Starbucks 2006 Annual Report Download - page 26

The Company derived the remaining 15% of total net revenues from channels outside the Company-operated retail
stores, collectively known as “Specialty Operations.” Specialty revenues, which include licensing revenues and foodservice
and other revenues, increased 23% to $1.2 billion for the fiscal year ended 2006, from $977 million for fiscal 2005.
Licensing revenues, which are derived from retail store licensing arrangements, as well as grocery, warehouse club and
certain other branded product operations, increased 28% to $861 million for fiscal 2006, from $673 million for fiscal
2005. The increase is primarily due to higher product sales and royalty revenues from the opening of 1,159 new licensed
retail stores in the last 12 months and, to a lesser extent, growth in the licensed grocery and warehouse club business.
Foodservice and other revenues increased 13% to $343 million for fiscal 2006, from $304 million for fiscal 2005.
Foodservice and other revenues increased primarily due to growth in new and existing U.S. foodservice accounts.
Cost of sales including occupancy costs decreased slightly to 40.8% of total net revenues for fiscal 2006, from 40.9% in
fiscal 2005. The decrease was primarily due to fixed rent costs in fiscal 2006 being distributed over an expanded revenue
base, as well as increased occupancy costs in fiscal 2005 resulting from intensified store maintenance activities. These
favorable items, combined with lower dairy costs, offset higher green coffee costs for fiscal 2006.
Store operating expenses as a percentage of Company-operated retail revenues increased to 40.8% for fiscal 2006 from
40.2% for fiscal 2005. The increase was due to the recognition of stock-based compensation expense and to higher
provisions for incentive compensation.
Other operating expenses, which are expenses associated with the Company’s Specialty Operations, increased to 21.6% of
specialty revenues in fiscal 2006, compared to 20.2% in fiscal 2005. The increase was primarily due to the recognition of
stock-based compensation expense as well as higher payroll-related expenditures to support the expanding licensed store
operations, both in the U.S. and in existing and new international markets.
Depreciation and amortization expenses increased to $387 million in fiscal 2006, from $340 million in fiscal 2005. The
increase of $47 million was due to the opening of 1,040 new Company-operated retail stores in the last 12 months. As a
percentage of total net revenues, depreciation and amortization decreased to 5.0% for fiscal 2006, from 5.3% for fiscal
2005.
General and administrative expenses increased to $473 million in fiscal 2006, compared to $357 million in fiscal 2005.
The increase was due to higher payroll-related expenditures from the recognition of stock-based compensation expense,
additional employees to support continued global growth, and higher professional fees in support of global systems
infrastructure development. As a percentage of total net revenues, general and administrative expenses increased to 6.1%
for fiscal 2006, from 5.6% for fiscal 2005.
Income from equity investees increased to $94 million in fiscal 2006, compared to $77 million in fiscal 2005. The
increase was primarily due to favorable volume-driven operating results for The North American Coffee Partnership,
which produces ready-to-drink beverages which include, among others, bottled Frappuccino»coffee drinks and
Starbucks DoubleShot»espresso drinks, as well as improved operating results from international investees, including
Korea and Japan, mainly as a result of new store openings.
Operating income increased 15% to $894 million in fiscal 2006, from $781 million in fiscal 2005. The operating margin
decreased to 11.5% of total net revenues in fiscal 2006, compared to 12.3% in fiscal 2005, due to the recognition of
stock-based compensation expense.
Net interest and other income, which primarily consists of interest income, decreased to $12 million in fiscal 2006, from
$16 million in fiscal 2005. The decrease was primarily due to higher interest expense on the Company’s revolving credit
facility, as well as lower interest income earned due to lower average investment balances, offset in part by the recognition
of $4.4 million of income on unredeemed stored value card balances in fiscal 2006. There was no income recognized on
unredeemed stored value card balances in fiscal 2005.
Income taxes for fiscal 2006 resulted in an effective tax rate of 35.8%, compared to 37.9% in fiscal 2005. The decline in
the effective tax rate was due to the reversal of a valuation allowance in fiscal 2006 that had been established in fiscal 2005,
22 STARBUCKS CORPORATION, FORM 10-K