Starbucks 2005 Annual Report Download - page 60

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Note 5: Derivative Financial Instruments
Cash Flow Hedges
Starbucks, which include subsidiaries that use their local currency as their functional currency, enters into
cash flow derivative instruments to hedge portions of anticipated revenue streams and inventory purchases.
Current forward contracts hedge monthly forecasted revenue transactions denominated in Japanese yen and
Canadian dollars, as well as forecasted inventory purchases denominated in U.S. dollars, euros and Swiss
francs, for foreign operations. Additionally, the Company has swap contracts to hedge a portion of its
forecasted U.S. fluid milk purchases. The effect of these swaps will fix the price paid by Starbucks for the
monthly volume of milk purchases covered under the contracts on less than 5% of its forecasted U.S. fluid
milk purchases in fiscal 2006.
The Company had accumulated net derivative losses of $4.5 million, net of taxes, in other comprehensive
income as of October 2, 2005, related to cash flow hedges. Of this amount, $4.1 million of net derivative losses
will be reclassified into earnings within 12 months. No cash flow hedges were discontinued during the fiscal
years 2005, 2004 and 2003. Current contracts will expire within 12 months.
Net Investment Hedges
Net investment derivative instruments hedge the Company's equity method investment in Starbucks Coffee
Japan, Ltd. to minimize foreign currency exposure to fluctuations in the Japanese yen. The Company had
accumulated net derivative gains of $3.3 million, net of taxes, in other comprehensive income as of October 2,
2005, related to net investment derivative hedges. Current contracts expire within 31 months.
The following table presents the net gains and losses reclassified from other comprehensive income into the
consolidated statements of earnings during the periods indicated for cash flow and net investment hedges (in
thousands):
Oct 2, 2005 Oct 3, 2004 Sept 28, 2003
Cash flow hedges:
Reclassified losses into total net revenues ÏÏÏÏÏÏÏÏÏÏÏÏ $ (843) $(1,488) $(1,719)
Reclassified losses into cost of sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (4,535) (761) Ì
Net reclassified losses Ì cash flow hedgesÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5,378) (2,249) (1,719)
Net reclassified gains Ì net investment hedgesÏÏÏÏÏÏÏÏÏÏ 1,058 673 1,446
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(4,320) $(1,576) $ (273)
Note 6: Inventories
Inventories consist of the following (in thousands):
Fiscal Year Ended Oct 2, 2005 Oct 3, 2004
Coffee:
Unroasted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $319,745 $233,903
Roasted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56,231 46,070
Other merchandise held for saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 109,094 81,565
Packaging and other supplies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 61,229 61,125
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $546,299 $422,663
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