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 28, 2014
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 0-20322
Starbucks Corporation
(Exact Name of Registrant as Specified in its Charter)
Washington | 91-1325671 | |
(State 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark 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, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | x | Accelerated filer | ¨ |
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the 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 March 28, 2014 as reported on the NASDAQ Global Select Market was $54 billion. As of November 7, 2014, there were 748.3 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 18, 2015 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 28, 2014
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.
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PART I
Item 1. Business
General
Starbucks is the premier roaster, marketer and retailer of specialty coffee in the world, operating in 65 countries. 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 fresh 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 national foodservice accounts. In addition to our flagship Starbucks Coffee brand, we also sell goods and services under the following brands: Teavana, Tazo, Seattle’s Best Coffee, Evolution Fresh, La Boulange and Ethos.
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 US, and in newer, higher growth markets such as China, as well as optimizing the mix of company-operated and licensed stores in each market. 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, and through diverse channels. We also believe our Starbucks Global Responsibility strategy, commitments related to ethically sourcing high-quality coffee and 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 28, 2014 ("fiscal 2014"), Starbucks Corporation (together with its subsidiaries) is referred to as "Starbucks," the "Company," "we," "us" or "our."
Segment Financial Information
We have four reportable operating segments: 1) Americas, which is inclusive of the US, Canada, and Latin America; 2) Europe, Middle East, and Africa ("EMEA"); 3) China/Asia Pacific ("CAP") and 4) Channel Development. We also have several non-reportable operating segments, including Teavana, Seattle's Best Coffee, Evolution Fresh, and our Digital Ventures business, which are combined and referred to as All Other Segments. Revenues from our reportable segments and All Other Segments as a percentage of total net revenues for fiscal 2014 were as follows: Americas (73%), EMEA (8%), CAP (7%), Channel Development (9%) and All Other Segments (3%).
Our Americas, EMEA, and CAP 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 EMEA and CAP operations are still in the early stages of development and require a more extensive support organization, relative to their current levels of revenue and operating income, than our Americas operations. In certain markets within EMEA and CAP, occupancy costs and store operating expenses can be higher than in the Americas segment due to higher rents for prime store locations or costs of compliance with country-specific regulatory requirements. The Americas and EMEA segments also include certain foodservice accounts, primarily in Canada and the UK. Our Americas segment also includes our La Boulange® retail stores.
Our Channel Development segment includes roasted whole bean and ground coffees, premium Tazo® teas, Starbucks- and Tazo-branded single-serve products, a variety of ready-to-drink beverages, such as Frappuccino® beverages, Starbucks Doubleshot® espresso drinks, 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.
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.
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Revenue Components
We generate nearly all of our revenues through company-operated stores, licensed stores, consumer packaged goods ("CPG") and foodservice operations.
Company-operated and Licensed Store Summary as of September 28, 2014
Americas | As a% of Total Americas Stores | EMEA | As a% of Total EMEA Stores | CAP | As a% of Total CAP Stores | All Other Segments | As a% of Total All Other Segments Stores | Total | As a% of Total Stores | ||||||||||||||||||||
Company-operated stores | 8,395 | 59 | % | 817 | 38 | % | 1,132 | 24 | % | 369 | 90 | % | 10,713 | 50 | % | ||||||||||||||
Licensed stores | 5,796 | 41 | % | 1,323 | 62 | % | 3,492 | 76 | % | 42 | 10 | % | 10,653 | 50 | % | ||||||||||||||
Total | 14,191 | 100 | % | 2,140 | 100 | % | 4,624 | 100 | % | 411 | 100 | % | 21,366 | 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 and expected ultimate size of the market for Starbucks, and our ability to leverage the support infrastructure in an existing geographic region.
Company-operated Stores
Revenue from company-operated stores accounted for 79% of total net revenues during fiscal 2014. 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, and by providing each customer with a unique Starbucks Experience. The Starbucks Experience is built upon superior customer service, as well as clean and well-maintained company-operated 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 the maturity of the market.
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Company-operated store data for the year-ended September 28, 2014:
Stores Open as of | Stores Open as of | |||||||||||||
Sep 29, 2013 | Opened | Closed | Net | Sep 28, 2014 | ||||||||||
Americas: | ||||||||||||||
US | 7,049 | 287 | (33 | ) | 254 | 7,303 | ||||||||
Canada | 940 | 56 | (13 | ) | 43 | 983 | ||||||||
Brazil | 70 | 19 | — | 19 | 89 | |||||||||
Puerto Rico | 19 | 1 | — | 1 | 20 | |||||||||
Total Americas | 8,078 | 363 | (46 | ) | 317 | 8,395 | ||||||||
EMEA(1): | ||||||||||||||
UK(1) | 522 | 1 | (17 | ) | (16 | ) | 506 | |||||||
Germany | 157 | 1 | (6 | ) | (5 | ) | 152 | |||||||
France | 72 | 6 | — | 6 | 78 | |||||||||
Switzerland | 52 | 3 | — | 3 | 55 | |||||||||
Austria | 16 | 2 | (1 | ) | 1 | 17 | ||||||||
Netherlands | 7 | 2 | — | 2 | 9 | |||||||||
Total EMEA | 826 | 15 | (24 | ) | (9 | ) | 817 | |||||||
CAP(2): | ||||||||||||||
China | 614 | 217 | (8 | ) | 209 | 823 | ||||||||
Thailand | 174 | 31 | (2 | ) | 29 | 203 | ||||||||
Singapore | 94 | 16 | (4 | ) | 12 | 106 | ||||||||
Total CAP | 882 | 264 | (14 | ) | 250 | 1,132 | ||||||||
All Other Segments: | ||||||||||||||
Teavana | 338 | 27 | — | 27 | 365 | |||||||||
Seattle's Best Coffee | 15 | — | (15 | ) | (15 | ) | — | |||||||
Evolution Fresh | 4 | — | — | — | 4 | |||||||||
Total All Other Segments | 357 | 27 | (15 | ) | 12 | 369 | ||||||||
Total company-operated | 10,143 | 669 | (99 | ) | 570 | 10,713 | ||||||||
(1) | EMEA store data has been adjusted for the transfer of certain company-operated stores to licensed stores in the second and fourth quarters of fiscal 2014. |
(2) | CAP store data has been adjusted for the transfer of certain company-operated stores to licensed stores in the fourth quarter of fiscal 2014. |
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 various store formats, including Drive Thru stores, to provide a greater degree of access and convenience for our customers.
Starbucks® stores offer a choice of coffee and tea beverages, as well as other premium coffee, tea and related products, including distinctively packaged roasted whole bean and ground coffees, a variety of premium single-serve and ready-to-drink coffee and tea products, juices and bottled water. Starbucks® stores also offer an assortment of fresh food offerings, including selections focusing on high-quality ingredients, nutritional value and great flavor. A focused selection of beverage-making equipment and accessories are also sold in our stores. Each Starbucks® store varies its product mix depending upon the size of the store and its location. To complement the in-store experience, our company-operated Starbucks® stores in the US, Canada, and certain other international markets also provide customers free access to wireless internet.
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Retail sales mix by product type for company-operated stores:
Fiscal Year Ended | Sep 28, 2014 | Sep 29, 2013 | Sep 30, 2012 | |||||
Beverages | 73 | % | 74 | % | 75 | % | ||
Food | 18 | % | 18 | % | 17 | % | ||
Packaged and single-serve coffees and teas | 4 | % | 4 | % | 4 | % | ||
Other(1) | 5 | % | 4 | % | 4 | % | ||
Total | 100 | % | 100 | % | 100 | % | ||
(1) | "Other" primarily includes sales of ready-to-drink beverages, serveware and coffee-making equipment, among other items. |
In fiscal 2014, we moved ready-to-drink beverage revenues from the "Food" category to the "Other" category and combined packaged and single-serve teas, which were previously included in the "Other" category, with packaged and single serve coffees, which are now categorized as "Packaged and single-serve coffees and teas." Additionally, we revised our discount allocation methodology to more precisely allocate sales discounts to the various revenue product categories. None of these changes had a material impact on the composition of our retail sales mix by product type. Prior period amounts have been revised to be consistent with the current period presentation.
Stored Value Cards
The Starbucks Card and our other branded stored value card programs are 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 My Starbucks Rewards® loyalty program. 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, Brazil, and many of our markets in the EMEA segment, as well as on-line, via the Starbucks mobile app, and through other retailers, including a number of other international locations. Customers may access their card balances by utilizing their stored value card or the Starbucks® mobile app in participating stores, which also includes certain Teavana®, Evolution Fresh™, and La Boulange® locations. Customers who register their card in the US, Canada, and certain other countries are automatically enrolled in the My Starbucks Rewards® program and can receive various benefits depending on factors such as the number of reward points ("Stars") earned in a 12-month period.
Licensed Stores
Revenues from our licensed stores accounted for 10% of total net revenues in fiscal 2014. 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.
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 receive royalties and license fees from and sell coffee, tea and related products to licensees for use in their operations or resale to customers. 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. For Teavana® and Seattle's Best Coffee®, as well as Starbucks® stores within certain markets, we also use traditional franchising.
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Licensed store data for the year-ended September 28, 2014:
Stores Open as of | Stores Open as of | |||||||||||||
Sep 29, 2013 | Opened | Closed | Net | Sep 28, 2014 | ||||||||||
Americas: | ||||||||||||||
US | 4,408 | 361 | (110 | ) | 251 | 4,659 | ||||||||
Mexico | 403 | 31 | — | 31 | 434 | |||||||||
Canada | 397 | 69 | (4 | ) | 65 | 462 | ||||||||
Other | 207 | 37 | (3 | ) | 34 | 241 | ||||||||
Total Americas | 5,415 | 498 | (117 | ) | 381 | 5,796 | ||||||||
EMEA(1): | ||||||||||||||
UK(1) | 242 | 47 | (4 | ) | 43 | 285 | ||||||||
Turkey | 193 | 32 | (5 | ) | 27 | 220 | ||||||||
United Arab Emirates | 107 | 12 | (4 | ) | 8 | 115 | ||||||||
Spain | 82 | 5 | (1 | ) | 4 | 86 | ||||||||
Kuwait | 69 | 4 | (1 | ) | 3 | 72 | ||||||||
Saudi Arabia | 62 | 9 | (4 | ) | 5 | 67 | ||||||||
Russia | 65 | 24 | (2 | ) | 22 | 87 | ||||||||
Other | 323 | 74 | (6 | ) | 68 | 391 | ||||||||
Total EMEA | 1,143 | 207 | (27 | ) | 180 | 1,323 | ||||||||
CAP(2): | ||||||||||||||
Japan | 1,000 | 61 | (1 | ) | 60 | 1,060 | ||||||||
China | 403 | 146 | (5 | ) | 141 | 544 | ||||||||
South Korea | 559 | 159 | (18 | ) | 141 | 700 | ||||||||
Taiwan | 297 | 32 | (6 | ) | 26 | 323 | ||||||||
Philippines | 216 | 25 | (1 | ) | 24 | 240 | ||||||||
Other(2) | 525 | 117 | (17 | ) | 100 | 625 | ||||||||
Total CAP | 3,000 | 540 | (48 | ) | 492 | 3,492 | ||||||||
All Other Segments: | ||||||||||||||
Teavana | 28 | 3 | (2 | ) | 1 | 29 | ||||||||
Seattle's Best Coffee | 38 | 1 | (26 | ) | (25 | ) | 13 | |||||||
Total All Other Segments | 66 | 4 | (28 | ) | (24 | ) | 42 | |||||||
Total licensed | 9,624 | 1,249 | (220 | ) | 1,029 | 10,653 | ||||||||
(1) | EMEA store data has been adjusted for the transfer of certain company-operated stores to licensed stores in the second and fourth quarters of fiscal 2014. |
(2) | CAP store data has been adjusted for the transfer of certain company-operated stores to licensed stores in the fourth quarter of fiscal 2014. |
Consumer Packaged Goods
Revenues from sales of consumer packaged goods comprised 8% of total net revenues in fiscal 2014. Consumer packaged goods includes both domestic and international sales of packaged coffee and tea as well as a variety of ready-to-drink beverages and single-serve coffee and tea products to grocery, warehouse clubs and specialty retail stores. It also includes revenues from product sales to and licensing revenues from manufacturers that produce and market Starbucks- and Seattle’s Best Coffee-branded products through licensing agreements.
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Foodservice
Revenues from foodservice accounts comprised 3% of total net revenues in fiscal 2014. We sell Starbucks® and Seattle’s Best Coffee® roasted whole bean and ground coffees, a selection of premium Tazo® teas, Starbucks VIA® Ready Brew, and other coffee and tea related products to institutional foodservice companies that service business and industry, education, healthcare, office coffee distributors, hotels, restaurants, airlines and other retailers. We also sell our Seattle’s Best Coffee® through arrangements with national accounts. The majority of the sales in this channel come through national broadline distribution networks with SYSCO Corporation, US Foodservice™, and other distributors.
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 these types of contracts, either Starbucks or the seller has the option to select a date on which to "fix" the base "C" coffee commodity price prior to the delivery date. Until prices are fixed, we estimate the total cost of these purchase commitments. Total green coffee purchase commitments as of September 28, 2014 were $1.1 billion, comprised of $417 million under fixed-price contracts and an estimated $718 million under price-to-be-fixed contracts. As of September 28, 2014, approximately $29 million of our price-to-be-fixed contracts were effectively fixed through the use of futures contracts and approximately $16 million were price-protected through the use of collar instruments. All price-to-be-fixed contracts as of September 28, 2014 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 2015.
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 six 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 and yields.
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 La Boulange™ 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 these items is remote.
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Competition
Our primary competitors for coffee beverage sales are quick-service restaurants and specialty coffee shops. 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 US quick-service restaurant sector and the US 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 US foodservice accounts and compete indirectly against all other coffees and teas on the market.
Patents, Trademarks, Copyrights and Domain Names
Starbucks owns and has applied to register numerous trademarks and service marks in the US and in additional countries throughout the world. Some of our trademarks, including Starbucks, the Starbucks logo, Tazo, Seattle’s Best Coffee, Teavana, Frappuccino, Starbucks VIA, Evolution Fresh 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," "Tazo.com," "Seattlesbest.com" and "Teavana.com."
Seasonality and Quarterly Results
Our business is subject to seasonal fluctuations, including fluctuations resulting from the holiday season in December. Excluding the impact of a $2.8 billion cash payment in the first quarter of fiscal 2014 related to the Kraft arbitration matter, our cash flows from operations are considerably higher in the first fiscal quarter than the remainder of the year. This is largely driven by cash received as Starbucks Cards are issued to and loaded by customers during the holiday season. Since revenues from Starbucks Cards are recognized upon redemption and not when purchased, the impact of seasonal fluctuations on the consolidated statements of earnings is much less pronounced. Quarterly results are also affected by the timing of the opening of new stores and the closing of existing stores. For these reasons, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.
Employees
Starbucks employed approximately 191,000 people worldwide as of September 28, 2014. In the US, Starbucks employed approximately 141,000 people, with approximately 133,000 in company-operated stores and the remainder in support facilities, store development, and roasting, manufacturing, warehousing and distribution operations. Approximately 50,000 employees were employed outside of the US, with approximately 47,000 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 | ||
Howard Schultz | 61 | chairman, president and chief executive officer | ||
Troy Alstead | 51 | chief operating officer | ||
Cliff Burrows | 55 | group president, US, Americas and Teavana | ||
John Culver | 54 | group president, China, Asia Pacific, Channel Development and Emerging Brands | ||
Scott Maw | 47 | executive vice president, chief financial officer | ||
Lucy Lee Helm | 57 | executive vice president, general counsel and secretary | ||
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Howard Schultz is the founder of Starbucks Corporation and serves as the chairman, president and chief executive officer. Mr. Schultz has served as chairman of the board of directors since Starbucks inception in 1985, and in January 2008, he reassumed the role of president and chief executive officer. From June 2000 to February 2005, Mr. Schultz also held the title of chief global strategist. From November 1985 to June 2000, he served as chairman of the board and chief executive officer. From November 1985 to June 1994, Mr. Schultz also served as president. From January 1986 to July 1987, Mr. Schultz was the chairman of the board, chief executive officer and president of Il Giornale Coffee Company, a predecessor to the Company. From September 1982 to December 1985, Mr. Schultz was the director of retail operations and marketing for Starbucks Coffee Company, a predecessor to the Company.
Troy Alstead joined Starbucks in 1992 and has served as chief operating officer since February 2014. Mr. Alstead is responsible for overseeing Starbucks day-to-day operations, including aligning and prioritizing Company investments and operations across the global business units. He also has oversight responsibility for Starbucks Global Technology, Global Supply Chain, and Global Finance organizations. From September 2013 to February 2014, he served as chief financial officer and group president, Global Business Services. Mr. Alstead previously served as chief financial officer and chief administrative officer from November 2008 to September 2013, as chief operating officer, Starbucks Greater China from April 2008 to October 2008, senior vice president, Global Finance and Business Operations from August 2007 to April 2008, and senior vice president, Corporate Finance from September 2004 to August 2007. Mr. Alstead served in a number of other senior positions with Starbucks prior to 2004.
Cliff Burrows joined Starbucks in April 2001 and has served as group president, US, Americas and Teavana since February 2014. From May 2013 to February 2014, he served as group president, Americas and US, EMEA (Europe, Middle East and Africa) and Teavana. Mr. Burrows served as president, Starbucks Coffee Americas and US from October 2011 to May 2013 and as president, Starbucks Coffee US from March 2008 to October 2011. He served as president, Europe, Middle East and Africa (EMEA) from April 2006 to March 2008. He served as vice president and managing director, UK 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, China, Asia Pacific, Channel Development and Emerging Brands since May 2013. 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.
Scott Maw joined Starbucks in August 2011 and has served as executive vice president, chief financial officer since February 2014. 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.
Lucy Lee Helm joined Starbucks in September 1999 and has served as executive vice president, general counsel and secretary since May 2012. 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.
Global Responsibility
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, reducing our environmental impacts and contributing positively to communities around the world. Starbucks Global Responsibility 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 Responsibility strategy and commitments, please visit www.starbucks.com/responsibility.
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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 at investor.starbucks.com. 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 a very 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 operation.
• | Economic conditions in the US and certain 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 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, higher taxes and reduced access to credit. 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 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 corporate social responsibility programs. Our 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 US, where the Starbucks brand and our other brands are less well-known, we believe we must preserve, grow and leverage the value 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, foodservice, branded products and other initiatives, relies significantly on a variety of business partners, including licensee and joint venture relationships, particularly in our international markets. Licensees and food service operators are often authorized to use our logos and provide branded beverages, food 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 licensees and food services providers 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, licensed store or food service location. 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.
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, contaminated food, recalls or other potential incidents discussed in this risk factors section, particularly if the incidents receive considerable publicity, including rapidly through social or digital media, or result in litigation, can significantly reduce brand value and have a negative impact on our financial results. Consumer demand for our products and our brand equity could diminish significantly if we or our licensees or other business partners fail to preserve the quality of our products, are perceived to act in an unethical or socially irresponsible manner, including with respect to the sourcing or content of our products, fail to comply with laws and regulations or fail to deliver a consistently positive consumer experience in each of our markets. 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 negative impact on our financial results.
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• | The unauthorized access, 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 could impact our reputation and brand and expose us to potential liability and loss of revenues. |
Our information technology systems, such as those we use for our point-of-sale, web and mobile platforms, including online and mobile payment systems and rewards programs, and for administrative functions, as well as the information technology systems of our third party business partners and service providers, can contain personal, financial or other information that is entrusted to us by our customers and employees. Our information technology systems also contain Starbucks proprietary and other confidential information related to our business. Security breaches of our or a third party’s information technology systems that result in the unauthorized access, theft or destruction of customers' or employees' data or that of the Company stored in such systems, including through cyber-attacks or other external or internal methods, 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 US and international privacy and other laws, and subject us to private consumer or securities litigation and governmental investigations and proceedings, any of which could result in our exposure to material civil or criminal liability. 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, which could also result in similar exposure to liability. Significant capital investments and other expenditures could be required to remedy the problem 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, even if no breach has been attempted or has occurred, can also adversely impact our brand and reputation and materially impact our business. Like many other retail companies and because of the prominence of our brand, we have experienced frequent attempts to compromise our information technology systems but none have resulted in a material breach. 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 prevent 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.
• | Incidents involving food-borne illnesses, food tampering, food 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-borne illnesses, food tampering, food contamination or mislabeling, either during growing, manufacturing, packaging, storing or preparation, have in the past severely injured the reputations of companies in the food processing, grocery and quick-service restaurant sectors and could affect us as well. Any report linking us to the use of unclean water, food-borne illnesses or food tampering, contamination, mislabeling or other food-safety issues could damage our brand value and severely hurt sales of our beverages and food products, and possibly lead to product liability claims, litigation (including class actions) or damages. Clean water is critical to the preparation of coffee and tea beverages and our ability to ensure a clean water supply to our stores can be limited, particularly in some international locations. We have also incorporated many 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) and meats. If customers become ill from food-borne illnesses, tampering, contamination, mislabeling or other food-safety issues, we could also be forced to temporarily close some stores and/or supply chain facilities, as well as recall products. In addition, instances of food-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 closure of any of our stores or recalls, as well as adverse results of claims or litigation, could materially harm our business and results of operations.
Some of our products contain caffeine, dairy products, sugar and other compounds, the health effects of which are the subject of public 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 US, 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 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
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effects of caffeine or other compounds present in our products, whether accurate or not, 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.
• | 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, 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:
• | successfully leveraging Starbucks brand portfolio outside the company-operated store base, including our increased focus on international licensed stores; |
• | focusing on relevant product innovation and profitable new growth platforms, including retail tea, and achieving customer acceptance of these new products and platforms while maintaining demand for our current offerings; |
• | continuing the growth of our Channel Development business; |
• | balancing disciplined global store growth and existing store renovation while meeting target store-level unit economics in a given market; |
• | executing a multi-channel advertising and marketing campaign to effectively communicate our message directly to Starbucks consumers and employees; and |
• | strategic acquisitions, divestitures or joint ventures. |
In addition to other factors listed in this risk factors section, factors that may adversely affect the successful implementation of these initiatives, which could adversely impact our business and financial results, include 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 US and internationally; lack of customer acceptance of new products due to price increases necessary to cover the costs of new products or higher input costs; 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; not successfully consummating favorable strategic transactions or integrating acquired businesses; or 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. If we are not successful in implementing these strategic initiatives, we may be required to evaluate whether certain assets, including other intangibles and goodwill, have become impaired. In the event we record an impairment charge, it could have a material impact on our financial results.
Additionally, effectively managing growth can be challenging, particularly as we continue to expand into new channels outside the retail store model, increase our focus on our Channel Development business, and 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 experience.
• | 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, 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 US, 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 in our international markets could hinder growth and adversely affect our sales and results of operations in those markets. Increased competition in the US 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. Additionally, declines in general consumer demand for specialty coffee products for any reason, including due to consumer preference for other products, could have a negative effect on our business.
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• | 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 73% of consolidated total net revenues in fiscal 2014. If the Americas operating segment revenue trends slow or decline 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 our CAP and EMEA operating segments in order to achieve our growth targets. |
Our future growth increasingly depends on the growth and sustained profitability of our CAP and EMEA operating segments. 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. In particular, our China MBU contributes meaningfully to both net revenues and earnings for our CAP segment and our Japan MBU contributes significantly to earnings in that segment. In the EMEA segment, our UK MBU accounts for a significant portion of the net revenues. A decline in performance of any of these MBUs could have a material adverse impact on the results of our international operations.
Additionally, some factors that will be critical to the success of the CAP and EMEA segments are different than those affecting our US 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 US or other international markets. Occupancy costs and store operating expenses can be higher internationally than in the US 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 more developed operations, such as in the US. 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; |
• | interpretation and application of laws and regulations; |
• | restrictive actions of foreign or US governmental authorities affecting trade and foreign investment, especially during periods of heightened tension between the US 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 US 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.
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• | 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, including weather, 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 an 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 an 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 inputs, such as cocoa, produce, baking ingredients, meats and energy, are important to our operations. Increases in the cost of dairy products and other commodities, or lack of availability, especially in international markets, could have an 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 adversely impact our business, financial condition and/or results of operations:
• | increases in labor costs such as increased health care costs, general market and minimum wage levels and workers' compensation insurance costs; |
• | adverse outcomes of litigation; and |
• | especially in our larger or fast growing markets, labor discord, war, terrorism (including incidents targeting us), political instability, boycotts, 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, or natural disasters that cause a material disruption in our supply chain could negatively impact 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 and vendors to provide high quality products and to comply with applicable laws. Our ability to find qualified suppliers and vendors 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 US. A vendor's or supplier's failure to meet our standards, provide products in a timely and efficient manner, and comply with applicable laws is beyond our control. These issues could negatively impact our business and profitability.
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• | Failure to meet market expectations for our financial performance 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, 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. Accordingly, our performance depends on our ability to recruit and retain high quality employees to work in and manage our stores, both domestically and internationally. 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.
• | We rely heavily on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could harm our ability to effectively operate 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, mobile payments, reloads and loyalty functionality and various other processes and transactions. Our ability to effectively manage our business and coordinate the production, distribution 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. Although we have security measures 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, problems with transitioning to upgraded or replacement systems or platforms, flaws in third party software, or a breach in the security of these systems or platforms, including through cyber-attacks. If our disaster recovery and business continuity plans do not resolve these issues in an effective manner they could cause material negative impacts to our product availability and sales, the efficiency of our operations and our financial results.
• | Failure to comply with applicable laws and regulations 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, food, 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 to comply with the various 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.
Item 1B. | Unresolved Staff Comments |
None.
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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 | ||
San Francisco, CA | 79,000 | Warehouse and distribution | ||
Augusta, GA | 131,000 | Manufacturing | ||
Minden, NV (Carson Valley) | 360,000 | Roasting and distribution | ||
York, PA | 1,035,000 | Roasting, distribution and warehouse | ||
Gaston, SC (Sandy Run) | 117,000 | Roasting and distribution | ||
Lebanon, TN | 680,000 | Distribution center | ||
Auburn, WA | 491,000 | Warehouse and distribution | ||
Kent, WA | 510,000 | Roasting and distribution | ||
Seattle, WA | 1,001,000 | Corporate administrative | ||
Amsterdam, Netherlands | 97,000 | Roasting and distribution | ||
Samutprakarn, Thailand | 80,000 | Warehouse and distribution | ||
We own our roasting facilities and lease the majority of our warehousing and distribution locations. As of September 28, 2014, Starbucks had 10,713 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.
Item 4. | Mine Safety Disclosures |
Not applicable.
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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."
The following table shows the quarterly high and low sale prices per share of Starbucks common stock as reported by NASDAQ for each quarter during the last two fiscal years and the quarterly cash dividend declared per share of our common stock during the periods indicated:
High | Low | Cash Dividends Declared | |||||||||
Fiscal 2014: | |||||||||||
Fourth Quarter | $ | 80.64 | $ | 73.78 | $ | 0.32 | |||||
Third Quarter | 78.35 | 67.93 | 0.26 | ||||||||
Second Quarter | 78.83 | 68.67 | 0.26 | ||||||||
First Quarter | 82.50 | 74.45 | 0.26 | ||||||||
Fiscal 2013: | |||||||||||
Fourth Quarter | $ | 77.84 | $ | 65.82 | $ | 0.26 | |||||
Third Quarter | 67.48 | 56.65 | 0.21 | ||||||||
Second Quarter | 58.97 | 52.39 | 0.21 | ||||||||
First Quarter | 54.90 | 44.27 | 0.21 | ||||||||
As of November 7, 2014, we had approximately 17,800 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 28, 2014:
Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (2) | ||||||||||
Period(1) | |||||||||||||
June 30, 2014 — July 27, 2014 | — | $ | — | — | 18,132,067 | ||||||||
July 28, 2014 — August 24, 2014 | 789,975 | 77.27 | 789,975 | 17,342,092 | |||||||||
August 25, 2014 — September 28, 2014 | 1,484,884 | 76.52 | 1,484,884 | 15,857,208 | |||||||||
Total | 2,274,859 | $ | 76.78 | 2,274,859 | |||||||||
(1) | Monthly information is presented by reference to our fiscal months during the fourth quarter of fiscal 2014. |
(2) | The share repurchase program is conducted under authorizations made from time to time by our Board of Directors. On November 15, 2012, we publicly announced the authorization of up to 25 million shares. This authorization has no expiration date. |
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Performance Comparison Graph
The following graph depicts the total return to shareholders from September 27, 2009 through September 28, 2014, 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 27, 2009, 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.
Sep 27, 2009 | Oct 3, 2010 | Oct 2, 2011 | Sep 30, 2012 | Sep 29, 2013 | Sep 28, 2014 | ||||||||||||||||||
Starbucks Corporation | $ | 100.00 | $ | 132.04 | $ | 192.82 | $ | 266.00 | $ | 411.41 | $ | 405.56 | |||||||||||
S&P 500 | 100.00 | 110.16 | 111.42 | 145.07 | 173.13 | 207.30 | |||||||||||||||||
NASDAQ Composite | 100.00 | 112.55 | 116.28 | 153.12 | 189.49 | 227.09 | |||||||||||||||||
S&P Consumer Discretionary | 100.00 | 123.63 | 131.26 | 179.35 | 236.45 | 264.29 | |||||||||||||||||
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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) | Sep 28, 2014 (52 Wks) | Sep 29, 2013 (52 Wks) | Sep 30, 2012 (52 Wks) | Oct 2, 2011 (52 Wks) | Oct 3, 2010 (53 Wks) | |||||||||||||||
Results of Operations | ||||||||||||||||||||
Net revenues: | ||||||||||||||||||||
Company-operated stores | $ | 12,977.9 | $ | 11,793.2 | $ | 10,534.5 | $ | 9,632.4 | $ | 8,963.5 | ||||||||||
Licensed stores | 1,588.6 | 1,360.5 | 1,210.3 | 1,007.5 | 875.2 | |||||||||||||||
CPG, foodservice and other(2) | 1,881.3 | 1,713.1 | 1,532.0 | 1,060.5 | 868.7 | |||||||||||||||
Total net revenues(2) | $ | 16,447.8 | $ | 14,866.8 | $ | 13,276.8 | $ | 11,700.4 | $ | 10,707.4 | ||||||||||
Operating income/(loss)(3,4) | $ | 3,081.1 | $ | (325.4 | ) | $ | 1,997.4 | $ | 1,728.5 | $ | 1,419.4 | |||||||||
Net earnings including noncontrolling interests(3,4) | 2,067.7 | 8.8 | 1,384.7 | 1,248.0 | 948.3 | |||||||||||||||
Net earnings attributable to noncontrolling interests | (0.4 | ) | 0.5 | 0.9 | 2.3 | 2.7 | ||||||||||||||
Net earnings attributable to Starbucks(3,4) | 2,068.1 | 8.3 | 1,383.8 | 1,245.7 | 945.6 | |||||||||||||||
EPS — diluted(3,4) | 2.71 | 0.01 | 1.79 | 1.62 | 1.24 | |||||||||||||||
Cash dividends declared per share | 1.10 | 0.89 | 0.72 | 0.56 | 0.36 | |||||||||||||||
Net cash provided by operating activities | 607.8 | 2,908.3 | 1,750.3 | 1,612.4 | 1,704.9 | |||||||||||||||
Capital expenditures (additions to property, plant and equipment) | 1,160.9 | 1,151.2 | 856.2 | 531.9 | 440.7 | |||||||||||||||
Balance Sheet | ||||||||||||||||||||
Total assets | $ | 10,752.9 | $ | 11,516.7 | $ | 8,219.2 | $ | 7,360.4 | $ | 6,385.9 | ||||||||||
Long-term debt (including current portion) | 2,048.3 | 1,299.4 | 549.6 | 549.5 | 549.4 | |||||||||||||||
Shareholders’ equity | 5,272.0 | 4,480.2 | 5,109.0 | 4,384.9 | 3,674.7 | |||||||||||||||
(1) | 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 our fourth fiscal quarter. |
(2) | For fiscal 2013 and 2012, we reclassified certain fees related to our US and Seattle's Best Coffee foodservice operations, totaling $25.4 million and $22.7 million, respectively, from other operating expenses to foodservice revenues included in CPG, foodservice and other net revenues. This correction of an immaterial error is discussed further in Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements included in Item 8 of Part II of this 10-K. |
(3) | Fiscal 2010 results include pretax restructuring charges of $53.0 million. |
(4) | Fiscal 2013 results include a pretax charge of $2,784.1 million resulting from the conclusion of our arbitration with Kraft Foods Global, Inc. The impact of this charge to net earnings attributable to Starbucks and diluted EPS, net of the related tax benefit, was $1,713.1 million and $2.25 per share, respectively. |
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Comparable Store Sales:
Fiscal Year Ended | Sep 28, 2014 (52 Wks) | Sep 29, 2013 (52 Wks) | Sep 30, 2012 (52 Wks) | Oct 2, 2011 (52 Wks) | Oct 3, 2010 (53 Wks) | ||||||||||
Percentage change in comparable store sales(5) | |||||||||||||||
Americas | |||||||||||||||
Sales growth | 6 | % | 7 | % | 8 | % | 8 | % | 7 | % | |||||
Change in transactions | 2 | % | 5 | % | 6 | % | 5 | % | 3 | % | |||||
Change in ticket | 3 | % | 2 | % | 2 | % | 2 | % | 3 | % | |||||
EMEA | |||||||||||||||
Sales growth | 5 | % | — | % | — | % | 3 | % | 5 | % | |||||
Change in transactions | 3 | % | 2 | % | — | % | 3 | % | 6 | % | |||||
Change in ticket | 2 | % | (2 | )% | — | % | — | % | (1 | )% | |||||
China/Asia Pacific | |||||||||||||||
Sales growth | 7 | % | 9 | % | 15 | % | 22 | % | 11 | % | |||||
Change in transactions | 6 | % | 7 | % | 11 | % | 20 | % | 9 | % | |||||
Change in ticket | — | % | 2 | % | 3 | % | 2 | % | 2 | % | |||||
Consolidated | |||||||||||||||
Sales growth | 6 | % | 7 | % | 7 | % | 8 | % | 7 | % | |||||
Change in transactions | 3 | % | 5 | % | 6 | % | 6 | % | 4 | % | |||||
Change in ticket | 3 | % | 2 | % | 1 | % | 2 | % | 3 | % | |||||
(5) | Includes only Starbucks® company-operated stores open 13 months or longer. For fiscal 2010, comparable store sales percentages were calculated excluding the 53rd week. Comparable store sales exclude the effect of fluctuations in foreign currency exchange rates. |
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Store Count Data:
As of and for the Fiscal Year Ended | Sep 28, 2014 (52 Wks) | Sep 29, 2013 (52 Wks) | Sep 30, 2012 (52 Wks) | Oct 2, 2011 (52 Wks) | Oct 3, 2010 (53 Wks) | ||||||||||
Net stores opened/(closed) during the year: | |||||||||||||||
Americas(6) | |||||||||||||||
Company-operated stores | 317 | 276 | 228 | 32 | (32 | ) | |||||||||
Licensed stores | 381 | 404 | 280 | 215 | 101 | ||||||||||
EMEA(7) | |||||||||||||||
Company-operated stores | (9 | ) | (29 | ) | 10 | 25 | (64 | ) | |||||||
Licensed stores | 180 | 129 | 101 | 79 | 100 | ||||||||||
China/Asia Pacific (8) | |||||||||||||||
Company-operated stores | 250 | 239 | 152 | 74 | 31 | ||||||||||
Licensed stores | 492 | 349 | 296 | 192 | 78 | ||||||||||
All Other Segments (9) | |||||||||||||||
Company-operated stores | 12 | 343 | — | 6 | (1 | ) | |||||||||
Licensed stores(10) | (24 | ) | (10 | ) | (4 | ) | (478 | ) | 10 | ||||||
Total | 1,599 | 1,701 | 1,063 | 145 | 223 | ||||||||||
Stores open at year end: | |||||||||||||||
Americas (6) | |||||||||||||||
Company-operated stores | 8,395 | 8,078 | 7,802 | 7,574 | 7,542 | ||||||||||
Licensed stores | 5,796 | 5,415 | 5,011 | 4,731 | 4,516 | ||||||||||
EMEA(7) | |||||||||||||||
Company-operated stores | 817 | 826 | 855 | 845 | 820 | ||||||||||
Licensed stores | 1,323 | 1,143 | 1,014 | 913 | 834 | ||||||||||
China/Asia Pacific(8) | |||||||||||||||
Company-operated stores | 1,132 | 882 | 643 | 491 | 417 | ||||||||||
Licensed stores | 3,492 | 3,000 | 2,651 | 2,355 | 2,163 | ||||||||||
All Other Segments (9) | |||||||||||||||
Company-operated stores | 369 | 357 | 14 | 14 | 8 | ||||||||||
Licensed stores (10) | 42 | 66 | 76 | 80 | 558 | ||||||||||
Total | 21,366 | 19,767 | 18,066 | 17,003 | 16,858 | ||||||||||
(6) | Americas store data has been adjusted for the sale of store locations in Chile to a joint venture partner in the fourth quarter of fiscal 2013 by reclassifying historical information from company-operated stores to licensed stores, and to exclude Seattle's Best Coffee and Evolution Fresh, which are reported within All Other Segments. |
(7) | EMEA store data has been adjusted for the acquisition of store locations in Austria and Switzerland in the fourth quarter of fiscal 2011 by reclassifying historical information from licensed stores to company-operated stores, and the transfer of certain company-operated stores to licensed stores in the fourth quarter of fiscal 2012 and in the second and fourth quarters of fiscal 2014. |
(8) | CAP store data has been adjusted for the transfer of certain company-operated stores to licensed stores in the fourth quarter of fiscal 2014. |
(9) | Includes 337 Teavana® stores acquired in the second quarter of fiscal 2013. |
(10) | Includes the closure of 475 licensed Seattle’s Best Coffee® locations in Borders Bookstores during fiscal 2011. |
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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 28, 2014, September 29, 2013 and September 30, 2012 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 11% to $16.4 billion in fiscal 2014 compared to $14.9 billion in fiscal 2013. |
• | Global comparable store sales grew 6% driven by a 3% increase in the number of transactions and a 3% increase in average ticket. |
• | Consolidated operating income increased to $3.1 billion in fiscal 2014 compared to an operating loss of $325.4 million in fiscal 2013. Fiscal 2014 operating margin was 18.7% compared to (2.2)% in fiscal 2013. The operating margin expansion was primarily due to lapping the $2.8 billion Kraft litigation charge in the prior year. The remaining change in operating margin was primarily driven by sales leverage and lower commodity costs, mainly coffee. |
• | Earnings per share for fiscal 2014 increased to $2.71, compared to EPS of $0.01 in fiscal 2013, primarily due to lapping the Kraft litigation charge, which reduced EPS by $2.25 per share in fiscal 2013. The remaining increase was primarily due to the improved sales leverage and lower commodity costs, as well as a gain on the sale of our equity interest in our Malaysia joint venture. |
• | Cash flows from operations were $607.8 million in fiscal 2014 compared to $2.9 billion in fiscal 2013. The decline in fiscal 2014 was driven by the payment of $2.8 billion during the year for the Kraft arbitration matter. This was partially offset by cash provided by operating activities of $3.4 billion resulting from strong earnings and favorable changes in working capital accounts in the current year. |
• | Capital expenditures were $1.2 billion in fiscal 2014 and fiscal 2013. |
• | We returned $1.6 billion to our shareholders in fiscal 2014 through dividends and share repurchases. |
Overview
Starbucks results for fiscal 2014 demonstrate the continued strength of our global business model and our ability to successfully execute new growth initiatives in a disciplined manner. All reportable segments contributed to strong revenue growth and collectively drove an increase in consolidated operating income and operating margin expansion.
The Americas segment continued its strong performance in fiscal 2014, with revenues growing 9% to $12.0 billion, primarily driven by comparable store sales growth of 6%, comprised of a 3% increase in average ticket and a 2% increase in number of transactions. Enhanced food offerings, including the full rollout of our La Boulange™ food platform in the US, the impact of price increases in our retail stores and successful promotional beverages contributed to the growth in comparable store sales. Americas operating margin grew 190 basis points to 23.4% in fiscal 2014, primarily driven by sales leverage and lower commodity costs. Looking forward, we expect to continue to drive revenue growth and margin expansion through new stores and continued product innovation, targeted at driving growth across all geographies and all dayparts. We plan to continue to expand our beverage platforms and elevate our food program, in part with continued enhancements to our lunch options.
In the EMEA segment, fiscal 2014 benefited from the significant performance improvement of this segment, reaching double-digit revenue growth and increased profitability compared to the prior year. Revenues grew 12% to $1.3 billion, primarily driven by favorable foreign currency exchange and comparable store sales growth of 5%. Incremental revenues from 180 net new licensed store openings over the past year also contributed. EMEA operating margin expanded 370 basis points to 9.2% in fiscal 2014, primarily due to sales leverage and continued cost management, largely driven by the shift in our store portfolio to more licensed stores in this segment. We expect our continued disciplined licensed store expansion and focus on the customer experience in this region will result in improved operating performance as we progress on our plan towards mid-teens operating margin over time.
Our China/Asia Pacific segment results reflect the growth and strong performance of new stores in the region, including 250 company-operated and 492 licensed net new store openings over the past year. This new store growth, along with a 7% increase in comparable store sales, drove a 23% increase in total net revenues to $1.1 billion for fiscal 2014. Operating income grew $51.3 million, or 16%, to $373 million compared to the prior year. Operating margin declined 200 basis points primarily resulting from the shift in the composition of our store portfolio in this segment to more company-operated stores. We expect this segment will become a more significant contributor to overall company profitability in the future. We look forward to continued new store openings and the acquisition and integration of Starbucks Japan, including expanding our presence into
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other channels in the Japan market, such as CPG, licensing and foodservice. We also expect that China will continue to grow toward being one of our largest markets outside of the US.
Channel Development segment revenues grew 11% to $1.5 billion, in fiscal 2014, primarily due to increased sales of premium single-serve products. Lower coffee costs was the primary contributor to the 630 basis point increase in operating margin for fiscal 2014. 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 to become a more significant contributor to future growth.
Fiscal 2015 — The View Ahead
For fiscal 2015, we expect revenue growth of 16% to 18%, including 6% to 7% of incremental growth from the acquisition of Starbucks Japan. The remaining growth will primarily come from mid-single-digit global comparable store sales growth and the addition of approximately 1,650 net new stores. Approximately one-half of net new store openings will be in our China/Asia Pacific segment, with the remaining half coming primarily from the Americas.
We expect consolidated operating margin to decline slightly in fiscal 2015 when compared to our fiscal 2014 results, primarily due to the mildly dilutive margin impact of the acquisition of Starbucks Japan, largely driven by the change in business model from a joint venture to a company-operated market. We expect strong EPS growth in fiscal 2015, due in part to an anticipated acquisition-related gain of approximately $325 million to $375 million after-tax, or $0.43 to $0.49 per share, resulting from a fair value adjustment of our current 39.5% ownership interest in Starbucks Japan. We expect sales leverage to also contribute to the EPS growth.
The effective tax rate for fiscal 2015 is expected to be approximately 31%, including a net tax benefit of approximately 4% from the acquisition of Starbucks Japan.
Capital expenditures in fiscal 2015 are expected to be approximately $1.4 billion, primarily for new stores and store renovations, as well as for other investments to support our ongoing growth initiatives.
Acquisitions and Divestitures
See Note 2, Acquisitions and Divestitures, to the consolidated financial statements included in Item 8 of Part II of this 10-K for information regarding acquisitions and divestitures.
RESULTS OF OPERATIONS — FISCAL 2014 COMPARED TO FISCAL 2013
Consolidated results of operations (in millions):
Revenues
Fiscal Year Ended | Sep 28, 2014 | Sep 29, 2013 | % Change | |||||||
Net revenues: | ||||||||||
Company-operated stores | $ | 12,977.9 | $ | 11,793.2 | 10.0 | % | ||||
Licensed stores | 1,588.6 | 1,360.5 | 16.8 | |||||||
CPG, foodservice and other | 1,881.3 | 1,713.1 | 9.8 | |||||||
Total net revenues | $ | 16,447.8 | $ | 14,866.8 | 10.6 | % | ||||
Total net revenues were $16.4 billion for fiscal 2014, an increase of $1.6 billion, or 11%, over fiscal 2013, primarily due to increased revenues from company-operated stores (contributing $1.2 billion). The growth in company-operated store revenues was driven by a 6% increase in comparable store sales (approximately $641 million) and incremental revenues from 555 net new Starbucks® company-operated store openings over the past 12 months (approximately $529 million).
Licensed store revenue growth contributed $228 million to the increase in total net revenues, primarily due to increased product sales to and royalty revenues from our licensees, as a result of improved comparable store sales and the opening of 1,029 net new licensed stores over the past 12 months.
CPG, foodservice and other revenues increased $168 million, primarily due to increased sales of premium single-serve products (approximately $111 million) and increased foodservice sales (approximately $17 million).
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Operating Expenses
Fiscal Year Ended | Sep 28, 2014 | Sep 29, 2013 | Sep 28, 2014 | Sep 29, 2013 | |||||||||
% of Total Net Revenues | |||||||||||||
Cost of sales including occupancy costs | $ | 6,858.8 | $ | 6,382.3 | 41.7 | % | 42.9 | % | |||||
Store operating expenses | 4,638.2 | 4,286.1 | 28.2 | 28.8 | |||||||||
Other operating expenses | 457.3 | 431.8 | 2.8 | 2.9 | |||||||||
Depreciation and amortization expenses | 709.6 | 621.4 | 4.3 | 4.2 | |||||||||
General and administrative expenses | 991.3 | 937.9 | 6.0 | 6.3 | |||||||||
Litigation charge | (20.2 | ) | 2,784.1 | (0.1 | ) | 18.7 | |||||||
Total operating expenses | 13,635.0 | 15,443.6 | 82.9 | 103.9 | |||||||||
Income from equity investees | 268.3 | 251.4 | 1.6 | 1.7 | |||||||||
Operating income/(loss) | $ | 3,081.1 | $ | (325.4 | ) | 18.7 | % | (2.2 | )% | ||||
Store operating expenses as a percentage of company-operated store revenues | 35.7 | % | 36.3 | % | |||||||||
Cost of sales including occupancy costs as a percentage of total net revenues decreased 120 basis points, primarily driven by lower commodity costs (approximately 80 basis points), mainly coffee, and sales leverage (approximately 40 basis points).
Store operating expenses as a percentage of total net revenues, and as a percentage of company-operated store revenues, decreased 60 basis points, mainly driven by sales leverage (approximately 80 basis points).
Other operating expenses as a percentage of total net revenues decreased 10 basis points. Excluding the impact of company-operated store revenues, other operating expenses decreased 80 basis points, primarily due to sales leverage (approximately 30 basis points).
General and administrative expenses as a percentage of total net revenues decreased 30 basis points, mainly due to lapping of costs associated with our leadership conference held in the prior year.
The litigation charge of $2,784.1 million in fiscal 2013 reflects the charge we recorded as a result of the conclusion of the arbitration with Kraft. This charge included $2,227.5 million in damages and $556.6 million in estimated interest and attorneys' fees. The $20.2 million litigation credit recorded in fiscal 2014 reflects a reduction to our estimated prejudgment interest payable associated with the Kraft arbitration as a result of paying our obligation earlier than anticipated.
Income from equity investees increased $17 million, primarily due to improved performance from our joint venture operations in China, South Korea, and Japan, as well as improved performance from our North American Coffee Partnership joint venture, which produces, bottles and distributes our ready-to-drink beverages.
The combination of these changes resulted in an overall increase in operating margin to 18.7% compared to (2.2)% in the prior year period.
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Other Income and Expenses
Fiscal Year Ended | Sep 28, 2014 | Sep 29, 2013 | Sep 28, 2014 | Sep 29, 2013 | |||||||||
% of Total Net Revenues | |||||||||||||
Operating income/(loss) | $ | 3,081.1 | $ | (325.4 | ) | 18.7 | % | (2.2 | )% | ||||
Interest income and other, net | 142.7 | 123.6 | 0.9 | 0.8 | |||||||||
Interest expense | (64.1 | ) | (28.1 | ) | (0.4 | ) | (0.2 | ) | |||||
Earnings/(loss) before income taxes | 3,159.7 | (229.9 | ) | 19.2 | (1.5 | ) | |||||||
Income taxes | 1,092.0 | (238.7 | ) | 6.6 | (1.6 | ) | |||||||
Net earnings including noncontrolling interests | 2,067.7 | 8.8 | 12.6 | 0.1 | |||||||||
Net earnings attributable to noncontrolling interests | (0.4 | ) | 0.5 | — | — | ||||||||
Net earnings attributable to Starbucks | $ | 2,068.1 | $ | 8.3 | 12.6 | % | 0.1 | % | |||||
Effective tax rate including noncontrolling interests | 34.6 | % | 103.8 | % | |||||||||
Net interest income and other increased $19 million over the prior year, primarily due to a net benefit from transactions in the fourth quarter of fiscal 2014, driven by a gain on the sale of our equity interest in our Malaysia joint venture (approximately $68 million), favorable fair value adjustments from derivatives used to manage our risk of commodity price and foreign currency fluctuations (approximately $14 million), net favorable foreign exchange fluctuations (approximately $9 million), and realized gains on sales of investments (approximately $6 million). These increases were partially offset by lapping gains on the sales of our equity interests in our joint ventures in Chile and Argentina in the fourth quarter of fiscal 2013 (approximately $45 million) and in Mexico in the second quarter of fiscal 2013 (approximately $35 million).
Interest expense increased $36 million due to interest on the long-term debt we issued in the first quarter of fiscal 2014 and the fourth quarter of fiscal 2013.
Our tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amounts of income we earn in those jurisdictions, as well as discrete items that may occur in any given year, but are not consistent from year to year.
The effective tax rate for fiscal 2014 was 34.6% compared to 103.8% for fiscal 2013. The change in our effective tax rate was primarily due to lapping the 71.2% 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, Income Taxes, to the consolidated financial statements included in Item 8 of Part II of this 10-K. The remaining change in the effective tax rate over fiscal 2013 was an increase of 2.0%, which was primarily due to net higher discrete benefits in the prior year. In fiscal 2013, our effective tax rate benefited from releasing certain tax reserves that did not recur in fiscal 2014 and a net tax benefit from state income tax expense adjustments for returns filed in prior years. Also contributing to the increase in fiscal 2014 was additional tax resulting from the sale of our Australian company-operated retail store assets and operations and our 50% equity interest in our Malaysia joint venture.
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Segment Information
Results of operations by segment (in millions):
Americas
Fiscal Year Ended | Sep 28, 2014 | Sep 29, 2013 | Sep 28, 2014 | Sep 29, 2013 | |||||||||
As a % of Americas Total Net Revenues | |||||||||||||
Net revenues: | |||||||||||||
Company-operated stores | $ | 10,866.5 | $ | 10,038.3 | 90.7 | % | 91.3 | % | |||||
Licensed stores | 1,074.9 | 915.4 | 9.0 | 8.3 | |||||||||
CPG, foodservice and other | 39.1 | 47.1 | 0.3 | 0.4 | |||||||||
Total net revenues | 11,980.5 | 11,000.8 | 100.0 | 100.0 | |||||||||
Cost of sales including occupancy costs | 4,487.0 | 4,214.9 | 37.5 | 38.3 | |||||||||
Store operating expenses | 3,946.8 | 3,710.2 | 32.9 | 33.7 | |||||||||
Other operating expenses | 100.4 | 96.9 | 0.8 | 0.9 | |||||||||
Depreciation and amortization expenses | 469.5 | 429.3 | 3.9 | 3.9 | |||||||||
General and administrative expenses | 167.8 | 186.7 | 1.4 | 1.7 | |||||||||
Total operating expenses | 9,171.5 | 8,638.0 | 76.6 | 78.5 | |||||||||
Income from equity investees | — | 2.4 | — | — | |||||||||
Operating income | $ | 2,809.0 | $ | 2,365.2 | 23.4 | % | 21.5 | % | |||||
Store operating expenses as a percentage of company-operated store revenues | 36.3 | % | 37.0 | % | |||||||||
Revenues
Americas total net revenues for fiscal 2014 increased $980 million, or 9%, primarily due to increased revenues from company-operated stores (contributing $828 million) and licensed stores (contributing $160 million).
The increase in company-operated store revenues was driven by a 6% increase in comparable store sales (approximately $554 million), attributable to a 3% increase in average ticket and a 2% increase in number of transactions, and incremental revenues from 314 net new Starbucks® company-operated store openings over the past 12 months (approximately $377 million). Partially offsetting these increases was unfavorable foreign currency exchange (approximately $65 million), primarily driven by the strengthening of the US dollar against the Canadian dollar.
The increase in licensed store revenues was primarily due to increased product sales to and royalty revenues from our licensees as a result of an increase in comparable store sales and the opening of 381 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 sales leverage (approximately 40 basis points) and lower commodity costs (approximately 30 basis points), mainly coffee.
Store operating expenses as a percentage of total net revenues decreased 80 basis points. As a percentage of company-operated store revenues, store operating expenses decreased 70 basis points, mainly driven by sales leverage (approximately 60 basis points).
General and administrative expenses as a percentage of total net revenues decreased 30 basis points primarily due to lapping of costs associated with our leadership conference held in the prior year (approximately 20 basis points) and sales leverage (approximately 10 basis points).
The combination of these changes resulted in an overall increase in operating margin of 190 basis points over fiscal 2013.
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EMEA
Fiscal Year Ended | Sep 28, 2014 | Sep 29, 2013 | Sep 28, 2014 | Sep 29, 2013 | |||||||||
As a % of EMEA Total Net Revenues | |||||||||||||
Net revenues: | |||||||||||||
Company-operated stores | $ | 1,013.8 | $ | 932.8 | 78.3 | % | 80.4 | % | |||||
Licensed stores | 238.4 | 190.3 | 18.4 | 16.4 | |||||||||
CPG, foodservice and other | 42.6 | 36.9 | 3.3 | 3.2 | |||||||||
Total net revenues | 1,294.8 | 1,160.0 | 100.0 | 100.0 | |||||||||
Cost of sales including occupancy costs | 646.8 | 590.9 | 50.0 | 50.9 | |||||||||
Store operating expenses | 365.8 | 339.4 | 28.3 | 29.3 | |||||||||
Other operating expenses | 48.2 | 38.5 | 3.7 | 3.3 | |||||||||
Depreciation and amortization expenses | 59.4 | 55.5 | 4.6 | 4.8 | |||||||||
General and administrative expenses | 59.1 | 71.9 | 4.6 | 6.2 | |||||||||
Total operating expenses | 1,179.3 | 1,096.2 | 91.1 | 94.5 | |||||||||
Income from equity investees | 3.7 | 0.4 | 0.3 | — | |||||||||
Operating income | $ | 119.2 | $ | 64.2 | 9.2 | % | 5.5 | % | |||||
Store operating expenses as a percentage of company-operated store revenues | 36.1 | % | 36.4 | % | |||||||||
Revenues
EMEA total net revenues for fiscal 2014 increased $135 million, or 12%, over the prior year primarily due to an increase in company-operated stores revenues (approximately $81 million). This increase was primarily driven by favorable foreign currency exchange (approximately $47 million) and a 5% increase in comparable store sales (approximately $42 million), attributable to a 3% increase in number of transactions and a 2% increase in average ticket.
Licensed store revenues grew $48 million, or 25%, primarily due to increased product and equipment sales to and royalty revenues from our licensees, primarily resulting from the opening of 180 net new licensed stores over the past 12 months and improved comparable store sales.
Operating Expenses
Cost of sales including occupancy costs as a percentage of total net revenues decreased 90 basis points, primarily driven by lower coffee costs (approximately 50 basis points), sales leverage (approximately 40 basis points) and favorable foreign currency fluctuations (approximately 40 basis points). This favorability was partially offset by lapping a reduction to the estimated asset retirement obligations of our store leases in the region in fiscal 2013 (approximately 60 basis points).
Store operating expenses as a percentage of total net revenues decreased 100 basis points primarily due to sales leverage from more licensed stores in the region compared to the prior year. As a percentage of company-operated store revenues, store operating expenses decreased 30 basis points mainly due to sales leverage.
Other operating expenses as a percentage of total net revenues increased 40 basis points over fiscal 2013. Excluding the impact of company-operated store revenues, other operating expenses increased 30 basis points, driven by increased costs to grow our non-retail operations in the region (approximately 40 basis points).
General and administrative expenses as a percentage of total net revenues decreased 160 basis points, primarily due to sales leverage and reduced support costs, largely driven by the shift to more licensed stores.
The combination of these changes resulted in an overall increase in operating margin of 370 basis points over fiscal 2013.
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China/Asia Pacific
Fiscal Year Ended | Sep 28, 2014 | Sep 29, 2013 | Sep 28, 2014 | Sep 29, 2013 | |||||||||
As a % of China/Asia Pacific Total Net Revenues | |||||||||||||
Net revenues: | |||||||||||||
Company-operated stores | $ | 859.4 | $ | 671.7 | 76.1 | % | 73.2 | % | |||||
Licensed stores | 270.2 | 245.3 | 23.9 | 26.8 | |||||||||
Total net revenues | 1,129.6 | 917.0 | 100.0 | 100.0 | |||||||||
Cost of sales including occupancy costs | 547.4 | 449.5 | 48.5 | 49.0 | |||||||||
Store operating expenses | 221.1 | 170.0 | 19.6 | 18.5 | |||||||||
Other operating expenses | 48.0 | 46.1 | 4.2 | 5.0 | |||||||||
Depreciation and amortization expenses | 46.1 | 33.8 | 4.1 | 3.7 | |||||||||
General and administrative expenses | 58.5 | 48.4 | 5.2 | 5.3 | |||||||||
Total operating expenses | 921.1 | 747.8 | 81.5 | 81.5 | |||||||||
Income from equity investees | 164.0 | 152.0 | 14.5 | 16.6 | |||||||||
Operating income | $ | 372.5 | $ | 321.2 | 33.0 | % | 35.0 | % | |||||
Store operating expenses as a percentage of company-operated store revenues | 25.7 | % | 25.3 | % | |||||||||
Revenues
China/Asia Pacific total net revenues for fiscal 2014 increased $213 million, or 23%, primarily due to increased revenues from company-operated stores (contributing $188 million). This increase was primarily driven by the opening of 250 net new company-operated stores over the past 12 months (approximately $154 million) and a 7% increase in comparable store sales (approximately $44 million), mainly attributable to a 6% increase in the number of transactions.
Licensed store revenues contributed $25 million to the increase in total net revenues, mainly due to higher royalty revenues from and product sales to licensees, as a result of 492 net new licensed store openings over the past 12 months and an increase in comparable store sales.
Operating Expenses
Cost of sales including occupancy costs as a percentage of total net revenues decreased 50 basis points, primarily due to sales leverage (approximately 40 basis points).
Store operating expenses as a percentage of total net revenues increased 110 basis points, or 40 basis points as a percentage of company-operated store revenues, over the prior year period, as a result of company-operated store growth outpacing licensed store growth.
Other operating expenses as a percentage of total net revenues decreased 80 basis points. Excluding the impact of company-operated store revenues, other operating expenses decreased 100 basis points, largely due to cost management (approximately 60 basis points) and sales leverage (approximately 40 basis points).
Income from equity investees increased $12 million, primarily driven by improved performance from our joint venture operations in China, South Korea and Japan. This increase was partially offset by unfavorable foreign currency fluctuations, driven by the weakening of the Japanese yen against the US dollar and lapping a reduction to the estimated asset retirement obligations of our store leases in the region in fiscal 2013. These fluctuations, paired with the accelerated growth in segment revenues resulting from the shift in the composition of the store portfolio to more company-operated stores, resulted in income from equity investees declining 210 basis points as a percentage of total net revenues.
The combination of these changes resulted in an overall decline in operating margin of 200 basis points over fiscal 2013.
28
Channel Development
Fiscal Year Ended | Sep 28, 2014 | Sep 29, 2013 | Sep 28, 2014 | Sep 29, 2013 | |||||||||
As a % of Channel Development Total Net Revenues | |||||||||||||
Net revenues: | |||||||||||||
CPG | $ | 1,178.8 | $ | 1,056.0 | 76.2 | % | 75.5 | % | |||||
Foodservice | 367.2 | 342.9 | 23.8 | 24.5 | |||||||||
Total net revenues | 1,546.0 | 1,398.9 | 100.0 | 100.0 | |||||||||
Cost of sales | 882.4 | 878.4 | 57.1 | 62.8 | |||||||||
Other operating expenses | 187.0 | 179.4 | 12.1 | 12.8 | |||||||||
Depreciation and amortization expenses | 1.8 | 1.1 | 0.1 | 0.1 | |||||||||
General and administrative expenses | 18.2 | 21.1 | 1.2 | 1.5 | |||||||||
Total operating expenses | 1,089.4 | 1,080.0 | 70.5 | 77.2 | |||||||||
Income from equity investees | 100.6 | 96.6 | 6.5 | 6.9 | |||||||||
Operating income | $ | 557.2 | $ | 415.5 | 36.0 | % | 29.7 | % | |||||
Revenues
Channel Development total net revenues for fiscal 2014 increased $147 million, or 11%, over the prior year, primarily driven by increased sales of premium single-serve products (approximately $111 million) and increased foodservice sales (approximately $24 million).
Operating Expenses
Cost of sales as a percentage of total net revenues decreased 570 basis points, largely due to lower coffee costs (approximately 440 basis points) and other cost of goods sold efficiencies (approximately 150 basis points).
Other operating expenses as a percentage of total net revenues decreased 70 basis points, primarily driven by sales leverage (approximately 40 basis points).
Income from equity investees increased $4 million, driven by higher income from our North American Coffee Partnership joint venture, primarily due to strong sales of bottled Frappuccino® beverages. The growth in segment revenues resulted in our joint venture income declining 40 basis points as a percentage of total net revenues.
The combination of these changes contributed to an overall increase in operating margin of 630 basis points over fiscal 2013.
29
All Other Segments
Fiscal Year Ended | Sep 28, 2014 | Sep 29, 2013 | % Change | |||||||
Net revenues: | ||||||||||
Company-operated stores | $ | 238.2 | $ | 150.4 | 58.4 | % | ||||
Licensed stores | 5.1 | 9.5 | (46.3 | ) | ||||||
CPG, foodservice and other | 253.6 | 230.2 | 10.2 | |||||||
Total net revenues | 496.9 | 390.1 | 27.4 | |||||||
Cost of sales | 287.2 | 239.8 | 19.8 | |||||||
Store operating expenses | 104.5 | 66.5 | 57.1 | |||||||
Other operating expenses | 74.6 | 71.7 | 4.0 | |||||||
Depreciation and amortization expenses | 15.2 | 11.7 | 29.9 | |||||||
General and administrative expenses | 42.2 | 34.9 | 20.9 | |||||||
Total operating expenses | 523.7 | 424.6 | 23.3 | |||||||
Operating loss | $ | (26.8 | ) | $ | (34.5 | ) | (22.3 | )% | ||
All Other Segments includes Teavana, Seattle’s Best Coffee, Evolution Fresh, and Digital Ventures.
Total net revenues for All Other Segments increased $107 million, primarily due to having an additional quarter of Teavana revenues in fiscal 2014 as Teavana was acquired at the beginning of the second quarter of fiscal 2013 (approximately $92 million).
Total operating expenses increased $99 million, primarily due to having an additional quarter of Teavana expenses in fiscal 2014 as Teavana was acquired at the beginning of the second quarter of fiscal 2013.
RESULTS OF OPERATIONS — FISCAL 2013 COMPARED TO FISCAL 2012
Consolidated results of operations (in millions):
Revenues
Fiscal Year Ended | Sep 29, 2013 | Sep 30, 2012 | % Change | |||||||
Net revenues: | ||||||||||
Company-operated stores | $ | 11,793.2 | $ | 10,534.5 | 11.9 | % | ||||
Licensed stores | 1,360.5 | 1,210.3 | 12.4 | |||||||
CPG, foodservice and other | 1,713.1 | 1,532.0 | 11.8 | |||||||
Total net revenues | $ | 14,866.8 | $ | 13,276.8 | 12.0 | % | ||||
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 $181 million, primarily driven by increased sales of premium single-serve products (approximately $116 million) and increased foodservice sales (approximately $35 million).
30
Operating Expenses
Fiscal Year Ended | Sep 29, 2013 | Sep 30, 2012 | Sep 29, 2013 | Sep 30, 2012 | |||||||||
% of Total Net Revenues | |||||||||||||
Cost of sales including occupancy costs | $ | 6,382.3 | $ | 5,813.3 | 42.9 | % | 43.8 | % | |||||
Store operating expenses | 4,286.1 | 3,918.1 | 28.8 | 29.5 | |||||||||
Other operating expenses | 431.8 | 407.2 | 2.9 | 3.1 | |||||||||
Depreciation and amortization expenses | 621.4 | 550.3 | 4.2 | ||||||||||