Starbucks Investor Relations

SEC Filings

10-Q
STARBUCKS CORP filed this Form 10-Q on 07/30/2013
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SBUX - 6.30.2013 - 10Q
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 June 30, 2013
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 July 24, 2013
Common Stock, par value $0.001 per share
751.4 million



STARBUCKS CORPORATION
FORM 10-Q
For the Quarterly Period Ended June 30, 2013
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)
 
 
Quarter Ended
 
Three Quarters Ended
 
Jun 30,
2013
 
Jul 1,
2012
 
Jun 30,
2013
 
Jul 1,
2012
Net revenues:
 
 
 
 
 
 
 
Company-operated stores
$
2,986.3

 
$
2,615.6

 
$
8,783.7

 
$
7,868.6

Licensed stores
342.0

 
308.2

 
1,014.2

 
905.1

CPG, foodservice and other
413.4

 
379.8

 
1,299.3

 
1,161.7

Total net revenues
3,741.7

 
3,303.6

 
11,097.2

 
9,935.4

Cost of sales including occupancy costs
1,597.6

 
1,446.1

 
4,748.6

 
4,354.1

Store operating expenses
1,084.1

 
976.0

 
3,212.2

 
2,928.3

Other operating expenses
105.3

 
105.9

 
349.9

 
317.9

Depreciation and amortization expenses
153.3

 
136.7

 
455.3

 
408.6

General and administrative expenses
249.6

 
199.0

 
711.7

 
597.4

Total operating expenses
3,189.9

 
2,863.7

 
9,477.7

 
8,606.3

Income from equity investees
63.4

 
51.7

 
170.4

 
148.8

Operating income
615.2

 
491.6

 
1,789.9

 
1,477.9

Interest income and other, net
3.5

 
9.7

 
51.4

 
68.2

Interest expense
(6.3
)
 
(8.9
)
 
(19.0
)
 
(26.2
)
Earnings before income taxes
612.4

 
492.4

 
1,822.3

 
1,519.9

Income taxes
194.6

 
159.1

 
581.4

 
494.2

Net earnings including noncontrolling interest
417.8

 
333.3

 
1,240.9

 
1,025.7

Net earnings attributable to noncontrolling interest

 
0.2

 
0.6

 
0.6

Net earnings attributable to Starbucks
$
417.8

 
$
333.1

 
$
1,240.3

 
$
1,025.1

Earnings per share - basic
$
0.56

 
$
0.44

 
$
1.66

 
$
1.36

Earnings per share - diluted
$
0.55

 
$
0.43

 
$
1.63

 
$
1.33

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
749.7

 
758.9

 
748.3

 
753.8

Diluted
761.9

 
776.8

 
761.5

 
772.9

Cash dividends declared per share
$
0.21

 
$
0.17

 
$
0.63

 
$
0.51

See Notes to Condensed Consolidated Financial Statements

3


STARBUCKS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions, unaudited)

 
Quarter Ended
 
Three Quarters Ended
 
Jun 30,
2013
 
Jul 1,
2012
 
Jun 30,
2013
 
Jul 1,
2012
Net earnings including noncontrolling interest
$
417.8

 
$
333.3

 
$
1,240.9

 
$
1,025.7

Other comprehensive income/(loss), net of tax:
 
 
 
 
 
 
 
Unrealized holding losses on available-for-sale securities
(0.3
)
 

 
(0.3
)
 

Tax benefit
0.1

 

 
0.1

 

Unrealized holding gains/(losses) on cash flow hedging instruments
55.6

 
(22.5
)
 
34.9

 
(39.0
)
Tax (expense)/benefit
(20.0
)
 
2.6

 
(19.7
)
 
3.2

Unrealized holding gains/(losses) on net investment hedging instruments
7.9

 
(5.4
)
 
34.3

 
4.9

Tax (expense)/benefit
(2.9
)
 
2.0

 
(12.7
)
 
(1.8
)
Reclassification adjustment for net losses realized in net earnings for cash flow hedges
11.1

 
4.1

 
27.3

 
10.0

Tax benefit
(0.5
)
 
(1.0
)
 
(1.9
)
 
(3.1
)
Net unrealized holding gains/(losses)
51.0

 
(20.2
)
 
62.0

 
(25.8
)
Translation adjustment
(25.0
)
 
(23.0
)
 
(74.7
)
 
(22.5
)
Tax (expense)/benefit
5.8

 
(1.0
)
 
4.5

 
(0.5
)
Other comprehensive income/(loss)
31.8

 
(44.2
)
 
(8.2
)
 
(48.8
)
Comprehensive income/(loss) including noncontrolling interest
449.6

 
289.1

 
1,232.7

 
976.9

Comprehensive income attributable to noncontrolling interest

 
0.2

 
0.6

 
0.6

Comprehensive income attributable to Starbucks
$
449.6

 
$
288.9

 
$
1,232.1

 
$
976.3


See Notes to Condensed Consolidated Financial Statements


4


STARBUCKS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
(unaudited)
 
 
Jun 30,
2013
 
Sep 30,
2012
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,430.8

 
$
1,188.6

Short-term investments
613.5

 
848.4

Accounts receivable, net
506.8

 
485.9

Inventories
1,173.8

 
1,241.5

Prepaid expenses and other current assets
302.0

 
196.5

Deferred income taxes, net
212.8

 
238.7

Total current assets
4,239.7

 
4,199.6

Long-term investments
45.5

 
116.0

Equity and cost investments
443.4

 
459.9

Property, plant and equipment, net
2,987.1

 
2,658.9

Other assets
485.8

 
385.7

Goodwill
860.9

 
399.1

TOTAL ASSETS
$
9,062.4

 
$
8,219.2

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
415.2

 
$
398.1

Accrued liabilities
1,149.7

 
1,133.8

Insurance reserves
177.5

 
167.7

Deferred revenue
682.0

 
510.2

Total current liabilities
2,424.4

 
2,209.8

Long-term debt
549.7

 
549.6

Other long-term liabilities
340.7

 
345.3

Total liabilities
3,314.8

 
3,104.7

Shareholders’ equity:
 
 
 
Common stock ($0.001 par value) — authorized, 1,200.0 shares; issued and outstanding, 751.1 shares and 749.3 shares (includes 3.4 common stock units), respectively
0.8

 
0.7

Additional paid-in capital
167.7

 
39.4

Retained earnings
5,558.5

 
5,046.2

Accumulated other comprehensive income
14.5

 
22.7

Total shareholders’ equity
5,741.5

 
5,109.0

Noncontrolling interest
6.1

 
5.5

Total equity
5,747.6

 
5,114.5

TOTAL LIABILITIES AND EQUITY
$
9,062.4

 
$
8,219.2

See Notes to Condensed Consolidated Financial Statements

5


STARBUCKS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions, unaudited)
 
Three Quarters Ended
 
Jun 30,
2013
 
Jul 1,
2012
OPERATING ACTIVITIES:
 
 
 
Net earnings including noncontrolling interest
$
1,240.9

 
$
1,025.7

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
479.3

 
427.7

Deferred income taxes, net
3.9

 
33.6

Income earned from equity method investees, net of distributions
(42.6
)
 
(37.7
)
Gain resulting from sale of equity in joint venture
(35.2
)
 

Stock-based compensation
105.6

 
114.8

Other
18.3

 
10.0

Cash provided/(used) by changes in operating assets and liabilities:
 
 
 
Accounts receivable
(20.3
)
 
(44.8
)
Inventories
88.8

 
(285.1
)
Accounts payable
20.8

 
(139.1
)
Accrued liabilities and insurance reserves
38.1

 
(13.8
)
Deferred revenue
168.1

 
71.8

Prepaid expenses, other current assets and other assets
(27.9
)
 
(36.2
)
Net cash provided by operating activities
2,037.8

 
1,126.9

INVESTING ACTIVITIES:
 
 
 
Purchase of investments
(495.8
)
 
(1,578.6
)
Sales, maturities and calls of investments
803.2

 
1,452.9

Acquisitions, net of cash acquired
(576.9
)
 
(29.7
)
Additions to property, plant and equipment
(782.2
)
 
(516.5
)
Proceeds from sale of equity in joint venture
50.3

 

Other
3.0

 
(12.3
)
Net cash used by investing activities
(998.4
)
 
(684.2
)
FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of common stock
199.5

 
211.3

Excess tax benefit from exercise of stock options
229.2

 
156.5

Principal payments on long-term debt
(35.2
)
 

Cash dividends paid
(470.9
)
 
(384.0
)
Repurchase of common stock
(588.1
)
 
(15.7
)
Minimum tax withholdings on share-based awards
(120.6
)
 
(56.1
)
Other
2.3

 
(0.5
)
Net cash used by financing activities
(783.8
)
 
(88.5
)
Effect of exchange rate changes on cash and cash equivalents
(13.4
)
 
(1.0
)
Net increase in cash and cash equivalents
242.2

 
353.2

CASH AND CASH EQUIVALENTS:
 
 
 
Beginning of period
1,188.6

 
1,148.1

End of period
$
1,430.8

 
$
1,501.3

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
Cash paid during the period for:
 
 
 
Interest, net of capitalized interest
$
17.2

 
$
17.2

Income taxes
$
417.3

 
$
311.4

See Notes to Condensed Consolidated Financial Statements

6


STARBUCKS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1:
Summary of Significant Accounting Policies
Financial Statement Preparation
The unaudited condensed consolidated financial statements as of June 30, 2013, and for the quarter and three quarters ended June 30, 2013 and July 1, 2012, 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 quarter and three quarters ended June 30, 2013 and July 1, 2012 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 September 30, 2012 is derived from our audited consolidated financial statements and notes for the fiscal year ended September 30, 2012 (“fiscal 2012”) included in Item 8 in the Fiscal 2012 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. Effective at the beginning of the fiscal year ending September 29, 2013 ("fiscal 2013"), we decentralized certain leadership functions. General and administrative expenses and depreciation and amortization expenses associated with these functions, which were previously reported as unallocated corporate expenses within "Other," are now reported within the respective reportable operating segments to align with the regions which they support. On January 29, 2013, we filed a Current Report on Form 8-K to recast operating results for all periods covered in the 10-K to reflect this change. See further discussion and the impact of these changes in Note 11 of this 10-Q.
Beginning in the second quarter of fiscal 2013, we removed unallocated corporate expenses from Other in our segment reporting. Other is now referred to as All Other Segments and includes Teavana, Seattle's Best Coffee, Evolution Fresh and Tazo retail, as well as our Digital Ventures business. Unallocated corporate expenses are now a reconciling item between our segment results and our consolidated results, which are unchanged. Our historical segment financial information has been revised to be consistent with the current period presentation.
The results of operations for the quarter and three quarters ended June 30, 2013 are not necessarily indicative of the results of operations that may be achieved for the entire fiscal 2013.
Recent Accounting Pronouncements
In March 2013, the FASB issued guidance on a parent's accounting for the cumulative translation adjustment upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. This guidance requires a parent to release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The guidance will become effective for us at the beginning of our first quarter of fiscal 2015. The adoption of this new guidance will not have a material impact on our financial statements.
In February 2013, the FASB issued guidance that adds additional disclosure requirements for items reclassified out of accumulated other comprehensive income. This guidance requires the disclosure of significant amounts reclassified from each component of accumulated other comprehensive income and the income statement line items affected by the reclassification. The guidance will become effective for us at the beginning of our first quarter of fiscal 2014. The adoption of this guidance will result in the disclosure of reclassifications from accumulated other comprehensive income by component in the consolidated statements of comprehensive income.
In January 2013, the FASB issued guidance clarifying the scope of disclosure requirements for offsetting assets and liabilities. The amended guidance limits the scope of balance sheet offsetting disclosures to derivatives, repurchase agreements, and securities lending transactions to the extent that they are offset in the financial statements or subject to an enforceable master netting arrangement or similar agreement. The guidance will become effective for us at the beginning of our first quarter of fiscal 2014. The adoption of this new guidance will not have a material impact on our financial statements.
In July 2012, the FASB issued guidance that revises the requirements around how entities test indefinite-lived intangible assets, other than goodwill, for impairment. The guidance allows companies to perform a qualitative assessment before calculating the fair value of the indefinite-lived intangible asset. If entities determine, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is more likely than not greater than the carrying amount, a quantitative calculation would not be needed. The guidance became effective for us at the beginning of our first quarter of fiscal 2013. The adoption of this guidance did not have a material impact on our financial statements.

7


In June 2011, the FASB issued guidance that revises the manner in which entities present comprehensive income in their financial statements. The guidance requires entities to report the components of comprehensive income in either a single, continuous statement or two separate but consecutive statements. The guidance became effective for us at the beginning of our first quarter of fiscal 2013. In adopting this guidance, we added the consolidated statements of comprehensive income following our consolidated statements of earnings.
Note 2:
Acquisition
On May 2, 2013, we acquired 100% ownership of a coffee farm in Costa Rica for $8.1 million in cash. The fair value of the net assets acquired on the acquisition date primarily comprises property, plant and equipment.
On December 31, 2012, we acquired 100% of the outstanding shares of Teavana Holdings, Inc. (“Teavana”), a specialty retailer of premium loose-leaf teas, authentic artisanal teawares and other tea-related merchandise, to elevate our tea offerings as well as expand our domestic and global tea footprint. We acquired Teavana for $615.8 million in cash. Of the total cash paid, $13.5 million was excluded from the purchase price allocation below as it represents contingent consideration receivable. At closing, we also repaid $35.2 million of long term debt outstanding on Teavana's balance sheet, which was recognized separately from the business combination. The following table summarizes the allocation of the purchase price to the fair values of the assets acquired and liabilities assumed on the closing date (in millions):
 
 
Fair Value at
 Dec 31, 2012
Cash and cash equivalents
 
$
47.0

Inventories
 
21.3

Property, plant and equipment
 
59.7

Intangible assets
 
120.8

Goodwill
 
466.2

Other current and noncurrent assets
 
19.8

Current liabilities
 
(36.0
)
Long-term deferred tax liability
 
(54.3
)
Long-term debt
 
(35.2
)
Other long-term liabilities
 
(7.0
)
Total purchase price
 
$
602.3


During the third quarter of fiscal 2013, we recorded certain immaterial purchase accounting adjustments, which are reflected in the purchase price allocation table above.
The assets acquired and liabilities assumed are reported within All Other Segments. Other current and noncurrent assets acquired primarily include prepaid expenses, trade receivables, and deferred tax assets. In addition, we assumed various current liabilities primarily consisting of accounts payable, accrued payroll related liabilities and other accrued operating expenses. The intangible assets acquired as part of the transaction include the Teavana trade name, tea blends and non-compete agreements. The Teavana trade name was valued at $105.5 million and determined to have an indefinite life, based on our expectation that the brand will be used indefinitely and has no contractual limitations. The intangible asset related to the tea blends was valued at $13.0 million and will be amortized on a straight-line basis over a period of 10 years, and the intangible asset related to the non-compete agreements was valued at $2.3 million and will be amortized on a straight-line basis over a period of 3 years. The $466.2 million of goodwill represents the intangible assets that do not qualify for separate recognition, primarily including Teavana's established global store presence in high traffic mall locations and other high-sales-volume retail venues, Teavana's global customer base, and Teavana's "Heaven of tea" retail experience in which store employees engage and educate customers about the ritual and enjoyment of tea. The goodwill was allocated to All Other Segments and is not deductible for income tax purposes.

8


Note 3:
Derivative Financial Instruments
Interest Rates
During the third quarter of fiscal 2013, we entered into forward-starting interest rate swap agreements with an aggregate notional amount of $750.0 million. These swaps hedge the variability in cash flows due to changes in the benchmark interest rate related to an anticipated fixed-rate debt issuance in 2013. We intend to cash settle these agreements upon issuance of the fixed-rate debt, effectively locking in the benchmark interest rate in effect at the time the swap agreements were initiated. The gain or loss on these agreements is deferred in other comprehensive income and will be amortized using the constant effective yield method as a component of interest expense, as the underlying interest expense on the related debt is recognized in the consolidated statements of earnings.
Net derivative gains from these cash flow hedges of $31.1 million, net of taxes, were included in accumulated other comprehensive income as of June 30, 2013. We had no outstanding forward-starting interest rate swaps as of September 30, 2012. Of the net derivative gains accumulated as of June 30, 2013, $2.0 million is expected to be reclassified into earnings within 12 months and will also continue to experience fair value changes before affecting earnings.
Foreign Currency
We enter into forward and swap contracts to hedge portions of cash flows of anticipated revenue streams and inventory purchases in currencies other than the entity's functional currency. Net derivative gains from these cash flow hedges of $3.3 million and net derivative losses of $2.9 million, net of taxes, were included in accumulated other comprehensive income as of June 30, 2013 and September 30, 2012, respectively. Of the net derivative gains accumulated as of June 30, 2013, $2.5 million is expected to be reclassified into earnings within 12 months and will also continue to experience fair value changes before affecting earnings. Outstanding contracts will expire within 23 months.
We also enter into net investment derivative instruments to hedge our equity method investment in Starbucks Coffee Japan, Ltd., to minimize foreign currency exposure. Net derivative losses from net investment hedges of $12.0 million and $33.6 million, net of taxes, were included in accumulated other comprehensive income as of June 30, 2013 and September 30, 2012, respectively. Outstanding contracts will expire within 32 months.
In addition to the hedging instruments above, to mitigate the translation risk of certain balance sheet items, we enter into foreign currency swap 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 is also recognized in net interest income and other.
Coffee
Depending on market conditions, we enter into futures contracts to hedge a portion of anticipated cash flows under our price-to-be-fixed green coffee contracts, which are described further in Note 5. Net derivative losses of $30.0 million and $32.9 million, net of taxes, were included in accumulated other comprehensive income as of June 30, 2013 and September 30, 2012, respectively, related to coffee hedges. Of the net derivative losses accumulated as of June 30, 2013, $29.0 million is expected to be reclassified into earnings within 12 months and will also continue to experience fair value changes before affecting earnings. Outstanding contracts will expire within 9 months.
Dairy
To mitigate the price uncertainty of a portion of our future purchases of dairy products, we enter into futures 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. Gains and losses from these instruments are largely offset by price fluctuations on our dairy purchases, which are included in cost of sales.
Diesel Fuel
To mitigate the price uncertainty of a portion of our future purchases of diesel fuel, we enter into swap 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. Gains and losses from these instruments are largely offset by the financial impact of diesel fuel fluctuations on our shipping costs, which are included in operating expenses.


9


The following table presents the pretax effect of derivative contracts designated as hedging instruments on earnings and other comprehensive income ("OCI") for the quarter and three quarters ended (in millions):
 
Interest Rates
 
Foreign Currency
 
Coffee
Quarter Ended
Jun 30, 2013
 
Jul 1, 2012
 
Jun 30, 2013
 
Jul 1, 2012
 
Jun 30, 2013
 
Jul 1, 2012
 
 
 
 
 
 
 
 
 
 
 
 
Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
 
 
Gain/(Loss) recognized in earnings
$

 
$

 
$
2.4

 
$
(2.8
)
 
$
(13.3
)
 
$
(1.3
)
Gain/(Loss) recognized in OCI
$
49.3

 
$

 
$
5.6

 
$
(1.9
)
 
$
0.7

 
$
(20.6
)
Net Investment Hedges:
 
 
 
 
 
 
 
 
 
 
 
Gain/(Loss) recognized in earnings
 
 
 
 
$

 
$

 
 
 
 
Gain/(Loss) recognized in OCI
 
 
 
 
$
7.9

 
$
(5.4
)
 
 
 
 
 
Interest Rates
 
Foreign Currency
 
Coffee
Three Quarters Ended
Jun 30, 2013
 
Jul 1, 2012
 
Jun 30, 2013
 
Jul 1, 2012
 
Jun 30, 2013
 
Jul 1, 2012
 
 
 
 
 
 
 
 
 
 
 
 
Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
 
 
Gain/(Loss) recognized in earnings
$

 
$

 
$
3.0

 
$
(8.6
)
 
$
(29.6
)
 
$
(1.3
)
Gain/(Loss) recognized in OCI
$
49.3

 
$

 
$
12.0

 
$
1.0

 
$
(26.4
)
 
$
(40.0
)
Net Investment Hedges:
 
 
 
 
 
 
 
 
 
 
 
Gain/(Loss) recognized in earnings
 
 
 
 
$

 
$

 
 
 
 
Gain/(Loss) recognized in OCI
 
 
 
 
$
34.3

 
$
4.9

 
 
 
 
The amounts shown in the above table as recognized in earnings for interest rates, foreign currency and coffee hedges represent the realized gains/(losses) reclassified from OCI to net earnings during the year. The amounts shown as recognized in OCI are prior to these reclassifications.

The following table presents the pretax effect of derivative contracts not designated as hedging instruments on earnings for the quarter and three quarters ended (in millions):
 
 
Foreign Currency
 
Coffee
 
Dairy
 
Diesel Fuel
 
Jun 30, 2013
 
Jul 1, 2012
 
Jun 30, 2013
 
Jul 1, 2012
 
Jun 30, 2013
 
Jul 1, 2012
 
Jun 30, 2013
 
Jul 1, 2012
Gain/(Loss) recognized in earnings for the quarter ended
$
0.4

 
$
4.2

 
$

 
$

 
$
(2.0
)
 
$
1.2

 
$
0.1

 
$
(0.9
)
Gain/(Loss) recognized in earnings for the three quarters ended
$
2.6

 
$

 
$
(2.1
)
 
$

 
$
(4.6
)
 
$
2.0

 
$
0.2

 
$
0.7

Notional amounts of outstanding derivative contracts (in millions):
 
Jun 30, 2013
 
Sep 30, 2012
Interest rates
$
750

 
$

Foreign currency
393

 
383

Coffee
3

 
125

Dairy
34

 
72

Diesel fuel
5

 
24



10


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
June 30, 2013
 
Quoted Prices
in Active
Markets for 
Identical Assets
(Level 1)
 
Significant 
Other Observable 
Inputs
(Level 2)
 
Significant
Unobservable  Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,430.8

 
$
1,430.8

 
$

 
$

Short-term investments:
 
 
 
 
 
 
 
Available-for-sale securities
 
 
 
 
 
 
 
Agency obligations
10.0

 

 
10.0

 

Commercial paper
123.9

 

 
123.9

 

Corporate debt securities
71.9

 

 
71.9

 

Government treasury securities
311.9

 
311.9

 

 

Certificates of deposit
34.1

 

 
34.1

 

Total available-for-sale securities
551.8

 
311.9

 
239.9

 

Trading securities
61.7

 
61.7

 

 

Total short-term investments
613.5

 
373.6

 
239.9

 

Short-term derivatives
68.6

 

 
68.6

 

Long-term investments:
 
 
 
 
 
 
 
Available-for-sale securities
 
 
 
 
 
 
 
Agency obligations
4.0

 

 
4.0

 

Corporate debt securities
27.7

 

 
27.7

 

Auction rate securities
13.8

 

 

 
13.8

Total long-term investments
45.5

 

 
31.7

 
13.8

Long-term derivatives
12.9

 

 
12.9

 

Total
$
2,171.3

 
$
1,804.4

 
$
353.1

 
$
13.8

Liabilities:
 
 
 
 
 
 
 
Short-term derivatives
$
3.0

 
$

 
$
3.0

 
$



11


 
 
 
Fair Value Measurements at Reporting Date Using
 
Balance at
September 30, 2012
 
Quoted Prices
in Active
Markets for 
Identical Assets
(Level 1)
 
Significant 
Other Observable 
Inputs
(Level 2)
 
Significant
Unobservable  Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,188.6

 
$
1,188.6

 
$

 
$

Short-term investments:
 
 
 
 
 
 
 
Available-for-sale securities
 
 
 
 
 
 
 
Agency obligations
80.0

 

 
80.0

 

Commercial paper
103.9

 

 
103.9

 

Corporate debt securities
84.3

 

 
84.3

 

Government treasury securities
459.7

 
459.7

 

 

Certificates of deposit
62.9

 

 
62.9

 

Total available-for-sale securities
790.8

 
459.7

 
331.1

 

Trading securities
57.6

 
57.6

 

 

Total short-term investments
848.4

 
517.3

 
331.1

 

Short-term derivatives
9.5

 

 
9.5

 

Long-term investments:
 
 
 
 
 
 
 
Available-for-sale securities
 
 
 
 
 
 
 
Agency obligations
14.0

 

 
14.0

 

Corporate debt securities
61.3

 

 
61.3

 

Auction rate securities
18.6

 

 

 
18.6

Certificates of deposit
22.1

 

 
22.1

 

Total long-term investments
116.0

 

 
97.4

 
18.6

Total
$
2,162.5

 
$
1,705.9

 
$
438.0

 
$
18.6

Liabilities:
 
 
 
 
 
 
 
Short-term derivatives
$
18.9

 
$

 
$
18.9

 
$

Long-term derivatives
3.0

 

 
3.0

 

Total
$
21.9

 
$

 
$
21.9

 
$

Short-term and long-term derivative assets are included in prepaid expenses and other current assets and other assets, respectively. Short-term and long-term derivative liabilities are included in other accrued liabilities and other long-term liabilities, respectively.
Gross unrealized holding gains and losses were not material as of June 30, 2013 and September 30, 2012.
Changes in Level 3 Instruments Measured at Fair Value on a Recurring Basis
Financial instruments measured using Level 3 inputs are comprised entirely of our auction rate securities (“ARS”).
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
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, goodwill and other intangible assets, equity and cost method investments, and other assets. These assets are measured at fair value if determined to be impaired. During the quarter and three quarters ended June 30, 2013 and July 1, 2012, there were no material fair market value adjustments.

Fair Value of Other Financial Instruments
The estimated fair value of the $550 million of 6.25% Senior Notes based on the quoted market price (Level 2) was approximately $638 million and $674 million as of June 30, 2013 and September 30, 2012, respectively.

12


Note 5:
Inventories
 
(in millions)
Jun 30, 2013
 
Sep 30, 2012
 
Jul 1, 2012
Coffee:
 
 
 
 
 
Unroasted
$
605.1

 
$
711.3

 
$
749.1

Roasted
229.9

 
222.2

 
225.8

Other merchandise held for sale
204.2

 
181.6

 
133.4

Packaging and other supplies
134.6

 
126.4

 
140.9

Total
$
1,173.8

 
$
1,241.5

 
$
1,249.2

Other merchandise held for sale includes, among other items, serveware and tea. Inventory levels vary due to seasonality, commodity market supply and price fluctuations.
As of June 30, 2013, we had committed to purchasing green coffee totaling $363 million under fixed-price contracts and an estimated $414 million under price-to-be-fixed contracts. As of June 30, 2013, approximately $3 million of our price-to-be-fixed contracts were effectively fixed through the use of futures 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, and therefore the price, 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.

Note 6:
Supplemental Balance Sheet Information (in millions)
 
Property, Plant and Equipment, net
Jun 30, 2013
 
Sep 30, 2012
 
 
 
 
Land
$
47.0

 
$
46.2

Buildings
258.6

 
225.2

Leasehold improvements
4,252.5

 
3,957.6

Store equipment
1,292.4

 
1,251.0

Roasting equipment
390.3

 
322.8

Furniture, fixtures and other
888.4

 
836.2

Work in progress
330.9

 
264.1

Property, plant and equipment, gross
7,460.1

 
6,903.1

Less accumulated depreciation
(4,473.0
)
 
(4,244.2
)
Property, plant and equipment, net
$
2,987.1

 
$
2,658.9


Other Assets
Jun 30, 2013
 
Sep 30, 2012
 
 
 
 
Long-term deferred tax asset
$
30.9

 
$
97.3

Other intangible assets
268.8

 
143.7

Other
186.1

 
144.7

Total other assets
$
485.8

 
$
385.7



13


Accrued Liabilities
Jun 30, 2013
 
Sep 30, 2012
 
 
 
 
Accrued compensation and related costs
$
402.5

 
$
381.6

Accrued occupancy costs
118.2

 
126.9

Accrued taxes
82.4

 
138.3

Accrued dividend payable
157.7

 
157.4

Other
388.9

 
329.6

Total accrued liabilities
$
1,149.7

 
$
1,133.8


Other Long-Term Liabilities
Jun 30, 2013
 
Sep 30, 2012
 
 
 
 
Deferred rent
$
207.5

 
$
201.9

Unrecognized tax benefits
81.0

 
78.4

Asset retirement obligations
28.4

 
42.6

Other
23.8

 
22.4

Total other long-term liabilities
$
340.7

 
$
345.3


Cost Method Investments
In March 2013, we sold our 18% interest in Cafe Sirena S. de R.L. de CV (a Mexican limited liability company), to our controlling joint venture partner, SC de Mexico, S.A. de CV, owned by Alsea, S.A.B. de C.V. This transaction resulted in a gain of $35.2 million, which was included in net interest income and other in the consolidated statements of earnings in the second quarter of fiscal 2013. Cash proceeds from the sale of $50.3 million were received in April 2013.

Note 7:
Equity
Changes in total equity (in millions):
 
Three Quarters Ended
 
Jun 30, 2013
 
Jul 1, 2012
Beginning balance of total equity
$
5,114.5

 
$
4,387.3

Net earnings including noncontrolling interest
1,240.9

 
1,025.7

Other comprehensive loss
(8.2
)
 
(48.8
)
Stock-based compensation expense
107.0

 
116.3

Exercise of stock options/vesting of RSUs
293.6

 
295.6

Sale of common stock
15.1

 
14.3

Repurchase of common stock
(544.1
)
 
(15.7
)
Cash dividends declared
(471.2
)
 
(386.7
)
Ending balance of total equity
$
5,747.6

 
$
5,388.0

Components of accumulated other comprehensive income, net of tax (in millions):
 
Jun 30, 2013
 
Sep 30, 2012
Net unrealized losses on available-for-sale securities
$
(0.3
)
 
$
(0.1
)
Net unrealized losses on hedging instruments
(9.9
)
 
(72.1
)
Translation adjustment
24.7

 
94.9

Accumulated other comprehensive income
$
14.5

 
$
22.7

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 June 30, 2013.

14


Share repurchase activity (in millions, except for average price data):
 
Three Quarters Ended
 
Jun 30, 2013
 
Jul 1, 2012
Number of shares acquired
10.8

 
0.4

Average price per share of acquired shares
$
50.52

 
$
36.49

Total cost of acquired shares
$
544.1

 
$
15.7

As of June 30, 2013, 26.4 million shares remained available for repurchase under current authorizations.

During the third quarter of fiscal 2013, Starbucks Board of Directors declared a quarterly cash dividend to shareholders of $0.21 per share to be paid on August 23, 2013 to shareholders of record as of the close of business on August 8, 2013.
Note 8:
Employee Stock Plans
As of June 30, 2013, there were 17.7 million shares of common stock available for issuance pursuant to future equity-based compensation awards and 7.8 million shares available for issuance under our employee stock purchase plans.
Pursuant to the 1997 Deferred Stock Plan, in September 1997 our chairman, president and ceo elected to defer receipt of approximately 3.4 million shares of common stock (as adjusted for stock splits since 1997). In November 2006, he re-deferred receipt of the shares until December 21, 2012 (or earlier if his employment with Starbucks terminated before such date). On December 21, 2012, the deferral period ended and pursuant to the terms of the 1997 Deferred Stock Plan, we issued approximately 2.2 million shares of common stock to him and withheld approximately 1.2 million shares to satisfy tax withholdings.

Stock-based compensation expense recognized in the consolidated statements of earnings (in millions):
 
 
Quarter Ended
 
Three Quarters Ended
 
Jun 30, 2013
 
Jul 1, 2012
 
Jun 30, 2013
 
Jul 1, 2012
Options
$
8.3

 
$
11.2

 
$
28.1

 
$
35.4

Restricted Stock Units (“RSUs”)
26.4

 
27.6

 
77.5

 
79.4

Total stock-based compensation
$
34.7

 
$
38.8

 
$
105.6

 
$
114.8

Value of awards granted and exercised during the period:
 
 
Quarter Ended
 
Three Quarters Ended
 
Jun 30, 2013
 
Jul 1, 2012
 
Jun 30, 2013
 
Jul 1, 2012
Estimated fair value per option granted
$
14.32

 
$
14.58

 
$
12.84

 
$
12.79

Weighted average option grant price
$
62.82

 
$
54.93

 
$
51.00

 
$
44.07

Weighted average price per option exercised
$
20.02

 
$
17.23

 
$
16.46

 
$
15.90

Weighted average RSU grant price
$
63.10

 
$
55.38

 
$
50.14

 
$
43.93

Stock option and RSU transactions from September 30, 2012 through June 30, 2013 (in millions):
 
 
Stock Options
 
RSUs
Options outstanding/Nonvested RSUs, September 30, 2012
33.1

 
7.3

Granted
3.5

 
3.1

Options exercised/RSUs vested
(11.2
)
 
(3.4
)
Forfeited/expired
(1.3
)
 
(0.9
)
Options outstanding/Nonvested RSUs, June 30, 2013
24.1

 
6.1

Total unrecognized stock-based compensation expense, net of estimated forfeitures, as of June 30, 2013
$
39.9

 
$
104.2


15


Note 9:
Earnings Per Share
Calculation of net earnings per common share (“EPS”) — basic and diluted (in millions, except EPS):
 
Quarter Ended
 
Three Quarters Ended
 
Jun 30, 2013
 
Jul 1, 2012
 
Jun 30, 2013
 
Jul 1, 2012
Net earnings attributable to Starbucks
$
417.8

 
$
333.1

 
$
1,240.3

 
$
1,025.1

Weighted average common shares and common stock units outstanding (for basic calculation)
749.7

 
758.9

 
748.3

 
753.8

Dilutive effect of outstanding common stock options and RSUs
12.2

 
17.9

 
13.2

 
19.1

Weighted average common and common equivalent shares outstanding (for diluted calculation)
761.9

 
776.8

 
761.5

 
772.9

EPS — basic
$
0.56

 
$
0.44

 
$
1.66

 
$
1.36

EPS — diluted
$
0.55

 
$
0.43

 
$
1.63

 
$
1.33

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, calculated using the treasury stock method. The calculation of dilutive shares outstanding excludes out-of-the-money stock options (i.e., such options’ exercise prices were greater than the average market price of our common shares for the period) because their inclusion would have been antidilutive. Out-of-the-money stock options totaled 0.1 million as of June 30, 2013. There were no out-of-the-money stock options as of July 1, 2012.
Note 10:
Commitments and Contingencies
Legal Proceedings
In the first quarter of fiscal 2011, Starbucks notified Kraft Foods Global, Inc. (now known as Kraft Foods Group, Inc.) (“Kraft”) that we were discontinuing our distribution arrangement 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 defined the main distribution arrangement between the parties. Through our arrangement with Kraft, Starbucks sold 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 managed the distribution, marketing, advertising and promotion of these products.
Kraft denies it has materially breached the Agreement. 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. In addition to denying it materially breached the Agreement, Kraft further alleges that if Starbucks wished 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 distribution arrangement 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 appealed the District Court's decision to the Second Circuit Court of Appeals. On February 25, 2011, the Second Circuit Court of Appeals affirmed the District Court's decision. As a result, Starbucks has been in full control of our packaged coffee business since March 1, 2011.
While Starbucks believes we have valid claims of material breach by Kraft under the Agreement that allowed 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 in the arbitration or to resolve the matter. Although Kraft disclosed to the press and in federal court filings a $750 million offer Starbucks made to Kraft in August 2010 to avoid litigation and ensure a smooth transition of the business, the figure is not a proper basis upon which to estimate a possible outcome of the arbitration but was based upon facts and circumstances at the time. Kraft rejected the offer immediately and did not provide a counter-offer, effectively ending the discussions between the parties with regard to any payment. Moreover, the offer was made prior to our investigation of Kraft's breaches and without consideration of Kraft's continuing failure to comply with material terms of the agreements.
On April 2, 2012, Starbucks and Kraft exchanged expert reports regarding alleged damages on their affirmative claims. Starbucks claimed damages of up to $62.9 million from the loss of sales resulting from Kraft's failure to use commercially reasonable efforts to market Starbucks® coffee, plus attorney fees. Kraft's expert opined that the fair market value of the Agreement was $1.9 billion. After applying a 35% premium and 9% interest, Kraft claimed damages of up to $2.9

16


billion, plus attorney fees.  The arbitration hearing commenced on July 11, 2012 and was completed on August 3, 2012. Starbucks presented evidence of material breaches on Kraft's part and sought nominal damages from Kraft for those breaches. Kraft presented evidence denying it had breached the parties' Agreement and sought damages of $2.9 billion plus attorney fees. We expect a decision in the second half of fiscal 2013.
At this time, Starbucks believes an unfavorable outcome with respect to the arbitration is not probable, but as noted above is reasonably possible. As also noted above, Starbucks believes we have valid claims of material breach by Kraft under the Agreement that allowed us to terminate the Agreement without compensation to Kraft. In addition, Starbucks believes Kraft's damage estimates are highly inflated and based upon faulty analysis. As a result, we cannot reasonably estimate the possible loss. Accordingly, no loss contingency has been recorded for this matter.
Starbucks is party to various other legal proceedings arising in the ordinary course of business, including certain employment litigation cases that have been certified as class or collective actions, 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, results of operations or cash flows.
Note 11:
Segment Reporting
Segment information is prepared on the same basis that our ceo, who is our chief operating decision maker, manages the segments, evaluates financial results, and makes key operating decisions. Effective at the beginning of fiscal 2013, we decentralized certain leadership functions in the areas of retail marketing and category management, global store development and partner resources, to support and align with the respective operating segment presidents. In conjunction with these moves, certain general and administrative and depreciation and amortization expenses associated with these functions, which were previously reported as unallocated corporate expenses within "Other," are now reported within the respective reportable operating segments to align with the regions which they support.
Concurrent with the change in reportable operating segments and realignment of certain operating expenses noted above, we revised our prior period financial information to reflect comparable financial information for the new segment structure and reporting changes. Historical financial information presented herein reflects these changes. There was no impact on consolidated net revenues, total operating expenses, operating income, or net earnings as a result of these changes.
Beginning in the second quarter of fiscal 2013, we removed unallocated corporate expenses from Other. Other is now referred to as All Other Segments and includes Teavana, Seattle's Best Coffee, Evolution Fresh and Tazo retail, as well as our Digital Ventures business. Unallocated corporate operating expenses, which pertain primarily to corporate administrative functions that support the operating segments but are not specifically attributable to or managed by any segment, are now presented as a reconciling item between total segment operating results and consolidated financial results. While our consolidated results are not impacted, our historical segment financial information has been revised to be consistent with the current period presentation.

The table below presents financial information for our reportable operating segments and All Other Segments (in millions):
Quarter Ended
 
Americas
 
EMEA
 
China /
Asia Pacific
 
Channel
Development
 
All Other Segments
 
Segment
Total
June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Total net revenues
$
2,776.5

 
$
287.2

 
$
233.7

 
$
336.4

 
$
107.9

 
$
3,741.7

Depreciation and amortization expenses
105.2

 
13.7

 
8.6

 
0.2

 
3.6

 
131.3

Income from equity investees

 

 
40.3

 
23.1

 

 
63.4

Operating income/(loss)
619.3

 
9.3

 
84.7

 
96.3

 
(9.4
)
 
800.2

 
 
 
 
 
 
 
 
 
 
 
 
July 1, 2012
 
 
 
 
 
 
 
 
 
 
 
Total net revenues
$
2,471.2

 
$
282.0

 
$
181.8

 
$
316.4

 
$
52.2

 
$
3,303.6

Depreciation and amortization expenses
97.2

 
14.4

 
5.8

 
0.3

 
0.7

 
118.4

Income from equity investees

 

 
30.1

 
21.2

 
0.4

 
51.7

Operating income/(loss)
498.7

 
1.6

 
61.3

 
84.2

 
(9.1
)
 
636.7



17


Three Quarters Ended
 
Americas
 
EMEA
 
China /
Asia Pacific
 
Channel
Development
 
All Other Segments
 
Segment
Total
June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Total net revenues
$
8,221.2

 
$
866.6

 
$
661.4

 
$
1,059.8

 
$
288.2

 
$
11,097.2

Depreciation and amortization expenses
316.2

 
41.6

 
24.4

 
0.9

 
7.9

 
391.0

Income from equity investees
2.4

 

 
105.3

 
62.7

 

 
170.4

Operating income/(loss)
1,759.2

 
36.9

 
225.3

 
287.1

 
(18.0
)
 
2,290.5

 
 
 
 
 
 
 
 
 
 
 
 
July 1, 2012
 
 
 
 
 
 
 
 
 
 
 
Total net revenues
$
7,424.4

 
$
857.5

 
$
523.3

 
$
973.7

 
$
156.5

 
$
9,935.4

Depreciation and amortization expenses
291.5

 
42.9

 
16.4

 
1.0

 
1.7

 
353.5

Income from equity investees
2.1

 
0.3

 
90.7

 
55.4

 
0.3

 
148.8

Operating income/(loss)
1,497.0

 
13.3

 
187.0

 
241.4

 
(18.5
)
 
1,920.2


The following table reconciles total segment operating income in the tables above to consolidated earnings before income taxes (in millions):
 
Quarter Ended
 
Three Quarters Ended
 
Jun 30, 2013
 
Jul 1, 2012
 
Jun 30, 2013
 
Jul 1, 2012
Total segment operating income
$
800.2

 
$
636.7

 
$
2,290.5

 
$
1,920.2

Unallocated corporate operating expenses
(185.0
)
 
(145.1
)
 
(500.6
)
 
(442.3
)
Consolidated operating income
615.2

 
491.6

 
1,789.9

 
1,477.9

Interest income and other, net
3.5

 
9.7

 
51.4

 
68.2

Interest expense
(6.3
)
 
(8.9
)
 
(19.0
)
 
(26.2
)
Earnings before income taxes
$
612.4

 
$
492.4

 
$
1,822.3

 
$
1,519.9


Note 12:
Subsequent Event
In July 2013, we entered into an agreement to sell our 82% interest in Starbucks Coffee Chile S.A. and our 18% interest in Starbucks Coffee Argentina S.R.L. to our joint venture partner Alsea, S.A.B. de C.V., for a total purchase price of $61.8 million, which we expect will result in a gain that will be recognized in the fourth quarter of fiscal 2013.


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 income, operating margins, comparable store sales, sales leverage, sales growth, profitability, expenses, dividends, share repurchases, other financial results, capital expenditures, scaling and expansion of international operations, shifts in our store portfolio to more licensed stores in EMEA and to more company-operated stores in CAP, profitable growth models and opportunities, strategic acquisitions, changes to organizational structures, commodity costs and our mitigation strategies, the transition from our distribution arrangement with Kraft to a direct distribution model, liquidity, cash flow from operations, use of cash, the anticipated issuance of debt and applicable interest rate, anticipated store openings, closings and renovations, the health and growth of our business overall and of specific businesses or markets, benefits of recent initiatives, increased traffic to our stores, operational efficiencies, product innovation and distribution, tax rates, and economic conditions in the US and international markets, 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

18


economies and currencies, the impact of competitors’ initiatives, the effect of legal proceedings, and other risks detailed in our filings with the SEC, including in 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 third quarter results demonstrate the success of our growth platforms and the overall strength of our business. Total net revenues increased 13% to $3.7 billion, with every segment contributing. Global comparable store sales grew 8%, driven by a 7% increase in number of transactions. Consolidated operating income increased 25% to $615 million and operating margin expanded 150 basis points to 16.4%. Earnings per share was $0.55, representing growth of 28% over the prior year quarter.
The Americas segment continued its strong performance in the third quarter, growing revenues 12% to $2.8 billion, primarily driven by comparable store sales growth of 9%, comprised of a 7% increase in number of transactions and a 2% increase in average ticket. Strength in beverage innovation and promotions, operational improvements, and expanded food offerings all contributed to the increase in comparable store sales. Operating margin expanded 210 basis points to 22.3%, driven by sales leverage and lower coffee costs. Looking forward, we expect to continue to drive sales growth and profitability through new stores and expanded product offerings, including the continued roll out of La Boulange® bakery items in our retail stores.
In the EMEA segment, we are continuing to make steady progress toward long-term profitability in the region. Revenues grew 2% to $287 million compared to the prior year, driven by licensed store revenue growth nearly offset by a decline in company-operated store revenues. This reflects the shift in our ownership structure, as we have closed underperforming company-operated stores and are focused on growing our licensed store base in profitable locations. Ongoing cost management and our prior store portfolio optimization activities contributed to an increase in operating margin of 260 basis points over the prior year to 3.2%. We expect the investments we are making in this region will result in improved operating performance as we progress on our plan towards mid-teens operating margin over time.
Our CAP segment results reflect a combination of rapid new store growth and solid performance from our existing store base, including our joint venture operations in China and Japan. New store growth, along with a 9% increase in comparable store sales, drove a 29% increase in total net revenues to $234 million. Operating income grew 38% to $85 million and operating margin expanded 250 basis points to 36.2%, driven by sales leverage, improved performance from our joint venture operations and lower coffee costs. We expect this segment will become a more meaningful contributor to overall company profitability in the future, as we look forward to continued store openings and establishing China as our largest market outside of the US.
Channel Development segment revenues grew 6% for the quarter to $336 million, primarily due to increased sales of premium single serve products, driven by sales of Starbucks- and Tazo-branded K-Cup® portion packs, partially offset by decreased pricing on packaged coffee. Lower coffee costs was the primary contributor to the 200 basis point increase in operating margin for the third quarter of fiscal 2013. As we continue to expand customer occasions outside of our retail stores, including growing our presence in the premium single serve category, we expect this segment will become a more significant contributor to our future growth.

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Comparable Store Sales
Starbucks comparable store sales for the third quarter of fiscal 2013 are as follows:
 
 
Quarter Ended Jun 30, 2013
 
Three Quarters Ended Jun 30, 2013
 
Sales
Growth
 
Change in
Transactions
 
Change in
Ticket
 
Sales
Growth
 
Change in
Transactions
 
Change in
Ticket
Consolidated
8
%
 
7
%
 
1
 %
 
7
 %
 
5
%
 
1
 %
Americas
9
%
 
7
%
 
2
 %
 
7
 %
 
5
%
 
2
 %
EMEA
2
%
 
5
%
 
(3
)%
 
(1
)%
 
2
%
 
(2
)%
China / Asia Pacific
9
%
 
8
%
 
 %
 
9
 %
 
7
%
 
2
 %
Our comparable store sales represent the growth in revenue from Starbucks company-operated stores open 13 months or longer. Comparable store sales exclude the effect of fluctuations in foreign currency exchange rates.
Fiscal 2013 — Financial Outlook for the Year
For fiscal year 2013, we expect revenue growth driven by mid single-digit comparable store sales growth, new store openings and continued growth in the Channel Development business. Licensed stores will comprise between one-half and two-thirds of new store openings.
We expect continued robust consolidated operating margin and EPS improvement compared to fiscal 2012, reflecting the strength of our global business and the pipeline of profitable growth initiatives.
We expect increased capital expenditures in fiscal 2013 compared to fiscal 2012, reflecting new store growth, a continued focus on store renovations and additional investments in manufacturing capacity.
Fiscal 2014 — Financial Outlook for the Year
For fiscal year 2014, we expect revenue growth driven by mid-single-digit comparable store sales growth, new store openings, and continued growth in the Channel Development business. Approximately one-half of new store openings will be in China / Asia Pacific, with the remaining half coming primarily from the Americas.
We expect full-year consolidated operating margin improvement of 150 to 200 basis points and strong EPS growth.
Results of Operations (in millions)
Revenues
 
 
Quarter Ended
 
Three Quarters Ended
 
Jun 30,
2013
 
Jul 1,
2012
 
%
Change
 
Jun 30,
2013
 
Jul 1,
2012
 
%
Change
Company-operated stores
$
2,986.3

 
$
2,615.6

 
14.2
%
 
$
8,783.7

 
$
7,868.6

 
11.6
%
Licensed stores
342.0

 
308.2

 
11.0

 
1,014.2

 
905.1

 
12.1

CPG, foodservice and other
413.4

 
379.8

 
8.8

 
1,299.3

 
1,161.7

 
11.8

Total net revenues
$
3,741.7

 
$
3,303.6

 
13.3
%
 
$
11,097.2

 
$
9,935.4

 
11.7
%
Total net revenues for the third quarter and the first three quarters of fiscal 2013 increased $438 million and $1.2 billion, respectively, primarily driven by increased revenues from company-operated stores (contributing $371 million and $915 million, respectively). An increase in comparable store sales was the primary driver of the increase in company-operated store revenues for both periods (approximately 8%, or $217 million, for the third quarter and approximately 7%, or $525 million, for the first three quarters). Also contributing for both periods were incremental revenues from 802 net new company-operated store openings over the past 12 months (approximately $102 million for the third quarter and $267 million for the first three quarters).
Licensed store revenue growth also contributed to the increase in total net revenues for the third quarter and the first three quarters of fiscal 2013 (approximately $34 million and $109 million, respectively). These increases were driven by increased

20


product sales to and royalty revenues from our licensees, resulting from improved comparable store sales and the opening of 756 net new licensed stores over the last 12 months.
CPG, foodservice and other revenues increased $34 million and $138 million for the third quarter and the first three quarters of fiscal 2013, respectively. These increases were primarily due to increased sales of premium single serve products (approximately $29 million and $90 million, respectively).
Operating Expenses
 
Quarter Ended
 
Three Quarters Ended
 
Jun 30,
2013
 
Jul 1,
2012
 
Jun 30,
2013
 
Jul 1,
2012
 
Jun 30,
2013
 
Jul 1,
2012
 
Jun 30,
2013
 
Jul 1,
2012
 
 
 
 
 
% of Total
 
 
 
 
 
% of Total
Net Revenues
 
Net Revenues
Cost of sales including occupancy costs
$
1,597.6

 
$
1,446.1

 
42.7
%
 
43.8
%
 
$
4,748.6

 
$
4,354.1

 
42.8
%
 
43.8
%
Store operating expenses
1,084.1

 
976.0

 
29.0

 
29.5

 
3,212.2

 
2,928.3

 
28.9

 
29.5

Other operating expenses
105.3

 
105.9

 
2.8

 
3.2

 
349.9

 
317.9

 
3.2

 
3.2

Depreciation and amortization expenses
153.3

 
136.7

 
4.1

 
4.1

 
455.3

 
408.6

 
4.1

 
4.1

General and administrative expenses
249.6

 
199.0

 
6.7

 
6.0

 
711.7

 
597.4

 
6.4

 
6.0

Total operating expenses
3,189.9

 
2,863.7

 
85.3

 
86.7

 
9,477.7

 
8,606.3

 
85.4

 
86.6

Income from equity investees
63.4

 
51.7

 
1.7

 
1.6

 
170.4

 
148.8

 
1.5

 
1.5

Operating income
$
615.2

 
$
491.6

 
16.4
%
 
14.9
%
 
$
1,789.9

 
$
1,477.9

 
16.1
%
 
14.9
%
Store operating expenses as a % of related revenues
 
 
 
 
36.3
%
 
37.3
%
 
 
 
 
 
36.6
%
 
37.2
%
Cost of sales including occupancy costs as a percentage of total net revenues decreased 110 basis points and 100 basis points for the third quarter and the first three quarters of fiscal 2013, respectively, primarily driven by lower coffee costs (approximately 60 basis points for the third quarter and 50 basis points for the first three quarters).
Store operating expenses as a percentage of total net revenues decreased 50 basis points for the third quarter and 60 basis points for the first three quarters of fiscal 2013. As a percentage of company-operated store revenues, store operating expenses decreased 100 basis points for the third quarter and 60 basis points for the first three quarters of fiscal 2013, primarily driven by sales leverage (approximately 110 basis points and 80 basis points, respectively).

Other operating expenses as a percentage of total net revenues decreased 40 basis points for the third quarter and was flat for the first three quarters of fiscal 2013. Excluding the impact of company-operated store revenues, other operating expenses decreased 150 basis points for the third quarter and 30 basis points for the first three quarters of fiscal 2013. These decreases were primarily driven by sales leverage from licensed store revenue growth (approximately 100 basis points the third quarter and approximately 20 basis points for the first three quarters). Also contributing to the decrease for the third quarter of fiscal 2013 was timing of marketing (approximately 50 basis points), largely due to lapping the prior year launch of Starbucks® Blonde Roast.

General and administrative expenses as a percentage of total net revenues increased 70 basis points for the third quarter and 40 basis points for the first three quarters of fiscal 2013. These increases were due in part to a donation to the Starbucks Foundation during the quarter (approximately 30 basis points for the third quarter and 10 basis points for the first three quarters). Also contributing to the increase for the first three quarters of fiscal 2013 were costs related to our October Global Leadership Conference (approximately 20 basis points). The remaining change for both periods was primarily the result of increased costs to support overall company growth.
Income from equity investees increased $12 million for the third quarter and $22 million for the first three quarters of fiscal 2013, primarily due to increased income from our joint venture operations in China and Japan, as well as improved performance from our North American Coffee Partnership joint venture which produces, bottles and distributes our ready to drink beverages. The increase for the first three quarters was partially offset by the absence this year of $6.7 million of non-routine income included in income from equity investees in the second quarter of the prior year.

21


The combination of these changes resulted in an increase in operating margin of 150 basis points for the third quarter and 120 basis points for the first three quarters of fiscal 2013.

Other Income and Expenses 
 
Quarter Ended
 
Three Quarters Ended
 
Jun 30,
2013
 
Jul 1,
2012
 
Jun 30,
2013
 
Jul 1,
2012
 
Jun 30,
2013
 
Jul 1,
2012
 
Jun 30,
2013
 
Jul 1,
2012
 
 
 
 
 
% of Total
 
 
 
 
 
% of Total
Net Revenues
 
Net Revenues
Operating income
$
615.2

 
$
491.6

 
16.4
 %
 
14.9
 %
 
$
1,789.9

 
$
1,477.9

 
16.1
 %
 
14.9
 %
Interest income and other, net
3.5

 
9.7

 
0.1

 
0.3

 
51.4

 
68.2

 
0.5

 
0.7

Interest expense
(6.3
)
 
(8.9
)
 
(0.2
)
 
(0.3
)
 
(19.0
)
 
(26.2
)
 
(0.2
)
 
(0.3
)
Earnings before income taxes
612.4

 
492.4

 
16.4

 
14.9

 
1,822.3

 
1,519.9

 
16.4

 
15.3

Income taxes
194.6

 
159.1

 
5.2

 
4.8

 
581.4

 
494.2

 
5.2

 
5.0

Net earnings including noncontrolling interests
417.8

 
333.3

 
11.2