Starbucks 2005 Annual Report Download - page 38

COMMODITY PRICES, AVAILABILITY AND GENERAL RISK CONDITIONS
The Company manages its exposure to various risks within the consolidated financial statements according to
an umbrella risk management policy, which was approved in May 2005 by the Company's Board of Directors.
Under this policy, market-based risks, including commodity costs and foreign currency exchange rates, are
quantified and evaluated for potential mitigation strategies, such as entering into hedging transactions.
Additionally, this policy restricts, among other things, the amount of market-based risk the Company will
tolerate before implementing approved hedging strategies and does not allow for speculative trading activity.
The Company purchases significant amounts of coffee and dairy products to support the needs of its
Company-operated retail stores. The price and availability of these commodities directly impacts the
Company's results of operations and can be expected to impact its future results of operations. For additional
details see ""Product Supply'' in Item 1, as well as ""Risk Factors'' in Item 1A of this Form 10-K.
FINANCIAL RISK MANAGEMENT
The Company is exposed to market risk related to foreign currency exchange rates, equity security prices and
changes in interest rates.
Foreign Currency Exchange Risk
The majority of the Company's revenue, expense and capital purchasing activities is transacted in U.S. dollars.
However, because a portion of the Company's operations consists of activities outside of the United States, the
Company has transactions in other currencies, primarily the Canadian dollar, British pound sterling, Euro and
Japanese yen. Under the Company's umbrella risk management policy, the Company frequently evaluates its
foreign currency exchange risk by monitoring market data and external factors that may influence exchange
rate fluctuations. As a result, Starbucks may engage in transactions involving various derivative instruments,
with maturities generally not exceeding five years, to hedge assets, liabilities, revenues and purchases
denominated in foreign currencies.
As of October 2, 2005, the Company had forward foreign exchange contracts that qualify as cash flow hedges
under Statement of Financial Accounting Standard (""SFAS'') No. 133, ""Accounting for Derivative
Instruments and Hedging Activities,'' to hedge a portion of anticipated international revenue and product
purchases. In addition, Starbucks had forward foreign exchange contracts that qualify as a hedge of its net
investment in Starbucks Japan. These contracts expire within 31 months.
Based on the foreign exchange contracts outstanding as of October 2, 2005, a 10% devaluation of the
U.S. dollar as compared to the level of foreign exchange rates for currencies under contract as of October 2,
2005, would result in a reduced fair value of these derivative financial instruments of approximately
$11.3 million, of which $4.6 million may reduce the Company's future earnings. Conversely, a 10%
appreciation of the U.S. dollar would result in an increase in the fair value of these instruments of
approximately $11.3 million, of which $5.8 million may increase the Company's future earnings. Consistent
with the nature of the economic hedges provided by these foreign exchange contracts, increases or decreases in
their fair value would be mostly offset by corresponding decreases or increases in the dollar value of the
Company's foreign investment, future foreign currency royalty fee payments and product purchases that would
occur within the hedging period.
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