10-K 1 sbux-9302018x10xk.htm 10-K Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 2018
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)
sbuxlogo09302018a11.jpg
Washington
 
91-1325671
(State of Incorporation)
 
(IRS Employer ID)
2401 Utah Avenue South, Seattle, Washington 98134
(206) 447-1575
(Address of principal executive offices, zip code, telephone number)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, $0.001 par value per share
 
Nasdaq Global Select Market
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.            Yes  ¨ No  x
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 every Interactive Data File required to be submitted 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 such files).    Yes  x    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation of S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
¨

Non-accelerated filer
¨
Smaller reporting company
¨

 
 
Emerging growth company
¨
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes   ¨    No  x
The aggregate market value of the voting stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter, based upon the closing sale price of the registrant’s common stock on April 1, 2018 as reported on the NASDAQ Global Select Market was $77.8 billion. As of November 9, 2018, there were 1,240.6 million shares of the registrant’s Common Stock outstanding.



DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the registrant’s Annual Meeting of Shareholders to be held on March 20, 2019 have been incorporated by reference into Part III of this Annual Report on Form 10-K.



STARBUCKS CORPORATION
Form 10-K
For the Fiscal Year Ended September 30, 2018
TABLE OF CONTENTS
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
PART II
Item 5
Item 6
Item 7
Item 7A
Item 8
 
 
Item 9
Item 9A
Item 9B
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Item 15
 



CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “seeks” or words of similar meaning, or future or conditional verbs, such as “will,” “should,” “could,” “may,” “aims,” “intends,” or “projects.” 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 forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. These forward-looking statements are all based on currently available operating, financial and competitive information and are subject to various risks and uncertainties. Our actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, the risks and uncertainties discussed under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Given these risks and uncertainties, you should not rely on forward-looking statements as a prediction of actual results. Any or all of the forward-looking statements contained in this Annual Report on Form 10-K and any other public statement made by us, including by our management, may turn out to be incorrect. We are including this cautionary note to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for forward-looking statements. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.



1


PART I
Item 1. Business
General
Starbucks is the premier roaster, marketer and retailer of specialty coffee in the world, operating in 78 markets. Formed in 1985, Starbucks Corporation’s common stock trades on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “SBUX.” We purchase and roast high-quality coffees that we sell, along with handcrafted coffee, tea and other beverages and a variety of high-quality food items through company-operated stores. We also sell a variety of coffee and tea products and license our trademarks through other channels such as licensed stores, grocery and foodservice accounts. In addition to our flagship Starbucks Coffee brand, we sell goods and services under the following brands: Teavana, Seattle’s Best Coffee, Evolution Fresh, La Boulange, Ethos, Starbucks Reserve and Princi.
Our objective is to maintain Starbucks standing as one of the most recognized and respected brands in the world. To achieve this, we are continuing the disciplined expansion of our global store base, adding stores in both existing, developed markets such as the U.S., and in newer, higher growth markets such as China, as well as optimizing the mix of company-operated and licensed stores around the world. In addition, by leveraging the experience gained through our traditional store model, we continue to offer consumers new coffee and other products in a variety of forms, across new categories, diverse channels and alternative store formats. We also believe our Starbucks Global Social Impact strategy, commitments related to ethically sourcing high-quality coffee, contributing positively to the communities we do business in and being an employer of choice are contributors to our objective.
In this Annual Report on Form 10-K (“10-K” or “Report”) for the fiscal year ended September 30, 2018 (“fiscal 2018”), Starbucks Corporation (together with its subsidiaries) is referred to as “Starbucks,” the “Company,” “we,” “us” or “our.”
Segment Financial Information
Segment information is prepared on the same basis that our management reviews financial information for operational decision-making purposes. On August 26, 2018, our Channel Development segment finalized licensing and distribution agreements with Nestlé S.A. (“Nestlé”) to sell and market our consumer packaged goods (“CPG”) and foodservice products and received an upfront prepaid royalty payment of approximately $7 billion. As a result, we realigned our organizational and operating segment structures in support of the newly established Global Coffee Alliance. The scope of the arrangement converts the majority of our previously defined Channel Development segment operations, as well as certain smaller businesses previously reported in the Americas, EMEA and Corporate and Other (previously All Other Segments), to licensed operations with Nestlé, and our reportable segments have been restated as if those smaller businesses were previously within our Channel Development segment.
We have four reportable operating segments: 1) Americas, which is inclusive of the U.S., Canada, and Latin America; 2) China/Asia Pacific (“CAP”); 3) Europe, Middle East, and Africa (“EMEA”) and 4) Channel Development. We also have several non-reportable operating segments, including Siren Retail, which consists of Starbucks ReserveTM Roastery & Tasting Rooms, Starbucks Reserve brand stores and products and Princi operations, as well as Evolution Fresh and the Teavana retail business which substantially ceased operations during fiscal 2018. Collectively, the combined group of non-reportable operating segments is reported within Corporate and Other. Revenues from our reportable segments and Corporate and Other as a percentage of total net revenues for fiscal 2018 were as follows: Americas (68%), CAP (18%), EMEA (4%), Channel Development (9%) and Corporate and Other (1%).
Our Americas, CAP and EMEA segments include both company-operated and licensed stores. Our Americas segment is our most mature business and has achieved significant scale. Certain markets within our CAP and EMEA operations are either in various stages of development or undergoing transformations of their business models. Therefore, they may require a more extensive support organization, relative to their current levels of revenue and operating income, than our Americas operations.
Our Channel Development segment includes roasted whole bean and ground coffees, Seattle's Best Coffee®, Starbucks- and Teavana-branded single-serve products, a variety of ready-to-drink beverages, such as Frappuccino®, Starbucks Doubleshot®, Starbucks Refreshers® beverages and TeavanaTM/MC iced tea, and other branded products sold worldwide outside of our company-operated and licensed stores. Historically our consumer packaged goods have been sold directly to grocery, warehouse club and specialty retail stores and through institutional foodservice companies. With the establishment of the Global Coffee Alliance with Nestlé, a large portion of our Channel Development business transitioned to a licensed model in the fourth quarter of fiscal 2018. Additionally, the CPG and foodservice businesses previously included in our Americas, EMEA and Corporate and Other (previously All Other Segments) were also transitioned to a licensed model under the Global Coffee Alliance and realigned to the Channel Development segment. Our collaborative relationships with PepsiCo, Inc., Anheuser-Busch InBev, Tingyi Holding Corp., Arla Foods and others for our global ready-to-drink beverage businesses in this segment are excluded from the Global Coffee Alliance.

2


Starbucks segment information is included in Note 16, Segment Reporting, to the consolidated financial statements included in Item 8 of Part II of this 10-K.
Revenue Components
We generate the majority of our revenues through company-operated stores and licensed stores.
Company-operated and Licensed Store Summary as of September 30, 2018
 
Americas
 
As a% of 
Total
Americas Stores
 
CAP
 
As a% of 
Total
CAP
Stores
 
EMEA
 
As a% of 
Total
EMEA Stores
 
Corporate and Other
 
As a% of 
Total
Corporate and Other
 
Total
 
As a% of
Total 
Stores
Company-operated stores
9,684

 
55
%
 
5,159

 
60
%
 
490

 
15
%
 
8

 
40
%
 
15,341

 
52
%
Licensed stores
7,770

 
45
%
 
3,371

 
40
%
 
2,830

 
85
%
 
12

 
60
%
 
13,983

 
48
%
Total
17,454

 
100
%
 
8,530

 
100
%
 
3,320

 
100
%
 
20

 
100
%
 
29,324

 
100
%
The mix of company-operated versus licensed stores in a given market will vary based on several factors, including our ability to access desirable local retail space, the complexity, profitability and expected ultimate size of the market for Starbucks and our ability to leverage the support infrastructure within a geographic region.
Company-operated Stores
Revenue from company-operated stores accounted for 80% of total net revenues during fiscal 2018. Our retail objective is to be the leading retailer and brand of coffee and tea in each of our target markets by selling the finest quality coffee, tea and related products, as well as complementary food offerings, and by providing each customer with a unique Starbucks Experience. The Starbucks Experience is built upon superior customer service and a seamless digital experience as well as clean and well-maintained stores that reflect the personalities of the communities in which they operate, thereby building a high degree of customer loyalty.
Our strategy for expanding our global retail business is to increase our market share in a disciplined manner, by selectively opening additional stores in new and existing markets, as well as increasing sales in existing stores, to support our long-term strategic objective to maintain Starbucks standing as one of the most recognized and respected brands in the world. Store growth in specific existing markets will vary due to many factors, including expected financial returns, the maturity of the market, economic conditions, consumer behavior and local business practices.

3


Company-operated store data for the year-ended September 30, 2018:
 
Stores Open
as of
 
 
 
 
 
 
 
 
 
Stores Open
as of
 
Oct 1, 2017
 
Opened
 
Closed
 
Transfers
 
Net
 
Sep 30, 2018
Americas(1):
 
 
 
 
 
 
 
 
 
 
 
U.S.
8,222

 
401

 
(48
)
 

 
353

 
8,575

Canada
1,083

 
65

 
(39
)
 

 
26

 
1,109

Brazil
108

 
4

 

 
(112
)
 
(108
)
 

Total Americas
9,413

 
470

 
(87
)
 
(112
)
 
271

 
9,684

China/Asia Pacific(2):
 
 
 
 
 
 
 
 
 
 
 
China
1,540

 
528

 
(24
)
 
1,477

 
1,981

 
3,521

Japan
1,218

 
84

 
(16
)
 

 
68

 
1,286

Thailand
312

 
41

 
(1
)
 

 
40

 
352

Total China/Asia Pacific
3,070

 
653

 
(41
)
 
1,477

 
2,089

 
5,159

EMEA:
 
 
 
 
 
 
 
 
 
 
 
U.K.
345

 
15

 
(23
)
 
(2
)
 
(10
)
 
335

All Other
157

 
3

 
(5
)
 

 
(2
)
 
155

Total EMEA
502

 
18

 
(28
)
 
(2
)
 
(12
)
 
490

Corporate and Other:
 
 
 
 
 
 
 
 
 
 
 
Teavana
288

 

 
(288
)
 

 
(288
)
 

Siren Retail
2

 
6

 

 

 
6

 
8

Total Corporate and Other
290

 
6

 
(288
)
 

 
(282
)
 
8

Total company-operated
13,275


1,147


(444
)

1,363


2,066


15,341

(1) Americas store data includes the transfer of 112 company-operated retail stores in Brazil to licensed stores as a result of the sale of our Brazil retail operations in the second quarter of fiscal 2018.
(2) China/Asia Pacific store data includes the transfer of 1,477 licensed stores in East China to company-operated retail stores as a result of the purchase of our East China joint venture in the first quarter of fiscal 2018.
Starbucks® company-operated stores are typically located in high-traffic, high-visibility locations. Our ability to vary the size and format of our stores allows us to locate them in or near a variety of settings, including downtown and suburban retail centers, office buildings, university campuses and in select rural and off-highway locations. We are continuing the expansion of our stores, inclusive of Drive Thru formats that provide a higher degree of access and convenience, and alternative store formats, which are focused on an elevated Starbucks Experience for our customers.
Retail sales mix by product type for company-operated stores:
Fiscal Year Ended
Sep 30,
2018
 
Oct 1,
2017
 
Oct 2,
2016
Beverages
74
%
 
73
%
 
74
%
Food
20
%
 
20
%
 
19
%
Packaged and single-serve coffees and teas
2
%
 
3
%
 
3
%
Other(1)
4
%
 
4
%
 
4
%
Total
100
%
 
100
%
 
100
%
(1) 
“Other” primarily consists of sales of serveware, ready-to-drink beverages and coffee-making equipment, among other items.


4


Stored Value Cards and Loyalty Program
The Starbucks Card, our branded stored value card program, is designed to provide customers with a convenient payment method, support gifting and increase the frequency of store visits by cardholders, in part through the related Starbucks Rewards loyalty program where available, as discussed below. Stored value cards are issued to customers when they initially load them with an account balance. They can be obtained in our company-operated and most licensed stores in North America, China, Japan, Latin America, and many of our markets in our CAP and EMEA segments. Stored value cards can also be obtained on-line, via the Starbucks® Mobile App, and through other U.S. and international retailers. Customers may access their card balances by utilizing their stored value card or the Starbucks® Mobile App in participating stores. Using the Mobile Order and Pay functionality of the Starbucks® Mobile App, customers can also place orders in advance for pick-up at certain participating locations in the U.S. and Canada. In nearly all markets, including the U.S. and Canada, customers who register their Starbucks Cards are automatically enrolled in the Starbucks Rewards program. Registered members can receive various benefits depending on factors such as the number of reward points (“Stars”) earned. Refer to Note 1, Summary of Significant Accounting Policies, included in Item 8 of Part II of this 10-K, for further discussion of our stored value cards and loyalty program.
Licensed Stores
Revenues from our licensed stores accounted for 11% of total net revenues in fiscal 2018. Licensed stores generally have a lower gross margin and 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 our share of costs as these are primarily incurred by the licensee.
In our licensed store operations, we leverage the expertise of our local partners and share our operating and store development experience. Licensees provide improved, and at times the only, access to desirable retail space. Most licensees are prominent retailers with in-depth market knowledge and access. As part of these arrangements, we sell coffee, tea, food and related products to licensees for resale to customers and receive royalties and license fees from the licensees. We also sell certain equipment, such as coffee brewers and espresso machines, to our licensees for use in their operations. Employees working in licensed retail locations are required to follow our detailed store operating procedures and attend training classes similar to those given to employees in company-operated stores. In a limited number of international markets, we also use traditional franchising and include these stores in the results of operations from our other licensed stores.

5


Licensed store data for the year-ended September 30, 2018:
 
Stores Open
as of
 
 
 
 
 
 
 
 
 
Stores Open
as of
 
Oct 1, 2017
 
Opened
 
Closed
 
Transfers
 
Net
 
Sep 30, 2018
Americas(1):
 
 
 
 
 
 
 
 
 
 
 
U.S.
5,708

 
442

 
(119
)
 

 
323

 
6,031

Mexico
632

 
76

 

 

 
76

 
708

Latin America
429

 
83

 
(2
)
 
112

 
193

 
622

Canada
377

 
44

 
(12
)
 

 
32

 
409

Total Americas
7,146

 
645

 
(133
)
 
112

 
624

 
7,770

China/Asia Pacific(2):
 
 
 
 
 
 
 
 
 
 
 
China
1,396

 
84

 
(3
)
 
(1,477
)
 
(1,396
)
 

Korea
1,108

 
138

 
(15
)
 

 
123

 
1,231

Taiwan
420

 
43

 
(5
)
 

 
38

 
458

Philippines
324

 
37

 
(1
)
 

 
36

 
360

Indonesia
317

 
56

 
(8
)
 

 
48

 
365

Malaysia
248

 
23

 
(3
)
 

 
20

 
268

All Other
596

 
101

 
(8
)
 

 
93

 
689

Total China/Asia Pacific
4,409

 
482

 
(43
)
 
(1,477
)
 
(1,038
)
 
3,371

EMEA:
 
 
 
 
 
 
 
 
 
 
 
U.K.
606

 
62

 
(17
)
 
2

 
47

 
653

Turkey
387

 
67

 
(1
)
 

 
66

 
453

United Arab Emirates
164

 
26

 
(4
)
 

 
22

 
186

Germany
156

 
10

 
(14
)
 

 
(4
)
 
152

Saudi Arabia
124

 
46

 
(4
)
 

 
42

 
166

Kuwait
118

 
24

 

 

 
24

 
142

Spain
113

 
34

 
(5
)
 

 
29

 
142

All Other
804

 
157

 
(25
)
 

 
132

 
936

Total EMEA
2,472

 
426

 
(70
)
 
2

 
358

 
2,830

Corporate and Other:
 
 
 
 
 
 
 
 
 
 
 
Teavana
37

 

 
(25
)
 

 
(25
)
 
12

Total Corporate and Other
37

 

 
(25
)
 

 
(25
)
 
12

Total licensed
14,064


1,553


(271
)

(1,363
)

(81
)

13,983

(1) Americas store data includes the transfer of 112 company-operated retail stores in Brazil to licensed stores as a result of the sale of our Brazil retail operations in the second quarter of fiscal 2018.
(2) China/Asia Pacific store data includes the transfer of 1,477 licensed stores in East China to company-operated retail stores as a result of the purchase of our East China joint venture in the first quarter of fiscal 2018.
Other Revenues
Other revenues primarily are recorded in our Channel Development segment and include sales of packaged coffee, tea and ready-to-drink beverages to customers outside of our company-operated and licensed stores. Historically revenues have included domestic and international sales of our packaged coffee, tea and ready-to-drink products to grocery, warehouse club and specialty retail stores and through institutional foodservice companies which serviced businesses. In the fourth quarter of fiscal 2018, we began licensing the rights to sell and market Starbucks-branded products in authorized channels to Nestlé. As a result, other revenues includes product sales to and licensing revenue from Nestlé under this arrangement and the amortization of the upfront prepaid royalty payment. Our collaborative business relationships for global ready-to-drink products and the associated revenues remain unchanged due to the Global Coffee Alliance with Nestlé.

6


Product Supply
Starbucks is committed to selling the finest whole bean coffees and coffee beverages. To ensure compliance with our rigorous coffee standards, we control coffee purchasing, roasting and packaging and the global distribution of coffee used in our operations. We purchase green coffee beans from multiple coffee-producing regions around the world and custom roast them to our exacting standards for our many blends and single origin coffees.
The price of coffee is subject to significant volatility. Although most coffee trades in the commodity market, high-altitude arabica coffee of the quality sought by Starbucks tends to trade on a negotiated basis at a premium above the “C” coffee commodity price. Both the premium and the commodity price depend upon the supply and demand at the time of purchase. Supply and price can be affected by multiple factors in the producing countries, including weather, natural disasters, crop disease, general increase in farm inputs and costs of production, inventory levels and political and economic conditions. Price is also impacted by trading activities in the arabica coffee futures market, including hedge funds and commodity index funds. In addition, green coffee prices have been affected in the past, and may be affected in the future, by the actions of certain organizations and associations that have historically attempted to influence prices of green coffee through agreements establishing export quotas or by restricting coffee supplies.
We buy coffee using fixed-price and price-to-be-fixed purchase commitments, depending on market conditions, to secure an adequate supply of quality green coffee. 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 most contracts, either Starbucks or the seller has the option to “fix” the base “C” coffee commodity price prior to the delivery date. For other contracts, Starbucks and the seller may agree upon pricing parameters determined by the base “C” coffee commodity price. Until prices are fixed, we estimate the total cost of these purchase commitments. Total green coffee purchase commitments as of September 30, 2018 were $1.1 billion, comprised of $996 million under fixed-price contracts and an estimated $166 million under price-to-be-fixed contracts. As of September 30, 2018, none of our price-to-be-fixed contracts were effectively fixed through the use of futures contracts. Most price-to-be-fixed contracts as of September 30, 2018 were at the Company’s option to fix the base “C” coffee commodity price component. Total purchase commitments, together with existing inventory, are expected to provide an adequate supply of green coffee through fiscal 2019.
We depend upon our relationships with coffee producers, outside trading companies and exporters for our supply of green coffee. We believe, based on relationships established with our suppliers, the risk of non-delivery on such purchase commitments is remote.
To help ensure the future supply of high-quality green coffee and to reinforce our leadership role in the coffee industry, Starbucks operates nine farmer support centers. The farmer support centers are staffed with agronomists and sustainability experts who work with coffee farming communities to promote best practices in coffee production designed to improve both coffee quality, yields and agronomy support to address climate and other impacts.
In addition to coffee, we also purchase significant amounts of dairy products, particularly fluid milk, to support the needs of our company-operated stores. We believe, based on relationships established with our dairy suppliers, that the risk of non-delivery of sufficient fluid milk to support our stores is remote.
Products other than whole bean coffees and coffee beverages sold in Starbucks® stores include tea and a number of ready-to-drink beverages that are purchased from several specialty suppliers, usually under long-term supply contracts. Food products, such as pastries, breakfast sandwiches and lunch items, are purchased from national, regional and local sources. We also purchase a broad range of paper and plastic products, such as cups and cutlery, from several companies to support the needs of our retail stores as well as our manufacturing and distribution operations. We believe, based on relationships established with these suppliers and manufacturers, that the risk of non-delivery of sufficient amounts of these items is remote.
Competition
Our primary competitors for coffee beverage sales are specialty coffee shops offering premium and artisanal products and experiences. In almost all markets in which we do business, there are numerous competitors in the specialty coffee beverage business. We believe that our customers choose among specialty coffee retailers primarily on the basis of product quality, service and convenience, as well as price. We continue to experience direct competition from large competitors in the U.S. quick-service restaurant sector and the U.S. ready-to-drink coffee beverage market, in addition to well-established companies in many international markets. We also compete with restaurants and other specialty retailers for prime retail locations and qualified personnel to operate both new and existing stores.
Our coffee and tea products sold through our Channel Development segment compete directly against specialty coffees and teas sold through grocery stores, warehouse clubs, specialty retailers, convenience stores and foodservice accounts and compete indirectly against all other coffees and teas on the market.

7


Trademarks, Copyrights, Patents and Domain Names
Starbucks owns and has applied to register numerous trademarks and service marks in the U.S. and in other countries throughout the world. Some of our trademarks, including Starbucks, the Starbucks logo, Starbucks Reserve, Seattle’s Best Coffee, Teavana, Frappuccino, Starbucks VIA and La Boulange are of material importance. The duration of trademark registrations varies from country to country. However, trademarks are generally valid and may be renewed indefinitely as long as they are in use and/or their registrations are properly maintained.
We own numerous copyrights for items such as product packaging, promotional materials, in-store graphics and training materials. We also hold patents on certain products, systems and designs. In addition, Starbucks has registered and maintains numerous Internet domain names, including “Starbucks.com,” “Starbucks.net,” “Starbucksreserve.com,” “Seattlesbest.com” and “Teavana.com.”
Seasonality and Quarterly Results
Our business is subject to moderate seasonal fluctuations, of which our fiscal second quarter typically experiences lower revenues and operating income. Additionally, as Starbucks Cards are issued to and loaded by customers during the holiday season, we tend to have higher cash flows from operations during the first quarter of the fiscal year. However, since revenues from Starbucks Cards are recognized upon redemption and not when cash is loaded onto the Card, the impact of seasonal fluctuations on the consolidated statements of earnings is much less pronounced. As a result of moderate seasonal fluctuations, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.
Employees
Starbucks employed approximately 291,000 people worldwide as of September 30, 2018. In the U.S., Starbucks employed approximately 191,000 people, with approximately 183,000 in company-operated stores and the remainder in support facilities, store development, and roasting, manufacturing, warehousing and distribution operations. Approximately 100,000 employees were employed outside of the U.S., with approximately 97,000 in company-operated stores and the remainder in regional support operations. The number of Starbucks employees represented by unions is not significant. We believe our current relations with our employees are good.
Executive Officers of the Registrant
Name
 
Age
 
Position
Kevin R. Johnson
 
58
 
president and chief executive officer
Rosalind G. Brewer
 
56
 
group president, Americas and chief operating officer
Cliff Burrows
 
59
 
group president, Siren Retail
John Culver
 
58
 
group president, International, Channel Development and Global Coffee & Tea
Rachel A. Gonzalez
 
49
 
executive vice president, general counsel and secretary
Patrick J. Grismer
 
56
 
executive vice president, effective November 12, 2018;
executive vice president, chief financial officer and chief accounting officer, effective November 30, 2018
Lucy Lee Helm
 
61
 
executive vice president, chief partner officer
Scott Maw
 
51
 
executive vice president, chief financial officer (retiring November 30, 2018)
Vivek Varma
 
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executive vice president, Public Affairs
Kevin R. Johnson has served as president and chief executive officer since April 2017, and has been a Starbucks director since March 2009. Mr. Johnson served as president and chief operating officer from March 2015 to April 2017. Mr. Johnson served as Chief Executive Officer of Juniper Networks, Inc., a leading provider of high-performance networking products and services, from September 2008 to December 2013. He also served on the Board of Directors of Juniper Networks from September 2008 through February 2014. Prior to joining Juniper Networks, Mr. Johnson served as President, Platforms and Services Division for Microsoft Corporation, a worldwide provider of software, services and solutions. Mr. Johnson was a member of Microsoft’s Senior Leadership Team and held a number of senior executive positions over the course of his 16 years at Microsoft. Prior to joining Microsoft in 1992, Mr. Johnson worked in International Business Machine Corp.’s systems integration and consulting business.
Rosalind G. Brewer has served as group president, Americas and chief operating officer since October 2017, and has been a director of Starbucks since March 2017. Ms. Brewer served as President and Chief Executive Officer of Sam's Club, a membership-only retail warehouse club and a division of Walmart Inc., from February 2012 to February 2017. Previously, Ms.

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Brewer was Executive Vice President and President of Walmart's East Business Unit from February 2011 to January 2012; Executive Vice President and President of Walmart South from February 2010 to February 2011; Senior Vice President and Division President of the Southeast Operating Division from March 2007 to January 2010; and Regional General Manager, Georgia Operations, from 2006 to February 2007. Prior to joining Walmart, Ms. Brewer was President of Global Nonwovens Division for Kimberly-Clark Corporation, a global health and hygiene products company, from 2004 to 2006 and held various management positions at Kimberly-Clark Corporation from 1984 to 2006. She serves as the Chair of the Board of Trustees for Spelman College and formerly served on the Board of Directors for Lockheed Martin Corporation and Molson Coors Brewing Company.
Cliff Burrows joined Starbucks in April 2001 and has served as group president, Siren Retail, since September 2016, which includes the Starbucks ReserveTM Roastery & Tasting Rooms, Starbucks Reserve brand and Princi operations. From July 2015 to September 2016, he served as group president, U.S. and Americas. From February 2014 to June 2015, he served as group president, U.S., Americas and Teavana. From May 2013 to February 2014, he served as group president, Americas and U.S., EMEA (Europe, Middle East and Africa) and Teavana. Mr. Burrows served as president, Starbucks Coffee Americas and U.S. from October 2011 to May 2013 and as president, Starbucks Coffee U.S. from March 2008 to October 2011. He served as president, EMEA from April 2006 to March 2008. He served as vice president and managing director, U.K. prior to April 2006. Prior to joining Starbucks, Mr. Burrows served in various management positions with Habitat Designs Limited, a furniture and housewares retailer.
John Culver joined Starbucks in August 2002 and has served as group president, International, Channel Development and Global Coffee & Tea, since July 2018. From October 2017 to July 2018, Mr. Culver served as group president, International and Channels. From September 2016 to October 2017, he served as group president, Starbucks Global Retail. From May 2013 to September 2016, he served as group president, China, Asia Pacific, Channel Development and Emerging Brands. Mr. Culver served as president, Starbucks Coffee China and Asia Pacific from October 2011 to May 2013. From December 2009 to October 2011, he served as president, Starbucks Coffee International. Mr. Culver served as executive vice president; president, Global Consumer Products, Foodservice and Seattle’s Best Coffee from February 2009 to September 2009, and then as president, Global Consumer Products and Foodservice from October 2009 to November 2009. He previously served as senior vice president; president, Starbucks Coffee Asia Pacific from January 2007 to February 2009, and vice president; general manager, Foodservice from August 2002 to January 2007.
Rachel A. Gonzalez joined Starbucks and has served as executive vice president, general counsel and secretary since joining Starbucks in April 2018. Prior to joining Starbucks, Ms. Gonzalez served as executive vice president and chief administrative officer of Sabre Corporation, a technology provider to the travel industry, from May 2017 to April 2018 and as Sabre’s executive vice president and general counsel from September 2014 to May 2017. From March 2013 to September 2014, Ms. Gonzalez served as executive vice president, general counsel and corporate secretary of Dean Foods Company, a food and beverage company, and as its executive vice president, general counsel designate from November 2012 to March 2013. She served as chief counsel, corporate and securities of Dean Foods from 2008 to November 2012. From 2006 to 2008, Ms. Gonzalez served as senior vice president and group counsel for Affiliated Computer Services, Inc., an information technology service provider. Prior to that, Ms. Gonzalez was a partner with the law firm of Morgan, Lewis & Bockius LLP, where she focused on corporate finance, mergers and acquisitions, SEC compliance and corporate governance. Ms. Gonzalez serves on the Board of Directors of Dana Incorporated.
Patrick J. Grismer joined Starbucks in November 2018, as executive vice president, effective November 12, 2018 and will be executive vice president, chief financial officer and chief accounting officer, effective November 30, 2018. From March 2016 to November 2018, Mr. Grismer served as Executive Vice President, Chief Financial Officer of Hyatt Hotels Corporation, a global hospitality company. From May 2012 to February 2016, Mr. Grismer served as Chief Financial Officer at Yum! Brands, Inc., a global restaurant company. He previously held a number of roles at Yum!, including Chief Planning and Control Officer and Chief Financial Officer for Yum! Restaurants International. Prior to that, Mr. Grismer served in various roles at The Walt Disney Company including Vice President, Business Planning and Development for The Disneyland Resort and Chief Financial Officer for the Disney Vacation Club. Mr. Grismer began his career with Price Waterhouse.
Lucy Lee Helm joined Starbucks in September 1999, and has served as executive vice president, chief partner officer since August 2017. From May 2012 to August 2017, Ms. Helm served as executive vice president, general counsel and secretary. She served as senior vice president and deputy general counsel from October 2007 to April 2012 and served as interim general counsel and secretary from April 2012 to May 2012. Ms. Helm previously served as vice president, assistant general counsel from June 2002 to September 2007 and as director, corporate counsel from September 1999 to May 2002. During her tenure at Starbucks, Ms. Helm has led various teams of the Starbucks legal department, including the Litigation and Brand protection team, the Global Business (Commercial) team and the Litigation and Employment team. Prior to joining Starbucks, Ms. Helm was a principal at the Seattle law firm of Riddell Williams P.S. from 1990 to 1999, where she was a trial lawyer specializing in commercial, insurance coverage and environmental litigation.

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Scott Maw joined Starbucks in August 2011, and has served as executive vice president, chief financial officer since February 2014. He will retire from the Company on November 30, 2018. From October 2012 to February 2014, he served as senior vice president, Corporate Finance and as corporate controller from August 2011 to October 2012. Prior to joining Starbucks, Mr. Maw served as chief financial officer of SeaBright Insurance Company from February 2010 to August 2011. From October 2008 to February 2010, Mr. Maw served as chief financial officer of the Consumer Banking division of JPMorgan Chase & Co., having held a similar position at Washington Mutual Bank prior to its acquisition by Chase. From 1994 to 2003, he served in various finance leadership positions at General Electric Company. Mr. Maw serves on the Board of Directors of Avista Corporation.
Vivek Varma joined Starbucks in September of 2008, and has served as executive vice president, Public Affairs since May 2010. From September 2008 to May 2010, Mr. Varma served as senior vice president, Public Affairs. Prior to joining Starbucks, Mr. Varma was general manager of communications and public relations for the Platforms and Services Division of Microsoft Corporation, a worldwide provider of software, services and solutions, from April 2006 to September 2008. From January 2002 to April 2006, Mr. Varma served in a number of other positions with Microsoft, including as senior director of corporate communications and public relations in Microsoft’s Corporate Marketing Group.
Global Social Impact
We are committed to being a deeply responsible company in the communities where we do business. Our focus is on ethically sourcing high-quality coffee and tea, reducing our environmental impacts and contributing positively to communities around the world. Starbucks Global Social Impact strategy and commitments are integral to our overall business strategy. As a result, we believe we deliver benefits to our stakeholders, including employees, business partners, customers, suppliers, shareholders, community members and others. For an overview of Starbucks Global Social Impact strategy and commitments, please visit www.starbucks.com/responsibility.
Available Information
Starbucks 10-K reports, along with all other reports and amendments filed with or furnished to the Securities and Exchange Commission (“SEC”), are publicly available free of charge on the Investor Relations section of our website at investor.starbucks.com or at www.sec.gov as soon as reasonably practicable after these materials are filed with or furnished to the SEC. Our corporate governance policies, code of ethics and Board committee charters and policies are also posted on the Investor Relations section of Starbucks website. The information on our website is not part of this or any other report Starbucks files with, or furnishes to, the SEC.
Item 1A. Risk Factors
You should carefully consider the risks described below. If any of the risks and uncertainties described in the cautionary factors described below actually occurs, our business, financial condition and results of operations, and the trading price of our common stock could be materially and adversely affected. Moreover, we operate in an increasingly competitive and rapidly changing environment. New factors emerge from time to time and it is not possible to predict the impact of all these factors on our business, financial condition or results of operations.
Economic conditions in the U.S. and international markets could adversely affect our business and financial results.
As a retailer that is dependent upon consumer discretionary spending, our results of operations are sensitive to changes in or uncertainty about macro-economic conditions. Our customers may have less money for discretionary purchases and may stop or reduce their purchases of our products or trade down to Starbucks or competitors' lower priced products as a result of job losses, foreclosures, bankruptcies, increased fuel and energy costs, higher interest rates, inflation, higher taxes, reduced access to credit, economic uncertainty and potential negative impacts relating to federal economic policy changes and recent international trade disputes. These factors may also result in a general downturn in the restaurant industry. Decreases in customer traffic and/or average value per transaction will negatively impact our financial performance as reduced revenues without a corresponding decrease in expenses result in sales de-leveraging, which creates downward pressure on margins and also negatively impacts comparable store sales, net revenues, operating income and earnings per share. There is also a risk that if negative economic conditions or uncertainty persist for a long period of time or worsen, consumers may make long-lasting changes to their discretionary purchasing behavior, including less frequent discretionary purchases on a more permanent basis.
Our success depends substantially on the value of our brands and failure to preserve their value, either through our actions or those of our business partners, could have a negative impact on our financial results.
We believe we have built an excellent reputation globally for the quality of our products, for delivery of a consistently positive consumer experience and for our global social impact programs. The Starbucks brand is recognized throughout the world and we have received high ratings in global brand value studies. To be successful in the future, particularly outside of the U.S., where the Starbucks brand and our other brands are less well-known, we believe we must preserve, grow and leverage the value

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of our brands across all sales channels. Brand value is based in part on consumer perceptions on a variety of subjective qualities.
Additionally, our business strategy, including our plans for new stores, branded products and other initiatives, relies significantly on a variety of business partners, including licensee and joint venture relationships, particularly in our international markets, and third-party manufacturers, distributors and retailers, particularly for our entire global Channel Development business. Licensees, retailers and foodservice operators are often authorized to use our logos and provide branded food, beverage and other products directly to customers. We provide training and support to, and monitor the operations of, certain of these business partners, but the product quality and service they deliver may be diminished by any number of factors beyond our control, including financial pressures they may face. We believe customers expect the same quality of products and service from our licensed-store operators as they do from us and we strive to ensure customers receive the same quality of products and service experience whether they visit a company-operated store or a licensed store. We also source our food, beverage and other products from a wide variety of domestic and international business partners in our supply chain operations, and in certain cases such products are produced or sourced by our licensees directly. And although foodservice operators are authorized to use our logos and provide branded products as part of their foodservice business, we do not monitor the quality of non-Starbucks products served in those locations. Additionally, inconsistent uses of our brand and other of our intellectual property assets, as well as failure to protect our intellectual property, including from unauthorized uses of our brand or other of our intellectual property assets, can erode consumer trust and our brand value and have a material negative impact on our financial results.
Business incidents, whether isolated or recurring and whether originating from us or our business partners, that erode consumer trust, such as actual or perceived breaches of privacy or violations of domestic or international privacy laws, contaminated food, product recalls, store employees or other food handlers infected with communicable diseases or other potential incidents discussed in this risk factors section, particularly if the incidents receive considerable publicity, including rapidly through social or digital media (including for malicious reasons), or result in litigation, and failure to respond appropriately to these incidents (or being perceived to not have reacted appropriately), can significantly reduce brand value, trigger boycotts of our stores or products or demonstrations at our stores, result in civil and criminal liability and have a negative impact on our financial results. Consumer demand for our products and our brand equity could diminish significantly if we, our employees or our licensees or other business partners fail to preserve the quality of our products, act or are perceived to act in an unethical, illegal, racially-biased or unequal treatment basis or socially irresponsible manner, including with respect to the sourcing, content or sale of our products, service and treatment at Starbucks stores or the use of customer data for general or direct marketing or other purposes, fail to comply with laws and regulations, publicly take controversial positions or actions or fail to deliver a consistently positive consumer experience in each of our markets, including by failing to invest in the right balance of wages and benefits to attract and retain employees that represent the brand well.
Incidents involving food or beverage-borne illnesses, tampering, adulteration, contamination or mislabeling, whether or not accurate, as well as adverse public or medical opinions about the health effects of consuming our products, could harm our business.
Instances or reports, whether true or not, of unclean water supply or food-safety issues, such as food or beverage-borne illnesses, tampering, adulteration, contamination or mislabeling, either during growing, manufacturing, packaging, storing or preparation, have in the past severely injured the reputations of companies in the food and beverage processing, grocery and quick-service restaurant sectors and could affect us as well. Any report linking us to the use of unclean water, food or beverage-borne illnesses, tampering, adulteration, contamination, mislabeling or other food or beverage-safety issues could damage our brand value and severely hurt sales of our food and beverage products and possibly lead to product liability claims, litigation (including class actions) or damages. Clean water is critical to the preparation of coffee, tea and other beverages, as well as ice for our cold beverages, and our ability to ensure a clean water and ice supply to our stores can be limited, particularly in some international locations. We are also continuing to incorporate more products in our food and beverage lineup that require freezing or refrigeration, including produce (such as fruits and vegetables in our salads and juices), dairy products (such as milk and cheeses), non-dairy alternative products (such as soymilk and almondmilk), ice for our cold drinks and meats. We also face risk by relying on third-party food suppliers to provide and transport ingredients and finished products to our stores. We monitor the operations of certain of these business partners, but the product quality and service they deliver may be diminished by any number of factors beyond our control, which make it more difficult to detect contamination or other defect in these products. Additionally, we are evolving our product lineup to include more local or smaller suppliers for some of our products who may not have as rigorous quality and safety systems and protocols as larger or more national suppliers. If customers become ill from food or beverage-borne illnesses, tampering, adulteration, contamination, mislabeling or other food or beverage-safety issues, we could be forced to temporarily close some stores and/or supply chain facilities, as well as recall products. In addition, instances of food or beverage-safety issues, even those involving solely the restaurants or stores of competitors or of suppliers or distributors (regardless of whether we use or have used those suppliers or distributors), could, by resulting in negative publicity about us or the foodservice industry in general, adversely affect our sales on a regional or global basis. A decrease in customer traffic as a result of food-safety concerns or negative publicity, or as a result of a temporary

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closure of any of our stores, product recalls or food or beverage-safety claims or litigation, could materially harm our business and results of operations.
Some of our products contain caffeine, dairy products, sugar and other compounds and allergens, the health effects of which are the subject of public and regulatory scrutiny, including the suggestion that excessive consumption of caffeine, dairy products, sugar and other compounds can lead to a variety of adverse health effects. Particularly in the U.S., there is increasing consumer awareness of health risks, including obesity, due in part to increased publicity and attention from health organizations, as well as increased consumer litigation based on alleged adverse health impacts of consumption of various food and beverage products. While we have a variety of beverage and food items, including items that are coffee-free and have reduced calories, an unfavorable report on the health effects of caffeine or other compounds present in our products, whether accurate or not, imposition of additional taxes on certain types of beverages, or negative publicity or litigation arising from certain health risks could significantly reduce the demand for our beverages and food products and could materially harm our business and results of operations.
The unauthorized access, use, theft or destruction of customer or employee personal, financial or other data or of Starbucks proprietary or confidential information that is stored in our information systems or by third parties on our behalf could impact our reputation and brand and expose us to potential liability and loss of revenues.
Many of our information technology systems, such as those we use for our point-of-sale, web and mobile platforms, including online and mobile payment systems, delivery services and rewards programs, and for administrative functions, including human resources, payroll, accounting and internal and external communications, as well as the information technology systems of our licensees, franchisees and other third-party business partners and service providers, whether cloud-based or hosted in proprietary servers, contain personal, financial or other information that is entrusted to us by our customers and employees. Many of our information technology systems also contain Starbucks proprietary and other confidential information related to our business, such as business plans, product development initiatives and designs. Similar to many other retail companies and because of the prominence of our brand, we are consistently subject to attempts to compromise our information technology systems. To the extent we or a third party were to experience a material breach of our or such third party’s information technology systems that result in the unauthorized access, theft, use, destruction or other compromises of customers' or employees' data or confidential information of the Company stored in such systems, including through cyber-attacks or other external or internal methods, it could result in a material loss of revenues from the potential adverse impact to our reputation and brand, our ability to retain or attract new customers and the potential disruption to our business and plans. Such security breaches also could result in a violation of applicable U.S. and international privacy and other laws, and subject us to private consumer, business partner, or securities litigation and governmental investigations and proceedings, any of which could result in our exposure to material civil or criminal liability. For example, the European Union adopted a new regulation that became effective in May 2018, called the General Data Protection Regulation (“GDPR”), which requires companies to meet new requirements regarding the handling of personal data, including its use, protection and transfer and the ability of persons whose data is stored to correct or delete such data about themselves. Failure to meet the GDPR requirements could result in penalties of up to 4% of annual worldwide revenue. The GDPR also confers a private right of action on certain individuals and associations. Our reputation and brand and our ability to attract new customers could also be adversely impacted if we fail, or are perceived to have failed, to properly respond to these incidents. Such failure to properly respond could also result in similar exposure to liability.
Compliance with the GDPR and other applicable international and U.S. privacy, cybersecurity and related laws can be costly and time-consuming. Significant capital investments and other expenditures could also be required to remedy cybersecurity problems and prevent future breaches, including costs associated with additional security technologies, personnel, experts and credit monitoring services for those whose data has been breached. These costs, which could be material, could adversely impact our results of operations in the period in which they are incurred and may not meaningfully limit the success of future attempts to breach our information technology systems.
Media or other reports of existing or perceived security vulnerabilities in our systems or those of our third-party business partners or service providers can also adversely impact our brand and reputation and materially impact our business, even if no breach has been attempted or has occurred. Additionally, the techniques and sophistication used to conduct cyber-attacks and breaches of information technology systems, as well as the sources and targets of these attacks, change frequently and are often not recognized until such attacks are launched or have been in place for a period of time. We continue to make significant investments in technology, third-party services and personnel to develop and implement systems and processes that are designed to anticipate cyber-attacks and to prevent or minimize breaches of our information technology systems or data loss, but these security measures cannot provide assurance that we will be successful in preventing such breaches or data loss.

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We rely heavily on information technology in our operations and growth initiatives, and any material failure, inadequacy, interruption or security failure of that technology could harm our ability to effectively operate and grow our business and could adversely affect our financial results.
We rely heavily on information technology systems across our operations, including for administrative functions, point-of-sale processing and payment in our stores and online, management of our supply chain, Starbucks Cards, online business, delivery services, mobile technology, including mobile payments and ordering apps, reloads and loyalty functionality and various other processes and transactions, and many of these systems are interdependent on one another for their functionality. Additionally, the success of several of our initiatives to drive growth, including our priority to increase digital relationships with our customers to drive incremental traffic and spend, is highly dependent on our technology systems. Our ability to effectively manage our business, launch digital and other initiatives, and coordinate the production, distribution, administration and sale of our products depends significantly on the reliability, integrity and capacity of these systems. We also rely on third-party providers and platforms for some of these information technology systems and support. Additionally, our systems hardware, software and services provided by third-party service providers are not fully redundant within a market or across our markets. Although we have operational safeguards in place, they may not be effective in preventing the failure of these systems or platforms to operate effectively and be available. Such failures may be caused by various factors, including power outages, catastrophic events, physical theft, computer and network failures, inadequate or ineffective redundancy, problems with transitioning to upgraded or replacement systems or platforms, flaws in third-party software or services, errors or improper use by our employees or third party service providers, or a breach in the security of these systems or platforms, including through cyber-attacks such as those that result in the blockage of our or our third-party business partners’ or service providers’ systems and platforms and those discussed in more detail in this risk factors section. If our incident response, disaster recovery and business continuity plans do not resolve these issues in an effective manner they could result in an interruption in our operations and could cause material negative impacts to our product availability and sales, the efficiency of our operations and our financial results. In addition, remediation of any problems with our systems could result in significant, unplanned expenses.
We may not be successful in implementing important strategic initiatives or effectively managing growth, which may have an adverse impact on our business and financial results.
There is no assurance that we will be able to implement important strategic initiatives in accordance with our expectations or that they will generate expected returns, which may result in an adverse impact on our business and financial results. These strategic initiatives are designed to create growth, improve our results of operations and drive long-term shareholder value, and include:
being an employer of choice and investing in employees to deliver a superior customer experience;
building our leadership position around coffee;
driving convenience, brand engagement and digital relationships through our mobile, loyalty, delivery and digital capabilities both domestically and internationally;
simplifying store administrative tasks to allow store partners to better engage with customers;
increasing the scale of the Starbucks store footprint with disciplined global expansion and introducing flexible and unique store formats; 
moving to a more licensed store model in some markets and a more company-owned model in other markets;
creating new occasions in stores across all dayparts with new product offerings, including our growing lunch food and beverage product lineup;
continuing the global growth of our Channel Development business through our supply, distribution and licensing agreements with Nestlé and other Channel Development business partners;
delivering continued growth in our cold beverage business, including our tea business through the Teavana brand in our Starbucks® retail stores and other channels and internationally; and
reducing our general and administrative costs.
In addition to other factors listed in this risk factors section, factors that may adversely affect the successful implementation of these initiatives, which could have a material adverse impact on our business and financial results, include the following:
increases in labor costs, including wages and benefits, which, in a retail business such as ours, are two of our most significant costs, both domestically and internationally; these increases include significant and sudden increases in labor costs triggered by regulatory actions regarding wages and scheduling and benefits requirements; they also include increased health care and workers’ compensation insurance costs, as well as increased wages and costs of other

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benefits necessary to attract and retain high quality employees with the right skill sets, whether due to changing industry practices, competition or our expansion into new channels or technology dependent operations;
not successfully developing and implementing new technologies necessary to effectuate our growth strategies, including increasing our digital relationships with customers to drive growth, due to inability to attract and retain qualified high-tech personnel or other factors;
increasing competition in channels in which we operate or seek to operate from new and existing large competitors or well-funded smaller ones that sell high-quality specialty coffee beverages;
continuing disruption in retail caused by on-line commerce, resulting in reduced foot traffic to “brick & mortar” retail stores;
consumers shifting categories of where they spend their discretionary income away from outside-the-home food and beverage;
imposition of additional taxes by jurisdictions, such as on certain types of beverages or based on number of employees;
construction cost increases associated with new store openings and remodeling of existing stores; delays in store openings for reasons beyond our control or a lack of desirable real estate locations available for lease at reasonable rates, either of which could keep us from meeting annual store opening targets in the U.S. and internationally;
not successfully scaling our supply chain infrastructure as our product offerings increase and as we continue to expand, including our emphasis on a broad range of high-quality food offerings;
the ability of our licensee partners to implement our growth platforms and product innovation;
lack of customer acceptance of new products (including due to price increases necessary to cover the costs of new products or higher input costs), brands (such as the global expansion of the Teavana brand in our Starbucks® retail stores and other channels) and platforms (such as features of our mobile technology, changes in our loyalty rewards programs and our delivery services initiatives), or customers reducing their demand for our current offerings as new products are introduced;
the degree to which we enter into, maintain, develop and are able to negotiate appropriate terms and conditions of, and enforce, commercial and other agreements and the performance of our business partners under such agreements;
not successfully consummating and implementing favorable strategic transactions or integrating acquired businesses, including our East China business;
the effects of the Tax Cuts and Jobs Act and related guidance and regulations that may be promulgated; and
the deterioration in our credit ratings, which could limit the availability of additional financing and increase the cost of obtaining financing to fund our initiatives.
Our Channel Development business is heavily reliant on Nestlé, which acquired the right to sell and distribute our packaged goods and foodservice products to retailers and operators, with few exceptions. If Nestlé fails to perform its distribution and marketing commitments under our agreements and/or fails to support, protect and grow our brand in Channel Development, our Channel Development business could be adversely impacted for a period of time, present long-term challenges to our brand, limit our ability to grow our Channel Development business and have a material adverse impact on our business and financial results. Additionally, our Channel Development business is also in part dependent on the level of support our retail business partners provide our products, and in some markets there are only a few retailers. If our retail business partners do not provide sufficient levels of support for our products, which is at their discretion, it could limit our ability to grow our Channel Development business.
Also, a relatively small number of licensee partners own a large number of licensed stores. If such licensee partners are not able to access sufficient funds or financing, or are otherwise unable to successfully operate and grow their businesses, including their licensed stores, it could have a material adverse effect on our results in the markets in which they operate their licensed stores.
Effectively managing growth can be challenging, particularly as we continue to expand into new channels outside the retail store model, implement our arrangement with Nestlé for most of our global Channel Development business and grow our Teavana brand in our Starbucks® retail stores and other channels, as well as expand into new markets internationally where we must balance the need for flexibility and a degree of autonomy for local management against the need for consistency with our goals, philosophy and standards. Growth can make it increasingly difficult to ensure a consistent supply of high-quality raw materials, to locate and hire sufficient numbers of key employees, to maintain an effective system of internal controls for a globally dispersed enterprise and to train employees worldwide to deliver a consistently high-quality product and customer

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experience. Furthermore, if we are not successful in implementing these strategic initiatives, such as large acquisitions and integrations, we may be required to evaluate whether certain assets, including goodwill and other intangibles, have become impaired. In the event we record an impairment charge, it could have a material impact on our financial results.
We face intense competition in each of our channels and markets, which could lead to reduced profitability.
The specialty coffee market is intensely competitive, including with respect to product quality, innovation, service, convenience, such as delivery service and mobile ordering, and price, and we face significant and increasing competition in all these areas in each of our channels and markets. Accordingly, we do not have leadership positions in all channels and markets. In the U.S., the ongoing focus by large competitors in the quick-service restaurant sector on selling high-quality specialty coffee beverages could lead to decreases in customer traffic to Starbucks® stores and/or average value per transaction adversely affecting our sales and results of operations. Similarly, continued competition from well-established competitors, or competition from large new entrants or well-funded smaller companies in our domestic and international markets could hinder growth and adversely affect our sales and results of operations in those markets. Many small competitors also continue to open coffee specialty stores in many of our markets across the world, which in the aggregate may also lead to significant decreases of customer traffic to our stores in those markets. Increased competition globally in packaged coffee and tea and single-serve and ready-to-drink coffee beverage markets, including from new and large entrants to this market could adversely affect the profitability of the Channel Development segment. Furthermore, declines in general consumer demand for specialty coffee products for any reason, including due to consumer preference for other products or flattening demand for our products, could have a negative effect on our business.
We are highly dependent on the financial performance of our Americas operating segment.
Our financial performance is highly dependent on our Americas operating segment, as it comprised approximately 68% of consolidated total net revenues in fiscal 2018. If the Americas operating segment revenue trends slow or decline, especially in our U.S. and Canada markets, our other segments may be unable to make up any significant shortfall and our business and financial results could be adversely affected. And because the Americas segment is relatively mature and produces the large majority of our operating cash flows, such a slowdown or decline could result in reduced cash flows for funding the expansion of our international business and other initiatives and for returning cash to shareholders.
We are increasingly dependent on the success of certain international markets in order to achieve our growth targets.
Our future growth increasingly depends on the growth and sustained profitability of certain international markets. Some or all of our international market business units (“MBUs”), which we generally define by the countries in which they operate, may not be successful in their operations or in achieving expected growth, which ultimately requires achieving consistent, stable net revenues and earnings. The performance of these international operations may be adversely affected by economic downturns in one or more of the countries in which our large MBUs operate. A decline in performance of one or more of our significant international MBUs could have a material adverse impact on our consolidated results.
The CAP segment is now one of our two significant profit centers driving our global returns, along with our Americas segment. In particular, our China MBU contributes meaningfully to both consolidated and CAP net revenues and earnings. China is currently our fastest growing market and second largest market overall. With our recent acquisition of the East China business, the China market is now 100% company owned and, along with the U.S. market. Due to the significance of our China market for our profit and growth, we are exposed to risks in China, including the risks mentioned elsewhere below and the following:
the effects of current U.S.-China relations, including rounds of tariff increases and retaliations and increasing restrictive regulations, potential boycotts and increasing anti-Americanism;
entry of new competitors to the specialty coffee market in China;
changes in economic conditions in China and potential negative effects to the growth of its middle class, wages, labor, inflation discretionary spending and real estate and supply chain costs;
ongoing government regulatory reform, including relating to food safety, tariffs and tax, bringing uncertainty and inconsistent interpretations, which may be contrary to ours, as well as potential significant increases in compliance costs;
food-safety related matters, including compliance with food-safety regulations and ability to ensure product quality and safety; and
the ability to successfully integrate the East China business.
Additionally, some factors that will be critical to the success of our international operations overall are different than those affecting our U.S. stores and licensees. Tastes naturally vary by region, and consumers in some MBUs may not embrace our products to the same extent as consumers in the U.S. or other international markets. Occupancy costs and store operating expenses can be higher internationally than in the U.S. due to higher rents for prime store locations or costs of compliance with

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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 more developed operations, such as in the U.S. Additionally, our international joint venture partners or licensees may face capital constraints or other factors that may limit the speed at which they are able to expand and develop in a certain market.
Our international operations are also subject to additional inherent risks of conducting business abroad, such as:
foreign currency exchange rate fluctuations, or requirements to transact in specific currencies;
changes or uncertainties in economic, legal, regulatory, social and political conditions in our markets, as well as negative effects on U.S. businesses due to increasing anti-American sentiment in certain markets;
interpretation and application of laws and regulations, including tax, tariffs, labor, merchandise, anti-bribery and privacy laws and regulations;
uncertainties and effects of the implementation of the United Kingdom's referendum to withdraw membership from the European Union (refer to as “Brexit”), including financial, legal, tax and trade implications;
restrictive actions of foreign or U.S. governmental authorities affecting trade and foreign investment, especially during periods of heightened tension between the U.S. and such foreign governmental authorities, including protective measures such as export and customs duties and tariffs, government intervention favoring local competitors, and restrictions on the level of foreign ownership;
import or other business licensing requirements;
the enforceability of intellectual property and contract rights;
limitations on the repatriation of funds and foreign currency exchange restrictions due to current or new U.S. and international regulations;
in developing economies, the growth rate in the portion of the population achieving sufficient levels of disposable income may not be as fast as we forecast;
difficulty in staffing, developing and managing foreign operations and supply chain logistics, including ensuring the consistency of product quality and service, due to governmental actions affecting supply chain logistics, distance, language and cultural differences, as well as challenges in recruiting and retaining high quality employees in local markets;
local laws that make it more expensive and complex to negotiate with, retain or terminate employees;
delays in store openings for reasons beyond our control, competition with locally relevant competitors or a lack of desirable real estate locations available for lease at reasonable rates, any of which could keep us from meeting annual store opening targets and, in turn, negatively impact net revenues, operating income and earnings per share; and
disruption in energy supplies affecting our markets.
Moreover, many of the foregoing risks are particularly acute in developing countries, which are important to our long-term growth prospects.
Increases in the cost of high-quality arabica coffee beans or other commodities or decreases in the availability of high-quality arabica coffee beans or other commodities could have an adverse impact on our business and financial results.
We purchase, roast and sell high-quality whole bean arabica coffee beans and related coffee products. The price of coffee is subject to significant volatility and has and may again increase significantly due to one or more of the factors described below. The high-quality arabica coffee of the quality we seek tends to trade on a negotiated basis at a premium above the “C” price. This premium depends upon the supply and demand at the time of purchase and the amount of the premium can vary significantly. Increases in the “C” coffee commodity price do increase the price of high-quality arabica coffee and also impact our ability to enter into fixed-price purchase commitments. We frequently enter into supply contracts whereby the quality, quantity, delivery period, and other negotiated terms are agreed upon, but the date, and therefore price, at which the base “C” coffee commodity price component will be fixed has not yet been established. These are known as price-to-be-fixed contracts. The supply and price of coffee we purchase can also be affected by multiple factors in the producing countries, such as weather (including the potential effects of climate change), natural disasters, crop disease, general increase in farm inputs and costs of production, inventory levels and political and economic conditions, as well as the actions of certain organizations and associations that have historically attempted to influence prices of green coffee through agreements establishing export quotas or by restricting coffee supplies. Speculative trading in coffee commodities can also influence coffee prices. Because of the significance of coffee beans to our operations, combined with our ability to only partially mitigate future price risk through purchasing practices and hedging activities, increases in the cost of high-quality arabica coffee beans could have a material

16


adverse impact on our profitability. In addition, if we are not able to purchase sufficient quantities of green coffee due to any of the above factors or to a worldwide or regional shortage, we may not be able to fulfill the demand for our coffee, which could have a material adverse impact on our profitability.
We also purchase significant amounts of dairy products, particularly fluid milk, to support the needs of our company-operated retail stores. Additionally, and although less significant to our operations than coffee or dairy, other commodities, including but not limited to tea and those related to food and beverage inputs, such as cocoa, produce, baking ingredients, meats, eggs and energy, as well as the processing of these inputs, are important to our operations. Increases in the cost of dairy products and other commodities, or lack of availability, whether due to supply shortages, delays or interruptions in processing, or otherwise, especially in international markets, could have a material adverse impact on our profitability.
Our financial condition and results of operations are sensitive to, and may be adversely affected by, a number of factors, many of which are largely outside our control.
Our operating results have been in the past and will continue to be subject to a number of factors, many of which are largely outside our control. Any one or more of the factors listed below or described elsewhere in this risk factors section could have a material adverse impact our business, financial condition and/or results of operations:
increases in real estate costs in certain domestic and international markets;
adverse outcomes of litigation;
severe weather or other natural or man-made disasters affecting a large market or several closely located markets that may temporarily but significantly affect our retail business in such markets; and
especially in our larger or fast growing markets, labor discord or disruption, geopolitical events, war, terrorism (including incidents targeting us), political instability, boycotts, increasing anti-American sentiment in certain markets, social unrest, and natural disasters, including health pandemics that lead to avoidance of public places or restrictions on public gatherings such as in our stores.
Interruption of our supply chain could affect our ability to produce or deliver our products and could negatively impact our business and profitability.
Any material interruption in our supply chain, such as material interruption of roasted coffee supply due to the casualty loss of any of our roasting plants, interruptions in service by our third party logistic service providers or common carriers that ship goods within our distribution channels, trade restrictions, such as increased tariffs or quotas, embargoes or customs restrictions, natural disasters or political disputes and military conflicts that cause a material disruption in our supply chain could have a negative material impact on our business and our profitability.
Additionally, our food, beverage and other products are sourced from a wide variety of domestic and international business partners in our supply chain operations, and in certain cases are produced or sourced by our licensees directly. We rely on these suppliers to provide high quality products and to comply with applicable laws. Our ability to find qualified suppliers who meet our standards and supply products in a timely and efficient manner is a significant challenge, especially with respect to goods sourced from outside the U.S., especially countries or regions with diminished infrastructure, developing or failing economies or experiencing political instability or social unrest, and as we increase our fresh and prepared food offerings. For certain products, we may rely on one or very few suppliers. A supplier's failure to meet our standards, provide products in a timely and efficient manner, or comply with applicable laws is beyond our control. These issues, especially for those products for which we rely on one or few suppliers, could have a material negative impact on our business and profitability.
Failure to meet market expectations for our financial performance and fluctuations in the stock market as a whole will likely adversely affect the market price and volatility of our stock.
Failure to meet market expectations going forward, particularly with respect to operating margins, earnings per share, comparable store sales, operating cash flows, shareholder returns and net revenues, will likely result in a decline and/or increased volatility in the market price of our stock. In addition, price and volume fluctuations in the stock market as a whole may affect the market price of our stock in ways that may be unrelated to our financial performance.
The loss of key personnel or difficulties recruiting and retaining qualified personnel could adversely impact our business and financial results.
Much of our future success depends on the continued availability and service of senior management personnel. The loss of any of our executive officers or other key senior management personnel could harm our business. We must continue to recruit, retain and motivate management and other employees sufficiently, both to maintain our current business and to execute our strategic initiatives, some of which involve ongoing expansion in business channels outside of our traditional company-operated store model. Our success also depends substantially on the contributions and abilities of our retail store employees whom we rely on to give customers a superior in-store experience and elevate our brand. Accordingly, our performance

17


depends on our ability to recruit and retain high quality employees to work in and manage our stores, both domestically and internationally. Our ability to attract and retain both corporate and retail personnel is also acutely impacted in certain international and domestic markets where the competition for a relatively small number of qualified employees is intense or in markets where large high-tech companies are able to offer more competitive salaries and benefits, as well as where there is a strong economy with many available jobs and intense competition for the available workforce. Additionally, there is intense competition for qualified technology systems developers necessary to develop and implement new technologies for our growth initiatives, including increasing our digital relationships with customers. If we are unable to recruit, retain and motivate employees sufficiently to maintain our current business and support our projected growth, our business and financial performance may be adversely affected.
Failure to comply with applicable laws and changing legal and regulatory requirements could harm our business and financial results.
Our policies and procedures are designed to comply with all applicable laws, accounting and reporting requirements, tax rules and other regulations and requirements, including those imposed by the SEC, Nasdaq, and foreign countries, as well as applicable trade, labor, healthcare, privacy (including the European Union’s GDPR, discussed in more detail in this risk factors section), food and beverage, sanitation, safety, environmental, labeling, anti-bribery and corruption and merchandise laws. The complexity of the regulatory environment in which we operate and the related cost of compliance are both increasing due to additional or changing legal and regulatory requirements, our ongoing expansion into new markets and new channels, and the fact that foreign laws occasionally conflict with domestic laws. In addition to potential damage to our reputation and brand, failure by us or our business partners to comply with the various applicable laws and regulations, as well as changes in laws and regulations or the manner in which they are interpreted or applied, may result in litigation, civil and criminal liability, damages, fines and penalties, increased cost of regulatory compliance and restatements of our financial statements and have an adverse impact on our business and financial results.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Properties
The significant properties used by Starbucks in connection with its roasting, manufacturing, warehousing, distribution and corporate administrative operations, serving all segments, are as follows:
Location
Approximate Size
in Square Feet
 
Purpose
Rancho Cucamonga, CA
265,000

 
Manufacturing
Washington, DC
130,000

 
Warehouse and distribution
Augusta, GA
131,000

 
Manufacturing
Minden, NV (Carson Valley)
1,080,000

 
Roasting and distribution
York, PA
1,957,000

 
Roasting, distribution and warehouse
Gaston, SC (Sandy Run)
117,000

 
Roasting and distribution
Lebanon, TN
680,000

 
Warehouse and distribution
Stratford, CT
196,000

 
Warehouse and distribution
Auburn, WA
491,000

 
Warehouse and distribution
Kent, WA
510,000

 
Roasting and distribution
Seattle, WA
1,283,000

 
Corporate administrative
Shanghai, China
211,000

 
Corporate administrative
Amsterdam, Netherlands
97,000

 
Roasting and distribution
Samutprakarn, Thailand
81,000

 
Warehouse and distribution
We own most of our roasting facilities and lease the majority of our warehousing and distribution locations. As of September 30, 2018, Starbucks had 15,341 company-operated stores, almost all of which are leased. We also lease space in various locations worldwide for regional, district and other administrative offices, training facilities and storage. In addition to the locations listed above, we hold inventory at various locations managed by third-party warehouses.
Item 3.
Legal Proceedings
See Note 15, Commitments and Contingencies, to the consolidated financial statements included in Item 8 of Part II of this 10-K for information regarding certain legal proceedings in which we are involved.

18


Item 4.Mine Safety Disclosures
Not applicable.

19


PART II
Item 5. Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
SHAREHOLDER INFORMATION
MARKET INFORMATION AND DIVIDEND POLICY
Starbucks common stock is traded on NASDAQ, under the symbol “SBUX.”
As of November 9, 2018, we had approximately 18,100 shareholders of record. This does not include persons whose stock is in nominee or “street name” accounts through brokers.
Future decisions to pay cash dividends continue to be at the discretion of the Board of Directors and will be dependent on our operating performance, financial condition, capital expenditure requirements and other factors that the Board of Directors considers relevant.
ISSUER PURCHASES OF EQUITY SECURITIES
The following table provides information regarding repurchases of our common stock during the quarter ended September 30, 2018:
 
 
Total
Number of
Shares
Purchased
 
Average
Price
Paid per
Share
 
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
(2)
 
Maximum
Number of
Shares that May
Yet Be
Purchased
Under the Plans
or Programs
(3)
Period(1)
 
 
 
 
 
 
 
 
July 2, 2018 - July 29, 2018
 
19,506,300

 
$
50.54

 
19,506,300

 
87,808,124

July 30, 2018 - August 26, 2018
 
15,000,000

 
52.70

 
15,000,000

 
72,808,124

August 27, 2018 - September 30, 2018
 
24,000,000

 
55.10

 
24,000,000

 
48,808,124

Total
 
58,506,300

 
$
52.96

 
58,506,300

 
 
(1) 
Monthly information is presented by reference to our fiscal months during the fourth quarter of fiscal 2018.
(2) 
Share repurchases are conducted under our ongoing share repurchase program announced in September 2001, which has no expiration date.
(3) 
This column includes the total remaining number of shares available for repurchase under the authorization announced on April 26, 2018 as part of our ongoing share repurchase program. These amounts do not include the additional 120 million shares authorized for repurchase announced on November 1, 2018. Shares under our ongoing share repurchase program may be repurchased in open market transactions, including pursuant to a trading plan adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, or through privately negotiated transactions. The timing, manner, price and amount of repurchases will be determined at the Company's discretion, and the share repurchase program may be suspended, terminated or modified at any time for any reason.

20


Performance Comparison Graph
The following graph depicts the total return to shareholders from September 29, 2013 through September 30, 2018, relative to the performance of the Standard & Poor’s 500 Index, the NASDAQ Composite Index and the Standard & Poor’s 500 Consumer Discretionary Sector, a peer group that includes Starbucks. All indices shown in the graph have been reset to a base of 100 as of September 29, 2013, and assume an investment of $100 on that date and the reinvestment of dividends paid since that date. The stock price performance shown in the graph is not necessarily indicative of future price performance.
sbux-09302018_chart.jpg
 
Sep 29, 2013
 
Sep 28, 2014
 
Sep 27, 2015
 
Oct 2, 2016
 
Oct 1, 2017
 
Sep 30, 2018
Starbucks Corporation
$
100.00

 
$
98.58

 
$
154.19

 
$
145.93

 
$
147.36

 
$
159.57

S&P 500
100.00

 
119.73

 
119.00

 
137.36

 
162.92

 
192.10

NASDAQ Composite
100.00

 
121.64

 
127.37

 
148.79

 
183.54

 
230.21

S&P Consumer Discretionary
100.00

 
111.77

 
126.50

 
138.69

 
158.83

 
210.51


21


Item 6.
Selected Financial Data
The following selected financial data is derived from the consolidated financial statements. The data below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors,” and the consolidated financial statements and notes.
Financial Information (in millions, except per share data):
 
As of and for the Fiscal Year Ended (1)
Sept 30,
2018
(52 Wks)
 
Oct 1,
2017
(52 Wks)
 
Oct 2,
2016
(53 Wks)
 
Sep  27,
2015
(52 Wks)
 
Sep  28,
2014
(52 Wks)
 
 
Results of Operations
 
 
 
 
 
 
 
 
 
 
Net revenues:
 
 
 
 
 
 
 
 
 
 
 Company-operated stores
$
19,690.3

 
$
17,650.7

 
$
16,844.1

 
$
15,197.3

 
$
12,977.9

 
Licensed stores
2,652.2

 
2,355.0

 
2,154.2

 
1,861.9

 
1,588.6

 
Other
2,377.0

 
2,381.1

 
2,317.6

 
2,103.5

 
1,881.3

 
Total net revenues
$
24,719.5

 
$
22,386.8

 
$
21,315.9

 
$
19,162.7

 
$
16,447.8

 
Operating income/(loss)
$
3,883.3

 
$
4,134.7

 
$
4,171.9

 
$
3,601.0

 
$
3,081.1

 
Net earnings including noncontrolling interests(2)
4,518.0

 
2,884.9

 
2,818.9

 
2,759.3

 
2,067.7

 
Net earnings/(loss) attributable to noncontrolling interests
(0.3
)
 
0.2

 
1.2

 
1.9

 
(0.4
)
 
Net earnings attributable to Starbucks(2)
4,518.3

 
2,884.7

 
2,817.7

 
2,757.4

 
2,068.1

 
EPS — diluted(2)
3.24

 
1.97

 
1.90

 
1.82

 
1.35

 
Cash dividends declared per share
1.32

 
1.05

 
0.85

 
0.68

 
0.55

 
Net cash provided by operating activities(3)
11,937.8

 
4,251.8

 
4,697.9

 
3,881.5

 
722.2

 
Capital expenditures (additions to property, plant and equipment)
1,976.4

 
1,519.4

 
1,440.3

 
1,303.7

 
1,160.9

 
Balance Sheet
 
 
 
 
 
 
 
 
 
 
Total assets
$
24,156.4

 
$
14,365.6

 
$
14,312.5

 
$
12,404.1

 
$
10,745.0

 
Long-term debt (including current portion)
9,440.1

 
3,932.6

 
3,585.2

 
2,335.3

 
2,041.3

 
Shareholders’ equity
1,169.5

 
5,450.1

 
5,884.0

 
5,818.0

 
5,272.0

(1) 
Our fiscal year ends on the Sunday closest to September 30. The fiscal year ended on October 2, 2016 included 53 weeks, with the 53rd week falling in our fourth fiscal quarter.
(2) 
Fiscal 2018 results include a gain not subject to income tax of $1.4 billion resulting from the acquisition of our East China joint venture. The impact of the gain to our diluted EPS was $0.99.
(3) 
Net cash provided by operating activities for fiscal 2014 through fiscal 2017 have been adjusted for the adoption of new accounting guidance related to excess tax benefits as discussed in Note 1, Summary of Significant Accounting Policies.

22


Comparable Store Sales:
 
Fiscal Year Ended
Sep 30,
2018
 
Oct 1,
2017
 
Oct 2,
2016
 
 Sep 27,
2015
 
Sep 28,
2014
 
 
Percentage change in comparable store sales(1)
 
 
 
 
 
 
 
 
 
 
Americas
 
 
 
 
 
 
 
 
 
 
Sales growth
2
 %
 
3
 %
 
6
%
 
7
%
 
6
%
 
Change in transactions
(1
)%
 
 %
 
1
%
 
3
%
 
2
%
 
Change in ticket
3
 %
 
4
 %
 
5
%
 
4
%
 
3
%
 
China/Asia Pacific(2)
 
 
 
 
 
 
 
 
 
 
Sales growth
1
 %
 
3
 %
 
3
%
 
9
%
 
7
%
 
Change in transactions
(1
)%
 
1
 %
 
1
%
 
8
%
 
6
%
 
Change in ticket
2
 %
 
1
 %
 
2
%
 
1
%
 
%
 
EMEA(3)
 
 
 
 
 
 
 
 
 
 
Sales growth
 %
 
1
 %
 
%
 
4
%
 
5
%
 
Change in transactions
(3
)%
 
(1
)%
 
1
%
 
2
%
 
3
%
 
Change in ticket
3
 %
 
1
 %
 
%
 
1
%
 
2
%
 
Consolidated
 
 
 
 
 
 
 
 
 
 
Sales growth
2
 %
 
3
 %
 
5
%
 
7
%
 
6
%
 
Change in transactions
(1
)%
 
 %
 
1
%
 
3
%
 
3
%
 
Change in ticket
3
 %
 
3
 %
 
4
%
 
4
%
 
3
%
(1) 
Includes only Starbucks® company-operated stores open 13 months or longer. Comparable store sales exclude the effect of fluctuations in foreign currency exchange rates. For fiscal year 2016, comparable store sales percentages were calculated excluding the 53rd week.
(2) 
Beginning in December of fiscal 2016, comparable store sales include the results of the 1,009 company-operated stores acquired as part of the acquisition of Starbucks Japan in the first quarter of fiscal 2015.
(3) 
Company-operated stores represent 15% of the EMEA segment store portfolio as of September 30, 2018.

23


Store Count Data:
 
As of and for the Fiscal Year Ended
Sept 30,
2018
(52 Wks)
 
Oct 1,
2017
(52 Wks)
 
Oct 2,
2016
(53 Wks)
 
Sep  27,
2015
(52 Wks)
 
Sep  28,
2014
(52 Wks)
 
 
Net stores opened/(closed) and transferred during the year:
 
 
 
 
 
 
 
 
 
 
Americas(1)
 
 
 
 
 
 
 
 
 
 
Company-operated stores
271

 
394

 
348

 
276

 
317

 
Licensed stores
624

 
558

 
456

 
336

 
381

 
China/Asia Pacific(2)
 
 
 
 
 
 
 
 
 
 
Company-operated stores
2,089

 
259

 
359

 
1,320

 
250

 
Licensed stores
(1,038
)
 
777

 
622

 
(482
)
 
492

 
EMEA(3)
 
 
 
 
 
 
 
 
 
 
Company-operated stores
(12
)
 
(21
)
 
(214
)
 
(80
)
 
(9
)
 
Licensed stores
358

 
353

 
494

 
302

 
180

 
Corporate and Other(4)
 
 
 
 
 
 
 
 
 
 
Company-operated stores
(282
)
 
(68
)
 
(17
)
 
6

 
12

 
Licensed stores
(25
)
 
2

 
(6
)
 
(1
)
 
(24
)
 
Total
1,985

 
2,254

 
2,042

 
1,677

 
1,599

 
Stores open at year end:
 
 
 
 
 
 
 
 
 
 
Americas(1)
 
 
 
 
 
 
 
 
 
 
Company-operated stores
9,684

 
9,413

 
9,019

 
8,671

 
8,395

 
Licensed stores
7,770

 
7,146

 
6,588

 
6,132

 
5,796

 
China/Asia Pacific(2)
 
 
 
 
 
 
 
 
 
 
Company-operated stores
5,159

 
3,070

 
2,811

 
2,452

 
1,132

 
Licensed stores
3,371

 
4,409

 
3,632

 
3,010

 
3,492

 
EMEA(3)
 
 
 
 
 
 
 
 
 
 
Company-operated stores
490

 
502

 
523

 
737

 
817

 
Licensed stores
2,830

 
2,472

 
2,119

 
1,625

 
1,323

 
Corporate and Other(4)
 
 
 
 
 
 
 
 
 
 
Company-operated stores
8

 
290

 
358

 
375

 
369

 
Licensed stores
12

 
37

 
35

 
41

 
42

 
Total
29,324

 
27,339

 
25,085

 
23,043

 
21,366

(1) 
Americas store data includes the transfer of 112 company-operated retail stores in Brazil to licensed stores as a result of the sale of our Brazil retail operations in the second quarter of fiscal 2018 and the closure of 132 Target Canada licensed stores in the second quarter of fiscal 2015.
(2) 
China/Asia Pacific store data has been adjusted for the transfer of certain company-operated stores to licensed stores in the fourth quarter of fiscal 2014. China/Asia Pacific store data also includes the transfer of 1,009 Japan stores from licensed stores to company-operated as a result of the acquisition of Starbucks Japan in the first quarter of fiscal 2015, the transfer of 133 Singapore stores from company-operated stores to licensed stores in the fourth quarter of fiscal 2017 and the transfer of 1,477 licensed stores in East China to company-operated retail stores as a result of the purchase of our East China joint venture in the first quarter of fiscal 2018.
(3) 
EMEA store data also includes the transfer of 144 Germany company-operated retail stores to licensed stores as a result of the sale to AmRest Holdings SE in the third quarter of fiscal 2016.
(4) 
As of September 30, 2018, Corporate and Other included 12 licensed Teavana-branded stores.



24


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 years ended on September 30, 2018 and October 1, 2017 included 52 weeks. The fiscal year ended on October 2, 2016 included 53 weeks, with the extra week falling in our fourth fiscal quarter. Comparable store sales percentages for fiscal 2016 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 10% to $24.7 billion in fiscal 2018 compared to $22.4 billion in fiscal 2017.
Global comparable store sales grew 2% driven by a 3% increase in average ticket.
Consolidated operating income decreased to $3.9 billion in fiscal 2018 compared to operating income of $4.1 billion in fiscal 2017. Fiscal 2018 operating margin was 15.7% compared to 18.5% in fiscal 2017. Operating margin compression in fiscal 2018 was primarily driven by food and beverage-related mix shifts, largely in the Americas segment, the impact of our ownership change in East China at the end of the first quarter of fiscal 2018, higher restructuring and impairment costs and higher salaries and benefits related to digital platforms, technology infrastructure and innovations.
Restructuring and impairment charges increased to $224 million in fiscal 2018 compared to $154 million in fiscal 2017. Increased costs were primarily related to higher asset impairments associated with the decision to close certain Starbucks® company-operated stores in the U.S. and Canada, higher goodwill impairment charges related to our Switzerland retail reporting unit and EMEA restructuring costs.
Earnings per share (“EPS”) for fiscal 2018 increased to $3.24, compared to EPS of $1.97 in fiscal 2017. The increase was primarily driven by the gains from the acquisition of our East China joint venture and the sale of our Tazo brand. Additionally, the net favorable impact from the Tax Cuts and Jobs Act (the “Tax Act”) also contributed to the increase.
Cash flows from operations were $11.9 billion in fiscal 2018 compared to $4.3 billion in fiscal 2017. The change was primarily due to receipt of the upfront payment from Nestlé related to the Global Coffee Alliance.
Capital expenditures were $2.0 billion in fiscal 2018 compared to $1.5 billion in fiscal 2017.
We returned $8.9 billion to our shareholders in fiscal 2018 through share repurchases and dividends compared to $3.5 billion in fiscal 2017.
Overview
Starbucks results for fiscal 2018 reflect the impact of certain restructuring and streamlining efforts, beginning in the fourth quarter of fiscal 2017, to focus on accelerating growth in high-returning businesses and removing non-core, slow growth activities. These efforts primarily include the acquisition of our East China joint venture, the conversion of our Singapore, Taiwan and Brazil operations to licensed models, the closure of TeavanaTM/MC retail stores, the sale of the Tazo brand, the licensing of our CPG and foodservice businesses to Nestlé, and the closure of certain company-operated stores in the U.S. and Canada, among other actions. These streamlining efforts span across all segments and our corporate functions.
On August 26, 2018, our Channel Development segment finalized licensing and distribution agreements with Nestlé to sell and market our CPG and foodservice products. The scope of the arrangement converts the majority of our previously defined Channel Development segment operations, as well as certain smaller businesses previously reported in the Americas, EMEA and Corporate and Other (previously All Other Segment), from company-owned to licensed operations with Nestlé. As a result, we realigned our organizational and operating segment structures in support of the newly established Global Coffee Alliance. Our reportable segments have been restated as if those smaller businesses were previously within our Channel Development segment.
Concurrent with the change in reportable operating segments, we revised our prior period financial information to reflect comparable financial information for the new segment structure. Further, in an effort to report operating expenses in line with the corresponding revenue generating activities, we have changed the classification of certain costs, primarily within our CAP segment and mainly from other operating expenses to general and administrative expenses. This reclassification has been retrospectively applied and was determined to be immaterial.
Starbucks largest acquisition to date affects our CAP segment. As a result of acquiring the remaining interest in our East China joint venture at the end of the first quarter of fiscal 2018, we began recording 100% of its revenues and expenses on our consolidated statements of earnings at the beginning of the second quarter of fiscal 2018. This is in contrast with our previous joint venture model, where we recorded only revenues and expenses from products sales to and royalties received from East China, as well as our proportionate share of the joint venture's net profit. The change from equity method to consolidation

25


method lowered the operating margin of our Consolidated and CAP segment, primarily due to incremental depreciation and amortization expenses and lower income from equity investees.
Starbucks results for fiscal 2018 continued to demonstrate the strength of our global business model and our ability to successfully make disciplined investments in our business and our partners. Consolidated total net revenues increased 10% to $24.7 billion, primarily driven by incremental revenues from 1,997 net new store openings over the past 12 months, incremental revenues from the impact of our ownership change in East China, 2% growth in global comparable store sales and favorable foreign currency translation. These increases were partially offset by the absence of revenue related to the closure of our TeavanaTM/MC retail stores, initiated in the fourth quarter of fiscal 2017 and substantially ceased during fiscal 2018 and the sale of our Singapore retail operations to a licensed partner in the fourth quarter of fiscal 2017. Consolidated operating income declined $251 million, or 6%, to $3.9 billion. Operating margin declined 280 basis points to 15.7%, primarily due to food and beverage-related mix shifts, largely in the Americas segment, the impact of our ownership change in East China, higher restructuring and impairment costs and higher salaries and benefits related to digital platforms, technology infrastructure and innovations. Earnings per share of $3.24 increased 64% over the prior year earnings per share of $1.97.
Americas revenue grew by 7% to $16.7 billion, primarily driven by incremental revenues from 895 net new store openings over the last 12 months and comparable store sales growth of 2%, partially offset by the absence of revenue related to the conversion of our Brazil retail business to fully licensed operations in the second quarter of fiscal 2018. Operating income declined $39 million to $3.6 billion and operating margin of 21.6% declined 180 basis points from a year ago, primarily due to food and beverage-related mix shifts, increased investments in our store partners and the impact of the May 29th anti-bias training. These increases were partially offset by sales leverage.
In our CAP segment, revenue grew by 38% to $4.5 billion, primarily driven by the impact of our ownership change in East China at the end of the first quarter of fiscal 2018, incremental revenues from 756 net new stores over the past 12 months. These increases were partially offset by the absence of revenue related to the sale of our Singapore retail operations to fully licensed operations in the fourth quarter of fiscal 2017. Operating income grew 13% to $867 million, while operating margin declined 420 basis points to 19.4%, primarily due to the impact of our ownership change in East China. We now operate 8,530 stores in 15 markets in our CAP segment making this our second largest reportable segment.
In our EMEA segment, revenue grew by 9% to $1.0 billion, primarily driven by increased revenues from the opening of 356 net new licensed stores over the past 12 months and favorable foreign currency translation. Operating margin declined 400 basis points to 5.9% primarily due to higher impairment of goodwill related to our Switzerland retail business and restructuring costs, including severance, asset impairments and business process optimization expenses. These decreases were partially offset by lapping of a prior year tax settlement.
Channel Development segment revenues grew by 2% to $2.3 billion, primarily driven by increased sales of packaged coffee and premium single-serve products, lapping a prior year revenue deduction adjustment and favorable foreign currency translation. These increases were partially offset by the net impact from the sale of our Tazo brand in the first quarter of fiscal 2018 and licensing our CPG and foodservice businesses to Nestlé beginning on August 26, 2018. Operating income declined $40 million, or 4%, to $927 million. Operating margin declined 250 basis points to 40.4%, primarily driven by business taxes associated with the upfront payment received from Nestlé, Global Coffee Alliance headcount related costs, including employee bonus and retention costs, and the impact of our ownership changes, including licensing our CPG and foodservice businesses to Nestlé and the sale of our Tazo brand.
Fiscal 2019 — The View Ahead
Turning to fiscal 2019, we expect continued growth through thoughtful long-term investments that create value and reward shareholders. These results are expected to be driven by our three strategic priorities, which include:
Accelerate growth in our targeted, long-term growth markets of the U.S. and China
Expand the global reach of the Starbucks brand leveraging the Global Coffee Alliance
Sharpen our focus on increasing shareholder returns
To successfully achieve these priorities, we will undertake a number of initiatives, including growing our core business in the U.S. through enhancement of the in-store experience, delivery of customer-relevant beverage innovation and digital relationships, and growing our business in China through new store expansion, comparable store sales and business partnerships. Further, we will continue expanding the reach of the Starbucks brand through retail market realignment, including our plans to license the France, Netherlands, Belgium and Luxembourg markets, business simplification and the Global Coffee Alliance. These additional streamlining initiatives will enable us to amplify our focus and resources on core value drivers with the greatest prospect for returns.
We expect moderate revenue growth in fiscal 2019, reflecting implementation of our streamlining activities and driven by comparable store sales growth and the opening of approximately 2,100 net new stores globally.

26


Consolidated operating margin is expected to decrease slightly in fiscal 2019 when compared to fiscal 2018, and our effective tax rate is expected to increase slightly from fiscal 2018. While GAAP full-year diluted earnings per share is expected to decrease in fiscal 2019, full-year non-GAAP diluted earnings per share is expected to grow when excluding gains from acquisitions and divestitures in fiscal 2018, integration costs related to East China and Japan and restructuring and impairment expenses.
Capital expenditures in fiscal 2019 are expected to be approximately $2.0 billion, primarily related to our retail portfolio including investments in our new and existing stores and strategic store-related initiatives.
Acquisitions and Divestitures
See Note 2, Acquisitions, Divestitures and Strategic Alliance, to the consolidated financial statements included in Item 8 of Part II of this 10-K for information regarding acquisitions and divestitures.

27


RESULTS OF OPERATIONS — FISCAL 2018 COMPARED TO FISCAL 2017
Consolidated results of operations (in millions):
Revenues
Fiscal Year Ended
Sep 30,
2018
 
Oct 1,
2017
 
%
Change
Net revenues:
 
 
 
 
 
Company-operated stores
$
19,690.3

 
$
17,650.7

 
11.6
 %
Licensed stores
2,652.2

 
2,355.0

 
12.6

Other
2,377.0

 
2,381.1

 
(0.2
)
Total net revenues
$
24,719.5

 
$
22,386.8

 
10.4
 %
Total net revenues increased $2.3 billion, or 10%, over fiscal 2017, primarily driven by increased revenues from company-operated stores ($2.0 billion). The growth in company-operated store revenues was driven by incremental revenues from 816 net new Starbucks® company-operated store openings over the past 12 months ($904 million), incremental revenues from the impact of our ownership change in East China ($903 million) and a 2% increase in comparable store sales ($345 million), attributable to a 3% increase in average ticket.
Licensed store revenue growth also contributed to the increase in total net revenues ($297 million), primarily due to increased product and equipment sales to and royalty revenues from our licensees ($298 million), largely due to the opening of 1,181 net new Starbucks® licensed stores over the past 12 months, the conversions of both the Singapore and Taiwan markets to fully licensed in the fourth quarter of fiscal 2017 and the first quarter of fiscal 2018, respectively ($44 million). These increases were partially offset by the impact of our ownership change in East China at the end of the first quarter of fiscal 2018 ($53 million).
Other revenues decreased $4 million, primarily driven by the absence of revenue from the sale of our Tazo brand in the first quarter of fiscal 2018 ($56 million), the closure of our e-commerce business in the fourth quarter of fiscal 2017 ($51 million) and licensing our CPG and foodservice businesses to Nestlé late in the fourth quarter of fiscal 2018 ($50 million). Partially offsetting these decreases were increased sales of packaged coffee and premium single-serve products ($115 million).
Operating Expenses
Fiscal Year Ended
Sep 30,
2018
 
Oct 1,
2017
 
Sep 30,
2018
 
Oct 1,
2017
 
 
 
 
 
As a % of Total
Net Revenues
Cost of sales including occupancy costs
$
10,174.5

 
$
9,034.3

 
41.2
%
 
40.4
%
Store operating expenses
7,193.2

 
6,493.3

 
29.1

 
29.0

Other operating expenses
539.3

 
500.3

 
2.2

 
2.2

Depreciation and amortization expenses
1,247.0

 
1,011.4

 
5.0

 
4.5

General and administrative expenses
1,759.0

 
1,450.7

 
7.1

 
6.5

Restructuring and impairments
224.4

 
153.5

 
0.9

 
0.7

Total operating expenses
21,137.4

 
18,643.5

 
85.5

 
83.3

Income from equity investees
301.2

 
391.4

 
1.2

 
1.7

Operating income
$
3,883.3

 
$
4,134.7

 
15.7
%
 
18.5
%
Store operating expenses as a % of related revenues
 
 
 
 
36.5
%
 
36.8
%
Other operating expenses as a % of non-company-operated store revenues
 
 
 
 
10.7
%
 
10.6
%
Cost of sales including occupancy costs as a percentage of total net revenues increased 80 basis points, primarily due to food and beverage-related mix shifts (approximately 120 basis points), largely in the Americas segment.
Store operating expenses as a percentage of total net revenues increased 10 basis points. Store operating expenses as a percentage of company-operated store revenues decreased 30 basis points, primarily driven by the impact of our ownership change in East China (approximately 60 basis points).
Depreciation and amortization expenses as a percentage of total net revenues increased 50 basis points, primarily due to the impact of our ownership change in East China (approximately 60 basis points).

28


General and administrative expenses as a percentage of total net revenues increased 60 basis points, primarily due to higher salaries and benefits related to digital platforms, technology infrastructure and innovations (approximately 20 basis points) and the 2018 U.S. stock award (approximately 20 basis points).
Restructuring and impairment expenses increased $71 million, primarily due to higher asset impairments associated with the decision to close certain company-operated stores in the U.S. and Canada ($23 million), higher goodwill impairment charges associated with our Switzerland company-operated retail reporting unit ($20 million) and EMEA restructuring costs, including severance and asset impairments ($18 million).
Income from equity investees decreased $90 million, primarily due to the impact of ownership changes in our East China and Taiwan joint ventures, partially offset by higher South Korea joint venture income.
The combination of these changes resulted in an overall decrease in operating margin of 280 basis points in fiscal 2018 when compared to fiscal 2017.
Other Income and Expenses
Fiscal Year Ended
Sep 30,
2018
 
Oct 1,
2017
 
Sep 30,
2018
 
Oct 1,
2017
 
 
 
 
 
As a % of Total
Net Revenues
Operating income
$
3,883.3

 
$
4,134.7

 
15.7
 %
 
18.5
 %
Gain resulting from acquisition of joint venture
1,376.4

 

 
5.6

 

Net gain resulting from divestiture of certain operations
499.2

 
93.5

 
2.0

 
0.4

Interest income and other, net
191.4

 
181.8

 
0.8

 
0.8

Interest expense
(170.3
)
 
(92.5
)
 
(0.7
)
 
(0.4
)
Earnings before income taxes
5,780.0

 
4,317.5

 
23.4

 
19.3

Income tax expense
1,262.0

 
1,432.6

 
5.1

 
6.4

Net earnings including noncontrolling interests
4,518.0

 
2,884.9

 
18.3

 
12.9

Net earnings/(loss) attributable to noncontrolling interests
(0.3
)
 
0.2

 

 

Net earnings attributable to Starbucks
$
4,518.3

 
$
2,884.7

 
18.3
 %
 
12.9
 %
Effective tax rate including noncontrolling interests
 
 
 
 
21.8
 %
 
33.2
 %
Gain resulting from acquisition of joint venture was due to remeasuring our preexisting 50% ownership interest in our East China joint venture to fair value upon acquisition.
Net gain resulting from divestiture of certain operations primarily consists of sales of our Tazo brand and Taiwan joint venture, partially offset by the net loss from the sale of our Brazil retail operations in fiscal 2018. The gain in fiscal 2017 was primarily due to the sale of our Singapore retail operations.
Interest income and other, net increased $10 million, primarily due to recognizing higher income on unredeemed stored value card balances, partially offset by lapping the gain on the sale of our investment in Square, Inc. warrants in the prior year period.
Interest expense increased $78 million primarily related to additional interest incurred on long-term debt issued in November 2017, March 2018 and August 2018.
The effective tax rate for fiscal 2018 was 21.8% compared to 33.2% for fiscal 2017. The decrease in the effective tax rate was primarily due to the gain on the purchase of our East China joint venture that is not subject to income tax (approximately 580 basis points) and the Tax Act (approximately 480 basis points). The impact from the Tax Act primarily included favorability from the lower corporate income tax rate applied to our fiscal 2018 results (approximately 760 basis points) and the remeasurement of our net deferred tax liabilities (approximately 130 basis points). This favorability was partially offset by the estimated transition tax on our accumulated undistributed foreign earnings (approximately 400 basis points). See Note 13, Income Taxes, for further discussion.

29


Segment Information
Results of operations by segment (in millions):
Americas
Fiscal Year Ended
Sep 30,
2018
 
Oct 1,
2017
 
Sep 30,
2018
 
Oct 1,
2017
 
 
 
 
 
As a % of Americas 
Total Net Revenues
Net revenues:
 
 
 
 
 
 
 
Company-operated stores
$
14,905.1

 
$
13,996.4

 
89.1
%
 
89.6
%
Licensed stores
1,814.0

 
1,617.3

 
10.8

 
10.4

Other
13.1

 
6.3

 
0.1

 

Total net revenues
16,732.2

 
15,620.0

 
100.0

 
100.0

Cost of sales including occupancy costs
6,301.2

 
5,695.0

 
37.7

 
36.5

Store operating expenses
5,747.9

 
5,320.2

 
34.4

 
34.1

Other operating expenses
150.0

 
130.8

 
0.9

 
0.8

Depreciation and amortization expenses
638.3

 
614.9

 
3.8

 
3.9

General and administrative expenses
247.0

 
201.4

 
1.5

 
1.3

Restructuring and impairments
33.4

 
4.1

 
0.2

 

Total operating expenses
13,117.8

 
11,966.4

 
78.4

 
76.6

Operating income
$
3,614.4

 
$
3,653.6

 
21.6
%
 
23.4
%
Store operating expenses as a % of related revenues
 
 
 
 
38.6
%
 
38.0
%
Other operating expenses as a % of non-company-operated store revenues
 
 
 
 
8.2
%
 
8.1
%
Revenues
Americas total net revenues for fiscal 2018 increased $1.1 billion, or 7%, over fiscal 2017, primarily due to increased revenues from company-operated stores (contributing $909 million) and licensed stores (contributing $197 million).
The increase in company-operated store revenues was driven by incremental revenues from 383 net new Starbucks® company-operated store openings over the past 12 months ($604 million) and a 2% increase in comparable store sales ($319 million), attributable to a 3% increase in average ticket, partially offset by the conversion of our Brazil retail business to fully licensed operations in the second quarter of fiscal 2018 ($40 million).
The increase in licensed store revenues was primarily driven by higher product sales to and royalty revenues from our licensees ($173 million), primarily resulting from the opening of 512 net new Starbucks® licensed stores over the past 12 months.
Operating Expenses
Cost of sales including occupancy costs as a percentage of total net revenues increased 120 basis points, primarily due to food and beverage-related mix shifts (approximately 130 basis points).
Store operating expenses as a percentage of total net revenues increased 30 basis points. As a percentage of company-operated store revenues, store operating expenses increased 60 basis points, primarily driven by increased investments in our store partners (approximately 140 basis points), which included incremental investments funded by the Tax Act, partially offset by sales leverage (approximately 60 basis points).
General and administrative expenses as a percentage of total net revenues increased 20 basis points, primarily driven by the May 29th anti-bias training (approximately 20 basis points).
Restructuring and impairment charges increased $29 million due to higher asset impairments in fiscal 2018 compared to fiscal 2017 associated with the decision to close certain U.S. company-operated stores ($23 million) and costs associated with the closure of certain company-operated stores in the U.S. and Canada ($6 million) in fiscal 2018.
The combination of these changes resulted in an overall decrease in operating margin of 180 basis points in fiscal 2018 when compared to fiscal 2017.

30


CAP
Fiscal Year Ended
Sep 30,
2018
 
Oct 1,
2017
 
Sep 30,
2018
 
Oct 1,
2017
 
 
 
 
 
 As a % of China/Asia Pacific 
Total Net Revenues
Net revenues:
 
 
 
 
 
 
 
Company-operated stores
$
4,096.9

 
$
2,906.0

 
91.6
%
 
89.7
%
Licensed stores
365.7

 
327.4

 
8.2

 
10.1

Other
11.0

 
6.8

 
0.2

 
0.2

Total net revenues
4,473.6

 
3,240.2

 
100.0

 
100.0

Cost of sales including occupancy costs
1,898.3

 
1,396.2

 
42.4

 
43.1

Store operating expenses
1,148.7

 
845.5

 
25.7

 
26.1

Other operating expenses
22.9

 
21.2

 
0.5

 
0.7

Depreciation and amortization expenses
412.1

 
202.2

 
9.2

 
6.2

General and administrative expenses
241.6

 
207.1

 
5.4

 
6.4

Total operating expenses
3,723.6

 
2,672.2

 
83.2

 
82.5

Income from equity investees
117.4

 
197.0

 
2.6

 
6.1

Operating income
$
867.4

 
$
765.0

 
19.4
%
 
23.6
%
Store operating expenses as a % of related revenues
 
 
 
 
28.0
%
 
29.1
%
Other operating expenses as a % of non-company-operated store revenues
 
 
 
 
6.1
%
 
6.3
%
Discussion of our China/Asia Pacific segment results below reflects the impact of fully consolidating our East China business due to the ownership change from an equity method joint venture to a company-operated market since the acquisition date of December 31, 2017. Under the joint venture model, we recognized royalties and product sales within revenue and related product cost of sales as well as our proportionate share of East China's net earnings, which we recognized within income from equity investees. This resulted in a higher operating margin. Under the company-operated ownership model, East China’s operating results are reflected in most income statement lines of this segment.
Revenues
China/Asia Pacific total net revenues for fiscal 2018 increased $1.2 billion, or 38%, over fiscal 2017, primarily driven by higher company-operated store revenues ($1.2 billion) due to the impact of our ownership change in East China ($903 million) and incremental revenues from 443 net new company-operated store openings over the past 12 months ($300 million). Also contributing were favorable foreign currency translation ($82 million) and a 1% increase in comparable store sales ($26 million). Partially offsetting these increases was the conversion of our Singapore retail business to fully licensed operations in the fourth quarter of fiscal 2017 ($121 million).
Licensed store revenues increased $38 million, primarily driven by increased product sales to and royalty revenues from licensees ($44 million), primarily resulting from the opening of 313 net new licensed stores over the past 12 months, the conversion of our Taiwan joint venture to fully licensed operations at the end of the first quarter of fiscal 2018 ($25 million) and the conversion of our Singapore retail operations to fully licensed operations in the fourth quarter of fiscal 2017 ($20 million). These increases were partially offset by the absence of revenue from our ownership change in East China ($53 million).
Operating Expenses
Cost of sales including occupancy costs as a percentage of total net revenues decreased 70 basis points, primarily due to the ownership change in East China (approximately 60 basis points).
Store operating expenses as a percentage of total net revenues decreased 40 basis points. As a percentage of company-operated store revenues, store operating expenses decreased 110 basis points, primarily due to the ownership change in East China (approximately 90 basis points).
General and administrative expenses as a percentage of total revenues decreased 100 basis points, primarily due to sales leverage on salaries and benefits (approximately 50 basis points) and the impact of ownership change in East China (approximately 30 basis points).
Income from equity investees decreased $80 million, primarily due to the impact of our ownership changes in East China and Taiwan joint ventures, partially offset by higher South Korea joint venture income.

31


The combination of these changes resulted in an overall decrease in operating margin of 420 basis points in fiscal 2018 when compared to fiscal 2017.
EMEA
Fiscal Year Ended
Sep 30,
2018
 
Oct 1,
2017
 
Sep 30,
2018
 
Oct 1,
2017
 
 
 
 
 
 As a % of EMEA 
Total Net Revenues
Net revenues:
 
 
 
 
 
 
 
Company-operated stores
$
575.6

 
$
551.0

 
54.9
%
 
57.5
%
Licensed stores
471.3

 
407.7

 
45.0

 
42.5

Other
1.1

 

 
0.1

 

Total net revenues
1,048.0

 
958.7

 
100.0

 
100.0

Cost of sales including occupancy costs
559.2

 
508.6

 
53.4

 
53.1

Store operating expenses
226.0

 
214.1

 
21.6

 
22.3

Other operating expenses
62.8

 
51.3

 
6.0

 
5.4

Depreciation and amortization expenses
31.7

 
30.6

 
3.0

 
3.2

General and administrative expenses
51.7

 
41.7

 
4.9

 
4.3

Restructuring and impairments
55.1

 
17.9

 
5.3

 
1.9

Total operating expenses
986.5

 
864.2

 
94.1

 
90.1

Operating income
$
61.5

 
$
94.5

 
5.9
%
 
9.9
%
Store operating expenses as a % of related revenues
 
 
 
 
39.3
%
 
38.9
%
Other operating expenses as a % of non-company-operated store
 
 
 
 
13.3
%
 
12.6
%
Revenues
EMEA total net revenues for fiscal 2018 increased $89 million, or 9%, over fiscal 2017, primarily due to higher revenue from licensed stores ($64 million) and company-operated stores ($25 million).
Company-operated stores increased $25 million, or 4%, primarily due to favorable currency translation ($31 million).
Licensed store revenues increased $64 million, or 16%, due to higher product sales to and royalty revenues from our licensees ($56 million), resulting from the opening of 356 net new licensed stores, and favorable foreign currency translation ($4 million).
Operating Expenses
Cost of sales including occupancy costs as a percentage of total net revenues increased 30 basis points, primarily due to growth in our licensed stores which have a lower gross margin (approximately 30 basis points).
Store operating expenses as a percentage of total net revenues decreased 70 basis points. As a percentage of company-operated store revenues, store operating expenses increased 40 basis points, primarily due to sales deleverage on salaries and benefits, largely due to increased minimum wage in certain markets (approximately 140 basis points), partially offset by lapping a prior year tax settlement (approximately 100 basis points).
Other operating expenses as a percentage of total net revenues increased 60 basis points. Excluding the impact of company-operated store revenues, other operating expenses increased 70 basis points, primarily due to business process optimization expenses (approximately 60 basis points).
General and administrative expenses as a percentage of total net revenues increased 60 basis points, primarily due to business process optimization expenses (approximately 50 basis points).
Restructuring and impairment expenses increased $37 million, primarily due to higher goodwill impairment expense associated with our Switzerland retail reporting unit in fiscal 2018 than in the prior year period ($20 million) and EMEA restructuring costs, including severance and asset impairments ($18 million).
The combination of these changes resulted in an overall decrease in operating margin of 400 basis points in fiscal 2018 when compared to fiscal 2017.

32


Channel Development
Fiscal Year Ended
Sep 30,
2018
 
Oct 1,
2017
 
Sep 30,
2018
 
Oct 1,
2017
 
 
 
 
 
 As a % of Channel Development 
Total Net Revenues
Net revenues
$
2,297.3

 
$
2,256.6

 
 
 
 
Cost of sales
1,252.3

 
1,209.3

 
54.5

 
53.6

Other operating expenses
286.5

 
260.4

 
12.5

 
11.5

Depreciation and amortization expenses
1.3

 
3.0

 
0.1

 
0.1

General and administrative expenses
13.9

 
11.3

 
0.6

 
0.5

Total operating expenses
1,554.0

 
1,484.0

 
67.6

 
65.8

Income from equity investees
183.8

 
194.4

 
8.0

 
8.6

Operating income
$
927.1

 
$
967.0

 
40.4
%
 
42.9
%
Discussion of our Channel Development segment results reflect the impact of the licensing of our CPG and foodservice businesses to Nestlé, the sale of Tazo and an immaterial, unfavorable revenue deduction adjustment recorded in the second quarter of fiscal 2017. Late in the fourth quarter of fiscal 2018, we licensed our CPG (Starbucks-, Starbucks Reserve-, Teavana-, Seattle's Best Coffee-, Starbucks VIA- and Torrefazione Italia-branded packaged coffee and tea) and foodservice businesses to Nestlé and formed a Global Coffee Alliance. Eleven months of fiscal 2018 results reflect our CPG and foodservice businesses as company-owned and one month as licensed operations. Our collaborative business relationships for our global ready-to-drink products and the associated revenues remain unchanged due to the Global Coffee Alliance.
Revenues
Channel Development net revenues for fiscal 2018 increased $41 million, or 2%, over fiscal 2017. Revenue growth was driven by an increase in sales of our packaged coffee and premium single-serve products ($115 million), lapping a prior year revenue deduction adjustment ($13 million) and favorable foreign currency translation ($10 million). These increases were partially offset by the absence of revenue from the sale of our Tazo brand in the first quarter of fiscal 2018 ($56 million) and licensing our CPG and foodservice businesses to Nestlé late in the fourth quarter of fiscal 2018 ($50 million).
Operating Expenses
Cost of sales as a percentage of total net revenues increased 90 basis points, primarily driven by the impact of licensing our CPG and foodservice businesses to Nestlé and the sale of our Tazo brand (approximately 120 basis points), partially offset by lapping a revenue deduction adjustment recorded in the second quarter of fiscal 2017 (approximately 30 basis points).
Other operating expenses as a percentage of total net revenues increased 100 basis points, primarily driven by business taxes associated with the upfront payment received from Nestlé (approximately 120 basis points) and Global Coffee Alliance headcount-related costs, including employee bonus and retention costs (approximately 80 basis points). These increases were partially offset by the cost savings related to our ownership changes, including licensing our CPG and foodservice businesses to Nestlé and the sale of our Tazo brand (approximately 40 basis points), and lower marketing expenses (approximately 40 basis points).
Income from equity investees decreased $11 million for fiscal 2018, due to lower income from our North American Coffee Partnership joint venture, driven by decreased sales of Frappuccino®, Starbucks Doubleshot® and Iced Coffee beverages.
The combination of these changes contributed to an overall decrease in operating margin of 250 basis points in fiscal 2018 when compared to fiscal 2017.

33


Corporate and Other
Fiscal Year Ended
Sep 30,
2018
 
Oct 1,
2017
 
% Change
Net revenues:
 
 
 
 
 
Company-operated stores
$
112.7

 
$
197.3

 
(42.9
)%