plant and
equipment of $69.6 million related to opening 165 new
Company-operated stores, remodeling certain existing
stores, purchasing roasting and packaging equipment,
enhancing existing information systems, and expanding
existing office space. The Company invested excess
cash in short-term investment-grade marketable debt
securities.
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 information systems. While there can be
no assurance that current expectations will be realized
and plans are subject to change upon further review,
management expects capital expenditures for the
remainder of fiscal 1997 to be approximately $100
million.
During the first 26 weeks of fiscal 1997, the Company
invested $11.6 million in its joint ventures and
currently anticipates additional cash requirements of
approximately $18 million for its domestic joint
ventures and international expansion during the
remainder of fiscal 1997. 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 the
first 26 weeks of fiscal 1997, the Company provided
approximately $1.5 million under this agreement,
bringing the total amount outstanding under this
agreement to $6.0 million as of March 30, 1997. 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 the existing cash and
investments plus cash generated from operations should
be sufficient to finance capital requirements for its
core businesses for fiscal 1997 and into fiscal 1998.
Any new joint ventures, other new business
opportunities, or store expansion rates substantially
in excess of that presently planned may require
additional debt or equity financing.
COFFEE PRICES AND AVAILABILITY AND GENERAL RISK CONDITIONS
Green coffee commodity prices are subject to
substantial price fluctuations, generally a result of
reports of adverse growing conditions in certain coffee-
producing countries. During the first six months of
fiscal 1997, worldwide green coffee commodity prices
have increased significantly. As discussed below, the
Company believes it has an adequate supply of green
coffee. In March 1997, the Company effected a sales
price increase on its whole bean coffees and most of
its coffee beverages to mitigate the effects of
increases in its costs of supply.
11
<PAGE 12>
The Company enters into fixed price purchase
commitments in order to secure an adequate supply of
quality green coffee and establish firm prices for
future periods. As of March 30, 1997, the Company had
approximately $81.5 million in fixed price purchase
commitments which, together with existing inventory,
management believes will provide an adequate supply of
green coffee for the remainder of fiscal 1997 and into
fiscal 1998. Based on relationships established with
its suppliers in the past, management believes the risk
of non-delivery on such purchase commitments is remote.
In addition to fluctuating coffee prices, 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, 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.
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 revenues 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 the Company's securities.
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. Quarterly results are
affected by the timing of the opening of new stores,
and the Company's rapid growth may conceal the impact
of seasonal influences. Because of the seasonality of
the Company's business, results for any quarter are not
necessarily indicative of the results that may be
achieved for the full fiscal year.
NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share." This
pronouncement specifies the computation, presentation
and disclosure requirements for earnings per share
(EPS) and will supersede APB Opinion 15. The new
standard modifies the calculation of earnings per share
by replacing the computation of "Primary EPS" with
"Basic EPS" which excludes the dilutive effect of
common stock equivalents. Additionally, the standard
replaces "Fully Diluted EPS" with "Diluted EPS." The
calculation of common stock equivalents using the
treasury stock method is modified under Diluted EPS to
always utilize an average share price during the period
as compared to the APB Opinion 15 method which utilizes
the higher of average or ending stock price. The
standard becomes effective for financial statements for
both interim and annual periods ending after December
15, 1997. Early application is not permitted; however,
an entity is permitted to disclose pro forma EPS
computed using this standard in periods prior to
required adoption. Based on this new standard,
earnings per share for the 13- and 26- week periods
ending March 30, 1997 and March 31, 1996 would be as
follows:
<TABLE>
<CAPTION>
Pro forma earnings per share under FAS 128:
March 30, March 31, March 30, March 31,
1997 1996 1997 1996
(13 Weeks) (13 Weeks) (26 Weeks) (26 Weeks)
===========================================================================
<S> <C> <C> <C> <C>
Basic Earnings per share $ 0.12 $ 0.15 $ 0.31 $ 0.28
===========================================================================
Diluted Earnings per share $ 0.12 $ 0.14 $ 0.30 $ 0.27
===========================================================================
Refer to Exhibit 11 for Primary and Fully Diluted EPS as reported.
</TABLE>
12
<PAGE 13>
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 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the Company was
held on March 6, 1997 for the purposes of electing two
directors to serve until the annual meeting for the
1999 fiscal year; approving a proposal to increase by
7,025,000 the number of shares reserved for issuance
under the Company's Key Employee Stock Option Plan-
1994; approving the material terms of the objective
performance goals under the Company's Executive
Management Bonus Plan; and ratifying the selection of
the independent auditors for fiscal 1997. All
proposals were approved. The table below shows the
results of the shareholders' voting:
<TABLE>
<CAPTION>
Votes in Votes Broker
Favor Opposed Abstain Non-Votes
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Election of Directors
Howard P. Behar 71,861,519 --- 474,622 ---
James G. Shennan, Jr. 72,103,651 --- 232,490 ---
Approve increase in shares
reserved for issuance under
the Company's Key
Employees Stock
Option Plan-1994 34,351,463 19,466,065 338,028 18,180,585
Approve material terms of
the objective performance
goals of the Company's
Executive Management
Bonus Plan 68,890,550 1,377,818 417,179 1,650,594
Ratification of
independent auditors 72,015,423 129,713 191,005 ---
</TABLE>
The following members of the Board of Directors, who were not up for
re-election during the current year, have terms that expire at the
annual meeting for the fiscal years 1997 and 1998:
<TABLE>
<CAPTION>
Director Term expires at the
annual meeting for fiscal:
- -------------------------------------------------------------------------
<S> <C>
Jeffrey H. Brotman 1997
Arlen I. Prentice 1997
Orin C. Smith 1997
Craig J. Foley 1998
Howard Schultz 1998
Barbara Bass 1998
</TABLE>
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 March 30, 1997.
13
<PAGE 14>
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: May 12, 1997 By: /s/ Michael Casey
----------------------
Michael Casey
senior vice president and
chief financial officer
Signing on behalf of the
registrant and as principal
financial officer
14
<PAGE 15>
<TABLE>
STARBUCKS CORPORATION
---------------------
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<CAPTION>
Three Months Ended Six Months Ended
March 30, March 31, March 30, March 31,
1997 1996 1997 1996
(13 Weeks) (13 Weeks) (26 Weeks) (26 Weeks)
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE CALCULATION
- -PRIMARY:
Net earnings $ 9,643 $10,391 $ 24,033 $19,957
=========================================================================
Weighted average common and
common equivalent shares calculation-primary:
Weighted average number of
common shares outstanding 78,127 71,257 77,925 71,186
Dilutive effect of outstanding
common stock options 3,179 2,423 3,391 2,608
- -------------------------------------------------------------------------
Weighted average common and
common equivalent shares-
primary 81,306 73,680 81,316 73,794
=========================================================================
Net earnings per common and
common equivalent share
-primary $ 0.12 $ 0.14 $ 0.30 $0.27
========================================================================
NET EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE CALCULATION
- -FULLY DILUTED(1):
Net earnings calculation:
Net earnings $ 9,643 $ 10,391 $ 24,033 $19,957
Add after tax interest
expense on Debentures 1,075 548 2,151 1,100
Add after tax amortization
of issuance costs related
to the Debentures 89 40 178 79
- -------------------------------------------------------------------------
Adjusted net earnings $ 10,807 $ 10,979 $ 26,362 $21,136
=========================================================================
Weighted average common and
common equivalent shares calculation-fully diluted:
Weighted average number of
common shares outstanding 78,127 71,257 77,925 71,186
Dilutive effect of outstanding
common stock options 3,179 3,172 3,398 3,214
Assuming conversion of
Convertible Subordinated
Debentures 7,098 5,331 7,098 5,340
- -------------------------------------------------------------------------
Weighted average common and
common equivalent shares
-fully diluted 88,404 79,760 88,421 79,740
=========================================================================
Net earnings per common and
common equivalent share
-fully diluted $ 0.12 $ 0.14 $ 0.30 $ 0.27
========================================================================
</TABLE>
- -------------------
(1) Fully diluted earnings per share assumes conversion of
the Company's convertible subordinated debentures using the
"if converted' method, when such securities are dilutive,
with income adjusted for the after-tax interest expense and
amortization applicable to these debentures.
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STARBUCKS CORPORATION SECOND QUARTER FISCAL 1997 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-28-1997
<PERIOD-START> SEP-30-1996
<PERIOD-END> MAR-30-1997
<CASH> 90,813
<SECURITIES> 122,026
<RECEIVABLES> 21,378
<ALLOWANCES> 228
<INVENTORY> 81,414
<CURRENT-ASSETS> 327,549
<PP&E> 527,274
<DEPRECIATION> 113,319
<TOTAL-ASSETS> 770,867
<CURRENT-LIABILITIES> 111,447
<BONDS> 165,020
0
0
<COMMON> 370,978
<OTHER-SE> 113,298
<TOTAL-LIABILITY-AND-EQUITY> 770,867
<SALES> 454,057
<TOTAL-REVENUES> 454,057
<CGS> 214,705
<TOTAL-COSTS> 214,705
<OTHER-EXPENSES> 204,053
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,638
<INCOME-PRETAX> 39,076
<INCOME-TAX> 15,043
<INCOME-CONTINUING> 24,033
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,033
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
</TABLE>
