Starbucks 2005 Annual Report Download - page 24

customers. The strategy is to increase comparable store sales by continuously improving the level of customer
service, introducing innovative products and improving the speed of service through training, technology and
process improvement. Global comparable store sales for Company-operated markets increased by 8%, making
fiscal 2005 the 14th consecutive year with comparable store sales growth of five percent or greater.
Comparable store sales for fiscal 2006 are expected to be in the range of three to seven percent.
In licensed retail operations, Starbucks leverages the expertise of local partners and shares its operating and
store development experience to help licensees improve the profitability of existing stores and build new stores.
Internationally, the Company's strategy is to selectively increase its equity stake in licensed international
operations as these markets develop.
The combination of more retail stores, higher revenues from existing stores and growth in other business
channels in both the United States and International operating segments resulted in a 20% increase in total net
revenues for the 52 weeks of fiscal 2005, compared to the 53 weeks of fiscal 2004. Excluding the impact of the
extra week in fiscal 2004, total net revenues increased 23%. Both of these revenue growth measures were at or
above the Company's three to five year target of approximately 20%.
The Company's International operations delivered improved operating results, primarily due to leverage
gained on most operating expenses distributed over an expanded revenue base. In recent fiscal years, the
Company made substantial infrastructure investments in corporate and regional support facilities and
personnel, as well as established more efficient distribution networks. Such investments have been and will
continue to be necessary to support the Company's planned international expansion, which is now realizing
substantial benefit from this foundation. Since both additional International and U.S. retail stores can leverage
existing support organizations and facilities, the Company's infrastructure can be expanded more slowly than
the rate of revenue growth and generate margin improvement. In fiscal 2005, operating income as a percentage
of total net revenues increased to 12.3% from 11.5% in fiscal 2004, and net earnings increased by 27%,
compared to fiscal 2004. These results demonstrated the Company's ability to improve operating margin while
at the same time making strategic investments in the core retail business and in emerging specialty channels.
Acquisitions
During fiscal 2005, Starbucks increased its equity ownership in its licensed operations in Germany, Southern
China and Chile, to 100%, 51% and 100%, respectively, for a combined purchase price of $41 million.
Previously, the Company owned less than 20% in each of these operations, which were accounted for under
the cost method. These increases in equity ownership resulted in a change of accounting method, from the cost
method to the consolidation method, on the respective dates of acquisition. This accounting change also
included adjusting previously reported information for the Company's proportionate share of net losses in
Germany, Southern China and Chile. The cumulative effect of the accounting change for previously reported
information resulted in a reduction of net earnings of $0.1 million for the 39 weeks ended July 3, 2005, and a
reduction of retained earnings of $4.0 million prior to fiscal 2005.
In April 2005, Starbucks acquired substantially all of the assets of Ethos Brands, LLC, (""Ethos''), a privately
held bottled water company based in Santa Monica, California, for $8 million. The earnings of Ethos are
included in the accompanying consolidated financial statements from the date of acquisition.
22