Starbucks 2007 Annual Report Download - page 37

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hedging instruments the business may use and limits the dollar risk to net earnings. The Company also monitors and
limits the amount of associated counterparty credit risk. Additionally, this policy restricts, among other things, the
amount of market-based risk the Company will tolerate before implementing approved hedging strategies and
prohibits speculative trading activity. In general, hedge instruments do not have maturities in excess of five years.
The sensitivity analyses performed below provide only a limited, point-in-time view of the market risk of the
financial instruments discussed. The actual impact of the respective underlying rates and price changes on the
financial instruments may differ significantly from those shown in the sensitivity analyses.
Commodity Price Risk
The Company purchases commodity inputs, including coffee and dairy products that are used in its operations and
are subject to price fluctuations that impact its financial results. In addition to fixed-priced contracts and price-to-
be-fixed contracts for coffee purchases, the Company may enter into commodity hedges to manage commodity
price risk using financial derivative instruments. The Company performed a sensitivity analysis based on a 10%
change in the underlying commodity prices of its commodity hedges, as of the end of fiscal 2007, and determined
that such a change would not have a significant effect on the fair value of these instruments.
Foreign Currency Exchange Risk
The majority of the Company’s revenue, expense and capital purchasing activities are 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. As a
result, Starbucks may engage in transactions involving various derivative instruments to hedge revenues, inventory
purchases, assets, and liabilities denominated in foreign currencies.
As of September 30, 2007, 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,” as amended and interpreted, to hedge portions of anticipated international revenue streams and
inventory purchases. In addition, Starbucks had forward foreign exchange contracts that qualify as accounting
hedges of its net investment in Starbucks Japan, as well as the Company’s net investments in its Canadian, UK, and
Chinese subsidiaries, to minimize foreign currency exposure. These contracts expire within 30 months.
The Company also had forward foreign exchange contracts that are not designated as hedging instruments for
accounting purposes (free standing derivatives), but which largely offset the financial impact of translating certain
foreign currency denominated payables and receivables. Increases or decreases in the fair value of these hedges are
generally offset by corresponding decreases or increases in the U.S. dollar value of the Company’s foreign currency
denominated payables and receivables (i.e. “hedged items”) that would occur within the hedging period.
The following table summarizes the potential impact to the Company’s future net earnings and other comprehensive
income (“OCI”) from changes in the fair value of these derivative financial instruments due in turn to a change in the
value of the U.S. dollar as compared to the level of foreign exchange rates. The information provided below relates
only to the hedging instruments and does not represent the corresponding changes in the underlying hedged items
(in millions):
September 30, 2007
10% Increase in
Underlying Rate
10% Decrease in
Underlying Rate
10% Increase in
Underlying Rate
10% Decrease in
Underlying Rate
Increase/(Decrease) to Net Earnings Increase/(Decrease) to OCI
Foreign currency hedges . . . . . . . . . . . . . $38 (34) 18 (22)
Equity Security Price Risk
The Company has minimal exposure to price fluctuations on equity mutual funds within its trading portfolio. The
trading securities approximate a portion of the Company’s liability under the MDCP. A corresponding liability is
included in “Accrued compensation and related costs” on the consolidated balance sheets. These investments are
35