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 April 1, 2001 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) <TABLE> <S> <C> Washington 91-1325671 (State or other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) </TABLE> 2401 Utah Avenue South, Seattle, Washington 98134 (Address of Principal Executive Office, including Zip Code) (206) 447-1575 (Registrant's Telephone Number, including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] As of May 11, 2001, there were 380,164,434 shares of the Registrant's Common Stock outstanding. - --------------------------------------------------------------------------------
2 STARBUCKS CORPORATION INDEX PART I. FINANCIAL INFORMATION <TABLE> <CAPTION> Page No. <S> <C> Item 1. Financial Statements ...................................... 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .......... 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk ...................................... 15 PART II OTHER INFORMATION Item 1. Legal Proceedings ......................................... 16 Item 2. Changes in Securities and Use of Proceeds ................. 16 Item 4. Submission of Matters to a Vote of Security Holders ....... 16 Item 6. Exhibits and Reports on Form 8-K .......................... 17 Signature ......................................................... 17 </TABLE> 2
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 Six Months Ended April 1, April 2, April 1, April 2, 2001 2000 2001 2000 (13 Weeks) (13 Weeks) (26 Weeks) (26 Weeks) (unaudited) (unaudited) - ------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net revenues: Retail $ 523,277 $ 429,031 $1,085,684 $ 869,816 Specialty 106,011 77,637 210,991 166,184 - ------------------------------------------------------------------------------------------------------- Total net revenues 629,288 506,668 1,296,675 1,036,000 Cost of sales and related occupancy costs 271,178 225,240 563,398 465,954 - ------------------------------------------------------------------------------------------------------- Gross margin 358,110 281,428 733,277 570,046 Joint venture income 6,167 3,821 10,972 7,216 Store operating expenses 208,608 169,257 418,298 333,457 Other operating expenses 23,785 20,212 45,571 37,957 Depreciation and amortization 38,597 31,951 76,159 61,241 General and administrative expenses 42,433 28,622 77,310 54,767 - ------------------------------------------------------------------------------------------------------- Operating income 50,854 35,207 126,911 89,840 Interest and other income, net 1,560 2,242 3,273 3,656 - ------------------------------------------------------------------------------------------------------- Earnings before income taxes 52,414 37,449 130,184 93,496 Income taxes 20,204 14,043 48,979 35,341 - ------------------------------------------------------------------------------------------------------- Net earnings $ 32,210 $ 23,406 $ 81,205 $ 58,155 ======================================================================================================= Net earnings per common share -- basic $ 0.08 $ 0.06 $ 0.21 $ 0.16 Net earnings per common share -- diluted $ 0.08 $ 0.06 $ 0.21 $ 0.15 Weighted average shares outstanding: Basic 380,363 369,570 378,825 368,212 Diluted 395,701 384,835 394,679 382,083 </TABLE> See notes to consolidated financial statements 3
4 STARBUCKS CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share data) <TABLE> <CAPTION> April 1, October 1, 2001 2000 (unaudited) - ------------------------------------------------------------------------------ <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 215,180 $ 70,817 Available-for-sale securities 45,649 57,573 Trading securities 5,340 3,763 Accounts receivable, net of allowances of $4,483 and $2,941, respectively 75,982 76,385 Inventories 151,368 201,656 Prepaid expenses and other current assets 29,430 18,736 Deferred income taxes, net 35,074 29,304 - ------------------------------------------------------------------------------ Total current assets 558,023 458,234 Joint ventures 60,348 52,051 Other investments 1,948 3,788 Property, plant and equipment, net 997,585 930,759 Other assets 27,780 25,403 Goodwill, net 22,585 21,311 - ------------------------------------------------------------------------------ Total $ 1,668,269 $ 1,491,546 ============================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 86,233 $ 73,653 Checks drawn in excess of bank balances 52,637 56,332 Accrued compensation and related costs 83,348 69,702 Accrued occupancy costs 32,641 29,117 Accrued taxes 28,186 35,841 Other accrued expenses 54,371 39,016 Deferred revenue 1,766 7,320 Current portion of long-term debt 691 685 - ------------------------------------------------------------------------------ Total current liabilities 339,873 311,666 Deferred income taxes, net 25,643 21,410 Long-term debt 6,157 6,483 Minority interest 4,386 3,588 Shareholders' equity: Common stock and additional paid-in Capital -- $0.001 par value; authorized, 600,000,000; issued and outstanding, 381,687,750 and 376,315,302 shares, respectively, (includes 1,697,100 common stock units in both periods) 819,207 750,872 Retained earnings 489,708 408,503 Accumulated other comprehensive loss (16,705) (10,976) - ------------------------------------------------------------------------------ Total shareholders' equity 1,292,210 1,148,399 - ------------------------------------------------------------------------------ Total $ 1,668,269 $ 1,491,546 ============================================================================== </TABLE> See notes to consolidated financial statements 4
5 STARBUCKS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) <TABLE> <CAPTION> Six Months Ended - ------------------------------------------------------------------------------- April 1, April 2, 2001 2000 (26 Weeks) (26 Weeks) (unaudited) - ------------------------------------------------------------------------------- <S> <C> <C> Operating activities: Net earnings $ 81,205 $ 58,155 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 82,727 67,594 Provision for store remodels and losses on asset disposals 12,508 1,307 Deferred income taxes, net (3,217) 84 Equity in income of investees (3,572) (5,055) Tax benefit from exercise of non-qualified stock options 25,904 13,276 Cash provided/(used) by changes in operating assets and liabilities: Net purchases of trading securities (3,022) -- Accounts receivable 406 (10,814) Inventories 50,203 29,882 Prepaid expenses and other current assets (9,035) (638) Accounts payable 12,581 8,140 Accrued compensation and related costs 13,270 18,301 Accrued occupancy costs 3,460 2,984 Accrued taxes (7,676) (18,954) Minority interest 798 -- Deferred revenue (5,555) 14,470 Other accrued expenses 16,292 3,004 - ------------------------------------------------------------------------------- Net cash provided by operating activities 267,277 181,736 Investing activities: Purchase of available-for-sale investments (53,012) (55,314) Maturity of available-for-sale investments 62,000 28,000 Sale of available-for-sale investments 2,000 35,524 Purchases of businesses, net of cash acquired -- (8,242) Net investments in joint ventures (12,130) (2,998) Purchases of other investments -- (35,189) Distributions from joint ventures 4,099 4,556 Additions to property, plant and equipment (161,697) (148,005) Additions to other assets (2,496) (3,986) - ------------------------------------------------------------------------------- Net cash used by investing activities (161,236) (185,654) Financing activities: Decrease in cash provided by checks drawn in excess of bank balances (3,695) (13,748) Proceeds from sale of common stock under employee stock purchase plan 5,976 5,020 Proceeds from exercise of stock options 36,455 32,853 Principal payments on long-term debt (320) (1,344) - ------------------------------------------------------------------------------- Net cash provided by financing activities 38,416 22,781 - ------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents (94) (24) - ------------------------------------------------------------------------------- Net increase in cash and cash equivalents 144,363 18,839 Cash and cash equivalents: Beginning of the period 70,817 66,419 - ------------------------------------------------------------------------------- End of the period $ 215,180 $ 85,258 =============================================================================== Supplemental cash flow information: Cash paid during the period for: Interest $ 262 $ 191 Income taxes 38,658 32,710 </TABLE> See notes to consolidated financial statements 5
6 STARBUCKS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the 13 Weeks and 26 Weeks Ended April 1, 2001 and April 2, 2000 NOTE 1: FINANCIAL STATEMENT PREPARATION The consolidated financial statements as of April 1, 2001 and October 1, 2000 and for the 13-week and 26-week periods ended April 1, 2001 and April 2, 2000 have been prepared by Starbucks Corporation ("Starbucks" or the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). The financial information for the 13-week and 26-week periods ended April 1, 2001 and April 2, 2000 is unaudited, but, in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments and accruals) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of October 1, 2000, is derived from the Company's audited consolidated financial statements and notes thereto for the year ended October 1, 2000, and should be read in conjunction with such financial statements. Certain reclassifications of prior year's balances have been made to conform to the current format. The results of operations for the 13-week and 26-week periods ended April 1, 2001 are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending September 30, 2001. NOTE 2: NEW ACCOUNTING STANDARDS In September 2000, the Emerging Issues Task Force ("EITF") reached a consensus regarding Issue 00-10, "Accounting for Shipping and Handling Fees and Costs," which requires any shipping and handling costs billed to customers in a sale transaction to be classified as revenue. The Company adopted Issue 00-10 on October 2, 2000. Issue 00-10 did not have a material impact on the Company's consolidated financial statements. NOTE 3: INVENTORIES Inventories consist of the following (in thousands): <TABLE> <CAPTION> April 1, October 1, 2001 2000 - ------------------------------------------------------------- <S> <C> <C> Coffee: Unroasted $ 48,172 $ 90,807 Roasted 27,021 27,880 Other merchandise held for sale 49,770 59,420 Packaging and other supplies 26,405 23,549 - ------------------------------------------------------------- Total $151,368 $201,656 ============================================================= </TABLE> As of April 1, 2001, the Company had fixed-price purchase commitments for green coffee totaling approximately $167 million. 6
7 NOTE 4: DERIVATIVE FINANCIAL INSTRUMENTS The Company manages its exposure to foreign currency risk within the consolidated financial statements according to a hedging policy. Under the policy, the Company may engage in transactions involving various derivative instruments with maturities generally not longer than five years, to hedge assets, liabilities, revenues and purchases denominated in foreign currencies. On October 2, 2000, the Company adopted Statement of Financial Accounting Standards ("SFAS") 133, as amended and interpreted, which requires that all derivatives be recorded on the balance sheet at fair value. The accounting for changes in the fair value of derivative instruments depends on the intended use and resulting designation. The Company designates its derivatives based upon the criteria established by SFAS 133. For a derivative designated as a fair value hedge, the gain or loss generated from the change in fair value is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item. For a derivative designated as a cash flow hedge, the effective portion of the derivative's gain or loss is initially reported as a component of other comprehensive income ("OCI") and subsequently reclassified into earnings when the hedged exposure affects earnings. For a derivative designated as a net investment hedge, the effective portion of the derivative's gain or loss is reported as a component of the foreign currency translation adjustment, a component of OCI. The ineffective portions of all derivatives are recognized immediately into earnings. For a derivative not designated as a hedging instrument, the gain or loss is recognized in earnings in the period of change. The Company classifies the cash flows from hedging transactions in the same category as the cash flows from the respective hedged items. The adoption of SFAS 133 did not have a material impact on the Company's consolidated results of operations, financial position or cash flows. During the 26-week period ended April 1, 2001, the Company entered into forward foreign exchange contracts that qualify as cash flow hedges under SFAS 133 to hedge a portion of anticipated international revenue. In accordance with SFAS 133, cash flow hedges related to anticipated transactions are designated and documented at the inception of each hedge by matching the terms of the contract to the underlying transaction. Once established, cash flow hedges are generally not removed until maturity. The Company also entered into a forward foreign exchange contract that qualifies as a hedge of a net investment in a foreign operation. These contracts expire within 20 months and are intended to minimize certain foreign currency exposures that can be confidently identified and quantified. Forward contract effectiveness for cash flow hedges is calculated by comparing the fair value of the contract to the change in value of the anticipated transaction using forward rates on a monthly basis. Any ineffectiveness is recognized immediately in "Interest and other income, net" on the accompanying consolidated statement of earnings. There was no ineffectiveness related to cash flow hedges for the 26-week period ended April 1, 2001. For net investment hedges, the spot-to-spot method is used by the Company to calculate effectiveness. As a result of using this method, a net gain of $0.5 million was recognized in earnings during both the 13-week and 26-week periods ended April 1, 2001. The Company had accumulated derivative gains of $2.9 million, net of taxes, in OCI as of April 1, 2001 related to cash flow and net investment hedges. Of this amount, $1.3 million is expected to be reclassified into earnings within 12 months. 7
8 NOTE 5: PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are recorded at cost and consist of the following (in thousands): <TABLE> <CAPTION> April 1, October 1, 2001 2000 - ----------------------------------------------------------------------- <S> <C> <C> Land $ 5,084 $ 5,084 Building 19,795 19,795 Leasehold improvements 833,039 754,132 Roasting and store equipment 365,056 346,482 Furniture, fixtures and other 202,605 190,026 - ----------------------------------------------------------------------- 1,425,579 1,315,519 Less accumulated depreciation and amortization (520,078) (446,403) - ----------------------------------------------------------------------- 905,501 869,116 Work in progress 92,084 61,643 - ----------------------------------------------------------------------- Property, plant and equipment, net $ 997,585 $ 930,759 ======================================================================= </TABLE> NOTE 6: CAPITAL TRANSACTIONS On March 20, 2001, the Board of Directors approved a two-for-one stock split of its $0.001 par value common stock for holders of record on March 30, 2001. In connection therewith, the Company amended and restated its Articles of Incorporation to authorize the issuance of up to 600,000,000 shares of common stock, $0.001 par value per share. Accordingly, outstanding shares, stock options, and per share data presented herein have been retroactively restated for all periods. Paid-in capital was $818.8 million and $750.5 million as of April 1, 2001 and October 1, 2000, respectively. 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 earnings and other comprehensive income. Accumulated other comprehensive 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 and on derivative instruments designated and qualifying as cash flow and net investment hedges. Comprehensive income, net of related tax effects, is as follows (in thousands): <TABLE> <CAPTION> Three months ended Six months ended April 1, April 2, April 1, April 2, 2001 2000 2001 2000 - -------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net earnings $ 32,210 $ 23,406 $ 81,205 $ 58,155 Unrealized holding gains (losses) on available- for-sale investments 158 (12,547) (12) (1,409) Unrealized holding gains on cash flow hedges 1,488 -- 1,971 -- Unrealized holding gain on net investment hedge 886 -- 886 -- Reclassification adjustment for net (gains) losses realized in net earnings -- (151) 14 (151) - -------------------------------------------------------------------------------------- Net unrealized gain (loss) 2,532 (12,698) 2,859 (1,560) Translation adjustment (10,101) (4,270) (8,588) (577) - -------------------------------------------------------------------------------------- Total comprehensive income $ 24,641 $ 6,438 $ 75,476 $ 56,018 ====================================================================================== </TABLE> 8
9 NOTE 8: 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. The following table represents the calculation of net earnings per common share - -- basic (in thousands, except earnings per share data): <TABLE> <CAPTION> Three months ended Six months ended April 1, April 2, April 1, April 2, 2001 2000 2001 2000 - --------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net earnings $ 32,210 $ 23,406 $ 81,205 $ 58,155 Weighted average common shares and common stock units outstanding 380,363 369,570 378,825 368,212 ================================================================================= Net earnings per common share -- basic $ 0.08 $ 0.06 $ 0.21 $ 0.16 ================================================================================= </TABLE> The following table represents the calculation of net earnings per common and common equivalent share -- diluted (in thousands, except per share data): <TABLE> <CAPTION> Three months ended Six months ended April 1, April 2, April 1, April 2, 2001 2000 2001 2000 - ------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Net earnings $ 32,210 $ 23,406 $ 81,205 $ 58,155 Weighted average shares outstanding calculation: Weighted average common shares and common stock units outstanding 380,363 369,570 378,825 368,212 Dilutive effect of outstanding common stock options 15,338 15,265 15,854 13,871 - ------------------------------------------------------------------------------ Weighted average common and common equivalent shares outstanding 395,701 384,835 394,679 382,083 ============================================================================== Net earnings per common and common equivalent share -- diluted $ 0.08 $ 0.06 $ 0.21 $ 0.15 ============================================================================== </TABLE> NOTE 9: 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 merchandise through Company-operated retail stores in the United States and Canada. At the beginning of fiscal 2001, the Company combined its foodservice and domestic retail store licensing operations to form Business Alliances. As a result of this internal reorganization and the manner in which the operations of foodservice and domestic retail store licensing are measured and evaluated as one combined business unit, the Company's management has determined that separate segment reporting of Business Alliances is appropriate under SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." All prior period disclosures will be restated as if Business Alliances had always been a separately reported segment. The Company operates through several other business units, each of which is managed and evaluated independently. These other business units include domestic wholesale, grocery channel licensing, international Company-operated retail stores, international licensing, a direct-to-consumer business, and other ventures. 9
10 The tables below present information by operating segment (in thousands): <TABLE> <CAPTION> Three months ended Six months ended April 1, April 2, April 1, April 2, 2001 2000 2001 2000 - ---------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> REVENUES: North American retail $ 492,310 $ 408,525 $1,023,388 $ 830,589 Business Alliances 48,305 37,780 96,894 78,289 All other business units 101,967 66,509 198,078 137,404 Intersegment revenues (13,294) (6,146) (21,685) (10,282) - ---------------------------------------------------------------------------------------------------- Total revenues $ 629,288 $ 506,668 $1,296,675 $1,036,000 ==================================================================================================== - ---------------------------------------------------------------------------------------------------- OPERATING INCOME: North American retail $ 73,891 $ 54,307 $ 166,300 $ 118,060 Business Alliances 11,121 9,629 23,450 22,194 All other business units 15,813 6,978 28,898 17,066 Unallocated corporate expenses (48,770) (35,803) (90,366) (67,295) Intersegment eliminations (1,201) 96 (1,371) (185) Interest, net 1,560 2,242 3,273 3,656 - ---------------------------------------------------------------------------------------------------- Earnings before income taxes $ 52,414 $ 37,449 $ 130,184 $ 93,496 ==================================================================================================== </TABLE> The table below represents information by geographic area (in thousands): <TABLE> <CAPTION> Three months ended Six months ended April 1, April 2, April 1, April 2, 2001 2000 2001 2000 - ---------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> REVENUES FROM EXTERNAL CUSTOMERS: United States $ 567,632 $ 452,264 $1,166,200 $ 925,141 Foreign countries 61,656 54,404 130,475 110,859 - ---------------------------------------------------------------------------------------------------- Total revenues $ 629,288 $ 506,668 $1,296,675 $1,036,000 ==================================================================================================== </TABLE> Revenues from foreign countries are based on the location of the customers and consist primarily of revenues from Canada and the United Kingdom. 10
11 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 operations of Starbucks Corporation ("Starbucks" or the "Company"), 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 26-week period ending April 1, 2001, 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 fee income, and sales through its direct-to-consumer business and its on-line store. The Company's fiscal year ends on the Sunday closest to September 30. Fiscal year 2000 had 52 weeks. The fiscal year ending on September 30, 2001 will also include 52 weeks. RESULTS OF OPERATIONS -- FOR THE 13 WEEKS ENDED APRIL 1, 2001, COMPARED TO THE 13 WEEKS ENDED APRIL 2, 2000 SYSTEMWIDE RETAIL STORE SALES Systemwide retail store sales, which include net sales for both Company-operated and licensed retail stores, were $679 million for the second quarter of fiscal 2001, an increase of 30% from $521 million in the second quarter of fiscal 2000, primarily due to the opening of 554 stores in the last 12 months. Systemwide retail store sales provides a broader perspective of global brand sales; however, it excludes net revenues from non-retail channels. REVENUES Net revenues for the 13 weeks ended April 1, 2001 increased 24% to $629 million from $507 million for the corresponding period in fiscal 2000. Retail revenues increased 22% to $523 million from $429 million, primarily due to the opening of new retail stores plus an increase in comparable store sales of 6% for the period. The increase in comparable store sales (stores open for at least 13 months) resulted from a 1% increase in the number of transactions combined with a 5% increase in the average dollar value per transaction. During the 13 weeks ended April 1, 2001, the Company opened 138 stores in continental North America, 24 in the United Kingdom, 4 in Australia and 2 in Thailand. The Company ended the period with 2,702 Company-operated stores in continental North America and 222 Company-operated stores in international markets. Specialty revenues increased 37% to $106 million for the 13 weeks ended April 1, 2001, compared to $78 million for the corresponding period in fiscal 2000. The increase in specialty revenues was driven primarily by domestic and international licensees, the Company's grocery channel, foodservice accounts, and revenues from the remainder of a commercial agreement with Kozmo.com, Inc. ("Kozmo.com"). Licensees (including those in which the Company has an equity interest) opened 86 stores in continental North America and 64 stores in international markets. The Company ended the period with 712 licensed stores in continental North America and 499 licensed stores in international markets. GROSS MARGIN Gross margin increased to 56.9% for the 13 weeks ended April 1, 2001 from 55.5% for the corresponding period in fiscal 2000. The improvement in gross margin was primarily due to the impact of beverage sales price increases, lower green coffee costs, and leverage gained from the growth of non-product revenues such as royalties and other fees, partially offset by higher retail occupancy costs. 11
12 JOINT VENTURE INCOME Joint venture income was $6.2 million for the second quarter of fiscal 2001, compared to $3.8 million in the second quarter of fiscal 2000. The increase was due to the improved profitability of both the North American Coffee Partnership and Starbucks Coffee Japan Limited. EXPENSES Store operating expenses as a percentage of retail revenues increased to 39.9% for the 13 weeks ended April 1, 2001, from 39.5% for the corresponding period in fiscal 2000. The increase was primarily due to higher pre-opening and recruiting expenses in the United Kingdom and other Company-owned international markets as the Company continues to expand these markets and fill key positions within the organization. In addition, retail revenues generated by the United Kingdom were adversely affected by an unusually wet winter, regional fuel crisis and to a lesser extent, increased competition. Other operating expenses (expenses associated with all operations other than Company-owned retail) were 22.4% of specialty revenues for the 13 weeks ended April 1, 2001, compared to 26.0% for the corresponding period in fiscal 2000 due to lower payroll-related and marketing expenditures. Depreciation and amortization expenses were 6.1% of net revenues for the 13 weeks ended April 1, 2001, compared to 6.3% for the corresponding period in fiscal 2000 because of increased royalties and fees from domestic and international licensing activity. General and administrative expenses as a percentage of net revenues were 6.7% for the 13 weeks ended April 1, 2001, compared to 5.6% for the corresponding period in fiscal 2000. The increase was primarily due to payroll-related expenditures and non-insured expenses associated with the Nisqually earthquake that occurred on February 28, 2001. There were no similar non-insured expenses in fiscal 2000. INTEREST AND OTHER INCOME, NET Net interest and other income decreased to 0.2% of net revenues for the 13 weeks ended April 1, 2001 from 0.4% of net revenues for the corresponding period in fiscal 2000. The decrease was primarily due to the $2.0 million write-off of the Company's remaining investment in Kozmo.com, which ceased its operations. INCOME TAXES The Company's effective tax rate was 38.5% for the 13 weeks ended April 1, 2001 compared to 37.5% in the corresponding period in fiscal 2000. The increase was due to the establishment of a valuation allowance against capital losses that management has determined may ultimately not be realizable for tax purposes. Excluding the effect of these losses, the effective tax rate for the 13 weeks ended April 1, 2001 was 37.0%. Management expects tax planning efforts to maintain the effective tax rate at 37.0% for the remainder of fiscal 2001. RESULTS OF OPERATIONS -- FOR THE 26 WEEKS ENDED APRIL 1, 2001, COMPARED TO THE 26 WEEKS ENDED APRIL 2, 2000 SYSTEMWIDE RETAIL STORE SALES Systemwide retail store sales were $1.4 billion for the 26 weeks ended April 1, 2001, an increase of 35% from $1.0 billion for the same period in fiscal 2000 primarily due to the opening of additional stores in the last 12 months. REVENUES Net revenues for the 26 weeks ended April 1, 2001, increased 25% to $1.3 billion from $1.0 billion for the corresponding period in fiscal 2000. Retail revenues increased 25% to $1.1 billion from $870 million primarily due to the opening of new retail stores plus an increase in comparable store sales of 8% for the period. The increase in comparable store sales resulted from a 3% increase in the number of transactions combined with a 5% increase in the average dollar value per transaction. During the 26 weeks ended April 1, 2001, the Company opened 256 stores in continental North America, 38 in the United Kingdom, 6 in Australia and 5 in Thailand. 12
13 Specialty revenues increased 27% to $211 million for the 26 weeks ended April 1, 2001, compared to $166 million for the corresponding period in fiscal 2000. The increase in specialty revenues was driven primarily by higher revenues from domestic and international licensees, the Company's grocery channel, the remainder of the Company's commercial agreement with Kozmo.com, and foodservice accounts. Licensees opened 182 stores in continental North America and 147 stores in international markets. GROSS MARGIN Gross margin increased to 56.6% for the 26 weeks ended April 1, 2001 from 55.0% for the corresponding period in fiscal 2000. The improvement in gross margin was primarily due to the impact of beverage sales price increases, lower green coffee costs, and leverage gained from non-product revenues, partially offset by higher international retail occupancy costs. JOINT VENTURE INCOME Joint venture income was $11.0 million for the 26 weeks ended April 1, 2001, compared to $7.2 million for the corresponding period in fiscal 2000. The increase was due to the improved profitability of both Starbucks Coffee Japan Limited and the North American Coffee Partnership. EXPENSES Store operating expenses as a percentage of retail revenues increased to 38.5% for the 26 weeks ended April 1, 2001, from 38.3% for the corresponding period in fiscal 2000. The increase was due to higher business taxes and increased provisions for store remodels and relocations, partially offset by lower advertising expenditures as a percent of retail revenues. Other operating expenses were 21.6% of specialty revenues for the 26 weeks ended April 1, 2001, compared to 22.8% for the corresponding period in fiscal 2000. The decrease was due to lower marketing and payroll-related expenditures, primarily associated with the Company's direct-to-consumer programs. General and administrative expenses as a percentage of net revenues were 6.0% for the 26 weeks ended April 1, 2001 compared to 5.3% for the corresponding period in fiscal 2000. This increase was primarily due to payroll-related expenditures and non-insured expenses associated with the Nisqually earthquake. There were no similar non-insured expenses in fiscal 2000. LIQUIDITY AND CAPITAL RESOURCES The Company ended the period with total cash and cash equivalents and short-term investments of $266 million and working capital of $218 million. Cash and cash equivalents increased by $144 million for the 26 weeks ended April 1, 2001 to $215 million. Cash provided by operating activities totaled $267 million for the first 26 weeks of fiscal 2001, resulting primarily from net earnings before non-cash charges of $196 million and a decrease in inventories of $50 million. Cash used by investing activities for the first 26 weeks of fiscal 2001 totaled $161 million. This included capital additions to property, plant and equipment of $162 million related to opening 305 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. During the 26-week period ending April 1, 2001, the Company made equity investments of $12 million in its international joint ventures and received $4 million in distributions primarily from the North American Coffee Partnership. 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 26-week period provided $11 million. 13
14 Cash provided by financing activities for the first 26 weeks of fiscal 2001 totaled $38 million. This included $36 million generated from the exercise of employee stock options and $6 million 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 may receive a tax deduction; however, neither the amounts nor timing can be predicted. Cash requirements for the remainder of fiscal 2001, 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 500 Company-operated stores in continental North America and 100 Company-operated stores in international markets during fiscal 2001. 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 2001 to be approximately $248 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 2001. New joint ventures, other new business opportunities or store expansion rates substantially in excess of that presently planned may require outside funding. 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 April 1, 2001, the Company had approximately $167 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 2001. 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. In addition to fluctuating green 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, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. 14
15 NEW ACCOUNTING STANDARDS In September 2000, the Emerging Issues Task Force ("EITF") reached a consensus regarding Issue 00-10, "Accounting for Shipping and Handling Fees and Costs," which requires any shipping and handling costs billed to customers in a sale transaction to be classified as revenue. The Company adopted Issue 00-10 on October 2, 2000. Issue 00-10 did not have material impact on the Company's consolidated financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk related to changes in interest rates, equity security prices and foreign currency exchange rates. INTEREST RATE RISK The Company's diversified available-for-sale portfolio consists mainly of fixed income instruments. The objectives of these investments are to preserve capital and liquidity without significantly increasing risk to the Company. Available-for-sale securities are of investment grade and are recorded on the balance sheet at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive loss. The Company does not hedge its interest rate exposure. EQUITY SECURITY PRICE RISK The Company has minimal exposure to price fluctuations on equity mutual funds within the trading portfolio. The trading securities are designated to approximate the Company's liability under the Management Deferred Compensation Plan ("MDCP"). A corresponding liability is included in "Accrued compensation and related costs" on the accompanying consolidated balance sheets. These investments are recorded at fair value with unrealized gains and losses recognized in "Interest and other income, net." The offsetting changes in the MDCP liability are recorded in "General and administrative expenses" on the accompanying consolidated statements of earnings. The Company also has an equity investment in a privately held company that could be considered to be in the start-up or development stages. The Company could lose its entire investment because this type of company is inherently risky. The investment is recorded on the accompanying consolidated balance sheet at a fair value of $1.6 million as of April 1, 2001. FOREIGN CURRENCY EXCHANGE RISK The majority of the Company's revenue, expense and capital purchasing activities are transacted in United States dollars. However, because a portion of the Company's operations consists of activities outside of the United States, the Company has transactions in other currencies, primarily the Canadian dollar, British pound and Japanese yen. As part of its risk management strategy, the Company frequently evaluates its foreign currency exchange risk by monitoring market data and external factors that may influence exchange rate fluctuations. As a result, the Company may engage in transactions involving various derivative instruments, with maturities generally not exceeding five years, to hedge assets, liabilities, revenues and purchases denominated in foreign currencies. During the 26 weeks ended April 1, 2001, the Company entered into forward foreign exchange contracts that qualify as cash flow hedges under SFAS 133 to hedge a portion of anticipated international revenue. In addition, the Company entered into a forward foreign exchange contract that qualifies as a hedge of a net investment in a foreign operation. These contracts expire within 20 months. 15
16 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On March 20, 2001, the Board of Directors approved a two-for-one stock split, effected in the form of a stock dividend, of its $0.001 par value common stock for holders of record on March 30, 2001. In connection therewith, the Company amended and restated its Articles of Incorporation to authorize the issuance of up to 600,000,000 shares of common stock, $0.001 par value per share. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of shareholders of the Company was held on March 20, 2001 for the purposes of (i) electing three Class 1 directors to serve until the Annual Meeting of Shareholders to be held in early 2004 and (ii) ratifying the selection of the independent auditors for fiscal 2001. All proposals were approved. The table below shows the results of the shareholders' voting: <TABLE> <CAPTION> Votes in Votes Votes Withheld Favor Against Abstentions ----------- ------------ -------------- <S> <C> <C> <C> Election of Directors Class 1 Directors: Gregory B. Maffei 165,435,930 0 1,482,287 Arlen I. Prentice 165,475,468 0 1,442,749 Orin C. Smith 165,312,637 0 1,605,580 Ratification of independent auditors 166,081,340 192,329 644,548 </TABLE> Because all proposals were routine, there were no broker non-votes. The following members of the Board of Directors, who were not up for re-election during the current year, have terms that expire at the annual meeting of shareholders to be held in early 2002 and 2003: <TABLE> <CAPTION> Term expires at the Director annual meeting held in: - ------------------------------------------------------------------------- <S> <C> Barbara Bass 2002 Craig J. Foley 2002 Howard Schultz 2002 Howard P. Behar 2003 James G. Shennan, Jr. 2003 Craig E. Weatherup 2003 </TABLE> 16
17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 3.1 Starbucks Corporation Amended and Restated Articles of Incorporation (b) Current Reports on Forms 8-K filed during the 26 weeks ended April 1, 2001: 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: May 15, 2001 By: /s/ Michael Casey ----------------------------------- Michael Casey executive vice president and chief financial officer Signing on behalf of the registrant and as principal financial officer 17
18 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION ----------- ------------ 3.1 Starbucks Corporation Amended and Restated Articles of Incorporation