<PAGE>
- --------------------------------------------------------------------
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 28, 1998
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, 1998, there were 89,104,244 shares of the Registrant's
Common Stock outstanding.
- --------------------------------------------------------------------
<PAGE>
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. . . 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk. . . . . . . . . . . . . . . . . . 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . 15
Signature. . . . . . . . . . . . . . . . . . . . . . . . . . 16
2
<PAGE>
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 28, June 29, June 28, June 29,
1998 1997 1998 1997
(13 Weeks) (13 Weeks) (39 Weeks) (39 Weeks)
(unaudited) (unaudited)
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $334,429 $244,241 $950,997 $700,665
Cost of sales and related
occupancy costs 145,081 103,835 424,817 319,906
Store operating expenses 111,734 82,664 304,859 223,736
Other operating expenses 12,221 7,159 30,527 21,873
Depreciation and amortization 18,928 13,829 52,416 37,898
General and administrative
expenses 20,588 14,186 57,678 40,342
Merger expenses 8,930 0 8,930 0
- -------------------------------------------------------------------------
Operating income 16,947 22,568 71,770 56,910
Interest and other income 2,176 2,605 6,662 10,065
Interest and other expense (114) (1,823) (1,193) (5,454)
- -------------------------------------------------------------------------
Earnings before income taxes 19,009 23,350 77,239 61,521
Income taxes 11,110 9,151 34,421 24,194
- -------------------------------------------------------------------------
Net earnings $ 7,899 $14,199 $42,818 $37,327
=========================================================================
Net earnings per common share -
basic $0.09 $0.18 $0.49 $0.47
=========================================================================
Net earnings per common and
common equivalent share -
diluted $0.09 $0.17 $0.47 $0.45
=========================================================================
Weighted average common shares
outstanding - basic 89,069 79,679 87,547 79,335
Weighted average common and
common equivalent shares
outstanding - diluted 92,574 89,868 91,709 89,786
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
STARBUCKS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except numbers of shares)
<TABLE>
<CAPTION>
June 28, September 28,
1998 1997
(unaudited)
- -------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 91,351 $ 70,126
Short-term investments 33,789 83,504
Accounts and notes receivable 34,022 31,231
Inventories 151,830 119,767
Prepaid expenses and other
current assets 10,275 8,763
Deferred income taxes, net 8,269 4,164
- --------------------------------------------------------------------
Total current assets 329,536 317,555
Joint ventures and other investments 37,138 34,464
Property, plant and equipment, net 567,548 488,791
Deposits and other assets 15,304 16,342
- --------------------------------------------------------------------
Total $ 949,526 $ 857,152
====================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 60,576 $ 47,987
Checks drawn in excess of bank balances 22,015 28,582
Accrued compensation and related costs 34,927 25,894
Accrued occupancy costs 16,083 12,184
Other accrued expenses 34,173 28,820
- --------------------------------------------------------------------
Total current liabilities 167,774 143,467
Deferred income taxes, net 14,981 12,946
Capital lease and other obligations 1,040 2,009
Convertible subordinated debentures 0 165,020
Shareholders' equity:
Common stock, no par value -- 150,000,000
shares authorized; 89,436,363 (includes
424,275 common stock units) and
80,559,023 shares, respectively,
issued and outstanding 583,457 391,284
Retained earnings including
cumulative translation adjustment
of $(4,071) and $(1,511), respectively,
and net unrealized holding (loss) gain
on investments of $(347) and $63,
respectively 182,274 142,426
- --------------------------------------------------------------------
Total shareholders' equity 765,731 533,710
- --------------------------------------------------------------------
Total $ 949,526 $ 857,152
====================================================================
See notes to consolidated financial statements
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
- --------------------------------------------------------------------
June 28, June 29,
1998 1997
(39 Weeks) (39 Weeks)
(unaudited)
- --------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net earnings $ 42,818 $ 37,327
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 58,312 42,252
Provision for store remodels and
other charges 7,153 350
Deferred income taxes, net (1,814) 4,461
Equity in losses of investees 1,002 3,221
Cash provided/(used) by changes in
operating assets and liabilities:
Accounts and notes receivable (2,828) (430)
Inventories (32,143) (26,751)
Prepaid expenses and other
current assets (1,523) (2,182)
Accounts payable 11,919 12,400
Accrued compensation and
related costs 8,953 4,705
Accrued occupancy costs 3,899 2,955
Other accrued expenses 5,709 (960)
- --------------------------------------------------------------------
Net cash provided by operating activities 101,457 77,348
Investing activities:
Purchase of short-term investments (51,410) (136,012)
Maturity of short-term investments 98,925 134,265
Sale of investments 6,736 9,759
Investments in joint ventures and
equity securities (10,424) (24,075)
Distributions from joint venture 1,547 0
Additions to property, plant
and equipment (143,904) (116,257)
Additions to deposits and other assets (2,511) (3,605)
- --------------------------------------------------------------------
Net cash used by investing activities (101,041) (135,925)
Financing activities:
(Decrease)/increase in cash provided by checks
drawn in excess of bank balances (6,604) 4,866
Payments on capital lease obligations (1,380) (915)
Proceeds from sale of common stock
under employee stock purchase plan 3,240 1,425
Exercise of stock options 13,339 8,989
Tax benefit from exercise of non-qualified
stock options 7,539 6,009
Proceeds from the sale of common stock 4,861 1,838
- --------------------------------------------------------------------
Net cash provided by financing activities 20,995 22,212
- --------------------------------------------------------------------
Balance, carried forward 21,411 (36,365)
(Continued on next page)
5
<PAGE>
Balance, brought forward 21,411 (36,365)
Effect of exchange rate changes
on cash and cash equivalents (186) (27)
- --------------------------------------------------------------------
Net increase/(decrease) in cash and 21,225 (36,392)
cash equivalents
Cash and cash equivalents:
Beginning of the period 70,126 127,165
- --------------------------------------------------------------------
End of the period $ 91,351 $ 90,773
====================================================================
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 4,100 $ 8,008
Income taxes 29,607 14,165
Net unrealized holding (loss) (410) (1,954)
on investments
Conversion of convertible debt into common
stock, net of unamortized issue costs and
accrued interest 162,036 0
Common stock tendered in settlement of stock
options exercised 4,859 0
Conversion of compensatory stock options
into common stock in connection with merger 1,158 0
See notes to consolidated financial statements
</TABLE>
6
<PAGE>
STARBUCKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the 13 Weeks and 39 Weeks Ended June 28,
1998 and
June 29, 1997
NOTE 1: FINANCIAL STATEMENT PREPARATION
The consolidated financial statements as of June 28, 1998 and September 28,
1997 and for the 13-week and 39-week periods ended June 28, 1998 and June 29,
1997 have been prepared by Starbucks Corporation ("Starbucks" or the
"Company") pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). As described in Note 2, on May 28, 1998,
the Company acquired all of the equity interests of Seattle Coffee Holdings
Limited ("Seattle Coffee"). These consolidated financial statements have
been prepared under the pooling of interests method of accounting and reflect
the combined financial position and operating results of Starbucks and its
wholly owned subsidiaries, including Seattle Coffee, for all periods
presented. The financial information for the 13-week and 39-week periods
ended June 28, 1998 and June 29, 1997 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 28, 1997, is derived from the
Company's audited supplemental consolidated financial statements and notes
thereto for the year ended September 28, 1997, included in the Company's
Registration Statement on Form S-3 (Registration No. 333-58725) filed on
July 8, 1998 and in the Company's Current Report on Form 8-K (Date of
Report: July 9, 1998), 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 28,
1998 are not necessarily indicative of the results of operations that may be
achieved for the entire fiscal year ending September 27, 1998.
NOTE 2: SEATTLE COFFEE
On May 28, 1998, the Company acquired all of the equity interests of Seattle
Coffee, a United Kingdom roaster/retailer of specialty coffee, in exchange
for 1,817,894 shares of Starbucks common stock. This business combination
transaction (the "Transaction") has been accounted for as a pooling of
interests for accounting and financial reporting purposes. The
pooling-of-interests method of accounting is intended to present as a single
interest, two or more common shareholders' interests which were previously
independent; accordingly, the historical financial statements for the periods
prior to the business combination are restated as though the companies had
always been combined. The restated financial statements are adjusted to
conform the accounting policies and fiscal reporting periods to Starbucks
accounting policies and fiscal reporting periods.
The Transaction resulted in one-time transaction and other related after-tax
charges of $0.14 per share in the third quarter of fiscal 1998.
The following table compares amounts previously reported by Starbucks prior
to the Transaction with combined amounts for the third quarter of fiscal 1997
(in thousands, except earnings per share):
<TABLE>
<CAPTION>
Starbucks Seattle Coffee Combined
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Q3 1997
Net revenues $ 242,190 $ 2,051 $ 244,241
Net earnings 14,616 (417) 14,199
Net earnings
per share-diluted $ 0.18 $(0.01) $ 0.17
- ---------------------------------------------------------------------
</TABLE>
7
<PAGE>
NOTE 3: EARNINGS PER SHARE
The computation of basic earnings per share, in accordance with Statement
of Financial Accounting Standards ("SFAS") 128 "Earnings per Share," is based
on the weighted average number of common shares and common stock units
outstanding during the period. The computation of diluted earnings per
share, in accordance with SFAS 128, includes the dilutive effect of common
stock equivalents consisting of certain shares subject to stock options.
The computation of diluted earnings per share also 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. The convertible subordinated debentures were converted to
equity in the first quarter of fiscal 1998. All periods presented have been
calculated in accordance with SFAS 128.
NOTE 4: DEFERRED STOCK PLAN
During the first quarter of fiscal 1998, the Company adopted a Deferred
Stock Plan for certain key employees that enables participants in the plan
to defer receipt of ownership of common shares from the exercise of non-
qualified stock options. The minimum deferral period is five years. During
the first quarter of fiscal 1998, receipt of 424,275 shares was deferred
under the terms of this plan. The rights to receive these shares,
represented by common stock units, are included in the calculation of basic
and diluted earnings per share as common stock equivalents.
NOTE 5: INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
June 28, September 28,
1998 1997
- -------------------------------------------------------------------
<S> <C> <C>
Coffee:
Unroasted $ 91,255 $ 65,296
Roasted 20,505 13,954
Other merchandise held for sale 31,915 33,253
Packaging and other supplies 8,155 7,264
- ------------------------------------------------------------------
$ 151,830 $ 119,767
==================================================================
</TABLE>
As of June 28, 1998, the Company had fixed price purchase commitments for
green coffee totaling approximately $101 million.
The Company, from time to time, enters into futures contracts to hedge
price-to-be-established coffee purchase commitments with the objective of
minimizing cost risk due to market fluctuations. The Company does not hold
or issue derivative instruments for trading purposes. In accordance with
SFAS 80 "Accounting for Futures Contracts," these futures contracts meet the
hedge criteria and are accounted for as hedges. Gains and losses are
calculated based on the difference between the cost basis and the market
value of the coffee contracts. Accordingly, gains and losses are deferred
and recognized as adjustments to the carrying amount of coffee inventory
when purchased, and recognized in results of operations as coffee products
are sold. The market risk related to coffee futures is substantially offset
by changes in the cost of coffee purchased. The aggregate commitment
underlying the Company's futures contracts and deferred losses from the
hedged coffee were not significant as of June 28, 1998. Such losses in fair
value, if realized, would be offset by lower costs of coffee purchased
during the remainder of fiscal 1998 and 1999.
8
<PAGE>
NOTE 6: NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative
Instruments and Hedging Activities." This pronouncement will require the
Company to recognize derivatives on its balance sheet at fair value.
Changes in the fair values of derivatives that qualify as cash flow hedges
will be recognized in comprehensive income until the hedged item is
recognized in earnings. The Company expects that this new standard will not
have a significant effect on its results of operations. SFAS 133 is
effective for fiscal years beginning after June 15, 1999.
NOTE 7: PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost and consist of the
following (in thousands):
<TABLE>
June 28, September 28,
1998 1997
- --------------------------------------------------------------------
<S> <C> <C>
Land $ 3,602 $ 3,602
Building 8,338 8,338
Leasehold improvements 430,077 352,640
Roasting and store equipment 205,716 168,929
Furniture, fixtures and other 75,692 49,790
- ------------------------------------------------------------------
723,425 583,299
Less accumulated depreciation
and amortization (198,597) (144,068)
- ------------------------------------------------------------------
524,828 439,231
Work in progress 42,720 49,560
- ------------------------------------------------------------------
$ 567,548 $ 488,791
==================================================================
</TABLE>
9
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
Certain statements which follow, including anticipated store openings,
planned capital expenditures, and trends in or expectations regarding the
Company's operations, constitute "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, the effect of legal proceedings
and other risks detailed herein and in the Company's annual and quarterly
reports filed with the Securities and Exchange Commission.
GENERAL
During the 39-week period ending June 28, 1998, Starbucks Corporation
("Starbucks" or the "Company") derived approximately 85% 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
licensees and joint ventures, as well as sales to wholesale customers and
grocery stores, accounted for approximately 13% 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 27, 1998 and September 28, 1997 each
include 52 weeks. The fiscal year ending on October 3, 1999 will include 53
weeks.
SEATTLE COFFEE
On May 28, 1998, the Company acquired all of the equity interests of Seattle
Coffee Holdings Limited ("Seattle Coffee") a United Kingdom roaster/retailer
of specialty coffee, in exchange for 1,817,894 shares of Starbucks common
stock. This business combination transaction (the "Transaction") has been
accounted for as a pooling of interests for accounting and financial reporting
purposes. The pooling-of-interests method of accounting is intended to
present as a single interest, two or more common shareholders' interests
which were previously independent; accordingly, the historical financial
statements for the periods prior to the business combination are restated
as though the companies had always been combined. The restated financial
statements are adjusted to conform the accounting policies and fiscal
reporting periods to Starbucks accounting policies and fiscal reporting
periods.
The Transaction resulted in one-time transaction and other related after-tax
charges of $0.14 per share in the third quarter of fiscal 1998.
RESULTS OF OPERATIONS -- FOR THE 13 WEEKS ENDED JUNE 28, 1998, COMPARED
TO THE 13 WEEKS ENDED JUNE 29, 1997
Revenues. Net revenues for the 13 weeks ended June 28, 1998, increased 37%
to $334.4 million from $244.2 million for the corresponding period in fiscal
1997. Retail sales increased 34% to $283.5 million from $212.0 million due
primarily 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. The increase in comparable store sales resulted from an
increase in the number of transactions combined with an increase in the
average dollar value per transaction. During the 13 weeks ended June 28,
1998, the Company opened 80 stores in continental North America and 11 in
the United Kingdom. The Company ended the period with 1,539 Company-
10
<PAGE>
operated stores in continental North America and 64 Company-operated stores
in the United Kingdom.
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. This
cannibalization, as well as increased competition and other factors, has and
may continue to put downward pressure on the Company's comparable store sales
growth.
Specialty sales revenues increased 68% to $47.0 million for the 13 weeks
ended June 28, 1998, compared to $27.9 million for the corresponding period
in fiscal 1997. Specialty sales growth was driven primarily by new sales to
the grocery channel, and increased sales to joint ventures and licensees,
and a chain of wholesale clubs.
Starbucks sells roasted coffee to its joint venture with Pepsi-Cola Company,
a division of PepsiCo, Inc., (the "North American Coffee Partnership") for
use in the manufacture of its bottled Frappuccino(TM) beverage. The Company
also sells coffee extract to Dreyer's Grand Ice Cream, Inc. ("Dreyer's") for
use in the manufacture of Starbucks branded ice cream sold by the Company's
joint venture with Dreyer's (the "Ice Cream Joint Venture"). During the 13
weeks ended June 28, 1998, licensees (including those in which the Company
is a joint venture partner) opened 13 stores in continental North America
and 14 Pacific Rim stores. The Company ended the period with 122 licensed
stores in continental North America and 53 licensed stores in the Pacific
Rim. Direct response sales decreased 8% to $4.0 million for the 13 weeks
ended June 28, 1998, compared to $4.3 million for the corresponding period
in fiscal 1997.
Cost and Expenses. Cost of sales and related occupancy costs as a
percentage of net revenues increased to 43.4% for the 13 weeks ended
June 28, 1998, from 42.5% for the corresponding period in fiscal 1997.
One-time Transaction-related costs accounted for 0.5% of the increase in
cost of sales and related occupancy expense as a percentage of net revenues.
The remaining increase of 0.4% was primarily the result of higher green
coffee costs partially offset by prior year sales price increases. Cost of
sales continues to reflect the higher cost of coffees purchased during the
period of high green coffee costs which began in January 1997 and extended
through April 1998.
Store operating expenses as a percentage of retail sales increased to 39.4%
for the 13 weeks ended June 28, 1998, from 39.0% for the corresponding period
in fiscal 1997. One-time Transaction-related costs increased store operating
expenses by 1.7% of retail sales. This was partially offset by lower
advertising costs.
Other operating expenses (expenses associated with all operations other than
Company-owned retail, as well as the Company's share of joint venture
profits and losses) were 3.7% of total company net revenues for the 13 weeks
ended June 28, 1998, compared to 2.9% for the corresponding period in fiscal
1997. The increase was due primarily to higher advertising and marketing
costs related to the rollout of Starbucks coffee to grocery stores on the
West Coast, partially offset by improved results of both the Company's North
American Coffee Partnership and Ice Cream Joint Venture compared to the
corresponding period in fiscal 1997.
General and administrative expenses as a percentage of net revenues were
6.2% for the 13 weeks ended June 28, 1998, compared to 5.8% for the same
period in fiscal 1997. This increase was primarily due to systems-
related expenditures.
Transaction-related costs totaling $15.6 million were comprised of $8.9
million in direct merger expenses and $6.6 million of other one-time costs
associated with the integration of Seattle Coffee. Merger expenses consisted
mainly of investment banking, legal and accounting fees for both parties to
the Transaction. Other one-time costs were primarily related to asset
write-offs due to the planned conversion of Seattle Coffee stores to
Starbucks.
Interest and other income for the 13 weeks ended June 28, 1998 was $2.2
million compared to $2.6 million for the corresponding period in fiscal
1997. The decrease in interest and other income was due to lower average
investment balances.
11
<PAGE>
Interest and other expense for the 13 weeks ended June 28, 1998 was $0.1
million compared to $1.8 million for the corresponding period in fiscal 1997
due to the conversion of the Company's convertible subordinated debentures
to common stock during the first quarter of fiscal 1998.
Income Taxes. The Company's effective tax rate for the 13 weeks ended
June 28, 1998 was 58.4% compared to 39.2% for the corresponding period in
fiscal 1997. The increase was due primarily to non-deductible merger costs.
The Company expects the consolidated tax rate going forward to be
approximately 38.5%.
RESULTS OF OPERATIONS -- FOR THE 39 WEEKS ENDED JUNE 28, 1998, COMPARED
TO THE 39 WEEKS ENDED JUNE 29, 1997
Revenues. Net revenues for the 39 weeks ended June 28, 1998, increased 36%
to $951.0 million from $700.7 million for the corresponding period in fiscal
1997. Retail sales increased 34% to $811.7 million from $604.8 million due
primarily 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 the average dollar value per transaction combined with an
increase in the number of transactions. During the 39 weeks ended June 28,
1998, the Company opened 273 stores in continental North America and 34
in the United Kingdom.
Specialty sales revenues increased 58% to $123.8 million for the 39 weeks
ended June 28, 1998, compared to $78.4 million for the corresponding period
in fiscal 1997. Specialty sales growth was broad-based, including increased
sales to joint ventures and licensees, sales to grocery stores and higher
sales to all other specialty sales categories. During the 39 weeks ended
June 28, 1998, licensees (including those in which the Company is a joint
venture partner) opened 31 stores in continental North America and 36 stores
in the Pacific Rim. Direct response sales decreased 11% to $15.6 million
for the 39 weeks ended June 28, 1998, compared to $17.4 million for the
corresponding period in fiscal 1997.
Costs and Expenses. Cost of sales and related occupancy costs as a
percentage of net revenues decreased to 44.7% for the 39 weeks ended June 28,
1998, from 45.7% for the corresponding period in fiscal 1997. This decrease
of 1.0% was primarily the result of prior year sales price increases
partially offset by higher green coffee costs.
Store operating expenses as a percentage of retail sales increased to 37.6%
from 37.0% for the corresponding period in fiscal 1997, due to the
Transaction-related costs.
Other operating expenses as a percentage of net revenues were 3.2% for the
39 weeks ended June 28, 1998, compared to 3.1% for the corresponding period
in fiscal 1997. The increase was due primarily to higher grocery advertising
expenses and higher payroll-related costs for the grocery and international
businesses partially offset by improved results of the Company's North
American Coffee Partnership and Ice Cream Joint Venture.
General and administrative expenses increased to 6.1% for the 39 weeks ended
June 28, 1998, compared to 5.8% for the same period in fiscal 1997. This
increase was due primarily to systems-related expenses.
Interest and other income for the 39 weeks ended June 28, 1998 was $6.7
million compared to $10.1 million for the corresponding period in 1997. The
decrease in interest and other income was due primarily to lower average
investment balances.
Interest and other expense for the 39 weeks ended June 28, 1998 was $1.2
million compared to $5.5 million for the corresponding period in fiscal 1997
due to the conversion of the Company's convertible subordinated debentures
to common stock during the first quarter of fiscal 1998.
12
<PAGE>
Income Taxes. The Company's effective tax rate for the 39 weeks ended
June 28, 1998 was 44.6% compared to 39.3% for the corresponding period in
fiscal 1997. The increase was due primarily to non-deductible merger costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the period with $125.1 million in total cash and
investments and working capital of $161.8 million. Cash and cash
equivalents increased by $21.2 million for the 39 weeks ended June 28, 1998
to $91.4 million.
Cash provided by operating activities totaled $101.5 million for the first
39 weeks of fiscal 1998 resulting primarily from net earnings before non-cash
charges of $107.5 million.
Cash used by investing activities for the first 39 weeks of fiscal 1998
totaled $101.0 million. This included capital additions to property, plant
and equipment of $143.9 million related to opening 307 new Company-operated
stores, purchasing roasting and packaging equipment, enhancing information
systems and remodeling certain existing stores. Sales of marketable debt
securities during the 39-week period provided $54.3 million. During the
39-week period ending June 28, 1998, the Company made equity investments of
$10.4 million in its North American Coffee Partnership and international
joint ventures and received $1.5 million in distributions from its Ice
Cream Joint Venture. The Company invested excess cash primarily in
short-term, investment-grade marketable debt securities.
Cash provided from financing activities for the first 39 weeks of fiscal
1998 totaled $21.0 million. The exercise of employee stock options, the
related income tax benefit available to the Company upon exercise of these
options and employee stock purchases provided approximately $24.1 million.
A decrease in checks drawn in excess of bank balances used $6.6 million. The
sale of common stock by Seattle Coffee prior to the Transaction provided
$4.9 million. Cash requirements for the remainder of fiscal 1998, 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 and its licensees plan to open a total of at least 350 new stores
in continental North America during fiscal 1998. The Company also anticipates
making additional expenditures for enhancing its production capacity and
information systems and remodeling certain existing stores. Management
expects capital expenditures for the remainder of fiscal 1998 to be
approximately $50 million.
Management currently anticipates additional cash requirements of
approximately $2 million for its domestic and international joint ventures
during the remainder of fiscal 1998.
Management believes that existing cash and investments plus cash generated
from operations should be sufficient to finance capital requirements for the
remainder of fiscal 1998 and through fiscal 1999, barring any major new
initiatives. Longer term, the Company expects to reach its goal of at least
2000 stores in continental North America by the end of the year 2000 and 500
stores in Asia and 500 stores in Europe by the end of 2003, using cash flow
generated from operations supplemented by additional debt or equity
financing, if necessary.
COFFEE PRICES AND AVAILABILITY AND GENERAL RISK CONDITIONS
Green coffee commodity prices are subject to substantial price fluctuations,
generally caused by multiple factors including weather, political and
economic conditions in certain coffee-producing countries and 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. The Company's ability to raise sales prices in response to
rising coffee prices may be limited and the Company's
13
<PAGE>
profitability could be adversely affected if coffee prices were to rise
substantially.
During fiscal 1997, worldwide green coffee commodity prices increased
significantly and remained high relative to historical levels through the
second fiscal quarter of 1998. In response, the Company effected sales
price increases during fiscal 1997 on its whole bean coffees and its coffee
beverages to mitigate the effects of increases in its costs of supply.
Because the Company had existing inventories and fixed-price purchase
commitments for some of its green coffee requirements at the time of these
sales price increases, the Company's gross margins during the first two
quarters of fiscal 1998 were favorably impacted by these sales price
increases relative to the corresponding periods of fiscal 1997. During the
third quarter of fiscal 1998, the Company's gross margins were unfavorably
impacted relative to the third quarter of fiscal 1997 as the Company passed
the anniversaries of the sales price increases while cost of sales continued
to reflect the higher cost of coffee.
The Company enters into fixed price purchase commitments in order to secure
an adequate supply of quality green coffee and bring greater certainty to the
cost of sales in future periods. As of June 28, 1998, the Company had
approximately $101 million in fixed price purchase commitments which,
together with existing inventory, is expected to fulfill all of its remaining
fiscal 1998 and a substantial portion of its fiscal 1999 green coffee
requirements. The Company believes, based on relationships established with
its suppliers in the past, that the risk of non-delivery on such purchase
commitments is remote.
To further reduce its exposure to rising coffee costs, the Company, from time
to time, enters into futures contracts to hedge price-to-be-established
coffee purchase commitments. The specific risks associated with these
activities are described below in Item 3 "Quantitative and Qualitative
Disclosures about Market Risk."
In addition to fluctuating coffee prices, management believes that 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 favorable
lease rates, the increased costs associated with opening and operating retail
stores in new markets and the Company's ability to hire, train and retain
qualified personnel.
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. In addition, 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 June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative
Instruments and Hedging Activities." This pronouncement will require the
Company to recognize derivatives on its balance sheet at fair value.
Changes in the fair values of derivatives that qualify as cash flow hedges
will be recognized in comprehensive income until the hedged item is
recognized in earnings. The Company expects that this new standard will not
have a significant effect on its results of operations. SFAS 133 is
effective for fiscal years beginning after June 15, 1999.
14
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company maintains investment portfolio holdings of various issuers,
types and maturities. These securities are classified as available-for-sale,
and are recorded on the balance sheet at fair value, with unrealized gains or
losses reported as a separate component of retained earnings. The Company
does not hedge its interest rate exposures.
The Company is subject to foreign currency exchange rate exposure, primarily
related to its retail operations in Canada and the United Kingdom.
Historically, this exposure has had a minimal impact on the Company. At the
present time, the Company does not hedge foreign currency risk, but may
hedge known transaction exposure in the future.
The Company, from time to time, enters into futures contracts to hedge
price-to-be-established coffee purchase commitments with the objective of
minimizing cost risk due to market fluctuations. The aggregate commitment
underlying the Company's futures contracts and deferred losses from the
hedged coffee were not significant as of June 28, 1998. Such losses in fair
value, if realized, would be offset by lower costs of coffee purchased
during the remainder of fiscal 1998
and 1999.
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) Current Reports on Form 8-K filed during the 13 weeks ended June 28,
1998:
The Company filed a Current Report on Form 8-K (Date of Earliest
Event Reported: April 29, 1998) announcing the acquisition of
Seattle Coffee.
The Company filed a Current Report on Form 8-K (Date of Earliest
Event Reported: June 4, 1998) reporting the issuance of shares to
certain of the equity interest holders of Seattle Coffee pursuant
to Regulation S.
The Company filed a Current Report on Form 8-K (Date of Report:
July 9, 1998) containing the supplemental consolidated financial
statements of Starbucks and its wholly owned subsidiaries, including
Seattle Coffee, prepared under the pooling of interests method of
accounting.
15
<PAGE>
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, 1998 By: /s/ Michael Casey
----------------------
Michael Casey
executive vice president and
chief financial officer
Signing on behalf of the
registrant and as principal
financial officer
16
<PAGE>
<TABLE>
<CAPTION>
STARBUCKS CORPORATION
---------------------
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
Three Months Ended Nine Months Ended
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
(13 Weeks) (13 Weeks) (39 Weeks) (39 Weeks)
- -------------------------------------------------------------------------
NET EARNINGS PER COMMON SHARE CALCULATION
- -BASIC:
<S> <C> <C> <C> <C>
Net earnings $ 7,899 $ 14,199 $ 42,818 $ 37,327
=========================================================================
Weighted average common shares calculation-basic:
Weighted average number of
common shares and common
stock units outstanding 89,069 79,679 87,547 79,335
=========================================================================
Net earnings per common share
- basic $ 0.09 $ 0.18 $ 0.49 $
0.47
=========================================================================
NET EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE CALCULATION
- -DILUTED(1):
Net earnings calculation:
Net earnings $ 7,899 $ 14,199 $ 42,818 $ 37,327
Add after tax interest
expense on Debentures 0 1,075 348 3,225
Add after tax amortization
of issuance costs related
to the Debentures 0 89 30 267
- -------------------------------------------------------------------------
Adjusted net earnings $ 7,899 $ 15,363 $ 43,196 $ 40,819
=========================================================================
Weighted average common and
common equivalent shares calculation- diluted:
Weighted average number of
common shares and common
stock units outstanding 89,069 79,679 87,547 79,335
Dilutive effect of outstanding
common stock options 3,505 3,091 3,226 3,353
Assuming conversion of
Convertible Subordinated
Debentures 0 7,098 936 7,098
- -------------------------------------------------------------------------
Weighted average common and
common equivalent shares
- diluted 92,574 89,868 91,709 89,786
=========================================================================
Net earnings per common and
common equivalent share
- diluted $ 0.09 $ 0.17 $ 0.47 $ 0.45
=========================================================================
(1) 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.
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STARBUCKS
CORPORATION THIRD QUARTER FISCAL 1998 10Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-27-1998
<PERIOD-START> SEP-29-1997
<PERIOD-END> JUN-28-1998
<CASH> 91,351
<SECURITIES> 33,789
<RECEIVABLES> 34,517
<ALLOWANCES> 495
<INVENTORY> 151,830
<CURRENT-ASSETS> 329,536
<PP&E> 766,145
<DEPRECIATION> 198,597
<TOTAL-ASSETS> 949,526
<CURRENT-LIABILITIES> 167,774
<BONDS> 1,040
0
0
<COMMON> 583,457
<OTHER-SE> 182,274
<TOTAL-LIABILITY-AND-EQUITY> 949,526
<SALES> 950,997
<TOTAL-REVENUES> 950,997
<CGS> 424,817
<TOTAL-COSTS> 424,817
<OTHER-EXPENSES> 454,410
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,193
<INCOME-PRETAX> 77,239
<INCOME-TAX> 34,421
<INCOME-CONTINUING> 42,818
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,818
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.47
</TABLE>
