Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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, 2011

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

Incorporation or Organization)

 

(IRS Employer

Identification No.)

2401 Utah Avenue South, Seattle, Washington 98134

(Address of principal executive offices)

(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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Title   Shares Outstanding as of January 28, 2011
Common Stock, par value $0.001 per share   746.0 million

 

 

 


Table of Contents

STARBUCKS CORPORATION

FORM 10-Q

For the Quarterly Period Ended January 2, 2011

Table of Contents

 

         Page      
PART I. FINANCIAL INFORMATION   

Item 1 Financial Statements (Unaudited):

     3   

Condensed Consolidated Statements of Earnings

     3   

Condensed Consolidated Balance Sheets

     4   

Condensed Consolidated Statements of Cash Flows

     5   

Notes to Condensed Consolidated Financial Statements

     6   

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations

     14   

Item 3 Quantitative and Qualitative Disclosures About Market Risk

     22   

Item 4 Controls and Procedures

     22   
PART II. OTHER INFORMATION   

Item 1 Legal Proceedings

     23   

Item 1A Risk Factors

     23   

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

     23   

Item 6 Exhibits

     24   

Signatures

     25   

Index to Exhibits

  


Table of Contents

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

STARBUCKS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(in millions, except per share data)

(unaudited)

 

     13 Weeks Ended  

Fiscal Year Ended

  

Jan 2,

2011

    

Dec 27,

2009

 

Net revenues:

     

Company-operated retail

     $2,451.3         $2,292.9   

Specialty:

     

Licensing

     378.8         326.1   

Foodservice and other

     120.7         103.7   
                 

Total specialty

     499.5         429.8   
                 

Total net revenues

     2,950.8         2,722.7   

Cost of sales including occupancy costs

     1,200.8         1,145.7   

Store operating expenses

     905.7         896.1   

Other operating expenses

     92.5         71.9   

Depreciation and amortization expenses

     127.8         130.6   

General and administrative expenses

     156.6         136.9   

Restructuring charges

     0.0         18.3   
                 

Total operating expenses

     2,483.4         2,399.5   

Income from equity investees

     34.5         29.4   
                 

Operating income

     501.9         352.6   

Interest income and other, net

     14.4         25.1   

Interest expense

     (7.9)         (8.2)   
                 

Earnings before income taxes

     508.4         369.5   

Income taxes

     160.8         126.0   
                 

Net earnings including noncontrolling interests

     347.6         243.5   

Net earnings attributable to noncontrolling interests

     1.0         2.0   
                 

Net earnings attributable to Starbucks

     $346.6         $241.5   
                 

Earnings per share - basic

     $0.46         $0.32   

Earnings per share - diluted

     $0.45         $0.32   

Weighted average shares outstanding:

     

Basic

     745.7         744.2   

Diluted

     766.7         762.9   

Cash dividends declared per share

     $0.13         $0.00   

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

STARBUCKS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except per share data)

(unaudited)

 

    

Jan 2,

2011

    

Oct 3,

2010

 
ASSETS   

Current assets:

     

Cash and cash equivalents

   $ 1,792.0       $ 1,164.0   

Short-term investments — available-for-sale securities

     204.5         236.5   

Short-term investments — trading securities

     54.1         49.2   

Accounts receivable, net

     316.1         302.7   

Inventories

     620.5         543.3   

Prepaid expenses and other current assets

     151.0         156.5   

Deferred income taxes, net

     262.2         304.2   
                 

Total current assets

     3,400.4         2,756.4   

Long-term investments — available-for-sale securities

     130.6         191.8   

Equity and cost investments

     352.9         341.5   

Property, plant and equipment, net

     2,393.6         2,416.5   

Other assets

     317.9         346.5   

Other intangible assets

     71.9         70.8   

Goodwill

     263.8         262.4   
                 

TOTAL ASSETS

   $ 6,931.1       $ 6,385.9   
                 
LIABILITIES AND EQUITY   

Current liabilities:

     

Accounts payable

     296.8         282.6   

Accrued compensation and related costs

     306.6         400.0   

Accrued occupancy costs

     163.7         173.2   

Accrued taxes

     115.8         100.2   

Insurance reserves

     151.3         146.2   

Other accrued liabilities

     314.0         262.8   

Deferred revenue

     608.2         414.1   
                 

Total current liabilities

     1,956.4         1,779.1   

Long-term debt

     549.4         549.4   

Other long-term liabilities

     365.0         375.1   
                 

Total liabilities

     2,870.8         2,703.6   

Shareholders’ equity:

     

Common stock ($0.001 par value) — authorized, 1,200.0 shares; issued and outstanding, 748.8 and 742.6 shares, respectively (includes 3.4 common stock units in both periods)

     0.7         0.7   

Additional paid-in capital

     228.9         106.2   

Other additional paid-in-capital

     39.4         39.4   

Retained earnings

     3,720.1         3,471.2   

Accumulated other comprehensive income

     62.6         57.2   
                 

Total shareholders’ equity

     4,051.7         3,674.7   

Noncontrolling interests

     8.6         7.6   
                 

Total equity

     4,060.3         3,682.3   
                 

TOTAL LIABILITIES AND EQUITY

   $ 6,931.1       $ 6,385.9   
                 

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

STARBUCKS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions, unaudited)

 

                 13 weeks ended               
    

Jan 2,

2011

    

Dec 27,

2009

 

OPERATING ACTIVITIES:

     

Net earnings including noncontrolling interests

     $347.6         $243.5   

Adjustments to reconcile net earnings to net cash provided by operating activities:

     

Depreciation and amortization

     135.3         138.2   

Provision for impairments and asset disposals

     17.2         37.2   

Deferred income taxes, net

     53.7         1.0   

Equity in income of investees

     (25.3)         (16.3)   

Distributions of income from equity investees

     17.9         21.2   

Stock-based compensation

     36.5         24.3   

Tax benefit from exercise of stock options

     11.9         5.3   

Excess tax benefit from exercise of stock options

     (36.6)         (8.6)   

Other

     (3.8)         (7.3)   

Cash provided/(used) by changes in operating assets and liabilities:

     

Inventories

     (77.6)         120.7   

Accounts payable

     15.4         (43.8)   

Accrued taxes

     37.6         69.5   

Deferred revenue

     193.0         180.3   

Other operating assets

     20.9         38.8   

Other operating liabilities

     (70.1)         (35.3)   
                 

Net cash provided/(used) by operating activities

     673.6         768.7   

INVESTING ACTIVITIES:

     

Purchase of available-for-sale securities

     (21.0)         (9.6)   

Maturities and calls of available-for-sale securities

     113.8         21.8   

Acquisitions, net of cash acquired

     0.0         (10.6)   

Net purchases of equity, other investments and other assets

     (0.7)         (1.9)   

Additions to property, plant and equipment, net

     (128.9)         (99.7)   
                 

Net cash provided/(used) by investing activities

     (36.8)         (100.0)   

FINANCING ACTIVITIES:

     

Proceeds from issuance of common stock

     62.3         38.1   

Excess tax benefit from exercise of stock options

     36.6         8.6   

Principal payments on long-term debt

     0.0         (6.5)   

Cash dividends paid

     (96.9)         0.0   

Repurchase of common stock

     (11.8)         0.0   

Other

     (0.1)         (0.4)   
                 

Net cash provided/(used) by financing activities

     (9.9)         39.8   

Effect of exchange rate changes on cash and cash equivalents

     1.1         (2.0)   
                 

Net increase/(decrease) in cash and cash equivalents

     628.0         706.5   

CASH AND CASH EQUIVALENTS:

     

Beginning of period

     1,164.0         599.8   
                 

End of period

     $1,792.0         $1,306.3   
                 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

     

Cash paid during the period for:

     

Interest, net of capitalized interest

     $0.0         $0.0   

Income taxes

     $49.2         $52.2   

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

STARBUCKS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the 13 Weeks Ended January 2, 2011

(unaudited)

Note 1: Summary of Significant Accounting Policies

Financial Statement Preparation

The unaudited condensed consolidated financial statements as of January 2, 2011, and for the 13-week periods ended January 2, 2011 and December 27, 2009, have been prepared by Starbucks Corporation under the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, the financial information for the 13-week periods ended January 2, 2011 and December 27, 2009 reflects all adjustments and accruals, which are of a normal recurring nature, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. In this Quarterly Report on Form 10-Q (“10-Q”) Starbucks Corporation is referred to as “Starbucks,” the “Company,” “we,” “us” or “our”.

The financial information as of October 3, 2010 is derived from our audited consolidated financial statements and notes for the fiscal year ended October 3, 2010 (“fiscal 2010”), included in Item 8 in the Fiscal 2010 Annual Report on Form 10-K (the “10-K”). The information included in this 10-Q should be read in conjunction with the footnotes and management’s discussion and analysis of the financial statements in the 10-K.

The results of operations for the 13-week period ended January 2, 2011 are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending October 2, 2011 (“fiscal 2011”).

Recent Accounting Pronouncements

In June 2009, the FASB issued authoritative guidance on the consolidation of variable interest entities. We adopted this new guidance effective at the beginning of the first quarter of fiscal 2011, with no impact on our financial statements.

Note 2: Derivative Financial Instruments

Cash Flow Hedges

Net derivative losses of $17.6 million and $13.9 million, net of taxes, were included in accumulated other comprehensive income as of January 2, 2011 and October 3, 2010, respectively, related to cash flow hedges. Of the net derivative losses accumulated as of January 2, 2011, $8.9 million pertain to hedging instruments that will be dedesignated within 12 months and will also continue to experience fair value changes before affecting earnings. Ineffectiveness from hedges that were discontinued during the year-to-date periods in fiscal 2011 and 2010 was not material. Outstanding contracts will expire within 33 months.

Net Investment Hedges

Net derivative losses of $28.9 million and $26.7 million, net of taxes, were included in accumulated other comprehensive income as of January 2, 2011 and October 3, 2010, respectively, related to net investment derivative hedges. Outstanding contracts will expire within 27 months.

Other Derivatives

To mitigate the translation risk of certain balance sheet items, we enter into certain foreign currency forward contracts that are not designated as hedging instruments. These contracts are recorded at fair value, with the changes in fair value recognized in net interest income and other on the consolidated statements of earnings. Gains and losses from these instruments are largely offset by the financial impact of translating foreign currency denominated payables and receivables, which are also recognized in net interest income and other.

We also enter into certain swap and futures contracts from time to time that are not designated as hedging instruments to mitigate the price uncertainty of a portion of our future purchases of dairy products and diesel fuel. These contracts are recorded at fair value, with the changes in fair value recognized in net interest income and other on the consolidated statement of earnings.

 

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The following table presents the pretax effect of derivative instruments on other comprehensive income and earnings for the 13-week period ended (in millions):

 

     Cash Flow Hedges      Net Investment Hedges      Other Derivatives  
     Jan 2, 2011        Dec 27, 2009        Jan 2, 2011        Dec 27, 2009        Jan 2, 2011        Dec 27, 2009    

Gain/(Loss) recognized in earnings

     ($2.8)        ($1.0)         $0.0        $0.0         $1.7        ($1.4)   

Gain/(Loss) recognized in OCI

     ($8.2)        ($6.4)         ($3.5)        $1.3        

Notional amounts of outstanding derivative contracts as of January 2, 2011:

 

   

$601 million in foreign exchange contracts

 

   

$23 million in dairy contracts

Note 3: Investments

Fair value of investments (in millions):

 

    

Jan 2, 2011

    

Oct 3, 2010

 

Short-term investments:

     

Available-for-sale securities - Agency obligations

     $27.0          $30.0    

Available-for-sale securities - Corporate debt securities

     37.6          15.0    

Available-for-sale securities - State and local government obligations

     0.0          0.7    

Available-for-sale securities - Government treasury securities

     139.9          190.8    

Trading securities

     54.1          49.2    
                 

Total short-term investments

     $258.6          $285.7    
                 

Long-term investments:

     

Available-for-sale securities – Agency obligations

     $0.0          $27.0    

Available-for-sale securities - Corporate debt securities

     93.7          123.5    

Available-for-sale securities - State and local government obligations

     36.9          41.3    
                 

Total long-term investments

     $130.6          $191.8    
                 

Gross unrealized holding gains and losses were not material at January 2, 2011 and October 3, 2010.

In the first quarter of fiscal 2011, $5.8 million of our auction rate securities (“ARS”), which are included in long-term available-for-sale state and local government obligations, were called at par.

 

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Note 4: Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis (in millions):

 

            Fair Value Measurements at Reporting Date Using  
           
     Balance at Jan 2,
2011
         Quoted Prices in
    Active
    Markets for
    Identical Assets
    (Level 1)
     Significant Other
Observable Inputs
(Level 2)
    

Significant      
Unobservable      
Inputs       

(Level 3)      

 
        

Assets:

           

Available-for-sale securities

     $335.1         $139.9         $158.3         $36.9     

Trading securities

     54.1         54.1         0.0         0.0     
        

Total

     $389.2         $194.0         $158.3         $36.9     
        

Liabilities:

           

Derivatives

     $39.8         $0.0         $39.8         $0.0     
            Fair Value Measurements at Reporting Date Using  
           
     Balance at Oct 3,
2010
    

    Quoted Prices in
    Active

    Markets for
    Identical Assets
    (Level 1)

     Significant Other
Observable Inputs
(Level 2)
    

Significant      
Unobservable      
Inputs       

(Level 3)      

 
        

Assets:

           

Available-for-sale securities

     $428.3         $190.8         $196.2         $41.3     

Trading securities

     49.2         49.2         0.0         0.0     
        

Total

     $477.5         $240.0         $196.2         $41.3     
        

Liabilities:

           

Derivatives

     $34.7         $0.0         $34.7         $0.0     

Changes in Level 3 Instruments Measured at Fair Value on a Recurring Basis

Financial instruments measured using level 3 inputs described above are comprised entirely of our ARS. Changes in this balance relate primarily to calls of certain of our ARS as discussed in Note 3.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis (in millions)

Assets and liabilities recognized or disclosed at fair value in the financial statements on a nonrecurring basis include items such as property, plant and equipment, equity and cost method investments, and other assets. These assets are measured at fair value if determined to be impaired.

 

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During the 13 weeks ended January 2, 2011 and December 27, 2009, we recognized fair market value adjustments with a charge to earnings for these assets as follows:

 

13 weeks ended January 2, 2011          Carrying
      Value before
       adjustment
     Fair value    
adjustment    
    Carrying      
value after      
adjustment      
 
           

Property, plant and equipment (1)

     $1.1         ($0.9     $0.2     

Other assets (2)

     $24.2         ($14.0     $10.2     
13 weeks ended December 27, 2009          Carrying    
      Value before    
      adjustment    
     Fair value    
adjustment    
    Carrying      
value after      
adjustment      
 
        

Property, plant and equipment (1)

     $13.9         ($11.1     $2.8     

Equity and cost investments (3)

     $9.6         ($7.5     $2.1     

 

 

(1)

These assets primarily consist of leasehold improvements in underperforming stores. The fair value was determined using a discounted cash flow model based on future store revenues and operating costs, using internal projections. The resulting impairment charge was included in store operating expenses.

(2)

The fair value was determined using a discounted cash flow model based on future expected revenues and operating costs, using internal projections. The resulting impairment charge was included in other operating expenses.

(3)

The fair value was determined using valuation techniques, including discounted cash flows, comparable transactions, and comparable company analyses. The resulting impairment charge was included in other operating expenses.

Fair Value of Other Financial Instruments

The carrying value of cash and cash equivalents approximates fair value because of the short-term nature of those instruments. The estimated fair value of the $550 million of 6.25% Senior Notes was approximately $618 million and $637 million as of January 2, 2011 and October 3, 2010, respectively.

Note 5: Inventories (in millions)

 

    

Jan 2, 2011

    

Oct 3, 2010

    

Dec 27, 2009

 

Coffee:

        

Unroasted

     $336.3          $238.3          $289.6    

Roasted

     89.7          95.1          76.1    

Other merchandise held for sale

     105.6          115.6          94.9    

Packaging and other supplies

     88.9          94.3          84.3    
                          

Total

     $620.5          $543.3          $544.9    
                          

Inventory levels vary due to seasonality driven primarily by the holiday season, commodity market supply and price variations, and changes in our use of fixed-price and price-to-be-fixed coffee contracts.

As of January 2, 2011, we had committed to purchasing green coffee totaling $477 million under fixed-price contracts and an estimated $184 million under price-to-be-fixed contracts. Price-to-be-fixed contracts are purchase commitments whereby the quality, quantity, delivery period, and other negotiated terms are agreed upon, but the date at which the base “C” coffee commodity price component will be fixed has not yet been established. For these types of contracts, either Starbucks or the seller has the option to “fix” the base “C” coffee commodity price prior to the delivery date. Until prices are fixed, we estimate the total cost of these purchase commitments. We believe, based on relationships established with our suppliers in the past, the risk of non-delivery on these purchase commitments is remote.

 

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Note 6: Property, Plant and Equipment (in millions)

 

    

Jan 2, 2011

    

Oct 3, 2010

 

Land

     $58.0          $58.0    

Buildings

     267.8          265.7    

Leasehold improvements

     3,467.7          3,435.6    

Store equipment

     1,072.7          1,047.7    

Roasting equipment

     290.6          290.6    

Furniture, fixtures and other

     626.6          617.5    

Work in progress

     173.4          173.6    
                 
     5,956.8          5,888.7    

Less accumulated depreciation

     (3,563.2)         (3,472.2)   
                 

Property, plant and equipment, net

     $2,393.6          $2,416.5    
                 

Note 7: Other Liabilities (in millions)

    

Jan 2, 2011

    

Oct 3, 2010

 

Accrued dividend payable

     97.3          96.5    

Other

     216.7          166.3    
                 

Total other accrued liabilities

     $314.0          $262.8    
                 

Deferred rent

     $234.9          $239.7    

Unrecognized tax benefits

     56.0          65.1    

Asset retirement obligations

     48.5          47.7    

Other

     25.6          22.6    
                 

Total other long term liabilities

     $365.0          $375.1    
                 

Note 8: Equity

Components of total equity (in millions):

    

13 Weeks Ended

 
    

Jan 2, 2011

   

Dec 27, 2009

 

Beginning balance of total equity

   $         3,682.3      $         3,056.9   

Net earnings including noncontrolling interest

     347.6        243.5   

Other comprehensive income / (loss)

     5.4        (7.2
                

Comprehensive income

     353.0        236.3   

Stock-based compensation expense

     37.1        24.3   

Exercise of stock options

     92.5        41.9   

Sale of common stock

     4.9        5.1   

Repurchase of common stock

     (11.8     -       

Cash dividends declared

     (97.7     -       

Net distributions to noncontrolling interests

     -            (0.4
                

Ending balance of total equity

   $ 4,060.3      $ 3,364.1   

Changes in noncontrolling interests for the 13 weeks ended January 2, 2011 and December 27, 2009 are not presented as they were not material.

In addition to 1.2 billion shares of authorized common stock with $0.001 par value per share, the Company has authorized 7.5 million shares of preferred stock, none of which was outstanding as of January 2, 2011.

 

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Share repurchase activity during the first quarter of fiscal 2011 (in millions, except for average price data):

 

Number of shares acquired

     0.4   

Average price per share of acquired shares

     $30.63   

Total cost of acquired shares

     $11.8   

As of January 2, 2011, 9.7 million shares remained available for repurchase under the current authorization. The Company did not repurchase any shares during the first quarter of fiscal 2010.

During the first quarter of fiscal 2011, Starbucks Board of Directors declared a quarterly cash dividend to shareholders of $0.13 per share to be paid on February 25, 2011, to shareholders of record on the close of business on February 9, 2011. The accrued dividend payable of $97.3 million is recorded in other accrued liabilities on the consolidated balance sheet.

Components of accumulated other comprehensive income, net of tax (in millions):

 

    

Jan 2, 2011

   

Oct 3, 2010

 

Net unrealized gains / (losses) on available-for-sale securities

   $ (0.7   $ (0.9

Net unrealized gains / (losses) on hedging instruments

     (46.5     (40.5

Translation adjustment

     109.8        98.6   
                

Accumulated other comprehensive income

   $             62.6      $             57.2   
                

Note 9: Employee Stock Plans

As of January 2, 2011, there were 23.8 million shares of common stock available for issuance pursuant to future equity-based compensation awards and employee stock purchase plans (“ESPP”).

Stock-based compensation expense recognized in the consolidated statement of earnings (in millions):

 

    

13 Weeks Ended

 
    

Jan 2, 2011

   

Dec 27, 2009

 

Options

   $             17.9      $             17.9   

RSUs

     18.6        6.4   
                

Total stock-based compensation

   $ 36.5      $ 24.3   
                

Value of awards granted and exercised during the period:

    
    

13 Weeks Ended

 
    

Jan 2, 2011

   

Dec 27, 2009

 

Estimated fair value per option granted

   $ 9.40      $ 8.34   

Weighted average option grant price

   $ 30.79      $ 22.07   

Weighted average price per option exercised

   $ 13.62      $ 11.86   

Weighted average RSU grant price

   $ 30.79      $ 22.05   
Stock option and RSU transactions from October 3, 2010 through January 2, 2011 (in millions):   
    

Stock Option

   

RSUs

 

Options outstanding/Nonvested RSUs, October 3, 2010

     60.7        5.4   

Options/RSUs granted

     3.8        5.2   

Options exercised/RSUs vested

     (5.2     (1.6

Options/RSUs forfeited/expired

     (1.2     (0.2
                

Options outstanding/Nonvested RSUs, January 2, 2011

     58.1        8.8   
                

Total unrecognized stock-based compensation expense, net of estimated forfeitures, as of January 2, 2011

   $ 79      $ 116   

 

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Note 10: Earnings Per Share

Calculation of net earnings per common share (“EPS”) basic and diluted (in millions, except EPS):

 

    

13 Weeks Ended

 
    

Jan 2, 2011

    

Dec 27, 2009

 

Net earnings attributable to Starbucks

     $346.6         $241.5   

Weighted average common shares and common stock units outstanding (for basic calculation)

     745.7         744.2   

Dilutive effect of outstanding common stock options and RSUs

     21.0         18.7   
                 

Weighted average common and common equivalent shares outstanding (for diluted calculation)

     766.7         762.9   
                 

EPS — basic

     $0.46         $0.32   

EPS — diluted

     $0.45         $0.32   

Potential dilutive shares consist of the incremental common shares issuable upon the exercise of outstanding stock options (both vested and non-vested) and unvested RSUs, using the treasury stock method. Potential dilutive shares are excluded from the computation of earnings per share if their effect is antidilutive. The number of antidilutive options totaled 7 million and 21 million for the 13-week periods ended January 2, 2011 and December 27, 2009, respectively.

Note 11: Commitments and Contingencies

Legal Proceedings

In the first quarter of fiscal 2011, Starbucks notified Kraft Foods Global, Inc. (“Kraft”) that we are discontinuing our licensing relationships with Kraft on March 1, 2011 due to material breaches by Kraft of its obligations under the Supply and License Agreement between the Company and Kraft, dated March 29, 2004 (the “Agreement”), which defines the main licensing relationship between the parties. Through our relationships with Kraft, Starbucks sells a selection of Starbucks and Seattle’s Best Coffee® branded packaged coffees in grocery and warehouse club stores throughout the US, and to grocery stores in Canada, the UK and other European countries. Kraft manages the distribution, marketing, advertising and promotion of these products.

On November 29, 2010, Starbucks received a notice of arbitration from Kraft putting the commercial dispute between the parties into binding arbitration pursuant to the terms of the Agreement. Kraft denies it has materially breached the Agreement. Kraft further alleges that if the Company wishes to terminate the Agreement it must compensate Kraft as provided in the Agreement in an amount equal to the fair value of the Agreement, with an additional premium of up to 35% under certain circumstances.

On December 6, 2010 Kraft commenced a federal court action against Starbucks, entitled Kraft Foods Global, Inc. v. Starbucks Corporation, in the U.S. District Court for the Southern District of New York (the “District Court”) seeking injunctive relief to prevent Starbucks from terminating the relationship until the parties’ dispute is resolved through the arbitration proceeding. On January 28, 2011, the District Court denied Kraft’s request for injunctive relief. Kraft has appealed the District Court’s decision and is seeking expedited consideration of its appeal by the Second Circuit Court of Appeals.

While Starbucks believes we have valid claims of material breach by Kraft under the Agreement that allow us to terminate the Agreement and certain other relationships with Kraft without compensation to Kraft, there exists the possibility of material adverse outcomes to Starbucks under the arbitration. At this time the Company is unable to estimate the range of possible outcomes with respect to this matter.

Starbucks is party to various other legal proceedings arising in the ordinary course of business, but, except as noted above, is not currently a party to any legal proceeding that management believes could have a material adverse effect on our consolidated financial position or results of operations.

 

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Note 12: Segment Reporting

Segment information is prepared on the same basis that management reviews financial information for operational decision making purposes. The tables below present information by operating segment (in millions):

 

13 Weeks Ended

January 2, 2011

  

United States

    

International

    

CPG

    

Other

   

Total

 

Total net revenues

   $          2,067.7       $             640.0       $     195.2       $       47.9      $ 2,950.8   

Depreciation and amortization expenses

     86.7         27.8         0.8         12.5        127.8   

Income (loss) from equity investees

     0.0         20.3         14.4         (0.2     34.5   

Operating income/(loss)

     452.5         104.5         67.5         (122.6     501.9   

December 27, 2009

             

Total net revenues

   $ 1,923.5       $ 588.7       $ 174.3       $ 36.1      $ 2,722.7   

Depreciation and amortization expenses

     89.6         28.2         1.0         11.8        130.6   

Income (loss) from equity investees

     0.0         17.0         12.4         0.0        29.4   

Operating income/(loss)

     334.2         42.9         63.9         (88.4     352.6   

The following table reconciles the total of operating income in the table above to consolidated earnings before income taxes (in millions):

 

13 Weeks Ended

  

Jan 2, 2011

    

Dec 27, 2009

 

Operating income

   $           501.9        $ 352.6    

Interest income and other, net

     14.4          25.1    

Interest expense

     (7.9)         (8.2)   
                 

Earnings before income taxes

   $           508.4        $ 369.5    

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Certain statements herein, including statements regarding trends in or expectations relating to the expected effects of our initiatives and plans, as well as trends in or expectations regarding, earnings per share, revenues, operating margins, comparable store sales, expenses, dividends, share repurchases, other financial results, capital expenditures, scaling and expansion of the international business; restructuring charges, profitable growth opportunities, commodity costs and our mitigation strategies, transitioning from our relationship with Kraft; liquidity, cash flow from operations, anticipated store openings and closings, tax rates, and economic conditions in the US and other international markets all 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, dairy and other raw materials prices and availability, successful execution of our initiatives, successful execution of internal plans, fluctuations in US and international economies and currencies, the impact of competitors’ initiatives, the effect of legal proceedings, and other risks detailed in our filings with the SEC, including Part I Item IA. “Risk Factors” in the 10-K.

A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. You should not place undue reliance on the forward-looking statements, which speak only as of the date of this report. We are under no obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

This information should be read in conjunction with the condensed consolidated financial statements and the notes included in Item 1 of Part I of this 10-Q and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the 10-K.

General

Our fiscal year ends on the Sunday closest to September 30. All references to store counts, including data for new store openings, are reported net of store closures, unless otherwise noted.

Overview

Starbucks results for the fiscal first quarter of 2011 demonstrate the ongoing success of our efforts over the last two years to improve the health of our core business and to position the Company for sustained, profitable growth into the future. Strong global comparable stores sales growth of 7% for the fiscal first quarter (US 8% and International 5%), combined with a more disciplined and efficient operating structure, drove increased sales leverage and resulted in higher operating margins and net earnings. Significantly higher coffee costs, which typically approximate 7% of consolidated revenues, were the largest factor pressuring results for the quarter and we expect these higher coffee costs to have a continued impact on our business.

In our US business we continued to refine our store efficiency efforts, including the final rollout of our new point-of-sale and inventory management systems in our company-operated stores, while maintaining strong levels of customer satisfaction.

The profitability of our international business continues to improve, reaching record levels in the first quarter of fiscal 2011 for revenues, operating income and operating margin. We continue to leverage the valuable lessons learned from the turnaround of our US business, and continue to make progress on scaling the infrastructure of this segment. We are aggressively pursuing the profitable expansion opportunities that exist outside the US, including disciplined growth and scale in our more mature markets, and faster expansion in key emerging markets like China and Brazil.

Our global consumer products group (“CPG”) represents another important profitable growth opportunity for us as we accelerate both product innovation and distribution, and we transition our packaged coffee and tea businesses to an in-house model and away from the current licensing agreement. We are aggressively pursuing the opportunities beyond our more traditional store experience to offer consumers new coffee and other products in multiple forms, across new categories, and through diverse channels, leveraging our strong brand and established retail store base. Examples include the ongoing global expansion of our successful Starbucks VIA® Ready Brew product and the introduction of new products such as Starbucks® Natural Fusions line of premium flavored coffee.

Financial Highlights for the First Quarter of Fiscal 2011 — Consolidated

 

 

Total net revenues increased 8% to $3.0 billion.

 

 

Comparable store sales increased 7%, driven by a 5% increase in traffic and a 2% increase in average ticket

 

  ¡  

U.S. comparable store sales increased 8%, driven by a 6% increase in traffic and a 2% increase in average ticket.

 

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  ¡  

International comparable store sales increased 5%, driven by a 2% increase in both traffic and average ticket.

 

 

Consolidated operating margin improved to 17%: up 400 basis points over the prior year.

 

  ¡  

U.S. operating margin improved to 21.9%: up 450 basis points over the prior year.

 

  ¡  

International operating margin improved to 16.3%: up 900 basis points over the prior year.

 

 

EPS increased 41% to $0.45 in Q1 fiscal 2011 compared to $0.32 in Q1 fiscal 2010.

 

 

Cash flow from operations was $674 million compared to $769 million in the prior year.

Fiscal 2011 — Financial Outlook for the Year

For fiscal year 2011, we expect revenues to grow in the mid-to-high single digits based on a 52-week comparable year, driven by low to mid single-digit comparable store sales growth. We plan to open approximately 500 net new stores globally in fiscal 2011: approximately 100 in the U.S. and approximately 400 internationally, the majority of which are expected to be licensed stores.

We expect continued improvement in our consolidated operating margin in fiscal 2011 compared to the prior year, given our current revenue expectations and sales leverage, and the absence of restructuring charges in fiscal 2011, offset in part by higher coffee costs. In order to mitigate the risk of higher coffee prices on our results for fiscal 2011 we have essentially locked in all of our coffee costs for the remainder of the year with fixed-price purchase commitments.

We expect capital expenditures to be approximately $550 million to $600 million for the full year.

Results of Operations for the 13 Weeks Ended January 2, 2011 and December 27, 2009 (in millions)

Results of Operations Details — Consolidated

Revenues:

    

13 Weeks Ended

 
    

Jan 2,

2011

    

Dec 27,

2009

    

%
Change

 

Company-operated retail

         $2,451.3             $2,292.9         6.9

Specialty:

        

Licensing

     378.8         326.1         16.2   

Foodservice and other

     120.7         103.7         16.4   
                    

Total specialty

     499.5         429.8         16.2   
                    

Total net revenues

         $2,950.8             $2,722.7         8.4

Net revenues for the 13 weeks ended January 2, 2011 increased $228 million, compared to the corresponding period in fiscal 2010, primarily driven by increases in company-operated retail operations (contributing approximately $158 million).

We derived 83% of total net revenues from our company-operated retail stores during the first quarter of fiscal 2011. For the 13 weeks ended January 2, 2011, the increase in consolidated net revenues was driven by a 7%, or $159 million, increase in comparable store sales. The increase in comparable store sales was due to a 5% increase in the number of transactions (contributing approximately $112 million) and a 2% increase in average ticket (contributing approximately $47 million).

For the first quarter of fiscal 2011 we derived 17% of total net revenues from channels outside the company-operated retail stores, collectively known as specialty operations. Specialty revenues were higher due to strong royalty and product sales related to our licensees (contributing approximately $38 million), driven by higher comparable store sales and new store openings. Increased sales of approximately $14 million in the packaged coffee business also contributed to the growth in specialty revenues.

 

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Operating Expenses:

 

    

13 Weeks Ended

 
     Jan 2,      Dec 27,      Jan 2,      Dec 27,  
  

2011

    

2009

    

2011

    

2009

 
                   % of Total  
        

Net Revenues

 

Cost of sales including occupancy costs

         $1,200.8             $1,145.7             40.7%         42.1%   

Store operating expenses

     905.7         896.1         30.7         32.9   

Other operating expenses

     92.5         71.9         3.1         2.6   

Depreciation and amortization expenses

     127.8         130.6         4.3         4.8   

General and administrative expenses

     156.6         136.9         5.3         5.0   

Restructuring charges

     -             18.3         -             0.7   
                                   

Total operating expenses

     2,483.4         2,399.5         84.2         88.1   

Income from equity investees

     34.5         29.4         1.2         1.1   
                                   

Operating income

     $501.9         $352.6         17.0%         13.0%   

Supplemental ratios as a % of related revenues:

           

Store operating expenses

           36.9%         39.1%   

Other operating expenses

           18.5%         16.7%   

Operating margin increased 400 basis points for the 13 weeks ended January 2, 2011, primarily due to lower cost of sales including occupancy costs (140 basis points), lower store operating expenses (220 basis points) and the absence of restructuring charges in the current period (70 basis points).

Cost of sales including occupancy costs as a percentage of total revenues decreased 140 basis points for the 13 weeks ended January 2, 2011 driven by increased sales leverage which contributed to lower occupancy costs as a percentage of total net revenues (approximately 110 basis points) and continued supply chain efficiencies (approximately 40 basis points). Partially offsetting these improvements were higher coffee costs (approximately 60 basis points).

Store operating expenses as a percent of total revenues decreased 220 basis points for the 13 weeks ended January 2, 2011. The decrease was driven by fewer impairments when compared to the prior year (approximately 100 basis points) as well as increased sales leverage which contributed to lower salaries and benefits (approximately 70 basis points).

In fiscal 2010 we completed the store rationalization efforts that we began in fiscal 2008, so there were no restructuring charges for the 13 weeks ended January 2, 2011. As a result our operating margin increased approximately 70 basis points when compared to the prior year period.

 

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Operating income and net earnings:

 

    

13 Weeks Ended

 
     Jan 2,     Dec 27,     Jan 2,     Dec 27,  
    

2011

   

2009

   

2011

   

2009

 
                 % of Total  
                

Net Revenues

 

Operating income

   $         501.9      $         352.6        17.0%        13.0%   

Interest income and other, net

     14.4        25.1        0.5        0.9   

Interest expense

     (7.9     (8.2     (0.3     (0.3
                                

Earnings before income taxes

     508.4        369.5        17.2        13.6   

Income taxes

     160.8        126.0        5.4        4.6   
                                

Net earnings including noncontrolling interests

     347.6        243.5        11.8        8.9   

Net earnings (loss) attributable to noncontrolling interest

     1.0        2.0        0.0        0.1   
                                

Net earnings attributable to Starbucks

   $ 346.6      $ 241.5        11.7%        8.9%   

Effective tax rate including noncontrolling interest

         31.6%        34.1%   

Net interest income and other for the 13 weeks ended January 2, 2011 decreased $11 million compared to the prior year. The decrease was primarily driven by the impact of an accounting gain recorded in the first quarter of fiscal 2010 related to our acquisition of a controlling interest in our previous joint venture operations in France. In accordance with generally accepted accounting principles, the carrying value of the previously held joint venture interest was adjusted to fair value upon the acquisition of the controlling interest.

The effective tax rate for the 13 weeks ended January 2, 2011 was 31.6% as compared to 34.1% for the same period in fiscal 2010. The lower rate was primarily due to an increase in income in foreign jurisdictions with lower tax rates. We currently estimate that our effective tax rate for the full fiscal year 2011 will be in the range of 32% to 33%.

 

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Operating Segments

Segment information is prepared on the same basis that our management reviews financial information for operational decision-making purposes. The following tables summarize the results of operations by segment:

United States

 

    

13 Weeks Ended

 
     Jan 2,      Dec 27,      Jan 2,      Dec 27,  
    

2011

    

2009

    

2011

    

2009

 
                   % of US  
                  

Net Revenues

 

Total net revenues

     $2,067.7         $1,923.5         

Cost of sales including occupancy costs

     773.4         748.9         37.4%         38.9%   

Store operating expenses

     720.1         707.3         34.8         36.8   

Other operating expenses

     15.3         13.9         0.7         0.7   

Depreciation and amortization expenses

     86.7         89.6         4.2         4.7   

General and administrative expenses

     19.7         21.7         1.0         1.1   

Restructuring charges

     -             7.9         -             0.4   
                                   

Total operating expenses

     1,615.2         1,589.3         78.1%         82.6%   
                                   

Operating income

     $452.5         $334.2         21.9%         17.4%   

Supplemental ratios as a % of related revenues:

           

Store operating expenses

           37.6%         39.6%   

Other operating expenses

           10.0%         10.3%   

Total US net revenues increased 7% for the 13 weeks ended January 2, 2011, nearly all due to higher retail revenues from company-operated stores. Company-operated retail revenues increased due to higher comparable store sales of 8%, or $137 million, which was comprised of a 6% increase in the number of transactions (contributing approximately $99 million) and a 2% increase in average ticket (contributing approximately $38 million). Also contributing to the increase in total net revenues was an $18 million increase in specialty revenues resulting from increased royalty and product revenues related to our store licensees and to new store openings.

Cost of sales including occupancy costs as a percentage of total revenues decreased by 150 basis points for the 13 weeks ended January 2, 2011 over the comparable prior year quarter. The decrease resulted primarily from increased leverage on occupancy costs, contributing approximately 80 basis points as a percentage of total revenues. Also contributing to the decrease were supply chain efficiencies (approximately 40 basis points). Partially offsetting these improvements were higher coffee and dairy costs (approximately 70 basis points).

Store operating expenses as a percent of total revenues decreased by 200 basis points for the 13 weeks ended January 2, 2011 over the comparable prior year quarter driven by lower asset impairments (approximately 90 basis points) and lower salaries and benefits as a percent of revenues (approximately 70 basis points). Salaries and benefits declined as a percent of total revenues primarily due to increased sales leverage.

Operating margin expanded 450 basis points for the 13 weeks ended January 2, 2011 driven by the increased sales leverage (approximately 180 basis points) and lower impairment charges (approximately 90 basis points) compared to the prior year quarter. Also contributing to the improvement was the absence of restructuring charges, compared to $8 million in the prior year quarter due to the completion of our restructuring program at the end of fiscal 2010.

 

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International

 

    

13 Weeks Ended

 
     Jan 2,      Dec 27,      Jan 2,      Dec 27,  
    

2011

    

2009

    

2011

    

2009

 
                   % of International  
                  

Net Revenues

 

Total net revenues

     $640.0         $588.7         

Cost of sales including occupancy costs

     292.4         280.1         45.7%         47.6%   

Store operating expenses

     185.6         188.8         29.0         32.1   

Other operating expenses

     20.1         24.8         3.1         4.2   

Depreciation and amortization expenses

     27.8         28.2         4.3         4.8   

General and administrative expenses

     29.9         30.5         4.7         5.2   

Restructuring charges

     -             10.4         -             1.8   
                                   

Total operating expenses

     555.8         562.8         86.8%         95.6%   

Income from equity investees

     20.3         17.0         3.2         2.9   
                                   

Operating income

     $104.5         $42.9         16.3%         7.3%   

Supplemental ratios as a % of related revenues:

           

Store operating expenses

           34.6%         37.4%   

Other operating expenses

           19.5%         29.5%   

Total international net revenues increased 9% for the 13 weeks ended January 2, 2011 primarily driven by higher retail revenues from company-operated stores. For the 13 weeks ended January 2, 2011, company-operated retail revenue increased $32 million driven by a 5% increase in comparable store sales (contributing approximately $22 million) and a $6 million increase as a result of consolidating our previous joint venture operations in Brazil. The increase in comparable store sales was driven by a 2% increase in the number of transactions (contributing approximately $11 million) and a 2% increase in average ticket (contributing approximately $11 million). Also contributing to the increase in total net revenues was a $19 million increase in specialty revenues resulting from increased royalty revenues and product sales related to our store licensees due to improved comparable store sales growth and the opening of 267 net new licensed stores over the last 12 months.

Cost of sales including occupancy costs as a percentage of total net revenues decreased 190 basis points for the 13 weeks ended January 2, 2011, driven by lower occupancy costs as a percentage of total net revenues, which contributed 150 basis points of the decrease, primarily due to increased sales leverage. Reduced food costs (approximately 30 basis points) and supply chain efficiencies (approximately 30 basis points) also contributed to improvement in cost of sales including occupancy costs. Partially offsetting these improvements were higher coffee costs (approximately 30 basis points).

Store operating expenses as a percent of total net revenues for the 13 weeks ended January 2, 2011 decreased 310 basis points with the majority of the benefit driven by lower asset impairments (approximately 150 basis points). Also contributing to the decrease were lower salaries and benefits as a percentage of revenues (approximately 100 basis points) primarily from increased sales leverage.

Other operating expenses as a percent of total net revenues for the 13 weeks ended January 2, 2011 decreased 110 basis points driven by lower asset impairments when compared to the prior year quarter.

Operating margin increased 900 basis points for the 13 weeks ended January 2, 2011 primarily driven by increased sales leverage (approximately 280 basis points) and lower asset impairments (approximately 260 basis points) when compared to the prior year quarter. Also contributing to the improvement was the absence of restructuring charges compared to $10 million in the prior year quarter.

 

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Global Consumer Products Group

 

    

13 Weeks Ended

 
     Jan 2,      Dec 27,      Jan 2,      Dec 27,  
    

2011

    

2009

    

2011

    

2009

 
                   % of CPG  
                  

Net Revenues

 

Total net revenues

     $195.2         $174.3         

Cost of sales

     107.5         95.1         55.1%         54.6%   

Other operating expenses

     30.5         24.1         15.6         13.8   

Depreciation and amortization expenses

     0.8         1.0         0.4         0.6   

General and administrative expenses

     3.3         2.6         1.7         1.5   
                                   

Total operating expenses

     142.1         122.8         72.8%         70.5%   

Income from equity investees

     14.4         12.4         7.4         7.1   
                                   

Operating income

     $67.5         $63.9         34.6%         36.6%   

Net revenues increased 12% for the 13 weeks ended January 2, 2011. The increase in net revenues was due to increased sales in the packaged coffee business (contributing approximately $9 million), increased sales of Starbucks VIA® Ready Brew (contributing approximately $5 million) and increased foodservice sales (contributing approximately $4 million) due primarily to an improved hospitality segment. Operating margin decreased 200 basis points for the 13 weeks ended January 2, 2011. The decrease was primarily due to increased coffee costs (approximately 390 basis points) partially offset by supply chain efficiencies (approximately 200 basis points).

Starbucks continues the process of transitioning from its current licensing relationship with Kraft for its sales of packaged coffee and tea products in grocery and warehouse club stores throughout the US, and to grocery stores in Canada, the UK and other European countries. We successfully transitioned the Tazo tea business and began selling and distributing the brand ourselves in January 2011. We currently expect the transition of the Starbucks and Seattle’s Best Coffee brands to occur on March 1, 2011. We are in a commercial dispute with Kraft over our termination of our Supply and License Agreement (the “Agreement”) with Kraft and the dispute is currently in binding arbitration pursuant to the terms of the Agreement. For additional details on the status of the commercial dispute between Kraft and Starbucks, see Note 11 to the financial statements in this 10-Q.

Other

 

    

13 Weeks Ended

 
     Jan 2,     Dec 27,     %  
    

2011

   

2009

   

Change

 

Total net revenues

     $47.9        $36.1        32.7

Cost of sales

     27.5        21.6        27.3   

Other operating expenses

     26.6        9.1        192.3   

Depreciation and amortization expenses

     12.5        11.8        5.9   

General and administrative expenses

     103.7        82.0        26.5   
                        

Total operating expenses

     170.3        124.5        36.8

Income from equity investees

     (0.2     -            nm   
                        

Operating income

     ($122.6     ($88.4     (38.7 )% 

Substantially all of net revenues in Other are generated from the Seattle’s Best Coffee operating segment. The increase in revenues for Seattle’s Best Coffee was primarily due to sales to new national accounts (contributing approximately $7 million).

Operating expenses included in Other relate to the Seattle’s Best Coffee and Digital Ventures businesses as well as expenses pertaining to corporate administrative functions that support our operating segments but are not specifically attributable to or managed by any segment and are not included in the reported financial results of the operating segments. Total operating expenses increased approximately $46 million primarily as a result of increased general and administrative expenses (approximately $22 million) resulting primarily from higher charitable contributions in the current quarter. Also contributing to the increase were higher other operating expenses (approximately $18 million) driven by the impairment of certain long-lived assets.

 

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Financial Condition, Liquidity and Capital Resources

Starbucks cash and short-term investments were $2.0 billion and $1.4 billion as of January 2, 2011 and October 3, 2010, respectively. We actively manage our cash and short-term investments in order to internally fund operating needs, make scheduled interest and principal payments on our borrowings, and return cash to shareholders through common stock dividend payments and share repurchases. Our short-term investments consisted of US Treasury securities, commercial paper, corporate bonds and US Agency securities.

Our portfolio of long-term available for sale securities consists predominantly of high investment-grade corporate bonds, diversified among industries and individual issuers. We also have investments in auction rate securities (“ARS”), all of which are classified as long-term. ARS totaling $37 million and $41 million were outstanding as of January 2, 2011 and October 3, 2010, respectively. The reduction in ARS was due to $6 million in redemptions during the fiscal first quarter with all redemptions done at par. While the ongoing auction failures will continue to limit the liquidity of these ARS investments for some period of time, we do not believe the auction failures will materially impact our ability to fund our working capital needs, capital expenditures, shareholder dividends or other business requirements.

Starbucks $500 million unsecured credit facility is available for working capital, capital expenditures and other corporate purposes, including acquisitions and share repurchases. The credit facility contains provisions requiring us to maintain compliance with certain covenants, including a minimum fixed charge coverage ratio which measures our ability to cover financing expenses. As of January 2, 2011 and October 3, 2010, we were in compliance with each of these covenants. The $550 million of 10-year 6.25% Senior Notes also require us to maintain compliance with certain covenants, including limits on future liens and sale and leaseback transactions on certain material properties. As of January 2, 2011 and October 3, 2010, we were in compliance with each of these covenants.

We expect to use our cash and short-term investments, including any potential future borrowings under the credit facility and commercial paper program, to invest in our core businesses, including product innovations and related marketing support, as well as other new business opportunities related to our core businesses. We believe that cash flow generated from operations and existing cash and short-term investments should be sufficient to finance capital requirements for our core businesses as well as shareholder distributions for the foreseeable future. We may use our available cash resources to make proportionate capital contributions to our equity method and cost method investees. Any decisions to increase ownership interest in our equity method investees or licensed operations will be driven by valuation and fit with our ownership strategy. Significant new joint ventures, acquisitions and/or other new business opportunities may require additional outside funding.

Other than normal operating expenses, cash requirements for fiscal 2011 are expected to consist primarily of capital expenditures for remodeling and refurbishment of, and equipment upgrades for, existing company-operated retail stores; systems and technology investments in the stores and in the support infrastructure; and new company-operated retail stores. Total capital expenditures for fiscal 2011 are expected to range from $550 million to $600 million.

During the first quarter of fiscal 2011, Starbucks declared a $0.13 per share cash dividend to shareholders of record as of February 9, 2011, which will be paid on February 25, 2011. Starbucks repurchased 0.4 million shares of common stock ($12 million) during the first quarter of fiscal 2011 under our current share repurchase authorization. The number of remaining shares authorized for repurchase at the end of the first fiscal quarter totaled 9.7 million.

Cash provided by operating activities was $674 million for the first quarter of fiscal 2011 as compared to $769 million for the first quarter of fiscal 2010. The decrease was primarily due to an increase in inventory resulting from higher coffee costs. The decrease was partially offset by higher net earnings for the period.

Cash used by investing activities for the first quarter of fiscal 2011 totaled $37 million as compared to $100 million in the first quarter of fiscal 2010. The decrease results primarily from the maturity of a portion of our short-term investment portfolio. This decrease was partially offset by increased capital expenditure for remodeling and renovating our existing company-operated retail stores, opening new retail stores and investment in information technology systems.

Cash used by financing activities for the first quarter of fiscal 2011 totaled $10 million as compared to $40 million of cash provided by financing activities in the first quarter of fiscal 2010. The change primarily reflects dividend payments and common share repurchases in the first quarter of fiscal 2011, which did not occur in the first quarter of fiscal 2010.

Contractual Obligations

There have been no material changes during the period covered by this 10-Q, outside of the ordinary course of our business, to the contractual obligations specified in the table of contractual obligations included in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 10-K.

 

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Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements.

Commodity Prices, Availability and General Risk Conditions

Commodity price risk represents our primary market risk, generated by our purchases of green coffee and dairy products, among other items. We purchase, roast and sell high quality whole bean arabica coffee and related products and risk arises from the price volatility of green coffee. In addition to coffee, we also purchase significant amounts of dairy products to support the needs of our company-operated retail stores. The price and availability of these commodities directly impact our results of operations and can be expected to impact future results of operations. For additional details see Product Supply in Item 1 of the 10-K, as well as Risk Factors in Item 1A of the 10-K.

Seasonality and Quarterly Results

Our business is subject to seasonal fluctuations, including fluctuations resulting from the holiday season. Our cash flows from operations are considerably higher in the first fiscal quarter than the remainder of the year. This is largely driven by cash received as Starbucks Cards are purchased and loaded during the holiday season. Since revenues from the Starbucks Card are recognized upon redemption and not when purchased, seasonal fluctuations on the consolidated statements of earnings are much less pronounced. Quarterly results are affected by the timing of the opening of new stores and the closing of existing stores. For these reasons, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 1 in this 10-Q.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There has been no material change in the commodity price risk, foreign currency exchange risk, equity security price risk, or interest rate risk discussed in Item 7A of the 10-K.

 

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that material information required to be disclosed in our periodic reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures are also designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer as appropriate, to allow timely decisions regarding required disclosure.

During the first quarter of fiscal 2011 we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of the disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this report (January 2, 2011).

During the first quarter of fiscal 2011, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that materially affected or are reasonably likely to materially affect internal control over financial reporting.

The certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 are filed as exhibits 31.1 and 31.2, respectively, to this 10-Q.

 

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PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings

In the first quarter of fiscal 2011, Starbucks notified Kraft Foods Global, Inc. (“Kraft”) that we are discontinuing our licensing relationships with Kraft on March 1, 2011 due to material breaches by Kraft of its obligations under the Supply and License Agreement between the Company and Kraft, dated March 29, 2004 (the “Agreement”), which defines the main licensing relationship between the parties. Through our relationships with Kraft, Starbucks sells a selection of Starbucks and Seattle’s Best Coffee® branded packaged coffees in grocery and warehouse club stores throughout the US, and to grocery stores in Canada, the UK and other European countries. Kraft manages the distribution, marketing, advertising and promotion of these products.

On November 29, 2010, Starbucks received a notice of arbitration from Kraft putting the commercial dispute between the parties into binding arbitration pursuant to the terms of the Agreement. Kraft denies it has materially breached the Agreement. Kraft further alleges that if the Company wishes to terminate the Agreement it must compensate Kraft as provided in the Agreement in an amount equal to the fair value of the Agreement, with an additional premium of up to 35% under certain circumstances.

On December 6, 2010 Kraft commenced a federal court action against Starbucks, entitled Kraft Foods Global, Inc. v. Starbucks Corporation, in the U.S. District Court for the Southern District of New York (the “District Court”) seeking injunctive relief to prevent Starbucks from terminating the relationship until the parties’ dispute is resolved through the arbitration proceeding. On January 28, 2011, the District Court denied Kraft’s request for injunctive relief. Kraft has appealed the District Court’s decision and is seeking expedited consideration of its appeal by the Second Circuit Court of Appeals.

While Starbucks believes we have valid claims of material breach by Kraft under the Agreement that allow us to terminate the Agreement and certain other relationships with Kraft without compensation to Kraft, there exists the possibility of material adverse outcomes to Starbucks under the arbitration. At this time the Company is unable to estimate the range of possible outcomes with respect to this matter.

Starbucks is party to various other legal proceedings arising in the ordinary course of business, but, except as noted above, is not currently a party to any legal proceeding that management believes could have a material adverse effect on our consolidated financial position or results of operations.

 

Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed in the 10-K.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information regarding repurchases by the Company of its common stock during the 13-week period ended January 2, 2011:

ISSUER PURCHASES OF EQUITY SECURITIES

 

    

Total

Number of

Shares

Purchased

    

Average

Price

Paid per

Share

    

Total Number

of Shares

Purchased as

Part of Publicly

Announced

Plans or

Programs

    

Maximum

Number of

Shares that May

Yet Be

Purchased

Under the Plans

or Programs(2)

 

Period(1)

           

October 4, 2010 — October 31, 2010

     -         $ -         -         10,095,392   

November 1, 2010 — November 28, 2010

     383,800         30.63         383,800         9,711,592   

November 29, 2010 — January 2, 2011

     -         $ -         -         9,711,592   
                             

Total

     383,800       $  30.63         383,800      
                             
(1) Monthly information is presented by reference to Starbucks fiscal months during the first quarter of fiscal 2011.

 

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(2)

Starbucks share repurchase program is conducted under authorizations made from time to time by our Board of Directors. On March 24, 2010 we publicly announced the authorization of 15 million shares and on November 15, 2010 we publicly announced the authorization of up to an additional 10 million shares. These authorizations have no expiration date.

 

Item 6. Exhibits

 

          Incorporated by Reference       

Exhibit

No.

  

Exhibit Description

  

Form

    

File No.

    

Date of

First Filing

    

Exhibit

    

Filed

Herewith

  10.1

   Credit Agreement dated November 17, 2010 among Starbucks Corporation, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, and the other Lenders from time to time a party thereto.      8-K         0-20322         11/19/10         10.1       —  

  10.2*

   Management Deferred Compensation Plan, as amended and restated effective January 1, 2011.      —          —          —          —        X

  31.1

   Certification of Principal Executive Officer Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of 2002      —           —           —           —         X

  31.2

   Certification of Principal Financial Officer Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of 2002      —           —           —           —         X

  32

   Certifications of Principal Executive Officer and Principal Financial Officer Pursuant to 18 USC. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002      —           —           —           —         X

101**

   The following financial statements from the Company’s 10-Q for the fiscal quarter ended January 2, 2011, formatted in XBRL:(i) Condensed Consolidated Statements of Earnings, (ii) Condensed Consolidated Balance Sheets, (iii) Condensed Consolidated Statements of Cash Flows (iv) Notes to Condensed Consolidated Financial Statements      —           —           —           —         —  

 

    *  

    **

  

   Denotes a management contract or compensatory plan or arrangement

   Furnished herewith.

              

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

February 4, 2011

 

STARBUCKS CORPORATION
By:  

/s/ Troy Alstead

  Troy Alstead
  chief financial officer
  and chief administrative officer
 

Signing on behalf of the registrant and as

principal financial officer

 

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