Starbucks 2002 Annual Report Download - page 6

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Results of Operations by Segment
The table below reconciles results of operations on the accompanying consolidated statements of earnings to operating income
by operating segment (in thousands):
Fiscal year ended September 29, 2002: Consolidated Intersegment Segment Results
North American Retail $ 432,513 $ - $ 432,513
Business Alliances 56,605 - 56,605
All other business units 62,914 107 63,021
Intersegment eliminations (1) -(107) (107)
Unallocated corporate expenses (233,307) - (233,307)
Operating income $318,725 $ - $ 318,725
Fiscal year ended September 30, 2001:
North American Retail $ 336,434 $ - $ 336,434
Business Alliances 50,165 - 50,165
All other business units 68,783 1,333 70,116
Intersegment eliminations (1) -(1,333) (1,333)
Unallocated corporate expenses (174,288) - (174,288)
Operating income $281,094 $ - $ 281,094
Fiscal year ended October 1, 2000:
North American Retail $ 249,924 $ - $ 249,924
Business Alliances 43,777 - 43,777
All other business units 53,453 (130) 53,323
Intersegment eliminations (1) - 130 130
Unallocated corporate expenses (134,902) - (134,902)
Operating income $212,252 $ - $ 212,252
(1) Intersegment eliminations consist primarily of product sales and related cost of sales to and from subsidiaries and equity investees.
North American Retail
Operating income for North American Retail increased by
28.6% to $432.5 million in fiscal 2002, from $336.4 million in
fiscal 2001. Operating margin increased to 16.7% of related
revenues from 16.1% in the prior year, primarily due to
improvements in cost of sales related to the shift to higher
margin products and lower green coffee and dairy costs,
partially offset by increased payroll-related expenditures
resulting from the continuing shift in sales to more labor-
intensive handcrafted beverages and higher average wage rates.
Business Alliances
Operating income for Business Alliances increased by 12.8%
to $56.6 million in fiscal 2002, from $50.2 million in fiscal
2001. Operating margin decreased to 25.5% of related
revenues from 25.9% in the prior year primarily due to the
significant amount of infrastructure investment made in fiscal
2002 to grow the domestic licensee channel.
All Other Business Units
Operating income for all other business units decreased 8.5%
to $62.9 million in fiscal 2002, from $68.8 million in fiscal
2001. Operating margin decreased to 13.0% of related revenues
from 18.6% in the prior year, primarily due to increased
international store maintenance and rent costs for Company-
operated stores, as well as provisions for asset impairment.
Unallocated Corporate Expenses
Unallocated corporate expenses pertain to corporate functions
that are not specifically attributable to the Company’s
operating segments and include “General and administrative
expenses” and related depreciation and amortization expenses.
Depreciation and amortization expenses of $31.1 million and
$22.9 million are included in unallocated corporate expenses
for the fiscal years ended 2002 and 2001, respectively.
Income from Equity Investees
Income from equity investees was $35.8 million in fiscal 2002,
compared to $28.6 million in fiscal 2001. The increase was
primarily due to the improved profitability of the North
American Coffee Partnership as a result of increased sales
volume from extensions of its product line and expansion of
geographic distribution, as well as improvements in its cost of
goods sold primarily due to manufacturing efficiencies.
Additionally, the net earnings of Starbucks Coffee Korea Co.,
Ltd. increased as a result of an increase in retail stores to 53 in
fiscal 2002, compared to 24 in fiscal 2001.These increases were
partially offset by slightly lower contributions from Starbucks
Coffee Japan, Ltd. due to lower profitability as well as the
reduction of our ownership interest from 50.0% to 40.1% at
the beginning of fiscal 2002. See “Gain on Sale of Investment”
discussion for additional information.
Interest and Other Income, Net
Net interest and other income, which primarily consists of
investment income, decreased to $9.3 million in fiscal 2002,
from $10.8 million in fiscal 2001, primarily as a result of lower
interest rates on cash, cash equivalents and short-term securities.
Gain on Sale of Investment
On October 10, 2001, the Company sold 30,000 of its shares
of Starbucks Coffee Japan, Ltd. (“Starbucks Japan”) at
approximately $495 per share, net of related costs. In
connection with this sale,the Company received cash proceeds
of $14.8 million and recorded a gain of $13.4 million on the
accompanying consolidated statement of earnings. The
Company’s ownership interest in Starbucks Japan was reduced
from 50.0% to 47.5% following the sale of the shares.
Also on October 10, 2001, Starbucks Japan issued 220,000
shares of common stock at approximately $495 per share, net
of related costs, in an initial public offering in Japan. In
connection with this offering, the Company’s ownership
interest in Starbucks Japan was reduced from 47.5% to 40.1%.
The Company recorded “Other additional paid-in capital” on
the accompanying consolidated balance sheet of $39.4 million,
reflecting the increase in value of its share of the net assets of
Starbucks Japan related to the stock offering.As of September
29, 2002, the quoted closing price of Starbucks Japan shares
was approximately $203 per share.
Income Taxes
The Company’s effective tax rates were 37.0% in fiscal
2002 and 37.3% in fiscal 2001. The effective tax rate in
fiscal 2001 was impacted by the establishment of valuation
allowances against deferred tax benefits resulting from losses
from investments in majority-owned foreign subsidiaries and
Internet-related investment losses. Management determined
that a portion of these losses may not be realizable for tax
purposes within the allowable carryforward period. Excluding
the impact of these allowances, the effective tax rate would
have been 37.0% in fiscal 2001.