<PAGE 1>
- ---------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 29, 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 August 7, 1997, there were 78,830,422 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
Signature. . . . . . . . . . . . . . . . . . . . . . . . . . 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 Nine Months Ended
June 29, June 30, June 29, June 30,
1997 1996 1997 1996
(13 Weeks) (13 Weeks) (39 Weeks) (39 Weeks)
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $242,190 $176,950 $696,247 $500,095
Cost of sales and related
occupancy costs 102,625 83,164 317,330 246,619
Store operating expenses 81,577 54,757 220,903 148,993
Other operating expenses 7,159 4,941 21,873 14,516
Depreciation and amortization 13,665 9,454 37,521 25,615
General and administrative
expenses 14,186 10,014 40,342 26,373
- --------------------------------------------------------------------------
Operating income 22,978 14,620 58,278 37,979
Interest and other income 2,605 2,829 10,020 7,944
Gain on sale of investment 0 0 0 9,201
Interest expense (1,816) (1,960) (5,454) (6,919)
- --------------------------------------------------------------------------
Earnings before income taxes 23,767 15,489 62,844 48,205
Income taxes 9,151 6,043 24,194 18,802
- --------------------------------------------------------------------------
Net earnings $14,616 $9,446 $38,650 $29,403
==========================================================================
Net earnings per common and
common equivalent share -
primary $0.18 $0.12 $0.48 $0.39
=========================================================================
Net earnings per common and
common equivalent share -
fully diluted $0.18 $0.12 $0.47 $0.38
=========================================================================
Weighted average common and
common equivalent shares
outstanding - primary 81,313 78,973 81,302 75,598
Weighted average common and
common equivalent shares
outstanding - fully diluted 89,064 80,535 88,941 80,386
</TABLE>
See notes to consolidated financial statements
3
<PAGE 4>
<TABLE>
STARBUCKS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except numbers of shares)
<CAPTION>
June 29, September 29,
1997 1996
- ----------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 90,773 $ 126,215
Short-term investments 92,032 103,221
Accounts and notes receivable 17,605 17,621
Inventories 109,936 83,370
Prepaid expenses and other
current assets 8,712 6,534
Deferred income taxes, net 4,526 2,580
- ----------------------------------------------------------------------
Total current assets 323,584 339,541
Joint ventures and equity investments 25,255 4,401
Property, plant and equipment, net 441,321 369,477
Deposits and other assets 15,686 13,194
- ----------------------------------------------------------------------
Total $ 805,846 $ 726,613
======================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 49,395 $ 38,034
Checks drawn in excess of bank balances 19,890 16,241
Accrued compensation and related costs 19,725 15,001
Other accrued expenses 31,583 29,072
Income taxes payable 2,487 2,743
- ----------------------------------------------------------------------
Total current liabilities 123,080 101,091
Deferred income taxes, net 12,298 7,114
Capital lease and other obligations 1,328 1,728
Convertible subordinated debentures 165,020 165,020
Shareholders' equity:
Common stock, no par value -- 150,000,000
shares authorized; 78,654,825 and
77,583,868 shares, respectively,
issued and outstanding 377,732 361,309
Retained earnings including
cumulative translation adjustment
of $(1,435) and $(776), respectively,
and net unrealized holding gain
on investments of $92 and $2,046,
respectively 126,388 90,351
- ----------------------------------------------------------------------
Total shareholders' equity 504,120 451,660
- ----------------------------------------------------------------------
Total $ 805,846 $ 726,613
======================================================================
</TABLE>
See notes to consolidated financial statements
4
<PAGE 5>
<TABLE>
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Nine Months Ended
- ----------------------------------------------------------------------
June 29, June30,
1997 1996
(39 Weeks) (39 Weeks)
- ----------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net earnings $ 38,650 $ 29,403
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 41,874 28,072
Deferred income taxes, net 4,461 2,208
Equity in losses of investees 3,221 1,166
Gain on sale of equity investment 0 (9,201)
Cash provided (used) by changes in
operating assets and liabilities:
Accounts and notes receivable 13 (4,985)
Inventories (26,590) 46,697
Prepaid expenses and other
current assets (2,182) (1,007)
Accounts payable 11,222 (5,038)
Income taxes payable (252) 2,808
Accrued compensation and
related costs 4,702 (180)
Other accrued expenses 2,244 7,152
- -----------------------------------------------------------------------
Net cash provided by operating activities 77,363 97,095
Investing activities:
Purchase of short-term investments (136,012) (128,142)
Maturity of short-term investments 134,265 71,956
Sale of short-term investments 9,759 7,711
Investments in joint ventures and
equity securities (24,075) (5,690)
Proceeds from sale of equity investments 0 20,535
Additions to property, plant
and equipment (112,247) (116,471)
Increase in deposits and other assets (3,605) (876)
- ----------------------------------------------------------------------
Net cash used by investing activities (131,915) (150,977)
Financing activities:
Increase in cash provided by checks
drawn in excess of bank balances 3,633 1,904
Proceeds from sale of convertible
debentures 0 165,020
Debt issuance costs 0 (4,041)
Proceeds from sale of common stock
under employee stock purchase plan 1,425 1,241
Exercise of stock options and warrants 8,989 5,623
Tax benefit from exercise of non-qualified
stock options 6,009 3,705
Payments on capital lease obligations (915) (266)
Debt conversion costs 0 (285)
- ----------------------------------------------------------------------
Net cash provided by financing activities 19,141 172,901
- ----------------------------------------------------------------------
Balance, carried forward (35,411) 119,019
(Continued on next page)
5
<PAGE 6>
Balance, brought forward (35,411) 119,019
Effect of exchange rate changes
on cash and cash equivalents (31) (19)
- ---------------------------------------------------------------------
Net (decrease)/increase in cash and (35,442) 119,000
cash equivalents
Cash and cash equivalents:
Beginning of the period 126,215 20,944
- ---------------------------------------------------------------------
End of the period $ 90,773 $139,944
=====================================================================
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 8,008 $ 5,586
Income taxes 14,165 9,960
Noncash financing and investing transactions:
Obligation incurred on fixed asset addition 764 763
Net unrealized holding loss on investments (1,954) (66)
Conversion of convertible debt into common
stock, net of unamortized issue costs and
accrued interest 0 79,345
</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 29, 1997 and June 30, 1996
(UNAUDITED)
NOTE 1. FINANCIAL STATEMENT PREPARATION:
The consolidated financial statements as of June 29,
1997 and September 29, 1996 and for the 13-week and 39-
week periods ended June 29, 1997 and June 30, 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 39-week
periods ended June 29, 1997 and June 30, 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 audited consolidated
financial statements and notes thereto contained in the
Company's Annual Report to Shareholders and
incorporated by reference into the Company's Annual
Report on Form 10-K, as amended, 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 39-week
periods ended June 29, 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>
Inventories consist of the following (in thousands):
<CAPTION>
June 29, September 29,
1997 1996
- -------------------------------------------------------------------
<S> <C> <C>
Coffee:
Unroasted $ 62,055 $ 37,127
Roasted 13,211 9,753
Other merchandise held for sale 28,697 29,518
Packaging and other supplies 5,973 6,972
- ------------------------------------------------------------------
$ 109,936 $ 83,370
==================================================================
</TABLE>
As of June 29, 1997, the Company had fixed price
purchase commitments for green coffee totaling
approximately $43.0 million.
7
<PAGE 8>
<TABLE>
NOTE 4. PROPERTY, PLANT, AND EQUIPMENT:
Property, plant, and equipment consist of the following
(in thousands):
<CAPTION>
June 29, September 29,
1997 1996
- --------------------------------------------------------------------
<S> <C> <C>
Land $ 3,602 $ 3,602
Building 8,338 8,338
Leasehold improvements 328,682 255,567
Roasting and store equipment 155,499 120,575
Furniture, fixtures and other 52,071 38,794
- ------------------------------------------------------------------
548,192 426,876
Less accumulated depreciation
and amortization (127,923) (88,003)
- ------------------------------------------------------------------
420,269 338,873
Construction in process 21,052 30,604
- ------------------------------------------------------------------
$ 441,321 $ 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-week and 39-week periods
ending June 29, 1997 and June 30, 1996 would be as
follows:
<TABLE>
Pro forma earnings per share under FAS 128:
<CAPTION>
June 29, June 30, June 29, June 30,
1997 1996 1997 1996
(13 Weeks) (13 Weeks) (39 Weeks) (39 Weeks)
===============================================================================
<S> <C> <C> <C> <C>
Basic Earnings per share $ 0.19 $ 0.12 $ 0.50 $ 0.40
===============================================================================
Diluted Earnings per share $ 0.18 $ 0.12 $ 0.48 $ 0.39
===============================================================================
</TABLE>
8
<PAGE 9>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
During the 39-week period ending June 29, 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.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
Some of the following information, including
anticipated store openings, planned capital
expenditures, and trends in the Company's operations,
are forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995.
Such statements are based on currently available
operating, financial and competitive information and
are subject to risks and uncertainties. Actual future
results and trends may differ materially depending on a
variety of factors, including, but not limited to,
coffee and other raw materials prices and availability,
successful execution of internal performance and
expansion plans, the impact of competition,
availability of financing, the effect of legal
proceedings, and other risks detailed herein and in the
Company's Securities and Exchange Commission filings,
including the Company's Annual Report to Shareholders
for the fiscal year ended September 29, 1996.
RESULTS OF OPERATIONS -- FOR THE 13 WEEKS ENDED JUNE
29, 1997, COMPARED TO THE 13 WEEKS ENDED JUNE 30, 1996
Revenues. Net revenues for the 13 weeks ended June 29,
1997, increased 37% to $242.2 million from $176.9
million for the corresponding period in fiscal 1996.
Retail sales increased 37% to $210.0 million from
$153.2 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 6% for
the period. The increase in comparable store sales
resulted from an increase in both the number of
transactions and average ticket. The increase in
average ticket was primarily the result of sales price
increases which the Company effected on its coffee
products in the second and third quarter of fiscal 1997
in response to recent increases in the cost of green
coffee.
During the 13 weeks ended June 29, 1997, the Company
opened 89 stores in continental North America,
including stores in the new markets of Albany and
Rochester, New York; Fort Lauderdale, Florida;
Charleston, South Carolina; and Cleveland, Ohio. The
Company ended the period with 1,183 Company-operated
stores in continental North America. As Starbucks
strives to build overall market share, management
anticipates that 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.
Specialty sales revenues increased 41% to $27.9 million
for the 13 weeks ended June 29, 1997, compared to $19.9
million for the corresponding period in fiscal 1996.
Increased sales to joint ventures, a chain of
membership warehouse clubs, multi-unit retailers and
licensed concept partners made up the majority of the
increase in revenues. During the 13 weeks ended June
29, 1997, licensees (including those in which the
Company is a joint venture partner) opened 5 stores in
continental North America and 3 stores in the Pacific
Rim. The Company ended the period with 87 licensed
stores in continental North America and 11 licensed
stores in the Pacific Rim. The Company sells roasted
coffee to its joint venture with Pepsi-Cola Company, a
division of PepsiCo, Inc. for use in the manufacture of
its bottled Frappuccino beverage, and coffee extract to
Dreyer's Grand Ice Cream, Inc. for use in the
manufacture of Starbucks branded ice cream which is
sold by the Company's joint venture with Dreyer's.
Direct response sales increased 11% to $4.3 million for
the 13 weeks ended June 29, 1997, compared to $3.9
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
42.4% for the 13 weeks ended June 29, 1997, from 47.0%
for the corresponding fiscal 1996 period. This
decrease as a percentage of net revenues was primarily
the result of lower green coffee costs and the
aforementioned sales price increases. Margins were
favorably impacted by these
9
<PAGE 10>
sales price increases because cost of sales was not yet
significantly impacted by the receipt of coffee
purchased during the most recent sustained spike in
coffee costs. Management believes gross margins in
fiscal 1998 may contract somewhat compared to fiscal
1997 as relatively higher priced coffees are reflected
in cost of goods sold. Store operating expenses as a
percentage of retail sales increased to 38.8% for the
13 weeks ended June 29, 1997, from 35.7% for the
corresponding period in fiscal 1996. The 3.1% increase
was due primarily to higher advertising expenses and
payroll-related costs as a percentage of retail sales.
Other operating expenses (those associated with the
Company's specialty sales, international and direct
response activities as well as the Company's share of
profits and losses of its joint ventures) increased to
3.0% of net revenues for the 13 weeks ended June 29,
1997, from 2.8% for the corresponding period in fiscal
1996. The increase was attributable to increases in
the Company's share of joint venture losses,
infrastructure build-up supporting international
expansion, and costs associated with testing the
feasibility of selling whole bean and ground coffee in
grocery stores. During the fourth quarter, the Company
will begin selling its coffees in grocery stores in the
Chicago area. If this test is successful, the Company
may pursue broader distribution.
Depreciation and amortization as a percentage of net
revenues increased 0.3% to 5.6% for the 13 weeks ended
June 29, 1997. General and administrative expenses as
a percentage of net revenues were 5.9% for the 13 weeks
ended June 29, 1997, compared to 5.7% for the same
period in fiscal 1996. This increase was primarily due
to internal computer system upgrade costs and higher
travel costs related to research and development and
field marketing activities. Lower recruiting,
relocation and payroll-related expenses as a percentage
of net revenues partially offset these increases.
Interest and other income for the 13 weeks ended June
29, 1997 was $2.6 million compared to $2.8 million for
the corresponding period in fiscal 1996. The decrease
in interest and other income is due to lower average
investment balances partially offset by a favorable
rate variance. Interest expense for the 13 weeks ended
June 29, 1997 was $1.8 million compared to $2.0 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
13 weeks ended June 29, 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.
RESULTS OF OPERATIONS -- FOR THE 39 WEEKS ENDED JUNE
29, 1997, COMPARED TO THE 39 WEEKS ENDED JUNE 30, 1996
Revenues. Net revenues for the 39 weeks ended June 29,
1997, increased 39% to $696.2 million from $500.1
million for the corresponding period in fiscal 1996.
Retail sales increased 39% to $600.4 million from
$431.2 million, due to the opening of new retail stores
combined with an increase in comparable store sales of
5% for the period. The increase in comparable store
sales resulted primarily from an increase in the number
of transactions. The sales price increases effected
during the second and third quarters were less
significant factors in the increased sales. During the
39 weeks ended June 29, 1997, the Company opened 254
stores in continental North America, including stores
in the major new markets of Phoenix, Arizona; Miami,
Florida; and Detroit, Michigan.
Specialty sales revenues increased 44% to $78.4 million
for the 39 weeks ended June 29, 1997, compared to $54.5
million for the corresponding period in fiscal 1996.
Increased sales to joint ventures, a chain of
membership warehouse clubs, office coffee distributors,
multi-unit retailers and licensed concept partners
accounted for the majority of the increase in revenues.
During the 39 weeks ended June 29, 1997, licensees
(including those in which the Company is a joint
venture partner) opened 13 stores in continental North
America and 9 stores in the Pacific Rim.
Direct response sales increased 21% to $17.4 million
for the 39 weeks ended June 29, 1997, compared to $14.4
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 45.6% for the 39 weeks ended June 29,
1997, from 49.3% for the corresponding period in fiscal
1996. This decrease was primarily the result of lower
green coffee costs as a percentage of net revenues.
10
<PAGE 11>
Store operating expenses as a percentage of retail
sales increased to 36.8% from 34.5% for the
corresponding period in fiscal 1996. The 2.3% of
retail sales increase reflects higher payroll-related
costs and higher advertising expenses as a percentage
of retail sales. Other operating expenses as a
percentage of net revenues increased to 3.1% for the 39
weeks ended June 29, 1997, from 2.9% 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.
Depreciation and amortization as a percentage of net
revenues increased 0.3% to 5.4% for the 39 weeks ended
June 29, 1997. General and administrative expenses as
a percentage of net revenues were 5.8% for the 39 weeks
ended June 29, 1997, compared to 5.3% 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.
Interest and other income for the 39 weeks ended June
29, 1997 was $10.0 million compared to $7.9 million for
the corresponding period in 1996. The increase in
interest and other income was due primarily to gains on
sale of investments, higher interest rates and higher
average investment balances. Interest expense for the
39 weeks ended June 29, 1997 was $5.5 million compared
to $6.9 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
39 weeks ended June 29, 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 $182.8 million in
total cash and investments and working capital of
$200.5 million. Cash provided by operating activities
totaled $77.4 million for the first 39 weeks of fiscal
1997 resulting primarily from net earnings before non-
cash charges of $88.2 million partially offset by
buildup of inventories.
Cash provided from financing activities for the first
39 weeks of fiscal 1997 totaled $19.1 million. The
exercise of employee stock options and the related
income tax benefit available to the Company upon
exercise of these options provided approximately $15.0
million. An increase in checks drawn in excess of bank
balances provided an additional $3.6 million.
Cash used by investing activities for the first 39
weeks of fiscal 1997 totaled $131.9 million. This
included capital additions to property, plant and
equipment of $112.2 million related to opening 254 new
Company-operated stores, purchasing roasting and
packaging equipment, remodeling certain existing stores
and enhancing existing information systems. 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 $60
million.
During the first 39 weeks of fiscal 1997, the Company
invested $24.1 million in its joint ventures and
currently anticipates additional cash requirements of
approximately $10 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 39 weeks of fiscal 1997, the Company provided
approximately $3.0 million under this agreement,
bringing the total amount outstanding under this
agreement to $7.5 million as of June 29, 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.
11
<PAGE 12>
The Company plans to open at least 350 new stores in
continental North America and at least 40 in the
Pacific Rim during fiscal 1998. Estimated capital
requirements for fiscal 1998 are $170 to $200 million.
Management believes that 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 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 as a result
of reports of adverse growing conditions in certain
coffee-producing countries or other supply-related
concerns. In addition, green coffee prices have been
affected in the past, and may be affected in the
future, by the actions of certain organizations and
associations, such as the International Coffee
Organization and the Association of Coffee Producing
Countries, which have historically attempted to
influence commodity prices of green coffee through
agreements establishing export quotas or restricting
coffee supplies worldwide. In March and May 1997, the
Company effected sales price increases on its whole
bean coffees and its coffee beverages to mitigate the
effects of increases in its costs of supply. During
the first nine months of fiscal 1997. worldwide green
coffee commodity prices have increased significantly
compared to the last several years. If coffee prices
remain at their current levels, the Company will
continue to incur substantially higher costs for the
specialty coffees it purchases. The Company's ability
to raise prices in response to rising coffee prices may
be limited by competitive pressures if other major
specialty coffee retailers do not also raise prices.
The Company's inability to pass through higher coffee
prices in the form of higher retail prices for beans
and beverages could have a material adverse effect on
the Company's earnings. Similarly, rapid sharp
decreases in the cost of green coffee could also
pressure the Company to lower sales prices before
realizing cost reductions in its green coffee
inventory.
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 June 29, 1997, the Company had
approximately $43.0 million in fixed price purchase
commitments which, together with existing inventory,
should provide an adequate supply of green coffee for
the remainder of fiscal 1997 and well 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 factors such as increased
competition within the specialty coffee industry, the
Company's ability to find optimal store locations at
reasonable lease rates, the increased costs associated
with opening and operating retail stores in new
markets, the Company's 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.
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"
12
<PAGE 13>
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-week and 39-week periods
ending June 29, 1997 and June 30, 1996 would be as
follows:
<TABLE>
Pro forma earnings per share under FAS 128:
<CAPTION>
June 29, June 30, June 29, June 30,
1997 1996 1997 1996
(13 Weeks) (13 Weeks) (39 Weeks) (39 Weeks)
================================================================================
<S> <C> <C> <C> <C>
Basic Earnings per share $ 0.19 $ 0.12 $ 0.50 $ 0.40
================================================================================
Diluted Earnings per share $ 0.18 $ 0.12 $ 0.48 $ 0.39
================================================================================
</TABLE>
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
management believes would have a material adverse
effect on the financial position or results of
operations of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
11 Statement re: computation of per share earnings
27 Financial data schedule
(b) Forms 8-K:
No reports on Form 8-K were filed by the Company during the
13-week period ended June 29, 1997.
SIGNATURE
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto
duly authorized.
STARBUCKS CORPORATION
Dated: August 11, 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 Nine Months Ended
June 29, June 30, June 29, June 30,
1997 1996 1997 1996
(13 Weeks) (13 Weeks) (39 Weeks) (39 Weeks)
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE CALCULATION
- -PRIMARY:
Net earnings $ 14,616 $ 9,446 $ 38,650 $ 29,403
=========================================================================
Weighted average common and
common equivalent shares calculation-primary:
Weighted average number of
common shares outstanding 78,381 75,575 78,077 72,649
Dilutive effect of outstanding
common stock options 2,932 3,398 3,225 2,949
- -------------------------------------------------------------------------
Weighted average common and
common equivalent shares-
primary 81,313 78,973 81,302 75,598
=========================================================================
Net earnings per common and
common equivalent share
-primary $ 0.18 $ 0.12 $ 0.48 $ 0.39
=========================================================================
NET EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE CALCULATION
- -FULLY DILUTED(1):
Net earnings calculation:
Net earnings $ 14,616 $ 9,446 $ 38,650 $ 29,403
Add after tax interest
expense on Debentures 1,075 138 3,225 1,239
Add after tax amortization
of issuance costs related
to the Debentures 89 14 267 93
- -------------------------------------------------------------------------
Adjusted net earnings $ 15,780 $ 9,598 $ 42,142 $ 30,735
=========================================================================
Weighted average common and
common equivalent shares calculation-fully diluted:
Weighted average number of
common shares outstanding 78,381 75,575 78,077 72,649
Dilutive effect of outstanding
common stock options 3,585 3,535 3,766 3,702
Assuming conversion of
Convertible Subordinated
Debentures 7,098 1,425 7,098 4,035
- -------------------------------------------------------------------------
Weighted average common and
common equivalent shares
-fully diluted 89,064 80,535 88,941 80,386
=========================================================================
Net earnings per common and
common equivalent share
-fully diluted $ 0.18 $ 0.12 $ 0.47 $ 0.38
=========================================================================
</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 THIRD 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> 9-MOS
<FISCAL-YEAR-END> SEP-28-1997
<PERIOD-START> SEP-30-1996
<PERIOD-END> JUN-29-1997
<CASH> 90,773
<SECURITIES> 92,032
<RECEIVABLES> 17,605
<ALLOWANCES> 280
<INVENTORY> 109,936
<CURRENT-ASSETS> 323,584
<PP&E> 569,244
<DEPRECIATION> 127,923
<TOTAL-ASSETS> 805,846
<CURRENT-LIABILITIES> 123,080
<BONDS> 165,020
0
0
<COMMON> 377,732
<OTHER-SE> 126,388
<TOTAL-LIABILITY-AND-EQUITY> 805,846
<SALES> 696,247
<TOTAL-REVENUES> 696,247
<CGS> 317,330
<TOTAL-COSTS> 317,330
<OTHER-EXPENSES> 320,639
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,454
<INCOME-PRETAX> 62,844
<INCOME-TAX> 24,194
<INCOME-CONTINUING> 38,650
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,650
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.47
</TABLE>
