Starbucks 2007 Annual Report Download - page 34

Starbucks DoubleShot»espresso drinks. Lower cost of sales was due to a sales mix shift to products with higher
gross margins.
Unallocated Corporate
Oct 1,
2006
Oct 2,
2005
%
Change
Oct 1,
2006
Oct 2,
2005
52 Weeks Ended 52 Weeks Ended
As a % of total
net revenues
Depreciation and amortization expenses ............. $ 35,678 $ 33,049 8.0% 0.4% 0.5%
General and administrative expenses ................ 300,932 218,683 37.6 3.9 3.4
Operating loss .............................. $(336,610) $(251,732) 33.7% (4.3)% (3.9)%
Unallocated corporate expenses increased to $337 million for the fiscal year ended 2006, from $252 million in fiscal
2005. The increase was due to higher payroll-related expenditures from the recognition of stock-based compen-
sation expense and to additional employees, as well as higher professional fees primarily in support of global
systems infrastructure development. Total unallocated corporate expenses as a percentage of total net revenues were
4.3% for the fiscal year ended 2006, compared to 3.9% for fiscal 2005.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of the Company’s liquidity are cash flows generated from retail store operations and other
business channels, borrowings under available commercial paper programs and credit agreements, proceeds from
the issuance of long-term debt securities and the Company’s existing cash and liquid investments, which were
$460 million and $459 million as of September 30, 2007 and October 1, 2006, respectively.
Components of the Company’s most liquid assets are as follows (in thousands):
Fiscal Year Ended
Sept 30,
2007
Oct 1,
2006
Cash and cash equivalents ...................................... $281,261 $312,606
Short-term investments — available-for-sale securities ................. 83,845 87,542
Short-term investments — trading securities ......................... 73,588 53,496
Long-term investments — available-for-sale securities ................. 21,022 5,811
Total cash and liquid investments. ................................ $459,716 $459,455
In order to hedge its liability under its Management Deferred Compensation Plan (“MDCP”), the Company
maintains a portfolio of unrestricted trading securities, the value of which was $74 million as of September 30,
2007. In addition, unrestricted cash and liquid securities held within the Company’s wholly owned captive
insurance company to fund claim payouts totaled approximately $98 million as of September 30, 2007. The
Company manages the balance of its cash and liquid investments in order to internally fund operating needs and
make scheduled payments on short-term borrowings.
In determining the appropriate capital structure for the Company, management considers, among other things, how
debt may reduce its total cost of capital when used to fund increased distributions to shareholders in the form of
stock repurchases. The Company also evaluates its degree of cash flow risk and how much financial flexibility
should be retained for future investment opportunities given its high growth rate. The Company’s key metrics for
monitoring its capital structure are leverage, measured as the ratio of debt to EBITDA, and coverage, measured as
the ratio of EBITDA to interest expense including rent expense. Both ratios are adjusted to capitalize operating
leases. The credit rating agencies, Moody’s and Standard & Poor’s, currently rate the Company’s commercial paper
P-2 and A-2, respectively, and its long-term debt Baa1 and BBB+, respectively.
The Company intends to use its cash and liquid investments, including any borrowings under its revolving credit
facility, commercial paper program and proceeds from the issuance of long term debt securities, to invest in its core
businesses and other new business opportunities related to its core businesses. The Company may use its available
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