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SBUX > SEC Filings for SBUX > Form 10-K on 18-Nov-2013All Recent SEC Filings

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Form 10-K for STARBUCKS CORP


18-Nov-2013

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 years ended on September 29, 2013, September 30, 2012 and October 2, 2011 all included 52 weeks. 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 12.0% to $14.9 billion in fiscal 2013 compared to $13.3 billion in fiscal 2012.

• Global comparable store sales grew 7% driven by a 5% increase in the number of transactions and a 2% increase in average ticket.

• Consolidated operating income decreased to $(0.3) billion in fiscal 2013 compared to $2.0 billion in fiscal 2012 and fiscal 2013 operating margin was (2.2)% compared to 15.0% in fiscal 2012. The declines were due to the litigation charge noted below.

• EPS for fiscal 2013 decreased to $0.01, compared to EPS of $1.79 in fiscal 2012. The decline was due to the litigation charge noted below.

• Arbitration concluded on litigation with Kraft Foods Global, Inc. ("Kraft") on November 12, 2013, which resulted in a pretax charge to fiscal 2013 operating results of $2.8 billion. This charge reduced EPS by $2.25 per share in fiscal 2013.

• Cash flow from operations was $2.9 billion in fiscal 2013 compared to $1.8 billion in fiscal 2012. Capital expenditures were $1.2 billion in fiscal 2013 compared to $856 million in fiscal 2012.

• Available operating cash flow after capital expenditures during fiscal 2013 was directed at returning $1.2 billion of cash to our shareholders through dividends and share repurchases.

Overview
Starbucks segment results for fiscal 2013 demonstrate the fundamental health of our global business model and our continued ability to successfully execute new growth initiatives in a disciplined manner. Our strong revenue growth of 12% and continued segment margin expansion drove increased operating cash flows, which allowed us to both fund our growth initiatives and increase cash returned to shareholders through dividends and share repurchases.
The Americas segment continued its strong performance in fiscal 2013, with revenues growing 11% and comparable store sales growth of 7%. Strength in beverage innovation and promotions, operational improvements, and expanded food offerings all contributed to the increase in comparable store sales. Operating margin expanded 120 basis points to 21.5%, driven by sales leverage, store efficiencies, and lower commodity costs. Looking forward, we expect to continue to drive sales growth and profitability through new stores and enhanced product offerings, including the continued roll out of La Boulange™ bakery items into all of our company-operated stores by the end of fiscal 2014.
In the EMEA segment, we are continuing to make steady progress toward long-term profitability in the region. Revenues grew 2% compared to the prior year, with licensed store revenue growth nearly offset by a decline in company-operated store revenues. This reflects the shift in our ownership structure, as we have closed underperforming company-operated stores and are focused on growing our licensed store base in profitable locations. Comparable store sales were flat year over year, but were modestly positive in the second half of fiscal 2013. EMEA operating margin improved to 5.5% in fiscal 2013 due to our ongoing cost management efforts and our store portfolio optimization activities which began in the prior year. We expect the investments we are making in this segment will result in improved operating performance as we progress on our plan towards mid-teens operating margin over time.
Our CAP segment results reflect a combination of rapid new store growth and solid performance from our existing store base, including our joint venture operations in China and Japan. New store growth, along with a 9% increase in comparable store sales, drove a 27% increase in total net revenues for fiscal 2013. Operating income grew 27% to $321 million and operating margin was unchanged at 35%, primarily due to our rapid growth shifting away from our historically licensed model. We expect this segment will become a more meaningful contributor to overall company profitability in the future, as we look forward to continued store openings and establishing China as our largest market outside of the US.


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Channel Development segment revenues grew 10% in fiscal 2013, primarily due to increased sales of premium single serve products. Lower coffee costs was the primary contributor to the 290 basis point increase in operating margin for fiscal 2013. As we continue to expand customer occasions outside of our retail stores, including growing our presence in the premium single serve category, we expect this segment will become a more significant contributor to our future growth.
Our consolidated operating results included a litigation charge as a result of the conclusion of our arbitration with Kraft which resulted in a pretax charge to operating expenses of $2.8 billion. The conclusion of this litigation is described in more detail in Note 15 to the consolidated financial statements included in Item 8 of Part II of this 10-K. We believe we have adequate liquidity to fund this expected payment, both in the form of cash on hand and the expected issuance of additional debt in fiscal 2014. Fiscal 2014 - The View Ahead
For fiscal year 2014, we expect revenue growth driven by mid-single-digit global comparable store sales growth, 1,500 new store openings, and continued growth in the Channel Development business.
We expect fiscal year 2014 consolidated operating margin improvement, when compared to our fiscal 2013 operating results excluding the litigation charge associated with the Kraft arbitration, of 150 to 200 basis points and strong EPS growth, driven primarily by leverage on revenue growth.

The effective tax rate for fiscal 2014 is expected to be approximately 34.5%. Capital expenditures in fiscal 2014 are expected to be approximately $1.2 billion, primarily for store renovations and new stores, as well for other investments to support our ongoing growth initiatives.

Operating Segment Overview
Starbucks has four reportable operating segments: 1) Americas, inclusive of the US, Canada, and Latin America markets; 2) Europe, Middle East, and Africa, ("EMEA"); 3) China / Asia Pacific ("CAP") and 4) Channel Development. All Other Segments includes Teavana, Seattle's Best Coffee and Evolution Fresh, as well as our Digital Ventures business.
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 two segments. Average sales per store are also higher in the Americas due to various factors including length of time in market.
In certain international markets occupancy costs and store operating expenses can be higher than in the US market 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 US market. 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 US market. We continue to add new stores in both existing, more-mature markets such as the US, and in newer, higher growth markets such as China. Our disciplined approach to expanding our global store base also includes optimizing the mix of company-operated and licensed stores in each market.
Our Channel Development segment includes whole bean and ground coffees, premium Tazo® teas, Starbucks- and Tazo-branded single serve products, a variety of ready-to-drink beverages, such as Starbucks Refreshers™ beverages, and other branded products sold worldwide through channels such as grocery stores, warehouse clubs, specialty retailers, convenience stores, and US foodservice accounts. Ready-to-drink beverages 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.
Acquisitions
See Note 2 to the consolidated financial statements included in Item 8 of Part II of this 10-K for information regarding acquisitions.


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RESULTS OF OPERATIONS - FISCAL 2013 COMPARED TO FISCAL 2012

Consolidated results of operations (in millions):

Revenues
                               Sep 29,       Sep 30,        %      Sep 29,    Sep 30,
  Fiscal Year Ended             2013          2012       Change      2013       2012
                                                                       % of Total
                                                                      Net Revenues
  Net revenues:
  Company-operated stores    $ 11,793.2    $ 10,534.5     11.9 %     79.2 %     79.2 %
  Licensed stores               1,360.5       1,210.3     12.4 %      9.1 %      9.1 %
  CPG, foodservice and other    1,738.5       1,554.7     11.8 %     11.7 %     11.7 %
  Total net revenues         $ 14,892.2    $ 13,299.5     12.0 %    100.0 %    100.0 %

Total net revenues were $14.9 billion for fiscal 2013, an increase of $1.6 billion, or 12%, over fiscal 2012, primarily due to increased revenues from company-operated stores (contributing $1.3 billion). The increase in company-operated store revenue was driven by an increase in comparable store sales (7%, or approximately $720 million) and incremental revenues from 492 net new company-operated store openings over the past 12 months (approximately $386 million).

Licensed store revenue growth contributed $150 million to the increase in total net revenues in fiscal 2013, primarily due to higher product sales to and royalty revenues from our licensees, as a result of improved comparable store sales and the opening of 843 net new licensed stores over the past 12 months. CPG, foodservice and other revenues increased $184 million, primarily driven by increased sales of premium single serve products (approximately $116 million) and increased foodservice sales (approximately $37 million).

Operating Expenses
                                         Sep 29,        Sep 30,        Sep 29,        Sep 30,
  Fiscal Year Ended                        2013           2012           2013          2012
                                                                             % of Total
                                                                            Net Revenues
  Cost of sales including occupancy
  costs                                $  6,382.3     $  5,813.3          42.9  %        43.7 %
  Store operating expenses                4,286.1        3,918.1          28.8  %        29.5 %
  Other operating expenses                  457.2          429.9           3.1  %         3.2 %
  Depreciation and amortization
  expenses                                  621.4          550.3           4.2  %         4.1 %
  General and administrative expenses       937.9          801.2           6.3  %         6.0 %
  Litigation charge                       2,784.1              -          18.7  %           - %
  Total operating expenses               15,469.0       11,512.8         103.9  %        86.6 %
  Income from equity investees              251.4          210.7           1.7  %         1.6 %
  Operating income/(loss)              $   (325.4 )   $  1,997.4          (2.2 )%        15.0 %
  Supplemental ratios as a % of
  related revenues:
  Store operating expenses                                                36.3  %        37.2 %

Cost of sales including occupancy costs as a percentage of total net revenues decreased 80 basis points, primarily due to lower commodity costs (approximately 50 basis points), driven by a decrease in coffee costs.
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 decreased 90 basis points, primarily driven by sales leverage in our Americas segment (approximately 90 basis points) and store portfolio optimization initiatives in Europe that began in the fourth quarter of fiscal 2012 (approximately 50 basis points). This was partially offset by the addition of Teavana and continued investment in our emerging brands (approximately 60 basis points).


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Other operating expenses as a percentage of total net revenues decreased 10 basis points. As a percentage of non-company-operated store revenues, other operating expenses decreased 70 basis points, primarily driven by sales leverage (approximately 40 basis points) and decreased marketing expenses (approximately 20 basis points).
General and administrative expenses as a percentage of total net revenues increased 30 basis points, primarily driven by increased costs to support overall company growth and the costs related to our October Global Leadership Conference.
Income from equity investees increased $41 million, primarily due to increased income from of our joint venture operations in Japan and China, as well as improved performance from our North American Coffee Partnership joint venture, which produces, bottles and distributes our ready-to-drink beverages. Litigation charge of $2,784.1 million reflects the accrual we recorded as a result of the conclusion of the arbitration with Kraft. This charge includes $2,227.5 million in damages and $556.6 million in estimated interest and attorneys' fees.
The combination of the above resulted in an operating loss of $325.4 million and operating margin of (220) basis points.

Other Income and Expenses
                                         Sep 29,        Sep 30,        Sep 29,        Sep 30,
  Fiscal Year Ended                        2013           2012           2013           2012
                                                                             % of Total
                                                                            Net Revenues
  Operating income/(loss)              $   (325.4 )   $  1,997.4          (2.2 )%        15.0  %
  Interest income and other, net            123.6           94.4           0.8  %         0.7  %
  Interest expense                          (28.1 )        (32.7 )        (0.2 )%        (0.2 )%
  Earnings/(loss) before income taxes      (229.9 )      2,059.1          (1.5 )%        15.5  %
  Income taxes                             (238.7 )        674.4          (1.6 )%         5.1  %
  Net earnings including
  noncontrolling interests                    8.8        1,384.7           0.1  %        10.4  %
  Net earnings attributable to
  noncontrolling interests                    0.5            0.9             -  %           -  %
  Net earnings attributable to
  Starbucks                            $      8.3     $  1,383.8           0.1  %        10.4  %
  Effective tax rate including
  noncontrolling interests                                               103.8  %        32.8  %

Net interest income and other increased $29 million over the prior year, primarily due to gains on the sale of the equity in our Chile and Argentina joint ventures in the fourth quarter of fiscal 2013 (approximately $45 million) and in Mexico in the second quarter of fiscal 2013 (approximately $35 million). These gains were partially offset by the absence of additional income recognized in the prior year associated with unredeemed gift cards following a court ruling related to state unclaimed property laws (approximately $29 million). Also offsetting the gains were unfavorable mark-to-market adjustments in fiscal 2013 compared to favorable mark-to-market adjustments in fiscal 2012 from derivatives used to manage our risk of commodity price fluctuations (approximately $24 million).

Income taxes for fiscal year 2013 resulted in an effective tax rate of 103.8% compared to 32.8% for fiscal year 2012. The change in our effective tax rate was primarily due to the impact of the litigation charge associated with the Kraft arbitration in fiscal 2013. For additional information on the impact to our fiscal 2013 effective tax rate from the litigation charge, see Note 13 to the consolidated financial statements included in Item 8 of Part II of this 10-K. Excluding the impact of the litigation charge, the effective tax rate for fiscal year 2013 decreased slightly compared to fiscal 2012 primarily due to benefits from releasing certain tax reserves in fiscal 2013 and a further benefit in fiscal 2013 primarily relating to state income tax expense adjustments for returns filed in prior years. These items were partially offset by a decrease in tax benefits relating to coffee procurement in the current year.


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Segment Information
The following tables summarize the results of operations by segment (in
millions):
Americas
                                         Sep 29,        Sep 30,        Sep 29,         Sep 30,
  Fiscal Year Ended                        2013           2012           2013           2012
                                                                         As a % of Americas
                                                                         Total Net Revenues
  Total net revenues                   $ 11,000.8     $  9,936.0         100.0 %         100.0 %
  Cost of sales including occupancy
  costs                                   4,214.9        3,885.5          38.3 %          39.1 %
  Store operating expenses                3,710.2        3,427.8          33.7 %          34.5 %
  Other operating expenses                   96.9           83.8           0.9 %           0.8 %
  Depreciation and amortization
  expenses                                  429.3          392.4           3.9 %           3.9 %
  General and administrative expenses       186.7          128.2           1.7 %           1.3 %
  Total operating expenses                8,638.0        7,917.7          78.5 %          79.7 %
  Income from equity investees                2.4            2.1             - %             - %
  Operating income                     $  2,365.2     $  2,020.4          21.5 %          20.3 %
  Supplemental ratios as a % of
  related revenues:
  Store operating expenses                                                37.0 %          37.8 %

Revenues
Americas total net revenues for fiscal 2013 increased $1.1 billion, or 11%, primarily due to increased revenues from company-operated stores (contributing $961 million) and licensed stores (contributing $90 million).
The increase in company-operated store revenues was driven by an increase in comparable store sales (7%, or approximately$676 million) and incremental revenues from 276 net new company-operated store openings over the past 12 months (approximately $273 million). The increase in licensed stores revenue was due to higher product sales to and royalty revenues from our licensees as a result of improved comparable store sales and the opening of 404 net new licensed stores over the past 12 months. Operating Expenses
Cost of sales including occupancy costs as a percentage of total net revenues decreased 80 basis points, primarily due to store initiatives to reduce waste (approximately 40 basis points) and lower commodity costs (approximately 30 basis points), driven by a decrease in coffee costs.
Store operating expenses as a percentage of total net revenues (as well as a percentage of company-operated store revenues) decreased 80 basis points, primarily driven by sales leverage (approximately 60 basis points).

General and administrative expenses as a percentage of total net revenues increased 40 basis points primarily due to the costs related to our October Global Leadership Conference (approximately 20 basis points).
The combination of these changes resulted in an increase in operating margin of 120 basis points over fiscal 2012.


Table of Contents

EMEA
                                         Sep 29,        Sep 30,        Sep 29,        Sep 30,
  Fiscal Year Ended                        2013           2012           2013          2012
                                                                           As a % of EMEA
                                                                         Total Net Revenues
  Total net revenues                   $  1,160.0     $  1,141.3         100.0 %        100.0 %
  Cost of sales including occupancy
  costs                                     590.9          597.3          50.9 %         52.3 %
  Store operating expenses                  339.4          371.1          29.3 %         32.5 %
  Other operating expenses                   38.5           33.6           3.3 %          2.9 %
  Depreciation and amortization
  expenses                                   55.5           57.1           4.8 %          5.0 %
  General and administrative expenses        71.9           75.7           6.2 %          6.6 %
  Total operating expenses                1,096.2        1,134.8          94.5 %         99.4 %
  Income from equity investees                0.4            0.3             - %            - %
  Operating income                     $     64.2     $      6.8           5.5 %          0.6 %
  Supplemental ratios as a % of
  related revenues:
  Store operating expenses                                                36.4 %         38.3 %

Revenues
EMEA total net revenues for fiscal 2013 increased $19 million, or 2%, over fiscal 2012. Licensed stores revenue grew $51 million, or 36%, due to increased product sales to and higher royalty revenues from licensees, primarily from the opening of 129 net new licensed stores over the past 12 months and improved comparable store sales. This growth was largely offset by a decline of $36 million in company-operated stores revenue resulting from our store portfolio optimization activities which began in the prior year. Operating Expenses
Cost of sales including occupancy costs as a percentage of total net revenues decreased 140 basis points, primarily due to lower occupancy costs resulting from our store portfolio optimization initiatives in Europe that began in the fourth quarter of fiscal 2012 (approximately 120 basis points) and a reduction to the estimated asset retirement obligations of our store leases in the region in fiscal 2013 (approximately 70 basis points). These improvements were partially offset by the impact of the shift in composition of our store portfolio in the region to more licensed stores, which have a lower gross margin.
Store operating expenses as a percentage of total net revenues decreased 320 basis points. As a percentage of company-operated store revenues, store operating expenses decreased 190 basis points, primarily from our store portfolio optimization initiatives (approximately 120 basis points). Other operating expenses as a percentage of total net revenues increased 40 basis points. As a percentage of non-company-operated store revenues, other operating expenses decreased 250 basis points, mainly driven by sales leverage (approximately 180 basis points).
The above changes contributed to an overall improvement in operating margin of 490 basis points over fiscal 2012.


Table of Contents

China / Asia Pacific
                                          Sep 29,         Sep 30,        Sep 29,        Sep 30,
  Fiscal Year Ended                        2013            2012            2013          2012
                                                                              As a % of CAP
                                                                           Total Net Revenues
  Total net revenues                   $     917.0     $     721.4         100.0 %        100.0 %
  Cost of sales including occupancy
  costs                                      449.5           362.8          49.0 %         50.3 %
  Store operating expenses                   170.0           119.2          18.5 %         16.5 %
  Other operating expenses                    46.1            47.0           5.0 %          6.5 %
  Depreciation and amortization
  expenses                                    33.8            23.2           3.7 %          3.2 %
  General and administrative expenses         48.4            39.0           5.3 %          5.4 %
  Total operating expenses                   747.8           591.2          81.5 %         82.0 %
  Income from equity investees               152.0           122.4          16.6 %         17.0 %
  Operating income                     $     321.2     $     252.6          35.0 %         35.0 %
  Supplemental ratios as a % of
  related revenues:
  Store operating expenses                                                  25.3 %         24.4 %

Revenues
China/Asia Pacific total net revenues for fiscal 2013 increased $196 million, or 27%, primarily due to increased revenues from company-operated stores (contributing $183 million), driven by the opening of 240 net new stores over the past 12 months (approximately $129 million) and a 9% increase in comparable store sales (approximately $43 million).
Licensed store revenues contributed $13 million to the increase in total net revenues, mainly from increased royalty revenues from and product sales to licensees, driven by the opening of 348 net new licensed stores over the past 12 months.
Operating Expenses
Cost of sales including occupancy costs as a percentage of total net revenues decreased 130 basis points, primarily driven by company-operated store growth (approximately 170 basis points) as product sales through company-operated stores have higher gross margins than product sales to licensees. Store operating expenses as a percentage of total net revenues increased 200 basis points due primarily to new store growth. As a percentage of company-operated store revenues, store operating expenses increased 90 basis points due to a change in classification of certain operating costs that were included in general and administrative expenses (approximately 50 basis points) and other operating expenses (approximately 40 basis points) in the prior year. Other operating expenses as a percentage of total net revenues decreased 150 basis points. As a percentage of non-company-operated store revenues, other operating expenses decreased 140 basis points, primarily driven by a change in classification of certain operating costs to store operating expenses in the . . .

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