Starbucks 2007 Annual Report Download - page 31

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 Part-
nership, 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, the settlement in the third quarter of fiscal 2006 of a multi-year income tax audit in a
foreign jurisdiction for which the Company had established a contingent liability, and to increased effectiveness of
the Company’s long-term tax planning strategies.
Operating Segments
Segment information is prepared on the same basis that the Company’s management reviews financial information
for operational decision-making purposes. Operating income represents earnings before “Net interest and other
income” and “Income taxes.” The following tables summarize the Company’s results of operations by segment for
fiscal 2006 and 2005 (in thousands):
United States
Oct 1,
2006
Oct 2,
2005
%
Change
Oct 1,
2006
Oct 2,
2005
52 Weeks Ended 52 Weeks Ended
As a % of U.S. total
net revenues
Net revenues:
Company-operated retail .................... $5,495,240 $4,539,455 21.1% 88.9% 89.1%
Specialty:
Licensing ............................. 369,155 277,987 32.8 6.0 5.4
Foodservice and other .................... 314,162 280,073 12.2 5.1 5.5
Total specialty . ....................... 683,317 558,060 22.4 11.1 10.9
Total net revenues ......................... 6,178,557 5,097,515 21.2 100.0 100.0
Cost of sales including occupancy costs .......... 2,374,485 1,944,356 22.1 38.4 38.1
Store operating expenses(1) ................... 2,280,044 1,848,836 23.3 36.9 36.3
Other operating expenses(2) ................... 190,624 150,712 26.5 3.1 2.9
Depreciation and amortization expenses .......... 284,625 250,339 13.7 4.6 4.9
General and administrative expenses ............. 93,754 85,362 9.8 1.5 1.7
Total operating expenses .................. 5,223,532 4,279,605 22.1 84.5 83.9
Income from equity investees .................. 151 592 nm — —
Operating income ...................... $ 955,176 $ 818,502 16.7% 15.5% 16.1%
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