EX-99.1 3 sbux-12913xex991.htm EXHIBIT 99.1 SBUX - 1.29.13 - EX99.1


Exhibit 99.1

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

General
Our fiscal year ends on the Sunday closest to September 30. The fiscal year ended on October 3, 2010 included 53 weeks with the 53rd week falling in the fourth fiscal quarter. The fiscal years ended on October 2, 2011 and September 30, 2012 both included 52 weeks. Comparable store sales percentages for fiscal 2010 are calculated excluding the 53rd week. All references to store counts, including data for new store openings, are reported net of related store closures, unless otherwise noted.

Financial Highlights
Total net revenues increased 14% to $13.3 billion in fiscal 2012 compared to $11.7 billion in fiscal 2011. The increase was due primarily to a 7% increase in global comparable store sales, 50% revenue growth in Channel Development, and 20% growth in licensed stores revenue. The comparable store sales growth in company-operated stores was comprised of a 6% increase in the number of transactions and a 1% increase in average ticket.
Consolidated operating income was $2.0 billion in fiscal 2012 compared to $1.7 billion in fiscal 2011 and operating margin increased to 15.0% compared to 14.8% in fiscal 2011. The operating margin expansion was driven by increased sales leverage and the absence of charges in fiscal 2012 related to the Seattle's Best Coffee store closures in Border's bookstores, partially offset by higher commodity costs.
EPS for fiscal 2012 was $1.79, compared to EPS of $1.62 reported in fiscal 2011, with the increase driven by the improved sales leverage, partially offset by the impact of higher commodity costs in fiscal 2012 and certain gains recorded in the fourth quarter of fiscal 2011, including a gain from a fair market value adjustment resulting from the acquisition of the remaining ownership interest in our joint venture in Switzerland and Austria as well as a gain on the sale of corporate real estate.
Cash flow from operations was $1.8 billion in fiscal 2012 compared to $1.6 billion in fiscal 2011. Capital expenditures were approximately $856 million in fiscal 2012 compared to $532 million in fiscal 2011. Available operating cash flow after capital expenditures during fiscal 2012 was directed at returning approximately $1.1 billion of cash to our shareholders via share repurchases and dividends.

Overview
Starbucks results for fiscal 2012 reflect the strength of our global business model. We continue to execute on our new regional operating model which we implemented at the beginning of fiscal 2012. We now have four reportable operating segments: Americas; Europe, Middle East, and Africa ("EMEA"); China / Asia Pacific ("CAP") and Channel Development. Each segment is managed by an operating segment president.
Total net revenues increased 14% to $13.3 billion driven by global comparable store sales growth of 7% and a 50% increase in Channel Development revenue. This growth drove increased sales leverage and resulted in higher operating margin and net earnings compared to fiscal 2011. This helped mitigate the impact of higher commodity costs, mostly coffee, which negatively impacted operating income by approximately $214 million for the year, equivalent to approximately 160 basis points of impact on operating margin.
Our Americas business continued its strong momentum and contributed 75% of total net revenues in fiscal 2012. The revenue growth for the year was driven by an 8% increase in comparable store sales, comprised of a 6% increase in traffic and a 2% increase in average ticket. This sales growth, combined with a continued focus on operational efficiencies, drove increased sales leverage that offset the impact of higher commodity costs. Looking forward, we expect to continue driving sales growth and profitability through continued store efficiency efforts, new store development, and expanding our pipeline of new product offerings to increase revenues throughout all dayparts.

1



EMEA segment results reflect both the investments we have begun making as part of our transformation plan for the region, as well as the macro-economic headwinds we, and others, face there. This resulted in flat comparable store sales and operating income of $7 million for fiscal 2012, a decrease of $32 million compared to fiscal 2011. We started the year by putting in place a new leadership team that is focused on increasing the Starbucks brand presence, health and relevancy across the region, improving the profitability of the existing store base through a focus on revenue growth and operating costs, and identifying opportunities for new store growth through licensing arrangements. We expect the investments we are making as part of this transformation effort will result in improved operating performance as we progress on our plan towards mid-teens operating margin; however, this turnaround will take time to gain traction.
CAP segment revenues increased 31%, driven by new store growth and comparable store sales of 15%. This segment continues to grow rapidly and is becoming a more meaningful contributor to overall company profitability. We expect continued growth will be from a mix of new store openings and comparable store sales growth. China continues to be a significant growth opportunity for us as we remain on track to reach our goal of 1,500 stores in 2015. In addition, other key markets such as Japan, Korea, Thailand, Singapore and Indonesia all continue to be profitable and provide a solid foundation for continued growth in the region.
Our Channel Development segment represents another important, profitable growth opportunity for us. Channel Development results were a solid contributor to overall revenue growth with a 50% increase in revenues primarily due to sales of Starbucks and Tazo branded K-Cup® portion packs which launched at the start of fiscal 2012 and our transition to a direct distribution model for packaged coffee, which occurred during the second quarter of fiscal 2011. High commodity costs continued to be a significant drag on operating margin; however, despite these higher costs, operating income increased $57 million to $340 million for fiscal 2012. We expect continued innovation and new product offerings such as the Verismo™ system by Starbucks and Starbucks Refreshers™ beverages will drive further growth and profitability within this segment over time.

Fiscal 2013 — The View Ahead
For fiscal year 2013, we expect moderate revenue growth driven by mid single-digit increased comparable store sales, new store openings and strong 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 additional investments in store renovations, new store growth and manufacturing capacity.

Operating Segment Overview
Starbucks has four reportable operating segments: Americas, Europe, Middle East, and Africa ("EMEA"), China and Asia Pacific ("CAP") and Channel Development. Seattle’s Best Coffee is reported in “Other,” along with Evolution Fresh, Digital Ventures and unallocated corporate expenses that pertain 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.
The Americas, EMEA and CAP segments include company-operated stores and licensed stores. Licensed stores generally have a higher operating margin than company-operated stores. Under the licensed model, Starbucks receives a reduced share of the total store revenues, but this is more than offset by the reduction in its share of costs as these are primarily incurred by the licensee. The EMEA and CAP segments have a higher relative share of licensed stores versus company-operated stores compared to the Americas segment; however, the Americas segment has been operating significantly longer than the other segments and has developed deeper awareness of, and attachment to, the Starbucks brand and stores among its customer base. As a result, the more mature Americas segment has significantly more stores and higher total revenues than the other segments. Average sales per store are also higher in the Americas due to various factors including length of time in market and local income levels.

2



Starbucks store base in EMEA and CAP continues to expand and we continue to focus on achieving sustainable growth from established international markets while at the same time investing in emerging markets, such as China. Occupancy costs and store operating expenses can be higher in certain international markets than in the Americas segment due to higher rents for prime store locations or costs of compliance with country-specific regulatory requirements. Because many of our international operations are in an early phase of development, operating expenses as a percentage of related revenues are often higher compared to the Americas segment. International markets in the early stages of development require a more extensive support organization, relative to the current levels of revenue and operating income, than the Americas.
The Channel Development segment includes packaged coffee and tea, a variety of ready-to-drink beverages, single-serve coffee and tea products and other branded product operations worldwide, as well as the US foodservice business. In prior years through the first several months of fiscal 2011, we sold a selection of Starbucks and Seattle’s Best Coffee branded packaged coffees and Tazo® teas in grocery and warehouse club stores throughout the US and to grocery stores in Canada, the UK and other European countries through a distribution arrangement with Kraft Foods Global, Inc. Kraft managed the distribution, marketing, advertising and promotion of these products as a part of that arrangement. During fiscal 2011, we successfully transitioned these businesses including the marketing, advertising, and promotion of these products, from our previous distribution arrangement with Kraft and began selling these products directly to the grocery and warehouse club stores. Our Channel Development segment also includes ready-to-drink beverages, which are primarily manufactured and distributed through The North American Coffee Partnership, a joint venture with the Pepsi-Cola Company. The proportionate share of the results of the joint venture is included, on a net basis, in income from equity investees on the consolidated statements of earnings. The US foodservice business sells coffee and other related products to institutional foodservice companies with the majority of its sales through national broad-line distribution networks. The Channel Development segment reflects a modest cost structure and a resulting higher operating margin, compared to the other reporting segments, which consist primarily of retail stores.

Acquisitions
See Note 2 to the consolidated financial statements in this 10-K.

RESULTS OF OPERATIONS — FISCAL 2012 COMPARED TO FISCAL 2011

Consolidated results of operations (in millions):
Revenues
 
Fiscal Year Ended
Sep 30,
2012
 
Oct 2,
2011
 
%
Change
 
Sep 30,
2012
 
Oct 2,
2011
 
 
 
 
 
 
 
 
 
% of Total
Net Revenues
 
Net revenues:
 
 
 
 
 
 
 
 
 
 
Company-operated stores
$
10,534.5

 
$
9,632.4

 
9.4
%
 
79.2
%
 
82.3
%
 
Licensed stores
1,210.3

 
1,007.5

 
20.1
%
 
9.1
%
 
8.6
%
 
CPG, foodservice and other
1,554.7

 
1,060.5

 
46.6
%
 
11.7
%
 
9.1
%
 
Total net revenues
$
13,299.5

 
$
11,700.4

 
13.7
%
 
100.0
%
 
100.0
%
Consolidated net revenues were $13.3 billion for fiscal 2012, an increase of 13.7%, or $1.6 billion over fiscal 2011, primarily due to increased revenues from company-operated stores (contributing $902 million), driven by an increase in comparable store sales (approximately 7%, or $680 million). Also contributing to the increase were

3



incremental revenues from net new company-operated store openings over the past 12 months (approximately $184 million).

Licensed store revenues contributed $203 million to the increase in total net revenues in fiscal 2012, primarily due to higher product sales to and royalty revenues from our licensees, resulting from improved comparable store sales and the opening of 665 net new licensed stores over the past 12 months.
CPG, foodservice and other revenues increased $494 million, primarily due to sales of Starbucks and Tazo branded K-Cup® portion packs launched in the CPG channel on November 1, 2011 (approximately $232 million). The benefit of recognizing full revenue from packaged coffee and tea under the direct distribution model (approximately $78 million) and an increase in foodservice revenues (approximately $50 million) also contributed.

Operating Expenses
 
Fiscal Year Ended
Sep 30,
2012
 
Oct 2,
2011
 
Sep 30,
2012
 
Oct 2,
2011
 
 
 
 
 
 
 
% of Total
Net Revenues
 
Cost of sales including occupancy costs
$
5,813.3

 
$
4,915.5

 
43.7
%
 
42.0
%
 
Store operating expenses
3,918.1

 
3,594.9

 
29.5
%
 
30.7
%
 
Other operating expenses
429.9

 
392.8

 
3.2
%
 
3.4
%
 
Depreciation and amortization expenses
550.3

 
523.3

 
4.1
%
 
4.5
%
 
General and administrative expenses
801.2

 
749.3

 
6.0
%
 
6.4
%
 
Total operating expenses
11,512.8

 
10,175.8

 
86.6
%
 
87.0
%
 
Gain on sale of properties

 
30.2

 
%
 
0.3
%
 
Income from equity investees
210.7

 
173.7

 
1.6
%
 
1.5
%
 
Operating income
$
1,997.4

 
$
1,728.5

 
15.0
%
 
14.8
%
 
Supplemental ratios as a % of related revenues:
 
 
 
 
 
 
 
 
Store operating expenses
 
 
 
 
37.2
%
 
37.3
%
Cost of sales including occupancy costs as a percentage of total net revenues increased 170 basis points, driven by increased commodity costs (approximately 160 basis points), primarily due to higher coffee costs.
Store operating expenses as a percentage of total net revenues decreased 120 basis points, due to increased Channel Development and licensed store revenues. Store operating expenses as a percent of company-operated store revenues decreased 10 basis points due to increased sales leverage.

Other operating expenses as a percentage of total net revenues decreased 20 basis points. As a percentage of net revenues excluding company-operated store revenues, other operating expenses decreased 350 basis points. This decrease was primarily driven by increased sales leverage (approximately 150 basis points), the absence of charges in fiscal 2012 related to the Seattle’s Best Coffee store closures in Borders bookstores (approximately 80 basis points) and a shift in the timing of marketing spend (approximately 60 basis points).
Income from equity investees increased $37.0 million, primarily due to an increase in income from our North American Coffee Partnership (approximately $13 million), Japan (approximately $11 million) and Shanghai (approximately $10 million) joint venture operations.
The combination of these changes, along with increased sales leverage on depreciation and amortization (approximately 40 basis points) and general and administrative expenses (approximately 40 basis points), resulted in an increase in operating margin of 20 basis points over fiscal 2011.


4



Other Income and Expenses
 
Fiscal Year Ended
Sep 30,
2012
 
Oct 2,
2011
 
Sep 30,
2012
 
Oct 2,
2011
 
 
 
 
 
 
 
% of Total
Net Revenues
 
Operating income
$
1,997.4

 
$
1,728.5

 
15.0
 %
 
14.8
 %
 
Interest income and other, net
94.4

 
115.9

 
0.7
 %
 
1.0
 %
 
Interest expense
(32.7
)
 
(33.3
)
 
(0.2
)%
 
(0.3
)%
 
Earnings before income taxes
2,059.1

 
1,811.1

 
15.5
 %
 
15.5
 %
 
Income taxes
674.4

 
563.1

 
5.1
 %
 
4.8
 %
 
Net earnings including noncontrolling interests
1,384.7

 
1,248.0

 
10.4
 %
 
10.7
 %
 
Net earnings (loss) attributable to noncontrolling interests
0.9

 
2.3

 
 %
 
 %
 
Net earnings attributable to Starbucks
$
1,383.8

 
$
1,245.7

 
10.4
 %
 
10.6
 %
 
Effective tax rate including noncontrolling interests
 
 
 
 
32.8
 %
 
31.1
 %
Net interest income and other decreased $21 million over the prior year, primarily due to the absence of the gain recognized in the fourth quarter of fiscal 2011 resulting from the acquisition of the remaining interest in our previous joint venture operations in Switzerland and Austria (approximately $55 million), partially offset by the recognition of additional income associated with unredeemed gifts cards in the second quarter of fiscal 2012 (approximately $29 million), following a court ruling related to state unclaimed property laws.

Income taxes for the fiscal year ended 2012 resulted in an effective tax rate of 32.8% compared to 31.1% for fiscal year 2011.  The rate increased in fiscal year 2012 primarily due to tax benefits recognized in fiscal 2011 from the Switzerland and Austria transaction and the release of foreign valuation allowances. The effective tax rate for fiscal 2013 is expected to be approximately 33%.


5



Segment Information
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 (in millions):
Americas
 
Fiscal Year Ended
 
Sep 30,
2012
 
Oct 2,
2011
 
Sep 30,
2012
 
Oct 2,
2011
 
 
 
 
 
 
 
 
As a % of Americas 
Total Net Revenues
 
Total net revenues
 
$
9,936.0

 
$
9,065.0

 
100.0
%
 
100.0
%
 
Cost of sales including occupancy costs
 
3,885.5

 
3,512.7

 
39.1
%
 
38.8
%
 
Store operating expenses
 
3,427.8

 
3,184.2

 
34.5
%
 
35.1
%
 
Other operating expenses
 
83.8

 
75.8

 
0.8
%
 
0.8
%
 
Depreciation and amortization expenses
 
392.4

 
391.4

 
3.9
%
 
4.3
%
 
General and administrative expenses
 
128.2

 
127.3

 
1.3
%
 
1.4
%
 
Total operating expenses
 
7,917.7

 
7,291.4

 
79.7
%
 
80.4
%
 
Income from equity investees
 
2.1

 
1.6

 
%
 
%
 
Operating income
 
$
2,020.4

 
$
1,775.2

 
20.3
%
 
19.6
%
 
Supplemental ratios as a % of related revenues:
 
 
 
 
 
 
 
 
 
Store operating expenses
 
 
 
 
 
37.8
%
 
38.1
%

Revenues
Americas total net revenues for fiscal 2012 increased 10%, or $871 million, primarily due to increased revenues from company-operated stores (contributing $712 million), driven by an increase in comparable store sales (approximately 8%, or $626 million). Also contributing to the increase were incremental revenues from net new company-operated store openings over the past 12 months (approximately $100 million).

Licensed store revenues also contributed to the increase in total net revenues with an increase of $149 million in fiscal 2012 over the prior year period, primarily due to higher product sales to and royalty revenues from our licensees, resulting from improved comparable store sales and the opening of 270 net new licensed stores over the past 12 months.
Operating Expenses
Cost of sales including occupancy costs as a percentage of total net revenues increased 30 basis points, primarily driven by higher commodity costs (approximately 110 basis points), mainly coffee, partially offset by increased sales leverage on occupancy costs (approximately 70 basis points).
Store operating expenses as a percentage of total net revenues decreased 60 basis points. Increased licensed store revenues contributed approximately 30 basis points of the decrease. Store operating expenses as a percentage of company-operated store revenues decreased 30 basis points, primarily due to increased sales leverage (approximately 70 basis points), partially offset by higher debit card transaction fees (approximately 20 basis points).


6



Other operating expenses as a percentage of total net revenues was flat over prior year. As a percentage of net revenues excluding company-operated store revenues, other operating expenses decreased 100 basis points, primarily driven by increased sales leverage.
The combination of these changes, along with increased sales leverage on depreciation and amortization expense (approximately 40 basis points), resulted in an increase in operating margin of 70 basis points over fiscal 2011.


EMEA
 
Fiscal Year Ended
Sep 30,
2012
 
Oct 2,
2011
 
Sep 30,
2012
 
Oct 2,
2011
 
 
 
 
 
 
 
    As a % of EMEA 
Total Net Revenues
 
Total net revenues
$
1,141.3

 
$
1,046.8

 
100.0
%
 
100.0
%
 
Cost of sales including occupancy costs
597.3

 
530.3

 
52.3
%
 
50.7
%
 
Store operating expenses
371.1

 
327.3

 
32.5
%
 
31.3
%
 
Other operating expenses
33.6

 
36.5

 
2.9
%
 
3.5
%
 
Depreciation and amortization expenses
57.1

 
53.4

 
5.0
%
 
5.1
%
 
General and administrative expenses
75.7

 
66.4

 
6.6
%
 
6.3
%
 
Total operating expenses
1,134.8

 
1,013.9

 
99.4
%
 
96.9
%
 
Income from equity investees
0.3

 
6.0

 
%
 
0.6
%
 
Operating income
$
6.8

 
$
38.9

 
0.6
%
 
3.7
%
 
Supplemental ratios as a % of related revenues:
 
 
 
 
 
 
 
 
Store operating expenses
 
 
 
 
38.3
%
 
36.1
%
Revenues
EMEA total net revenues for fiscal 2012 increased 9%, or $95 million, primarily driven by increased revenues from company-operated stores (contributing $63 million), due to the acquisition of the remaining interest in our previous joint venture operations in Switzerland and Austria in the fourth quarter of fiscal 2011 (approximately $80 million), partially offset by unfavorable foreign currency fluctuations (approximately $33 million).
An increase in licensed store revenues of $27 million also contributed to the increase in total net revenues, primarily due to higher product sales to and royalty revenues from our licensees, resulting from the opening of 101 net new licensed stores over the past 12 months.
Operating Expenses
Cost of sales including occupancy costs as a percentage of total net revenues increased 160 basis points, primarily driven by higher costs related to the transition to a consolidated food and dairy distribution model in the UK that began in the first quarter of fiscal 2012 (approximately 180 basis points). These costs are expected to decline over time as the full benefits of the transition are realized. Also contributing to the decrease were costs related to store portfolio optimization initiatives occurring in the fourth quarter of fiscal 2012 (approximately 60 basis points), partially offset by increased sales leverage on occupancy costs.
Store operating expenses as a percentage of total net revenues increased 120 basis points. Store operating expenses as a percentage of company-operated store revenues increased 220 basis points, primarily driven by asset impairments related to underperforming stores (approximately 140 basis points). Also contributing to the decrease were costs related to store portfolio optimization initiatives occurring in the fourth quarter of fiscal 2012 (approximately 40 basis points).

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Other operating expenses as a percentage of total net revenues decreased 60 basis points. Excluding the impact of company-operated store revenues, other operating expenses decreased 640 basis points, primarily driven by operational efficiencies.
Income from equity investees declined to $0.3 million in fiscal 2012, due to the acquisition of the remaining interest in our previous joint venture operations in Switzerland and Austria.
The above changes contributed to a decrease in operating margin of 310 basis points over the prior year.


China / Asia Pacific

 
Fiscal Year Ended
Sep 30,
2012
 
Oct 2,
2011
 
Sep 30,
2012
 
Oct 2,
2011
 
 
 
 
 
 
 
    As a % of CAP 
Total Net Revenues
 
Total net revenues
$
721.4

 
$
552.3

 
100.0
%
 
100.0
%
 
Cost of sales including occupancy costs
362.8

 
282.0

 
50.3
%
 
51.1
%
 
Store operating expenses
119.2

 
83.4

 
16.5
%
 
15.1
%
 
Other operating expenses
47.0

 
35.7

 
6.5
%
 
6.5
%
 
Depreciation and amortization expenses
23.2

 
18.1

 
3.2
%
 
3.3
%
 
General and administrative expenses
39.0

 
34.7

 
5.4
%
 
6.3
%
 
Restructuring charges

 

 
%
 
%
 
Total operating expenses
591.2

 
453.9

 
82.0
%
 
82.2
%
 
Income from equity investees
122.4

 
92.9

 
17.0
%
 
16.8
%
 
Operating income
$
252.6

 
$
191.3

 
35.0
%
 
34.6
%
 
Supplemental ratios as a % of related revenues:
 
 
 
 
 
 
 
 
Store operating expenses
 
 
 
 
24.4
%
 
23.1
%
Revenues
China / Asia Pacific total net revenues for fiscal 2012 increased 31%, or $169 million, primarily driven by increased revenues from company-operated stores (contributing $128 million). The increase in company-operated store revenues was primarily due to the opening of 154 net new stores over the past 12 months (approximately $71 million) and an increase in comparable store sales (approximately 15%, or $53 million).
Also contributing to the increase in revenues was an increase in licensed store revenues of $41 million, due to increased royalty revenues from and product sales to licensees, primarily driven by 294 net new licensed store openings over the past 12 months.
Operating Expenses
Cost of sales including occupancy costs as a percentage of total net revenues decreased 80 basis points primarily driven by the accelerated growth of company-operated stores, which contribute a higher gross margin, in China (approximately 140 basis points), partially offset by increased commodity costs (approximately 120 basis points), mainly higher coffee costs.
Store operating expenses as a percentage of total net revenues increased 140 basis points. Store operating expenses as a percentage of company-operated store revenues increased 130 basis points, primarily driven by increased costs associated with the expansion efforts of company-operated stores in mainland China.

8



Income from equity investees increased $30 million, primarily driven by an increase in income from our Japan (approximately $11 million) and Shanghai (approximately $10 million) joint venture operations.
The combination of these changes, along with increased sales leverage on depreciation and amortization (approximately 10 basis points) and general and administrative expenses (approximately 90 basis points), resulted in an increase in operating margin of 40 basis points over fiscal 2011.

Channel Development

 
Fiscal Year Ended
Sep 30,
2012
 
Oct 2,
2011
 
Sep 30,
2012
 
Oct 2,
2011
 
 
 
 
 
 
 
    As a % of Channel Development 
Total Net Revenues
 
Total net revenues
$
1,292.2

 
$
860.5

 
100.0
%
 
100.0
%
 
Cost of sales
827.6

 
487.5

 
64.0
%
 
56.7
%
 
Other operating expenses
191.1

 
151.8

 
14.8
%
 
17.6
%
 
Depreciation and amortization expenses
1.3

 
2.4

 
0.1
%
 
0.3
%
 
General and administrative expenses
17.0

 
10.9

 
1.3
%
 
1.3
%
 
Total operating expenses
1,037.0

 
652.6

 
80.3
%
 
75.8
%
 
Income from equity investees
85.2

 
75.6

 
6.6
%
 
8.8
%
 
Operating income
$
340.4

 
$
283.5

 
26.3
%
 
32.9
%
Revenues
Channel Development total net revenues for fiscal 2012 increased 50%, or $432 million, primarily due to sales of Starbucks and Tazo branded K-Cup® portion packs (approximately $232 million). The benefit of recognizing full revenue from packaged coffee and tea sales under the direct distribution model through the second quarter of fiscal 2012 (approximately $70 million) and increased foodservice revenues (approximately $33 million) also contributed.
Operating Expenses
Cost of sales as a percentage of total net revenues increased 730 basis points, primarily due to increased commodity costs (approximately 570 basis points), mainly coffee, and a shift in our product mix driven by the introduction of Starbucks and Tazo branded K-Cup® portion packs (approximately 140 basis points).
Other operating expenses as a percentage of total net revenues decreased 280 basis points, primarily due to increased sales leverage.
Income from equity investees increased $10 million over the prior year period, driven by increased income from our North American Coffee Partnership joint venture. Income from equity investees declined as a percentage of total net revenues (approximately 220 basis points) primarily due to the growth in segment revenues.
The combination of these changes resulted in a decrease in operating margin of 660 basis points over fiscal 2011.


9



Other
 
Fiscal Year Ended
Sep 30,
2012
 
Oct 2,
2011
 
% Change
 
 
 
 
 
 
 
 
 
Total net revenues
$
208.6

 
$
175.8

 
18.7
 %
 
Cost of sales
140.1

 
103.0

 
36.0
 %
 
Other operating expenses
74.4

 
93.0

 
(20.0
)%
 
Depreciation and amortization expenses
76.3

 
58.0

 
31.6
 %
 
General and administrative expenses
541.3

 
510.0

 
6.1
 %
 
Total operating expenses
832.1

 
764.0

 
8.9
 %
 
Gain on sale of properties

 
30.2

 
(100.0
)%
 
Income from equity investees
0.7

 
(2.4
)
 
nm

 
Operating loss
$
(622.8
)
 
$
(560.4
)
 
11.1
 %
Other includes operating results from Seattle’s Best Coffee, Evolution Fresh, and Digital Ventures, 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.
Other total net revenues increased $33 million, primarily due to incremental revenues from Evolution Fresh, which was acquired during the first quarter of fiscal 2012.
Total operating expenses increased $68 million, primarily due to increased cost of sales resulting from higher commodity costs, primarily coffee, and higher general and administrative expenses to support the growth of the business.

RESULTS OF OPERATIONS — FISCAL 2011 COMPARED TO FISCAL 2010

Consolidated results of operations (in millions):
Revenues
 
Fiscal Year Ended
Oct 2,
2011
 
Oct 3,
2010
 
%
Change
 
Oct 2,
2011
 
Oct 3,
2010
 
 
 
 
 
 
 
 
 
% of Total
Net Revenues
 
Net revenues:
 
 
 
 
 
 
 
 
 
 
Company-operated stores
$
9,632.4

 
$
8,963.5

 
7.5
%
 
82.3
%
 
83.7
%
 
Licensed stores
1,007.5

 
875.2

 
15.1
%
 
8.6
%
 
8.2
%
 
CPG, foodservice and other
1,060.5

 
868.7

 
22.1
%
 
9.1
%
 
8.1
%
 
Total net revenues
$
11,700.4

 
$
10,707.4

 
9.3
%
 
100.0
%
 
100.0
%
Consolidated net revenues were $11.7 billion for fiscal 2011, an increase of 9%, or $993 million over fiscal 2010. The increase was primarily due to an increase in company-operated store revenues driven by an 8% increase in global comparable stores sales (contributing approximately $672 million). The increase in comparable store sales was due to a 6% increase in number of transactions (contributing approximately $499 million) and a 2% increase in average value per transaction (contributing approximately $173 million). Also contributing to the increase in

10



total net revenues was favorable foreign currency translation (approximately $126 million) resulting from a weakening of the US dollar relative to foreign currencies and an increase in licensed store revenues (approximately $106 million). This increase was partially offset by the impact of the extra week in fiscal 2010 (approximately $207 million).

Operating Expenses
 
Fiscal Year Ended
Oct 2,
2011
 
Oct 3,
2010
 
Oct 2,
2011
 
Oct 3,
2010
 
 
 
 
 
 
 
% of Total
Net Revenues
 
Cost of sales including occupancy costs
$
4,915.5

 
$
4,416.5

 
42.0
%
 
41.2
%
 
Store operating expenses
3,594.9

 
3,471.9

 
30.7
%
 
32.4
%
 
Other operating expenses
392.8

 
279.7

 
3.4
%
 
2.6
%
 
Depreciation and amortization expenses
523.3

 
510.4

 
4.5
%
 
4.8
%
 
General and administrative expenses
749.3

 
704.6

 
6.4
%
 
6.6
%
 
Restructuring charges

 
53.0

 
%
 
0.5
%
 
Total operating expenses
10,175.8

 
9,436.1

 
87.0
%
 
88.1
%
 
Gain on sale of properties
30.2

 

 
0.3
%
 
%
 
Income from equity investees
173.7

 
148.1

 
1.5
%
 
1.4
%
 
Operating income
$
1,728.5

 
$
1,419.4

 
14.8
%
 
13.3
%
 
Supplemental ratios as a % of related revenues:
 
 
 
 
 
 
 
 
Store operating expenses
 
 
 
 
37.3
%
 
38.7
%
Cost of sales including occupancy costs as a percentage of total net revenues increased 80 basis points. The increase was primarily due to higher commodity costs (approximately 220 basis points), mainly driven by increased coffee costs. Partially offsetting this increase was lower occupancy costs as a percentage of total net revenues (approximately 70 basis points), driven by increased sales leverage.
Store operating expenses as a percentage of total net revenues decreased 170 basis points primarily due to increased sales leverage.
Other operating expenses as a percentage of total net revenues increased 80 basis points primarily due to higher expenses to support the direct distribution model for packaged coffee and tea (approximately 40 basis points) and the impairment of certain assets in our Seattle’s Best Coffee business associated with the Borders bankruptcy in April 2011 (approximately 20 basis points).
The above changes contributed to an overall increase in operating margin of 150 basis points for fiscal 2011. Considering the impact from all line items, the primary drivers for the increase in operating margin for fiscal 2011 were increased sales leverage (approximately 300 basis points), the absence of restructuring charges in the current year (approximately 50 basis points) and the gain on the sale of corporate real estate in fiscal 2011 (approximately 30 basis points). These increases were partially offset by higher commodity costs (approximately 220 basis points).


11



Other Income and Expenses
 
Fiscal Year Ended
Oct 2,
2011
 
Oct 3,
2010
 
Oct 2,
2011
 
Oct 3,
2010
 
 
 
 
 
 
 
% of Total
Net Revenues
 
Operating income
$
1,728.5

 
$
1,419.4

 
14.8
 %
 
13.3
 %
 
Interest income and other, net
115.9

 
50.3

 
1.0
 %
 
0.5
 %
 
Interest expense
(33.3
)
 
(32.7
)
 
(0.3
)%
 
(0.3
)%
 
Earnings before income taxes
1,811.1

 
1,437.0

 
15.5
 %
 
13.4
 %
 
Income taxes
563.1

 
488.7

 
4.8
 %
 
4.6
 %
 
Net earnings including noncontrolling interests
1,248.0

 
948.3

 
10.7
 %
 
8.9
 %
 
Net earnings (loss) attributable to noncontrolling interests
2.3

 
2.7

 
 %
 
 %
 
Net earnings attributable to Starbucks
$
1,245.7

 
$
945.6

 
10.6
 %
 
8.8
 %
 
Effective tax rate including noncontrolling interests
 
 
 
 
31.1
 %
 
34.0
 %
Net interest income and other increased $66 million over the prior year. The increase primarily resulted from the gain recorded in the fourth quarter of fiscal 2011 related to our acquisition of the remaining ownership interest in our joint venture operations in Switzerland and Austria (approximately $55 million).
Income taxes for the fiscal year ended 2011 resulted in an effective tax rate of 31.1% compared to 34.0% for fiscal 2010. The lower rate in fiscal 2011 was primarily due to a benefit from the Switzerland and Austria transaction and to an increase in income in foreign jurisdictions having lower tax rates.

Segment Information
The following tables summarize our results of operations by segment for fiscal 2011 and 2010 (in millions).

Americas
 
Fiscal Year Ended
Oct 2,
2011
 
Oct 3,
2010
 
Oct 2,
2011
 
Oct 3,
2010
 
 
 
 
 
 
 
As a % of Americas Total
Net Revenues
 
Total net revenues
$
9,065.0

 
$
8,488.5

 
100.0
%
 
100.0
%
 
Cost of sales including occupancy costs
3,512.7

 
3,258.5

 
38.8
%
 
38.4
%
 
Store operating expenses
3,184.2

 
3,083.3

 
35.1
%
 
36.3
%
 
Other operating expenses
75.8

 
63.1

 
0.8
%
 
0.7
%
 
Depreciation and amortization expenses
391.4

 
394.2

 
4.3
%
 
4.6
%
 
General and administrative expenses
127.3

 
132.4

 
1.4
%
 
1.6
%
 
Restructuring charges

 
28.4

 
%
 
0.3
%
 
Total operating expenses
7,291.4

 
6,959.9

 
80.4
%
 
82.0
%
 
Income from equity investees
1.6

 
0.9

 
%
 

 
Operating income
$
1,775.2

 
$
1,529.5

 
19.6
%
 
18.0
%
 
Supplemental ratios as a % of related revenues:
 
 
 
 
 
 
 
 
Store operating expenses
 
 
 
 
38.1
%
 
39.2
%


12



Revenues
Americas total net revenues for fiscal 2011 increased 7%, or $577 million. The increase was primarily driven by an increase in comparable store sales in our company-operated stores of 8% (contributing approximately $590 million), driven by a 5% increase in number of transactions and a 2% increase in average value per transaction. Also contributing to the increase was favorable foreign currency translation resulting from the weakening of the US dollar (approximately $51 million), primarily in relation to the Canadian dollar, and an increase in product sales to and royalty revenues from licensees (approximately $73 million), primarily due to improved comparable store sales and net new store openings. These increases were partially offset by the absence of the extra week in fiscal 2010 (approximately $162 million).

Operating Expenses
Cost of sales including occupancy costs as a percentage of total net revenues increased 40 basis points over the prior year. The increase was primarily due to higher commodity costs (approximately 140 basis points), mainly coffee, partially offset by increased sales leverage on occupancy costs (approximately 60 basis points).
Store operating expenses as a percentage of total net revenues decreased 120 basis points primarily due to increased sales leverage.
Also contributing to the increase in operating margin was the absence of restructuring charges in fiscal 2011 (approximately 30 basis points) and increased sales leverage resulting in lower depreciation and amortization expenses as a percentage of total net revenues (contributing 30 basis points). The combination of these changes contributed to an overall increase in operating margin of 160 basis points for fiscal 2011.


EMEA
 
Fiscal Year Ended
Oct 2,
2011
 
Oct 3,
2010
 
Oct 2,
2011
 
Oct 3,
2010
 
 
 
 
 
 
 
    As a % of EMEA Total    
Net Revenues
 
Total net revenues
$
1,046.8

 
$
953.4

 
100.0
%
 
100.0
 %
 
Cost of sales including occupancy costs
530.3

 
471.8

 
50.7
%
 
49.5
 %
 
Store operating expenses
327.3

 
324.5

 
31.3
%
 
34.0
 %
 
Other operating expenses
36.5

 
36.1

 
3.5
%
 
3.8
 %
 
Depreciation and amortization expenses
53.4

 
50.6

 
5.1
%
 
5.3
 %
 
General and administrative expenses
66.4

 
60.9

 
6.3
%
 
6.4
 %
 
Restructuring charges

 
24.5

 
%
 
2.6
 %
 
Total operating expenses
1,013.9

 
968.4

 
96.9
%
 
101.6
 %
 
Income from equity investees
6.0

 
6.8

 
0.6
%
 
0.7
 %
 
Operating income
$
38.9

 
$
(8.2
)
 
3.7
%
 
(0.9
)%
 
Supplemental ratios as a % of related revenues:
 
 
 
 
 
 
 
 
Store operating expenses
 
 
 
 
36.1
%
 
38.4
 %
Revenues
EMEA total net revenues for fiscal 2011 increased 10%, or $93 million. The increase was primarily driven by favorable foreign currency translation resulting from the weakening of the US dollar (approximately $35 million), primarily in relation to the British pound, the acquisition of the remaining interest in our previous joint venture operations in Switzerland and Austria in the fourth quarter of fiscal 2011 (approximately $28 million), and an

13



increase in comparable store sales in our company-operated stores of 3% (approximately $24 million). An increase in royalty revenues from and product sales to licensees also contributed (approximately $20 million), due to improved comparable store sales and net new store openings. These increases were partially offset by the absence of the extra week in fiscal 2010 (approximately $18 million).

Operating Expenses
Cost of sales including occupancy costs as a percentage of total net revenues increased by 120 basis points compared to the prior year. The increase was primarily driven by higher higher commodity costs (approximately 160 basis points), mainly coffee, partially offset by increased sales leverage on occupancy costs (approximately 50 basis points).
Store operating expenses as a percentage of total net revenues decreased 270 basis points. Increased licensed stores revenues contributed approximately 40 basis points to the decrease. Store operating expenses as a percentage of company-operated store revenues decreased 230 basis points primarily due to fewer impairment charges in fiscal 2011 compared to fiscal 2010 (approximately 110 basis points), lower equipment maintenance costs (approximately 60 basis points) and increased sales leverage on salaries and benefits (approximately 40 basis points).
Also contributing to the increase in operating margin was the absence of restructuring charges in fiscal 2011 (approximately 260 basis points). The combination of these changes resulted in an overall increase in operating margin of 460 basis points for fiscal 2011.


China / Asia Pacific
 
Fiscal Year Ended
Oct 2,
2011
 
Oct 3,
2010
 
Oct 2,
2011
 
Oct 3,
2010
 
 
 
 
 
 
 
    As a % of CAP Total    
Net Revenues
 
Total net revenues
$
552.3

 
$
407.3

 
100.0
%
 
100.0
%
 
Cost of sales including occupancy costs
282.0

 
213.4

 
51.1
%
 
52.4
%
 
Store operating expenses
83.4

 
64.1

 
15.1
%
 
15.7
%
 
Other operating expenses
35.7

 
30.0

 
6.5
%
 
7.4
%
 
Depreciation and amortization expenses
18.1

 
15.8

 
3.3
%
 
3.9
%
 
General and administrative expenses
34.7

 
31.0

 
6.3
%
 
7.6
%
 
Restructuring charges

 
0.1

 
%
 
%
 
Total operating expenses
453.9

 
354.4

 
82.2
%
 
87.0
%
 
Income from equity investees
92.9

 
73.1

 
16.8
%
 
17.9
%
 
Operating income
$
191.3

 
$
126.0

 
34.6
%
 
30.9
%
 
Supplemental ratios as a % of related revenues:
 
 
 
 
 
 
 
 
Store operating expenses
 
 
 
 
23.1
%
 
25.4
%
Revenues
China / Asia Pacific total net revenues for fiscal 2011 increased 36%, or $145 million. The increase was primarily driven by an increase in comparable store sales in our company-operated stores of 22% (contributing approximately $58 million), driven by a 20% increase in number of transactions and a 2% increase in average value per transaction. Also contributing to the increase in total net revenues was favorable foreign currency translation resulting from the weakening of the US dollar (approximately $40 million), the opening of 73 net new company-operated stores in the past 12 months (approximately $40 million), and an increase in royalty revenues

14



from and product sales to licensees (approximately $17 million), due to improved comparable store sales and net new store openings. These increases were partially offset by the absence of the extra week in fiscal 2010 (approximately $9 million).

Operating Expenses
Cost of sales including occupancy costs as a percentage of total net revenues decreased by 130 basis points compared to the prior year, primarily due to increased sales leverage on occupancy costs.
Store operating expenses as a percentage of total net revenues decreased 60 basis points. Excluding the impact of licensed store revenues, store operating expenses decreased 230 basis points as a percent of company-operated store revenues in fiscal 2011 compared to fiscal 2010, primarily driven by lower compensation costs (approximately 210 basis points) as a percentage of total net revenues.
Other operating expenses as a percentage of total net revenues decreased 90 basis points. Increased company-operated store revenues contributed approximately 30 basis points to the decrease. Other operating expenses as a percentage of licensed store revenues decreased 60 basis points, primarily driven by lower compensation related costs (approximately 140 basis points), partially offset by increasing costs related to our expansion efforts into key emerging markets, primarily China.
Income from equity investees increased $20 million in fiscal 2011, driven by improved performance in our joint venture operations, primarily in Japan, Shanghai and Taiwan.
The changes in the above line items combined with increased sales leverage on general and administrative expenses (approximately 130 basis points) and depreciation and amortization (approximately 60 basis points) contributed to an overall increase in operating margin of 370 basis points in fiscal 2011.


Channel Development
Fiscal Year Ended
Oct 2,
2011
 
Oct 3,
2010
 
Oct 2,
2011
 
Oct 3,
2010
 
 
 
 
 
As a % of Channel Development
Total Net Revenues
Total net revenues
$
860.5

 
$
707.4

 
100.0
%
 
100.0
%
Cost of sales including occupancy costs
487.5

 
383.2

 
56.7
%
 
54.2
%
Other operating expenses
151.8

 
115.6

 
17.6
%
 
16.3
%
Depreciation and amortization expenses
2.4

 
3.7

 
0.3
%
 
0.5
%
General and administrative expenses
10.9

 
6.8

 
1.3
%
 
1.0
%
Total operating expenses
652.6

 
509.3

 
75.8
%
 
72.0
%
Income from equity investees
75.6

 
70.6

 
8.8
%
 
10.0
%
Operating income
$
283.5

 
$
268.7

 
32.9
%
 
38.0
%
Revenues
Total Channel Development net revenues for fiscal 2011 increased 22%, or $153 million. The increase was primarily due to the benefit of recognizing full revenue from packaged coffee and tea sales under the direct distribution model for the majority of the year (approximately $70 million). On March 1, 2011, we successfully transitioned to a direct distribution model from our previous distribution arrangement with Kraft for the sale of packaged Starbucks® and Seattle’s Best Coffee® coffee 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 to a direct distribution model in January 2011. Also contributing to the increase were improved revenues from US foodservice (approximately $26 million) and the expanded distribution of Starbucks VIA®

15



Ready Brew in fiscal 2011 (approximately $24 million), partially offset by the extra week in fiscal 2010 (approximately $16 million).

Operating Expenses
Operating margin decreased 510 basis points over the prior year primarily due to increased commodity costs (approximately 830 basis points), driven by higher coffee costs. Partially offsetting the increase in commodity costs was the benefit of price increases (approximately 200 basis points) and lower marketing expenses for Starbucks VIA® Ready Brew in 2011 (approximately 120 basis points).


Other
Fiscal Year Ended
Oct 2,
2011
 
Oct 3,
2010
 
%
Change
Total net revenues
$
175.8

 
$
150.8

 
16.6
 %
Cost of sales
103.0

 
89.6

 
15.0
 %
Other operating expenses
93.0

 
34.9

 
166.5
 %
Depreciation and amortization expenses
58.0

 
46.1

 
25.8
 %
General and administrative expenses
510.0

 
473.5

 
7.7
 %
Total operating expenses
764.0

 
644.1

 
18.6
 %
Gain on sale of properties
30.2

 

 
nm

Loss from equity investee
(2.4
)
 
(3.3
)
 
(27.3
)%
Operating loss
$
(560.4
)
 
$
(496.6
)
 
12.8
 %
Substantially all 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 the recognition of a full year of sales to national accounts added in the latter part of fiscal 2010 as well as new accounts added during fiscal 2011(approximately $20 million). This was partially offset by the impact of the closure of the Seattle’s Best Coffee locations in Borders Bookstores.
Total operating expenses in fiscal 2011 increased 19%, or $120 million. This increase is the result of an increase of $59 million in other operating expenses primarily due to the impairment of certain assets in our Seattle’s Best Coffee business associated with the Borders bankruptcy in April 2011 and an increase in marketing expenses. Also contributing was a $37 million increase in general and administrative expenses due to higher corporate expenses to support growth initiatives and higher donations to the Starbucks Foundation. These increases in operating expenses were partially offset by a gain on the sale of corporate real estate in fiscal 2011 (approximately $30 million).


16



SUMMARIZED QUARTERLY FINANCIAL INFORMATION (unaudited; in millions, except EPS)
 
First
 
Second
 
Third
 
Fourth
 
Total
2012:
 
 
 
 
 
 
 
 
 
Net revenues
$
3,435.9

 
$
3,195.9

 
$
3,303.6

 
$
3,364.2

 
$
13,299.5

Operating income
556.0

 
430.4

 
491.6

 
519.6

 
1,997.4

Net earnings attributable to Starbucks
382.1

 
309.9

 
333.1

 
359.0

 
1,383.8

EPS — diluted
$
0.50

 
$
0.40

 
$
0.43

 
$
0.46

 
$
1.79

2011:
 
 
 
 
 
 
 
 
 
Net revenues
$
2,950.8

 
$
2,785.7

 
$
2,932.2

 
$
3,031.9

 
$
11,700.4

Operating income
501.9

 
376.1

 
402.2

 
448.3

 
1,728.5

Net earnings attributable to Starbucks
346.6

 
261.6

 
279.1

 
358.5

 
1,245.7

EPS — diluted
$
0.45

 
$
0.34

 
$
0.36

 
$
0.47

 
$
1.62

 

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Investment Overview
Starbucks cash and short-term investments were $2.0 billion and $2.1 billion as of September 30, 2012 and October 2, 2011, respectively. As of September 30, 2012, approximately $703 million of cash was held in foreign subsidiaries. Of our cash held in foreign subsidiaries, $343 million is denominated in the US dollar. We actively manage our cash and short-term investments in order to internally fund operating needs domestically and internationally, make scheduled interest and principal payments on our borrowings, and return cash to shareholders through common stock cash dividend payments and share repurchases. Our short-term investments consisted predominantly of US Treasury securities, commercial paper, corporate bonds, and US Agency securities. Also included in our short-term investment portfolio are certificates of deposit placed through an account registry service, with maturities ranging from 91 days to one year. The principal amounts of the individual certificates of deposit do not exceed the Federal Deposit Insurance Corporation limits. Our portfolio of long-term available for sale securities consists predominantly of high investment-grade corporate bonds, diversified among industries and individual issuers, as well as certificates of deposits with maturities greater than 1 year.

Borrowing capacity
In November 2010, we replaced our previous credit facility with a new $500 million unsecured credit facility ("the credit facility”) with various banks, of which $100 million may be used for issuances of letters of credit. The credit facility is available for working capital, capital expenditures and other corporate purposes, including acquisitions and share repurchases and is currently set to mature in November 2014. Starbucks has the option, subject to negotiation and agreement with the related banks, to increase the maximum commitment amount by an additional $500 million. The interest rate for any borrowings under the credit facility, based on Starbucks current ratings and fixed charge coverage ratio, is 0.85% over LIBOR. The specific spread over LIBOR will depend upon our long-term credit ratings assigned by Moody’s and Standard & Poor’s rating agencies and our fixed charge coverage ratio. 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 September 30, 2012 and October 2, 2011, we were in compliance with each of these covenants.
Under our commercial paper program we may issue unsecured commercial paper notes, up to a maximum aggregate amount outstanding at any time of $500 million, with individual maturities that may vary, but not

17



exceed 397 days from the date of issue. The program is backstopped by the credit facility and the combined borrowing limit is $500 million for the commercial paper program and the credit facility. Starbucks may issue commercial paper from time to time, and the proceeds of the commercial paper financing may be used for working capital needs, capital expenditures and other corporate purposes, including acquisitions and share repurchases. During fiscal 2012 and fiscal 2011, there were no borrowings under the credit facility or commercial paper programs. As of September 30, 2012 and October 2, 2011, a total of $18 million and $17 million, respectively, in letters of credit were outstanding under the revolving credit facility.
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 September 30, 2012 and October 2, 2011, we were in compliance with each of these covenants.

Use of Cash
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 new product innovations and related marketing support, as well as other new business opportunities related to our core businesses. We believe that future cash flows generated from operations and existing cash and short-term investments both domestically and internationally will be sufficient to finance capital requirements for our core businesses in those respective markets as well as shareholder distributions for the foreseeable future.
We consider the majority of undistributed earnings of our foreign subsidiaries and equity investees as of September 30, 2012 to be indefinitely reinvested and, accordingly, no US income and foreign withholding taxes have been provided on such earnings. We have not, nor do we anticipate the need to, repatriate funds to the US to satisfy domestic liquidity needs; however, in the event that we need to repatriate all or a portion of our foreign cash to the US we would be subject to additional US income taxes, which could be material. We do not believe it is practical to calculate the potential tax impact of repatriation, as there is a significant amount of uncertainty around the calculation, including the availability and amount of foreign tax credits at the time of repatriation, tax rates in effect, and other indirect tax consequences associated with repatriation.
We may use our available cash resources to make proportionate capital contributions to our equity method and cost method investees. We may also seek strategic acquisitions to leverage existing capabilities and further build our business in support of our growth agenda. Acquisitions may include increasing our ownership interests in our equity method and cost method investees. Any decisions to increase such ownership interests 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.
As discussed further in Note 15, we are in arbitration with Kraft Foods Global, Inc. (“Kraft”) for a commercial dispute relating to a distribution agreement we previously held with Kraft. As a part of those proceedings Kraft has claimed damages inclusive of a premium and interest for terminating the arrangement. We believe we have valid claims of material breach by Kraft under the Agreement. We also believe Kraft’s claim is highly inflated and based upon faulty analysis. However, should the arbitration result in an unfavorable outcome, we believe we have adequate liquidity.
Other than normal operating expenses, cash requirements for fiscal 2013 are expected to consist primarily of capital expenditures for remodeling and refurbishment of, and equipment upgrades for, existing company-operated stores; systems and technology investments in the stores and in the support infrastructure; new company-operated stores; and additional investments in manufacturing capacity. Total capital expenditures for fiscal 2013 are expected to be approximately $1.2 billion.
During the first three quarters of fiscal 2011, we declared and paid a cash dividend to shareholders of $0.13 per share. In the fourth quarter of fiscal 2011 and the first three quarters of fiscal 2012 we declared and paid a cash dividend of $0.17 per share. Cash dividends paid in fiscal 2012 and 2011 totaled $513 million and $390 million, respectively. In the fourth quarter, we declared a cash dividend of $0.21 per share to be paid on November 30, 2012 with an expected payout of $157 million.

18



During fiscal years 2012 and 2011, we repurchased 12 million and 16 million shares of common stock ($593 million and $556 million, respectively) under share repurchase authorizations. The number of remaining shares authorized for repurchase at September 30, 2012 totaled 12.1 million. On November 14, 2012, our Board of Directors authorized the repurchase of up to an additional 25 million shares under our share repurchase program.

Cash Flows
Cash provided by operating activities was $1.8 billion for fiscal year 2012, compared to $1.6 billion for fiscal year 2011. The slight increase was primarily attributable to an increase in net earnings in fiscal 2012. This was partially offset by a net increase in our working capital accounts, due primarily to increased payments on accounts payable.
Cash used by investing activities totaled $1.0 billion for fiscal years 2012 and 2011. Net cash proceeds on investment maturities were offset by an increase in capital expenditures, primarily for remodeling and renovating existing company-operated stores and opening new retail stores, the absence of cash proceeds from the sale of corporate real estate in the prior year and cash paid to acquire Evolution Fresh and Bay Bread, LLC (doing business as La Boulange) in the first and fourth quarters of fiscal 2012, respectively.
Cash used by financing activities for fiscal year 2012 totaled $746 million, compared to $608 million for fiscal year 2011. The increase was primarily due to an increase in cash returned to shareholders through higher dividend payments in fiscal 2012.

The following table summarizes our contractual obligations and borrowings as of September 30, 2012, and the timing and effect that such commitments are expected to have on our liquidity and capital requirements in future periods (in millions):
 
Payments Due by Period
Contractual Obligations(1)
Total
 
Less than 1
Year
 
1 - 3
Years
 
3 - 5
Years
 
More than
5 Years
Operating lease obligations(2)
$
4,060.2

 
$
787.9

 
$
1,368.9

 
$
934.9

 
$
968.5

Purchase obligations(3)
911.0

 
727.9

 
170.0

 
13.1

 

Debt obligations(4)
722.0

 
34.4

 
68.8

 
618.8

 

Other obligations(5)
94.9

 
19.4

 
9.6

 
8.3

 
57.6

Total
$
5,788.1

 
$
1,569.6

 
$
1,617.3

 
$
1,575.1

 
$
1,026.1

(1)
Income tax liabilities for uncertain tax positions were excluded as we are not able to make a reasonably reliable estimate of the amount and period of related future payments. As of September 30, 2012, we had $78.4 million of gross unrecognized tax benefits for uncertain tax positions.
(2)
Amounts include the direct lease obligations, excluding any taxes, insurance and other related expenses.
(3)
Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on Starbucks and that specify all significant terms. Green coffee purchase commitments comprise 94% of total purchase obligations.
(4)
Debt amounts include principal maturities and scheduled interest payments on our long-term debt.
(5)
Other obligations include other long-term liabilities primarily consisting of asset retirement obligations, capital lease obligations and hedging instruments.
Starbucks currently expects to fund these commitments with operating cash flows generated in the normal course of business.


19



Off-Balance Sheet Arrangements
Off-balance sheet arrangements relate to operating lease and purchase commitments detailed in the footnotes to the consolidated financial statements in this 10-K.


COMMODITY PRICES, AVAILABILITY AND GENERAL RISK CONDITIONS
Commodity price risk represents Starbucks primary market risk, generated by our purchases of green coffee and dairy products, among other things. 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 stores. The price and availability of these commodities directly impacts our results of operations and can be expected to impact our future results of operations. For additional details see Product Supply in Item 1, as well as Risk Factors in Item 1A of this 10-K.


FINANCIAL RISK MANAGEMENT
Market risk is defined as the risk of losses due to changes in commodity prices, foreign currency exchange rates, equity security prices, and interest rates. We manage our exposure to various market-based risks according to a market price risk management policy. Under this policy, market-based risks are quantified and evaluated for potential mitigation strategies, such as entering into hedging transactions. The market price risk management policy governs how hedging instruments may be used to mitigate risk. Risk limits are set annually and prohibit speculative trading activity. We also monitor and limit the amount of associated counterparty credit risk. In general, hedging instruments do not have maturities in excess of five years.
The sensitivity analyses disclosed below provide only a limited, point-in-time view of the market risk of the financial instruments discussed. The actual impact of the respective underlying rates and price changes on the financial instruments may differ significantly from those shown in the sensitivity analyses.

Commodity Price Risk
We purchase commodity inputs, including coffee, dairy products and diesel that are used in our operations and are subject to price fluctuations that impact our financial results. In addition to fixed-price and price-to-be-fixed contracts for coffee purchases, we have entered into commodity hedges to manage commodity price risk using financial derivative instruments.
The following table summarizes the potential impact as of September 30, 2012 to Starbucks future net earnings and other comprehensive income (“OCI”) from changes in commodity prices. The information provided below relates only to the hedging instruments and does not represent the corresponding changes in the underlying hedged items (in millions):
 
Increase/(Decrease) to Net Earnings
 
Increase/(Decrease) to OCI
 
10% Increase  in
Underlying Rate
 
10% Decrease  in
Underlying Rate
 
10% Increase  in
Underlying Rate
 
10% Decrease  in
Underlying Rate
Commodity hedges
$
10

 
$
(10
)
 
$
13

 
$
(13
)

Foreign Currency Exchange Risk
The majority of our revenue, expense and capital purchasing activities are transacted in US dollars. However, because a portion of our operations consists of activities outside of the US, we have transactions in other currencies, primarily the Canadian dollar, British pound, euro, and Japanese yen. As a result, we may engage in

20



transactions involving various derivative instruments to hedge revenues, inventory purchases, assets, and liabilities denominated in foreign currencies.
As of September 30, 2012, we had forward foreign exchange contracts that hedge portions of anticipated international revenue streams and inventory purchases. In addition, we had forward foreign exchange contracts that qualify as accounting hedges of our net investment in Starbucks Japan to minimize foreign currency exposure.
Starbucks also had forward foreign exchange contracts that are not designated as hedging instruments for accounting purposes (free standing derivatives), but which largely offset the financial impact of translating certain foreign currency denominated payables and receivables. Increases or decreases in the fair value of these derivatives are generally offset by corresponding decreases or increases in the US dollar value of our foreign currency denominated payables and receivables (i.e. “hedged items”) that would occur within the period.
The following table summarizes the potential impact as of September 30, 2012 to Starbucks future net earnings and other comprehensive income (“OCI”) from changes in the fair value of these derivative financial instruments due in turn to a change in the value of the US dollar as compared to the level of foreign exchange rates. The information provided below relates only to the hedging instruments and does not represent the corresponding changes in the underlying hedged items (in millions):
 
Increase/(Decrease) to Net Earnings
 
Increase/(Decrease) to OCI
 
10% Increase  in
Underlying Rate
 
10% Decrease  in
Underlying Rate
 
10% Increase  in
Underlying Rate
 
10% Decrease  in
Underlying Rate
Foreign currency hedges
$
8

 
$
(8
)
 
$
30

 
$
(30
)

Equity Security Price Risk
We have minimal exposure to price fluctuations on equity mutual funds and equity exchange-traded funds within our trading portfolio. The trading securities approximate a portion of our liability under the Management Deferred Compensation Plan (“MDCP”). A corresponding liability is included in accrued compensation and related costs on the consolidated balance sheets. These investments are recorded at fair value with unrealized gains and losses recognized in net interest income and other in the consolidated statements of earnings. The offsetting changes in the MDCP liability are recorded in general and administrative expenses. We performed a sensitivity analysis based on a 10% change in the underlying equity prices of our investments as of September 30, 2012 and determined that such a change would not have a significant impact on the fair value of these instruments.

Interest Rate Risk
We utilize short-term and long-term financing and may use interest rate hedges to manage the effect of interest rate changes on our existing debt as well as the anticipated issuance of new debt. As of September 30, 2012 and October 2, 2011, we did not have any interest rate hedge agreements outstanding.
The following table summarizes the impact of a change in interest rates as of September 30, 2012 on the fair value of Starbucks debt (in millions):
 
 
 
Change in Fair Value
 
Fair Value
 
100 Basis Point Increase in
Underlying Rate
 
100 Basis Point Decrease in
Underlying Rate
 
Debt
$
674

 
$
29

 
$
(29
)
Our available-for-sale securities comprise a diversified portfolio consisting mainly of fixed income instruments. The primary objectives of these investments are to preserve capital and liquidity. Available-for-sale securities are recorded on the consolidated balance sheets at fair value with unrealized gains and losses reported as a component

21



of accumulated other comprehensive income. We do not hedge the interest rate exposure on our available-for-sale securities. We performed a sensitivity analysis based on a 100 basis point change in the underlying interest rate of our available-for-sale securities as of September 30, 2012, and determined that such a change would not have a significant impact on the fair value of these instruments.


APPLICATION OF CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that management believes are both most important to the portrayal of our financial condition and results and require the most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions.
We consider financial reporting and disclosure practices and accounting policies quarterly to ensure that they provide accurate and transparent information relative to the current economic and business environment. We believe that of our significant accounting policies, the following policies involve a higher degree of judgment and/or complexity:

Asset Impairment
When facts and circumstances indicate that the carrying values of long-lived assets may not be recoverable, we evaluate long-lived assets for impairment. We first compare the carrying value of the asset to the asset’s estimated future undiscounted cash flows. If the estimated future cash flows are less than the carrying value of the asset, we measure an impairment loss based on the asset’s estimated fair value. For retail assets, the impairment test is performed at the individual store asset group level. The fair value of a store’s assets is estimated using a discounted cash flow model based on internal projections. Key assumptions used in this calculation include revenue growth, operating expenses and a discount rate that we believe a buyer would assume when determining a purchase price for the store. Estimates of revenue growth and operating expenses are based on internal projections and consider a store’s historical performance, local market economics and the business environment impacting the store’s performance. These estimates are subjective and can be significantly impacted by changes in the business or economic conditions. For non-retail assets, fair value is determined using an approach that is appropriate based on the relevant facts and circumstances, which may include discounted cash flows, comparable transactions, or comparable company analyses.
Our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values, including forecasting asset useful lives. Further, our ability to realize undiscounted cash flows in excess of the carrying values of our assets is affected by factors such as the ongoing maintenance and improvement of the assets, changes in economic conditions, and changes in operating performance. During the past three fiscal years, we have not made any material changes in the accounting methodology that we use to assess long-lived asset impairment loss. For the foreseeable future, we do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions that we use to calculate long-lived asset impairment losses. However, as we periodically reassess estimated future cash flows and asset fair values, changes in our estimates and assumptions may cause us to realize material impairment charges in the future.

Goodwill Impairment
We test goodwill for impairment on an annual basis during our third fiscal quarter, or more frequently if circumstances, such as material deterioration in performance or a significant number of store closures, indicate reporting unit carrying values may exceed their fair values.When evaluating goodwill for impairment, we first perform a qualitative assessment to determine if the fair value of the reporting unit is more likely than not greater than the carrying amount. If not, we calculate the implied estimated fair value of the reporting unit. If the carrying amount of goodwill exceeds the implied estimated fair value, an impairment charge is recorded to reduce the carrying value to the implied estimated fair value. The fair value of each of our reporting units is the price a

22



willing buyer would pay for the reporting unit and is typically calculated using a discounted cash flow model. Key assumptions used in this calculation include revenue growth, operating expenses and a discount rate that we believe a buyer would assume when determining a purchase price for the reporting unit. Estimates of revenue growth and operating expenses are based on internal projections considering a reporting unit’s past performance and forecasted growth, local market economics and the local business environment impacting the reporting unit’s performance. The discount rate is calculated using an estimated cost of capital for a retail operator to operate the reporting unit in the region. These estimates are highly subjective judgments and can be significantly impacted by changes in the business or economic conditions.
Our impairment loss calculations contain uncertainties because they require management to make assumptions in the qualitative assessment of the reporting unit and require management to apply judgment to estimate the fair value of our reporting units, including estimating future cash flows, and if necessary, the fair value of a reporting units’ assets and liabilities. Further, our ability to realize the future cash flows used in our fair value calculations is affected by factors such as changes in economic conditions, changes in our operating performance, and changes in our business strategies.
As a part of our ongoing operations, we may close certain stores within a reporting unit containing goodwill due to underperformance of the store or inability to renew our lease, among other reasons. We abandon certain assets associated with a closed store including leasehold improvements and other non-transferable assets. Under GAAP, when a portion of a reporting unit that constitutes a business is to be disposed of, goodwill associated with the business is included in the carrying amount of the business in determining any loss on disposal. Our evaluation of whether the portion of a reporting unit being disposed of constitutes a business occurs on the date of abandonment. Although an operating store meets the accounting definition of a business prior to abandonment, it does not constitute a business on the closure date because the remaining assets on that date do not constitute an integrated set of assets that are capable of being conducted and managed for the purpose of providing a return to investors. As a result, when closing individual stores, we do not include goodwill in the calculation of any loss on disposal of the related assets. As noted above, if store closures are indicative of potential impairment of goodwill at the reporting unit level, we perform an evaluation of our reporting unit goodwill when such closures occur.
During the past three fiscal years, we have not made any material changes in the accounting methodology that we use to assess goodwill impairment loss. For fiscal 2012, we determined the fair value of our reporting units was substantially in excess of their carrying values. Accordingly, we did not recognize any goodwill impairments during the current fiscal year. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions that we use to test for impairment losses on goodwill in the foreseeable future. However, as we periodically reassess our fair value calculations, including estimated future cash flows, changes in our estimates and assumptions may cause us to realize material impairment charges in the future.

Self Insurance Reserves
We use a combination of insurance and self-insurance mechanisms, including a wholly owned captive insurance entity and participation in a reinsurance treaty, to provide for the potential liabilities for certain risks, including workers’ compensation, healthcare benefits, general liability, property insurance, and director and officers’ liability insurance. Key assumptions used in the estimate of our self insurance reserves include the amount of claims incurred but not reported at the balance sheet date. These liabilities, which are associated with the risks that are retained by Starbucks are not discounted and are estimated, in part, by considering historical claims experience, demographic, exposure and severity factors, and other actuarial assumptions. The estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends.
Our self-insurance reserves contain uncertainties because management is required to make assumptions and to apply judgment to estimate the ultimate cost to settle reported claims and claims incurred but not reported at the balance sheet date. Periodically, we review our assumptions to determine the adequacy of our self-insurance reserves.

23



During the past three fiscal years, we have not made any material changes in the accounting methodology that we use to calculate our self-insurance reserves. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions that we use to calculate our self-insurance reserves for the foreseeable future. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.
A 10% change in our self-insurance reserves at September 30, 2012 would have affected net earnings by approximately $10 million in fiscal 2012.

Income Taxes
We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the respective tax bases of our assets and liabilities. Deferred tax assets and liabilities are measured using current enacted tax rates expected to apply to taxable income in the years in which we expect the temporary differences to reverse. We routinely evaluate the likelihood of realizing the benefit of our deferred tax assets and may record a valuation allowance if, based on all available evidence, we determine that some portion of the tax benefit will not be realized.
In addition, our income tax returns are periodically audited by domestic and foreign tax authorities. These audits include questions regarding our tax filing positions, including the timing and amount of deductions taken and the allocation of income among various tax jurisdictions. We evaluate our exposures associated with our various tax filing positions; we recognize a tax benefit only if it is more likely than not that the tax position will be sustained on examination by the relevant taxing authorities, based on the technical merits of our position. For uncertain tax positions that do not meet this threshold, we record a related liability. We adjust our unrecognized tax benefits liability and income tax expense in the period in which the uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position, or when new information becomes available.
Income generated in certain foreign jurisdictions has not been subject to US income taxes. We intend to reinvest these earnings for the foreseeable future. If these amounts were distributed to the US, in the form of dividends or otherwise, we would be subject to additional US income taxes, which could be material. Determination of the amount of unrecognized deferred income tax liabilities on these earnings is not practicable because such liability, if any, is dependent on circumstances existing if and when remittance occurs.
Deferred tax asset valuation allowances and our liability for unrecognized tax benefits require significant management judgment regarding applicable statutes and their related interpretation, the status of various income tax audits, and our particular facts and circumstances. Although we believe that the judgments and estimates discussed herein are reasonable, actual results could differ, and we may be exposed to losses or gains that could be material. To the extent we prevail in matters for which a liability has been established, or are required to pay amounts in excess of our established liability, our effective income tax rate in a given financial statement period could be materially affected.

Litigation Accruals
We are involved in various claims and legal actions that arise in the ordinary course of business. Legal and other contingency reserves and related disclosures are based on our assessment of the likelihood of a potential loss and our ability to estimate the loss or range of loss, which includes consultation with outside legal counsel and advisors. We record reserves related to legal matters when it is probable that a loss has been incurred and the range of such loss can be reasonably estimated. Such assessments are reviewed each period and revised, based on current facts and circumstances and historical experience with similar claims, as necessary.
Our disclosures of and accruals for litigation claims, if any, contain uncertainties because management is required to use judgment to estimate the probability of a loss and a range of possible losses related to each claim. Note 15 to the consolidated financial statements describes the Company’s legal and other contingent liability matters.
As we periodically review our assessments of litigation accruals, we may change our assumptions with respect to loss probabilities and ranges of potential losses. Any changes in these assumptions could have a material impact on our future results of operations.


RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 to the consolidated financial statements in this 10-K for a detailed description of recent accounting pronouncements. We do not expect these recently issued accounting pronouncements to have a material impact on our results of operations, financial condition, or liquidity in future periods.


24



Item 8.
Financial Statements and Supplementary Data
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(in millions, except per share data)
 
Fiscal Year Ended
Sep 30,
2012
 
Oct 2,
2011
 
Oct 3,
2010
Net revenues:
 
 
 
 
 
Company-operated stores
$
10,534.5

 
$
9,632.4

 
$
8,963.5

Licensed stores
1,210.3

 
1,007.5

 
875.2

CPG, foodservice and other
1,554.7

 
1,060.5

 
868.7

Total net revenues
13,299.5

 
11,700.4

 
10,707.4

Cost of sales including occupancy costs
5,813.3

 
4,915.5

 
4,416.5

Store operating expenses
3,918.1

 
3,594.9

 
3,471.9

Other operating expenses
429.9

 
392.8

 
279.7

Depreciation and amortization expenses
550.3

 
523.3

 
510.4

General and administrative expenses
801.2

 
749.3

 
704.6

Restructuring charges

 

 
53.0

Total operating expenses
11,512.8

 
10,175.8

 
9,436.1

Gain on sale of properties

 
30.2

 

Income from equity investees
210.7

 
173.7

 
148.1

Operating income
1,997.4

 
1,728.5

 
1,419.4

Interest income and other, net
94.4

 
115.9

 
50.3

Interest expense
(32.7
)
 
(33.3
)
 
(32.7
)
Earnings before income taxes
2,059.1

 
1,811.1

 
1,437.0

Income taxes
674.4

 
563.1

 
488.7

Net earnings including noncontrolling interests
1,384.7

 
1,248.0

 
948.3

Net earnings (loss) attributable to noncontrolling interests
0.9

 
2.3

 
2.7

Net earnings attributable to Starbucks
$
1,383.8

 
$
1,245.7

 
$
945.6

Earnings per share — basic
$
1.83

 
$
1.66

 
$
1.27

Earnings per share — diluted
$
1.79

 
$
1.62

 
$
1.24

Weighted average shares outstanding:
 
 
 
 
 
Basic
754.4

 
748.3

 
744.4

Diluted
773.0

 
769.7

 
764.2

Cash dividends declared per share
$
0.72

 
$
0.56

 
$
0.36

See Notes to Consolidated Financial Statements.



25



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

 
Sep 30,
2012
 
Oct 2,
2011
 
Oct 3,
2010
Net earnings including noncontrolling interests
$
1,384.7

 
$
1,248.0

 
$
948.3

Other comprehensive income (loss), net of tax:
 
 
 
 
 
Unrealized holding gains/(losses) on available-for-sale securities, net of tax (provision)/benefit of $(0.3), $(0.3), and $0.1, respectively
0.4

 
0.4

 
(0.2
)
Unrealized holding losses on cash flow hedging instruments, net of tax benefit of $4.3 $4.5, and $6.6, respectively
(37.9
)
 
(7.7
)
 
(11.3
)
Unrealized holding gains/(losses) on net investment hedging instruments, net of tax (provision)/benefit of $(0.4), $4.5, and $4.0, respectively
0.6

 
(7.6
)
 
(6.8
)
Reclassification adjustment for net losses realized in net earnings for cash flow hedges, net of tax benefit of $4.3, $6.1, and $0.8, respectively
10.5

 
10.5

 
1.3

Net unrealized loss
(26.4
)
 
(4.4
)
 
(17.0
)
Translation adjustment, net of tax (provision)/benefit of $(3.3), $0.9, and $(3.2), respectively
2.8

 
(6.5
)
 
8.8

Other comprehensive income (loss)
(23.6
)
 
(10.9
)
 
$
(8.2
)
Comprehensive income
1,361.1

 
1,237.1

 
940.1

Comprehensive income attributable to noncontrolling interests
0.9

 
2.3

 
2.7

Comprehensive income attributable to Starbucks
$
1,360.2

 
$
1,234.8

 
937.4


See Notes to Condensed Consolidated Financial Statements



26



STARBUCKS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
 
 
Sep 30,
2012
 
Oct 2,
2011
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,188.6

 
$
1,148.1

Short-term investments
848.4

 
902.6

Accounts receivable, net
485.9

 
386.5

Inventories
1,241.5

 
965.8

Prepaid expenses and other current assets
196.5

 
161.5

Deferred income taxes, net
238.7

 
230.4

Total current assets
4,199.6

 
3,794.9

Long-term investments — available-for-sale securities
116.0

 
107.0

Equity and cost investments
459.9

 
372.3

Property, plant and equipment, net
2,658.9

 
2,355.0

Other assets
385.7

 
409.6

Goodwill
399.1

 
321.6

TOTAL ASSETS
$
8,219.2

 
$
7,360.4

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
398.1

 
$
540.0

Accrued liabilities
1,133.8

 
940.9

Insurance reserves
167.7

 
145.6

Deferred revenue
510.2

 
449.3

Total current liabilities
2,209.8

 
2,075.8

Long-term debt
549.6

 
549.5

Other long-term liabilities
345.3

 
347.8

Total liabilities
3,104.7

 
2,973.1

Shareholders’ equity:
 
 
 
Common stock ($0.001 par value) — authorized, 1,200.0 shares; issued and outstanding, 749.3 and 744.8 shares, respectively (includes 3.4 common stock units in both periods)
0.7

 
0.7

Additional paid-in capital
39.4

 
40.5

Retained earnings
5,046.2

 
4,297.4

Accumulated other comprehensive income
22.7

 
46.3

Total shareholders’ equity
5,109.0

 
4,384.9

Noncontrolling interests
5.5

 
2.4

Total equity
5,114.5

 
4,387.3

TOTAL LIABILITIES AND EQUITY
$
8,219.2

 
$
7,360.4


See Notes to Consolidated Financial Statements.



27



STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Fiscal Year Ended
Sep 30,
2012
 
Oct 2,
2011
 
Oct 3,
2010
OPERATING ACTIVITIES:
 
 
 
 
 
Net earnings including noncontrolling interests
$
1,384.7

 
$
1,248.0

 
$
948.3

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
580.6

 
550.0

 
540.8

Gain on sale of properties

 
(30.2
)
 

Deferred income taxes, net
61.1

 
106.2

 
(42.0
)
Income earned from equity method investees, net of distributions
(49.3
)
 
(32.9
)
 
(17.2
)
Gain resulting from acquisition of joint ventures

 
(55.2
)
 
(23.1
)
Stock-based compensation
153.6

 
145.2

 
113.6

Other
23.6

 
33.3

 
75.5

Cash provided/(used) by changes in operating assets and liabilities:
 
 
 
 
 
Accounts receivable
(90.3
)
 
(88.7
)
 
(33.4
)
Inventories
(273.3
)
 
(422.3
)
 
123.2

Accounts payable
(105.2
)
 
227.5

 
(3.6
)
Accrued liabilities and insurance reserves
23.7

 
(81.8
)
 
(18.7
)
Deferred revenue
60.8

 
35.8

 
24.2

Prepaid expenses, other current assets and other assets
(19.7
)
 
(22.5
)
 
17.3

Net cash provided by operating activities
1,750.3

 
1,612.4

 
1,704.9

INVESTING ACTIVITIES:
 
 
 
 
 
Purchase of investments
(1,748.6
)
 
(966.0
)
 
(549.0
)
Maturities and calls of investments
1,796.4

 
430.0

 
209.9

Acquisitions, net of cash acquired
(129.1
)
 
(55.8
)
 
(12.0
)
Additions to property, plant and equipment
(856.2
)
 
(531.9
)
 
(445.8
)
Cash proceeds from sale of property, plant, and equipment
5.3

 
117.4

 
5.1

Other
(41.8
)
 
(13.2
)
 
2.3

Net cash used by investing activities
(974.0
)
 
(1,019.5
)
 
(789.5
)
FINANCING ACTIVITIES:
 
 
 
 
 
(Payments)/proceeds from short-term borrowings
(30.8
)
 
30.8

 

Purchase of noncontrolling interest

 
(27.5
)
 
(45.8
)
Proceeds from issuance of common stock
236.6

 
250.4

 
132.8

Excess tax benefit from exercise of stock options
169.8

 
103.9

 
36.9

Cash dividends paid
(513.0
)
 
(389.5
)
 
(171.0
)
Repurchase of common stock
(549.1
)
 
(555.9
)
 
(285.6
)
Minimum tax withholdings on share-based awards
(58.5
)
 
(15.0
)
 
(4.9
)
Other
(0.5
)
 
(5.2
)
 
(8.4
)
Net cash used by financing activities
(745.5
)
 
(608.0
)
 
(346.0
)
Effect of exchange rate changes on cash and cash equivalents
9.7

 
(0.8
)
 
(5.2
)
Net increase (decrease) in cash and cash equivalents
40.5

 
(15.9
)
 
564.2

CASH AND CASH EQUIVALENTS:
 
 
 
 
 
Beginning of period
1,148.1

 
1,164.0

 
599.8

End of period
$
1,188.6

 
$
1,148.1

 
$
1,164.0

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
 
 
Cash paid during the period for:
 
 
 
 
 
Interest, net of capitalized interest
$
34.4

 
$
34.4

 
$
32.0

Income taxes
$
416.9

 
$
350.1

 
$
527.0

See Notes to Consolidated Financial Statements.

28



STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(in millions)
 
Common Stock
 
Additional Paid-in Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income/(Loss)
 
Shareholders’
Equity
 
Noncontrolling
Interest
 
Total
 
Shares
 
Amount
 
Balance, September 27, 2009
742.9

 
$
0.7

 
$
186.4

 
$
2,793.2

 
$
65.4

 
$
3,045.7

 
$
11.2

 
$
3,056.9

Net earnings

 

 

 
945.6

 

 
945.6

 
2.7

 
948.3

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
(8.2
)
 
(8.2
)
 

 
(8.2
)
Stock-based compensation expense

 

 
115.6

 

 

 
115.6

 

 
115.6

Exercise of stock options, including tax benefit of $27.7
10.1

 

 
137.5

 

 

 
137.5

 

 
137.5

Sale of common stock, including tax benefit of $0.1
0.8

 

 
18.5

 

 

 
18.5

 

 
18.5

Repurchase of common stock
(11.2
)
 

 
(285.6
)
 

 

 
(285.6
)
 

 
(285.6
)
Net distributions to noncontrolling interests

 

 

 

 

 

 
(0.8
)
 
(0.8
)
Cash dividend

 

 

 
(267.6
)
 

 
(267.6
)
 

 
(267.6
)
Purchase of noncontrolling interests

 

 
(26.8
)
 

 

 
(26.8
)
 
(5.5
)
 
(32.3
)
Balance, October 3, 2010
742.6

 
$
0.7

 
$
145.6

 
$
3,471.2

 
$
57.2

 
$
3,674.7

 
$
7.6

 
$
3,682.3

Net earnings

 

 

 
1,245.7

 

 
1,245.7

 
2.3

 
1,248.0

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
(10.9
)
 
(10.9
)
 

 
(10.9
)
Stock-based compensation expense

 

 
147.2

 

 

 
147.2