<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 January 2, 2000
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 February 14, 2000, there were 183,546,902 shares of the Registrant's
Common Stock outstanding.
- --------------------------------------------------------------------------------
<PAGE> 2
STARBUCKS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
Item 1. Financial Statements ................................ 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ..... 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ................................. 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................... 12
Item 6. Exhibits and Reports on Form 8-K .................... 12
Signature .................................................... 12
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except earnings per share)
<TABLE>
<CAPTION>
Three Months Ended
January 2, December 27,
2000 1998
(13 Weeks) (13 Weeks)
(unaudited)
- ---------------------------------------------------------------------------
<S> <C> <C>
Net revenues $526,982 $405,638
Cost of sales and related
occupancy costs 238,402 186,300
- ---------------------------------------------------------------------------
Gross Margin 288,580 219,338
Store operating expenses 164,200 122,601
Other operating expenses 14,312 13,308
Depreciation and amortization 29,290 21,893
General and administrative
expenses 26,145 20,359
- ---------------------------------------------------------------------------
Operating income 54,633 41,177
Interest and other income, net 1,414 1,941
- ---------------------------------------------------------------------------
Earnings before income taxes 56,047 43,118
Income taxes 21,298 16,385
- ---------------------------------------------------------------------------
Net earnings $ 34,749 $ 26,733
===========================================================================
Net earnings per common share - basic $ 0.19 $ 0.15
Net earnings per common share - diluted $ 0.18 $ 0.14
Weighted average shares outstanding:
Basic 183,427 180,042
Diluted 189,340 185,466
</TABLE>
See notes to consolidated financial statements
3
<PAGE> 4
STARBUCKS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
January 2, October 3,
2000 1999
(unaudited)
- ----------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 77,368 $ 66,419
Short-term investments 72,808 51,367
Accounts receivable 48,567 47,646
Inventories 157,232 180,886
Prepaid expenses and other
current assets 17,549 19,049
Deferred income taxes, net 25,093 21,133
- ----------------------------------------------------------------------
Total current assets 398,617 386,500
Joint ventures and other investments 82,424 68,060
Property, plant and equipment, net 796,550 760,289
Deposits and other assets 27,582 23,474
Goodwill, net 19,384 14,191
- ----------------------------------------------------------------------
Total $ 1,324,557 $ 1,252,514
======================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 63,803 $ 56,108
Checks drawn in excess of bank balances 47,122 64,211
Accrued compensation and related costs 51,193 43,872
Accrued occupancy costs 25,608 23,017
Accrued taxes 40,366 30,752
Other accrued expenses 31,103 33,637
- ----------------------------------------------------------------------
Total current liabilities 259,195 251,597
Deferred income taxes, net 40,152 32,886
Long-term debt 6,848 7,018
Shareholders' equity:
Common stock - Authorized, 300,000,000;
issued and outstanding, 183,730,150 and
183,282,095 shares, respectively, (includes
848,550 common stock units in both periods) 658,789 651,020
Retained earnings 348,688 313,939
Accumulated other comprehensive income (loss) 10,885 (3,946)
- ----------------------------------------------------------------------
Total shareholders' equity 1,018,362 961,013
- ----------------------------------------------------------------------
Total $ 1,324,557 $ 1,252,514
======================================================================
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 5
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
- ------------------------------------------------------------------------------------------------
January 2, December 27,
2000 1998
(13 Weeks) (13 Weeks)
(unaudited)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net earnings $ 34,749 $ 26,733
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 31,976 24,396
Provision for store remodels
and losses on asset disposals 613 242
Deferred income taxes, net (2,240) 604
Equity in (income)/losses of investees (2,798) 353
Cash provided/(used) by changes in
operating assets and liabilities:
Accounts receivable (765) 5,920
Inventories 24,692 26,435
Prepaid expenses and other
current assets 1,656 (419)
Accounts payable 7,007 (1,602)
Accrued compensation and
related costs 7,381 252
Accrued occupancy costs 2,625 1,830
Accrued taxes 9,625 3,753
Other accrued expenses (852) 8,843
- ------------------------------------------------------------------------------------------------
Net cash provided by operating activities 113,669 97,340
Investing activities:
Purchase of investments (18,775) (52,998)
Maturity of investments 10,000 11,000
Sale of investments 5,282 0
Purchases of businesses, net of cash acquired (8,242) 0
Investments in joint ventures and other
investments (11,792) (1,963)
Distributions from joint ventures 500 5,000
Additions to property, plant
and equipment (65,988) (51,817)
Additions to deposits and other assets (3,682) (1,018)
- ------------------------------------------------------------------------------------------------
Net cash used by investing activities (92,697) (91,796)
Financing activities:
(Decrease)/increase in cash provided by
checks drawn in excess of bank balances (17,038) 3,216
Proceeds from sale of common stock 2,544 1,499
Exercise of stock options 4,144 10,181
Tax benefit from exercise of non-qualified
stock options 1,081 6,614
Payments on long-term debt (923) 0
- ------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities (10,192) 21,510
- ------------------------------------------------------------------------------------------------
Effect of exchange rate changes
on cash and cash equivalents 169 (332)
- ------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 10,949 26,722
Cash and cash equivalents:
Beginning of the period 66,419 101,663
- ------------------------------------------------------------------------------------------------
End of the period $ 77,368 $ 128,385
================================================================================================
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 131 $ 54
Income taxes 12,689 7,487
Net unrealized holding gain/(loss) 11,138 (4)
on investments
</TABLE>
See notes to consolidated financial statements
5
<PAGE> 6
STARBUCKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the 13 Weeks Ended January 2, 2000 and December 27, 1998
NOTE 1: FINANCIAL STATEMENT PREPARATION
The consolidated financial statements as of January 2, 2000 and October 3, 1999
and for the 13-week periods ended January 2, 2000 and December 27, 1998 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 periods ended January 2, 2000
and December 27, 1998 is unaudited, but, in the opinion of management, reflects
all adjustments (consisting only of normal recurring adjustments and accruals)
necessary for a fair presentation of the financial position, results of
operations and cash flows for the interim periods.
The financial information as of October 3, 1999, is derived from the Company's
audited consolidated financial statements and notes thereto for the year ended
October 3, 1999, 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 period ended January 2, 2000 are not
necessarily indicative of the results of operations that may be achieved for the
entire fiscal year ending October 1, 2000.
NOTE 2: OTHER EVENTS
On October 18, 1999, Starbucks acquired all of the outstanding stock of
Tympanum, Inc. ("Hear Music"), a music retailer with five company stores and 12
licensed locations, in a transaction accounted for as a purchase. The total
purchase price was $8 million and the excess purchase price over the net assets
acquired was allocated to goodwill and is being amortized over a period of 10
years. Hear Music's results of operations are included in these financial
statements from the date of acquisition. Pro forma financial information is not
presented, as Hear Music's operations are not material.
NOTE 3: EARNINGS PER SHARE
The computation of basic earnings per share is based on the weighted average
number of shares and common stock units outstanding during the period. The
computation of diluted earnings per share includes the dilutive effect of common
stock equivalents consisting of certain shares subject to stock options.
On March 19, 1999, the Company effected a two-for-one stock split for its
holders of record on March 5, 1999. All applicable share and per-share data in
these consolidated financial statements have been restated to give effect to
this stock split.
NOTE 4: INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
January 2, October 3,
2000 1999
- -------------------------------------------------------------------
<S> <C> <C>
Coffee:
Unroasted $ 67,870 $ 95,001
Roasted 24,107 28,065
Other merchandise held for sale 50,732 46,655
Packaging and other supplies 14,523 11,165
- -------------------------------------------------------------------
$ 157,232 $ 180,886
===================================================================
</TABLE>
6
<PAGE> 7
As of January 2, 2000, the Company had fixed-price purchase commitments for
green coffee totaling approximately $110 million.
The Company may, from time to time, enter 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 Statement
of Financial Accounting Standards ("SFAS") No. 80 "Accounting for Futures
Contracts," these futures contracts meet the hedge criteria and are accounted
for as hedges. Accordingly, gains and losses are deferred and recognized as
adjustments to the carrying value of coffee inventory when purchased and
recognized in results of operations as coffee products are sold. Gains and
losses are calculated based on the difference between the cost basis and the
market value of the coffee contracts. The market risk related to coffee futures
is substantially offset by changes in the cost of coffee purchased.
NOTE 5: NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
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 accumulated other comprehensive income
until the hedged item is recognized in earnings. The Company is in the process
of evaluating the impact of this new accounting standard and does not expect
that it will have a significant effect on its results of operations. The FASB
subsequently issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB No. 133", which
postpones initial application until fiscal years beginning after June 15, 2000.
The Company expects to adopt SFAS No. 133 in fiscal 2001.
NOTE 6: PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost and consist of the
following (in thousands):
<TABLE>
<CAPTION>
January 2, October 3,
2000 1999
- ------------------------------------------------------------------
<S> <C> <C>
Land $ 5,084 $ 5,084
Building 19,795 19,795
Leasehold improvements 615,313 591,640
Roasting and store equipment 296,167 273,612
Furniture, fixtures and other 134,723 130,223
- ------------------------------------------------------------------
1,071,082 1,020,354
Less accumulated depreciation
and amortization (352,299) (320,982)
- ------------------------------------------------------------------
718,783 699,372
Work in progress 77,767 60,917
- ------------------------------------------------------------------
$ 796,550 $ 760,289
==================================================================
</TABLE>
7
<PAGE> 8
NOTE 7: COMPREHENSIVE INCOME
Comprehensive income includes all changes in equity during the period, except
those resulting from transactions with shareholders of the Company. It has two
components: net income and other comprehensive income. Accumulated other
comprehensive income (loss) reported on the Company's consolidated balance
sheets consists of foreign currency translation adjustments and the unrealized
gains and losses, net of applicable taxes, on available-for-sale securities.
Comprehensive income, net of related tax effects, is as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended
January 2, December 27,
2000 1998
- ----------------------------------------------------------------
<S> <C> <C>
Net income $ 34,749 $ 26,733
Unrealized holding gains/(losses), net 11,138 (4)
Translation adjustment 3,693 724
- ----------------------------------------------------------------
Total comprehensive income $ 49,580 $ 27,453
================================================================
</TABLE>
NOTE 8: SEGMENT REPORTING
The Company is organized into a number of business units. The Company's North
American retail business sells coffee beverages, whole bean coffees, and related
hardware and equipment through Company-operated retail stores in the United
States and Canada. The Company also owns and operates retail stores in the
United Kingdom. These two retail segments are managed by different presidents
within the Company and are measured and evaluated separately by senior
management.
The Company operates through several other business units, each of which is
managed and evaluated independently. These other business units include domestic
wholesale, domestic retail store and grocery channel licensing, international
licensing and a direct-to-consumer business.
The tables below present information by operating segment (in thousands):
<TABLE>
<CAPTION>
Three months ended
January 2, December 27,
2000 1998
- ----------------------------------------------------------------
<S> <C> <C>
REVENUES
North American retail $422,064 $332,526
All other business units 108,331 74,781
Intersegment revenues (3,413) (1,669)
- ----------------------------------------------------------------
Total revenues $526,982 $405,638
================================================================
- ----------------------------------------------------------------
OPERATING INCOME
North American retail $ 63,747 $ 52,767
All other business units 22,659 12,647
Unallocated corporate expenses (31,490) (24,240)
Intersegment eliminations (283) 3
Interest, net 1,414 1,941
- ----------------------------------------------------------------
Earnings before income taxes $ 56,047 $ 43,118
================================================================
</TABLE>
NOTE 9: SUBSEQUENT EVENT
On February 12, 2000, Starbucks entered into a strategic agreement with
Kozmo.com, Inc., an internet-to-door delivery service for food, entertainment
and convenience items. Under the agreement, Starbucks will receive $150 million
over a five-year period for in-store exposure and co-marketing opportunities.
Kozmo.com will locate drop boxes within Starbucks stores for return of videos,
DVDs, video games and other items delivered by Kozmo.com and will deliver
Starbucks coffee by the pound, Tazo teas and other Starbucks products.
8
<PAGE> 9
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 herein, 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
various 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 filings with the Securities and Exchange Commission.
GENERAL
During the 13-week period ending January 2, 2000, Starbucks Corporation
("Starbucks" or the "Company") derived approximately 84% of net revenues from
its Company-operated retail stores. The remaining 16% of net revenues is derived
from the Company's specialty operations, which include sales to wholesale
accounts and licensees, royalty and license fee income and sales through its
direct-to-consumer business and its on-line store at www.starbucks.com. The
Company's fiscal year ends on the Sunday closest to September 30. Fiscal year
1999 had 53 weeks. The fiscal year ending on October 1, 2000 will include 52
weeks.
On October 18, 1999, Starbucks acquired all of the outstanding stock of
Tympanum, Inc. ("Hear Music"), a music retailer with five company stores and 12
licensed locations, in a transaction accounted for as a purchase. The total
purchase price was $8 million and the excess purchase price over the net assets
acquired was allocated to goodwill and is being amortized over a period of 10
years. Hear Music's results of operations are included in these financial
statements from the date of acquisition. Pro forma financial information is not
presented, as Hear Music's operations are not material.
RESULTS OF OPERATIONS -- FOR THE 13 WEEKS ENDED JANUARY 2, 2000, COMPARED
TO THE 13 WEEKS ENDED DECEMBER 27, 1998
Revenues. Net revenues for the 13 weeks ended January 2, 2000, increased 30% to
$527 million from $406 million for the corresponding period in fiscal 1999.
Retail revenues increased 29% to $441 million from $343 million primarily due to
the opening of new retail stores plus an increase in comparable store sales of
7% for the period. The increase in comparable store sales resulted from a 4%
increase in the number of transactions combined with a 3% increase in the
average dollar value per transaction. During the 13 weeks ended January 2, 2000,
the Company opened 104 stores in continental North America and 15 in the United
Kingdom. The Company ended the period with 2,139 Company-operated stores in
continental North America and 110 Company-operated stores in the United Kingdom.
Specialty revenues increased 37% to $86 million for the 13 weeks ended January
2, 2000, compared to $63 million for the corresponding period in fiscal 1999.
The increase in specialty revenues was driven primarily by higher revenues from
licensees, foodservice accounts, and the wholesale channel. Licensees (including
those in which the Company is a joint venture partner) opened 31 stores in
continental North America and 34 stores in international markets. The Company
ended the period with 207 licensed stores in continental North America and 218
licensed stores in international markets.
Gross margin. Gross margin increased to 54.8% for the 13 weeks ended January 2,
2000 from 54.1% for the corresponding period in fiscal 1999. The improvement in
gross margin was primarily due to lower green coffee costs and the impact of a
beverage sales price increase implemented in May 1999.
Store operating expenses as a percentage of retail sales increased to 37.3% for
the 13 weeks ended January 2, 2000, from 35.8% for the corresponding period in
fiscal 1999. The increase was primarily due to higher payroll-related
expenditures resulting from an increase in average hourly wage rates and a
continuing shift in sales to more labor-intensive handcrafted beverages.
9
<PAGE> 10
Other operating expenses (expenses associated with all operations other than
Company-owned retail, including the Company's share of joint venture profits and
losses) were 16.6% of specialty revenues for the 13 weeks ended January 2, 2000,
compared to 21.2% for the corresponding period in fiscal 1999. The decrease was
primarily due to improved profit contribution from joint venture activities.
General and administrative expenses as a percentage of net revenues were 5.0%
for the 13 weeks ended January 2, 2000 and December 27, 1998. Higher
professional fees were primarily offset by lower payroll-related expenses as a
percent of revenues.
Income Taxes. The Company's effective tax rate for the 13 weeks ended January 2,
2000 and December 27, 1998 was 38.0%. Management expects the tax rate to
decrease to 37.5% for the remainder of fiscal 2000 due to tax planning and a
reduction of losses by the Company's joint venture in Japan. Such losses are not
deductible for U.S. tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the period with $150 million in total cash and short-term
investments and working capital of $139 million. Cash and cash equivalents
increased by $11 million for the 13 weeks ended January 2, 2000 to $77 million.
Cash provided by operating activities totaled $114 million for the first 13
weeks of fiscal 2000, resulting primarily from net earnings before non-cash
charges of $62 million and a decrease in inventories of $25 million.
Cash used by investing activities for the first 13 weeks of fiscal 2000 totaled
$93 million. This included capital additions to property, plant and equipment of
$66 million related to opening 119 new Company-operated retail stores, enhancing
information systems, purchasing roasting and packaging equipment for the
Company's roasting and distribution facilities, and remodeling certain existing
stores. The purchase of Hear Music used $8 million. The Company also used $10
million to make a minority investment in Cooking.com, a leading web-based
retailer of cookware, accessories, specialty foods and cooking content such as
menus and recipes. During the 13-week period ending January 2, 2000, the Company
made equity investments of $2 million in its international joint ventures. The
Company received $.5 million in distributions from its domestic joint ventures.
The Company invested excess cash primarily in short-term, investment-grade
marketable debt securities. The net activity in the Company's marketable
securities portfolio during the 13-week period used $3 million.
Cash used by financing activities for the first 13 weeks of fiscal 2000 totaled
$10 million. This included a $17 million decrease of checks outstanding, offset
by $8 million generated from the exercise of employee stock options and the
related income tax benefit available to the Company upon exercise of such
options and cash generated from the Company's employee stock purchase plan. As
options granted under the Company's stock option plans vest and are exercised,
the Company will continue to receive proceeds and a tax deduction; however,
neither the amounts nor timing can be predicted.
Cash requirements for the remainder of fiscal 2000, 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 plans to open at
least 400 Company-operated stores during fiscal 2000. The Company also
anticipates incurring additional expenditures for enhancing its production
capacity and information systems and remodeling certain existing stores. While
there can be no assurance that current expectations will be realized, management
expects capital expenditures for the remainder of fiscal 2000 to be
approximately $235 million.
Management believes that existing cash and investments plus cash generated from
operations should be sufficient to finance capital requirements for its core
businesses through fiscal 2000. New joint ventures, other new business
opportunities or store expansion rates substantially in excess of that presently
planned may require outside funding.
10
<PAGE> 11
COFFEE PRICES AND AVAILABILITY AND GENERAL RISK CONDITIONS
The supply and price of coffee are subject to significant volatility. Although
most coffee trades in the commodity market, coffee of the quality sought by the
Company tends to trade on a negotiated basis at a substantial premium above
commodity coffee prices, depending upon the supply and demand at the time of
purchase. Supply and price can be affected by multiple factors in the producing
countries, including weather, political and economic conditions. 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 that 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 profitability could be adversely affected if
coffee prices were to rise substantially.
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 January 2, 2000, the Company had approximately
$110 million in fixed-price purchase commitments which, together with existing
inventory, is expected to provide an adequate supply of green coffee for the
remainder of fiscal 2000. 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 may, from
time to time, enter 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
other factors such as increased competition within the specialty coffee
industry, the Company's ability to find optimal store locations at favorable
lease rates, increased costs associated with opening and operating retail stores
in new markets, increases in the cost of dairy products and the Company's
continued 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 and its overall
growth, results for any quarter are not necessarily indicative of the results
that may be achieved for the full fiscal year.
NEW ACCOUNTING STANDARDS
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
accumulated other comprehensive income until the hedged item is recognized in
earnings. The Company is in the process of evaluating the impact of this new
accounting standard and does not expect that it will have a significant effect
on its results of operations. The FASB subsequently issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB No. 133", which postpones initial application until
fiscal years beginning after June 15, 2000. The Company expects to adopt SFAS
No. 133 in fiscal 2001.
11
<PAGE> 12
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 accumulated other comprehensive income. The
Company does not hedge its interest rate exposure.
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 do so in the future.
The Company may, from time to time, enter into futures contracts to hedge
price-to-be-fixed 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 No. 80
"Accounting for Futures Contracts," these futures contracts meet the hedge
criteria and are accounted for as hedges. Accordingly, gains and losses are
deferred and recognized as adjustments to the carrying value of the coffee
inventory when purchased and recognized in results of operations as coffee
products are sold. Gains and losses are calculated based on the difference
between the cost basis and the market value of the coffee contracts. The market
risk related to coffee futures is substantially offset by changes in the costs
of coffee purchased.
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 5. Other Information
On February 12, 2000, Starbucks entered into a strategic agreement with
Kozmo.com, Inc., an internet-to-door delivery service for food, entertainment
and convenience items. Under the agreement, Starbucks will receive $150 million
over a five-year period for in-store exposure and co-marketing opportunities.
Kozmo.com will locate drop boxes within Starbucks stores for return of videos,
DVDs, video games and other items delivered by Kozmo.com and will deliver
Starbucks coffee by the pound, Tazo teas and other Starbucks products.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
11 Statement re: computation of per share earnings
27 Financial Data Schedule
</TABLE>
(b) Current Reports on Forms 8-K filed during the 13 weeks ended January 2,
2000:
None
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: February 16, 2000 By: /s/ Michael Casey
----------------------------
Michael Casey
executive vice president and
chief financial officer
Signing on behalf of the
registrant and as principal
financial officer
12
<PAGE> 1
STARBUCKS CORPORATION
---------------------
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<TABLE>
<CAPTION>
Three Months Ended
January 2, December 27,
2000 1998
(13 Weeks)
- --------------------------------------------------------------
<S> <C> <C>
CALCULATION OF EARNINGS PER COMMON SHARE-BASIC:
Net earnings $ 34,749 $ 26,733
==============================================================
Weighted average common shares and
common stock units outstanding 183,427 180,042
==============================================================
Net earnings per common share-basic $ 0.19 $ 0.15
==============================================================
CALCULATION OF EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE-DILUTED:
Net earnings $ 34,749 $ 26,733
==============================================================
Weighted average shares outstanding
calculation:
Weighted average common shares
and common stock units outstanding 183,427 180,042
Dilutive effect of outstanding common
stock options 5,913 5,424
- --------------------------------------------------------------
Weighted average common and common
equivalent shares outstanding 189,340 185,466
==============================================================
Net earnings per common and
common equivalent share-diluted $ 0.18 $ 0.14
==============================================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STARBUCKS
CORPORATION FIRST QUARTER FISCAL 2000 CONSOLIDATED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-01-2000
<PERIOD-START> OCT-04-1999
<PERIOD-END> JAN-02-2000
<CASH> 77,368
<SECURITIES> 77,924
<RECEIVABLES> 50,297
<ALLOWANCES> 1,730
<INVENTORY> 157,232
<CURRENT-ASSETS> 398,617
<PP&E> 1,148,849
<DEPRECIATION> 352,299
<TOTAL-ASSETS> 1,324,557
<CURRENT-LIABILITIES> 259,195
<BONDS> 6,848
0
0
<COMMON> 658,789
<OTHER-SE> 359,573
<TOTAL-LIABILITY-AND-EQUITY> 1,324,557
<SALES> 526,982
<TOTAL-REVENUES> 526,982
<CGS> 238,402
<TOTAL-COSTS> 238,402
<OTHER-EXPENSES> 233,947
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 383
<INCOME-PRETAX> 56,047
<INCOME-TAX> 21,298
<INCOME-CONTINUING> 34,749
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,749
<EPS-BASIC> .19
<EPS-DILUTED> .18
</TABLE>
