|
|
Item 7.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
General
Our fiscal year ends on the Sunday closest to September 30. The fiscal years ended on
September 30, 2018
and
October 1, 2017
included 52 weeks. The fiscal year ended on October 2, 2016 included 53 weeks, with the extra week falling in our fourth fiscal quarter. Comparable store sales percentages for fiscal 2016 are calculated excluding the 53
rd
week. All references to store counts, including data for new store openings, are reported net of related store closures, unless otherwise noted.
Financial Highlights
|
|
•
|
Total net revenues increased
10%
to
$24.7 billion
in fiscal
2018
compared to
$22.4 billion
in fiscal
2017
.
|
|
|
•
|
Global comparable store sales grew 2% driven by a 3% increase in average ticket.
|
|
|
•
|
Consolidated operating income decreased to
$3.9 billion
in fiscal
2018
compared to operating income of
$4.1 billion
in fiscal
2017
. Fiscal
2018
operating margin was
15.7%
compared to
18.5%
in fiscal
2017
. Operating margin compression in fiscal
2018
was primarily driven by food and beverage-related mix shifts, largely in the Americas segment, the impact of our ownership change in East China at the end of the first quarter of fiscal 2018, higher restructuring and impairment costs and higher salaries and benefits related to digital platforms, technology infrastructure and innovations.
|
|
|
•
|
Restructuring and impairment charges increased to
$224 million
in fiscal 2018 compared to
$154 million
in fiscal 2017. Increased costs were primarily related to higher asset impairments associated with the decision to close certain Starbucks
®
company-operated stores in the U.S. and Canada, higher goodwill impairment charges related to our Switzerland retail reporting unit and EMEA restructuring costs.
|
|
|
•
|
Earnings per share (“EPS”) for fiscal
2018
increased to
$3.24
, compared to EPS of
$1.97
in fiscal 2017. The increase was primarily driven by the gains from the acquisition of our East China joint venture and the sale of our Tazo brand. Additionally, the net favorable impact from the Tax Cuts and Jobs Act (the “Tax Act”) also contributed to the increase.
|
|
|
•
|
Cash flows from operations were
$11.9 billion
in fiscal
2018
compared to
$4.3 billion
in fiscal
2017
. The change was primarily due to receipt of the upfront payment from Nestlé related to the Global Coffee Alliance.
|
|
|
•
|
Capital expenditures were
$2.0 billion
in fiscal
2018
compared to
$1.5 billion
in fiscal
2017
.
|
|
|
•
|
We returned
$8.9 billion
to our shareholders in fiscal
2018
through share repurchases and dividends compared to $3.5 billion in fiscal 2017.
|
Overview
Starbucks results for fiscal 2018 reflect the impact of certain restructuring and streamlining efforts, beginning in the fourth quarter of fiscal 2017, to focus on accelerating growth in high-returning businesses and removing non-core, slow growth activities. These efforts primarily include the acquisition of our East China joint venture, the conversion of our Singapore, Taiwan and Brazil operations to licensed models, the closure of Teavana
TM/MC
retail stores, the sale of the Tazo brand, the licensing of our CPG and foodservice businesses to Nestlé, and the closure of certain company-operated stores in the U.S. and Canada, among other actions. These streamlining efforts span across all segments and our corporate functions.
On August 26, 2018, our Channel Development segment finalized licensing and distribution agreements with Nestlé to sell and market our CPG and foodservice products. The scope of the arrangement converts the majority of our previously defined Channel Development segment operations, as well as certain smaller businesses previously reported in the Americas, EMEA and Corporate and Other (previously All Other Segment), from company-owned to licensed operations with Nestlé. As a result, we realigned our organizational and operating segment structures in support of the newly established Global Coffee Alliance. Our reportable segments have been restated as if those smaller businesses were previously within our Channel Development segment.
Concurrent with the change in reportable operating segments, we revised our prior period financial information to reflect comparable financial information for the new segment structure. Further, in an effort to report operating expenses in line with the corresponding revenue generating activities, we have changed the classification of certain costs, primarily within our CAP segment and mainly from other operating expenses to general and administrative expenses. This reclassification has been retrospectively applied and was determined to be immaterial.
Starbucks largest acquisition to date affects our CAP segment. As a result of acquiring the remaining interest in our East China joint venture at the end of the first quarter of fiscal 2018, we began recording 100% of its revenues and expenses on our consolidated statements of earnings at the beginning of the second quarter of fiscal 2018. This is in contrast with our previous joint venture model, where we recorded only revenues and expenses from products sales to and royalties received from East China, as well as our proportionate share of the joint venture's net profit. The change from equity method to consolidation
method lowered the operating margin of our Consolidated and CAP segment, primarily due to incremental depreciation and amortization expenses and lower income from equity investees.
Starbucks results for fiscal
2018
continued to demonstrate the strength of our global business model and our ability to successfully make disciplined investments in our business and our partners. Consolidated total net revenues increased 10% to $24.7 billion, primarily driven by incremental revenues from 1,997 net new store openings over the past 12 months, incremental revenues from the impact of our ownership change in East China, 2% growth in global comparable store sales and favorable foreign currency translation. These increases were partially offset by the absence of revenue related to the closure of our Teavana
TM/MC
retail stores, initiated in the fourth quarter of fiscal 2017 and substantially ceased during fiscal 2018 and the sale of our Singapore retail operations to a licensed partner in the fourth quarter of fiscal 2017. Consolidated operating income declined $251 million, or 6%, to $3.9 billion. Operating margin declined 280 basis points to 15.7%, primarily due to food and beverage-related mix shifts, largely in the Americas segment, the impact of our ownership change in East China, higher restructuring and impairment costs and higher salaries and benefits related to digital platforms, technology infrastructure and innovations. Earnings per share of $3.24 increased 64% over the prior year earnings per share of $1.97.
Americas revenue grew by 7% to $16.7 billion, primarily driven by incremental revenues from 895 net new store openings over the last 12 months and comparable store sales growth of 2%, partially offset by the absence of revenue related to the conversion of our Brazil retail business to fully licensed operations in the second quarter of fiscal 2018. Operating income declined $39 million to $3.6 billion and operating margin of 21.6% declined 180 basis points from a year ago, primarily due to food and beverage-related mix shifts, increased investments in our store partners and the impact of the May 29th anti-bias training. These increases were partially offset by sales leverage.
In our CAP segment, revenue grew by 38% to $4.5 billion, primarily driven by the impact of our ownership change in East China at the end of the first quarter of fiscal 2018, incremental revenues from 756 net new stores over the past 12 months. These increases were partially offset by the absence of revenue related to the sale of our Singapore retail operations to fully licensed operations in the fourth quarter of fiscal 2017. Operating income grew 13% to $867 million, while operating margin declined 420 basis points to 19.4%, primarily due to the impact of our ownership change in East China. We now operate 8,530 stores in 15 markets in our CAP segment making this our second largest reportable segment.
In our EMEA segment, revenue grew by 9% to $1.0 billion, primarily driven by increased revenues from the opening of 356 net new licensed stores over the past 12 months and favorable foreign currency translation. Operating margin declined 400 basis points to 5.9% primarily due to higher impairment of goodwill related to our Switzerland retail business and restructuring costs, including severance, asset impairments and business process optimization expenses. These decreases were partially offset by lapping of a prior year tax settlement.
Channel Development segment revenues grew by 2% to $2.3 billion, primarily driven by increased sales of packaged coffee and premium single-serve products, lapping a prior year revenue deduction adjustment and favorable foreign currency translation. These increases were partially offset by the net impact from the sale of our Tazo brand in the first quarter of fiscal 2018 and licensing our CPG and foodservice businesses to Nestlé beginning on August 26, 2018. Operating income declined $40 million, or 4%, to $927 million. Operating margin declined 250 basis points to 40.4%, primarily driven by business taxes associated with the upfront payment received from Nestlé, Global Coffee Alliance headcount related costs, including employee bonus and retention costs, and the impact of our ownership changes, including licensing our CPG and foodservice businesses to Nestlé and the sale of our Tazo brand.
Fiscal
2019
— The View Ahead
Turning to fiscal
2019
, we expect continued growth through thoughtful long-term investments that create value and reward shareholders. These results are expected to be driven by our three strategic priorities, which include:
|
|
•
|
Accelerate growth in our targeted, long-term growth markets of the U.S. and China
|
|
|
•
|
Expand the global reach of the Starbucks brand leveraging the Global Coffee Alliance
|
|
|
•
|
Sharpen our focus on increasing shareholder returns
|
To successfully achieve these priorities, we will undertake a number of initiatives, including growing our core business in the U.S. through enhancement of the in-store experience, delivery of customer-relevant beverage innovation and digital relationships, and growing our business in China through new store expansion, comparable store sales and business partnerships. Further, we will continue expanding the reach of the Starbucks brand through retail market realignment, including our plans to license the France, Netherlands, Belgium and Luxembourg markets, business simplification and the Global Coffee Alliance. These additional streamlining initiatives will enable us to amplify our focus and resources on core value drivers with the greatest prospect for returns.
We expect moderate revenue growth in fiscal 2019, reflecting implementation of our streamlining activities and driven by comparable store sales growth and the opening of approximately 2,100 net new stores globally.
Consolidated operating margin is expected to decrease slightly in fiscal 2019 when compared to fiscal 2018, and our effective tax rate is expected to increase slightly from fiscal 2018. While GAAP full-year diluted earnings per share is expected to decrease in fiscal 2019, full-year non-GAAP diluted earnings per share is expected to grow when excluding gains from acquisitions and divestitures in fiscal 2018, integration costs related to East China and Japan and restructuring and impairment expenses.
Capital expenditures in fiscal
2019
are expected to be approximately $2.0 billion, primarily related to our retail portfolio including investments in our new and existing stores and strategic store-related initiatives.
Acquisitions and Divestitures
See
Note 2
, Acquisitions, Divestitures and Strategic Alliance, to the consolidated financial statements included in Item 8 of Part II of this 10-K for information regarding acquisitions and divestitures.
RESULTS OF OPERATIONS — FISCAL
2018
COMPARED TO FISCAL
2017
Consolidated results of operations
(in millions)
:
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Sep 30,
2018
|
|
Oct 1,
2017
|
|
%
Change
|
Net revenues:
|
|
|
|
|
|
Company-operated stores
|
$
|
19,690.3
|
|
|
$
|
17,650.7
|
|
|
11.6
|
%
|
Licensed stores
|
2,652.2
|
|
|
2,355.0
|
|
|
12.6
|
|
Other
|
2,377.0
|
|
|
2,381.1
|
|
|
(0.2
|
)
|
Total net revenues
|
$
|
24,719.5
|
|
|
$
|
22,386.8
|
|
|
10.4
|
%
|
Total net revenues increased
$2.3 billion
, or
10%
, over fiscal
2017
, primarily driven by increased revenues from company-operated stores (
$2.0 billion
). The growth in company-operated store revenues was driven by incremental revenues from 816 net new Starbucks
®
company-operated store openings over the past 12 months ($904 million), incremental revenues from the impact of our ownership change in East China ($903 million) and a
2%
increase in comparable store sales ($345 million), attributable to a
3%
increase in average ticket.
Licensed store revenue growth also contributed to the increase in total net revenues (
$297 million
), primarily due to increased product and equipment sales to and royalty revenues from our licensees ($298 million), largely due to the opening of 1,181 net new Starbucks
®
licensed stores over the past 12 months, the conversions of both the Singapore and Taiwan markets to fully licensed in the fourth quarter of fiscal 2017 and the first quarter of fiscal 2018, respectively ($44 million). These increases were partially offset by the impact of our ownership change in East China at the end of the first quarter of fiscal 2018 ($53 million).
Other revenues decreased
$4 million
, primarily driven by the absence of revenue from the sale of our Tazo brand in the first quarter of fiscal 2018 ($56 million), the closure of our e-commerce business in the fourth quarter of fiscal 2017 ($51 million) and licensing our CPG and foodservice businesses to Nestlé late in the fourth quarter of fiscal 2018 ($50 million). Partially offsetting these decreases were increased sales of packaged coffee and premium single-serve products ($115 million).
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Sep 30,
2018
|
|
Oct 1,
2017
|
|
Sep 30,
2018
|
|
Oct 1,
2017
|
|
|
|
|
|
As a % of Total
Net Revenues
|
Cost of sales including occupancy costs
|
$
|
10,174.5
|
|
|
$
|
9,034.3
|
|
|
41.2
|
%
|
|
40.4
|
%
|
Store operating expenses
|
7,193.2
|
|
|
6,493.3
|
|
|
29.1
|
|
|
29.0
|
|
Other operating expenses
|
539.3
|
|
|
500.3
|
|
|
2.2
|
|
|
2.2
|
|
Depreciation and amortization expenses
|
1,247.0
|
|
|
1,011.4
|
|
|
5.0
|
|
|
4.5
|
|
General and administrative expenses
|
1,759.0
|
|
|
1,450.7
|
|
|
7.1
|
|
|
6.5
|
|
Restructuring and impairments
|
224.4
|
|
|
153.5
|
|
|
0.9
|
|
|
0.7
|
|
Total operating expenses
|
21,137.4
|
|
|
18,643.5
|
|
|
85.5
|
|
|
83.3
|
|
Income from equity investees
|
301.2
|
|
|
391.4
|
|
|
1.2
|
|
|
1.7
|
|
Operating income
|
$
|
3,883.3
|
|
|
$
|
4,134.7
|
|
|
15.7
|
%
|
|
18.5
|
%
|
Store operating expenses as a % of related revenues
|
|
|
|
|
36.5
|
%
|
|
36.8
|
%
|
Other operating expenses as a % of non-company-operated store revenues
|
|
|
|
|
10.7
|
%
|
|
10.6
|
%
|
Cost of sales including occupancy costs as a percentage of total net revenues increased 80 basis points, primarily due to food and beverage-related mix shifts (approximately 120 basis points), largely in the Americas segment.
Store operating expenses as a percentage of total net revenues increased 10 basis points. Store operating expenses as a percentage of company-operated store revenues decreased 30 basis points, primarily driven by the impact of our ownership change in East China (approximately 60 basis points).
Depreciation and amortization expenses as a percentage of total net revenues increased 50 basis points, primarily due to the impact of our ownership change in East China (approximately 60 basis points).
General and administrative expenses as a percentage of total net revenues increased 60 basis points, primarily due to higher salaries and benefits related to digital platforms, technology infrastructure and innovations (approximately 20 basis points) and the 2018 U.S. stock award (approximately 20 basis points).
Restructuring and impairment expenses increased $71 million, primarily due to higher asset impairments associated with the decision to close certain company-operated stores in the U.S. and Canada ($23 million), higher goodwill impairment charges associated with our Switzerland company-operated retail reporting unit ($20 million) and EMEA restructuring costs, including severance and asset impairments ($18 million).
Income from equity investees decreased $90 million, primarily due to the impact of ownership changes in our East China and Taiwan joint ventures, partially offset by higher South Korea joint venture income.
The combination of these changes resulted in an overall decrease in operating margin of 280 basis points in fiscal
2018
when compared to fiscal
2017
.
Other Income and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Sep 30,
2018
|
|
Oct 1,
2017
|
|
Sep 30,
2018
|
|
Oct 1,
2017
|
|
|
|
|
|
As a % of Total
Net Revenues
|
Operating income
|
$
|
3,883.3
|
|
|
$
|
4,134.7
|
|
|
15.7
|
%
|
|
18.5
|
%
|
Gain resulting from acquisition of joint venture
|
1,376.4
|
|
|
—
|
|
|
5.6
|
|
|
—
|
|
Net gain resulting from divestiture of certain operations
|
499.2
|
|
|
93.5
|
|
|
2.0
|
|
|
0.4
|
|
Interest income and other, net
|
191.4
|
|
|
181.8
|
|
|
0.8
|
|
|
0.8
|
|
Interest expense
|
(170.3
|
)
|
|
(92.5
|
)
|
|
(0.7
|
)
|
|
(0.4
|
)
|
Earnings before income taxes
|
5,780.0
|
|
|
4,317.5
|
|
|
23.4
|
|
|
19.3
|
|
Income tax expense
|
1,262.0
|
|
|
1,432.6
|
|
|
5.1
|
|
|
6.4
|
|
Net earnings including noncontrolling interests
|
4,518.0
|
|
|
2,884.9
|
|
|
18.3
|
|
|
12.9
|
|
Net earnings/(loss) attributable to noncontrolling interests
|
(0.3
|
)
|
|
0.2
|
|
|
—
|
|
|
—
|
|
Net earnings attributable to Starbucks
|
$
|
4,518.3
|
|
|
$
|
2,884.7
|
|
|
18.3
|
%
|
|
12.9
|
%
|
Effective tax rate including noncontrolling interests
|
|
|
|
|
21.8
|
%
|
|
33.2
|
%
|
Gain resulting from acquisition of joint venture was due to remeasuring our preexisting 50% ownership interest in our East China joint venture to fair value upon acquisition.
Net gain resulting from divestiture of certain operations primarily consists of sales of our Tazo brand and Taiwan joint venture, partially offset by the net loss from the sale of our Brazil retail operations in fiscal 2018. The gain in fiscal 2017 was primarily due to the sale of our Singapore retail operations.
Interest income and other, net increased
$10 million
, primarily due to recognizing higher income on unredeemed stored value card balances, partially offset by lapping the gain on the sale of our investment in Square, Inc. warrants in the prior year period.
Interest expense increased
$78 million
primarily related to additional interest incurred on long-term debt issued in November 2017, March 2018 and August 2018.
The effective tax rate for fiscal
2018
was
21.8%
compared to
33.2%
for fiscal
2017
. The
decrease
in the effective tax rate was primarily due to the gain on the purchase of our East China joint venture that is not subject to income tax (approximately 580 basis points) and the Tax Act (approximately 480 basis points). The impact from the Tax Act primarily included favorability from the lower corporate income tax rate applied to our fiscal 2018 results (approximately 760 basis points) and the remeasurement of our net deferred tax liabilities (approximately 130 basis points). This favorability was partially offset by the estimated transition tax on our accumulated undistributed foreign earnings (approximately 400 basis points). See
Note 13
, Income Taxes, for further discussion.
Segment Information
Results of operations by segment
(in millions)
:
Americas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Sep 30,
2018
|
|
Oct 1,
2017
|
|
Sep 30,
2018
|
|
Oct 1,
2017
|
|
|
|
|
|
As a % of Americas
Total Net Revenues
|
Net revenues:
|
|
|
|
|
|
|
|
Company-operated stores
|
$
|
14,905.1
|
|
|
$
|
13,996.4
|
|
|
89.1
|
%
|
|
89.6
|
%
|
Licensed stores
|
1,814.0
|
|
|
1,617.3
|
|
|
10.8
|
|
|
10.4
|
|
Other
|
13.1
|
|
|
6.3
|
|
|
0.1
|
|
|
—
|
|
Total net revenues
|
16,732.2
|
|
|
15,620.0
|
|
|
100.0
|
|
|
100.0
|
|
Cost of sales including occupancy costs
|
6,301.2
|
|
|
5,695.0
|
|
|
37.7
|
|
|
36.5
|
|
Store operating expenses
|
5,747.9
|
|
|
5,320.2
|
|
|
34.4
|
|
|
34.1
|
|
Other operating expenses
|
150.0
|
|
|
130.8
|
|
|
0.9
|
|
|
0.8
|
|
Depreciation and amortization expenses
|
638.3
|
|
|
614.9
|
|
|
3.8
|
|
|
3.9
|
|
General and administrative expenses
|
247.0
|
|
|
201.4
|
|
|
1.5
|
|
|
1.3
|
|
Restructuring and impairments
|
33.4
|
|
|
4.1
|
|
|
0.2
|
|
|
—
|
|
Total operating expenses
|
13,117.8
|
|
|
11,966.4
|
|
|
78.4
|
|
|
76.6
|
|
Operating income
|
$
|
3,614.4
|
|
|
$
|
3,653.6
|
|
|
21.6
|
%
|
|
23.4
|
%
|
Store operating expenses as a % of related revenues
|
|
|
|
|
38.6
|
%
|
|
38.0
|
%
|
Other operating expenses as a % of non-company-operated store revenues
|
|
|
|
|
8.2
|
%
|
|
8.1
|
%
|
Revenues
Americas total net revenues for fiscal
2018
increased
$1.1 billion
, or
7%
, over fiscal
2017
, primarily due to increased revenues from company-operated stores (contributing
$909 million
) and licensed stores (contributing
$197 million
).
The increase in company-operated store revenues was driven by incremental revenues from 383 net new Starbucks
®
company-operated store openings over the past 12 months ($604 million) and a
2%
increase in
comparable store sales ($319 million), attributable to a
3%
increase in average ticket, partially offset by the conversion of our Brazil retail business to fully licensed operations in the second quarter of fiscal 2018 ($40 million).
The increase in licensed store revenues was primarily driven by higher product sales to and royalty revenues from our licensees ($173 million), primarily resulting from the opening of 512 net new Starbucks
®
licensed stores over the past 12 months.
Operating Expenses
Cost of sales including occupancy costs as a percentage of total net revenues increased 120 basis points, primarily due to food and beverage-related mix shifts (approximately 130 basis points).
Store operating expenses as a percentage of total net revenues increased 30 basis points. As a percentage of company-operated store revenues, store operating expenses increased 60 basis points, primarily driven by increased investments in our store partners (approximately 140 basis points), which included incremental investments funded by the Tax Act, partially offset by sales leverage (approximately 60 basis points).
General and administrative expenses as a percentage of total net revenues increased 20 basis points, primarily driven by the May 29th anti-bias training (approximately 20 basis points).
Restructuring and impairment charges increased $29 million due to higher asset impairments in fiscal 2018 compared to fiscal 2017 associated with the decision to close certain U.S. company-operated stores ($23 million) and costs associated with the closure of certain company-operated stores in the U.S. and Canada ($6 million) in fiscal 2018.
The combination of these changes resulted in an overall decrease in operating margin of 180 basis points in fiscal
2018
when compared to fiscal
2017
.
CAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Sep 30,
2018
|
|
Oct 1,
2017
|
|
Sep 30,
2018
|
|
Oct 1,
2017
|
|
|
|
|
|
As a % of China/Asia Pacific
Total Net Revenues
|
Net revenues:
|
|
|
|
|
|
|
|
Company-operated stores
|
$
|
4,096.9
|
|
|
$
|
2,906.0
|
|
|
91.6
|
%
|
|
89.7
|
%
|
Licensed stores
|
365.7
|
|
|
327.4
|
|
|
8.2
|
|
|
10.1
|
|
Other
|
11.0
|
|
|
6.8
|
|
|
0.2
|
|
|
0.2
|
|
Total net revenues
|
4,473.6
|
|
|
3,240.2
|
|
|
100.0
|
|
|
100.0
|
|
Cost of sales including occupancy costs
|
1,898.3
|
|
|
1,396.2
|
|
|
42.4
|
|
|
43.1
|
|
Store operating expenses
|
1,148.7
|
|
|
845.5
|
|
|
25.7
|
|
|
26.1
|
|
Other operating expenses
|
22.9
|
|
|
21.2
|
|
|
0.5
|
|
|
0.7
|
|
Depreciation and amortization expenses
|
412.1
|
|
|
202.2
|
|
|
9.2
|
|
|
6.2
|
|
General and administrative expenses
|
241.6
|
|
|
207.1
|
|
|
5.4
|
|
|
6.4
|
|
Total operating expenses
|
3,723.6
|
|
|
2,672.2
|
|
|
83.2
|
|
|
82.5
|
|
Income from equity investees
|
117.4
|
|
|
197.0
|
|
|
2.6
|
|
|
6.1
|
|
Operating income
|
$
|
867.4
|
|
|
$
|
765.0
|
|
|
19.4
|
%
|
|
23.6
|
%
|
Store operating expenses as a % of related revenues
|
|
|
|
|
28.0
|
%
|
|
29.1
|
%
|
Other operating expenses as a % of non-company-operated store revenues
|
|
|
|
|
6.1
|
%
|
|
6.3
|
%
|
Discussion of our China/Asia Pacific segment results below reflects the impact of fully consolidating our East China business due to the ownership change from an equity method joint venture to a company-operated market since the acquisition date of December 31, 2017. Under the joint venture model, we recognized royalties and product sales within revenue and related product cost of sales as well as our proportionate share of East China's net earnings, which we recognized within income from equity investees. This resulted in a higher operating margin. Under the company-operated ownership model, East China’s operating results are reflected in most income statement lines of this segment.
Re
venues
China/Asia Pacific total net revenues for fiscal
2018
increased
$1.2 billion
, or
38%
, over fiscal
2017
, primarily driven by higher company-operated store revenues ($1.2 billion) due to the impact of our ownership change in East China ($903 million) and incremental revenues from 443 net new company-operated store openings over the past 12 months ($300 million). Also contributing were favorable foreign currency translation ($82 million) and a
1%
increase in comparable store sales ($26 million). Partially offsetting these increases was the conversion of our Singapore retail business to fully licensed operations in the fourth quarter of fiscal 2017 ($121 million).
Licensed store revenues increased
$38 million
, primarily driven by increased product sales to and royalty revenues from licensees ($44 million), primarily resulting from the opening of 313 net new licensed stores over the past 12 months, the conversion of our Taiwan joint venture to fully licensed operations at the end of the first quarter of fiscal 2018 ($25 million) and the conversion of our Singapore retail operations to fully licensed operations in the fourth quarter of fiscal 2017 ($20 million). These increases were partially offset by the absence of revenue from our ownership change in East China ($53 million).
Operating Expenses
Cost of sales including occupancy costs as a percentage of total net revenues decreased 70 basis points, primarily due to the ownership change in East China (approximately 60 basis points).
Store operating expenses as a percentage of total net revenues decreased 40 basis points. As a percentage of company-operated store revenues, store operating expenses decreased 110 basis points, primarily due to the ownership change in East China (approximately 90 basis points).
General and administrative expenses as a percentage of total revenues decreased 100 basis points, primarily due to sales leverage on salaries and benefits (approximately 50 basis points) and the impact of ownership change in East China (approximately 30 basis points).
Income from equity investees decreased $80 million, primarily due to the impact of our ownership changes in East China and Taiwan joint ventures, partially offset by higher South Korea joint venture income.
The combination of these changes resulted in an overall decrease in operating margin of 420 basis points in fiscal
2018
when compared to fiscal
2017
.
EMEA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Sep 30,
2018
|
|
Oct 1,
2017
|
|
Sep 30,
2018
|
|
Oct 1,
2017
|
|
|
|
|
|
As a % of EMEA
Total Net Revenues
|
Net revenues:
|
|
|
|
|
|
|
|
Company-operated stores
|
$
|
575.6
|
|
|
$
|
551.0
|
|
|
54.9
|
%
|
|
57.5
|
%
|
Licensed stores
|
471.3
|
|
|
407.7
|
|
|
45.0
|
|
|
42.5
|
|
Other
|
1.1
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
Total net revenues
|
1,048.0
|
|
|
958.7
|
|
|
100.0
|
|
|
100.0
|
|
Cost of sales including occupancy costs
|
559.2
|
|
|
508.6
|
|
|
53.4
|
|
|
53.1
|
|
Store operating expenses
|
226.0
|
|
|
214.1
|
|
|
21.6
|
|
|
22.3
|
|
Other operating expenses
|
62.8
|
|
|
51.3
|
|
|
6.0
|
|
|
5.4
|
|
Depreciation and amortization expenses
|
31.7
|
|
|
30.6
|
|
|
3.0
|
|
|
3.2
|
|
General and administrative expenses
|
51.7
|
|
|
41.7
|
|
|
4.9
|
|
|
4.3
|
|
Restructuring and impairments
|
55.1
|
|
|
17.9
|
|
|
5.3
|
|
|
1.9
|
|
Total operating expenses
|
986.5
|
|
|
864.2
|
|
|
94.1
|
|
|
90.1
|
|
Operating income
|
$
|
61.5
|
|
|
$
|
94.5
|
|
|
5.9
|
%
|
|
9.9
|
%
|
Store operating expenses as a % of related revenues
|
|
|
|
|
39.3
|
%
|
|
38.9
|
%
|
Other operating expenses as a % of non-company-operated store
|
|
|
|
|
13.3
|
%
|
|
12.6
|
%
|
R
evenues
EMEA total net revenues for fiscal
2018
increased
$89 million
, or
9%
, over fiscal
2017
, primarily due to higher revenue from licensed stores ($64 million) and company-operated stores ($25 million).
Company-operated stores increased $25 million, or 4%, primarily due to favorable currency translation ($31 million).
Licensed store revenues increased
$64 million
, or 16%, due to higher product sales to and royalty revenues from our licensees ($56 million), resulting from the opening of 356 net new licensed stores, and favorable foreign currency translation ($4 million).
Operating Expenses
Cost of sales including occupancy costs as a percentage of total net revenues increased 30 basis points, primarily due to growth in our licensed stores which have a lower gross margin (approximately 30 basis points).
Store operating expenses as a percentage of total net revenues decreased 70 basis points. As a percentage of company-operated store revenues, store operating expenses increased 40 basis points, primarily due to sales deleverage on salaries and benefits, largely due to increased minimum wage in certain markets
(approximately 140 basis points), partially offset by lapping a prior year tax settlement (approximately 100 basis points).
Other operating expenses as a percentage of total net revenues increased 60 basis points. Excluding the impact of company-operated store revenues, other operating expenses increased 70 basis points, primarily due to business process optimization expenses (approximately 60 basis points).
General and administrative expenses as a percentage of total net revenues increased 60 basis points, primarily due to business process optimization expenses (approximately 50 basis points).
Restructuring and impairment expenses increased $37 million, primarily due to higher goodwill impairment expense associated with our Switzerland retail reporting unit in fiscal 2018 than in the prior year period ($20 million) and EMEA restructuring costs, including severance and asset impairments ($18 million).
The combination of these changes resulted in an overall decrease in operating margin of 400 basis points in fiscal
2018
when compared to fiscal
2017
.
Channel Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Sep 30,
2018
|
|
Oct 1,
2017
|
|
Sep 30,
2018
|
|
Oct 1,
2017
|
|
|
|
|
|
As a % of Channel Development
Total Net Revenues
|
Net revenues
|
$
|
2,297.3
|
|
|
$
|
2,256.6
|
|
|
|
|
|
Cost of sales
|
1,252.3
|
|
|
1,209.3
|
|
|
54.5
|
|
|
53.6
|
|
Other operating expenses
|
286.5
|
|
|
260.4
|
|
|
12.5
|
|
|
11.5
|
|
Depreciation and amortization expenses
|
1.3
|
|
|
3.0
|
|
|
0.1
|
|
|
0.1
|
|
General and administrative expenses
|
13.9
|
|
|
11.3
|
|
|
0.6
|
|
|
0.5
|
|
Total operating expenses
|
1,554.0
|
|
|
1,484.0
|
|
|
67.6
|
|
|
65.8
|
|
Income from equity investees
|
183.8
|
|
|
194.4
|
|
|
8.0
|
|
|
8.6
|
|
Operating income
|
$
|
927.1
|
|
|
$
|
967.0
|
|
|
40.4
|
%
|
|
42.9
|
%
|
Discussion of our Channel Development segment results reflect the impact of the licensing of our CPG and foodservice businesses to Nestlé, the sale of Tazo and an immaterial, unfavorable revenue deduction adjustment recorded in the second quarter of fiscal 2017. Late in the fourth quarter of fiscal 2018, we licensed our CPG (Starbucks-, Starbucks Reserve-, Teavana-, Seattle's Best Coffee-, Starbucks VIA- and Torrefazione Italia-branded packaged coffee and tea) and foodservice businesses to Nestlé and formed a Global Coffee Alliance. Eleven months of fiscal 2018 results reflect our CPG and foodservice businesses as company-owned and one month as licensed operations. Our collaborative business relationships for our global ready-to-drink products and the associated revenues remain unchanged due to the Global Coffee Alliance.
Revenues
Channel Development net revenues for fiscal
2018
increased
$41 million
, or
2%
, over fiscal
2017
. Revenue growth was driven by an increase in sales of our packaged coffee and premium single-serve products ($115 million), lapping a prior year revenue deduction adjustment ($13 million) and favorable foreign currency translation ($10 million). These increases were partially offset by the absence of revenue from the sale of our Tazo brand in the first quarter of fiscal 2018 ($56 million) and licensing our CPG and foodservice businesses to Nestlé late in the fourth quarter of fiscal 2018 ($50 million).
Operating Expenses
Cost of sales as a percentage of total net revenues increased 90 basis points, primarily driven by the impact of licensing our CPG and foodservice businesses to Nestlé and the sale of our Tazo brand (approximately 120 basis points), partially offset by lapping a revenue deduction adjustment recorded in the second quarter of fiscal 2017 (approximately 30 basis points).
Other operating expenses as a percentage of total net revenues increased 100 basis points, primarily driven by business taxes associated with the upfront payment received from Nestlé (approximately 120 basis points) and Global Coffee Alliance headcount-related costs, including employee bonus and retention costs (approximately 80 basis points). These increases were partially offset by the cost savings related to our ownership changes, including licensing our CPG and foodservice businesses to Nestlé and the sale of our Tazo brand (approximately 40 basis points), and lower marketing expenses (approximately 40 basis points).
Income from equity investees decreased $11 million for fiscal
2018
, due to lower income from our North American Coffee Partnership joint venture, driven by decreased sales of Frappuccino
®
, Starbucks Doubleshot
®
and Iced Coffee beverages.
The combination of these changes contributed to an overall decrease in operating margin of 250 basis points in fiscal
2018
when compared to fiscal
2017
.
Corporate and Other
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Sep 30,
2018
|
|
Oct 1,
2017
|
|
% Change
|
Net revenues:
|
|
|
|
|
|
Company-operated stores
|
$
|
112.7
|
|
|
$
|
197.3
|
|
|
(42.9
|
)%
|
Licensed stores
|
1.2
|
|
|
2.6
|
|
|
(53.8
|
)
|
Other
|
54.5
|
|
|
111.4
|
|
|
(51.1
|
)
|
Total net revenues
|
168.4
|
|
|
311.3
|
|
|
(45.9
|
)
|
Cost of sales including occupancy costs
|
163.5
|
|
|
225.2
|
|
|
(27.4
|
)
|
Store operating expenses
|
70.6
|
|
|
113.5
|
|
|
(37.8
|
)
|
Other operating expenses
|
17.1
|
|
|
36.6
|
|
|
(53.3
|
)
|
Depreciation and amortization expenses
|
163.6
|
|
|
160.7
|
|
|
1.8
|
|
General and administrative expenses
|
1,204.8
|
|
|
989.2
|
|
|
21.8
|
|
Restructuring and impairments
|
135.9
|
|
|
131.5
|
|
|
3.3
|
|
Total operating expenses
|
1,755.5
|
|
|
1,656.7
|
|
|
6.0
|
|
Operating loss
|
$
|
(1,587.1
|
)
|
|
$
|
(1,345.4
|
)
|
|
18.0
|
%
|
Corporate and Other primarily consists of our unallocated corporate expenses, the results from Siren Retail, as well as Evolution Fresh and the legacy operations of the Teavana retail business, which substantially ceased during fiscal 2018. Unallocated corporate expenses include corporate administrative functions that support the operating segments but are not specifically attributable to or managed by any segment and are not included in the reported financial results of the operating segments.
RESULTS OF OPERATIONS — FISCAL
2017
COMPARED TO FISCAL
2016
Consolidated results of operations
(in millions)
:
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Oct 1,
2017
|
|
Oct 2,
2016
|
|
%
Change
|
|
(52 Weeks Ended)
|
|
(53 Weeks Ended)
|
|
Net revenues:
|
|
|
|
|
|
Company-operated stores
|
$
|
17,650.7
|
|
|
$
|
16,844.1
|
|
|
4.8
|
%
|
Licensed stores
|
2,355.0
|
|
|
2,154.2
|
|
|
9.3
|
|
Other
|
2,381.1
|
|
|
2,317.6
|
|
|
2.7
|
|
Total net revenues
|
$
|
22,386.8
|
|
|
$
|
21,315.9
|
|
|
5.0
|
%
|
Total net revenues increased $1.1 billion, or 5%, over fiscal 2016, primarily driven by increased revenues from company operated stores ($807 million). The growth in company-operated store revenues was primarily driven by incremental revenues from 768 net new Starbucks
®
company-operated store openings over the past 12 months ($869 million) and a 3% increase in comparable store sales ($496 million), attributable to a 3% increase in average ticket. Partially offsetting these incremental revenues was the absence of the 53rd week ($324 million), the absence of sales from the conversion of certain company operated stores to licensed stores ($121 million) and the impact of unfavorable foreign currency translation ($70 million).
Licensed store revenue growth also contributed to the increase in total net revenue ($201 million), primarily due to increased product sales to and royalty revenues from our licensees ($260 million), largely due to the opening of 1,552 net new Starbucks
®
licensed stores and improved comparable store sales, partially offset by the absence of the 53rd week ($41 million) and unfavorable foreign currency translation ($27 million).
Other revenues increased $64 million, primarily driven by increased sales of packaged coffee, tea and premium single-serve products ($73 million), our ready-to-drink beverages ($21 million) and higher foodservice sales ($26 million). Increased sales were partially offset by the absence of the 53rd week ($47 million) and an unfavorable revenue deduction adjustment pertaining to periods prior to 2017 ($13 million).
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Oct 1,
2017
|
|
Oct 2,
2016
|
|
Oct 1,
2017
|
|
Oct 2,
2016
|
|
(52 Weeks Ended)
|
|
(53 Weeks Ended)
|
|
|
|
|
|
|
|
As a % of Total
Net Revenues
|
Cost of sales including occupancy costs
|
$
|
9,034.3
|
|
|
$
|
8,509.0
|
|
|
40.4
|
%
|
|
39.9
|
%
|
Store operating expenses
|
6,493.3
|
|
|
6,064.3
|
|
|
29.0
|
|
|
28.4
|
|
Other operating expenses
|
500.3
|
|
|
499.2
|
|
|
2.2
|
|
|
2.3
|
|
Depreciation and amortization expenses
|
1,011.4
|
|
|
980.8
|
|
|
4.5
|
|
|
4.6
|
|
General and administrative expenses
|
1,450.7
|
|
|
1,408.9
|
|
|
6.5
|
|
|
6.6
|
|
Restructuring and impairments
|
153.5
|
|
|
—
|
|
|
0.7
|
|
|
—
|
|
Total operating expenses
|
18,643.5
|
|
|
17,462.2
|
|
|
83.3
|
|
|
81.9
|
|
Income from equity investees
|
391.4
|
|
|
318.2
|
|
|
1.7
|
|
|
1.5
|
|
Operating income
|
$
|
4,134.7
|
|
|
$
|
4,171.9
|
|
|
18.5
|
%
|
|
19.6
|
%
|
Store operating expenses as a % of related revenues
|
|
|
|
|
36.8
|
%
|
|
36.0
|
%
|
Other operating expenses as a % of non-company-operated store revenues
|
|
|
|
|
10.6
|
%
|
|
11.2
|
%
|
Cost of sales including occupancy costs as a percentage of total net revenues increased 50 basis points, primarily driven by a product mix shift (approximately 70 basis points) largely towards premium food in the Americas segment, partially offset by leverage on cost of sales and occupancy costs (approximately 30 basis points).
Store operating expenses as a percentage of total net revenues increased 60 basis points. Store operating expenses as a percentage of company-operated store revenues increased 80 basis points, primarily driven by higher partner and digital investments, largely in the Americas segment (approximately 150 basis points), partially offset by sales leverage (approximately 90 basis points).
Other operating expenses as a percentage of total net revenues decreased 10 basis points. Excluding the impact of company operated store revenues, other operating expenses decreased 60 basis points, primarily due to lower performance-based compensation (approximately 20 basis points).
General and administrative expenses as a percentage of total net revenues decreased 10 basis points, primarily driven by lower performance-based compensation (approximately 30 basis points), and employment taxes, including the lapping of higher employment taxes resulting from a multiple year audit in the prior year (approximately 20 basis points). These were partially offset by increased salaries and benefits related to digital platforms, technology infrastructure and innovations.
Restructuring and impairments charges in fiscal 2017 were primarily the result of our strategic changes in Teavana. We recorded $130 million of restructuring–related costs, including a partial goodwill impairment charge of $69 million, store asset impairments, and costs related to early store closure obligations and severance. Additionally, we recorded $18 million of partial goodwill impairment relating to our Switzerland retail business.
Income from equity investees increased $73 million, due to higher income from our CAP joint venture operations, primarily China and South Korea, as well as our North American Coffee Partnership.
The combination of these changes resulted in an overall decrease in operating margin of 110 basis points in fiscal 2017 when compared to fiscal 2016.
Other Income and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Oct 1,
2017
|
|
Oct 2,
2016
|
|
Oct 1,
2017
|
|
Oct 2,
2016
|
|
(52 Weeks Ended)
|
|
(53 Weeks Ended)
|
|
|
|
|
|
|
|
As a % of Total
Net Revenues
|
Operating income
|
$
|
4,134.7
|
|
|
$
|
4,171.9
|
|
|
18.5
|
%
|
|
19.6
|
|
Net gain resulting from divestiture of certain operations
|
93.5
|
|
|
5.4
|
|
|
0.4
|
|
|
—
|
|
Interest income and other, net
|
181.8
|
|
|
102.6
|
|
|
0.8
|
|
|
0.5
|
|
Interest expense
|
(92.5
|
)
|
|
(81.3
|
)
|
|
(0.4
|
)
|
|
(0.4
|
)
|
Earnings before income taxes
|
4,317.5
|
|
|
4,198.6
|
|
|
19.3
|
|
|
19.7
|
|
Income tax expense
|
1,432.6
|
|
|
1,379.7
|
|
|
6.4
|
|
|
6.5
|
|
Net earnings including noncontrolling interests
|
2,884.9
|
|
|
2,818.9
|
|
|
12.9
|
|
|
13.2
|
|
Net earnings attributable to noncontrolling interests
|
0.2
|
|
|
1.2
|
|
|
—
|
|
|
—
|
|
Net earnings attributable to Starbucks
|
$
|
2,884.7
|
|
|
$
|
2,817.7
|
|
|
12.9
|
%
|
|
13.2
|
%
|
Effective tax rate including noncontrolling interests
|
|
|
|
|
33.2
|
%
|
|
32.9
|
%
|
Net gain resulting from divestiture of certain operations increased $88 million, primarily due to the gain from the sale of our Singapore retail operations in the fourth quarter of fiscal 2017 ($84 million).
Interest income and other, net increased $79 million, primarily driven by gain in our investment in Square, Inc. warrants ($41 million) and higher income recognized on unredeemed stored value card balances ($44 million).
Interest expense increased $11 million primarily related to additional interest incurred on long-term debt issued in February 2016, May 2016 and March 2017, partially offset by lower interest expense from the repayment of our December 2016 notes.
The effective tax rate for fiscal 2017 was 33.2% compared to 32.9% for fiscal 2016. The increase in the effective tax rate was primarily due to unfavorability from non-deductible goodwill impairment charges recorded in the third quarter of fiscal 2017 (approximately 70 basis points) and the lapping of the release of certain tax reserves in the third quarter of fiscal 2016, primarily related to statute closures (approximately 30 basis points). The increase was partially offset by the largely non-taxable gain on the sale of our Singapore retail operations in the fourth quarter of fiscal 2017 (approximately 70 basis points).
Segment Information
Results of operations by segment
(in millions)
:
Americas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Oct 1,
2017
|
|
Oct 2,
2016
|
|
Oct 1,
2017
|
|
Oct 2,
2016
|
|
(52 Weeks Ended)
|
|
(53 Weeks Ended)
|
|
|
|
|
|
|
|
As a % of Americas
Total Net Revenues
|
Net revenues:
|
|
|
|
|
|
|
|
Company-operated stores
|
$
|
13,996.4
|
|
|
$
|
13,247.4
|
|
|
89.6
|
%
|
|
89.7
|
%
|
Licensed stores
|
1,617.3
|
|
|
1,518.5
|
|
|
10.4
|
|
|
10.3
|
|
Other
|
6.3
|
|
|
9.3
|
|
|
—
|
|
|
0.1
|
|
Total net revenues
|
15,620.0
|
|
|
14,775.2
|
|
|
100.0
|
|
|
100.0
|
|
Cost of sales including occupancy costs
|
5,695.0
|
|
|
5,254.2
|
|
|
36.5
|
|
|
35.6
|
|
Store operating expenses
|
5,320.2
|
|
|
4,909.3
|
|
|
34.1
|
|
|
33.2
|
|
Other operating expenses
|
130.8
|
|
|
97.1
|
|
|
0.8
|
|
|
0.7
|
|
Depreciation and amortization expenses
|
614.9
|
|
|
590.0
|
|
|
3.9
|
|
|
4.0
|
|
General and administrative expenses
|
201.4
|
|
|
186.1
|
|
|
1.3
|
|
|
1.3
|
|
Restructuring and impairments
|
4.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total operating expenses
|
11,966.4
|
|
|
11,036.7
|
|
|
76.6
|
|
|
74.7
|
|
Income from equity investees
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Operating income
|
$
|
3,653.6
|
|
|
$
|
3,738.5
|
|
|
23.4
|
%
|
|
25.3
|
%
|
Store operating expenses as a % of related revenues
|
|
|
|
|
38.0
|
%
|
|
37.1
|
%
|
Other operating expenses as a % of non-company-operated store revenues
|
|
|
|
|
8.1
|
%
|
|
6.4
|
%
|
Revenues
Americas total net revenues for fiscal 2017 increased $845 million, or 6%, over fiscal 2016, primarily due to increased revenues from company-operated stores (contributing $749 million) and licensed stores (contributing $99 million).
The increase in company-operated store revenues was driven by incremental revenues from 383 net new Starbucks® company-operated store openings over the past 12 months ($585 million) and a 3% increase in comparable store sales ($426 million), attributable to a 4% increase in average ticket, partially offset by the absence of the 53rd week ($258 million).
The increase in licensed store revenues was primarily driven by increased product sales to and royalty revenues from our licensees ($127 million), primarily resulting from the opening of 569 net new Starbucks® licensed stores over the past 12 months and improved comparable store sales, partially offset by the absence of the 53rd week ($31 million).
Operating Expenses
Cost of sales including occupancy costs as a percentage of total net revenues increased 90 basis points, primarily due to a product mix shift (approximately 90 basis points) largely towards premium food.
Store operating expenses as a percentage of total net revenues increased 90 basis points. As a percentage of company-operated store revenues, store operating expenses increased 90 basis points, primarily driven by increased partner and digital investments (approximately 180 basis points), partially offset by sales leverage on salaries and benefits (approximately 80 basis points).
Other operating expenses as a percentage of total net revenues increased 10 basis points. Excluding the impact of company-operated store revenues, other operating expenses increased 170 basis points, primarily due to lapping a settlement received in the fourth quarter of fiscal 2016 related to the closure of Target Canada stores in fiscal 2015 (approximately 120 basis points).
Restructuring and impairment charges of $4 million related to asset impairments of certain company-operated stores in Canada.
The combination of these changes resulted in an overall decrease in operating margin of 190 basis points in fiscal 2017 when compared to fiscal 2016.
CAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Oct 1,
2017
|
|
Oct 2,
2016
|
|
Oct 1,
2017
|
|
Oct 2,
2016
|
|
(52 Weeks Ended)
|
|
(53 Weeks Ended)
|
|
|
|
|
|
|
|
As a % of China/Asia Pacific
Total Net Revenues
|
Net revenues:
|
|
|
|
|
|
|
|
Company-operated stores
|
$
|
2,906.0
|
|
|
$
|
2,640.4
|
|
|
89.7
|
%
|
|
89.8
|
%
|
Licensed stores
|
327.4
|
|
|
292.3
|
|
|
10.1
|
|
|
9.9
|
|
Other
|
6.8
|
|
|
6.1
|
|
|
0.2
|
|
|
0.2
|
|
Total net revenues
|
3,240.2
|
|
|
2,938.8
|
|
|
100.0
|
|
|
100.0
|
|
Cost of sales including occupancy costs
|
1,396.2
|
|
|
1,298.9
|
|
|
43.1
|
|
|
44.2
|
|
Store operating expenses
|
845.5
|
|
|
779.4
|
|
|
26.1
|
|
|
26.5
|
|
Other operating expenses
|
21.2
|
|
|
24.2
|
|
|
0.7
|
|
|
0.8
|
|
Depreciation and amortization expenses
|
202.2
|
|
|
180.6
|
|
|
6.2
|
|
|
6.1
|
|
General and administrative expenses
|
207.1
|
|
|
174.2
|
|
|
6.4
|
|
|
5.9
|
|
Total operating expenses
|
2,672.2
|
|
|
2,457.3
|
|
|
82.5
|
|
|
83.6
|
|
Income from equity investees
|
197.0
|
|
|
150.1
|
|
|
6.1
|
|
|
5.1
|
|
Operating income
|
$
|
765.0
|
|
|
$
|
631.6
|
|
|
23.6
|
%
|
|
21.5
|
%
|
Store operating expenses as a % of related revenues
|
|
|
|
|
29.1
|
%
|
|
29.5
|
%
|
Other operating expenses as a % of non-company-operated store revenues
|
|
|
|
|
6.3
|
%
|
|
8.1
|
%
|
Revenues
China/Asia Pacific total net revenues for fiscal 2017 increased $301 million, or 10%, over fiscal 2016, primarily from higher company-operated store revenues ($266 million), driven by incremental revenues from 392 net new company-operated store
openings over the past 12 months ($293 million). Also contributing was a 3% increase in comparable store sales ($67 million), partially offset by the absence of the 53rd week ($52 million) and unfavorable foreign currency translation ($40 million).
Licensed store revenues increased $35 million, primarily driven by increased product sales to and royalty revenues from licensees ($39 million), primarily resulting from the opening of 644 net new licensed stores over the past 12 months, partially offset the absence of the 53rd week ($4 million).
Operating Expenses
Cost of sales including occupancy costs as a percentage of total net revenues decreased 110 basis points, primarily driven by favorability from the transition to China's new value added tax structure (approximately 120 basis points).
Store operating expenses as a percentage of total net revenues decreased 40 basis points. As a percentage of company-operated store revenues, store operating expenses decreased 40 basis points, primarily due to sales leverage on salaries and benefits (approximately 30 basis points) and lower performance-based compensation in Japan (approximately 10 basis points).
Other operating expenses as a percentage of total net revenues decreased 10 basis points. Excluding the impact of company operated store revenues, other operating expenses decreased 180 basis points, primarily due to lower performance-based compensation (approximately 100 basis points) and timing of certain reimbursable expenses (approximately 90 basis points).
General and administrative expenses as a percentage of total revenues increased 50 basis points, primarily due to continued focus and investment in product quality and innovation (approximately 20 basis points) and higher salaries and benefits (approximately 20 basis points).
Income from equity investees increased $47 million, driven by higher income from our joint venture operations, primarily in East China and South Korea. Favorability in both regions was attributable to comparable store sales growth and the addition of net new licensed stores over the past 12 months. East China also benefited from the new value added tax structure.
The combination of these changes resulted in an overall increase in operating margin of 210 basis points in fiscal 2017 when compared to fiscal 2016.
EMEA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Oct 1,
2017
|
|
Oct 2,
2016
|
|
Oct 1,
2017
|
|
Oct 2,
2016
|
|
(52 Weeks Ended)
|
|
(53 Weeks Ended)
|
|
|
|
|
|
|
|
As a % of EMEA
Total Net Revenues
|
Net revenues:
|
|
|
|
|
|
|
|
Company-operated stores
|
$
|
551.0
|
|
|
$
|
732.0
|
|
|
57.5
|
%
|
|
68.3
|
%
|
Licensed stores
|
407.7
|
|
|
339.5
|
|
|
42.5
|
|
|
31.7
|
|
Total net revenues
|
958.7
|
|
|
1,071.5
|
|
|
100.0
|
|
|
100.0
|
|
Cost of sales including occupancy costs
|
508.6
|
|
|
540.7
|
|
|
53.1
|
|
|
50.5
|
|
Store operating expenses
|
214.1
|
|
|
260.6
|
|
|
22.3
|
|
|
24.3
|
|
Other operating expenses
|
51.3
|
|
|
49.4
|
|
|
5.4
|
|
|
4.6
|
|
Depreciation and amortization expenses
|
30.6
|
|
|
39.9
|
|
|
3.2
|
|
|
3.7
|
|
General and administrative expenses
|
41.7
|
|
|
51.4
|
|
|
4.3
|
|
|
4.8
|
|
Restructuring and impairments
|
17.9
|
|
|
—
|
|
|
1.9
|
|
|
—
|
|
Total operating expenses
|
864.2
|
|
|
942.0
|
|
|
90.1
|
|
|
87.9
|
|
Income from equity investees
|
—
|
|
|
1.5
|
|
|
—
|
|
|
0.1
|
|
Operating income
|
$
|
94.5
|
|
|
$
|
131.0
|
|
|
9.9
|
%
|
|
12.2
|
%
|
Store operating expenses as a % of related revenues
|
|
|
|
|
38.9
|
%
|
|
35.6
|
%
|
Other operating expenses as a % of non-company-operated store revenues
|
|
|
|
|
12.6
|
%
|
|
14.6
|
%
|
Revenues
EMEA total net revenues for fiscal 2017 decreased $113 million, or 11%, over fiscal 2016. The decrease was primarily due to a decline in company-operated store revenues ($181 million), driven by the shift to more licensed stores in the region ($121 million), which includes the absence of revenues related to the sale of our Germany retail operations in the third quarter of fiscal 2016. Also contributing to the decline was unfavorable foreign currency translation ($43 million) and the absence of the 53rd week ($11 million).
Licensed store revenues increased $68 million, driven by higher product sales to and royalty revenues from our licensees ($95 million), resulting from the opening of 339 net new licensed stores and the transfer of 14 company-operated stores to licensed stores over the past 12 months. These increases were partially offset by unfavorable foreign currency translation ($24 million) and the absence of the 53rd week ($6 million).
Operating Expenses
Cost of sales including occupancy costs as a percentage of total net revenues increased 260 basis points, primarily due to unfavorable foreign currency transactions (approximately 150 basis points) and the shift in the composition of our store portfolio to more licensed stores, which have a lower gross margin (approximately 100 basis points).
Store operating expenses as a percentage of total net revenues decreased 200 basis points. As a percentage of company-operated store revenues, store operating expenses increased 330 basis points, primarily due to sales deleverage in certain company-operated stores (approximately 320 basis points) and the impact of a tax settlement (approximately 100 basis points), partially offset by the shift in the portfolio towards more licensed stores (approximately 140 basis points).
Other operating expenses as a percentage of total net revenues increased 80 basis points. Excluding the impact of company operated store revenues, other operating expenses decreased 200 basis points, primarily due to sales leverage driven by the shift to more licensed stores (approximately 160 basis points).
Depreciation and amortization expenses as a percentage of total net revenues decreased 50 basis points, primarily due to the shift in portfolio towards more licensed stores (approximately 50 basis points).
Restructuring and impairment charges in fiscal 2017 relate to a partial goodwill impairment expense recorded in our Switzerland company-operated retail reporting unit, which we fully acquired in the fourth quarter of fiscal 2011. The overall economic backdrop in Europe, coupled with the strengthening of the Swiss franc when compared to the relatively inexpensive euro in surrounding countries, caused ongoing unfavorable changes in consumer behavior and depressed tourism. Our latest mitigation efforts 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. As a result, we recorded a goodwill impairment charge of $18 million in the third quarter of fiscal 2017.
The combination of these changes resulted in an overall decrease in operating margin of 230 basis points in fiscal 2017 when compared to fiscal 2016.
Channel Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Oct 1,
2017
|
|
Oct 2,
2016
|
|
Oct 1,
2017
|
|
Oct 2,
2016
|
|
(52 Weeks Ended)
|
|
(53 Weeks Ended)
|
|
|
|
|
|
|
|
As a % of Channel Development
Total Net Revenues
|
Total net revenues
|
$
|
2,256.6
|
|
|
$
|
2,195.1
|
|
|
|
|
|
|
|
Cost of sales
|
1,209.3
|
|
|
1,191.8
|
|
|
53.6
|
|
|
54.3
|
|
Other operating expenses
|
260.4
|
|
|
270.7
|
|
|
11.5
|
|
|
12.3
|
|
Depreciation and amortization expenses
|
3.0
|
|
|
3.9
|
|
|
0.1
|
|
|
0.2
|
|
General and administrative expenses
|
11.3
|
|
|
18.0
|
|
|
0.5
|
|
|
0.8
|
|
Total operating expenses
|
1,484.0
|
|
|
1,484.4
|
|
|
65.8
|
|
|
67.6
|
|
Income from equity investees
|
194.4
|
|
|
166.6
|
|
|
8.6
|
|
|
7.6
|
|
Operating income
|
$
|
967.0
|
|
|
$
|
877.3
|
|
|
42.9
|
%
|
|
40.0
|
%
|
Discussion of our Channel Development segment results reflects the impact of an unfavorable revenue deduction adjustment recorded in the second quarter of fiscal 2017. While this adjustment was immaterial, the discussion below quantifies the impact to provide a better understanding of our results for fiscal 2017.
Revenues
Channel Development total net revenues for fiscal 2017 increased $62 million, or 3%, over fiscal 2016. Revenue growth was driven by increased sales of packaged coffee, tea and premium single-serve products ($73 million), our ready-to-drink beverages ($21 million) and higher foodservice sales ($26 million). Higher foodservice sales were primarily the result of a change to a direct distribution model and recognizing the benefit of full revenue from premium single-serve product sales. Increased sales were partially offset by the absence of the 53rd week ($45 million) and an unfavorable revenue deduction adjustment pertaining to prior periods ($13 million).
Operating Expenses
Cost of sales as a percentage of total net revenues decreased 70 basis points, primarily driven by lower coffee costs (approximately 80 basis points) and leverage on cost of sales (approximately 60 basis points), partially offset by a shift toward lower margin products (approximately 80 basis points) and the revenue deduction adjustment pertaining to prior periods (approximately 30 basis points).
Other operating expenses as a percentage of total net revenues decreased 80 basis points, primarily driven by lower performance-based compensation (approximately 40 basis points).
General and administrative expenses as a percentage of total net revenues decreased 30 basis points, primarily driven by lower performance-based compensation (approximately 20 basis points) and salaries and benefits (approximately 10 basis points).
Income from equity investees increased $28 million for fiscal 2017, due to higher income from our North American Coffee Partnership joint venture, driven by increased sales of Frappuccino® and Starbucks Doubleshot® beverages as well as new product launches over the past 12 months.
The combination of these changes contributed to an overall increase in operating margin of 290 basis points in fiscal 2017 when compared to fiscal 2016.
Corporate and Other
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Oct 1,
2017
|
|
Oct 2,
2016
|
|
%
Change
|
|
(52 Weeks Ended)
|
|
(53 Weeks Ended)
|
|
Net revenues:
|
|
|
|
|
|
Company-operated stores
|
$
|
197.3
|
|
|
$
|
224.3
|
|
|
(12.0
|
)%
|
Licensed stores
|
2.6
|
|
|
3.9
|
|
|
(33.3
|
)%
|
Other
|
111.4
|
|
|
107.1
|
|
|
4.0
|
|
Total net revenues
|
311.3
|
|
|
335.3
|
|
|
(7.2
|
)
|
Cost of sales including occupancy costs
|
225.2
|
|
|
223.4
|
|
|
0.8
|
|
Store operating expenses
|
113.5
|
|
|
115.0
|
|
|
(1.3
|
)
|
Other operating expenses
|
36.6
|
|
|
57.8
|
|
|
(36.7
|
)
|
Depreciation and amortization expenses
|
160.7
|
|
|
166.4
|
|
|
(3.4
|
)
|
General and administrative expenses
|
989.2
|
|
|
979.2
|
|
|
1.0
|
|
Restructuring and impairments
|
131.5
|
|
|
—
|
|
|
nm
|
|
Total operating expenses
|
1,656.7
|
|
|
1,541.8
|
|
|
7.5
|
|
Operating loss
|
$
|
(1,345.4
|
)
|
|
$
|
(1,206.5
|
)
|
|
11.5
|
%
|
Corporate and Other includes the results of our Teavana, Siren Retail, Evolution Fresh and our unallocated corporate expenses. Unallocated corporate expenses include corporate administrative functions that support the operating segments but are not specifically attributable to or managed by any segment and are not included in the reported financial results of the operating segments.
The increase in the operating loss in fiscal 2017 compared to fiscal 2016 was primarily due to restructuring and impairment charges related to our strategy to close Teavana
TM/MC
retail stores and focus on Teavana
TM/MC
tea within Starbucks
®
stores. We recorded $69 million for the partial impairment of goodwill and $60 million in restructuring-related costs, including asset impairments, costs associated with the early closure of stores and their related obligations, and severance.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash and Investment Overview
Our cash and investments were
$9.2 billion
and
$3.2 billion
as of
September 30, 2018
and
October 1, 2017
, respectively with the increase driven primarily by the upfront payment associated with the Global Coffee Alliance. We actively manage our cash and investments in order to internally fund operating needs, make scheduled interest and principal payments on our borrowings, make acquisitions, and return cash to shareholders through common stock cash dividend payments and share repurchases. Our investment portfolio primarily includes highly liquid available-for-sale securities, including corporate debt securities, government treasury securities (domestic and foreign), mortgage and asset-backed securities, commercial paper, and agency obligations. As of
September 30, 2018
, approximately
$1.3 billion
of cash was held in foreign subsidiaries.
Borrowing capacity
Our $2.0 billion unsecured 5-year revolving credit facility (the “2018 credit facility”) and our $1.0 billion unsecured 364-Day credit facility (the “364-day credit facility”) are available for working capital, capital expenditures and other corporate purposes, including acquisitions and share repurchases.
The 2018 credit facility, of which
$150 million
may be used for issuances of letters of credit, is currently set to mature on
October 25, 2022
. We have the option, subject to negotiation and agreement with the related banks, to increase the maximum commitment amount by an additional
$500 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 five-year credit agreement. The current applicable margin is
0.680%
for Eurocurrency Rate Loans and
0.00%
(nil) for Base Rate Loans.
The 364-day credit facility, of which no amount may be used for issuances of letters of credit, was originally set to mature on October 25, 2018. In the first quarter of fiscal 2019, the maturity has been extended to October 23, 2019. We have the option, subject to negotiation and agreement with the related banks, to increase the maximum commitment amount by an additional
$500 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 was increased from
0.585%
to 0.92% for Eurocurrency Rate Loans and
0.00%
(nil) for Base Rate Loans as a result of the extension.
Both credit facilities contain 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
September 30, 2018
, we were in compliance with all applicable credit facility covenants. No amounts were outstanding under our credit facility as of
September 30, 2018
.
Under our commercial paper program, we may issue unsecured commercial paper notes up to a maximum aggregate amount outstanding at any time of
$3 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 facilities 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
September 30, 2018
, we had no borrowings under our commercial paper program.
In
August 2018
, we issued long-term debt in an underwritten registered public offering, which consisted of
$1.25 billion
of
7
-year
3.800%
Senior Notes (the “2025 notes”) due
August 2025
,
$750 million
of
10
-year
4.000%
Senior Notes (the “2028 notes”) due
November 2028
and
$1 billion
of
30
-year
4.500%
Senior Notes (the “2048 notes”) due
November 2048
. Interest on the 2025 notes is payable semi-annually on February 15 and August 15, commencing on February 15, 2019. Interest on the 2028 and 2048 notes is payable semi-annually on May 15 and November 15, commencing on November 15, 2018.
In February 2018, we issued long-term debt in an underwritten registered public offering, which consisted of
$1 billion
of
5
-year
3.100%
Senior Notes (the “2023 notes”) due
March 2023
and
$600 million
of
10
-year
3.500%
Senior Notes (the “2028 notes”) due
March 2028
. Interest on the 2023 and 2028 notes is payable semi-annually on March 1 and September 1, commencing on September 1, 2018.
In November 2017, we issued long-term debt in an underwritten registered public offering, which consisted of
$500 million
of
3
-year
2.200%
Senior Notes (the “2020 notes”) due
November 2020
and
$500 million
of
30
-year
3.750%
Senior Notes (the “2047 notes”) due
December 2047
. Interest on the 2020 notes is payable semi-annually on May 22 and November 22, commencing on May 22, 2018 and interest on the 2047 notes is payable semi-annually on June 1 and December 1, commencing on June 1, 2018.
The net proceeds from these offerings are used for general corporate purposes, including repurchases of our common stock under our ongoing share repurchase program and payment of dividends.
See
Note 9
, Debt, to the consolidated financial statements included in Item 8 of Part II of this 10-K for details of the components of our long-term debt.
The indentures under which all of our Senior Notes were issued require us to maintain compliance with certain covenants, including limits on future liens and sale and leaseback transactions on certain material properties. As of
September 30, 2018
, we were in compliance with all applicable covenants.
Use of Cash
We expect to use our available cash and investments, including, but not limited to, additional potential future borrowings under the credit facilities, commercial paper program and the issuance of debt, to invest in our core businesses, including capital expenditures, new product innovations, related marketing support and partner and digital investments, return cash to shareholders through common stock cash dividend payments and share repurchases, as well as other new business opportunities related to our core and other developing businesses. Further, we may use our available cash resources to make proportionate capital contributions to our investees. We may also seek strategic acquisitions to leverage existing capabilities and further build our business in support of our growth agenda. Acquisitions may include increasing our ownership interests in our investees. Any decisions to increase such ownership interests will be driven by valuation and fit with our ownership strategy.
We believe that future cash flows generated from operations and existing cash and investments both domestically and internationally combined with our ability to leverage our balance sheet through the issuance of debt will be sufficient to finance capital requirements for our core businesses as well as any shareholder distributions for the foreseeable future. Significant new joint ventures, acquisitions and/or other new business opportunities may require additional outside funding. We have borrowed funds and continue to believe we have the ability to do so at reasonable interest rates; however, additional borrowings would result in increased interest expense in the future. In this regard, we may incur additional debt, within targeted levels, as part of our plans to fund our capital programs, including cash returns to shareholders through dividends and share repurchases.
We have historically considered the majority of undistributed earnings of our foreign subsidiaries and equity investees to be indefinitely reinvested, and, accordingly, no foreign withholding taxes have been provided on such earnings. We continue to
evaluate our plans for reinvestment or repatriation of unremitted foreign earnings and thus have not adjusted our previous indefinite reinvestment assertions for the effects of the Tax Act. We have not, nor do we anticipate the need for, repatriated funds to the U.S. to satisfy domestic liquidity needs. However, the Tax Act requires a one-time transition tax for deemed repatriation of accumulated undistributed earnings of certain foreign investments. This one-time transition tax is payable over eight years, with most of the cash outlay expected to be made in the later years. In connection with our initial analysis, we have estimated a provisional amount of $262 million, of which $237 million of income taxes payable was included in other long-term liabilities on the consolidated balance sheet, as of
September 30, 2018
. See
Note 13
, Income Taxes, for further discussion.
We regularly review our cash positions and our determination of permanent reinvestment of foreign earnings. In the event we determine that all or a portion of such foreign earnings are no longer indefinitely reinvested, we may be subject to additional foreign withholding taxes and U.S. state income taxes, beyond the Tax Act's one-time transition tax, which could be material.
During each of the first three quarters of fiscal
2017
, we declared a cash dividend to shareholders of
$0.25
per share. In the fourth quarter of fiscal
2017
and each of the first two quarters of fiscal
2018
, we declared a cash dividend of
$0.30
per share, and we declared
$0.36
per share in the last two quarters of fiscal 2018. Dividends are paid in the quarter following the declaration date. Cash returned to shareholders through dividends in fiscal
2018
and
2017
totaled
$1.7 billion
and
$1.5 billion
, respectively. In the fourth quarter of fiscal
2018
, we declared a cash dividend of
$0.36
per share to be paid on
November 30, 2018
with an expected payout of approximately
$445 million
.
During fiscal years
2018
and
2017
, we repurchased
131.5 million
and
37.5 million
shares of common stock, respectively, or
$7.2 billion
and
$2.1 billion
, respectively, under our ongoing share repurchase program. In early fiscal 2019, we commenced the repurchase of
$5.0 billion
of our common stock under accelerated share repurchase agreements.
Other than normal operating expenses, cash requirements for fiscal 2019 are expected to consist primarily of capital expenditures for investments in our new and existing stores, our developing Siren Retail business and our supply chain and corporate facilities. Total capital expenditures for fiscal 2019 are expected to be approximately
$2 billion
.
Cash Flows
Cash
provided
by operating activities was
$11.9 billion
for fiscal
2018
, compared to
$4.3 billion
for fiscal
2017
. The change was primarily due to receipt of the upfront payment from Nestlé in the fourth quarter of fiscal 2018.
Cash
used
by investing activities totaled
$2.4 billion
for fiscal
2018
, compared to
$0.9 billion
for fiscal
2017
. The change was primarily due to cash used to acquire the 50% ownership interest in our East China joint venture in the first quarter of fiscal 2018 and additions to property, plant and equipment driven by new store openings and increased store renovations, partially offset by the net proceeds from the divestiture of certain operations.
Cash
used
by financing activities for fiscal
2018
totaled
$3.2 billion
, compared to
$3.1 billion
for fiscal
2017
. The change was primarily due to an increase in cash returned to shareholders through share repurchases and dividend payments, partially offset by higher proceeds from the issuance of long-term debt.
Contractual Obligations
The following table summarizes our contractual obligations and borrowings as of
September 30, 2018
, and the timing and effect that such commitments are expected to have on our liquidity and capital requirements in future periods (
in millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
Contractual Obligations
(1)
|
Total
|
|
Less than 1
Year
|
|
1 - 3
Years
|
|
3 - 5
Years
|
|
More than
5 Years
|
Operating lease obligations
(2)
|
$
|
9,353.8
|
|
|
$
|
1,340.6
|
|
|
$
|
2,463.4
|
|
|
$
|
2,045.4
|
|
|
$
|
3,504.4
|
|
Financing lease obligations
|
58.0
|
|
|
4.4
|
|
|
8.7
|
|
|
8.3
|
|
|
36.6
|
|
Debt obligations
|
|
|
|
|
|
|
|
|
|
Principal payments
|
9,548.4
|
|
|
350.0
|
|
|
1,250.0
|
|
|
1,500.0
|
|
|
6,448.4
|
|
Interest payments
|
3,698.0
|
|
|
278.9
|
|
|
586.0
|
|
|
488.0
|
|
|
2,345.1
|
|
Purchase obligations
(3)
|
1,267.1
|
|
|
806.6
|
|
|
342.9
|
|
|
101.0
|
|
|
16.6
|
|
Other obligations
(4)
|
417.7
|
|
|
31.0
|
|
|
64.3
|
|
|
98.8
|
|
|
223.6
|
|
Total
|
$
|
24,343.0
|
|
|
$
|
2,811.5
|
|
|
$
|
4,715.3
|
|
|
$
|
4,241.5
|
|
|
$
|
12,574.7
|
|
|
|
(1)
|
We have excluded long-term gross unrecognized tax benefits for uncertain tax positions, including interest and penalties of
$237.2 million
from the amounts presented as the timing of these obligations is uncertain.
|
|
|
(2)
|
Amounts include direct lease obligations, excluding any taxes, insurance and other related expenses.
|
|
|
(3)
|
Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on Starbucks and that specify all significant terms. Green coffee purchase commitments comprise
92%
of total purchase obligations.
|
|
|
(4)
|
Other obligations include other long-term liabilities primarily consisting of the Tax Act transition tax, asset retirement obligations and hedging instruments.
|
Starbucks currently expects to fund these commitments primarily with operating cash flows generated in the normal course of business.
Off-Balance Sheet Arrangements
Off-balance sheet arrangements relate to operating lease and purchase commitments detailed in the footnotes to the consolidated financial statements included in
Item 8
of Part II of this 10-K.
COMMODITY PRICES, AVAILABILITY AND GENERAL RISK CONDITIONS
Commodity price risk represents Starbucks primary market risk, generated by our purchases of green coffee and dairy products, among other items. We purchase, roast and sell high-quality
arabica
coffee and related products and risk arises from the price volatility of green coffee. In addition to coffee, we also purchase significant amounts of dairy products to support the needs of our company-operated stores. The price and availability of these commodities directly impacts our results of operations, and we expect commodity prices, particularly coffee, to impact future results of operations. For additional details see Product Supply in
Item 1
, as well as Risk Factors in
Item 1A
of this 10-K.
FINANCIAL RISK MANAGEMENT
Market risk is defined as the risk of losses due to changes in commodity prices, foreign currency exchange rates, equity security prices and interest rates. We manage our exposure to various market-based risks according to a market price risk management policy. Under this policy, market-based risks are quantified and evaluated for potential mitigation strategies, such as entering into hedging transactions. The market price risk management policy governs how hedging instruments may be used to mitigate risk. Risk limits are set annually and prohibit speculative trading activity. We also monitor and limit the amount of associated counterparty credit risk, which we consider to be low. Excluding interest rate swaps, hedging instruments generally do not have maturities in excess of
three years
. Refer to
Note 1
, Summary of Significant Accounting Policies, and
Note 3
, Derivative Financial Instruments, to the consolidated financial statements included in Item 8 of Part II of this 10-K for further discussion of our hedging instruments.
The sensitivity analyses disclosed below provide only a limited, point-in-time view of the market risk of the financial instruments discussed. The actual impact of the respective underlying rates and price changes on the financial instruments may differ significantly from those shown in the sensitivity analyses.
Commodity Price Risk
We purchase commodity inputs, primarily coffee, dairy products, diesel, cocoa, sugar and other commodities, that are used in our operations and are subject to price fluctuations that impact our financial results. We use a combination of pricing features embedded within supply contracts, such as fixed-price and price-to-be-fixed contracts for coffee purchases, and financial derivatives to manage our commodity price risk exposure.
The following table summarizes the potential impact as of
September 30, 2018
to Starbucks future net earnings and other comprehensive income (“OCI”) from changes in commodity prices. The information provided below relates only to the hedging instruments and does not represent the corresponding changes in the underlying hedged items
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease) to Net Earnings
|
|
Increase/(Decrease) to OCI
|
|
10% Increase in
Underlying Rate
|
|
10% Decrease in
Underlying Rate
|
|
10% Increase in
Underlying Rate
|
|
10% Decrease in
Underlying Rate
|
Commodity hedges
|
$
|
4
|
|
|
$
|
(4
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign Currency Exchange Risk
The majority of our revenue, expense and capital purchasing activities are transacted in U.S. dollars. However, because a portion of our operations consists of activities outside of the U.S., we have transactions in other currencies, primarily the Chinese renminbi, Japanese yen, Canadian dollar, British pound, South Korean won and euro. To reduce cash flow volatility from foreign currency fluctuations, we enter into derivative instruments to hedge portions of cash flows of anticipated intercompany royalty payments, inventory purchases, intercompany borrowing and lending activities and certain other transactions in currencies other than the functional currency of the entity that enters into the arrangements, as well as the translation risk of certain balance sheet items. See
Note 3
, Derivative Financial Instruments, to the consolidated financial statements included in Item 8 of Part II of this 10-K for further discussion.
The following table summarizes the potential impact as of
September 30, 2018
to Starbucks future net earnings and other comprehensive income from changes in the fair value of these derivative financial instruments due to a change in the value of the U.S. dollar as compared to foreign exchange rates. The information provided below relates only to the hedging instruments and does not represent the corresponding changes in the underlying hedged items (
in millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease) to Net Earnings
|
|
Increase/(Decrease) to OCI
|
|
10% Increase in
Underlying Rate
|
|
10% Decrease in
Underlying Rate
|
|
10% Increase in
Underlying Rate
|
|
10% Decrease in
Underlying Rate
|
Foreign currency hedges
|
$
|
27
|
|
|
$
|
(27
|
)
|
|
$
|
108
|
|
|
$
|
(108
|
)
|
Equity Security Price Risk
We have minimal exposure to price fluctuations on equity mutual funds and equity exchange-traded funds within our trading securities portfolio. Trading securities are recorded at fair value and approximates a portion of our liability under our Management Deferred Compensation Plan (“MDCP”). Gains and losses from the portfolio and the change in our MDCP liability are recorded in our consolidated statements of earnings.
We performed a sensitivity analysis based on a 10% change in the underlying equity prices of our investments as of
September 30, 2018
and determined that such a change would not have a significant impact on the fair value of these instruments.
Interest Rate Risk
Long-term Debt
We utilize short-term and long-term financing and may use interest rate hedges to manage our overall interest expense related to our existing fixed-rate debt, as well as to hedge the variability in cash flows due to changes in benchmark interest rates related to anticipated debt issuances. See
Note 3
, Derivative Financial Instruments and
Note 9
, Debt, to the consolidated financial statements included in Item 8 of Part II of this 10-K for further discussion of our interest rate hedge agreements and details of the components of our long-term debt, respectively, as of
September 30, 2018
.
The following table summarizes the impact of a change in interest rates as of
September 30, 2018
on the fair value of Starbucks debt
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Fair Value
|
|
Stated Interest Rate
|
|
Fair Value
|
|
100 Basis Point Increase in
Underlying Rate
|
|
100 Basis Point Decrease in
Underlying Rate
|
|
|
2018 notes
|
2.000
|
%
|
|
$
|
350
|
|
|
$
|
(1
|
)
|
|
$
|
1
|
|
2020 notes
|
2.200
|
%
|
|
$
|
490
|
|
|
$
|
(10
|
)
|
|
$
|
10
|
|
2021 notes
|
2.100
|
%
|
|
$
|
733
|
|
|
$
|
(17
|
)
|
|
$
|
17
|
|
2022 notes
|
2.700
|
%
|
|
$
|
486
|
|
|
$
|
(17
|
)
|
|
$
|
17
|
|
2023 notes
(1)
|
3.850
|
%
|
|
$
|
759
|
|
|
$
|
—
|
|
|
$
|
—
|
|
2023 notes
|
3.100
|
%
|
|
$
|
986
|
|
|
$
|
(40
|
)
|
|
$
|
40
|
|
2024 notes
|
0.372
|
%
|
|
$
|
743
|
|
|
$
|
(40
|
)
|
|
$
|
40
|
|
2025 notes
|
3.800
|
%
|
|
$
|
1,249
|
|
|
$
|
(74
|
)
|
|
$
|
74
|
|
2026 notes
|
2.450
|
%
|
|
$
|
451
|
|
|
$
|
(34
|
)
|
|
$
|
34
|
|
2028 notes
|
3.500
|
%
|
|
$
|
576
|
|
|
$
|
(47
|
)
|
|
$
|
47
|
|
2028 notes
|
4.000
|
%
|
|
$
|
754
|
|
|
$
|
(61
|
)
|
|
$
|
61
|
|
2045 notes
|
4.300
|
%
|
|
$
|
330
|
|
|
$
|
(53
|
)
|
|
$
|
53
|
|
2047 notes
|
3.750
|
%
|
|
$
|
438
|
|
|
$
|
(81
|
)
|
|
$
|
81
|
|
2048 notes
|
4.500
|
%
|
|
$
|
977
|
|
|
$
|
(159
|
)
|
|
$
|
159
|
|
|
|
(1)
|
Amount disclosed is net of ($32 million) change in the fair value of our designated interest rate swap. Refer to
Note 3
, Derivative Financial Instruments, for additional information on our interest rate swap designated as a fair value hedge.
|
Available-for-Sale Securities
Our available-for-sale securities comprise a diversified portfolio consisting mainly of investment-grade debt securities. The primary objective of these investments is to preserve capital and liquidity. Available-for-sale securities are recorded on the consolidated balance sheets at fair value with unrealized gains and losses reported as a component of accumulated other comprehensive income. We do not hedge the interest rate exposure on our available-for-sale securities. We performed a sensitivity analysis based on a 100 basis point change in the underlying interest rate of our available-for-sale securities as of
September 30, 2018
and determined that such a change would not have a significant impact on the fair value of these instruments.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that management believes are both most important to the portrayal of our financial condition and results and require the most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions.
Our significant accounting policies are discussed in
Note 1
, Summary of Significant Accounting Policies, to the consolidated financial statements included in Item 8 of Part II of this 10-K. We believe that of our significant accounting policies, the following policies involve a higher degree of judgment and/or complexity.
We consider financial reporting and disclosure practices and accounting policies quarterly to ensure that they provide accurate and transparent information relative to the current economic and business environment. During the past five fiscal years, we have not made any material changes to the accounting methodologies used to assess the areas discussed below, unless noted otherwise.
Property, Plant and Equipment and Other Finite-Lived Assets
We evaluate property, plant and equipment and other finite-lived assets 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 adjusted carrying amount of the asset becomes its new cost basis and is depreciated over the asset's remaining useful life.
Long-lived assets are grouped with other assets and liabilities 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. The fair value of a store’s assets is estimated using a discounted cash flow model. For other long-lived assets, fair value is determined using an approach that is appropriate based on the relevant facts and circumstances, which may include discounted cash flows, comparable transactions, or comparable company analyses.
Our impairment calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values. Key assumptions used in estimating future cash flows and asset fair values include projected revenue growth and operating expenses, as well as forecasting asset useful lives and selecting an appropriate discount rate. For company-operated stores, estimates of revenue growth and operating expenses are based on internal projections and consider the store’s historical performance, the local market economics and the business environment impacting the store’s performance. The discount rate is selected based on what we believe a buyer would assume when determining a purchase price for the store. These estimates are subjective and our ability to realize future cash flows and asset fair values is affected by factors such as ongoing maintenance and improvement of the assets, changes in economic conditions, and changes in operating performance.
During fiscal 2018, there were no significant changes in any of our estimates or assumptions, aside from those related to the decision to close certain company-operated stores in the U.S. and Canada, which had a material impact on the outcome of our impairment calculations. However, as we periodically reassess estimated future cash flows and asset fair values, changes in our estimates and assumptions may cause us to realize material impairment charges in the future.
Goodwill and Indefinite-Lived Intangible Assets
We evaluate goodwill and indefinite-lived intangible assets for impairment annually during our third fiscal quarter, or more frequently if an event occurs or circumstances change that would indicate that impairment may exist. When evaluating these assets 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 using discounted cash flows or a combination of discounted cash flow and market approaches.
When assessing goodwill for impairment, our decision to perform a qualitative impairment assessment for an individual reporting unit in a given year is influenced by a number of factors, inclusive of the size of the reporting unit's goodwill, the significance of the excess of the reporting unit's estimated fair value over carrying value at the last quantitative assessment date, the amount of time in between quantitative fair value assessments and the date of acquisition. If we perform a quantitative assessment of an individual reporting unit’s goodwill, our impairment calculations contain uncertainties because they require management to make assumptions and to apply judgment when estimating future cash flows and asset fair values, including projected revenue growth and operating expenses related to existing businesses, product innovation and new store concepts, as well as utilizing valuation multiples of similar publicly traded companies and selecting an appropriate discount rate. Estimates of revenue growth and operating expenses are based on internal projections considering the reporting unit’s past performance and forecasted growth, strategic initiatives, local market economics and the local business environment impacting the reporting unit’s performance. The discount rate is selected based on the estimated cost of capital for a market participant to operate the reporting unit in the region. These estimates, as well as the selection of comparable companies and valuation multiples used in the market approaches are highly subjective, and our ability to realize the future cash flows used in our fair value calculations is affected by factors such as the success of strategic initiatives, changes in economic conditions, changes in our operating performance and changes in our business strategies, including retail initiatives and international expansion.
When assessing indefinite-lived intangible assets for impairment, where we perform a qualitative assessment, we evaluate if changes in events or circumstances have occurred that indicate that impairment may exist. If we do not perform a qualitative impairment assessment or if changes in events and circumstances indicate that a quantitative assessment should be performed, management is required to calculate the fair value of the intangible asset group. The fair value calculation includes estimates of revenue growth, which are based on past performance and internal projections for the intangible asset group's forecasted growth, and royalty rates, which are adjusted for our particular facts and circumstances. The discount rate is selected based on the estimated cost of capital that reflects the risk profile of the related business. These estimates are highly subjective, and our
ability to achieve the forecasted cash flows used in our fair value calculations is affected by factors such as the success of strategic initiatives, changes in economic conditions, changes in our operating performance and changes in our business strategies, including retail initiatives and international expansion.
The goodwill impairment charges related to the Switzerland reporting unit are discussed in
Note 8
, Other Intangible Assets and Goodwill, to the consolidated financial statements included in Item 8 of Part II of this 10-K.
Income Taxes
We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the respective tax bases 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. 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 jurisdiction 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 operations. In projecting future taxable income, we consider historical results and incorporate assumptions about the amount of future state, federal and foreign pretax operating income adjusted for items that do not have tax consequences. Our assumptions regarding future taxable income are consistent with the plans and estimates we use to manage our underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income/(loss).
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 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. 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. As discussed in
Note 13
, Income Taxes, to the consolidated financial statements included in Item 8 of Part II of this 10-K, there is a reasonable possibility that our unrecognized tax benefit liability will be adjusted within 12 months due to the expiration of a statute of limitations and/or resolution of examinations with taxing authorities.
We have generated income in certain foreign jurisdictions that may be subject to additional income or withholding taxes. We have historically asserted our intent to reinvest these earnings for the foreseeable future. The Company continues to evaluate its plans for reinvestment or repatriation of unremitted foreign earnings and thus has not adjusted its previous indefinite reinvestment assertions for the effects of the Tax Act. While we do not expect to repatriate cash to the U.S. to satisfy domestic liquidity needs, if these amounts were distributed to the U.S., in the form of dividends or otherwise, we may be subject to additional income or withholding taxes, which could be material.
Our income tax expense, deferred tax assets and liabilities and liabilities for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid. Deferred tax asset valuation allowances and our liabilities for unrecognized tax benefits require significant management judgment regarding applicable statutes and their related interpretation, the status of various income tax audits and our particular facts and circumstances. Although we believe that the judgments and estimates discussed herein are reasonable, actual results could differ, and we may be exposed to losses or gains that could be material. To the extent we prevail in matters for which a liability has been established or are required to pay amounts in excess of our established liability, our effective income tax rate in a given financial statement period could be materially affected.
Refer to
Note 13
, Income Taxes, to the consolidated financial statements included in Item 8 of Part II of this 10-K, for additional discussion surrounding the changes as a result of the Tax Act.
RECENT ACCOUNTING PRONOUNCEMENTS
See
Note 1
, Summary of Significant Accounting Policies, to the consolidated financial statements included in Item 8 of Part II of this 10-K for a detailed description of recent accounting pronouncements.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is incorporated by reference to the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Commodity Prices, Availability and General Risk Conditions” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Risk Management” in Item 7 of this Report.
|
|
Item 8.
|
Financial Statements and Supplementary Data
|
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Sep 30,
2018
|
|
Oct 1,
2017
|
|
Oct 2,
2016
|
Net revenues:
|
|
|
|
|
|
Company-operated stores
|
$
|
19,690.3
|
|
|
$
|
17,650.7
|
|
|
$
|
16,844.1
|
|
Licensed stores
|
2,652.2
|
|
|
2,355.0
|
|
|
2,154.2
|
|
Other
|
2,377.0
|
|
|
2,381.1
|
|
|
2,317.6
|
|
Total net revenues
|
24,719.5
|
|
|
22,386.8
|
|
|
21,315.9
|
|
Cost of sales including occupancy costs
|
10,174.5
|
|
|
9,034.3
|
|
|
8,509.0
|
|
Store operating expenses
|
7,193.2
|
|
|
6,493.3
|
|
|
6,064.3
|
|
Other operating expenses
|
539.3
|
|
|
500.3
|
|
|
499.2
|
|
Depreciation and amortization expenses
|
1,247.0
|
|
|
1,011.4
|
|
|
980.8
|
|
General and administrative expenses
|
1,759.0
|
|
|
1,450.7
|
|
|
1,408.9
|
|
Restructuring and impairments
|
224.4
|
|
|
153.5
|
|
|
—
|
|
Total operating expenses
|
21,137.4
|
|
|
18,643.5
|
|
|
17,462.2
|
|
Income from equity investees
|
301.2
|
|
|
391.4
|
|
|
318.2
|
|
Operating income
|
3,883.3
|
|
|
4,134.7
|
|
|
4,171.9
|
|
Gain resulting from acquisition of joint venture
|
1,376.4
|
|
|
—
|
|
|
—
|
|
Net gain resulting from divestiture of certain operations
|
499.2
|
|
|
93.5
|
|
|
5.4
|
|
Interest income and other, net
|
191.4
|
|
|
181.8
|
|
|
102.6
|
|
Interest expense
|
(170.3
|
)
|
|
(92.5
|
)
|
|
(81.3
|
)
|
Earnings before income taxes
|
5,780.0
|
|
|
4,317.5
|
|
|
4,198.6
|
|
Income tax expense
|
1,262.0
|
|
|
1,432.6
|
|
|
1,379.7
|
|
Net earnings including noncontrolling interests
|
4,518.0
|
|
|
2,884.9
|
|
|
2,818.9
|
|
Net earnings/(loss) attributable to noncontrolling interests
|
(0.3
|
)
|
|
0.2
|
|
|
1.2
|
|
Net earnings attributable to Starbucks
|
$
|
4,518.3
|
|
|
$
|
2,884.7
|
|
|
$
|
2,817.7
|
|
Earnings per share — basic
|
$
|
3.27
|
|
|
$
|
1.99
|
|
|
$
|
1.91
|
|
Earnings per share — diluted
|
$
|
3.24
|
|
|
$
|
1.97
|
|
|
$
|
1.90
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
Basic
|
1,382.7
|
|
|
1,449.5
|
|
|
1,471.6
|
|
Diluted
|
1,394.6
|
|
|
1,461.5
|
|
|
1,486.7
|
|
See Notes to Consolidated Financial Statements.
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Sep 30,
2018
|
|
Oct 1,
2017
|
|
Oct 2,
2016
|
Net earnings including noncontrolling interests
|
$
|
4,518.0
|
|
|
$
|
2,884.9
|
|
|
$
|
2,818.9
|
|
Other comprehensive income/(loss), net of tax:
|
|
|
|
|
|
Unrealized holding gains/(losses) on available-for-sale securities
|
(7.0
|
)
|
|
(9.5
|
)
|
|
3.5
|
|
Tax (expense)/benefit
|
1.9
|
|
|
2.9
|
|
|
(1.3
|
)
|
Unrealized gains/(losses) on cash flow hedging instruments
|
24.4
|
|
|
53.2
|
|
|
(109.6
|
)
|
Tax (expense)/benefit
|
(6.5
|
)
|
|
(12.6
|
)
|
|
27.5
|
|
Unrealized gains/(losses) on net investment hedging instruments
|
7.8
|
|
|
20.1
|
|
|
—
|
|
Tax (expense)/benefit
|
(2.2
|
)
|
|
(7.4
|
)
|
|
—
|
|
Translation adjustment and other
|
(220.0
|
)
|
|
(38.3
|
)
|
|
85.5
|
|
Tax (expense)/benefit
|
3.4
|
|
|
(2.4
|
)
|
|
19.0
|
|
Reclassification adjustment for net (gains)/losses realized in net earnings for available-for-sale securities, hedging instruments, and translation adjustment
|
24.7
|
|
|
(67.2
|
)
|
|
78.2
|
|
Tax expense/(benefit)
|
(1.2
|
)
|
|
14.0
|
|
|
(11.8
|
)
|
Other comprehensive income/(loss)
|
(174.7
|
)
|
|
(47.2
|
)
|
|
91.0
|
|
Comprehensive income including noncontrolling interests
|
4,343.3
|
|
|
2,837.7
|
|
|
2,909.9
|
|
Comprehensive income/(loss) attributable to noncontrolling interests
|
(0.3
|
)
|
|
0.2
|
|
|
1.2
|
|
Comprehensive income attributable to Starbucks
|
$
|
4,343.6
|
|
|
$
|
2,837.5
|
|
|
$
|
2,908.7
|
|
See Notes to Consolidated Financial Statements.
STARBUCKS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
Sep 30,
2018
|
|
Oct 1,
2017
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
8,756.3
|
|
|
$
|
2,462.3
|
|
Short-term investments
|
181.5
|
|
|
228.6
|
|
Accounts receivable, net
|
693.1
|
|
|
870.4
|
|
Inventories
|
1,400.5
|
|
|
1,364.0
|
|
Prepaid expenses and other current assets
|
1,462.8
|
|
|
358.1
|
|
Total current assets
|
12,494.2
|
|
|
5,283.4
|
|
Long-term investments
|
267.7
|
|
|
542.3
|
|
Equity and cost investments
|
334.7
|
|
|
481.6
|
|
Property, plant and equipment, net
|
5,929.1
|
|
|
4,919.5
|
|
Deferred income taxes, net
|
134.7
|
|
|
795.4
|
|
Other long-term assets
|
412.2
|
|
|
362.8
|
|
Other intangible assets
|
1,042.2
|
|
|
441.4
|
|
Goodwill
|
3,541.6
|
|
|
1,539.2
|
|
TOTAL ASSETS
|
$
|
24,156.4
|
|
|
$
|
14,365.6
|
|
LIABILITIES AND EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
1,179.3
|
|
|
$
|
782.5
|
|
Accrued liabilities
|
2,298.4
|
|
|
1,934.5
|
|
Insurance reserves
|
213.7
|
|
|
215.2
|
|
Stored value card liability and current portion of deferred revenue
|
1,642.9
|
|
|
1,288.5
|
|
Current portion of long-term debt
|
349.9
|
|
|
—
|
|
Total current liabilities
|
5,684.2
|
|
|
4,220.7
|
|
Long-term debt
|
9,090.2
|
|
|
3,932.6
|
|
Deferred revenue
|
6,775.7
|
|
|
4.4
|
|
Other long-term liabilities
|
1,430.5
|
|
|
750.9
|
|
Total liabilities
|
22,980.6
|
|
|
8,908.6
|
|
Shareholders’ equity:
|
|
|
|
Common stock ($0.001 par value) — authorized, 2,400.0 shares; issued and outstanding, 1,309.1 and 1,431.6 shares, respectively
|
1.3
|
|
|
1.4
|
|
Additional paid-in capital
|
41.1
|
|
|
41.1
|
|
Retained earnings
|
1,457.4
|
|
|
5,563.2
|
|
Accumulated other comprehensive loss
|
(330.3
|
)
|
|
(155.6
|
)
|
Total shareholders’ equity
|
1,169.5
|
|
|
5,450.1
|
|
Noncontrolling interests
|
6.3
|
|
|
6.9
|
|
Total equity
|
1,175.8
|
|
|
5,457.0
|
|
TOTAL LIABILITIES AND EQUITY
|
$
|
24,156.4
|
|
|
$
|
14,365.6
|
|
See Notes to Consolidated Financial Statements.
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Sep 30,
2018
|
|
Oct 1,
2017
|
|
Oct 2,
2016
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
Net earnings including noncontrolling interests
|
$
|
4,518.0
|
|
|
$
|
2,884.9
|
|
|
$
|
2,818.9
|
|
Adjustments to reconcile net earnings to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
1,305.9
|
|
|
1,067.1
|
|
|
1,030.1
|
|
Deferred income taxes, net
|
714.9
|
|
|
95.1
|
|
|
265.7
|
|
Income earned from equity method investees
|
(242.8
|
)
|
|
(310.2
|
)
|
|
(250.2
|
)
|
Distributions received from equity method investees
|
226.8
|
|
|
186.6
|
|
|
223.3
|
|
Gain resulting from acquisition of joint venture
|
(1,376.4
|
)
|
|
—
|
|
|
—
|
|
Net gain resulting from divestiture of certain retail operations
|
(499.2
|
)
|
|
(93.5
|
)
|
|
(6.1
|
)
|
Stock-based compensation
|
250.3
|
|
|
176.0
|
|
|
218.1
|
|
Goodwill impairments
|
37.6
|
|
|
87.2
|
|
|
—
|
|
Other
|
89.0
|
|
|
68.9
|
|
|
45.1
|
|
Cash provided by changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
131.0
|
|
|
(96.8
|
)
|
|
(55.6
|
)
|
Inventories
|
(41.2
|
)
|
|
14.0
|
|
|
(67.5
|
)
|
Accounts payable
|
391.6
|
|
|
46.4
|
|
|
46.9
|
|
Deferred revenue
|
7,109.4
|
|
|
130.8
|
|
|
180.4
|
|
Other operating assets and liabilities
|
(677.1
|
)
|
|
(4.7
|
)
|
|
248.8
|
|
Net cash provided by operating activities
|
11,937.8
|
|
|
4,251.8
|
|
|
4,697.9
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
Purchases of investments
|
(191.9
|
)
|
|
(674.4
|
)
|
|
(1,585.7
|
)
|
Sales of investments
|
459.0
|
|
|
1,054.5
|
|
|
680.7
|
|
Maturities and calls of investments
|
45.3
|
|
|
149.6
|
|
|
27.9
|
|
Acquisitions, net of cash acquired
|
(1,311.3
|
)
|
|
—
|
|
|
—
|
|
Additions to property, plant and equipment
|
(1,976.4
|
)
|
|
(1,519.4
|
)
|
|
(1,440.3
|
)
|
Net proceeds from the divestiture of certain operations
|
608.2
|
|
|
85.4
|
|
|
69.6
|
|
Other
|
5.6
|
|
|
54.3
|
|
|
24.9
|
|
Net cash used by investing activities
|
(2,361.5
|
)
|
|
(850.0
|
)
|
|
(2,222.9
|
)
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
5,584.1
|
|
|
750.2
|
|
|
1,254.5
|
|
Repayments of long-term debt
|
—
|
|
|
(400.0
|
)
|
|
—
|
|
Proceeds from issuance of common stock
|
153.9
|
|
|
150.8
|
|
|
160.7
|
|
Cash dividends paid
|
(1,743.4
|
)
|
|
(1,450.4
|
)
|
|
(1,178.0
|
)
|
Repurchase of common stock
|
(7,133.5
|
)
|
|
(2,042.5
|
)
|
|
(1,995.6
|
)
|
Minimum tax withholdings on share-based awards
|
(62.7
|
)
|
|
(82.8
|
)
|
|
(106.0
|
)
|
Other
|
(41.2
|
)
|
|
(4.4
|
)
|
|
(8.4
|
)
|
Net cash used by financing activities
|
(3,242.8
|
)
|
|
(3,079.1
|
)
|
|
(1,872.8
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
(39.5
|
)
|
|
10.8
|
|
|
(3.5
|
)
|
Net increase in cash and cash equivalents
|
6,294.0
|
|
|
333.5
|
|
|
598.7
|
|
CASH AND CASH EQUIVALENTS:
|
|
|
|
|
|
Beginning of period
|
2,462.3
|
|
|
2,128.8
|
|
|
1,530.1
|
|
End of period
|
$
|
8,756.3
|
|
|
$
|
2,462.3
|
|
|
$
|
2,128.8
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
Interest, net of capitalized interest
|
$
|
137.1
|
|
|
$
|
96.6
|
|
|
$
|
74.7
|
|
Income taxes, net of refunds
|
$
|
1,176.9
|
|
|
$
|
1,389.1
|
|
|
$
|
878.7
|
|
See Notes to Consolidated Financial Statements.
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional Paid-in Capital
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Income/(Loss)
|
|
Shareholders’
Equity
|
|
Noncontrolling
Interests
|
|
Total
|
|
Shares
|
|
Amount
|
|
Balance, September 27, 2015
|
1,485.1
|
|
|
$
|
1.5
|
|
|
$
|
41.1
|
|
|
$
|
5,974.8
|
|
|
$
|
(199.4
|
)
|
|
$
|
5,818.0
|
|
|
$
|
1.8
|
|
|
$
|
5,819.8
|
|
Net earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
2,817.7
|
|
|
—
|
|
|
2,817.7
|
|
|
1.2
|
|
|
2,818.9
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
91.0
|
|
|
91.0
|
|
|
—
|
|
|
91.0
|
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
219.6
|
|
|
—
|
|
|
—
|
|
|
219.6
|
|
|
—
|
|
|
219.6
|
|
Exercise of stock options/vesting of RSUs, including tax benefit of $124.3
|
9.8
|
|
|
—
|
|
|
153.0
|
|
|
—
|
|
|
—
|
|
|
153.0
|
|
|
—
|
|
|
153.0
|
|
Sale of common stock, including tax benefit of $0.2
|
0.5
|
|
|
—
|
|
|
26.5
|
|
|
—
|
|
|
—
|
|
|
26.5
|
|
|
—
|
|
|
26.5
|
|
Repurchase of common stock
|
(34.9
|
)
|
|
—
|
|
|
(399.1
|
)
|
|
(1,596.5
|
)
|
|
—
|
|
|
(1,995.6
|
)
|
|
—
|
|
|
(1,995.6
|
)
|
Cash dividends declared, $0.85 per share
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,246.2
|
)
|
|
—
|
|
|
(1,246.2
|
)
|
|
—
|
|
|
(1,246.2
|
)
|
Noncontrolling interest resulting from acquisition
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3.7
|
|
|
3.7
|
|
Balance, October 2, 2016
|
1,460.5
|
|
|
$
|
1.5
|
|
|
$
|
41.1
|
|
|
$
|
5,949.8
|
|
|
$
|
(108.4
|
)
|
|
$
|
5,884.0
|
|
|
$
|
6.7
|
|
|
$
|
5,890.7
|
|
Net earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
2,884.7
|
|
|
—
|
|
|
2,884.7
|
|
|
0.2
|
|
|
2,884.9
|
|
Other comprehensive income/(loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(47.2
|
)
|
|
(47.2
|
)
|
|
—
|
|
|
(47.2
|
)
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
177.9
|
|
|
—
|
|
|
—
|
|
|
177.9
|
|
|
—
|
|
|
177.9
|
|
Exercise of stock options/vesting of RSUs, including tax benefit of $77.4
|
8.1
|
|
|
—
|
|
|
117.0
|
|
|
—
|
|
|
—
|
|
|
117.0
|
|
|
—
|
|
|
117.0
|
|
Sale of common stock, including tax benefit of $0.2
|
0.5
|
|
|
—
|
|
|
28.7
|
|
|
—
|
|
|
—
|
|
|
28.7
|
|
|
—
|
|
|
28.7
|
|
Repurchase of common stock
|
(37.5
|
)
|
|
(0.1
|
)
|
|
(323.6
|
)
|
|
(1,755.4
|
)
|
|
—
|
|
|
(2,079.1
|
)
|
|
—
|
|
|
(2,079.1
|
)
|
Cash dividends declared, $1.05 per share
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,515.9
|
)
|
|
—
|
|
|
(1,515.9
|
)
|
|
—
|
|
|
(1,515.9
|
)
|
Balance, October 1, 2017
|
1,431.6
|
|
|
$
|
1.4
|
|
|
$
|
41.1
|
|
|
$
|
5,563.2
|
|
|
$
|
(155.6
|
)
|
|
$
|
5,450.1
|
|
|
$
|
6.9
|
|
|
$
|
5,457.0
|
|
Net earnings/(loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
4,518.3
|
|
|
—
|
|
|
4,518.3
|
|
|
(0.3
|
)
|
|
4,518.0
|
|
Other comprehensive income/(loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(174.7
|
)
|
|
(174.7
|
)
|
|
—
|
|
|
(174.7
|
)
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
253.8
|
|
|
—
|
|
|
—
|
|
|
253.8
|
|
|
—
|
|
|
253.8
|
|
Exercise of stock options/vesting of RSUs
|
8.4
|
|
|
—
|
|
|
59.4
|
|
|
—
|
|
|
—
|
|
|
59.4
|
|
|
—
|
|
|
59.4
|
|
Sale of common stock
|
0.6
|
|
|
—
|
|
|
31.8
|
|
|
—
|
|
|
—
|
|
|
31.8
|
|
|
—
|
|
|
31.8
|
|
Repurchase of common stock
|
(131.5
|
)
|
|
(0.1
|
)
|
|
(345.0
|
)
|
|
(6,863.6
|
)
|
|
—
|
|
|
(7,208.7
|
)
|
|
—
|
|
|
(7,208.7
|
)
|
Cash dividends declared, $1.32 per share
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,760.5
|
)
|
|
—
|
|
|
(1,760.5
|
)
|
|
—
|
|
|
(1,760.5
|
)
|
Net distributions to noncontrolling interests
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.3
|
)
|
|
(0.3
|
)
|
Balance, September 30, 2018
|
1,309.1
|
|
|
$
|
1.3
|
|
|
$
|
41.1
|
|
|
$
|
1,457.4
|
|
|
$
|
(330.3
|
)
|
|
$
|
1,169.5
|
|
|
$
|
6.3
|
|
|
$
|
1,175.8
|
|
See Notes to Consolidated Financial Statements.
STARBUCKS CORPORATION
INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
Note 1
|
|
|
Note 2
|
|
|
Note 3
|
|
|
Note 4
|
|
|
Note 5
|
|
|
Note 6
|
|
|
Note 7
|
|
|
Note 8
|
|
|
Note 9
|
|
|
Note 10
|
|
|
Note 11
|
|
|
Note 12
|
|
|
Note 13
|
|
|
Note 14
|
|
|
Note 15
|
|
|
Note 16
|
|
|
Note 17
|
|
|
Note 18
|
|
|
STARBUCKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years ended
September 30, 2018
,
October 1, 2017
and
October 2, 2016
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.”
Segment information is prepared on the same basis that our management reviews financial information for operational decision-making purposes. On August 26, 2018, our Channel Development segment finalized licensing and distribution agreements with Nestlé to sell and market our consumer packaged goods and foodservice products. The scope of the arrangement converts the majority of our previously defined Channel Development segment operations, as well as certain smaller businesses previously reported in the Americas, EMEA and Corporate and Other (previously All Other segments), from company-owned to licensed operations with Nestlé. As a result, we realigned our organizational and operating segment structures in support of this newly established Global Coffee Alliance, and our reportable segments were restated as if those smaller businesses were previously within our Channel Development segment.
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 Starbucks Reserve
TM
Roastery & Tasting Rooms, Starbucks Reserve brand and products and Princi operations, Evolution Fresh and the legacy operations of the Teavana retail business, which substantially ceased during fiscal 2018. 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 combined with the non-reportable operating segments and reported within Corporate and Other.
Further, in an effort to report operating expenses in line with the corresponding revenue generating activities, we have changed the classification of certain costs, primarily within our CAP segment and mainly from other operating expenses to general and administrative expenses. These reclassifications have been retrospectively applied and was determined to be immaterial.
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 years
2018
and
2017
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 debt 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 may 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 and typically do not offset derivative assets and liabilities. Excluding interest rate swaps and foreign currency debt, we generally do not enter into derivative instruments with maturities longer than
three years
. 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
September 30, 2018
and
October 1, 2017
, we
received
$5.4 million
and
$5.8 million
, respectively, of cash collateral related to the derivative instruments under collateral security arrangements. As of
September 30, 2018
and
October 1, 2017
, 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
$5.5 million
and
$7.4 million
,
respectively, resulting in net derivative assets of
$29.4 million
a
nd net derivative liabilities of
$44.5 million
as of
September 30, 2018
, and net derivative assets of
$30.4 million
and net derivative liabilities of
$31.1 million
as of
October 1, 2017
.
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 CPG customers. Our allowance for doubtful accounts is calculated based on historical experience, customer credit risk and application of the specific identification method. As of
September 30, 2018
and
October 1, 2017
, our allowance for doubtful accounts was
$8.0 million
and
$9.8 million
, respectively.
Inventories
Inventories are stated at the lower of cost (primarily moving average cost) or net realizable value. 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
September 30, 2018
and
October 1, 2017
, inventory reserves were
$41.5 million
and
$38.4 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
$32.8 million
,
$46.9 million
, and
$25.1 million
in fiscal
2018
,
2017
, and
2016
, respectively. Additionally, we recognized net impairment charges of
$42.8 million
,
$56.1 million
, and
$24.1 million
in fiscal
2018
,
2017
, and
2016
, respectively. Of the total net impairment charges,
$37.0 million
and
$39.9 million
in fiscal 2018 and 2017, respectively, 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.
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 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 activities (substantive processes) and 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.
For goodwill related to our Switzerland retail reporting unit, we initially recorded an impairment charge of
$17.9 million
in the third quarter of fiscal 2017. This was primarily due to the impacts of the strength of the Swiss franc, continued shift of consumer behaviors to neighboring countries and the relocations of certain businesses sustaining beyond our projections and indicating the reporting unit's carrying value would not be fully recovered. Since then, the operational investments and improvements we made did not sufficiently slow the performance decline, and we recorded impairment charges of
$37.6 million
for the remaining Switzerland goodwill balance during fiscal 2018.
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.
There were
no
material goodwill impairment charges recorded during fiscal
2016
. 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
2018
,
2017
, and
2016
.
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 license 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. 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.
Other Revenues
Other revenues primarily include sales of packaged coffee, tea and a variety of ready-to-drink beverages and single-serve coffee and tea products to customers outside of our company-operated and licensed stores. Historically revenues have included domestic and international sales of our packaged coffee, tea and ready-to-drink products to grocery, warehouse clubs and specialty retail stores and through institutional foodservice accounts. Sales of coffee, tea, ready-to-drink beverages and related products to grocery, warehouse club stores and foodservice accounts were generally recognized when received by the customer or distributor, depending on contract terms. Revenues were 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.
Sales to customers through CPG channels and national foodservice accounts, including sales to national distributors, were recognized net of certain fees paid to the customer. We characterized these fees as a reduction of revenue unless we were 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 could reasonably estimate the fair value of such benefit.
Revenues from sales of products to manufacturers that produce, market and sell our 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.
In the fourth quarter of fiscal 2018, we licensed the rights to sell and market our products in authorized channels to Nestlé and also received an upfront prepaid royalty. The upfront payment was recorded as deferred revenue and will be recognized as other revenue on a straight-line basis over the estimated economic life of the arrangement of
40 years
. At September 30, 2018, the current and long term deferred revenue related to the Nestlé upfront payment was
$174 million
and
$6.8 billion
, respectively.
Additionally, other revenues will include product sales to and licensing revenue from Nestlé under this arrangement. Product sales to Nestlé are generally recognized when the product is shipped, whereas license and royalty revenues are based on a percentage of sales and are recognized on a monthly basis when earned.
Stored Value Cards
Stored value cards, primarily Starbucks Cards, can be activated at our company-operated and most licensed store locations, online at Starbucks.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. When a stored value card is redeemed at a company-operated store, 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.
In most markets, there are no expiration dates on our stored value cards and 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
2018
,
2017
, and
2016
, we recognized breakage income of
$155.9 million
,
$104.6 million
, and
$60.5 million
, respectively. Refer to the
Recent Accounting Pronouncements
section of this footnote for further discussion regarding the expected changes to breakage income in the first quarter of fiscal 2019.
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
®
stores, as well as on certain packaged coffee products purchased in select Starbucks
®
stores, through CPG channels, and when making purchases with the Starbucks branded credit and debit cards. 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
$260.3 million
,
$282.6 million
and
$248.6 million
in fiscal
2018
,
2017
, and
2016
, 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 current assets and other long-term 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 a lease abandonment accrual equal to the present value of the remaining lease payments to the landlord and other rent related payments such as common area maintenance, taxes and insurance, 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, net. The offsetting lease financing obligations are recorded in other long-term liabilities, with the current portion recorded 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
September 30, 2018
and
October 1, 2017
, our net ARO assets included in property, plant and equipment were
$19.1 million
and
$12.4 million
, respectively, and our net ARO liabilities included in other long-term liabilities were
$82.4 million
and
$70.0 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.
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.
Recent Accounting Pronouncements
In February 2018, the Financial Accounting Standards Board (“FASB”) issued guidance on the reclassification of certain tax effects from AOCI. The guidance permits entities to reclassify the stranded tax effects resulting from the Tax Act from AOCI to retained earnings. The guidance will be effective at the beginning of our first quarter of fiscal 2020 but permits adoption in an earlier period. The guidance may be applied in the period of adoption or retrospectively to each period in which the effect of the change related to the Tax Act was recognized. We are currently evaluating the impact this guidance will have on our consolidated financial statements and the timing of adoption.
In August 2017, the FASB amended its guidance on the accounting for 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 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 new accounting guidance that changes the definition of a business to assist companies in evaluating when a set of transferred assets and activities constitutes a business. We elected to adopt this guidance in fiscal 2018, which was applied to transactions subsequent to adoption.
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. We expect to record a deferred tax asset relating to these historical intercompany activities; however, we are still assessing its final impact.
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. This guidance requires that excess tax benefits and tax deficiencies related to stock-based compensation be prospectively reflected as 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 requires 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. We adopted this guidance in the first quarter of fiscal 2018. The primary impact of the adoption was the recognition of excess tax benefits that reduced income tax expenses by
$60.2 million
for the year ended
September 30, 2018
, instead of additional paid-in capital. As a result, net income increased
$60.2 million
for the year ended
September 30, 2018
, and basic and diluted earnings per share increased
$0.04
for the year ended
September 30, 2018
, respectively. Excess tax benefits of
$77.5 million
and
$122.8 million
, for the years ended
October 1, 2017
and October 2, 2016, respectively, previously reported in financing activities have been reclassified to operating activities in the consolidated statements of cash flows.
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. In July 2018, the FASB issued an alternative method that permits application of the new guidance at the beginning of the year of adoption. This is in addition to the method of applying the new guidance retrospectively to each prior reporting period presented. The guidance will be effective for us at the beginning of our first quarter of fiscal 2020, with optional practical expedients. Early adoption is permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements and the method of adoption. 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 the adoption of the guidance, we are in the process of implementing controls and key system changes to enable the preparation of financial information.
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 prospectively with the cumulative effect recognized as of the date of adoption (“modified retrospective method”). 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 utilizing the modified retrospective method with a cumulative adjustment to retained earnings of approximately
$300 million
.
Note 2: Acquisitions, Divestitures and Strategic Alliance
Fiscal 2018
We entered into an agreement on May 6, 2018 to establish the Global Coffee Alliance with Nestlé. On August 26, 2018, Nestlé licensed the rights to market, sell and distribute Starbucks consumer packaged goods and foodservice products in authorized channels. We received an upfront payment of approximately
$7 billion
primarily of prepaid royalties which was recorded as a liability to current and long-term deferred revenue and will be recognized as other revenue on a straight-line basis over the estimated economic life of the arrangement.
On March 23, 2018, we sold our company-operated retail store assets and operations in Brazil to SouthRock, converting these operations to a fully licensed market, for a total of
$48.2 million
. This transaction resulted in an insignificant pre-tax loss. This pre-tax loss was included in net gain resulting from divestiture of certain operations on our consolidated statements of earnings.
On December 31, 2017, we acquired the remaining
50%
interest of our East China joint venture (“East China”) from President Chain Store (Hong Kong) Holding Ltd. and Kai Yu (BVI) collectively, “Uni-President Group” or “UPG”, for approximately
$1.4 billion
. Approximately
$90.5 million
of pre-existing liabilities owed by East China to Starbucks were effectively settled upon the acquisition. Acquiring the remaining interest of East China, which operates over
1,400
stores in the Shanghai, Jiangsu and Zhejiang Provinces, builds on the Company's ongoing investment in China. The estimated fair values of the assets acquired and liabilities assumed are based on valuation and analysis performed by management. The valuation of certain assets and liabilities is preliminary and are subject to change as additional information becomes available.
Concurrently with the purchase of our East China joint venture, we sold our
50%
interest in President Starbucks Coffee Taiwan Limited, our joint venture operations in Taiwan, to UPG for approximately
$181.2 million
. The transaction resulted in a pre-tax gain of
$156.6 million
which was included in net gain resulting from divestiture of certain operations on our consolidated statements of earnings.
The following table summarizes the preliminary allocation of the total consideration to the fair values of the assets acquired and liabilities assumed as of
December 31, 2017
, which are reported within our China/Asia Pacific segment
(in millions)
:
|
|
|
|
|
|
Consideration:
|
|
|
Cash paid for UPG 50% equity interest
|
|
$
|
1,440.8
|
|
Fair value of our pre-existing 50% equity interest
|
|
1,440.8
|
|
Settlement of pre-existing liabilities
|
|
90.5
|
|
Total consideration
|
|
$
|
2,972.1
|
|
|
|
|
Fair value of assets acquired and liabilities assumed:
|
|
|
Cash and cash equivalents
|
|
$
|
129.5
|
|
Accounts receivable
|
|
14.3
|
|
Inventories
|
|
16.1
|
|
Prepaid expenses and other current assets
|
|
20.6
|
|
Property, plant and equipment
|
|
254.1
|
|
Other long-term assets
|
|
44.6
|
|
Other intangible assets
|
|
818.0
|
|
Goodwill
|
|
2,164.1
|
|
Total assets acquired
|
|
3,461.3
|
|
Accounts payable
|
|
34.7
|
|
Accrued liabilities
|
|
187.7
|
|
Stored value card liability
|
|
21.7
|
|
Other long-term liabilities
|
|
245.1
|
|
Total liabilities assumed
|
|
489.2
|
|
Total consideration
|
|
$
|
2,972.1
|
|
As a result of this acquisition, we remeasured the carrying value of our preexisting
50%
equity method investment to fair value, which resulted in a total gain of
$1.4 billion
that is not subject to income tax, and was presented as gain resulting from acquisition of joint venture on our consolidated statements of earnings. The fair value of
$1.4 billion
was calculated using an
income approach, which was based on significant inputs that are not observable in the market and thus represents a fair value measurement categorized within Level 3 of the fair value hierarchy. Key assumptions used in estimating future cash flows included projected revenue growth and operating expenses, as well as the selection of an appropriate discount rate. Estimates of revenue growth and operating expenses were based on internal projections and considered the historical performance of stores, local market economics and the business environments impacting store performance. The discount rate applied was based on East China's weighted-average cost of capital and included company-specific and size risk premiums.
The assets acquired and liabilities assumed are reported within our China/Asia Pacific segment. Other current and long-term assets acquired primarily include lease deposits and prepaid rent. Accrued liabilities and other long-term liabilities assumed primarily include deferred income tax, dividend payable, accrued payroll, income tax payable and accrued occupancy costs.
The definite-lived intangibles primarily relate to reacquired rights to operate stores exclusively in East China. The reacquired rights of
$798.0 million
represent the fair value calculated over the remaining original contractual period and will be amortized on a straight-line basis through
September 2022
. Amortization expense for these definite-lived intangible assets for the fiscal year 2018 was
$129.8 million
. The estimated future amortization expense is approximately
$163.8 million
each year for the next three years and approximately
$160.4 million
in the final year of fiscal 2022.
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, and the existing geographic retail and online presence. The entire balance 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
$115.2 million
since the date of acquisition to
$2.0 billion
as of September 30, 2018.
We began consolidating East China's results of operations and cash flows into our consolidated financial statements after December 31, 2017. For the year ended
September 30, 2018
, East China's revenue included in our consolidated statements of earnings was
$903.0 million
. For the year ended
September 30, 2018
, East China's net earnings included in our consolidated statements of earnings was
$73.1 million
.
The following table provides the supplemental pro forma revenue and net earnings of the combined entity had the acquisition date of East China been October 3, 2016, the first day of our first quarter of fiscal 2017, rather than the end of our first quarter of fiscal 2018
(in millions)
:
|
|
|
|
|
|
|
|
|
|
Pro Forma (unaudited)
|
|
Year Ended
|
|
Sep 30, 2018
|
|
Oct 1, 2017
(1)
|
Revenue
|
$
|
24,990.4
|
|
|
$
|
23,315.0
|
|
Net earnings attributable to Starbucks
|
3,196.8
|
|
|
4,209.0
|
|
|
|
(1)
|
The pro forma net earnings attributable to Starbucks for fiscal 2017 includes acquisition-related gain of
$1.4 billion
and transaction and integration costs of
$39.3 million
for the year ended October 1, 2017.
|
The amounts in the supplemental pro forma earnings for the periods presented above fully eliminate intercompany transactions, apply our accounting policies and reflect adjustments for additional occupancy costs as well as 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 October 3, 2016. These pro forma results are unaudited and are not necessarily indicative of results of operations that would have occurred had the acquisition actually closed in the prior year period or indicative of the results of operations for any future period.
During the year ended September 30, 2018, we incurred approximately
$3.6 million
of acquisition-related costs, such as regulatory, legal, and advisory fees, which were recorded in general and administrative expenses.
On December 11, 2017, we sold the assets associated with our Tazo brand including Tazo
®
signature recipes, intellectual property and inventory to Unilever for a total of
$383.8 million
. The transaction resulted in a pre-tax gain of
$347.9 million
, which was included in the net gain from divestiture of certain operations on our consolidated statements of earnings. Results from Tazo operations prior to the sale are reported primarily in Channel Development.
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 the net gain resulting from divestiture of certain operations 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 the net gain resulting from divestiture of certain operations on our consolidated statements of earnings.
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 AOCI and is subsequently reclassified to interest expense over the life of the related debt. Refer to
Note 9
, Debt, for details of the components of our long-term debt.
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 statements of earnings. 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)
|
|
Sep 30,
2018
|
|
Oct 1,
2017
|
|
Oct 2,
2016
|
|
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
Interest rates
|
$
|
24.7
|
|
|
$
|
17.6
|
|
|
$
|
20.5
|
|
|
$
|
4.2
|
|
|
0
|
Cross-currency swaps
|
(12.6
|
)
|
|
(6.0
|
)
|
|
(7.7
|
)
|
|
—
|
|
|
74
|
Foreign currency - other
|
5.8
|
|
|
(9.1
|
)
|
|
(0.4
|
)
|
|
3.8
|
|
|
36
|
Coffee
|
(0.2
|
)
|
|
(6.6
|
)
|
|
(1.6
|
)
|
|
(0.2
|
)
|
|
5
|
Net Investment Hedges:
|
|
|
|
|
|
|
|
|
|
Foreign currency
|
16.0
|
|
|
16.2
|
|
|
1.3
|
|
|
—
|
|
|
0
|
Foreign currency debt
|
3.6
|
|
|
(2.2
|
)
|
|
—
|
|
|
—
|
|
|
66
|
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
|
|
Sep 30,
2018
|
|
Oct 1,
2017
|
|
Oct 2,
2016
|
|
Sep 30,
2018
|
|
Oct 1,
2017
|
|
Oct 2,
2016
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Interest rates
|
$
|
14.1
|
|
|
$
|
—
|
|
|
$
|
(10.3
|
)
|
|
$
|
4.9
|
|
|
$
|
4.8
|
|
|
$
|
5.0
|
|
Cross-currency swaps
|
(6.1
|
)
|
|
59.5
|
|
|
(75.7
|
)
|
|
2.2
|
|
|
57.2
|
|
|
(101.1
|
)
|
Foreign currency - other
|
16.7
|
|
|
1.8
|
|
|
(25.4
|
)
|
|
(3.6
|
)
|
|
11.4
|
|
|
19.1
|
|
Coffee
|
(0.3
|
)
|
|
(8.1
|
)
|
|
1.7
|
|
|
(7.4
|
)
|
|
(2.7
|
)
|
|
(2.8
|
)
|
Net Investment Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
|
(0.1
|
)
|
|
23.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign currency debt
|
7.9
|
|
|
(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
|
|
Sep 30, 2018
|
|
Oct 1, 2017
|
|
Oct 2, 2016
|
Non-Designated Derivatives:
|
|
|
|
|
|
Foreign currency - other
|
$
|
4.6
|
|
|
$
|
4.6
|
|
|
$
|
(5.7
|
)
|
Dairy
|
(2.4
|
)
|
|
—
|
|
|
(5.5
|
)
|
Diesel fuel and other commodities
|
3.7
|
|
|
1.3
|
|
|
(0.2
|
)
|
Designated Fair Value Hedging Instruments:
|
|
|
|
|
|
Interest rate swap
|
(33.7
|
)
|
|
(5.2
|
)
|
|
—
|
|
Notional amounts of outstanding derivative contracts
(in millions)
|
|
|
|
|
|
|
|
|
|
Sep 30, 2018
|
|
Oct 1, 2017
|
Interest rate swap
|
$
|
750
|
|
|
$
|
750
|
|
Cross-currency swaps
|
434
|
|
|
514
|
|
Foreign currency - other
|
914
|
|
|
901
|
|
Dairy
|
16
|
|
|
14
|
|
Diesel fuel and other commodities
|
21
|
|
|
41
|
|
Fair value of outstanding derivative contracts (
in millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
Sep 30, 2018
|
|
Oct 1, 2017
|
|
Sep 30, 2018
|
|
Oct 1, 2017
|
Designated Derivative Instruments:
|
|
|
|
|
|
|
|
Cross-currency swaps
|
$
|
5.8
|
|
|
$
|
12.4
|
|
|
$
|
9.3
|
|
|
$
|
9.8
|
|
Foreign currency - other
|
13.6
|
|
|
7.7
|
|
|
5.3
|
|
|
20.8
|
|
Net investment hedges
|
—
|
|
|
0.3
|
|
|
—
|
|
|
—
|
|
Interest rate swap
|
—
|
|
|
—
|
|
|
32.5
|
|
|
3.8
|
|
Non-designated Derivative Instruments:
|
|
|
|
|
|
|
|
Foreign currency
|
13.7
|
|
|
15.8
|
|
|
2.5
|
|
|
1.4
|
|
Dairy
|
0.2
|
|
|
—
|
|
|
0.1
|
|
|
2.4
|
|
Diesel fuel and other commodities
|
1.6
|
|
|
1.6
|
|
|
0.3
|
|
|
0.3
|
|
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
September 30, 2018
|
|
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
|
$
|
8,756.3
|
|
|
$
|
8,756.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Short-term investments:
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
Commercial paper
|
8.4
|
|
|
—
|
|
|
8.4
|
|
|
—
|
|
Corporate debt securities
|
91.8
|
|
|
—
|
|
|
91.8
|
|
|
—
|
|
Mortgage and other asset-backed securities
|
6.0
|
|
|
—
|
|
|
6.0
|
|
|
—
|
|
Total available-for-sale securities
|
106.2
|
|
|
—
|
|
|
106.2
|
|
|
—
|
|
Trading securities
|
75.3
|
|
|
75.3
|
|
|
—
|
|
|
—
|
|
Total short-term investments
|
181.5
|
|
|
75.3
|
|
|
106.2
|
|
|
—
|
|
Prepaid expenses and other current assets:
|
|
|
|
|
|
|
|
Derivative assets
|
24.5
|
|
|
1.2
|
|
|
23.3
|
|
|
—
|
|
Long-term investments:
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
Agency obligations
|
5.9
|
|
|
—
|
|
|
5.9
|
|
|
—
|
|
Corporate debt securities
|
114.5
|
|
|
—
|
|
|
114.5
|
|
|
—
|
|
Auction rate securities
|
5.9
|
|
|
—
|
|
|
—
|
|
|
5.9
|
|
Foreign government obligations
|
3.6
|
|
|
—
|
|
|
3.6
|
|
|
—
|
|
U.S. government treasury securities
|
108.1
|
|
|
108.1
|
|
|
—
|
|
|
—
|
|
State and local government obligations
|
4.8
|
|
|
—
|
|
|
4.8
|
|
|
—
|
|
Mortgage and other asset-backed securities
|
24.9
|
|
|
—
|
|
|
24.9
|
|
|
—
|
|
Total long-term investments
|
267.7
|
|
|
108.1
|
|
|
153.7
|
|
|
5.9
|
|
Other long-term assets:
|
|
|
|
|
|
|
|
Derivative assets
|
10.4
|
|
|
—
|
|
|
10.4
|
|
|
—
|
|
Total assets
|
$
|
9,240.4
|
|
|
$
|
8,940.9
|
|
|
$
|
293.6
|
|
|
$
|
5.9
|
|
Liabilities:
|
|
|
|
|
|
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
Derivative liabilities
|
$
|
6.5
|
|
|
$
|
0.4
|
|
|
$
|
6.1
|
|
|
$
|
—
|
|
Other long-term liabilities:
|
|
|
|
|
|
|
|
Derivative liabilities
|
43.5
|
|
|
—
|
|
|
43.5
|
|
|
—
|
|
Total liabilities
|
$
|
50.0
|
|
|
$
|
0.4
|
|
|
$
|
49.6
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
—
|
|
|
—
|
|
State and local government obligations
|
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
|
$
|
38.5
|
|
|
$
|
2.5
|
|
|
$
|
36.0
|
|
|
$
|
—
|
|
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
4 years
. Proceeds from sales of available-for-sale securities were
$459.0 million
,
$999.7 million
, and
$680.7 million
for fiscal years
2018
,
2017
and
2016
, respectively. Realized gains and losses on sales and maturities of available-for-sale securities were not material for fiscal years
2018
,
2017
, and
2016
. Gross unrealized holding gains and losses on available-for-sale securities were not material as of
September 30, 2018
and
October 1, 2017
.
Trading Securities
Trading securities include equity mutual funds and exchange-traded funds. Our trading securities portfolio approximates a portion of our liability under our MDCP, a defined contribution plan. Our MDCP liability was
$102.2 million
and
$105.9 million
as of
September 30, 2018
and
October 1, 2017
, respectively. The changes in net unrealized holding gains and losses in the trading securities portfolio included in earnings for fiscal years
2018
,
2017
and
2016
were not material. Gross unrealized holding gains and losses on trading securities were not material as of
September 30, 2018
and
October 1, 2017
.
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
2018
and
2017
.
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)
|
|
|
|
|
|
|
|
|
|
Sep 30, 2018
|
|
Oct 1, 2017
|
Coffee:
|
|
|
|
Unroasted
|
$
|
588.6
|
|
|
$
|
541.0
|
|
Roasted
|
281.2
|
|
|
301.1
|
|
Other merchandise held for sale
|
273.1
|
|
|
301.1
|
|
Packaging and other supplies
|
257.6
|
|
|
220.8
|
|
Total
|
$
|
1,400.5
|
|
|
$
|
1,364.0
|
|
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
September 30, 2018
, we had committed to purchasing green coffee totaling
$996 million
under fixed-price contracts and an estimated
$166 million
under price-to-be-fixed contracts. As of
September 30, 2018
,
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)
|
|
|
|
|
|
|
|
|
|
Sep 30,
2018
|
|
Oct 1,
2017
|
Equity method investments
|
$
|
296.0
|
|
|
$
|
432.8
|
|
Cost method investments
|
38.7
|
|
|
48.8
|
|
Total
|
$
|
334.7
|
|
|
$
|
481.6
|
|
Equity Method Investments
As of
September 30, 2018
, we had
50%
ownership interests in Starbucks Coffee Korea Co., Ltd. and Tata Starbucks Limited (India). These international entities operate licensed Starbucks
®
retail stores. Additional disclosure regarding changes in our equity method investments due to acquisition or divestiture is included at
Note 2
, Acquisitions, Divestitures and Strategic Alliance.
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.
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
$112.8 million
,
$187.3 million
, and
$164.2 million
in fiscal years
2018
,
2017
and
2016
, respectively. Related costs of sales were
$71.5 million
,
$109.3 million
, and
$97.5 million
in fiscal years
2018
,
2017
and
2016
, respectively. As of
September 30, 2018
and
October 1, 2017
, there were
$41.2 million
and
$54.3 million
of accounts receivable from equity investees, respectively, on our consolidated balance sheets, primarily related to product sales and royalty revenues.
Cost Method Investments
We invest in equity interests of entities that develop and operate Starbucks
®
licensed stores in several global markets and in other entities, unrelated to licensed stores, from time to time. As of
September 30, 2018
and
October 1, 2017
, we had
$23 million
invested in entities that develop and operate Starbucks
®
licensed stores and 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)
Prepaid Expenses and Other Current Assets
|
|
|
|
|
|
|
|
|
|
Sep 30, 2018
|
|
Oct 1, 2017
|
Income tax receivable
|
$
|
955.4
|
|
|
$
|
68.0
|
|
Other prepaid expenses and current assets
|
507.4
|
|
|
290.1
|
|
Total prepaid expenses and current assets
|
$
|
1,462.8
|
|
|
$
|
358.1
|
|
Property, Plant and Equipment, net
|
|
|
|
|
|
|
|
|
|
Sep 30, 2018
|
|
Oct 1, 2017
|
Land
|
$
|
46.8
|
|
|
$
|
46.9
|
|
Buildings
|
557.3
|
|
|
481.7
|
|
Leasehold improvements
|
7,372.8
|
|
|
6,401.0
|
|
Store equipment
|
2,400.2
|
|
|
2,110.7
|
|
Roasting equipment
|
658.8
|
|
|
619.8
|
|
Furniture, fixtures and other
|
1,659.3
|
|
|
1,514.1
|
|
Work in progress
|
501.9
|
|
|
409.8
|
|
Property, plant and equipment, gross
|
13,197.1
|
|
|
11,584.0
|
|
Accumulated depreciation
|
(7,268.0
|
)
|
|
(6,664.5
|
)
|
Property, plant and equipment, net
|
$
|
5,929.1
|
|
|
$
|
4,919.5
|
|
Accrued Liabilities
|
|
|
|
|
|
|
|
|
|
Sep 30, 2018
|
|
Oct 1, 2017
|
Accrued compensation and related costs
|
$
|
656.8
|
|
|
$
|
524.5
|
|
Accrued occupancy costs
|
164.2
|
|
|
151.3
|
|
Accrued taxes
|
286.6
|
|
|
226.6
|
|
Accrued dividends payable
|
445.4
|
|
|
429.5
|
|
Accrued capital and other operating expenditures
|
745.4
|
|
|
602.6
|
|
Total accrued liabilities
|
$
|
2,298.4
|
|
|
$
|
1,934.5
|
|
Note 8: Other Intangible Assets and Goodwill
Indefinite-Lived Intangible Assets
|
|
|
|
|
|
|
|
|
(in millions)
|
Sep 30, 2018
|
|
Oct 1, 2017
|
Trade names, trademarks and patents
|
$
|
215.9
|
|
|
$
|
212.1
|
|
Other indefinite-lived intangible assets
|
15.1
|
|
|
15.1
|
|
Total indefinite-lived intangible assets
|
$
|
231.0
|
|
|
$
|
227.2
|
|
Additional disclosure regarding changes in our intangible assets due to acquisitions is included at
Note 2
, Acquisitions, Divestitures and Strategic Alliance.
Goodwill
Changes in the carrying amount of goodwill by reportable operating segment
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
China/Asia Pacific
|
|
EMEA
|
|
Channel
Development
|
|
Corporate and Other
|
|
Total
|
Goodwill balance at October 2, 2016
|
$
|
210.1
|
|
|
$
|
944.9
|
|
|
$
|
55.1
|
|
|
$
|
30.2
|
|
|
$
|
479.3
|
|
|
$
|
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
|
$
|
211.6
|
|
|
$
|
850.2
|
|
|
$
|
37.2
|
|
|
$
|
30.2
|
|
|
$
|
410.0
|
|
|
$
|
1,539.2
|
|
Acquisition/(divestiture)
|
—
|
|
|
2,164.0
|
|
|
—
|
|
|
(1.5
|
)
|
|
—
|
|
|
2,162.5
|
|
Impairment
|
—
|
|
|
—
|
|
|
(37.6
|
)
|
|
—
|
|
|
—
|
|
|
(37.6
|
)
|
Other
|
285.8
|
|
|
(27.6
|
)
|
|
11.7
|
|
|
6.0
|
|
|
(398.4
|
)
|
|
(122.5
|
)
|
Goodwill balance at September 30, 2018
|
$
|
497.4
|
|
|
$
|
2,986.6
|
|
|
$
|
11.3
|
|
|
$
|
34.7
|
|
|
$
|
11.6
|
|
|
$
|
3,541.6
|
|
“Other” consists of changes in the goodwill balance resulting from transfers between segments due to the dissolution of the Teavana reporting unit as well as foreign currency translation, as applicable.
For goodwill related to our Switzerland retail reporting unit, we initially recorded an impairment charge of
$17.9 million
in the third quarter of fiscal 2017. This was primarily due to the impacts of the strength of the Swiss franc, continued shift of consumer behaviors to neighboring countries and the relocation of certain businesses sustaining beyond our projections and indicating the reporting unit's carrying value would not be fully recovered. Since then, the operational investments and improvements we made did not sufficiently slow the performance decline, and we recorded impairment charges of
$37.6 million
for the remaining Switzerland goodwill balance during fiscal 2018.
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
TM/MC
tea products at Starbucks branded stores and, to a lesser extent, consumer product channels. 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. The retail store assets were determined to be fully impaired, which resulted in a charge of
$33.0 million
. 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 July 2, 2017. During the third quarter of fiscal 2018, we dissolved the Teavana reporting unit upon completion of the retail store closures. As a result, we reorganized the Teavana business and allocated the remaining
$398.3 million
of goodwill to other reporting units, primarily within the Americas segment, based on a relative fair value approach. Other intangible assets of
$117.2 million
, consisting primarily of the indefinite-lived tradename and definite-lived tea recipes, were also tested, and no impairment losses were recorded.
Finite-Lived Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sep 30, 2018
|
|
Oct 1, 2017
|
(in millions)
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Acquired and reacquired rights
|
$
|
1,081.7
|
|
|
$
|
(320.1
|
)
|
|
$
|
761.6
|
|
|
$
|
328.8
|
|
|
$
|
(154.2
|
)
|
|
$
|
174.6
|
|
Acquired trade secrets and processes
|
27.6
|
|
|
(16.5
|
)
|
|
11.1
|
|
|
27.6
|
|
|
(13.7
|
)
|
|
13.9
|
|
Trade names, trademarks and patents
|
33.0
|
|
|
(19.5
|
)
|
|
13.5
|
|
|
31.5
|
|
|
(17.6
|
)
|
|
13.9
|
|
Licensing agreements
|
14.3
|
|
|
(5.1
|
)
|
|
9.2
|
|
|
14.4
|
|
|
(3.8
|
)
|
|
10.6
|
|
Other finite-lived intangible assets
|
25.6
|
|
|
(9.8
|
)
|
|
15.8
|
|
|
6.7
|
|
|
(5.5
|
)
|
|
1.2
|
|
Total finite-lived intangible assets
|
$
|
1,182.2
|
|
|
$
|
(371.0
|
)
|
|
$
|
811.2
|
|
|
$
|
409.0
|
|
|
$
|
(194.8
|
)
|
|
$
|
214.2
|
|
Amortization expense for finite-lived intangible assets was
$186.5 million
,
$57.5 million
, and
$57.3 million
during fiscal
2018
,
2017
and
2016
, respectively.
Estimated future amortization expense as of
September 30, 2018
(
in millions
):
|
|
|
|
|
Fiscal Year Ending
|
|
2019
|
$
|
218.1
|
|
2020
|
218.0
|
|
2021
|
195.2
|
|
2022
|
168.5
|
|
2023
|
5.1
|
|
Thereafter
|
6.3
|
|
Total estimated future amortization expense
|
$
|
811.2
|
|
Additional disclosure regarding changes in our intangible assets due to acquisitions is included at
Note 2
, Acquisitions, Divestitures and Strategic Alliance.
Note 9: Debt
Revolving Credit Facility and Commercial Paper Program
Our
$2.0 billion
unsecured 5-year revolving credit facility (the “2018 credit facility”) and a
$1.0 billion
unsecured 364-Day credit facility (the “364-day credit facility”) are available for working capital, capital expenditures and other corporate purposes, including acquisitions and share repurchases.
The 2018 credit facility, of which
$150 million
may be used for issuances of letters of credit, is currently set to mature on
October 25, 2022
. We have the option, subject to negotiation and agreement with the related banks, to increase the maximum commitment amount by an additional
$500 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 five-year credit agreement. The current applicable margin is
0.680%
for Eurocurrency Rate Loans and
0.00%
(nil) for Base Rate Loans.
The 364-day credit facility, of which
no
amount may be used for issuances of letters of credit, matured on
October 25, 2018
. See
Note 18
, Subsequent Events, for information about the extension of the 364-day credit facility. We had the option, subject to negotiation and agreement with the related banks, to increase the maximum commitment amount by an additional
$500 million
. Borrowings under the credit facility 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 was
0.585%
for Eurocurrency Rate Loans and
0.00%
(nil) for Base Rate Loans.
Both credit facilities contain 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 September 30, 2018, we were in compliance with all applicable covenants.
No
amounts were outstanding under our credit facility as of
September 30, 2018
.
Under our commercial paper program, we may issue unsecured commercial paper notes up to a maximum aggregate amount outstanding at any time of
$3.0 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
September 30, 2018
, availability under our commercial paper program was approximately
$3.0 billion
(which represents the full committed credit facility amount, as no amounts were outstanding under our commercial paper program).
Long-term Debt
In
August 2018
, we issued long-term debt in an underwritten registered public offering, which consisted of
$1.25 billion
of
7
-year
3.800%
Senior Notes (the “2025 notes”) due
August 2025
,
$750 million
of
10
-year
4.000%
Senior Notes (the “2028 notes”) due
November 2028
and
$1 billion
of
30
-year
4.500%
Senior Notes (the “2048 notes”) due
November 2048
. Interest on the 2025 notes is payable semi-annually on February 15 and August 15, commencing on February 15, 2019. Interest on the 2028 and 2048 notes is payable semi-annually on May 15 and November 15, commencing on November 15, 2018.
In
February 2018
, we issued long-term debt in an underwritten registered public offering, which consisted of
$1 billion
of
5
-year
3.100%
Senior Notes (the “2023 notes”) due
March 2023
and
$600 million
of
10
-year
3.500%
Senior Notes (the “2028 notes”) due
March 2028
. Interest on the 2023 and 2028 notes is payable semi-annually on March 1 and September 1, commencing on September 1, 2018.
In
November 2017
, we issued long-term debt in an underwritten registered public offering, which consisted of
$500 million
of
3
-year
2.200%
Senior Notes (the “2020 notes”) due
November 2020
and
$500 million
of
30
-year
3.750%
Senior Notes (the “2047 notes”) due
December 2047
. Interest on the 2020 notes is payable semi-annually on May 22 and November 22, commencing on May 22, 2018 and interest on the 2047 notes is payable semi-annually on June 1 and December 1, commencing on June 1, 2018.
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
, all of which 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
.
Components of long-term debt including the associated interest rates and related fair values by calendar maturity (
in millions, except interest rates):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sep 30, 2018
|
|
Oct 1, 2017
|
|
Stated Interest Rate
|
Effective Interest Rate
(1)
|
Issuance
|
Face Value
|
Estimated Fair Value
|
|
Face Value
|
Estimated Fair Value
|
|
2018 notes
|
$
|
350.0
|
|
$
|
350
|
|
|
$
|
350.0
|
|
$
|
352
|
|
|
2.000
|
%
|
2.012
|
%
|
2020 notes
(2)
|
500.0
|
|
490
|
|
|
—
|
|
—
|
|
|
2.200
|
%
|
2.228
|
%
|
2021 notes
|
500.0
|
|
489
|
|
|
500.0
|
|
501
|
|
|
2.100
|
%
|
2.293
|
%
|
2021 notes
|
250.0
|
|
244
|
|
|
250.0
|
|
250
|
|
|
2.100
|
%
|
1.600
|
%
|
2022 notes
|
500.0
|
|
486
|
|
|
500.0
|
|
508
|
|
|
2.700
|
%
|
2.819
|
%
|
2023 notes
(6)
|
750.0
|
|
759
|
|
|
750.0
|
|
806
|
|
|
3.850
|
%
|
2.859
|
%
|
2023 notes
(3)
|
1,000.0
|
|
986
|
|
|
—
|
|
—
|
|
|
3.100
|
%
|
3.107
|
%
|
2024 notes
(5)
|
748.4
|
|
743
|
|
|
755.3
|
|
760
|
|
|
0.372
|
%
|
0.462
|
%
|
2025 notes
(4)
|
1,250.0
|
|
1,249
|
|
|
—
|
|
—
|
|
|
3.800
|
%
|
3.721
|
%
|
2026 notes
|
500.0
|
|
451
|
|
|
500.0
|
|
481
|
|
|
2.450
|
%
|
2.511
|
%
|
2028 notes
(3)
|
600.0
|
|
576
|
|
|
—
|
|
—
|
|
|
3.500
|
%
|
3.529
|
%
|
2028 notes
(4)
|
750.0
|
|
754
|
|
|
—
|
|
—
|
|
|
4.000
|
%
|
3.958
|
%
|
2045 notes
|
350.0
|
|
330
|
|
|
350.0
|
|
381
|
|
|
4.300
|
%
|
4.348
|
%
|
2047 notes
(2)
|
500.0
|
|
438
|
|
|
—
|
|
—
|
|
|
3.750
|
%
|
3.765
|
%
|
2048 notes
(4)
|
1,000.0
|
|
977
|
|
|
—
|
|
—
|
|
|
4.500
|
%
|
4.504
|
%
|
Total
|
9,548.4
|
|
9,322
|
|
|
3,955.3
|
|
4,039
|
|
|
|
|
Aggregate debt issuance costs and unamortized premium/(discount), net
|
(69.3
|
)
|
|
|
(17.5
|
)
|
|
|
|
|
Hedge accounting fair value adjustment
(6)
|
(39.0
|
)
|
|
|
(5.2
|
)
|
|
|
|
|
Total
|
$
|
9,440.1
|
|
|
|
$
|
3,932.6
|
|
|
|
|
|
|
|
(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)
Issued in November 2017.
(3)
Issued in February 2018.
|
|
(4)
|
Issued in August 2018.
|
(5)
Japanese yen-denominated long-term debt.
(6)
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 1, 2018, we were in compliance with each of these covenants.
The following table summarizes our long-term debt maturities as of
September 30, 2018
by fiscal year (
in millions
):
|
|
|
|
|
Fiscal Year
|
Total
|
2019
|
$
|
350.0
|
|
2020
|
—
|
|
2021
|
1,250.0
|
|
2022
|
500.0
|
|
2023
|
1,000.0
|
|
Thereafter
|
6,448.4
|
|
Total
|
$
|
9,548.4
|
|
Note 10: Leases
Rent expense under operating lease agreements
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Sep 30, 2018
|
|
Oct 1, 2017
|
|
Oct 2, 2016
|
Minimum rent
|
$
|
1,424.5
|
|
|
$
|
1,185.7
|
|
|
$
|
1,092.5
|
|
Contingent rent
|
200.7
|
|
|
143.5
|
|
|
130.7
|
|
Total
|
$
|
1,625.2
|
|
|
$
|
1,329.2
|
|
|
$
|
1,223.2
|
|
Minimum future rental payments under non-cancelable operating leases and lease financing arrangements as of
September 30, 2018
(in millions)
:
|
|
|
|
|
|
|
|
|
Fiscal Year Ending
|
Operating Leases
|
|
Lease Financing Arrangements
|
2019
|
$
|
1,340.6
|
|
|
$
|
4.4
|
|
2020
|
1,273.2
|
|
|
4.4
|
|
2021
|
1,190.2
|
|
|
4.3
|
|
2022
|
1,087.3
|
|
|
4.2
|
|
2023
|
958.1
|
|
|
4.1
|
|
Thereafter
|
3,504.4
|
|
|
36.6
|
|
Total minimum lease payments
|
$
|
9,353.8
|
|
|
$
|
58.0
|
|
We have subleases related to certain of our operating leases. During fiscal
2018
,
2017
and
2016
, we recognized sublease income of
$12.3 million
,
$15.5 million
, and
$14.6 million
, respectively. Additionally, as of
September 30, 2018
and
October 1, 2017
, the gross carrying values of assets related to build-to-suit lease arrangements accounted for as financing leases were
$103.2 million
and
$94.3 million
, respectively, with associated accumulated depreciation of
$12.7 million
and
$9.0 million
, respectively. Lease exit costs associated with our restructuring efforts, primarily relate to the closure of Teavana retail stores and certain Starbucks company-operated stores, are recognized concurrently with actual store closures. Total lease exit costs are expected to be approximately
$208.5 million
of which
$119.3 million
and
$15.7 million
were recorded within restructuring and impairments on the consolidated statement of earnings in fiscal 2018 and 2017, respectively.
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
September 30, 2018
.
We repurchased
131.5 million
shares of common stock at a total cost of
$7.2 billion
,
37.5 million
shares at a total cost of
$2.1 billion
, and
34.9 million
shares of common stock at a total cost of
$2.0 billion
for the years ended
September 30, 2018
,
October 1, 2017
, and
October 2, 2016
, respectively. As of
September 30, 2018
,
48.8 million
shares remained available for repurchase. On November 1, 2018, we announced that our Board of Directors approved an increase of
120 million
shares to our ongoing share repurchase program.
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 items 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 AOCI by component for the years ended
September 30, 2018
,
October 1, 2017
, and
October 2, 2016
, net of tax, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Available-for-Sale Securities
|
|
Cash Flow Hedges
|
|
Net Investment Hedges
|
|
Translation Adjustment and Other
|
|
Total
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
Net gains/(losses) in AOCI, beginning of period
|
$
|
(2.5
|
)
|
|
$
|
(4.1
|
)
|
|
$
|
14.0
|
|
|
$
|
(163.0
|
)
|
|
$
|
(155.6
|
)
|
Net gains/(losses) recognized in OCI before reclassifications
|
(5.1
|
)
|
|
17.9
|
|
|
5.6
|
|
|
(216.6
|
)
|
|
(198.2
|
)
|
Net (gains)/losses reclassified from AOCI to earnings
|
2.7
|
|
|
3.9
|
|
|
—
|
|
|
16.9
|
|
|
23.5
|
|
Other comprehensive income/(loss) attributable to Starbucks
|
(2.4
|
)
|
|
21.8
|
|
|
5.6
|
|
|
(199.7
|
)
|
|
(174.7
|
)
|
Net gains/(losses) in AOCI, end of period
|
$
|
(4.9
|
)
|
|
$
|
17.7
|
|
|
$
|
19.6
|
|
|
$
|
(362.7
|
)
|
|
$
|
(330.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
)
|
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
|
|
|
Sep 30, 2018
|
|
Oct 1, 2017
|
|
Oct 2, 2016
|
|
Gains/(losses) on available-for-sale securities
|
|
$
|
(3.6
|
)
|
|
$
|
(4.1
|
)
|
|
$
|
1.6
|
|
|
Interest income and other, net
|
Gains/(losses) on cash flow hedges
|
|
|
|
|
|
|
|
|
Interest rate hedges
|
|
4.9
|
|
|
4.8
|
|
|
5.0
|
|
|
Interest expense
|
Cross-currency swaps
|
|
2.2
|
|
|
57.2
|
|
|
(101.1
|
)
|
|
Interest income and other, net
|
Foreign currency hedges
|
|
(0.4
|
)
|
|
3.0
|
|
|
4.9
|
|
|
Revenues
|
Foreign currency/coffee hedges
|
|
(10.6
|
)
|
|
5.7
|
|
|
11.4
|
|
|
Cost of sales including occupancy costs
|
Translation adjustment
(1)
|
|
|
|
|
|
|
|
|
Brazil
|
|
(24.1
|
)
|
|
—
|
|
|
—
|
|
|
Net gain resulting from divestiture of certain operations
|
East China joint venture
|
|
7.2
|
|
|
—
|
|
|
—
|
|
|
Gain resulting from acquisition of joint venture
|
Taiwan joint venture
|
|
1.4
|
|
|
—
|
|
|
—
|
|
|
Net gain resulting from divestiture of certain operations
|
Other
|
|
(1.7
|
)
|
|
0.6
|
|
|
—
|
|
|
Interest income and other, net
|
|
|
(24.7
|
)
|
|
67.2
|
|
|
(78.2
|
)
|
|
Total before tax
|
|
|
1.2
|
|
|
(14.0
|
)
|
|
11.8
|
|
|
Tax (expense)/benefit
|
|
|
$
|
(23.5
|
)
|
|
$
|
53.2
|
|
|
$
|
(66.4
|
)
|
|
Net of tax
|
|
|
(1)
|
Release of cumulative translation adjustments to earnings upon sale or liquidation of foreign businesses.
|
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
September 30, 2018
, there were
56.9 million
shares of common stock available for issuance pursuant to future equity-based compensation awards and
12.7 million
shares available for issuance under our ESPP.
Stock-based compensation expense recognized in the consolidated financial statements
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Sep 30, 2018
|
|
Oct 1, 2017
|
|
Oct 2, 2016
|
Options
|
$
|
28.0
|
|
|
$
|
44.3
|
|
|
$
|
42.7
|
|
RSUs
|
222.3
|
|
|
131.7
|
|
|
175.4
|
|
Total stock-based compensation expense recognized in the consolidated statements of earnings
|
$
|
250.3
|
|
|
$
|
176.0
|
|
|
$
|
218.1
|
|
Total related tax benefit
|
$
|
62.4
|
|
|
$
|
57.6
|
|
|
$
|
73.0
|
|
Total capitalized stock-based compensation included in net property, plant and equipment and inventories on the consolidated balance sheets
|
$
|
3.5
|
|
|
$
|
1.9
|
|
|
$
|
1.5
|
|
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
2018
,
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Options
Granted During the Period
|
Fiscal Year Ended
|
2018
|
|
2017
|
|
2016
|
Expected term (in years)
|
3.6
|
|
|
3.9
|
|
|
3.9
|
|
Expected stock price volatility
|
20.5
|
%
|
|
21.6
|
%
|
|
23.9
|
%
|
Risk-free interest rate
|
2.1
|
%
|
|
1.5
|
%
|
|
1.2
|
%
|
Expected dividend yield
|
2.2
|
%
|
|
1.8
|
%
|
|
1.3
|
%
|
Weighted average grant price
|
$
|
56.56
|
|
|
$
|
56.12
|
|
|
$
|
60.20
|
|
Estimated fair value per option granted
|
$
|
7.32
|
|
|
$
|
8.56
|
|
|
$
|
10.54
|
|
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
September 30, 2018
(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 1, 2017
|
31.4
|
|
|
$
|
36.51
|
|
|
5.8
|
|
$
|
589
|
|
Granted
|
3.9
|
|
|
56.56
|
|
|
|
|
|
Exercised
|
(6.3
|
)
|
|
19.46
|
|
|
|
|
|
Expired/forfeited
|
(1.7
|
)
|
|
55.24
|
|
|
|
|
|
Outstanding, September 30, 2018
|
27.3
|
|
|
42.13
|
|
|
5.2
|
|
418
|
|
Exercisable, September 30, 2018
|
19.8
|
|
|
36.95
|
|
|
4.1
|
|
405
|
|
Vested and expected to vest, September 30, 2018
|
26.3
|
|
|
41.59
|
|
|
5.1
|
|
417
|
|
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
September 30, 2018
, total unrecognized stock-based compensation expense, net of estimated forfeitures, related to nonvested options was approximately
$19 million
, before income taxes, and is expected to be recognized over a weighted average period of approximately
2.4 years
. The total intrinsic value of options exercised was
$236 million
,
$181 million
, and
$254 million
during fiscal years
2018
,
2017
and
2016
, respectively. The total fair value of options vested was
$53 million
,
$40 million
, and
$37 million
during fiscal years
2018
,
2017
and
2016
, 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
September 30, 2018
(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 1, 2017
|
7.6
|
|
|
$
|
52.06
|
|
|
0.9
|
|
$
|
410
|
|
Granted
|
9.5
|
|
|
56.48
|
|
|
|
|
|
Vested
|
(3.3
|
)
|
|
50.18
|
|
|
|
|
|
Forfeited/canceled
|
(2.6
|
)
|
|
54.87
|
|
|
|
|
|
Nonvested, September 30, 2018
|
11.2
|
|
|
55.62
|
|
|
1.0
|
|
636
|
|
For fiscal
2017
and
2016
, the weighted average fair value per RSU granted was
$54.30
and
$58.81
, respectively. As of
September 30, 2018
, total unrecogniz
ed stock-based compensation expense related to nonvested RSUs, net of estimated forfeitures, was approximately
$192 million
, before income taxes, and is expected to be recognized over a weighted average period of approximately
1.9 years
. The total fair value of RSUs vested was
$166 million
,
$182 million
and
$169 million
during fiscal years
2018
,
2017
and
2016
, 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
0.6 million
in fiscal
2018
.
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
$111.7 million
,
$101.4 million
and
$86.2 million
in fiscal years
2018
,
2017
and
2016
, respectively.
Note 13: Income Taxes
On December 22, 2017, the President of the United States signed and enacted comprehensive tax legislation into law H.R. 1, commonly referred to as the Tax Act. Except for certain provisions, the Tax Act is effective for tax years beginning on or after January 1, 2018. As a fiscal year U.S. taxpayer, the majority of the provisions will apply to our fiscal 2019, such as eliminating the domestic manufacturing deduction, creating new taxes on certain foreign sourced income and introducing new limitations on certain business deductions. For fiscal 2018 and effective in the first fiscal quarter, the most significant impacts included: lowering of the U.S. federal corporate income tax rate; remeasuring certain net deferred tax liabilities; and requiring the transition tax on the deemed repatriation of certain foreign earnings. The phase in of the lower corporate income tax rate resulted in a blended rate of
24.5%
for fiscal 2018, as compared to the previous 35%. The tax rate will be reduced to 21% in subsequent fiscal years. We recorded net income tax benefit for the provisional remeasurement of certain deferred taxes and related amounts of
$71 million
for the year ended
September 30, 2018
. Additionally, we recorded a provisional
$231 million
of income tax expense for the estimated effects of the transition tax, net of adjustments related to uncertain tax positions for the year ended
September 30, 2018
. Of the total provisional transition tax obligation recorded to date,
$237 million
of income taxes payable was included in other long-term liabilities on the consolidated balance sheet as of
September 30, 2018
.
Based on our current interpretation of the Tax Act, we made reasonable estimates to record provisional adjustments during fiscal 2018, as described above. Collectively, these items did not have a material impact to our consolidated financial statements. Since we are still accumulating and processing data to finalize the underlying calculations and expect regulators to issue further guidance, among other things, we believe our estimates may change. We continue to refine such amounts within the measurement period allowed, which will be completed no later than the first quarter of fiscal 2019.
Components of earnings before income taxes
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Sep 30, 2018
|
|
Oct 1, 2017
|
|
Oct 2, 2016
|
United States
|
$
|
4,826.0
|
|
|
$
|
3,393.0
|
|
|
$
|
3,415.7
|
|
Foreign
|
954.0
|
|
|
924.5
|
|
|
782.9
|
|
Total earnings before income taxes
|
$
|
5,780.0
|
|
|
$
|
4,317.5
|
|
|
$
|
4,198.6
|
|
Provision/(benefit) for income taxes
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Sep 30, 2018
|
|
Oct 1, 2017
|
|
Oct 2, 2016
|
Current taxes:
|
|
|
|
|
|
U.S. federal
|
$
|
156.2
|
|
|
$
|
931.0
|
|
|
$
|
704.1
|
|
U.S. state and local
|
52.0
|
|
|
170.8
|
|
|
166.5
|
|
Foreign
|
327.0
|
|
|
216.6
|
|
|
218.5
|
|
Total current taxes
|
535.2
|
|
|
1,318.4
|
|
|
1,089.1
|
|
Deferred taxes:
|
|
|
|
|
|
U.S. federal
|
633.7
|
|
|
121.2
|
|
|
351.3
|
|
U.S. state and local
|
101.5
|
|
|
14.2
|
|
|
25.8
|
|
Foreign
|
(8.4
|
)
|
|
(21.2
|
)
|
|
(86.5
|
)
|
Total deferred taxes
|
726.8
|
|
|
114.2
|
|
|
290.6
|
|
Total income tax expense
|
$
|
1,262.0
|
|
|
$
|
1,432.6
|
|
|
$
|
1,379.7
|
|
Reconciliation of the statutory U.S. federal income tax rate with our effective income tax rate:
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Sep 30, 2018
|
|
Oct 1, 2017
|
|
Oct 2, 2016
|
Statutory rate
|
24.5
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes, net of federal tax benefit
|
2.1
|
|
|
2.8
|
|
|
3.0
|
|
Benefits and taxes related to foreign operations
|
(0.1
|
)
|
|
(2.8
|
)
|
|
(2.2
|
)
|
Domestic production activity deduction
|
—
|
|
|
(1.8
|
)
|
|
(1.9
|
)
|
Gain resulting from acquisition of joint venture
|
(5.8
|
)
|
|
—
|
|
|
—
|
|
Impact of the Tax Act
|
2.8
|
|
|
—
|
|
|
—
|
|
Other, net
|
(1.7
|
)
|
|
—
|
|
|
(1.0
|
)
|
Effective tax rate
|
21.8
|
%
|
|
33.2
|
%
|
|
32.9
|
%
|
The Company continues to evaluate its plans for reinvestment or repatriation of unremitted foreign earnings and thus has not adjusted its previous indefinite reinvestment assertions for the effects of the Tax Act. In the event we determine that all or a portion of such unremitted foreign earnings are no longer indefinitely reinvested, we may be subject to additional U.S. federal and state income taxes and foreign withholding taxes, beyond the Tax Act's one-time transition tax, which could be material.
Tax effect of temporary differences and carryforwards that comprise significant portions of deferred tax assets and liabilities
(in millions):
|
|
|
|
|
|
|
|
|
|
Sep 30, 2018
|
|
Oct 1, 2017
|
Deferred tax assets:
|
|
|
|
Property, plant and equipment
|
$
|
67.4
|
|
|
$
|
71.3
|
|
Accrued occupancy costs
|
109.0
|
|
|
118.0
|
|
Accrued compensation and related costs
|
64.2
|
|
|
95.0
|
|
Stored value card liability and deferred revenue
|
144.2
|
|
|
130.7
|
|
Stock-based compensation
|
96.7
|
|
|
125.9
|
|
Net operating losses
|
79.2
|
|
|
80.8
|
|
Litigation charge
(1)
|
—
|
|
|
792.0
|
|
Other
|
129.5
|
|
|
180.8
|
|
Total
|
$
|
690.2
|
|
|
$
|
1,594.5
|
|
Valuation allowance
|
(129.3
|
)
|
|
(80.1
|
)
|
Total deferred tax asset, net of valuation allowance
|
$
|
560.9
|
|
|
$
|
1,514.4
|
|
Deferred tax liabilities:
|
|
|
|
Property, plant and equipment
|
(348.1
|
)
|
|
(477.2
|
)
|
Intangible assets and goodwill
|
(274.2
|
)
|
|
(159.0
|
)
|
Other
|
(74.1
|
)
|
|
(89.1
|
)
|
Total
|
(696.4
|
)
|
|
(725.3
|
)
|
Net deferred tax asset (liability)
|
$
|
(135.5
|
)
|
|
$
|
789.1
|
|
Reported as:
|
|
|
|
Deferred income tax assets
|
134.7
|
|
|
795.4
|
|
Deferred income tax liabilities (included in Other long-term liabilities)
|
(270.2
|
)
|
|
(6.3
|
)
|
Net deferred tax asset (liability)
|
$
|
(135.5
|
)
|
|
$
|
789.1
|
|
(1)
The tax deduction for litigation charges was accelerated during fiscal 2018.
The valuation allowance as of
September 30, 2018
and
October 1, 2017
is primarily related to net operating losses and other deferred tax assets of consolidated foreign subsidiaries.
As of
September 30, 2018
, we had state net operating loss carryforwards of
$32.0 million
which will begin to expire in
fiscal 2024
, state tax credit carryforwards of
$9.7 million
, of which
$9.3 million
will begin to expire in fiscal 2024 and the remainder will begin to expire in fiscal 2019, and foreign net operating loss carryforwards of
$290.7 million
, of which
$180.8 million
have an indefinite carryforward period and the remainder expire at various dates starting from fiscal 2019.
Uncertain Tax Positions
As of
September 30, 2018
, we had
$224.6 million
of gross unrecognized tax benefits of which
$157.3 million
, if recognized, would affect our effective tax rate. We recognized a
benefit
of
$0.5 million
, an
expense
of
$5.2 million
and a
benefit
of
$3.6 million
of interest and penalties in income tax expense, prior to the benefit of the federal tax deduction, for fiscal
2018
,
2017
and
2016
, respectively. As of
September 30, 2018
and
October 1, 2017
, we had accrued interest and penalties of
$12.8 million
and
$11.2 million
, respectively, within our consolidated balance sheets.
The following table summarizes the activity related to our unrecognized tax benefits
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sep 30, 2018
|
|
Oct 1, 2017
|
|
Oct 2, 2016
|
Beginning balance
|
$
|
196.9
|
|
|
$
|
146.5
|
|
|
$
|
150.4
|
|
Increase related to prior year tax positions
|
17.5
|
|
|
10.4
|
|
|
—
|
|
Decrease related to prior year tax positions
|
(41.8
|
)
|
|
—
|
|
|
(23.6
|
)
|
Increase related to current year tax positions
|
62.4
|
|
|
41.3
|
|
|
33.7
|
|
Decreases related to settlements with taxing authorities
|
(4.5
|
)
|
|
—
|
|
|
(3.1
|
)
|
Decrease related to lapsing of statute of limitations
|
(5.9
|
)
|
|
(1.3
|
)
|
|
(10.9
|
)
|
Ending balance
|
$
|
224.6
|
|
|
$
|
196.9
|
|
|
$
|
146.5
|
|
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 2017.
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 2019 for reasons such as a lapse of the statute of limitations or resolution of examinations with tax authorities. We estimate this range to be approximately
$79 million
to
$117 million
.
Note 14: Earnings per Share
Calculation of net earnings per common share (“EPS”) — basic and diluted
(in millions, except EPS)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Sep 30, 2018
|
|
Oct 1, 2017
|
|
Oct 2, 2016
|
Net earnings attributable to Starbucks
|
$
|
4,518.3
|
|
|
$
|
2,884.7
|
|
|
$
|
2,817.7
|
|
Weighted average common shares outstanding (for basic calculation)
|
1,382.7
|
|
|
1,449.5
|
|
|
1,471.6
|
|
Dilutive effect of outstanding common stock options and RSUs
|
11.9
|
|
|
12.0
|
|
|
15.1
|
|
Weighted average common and common equivalent shares outstanding (for diluted calculation)
|
1,394.6
|
|
|
1,461.5
|
|
|
1,486.7
|
|
EPS — basic
|
$
|
3.27
|
|
|
$
|
1.99
|
|
|
$
|
1.91
|
|
EPS — diluted
|
$
|
3.24
|
|
|
$
|
1.97
|
|
|
$
|
1.90
|
|
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
14.1 million
,
11.4 million
, and
5.4 million
out-of-the-money stock options as of
September 30, 2018
,
October 1, 2017
, and
October 2, 2016
, respectively.
Note 15: Commitments and Contingencies
Return of Capital
In September 2018, we entered into accelerated share repurchase agreements (“ASR agreements”) with third-party financial institutions totaling
$5.0 billion
, effective October 1, 2018. We made a
$5.0 billion
upfront payment on
October 2, 2018
to the financial institutions and received an initial delivery of shares, which
approximates 80 percent of the total number of shares to be repurchased under the ASR agreements.
Upon completion, the total shares repurchased will be based on the volume-weighted average share price during the term of the ASR agreements less an applicable discount. The financial institutions may be required to deliver additional shares or, under certain circumstances, we may be required to deliver shares or elect to make a cash payment to the financial institutions. Final settlement is expected to be completed as early as February 2019 and no later than March 2019. Refer to
Note 18
, Subsequent Events, for additional information about our ASR agreements.
Legal Proceedings
On April 13, 2010, an organization named Council for Education and Research on Toxics (“Plaintiff”) filed a lawsuit in the Superior Court of the State of California, County of Los Angeles, against the Company and certain other defendants who manufacture, package, distribute or sell brewed coffee. The lawsuit is
Council for Education and Research on Toxics v. Starbucks Corporation, et al
.. On May 9, 2011, the Plaintiff filed an additional lawsuit in the Superior Court of the State of California, County of Los Angeles, against the Company and additional defendants who manufacture, package, distribute or
sell packaged coffee. The lawsuit is
Council for Education and Research on Toxics v. Brad Barry LLC, et al
.. Both cases have since been consolidated and now include nearly eighty defendants, which constitute the great majority of the coffee industry in California. Plaintiff alleges that the Company and the other defendants failed to provide warnings for their coffee products of exposure to the chemical acrylamide as required under California Health and Safety Code section 25249.5, the California Safe Drinking Water and Toxic Enforcement Act of 1986, better known as Proposition 65. Plaintiff seeks equitable relief, including providing warnings to consumers of coffee products, as well as civil penalties in the amount of the statutory maximum of two thousand five hundred dollars per day per violation of Proposition 65. The Plaintiff asserts that every consumed cup of coffee, absent a compliant warning, is equivalent to a violation under Proposition 65.
The Company, as part of a joint defense group organized to defend against the lawsuit, disputes the claims of the Plaintiff. Acrylamide is not added to coffee, but is present in all coffee in small amounts (parts per billion) as a byproduct of the coffee bean roasting process. The Company has asserted multiple affirmative defenses. Trial of the first phase of the case commenced on September 8, 2014, and was limited to three affirmative defenses shared by all defendants. On September 1, 2015, the trial court issued a final ruling adverse to defendants on all Phase 1 defenses. Trial of the second phase of the case commenced in the fall of 2017. On May 7, 2018, the trial court issued a ruling adverse to defendants on the Phase 2 defense, the Company's last remaining defense to liability. On June 22, 2018 the California Office of Environmental Health Hazard Assessment (OEHHA) proposed a new regulation clarifying that cancer warnings are not required for coffee under Proposition 65. Defendants anticipate that the proposed regulation will be final by January 2019. The case was set to proceed to a third phase trial on damages, remedies and attorneys' fees on October 15, 2018. However, on October 12, 2018, the California Court of Appeal granted the defendants request for a stay of the Phase 3 trial.
At this stage of the proceedings, Starbucks believes that the likelihood that the Company will ultimately incur a loss in connection with this litigation is reasonably possible rather than probable. Accordingly, no loss contingency was recorded for this matter. The outcome and the financial impact of the case to Starbucks, if any, cannot be predicted.
Starbucks is party to various other legal proceedings arising in the ordinary course of business, including certain employment litigation cases that have been certified as class or collective actions, but, except as noted above, 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
Segment information is prepared on the same basis that our ceo, who is our Chief Operating Decision Maker, manages the segments, evaluates financial results, and makes key operating decisions.
On August 26, 2018, our Channel Development segment finalized licensing and distribution agreements with Nestlé to sell and market our consumer packaged goods and foodservice products. The scope of the arrangement converts the majority of our previously defined Channel Development segment operations, as well as certain smaller businesses previously reported in the Americas, EMEA and Corporate and Other (previously All Other Segments), from company-owned to licensed operations with Nestlé. As a result, we realigned our organizational and operating segment structures in support of this newly established Global Coffee Alliance, and our reportable segments were restated as if those smaller businesses were previously within our Channel Development segment.
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.
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 in various stages of development or undergoing transformations of their business models. Therefore, they may require a more extensive support organization, relative to their current levels of revenue and operating income, than our Americas operations.
Channel Development revenues include packaged coffee sales, tea and ready-to-drink beverages to customers outside of our company-operated and licensed stores. Historically revenues have included domestic and international sales of our packaged coffee, tea and ready-to-drink products to grocery, warehouse club and specialty retail stores and through institutional foodservice companies which serviced businesses. In the fourth quarter of fiscal 2018, we licensed our consumer packaged goods and foodservice businesses to Nestlé. As a result, Channel Development revenues also include revenues from product sales to and royalty revenues from Nestlé. The collaborative business relationships for ready-to-drink products and the associated revenues remain unchanged due to the Global Coffee Alliance.
Consolidated revenue mix by product type
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Sep 30, 2018
|
|
Oct 1, 2017
|
|
Oct 2, 2016
|
Beverage
|
$
|
14,463.1
|
|
|
59
|
%
|
|
$
|
12,915.0
|
|
|
58
|
%
|
|
$
|
12,383.4
|
|
|
58
|
%
|
Food
|
4,397.7
|
|
|
18
|
%
|
|
3,832.1
|
|
|
17
|
%
|
|
3,495.0
|
|
|
16
|
%
|
Packaged and single-serve coffees and teas
|
2,797.5
|
|
|
11
|
%
|
|
2,883.6
|
|
|
13
|
%
|
|
2,866.0
|
|
|
14
|
%
|
Other
(1)
|
3,061.2
|
|
|
12
|
%
|
|
2,756.1
|
|
|
12
|
%
|
|
2,571.5
|
|
|
12
|
%
|
Total
|
$
|
24,719.5
|
|
|
100
|
%
|
|
$
|
22,386.8
|
|
|
100
|
%
|
|
$
|
21,315.9
|
|
|
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
|
Sep 30, 2018
|
|
Oct 1, 2017
|
|
Oct 2, 2016
|
Net revenues:
|
|
|
|
|
|
United States
|
$
|
17,409.4
|
|
|
$
|
16,527.1
|
|
|
$
|
15,774.8
|
|
Other countries
|
7,310.1
|
|
|
5,859.7
|
|
|
5,541.1
|
|
Total
|
$
|
24,719.5
|
|
|
$
|
22,386.8
|
|
|
$
|
21,315.9
|
|
|
|
|
|
|
|
Long-lived assets:
|
|
|
|
|
|
United States
|
$
|
5,635.9
|
|
|
$
|
5,848.3
|
|
|
$
|
6,012.8
|
|
Other countries
|
6,026.3
|
|
|
3,234.0
|
|
|
3,541.8
|
|
Total
|
$
|
11,662.2
|
|
|
$
|
9,082.3
|
|
|
$
|
9,554.6
|
|
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 China, Japan, Canada and the U.K., which together account for approximately
81%
of net revenues from other countries for fiscal
2018
.
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 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 Corporate and Other segment for the years ended
September 30, 2018
,
October 1, 2017
and
October 2, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
in millions
)
|
Americas
|
|
China /
Asia Pacific
|
|
EMEA
|
|
Channel
Development
|
|
Corporate and Other
|
|
Total
|
Fiscal 2018
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
$
|
16,732.2
|
|
|
$
|
4,473.6
|
|
|
$
|
1,048.0
|
|
|
$
|
2,297.3
|
|
|
$
|
168.4
|
|
|
$
|
24,719.5
|
|
Depreciation and amortization expenses
|
638.3
|
|
|
412.1
|
|
|
31.7
|
|
|
1.3
|
|
|
163.6
|
|
|
1,247.0
|
|
Income from equity investees
|
—
|
|
|
117.4
|
|
|
—
|
|
|
183.8
|
|
|
—
|
|
|
301.2
|
|
Operating income/(loss)
|
3,614.4
|
|
|
867.4
|
|
|
61.5
|
|
|
927.1
|
|
|
(1,587.1
|
)
|
|
3,883.3
|
|
Total assets
|
4,380.9
|
|
|
5,863.5
|
|
|
356.4
|
|
|
148.2
|
|
|
13,407.4
|
|
|
24,156.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2017
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
$
|
15,620.0
|
|
|
$
|
3,240.2
|
|
|
$
|
958.7
|
|
|
$
|
2,256.6
|
|
|
$
|
311.3
|
|
|
$
|
22,386.8
|
|
Depreciation and amortization expenses
|
614.9
|
|
|
202.2
|
|
|
30.6
|
|
|
3.0
|
|
|
160.7
|
|
|
1,011.4
|
|
Income from equity investees
|
—
|
|
|
197.0
|
|
|
—
|
|
|
194.4
|
|
|
—
|
|
|
391.4
|
|
Operating income/(loss)
|
3,653.6
|
|
|
765.0
|
|
|
94.5
|
|
|
967.0
|
|
|
(1,345.4
|
)
|
|
4,134.7
|
|
Total assets
|
3,327.2
|
|
|
2,770.9
|
|
|
273.8
|
|
|
129.1
|
|
|
7,864.6
|
|
|
14,365.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2016
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
$
|
14,775.2
|
|
|
$
|
2,938.8
|
|
|
$
|
1,071.5
|
|
|
$
|
2,195.1
|
|
|
$
|
335.3
|
|
|
$
|
21,315.9
|
|
Depreciation and amortization expenses
|
590.0
|
|
|
180.6
|
|
|
39.9
|
|
|
3.9
|
|
|
166.4
|
|
|
980.8
|
|
Income from equity investees
|
—
|
|
|
150.1
|
|
|
1.5
|
|
|
166.6
|
|
|
—
|
|
|
318.2
|
|
Operating income/(loss)
|
3,738.5
|
|
|
631.6
|
|
|
131.0
|
|
|
877.3
|
|
|
(1,206.5
|
)
|
|
4,171.9
|
|
Total assets
|
3,424.6
|
|
|
2,740.2
|
|
|
552.1
|
|
|
82.2
|
|
|
7,513.4
|
|
|
14,312.5
|
|
Note 17: Selected Quarterly Financial Information
(unaudited; in millions, except EPS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Full
Year
|
Fiscal 2018:
|
|
|
|
|
|
|
|
|
|
Net revenues
|
$
|
6,073.7
|
|
|
$
|
6,031.8
|
|
|
$
|
6,310.3
|
|
|
$
|
6,303.6
|
|
|
$
|
24,719.5
|
|
Operating income
|
1,116.1
|
|
|
772.5
|
|
|
1,038.2
|
|
|
956.6
|
|
|
3,883.3
|
|
Net earnings attributable to Starbucks
|
2,250.2
|
|
|
660.1
|
|
|
852.5
|
|
|
755.8
|
|
|
4,518.3
|
|
EPS — diluted
|
1.57
|
|
|
0.47
|
|
|
0.61
|
|
|
0.56
|
|
|
3.24
|
|
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
|
|
Note 18: Subsequent Events
On
October 2, 2018
we used
$5.0 billion
of net proceeds received from Nestlé to enter into an accelerated share repurchase program with third-party financial institutions. As a result,
72.0 million
shares of our common stock have been retired. Final settlement is expected to be completed as early as
February 2019
and no later than
March 2019
. Refer to
Note 15
, Commitments and Contingencies for further discussion.
On October 24, 2018, we amended and restated our
$1.0 billion
unsecured 364-Day credit facility to extend the term, which is now set to mature on
October 23, 2019
.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Starbucks Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Starbucks Corporation and subsidiaries (the “Company”) as of
September 30, 2018
and
October 1, 2017
, the related consolidated statements of earnings, comprehensive income, equity, and cash flows for each of the three years in the period ended
September 30, 2018
, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
September 30, 2018
and
October 1, 2017
, and the results of its operations and its cash flows for each of the three years in the period ended
September 30, 2018
, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of
September 30, 2018
, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
November 16, 2018
, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Seattle, Washington
November 16, 2018
We have served as the Company's auditor since 1987.