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SBUX > SEC Filings for SBUX > Form 10-K on 16-Nov-2012All Recent SEC Filings

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Form 10-K for STARBUCKS CORP


16-Nov-2012

Annual Report


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

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

Financial Highlights
• Total net revenues increased 14% to $13.3 billion in fiscal 2012 compared to $11.7 billion in fiscal 2011. The increase was due primarily to a 7% increase in global comparable store sales, 50% revenue growth in Channel Development, and 20% growth in licensed stores revenue. The comparable store sales growth in company-operated stores was comprised of a 6% increase in the number of transactions and a 1% increase in average ticket.

• Consolidated operating income was $2.0 billion in fiscal 2012 compared to $1.7 billion in fiscal 2011 and operating margin increased to 15.0% compared to 14.8% in fiscal 2011. The operating margin expansion was driven by increased sales leverage and the absence of charges in fiscal 2012 related to the Seattle's Best Coffee store closures in Border's bookstores, partially offset by higher commodity costs.

• EPS for fiscal 2012 was $1.79, compared to EPS of $1.62 reported in fiscal 2011, with the increase driven by the improved sales leverage, partially offset by the impact of higher commodity costs in fiscal 2012 and certain gains recorded in the fourth quarter of fiscal 2011, including a gain from a fair market value adjustment resulting from the acquisition of the remaining ownership interest in our joint venture in Switzerland and Austria as well as a gain on the sale of corporate real estate.

• Cash flow from operations was $1.8 billion in fiscal 2012 compared to $1.6 billion in fiscal 2011. Capital expenditures were approximately $856 million in fiscal 2012 compared to $532 million in fiscal 2011. Available operating cash flow after capital expenditures during fiscal 2012 was directed at returning approximately $1.1 billion of cash to our shareholders via share repurchases and dividends.

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


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EMEA segment results reflect both the investments we have begun making as part of our transformation plan for the region, as well as the macro-economic headwinds we, and others, face there. This resulted in flat comparable store sales and operating income of $10 million for fiscal 2012, a decrease of $30 million compared to fiscal 2011. We started the year by putting in place a new leadership team that is focused on increasing the Starbucks brand presence, health and relevancy across the region, improving the profitability of the existing store base through a focus on revenue growth and operating costs, and identifying opportunities for new store growth through licensing arrangements. We expect the investments we are making as part of this transformation effort will result in improved operating performance as we progress on our plan towards mid-teens operating margin; however, this turnaround will take time to gain traction.
CAP segment revenues increased 31%, driven by new store growth and comparable store sales of 15%. This segment continues to grow rapidly and is becoming a more meaningful contributor to overall company profitability. We expect continued growth will be from a mix of new store openings and comparable store sales growth. China continues to be a significant growth opportunity for us as we remain on track to reach our goal of 1,500 stores in 2015. In addition, other key markets such as Japan, Korea, Thailand, Singapore and Indonesia all continue to be profitable and provide a solid foundation for continued growth in the region.
Our Channel Development segment represents another important, profitable growth opportunity for us. Channel Development results were a solid contributor to overall revenue growth with a 50% increase in revenues primarily due to sales of Starbucks and Tazo branded K-Cup® portion packs which launched at the start of fiscal 2012 and our transition to a direct distribution model for packaged coffee, which occurred during the second quarter of fiscal 2011. High commodity costs continued to be a significant drag on operating margin; however, despite these higher costs, operating income increased $61 million to $349 million for fiscal 2012. We expect continued innovation and new product offerings such as the Verismo™ system by Starbucks and Starbucks Refreshers™ beverages will drive further growth and profitability within this segment over time.

Fiscal 2013 - The View Ahead
For fiscal year 2013, we expect moderate revenue growth driven by mid single-digit increased comparable store sales, new store openings and strong growth in the Channel Development business. Licensed stores will comprise between one-half and two-thirds of new store openings.
We expect continued robust consolidated operating margin and EPS improvement compared to fiscal 2012, reflecting the strength of our global business and the pipeline of profitable growth initiatives.
We expect increased capital expenditures in fiscal 2013 compared to fiscal 2012, reflecting additional investments in store renovations, new store growth and manufacturing capacity.

Operating Segment Overview
Starbucks has four reportable operating segments: Americas, Europe, Middle East, and Africa ("EMEA"), China and Asia Pacific ("CAP") and Channel Development. Seattle's Best Coffee is reported in "Other," along with Evolution Fresh, Digital Ventures and unallocated corporate expenses that pertain to corporate administrative functions that support our operating segments but are not specifically attributable to or managed by any segment and are not included in the reported financial results of the operating segments.
The Americas, EMEA and CAP segments include company-operated stores and licensed stores. Licensed stores generally have a higher operating margin than company-operated stores. Under the licensed model, Starbucks receives a reduced share of the total store revenues, but this is more than offset by the reduction in its share of costs as these are primarily incurred by the licensee. The EMEA and CAP segments have a higher relative share of licensed stores versus company-operated stores compared to the Americas segment; however, the Americas segment has been operating significantly longer than the other segments and has developed deeper awareness of, and attachment to, the Starbucks brand and stores among its customer base. As a result, the more mature Americas segment has significantly more stores and higher total revenues than the other segments. Average sales per store are also higher in the Americas due to various factors including length of time in market and local income levels.


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

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

RESULTS OF OPERATIONS - FISCAL 2012 COMPARED TO FISCAL 2011

Consolidated results of operations (in millions):

Revenues
                               Sep 30,       Oct 2,         %      Sep 30,    Oct 2,
  Fiscal Year Ended             2012          2011       Change      2012      2011
                                                                       % of Total
                                                                      Net Revenues
  Net revenues:
  Company-operated stores    $ 10,534.5    $  9,632.4      9.4 %     79.2 %    82.3 %
  Licensed stores               1,210.3       1,007.5     20.1 %      9.1 %     8.6 %
  CPG, foodservice and other    1,554.7       1,060.5     46.6 %     11.7 %     9.1 %
  Total net revenues         $ 13,299.5    $ 11,700.4     13.7 %    100.0 %   100.0 %

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


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

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

Operating Expenses
                                         Sep 30,         Oct 2,        Sep 30,       Oct 2,
  Fiscal Year Ended                        2012           2011          2012          2011
                                                                            % of Total
                                                                           Net Revenues
  Cost of sales including occupancy
  costs                                $  5,813.3     $  4,915.5          43.7 %        42.0 %
  Store operating expenses                3,918.1        3,594.9          29.5 %        30.7 %
  Other operating expenses                  429.9          392.8           3.2 %         3.4 %
  Depreciation and amortization
  expenses                                  550.3          523.3           4.1 %         4.5 %
  General and administrative expenses       801.2          749.3           6.0 %         6.4 %
  Total operating expenses               11,512.8       10,175.8          86.6 %        87.0 %
  Gain on sale of properties                    -           30.2             - %         0.3 %
  Income from equity investees              210.7          173.7           1.6 %         1.5 %
  Operating income                     $  1,997.4     $  1,728.5          15.0 %        14.8 %
  Supplemental ratios as a % of
  related revenues:
  Store operating expenses                                                37.2 %        37.3 %

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

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


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Other Income and Expenses
                                         Sep 30,         Oct 2,        Sep 30,         Oct 2,
  Fiscal Year Ended                        2012           2011           2012           2011
                                                                             % of Total
                                                                            Net Revenues
  Operating income                     $  1,997.4     $  1,728.5          15.0  %        14.8  %
  Interest income and other, net             94.4          115.9           0.7  %         1.0  %
  Interest expense                          (32.7 )        (33.3 )        (0.2 )%        (0.3 )%
  Earnings before income taxes            2,059.1        1,811.1          15.5  %        15.5  %
  Income taxes                              674.4          563.1           5.1  %         4.8  %
  Net earnings including
  noncontrolling interests                1,384.7        1,248.0          10.4  %        10.7  %
  Net earnings (loss) attributable to
  noncontrolling interests                    0.9            2.3             -  %           -  %
  Net earnings attributable to
  Starbucks                            $  1,383.8     $  1,245.7          10.4  %        10.6  %
  Effective tax rate including
  noncontrolling interests                                                32.8  %        31.1  %

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

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


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Segment Information
Segment information is prepared on the same basis that our management reviews
financial information for operational decision-making purposes. The following
tables summarize the results of operations by segment (in millions):
Americas
                                          Sep 30,         Oct 2,        Sep 30,         Oct 2,
  Fiscal Year Ended                         2012           2011           2012           2011
                                                                          As a % of Americas
                                                                          Total Net Revenues
  Total net revenues                    $  9,936.0     $  9,065.0         100.0 %         100.0 %
  Cost of sales including occupancy
  costs                                    3,885.5        3,512.7          39.1 %          38.8 %
  Store operating expenses                 3,427.8        3,184.2          34.5 %          35.1 %
  Other operating expenses                    83.8           75.8           0.8 %           0.8 %
  Depreciation and amortization
  expenses                                   392.3          390.8           3.9 %           4.3 %
  General and administrative expenses         74.3           60.8           0.7 %           0.7 %
  Total operating expenses                 7,863.7        7,224.3          79.1 %          79.7 %
  Income from equity investees                 2.1            1.6             - %             - %
  Operating income                      $  2,074.4     $  1,842.3          20.9 %          20.3 %
  Supplemental ratios as a % of
  related revenues:
  Store operating expenses                                                 37.8 %          38.1 %

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

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


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Other operating expenses as a percentage of total net revenues was flat over prior year. As a percentage of net revenues excluding company-operated store revenues, other operating expenses decreased 100 basis points, primarily driven by increased sales leverage.
The combination of these changes, along with increased sales leverage on depreciation and amortization expense (approximately 40 basis points), resulted in an increase in operating margin of 60 basis points over fiscal 2011.

EMEA
                                         Sep 30,         Oct 2,        Sep 30,         Oct 2,
  Fiscal Year Ended                        2012           2011           2012           2011
                                                                            As a % of EMEA
                                                                         Total Net Revenues
  Total net revenues                   $  1,141.3     $  1,046.8         100.0 %         100.0 %
  Cost of sales including occupancy
  costs                                     597.3          530.3          52.3 %          50.7 %
  Store operating expenses                  371.1          327.3          32.5 %          31.3 %
  Other operating expenses                   33.6           36.5           2.9 %           3.5 %
  Depreciation and amortization
  expenses                                   57.1           53.4           5.0 %           5.1 %
  General and administrative expenses        72.1           65.0           6.3 %           6.2 %
  Total operating expenses                1,131.2        1,012.5          99.1 %          96.7 %
  Income from equity investees                0.3            6.0             - %           0.6 %
  Operating income                     $     10.4     $     40.3           0.9 %           3.8 %
  Supplemental ratios as a % of
  related revenues:
  Store operating expenses                                                38.3 %          36.1 %

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


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Other operating expenses as a percentage of total net revenues decreased 60 basis points. Excluding the impact of company-operated store revenues, other operating expenses decreased 640 basis points, primarily driven by operational efficiencies.
Income from equity investees declined to $0.3 million in fiscal 2012, due to the acquisition of the remaining interest in our previous joint venture operations in Switzerland and Austria.
The above changes contributed to a decrease in operating margin of 290 basis points over the prior year.

China / Asia Pacific

                                          Sep 30,         Oct 2,        Sep 30,         Oct 2,
  Fiscal Year Ended                        2012            2011           2012           2011
                                                                             As a % of CAP
                                                                          Total Net Revenues
  Total net revenues                   $     721.4     $    552.3         100.0 %         100.0 %
  Cost of sales including occupancy
  costs                                      362.8          282.0          50.3 %          51.1 %
  Store operating expenses                   119.2           83.4          16.5 %          15.1 %
  Other operating expenses                    47.0           35.7           6.5 %           6.5 %
  Depreciation and amortization
. . .
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