Starbucks 1999 Annual Report Download - page 5

BUSINESS COMBINATIONS
During the second quarter of fiscal 1999, Starbucks acquired the net assets of Tazo, L.L.C.
(“Tazo”), a Portland, Oregon-based tea company that produces premium tea products, and Pasqua
Inc. (“Pasqua”), a San Francisco, California-based roaster and retailer of specialty coffee. Both of
these acquisitions were accounted for under the purchase method of accounting. The results of
operations for Tazo and Pasqua are included in the accompanying consolidated financial statements
from the dates of acquisition. During the third quarter of fiscal 1998, Starbucks acquired the
United Kingdom-based Seattle Coffee Holdings Limited (“Seattle Coffee Company”) in a pooling-
of-interests transaction (the “Transaction”). In conjunction with the Transaction, Starbucks recorded
pre-tax charges of $8.9 million in direct merger costs and $6.6 million in other charges
associated with the integration of Seattle Coffee Company. The historical financial statements
for the periods prior to the Transaction were restated as though the companies had always
been combined.
RESULTS OF OPERATIONS – FISCAL 1999 COMPARED TO FISCAL 1998
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Net revenues increased 28% to $1.7 billion for fiscal 1999, compared to $1.3 billion for fiscal
1998. Retail sales increased 29% to $1.4 billion from $1.1 billion.The increase in retail sales was
due to the addition of new Company-operated stores, comparable store sales growth of 6%
and sales for the 53rd week of the fiscal year. Comparable store sales percentages have been
calculated excluding the 53rd week of fiscal 1999.The increase in comparable store sales resulted
from a 5% increase in the number of transactions and a 1% increase in the average dollar value per
transaction. During fiscal 1999, the Company opened 424 stores in continental North America
and 36 stores in the United Kingdom. As of fiscal year-end, there were 2,038 Company-operated
stores in continental North America and 97 in the United Kingdom. During fiscal 2000, the
Company expects to open at least 350 Company-operated stores in North America and 50 in the
United Kingdom.
Specialty revenues increased 25% to $257 million for fiscal 1999 from $206 million for fiscal 1998.
The increase was driven primarily by higher sales to licensees and joint ventures and business dining
customers. Licensees (including those in which the Company is a joint venture partner) opened
44 stores in continental North America and 121 stores in international markets.The Company ended
the year with 179 licensed stores in continental North America and 184 licensed stores in
international markets. During fiscal 2000, the Company expects to open at least 200 licensed stores.
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Gross margin increased to 55.9% for fiscal 1999 from 55.8% in fiscal 1998.The positive impact
on gross margin of lower green coffee costs was partially offset by lower gross margins associated
with a change in the Company’s strategy for the grocery channel. In late fiscal 1998, the Company
signed a long-term licensing agreement with Kraft Foods, Inc. (“Kraft”) to handle the U.S.
distribution, marketing and advertising for Starbucks whole bean and ground coffee in grocery,
warehouse club and mass merchandise stores.The transition to Kraft occurred in the first quarter
of fiscal 1999.
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STARBUCKS COFFEE COMPANY