NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years ended
October 1, 2017
,
October 2, 2016
and
September 27, 2015
Note 1: Summary of Significant Accounting Policies
Description of Business
We purchase and roast high-quality coffees that we sell, along with handcrafted coffee and tea beverages and a variety of fresh and prepared food items, through our company-operated stores. We also sell a variety of coffee and tea products and license our trademarks through other channels such as licensed stores, grocery and national foodservice accounts.
In this 10-K, Starbucks Corporation (together with its subsidiaries) is referred to as “Starbucks,” the “Company,” “we,” “us” or “our.”
We have
four
reportable operating segments: 1) Americas, which is inclusive of the U.S., Canada, and Latin America; 2) China/Asia Pacific (“CAP”); 3) Europe, Middle East, and Africa (“EMEA”) and 4) Channel Development. We also have several non-reportable operating segments, including Teavana, Seattle's Best Coffee and Evolution Fresh, as well as certain developing businesses such as Siren Retail, which includes the Starbucks Reserve
TM
Roastery & Tasting Rooms, Starbucks Reserve brand and products and Princi operations, which are combined and referred to as All Other Segments. Unallocated corporate operating expenses, which pertain primarily to corporate administrative functions that support the operating segments but are not specifically attributable to or managed by any segment, are presented as a reconciling item between total segment operating results and consolidated financial results.
Additional details on the nature of our business and our reportable operating segments are included in
Note 16
, Segment Reporting.
Principles of Consolidation
Our consolidated financial statements reflect the financial position and operating results of Starbucks, including wholly-owned subsidiaries and investees that we control. Investments in entities that we do not control, but have the ability to exercise significant influence over operating and financial policies, are accounted for under the equity method. Investments in entities in which we do not have the ability to exercise significant influence are accounted for under the cost method. Intercompany transactions and balances have been eliminated.
Fiscal Year End
Our fiscal year ends on the Sunday closest to September 30. Fiscal year
2017
and
2015
included
52
weeks. Fiscal year
2016
included 53 weeks, with the 53
rd
week falling in the fourth fiscal quarter.
Estimates and Assumptions
Preparing financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Examples include, but are not limited to, estimates for inventory reserves, asset and goodwill impairments, assumptions underlying self-insurance reserves, income from unredeemed stored value cards, stock-based compensation forfeiture rates, future asset retirement obligations and the potential outcome of future tax consequences of events that have been recognized in the financial statements. Actual results and outcomes may differ from these estimates and assumptions.
Cash and Cash Equivalents
We consider all highly liquid instruments with maturities of three months or less at the time of purchase, as well as credit card receivables for sales to customers in our company-operated stores that generally settle within
two
to
five
business days, to be cash equivalents. We maintain cash and cash equivalent balances with financial institutions that exceed federally-insured limits. We have not experienced any losses related to these balances, and we believe credit risk to be minimal.
Our cash management system provides for the funding of all major bank disbursement accounts on a daily basis as checks are presented for payment. Under this system, outstanding checks are in excess of the cash balances at certain banks, which creates book overdrafts. Book overdrafts are presented as a current liability in accrued liabilities on our consolidated balance sheets.
Investments
Available-for-sale Securities
Our short-term and long-term investments consist primarily of investment-grade debt securities, all of which are classified as available-for-sale. Available-for-sale securities are recorded at fair value, and unrealized holding gains and losses are recorded, net of tax, as a component of accumulated other comprehensive income. Available-for-sale securities with remaining maturities of less than one year and those identified by management at the time of purchase to be used to fund operations within one year are classified as short-term. All other available-for-sale securities are classified as long-term. We evaluate our available-for-sale securities for other than temporary impairment on a quarterly basis. Unrealized losses are charged against net earnings when a decline in fair value is determined to be other than temporary. We review several factors to determine whether a loss is other than temporary, such as the length and extent of the fair value decline, the financial condition and near-term prospects of the issuer and whether we have the intent to sell or will more likely than not be required to sell before the securities' anticipated recovery, which may be at maturity. Realized gains and losses are accounted for using the specific identification method. Purchases and sales are recorded on a trade date basis.
Trading Securities
We also have a trading securities portfolio, which is comprised of marketable equity mutual funds and equity exchange-traded funds. Trading securities are recorded at fair value and approximates a portion of our liability under our Management Deferred Compensation Plan (“MDCP”). Gains or losses from the portfolio and the change in our MDCP liability are recorded in our consolidated statements of earnings.
Equity and Cost Method Investments
Equity investments are accounted for using the equity method of accounting if the investment gives us the ability to exercise significant influence, but not control, over an investee. Equity method investments are included within long-term investments on our consolidated balance sheets. Our share of the earnings or losses as reported by equity method investees are classified as income from equity investees on our consolidated statements of earnings.
Equity investments for which we do not have the ability to exercise significant influence are accounted for using the cost method of accounting and are recorded in long-term investments on our consolidated balance sheets. Under the cost method, investments are carried at cost and are adjusted only for other-than-temporary declines in fair value, certain distributions and additional investments.
We evaluate our equity and cost method investments for impairment annually and when facts and circumstances indicate that the carrying value of such investments may not be recoverable. We review several factors to determine whether the loss is other than temporary, such as the length and extent of the fair value decline, the financial condition and near-term prospects of the investee, and whether we have the intent to sell or will more likely than not be required to sell before the investment’s anticipated recovery. If a decline in fair value is determined to be other than temporary, an impairment charge is recorded in net earnings.
Fair Value
Fair value is the price we would receive to sell an asset or pay to transfer a liability (exit price) in an orderly transaction between market participants. For assets and liabilities recorded or disclosed at fair value on a recurring basis, we determine fair value based on the following:
Level 1:
The carrying value of cash and cash equivalents approximates fair value because of the short-term nature of these instruments. For trading and U.S. government treasury securities and commodity futures contracts, we use quoted prices in active markets for identical assets to determine fair value.
Level 2:
When quoted prices in active markets for identical assets are not available, we determine the fair value of our available-for-sale securities and our over-the-counter forward contracts, collars and swaps based upon factors such as the quoted market price of similar assets or a discounted cash flow model using readily observable market data, which may include interest rate curves and forward and spot prices for currencies and commodities, depending on the nature of the investment. The fair value of our long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to us for debt of the same remaining maturities.
Level 3:
We determine the fair value of our auction rate securities using an internally-developed valuation model, using inputs that include interest rate curves, credit and liquidity spreads and effective maturity.
Assets and liabilities recognized or disclosed at fair value on a nonrecurring basis include items such as property, plant and equipment, goodwill and other intangible assets, equity and cost method investments and other assets. We determine the fair value of these items using Level 3 inputs, as described in the related sections below.
Derivative Instruments
We manage our exposure to various risks within our consolidated financial statements according to a market price risk management policy. Under this policy, we may engage in transactions involving various derivative instruments to hedge interest rates, commodity prices and foreign currency denominated revenue streams, inventory purchases, assets and liabilities and investments in certain foreign operations. In order to manage our exposure to these risks, we use various types of derivative instruments including forward contracts, commodity futures contracts, collars and swaps. Forward contracts and commodity futures contracts are agreements to buy or sell a quantity of a currency or commodity at a predetermined future date and at a predetermined rate or price. A collar is a strategy that uses a combination of a purchased call option and a sold put option with equal premiums to hedge a portion of anticipated cash flows, or to limit the range of possible gains or losses on an underlying asset or liability to a specific range. A swap agreement is a contract between two parties to exchange cash flows based on specified underlying notional amounts, assets and/or indices. We do not enter into derivative instruments for speculative purposes.
We record all derivatives on our consolidated balance sheets at fair value. Excluding interest rate swaps and foreign currency debt, we generally do not enter into derivative instruments with maturities longer than
three years
or offset derivative assets and liabilities in our consolidated balance sheets. However, we are allowed to net settle transactions with respective counterparties for certain derivative contracts, inclusive of interest rate swaps and foreign currency forwards, with a single, net amount payable by one party to the other. We also enter into collateral security arrangements that provide for collateral to be received or posted
when the net fair value of certain financial instruments fluctuates from contractually established thresholds. As of
October 1, 2017
and
October 2, 2016
, we received and posted
$5.8 million
and
$19.5 million
, respectively, of cash collateral related to the derivative instruments under collateral security arrangements. As of
October 1, 2017
and
October 2, 2016
, the potential effects of netting arrangements with our derivative contracts, excluding the effects of collateral, would be a reduction to both derivative assets and liabilities of
$7.4 million
and
$9.4 million
,
respectively, resulting in net derivative assets of
$30.4 million
a
nd net derivative liabilities of
$
31.1 million
as of
October 1, 2017
, and net derivative assets of
$24.7 million
and net derivative liabilities of $
80.2 million
as of
October 2, 2016
.
By using these derivative instruments, we expose ourselves to potential credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. We minimize this credit risk by entering into transactions with carefully selected, credit-worthy counterparties and distribute contracts among several financial institutions to reduce the concentration of credit risk.
Cash Flow Hedges
For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the derivative's gain or loss is reported as a component of other comprehensive income (“OCI”) and recorded in accumulated other comprehensive income (“AOCI”) on our consolidated balance sheets. The gain or loss is subsequently reclassified into net earnings when the hedged exposure affects net earnings.
To the extent that the change in the fair value of the contract corresponds to the change in the value of the anticipated transaction using forward rates on a monthly basis, the hedge is considered effective and is recognized as described above. The remaining change in fair value of the contract represents the ineffective portion, which is immediately recorded in interest income and other, net on our consolidated statements of earnings.
Cash flow hedges related to anticipated transactions are designated and documented at the inception of each hedge by matching the terms of the contract to the underlying transaction. Cash flows from hedging transactions are classified in the same categories as the cash flows from the respective hedged items. Once established, cash flow hedges generally remain designated as such until the hedged item impacts net earnings, or the anticipated transaction is no longer likely to occur. For de-designated cash flow hedges or for transactions that are no longer likely to occur, the related accumulated derivative gains or losses are recognized in interest income and other, net or interest expense on our consolidated statements of earnings based on the nature of the underlying transaction.
Net Investment Hedges
For derivative instruments that are designated and qualify as a net investment hedge, the effective portion of the derivative's gain or loss is reported as a component of OCI and recorded in AOCI. The gain or loss will be subsequently reclassified into net earnings when the hedged net investment is either sold or substantially liquidated.
To the extent that the change in the fair value of the forward contract corresponds to the change in value of the anticipated transactions using spot rates on a monthly basis, the hedge is considered effective and is recognized as described above. The remaining change in fair value of the forward contract represents the ineffective portion, which is immediately recognized in interest income and other, net on our consolidated statements of earnings.
Fair Value Hedges
For derivative instruments that are designated and qualify as a fair value hedge, the changes in fair value of the derivative instruments and the offsetting changes in fair values of the underlying hedged item are recorded in interest income and other, net or interest expense on our consolidated statements of earnings.
Derivatives Not Designated As Hedging Instruments
We also enter into certain foreign currency forward contracts, commodity futures contracts, collars and swaps that are not designated as hedging instruments for accounting purposes. The change in the fair value of these contracts is immediately recognized in interest income and other, net on our consolidated statements of earnings.
Normal Purchase Normal Sale
We enter into fixed-price and price-to-be-fixed green coffee purchase commitments, which are described further at
Note 5
, Inventories. For both fixed-price and price-to-be-fixed purchase commitments, we expect to take delivery of and to utilize the coffee in a reasonable period of time and in the conduct of normal business. Accordingly, these purchase commitments qualify as normal purchases and are not recorded at fair value on our balance sheets.
Refer to
Note 3
, Derivative Financial Instruments, and
Note 5
, Inventories, for further discussion of our derivative instruments and green coffee purchase commitments.
Receivables, net of Allowance for Doubtful Accounts
Our receivables are mainly comprised of receivables for product and equipment sales to and royalties from our licensees, as well as receivables from our consumer packaged goods (“CPG”) and foodservice business customers. Our allowance for doubtful accounts is calculated based on historical experience, customer credit risk and application of the specific identification method. As of
October 1, 2017
and
October 2, 2016
, our allowance for doubtful accounts was
$9.8 million
and
$9.4 million
, respectively.
Inventories
Inventories are stated at the lower of cost (primarily moving average cost) or market. We record inventory reserves for obsolete and slow-moving inventory and for estimated shrinkage between physical inventory counts. Inventory reserves are based on inventory obsolescence trends, historical experience and application of the specific identification method. As of
October 1, 2017
and
October 2, 2016
, inventory reserves were
$38.4 million
and
$39.6 million
, respectively.
Property, Plant and Equipment
Property, plant and equipment, which includes assets under capital leases, are carried at cost less accumulated depreciation. Cost includes all direct costs necessary to acquire and prepare assets for use, including internal labor and overhead in some cases. Depreciation is computed using the straight-line method over estimated useful lives of the assets, generally ranging from
2
to
15 years
for equipment and
30
to
40 years
for buildings. Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease life, generally
10 years
. For leases with renewal periods at our option, we generally use the original lease term, excluding renewal option periods, to determine estimated useful lives. If failure to exercise a renewal option imposes an economic penalty to us, we may determine at the inception of the lease that renewal is reasonably assured and include the renewal option period in the determination of the appropriate estimated useful lives.
The portion of depreciation expense related to production and distribution facilities is included in cost of sales including occupancy costs on our consolidated statements of earnings. The costs of repairs and maintenance are expensed when incurred, while expenditures for refurbishments and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. When assets are disposed of, whether through retirement or sale, the net gain or loss is recognized in net earnings. Long-lived assets to be disposed of are reported at the lower of their carrying amount or fair value less estimated costs to sell.
We evaluate property, plant and equipment for impairment when facts and circumstances indicate that the carrying values of such assets may not be recoverable. When evaluating for impairment, we first compare the carrying value of the asset to the asset’s estimated future undiscounted cash flows. If the estimated undiscounted future cash flows are less than the carrying value of the asset, we determine if we have an impairment loss by comparing the carrying value of the asset to the asset's estimated fair value and recognize an impairment charge when the asset’s carrying value exceeds its estimated fair value. The fair value of the asset is estimated using a discounted cash flow model based on forecasted future revenues and operating costs, using internal projections. Property, plant and equipment assets are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For company-operated store assets, the impairment test is performed at the individual store asset group level.
We recognized net disposition charges of
$46.9 million
,
$25.1 million
, and
$12.5 million
in fiscal
2017
,
2016
, and
2015
, respectively. Additionally, we recognized net impairment charges of
$56.1 million
,
$24.1 million
, and
$25.8 million
in fiscal
2017
,
2016
, and
2015
, respectively, of which
$39.9 million
in fiscal 2017 were restructuring related and recorded in restructuring and impairment expenses. Unless it is restructuring related, the nature of the underlying asset that is impaired or disposed of will determine the operating expense line on which the related impact is recorded on our consolidated statements of earnings. For assets within our retail operations, net impairment and disposition charges are recorded in store operating expenses. For all other assets, these charges are recorded in cost of sales including occupancy costs, other operating expenses or general and administrative expenses.
Goodwill
We evaluate goodwill for impairment annually during our third fiscal quarter, or more frequently if an event occurs or circumstances change, such as material deterioration in performance or a significant number of store closures, that would indicate that impairment may exist. When evaluating goodwill for impairment, we may first perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. If we do not perform a qualitative assessment, or if we determine that it is not more likely than not that the fair value of the reporting unit exceeds its carrying amount, we calculate the estimated fair value of the reporting unit. Fair value is the price a willing buyer would pay for the reporting unit and is typically calculated using a discounted cash flow model. For certain reporting units, where deemed appropriate, we may also utilize a market approach for estimating fair value. If the carrying amount of the reporting unit exceeds the estimated fair value, an impairment charge is recorded to reduce the carrying value to the estimated fair value.
As part of our ongoing operations, we may close certain stores within a reporting unit containing goodwill due to underperformance of the store or inability to renew our lease, among other reasons. We may abandon certain assets associated with a closed store, including leasehold improvements and other non-transferable assets. When a portion of a reporting unit that constitutes a business is to be disposed of, goodwill associated with the business is included in the carrying amount of the business in determining any loss on disposal. Our evaluation of whether the portion of a reporting unit being disposed of constitutes a business occurs on the date of abandonment. Although an operating store meets the accounting definition of a business prior to abandonment, it does not constitute a business on the closure date because the remaining assets on that date do not constitute an integrated set of assets that are capable of being managed for the purpose of providing a return to investors. As a result, when closing individual stores, we do not include goodwill in the calculation of any loss on disposal of the related assets.
As noted above, if store closures are indicative of potential impairment of goodwill at the reporting unit level, we perform an evaluation of our reporting unit goodwill when such closures occur. Due to the strategic decision to close Teavana branded retail stores and our subsequent review of this reporting unit's fair value, we recorded goodwill impairment charges of
$69.3 million
during the third quarter of fiscal 2017.
Additionally, we recorded a partial goodwill impairment of
$17.9 million
related to our Switzerland retail reporting unit during the third quarter of fiscal 2017, primarily due to ongoing macro economic factors. There were no material goodwill impairment charges recorded during fiscal
2016
and
2015
. Refer to
Note 8
, Other Intangible Assets and Goodwill, for further discussions.
Other Intangible Assets
Other intangible assets include finite-lived intangible assets, which mainly consist of acquired and reacquired rights, trade secrets, licensing agreements, contract-based patents and copyrights. These assets are amortized over their estimated useful lives and are tested for impairment using a similar methodology to our property, plant and equipment, as described above.
Indefinite-lived intangibles, which consist primarily of trade names and trademarks, are tested for impairment annually during the third fiscal quarter, or more frequently if an event occurs or circumstances change that would indicate that impairment may exist. When evaluating other intangible assets for impairment, we may first perform a qualitative assessment to determine whether it is more likely than not that an intangible asset group is impaired. If we do not perform the qualitative assessment, or if we determine that it is not more likely than not that the fair value of the intangible asset group exceeds its carrying amount, we calculate the estimated fair value of the intangible asset group. Fair value is the price a willing buyer would pay for the intangible asset group and is typically calculated using an income approach, such as a relief-from-royalty model. If the carrying amount of the intangible asset group exceeds the estimated fair value, an impairment charge is recorded to reduce the carrying value to the estimated fair value. In addition, we continuously monitor and may revise our intangible asset useful lives if and when facts and circumstances change.
There were no significant other intangible asset impairment charges recorded during fiscal
2017
,
2016
, and
2015
.
Insurance Reserves
We use a combination of insurance and self-insurance mechanisms, including a wholly-owned captive insurance entity and participation in a reinsurance treaty, to provide for the potential liabilities for certain risks, including workers’ compensation, healthcare benefits, general liability, property insurance and director and officers’ liability insurance. Liabilities associated with the risks that are retained by us are not discounted and are estimated, in part, by considering historical claims experience, demographics, exposure and severity factors and other actuarial assumptions.
Revenue Recognition
Consolidated revenues are presented net of intercompany eliminations for wholly-owned subsidiaries and investees controlled by us and for product sales to and royalty and other fees from licensees accounted for under the equity method. Additionally, consolidated revenues are recognized net of any discounts, returns, allowances and sales incentives, including coupon redemptions and rebates.
Company-operated Store Revenues
Company-operated store revenues are recognized when payment is tendered at the point of sale. Company-operated store revenues are reported net of sales, use or other transaction taxes that are collected from customers and remitted to taxing authorities.
Licensed Store Revenues
Licensed store revenues consist of product and equipment sales to licensees, as well as royalties and other fees paid by licensees. Sales of coffee, tea, food and related products are generally recognized upon shipment to licensees, depending on contract terms. Shipping charges billed to licensees are also recognized as revenue, and the related shipping costs are included in cost of sales including occupancy costs on our consolidated statements of earnings.
Initial nonrefundable development fees for licensed stores are recognized upon substantial performance of services for new market business development activities, such as initial business, real estate and store development planning, as well as providing operational materials and functional training courses for opening new licensed retail markets. Additional store licensing fees are recognized when new licensed stores are opened. Royalty revenues based upon a percentage of reported sales, and other continuing fees, such as marketing and service fees, are recognized on a monthly basis when earned.
CPG, Foodservice and Other Revenues
CPG, foodservice and other revenues primarily include sales of packaged coffee and tea as well as a variety of ready-to-drink beverages and single-serve coffee and tea products to grocery, warehouse clubs and specialty retail stores, sales to our national foodservice accounts, and revenues from sales of products to and license fee revenues from manufacturers that produce and market Starbucks-, Seattle’s Best Coffee- and Tazo-branded products through licensing agreements. Sales of coffee, tea, ready-to-drink beverages and related products to grocery and warehouse club stores are generally recognized when received by the customer or distributor, depending on contract terms. Revenues are recorded net of sales discounts given to customers for trade promotions and other incentives and for sales return allowances, which are determined based on historical patterns.
Revenues from sales of products to manufacturers that produce and market Starbucks-, Seattle’s Best Coffee- and Tazo-branded products through licensing agreements are generally recognized when the product is received by the manufacturer or distributor. License fee revenues from manufacturers are based on a percentage of sales and are recognized on a monthly basis when earned. National foodservice account revenues are recognized when the product is received by the customer or distributor.
Sales to customers through CPG channels and national foodservice accounts, including sales to national distributors, are recognized net of certain fees paid to the customer. We characterize these fees as a reduction of revenue unless we are able to identify a sufficiently separable benefit from the customer's purchase of our products such that we could have entered into an exchange transaction with a party other than the customer in order to receive such benefit, and we can reasonably estimate the fair value of such benefit.
Stored Value Cards
Stored value cards, primarily Starbucks Cards, can be activated at our company-operated and most licensed store locations, online at StarbucksStore.com or via mobile devices held by our customers, and at certain other third party locations, such as grocery stores, although they cannot be reloaded at these third party locations. When an amount is loaded onto a stored value card at any of these locations, we recognize a corresponding liability for the full amount loaded onto the card, which is recorded within stored value card liability on our consolidated balance sheets.
Stored value cards can be redeemed at company-operated and most licensed stores, as well as online. When a stored value card is redeemed at a company-operated store or online, we recognize revenue by reducing the stored value card liability. When a
stored value card is redeemed at a licensed store location, we reduce the corresponding stored value card liability and cash, which is reimbursed to the licensee.
There are no expiration dates on our stored value cards, and in most markets, we do not charge service fees that cause a decrement to customer balances. While we will continue to honor all stored value cards presented for payment, management may determine the likelihood of redemption, based on historical experience, is deemed to be remote for certain cards due to long periods of inactivity. In these circumstances, if management also determines there is no requirement for remitting balances to government agencies under unclaimed property laws, unredeemed card balances may then be recognized as breakage income, which is included in interest income and other, net on our consolidated statements of earnings. In fiscal
2017
,
2016
, and
2015
, we recognized breakage income of
$104.6 million
,
$60.5 million
, and
$39.3 million
, respectively.
Loyalty Program
In the U.S. and Canada, effective April 2016, we modified our transaction-based loyalty program, My Starbucks Rewards
®
to a spend-based program, Starbucks Rewards
TM
. For fiscal 2016, the existing transaction-based programs remain unchanged for other markets. During fiscal 2017, we launched Starbucks Rewards
TM
in Japan. Customers in the U.S., Canada, and certain other countries who register their Starbucks Card are automatically enrolled in the program. They earn loyalty points (“Stars”) with each purchase at participating Starbucks
®
and Teavana
TM
stores, as well as on certain packaged coffee products purchased in select Starbucks
®
stores, online, and through CPG channels. After accumulating a certain number of Stars, the customer earns a reward that can be redeemed for free product that, regardless of where the related Stars were earned within that country, will be honored at company-operated stores and certain participating licensed store locations in that same country.
Regardless of whether it is a spend or transaction-based program, we defer revenue associated with the estimated selling price of Stars earned by our program members towards free product as each Star is earned, and a corresponding liability is established within stored value card liability on our consolidated balance sheets. The estimated selling price of each Star earned is based on the estimated value of the product for which the reward is expected to be redeemed, net of Stars we do not expect to be redeemed, based on historical redemption patterns. Stars generally expire if inactive for a period of six months.
When a customer redeems an earned reward, we recognize revenue for the redeemed product and reduce the related loyalty program liability.
Advertising
We expense most advertising costs as they are incurred, except for certain production costs that are expensed the first time the advertising takes place. Advertising expenses totaled
$282.6 million
,
$248.6 million
and
$227.9 million
in fiscal
2017
,
2016
, and
2015
, respectively.
Store Preopening Expenses
Costs incurred in connection with the start-up and promotion of new store openings are expensed as incurred.
Leases
Operating Leases
We lease retail stores, roasting, distribution and warehouse facilities and office space for corporate administrative purposes under operating leases. Most lease agreements contain tenant improvement allowances, rent holidays, lease premiums, rent escalation clauses and/or contingent rent provisions. We recognize amortization of lease incentives, premiums and minimum rent expenses on a straight-line basis beginning on the date of initial possession, which is generally when we enter the space and begin to make improvements in preparation for intended use.
For tenant improvement allowances and rent holidays, we record a deferred rent liability within accrued liabilities, or other long-term liabilities, on our consolidated balance sheets and amortize the deferred rent over the terms of the leases as reductions to rent expense in cost of sales including occupancy costs on our consolidated statements of earnings.
For premiums paid upfront to enter a lease agreement, we record a prepaid rent asset in prepaid expenses and other non-current assets on our consolidated balance sheets and amortize the premium over the terms of the leases as additional rent expense in cost of sales including occupancy costs on our consolidated statements of earnings.
For scheduled rent escalation clauses during the lease terms or for rental payments commencing at a date other than the date of initial possession, we record minimum rent expense on a straight-line basis over the terms of the leases in cost of sales including occupancy costs on our consolidated statements of earnings, with the adjustments to cash rent accrued as deferred rent in our consolidated balance sheets.
Certain leases provide for contingent rent, which is determined as a percentage of gross sales in excess of specified levels. We record a contingent rent liability in accrued occupancy costs within accrued liabilities on our consolidated balance sheets and the corresponding rent expense when we determine that achieving the specified levels during the fiscal year is probable.
When ceasing operations of company-operated stores under operating leases, in cases where the lease contract specifies a termination fee due to the landlord, we record such expense at the time written notice is given to the landlord. In cases where terms, including termination fees, are yet to be negotiated with the landlord, we will record the expense upon signing of an agreement with the landlord. In cases where the landlord does not allow us to prematurely exit the lease, we recognize an expense equal to the present value of the remaining lease payments to the landlord less any projected sublease income at the cease-use date.
Lease Financing Arrangements
We are sometimes involved in the construction of leased buildings, primarily stores. When we qualify as the deemed owner of these buildings due to significant involvement during the construction period under build-to-suit lease accounting requirements and do not qualify for sales recognition under sales-leaseback accounting guidance, we record the cost of the related buildings in property, plant and equipment. The offsetting lease financing obligations are recorded in other long-term liabilities, with the current portion recorded in in accrued occupancy costs within accrued liabilities on our consolidated balance sheets. These assets and obligations are amortized in depreciation and amortization and interest expense, respectively, on our consolidated statements of earnings based on the terms of the related lease agreements.
Asset Retirement Obligations
We recognize a liability for the fair value of required asset retirement obligations (“ARO”) when such obligations are incurred. Our AROs are primarily associated with leasehold improvements, which, at the end of a lease, we are contractually obligated to remove in order to comply with the lease agreement. At the inception of a lease with such conditions, we record an ARO liability and a corresponding capital asset in an amount equal to the estimated fair value of the obligation. We estimate the liability using a number of assumptions, including store closing costs, cost inflation rates and discount rates, and accrete the liability to its projected future value over time. The capitalized asset is depreciated using the same depreciation convention as leasehold improvement assets. Upon satisfaction of the ARO conditions, any difference between the recorded ARO liability and the actual retirement costs incurred is recognized as a gain or loss in cost of sales including occupancy costs on our consolidated statements of earnings. As of
October 1, 2017
and
October 2, 2016
, our net ARO assets included in property, plant and equipment were
$12.4 million
and
$9.3 million
, respectively, and our net ARO liabilities included in other long-term liabilities were
$70.0 million
and
$67.9 million
, respectively.
Stock-based Compensation
We maintain several equity incentive plans under which we may grant non-qualified stock options, incentive stock options, restricted stock, restricted stock units (“RSUs”) or stock appreciation rights to employees, non-employee directors and consultants. We also have an employee stock purchase plan (“ESPP”). RSUs issued by us are equivalent to nonvested shares under the applicable accounting guidance. We record stock-based compensation expense based on the fair value of stock awards at the grant date and recognize the expense over the related service period following a graded vesting expense schedule. Expense for performance-based RSUs is recognized when it is probable the performance goal will be achieved. Performance goals are determined by the Board of Directors and may include measures such as earnings per share, operating income and return on invested capital. The fair value of each stock option granted is estimated on the grant date using the Black-Scholes-Merton option valuation model. The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and our historical experience. The fair value of RSUs is based on the closing price of Starbucks common stock on the award date, less the present value of expected dividends not received during the vesting period. Compensation expense is recognized over the requisite service period for each separately vesting portion of the award, and only for those awards expected to vest, with forfeitures estimated at the date of grant based on our historical experience and future expectations.
Foreign Currency Translation
Our international operations generally use their local currency as their functional currency. Assets and liabilities are translated at exchange rates in effect at the balance sheet date. Income and expense accounts are translated at the average monthly exchange rates during the year. Resulting translation adjustments are reported as a component of OCI and recorded in AOCI on our consolidated balance sheets.
Income Taxes
We compute income taxes using the asset and liability method, under which deferred income taxes are recognized based on the differences between the financial statement carrying amounts and the respective tax basis of our assets and liabilities. Deferred tax assets and liabilities are measured using current enacted tax rates expected to apply to taxable income in the years in which we expect the temporary differences to reverse. The effect of a change in tax rates on deferred taxes is recognized in income in the period that includes the enactment date.
We routinely evaluate the likelihood of realizing the benefit of our deferred tax assets and may record a valuation allowance if, based on all available evidence, we determine that some portion of the tax benefit will not be realized. In evaluating our ability to recover our deferred tax assets within the jurisdictions from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
In addition, our income tax returns are periodically audited by domestic and foreign tax authorities. These audits include review of our tax filing positions, including the timing and amount of deductions taken and the allocation of income between tax jurisdictions. We evaluate our exposures associated with our various tax filing positions and recognize a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the relevant taxing authorities, including resolutions of any related appeals or litigation processes, based on the technical merits of our position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. For uncertain tax positions that do not meet this threshold, we record a related liability. We adjust our unrecognized tax benefit liability and income tax expense in the period in which the uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position or when new information becomes available.
Starbucks recognizes interest and penalties related to income tax matters in income tax expense on our consolidated statements of earnings. Accrued interest and penalties are included within the related tax liability on our consolidated balance sheets.
Stock Split
On April 9, 2015, we effected a
two
-for-one stock split of our
$0.001
par value common stock for shareholders of record as of March 30, 2015. All share and per-share data in our consolidated financial statements and notes has been retroactively adjusted to reflect this stock split. We adjusted shareholders' equity to reflect the stock split by reclassifying an amount equal to the par value of the additional shares arising from the split from retained earnings to common stock during the second quarter of fiscal 2015, resulting in
no
net impact to shareholders' equity on our consolidated balance sheets.
Earnings per Share
Basic earnings per share is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed based on the weighted average number of shares of common stock and the effect of dilutive potential common shares outstanding during the period, calculated using the treasury stock method. Dilutive potential common shares include outstanding stock options and RSUs. Performance-based RSUs are considered dilutive when the related performance criterion has been met.
Common Stock Share Repurchases
We may repurchase shares of Starbucks common stock under a program authorized by our Board of Directors, including pursuant to a contract, instruction or written plan meeting the requirements of Rule 10b5-1(c)(1) of the Securities Exchange Act of 1934. Under applicable Washington State law, shares repurchased are retired and not displayed separately as treasury stock on the financial statements. Instead, the par value of repurchased shares is deducted from common stock and the excess repurchase price over par value is deducted from additional paid-in capital and from retained earnings, once additional paid-in capital is depleted.
Recent Accounting Pronouncements
In August 2017, the Financial Accounting Standards Board (“FASB”) amended its guidance on the financial reporting of hedging relationships. The new guidance eliminates the requirement to separately measure and report hedge ineffectiveness, expands permissible cash flow hedges on contractually specified components, and simplifies hedge documentation and effectiveness assessment. The guidance will be effective at the beginning of our first quarter of fiscal year 2020 and will require a modified retrospective approach on existing cash flow and net investment hedges. The presentation and disclosure requirements will be applied prospectively. We are currently evaluating the impact this guidance will have on our consolidated financial statements and the timing of adoption.
In January 2017, the FASB issued guidance that simplifies the measurement of goodwill impairment. Under this new guidance, an impairment charge, if triggered, is calculated as the difference between a reporting unit’s carrying value and fair value, but it is limited to the carrying value of goodwill. During the second quarter of fiscal 2017, we elected to early-adopt this guidance on a prospective basis.
In October 2016, the FASB issued guidance on the accounting for income tax effects of intercompany sales or transfers of assets other than inventory. The guidance requires entities to recognize the income tax impact of an intra-entity sale or transfer of an asset other than inventory when the sale or transfer occurs, rather than when the asset has been sold to an outside party. The guidance will require a modified retrospective application with a cumulative catch-up adjustment to opening retained earnings at the beginning of our first quarter of fiscal 2019 but permits adoption in an earlier period. We are currently evaluating the impact this guidance will have on our consolidated financial statements and the timing of adoption.
In June 2016, the FASB issued guidance on the measurement and recognition of credit losses on most financial assets. For trade receivables, loans, and held-to-maturity debt securities, the current probable loss recognition methodology is being replaced by an expected credit loss model. For available-for-sale debt securities, the recognition model on credit losses is generally unchanged, except the losses will be presented as an adjustable allowance. The guidance will be applied retrospectively with the cumulative effect recognized as of the date of adoption. The guidance will become effective at the beginning of our first quarter of fiscal 2021 but can be adopted as early as the beginning of our first quarter of fiscal 2020. We are currently evaluating the impact this guidance will have on our consolidated financial statements and the timing of adoption.
In March 2016, the FASB issued guidance related to stock-based compensation, which changes the accounting and classification of excess tax benefits and minimum tax withholdings on share-based awards. With this adoption, excess tax benefits and tax deficiencies related to stock-based compensation will be prospectively reflected as a reduction of, or increase in, income tax expense in our consolidated statement of earnings instead of additional paid-in capital on our consolidated balance sheet. Additionally, within our consolidated statement of cash flows, this guidance will require excess tax benefits to be presented as an operating activity, rather than a financing activity, in the same manner as other cash flows related to income taxes. As a result, we expect the adoption will have a significant impact on income tax expense and earnings per share, as reported in our consolidated statement of earnings and consolidated statement of cash flows. We will adopt this guidance in the first quarter of fiscal 2018. If the new guidance had been adopted for fiscal years 2017, 2016 and 2015, approximately
$78 million
,
$125 million
and
$132 million
, respectively, of excess net tax benefits recorded to additional paid-in capital would have been recorded as a reduction to income tax expense. Excess tax benefits or deficiencies are based on our stock price at the time stock options are exercised or when restricted stock units vest, therefore prior year amounts are not indicative of the future impact of this guidance.
In March 2016, the FASB issued guidance for financial liabilities resulting from selling prepaid stored value products that are redeemable at third-party merchants. Under the new guidance, expected breakage amounts associated with these products must be recognized proportionately in earnings as redemption occurs. Our current accounting policy of applying the remote method to all of our stored value cards, including cards redeemable at the third-party licensed locations, will no longer be allowed. We will adopt and implement the provisions of this guidance and the new revenue recognition standard issued by the FASB, as discussed below, in the first quarter of fiscal 2019.
In February 2016, the FASB issued guidance on the recognition and measurement of leases. Under the new guidance, lessees are required to recognize a lease liability, which represents the discounted obligation to make future minimum lease payments, and a corresponding right-of-use asset on the balance sheet for most leases. The guidance retains the current accounting for lessors and does not make significant changes to the recognition, measurement, and presentation of expenses and cash flows by a lessee. Enhanced disclosures will also be required to give financial statement users the ability to assess the amount, timing and uncertainty of cash flows arising from leases. The guidance will require modified retrospective application at the beginning of our first quarter of fiscal 2020, with optional practical expedients, but permits adoption in an earlier period. We are currently evaluating the impact this guidance will have on our consolidated financial statements. We expect this adoption will result in a material increase in the assets and liabilities on our consolidated balance sheets but will likely have an insignificant impact on our consolidated statements of earnings. In preparation for adoption of the guidance, we are in the process of implementing controls and key system changes to enable the preparation of financial information.
In April 2015, the FASB issued guidance on the financial statement presentation of debt issuance costs. This guidance requires these costs to be presented in the balance sheet as a reduction of the related debt liability rather than as an asset. We retrospectively adopted this guidance in the first quarter of fiscal 2017, which resulted in the reclassification of
$17.0 million
of debt issuance costs previously presented in prepaid expenses and other current assets and other long-term assets to long-term debt in our consolidated balance sheet as of October 2, 2016. Components of our long-term debt and aggregate debt issuance costs and unamortized premium are disclosed in
Note 9
, Debt.
In May 2014, the FASB issued guidance outlining a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers that supersedes most current revenue recognition guidance. This guidance requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. We are currently evaluating the overall impact this guidance will have on our consolidated financial statements, as well as the expected method of adoption. Based on our continued assessment, which may identify other accounting impacts, we have determined the adoption will change the timing of recognition and classification of our stored value card breakage income, which is currently recognized using the remote method and recorded in interest income and other, net. The new guidance will require application of the proportional method and classification within total net revenues on our consolidated statements of earnings. Additionally, the new guidance requires enhanced disclosures, including revenue recognition policies to identify performance obligations to customers and significant judgments in measurement and recognition. We will adopt this guidance in the first quarter of fiscal 2019.
Note 2: Acquisitions and Divestitures
Fiscal 2017
In the fourth quarter of fiscal 2017, we sold our company-operated retail store assets and operations in Singapore to Maxim's Caterers Limited, converting these operations to a fully licensed market, for a total of
$119.9 million
. This transaction resulted in a pre-tax gain of
$83.9 million
, which was included in interest income and other, net on our consolidated statements of earnings.
Fiscal 2016
During the third quarter of fiscal 2016, we sold our ownership interest in our Germany retail business to AmRest Holdings SE for a total of
$47.3 million
. This transaction converted these company-operated stores to a fully licensed market and resulted in an
insignificant
pre-tax gain, which was included in interest income and other, net on our condensed consolidated statements of earnings.
Fiscal 2015
During the fourth quarter of fiscal 2015, we sold our company-operated retail store assets and operations in Puerto Rico to Baristas Del Caribe, LLC, converting these operations to a fully licensed market, for a total of
$8.9 million
. This transaction resulted in an
insignificant
pre-tax gain, which was included in interest income and other, net on the consolidated statements of earnings.
On
September 23, 2014
, we entered into a tender offer bid agreement with Starbucks Coffee Japan, Ltd. (“Starbucks Japan”), at the time a
39.5%
owned equity method investment, and our former joint venture partner, Sazaby League, Ltd. (“Sazaby”), to acquire the remaining
60.5%
ownership interest in Starbucks Japan for approximately
$876 million
, through a two-step tender offer.
Acquiring Starbucks Japan further leverages our existing infrastructure to continue disciplined retail store growth and expand our presence into other channels in the Japan market, such as CPG, licensing and foodservice
.
The following table summarizes the final allocation of the total consideration to the fair values of the assets acquired and liabilities assumed as of
October 31, 2014
, which are reported within our China/Asia Pacific segment
(in millions)
:
|
|
|
|
|
|
Consideration:
|
|
|
Cash paid for Sazaby's 39.5% equity interest
|
|
$
|
508.7
|
|
Fair value of our preexisting 39.5% equity interest
|
|
577.0
|
|
Total consideration
|
|
$
|
1,085.7
|
|
|
|
|
Fair value of assets acquired and liabilities assumed:
|
|
|
Cash and cash equivalents
|
|
$
|
224.4
|
|
Accounts receivable, net
|
|
37.4
|
|
Inventories
|
|
26.4
|
|
Prepaid expenses and other current assets
|
|
35.7
|
|
Property, plant and equipment
|
|
282.9
|
|
Other long-term assets
|
|
141.4
|
|
Other intangible assets
|
|
323.0
|
|
Goodwill
|
|
815.6
|
|
Total assets acquired
|
|
1,886.8
|
|
Accounts payable
|
|
(54.5
|
)
|
Accrued liabilities
|
|
(115.9
|
)
|
Stored value card liability
|
|
(36.5
|
)
|
Deferred income taxes
|
|
(67.3
|
)
|
Other long-term liabilities
|
|
(115.8
|
)
|
Total liabilities assumed
|
|
(390.0
|
)
|
Noncontrolling interest
|
|
(411.1
|
)
|
Total consideration
|
|
$
|
1,085.7
|
|
Other current and long-term assets acquired primarily include various deposits, specifically lease and key money deposits. Accrued liabilities and other long-term liabilities assumed primarily include financing obligations associated with build-to-suit leases as well as asset retirement obligations.
The intangible assets are finite-lived and include reacquired rights, licensing agreements with Starbucks Japan's current licensees and Starbucks Japan's customer loyalty program. The reacquired rights to exclusively operate licensed Starbucks
®
retail stores in Japan were assigned a fair value of
$305.0 million
; these rights will be amortized on a straight-line basis through
March 2021
. Amortization expense for these finite-lived intangible assets for fiscal year 2017 was
$48.4 million
, and, as of
October 1, 2017
, accumulated amortization was
$139.1 million
. Future amortization expense is estimated to be approximately
$47.0 million
each year for the next three years,
$24.0 million
in the fourth year and
$5 million
thereafter.
The
$815.6 million
of goodwill represents
the intangible assets that do not qualify for separate recognition and primarily includes the acquired customer base, the acquired workforce including store partners in the region that have strong relationships with these customers, the existing geographic retail and online presence, and the expected geographic presence in new channels
. The goodwill was allocated to the China/Asia Pacific segment and is not deductible for income tax purposes. Due to foreign currency translation, the balance of goodwill related to the acquisition decreased
$32.2 million
to
$783.4 million
as of
October 1, 2017
.
As a result of this acquisition, we remeasured the carrying value of our preexisting
39.5%
equity method investment to fair value, which resulted in a pre-tax gain of
$390.6 million
that was presented separately as gain resulting from acquisition of joint venture within other income and expenses on the consolidated statements of earnings.
We began consolidating Starbucks Japan's results of operations and cash flows into our consolidated financial statements beginning after
October 31, 2014
. For the year ended
September 27, 2015
, Starbucks Japan's net revenues and net earnings included in our consolidated statement of earnings were
$1.1 billion
and
$108.5 million
, respectively.
The following table provides the supplemental pro forma revenue and net earnings of the combined entity had the acquisition date of Starbucks Japan been the first day of our first quarter of fiscal 2014 rather than during our first quarter of fiscal 2015
(in millions)
:
|
|
|
|
|
|
|
|
Pro Forma (unaudited)
|
|
|
Year Ended
|
|
|
Sep 27, 2015
|
Revenue
|
|
$
|
19,254.5
|
|
Net earnings attributable to Starbucks
|
|
2,380.9
|
|
The amounts in the supplemental pro forma earnings for the period presented above fully eliminate intercompany transactions, apply our accounting policies and reflect adjustments for additional occupancy costs, depreciation and amortization that would have been charged assuming the same fair value adjustments to leases, property, plant and equipment and acquired intangibles had been applied on September 30, 2013, including the acquisition-related gain. These pro forma results are unaudited and are not necessarily indicative of results of operations that would have occurred had the acquisition actually occurred in the prior year period or indicative of the results of operations for any future period.
Note 3: Derivative Financial Instruments
Interest Rates
We are subject to interest rate volatility with regard to existing and future issuances of debt. From time to time, we enter into swap agreements to manage our exposure to interest rate fluctuations.
To hedge the variability in cash flows due to changes in benchmark interest rates, we enter into interest rate swap agreements related to anticipated debt issuances. These agreements are cash settled at the time of the pricing of the related debt. The effective portion of the derivative's gain or loss is recorded in accumulated other comprehensive income (“AOCI”) and is subsequently reclassified to interest expense over the life of the related debt. During fiscal 2016, we entered into forward-starting interest rate swap agreements with an aggregate notional amount of
$375 million
related to the
$500 million
and
$250 million
of 5-year
2.100%
Senior Notes (the “2021 notes”) due
February 2021
and
$500 million
of 10-year
2.450%
Senior Notes (the “2026 notes”) due
June 2026
. Refer to
Note 9
, Debt, for details of the components of our long-term debt. We cash settled these swap agreements at the time of pricing the 2021 and 2026 notes.
To hedge the exposure to changes in the fair value of our fixed-rate debt, we enter into interest rate swap agreements, which are designated as fair value hedges. The changes in fair value of these derivative instruments and the offsetting changes in fair values of the underlying hedged debt are recorded in interest expense and have an insignificant impact on our consolidated statement of earnings. We entered into an interest rate swap agreement during the third quarter of fiscal 2017 related to our
3.850%
Senior Notes due in
October 2023
(“2023 notes”). Refer to
Note 9
, Debt, for additional information on our long-term debt.
Foreign Currency
To reduce cash flow volatility from foreign currency fluctuations, we enter into forward and swap contracts to hedge portions of cash flows of anticipated intercompany royalty payments, inventory purchases and intercompany borrowing and lending activities. The effective portion of the derivative's gain or loss is recorded in AOCI and is subsequently reclassified to revenue, cost of sales including occupancy costs or interest income and other, net, respectively, when the hedged exposure affects net earnings.
To mitigate foreign currency transaction risk of intercompany borrowings, we enter into cross-currency swap contracts, which are designated as cash flow hedges. Gains and losses from these swaps offset the changes in value of interest and principal payments as a result of changes in foreign exchange rates. There are no credit-risk-related contingent features associated with these swaps, although we may hold or post collateral depending upon the gain or loss position of the swap agreements.
We also enter into forward contracts or use foreign currency-denominated debt to hedge the foreign currency exposure of our net investment in certain international operations. The effective portion of the derivative's gain or loss is recorded in AOCI and is subsequently reclassified to net earnings when the hedged net investment is either sold or substantially liquidated.
To mitigate the foreign exchange risk of certain balance sheet items, we enter into foreign currency forward and swap contracts that are not designated as hedging instruments. Gains and losses from these derivatives are largely offset by the financial impact of translating foreign currency denominated payables and receivables; both are recorded in interest income and other, net.
Commodities
Depending on market conditions, we may enter into coffee futures contracts and collars to hedge a portion of anticipated cash flows under our price-to-be-fixed green coffee contracts, which are described further in
Note 5
, Inventories. The effective portion of each derivative's gain or loss is recorded in AOCI and is subsequently reclassified to cost of sales including occupancy costs when the hedged exposure affects net earnings.
To mitigate the price uncertainty of a portion of our future purchases, primarily of dairy products, diesel fuel and other commodities, we enter into swap contracts, futures and collars that are not designated as hedging instruments. Gains and losses from these derivatives are recorded in interest income and other, net and help offset price fluctuations on our beverage, food, packaging and transportation costs, which are included in cost of sales including occupancy costs on our consolidated statements of earnings.
Gains and losses on derivative contracts designated as hedging instruments included in AOCI and expected to be reclassified into earnings within 12 months, net of tax (
in millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Gains/(Losses)
Included in AOCI
|
|
Net Gains/(Losses) Expected to be Reclassified from AOCI into Earnings within 12 Months
|
|
Contract Remaining Maturity
(Months)
|
|
Oct 1,
2017
|
|
Oct 2,
2016
|
|
Sep 27,
2015
|
|
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
Interest rates
|
$
|
17.6
|
|
|
$
|
20.5
|
|
|
$
|
30.1
|
|
|
$
|
3.0
|
|
|
0
|
Cross-currency swaps
|
(6.0
|
)
|
|
(7.7
|
)
|
|
(27.8
|
)
|
|
—
|
|
|
86
|
Foreign currency - other
|
(9.1
|
)
|
|
(0.4
|
)
|
|
29.0
|
|
|
(5.8
|
)
|
|
36
|
Coffee
|
(6.6
|
)
|
|
(1.6
|
)
|
|
(5.7
|
)
|
|
(6.6
|
)
|
|
4
|
Net Investment Hedges:
|
|
|
|
|
|
|
|
|
|
Foreign currency
|
16.2
|
|
|
1.3
|
|
|
1.3
|
|
|
0.1
|
|
|
0
|
Foreign currency debt
|
(2.2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
79
|
Pretax gains and losses on derivative contracts designated as hedging instruments recognized in other comprehensive income (“OCI”) and reclassifications from AOCI to earnings (
in millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Gains/(Losses) Recognized in
OCI Before Reclassifications
|
|
Gains/(Losses) Reclassified from AOCI to Earnings
|
|
Oct 1,
2017
|
|
Oct 2,
2016
|
|
Sep 27,
2015
|
|
Oct 1,
2017
|
|
Oct 2,
2016
|
|
Sep 27,
2015
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Interest rates
|
$
|
—
|
|
|
$
|
(10.3
|
)
|
|
$
|
(6.8
|
)
|
|
$
|
4.8
|
|
|
$
|
5.0
|
|
|
$
|
3.2
|
|
Cross-currency swaps
|
59.5
|
|
|
(75.7
|
)
|
|
11.4
|
|
|
57.2
|
|
|
(101.1
|
)
|
|
46.2
|
|
Foreign currency - other
|
1.8
|
|
|
(25.4
|
)
|
|
52.0
|
|
|
11.4
|
|
|
19.1
|
|
|
26.1
|
|
Coffee
|
(8.1
|
)
|
|
1.7
|
|
|
(9.0
|
)
|
|
(2.7
|
)
|
|
(2.8
|
)
|
|
(3.5
|
)
|
Net Investment Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
|
23.6
|
|
|
—
|
|
|
4.3
|
|
|
—
|
|
|
—
|
|
|
7.2
|
|
Foreign currency debt
|
(3.5
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Pretax gains and losses on non-designated derivatives and designated fair value hedging instruments recognized in earnings (
in millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains/(Losses) Recognized in Earnings
|
|
Oct 1, 2017
|
|
Oct 2, 2016
|
|
Sep 27, 2015
|
Non-Designated Derivatives:
|
|
|
|
|
|
Foreign currency - other
|
$
|
4.6
|
|
|
$
|
(5.7
|
)
|
|
$
|
27.1
|
|
Dairy
|
—
|
|
|
(5.5
|
)
|
|
(3.8
|
)
|
Diesel fuel and other commodities
|
1.3
|
|
|
(0.2
|
)
|
|
(9.0
|
)
|
Designated Fair Value Hedging Instruments:
|
|
|
|
|
|
Interest rate swap
|
(5.2
|
)
|
|
—
|
|
|
—
|
|
Notional amounts of outstanding derivative contracts
(in millions)
:
|
|
|
|
|
|
|
|
|
|
Oct 1, 2017
|
|
Oct 2, 2016
|
Interest rate swap
|
$
|
750
|
|
|
$
|
—
|
|
Cross-currency swaps
|
514
|
|
|
660
|
|
Foreign currency - other
|
901
|
|
|
688
|
|
Coffee
|
—
|
|
|
7
|
|
Dairy
|
14
|
|
|
76
|
|
Diesel fuel and other commodities
|
41
|
|
|
46
|
|
Fair value of outstanding derivative contracts (
in millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
Oct 1, 2017
|
|
Oct 2, 2016
|
|
Oct 1, 2017
|
|
Oct 2, 2016
|
Designated Derivative Instruments:
|
|
|
|
|
|
|
|
Cross-currency swaps
|
$
|
12.4
|
|
|
$
|
—
|
|
|
$
|
9.8
|
|
|
$
|
57.0
|
|
Foreign currency - other
|
7.7
|
|
|
20.8
|
|
|
20.8
|
|
|
24.0
|
|
Coffee
|
—
|
|
|
1.8
|
|
|
—
|
|
|
—
|
|
Net investment hedges
|
0.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Interest rate swap
|
—
|
|
|
—
|
|
|
3.8
|
|
|
—
|
|
Non-designated Derivative Instruments:
|
|
|
|
|
|
|
|
Foreign currency
|
15.8
|
|
|
6.2
|
|
|
1.4
|
|
|
6.5
|
|
Dairy
|
—
|
|
|
1.5
|
|
|
2.4
|
|
|
1.6
|
|
Diesel fuel and other commodities
|
1.6
|
|
|
3.8
|
|
|
0.3
|
|
|
0.5
|
|
Additional disclosures related to cash flow hedge gains and losses included in AOCI, as well as subsequent reclassifications to earnings, are included in
Note 11
, Equity.
Note 4: Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Balance at
Oct 1, 2017
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other Observable
Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
2,462.3
|
|
|
$
|
2,462.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Short-term investments:
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
Agency obligations
|
7.5
|
|
|
—
|
|
|
7.5
|
|
|
—
|
|
Commercial paper
|
2.0
|
|
|
—
|
|
|
2.0
|
|
|
—
|
|
Corporate debt securities
|
49.4
|
|
|
—
|
|
|
49.4
|
|
|
—
|
|
Foreign government obligations
|
7.1
|
|
|
—
|
|
|
7.1
|
|
|
—
|
|
U.S. government treasury securities
|
81.4
|
|
|
81.4
|
|
|
—
|
|
|
—
|
|
Mortgage and other asset-backed securities
|
2.0
|
|
|
—
|
|
|
2.0
|
|
|
—
|
|
Certificates of deposit
|
2.3
|
|
|
—
|
|
|
2.3
|
|
|
—
|
|
Total available-for-sale securities
|
151.7
|
|
|
81.4
|
|
|
70.3
|
|
|
—
|
|
Trading securities
|
76.9
|
|
|
76.9
|
|
|
—
|
|
|
—
|
|
Total short-term investments
|
228.6
|
|
|
158.3
|
|
|
70.3
|
|
|
—
|
|
Prepaid expenses and other current assets:
|
|
|
|
|
|
|
|
Derivative assets
|
13.4
|
|
|
0.1
|
|
|
13.3
|
|
|
—
|
|
Long-term investments:
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
Agency obligations
|
21.8
|
|
|
—
|
|
|
21.8
|
|
|
—
|
|
Corporate debt securities
|
207.4
|
|
|
—
|
|
|
207.4
|
|
|
—
|
|
Auction rate securities
|
5.9
|
|
|
—
|
|
|
—
|
|
|
5.9
|
|
Foreign government obligations
|
17.1
|
|
|
—
|
|
|
17.1
|
|
|
—
|
|
U.S. government treasury securities
|
127.4
|
|
|
127.4
|
|
|
—
|
|
|
—
|
|
State and local government obligations
|
7.0
|
|
|
—
|
|
|
7.0
|
|
|
—
|
|
Mortgage and other asset-backed securities
|
155.7
|
|
|
—
|
|
|
155.7
|
|
|
—
|
|
Total long-term investments
|
542.3
|
|
|
127.4
|
|
|
409.0
|
|
|
5.9
|
|
Other long-term assets:
|
|
|
|
|
|
|
|
Derivative assets
|
24.4
|
|
|
—
|
|
|
24.4
|
|
|
—
|
|
Total assets
|
$
|
3,271.0
|
|
|
$
|
2,748.1
|
|
|
$
|
517.0
|
|
|
$
|
5.9
|
|
Liabilities:
|
|
|
|
|
|
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
Derivative liabilities
|
$
|
16.4
|
|
|
$
|
2.5
|
|
|
$
|
13.9
|
|
|
$
|
—
|
|
Other long-term liabilities:
|
|
|
|
|
|
|
|
Derivative liabilities
|
22.1
|
|
|
—
|
|
|
22.1
|
|
|
—
|
|
Total liabilities
|
$
|
38.5
|
|
|
$
|
2.5
|
|
|
$
|
36.0
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Balance at
Oct 2, 2016
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other Observable
Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
2,128.8
|
|
|
$
|
2,128.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Short-term investments:
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
Agency obligations
|
1.3
|
|
|
—
|
|
|
1.3
|
|
|
—
|
|
Commercial paper
|
2.6
|
|
|
—
|
|
|
2.6
|
|
|
—
|
|
Corporate debt securities
|
34.2
|
|
|
—
|
|
|
34.2
|
|
|
—
|
|
Foreign government obligations
|
5.5
|
|
|
—
|
|
|
5.5
|
|
|
—
|
|
U.S. government treasury securities
|
15.8
|
|
|
15.8
|
|
|
—
|
|
|
—
|
|
State and local government obligations
|
0.5
|
|
|
—
|
|
|
0.5
|
|
|
—
|
|
Certificates of deposit
|
5.8
|
|
|
—
|
|
|
5.8
|
|
|
—
|
|
Total available-for-sale securities
|
65.7
|
|
|
15.8
|
|
|
49.9
|
|
|
—
|
|
Trading securities
|
68.7
|
|
|
68.7
|
|
|
—
|
|
|
—
|
|
Total short-term investments
|
134.4
|
|
|
84.5
|
|
|
49.9
|
|
|
—
|
|
Prepaid expenses and other current assets:
|
|
|
|
|
|
|
|
Derivative assets
|
27.7
|
|
|
3.1
|
|
|
24.6
|
|
|
—
|
|
Long-term investments:
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
Agency obligations
|
44.4
|
|
|
—
|
|
|
44.4
|
|
|
—
|
|
Corporate debt securities
|
459.3
|
|
|
—
|
|
|
459.3
|
|
|
—
|
|
Auction rate securities
|
5.7
|
|
|
—
|
|
|
—
|
|
|
5.7
|
|
Foreign government obligations
|
46.7
|
|
|
—
|
|
|
46.7
|
|
|
—
|
|
U.S. government treasury securities
|
358.2
|
|
|
358.2
|
|
|
—
|
|
|
—
|
|
State and local government obligations
|
57.5
|
|
|
—
|
|
|
57.5
|
|
|
—
|
|
Mortgage and other asset-backed securities
|
169.9
|
|
|
—
|
|
|
169.9
|
|
|
—
|
|
Total long-term investments
|
1,141.7
|
|
|
358.2
|
|
|
777.8
|
|
|
5.7
|
|
Other long-term assets:
|
|
|
|
|
|
|
|
Derivative assets
|
6.4
|
|
|
—
|
|
|
6.4
|
|
|
—
|
|
Total assets
|
$
|
3,439.0
|
|
|
$
|
2,574.6
|
|
|
$
|
858.7
|
|
|
$
|
5.7
|
|
Liabilities:
|
|
|
|
|
|
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
Derivative liabilities
|
$
|
18.0
|
|
|
$
|
1.7
|
|
|
$
|
16.3
|
|
|
$
|
—
|
|
Other long-term liabilities:
|
|
|
|
|
|
|
|
Derivative liabilities
|
71.6
|
|
|
—
|
|
|
71.6
|
|
|
—
|
|
Total
|
$
|
89.6
|
|
|
$
|
1.7
|
|
|
$
|
87.9
|
|
|
$
|
—
|
|
There were no material transfers between levels and there was no significant activity within Level 3 instruments during the periods presented. The fair values of any financial instruments presented above exclude the impact of netting assets and liabilities when a legally enforceable master netting agreement exists.
Available-for-sale Securities
Long-term investments generally mature within
5 years
. Proceeds from sales of available-for-sale securities were
$999.7 million
,
$680.7 million
, and
$600.6 million
for fiscal years
2017
,
2016
and
2015
, respectively. Realized gains and losses on sales and maturities of available-for-sale securities were not material for fiscal years
2017
,
2016
, and
2015
. Gross unrealized holding gains and losses on available-for-sale securities were not material as of
October 1, 2017
and
October 2, 2016
.
Trading Securities
Trading securities include equity mutual funds and exchange-traded funds. Our trading securities portfolio approximates a portion of our liability under our Management Deferred Compensation Plan (“MDCP”), a defined contribution plan. Our MDCP liability was
$105.9 million
and
$101.5 million
as of
October 1, 2017
and
October 2, 2016
, respectively. The changes in net unrealized holding gains and losses in the trading securities portfolio included in earnings for fiscal years
2017
and
2016
were net gains of
$10.5 million
and
$3.6 million
and a net loss of
$4.5 million
in fiscal year
2015
. Gross unrealized holding gains and losses on trading securities were not material as of
October 1, 2017
and
October 2, 2016
.
Derivative Assets and Liabilities
Derivative assets and liabilities include foreign currency forward contracts, commodity futures contracts, collars and swaps, which are described further in
Note 3
, Derivative Financial Instruments.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets and liabilities recognized or disclosed at fair value on a nonrecurring basis include items such as property, plant and equipment, goodwill and other intangible assets, equity and cost method investments, and other assets. These assets are measured at fair value if determined to be impaired. Impairment of property, plant, and equipment is included at
Note 1
, Summary of Significant Accounting Policies.
Other than the impairments discussed in
Note 8
, Other Intangible Assets and Goodwill, and the aforementioned fair value adjustments, there were no other material fair value adjustments during fiscal
2017
and
2016
.
Fair Value of Other Financial Instruments
The estimated fair value of our long-term debt based on the quoted market price (Level 2) is included at
Note 9
, Debt.
Note 5: Inventories
(in millions)
|
|
|
|
|
|
|
|
|
|
Oct 1, 2017
|
|
Oct 2, 2016
|
Coffee:
|
|
|
|
Unroasted
|
$
|
541.0
|
|
|
$
|
561.6
|
|
Roasted
|
301.1
|
|
|
300.4
|
|
Other merchandise held for sale
|
301.1
|
|
|
308.6
|
|
Packaging and other supplies
|
220.8
|
|
|
207.9
|
|
Total
|
$
|
1,364.0
|
|
|
$
|
1,378.5
|
|
Other merchandise held for sale includes, among other items, serveware and tea. Inventory levels vary due to seasonality, commodity market supply and price fluctuations.
As of
October 1, 2017
, we had committed to purchasing green coffee totaling
$860 million
under fixed-price contracts and an estimated
$336 million
under price-to-be-fixed contracts. As of
October 1, 2017
,
none
of our price-to-be-fixed contracts were effectively fixed through the use of futures contracts. Price-to-be-fixed contracts are purchase commitments whereby the quality, quantity, delivery period and other negotiated terms are agreed upon, but the date, and therefore the price, at which the base “C” coffee commodity price component will be fixed has not yet been established. For most contracts, either Starbucks or the seller has the option to “fix” the base “C” coffee commodity price prior to the delivery date. For other contracts, Starbucks and the seller may agree upon pricing parameters determined by the base “C” coffee commodity price. Until prices are fixed, we estimate the total cost of these purchase commitments. We believe, based on relationships established with our suppliers in the past, the risk of non-delivery on these purchase commitments is remote.
Note 6: Equity and Cost Investments
(in millions)
|
|
|
|
|
|
|
|
|
|
Oct 1,
2017
|
|
Oct 2,
2016
|
Equity method investments
|
$
|
432.8
|
|
|
$
|
305.7
|
|
Cost method investments
|
48.8
|
|
|
48.8
|
|
Total
|
$
|
481.6
|
|
|
$
|
354.5
|
|
Equity Method Investments
As of
October 1, 2017
, we had a
50%
ownership interest in each of the following international equity method investees: President Starbucks Coffee (East China); Starbucks Coffee Korea Co., Ltd.; President Starbucks Coffee Corporation (Taiwan) Company Limited; and Tata Starbucks Limited (India). These international entities operate licensed Starbucks
®
retail stores. We further describe the pending transactions to acquire East China and to divest Taiwan in
Note 15
, Commitments and Contingencies.
We also license the rights to produce and distribute Starbucks-branded products to our
50%
owned joint venture, The North American Coffee Partnership with the Pepsi-Cola Company, which develops and distributes bottled Starbucks
®
beverages, including Frappuccino
®
coffee drinks, Starbucks Doubleshot
®
espresso drinks, Starbucks Refreshers
®
beverages, and Starbucks
®
Iced Espresso Classics.
In the first quarter of fiscal 2016, we sold our
49%
ownership interest in our Spanish joint venture, Starbucks Coffee España, S.L. (“Starbucks Spain”), to our joint venture partner, Sigla S.A. (Grupo Vips), for a total purchase price of
$30.2 million
. This transaction resulted in an
insignificant
pre-tax gain, which was included in interest income and other, net on our consolidated statements of earnings.
Our share of income and losses from our equity method investments is included in income from equity investees on our consolidated statements of earnings. Also included in this line item is our proportionate share of gross profit resulting from coffee and other product sales to, and royalty and license fee revenues generated from, equity investees. Revenues generated from these related parties were
$187.3 million
,
$164.2 million
, and
$153.4 million
in fiscal years
2017
,
2016
and
2015
, respectively. Related costs of sales were
$109.3 million
,
$97.5 million
, and
$94.5 million
in fiscal years
2017
,
2016
and
2015
, respectively. As of
October 1, 2017
and
October 2, 2016
, there were
$54.3 million
and
$55.7 million
of accounts receivable from equity investees, respectively, on our consolidated balance sheets, primarily related to product sales and royalty revenues.
Cost Method Investments
As of
October 1, 2017
and
October 2, 2016
, we had
$23 million
invested in equity interests of entities that develop and operate Starbucks
®
licensed stores in several global markets. We have the ability to acquire additional interests in some of these cost method investees at certain intervals. Depending on our total percentage ownership interest and our ability to exercise significant influence over financial and operating policies, additional investments may require application of the equity method of accounting.
Note 7: Supplemental Balance Sheet Information
(in millions)
Property, Plant and Equipment, net
|
|
|
|
|
|
|
|
|
|
Oct 1, 2017
|
|
Oct 2, 2016
|
Land
|
$
|
46.9
|
|
|
$
|
46.6
|
|
Buildings
|
481.7
|
|
|
458.4
|
|
Leasehold improvements
|
6,401.0
|
|
|
5,892.9
|
|
Store equipment
|
2,110.7
|
|
|
1,931.7
|
|
Roasting equipment
|
619.8
|
|
|
605.4
|
|
Furniture, fixtures and other
|
1,514.1
|
|
|
1,366.9
|
|
Work in progress
|
409.8
|
|
|
271.4
|
|
Property, plant and equipment, gross
|
11,584.0
|
|
|
10,573.3
|
|
Accumulated depreciation
|
(6,664.5
|
)
|
|
(6,039.5
|
)
|
Property, plant and equipment, net
|
$
|
4,919.5
|
|
|
$
|
4,533.8
|
|
Accrued Liabilities
|
|
|
|
|
|
|
|
|
|
Oct 1, 2017
|
|
Oct 2, 2016
|
Accrued compensation and related costs
|
$
|
524.5
|
|
|
$
|
510.8
|
|
Accrued occupancy costs
|
151.3
|
|
|
137.5
|
|
Accrued taxes
|
226.6
|
|
|
368.4
|
|
Accrued dividends payable
|
429.5
|
|
|
365.1
|
|
Accrued capital and other operating expenditures
|
602.6
|
|
|
617.3
|
|
Total accrued liabilities
|
$
|
1,934.5
|
|
|
$
|
1,999.1
|
|
Note 8: Other Intangible Assets and Goodwill
Indefinite-Lived Intangible Assets
|
|
|
|
|
|
|
|
|
(in millions)
|
Oct 1, 2017
|
|
Oct 2, 2016
|
Trade names, trademarks and patents
|
$
|
212.1
|
|
|
$
|
207.8
|
|
Other indefinite-lived intangible assets
|
15.1
|
|
|
15.1
|
|
Total indefinite-lived intangible assets
|
$
|
227.2
|
|
|
$
|
222.9
|
|
Additional disclosure regarding changes in our intangible assets due to acquisitions is included at
Note 2
, Acquisitions and Divestitures.
Goodwill
Changes in the carrying amount of goodwill by reportable operating segment
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
China/Asia Pacific
|
|
EMEA
|
|
Channel
Development
|
|
All Other Segments
|
|
Total
|
Goodwill balance at September 27, 2015
|
$
|
211.2
|
|
|
$
|
804.1
|
|
|
$
|
57.4
|
|
|
$
|
23.8
|
|
|
$
|
478.9
|
|
|
$
|
1,575.4
|
|
Acquisition/(divestiture)
|
—
|
|
|
—
|
|
|
(2.6
|
)
|
|
—
|
|
|
5.3
|
|
|
2.7
|
|
Other
|
0.4
|
|
|
140.8
|
|
|
0.3
|
|
|
—
|
|
|
—
|
|
|
141.5
|
|
Goodwill balance at October 2, 2016
|
$
|
211.6
|
|
|
$
|
944.9
|
|
|
$
|
55.1
|
|
|
$
|
23.8
|
|
|
$
|
484.2
|
|
|
$
|
1,719.6
|
|
Acquisition/(divestiture)
|
—
|
|
|
(7.6
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7.6
|
)
|
Impairment
|
—
|
|
|
—
|
|
|
(17.9
|
)
|
|
—
|
|
|
(69.3
|
)
|
|
(87.2
|
)
|
Other
|
1.5
|
|
|
(87.1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(85.6
|
)
|
Goodwill balance at October 1, 2017
|
$
|
213.1
|
|
|
$
|
850.2
|
|
|
$
|
37.2
|
|
|
$
|
23.8
|
|
|
$
|
414.9
|
|
|
$
|
1,539.2
|
|
“Other” primarily consists of changes in the goodwill balance as a result of foreign currency translation.
During the third quarter of fiscal 2017, management finalized its long-term strategy for the Teavana reporting unit. The plan emphasizes sales of premium Teavana™ tea products at Starbucks branded stores and, to a lesser extent, consumer product channels. The existing portfolio of Teavana-branded retail stores are expected to be closed over the next several quarters. This change in strategic direction triggered an impairment test first of the retail store assets and then an impairment test of the goodwill asset, which also coincided with our annual goodwill testing process. For goodwill, we utilized a combination of income and market approaches to determine the implied fair value of the reporting unit. These approaches used primarily unobservable inputs, including discount, sales growth and royalty rates and valuation multiples of a selection of similar publicly traded companies, which are considered Level 3 fair value measurements. We then compared the implied fair value with the carrying value and recognized a goodwill impairment charge of
$69.3 million
, thus reducing goodwill of the Teavana reporting unit to
$398.3 million
as of
October 1, 2017
. The remaining intangible assets for the Teavana reporting unit of
$117.2 million
, consisting primarily of the indefinite-lived tradename and finite-lived tea recipes, were also tested, and no impairment losses were recorded.
The ongoing impact of the macro economic challenges we have experienced in our EMEA company-owned markets and the continued strength of the Swiss franc, when compared to the relatively inexpensive euro in surrounding countries, have posed strong headwinds to our Switzerland retail reporting unit. Our latest mitigation efforts incorporated into our Level 3 fair value
calculation for our Switzerland retail business are not expected to fully recover the reporting unit’s carrying value given the sustained nature of these and other external factors on consumer behavior and tourism. As a result, we recorded a goodwill impairment charge of
$17.9 million
in the third quarter of fiscal 2017, and, as of
October 1, 2017
, we had approximately
$37 million
of goodwill remaining on our condensed consolidated balance sheet associated with this reporting unit.
Finite-Lived Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oct 1, 2017
|
|
Oct 2, 2016
|
(in millions)
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Acquired and reacquired rights
|
$
|
328.8
|
|
|
$
|
(154.2
|
)
|
|
$
|
174.6
|
|
|
$
|
361.3
|
|
|
$
|
(114.5
|
)
|
|
$
|
246.8
|
|
Acquired trade secrets and processes
|
27.6
|
|
|
(13.7
|
)
|
|
13.9
|
|
|
27.6
|
|
|
(11.0
|
)
|
|
16.6
|
|
Trade names, trademarks and patents
|
31.5
|
|
|
(17.6
|
)
|
|
13.9
|
|
|
29.4
|
|
|
(15.2
|
)
|
|
14.2
|
|
Licensing agreements
|
14.4
|
|
|
(3.8
|
)
|
|
10.6
|
|
|
16.0
|
|
|
(2.8
|
)
|
|
13.2
|
|
Other finite-lived intangible assets
|
6.7
|
|
|
(5.5
|
)
|
|
1.2
|
|
|
7.2
|
|
|
(4.6
|
)
|
|
2.6
|
|
Total finite-lived intangible assets
|
$
|
409.0
|
|
|
$
|
(194.8
|
)
|
|
$
|
214.2
|
|
|
$
|
441.5
|
|
|
$
|
(148.1
|
)
|
|
$
|
293.4
|
|
Amortization expense for finite-lived intangible assets was
$57.5 million
,
$57.3 million
, and
$50.0 million
during fiscal
2017
,
2016
and
2015
, respectively.
Estimated future amortization expense as of
October 1, 2017
(
in millions
):
|
|
|
|
|
Fiscal Year Ending
|
|
2018
|
$
|
55.7
|
|
2019
|
54.5
|
|
2020
|
54.3
|
|
2021
|
31.4
|
|
2022
|
8.0
|
|
Thereafter
|
10.3
|
|
Total estimated future amortization expense
|
$
|
214.2
|
|
Additional disclosure regarding changes in our intangible assets due to acquisitions is included at
Note 2
, Acquisitions and Divestitures.
Note 9: Debt
Revolving Credit Facility and Commercial Paper Program
Our
$1.5 billion
unsecured, revolving credit facility with various banks, of which
$150 million
may be used for issuances of letters of credit, is available for working capital, capital expenditures and other corporate purposes, including acquisitions and share repurchases, and is currently set to mature on
November 6, 2020
. Starbucks has the option, subject to negotiation and agreement with the related banks, to increase the maximum commitment amount by an additional
$750 million
. Borrowings under the credit facility will bear interest at a variable rate based on LIBOR, and, for U.S. dollar-denominated loans under certain circumstances, a Base Rate (as defined in the credit facility), in each case plus an applicable margin. The applicable margin is based on the better of (i) the Company's long-term credit ratings assigned by Moody's and Standard & Poor's rating agencies and (ii) the Company's fixed charge coverage ratio, pursuant to a pricing grid set forth in the credit agreement. The current applicable margin is
0.565%
for Eurocurrency Rate Loans and
0.00%
(nil) for Base Rate Loans. The credit facility contains provisions requiring us to maintain compliance with certain covenants, including a minimum fixed charge coverage ratio, which measures our ability to cover financing expenses.
As of October 1, 2017, we were in compliance with all applicable covenants.
No amounts were outstanding under our credit facility as of
October 1, 2017
.
Under our commercial paper program, we may issue unsecured commercial paper notes up to a maximum aggregate amount outstanding at any time of
$1 billion
, with individual maturities that may vary but not exceed
397 days
from the date of issue. Amounts outstanding under the commercial paper program are required to be backstopped by available commitments under our credit facility discussed above. The proceeds from borrowings under our commercial paper program may be used for working capital needs, capital expenditures and other corporate purposes, including, but not limited to, business expansion, payment of cash dividends on our common stock and share repurchases. As of
October 1, 2017
, availability under our commercial paper
program was approximately
$0 billion
(which represents the full committed credit facility amount, as no amounts were outstanding under our commercial paper program).
In the first quarter of fiscal 2018 we entered into a new credit facility and commercial paper program. See
Note 18
, Subsequent Events for further detail.
Long-term Debt
In
March 2017
, we issued Japanese yen-denominated long-term debt in an underwritten registered public offering. The
7
-year
0.372%
Senior Notes (the “2024 notes”) due
March 2024
were issued with a face value of ¥
85 billion
, of which ¥
81 billion
has been designated to hedge the foreign currency exposure of our net investment in Japan. Interest on the 2024 notes is payable semi-annually on
March 15
and
September 15
of each year, commencing on
September 15, 2017
.
In December 2016, we repaid the
$400 million
of
0.875%
Senior Notes (the “2016 notes”) at maturity.
In
May 2016
, we issued long-term debt in an underwritten registered public offering, which consisted of
$500 million
of 10-year
2.450%
Senior Notes (the “2026 notes”) due
June 2026
. Interest on the 2026 notes is payable semi-annually on
June 15
and
December 15
of each year, commencing on
December 15, 2016
.
In
February 2016
, we issued long-term debt in an underwritten registered public offering, which consisted of
$500 million
of 5-year
2.100%
Senior Notes (the “2021 notes”) due
February 2021
. In
May 2016
, we reopened this offering with the same terms and issued an additional
$250 million
of Senior Notes (collectively, the “2021 notes”) for an aggregate amount outstanding of
$750 million
. Interest on the 2021 notes is payable semi-annually on
February 4
and
August 4
of each year, commencing on
August 4, 2016
.
In
July 2015
, we redeemed
$550 million
of
6.250%
Senior Notes (the “2017 notes”) originally scheduled to mature in August 2017. The redemption resulted in a charge of
$61.1 million
, which is presented separately as loss on extinguishment of debt within other income and expenses on our consolidated statements of earnings. This loss primarily relates to the optional redemption payment as outlined in the 2017 notes indenture, as well as non-cash expenses related to the previously capitalized original issuance costs and accelerated amortization of the unamortized discount. In connection with the redemption, we also reclassified
$2.0 million
from accumulated other comprehensive income to interest expense on our consolidated statements of earnings related to remaining unrecognized losses from interest rate contracts entered into in conjunction with the 2017 notes and designated as cash flow hedges.
In
June 2015
, we issued long-term debt in an underwritten registered public offering, which consisted of
$500 million
of 7-year
2.700%
Senior Notes (the “2022 notes”) due
June 2022
, and
$350 million
of 30-year
4.300%
Senior Notes (the “2045 notes”) due
June 2045
. Interest on the 2022 and 2045 notes is payable semi-annually on
June 15
and
December 15
of each year, commencing on
December 15, 2015
.
Components of long-term debt including the associated interest rates and related fair values by calendar maturity (
in millions, except interest rates)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oct 1, 2017
|
|
Oct 2, 2016
|
|
Stated Interest Rate
|
Effective Interest Rate
(1)
|
Issuance
|
Face Value
|
Estimated Fair Value
|
|
Face Value
|
Estimated Fair Value
|
|
2016 notes
|
$
|
—
|
|
$
|
—
|
|
|
$
|
400.0
|
|
$
|
400
|
|
|
0.875
|
%
|
0.941
|
%
|
2018 notes
|
350.0
|
|
352
|
|
|
350.0
|
|
357
|
|
|
2.000
|
%
|
2.012
|
%
|
2021 notes
|
500.0
|
|
501
|
|
|
500.0
|
|
511
|
|
|
2.100
|
%
|
2.293
|
%
|
2021 notes
|
250.0
|
|
250
|
|
|
250.0
|
|
255
|
|
|
2.100
|
%
|
1.600
|
%
|
2022 notes
|
500.0
|
|
508
|
|
|
500.0
|
|
526
|
|
|
2.700
|
%
|
2.819
|
%
|
2023 notes
|
750.0
|
|
806
|
|
|
750.0
|
|
839
|
|
|
3.850
|
%
|
2.859
|
%
|
2024 notes
(2)
|
755.3
|
|
760
|
|
|
—
|
|
—
|
|
|
0.372
|
%
|
0.462
|
%
|
2026 notes
|
500.0
|
|
481
|
|
|
500.0
|
|
509
|
|
|
2.450
|
%
|
2.511
|
%
|
2045 notes
|
350.0
|
|
381
|
|
|
350.0
|
|
417
|
|
|
4.300
|
%
|
4.348
|
%
|
Total
|
3,955.3
|
|
4,039
|
|
|
3,600.0
|
|
3,814
|
|
|
|
|
Aggregate debt issuance costs and unamortized premium/(discount), net
|
(17.5
|
)
|
|
|
(14.8
|
)
|
|
|
|
|
Hedge accounting fair value adjustment
(3)
|
(5.2
|
)
|
|
|
—
|
|
|
|
|
|
Total
|
$
|
3,932.6
|
|
|
|
$
|
3,585.2
|
|
|
|
|
|
|
|
(1)
|
Includes the effects of the amortization of any premium or discount and any gain or loss upon settlement of related treasury locks or forward-starting interest rate swaps utilized to hedge the interest rate risk prior to the debt issuance.
|
(2)
Japanese yen-denominated long-term debt.
(3)
Amount represents the change in fair value due to changes in benchmark interest rates related to our 2023 notes. Refer to
Note 3
, Derivative Financial Instruments, for additional information on our interest rate swap designated as a fair value hedge.
The indentures under which the above notes were issued also require us to maintain compliance with certain covenants, including limits on future liens and sale and leaseback transactions on certain material properties. As of October 2, 2017, we were in compliance with each of these covenants.
The following table summarizes our long-term debt maturities as of
October 1, 2017
by fiscal year (
in millions
):
|
|
|
|
|
Fiscal Year
|
Total
|
2018
|
$
|
—
|
|
2019
|
350.0
|
|
2020
|
—
|
|
2021
|
750.0
|
|
2022
|
500.0
|
|
Thereafter
|
2,355.3
|
|
Total
|
$
|
3,955.3
|
|
Note 10: Leases
Rent expense under operating lease agreements
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Oct 1, 2017
|
|
Oct 2, 2016
|
|
Sep 27, 2015
|
Minimum rent
|
$
|
1,185.7
|
|
|
$
|
1,092.5
|
|
|
$
|
1,026.3
|
|
Contingent rent
|
143.5
|
|
|
130.7
|
|
|
111.5
|
|
Total
|
$
|
1,329.2
|
|
|
$
|
1,223.2
|
|
|
$
|
1,137.8
|
|
Minimum future rental payments under non-cancelable operating leases and lease financing arrangements as of
October 1, 2017
(in millions)
:
|
|
|
|
|
|
|
|
|
Fiscal Year Ending
|
Operating Leases
|
|
Lease Financing Arrangements
|
2018
|
$
|
1,213.1
|
|
|
$
|
4.1
|
|
2019
|
1,141.6
|
|
|
4.1
|
|
2020
|
1,068.6
|
|
|
4.1
|
|
2021
|
986.9
|
|
|
4.0
|
|
2022
|
888.1
|
|
|
3.9
|
|
Thereafter
|
3,315.2
|
|
|
38.9
|
|
Total minimum lease payments
|
$
|
8,613.5
|
|
|
$
|
59.1
|
|
We have subleases related to certain of our operating leases. During fiscal
2017
,
2016
and
2015
, we recognized sublease income of
$15.5 million
,
$14.6 million
, and
$11.9 million
, respectively. Additionally, as of
October 1, 2017
and
October 2, 2016
, the gross carrying values of assets related to build-to-suit lease arrangements accounted for as financing leases were
$94.3 million
and
$92.7 million
, respectively, with associated accumulated depreciation of
$9.0 million
and
$6.2 million
, respectively. Lease exit costs associated with our restructuring efforts will be recognized concurrently with actual store closures. Total lease exit costs are expected to be approximately
$153.7 million
of which
$15.7 million
were recorded within restructuring and impairments on the consolidated statement of earnings in fiscal 2017.
Note 11: Equity
In addition to
2.4 billion
shares of authorized common stock with
$0.001
par value per share, we have authorized
7.5 million
shares of preferred stock,
none
of which was outstanding at
October 1, 2017
.
We repurchased
37.5 million
shares of common stock at a total cost of
$2.1 billion
, and
34.9 million
shares at a total cost of $
2.0 billion
for the years ended
October 1, 2017
and
October 2, 2016
, respectively. As of
October 1, 2017
,
80.3 million
shares remained available for repurchase under current authorizations.
Comprehensive Income
Comprehensive income includes all changes in equity during the period, except those resulting from transactions with our shareholders. Comprehensive income is comprised of net earnings and other comprehensive income. Accumulated other comprehensive income reported on our consolidated balance sheets consists of foreign currency translation adjustments and other and the unrealized gains and losses, net of applicable taxes, on available-for-sale securities and on derivative instruments designated and qualifying as cash flow and net investment hedges.
Changes in accumulated other comprehensive income (“AOCI”) by component, for the years ended
October 1, 2017
,
October 2, 2016
, and
September 27, 2015
, net of tax,a re as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Available-for-Sale Securities
|
|
Cash Flow Hedges
|
|
Net Investment Hedges
|
|
Translation Adjustment and Other
|
|
Total
|
October 1, 2017
|
|
|
|
|
|
|
|
|
|
Net gains/(losses) in AOCI, beginning of period
|
$
|
1.1
|
|
|
$
|
10.9
|
|
|
$
|
1.3
|
|
|
$
|
(121.7
|
)
|
|
$
|
(108.4
|
)
|
Net gains/(losses) recognized in OCI before reclassifications
|
(6.6
|
)
|
|
40.6
|
|
|
12.7
|
|
|
(40.7
|
)
|
|
6.0
|
|
Net (gains)/losses reclassified from AOCI to earnings
|
3.0
|
|
|
(55.6
|
)
|
|
—
|
|
|
(0.6
|
)
|
|
(53.2
|
)
|
Other comprehensive income/(loss) attributable to Starbucks
|
(3.6
|
)
|
|
(15.0
|
)
|
|
12.7
|
|
|
(41.3
|
)
|
|
(47.2
|
)
|
Net gains/(losses) in AOCI, end of period
|
$
|
(2.5
|
)
|
|
$
|
(4.1
|
)
|
|
$
|
14.0
|
|
|
$
|
(163.0
|
)
|
|
$
|
(155.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Available-for-Sale Securities
|
|
Cash Flow Hedges
|
|
Net Investment Hedges
|
|
Translation Adjustment and Other
|
|
Total
|
October 2, 2016
|
|
|
|
|
|
|
|
|
|
Net gains/(losses) in AOCI, beginning of period
|
$
|
(0.1
|
)
|
|
$
|
25.6
|
|
|
$
|
1.3
|
|
|
$
|
(226.2
|
)
|
|
$
|
(199.4
|
)
|
Net gains/(losses) recognized in OCI before reclassifications
|
2.2
|
|
|
(82.1
|
)
|
|
—
|
|
|
104.5
|
|
|
24.6
|
|
Net (gains)/losses reclassified from AOCI to earnings
|
(1.0
|
)
|
|
67.4
|
|
|
—
|
|
|
—
|
|
|
66.4
|
|
Other comprehensive income/(loss) attributable to Starbucks
|
1.2
|
|
|
(14.7
|
)
|
|
—
|
|
|
104.5
|
|
|
91.0
|
|
Net gains/(losses) in AOCI, end of period
|
$
|
1.1
|
|
|
$
|
10.9
|
|
|
$
|
1.3
|
|
|
$
|
(121.7
|
)
|
|
$
|
(108.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Available-for-Sale Securities
|
|
Cash Flow Hedges
|
|
Net Investment Hedges
|
|
Translation Adjustment and Other
|
|
Total
|
September 27, 2015
|
|
|
|
|
|
|
|
|
|
Net gains/(losses) in AOCI, beginning of period
|
$
|
(0.4
|
)
|
|
$
|
46.3
|
|
|
$
|
3.2
|
|
|
$
|
(23.8
|
)
|
|
$
|
25.3
|
|
Net gains/(losses) recognized in OCI before reclassifications
|
0.9
|
|
|
30.8
|
|
|
2.7
|
|
|
(185.6
|
)
|
|
(151.2
|
)
|
Net (gains)/losses reclassified from AOCI to earnings
|
(0.6
|
)
|
|
(51.5
|
)
|
|
(4.6
|
)
|
|
14.3
|
|
|
(42.4
|
)
|
Other comprehensive income/(loss) attributable to Starbucks
|
0.3
|
|
|
(20.7
|
)
|
|
(1.9
|
)
|
|
(171.3
|
)
|
|
(193.6
|
)
|
Purchase of noncontrolling interest
|
—
|
|
|
—
|
|
|
—
|
|
|
(31.1
|
)
|
|
(31.1
|
)
|
Net gains/(losses) in AOCI, end of period
|
$
|
(0.1
|
)
|
|
$
|
25.6
|
|
|
$
|
1.3
|
|
|
$
|
(226.2
|
)
|
|
$
|
(199.4
|
)
|
Impact of reclassifications from AOCI on the consolidated statements of earnings
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOCI
Components
|
|
Amounts Reclassified from AOCI
|
|
Affected Line Item in
the Statements of Earnings
|
|
Fiscal Year Ended
|
|
|
Oct 1, 2017
|
|
Oct 2, 2016
|
|
Sep 27, 2015
|
|
Gains/(losses) on available-for-sale securities
|
|
$
|
(4.1
|
)
|
|
$
|
1.6
|
|
|
$
|
1.0
|
|
|
Interest income and other, net
|
Gains/(losses) on cash flow hedges
|
|
|
|
|
|
|
|
|
Interest rate hedges
|
|
4.8
|
|
|
5.0
|
|
|
3.2
|
|
|
Interest expense
|
Cross-currency swaps
|
|
57.2
|
|
|
(101.1
|
)
|
|
46.2
|
|
|
Interest income and other, net
|
Foreign currency hedges
|
|
3.0
|
|
|
4.9
|
|
|
14.0
|
|
|
Revenue
|
Foreign currency/coffee hedges
|
|
5.7
|
|
|
11.4
|
|
|
8.6
|
|
|
Cost of sales including occupancy costs
|
Gains/(losses) on net investment hedges
(1)
|
|
—
|
|
|
—
|
|
|
7.2
|
|
|
Gain resulting from acquisition of joint venture
|
Translation adjustment
(2)
|
|
|
|
|
|
|
|
|
Starbucks Japan
|
|
—
|
|
|
—
|
|
|
(7.2
|
)
|
|
Gain resulting from acquisition of joint venture
|
Other
|
|
0.6
|
|
|
—
|
|
|
(7.1
|
)
|
|
Interest income and other, net
|
|
|
67.2
|
|
|
(78.2
|
)
|
|
65.9
|
|
|
Total before tax
|
|
|
(14.0
|
)
|
|
11.8
|
|
|
(23.5
|
)
|
|
Tax (expense)/benefit
|
|
|
$
|
53.2
|
|
|
$
|
(66.4
|
)
|
|
$
|
42.4
|
|
|
Net of tax
|
|
|
(1)
|
Release of pretax cumulative net gains in AOCI related to our net investment derivative instruments used to hedge our preexisting
39.5%
equity method investment in Starbucks Japan.
|
|
|
(2)
|
Release of cumulative translation adjustments to earnings upon sale or liquidation of foreign business.
|
Note 12: Employee Stock and Benefit Plans
We maintain several equity incentive plans under which we may grant non-qualified stock options, incentive stock options, restricted stock, restricted stock units (“RSUs”) or stock appreciation rights to employees, non-employee directors and consultants. We issue new shares of common stock upon exercise of stock options and the vesting of RSUs. We also have an employee stock purchase plan (“ESPP”).
As of
October 1, 2017
, there were
73.5 million
shares of common stock available for issuance pursuant to future equity-based compensation awards and
13.3 million
shares available for issuance under our ESPP.
Stock-based compensation expense recognized in the consolidated financial statements
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Oct 1, 2017
|
|
Oct 2, 2016
|
|
Sep 27, 2015
|
Options
|
$
|
44.3
|
|
|
$
|
42.7
|
|
|
$
|
37.8
|
|
RSUs
|
131.7
|
|
|
175.4
|
|
|
172.0
|
|
Total stock-based compensation expense recognized in the consolidated statements of earnings
|
$
|
176.0
|
|
|
$
|
218.1
|
|
|
$
|
209.8
|
|
Total related tax benefit
|
$
|
57.6
|
|
|
$
|
73.0
|
|
|
$
|
72.3
|
|
Total capitalized stock-based compensation included in net property, plant and equipment and inventories on the consolidated balance sheets
|
$
|
1.9
|
|
|
$
|
1.5
|
|
|
$
|
1.9
|
|
Stock Option Plans
Stock options to purchase our common stock are granted at the fair value of the stock on the grant date. The majority of options become exercisable in four equal installments beginning a year from the grant date and generally expire
10 years
from the grant date. Options granted to non-employee directors generally vest over
one
to
three years
. All outstanding stock options are non-qualified stock options.
The fair value of stock option awards was estimated at the grant date with the following weighted average assumptions for fiscal years
2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Options
Granted During the Period
|
Fiscal Year Ended
|
2017
|
|
2016
|
|
2015
|
Expected term (in years)
|
3.9
|
|
|
3.9
|
|
|
4.2
|
|
Expected stock price volatility
|
21.6
|
%
|
|
23.9
|
%
|
|
22.3
|
%
|
Risk-free interest rate
|
1.5
|
%
|
|
1.2
|
%
|
|
1.1
|
%
|
Expected dividend yield
|
1.8
|
%
|
|
1.3
|
%
|
|
1.6
|
%
|
Weighted average grant price
|
$
|
56.12
|
|
|
$
|
60.20
|
|
|
$
|
39.89
|
|
Estimated fair value per option granted
|
$
|
8.56
|
|
|
$
|
10.54
|
|
|
$
|
6.58
|
|
The expected term of the options represents the estimated period of time until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. Expected stock price volatility is based on a combination of historical volatility of our stock and the one-year implied volatility of Starbucks traded options, for the related vesting periods. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with an equivalent remaining term. The dividend yield assumption is based on our anticipated cash dividend payouts. The amounts shown above for the estimated fair value per option granted are before the estimated effect of forfeitures, which reduce the amount of expense recorded in the consolidated statements of earnings.
Stock option transactions for the year ended
October 1, 2017
(in millions, except per share and contractual life amounts)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Subject to
Options
|
|
Weighted
Average
Exercise
Price
per Share
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
Aggregate
Intrinsic
Value
|
Outstanding, October 2, 2016
|
31.3
|
|
|
$
|
30.59
|
|
|
5.8
|
|
$
|
771
|
|
Granted
|
7.1
|
|
|
56.12
|
|
|
|
|
|
Exercised
|
(5.3
|
)
|
|
23.16
|
|
|
|
|
|
Expired/forfeited
|
(1.7
|
)
|
|
51.13
|
|
|
|
|
|
Outstanding, October 1, 2017
|
31.4
|
|
|
36.51
|
|
|
5.8
|
|
589
|
|
Exercisable, October 1, 2017
|
19.7
|
|
|
26.42
|
|
|
4.2
|
|
552
|
|
Vested and expected to vest, October 1, 2017
|
30.0
|
|
|
35.60
|
|
|
5.6
|
|
587
|
|
The aggregate intrinsic value in the table above, which is the amount by which the market value of the underlying stock exceeded the exercise price of outstanding options, is before applicable income taxes and represents the amount optionees would have realized if all in-the-money options had been exercised on the last business day of the period indicated.
As of
October 1, 2017
, total unrecognized stock-based compensation expense, net of estimated forfeitures, related to nonvested options was approximately
$38 million
, before income taxes, and is expected to be recognized over a weighted average period of approximately
2.7 years
. The total intrinsic value of options exercised was
$181 million
,
$254 million
, and
$358 million
during fiscal years
2017
,
2016
and
2015
, respectively. The total fair value of options vested was
$40 million
,
$37 million
, and
$36 million
during fiscal years
2017
,
2016
and
2015
, respectively.
RSUs
We have both time-vested and performance-based RSUs. Time-vested RSUs are awarded to eligible employees and non-employee directors and entitle the grantee to receive shares of common stock at the end of a vesting period, subject solely to the employee’s continuing employment or the non-employee director's continuing service. The majority of time-vested RSUs vest in two equal annual installments beginning a year from the grant date. Our performance-based RSUs are awarded to eligible employees and entitle the grantee to receive shares of common stock if we achieve specified performance goals during the performance period and the grantee remains employed during the subsequent vesting period. The majority of performance-based RSUs vest in two equal annual installments beginning two years from the grant date.
RSU transactions for the year ended
October 1, 2017
(in millions, except per share and contractual life amounts)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Shares
|
|
Weighted
Average
Grant Date
Fair Value
per Share
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
Aggregate
Intrinsic
Value
|
Nonvested, October 2, 2016
|
8.3
|
|
|
$
|
46.15
|
|
|
0.9
|
|
$
|
448
|
|
Granted
|
5.1
|
|
|
54.30
|
|
|
|
|
|
Vested
|
(4.3
|
)
|
|
42.09
|
|
|
|
|
|
Forfeited/canceled
|
(1.5
|
)
|
|
51.05
|
|
|
|
|
|
Nonvested, October 1, 2017
|
7.6
|
|
|
52.06
|
|
|
0.9
|
|
410
|
|
For fiscal 2016 and 2015, the weighted average fair value per RSU granted was
$58.81
and
$38.56
, respectively. As of
October 1, 2017
, total unrecogniz
ed stock-based compensation expense related to nonvested RSUs, net of estimated forfeitures, was approximately
$75 million
, before income taxes, and is expected to be recognized over a weighted average period of approximately
2.0 years
. The total fair value of RSUs vested was
$182 million
,
$169 million
and
$137 million
during fiscal years
2017
,
2016
and
2015
, respectively.
ESPP
Our ESPP allows eligible employees to contribute up to
10%
of their base earnings toward the quarterly purchase of our common stock, subject to an annual maximum dollar amount. The purchase price is
95%
of the fair market value of the stock on the last business day of the quarterly offering period. The number of shares issued under our ESPP was
0.5 million
in fiscal
2017
.
Deferred Compensation Plan
We have a Deferred Compensation Plan for Non-Employee Directors under which non-employee directors may, for any fiscal year, irrevocably elect to defer receipt of shares of common stock the director would have received upon vesting of restricted stock units. The number of deferred shares outstanding related to deferrals made under this plan is not material.
Defined Contribution Plans
We maintain voluntary defined contribution plans, both qualified and non-qualified, covering eligible employees as defined in the plan documents. Participating employees may elect to defer and contribute a portion of their eligible compensation to the plans up to limits stated in the plan documents, not to exceed the dollar amounts set by applicable laws.
Our matching contributions to all U.S. and non-U.S. plans were
$101.4 million
,
$86.2 million
and
$70.9 million
in fiscal years
2017
,
2016
and
2015
, respectively.
Note 13: Income Taxes
Components of earnings before income taxes
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Oct 1, 2017
|
|
Oct 2, 2016
|
|
Sep 27, 2015
|
United States
|
$
|
3,393.0
|
|
|
$
|
3,415.7
|
|
|
$
|
2,837.2
|
|
Foreign
|
924.5
|
|
|
782.9
|
|
|
1,065.8
|
|
Total earnings before income taxes
|
$
|
4,317.5
|
|
|
$
|
4,198.6
|
|
|
$
|
3,903.0
|
|
Provision/(benefit) for income taxes
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Oct 1, 2017
|
|
Oct 2, 2016
|
|
Sep 27, 2015
|
Current taxes:
|
|
|
|
|
|
U.S. federal
|
$
|
931.0
|
|
|
$
|
704.1
|
|
|
$
|
801.0
|
|
U.S. state and local
|
170.8
|
|
|
166.5
|
|
|
150.1
|
|
Foreign
|
216.6
|
|
|
218.5
|
|
|
172.2
|
|
Total current taxes
|
1,318.4
|
|
|
1,089.1
|
|
|
1,123.3
|
|
Deferred taxes:
|
|
|
|
|
|
U.S. federal
|
121.2
|
|
|
351.3
|
|
|
56.5
|
|
U.S. state and local
|
14.2
|
|
|
25.8
|
|
|
4.0
|
|
Foreign
|
(21.2
|
)
|
|
(86.5
|
)
|
|
(40.1
|
)
|
Total deferred taxes
|
114.2
|
|
|
290.6
|
|
|
20.4
|
|
Total income tax expense
|
$
|
1,432.6
|
|
|
$
|
1,379.7
|
|
|
$
|
1,143.7
|
|
Reconciliation of the statutory U.S. federal income tax rate with our effective income tax rate:
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Oct 1, 2017
|
|
Oct 2, 2016
|
|
Sep 27, 2015
|
Statutory rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes, net of federal tax benefit
|
2.8
|
|
|
3.0
|
|
|
2.8
|
|
Benefits and taxes related to foreign operations
|
(2.8
|
)
|
|
(2.2
|
)
|
|
(2.1
|
)
|
Domestic production activity deduction
|
(1.8
|
)
|
|
(1.9
|
)
|
|
(2.2
|
)
|
Gain resulting from acquisition of joint venture
|
—
|
|
|
—
|
|
|
(3.7
|
)
|
Other, net
|
—
|
|
|
(1.0
|
)
|
|
(0.5
|
)
|
Effective tax rate
|
33.2
|
%
|
|
32.9
|
%
|
|
29.3
|
%
|
U.S. income and foreign withholding taxes have not been provided on approximately
$3.7 billion
of cumulative undistributed earnings of foreign subsidiaries and equity investees, including cumulative unrealized currency translation adjustments. We intend to reinvest these earnings for the foreseeable future. If these amounts were distributed to the U.S., in the form of
dividends or otherwise, we would be subject to additional U.S. income taxes, which could be material. Determination of the amount of unrecognized deferred income tax liabilities on these earnings is not practicable because of the complexities with its hypothetical calculation, and the amount of liability, if any, is dependent on circumstances existing if and when remittance occurs.
Tax effect of temporary differences and carryforwards that comprise significant portions of deferred tax assets and liabilities
(in millions):
|
|
|
|
|
|
|
|
|
|
Oct 1, 2017
|
|
Oct 2, 2016
|
Deferred tax assets:
|
|
|
|
Property, plant and equipment
|
$
|
71.3
|
|
|
$
|
56.8
|
|
Accrued occupancy costs
|
118.0
|
|
|
104.5
|
|
Accrued compensation and related costs
|
95.0
|
|
|
88.6
|
|
Stored value card liability
|
130.7
|
|
|
124.2
|
|
Stock-based compensation
|
125.9
|
|
|
138.3
|
|
Net operating losses
|
80.8
|
|
|
79.0
|
|
Litigation charge
|
792.0
|
|
|
862.3
|
|
Other
|
180.8
|
|
|
197.4
|
|
Total
|
$
|
1,594.5
|
|
|
$
|
1,651.1
|
|
Valuation allowance
|
(80.1
|
)
|
|
(70.3
|
)
|
Total deferred tax asset, net of valuation allowance
|
$
|
1,514.4
|
|
|
$
|
1,580.8
|
|
Deferred tax liabilities:
|
|
|
|
Property, plant and equipment
|
(477.2
|
)
|
|
(445.7
|
)
|
Intangible assets and goodwill
|
(159.0
|
)
|
|
(175.9
|
)
|
Other
|
(89.1
|
)
|
|
(88.5
|
)
|
Total
|
(725.3
|
)
|
|
(710.1
|
)
|
Net deferred tax asset
|
$
|
789.1
|
|
|
$
|
870.7
|
|
Reported as:
|
|
|
|
Deferred income tax assets
|
795.4
|
|
|
885.4
|
|
Deferred income tax liabilities (included in Other long-term liabilities)
|
(6.3
|
)
|
|
(14.7
|
)
|
Net deferred tax asset
|
$
|
789.1
|
|
|
$
|
870.7
|
|
The valuation allowance as of
October 1, 2017
and
October 2, 2016
is primarily related to net operating losses and other deferred tax assets of consolidated foreign subsidiaries.
As of
October 1, 2017
, we had state net operating loss carryforwards of
$31.2 million
which will begin to expire in
fiscal 2024
, state tax credit carryforwards of
$18.0 million
, of which
$15.9 million
will begin to expire in fiscal 2024 and the remainder will begin to expire in fiscal 2018, and foreign net operating loss carryforwards of
$262.2 million
, of which
$207.3 million
have an indefinite carryforward period and the remainder expire at various dates starting from fiscal 2018.
Uncertain Tax Positions
As of
October 1, 2017
, we had
$196.9 million
of gross unrecognized tax benefits of which
$139.5 million
, if recognized, would affect our effective tax rate. We recognized an
expense
of
$5.2 million
, a
benefit
of
$3.6 million
and an
expense
of
$0.7 million
of interest and penalties in income tax expense, prior to the benefit of the federal tax deduction, for fiscal
2017
,
2016
and
2015
, respectively. As of
October 1, 2017
and
October 2, 2016
, we had accrued interest and penalties of
$11.2 million
and
$7.7 million
, respectively, within our consolidated balance sheets.
The following table summarizes the activity related to our unrecognized tax benefits
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oct 1, 2017
|
|
Oct 2, 2016
|
|
Sep 27, 2015
|
Beginning balance
|
$
|
146.5
|
|
|
$
|
150.4
|
|
|
$
|
112.7
|
|
Increase related to prior year tax positions
|
10.4
|
|
|
—
|
|
|
7.9
|
|
Decrease related to prior year tax positions
|
—
|
|
|
(23.6
|
)
|
|
(0.9
|
)
|
Increase related to current year tax positions
|
41.3
|
|
|
33.7
|
|
|
32.0
|
|
Decrease related to current year tax positions
|
—
|
|
|
—
|
|
|
(0.6
|
)
|
Decreases related to settlements with taxing authorities
|
—
|
|
|
(3.1
|
)
|
|
(0.7
|
)
|
Decrease related to lapsing of statute of limitations
|
(1.3
|
)
|
|
(10.9
|
)
|
|
—
|
|
Ending balance
|
$
|
196.9
|
|
|
$
|
146.5
|
|
|
$
|
150.4
|
|
We are currently under examination, or may be subject to examination, by various U.S. federal, state, local and foreign tax jurisdictions for fiscal years 2006 through 2016.
We are no longer subject to U.S. federal or state examination for years prior to fiscal year 2011, with the exception of
one
state. We are no longer subject to examination in any material international markets prior to 2006.
It is reasonably possible that a portion of the Company's gross unrecognized tax benefits may be recognized by the end of fiscal 2018 as a result of a lapse of the statute of limitations or resolution of examinations with tax authorities. We estimate this range to be approximately
$42 million
to
$75 million
.
Note 14: Earnings per Share
Calculation of net earnings per common share (“EPS”) — basic and diluted
(in millions, except EPS)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Oct 1, 2017
|
|
Oct 2, 2016
|
|
Sep 27, 2015
|
Net earnings attributable to Starbucks
|
$
|
2,884.7
|
|
|
$
|
2,817.7
|
|
|
$
|
2,757.4
|
|
Weighted average common shares outstanding (for basic calculation)
|
1,449.5
|
|
|
1,471.6
|
|
|
1,495.9
|
|
Dilutive effect of outstanding common stock options and RSUs
|
12.0
|
|
|
15.1
|
|
|
17.5
|
|
Weighted average common and common equivalent shares outstanding (for diluted calculation)
|
1,461.5
|
|
|
1,486.7
|
|
|
1,513.4
|
|
EPS — basic
|
$
|
1.99
|
|
|
$
|
1.91
|
|
|
$
|
1.84
|
|
EPS — diluted
|
$
|
1.97
|
|
|
$
|
1.90
|
|
|
$
|
1.82
|
|
Potential dilutive shares consist of the incremental common shares issuable upon the exercise of outstanding stock options (both vested and non-vested) and unvested RSUs, calculated using the treasury stock method. The calculation of dilutive shares outstanding excludes out-of-the-money stock options (i.e., such options’ exercise prices were greater than the average market price of our common shares for the period) because their inclusion would have been antidilutive. We had
11.4 million
and
5.4 million
out-of-the-money stock options as of
October 1, 2017
and
October 2, 2016
, respectively. There were
no
out-of-the-money stock options as of
September 27, 2015
.
Note 15: Commitments and Contingencies
Contractual Commitments
In the fourth quarter of fiscal 2017, we signed an agreement to acquire the remaining
50%
ownership of our East China joint venture from Uni-President Enterprises Corporation (“UPEC”) and President Chain Store Corporation (“PCSC”) for approximately
$1.3 billion
to unify our business operations across mainland China. The acquisition will convert these licensed stores to company-operated stores and is expected to close by early calendar year 2018, subject to regulatory approval and customary closing conditions. Concurrently, with the purchase of our East China joint venture, UPEC and PCSC will assume 100% ownership of Starbucks operations in Taiwan by acquiring our
50%
interest in President Starbucks Coffee Taiwan Limited for approximately
$175 million
. The sale is also expected to close by early calendar year 2018.
Legal Proceedings
Starbucks is party to various other legal proceedings arising in the ordinary course of business, including, at times, certain employment litigation cases that have been certified as class or collective actions, but is not currently a party to any legal
proceeding that management believes could have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Note 16: Segment Reporting
Our chief executive officer and executive chairman comprise the Company's Chief Operating Decision Maker function (“CODM”). Segment information is prepared on the same basis that our CODM manages the segments, evaluates financial results, and makes key operating decisions.
We have
four
reportable operating segments: 1) Americas, inclusive of the U.S., Canada, and Latin America; 2) China/Asia Pacific (“CAP”); 3) Europe, Middle East, and Africa (“EMEA”) and 4) Channel Development.
Americas, CAP, and EMEA operations sell coffee and other beverages, complementary food, packaged coffees, single-serve coffee products and a focused selection of merchandise through company-operated stores and licensed stores.
Our Americas segment is our most mature business and has achieved significant scale. Certain markets within our CAP and EMEA operations are still in the early stages of development and require a more extensive support organization, relative to their current levels of revenue and operating income, than our Americas operations. The Americas, CAP and EMEA segments also include certain foodservice accounts, primarily in Canada, Japan and the U.K.
Channel Development operations sell a selection of packaged coffees and single-serve products, as well as a selection of premium Tazo
®
teas globally. Channel Development operations also produce and sell a variety of ready-to-drink beverages, such as Frappuccino
®
coffee drinks, Starbucks Doubleshot
®
espresso drinks, Starbucks Refreshers
®
beverages, Teavana™ tea beverages and chilled multi-serve beverages. The U.S. foodservice business, which is included in the Channel Development segment, sells coffee and other related products to institutional foodservice companies.
Consolidated revenue mix by product type
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Oct 1, 2017
|
|
Oct 2, 2016
|
|
Sep 27, 2015
|
Beverage
|
$
|
12,915.0
|
|
|
58
|
%
|
|
$
|
12,383.4
|
|
|
58
|
%
|
|
$
|
11,115.4
|
|
|
58
|
%
|
Food
|
3,832.1
|
|
|
17
|
%
|
|
3,495.0
|
|
|
16
|
%
|
|
3,085.3
|
|
|
16
|
%
|
Packaged and single-serve coffees and teas
|
2,883.6
|
|
|
13
|
%
|
|
2,866.0
|
|
|
14
|
%
|
|
2,619.9
|
|
|
14
|
%
|
Other
(1)
|
2,756.1
|
|
|
12
|
%
|
|
2,571.5
|
|
|
12
|
%
|
|
2,342.1
|
|
|
12
|
%
|
Total
|
$
|
22,386.8
|
|
|
100
|
%
|
|
$
|
21,315.9
|
|
|
100
|
%
|
|
$
|
19,162.7
|
|
|
100
|
%
|
(1)
“Other” primarily consists of royalty and licensing revenues, beverage-related ingredients, serveware, and ready-to-drink beverages, among other items.
Information by geographic area (
in millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Oct 1, 2017
|
|
Oct 2, 2016
|
|
Sep 27, 2015
|
Net revenues:
|
|
|
|
|
|
United States
|
$
|
16,527.1
|
|
|
$
|
15,774.8
|
|
|
$
|
14,123.7
|
|
Other countries
|
5,859.7
|
|
|
5,541.1
|
|
|
5,039.0
|
|
Total
|
$
|
22,386.8
|
|
|
$
|
21,315.9
|
|
|
$
|
19,162.7
|
|
|
|
|
|
|
|
Long-lived assets
(1)
:
|
|
|
|
|
|
United States
|
$
|
5,848.3
|
|
|
$
|
6,012.8
|
|
|
$
|
5,795.2
|
|
Other countries
|
3,234.0
|
|
|
3,541.8
|
|
|
2,639.9
|
|
Total
|
$
|
9,082.3
|
|
|
$
|
9,554.6
|
|
|
$
|
8,435.1
|
|
(1)
Long-lived assets for fiscal 2016 and fiscal 2015 have been adjusted for the adoption of new accounting guidance related to the reclassification of debt issuance costs as discussed in
Note 1
, Summary of Significant Accounting Policies.
No customer accounts for 10% or more of our revenues
. Revenues are shown based on the geographic location of our customers. Revenues from countries other than the U.S. consist primarily of revenues from Japan, Canada, China and the U.K., which together account for approximately
77%
of net revenues from other countries for fiscal
2017
.
Management evaluates the performance of its operating segments based on net revenues and operating income. The accounting policies of the operating segments are the same as those described in
Note 1
, Summary of Significant Accounting Policies.
Operating income represents earnings before other income and expenses and income taxes. Management does not evaluate the performance of its operating segments using asset measures. The identifiable assets by segment disclosed in this note are those assets specifically identifiable within each segment and include cash and cash equivalents, net property, plant and equipment, equity and cost investments, goodwill, and other intangible assets. Assets not attributed to reportable operating segments below are corporate assets and are primarily comprised of cash and cash equivalents available for general corporate purposes, investments, assets of the corporate headquarters and roasting facilities, and inventory.
The table below presents financial information for our reportable operating segments and All Other Segments for the years ended
October 1, 2017
,
October 2, 2016
and
September 27, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
in millions
)
|
Americas
|
|
China /
Asia Pacific
|
|
EMEA
|
|
Channel
Development
|
|
All Other Segments
|
|
Segment
Total
|
Fiscal 2017
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
$
|
15,652.7
|
|
|
$
|
3,240.2
|
|
|
$
|
1,013.7
|
|
|
$
|
2,008.6
|
|
|
$
|
471.6
|
|
|
$
|
22,386.8
|
|
Depreciation and amortization expenses
|
615.0
|
|
|
202.2
|
|
|
31.3
|
|
|
2.2
|
|
|
10.1
|
|
|
860.8
|
|
Income from equity investees
|
—
|
|
|
197.0
|
|
|
—
|
|
|
194.4
|
|
|
—
|
|
|
391.4
|
|
Operating income/(loss)
|
3,663.2
|
|
|
765.0
|
|
|
116.1
|
|
|
893.4
|
|
|
(174.3
|
)
|
|
5,263.4
|
|
Total assets
|
3,327.2
|
|
|
2,770.9
|
|
|
273.8
|
|
|
114.0
|
|
|
771.9
|
|
|
7,257.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2016
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
$
|
14,795.4
|
|
|
$
|
2,938.8
|
|
|
$
|
1,124.9
|
|
|
$
|
1,932.5
|
|
|
$
|
524.3
|
|
|
$
|
21,315.9
|
|
Depreciation and amortization expenses
|
590.1
|
|
|
180.6
|
|
|
40.8
|
|
|
2.8
|
|
|
13.3
|
|
|
827.6
|
|
Income from equity investees
|
—
|
|
|
150.1
|
|
|
1.5
|
|
|
166.6
|
|
|
—
|
|
|
318.2
|
|
Operating income/(loss)
|
3,742.0
|
|
|
631.6
|
|
|
151.6
|
|
|
807.3
|
|
|
(38.4
|
)
|
|
5,294.1
|
|
Total assets
|
3,424.6
|
|
|
2,740.2
|
|
|
552.1
|
|
|
67.1
|
|
|
861.1
|
|
|
7,645.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2015
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
$
|
13,293.4
|
|
|
$
|
2,395.9
|
|
|
$
|
1,216.7
|
|
|
$
|
1,730.9
|
|
|
$
|
525.8
|
|
|
$
|
19,162.7
|
|
Depreciation and amortization expenses
|
522.3
|
|
|
150.7
|
|
|
52.0
|
|
|
2.7
|
|
|
16.3
|
|
|
744.0
|
|
Income from equity investees
|
—
|
|
|
119.6
|
|
|
3.1
|
|
|
127.2
|
|
|
—
|
|
|
249.9
|
|
Operating income/(loss)
|
3,223.3
|
|
|
500.5
|
|
|
168.2
|
|
|
653.9
|
|
|
(24.8
|
)
|
|
4,521.1
|
|
Total assets
|
2,726.7
|
|
|
2,230.5
|
|
|
749.1
|
|
|
87.3
|
|
|
1,785.3
|
|
|
7,578.9
|
|
The following table reconciles total segment operating income in the table above to consolidated earnings before income taxes
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Oct 1, 2017
|
|
Oct 2, 2016
|
|
Sep 27, 2015
|
Total segment operating income
|
$
|
5,263.4
|
|
|
$
|
5,294.1
|
|
|
$
|
4,521.1
|
|
Unallocated corporate operating expenses
|
(1,128.7
|
)
|
|
(1,122.2
|
)
|
|
(920.1
|
)
|
Consolidated operating income
|
4,134.7
|
|
|
4,171.9
|
|
|
3,601.0
|
|
Gain resulting from acquisition of joint venture
|
—
|
|
|
—
|
|
|
390.6
|
|
Loss on extinguishment of debt
|
—
|
|
|
—
|
|
|
(61.1
|
)
|
Interest income and other, net
|
275.3
|
|
|
108.0
|
|
|
43.0
|
|
Interest expense
|
(92.5
|
)
|
|
(81.3
|
)
|
|
(70.5
|
)
|
Earnings before income taxes
|
$
|
4,317.5
|
|
|
$
|
4,198.6
|
|
|
$
|
3,903.0
|
|
Note 17: Selected Quarterly Financial Information
(unaudited; in millions, except EPS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Full
Year
|
Fiscal 2017:
|
|
|
|
|
|
|
|
|
|
Net revenues
|
$
|
5,732.9
|
|
|
$
|
5,294.0
|
|
|
$
|
5,661.5
|
|
|
$
|
5,698.3
|
|
|
$
|
22,386.8
|
|
Operating income
|
1,132.6
|
|
|
935.4
|
|
|
1,044.2
|
|
|
1,022.5
|
|
|
4,134.7
|
|
Net earnings attributable to Starbucks
|
751.8
|
|
|
652.8
|
|
|
691.6
|
|
|
788.5
|
|
|
2,884.7
|
|
EPS — diluted
|
0.51
|
|
|
0.45
|
|
|
0.47
|
|
|
0.54
|
|
|
1.97
|
|
Fiscal 2016
(1)
:
|
|
|
|
|
|
|
|
|
|
Net revenues
|
$
|
5,373.5
|
|
|
$
|
4,993.2
|
|
|
$
|
5,238.0
|
|
|
$
|
5,711.2
|
|
|
$
|
21,315.9
|
|
Operating income
|
1,058.0
|
|
|
864.2
|
|
|
1,022.3
|
|
|
1,227.5
|
|
|
4,171.9
|
|
Net earnings attributable to Starbucks
|
687.6
|
|
|
575.1
|
|
|
754.1
|
|
|
801.0
|
|
|
2,817.7
|
|
EPS — diluted
|
0.46
|
|
|
0.39
|
|
|
0.51
|
|
|
0.54
|
|
|
1.90
|
|
(1)
The fiscal year ended on October 2, 2016, included 53 weeks, with the 53
rd
week falling in our fourth fiscal quarter.
Note 18: Subsequent Events
On October 25, 2017, we replaced our
$1.5 billion
2016 credit facility with our new
$2.0 billion
unsecured 5-year revolving credit facility (the “2018 credit facility”), set to mature on
October 25, 2022
and a
$1.0 billion
unsecured 364-Day credit facility (the “364-day credit facility”), set to mature on
October 24, 2018
. We have the option, subject to negotiation and agreement with the related banks, to increase either facility by an additional
$500 million
.
On October 27, 2017 we increased our commercial paper program from
$1 billion
to
$3 billion
, allowing us to issue unsecured commercial paper notes up to this maximum aggregate amount outstanding at any time.
On November 2, 2017, we entered into an agreement to sell assets associated with our Tazo brand including Tazo
®
signature recipes, intellectual property and inventory to Unilever for a total of
$384.0 million
. This transaction is subject to customary closing conditions, and Starbucks expects the closing date to occur in the first quarter of fiscal 2018. The transaction will result in a net gain and will be included in interest income and other, net on our consolidated statements of earnings. Results from Tazo
operations are currently reported primarily in Channel Development.