Starbucks 2003 Annual Report Download - page 7

18฀ Fiscal฀2003฀Annual฀Report
Fiscal฀2003฀Annual฀Report฀ 19
Operating฀income฀for฀the฀United฀States฀increased฀by฀19.7%฀to฀
$606.5฀ million฀ in฀ fiscal฀ 2003,฀ from฀ $506.9฀ million฀ in฀ fiscal฀
2002.฀Operating฀margin฀decreased฀to฀17.5%฀of฀related฀revenues฀
from฀ 17.9%฀ in฀ the฀ prior฀ year,฀ primarily฀ due฀ to฀ higher฀ green฀
coffee฀costs฀and฀payroll-related฀expenditures,฀partially฀offset฀by฀
fixed฀occupancy฀costs฀spread฀over฀an฀expanding฀revenue฀base.฀
International฀
International฀total฀net฀revenues฀increased฀by฀$142.4฀million,฀or฀
30.9%,฀to฀$603.1฀million฀in฀fiscal฀2003,฀from฀$460.7฀million฀
in฀ fiscal฀ 2002.฀ International฀ retail฀ revenues฀ increased฀
$116.3฀million,฀ or฀ 31.6%,฀ to฀ $484.0฀ million,฀ primarily฀ due฀
to฀ the฀ opening฀ of฀ 96฀ new฀ Company-operated฀ retail฀ stores฀
in฀ fiscal฀ 2003฀ and฀ comparable฀ store฀ sales฀ growth฀ of฀ 7%.฀
The฀ increase฀ in฀ comparable฀ store฀ sales฀ was฀ almost฀ entirely฀
due฀to฀higher฀transaction฀volume฀and฀ref lects฀the฀improved฀
operational฀execution฀in฀the฀United฀Kingdom฀market.฀
International฀ specialty฀ revenues฀ increased฀ $26.1฀ million,฀ or฀
28.1%,฀to฀$119.1฀million฀in฀fiscal฀2003,฀primarily฀due฀to฀the฀
addition฀of฀284฀new฀licensed฀stores฀and฀resulting฀increases฀in฀
royalty฀revenues฀from฀and฀product฀sales฀to฀those฀licensees.฀
Operating฀ income฀ for฀ International฀ increased฀ by฀ 42.5%฀
to฀ $5.5฀ million฀ in฀ fiscal฀ 2003,฀ from฀ $3.8฀ million฀ in฀ fiscal฀
2002.฀ International฀ operating฀ margin฀ increased฀ to฀ 0.9%฀
in฀ fiscal฀ 2003,฀ from฀ 0.8%฀ in฀ fiscal฀ 2002,฀ primarily฀ due฀ to฀
lower฀ provisions฀ recorded฀ for฀ retail฀ store฀ asset฀ impairment฀
and฀ disposals฀ of฀ $3.7฀ million฀ in฀ fiscal฀ 2003฀ compared฀ to฀
$13.9฀ million฀ in฀ fiscal฀ 2002.฀ This฀ was฀ partially฀ offset฀ by฀
International’s฀proportionate฀share฀of฀net฀losses฀in฀Starbucks฀
Japan฀ and฀ a฀ shift฀ in฀ sales฀ mix฀ to฀ lower฀ margin฀ products.฀
Excluding฀ Canadian฀ operations,฀ operating฀ losses฀ increased฀
by฀ 11.1%฀ to฀ $18.5฀ million฀ in฀ fiscal฀ 2003,฀ compared฀ to฀ an฀
operating฀loss฀of฀$16.7฀million฀in฀fiscal฀2002.
Unallocated฀Corporate฀
Unallocated฀ corporate฀ expenses฀ pertain฀ to฀ functions,฀ such฀
as฀ executive฀ management,฀ administration,฀ tax,฀ treasury฀
and฀ information฀ technology฀ infrastructure,฀ that฀ are฀ not฀
specifically฀attributable฀to฀the฀Company’s฀operating฀segments฀
and฀include฀related฀depreciation฀and฀amortization฀expenses.฀
Unallocated฀ general฀ and฀ administrative฀ expenses฀ decreased฀
to฀$155.2฀million฀in฀fiscal฀2003,฀from฀$165.6฀million฀in฀fiscal฀
2002,฀primarily฀due฀to฀an฀$18.0฀million฀litigation฀settlement฀
in฀ fiscal฀ 2002.฀ Depreciation฀ and฀ amortization฀ expenses฀
increased฀to฀$32.1฀million฀in฀fiscal฀2003,฀from฀$28.7฀million฀
in฀fiscal฀2002,฀primarily฀due฀to฀expanded฀support฀facilities฀and฀
capital฀spending฀for฀information฀technology฀enhancements.฀
Total฀unallocated฀corporate฀expenses฀as฀a฀percentage฀of฀total฀
net฀revenues฀decreased฀from฀5.9%฀in฀fiscal฀2002฀to฀4.6%฀in฀
fiscal฀2003.฀
RESULTS฀OF฀OPERATIONS฀–฀FISCAL฀2002฀
COMPARED฀TO฀FISCAL฀2001
Consolidated฀Results฀of฀Operations
Net฀revenues฀for฀the฀fiscal฀year฀ended฀2002฀increased฀24.2%฀
to฀$3.3฀billion฀from฀$2.6฀billion฀for฀the฀corresponding฀period฀
in฀fiscal฀2001.฀During฀the฀fiscal฀year฀ended฀2002,฀Starbucks฀
derived฀ approximately฀ 85%฀ of฀ total฀ net฀ revenues฀ from฀ its฀
Company-operated฀ retail฀ stores.฀ Retail฀ revenues฀ increased฀
25.3%฀ to฀ $2.8฀ billion฀ for฀ the฀ fiscal฀ year฀ ended฀ 2002,฀ from฀
$2.2฀ billion฀ for฀ the฀ corresponding฀ period฀ of฀ fiscal฀ 2001.฀
This฀increase฀was฀due฀primarily฀to฀the฀opening฀of฀614฀new฀
Company-operated฀ retail฀ stores฀ in฀ the฀ last฀ 12฀ months฀ and฀
comparable฀store฀sales฀growth฀of฀6%,฀driven฀almost฀entirely฀
by฀increased฀transactions.฀
The฀ Company฀ derived฀ the฀ remaining฀ 15%฀ of฀ total฀ net฀
revenues฀ from฀ its฀ Specialty฀ Operations.฀ Specialty฀ revenues฀
increased฀ $76.6฀ million,฀ or฀ 18.3%,฀ to฀ $496.0฀ million฀ for฀
the฀ fiscal฀ year฀ ended฀ 2002,฀ from฀ $419.4฀ million฀ for฀ the฀
corresponding฀ period฀ in฀ fiscal฀ 2001.฀ Of฀ the฀ total฀ growth,฀
expanded฀retail฀licensing฀operations฀provided฀$54.1฀million,฀
or฀70.6%,฀and฀an฀increase฀in฀the฀grocery฀and฀warehouse฀club฀
business฀provided฀$14.7฀million,฀or฀19.2%.฀
Cost฀of฀sales฀and฀related฀occupancy฀costs฀decreased฀to฀41.0%฀
of฀ total฀ net฀ revenues฀ in฀ fiscal฀ 2002,฀ from฀ 42.0%฀ in฀ fiscal฀
2001.฀The฀decrease฀was฀primarily฀due฀to฀a฀shift฀in฀sales฀mix฀
to฀higher฀margin฀products,฀such฀as฀handcrafted฀beverages,฀as฀
well฀as฀lower฀green฀coffee฀costs.฀Improvements฀in฀cost฀of฀sales฀
were฀partially฀offset฀by฀higher฀occupancy฀costs฀due฀to฀increased฀
repair฀and฀maintenance฀activities฀on฀Company-operated฀retail฀
stores฀and฀higher฀retail฀rent฀expense.฀
Store฀ operating฀ expenses฀ as฀ a฀ percentage฀ of฀ retail฀ revenues฀
increased฀to฀39.7%฀in฀fiscal฀2002,฀from฀38.9%฀in฀fiscal฀2001,฀
primarily฀due฀to฀higher฀payroll-related฀expenditures฀due฀to฀the฀
continuing฀ shift฀ in฀ sales฀ to฀ more฀ labor-intensive฀ handcrafted฀
beverages฀ as฀ well฀ as฀ higher฀ average฀ wage฀ rates.฀ Higher฀
provisions฀ for฀ retail฀ store฀ asset฀ impairment฀ and฀ disposals฀ of฀
$26.0฀million฀in฀fiscal฀2002฀compared฀to฀$7.3฀million฀in฀fiscal฀
2001฀also฀contributed฀to฀the฀unfavorable฀variance.฀
Other฀ operating฀ expenses฀ (expenses฀ associated฀ with฀ the฀
Company’s฀ Specialty฀ Operations)฀ were฀ 21.4%฀ of฀ specialty฀
revenues฀ in฀ fiscal฀ 2002,฀ compared฀ to฀ 17.3%฀ in฀ fiscal฀ 2001,฀
primarily฀due฀to฀the฀continued฀development฀of฀the฀Company’s฀
international฀ infrastructure,฀ including฀ additional฀ regional฀
offices฀and฀employees฀supporting฀global฀expansion,฀as฀well฀as฀
higher฀advertising฀expenditures฀from฀the฀Company’s฀online฀
initiatives฀for฀Starbucks.com.฀
Depreciation฀and฀amortization฀expenses฀increased฀to฀$205.6฀
million฀ in฀ fiscal฀ 2002,฀ from฀ $163.5฀ million฀ in฀ fiscal฀ 2001,฀
primarily฀due฀to฀a฀net฀increase฀of฀614฀new฀Company-operated฀
retail฀stores฀in฀the฀last฀12฀months.
General฀ and฀ administrative฀ expenses฀ increased฀ to฀ $234.6฀
million฀in฀fiscal฀2002,฀compared฀ to฀$179.9฀million฀in฀fiscal฀
2001.฀ The฀ increase฀ was฀ primarily฀ due฀ to฀ an฀ $18.0฀ million฀
charge฀ for฀ the฀ litigation฀ settlement฀ of฀ two฀ California฀ class฀
action฀lawsuits.฀Excluding฀the฀litigation฀charge,฀general฀and฀
administrative฀expenses฀increased฀over฀the฀comparable฀period฀
in฀fiscal฀2001฀due฀to฀higher฀payroll-related฀expenditures.฀
Operating฀income฀increased฀12.9%฀to฀$316.3฀million฀in฀fiscal฀
2002,฀ from฀ $280.2฀ million฀ in฀ fiscal฀ 2001.฀ The฀ operating฀
margin฀ decreased฀ to฀ 9.6%฀ of฀ total฀ net฀ revenues฀ in฀ fiscal฀
2002,฀ compared฀ to฀ 10.6%฀ in฀ fiscal฀ 2001,฀ primarily฀ due฀ to฀
higher฀ operating฀ expenses฀ partially฀ offset฀ by฀ cost฀ of฀ sales฀
improvements,฀as฀discussed฀above.
Income฀from฀equity฀investees฀was฀$33.4฀million฀in฀fiscal฀2002,฀
compared฀to฀$27.7฀ million฀in฀fiscal฀2001.฀The฀increase฀was฀
mainly฀ attributable฀ to฀ 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.฀improved฀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฀Japan฀due฀to฀lower฀profitability฀as฀well฀as฀the฀
reduction฀of฀the฀Company’s฀ownership฀interest฀from฀50.0%฀
to฀40.1%฀at฀the฀beginning฀of฀fiscal฀2002.฀
Net฀ interest฀ and฀ other฀ income,฀ which฀ primarily฀ consists฀
of฀ interest฀ 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฀the฀accompanying฀consolidated฀
statements฀ of฀ earnings฀ is฀ the฀ result฀ of฀ the฀ Company’s฀ sale฀
of฀ 30,000฀ of฀ its฀ shares฀ of฀ Starbucks฀ Japan฀ on฀ October฀ 10,฀
2001,฀ 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.฀
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.฀