NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years ended September 27, 2020, September 29, 2019 and September 30, 2018
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 foodservice. The grocery and foodservice business is primarily through our Global Coffee Alliance with Nestlé established in August 2018.
In this 10-K, Starbucks Corporation (together with its subsidiaries) is referred to as “Starbucks,” the “Company,” “we,” “us” or “our.”
Certain prior period information on the consolidated statements of cash flows has been reclassified to conform to the current year presentation.
In the third quarter of fiscal 2020, we renamed the “cost of sales” caption on our consolidated statement of earnings to “product and distribution costs,” which more accurately reflects the substance of costs classified within this line item. There were no classification or other changes made in conjunction with the new caption.
We have three reportable operating segments: 1) Americas, which is inclusive of the U.S., Canada and Latin America; 2) International, which is inclusive of China/Asia Pacific, Europe, the Middle East and Africa; and 3) Channel Development. Non-reportable operating segments such as Evolution Fresh and unallocated corporate expenses are reported within Corporate and Other.
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. Intercompany transactions and balances have been eliminated.
Fiscal Year End
Our fiscal year ends on the Sunday closest to September 30. Fiscal 2020, 2019 and 2018 included 52 weeks.
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 due to risks and uncertainties, including uncertainty in the current economic environment due to the outbreak of the novel coronavirus (“COVID-19”).
Restructuring
In the third quarter of fiscal 2020, we announced a plan to optimize our North America store portfolio, primarily in dense metropolitan markets by blending store formats to better cater to changing customer tastes and preferences. As of September 27, 2020, we expect the total number of closures to be approximately 800 stores in the U.S. and Canada, reflecting an additional 200 store closures than the initial estimate of 600 stores. As of September 27, 2020, we identified 405 stores for closure under our restructuring plans, and as a result we recorded approximately $254.7 million to restructuring and impairments on our consolidated statement of earnings. Of this total, $151.6 million related to the impairment of store assets for which either a triggering event occurred and the assets were determined not to be recoverable or the store was permanently closed. An additional $87.7 million was primarily associated with accelerated amortization or impairments of right-of-use (“ROU”) lease assets due to planned store closures prior to the end of contractual lease terms. For impaired store asset groups, we estimated the fair values using an income approach incorporating internal projections of revenue growth and operating expenses that are considered Level 3 fair value measurements, as well as applicable discount rates and market lease rates. The application of these projections and fair value measurements did not have a significant impact on our final impairment decisions given that we plan to fully exit the majority of these identified stores in the next 3 to 6 months. The remaining $15.4 million related to employee termination costs.
We expect total future restructuring costs, which are attributable to our Americas segment, to range from approximately $260 million to $400 million. These restructuring costs include accelerated amortization or impairments of ROU assets due to
planned store closures prior to the end of contractual lease terms ($150 million to $190 million), store impairment and disposal costs not previously recorded as part of our ongoing store impairment process ($100 million to $190 million) and the remaining amount relates to employee termination costs. As we have previously recorded impairment charges in fiscal 2020 for stores that may be identified for closure under our plans, and because store closure decisions are still subject to change, the final costs associated with these store closures may be different from the initial estimates. These costs will depend on the asset carrying value and remaining lease term of the specific stores identified. Future restructuring costs are expected to be incurred over the next 18 months as stores are specifically identified for closure or, in the case of lease exit costs, when the stores either cease operations or when a reduced lease term due to early termination is reasonably certain.
As of September 27, 2020, restructuring liabilities totaling $80.0 million were included in current and non-current operating lease liability for the remaining outstanding rent liabilities due to landlords. The associated expense was recognized in fiscal 2020 for these stores that were either closed or reasonably certain to close in fiscal 2021. Additionally, $15.2 million was included in accrued payroll and benefits for employee termination costs on the consolidated balance sheets. Cash payments were immaterial for fiscal 2020.
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 Debt 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.
Marketable Equity Securities
We also have a marketable equity securities portfolio, which is comprised of marketable equity mutual funds and equity exchange-traded funds. Marketable equity 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 Investments
Equity investments are accounted under the equity method if we are able to exercise significant influence, but not control, over an investee. Our share of the earnings or losses as reported by the investees is classified as income from equity investees on our consolidated statements of earnings. The investments are evaluated for impairment annually and when facts and circumstances indicate that the carrying value may not be recoverable. If a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded in interest income and other, net on our consolidated statements of earnings.
We account for equity investments for which we do not have significant influence and without readily determinable fair values at cost with adjustments for observable changes in price or impairments as permitted by the measurement alternative. Investments for which the measurement alternative has been elected are assessed for impairment quarterly, or if a triggering event indicates impairment may be present. Any adjustments as a result of price changes or impairments are recorded in interest income and other, net on our consolidated statements of 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 equity 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 other 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 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 hedging instruments, cross-currency swaps and foreign currency debt hedging instruments, 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 27, 2020, cash collateral held under collateral security arrangements was $34.9 million and is included in other long-term liabilities on our consolidated balance sheet. Cash collateral was immaterial as of September 29, 2019. The potential effects of netting arrangements with our derivative contracts, excluding the effects of collateral, would not have had a material impact on our consolidated balance sheets.
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 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, in the same line item as the underlying hedged item on our consolidated statements of earnings.
Cash flow hedges related to anticipated transactions are designated and documented at the inception of each hedge. Cash flows from hedging transactions are classified in the same categories as the cash flows from the respective hedged items. For de-designated cash flow hedges in which the transactions are no longer likely to occur, the related accumulated derivative gains or losses are recognized in interest income and other, net 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 derivative's, or qualifying non-derivative instrument’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.
Fair Value Hedges
For derivative instruments that are designated and qualify as a fair value hedge, the changes in fair value of the derivative instrument and the offsetting changes in fair value of the underlying hedged item due to changes in the hedged risk 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 changes in the fair values of these contracts are 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 in Note 5, Inventories. For both fixed-price and price-to-be-fixed purchase commitments, we expect to take delivery of green coffee and to utilize the coffee in a reasonable period of time in the ordinary course of business. Since these types of purchase commitments qualify for the normal purchase normal sale exemption, they are not recorded as derivative instruments on our consolidated 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 Global Coffee Alliance and other Channel Development customers. Our allowance for doubtful accounts is calculated based on historical experience, customer credit risk and application of the specific identification method. During fiscal 2020, we also assessed incremental risks due to COVID-19 on our licensees' financial viability. For the year ended September 27, 2020, we did not observe a significant deterioration of our receivable portfolio that required a significant increase in bad debt expense. To assist our international licensed partners with their efforts to recover from the impact of COVID-19, we provided a short-term payment extension for their outstanding receivables as of the end of the second quarter of fiscal 2020 and offered longer-term payment extensions to help certain licensees dedicate their capital to further develop stores and build the brand as the business recovers. During the third quarter of fiscal 2020, we waived royalty payments from our international licensees and did not recognize royalty revenues associated with these accounts. We do not believe the terms and forms of these financial relief actions changed our revenue recognition policy or had a significant impact on future collectability. During the fourth quarter of fiscal 2020, we resumed normal royalty billings and collections. As of September 27, 2020 and September 29, 2019, our allowance for doubtful accounts was $27.1 million and $6.7 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 27, 2020 and September 29, 2019, inventory reserves were $48.4 million and $33.7 million, respectively.
Property, Plant and Equipment
Property, plant and equipment is 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 product and distribution 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 and ROU assets related to the store lease 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 $84.9 million, $64.6 million and $32.8 million in fiscal 2020, 2019 and 2018, respectively. Additionally, we recognized net impairment charges of $210.0 million, $43.4 million and $42.8 million in fiscal 2020, 2019 and 2018, respectively. Of the total net impairment charges, $134.6 million, $7.1 million and $37.0 million in fiscal 2020, 2019 and 2018, respectively, were restructuring related and recorded in restructuring and impairment expenses. For fiscal 2020, we evaluated initial COVID-19 business recovery trends and their estimated impacts on future revenue growth and profitability for assessing impairment of our company-operated retail store and related operating lease right-of-use assets. As a result, we recorded $59.6 million of impairment losses within store operating expenses on our consolidated statement of earnings during the year ended September 27, 2020. 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.
Leases
The majority of our leases are operating leases for our company-operated retail store locations. We also lease, among other things, roasting, distribution and warehouse facilities and office space for corporate administrative purposes.
We categorize leases as either operating or finance leases at the commencement date of the lease. Operating lease agreements may contain tenant improvement allowances, rent holidays, rent escalation clauses and/or contingent rent provisions. We have lease agreements with lease and non-lease components, which are accounted for together as a single lease component for all underlying classes of assets.
We recognize a ROU asset and lease liability for each operating and finance lease with a contractual term greater than 12 months at the time of lease inception. We do not record leases with an initial term of 12 months or less on our consolidated balance sheet but continue to record rent expense on a straight-line basis over the lease term. Our leases often include options to extend or terminate at our sole discretion, which are included in the determination of lease term when they are reasonably certain to be exercised.
Our lease liability represents the present value of future lease payments over the lease term. Given our policy election to combine lease and non-lease components, we also consider fixed common area maintenance (“CAM”) part of our fixed future lease payments; therefore, fixed CAM is also included in our lease liability.
We cannot determine the interest rate implicit in each of our leases. Therefore, we use market and term-specific incremental borrowing rates. Our incremental borrowing rate for a lease is the rate of interest we expect to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. Because we do not borrow on a collateralized basis, we consider a combination of factors, including our credit-adjusted risk-free interest rate, the risk profile and funding cost of the specific geographic market of the lease, the lease term and the effect of adjusting the rate to reflect consideration of collateral. Our credit-adjusted risk-free rate takes into consideration interest rates we pay on our unsecured long-term bonds as well as quoted interest rates obtained from financial institutions.
Total lease costs recorded as rent and other occupancy costs include fixed operating lease costs, variable lease costs and short-term lease costs. Most of our real estate leases require we pay certain expenses, such as CAM costs, real estate taxes and other executory costs, of which the fixed portion is included in operating lease costs. We recognize operating lease costs on a straight-line basis over the lease term. In addition to the above costs, variable lease costs also include amounts based on a percentage of gross sales in excess of specified levels and are recognized when probable and are not included in determining the present value of our lease liability. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. A significant majority of our leases are related to our company-operated stores, and their related costs are recorded within store operating expenses.
The ROU asset is measured at the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, initial direct costs and any tenant improvement allowances received. For operating leases, ROU assets are
reduced over the lease term by the recognized straight-line lease expense less the amount of accretion of the lease liability determined using the effective interest method. For finance leases, ROU assets are amortized on a straight-line basis over the shorter of the useful life of the leased asset or the lease term. Interest expense on each finance lease liability is recognized utilizing the effective interest method. ROU assets are tested for impairment in the same manner as long-lived assets.
Additionally, we monitor for events or changes in circumstances that may require a reassessment of one of our leases and determine if a remeasurement is required. During fiscal 2020, we received $27.6 million of COVID-19-related rent concessions for stores in our International segment generally correlating with the temporary period our stores were closed. Consistent with updated guidance from the Financial Accounting Standards Board (“FASB”) in April 2020, we elected to treat COVID-19-related rent concessions as variable rent. Rent concessions were recognized as an offset to our rent expense within store operating expenses on our consolidated statement of earnings. See Note 10, Leases, for additional details. Additionally, for the year ended September 27, 2020, we recorded $87.7 million in accelerated amortization and impairment of ROU assets for stores identified for closure under the restructuring of our Americas store portfolio, which were recorded in restructuring and impairments on the consolidated statement 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.
We recorded no goodwill impairment during fiscal 2020. In fiscal 2019 and 2018, we recorded goodwill impairment of $10.5 million and $37.6 million, respectively. See Note 8, Other Intangible Assets and Goodwill, for further information.
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.
We recorded other intangible asset impairment charges of $22.1 million during fiscal 2020. There were no significant other intangible asset impairment charges recorded during fiscal 2019 and 2018. See Note 8, Other Intangible Assets and Goodwill, for further information.
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 as the performance obligation has been satisfied. Company-operated store revenues are reported excluding 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, royalties and other fees paid by licensees using the Starbucks brand. 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 product and distribution costs on our consolidated statements of earnings.
We consider pre-opening services, including site evaluation and selection, store architectural/design and development and operational training, to be performance obligations that are separate from the license to operate under the Starbucks brand. These services provide distinct value to our licensees, including business and industry insight and knowledge that transfers value apart from the license. Revenues associated with pre-opening services are recognized upon completion of the related performance obligations, generally when a store is opened. Royalty revenues are recognized based upon a percentage of reported sales, and other continuing fees, such as marketing and service fees, are recognized as the performance obligations are met.
Stored Value Cards
Stored value cards can be activated through various channels, including 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 websites and locations, such as grocery stores, although they cannot be reloaded at these third-party websites or locations. Amounts loaded onto stored value cards are initially recorded as deferred revenue and recognized as revenue upon redemption. Historically, the majority of stored value cards are redeemed within one year.
In many of our company-owned markets, including the U.S., our stored value cards do not have an expiration date nor do we charge service fees that cause a decrement to customer balances. Based on historical redemption rates, a portion of stored value cards is not expected to be redeemed and will be recognized as breakage over time in proportion to stored value card redemptions. The redemption rates are based on historical redemption patterns for each market, including the timing and business channel in which the card was activated or reloaded, and remittance to government agencies under unclaimed property laws, if applicable.
Breakage is recognized as company-operated stores and licensed stores revenue within the consolidated statement of earnings beginning in fiscal 2019 in accordance with the revenue recognition guidance that we adopted prospectively during fiscal 2019. For the fiscal years ended September 27, 2020 and September 29, 2019, we recognized breakage revenue of $130.3 million and $125.1 million in company-operated store revenues and $14.3 million and $15.7 million in licensed store revenues, respectively. Prior to the adoption of the new revenue recognition guidance, breakage was recorded using the remote method and recorded in interest income and other, net. In fiscal 2018, we recognized breakage income of $155.9 million.
Loyalty Program
Customers in the U.S., Canada and certain other countries who register their Starbucks Card are automatically enrolled in the Starbucks® Rewards program, which is primarily a spend-based loyalty program. They earn loyalty points (“Stars”) with each purchase at participating Starbucks® stores and when making purchases with the Starbucks-branded credit and debit cards. Beginning in the fourth quarter of fiscal 2020, in addition to using their Starbucks Cards, Starbucks® Rewards members can earn Stars by paying with cash, credit or debit cards, or selected mobile wallets at company-operated stores in the U.S. and Canada. 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.
We defer revenue associated with the estimated selling price of Stars earned by Starbucks® Rewards members towards free product as each Star is earned and a corresponding liability is established in deferred revenue. This deferral is based on the estimated value of the product for which the reward is expected to be redeemed, net of estimated unredeemed Stars. Stars generally expire after six months.
When a customer redeems an earned reward, we recognize revenue for the redeemed product and reduce the related deferred revenue. The revenue recognition guidance that we adopted prospectively during fiscal 2019, did not impact the timing or total revenue recognized related to the loyalty program.
Other Revenues
Other revenues primarily include royalty revenues, 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. Sales of these products are generally recognized upon shipment to customers, depending on contract terms.
Beginning in late fiscal 2018, other revenues also include product sales to and licensing revenue from Nestlé related to our Global Coffee Alliance. Product sales to Nestlé are generally recognized when the product is shipped whereas royalty revenues are recognized based on a percentage of reported sales.
The adoption of the revenue recognition guidance discussed above did not impact the timing and amount of revenue recognized related to other revenues.
Deferred Revenues
Our deferred revenue primarily consists of the up-front prepaid royalty from Nestlé, for which we have continuing performance obligations to support the Global Coffee Alliance, and our unredeemed stored value card liability and unredeemed Stars associated with our loyalty program. See Note 11, Deferred Revenue, for further information.
Disaggregation of Revenues
Revenues disaggregated by segment, product type and geographic area are disclosed in Note 17, Segment Reporting.
Product and Distribution Costs
Product and distribution costs primarily consist of raw materials, purchased goods and packaging costs as well as operational costs of our supply chain organization, such as wages and benefits, occupancy costs and depreciation expenses, in support of sourcing, procuring, manufacturing, warehousing and transportation activities of products sold at our company-operated and licensed stores as well as through Channel Development and our other businesses. Also included are inventory and supply chain asset impairment costs.
Store Operating Expenses
Store operating expenses consist of costs incurred in our company-operated stores, primarily wages and benefits related to store partners (employees), occupancy costs and other costs that directly support the operation and sales-related activities of those stores.
General and Administrative Expenses
General and administrative expenses primarily consist of wages and benefits, professional service fees and occupancy costs for corporate headquarter and regional offices that support our corporate functions, including technology, finance, legal and partner (employee) resources.
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 $258.8 million, $245.7 million and $260.3 million in fiscal 2020, 2019 and 2018, respectively.
Government Subsidies
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which among other things, provides employer payroll tax credits for wages paid to employees who are unable to work during the COVID-19 outbreak and options to defer payroll tax payments for a limited period. Based on our evaluation of the CARES Act, we qualify for certain employer payroll tax credits as well as the deferral of payroll tax payments in the future. Additionally, the Canadian government enacted the Canada Emergency Wage Subsidy (“CEWS”) to help employers offset a portion of their employee wages for a limited period. We elected to treat qualified government subsidies from the U.S., Canada and other governments as offsets to the related operating expenses. During fiscal 2020, the qualified payroll credits reduced our store operating expenses by $349.6 million on our consolidated statement of earnings. After netting the qualified U.S. payroll tax credits against our payroll tax payable, we recorded $155.1 million within prepaid expenses and other current assets as of September 27, 2020. As of September 27, 2020, deferred payroll tax payments of $151.0 million were included in other long-term liabilities on our consolidated balance sheets.
Store Preopening Expenses
Costs incurred in connection with the start-up and promotion of new company-operated store openings are expensed as incurred.
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 store operating expense on our consolidated statements of earnings. As of September 27, 2020 and September 29, 2019, our net ARO assets included in property, plant and equipment were $30.7 million and $23.5 million, respectively, and our net ARO liabilities included in other long-term liabilities were $111.0 million and $95.5 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. If applicable, our total shareholder return relative to our peer group is incorporated into the underlying assumptions used to calculate grant date fair value. 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 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. 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 balances on our consolidated balance sheets.
Global intangible low-taxed income (“GILTI”) provisions are applied, providing an incremental tax on foreign income. We have made a policy election to classify taxes due under the GILTI provision as a current period expense.
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
Recently Adopted Accounting Pronouncements
In the second quarter of fiscal 2020, we adopted the new guidance from the FASB on simplifying the accounting for income taxes by removing certain exceptions to the general principles. The guidance was adopted on a prospective basis and had no material impact on the consolidated financial statements.
On September 30, 2019, we adopted the new guidance from the FASB on the recognition and measurement of leases utilizing the modified retrospective approach. As a result, the prior period information reported under the previous lease guidance has not been restated.
As permitted under the new FASB lease guidance, we elected the package of practical expedients, which allowed us to retain our prior conclusions regarding lease identification, classification and initial direct costs. For our lease agreements with lease and non-lease components, we elected the practical expedient to account for these as a single lease component for all underlying classes of assets. For our adoption, we did not elect to use hindsight for our existing leases. Additionally, for short-term leases with an initial lease term of 12 months or less and with purchase options we are reasonably certain will not be exercised, we elected to not record right-of-use assets or corresponding lease obligations on our consolidated balance sheet. We will continue to record rent expense for each short-term lease on a straight-line basis over the lease term.
The new FASB lease guidance had a material impact on our consolidated balance sheet; however, it did not have a material impact on our consolidated statement of earnings. The most material impact was the recognition of right-of-use assets of
$8.4 billion upon adoption, with corresponding lease liabilities of $9.0 billion relating to our operating leases. Existing deferred rent and tenant improvement allowances of approximately $568.0 million, previously recorded within other long-term liabilities, were recorded as an offset to our gross operating lease right-of-use assets. Additionally, pursuant to the transition guidance, we derecognized build-to-suit lease assets, previously recorded in property, plant and equipment, net, along with the corresponding liabilities on the consolidated balance sheet as of September 30, 2019. Accordingly, these leases have been recorded as operating leases as of the adoption date and are now included in operating lease, right-of-use assets and operating lease liabilities on the consolidated balance sheet. As of the adoption date, accumulated deficit within shareholder's equity on our consolidated balance sheet decreased by $17.3 million, primarily related to the derecognition of build-to-suit leasing arrangements.
In the first quarter of fiscal 2020, we adopted the new guidance from the FASB on the reclassification of certain tax effects from accumulated other comprehensive income (loss) (“AOCI”) which permits entities to reclassify the stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Tax Act”) from AOCI to retained earnings. The guidance was adopted prospectively with no material impact on the consolidated financial statements as of September 27, 2020.
Recent Accounting Pronouncements Not Yet Adopted
In March 2020, the FASB issued guidance related to reference rate reform. The pronouncement provides temporary optional expedients and exceptions to the current guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. We are currently evaluating the impact of the transition from LIBOR to alternative reference rates but do not expect a significant impact to our consolidated financial statements.
In June 2016, the FASB issued guidance replacing the incurred loss impairment methodology with a new methodology that reflects Current Expected Credit Losses on financial assets, including receivables and available-for-sale securities. The new methodology requires entities to estimate and recognize expected credit losses each reporting period. The guidance will be applied under the modified retrospective approach and will be effective at the beginning of our first quarter of fiscal 2021. We do not expect a material impact to our consolidated financial statements upon adoption.
Note 2: Acquisitions, Divestitures and Strategic Alliance
Fiscal 2019
In the third quarter of fiscal 2019, we sold our company-operated retail business in Thailand to Coffee Concepts Thailand, a joint-venture between Maxim's Caterers Limited and F&N Retail Connection Co. Ltd, converting this operation to a fully licensed market. This transaction resulted in a pre-tax gain of $601.9 million, which was included in net gains resulting from divestiture of certain operations on our consolidated statements of earnings.
In the second quarter of fiscal 2019, we sold our company-operated retail businesses in France and the Netherlands to Alsea, S.A.B. de C.V. converting these operations to fully licensed markets. These transactions did not have a material impact on our consolidated financial statements.
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 up-front payment of approximately $7 billion consisting primarily of prepaid royalties which was recorded to current and long-term deferred revenue. See Note 1, Summary of Significant Accounting Policies, for the accounting treatment. Also see Note 11, Deferred Revenue.
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. This transaction did not have a material impact on our consolidated financial statements.
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 at the time operated over 1,400 stores in the Shanghai, Jiangsu and Zhejiang Provinces, built 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.
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 International 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 International 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 was $160.6 million and $163.8 million for fiscal 2020 and 2019, respectively. The estimated future amortization expense is approximately $157.8 million and $154.4 million in fiscal 2021 and 2022, respectively.
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 International segment and is not deductible for income tax purposes. Due to foreign currency translation, the balance of goodwill related to the acquisition decreased $102.8 million since the date of acquisition to $2.1 billion as of September 27, 2020.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
Sep 30, 2018
|
|
Revenue
|
|
|
|
|
|
$
|
24,990.4
|
|
|
Net earnings attributable to Starbucks
|
|
|
|
|
|
3,196.8
|
|
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 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.
In the first quarter of fiscal 2018, 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 were reported primarily in Channel Development.
Note 3: Derivative Financial Instruments
Interest Rates
From time to time, we enter into designated cash flow hedges to manage the variability in cash flows due to changes in benchmark interest rates. We enter into interest rate swap agreements and treasury locks, which are synthetic forward sales of U.S. treasury securities settled in cash based upon the difference between an agreed-upon treasury rate and the prevailing treasury rate at settlement. These agreements are cash settled at the time of the pricing of the related debt. Each derivative agreement's gain or loss is recorded in AOCI and is subsequently reclassified to interest expense over the life of the related 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 values of these derivative instruments and the offsetting changes in fair values of the underlying hedged debt due to changes in the relevant benchmark interest rates are recorded in interest expense. 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 resulting gains and losses from these derivatives are recorded in AOCI and subsequently reclassified to revenue, product and distribution costs, or interest income and other, net, respectively, when the hedged exposures affect net earnings.
From time to time, we may enter into financial instruments, including, but not limited to, forward and swap contracts or foreign currency-denominated debt, to hedge the currency exposure of our net investments in certain international operations. The resulting gains and losses from these derivatives are recorded in AOCI and are subsequently reclassified to net earnings when the hedged net investment is either sold or substantially liquidated.
Foreign currency forward and swap contracts not designated as hedging instruments are used to mitigate the foreign exchange risk of certain other balance sheet items. Gains and losses from these derivatives are largely offset by the financial impact of translating foreign currency-denominated payables and receivables; these gains and losses are recorded in interest income and other, net.
Commodities
Depending on market conditions, we may enter into coffee forward contracts, futures contracts and collars to hedge anticipated cash flows under our price-to-be-fixed green coffee contracts, which are described further in Note 5, Inventories, or our longer-dated forecasted coffee demand where underlying fixed price and price-to-be-fixed contracts are not yet available. The resulting gains and losses are recorded in AOCI and are subsequently reclassified to product and distribution costs when the hedged exposure affects net earnings.
Depending on market conditions, we may also enter into dairy forward contracts and futures contracts to hedge a portion of anticipated cash flows under our dairy purchase contracts and our forecasted dairy demand. The resulting gains or losses are recorded in AOCI and are subsequently reclassified to product and distribution costs when the hedged exposure affects net earnings.
Cash flow hedges related to anticipated transactions are designated and documented at the inception of each hedge. Cash flows from hedging transactions are classified in the same categories as the cash flows from the respective hedged items. For de-designated cash flow hedges in which the underlying transactions are no longer probable of occurring, the related accumulated derivative gains or losses are recognized in interest income and other, net on our consolidated statements of earnings. During the second, third and fourth quarters of fiscal 2020, we de-designated certain cash flow hedges due to the global COVID-19 impacts, resulting in the release of an insignificant net gain from AOCI to our consolidated statement of earnings. We continue to believe forecasted exposures relating to our other designated cash flow hedges are probable of occurring.
To mitigate the price uncertainty of a portion of our future purchases, including diesel fuel and other commodities, we enter into swap contracts, futures and collars that are not designated as hedging instruments. The resulting gains and losses are recorded in interest income and other, net to help offset price fluctuations on our beverage, food, packaging and transportation costs, which are included in product and distribution costs on our consolidated statements of earnings.
Gains and losses on derivative contracts and foreign currency-denominated debt 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
|
|
Outstanding Contract/Debt Remaining Maturity
(Months)
|
|
|
Sep 27,
2020
|
|
Sep 29,
2019
|
|
Sep 30,
2018
|
|
|
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
|
Coffee
|
$
|
(2.5)
|
|
|
$
|
(1.0)
|
|
|
$
|
(0.2)
|
|
|
$
|
(3.2)
|
|
|
15
|
|
Cross-currency swaps
|
5.2
|
|
|
(1.4)
|
|
|
(12.6)
|
|
|
—
|
|
|
50
|
|
Dairy
|
0.5
|
|
|
—
|
|
|
—
|
|
|
0.5
|
|
|
9
|
|
Foreign currency - other
|
5.3
|
|
|
12.9
|
|
|
5.8
|
|
|
4.6
|
|
|
36
|
|
Interest rates
|
(90.6)
|
|
|
0.5
|
|
|
24.7
|
|
|
(2.9)
|
|
|
145
|
|
Net Investment Hedges:
|
|
|
|
|
|
|
|
|
|
|
Cross-currency swaps
|
32.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
108
|
|
Foreign currency
|
16.0
|
|
|
16.0
|
|
|
16.0
|
|
|
—
|
|
|
0
|
|
Foreign currency debt
|
(37.1)
|
|
|
(26.1)
|
|
|
3.6
|
|
|
—
|
|
|
42
|
Pre-tax gains and losses on derivative contracts and foreign currency-denominated long-term debt designated as hedging instruments recognized in 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
|
|
Location of gain/(loss)
|
|
|
|
|
|
|
Sep 27,
2020
|
|
Sep 29,
2019
|
|
Sep 30,
2018
|
|
Sep 27,
2020
|
|
Sep 29,
2019
|
|
Sep 30,
2018
|
|
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coffee
|
|
|
|
|
|
$
|
(1.2)
|
|
|
$
|
(1.2)
|
|
|
$
|
(0.3)
|
|
|
$
|
0.5
|
|
|
$
|
(0.3)
|
|
|
$
|
(7.4)
|
|
|
Product and distribution costs
|
|
Cross-currency swaps
|
|
|
|
|
|
4.4
|
|
|
(5.9)
|
|
|
(6.1)
|
|
|
2.3
|
|
|
0.1
|
|
|
0.3
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
(6.1)
|
|
|
(19.8)
|
|
|
1.9
|
|
|
Interest income and other, net
|
|
Dairy
|
|
|
|
|
|
3.0
|
|
|
—
|
|
|
—
|
|
|
4.0
|
|
|
—
|
|
|
—
|
|
|
Product and distribution costs
|
|
|
|
|
|
|
|
|
|
(1.7)
|
|
|
—
|
|
|
—
|
|
|
Interest income and other, net(1)
|
|
Foreign currency - other
|
|
|
|
|
|
(6.4)
|
|
|
20.8
|
|
|
16.7
|
|
|
5.5
|
|
|
7.0
|
|
|
(0.3)
|
|
|
Licensed stores revenues
|
|
|
|
|
|
|
|
|
|
(8.7)
|
|
|
4.4
|
|
|
(3.3)
|
|
|
Product and distribution costs
|
|
|
|
|
|
|
|
|
|
6.1
|
|
|
—
|
|
|
—
|
|
|
Interest income and other, net(1)
|
|
Interest rates
|
|
|
|
|
|
(126.1)
|
|
|
(27.8)
|
|
|
14.1
|
|
|
—
|
|
|
4.7
|
|
|
4.9
|
|
|
Interest expense
|
|
Net Investment Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross-currency swaps
|
|
|
|
|
|
56.8
|
|
|
—
|
|
|
—
|
|
|
13.3
|
|
|
—
|
|
|
—
|
|
|
Interest expense
|
|
Foreign currency
|
|
|
|
|
|
—
|
|
|
—
|
|
|
(0.1)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
Foreign currency debt
|
|
|
|
|
|
(18.1)
|
|
|
(39.8)
|
|
|
7.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
(1)As a result of the global COVID-19 impacts, we discontinued cash flow hedges during the year ended September 27, 2020.
Pre-tax gains and losses on non-designated derivatives and designated fair value hedging instruments and the related fair value hedged item recognized in earnings (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains/(Losses) Recognized in Earnings
|
|
|
Location of gain/(loss) recognized in earnings
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
Sep 27, 2020
|
|
Sep 29, 2019
|
|
Sep 30, 2018
|
|
Non-Designated Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dairy
|
Interest income and other, net
|
|
|
|
|
|
$
|
—
|
|
|
$
|
(1.9)
|
|
|
$
|
(2.4)
|
|
|
Diesel fuel and other commodities
|
Interest income and other, net
|
|
|
|
|
|
(8.8)
|
|
|
(5.9)
|
|
|
3.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency - other
|
Interest income and other, net
|
|
|
|
|
|
0.3
|
|
|
(8.1)
|
|
|
4.6
|
|
|
Fair Value Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
Interest expense
|
|
|
|
|
|
28.7
|
|
|
54.7
|
|
|
(33.7)
|
|
|
Long-term debt (hedged item)
|
Interest expense
|
|
|
|
|
|
(23.8)
|
|
|
(50.7)
|
|
|
33.7
|
|
Notional amounts of outstanding derivative contracts (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sep 27, 2020
|
|
Sep 29, 2019
|
|
Coffee
|
$
|
63
|
|
|
$
|
52
|
|
|
Cross-currency swaps
|
870
|
|
|
341
|
|
|
Dairy
|
61
|
|
|
1
|
|
|
Diesel fuel and other commodities
|
5
|
|
|
17
|
|
|
Foreign currency - other
|
1,140
|
|
|
1,125
|
|
|
Interest rate swaps
|
1,750
|
|
|
1,500
|
|
Fair value of outstanding derivative contracts (in millions) including the location of the asset and/or liability on the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets
|
|
|
Balance Sheet Location
|
|
Sep 27, 2020
|
|
Sep 29, 2019
|
|
Designated Derivative Instruments:
|
|
|
|
|
|
|
Coffee
|
Prepaid expenses and other current assets
|
|
$
|
2.6
|
|
|
$
|
—
|
|
|
Cross-currency swaps
|
Other long-term assets
|
|
37.7
|
|
|
0.2
|
|
|
Dairy
|
Prepaid expenses and other current assets
|
|
2.1
|
|
|
—
|
|
|
Foreign currency - other
|
Prepaid expenses and other current assets
|
|
8.6
|
|
|
11.4
|
|
|
Other long-term assets
|
|
3.8
|
|
|
7.8
|
|
|
Interest rates
|
Other long-term assets
|
|
—
|
|
|
0.1
|
|
|
Interest rate swap
|
Other long-term assets
|
|
45.8
|
|
|
18.2
|
|
|
Non-designated Derivative Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diesel fuel and other commodities
|
Prepaid expenses and other current assets
|
|
—
|
|
|
0.2
|
|
|
Foreign currency
|
Prepaid expenses and other current assets
|
|
2.3
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities
|
|
|
Balance Sheet Location
|
|
Sep 27, 2020
|
|
Sep 29, 2019
|
|
Designated Derivative Instruments:
|
|
|
|
|
|
|
Coffee
|
Accrued liabilities
|
|
$
|
1.4
|
|
|
$
|
1.0
|
|
|
Other long-term liabilities
|
|
0.1
|
|
|
0.1
|
|
|
Cross-currency swaps
|
Other long-term liabilities
|
|
7.3
|
|
|
9.7
|
|
|
Dairy
|
Accrued liabilities
|
|
1.4
|
|
|
—
|
|
|
Foreign currency - other
|
Accrued liabilities
|
|
1.6
|
|
|
0.6
|
|
|
Other long-term liabilities
|
|
2.6
|
|
|
0.1
|
|
|
Interest rates
|
Other long-term liabilities
|
|
69.3
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
Non-designated Derivative Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diesel fuel and other commodities
|
Accrued liabilities
|
|
1.7
|
|
|
1.1
|
|
|
Foreign currency
|
Accrued liabilities
|
|
1.2
|
|
|
3.0
|
|
|
|
|
|
|
|
|
The following amounts were recorded on the consolidated balance sheets related to fixed-to-floating interest rate swaps designated in fair value hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying amount of hedged item
|
|
Cumulative amount of fair value hedging adjustment included in the carrying amount
|
|
|
Sep 27, 2020
|
|
Sep 29, 2019
|
|
Sep 27, 2020
|
|
Sep 29, 2019
|
|
Location on the balance sheet
|
|
|
|
|
|
|
|
|
Long-term debt
|
$
|
785.6
|
|
|
$
|
761.8
|
|
|
$
|
35.6
|
|
|
$
|
11.8
|
|
Additional disclosures related to cash flow gains and losses included in AOCI, as well as subsequent reclassifications to earnings, are included in Note 12, 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 27, 2020
|
|
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
|
$
|
4,350.9
|
|
|
$
|
4,350.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
1.6
|
|
|
—
|
|
|
1.6
|
|
|
—
|
|
|
Commercial paper
|
66.8
|
|
|
—
|
|
|
66.8
|
|
|
—
|
|
|
Corporate debt securities
|
123.6
|
|
|
—
|
|
|
123.6
|
|
|
—
|
|
|
Foreign government obligations
|
8.5
|
|
|
—
|
|
|
8.5
|
|
|
—
|
|
|
Mortgage and other asset-backed securities
|
15.8
|
|
|
—
|
|
|
15.8
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale debt securities
|
216.3
|
|
|
—
|
|
|
216.3
|
|
|
—
|
|
|
Marketable equity securities
|
64.9
|
|
|
64.9
|
|
|
—
|
|
|
—
|
|
|
Total short-term investments
|
281.2
|
|
|
64.9
|
|
|
216.3
|
|
|
—
|
|
|
Prepaid expenses and other current assets:
|
|
|
|
|
|
|
|
|
Derivative assets
|
15.6
|
|
|
3.6
|
|
|
12.0
|
|
|
—
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities
|
5.7
|
|
|
—
|
|
|
—
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
82.6
|
|
|
—
|
|
|
82.6
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage and other asset-backed securities
|
19.3
|
|
|
—
|
|
|
19.3
|
|
|
—
|
|
|
State and local government obligations
|
3.6
|
|
|
—
|
|
|
3.6
|
|
|
—
|
|
|
U.S. government treasury securities
|
94.9
|
|
|
94.9
|
|
|
—
|
|
|
—
|
|
|
Total long-term investments
|
206.1
|
|
|
94.9
|
|
|
105.5
|
|
|
5.7
|
|
|
Other long-term assets:
|
|
|
|
|
|
|
|
|
Derivative assets
|
87.3
|
|
|
—
|
|
|
87.3
|
|
|
—
|
|
|
Total assets
|
$
|
4,941.1
|
|
|
$
|
4,514.3
|
|
|
$
|
421.1
|
|
|
$
|
5.7
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
$
|
7.3
|
|
|
$
|
1.9
|
|
|
$
|
5.4
|
|
|
$
|
—
|
|
|
Other long-term liabilities:
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
79.3
|
|
|
0.1
|
|
|
79.2
|
|
|
—
|
|
|
Total liabilities
|
$
|
86.6
|
|
|
$
|
2.0
|
|
|
$
|
84.6
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
Balance at
September 29, 2019
|
|
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
|
$
|
2,686.6
|
|
|
$
|
2,686.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
0.5
|
|
|
—
|
|
|
0.5
|
|
|
—
|
|
|
Corporate debt securities
|
3.5
|
|
|
—
|
|
|
3.5
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale debt securities
|
4.0
|
|
|
—
|
|
|
4.0
|
|
|
—
|
|
|
Marketable equity securities
|
66.5
|
|
|
66.5
|
|
|
—
|
|
|
—
|
|
|
Total short-term investments
|
70.5
|
|
|
66.5
|
|
|
4.0
|
|
|
—
|
|
|
Prepaid expenses and other current assets:
|
|
|
|
|
|
|
|
|
Derivative assets
|
12.6
|
|
|
—
|
|
|
12.6
|
|
|
—
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities
|
5.8
|
|
|
—
|
|
|
—
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
101.2
|
|
|
—
|
|
|
101.2
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage and other asset-backed securities
|
1.6
|
|
|
—
|
|
|
1.6
|
|
|
—
|
|
|
State and local government obligations
|
4.9
|
|
|
—
|
|
|
4.9
|
|
|
—
|
|
|
U.S. government treasury securities
|
106.5
|
|
|
106.5
|
|
|
—
|
|
|
—
|
|
|
Total long-term investments
|
220.0
|
|
|
106.5
|
|
|
107.7
|
|
|
5.8
|
|
|
Other long-term assets:
|
|
|
|
|
|
|
|
|
Derivative assets
|
26.3
|
|
|
—
|
|
|
26.3
|
|
|
—
|
|
|
Total assets
|
$
|
3,016.0
|
|
|
$
|
2,859.6
|
|
|
$
|
150.6
|
|
|
$
|
5.8
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
$
|
5.7
|
|
|
$
|
1.1
|
|
|
$
|
4.6
|
|
|
$
|
—
|
|
|
Other long-term liabilities:
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
12.5
|
|
|
—
|
|
|
12.5
|
|
|
—
|
|
|
Total
|
$
|
18.2
|
|
|
$
|
1.1
|
|
|
$
|
17.1
|
|
|
$
|
—
|
|
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 Debt Securities
Long-term investments generally mature within 4 years. Proceeds from sales of securities were $177.4 million, $291.1 million and $459.0 million for fiscal 2020, 2019 and 2018, respectively. Realized gains and losses were not material for fiscal 2020, 2019 and 2018. Gross unrealized holding gains and losses were not material as of September 27, 2020 and September 29, 2019.
Marketable Equity Securities
Marketable equity securities include equity mutual funds and exchange-traded funds. Our marketable equity securities portfolio approximates a portion of our liability under our MDCP, a defined contribution plan. Our MDCP liability was $91.4 million and $92.1 million as of September 27, 2020 and September 29, 2019, respectively. The changes in net unrealized holding gains and losses in the marketable equity securities portfolio included in earnings for fiscal 2020, 2019 and 2018 were not material. Gross unrealized holding gains and losses on marketable equity securities were not material as of September 27, 2020 and September 29, 2019.
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 other investments and other assets. These assets are measured at fair value if determined to be impaired. Impairment of property, plant and equipment and ROU assets is included in 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 2020 and 2019.
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 27, 2020
|
|
Sep 29, 2019
|
|
Coffee:
|
|
|
|
|
Unroasted
|
$
|
664.7
|
|
|
$
|
656.5
|
|
|
Roasted
|
223.5
|
|
|
276.5
|
|
|
Other merchandise held for sale
|
293.9
|
|
|
288.0
|
|
|
Packaging and other supplies
|
369.3
|
|
|
308.4
|
|
|
Total
|
$
|
1,551.4
|
|
|
$
|
1,529.4
|
|
Other merchandise held for sale includes, among other items, serveware, food and tea. Inventory levels vary due to seasonality, commodity market supply and price fluctuations.
As of September 27, 2020, we had committed to purchasing green coffee totaling $687 million under fixed-price contracts and an estimated $458 million under price-to-be-fixed contracts. A portion of our price-to-be-fixed contacts are effectively fixed through the use of futures. See Note 3, Derivative Financial Instruments for further discussion. 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 and continuous monitoring of the business environment, the risk of non-delivery on these purchase commitments is remote.
During fiscal 2020, we wrote off approximately $50 million of inventory in the second quarter that was expiring or expected to expire due to COVID-19 related store closures, primarily perishable food and beverage ingredients located at our stores, distribution centers and suppliers. This was included in product and distribution costs on our consolidated statement of earnings. We did not record significant write-offs related to COVID-19 during the second half of the fiscal year.
Note 6: Equity Investments (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sep 27, 2020
|
|
Sep 29, 2019
|
|
Equity method investments
|
$
|
426.4
|
|
|
$
|
336.1
|
|
|
Other investments
|
52.3
|
|
|
59.9
|
|
|
Total
|
$
|
478.7
|
|
|
$
|
396.0
|
|
Equity Method Investments
As of September 27, 2020, we had 50% ownership interests in Starbucks Coffee Korea Co., Ltd. and Tata Starbucks Limited (India). These international entities operate licensed Starbucks® retail stores.
We also license the rights to produce and distribute Starbucks-branded p roducts 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, Starbucks® Iced Espresso Classics and Starbucks® Iced Coffee.
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 entities were $123.9 million, $130.7 million and $112.8 million in fiscal 2020, 2019 and 2018, respectively. Related
product and distribution costs were $79.8 million, $73.2 million and $71.5 million in fiscal 2020, 2019 and 2018, respectively. As of September 27, 2020 and September 29, 2019, there were $28.7 million and $35.5 million of accounts receivable from equity investees, respectively, on our consolidated balance sheets, primarily related to product sales and royalty revenues.
Other Investments
We have equity interests in entities that develop and operate Starbucks licensed stores in several global markets, as well as in companies that support our strategic initiatives. We do not have significant influence over these entities and their fair values are not readily determinable. Therefore, we elected to measure these investments at cost with adjustments for observable changes in price or impairment.
Note 7: Supplemental Balance Sheet and Statement of Earnings Information (in millions)
Prepaid Expenses and Other Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sep 27, 2020
|
|
Sep 29, 2019
|
|
Income tax receivable
|
$
|
356.9
|
|
|
$
|
141.1
|
|
|
Government subsidies receivable
|
155.1
|
|
|
—
|
|
|
Other prepaid expenses and current assets
|
227.5
|
|
|
347.1
|
|
|
Total prepaid expenses and current assets
|
$
|
739.5
|
|
|
$
|
488.2
|
|
Property, Plant and Equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sep 27, 2020
|
|
Sep 29, 2019
|
|
Land
|
$
|
46.0
|
|
|
$
|
46.8
|
|
|
Buildings
|
586.8
|
|
|
691.5
|
|
|
Leasehold improvements
|
8,262.6
|
|
|
7,948.6
|
|
|
Store equipment
|
2,800.3
|
|
|
2,659.5
|
|
|
Roasting equipment
|
796.6
|
|
|
769.6
|
|
|
Furniture, fixtures and other
|
1,285.7
|
|
|
1,799.0
|
|
|
Work in progress
|
377.3
|
|
|
358.5
|
|
|
Property, plant and equipment, gross
|
14,155.3
|
|
|
14,273.5
|
|
|
Accumulated depreciation
|
(7,913.9)
|
|
|
(7,841.8)
|
|
|
Property, plant and equipment, net
|
$
|
6,241.4
|
|
|
$
|
6,431.7
|
|
Accrued Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sep 27, 2020
|
|
Sep 29, 2019
|
|
|
|
|
|
|
Accrued occupancy costs
|
$
|
76.9
|
|
|
$
|
176.9
|
|
|
Accrued dividends payable
|
—
|
|
|
485.7
|
|
|
Accrued capital and other operating expenditures
|
677.2
|
|
|
703.9
|
|
|
Self-insurance reserves
|
243.9
|
|
|
210.5
|
|
|
Accrued business taxes
|
162.7
|
|
|
176.7
|
|
|
Total accrued liabilities
|
$
|
1,160.7
|
|
|
$
|
1,753.7
|
|
Store Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
Sep 27, 2020
|
|
Sep 29, 2019
|
|
Sep 30, 2018
|
|
Wages and benefits
|
|
$
|
6,131.9
|
|
|
$
|
5,941.7
|
|
|
$
|
5,319.2
|
|
|
Occupancy costs
|
|
2,388.0
|
|
|
2,411.2
|
|
|
2,250.5
|
|
|
Other expenses
|
|
2,244.1
|
|
|
2,140.7
|
|
|
1,902.5
|
|
|
Total store operating expenses
|
|
$
|
10,764.0
|
|
|
$
|
10,493.6
|
|
|
$
|
9,472.2
|
|
Note 8: Other Intangible Assets and Goodwill
During the third quarter of fiscal 2020, we completed our annual goodwill impairment analysis. The results of our analysis indicated significant excess fair values over carrying values across the different reporting units, and therefore no goodwill impairment was recorded. Due to changes in branding and marketing strategy, certain indefinite-lived intangible assets became definite-lived. As a result, approximately $105.5 million was reclassified primarily into Trade names, trademarks and patents within the Finite-Lived Intangible Assets table below. We estimated the fair values of these assets under an income approach with an average remaining useful life of approximately five years. The analysis indicated that the fair value of one of the assets exceeded its carrying value. As a result, we recorded a charge of $22.1 million to restructuring and impairments on our consolidated statement of earnings during the third quarter of fiscal 2020. For our remaining intangible assets, our analysis did not indicate further impairment.
Indefinite-Lived Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Sep 27, 2020
|
|
Sep 29, 2019
|
|
Trade names, trademarks and patents
|
$
|
95.0
|
|
|
$
|
203.4
|
|
|
|
|
|
|
|
|
|
|
|
Additional disclosure regarding changes in our intangible assets due to acquisitions is included at Note 2, Acquisitions, Divestitures and Strategic Alliance.
Finite-Lived Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sep 27, 2020
|
|
Sep 29, 2019
|
|
(in millions)
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Acquired and reacquired rights
|
$
|
1,116.1
|
|
|
$
|
(765.0)
|
|
|
$
|
351.1
|
|
|
$
|
1,075.0
|
|
|
$
|
(537.2)
|
|
|
$
|
537.8
|
|
|
Acquired trade secrets and processes
|
27.6
|
|
|
(22.0)
|
|
|
5.6
|
|
|
27.6
|
|
|
(19.2)
|
|
|
8.4
|
|
|
Trade names, trademarks and patents
|
124.8
|
|
|
(32.1)
|
|
|
92.7
|
|
|
40.6
|
|
|
(22.9)
|
|
|
17.7
|
|
|
Licensing agreements
|
16.6
|
|
|
(15.0)
|
|
|
1.6
|
|
|
16.2
|
|
|
(12.2)
|
|
|
4.0
|
|
|
Other finite-lived intangible assets
|
22.8
|
|
|
(16.7)
|
|
|
6.1
|
|
|
22.0
|
|
|
(11.5)
|
|
|
10.5
|
|
|
Total finite-lived intangible assets
|
$
|
1,307.9
|
|
|
$
|
(850.8)
|
|
|
$
|
457.1
|
|
|
$
|
1,181.4
|
|
|
$
|
(603.0)
|
|
|
$
|
578.4
|
|
Amortization expense for finite-lived intangible assets was $223.7 million, $232.8 million and $186.5 million during fiscal 2020, 2019 and 2018, respectively.
Estimated future amortization expense as of September 27, 2020 (in millions):
|
|
|
|
|
|
|
|
Fiscal Year Ending
|
|
|
2021
|
$
|
218.8
|
|
|
2022
|
183.5
|
|
|
2023
|
19.8
|
|
|
2024
|
19.2
|
|
|
2025
|
13.3
|
|
|
Thereafter
|
2.5
|
|
|
Total estimated future amortization expense
|
$
|
457.1
|
|
Goodwill
Changes in the carrying amount of goodwill by reportable operating segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
International
|
|
Channel
Development
|
|
Corporate and Other
|
|
Total
|
|
Goodwill balance at September 30, 2018
|
$
|
497.4
|
|
|
$
|
3,003.2
|
|
|
$
|
34.7
|
|
|
$
|
6.3
|
|
|
$
|
3,541.6
|
|
|
Acquisition/(divestiture)
|
—
|
|
|
(5.5)
|
|
|
—
|
|
|
—
|
|
|
(5.5)
|
|
|
Impairment
|
—
|
|
|
(5.3)
|
|
|
—
|
|
|
(5.2)
|
|
|
(10.5)
|
|
|
Other(1)
|
(0.7)
|
|
|
(34.0)
|
|
|
—
|
|
|
(0.1)
|
|
|
(34.8)
|
|
|
Goodwill balance at September 29, 2019
|
$
|
496.7
|
|
|
$
|
2,958.4
|
|
|
$
|
34.7
|
|
|
$
|
1.0
|
|
|
$
|
3,490.8
|
|
|
Acquisition/(divestiture)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Impairment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Other(1)
|
(0.2)
|
|
|
106.6
|
|
|
—
|
|
|
—
|
|
|
106.4
|
|
|
Goodwill balance at September 27, 2020
|
$
|
496.5
|
|
|
$
|
3,065.0
|
|
|
$
|
34.7
|
|
|
$
|
1.0
|
|
|
$
|
3,597.2
|
|
(1)For fiscal 2020 and 2019, “Other” primarily consists of foreign currency translation.
Note 9: Debt
Revolving Credit Facility
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 1.100% for Eurocurrency Rate Loans and 0.000% (nil) for Base Rate Loans.
The 364-day credit facility, of which no amount may be used for issuances of letters of credit, has been extended to mature on September 22, 2021. 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 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 364-day credit agreement. The applicable margin is 1.150% for Eurocurrency Rate Loans and 0.150% 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 27, 2020, we were in compliance with all applicable covenants. No amounts were outstanding under our 2018 credit facility or our 364-day credit facility as of September 27, 2020.
Short-term Debt
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 27, 2020, we had $296.5 million borrowings outstanding under the program, net of unamortized discount, of which a majority matures in the second quarter of fiscal 2021.
During the third quarter of fiscal 2020, we expanded our ¥1 billion unsecured credit facility to ¥5 billion, or $47.4 million. This facility is currently set to mature on December 31, 2020. Borrowings under the credit facility are subject to terms defined within the facility and will bear interest at a variable rate based on TIBOR plus an applicable margin of 0.400%. Additionally during the third quarter, we expanded our ¥2 billion unsecured credit facility to ¥10 billion, or $94.9 million. This facility is currently
set to mature on March 26, 2021. Borrowings under the credit facility are subject to terms defined within the facility and will bear interest at a variable rate based on TIBOR plus 0.300%. As of September 27, 2020, we had ¥15 billion, or $142.3 million, of borrowings outstanding under these Japanese Yen-denominated credit facilities.
Long-term Debt
Components of long-term debt including the associated interest rates and related fair values by calendar maturity (in millions, except interest rates):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sep 27, 2020
|
|
Sep 29, 2019
|
|
Stated Interest Rate
|
Effective Interest Rate (1)
|
|
Issuance
|
Face Value
|
Estimated Fair Value
|
|
Face Value
|
Estimated Fair Value
|
|
|
November 2020 notes
|
$
|
500.0
|
|
501
|
|
|
$
|
500.0
|
|
501
|
|
|
2.200
|
%
|
2.228
|
%
|
|
February 2021 notes
|
500.0
|
|
502
|
|
|
500.0
|
|
500
|
|
|
2.100
|
%
|
2.293
|
%
|
|
February 2021 notes
|
250.0
|
|
251
|
|
|
250.0
|
|
250
|
|
|
2.100
|
%
|
1.600
|
%
|
|
May 2022 notes(5)
|
500.0
|
|
506
|
|
|
—
|
|
—
|
|
|
1.300
|
%
|
1.334
|
%
|
|
June 2022 notes
|
500.0
|
|
518
|
|
|
500.0
|
|
509
|
|
|
2.700
|
%
|
2.819
|
%
|
|
March 2023 notes
|
1,000.0
|
|
1,059
|
|
|
1,000.0
|
|
1,033
|
|
|
3.100
|
%
|
3.107
|
%
|
|
October 2023 notes(2)
|
750.0
|
|
818
|
|
|
750.0
|
|
798
|
|
|
3.850
|
%
|
2.859
|
%
|
|
March 2024 notes(3)
|
806.4
|
|
794
|
|
|
788.3
|
|
795
|
|
|
0.372
|
%
|
0.462
|
%
|
|
August 2025 notes
|
1,250.0
|
|
1,415
|
|
|
1,250.0
|
|
1,351
|
|
|
3.800
|
%
|
3.721
|
%
|
|
June 2026 notes
|
500.0
|
|
543
|
|
|
500.0
|
|
502
|
|
|
2.450
|
%
|
2.511
|
%
|
|
March 2027 notes(4)
|
500.0
|
|
529
|
|
|
—
|
|
—
|
|
|
2.000
|
%
|
2.058
|
%
|
|
March 2028 notes
|
600.0
|
|
680
|
|
|
600.0
|
|
644
|
|
|
3.500
|
%
|
3.529
|
%
|
|
November 2028 notes
|
750.0
|
|
886
|
|
|
750.0
|
|
837
|
|
|
4.000
|
%
|
3.958
|
%
|
|
August 2029 notes
|
1,000.0
|
|
1,147
|
|
|
1,000.0
|
|
1,080
|
|
|
3.550
|
%
|
3.840
|
%
|
|
March 2030 notes(4)
|
750.0
|
|
778
|
|
|
—
|
|
—
|
|
|
2.250
|
%
|
3.084
|
%
|
|
November 2030 notes(5)
|
1,250.0
|
|
1,326
|
|
|
—
|
|
—
|
|
|
2.550
|
%
|
2.582
|
%
|
|
June 2045 notes
|
350.0
|
|
412
|
|
|
350.0
|
|
390
|
|
|
4.300
|
%
|
4.348
|
%
|
|
December 2047 notes
|
500.0
|
|
547
|
|
|
500.0
|
|
518
|
|
|
3.750
|
%
|
3.765
|
%
|
|
November 2048 notes
|
1,000.0
|
|
1,223
|
|
|
1,000.0
|
|
1,160
|
|
|
4.500
|
%
|
4.504
|
%
|
|
August 2049 notes
|
1,000.0
|
|
1,216
|
|
|
1,000.0
|
|
1,165
|
|
|
4.450
|
%
|
4.447
|
%
|
|
March 2050 notes(4)
|
500.0
|
|
517
|
|
|
—
|
|
—
|
|
|
3.350
|
%
|
3.362
|
%
|
|
November 2050 notes(5)
|
1,250.0
|
|
1,332
|
|
|
—
|
|
—
|
|
|
3.500
|
%
|
3.528
|
%
|
|
Total
|
16,006.4
|
|
17,500
|
|
|
11,238.3
|
|
12,033
|
|
|
|
|
|
Aggregate debt issuance costs and unamortized premium/(discount), net
|
(132.5)
|
|
|
|
(83.1)
|
|
|
|
|
|
|
Hedge accounting fair value adjustment(2)
|
35.6
|
|
|
|
11.8
|
|
|
|
|
|
|
Total
|
$
|
15,909.5
|
|
|
|
$
|
11,167.0
|
|
|
|
|
|
(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)Amount includes the change in fair value due to changes in benchmark interest rates related to our October 2023 notes. Refer to Note 3, Derivative Financial Instruments, for additional information on our interest rate swap designated as a fair value hedge.
(3)Japanese yen-denominated long-term debt.
(4)Issued in March 2020.
(5)Issued in May 2020.
The following table summarizes our long-term debt maturities as of September 27, 2020 by fiscal year (in millions):
|
|
|
|
|
|
|
|
Fiscal Year
|
Total
|
|
2021
|
$
|
1,250.0
|
|
|
2022
|
1,000.0
|
|
|
2023
|
1,000.0
|
|
|
2024
|
1,556.4
|
|
|
2025
|
1,250.0
|
|
|
Thereafter
|
9,950.0
|
|
|
Total
|
$
|
16,006.4
|
|
Note 10: Leases
The components of lease costs (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
Sep 27, 2020
|
|
|
|
|
|
Operating lease costs(1)
|
$
|
1,573.6
|
|
|
|
|
|
|
Variable lease costs
|
833.4
|
|
|
|
|
|
|
Short-term lease costs
|
34.1
|
|
|
|
|
|
|
Total lease costs
|
$
|
2,441.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)Operating lease costs includes an immaterial amount of sublease income.
The following table includes supplemental information (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
Sep 27, 2020
|
|
|
|
|
|
Cash paid related to operating lease liabilities
|
$
|
1,463.3
|
|
|
|
|
|
|
Operating lease liabilities arising from obtaining ROU assets(1)
|
1,093.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)Excludes the initial impact of adoption. See Note 1, Summary of Significant Accounting Policies for additional information.
|
|
|
|
|
|
|
|
|
|
|
Sep 27, 2020
|
|
|
|
Weighted-average remaining operating lease term
|
8.8 years
|
|
|
|
Weighted-average operating lease discount rate
|
2.5
|
%
|
|
|
Finance lease assets are recorded in property, plant and equipment, net with the corresponding lease liabilities included in accrued liabilities on the consolidated balance sheet. Finance leases were immaterial as of September 27, 2020.
Minimum future maturities of operating lease liabilities (in millions):
|
|
|
|
|
|
|
|
Fiscal Year
|
Total
|
|
2021
|
$
|
1,528.1
|
|
|
2022
|
1,402.6
|
|
|
2023
|
1,266.1
|
|
|
2024
|
1,132.1
|
|
|
2025
|
980.5
|
|
|
Thereafter
|
3,780.2
|
|
|
Total lease payments
|
10,089.6
|
|
|
Less imputed interest
|
(1,179.1)
|
|
|
Total
|
$
|
8,910.5
|
|
As of September 27, 2020, we have entered into operating leases that have not yet commenced of $653.8 million, primarily related to real estate leases. These leases will commence between fiscal year 2021 and fiscal year 2026 with lease terms of 3
years to 20 years. A charge of $87.7 million in accelerated amortization and impairment of ROU assets was recorded in restructuring and impairments on the consolidated statement of earnings in fiscal 2020.
Previous Lease Guidance Disclosures
Rent expense under operating lease agreements under the previous lease guidance, which excludes certain amounts required under the new guidance (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Sep 29, 2019
|
|
Sep 30, 2018
|
|
Minimum rent
|
$
|
1,441.7
|
|
|
$
|
1,424.5
|
|
|
Contingent rent
|
224.3
|
|
|
200.7
|
|
|
Total
|
1,666.0
|
|
|
1,625.2
|
|
As previously disclosed, the minimum future rental payments under non-cancelable operating leases and lease financing arrangements under the previous lease guidance as of September 29, 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
Operating Leases
|
|
Lease Financing Arrangements
|
|
2020
|
$
|
1,432.9
|
|
|
$
|
5.2
|
|
|
2021
|
1,342.2
|
|
|
5.2
|
|
|
2022
|
1,247.4
|
|
|
5.0
|
|
|
2023
|
1,124.3
|
|
|
5.0
|
|
|
2024
|
996.4
|
|
|
4.9
|
|
|
Thereafter
|
4,087.7
|
|
|
42.6
|
|
|
Total minimum lease payments
|
$
|
10,230.9
|
|
|
$
|
67.9
|
|
We have subleases related to certain of our operating leases. During fiscal 2019 and 2018, we recognized sublease income of $10.9 million and $12.3 million, respectively. Additionally, as of September 29, 2019 and September 30, 2018, the gross carrying values of assets related to build-to-suit lease arrangements accounted for as financing leases were $122.3 million and $103.2 million, respectively, with associated accumulated depreciation of $17.2 million and $12.7 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, and are recognized concurrently with actual store closures. Total lease exit costs of $55.3 million and $119.3 million were recorded in restructuring and impairments on the consolidated statement of earnings in fiscal 2019 and 2018.
Note 11: Deferred Revenue
In the fourth quarter of fiscal 2018, we licensed the rights to sell and market our products in authorized channels through the Global Coffee Alliance, and received an up-front prepaid royalty from Nestlé. The up-front payment of approximately $7 billion was recorded as deferred revenue as we have continuing performance obligations to support the Global Coffee Alliance, including providing Nestlé access to certain intellectual properties and products for future resale. The up-front payment will be recognized as other revenue on a straight-line basis over the estimated economic life of the arrangement of 40 years for the ongoing access to the licenses within the contractual territories. Our obligations to maintain the Starbucks brand and other intellectual properties are generally constant throughout the term of the arrangement. Therefore, a ratable recognition pattern is reflective of how we satisfy our performance obligations.
At September 27, 2020, the current and long-term deferred revenue related to the Nestlé up-front payment was $179.3 million and $6.5 billion, respectively. At September 29, 2019, the current and long-term deferred revenue related to the Nestlé up-front payment was $175.9 million and $6.7 billion, respectively. During the fiscal years ended September 27, 2020 and September 29, 2019, we recognized $176.8 million and $175.2 million of current deferred revenue, respectively, related to amortization of the up-front payment.
Changes in our deferred revenue balance related to our stored value cards and loyalty program (in millions):
|
|
|
|
|
|
|
|
Fiscal Year Ended September 27, 2020
|
Total
|
|
Stored value cards and loyalty program at September 29, 2019
|
$
|
1,113.7
|
|
|
Revenue deferred - card activations, card reloads and Stars earned
|
10,527.7
|
|
|
Revenue recognized - card and Stars redemptions and breakage
|
(10,367.9)
|
|
|
Other(1)
|
7.0
|
|
|
Stored value cards and loyalty program at September 27, 2020(2)
|
$
|
1,280.5
|
|
|
|
|
|
Fiscal Year Ended September 29, 2019
|
Total
|
|
Stored value cards and loyalty program at September 30, 2018
|
$
|
1,328.6
|
|
|
Revenue recognition adoption impact
|
(358.0)
|
|
|
Stored value cards and loyalty program at October 1, 2018
|
970.6
|
|
|
Revenue deferred - card activations, card reloads and Stars earned
|
10,983.6
|
|
|
Revenue recognized - card and Stars redemptions and breakage
|
(10,819.7)
|
|
|
Other(1)
|
(20.8)
|
|
|
Stored value cards and loyalty program at September 29, 2019(2)
|
$
|
1,113.7
|
|
(1)“Other” primarily consists of changes in the stored value cards and loyalty program balances resulting from foreign currency translation.
(2)As of September 27, 2020, approximately $1.2 billion of this amount was current. As of September 29, 2019, approximately $1.0 billion of this amount was current.
Note 12: 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 27, 2020.
Through open market transactions under our share repurchase program, we repurchased 131.5 million shares of common stock at a total cost of $7.2 billion for the year ended September 30, 2018.
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 up-front payment to the financial institutions and received an initial delivery of 72.0 million shares. In March 2019, we received an additional 4.9 million shares upon the completion of the program based on a volume-weighted average share price (less discount) of $65.03.
In March 2019, we entered into ASR agreements with third-party financial institutions totaling $2.0 billion, effective March 22, 2019. We made a $2.0 billion up-front payment to the financial institutions and received an initial delivery of 22.2 million shares. In June 2019, we received an additional 3.9 million shares upon the completion of the program based on a volume-weighted average share price (less discount) of $76.50.
Outside of the ASR agreements noted above, we repurchased 36.6 million shares of common stock for $3.1 billion on the open market during the year ended September 29, 2019. In total, we repurchased 139.6 million shares at a total cost of $10.1 billion for the year ended September 29, 2019.
Our Board of Directors authorized the repurchase of up to an additional 120 million and 40 million shares under our ongoing share repurchase program during the fiscal first quarter of 2019 and fiscal second quarter of 2020, respectively. We temporarily suspended share repurchases in March 2020. We repurchased 20.3 million shares of common stock for $1.7 billion on the open market during the year ended September 27, 2020. As of September 27, 2020, 48.9 million shares remained available for repurchase under current authorizations.
Subsequent to the fourth quarter of fiscal 2020, our Board of Directors declared a quarterly cash dividend to shareholders of $0.45 per share to be paid on November 27, 2020 to shareholders of record as of the close of business on November 12, 2020.
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 debt 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 27, 2020, September 29, 2019 and September 30, 2018, net of tax, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Available-for-Sale Securities
|
|
Cash Flow Hedges
|
|
Net Investment Hedges
|
|
Translation Adjustment and Other
|
|
Total
|
|
September 27, 2020
|
|
|
|
|
|
|
|
|
|
|
Net gains/(losses) in AOCI, beginning of period
|
$
|
3.9
|
|
|
$
|
11.0
|
|
|
$
|
(10.1)
|
|
|
$
|
(508.1)
|
|
|
$
|
(503.3)
|
|
|
Net gains/(losses) recognized in OCI before reclassifications
|
6.5
|
|
|
(95.0)
|
|
|
28.9
|
|
|
208.4
|
|
|
148.8
|
|
|
Net (gains)/losses reclassified from AOCI to earnings
|
(4.0)
|
|
|
(1.1)
|
|
|
(9.8)
|
|
|
—
|
|
|
(14.9)
|
|
|
Other comprehensive income/(loss) attributable to Starbucks
|
2.5
|
|
|
(96.1)
|
|
|
19.1
|
|
|
208.4
|
|
|
133.9
|
|
|
Cumulative effect of accounting adoption
|
(0.7)
|
|
|
3.0
|
|
|
2.5
|
|
|
—
|
|
|
4.8
|
|
|
Net gains/(losses) in AOCI, end of period
|
$
|
5.7
|
|
|
$
|
(82.1)
|
|
|
$
|
11.5
|
|
|
$
|
(299.7)
|
|
|
$
|
(364.6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Available-for-Sale Securities
|
|
Cash Flow Hedges
|
|
Net Investment Hedges
|
|
Translation Adjustment and Other
|
|
Total
|
|
September 29, 2019
|
|
|
|
|
|
|
|
|
|
|
Net gains/(losses) in AOCI, beginning of period
|
$
|
(4.9)
|
|
|
$
|
17.7
|
|
|
$
|
19.6
|
|
|
$
|
(362.7)
|
|
|
$
|
(330.3)
|
|
|
Net gains/(losses) recognized in OCI before reclassifications
|
8.2
|
|
|
(10.7)
|
|
|
(29.7)
|
|
|
(143.7)
|
|
|
(175.9)
|
|
|
Net (gains)/losses reclassified from AOCI to earnings
|
0.6
|
|
|
4.0
|
|
|
—
|
|
|
(1.7)
|
|
|
2.9
|
|
|
Other comprehensive income/(loss) attributable to Starbucks
|
8.8
|
|
|
(6.7)
|
|
|
(29.7)
|
|
|
(145.4)
|
|
|
(173.0)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains/(losses) in AOCI, end of period
|
$
|
3.9
|
|
|
$
|
11.0
|
|
|
$
|
(10.1)
|
|
|
$
|
(508.1)
|
|
|
$
|
(503.3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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)
|
|
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
|
|
|
Year Ended
|
|
|
|
Sep 27, 2020
|
|
Sep 29, 2019
|
|
Sep 30, 2018
|
|
|
Gains/(losses) on available-for-sale securities
|
|
$
|
4.9
|
|
|
$
|
0.9
|
|
|
$
|
(3.6)
|
|
|
Interest income and other, net
|
|
Gains/(losses) on cash flow hedges
|
|
1.9
|
|
|
(3.9)
|
|
|
(3.9)
|
|
|
Please refer to Note 3, Derivative Instruments for additional information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains/(losses) on net investment hedges
|
|
13.3
|
|
|
—
|
|
|
—
|
|
|
Interest expense
|
|
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
|
|
Thailand
|
|
—
|
|
|
1.7
|
|
|
—
|
|
|
Net gain resulting from divestiture of certain operations
|
|
Other
|
|
—
|
|
|
—
|
|
|
(1.7)
|
|
|
Interest income and other, net
|
|
|
|
20.1
|
|
|
(1.3)
|
|
|
(24.7)
|
|
|
Total before tax
|
|
|
|
(5.2)
|
|
|
(1.6)
|
|
|
1.2
|
|
|
Tax (expense)/benefit
|
|
|
|
$
|
14.9
|
|
|
$
|
(2.9)
|
|
|
$
|
(23.5)
|
|
|
Net of tax
|
(1) Release of cumulative translation adjustments to earnings upon sale or liquidation of foreign businesses.
Note 13: 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 27, 2020, there were 46.5 million shares of common stock available for issuance pursuant to future equity-based compensation awards and 11.9 million shares available for issuance under our ESPP.
Stock-based compensation expense recognized in the consolidated financial statements (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Sep 27, 2020
|
|
Sep 29, 2019
|
|
Sep 30, 2018
|
|
Options
|
$
|
7.5
|
|
|
$
|
20.0
|
|
|
$
|
28.0
|
|
|
RSUs
|
241.0
|
|
|
288.0
|
|
|
222.3
|
|
|
Total stock-based compensation expense recognized in the consolidated statements of earnings
|
$
|
248.5
|
|
|
$
|
308.0
|
|
|
$
|
250.3
|
|
|
Total related tax benefit
|
$
|
47.8
|
|
|
$
|
59.3
|
|
|
$
|
62.4
|
|
|
Total capitalized stock-based compensation included in net property, plant and equipment on the consolidated balance sheets
|
$
|
3.6
|
|
|
$
|
3.4
|
|
|
$
|
3.5
|
|
Stock Option Plans
We provide stock options as a form of employee compensation, which are primarily time-vested. The majority of time-vested 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 immediately or one year from grant. 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 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
Granted During the Period
|
|
Fiscal Year Ended
|
2020
|
|
2019
|
|
2018
|
|
Expected term (in years)
|
7.8
|
|
4.1
|
|
3.6
|
|
Expected stock price volatility
|
27.3
|
%
|
|
21.6
|
%
|
|
20.5
|
%
|
|
Risk-free interest rate
|
1.2
|
%
|
|
2.9
|
%
|
|
2.1
|
%
|
|
Expected dividend yield
|
2.9
|
%
|
|
2.1
|
%
|
|
2.2
|
%
|
|
Weighted average grant price
|
$
|
56.33
|
|
|
$
|
67.33
|
|
|
$
|
56.56
|
|
|
Estimated fair value per option granted
|
$
|
11.30
|
|
|
$
|
11.06
|
|
|
$
|
7.32
|
|
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 27, 2020 (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, September 29, 2019
|
15.2
|
|
|
$
|
49.45
|
|
|
5.0
|
|
$
|
592
|
|
|
Granted
|
0.1
|
|
|
56.33
|
|
|
|
|
|
|
Exercised
|
(6.0)
|
|
|
43.92
|
|
|
|
|
|
|
Expired/forfeited
|
(0.1)
|
|
|
52.20
|
|
|
|
|
|
|
Outstanding, September 27, 2020
|
9.2
|
|
|
53.06
|
|
|
5.4
|
|
287
|
|
|
Exercisable, September 27, 2020
|
6.8
|
|
|
51.16
|
|
|
4.8
|
|
226
|
|
|
Vested and expected to vest, September 27, 2020
|
9.1
|
|
|
53.03
|
|
|
5.4
|
|
286
|
|
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 27, 2020, total unrecognized stock-based compensation expense, net of estimated forfeitures, related to nonvested options was approximately $1 million, before income taxes, and is expected to be recognized over a weighted average period of approximately 1.0 year. The total intrinsic value of options exercised was $236 million, $466 million and
$236 million during fiscal 2020, 2019 and 2018, respectively. The total fair value of options vested was $25 million, $31 million and $53 million during fiscal 2020, 2019 and 2018, respectively.
RSUs
We have both time-vested and performance-based RSUs. Time-vested RSUs are awarded to eligible employees 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. The time-vested RSUs either vest in two or four 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 through the vesting period.
RSU transactions for the year ended September 27, 2020 (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, September 29, 2019
|
8.9
|
|
|
$
|
62.56
|
|
|
1.1
|
|
$
|
788
|
|
|
Granted
|
4.0
|
|
|
81.96
|
|
|
|
|
|
|
Vested
|
(3.5)
|
|
|
59.97
|
|
|
|
|
|
|
Forfeited/canceled
|
(1.1)
|
|
|
71.88
|
|
|
|
|
|
|
Nonvested, September 27, 2020
|
8.3
|
|
|
74.23
|
|
|
1.1
|
|
699
|
|
For fiscal 2019 and 2018, the weighted average fair value per RSU granted was $68.14 and $56.48, respectively. As of September 27, 2020, total unrecognized stock-based compensation expense related to nonvested RSUs, net of estimated forfeitures, was approximately $134 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 $211 million, $255 million and $166 million during fiscal 2020, 2019 and 2018, respectively.
ESPP
Our ESPP allows eligible employees to contribute up to 10% of their base earnings toward the quarterly purchase of our common stock, subject to an annual maximum dollar amount. The purchase price is 95% of the fair market value of the stock on the last business day of the quarterly offering period. The number of shares issued under our ESPP was 0.5 million in fiscal 2020.
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 $132.7 million, $122.1 million and $111.7 million in fiscal 2020, 2019 and 2018, respectively.
Note 14: Income Taxes
Components of earnings before income taxes (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Sep 27, 2020
|
|
Sep 29, 2019
|
|
Sep 30, 2018
|
|
United States
|
$
|
904.6
|
|
|
$
|
3,518.7
|
|
|
$
|
4,826.0
|
|
|
Foreign
|
259.8
|
|
|
947.5
|
|
|
954.0
|
|
|
Total earnings before income taxes
|
$
|
1,164.4
|
|
|
$
|
4,466.2
|
|
|
$
|
5,780.0
|
|
Provision/(benefit) for income taxes (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Sep 27, 2020
|
|
Sep 29, 2019
|
|
Sep 30, 2018
|
|
Current taxes:
|
|
|
|
|
|
|
U.S. federal
|
$
|
49.9
|
|
|
$
|
1,414.3
|
|
|
$
|
156.2
|
|
|
U.S. state and local
|
36.9
|
|
|
447.8
|
|
|
52.0
|
|
|
Foreign
|
181.4
|
|
|
458.3
|
|
|
327.0
|
|
|
Total current taxes
|
268.2
|
|
|
2,320.4
|
|
|
535.2
|
|
|
Deferred taxes:
|
|
|
|
|
|
|
U.S. federal
|
(8.4)
|
|
|
(1,074.5)
|
|
|
633.7
|
|
|
U.S. state and local
|
(4.8)
|
|
|
(322.4)
|
|
|
101.5
|
|
|
Foreign
|
(15.3)
|
|
|
(51.9)
|
|
|
(8.4)
|
|
|
Total deferred taxes
|
(28.5)
|
|
|
(1,448.8)
|
|
|
726.8
|
|
|
Total income tax expense
|
$
|
239.7
|
|
|
$
|
871.6
|
|
|
$
|
1,262.0
|
|
Reconciliation of the statutory U.S. federal income tax rate with our effective income tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Sep 27, 2020
|
|
Sep 29, 2019
|
|
Sep 30, 2018
|
|
Statutory rate
|
21.0
|
%
|
|
21.0
|
%
|
|
24.5
|
%
|
|
State income taxes, net of federal tax benefit
|
2.2
|
|
|
2.1
|
|
|
2.1
|
|
|
Foreign rate differential
|
(3.2)
|
|
|
(0.1)
|
|
|
(0.1)
|
|
|
Valuation allowances
|
10.0
|
|
|
—
|
|
|
—
|
|
|
Excess tax benefits of stock-based compensation
|
(4.2)
|
|
|
(2.1)
|
|
|
(0.9)
|
|
|
Change in tax rates
|
(2.2)
|
|
|
—
|
|
|
—
|
|
|
Charitable contributions
|
(1.7)
|
|
|
—
|
|
|
—
|
|
|
Foreign derived intangible income
|
(1.4)
|
|
|
(1.5)
|
|
|
—
|
|
|
Residual tax on foreign earnings
|
—
|
|
|
1.7
|
|
|
—
|
|
|
Tax impacts related to sale of certain operations
|
—
|
|
|
(1.3)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Gain resulting from acquisition of joint venture
|
—
|
|
|
—
|
|
|
(5.8)
|
|
|
Impact of the Tax Act
|
—
|
|
|
—
|
|
|
2.8
|
|
|
Other, net
|
0.1
|
|
|
(0.3)
|
|
|
(0.8)
|
|
|
Effective tax rate
|
20.6
|
%
|
|
19.5
|
%
|
|
21.8
|
%
|
As of September 27, 2020, in foreign subsidiaries in which we are partially indefinitely reinvested, the gross taxable temporary difference between the accounting basis and tax basis was approximately $1.4 billion for which there could be up to approximately $280 million of unrecognized tax liability.
Tax effect of temporary differences and carryforwards that comprise significant portions of deferred tax assets and liabilities (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sep 27, 2020
|
|
Sep 29, 2019
|
|
Deferred tax assets:
|
|
|
|
|
Operating lease liabilities
|
$
|
2,313.0
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Stored value card liability and deferred revenue
|
1,678.6
|
|
|
1,649.0
|
|
|
Intangible assets and goodwill
|
248.6
|
|
|
230.0
|
|
|
Accrued occupancy costs
|
—
|
|
|
121.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
554.4
|
|
|
413.0
|
|
|
Total
|
$
|
4,794.6
|
|
|
$
|
2,413.6
|
|
|
Valuation allowance
|
(239.4)
|
|
|
(75.1)
|
|
|
Total deferred tax asset, net of valuation allowance
|
$
|
4,555.2
|
|
|
$
|
2,338.5
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Operating lease, right-of-use assets
|
(2,191.8)
|
|
|
—
|
|
|
Property, plant and equipment
|
(463.3)
|
|
|
(400.9)
|
|
|
Intangible assets and goodwill
|
(145.1)
|
|
|
(209.9)
|
|
|
Other
|
(123.2)
|
|
|
(148.3)
|
|
|
Total
|
(2,923.4)
|
|
|
(759.1)
|
|
|
Net deferred tax asset (liability)
|
$
|
1,631.8
|
|
|
$
|
1,579.4
|
|
|
Reported as:
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets
|
1,789.9
|
|
|
1,765.8
|
|
|
|
|
|
|
|
Deferred income tax liabilities (included in Other long-term liabilities)
|
(158.1)
|
|
|
(186.4)
|
|
|
Net deferred tax asset (liability)
|
$
|
1,631.8
|
|
|
$
|
1,579.4
|
|
The valuation allowances as of September 27, 2020 and September 29, 2019 were primarily related to net operating losses and other deferred tax assets of consolidated foreign subsidiaries.
As of September 27, 2020, we had federal net operating loss carryforwards of $75.2 million which have an indefinite carryforward period, state net operating loss carryforwards of $112.8 million which will begin to expire in fiscal 2024, federal tax credit carryforwards of $11.9 million which will begin to expire in fiscal 2029, state tax credit carryforwards of $2.7 million which will begin to expire in fiscal 2024 and foreign net operating loss carryforwards of $317.8 million, of which $150.5 million have an indefinite carryforward period and the remainder expire at various dates starting from fiscal 2021.
Uncertain Tax Positions
As of September 27, 2020, we had $123.7 million of gross unrecognized tax benefits of which $103.0 million, if recognized, would affect our effective tax rate. We recognized an expense of $3.0 million, a benefit of $2.8 million and a benefit of $0.5 million of interest and penalties in income tax expense, prior to the benefit of the federal tax deduction, for fiscal 2020, 2019 and 2018, respectively. As of September 27, 2020 and September 29, 2019, we had accrued interest and penalties of $13.0 million and $10.0 million, respectively, within our consolidated balance sheets.
The following table summarizes the activity related to our unrecognized tax benefits (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sep 27, 2020
|
|
Sep 29, 2019
|
|
Sep 30, 2018
|
|
Beginning balance
|
$
|
132.1
|
|
|
$
|
224.6
|
|
|
$
|
196.9
|
|
|
Increase related to prior year tax positions
|
11.1
|
|
|
3.8
|
|
|
17.5
|
|
|
Decrease related to prior year tax positions
|
(0.5)
|
|
|
(75.3)
|
|
|
(41.8)
|
|
|
Increase related to current year tax positions
|
9.8
|
|
|
18.5
|
|
|
62.4
|
|
|
|
|
|
|
|
|
|
Decreases related to settlements with taxing authorities
|
—
|
|
|
(16.4)
|
|
|
(4.5)
|
|
|
Decrease related to lapsing of statute of limitations
|
(28.8)
|
|
|
(23.1)
|
|
|
(5.9)
|
|
|
Ending balance
|
$
|
123.7
|
|
|
$
|
132.1
|
|
|
$
|
224.6
|
|
We are currently under examination, or may be subject to examination, by various U.S. federal, state, local and foreign tax jurisdictions for fiscal 2011 through 2019. We are no longer subject to U.S. federal examination for years prior to fiscal 2017.
We are no longer subject to U.S. state and local examinations for years prior to fiscal 2011. We are no longer subject to examination in any material international markets prior to 2015.
It is reasonably possible that up to $39 million of the Company's gross unrecognized tax benefits may be recognized by the end of fiscal 2021 for reasons such as a lapse of the statute of limitations or resolution of examinations with tax authorities.
Note 15: Earnings per Share
Calculation of net earnings per common share (“EPS”) — basic and diluted (in millions, except EPS):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Sep 27, 2020
|
|
Sep 29, 2019
|
|
Sep 30, 2018
|
|
Net earnings attributable to Starbucks
|
$
|
928.3
|
|
|
$
|
3,599.2
|
|
|
$
|
4,518.3
|
|
|
Weighted average common shares outstanding (for basic calculation)
|
1,172.8
|
|
|
1,221.2
|
|
|
1,382.7
|
|
|
Dilutive effect of outstanding common stock options and RSUs
|
9.0
|
|
|
12.0
|
|
|
11.9
|
|
|
Weighted average common and common equivalent shares outstanding (for diluted calculation)
|
1,181.8
|
|
|
1,233.2
|
|
|
1,394.6
|
|
|
EPS — basic
|
$
|
0.79
|
|
|
$
|
2.95
|
|
|
$
|
3.27
|
|
|
EPS — diluted
|
$
|
0.79
|
|
|
$
|
2.92
|
|
|
$
|
3.24
|
|
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. As of September 27, 2020 and September 29, 2019, we had no out-of-the-money stock options compared to 14.1 million as of September 30, 2018.
Note 16: Commitments and Contingencies
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. 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.
On June 3, 2019, the Office of Administrative Law (OAL) approved the coffee exemption regulation. The regulation will be effective on October 1, 2019. On June 24, 2019, the Court of Appeal lifted the stay of the litigation. At the status conference on August 25, 2020, the trial judge granted the defendants’ motion for summary judgment, ruling that the coffee exemption regulation is a complete defense to the Plaintiff’s complaint. The Notice of Entry of Judgment from the court was served on October 6, 2020. The plaintiff has not yet filed a Notice of Appeal. Starbucks believes that the likelihood that the Company will ultimately incur a loss in connection with this litigation is less than reasonably possible. Accordingly, no loss contingency was recorded for this matter.
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 17: 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.
We have three reportable operating segments: 1) Americas, which is inclusive of the U.S., Canada and Latin America; 2) International, which is inclusive of China, Japan, Asia Pacific, Europe, the Middle East and Africa; and 3) Channel Development.
Americas and International 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.
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. Since the fourth quarter of fiscal 2018, most of our Channel Development revenues are 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(1) (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
Sep 27, 2020
|
|
Sep 29, 2019
|
|
Sep 30, 2018
|
|
Beverage(2)
|
$
|
14,337.5
|
|
|
61
|
%
|
|
$
|
15,921.2
|
|
|
60
|
%
|
|
$
|
14,463.1
|
|
|
59
|
%
|
|
Food(3)
|
3,799.2
|
|
|
16
|
%
|
|
4,336.3
|
|
|
16
|
%
|
|
3,986.5
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other(4)
|
5,381.3
|
|
|
23
|
%
|
|
6,251.1
|
|
|
24
|
%
|
|
6,269.9
|
|
|
25
|
%
|
|
Total
|
$
|
23,518.0
|
|
|
100
|
%
|
|
$
|
26,508.6
|
|
|
100
|
%
|
|
$
|
24,719.5
|
|
|
100
|
%
|
(1) Certain prior period amounts have been reclassified to conform to current year presentation.
(2) Beverage represents sales within our company-operated stores.
(3) Food includes sales within our company-operated stores.
(4) “Other” primarily consists of packaged and single-serve coffees and teas, 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 27, 2020
|
|
Sep 29, 2019
|
|
Sep 30, 2018
|
|
Net revenues:
|
|
|
|
|
|
|
United States
|
$
|
16,879.8
|
|
|
$
|
18,622.7
|
|
|
$
|
17,409.4
|
|
|
China
|
2,582.8
|
|
|
2,872.0
|
|
|
2,355.8
|
|
|
Other countries
|
4,055.4
|
|
|
5,013.9
|
|
|
4,954.3
|
|
|
Total
|
$
|
23,518.0
|
|
|
$
|
26,508.6
|
|
|
$
|
24,719.5
|
|
|
|
|
|
|
|
|
|
Long-lived assets:
|
|
|
|
|
|
|
United States
|
$
|
12,624.9
|
|
|
$
|
7,330.2
|
|
|
$
|
5,635.9
|
|
|
China
|
4,425.6
|
|
|
3,279.8
|
|
|
3,474.6
|
|
|
Other countries
|
4,517.6
|
|
|
2,955.7
|
|
|
2,551.7
|
|
|
Total
|
$
|
21,568.1
|
|
|
$
|
13,565.7
|
|
|
$
|
11,662.2
|
|
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. and China consist primarily of revenues from Japan, Canada and the U.K., which together account for approximately 78% of net revenues from other countries for fiscal 2020.
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. The identifiable assets by segment disclosed in this note are those assets specifically identifiable within each segment and include cash and cash equivalents, ROU assets, 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 27, 2020, September 29, 2019 and September 30, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Americas
|
|
International
|
|
|
|
Channel
Development
|
|
Corporate and Other
|
|
Total
|
|
Fiscal 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
$
|
16,379.2
|
|
|
$
|
5,147.6
|
|
|
|
|
$
|
1,925.0
|
|
|
$
|
66.2
|
|
|
$
|
23,518.0
|
|
|
Depreciation and amortization expenses
|
762.0
|
|
|
518.4
|
|
|
|
|
1.2
|
|
|
149.7
|
|
|
1,431.3
|
|
|
Income from equity investees
|
—
|
|
|
102.3
|
|
|
|
|
220.2
|
|
|
—
|
|
|
322.5
|
|
|
Operating income/(loss)
|
1,825.3
|
|
|
354.0
|
|
|
|
|
687.2
|
|
|
(1,304.8)
|
|
|
1,561.7
|
|
|
Total assets
|
$
|
10,717.4
|
|
|
$
|
9,449.7
|
|
|
|
|
$
|
165.0
|
|
|
$
|
9,042.4
|
|
|
$
|
29,374.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
$
|
18,259.0
|
|
|
$
|
6,190.7
|
|
|
|
|
$
|
1,992.6
|
|
|
$
|
66.3
|
|
|
$
|
26,508.6
|
|
|
Depreciation and amortization expenses
|
696.1
|
|
|
511.5
|
|
|
|
|
13.0
|
|
|
156.7
|
|
|
1,377.3
|
|
|
Income from equity investees
|
—
|
|
|
102.4
|
|
|
|
|
195.6
|
|
|
—
|
|
|
298.0
|
|
|
Operating income/(loss)
|
3,782.8
|
|
|
964.7
|
|
|
|
|
697.5
|
|
|
(1,367.1)
|
|
|
4,077.9
|
|
|
Total assets
|
$
|
4,446.7
|
|
|
$
|
6,724.6
|
|
|
|
|
$
|
132.2
|
|
|
$
|
7,916.1
|
|
|
$
|
19,219.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
$
|
16,748.6
|
|
|
$
|
5,551.2
|
|
|
|
|
$
|
2,297.3
|
|
|
$
|
122.4
|
|
|
$
|
24,719.5
|
|
|
Depreciation and amortization expenses
|
641.0
|
|
|
447.6
|
|
|
|
|
1.3
|
|
|
157.1
|
|
|
1,247.0
|
|
|
Income from equity investees
|
—
|
|
|
117.4
|
|
|
|
|
183.8
|
|
|
—
|
|
|
301.2
|
|
|
Operating income/(loss)
|
3,485.2
|
|
|
872.8
|
|
|
|
|
927.1
|
|
|
(1,401.8)
|
|
|
3,883.3
|
|
|
Total assets
|
$
|
4,473.7
|
|
|
$
|
6,361.9
|
|
|
|
|
$
|
148.2
|
|
|
$
|
13,172.6
|
|
|
$
|
24,156.4
|
|
Note 18: Selected Quarterly Financial Information (unaudited; in millions, except EPS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Full
Year
|
|
Fiscal 2020:
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
$
|
7,097.1
|
|
|
$
|
5,995.7
|
|
|
$
|
4,222.1
|
|
|
$
|
6,203.1
|
|
|
$
|
23,518.0
|
|
|
Operating income/(loss)
|
1,219.8
|
|
|
487.4
|
|
|
(703.9)
|
|
|
558.3
|
|
|
1,561.7
|
|
|
Net earnings/(loss) attributable to Starbucks
|
885.7
|
|
|
328.4
|
|
|
(678.4)
|
|
|
392.6
|
|
|
928.3
|
|
|
Earnings/(loss) per share — diluted
|
0.74
|
|
|
0.28
|
|
|
(0.58)
|
|
|
0.33
|
|
|
0.79
|
|
|
Fiscal 2019:
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
$
|
6,632.7
|
|
|
$
|
6,305.9
|
|
|
$
|
6,823.0
|
|
|
$
|
6,747.0
|
|
|
$
|
26,508.6
|
|
|
Operating income
|
1,015.7
|
|
|
857.7
|
|
|
1,121.3
|
|
|
1,083.3
|
|
|
4,077.9
|
|
|
Net earnings attributable to Starbucks
|
760.6
|
|
|
663.2
|
|
|
1,372.8
|
|
|
802.9
|
|
|
3,599.2
|
|
|
Earnings per share — diluted
|
0.61
|
|
|
0.53
|
|
|
1.12
|
|
|
0.67
|
|
|
2.92
|
|