SBUX - 6.29.2014 - 10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 29, 2014
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            .
Commission File Number: 0-20322
Starbucks Corporation
(Exact Name of Registrant as Specified in its Charter)
Washington
91-1325671
(State or Other Jurisdiction of
Incorporation or Organization)
(IRS Employer
Identification No.)
2401 Utah Avenue South, Seattle, Washington 98134
(Address of principal executive offices)
(206) 447-1575
(Registrant’s Telephone Number, including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    
Yes   ¨  No  x 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Title
Shares Outstanding as of July 23, 2014
Common Stock, par value $0.001 per share
751.2 million

Table of Contents

STARBUCKS CORPORATION
FORM 10-Q
For the Quarterly Period Ended June 29, 2014
Table of Contents
 
 
 
Page
PART I. FINANCIAL INFORMATION
 
 
 
Item 1
 
 
 
 
 
Item 2
Item 3
Item 4
 
PART II. OTHER INFORMATION
 
 
 
Item 1
Item 1A
Item 2
Item 6
Index to Exhibits
 

 

Table of Contents

PART I — FINANCIAL INFORMATION
Item 1.
Financial Statements
STARBUCKS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in millions, except per share data)
(unaudited)
 
 
Quarter Ended
 
Three Quarters Ended
 
Jun 29,
2014
 
Jun 30,
2013
 
Jun 29,
2014
 
Jun 30,
2013
Net revenues:
 
 
 
 
 
 
 
Company-operated stores
$
3,290.5

 
$
2,986.3

 
$
9,702.3

 
$
8,783.7

Licensed stores
408.1

 
342.0

 
1,166.1

 
1,014.2

CPG, foodservice and other
455.1

 
407.0

 
1,398.7

 
1,280.2

Total net revenues
4,153.7

 
3,735.3

 
12,267.1

 
11,078.1

Cost of sales including occupancy costs
1,711.5

 
1,597.6

 
5,135.7

 
4,748.6

Store operating expenses
1,176.5

 
1,084.1

 
3,486.1

 
3,212.2

Other operating expenses
120.6

 
98.9

 
346.3

 
330.8

Depreciation and amortization expenses
180.1

 
153.3

 
524.2

 
455.3

General and administrative expenses
269.4

 
249.6

 
752.6

 
711.7

Litigation charge/(credit)
—

 
—

 
(20.2
)
 
—

Total operating expenses
3,458.1

 
3,183.5

 
10,224.7

 
9,458.6

Income from equity investees
72.9

 
63.4

 
183.9

 
170.4

Operating income
768.5

 
615.2

 
2,226.3

 
1,789.9

Interest income and other, net
19.4

 
3.5

 
57.0

 
51.4

Interest expense
(16.4
)
 
(6.3
)
 
(47.7
)
 
(19.0
)
Earnings before income taxes
771.5

 
612.4

 
2,235.6

 
1,822.3

Income taxes
259.0

 
194.6

 
755.4

 
581.4

Net earnings including noncontrolling interests
512.5

 
417.8

 
1,480.2

 
1,240.9

Net earnings/(loss) attributable to noncontrolling interests
(0.1
)
 
—

 
(0.1
)
 
0.6

Net earnings attributable to Starbucks
$
512.6

 
$
417.8

 
$
1,480.3

 
$
1,240.3

Earnings per share - basic
$
0.68

 
$
0.56

 
$
1.96

 
$
1.66

Earnings per share - diluted
$
0.67

 
$
0.55

 
$
1.94

 
$
1.63

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
751.8

 
749.7

 
753.9

 
748.3

Diluted
761.0

 
761.9

 
763.9

 
761.5

Cash dividends declared per share
$
0.26

 
$
0.21

 
$
0.78

 
$
0.63

See Notes to Condensed Consolidated Financial Statements

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Table of Contents

STARBUCKS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions, unaudited)

 
Quarter Ended
 
Three Quarters Ended
 
Jun 29,
2014
 
Jun 30,
2013
 
Jun 29,
2014
 
Jun 30,
2013
Net earnings including noncontrolling interests
$
512.5

 
$
417.8

 
$
1,480.2

 
$
1,240.9

Other comprehensive income/(loss), net of tax:
 
 
 
 
 
 
 
Unrealized holding gains/(losses) on available-for-sale securities
1.7

 
(0.3
)
 
0.8

 
(0.3
)
Tax (expense)/benefit
(0.6
)
 
0.1

 
(0.2
)
 
0.1

Unrealized gains/(losses) on cash flow hedging instruments
(13.8
)
 
55.6

 
6.1

 
34.9

Tax (expense)/benefit
3.6

 
(20.0
)
 
(2.4
)
 
(19.7
)
Unrealized gains/(losses) on net investment hedging instruments
(0.7
)
 
7.9

 
5.2

 
34.3

Tax (expense)/benefit
0.3

 
(2.9
)
 
(1.9
)
 
(12.7
)
Reclassification adjustment for net (gains)/losses realized in net earnings for cash flow hedges and available-for-sale securities
(2.6
)
 
11.1

 
2.8

 
27.3

Tax expense/(benefit)
1.1

 
(0.5
)
 
2.0

 
(1.9
)
Translation adjustment
19.8

 
(25.0
)
 
(2.9
)
 
(74.7
)
Tax (expense)/benefit
(2.2
)
 
5.8

 
(5.6
)
 
4.5

Other comprehensive income/(loss)
6.6

 
31.8

 
3.9

 
(8.2
)
Comprehensive income including noncontrolling interests
519.1

 
449.6

 
1,484.1

 
1,232.7

Comprehensive income/(loss) attributable to noncontrolling interests
(0.1
)
 
—

 
(0.1
)
 
0.6

Comprehensive income attributable to Starbucks
$
519.2

 
$
449.6

 
$
1,484.2

 
$
1,232.1



See Notes to Condensed Consolidated Financial Statements


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STARBUCKS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
(unaudited)
 
Jun 29,
2014
 
Sep 29,
2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,019.4

 
$
2,575.7

Short-term investments
176.9

 
658.1

Accounts receivable, net
580.9

 
561.4

Inventories
1,025.8

 
1,111.2

Prepaid expenses and other current assets
289.4

 
287.7

Deferred income taxes, net
264.5

 
277.3

Total current assets
3,356.9

 
5,471.4

Long-term investments
832.7

 
58.3

Equity and cost investments
541.5

 
496.5

Property, plant and equipment, net
3,373.7

 
3,200.5

Deferred income taxes, net
947.1

 
967.0

Other assets
193.0

 
185.3

Other intangible assets
278.7

 
274.8

Goodwill
861.7

 
862.9

TOTAL ASSETS
$
10,385.3

 
$
11,516.7

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
474.5

 
$
491.7

Accrued litigation charge
—

 
2,784.1

Accrued liabilities
1,376.0

 
1,269.3

Insurance reserves
202.6

 
178.5

Deferred revenue
830.8

 
653.7

Total current liabilities
2,883.9

 
5,377.3

Long-term debt
2,048.1

 
1,299.4

Other long-term liabilities
382.5

 
357.7

Total liabilities
5,314.5

 
7,034.4

Shareholders’ equity:
 
 
 
Common stock ($0.001 par value) — authorized, 1,200.0 shares; issued and outstanding, 751.0 shares and 753.2 shares, respectively
0.8

 
0.8

Additional paid-in capital
39.4

 
282.1

Retained earnings
4,957.7

 
4,130.3

Accumulated other comprehensive income
70.9

 
67.0

Total shareholders’ equity
5,068.8

 
4,480.2

Noncontrolling interest
2.0

 
2.1

Total equity
5,070.8

 
4,482.3

TOTAL LIABILITIES AND EQUITY
$
10,385.3

 
$
11,516.7

See Notes to Condensed Consolidated Financial Statements

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Table of Contents

STARBUCKS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions, unaudited)
 
Three Quarters Ended
 
Jun 29,
2014
 
Jun 30,
2013
OPERATING ACTIVITIES:
 
 
 
Net earnings including noncontrolling interests
$
1,480.2

 
$
1,240.9

Adjustments to reconcile net earnings to net cash (used)/provided by operating activities:
 
 
 
Depreciation and amortization
554.0

 
479.3

Deferred income taxes, net
32.1

 
3.9

Income earned from equity method investees, net of distributions
(37.3
)
 
(42.6
)
Gain resulting from sale of equity in joint venture
—

 
(35.2
)
Stock-based compensation
142.6

 
105.6

Other
33.5

 
18.3

Cash (used)/provided by changes in operating assets and liabilities:
 
 
 
Accounts receivable
(19.0
)
 
(20.3
)
Inventories
85.2

 
88.8

Accounts payable
(3.1
)
 
20.8

Accrued litigation charge
(2,763.9
)
 
—

Accrued liabilities and insurance reserves
195.3

 
38.1

Deferred revenue
177.0

 
168.1

Prepaid expenses, other current assets and other assets
(10.0
)
 
(27.9
)
Net cash (used)/provided by operating activities
(133.4
)
 
2,037.8

INVESTING ACTIVITIES:
 
 
 
Purchase of investments
(1,545.2
)
 
(495.8
)
Sales, maturities and calls of investments
1,257.9

 
803.2

Acquisitions, net of cash acquired
—

 
(576.9
)
Additions to property, plant and equipment
(811.2
)
 
(782.2
)
Proceeds from sale of equity in joint venture
—

 
50.3

Other
(24.4
)
 
3.0

Net cash used by investing activities
(1,122.9
)
 
(998.4
)
FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of long-term debt
748.5

 
—

Principal payments on long-term debt
—

 
(35.2
)
Proceeds from issuance of common stock
117.6

 
199.5

Excess tax benefit on share-based awards
101.6

 
229.2

Cash dividends paid
(587.8
)
 
(470.9
)
Repurchase of common stock
(595.2
)
 
(588.1
)
Minimum tax withholdings on share-based awards
(76.8
)
 
(120.6
)
Other
(3.6
)
 
2.3

Net cash used by financing activities
(295.7
)
 
(783.8
)
Effect of exchange rate changes on cash and cash equivalents
(4.3
)
 
(13.4
)
Net (decrease)/increase in cash and cash equivalents
(1,556.3
)
 
242.2

CASH AND CASH EQUIVALENTS:
 
 
 
Beginning of period
2,575.7

 
1,188.6

End of period
$
1,019.4

 
$
1,430.8

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
Cash paid during the period for:
 
 
 
Interest, net of capitalized interest
$
39.2

 
$
17.2

Income taxes
$
548.0

 
$
417.3


See Notes to Condensed Consolidated Financial Statements

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Table of Contents

STARBUCKS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1:
Summary of Significant Accounting Policies
Financial Statement Preparation
The unaudited condensed consolidated financial statements as of June 29, 2014, and for the quarter and three quarters ended June 29, 2014 and June 30, 2013, have been prepared by Starbucks Corporation under the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, the financial information for the quarter and three quarters ended June 29, 2014 and June 30, 2013 reflects all adjustments and accruals, which are of a normal recurring nature, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. In this Quarterly Report on Form 10-Q (“10-Q”) Starbucks Corporation is referred to as “Starbucks,” the “Company,” “we,” “us” or “our.”
The financial information as of September 29, 2013 is derived from our audited consolidated financial statements and notes for the fiscal year ended September 29, 2013 (“fiscal 2013”) included in Item 8 in the Fiscal 2013 Annual Report on Form 10-K (the “10-K”). The information included in this 10-Q should be read in conjunction with the footnotes and management’s discussion and analysis of the financial statements in the 10-K.
The results of operations for the quarter and three quarters ended June 29, 2014 are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending September 28, 2014 ("fiscal 2014").
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued guidance outlining a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers that supersedes most current revenue recognition guidance. This guidance requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, this guidance expands related disclosure requirements. The guidance will become effective for us at the beginning of our first quarter of fiscal 2018 and will require full or modified retrospective application. We are currently evaluating the impact this guidance will have on our financial statements as well as the expected adoption method.
In April 2014, the FASB issued guidance that changes the criteria for reporting discontinued operations. To qualify as a discontinued operation under the amended guidance, a component or group of components of an entity that has been disposed of or is classified as held for sale must represent a strategic shift that has or will have a major effect on the entity's operations and financial results. This guidance also expands related disclosure requirements. The guidance will become effective for us at the beginning of our first quarter of fiscal 2016. We do not expect the adoption of this guidance will have a material impact on our financial statements.
In July 2013, the FASB issued guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This guidance requires the unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset. When a deferred tax asset is not available, or the asset is not intended to be used for this purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and not netted with a deferred tax asset. The guidance will become effective for us at the beginning of our first quarter of fiscal 2015. We do not expect the adoption of this guidance will have a material impact on our financial statements.
In March 2013, the FASB issued guidance on a parent's accounting for the cumulative translation adjustment upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. This guidance requires a parent to release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The guidance will become effective for us at the beginning of our first quarter of fiscal 2015. We do not expect the adoption of this guidance will have a material impact on our financial statements.
In February 2013, the FASB issued guidance that adds additional disclosure requirements for items reclassified out of accumulated other comprehensive income. This guidance requires the disclosure of significant amounts reclassified from each component of accumulated other comprehensive income and the income statement line items affected by the reclassification. The guidance became effective for us at the beginning of our first quarter of fiscal 2014 and the additional disclosures are provided in Note 7 of this 10-Q.
In January 2013, the FASB issued guidance clarifying the scope of disclosure requirements for offsetting assets and liabilities. The amended guidance limits the scope of balance sheet offsetting disclosures to derivatives, repurchase agreements, and

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securities lending transactions to the extent that they are offset in the financial statements or subject to an enforceable master netting arrangement or similar agreement. The guidance became effective for us at the beginning of our first quarter of fiscal 2014 and did not have a material impact on our financial statements.
Correction of an Immaterial Error
Effective at the beginning of fiscal 2014, we reclassified certain fees related to our US and Seattle's Best Coffee foodservice operations in our Channel Development segment and All Other Segments, respectively, from other operating expenses to foodservice revenues included in CPG, foodservice and other net revenues in our consolidated statements of earnings. This reclassification results from a correction of an error in our prior period financial statements which we have determined to be immaterial. In order to align prior period classifications with the current period presentation, the historical consolidated financial statements have been corrected, resulting in reclassifications of $25.4 million and $22.7 million for fiscal years 2013 and 2012, respectively. The reclassifications for the quarter and three quarters ended June 30, 2013 were $6.4 million and $19.1 million, respectively. The consolidated statements of earnings as corrected are presented below (in millions):
 
Fiscal 2013
 
Fiscal 2012
 
Q1
 
Q2
 
Q3
 
Q4
 
Full Year
 
Full Year
Net revenues
 
 
 
 
 
 
 
 
 
 
 
Company-operated stores
$
2,989.6

 
$
2,807.7

 
$
2,986.3

 
$
3,009.6

 
$
11,793.2

 
$
10,534.5

Licensed stores
350.2

 
322.1

 
342.0

 
346.3

 
1,360.5

 
1,210.3

CPG, foodservice and other
453.4

 
419.8

 
407.0

 
432.9

 
1,713.1

 
1,532.0

Total net revenues
3,793.2

 
3,549.6

 
3,735.3

 
3,788.8

 
14,866.8

 
13,276.8

Cost of sales including occupancy costs
1,620.7

 
1,530.4

 
1,597.6

 
1,633.7

 
6,382.3

 
5,813.3

Store operating expenses
1,089.5

 
1,038.4

 
1,084.1

 
1,073.9

 
4,286.1

 
3,918.1

Other operating expenses
126.1

 
105.8

 
98.9

 
101.1

 
431.8

 
407.2

Depreciation and amortization expenses
148.9

 
153.1

 
153.3

 
166.1

 
621.4

 
550.3

General and administrative expenses
231.9

 
230.3

 
249.6

 
226.1

 
937.9

 
801.2

Litigation charge
—

 
—

 
—

 
2,784.1

 
2,784.1

 
—

Total operating expenses
3,217.1

 
3,058.0

 
3,183.5

 
5,985.0

 
15,443.6

 
11,490.1

Income from equity investees
54.5

 
52.5

 
63.4

 
81.0

 
251.4

 
210.7

Operating income/(loss)
630.6

 
544.1

 
615.2

 
(2,115.2
)
 
(325.4
)
 
1,997.4

Interest income and other, net
(2.9
)
 
50.8

 
3.5

 
72.1

 
123.6

 
94.4

Interest expense
(6.6
)
 
(6.1
)
 
(6.3
)
 
(9.1
)
 
(28.1
)
 
(32.7
)
Earnings/(loss) before income taxes
621.1

 
588.8

 
612.4

 
(2,052.2
)
 
(229.9
)
 
2,059.1

Income taxes
188.7

 
198.1

 
194.6

 
(820.1
)
 
(238.7
)
 
674.4

Net earnings including noncontrolling interests
432.4

 
390.7

 
417.8

 
(1,232.1
)
 
8.8

 
1,384.7

Net earnings attributable to noncontrolling interests
0.2

 
0.3

 
—

 
(0.1
)
 
0.5

 
0.9

Net earnings attributable to Starbucks
$
432.2

 
$
390.4

 
$
417.8

 
$
(1,232.0
)
 
$
8.3

 
$
1,383.8

There was no impact on operating income or net earnings as a result of the error correction, nor any impact on our consolidated statements of comprehensive income, consolidated balance sheets or consolidated statements of cash flows. Additional disclosure regarding this change as it relates to our segment results is included at Note 11, Segment Reporting.

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Note 2: Derivative Financial Instruments
Interest Rates
Depending on market conditions, we enter into interest rate swap agreements to hedge the variability in cash flows due to changes in the benchmark interest rate related to anticipated debt issuances. These agreements are cash settled at the time of the pricing of the related debt. The effective portion of the derivative's gain or loss is recorded in accumulated other comprehensive income ("AOCI") and is subsequently reclassified to interest expense over the life of the related debt.
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 revenue streams and inventory purchases in currencies other than the entity's functional currency. The effective portion of the derivative's gain or loss is recorded in AOCI and is subsequently reclassified to revenue or cost of sales when the hedged exposure affects net earnings.
We also enter into forward contracts to hedge the foreign currency exposure of our net investment in certain foreign operations. The effective portion of the derivative's gain or loss is recorded in AOCI and will be subsequently reclassified to net earnings when the hedged net investment is either sold or substantially liquidated.
To mitigate the translation risk of certain balance sheet items, we enter into foreign currency forward contracts that are not designated as hedging instruments. Gains and losses from these derivatives are largely offset by the financial impact of translating foreign currency denominated payables and receivables; both are recorded in net interest income and other.
Commodities
Depending on market conditions, we enter into coffee futures contracts and collars (the combination of a purchased call option and a sold put option) to hedge a portion of anticipated cash flows under our price-to-be-fixed green coffee contracts, which are described further in Note 4, Inventories. The effective portion of the derivative's gain or loss is recorded in AOCI and is subsequently reclassified to cost of sales when the hedged exposure affects net earnings.
To mitigate the price uncertainty of a portion of our future purchases of dairy products and diesel fuel, we enter into dairy and diesel fuel swap contracts, as well as dairy futures and collars that are not designated as hedging instruments. Gains and losses from these derivatives are recorded in net interest income and other. Gains and losses from dairy swaps, futures and collars largely offset price fluctuations on our dairy purchases, which are included in cost of sales. Gains and losses from diesel fuel swaps largely offset the financial impact of diesel fuel fluctuations on our shipping costs, which are included in operating expenses.
Gains and losses on derivative contracts designated as hedging instruments included in AOCI and expected to be reclassified into earnings within 12 months, net of tax (in millions):
 
Net Gains/(Losses)
Included in AOCI
 
Net Gains/(Losses) Expected to be Reclassified from AOCI into Earnings within 12 Months
 
Contract Remaining Maturity
(Months)
 
Jun 29,
2014
 
Sep 29,
2013
 
 
Cash Flow Hedges:
 
 
 
 
 
 
 
Interest rates
$
37.2

 
$
41.4

 
$
3.2

 

Foreign currency
1.3

 
(0.3
)
 
1.2

 
34
Coffee
(3.4
)
 
(12.2
)
 
(3.3
)
 
14
Net Investment Hedges:
 
 
 
 
 
 
 
Foreign currency
(9.6
)
 
(12.9
)
 
 
 
33

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Pretax gains and losses on derivative contracts designated as hedging instruments recognized in other comprehensive income ("OCI") and reclassifications from AOCI to earnings (in millions):
 
Quarter Ended
 
Three Quarters Ended
 
Gains/(Losses) Recognized in
OCI Before Reclassifications
 
Gains/(Losses) Reclassified from AOCI to Earnings
 
Gains/(Losses) Recognized in
OCI Before Reclassifications
 
Gains/(Losses) Reclassified from AOCI to Earnings
 
Jun 29,
2014
 
Jun 30,
2013
 
Jun 29,
2014
 
Jun 30,
2013
 
Jun 29,
2014
 
Jun 30,
2013
 
Jun 29,
2014
 
Jun 30,
2013
Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rates
$
—

 
$
49.3

 
$
1.3

 
$
—

 
$
0.5

 
$
49.3

 
$
3.8

 
$
—

Foreign currency
(10.8
)
 
5.6

 
2.2

 
2.4

 
7.8

 
12.0

 
5.5

 
3.0

Coffee
(3.0
)
 
0.7

 
(0.9
)
 
(13.3
)
 
(2.2
)
 
(26.4
)
 
(11.8
)
 
(29.6
)
Net Investment Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency
(0.7
)
 
7.9

 
—

 
—

 
5.2

 
34.3

 
—

 
—

Pretax gains and losses on derivative contracts not designated as hedging instruments recognized in earnings (in millions):
 
Gains/(Losses) Recognized in Earnings
 
Quarter Ended
 
Three Quarters Ended
 
Jun 29, 2014
 
Jun 30, 2013
 
Jun 29, 2014
 
Jun 30, 2013
Foreign currency
$
(1.0
)
 
$
0.4

 
$
(2.0
)
 
$
2.6

Coffee
—

 
—

 
—

 
(2.1
)
Dairy
0.8

 
(2.0
)
 
12.7

 
(4.6
)
Diesel fuel
0.6

 
0.1

 
0.6

 
0.2

Notional amounts of outstanding derivative contracts (in millions):
 
Jun 29, 2014
 
Sep 29, 2013
Foreign currency
$
664

 
$
452

Coffee
36

 
—

Dairy
17

 
38

Diesel fuel
26

 
17


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Table of Contents

Note 3:
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
Jun 29, 2014
 
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
$
1,019.4

 
$
1,019.4

 
$
—

 
$
—

Short-term investments:
 
 
 
 
 
 
 
Available-for-sale securities
 
 
 
 
 
 
 
Corporate debt securities
14.3

 
—

 
14.3

 
—

Foreign government obligations
45.8

 
—

 
45.8

 
—

US government treasury securities
11.0

 
11.0

 
—

 
—

State and local government obligations
12.0

 
—

 
12.0

 
—

Certificates of deposit
20.0

 
—

 
20.0

 
—

Total available-for-sale securities
103.1

 
11.0

 
92.1

 
—

Trading securities
73.8

 
73.8

 
—

 
—

Total short-term investments
176.9

 
84.8

 
92.1

 
—

Prepaid expenses and other current assets:
 
 
 
 
 
 
 
Derivative assets
18.1

 
0.3

 
17.8

 
—

Long-term investments:
 
 
 
 
 
 
 
Available-for-sale securities
 
 
 
 
 
 
 
Agency obligations
10.7

 
—

 
10.7

 
—

Corporate debt securities
342.5

 
—

 
342.5

 
—

Auction rate securities
13.6

 
—

 
—

 
13.6

Foreign government obligations
85.6

 
—

 
85.6

 
—

US government treasury securities
243.5

 
243.5

 
—

 
—

State and local government obligations
11.2

 
—

 
11.2

 
—

Mortgage and asset-backed securities
125.6

 
—

 
125.6

 
—

Total long-term investments
832.7

 
243.5

 
575.6

 
13.6

Other assets:
 
 
 
 
 
 
 
Derivative assets
6.2

 
—

 
6.2

 
—

Total
$
2,053.3

 
$
1,348.0

 
$
691.7

 
$
13.6

Liabilities:
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$
3.8

 
$
1.3

 
$
2.5

 
$
—

Other long-term liabilities:
 
 
 
 
 
 
 
Derivative liabilities
1.9

 
—

 
1.9

 
—

Total
$
5.7

 
$
1.3

 
$
4.4

 
$
—



11
Table of Contents

 
 
 
Fair Value Measurements at Reporting Date Using
 
Balance at
Sep 29, 2013
 
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
$
2,575.7

 
$
2,575.7

 
$
—

 
$
—

Short-term investments:
 
 
 
 
 
 
 
Available-for-sale securities
 
 
 
 
 
 
 
Agency obligations
20.0

 
—

 
20.0

 
—

Commercial paper
127.0

 
—

 
127.0

 
—

Corporate debt securities
57.5

 
—

 
57.5

 
—

US government treasury securities
352.9

 
352.9

 
—

 
—

Certificates of deposit
34.1

 
—

 
34.1

 
—

Total available-for-sale securities
591.5

 
352.9

 
238.6

 
—

Trading securities
66.6

 
66.6

 
—

 
—

Total short-term investments
658.1

 
419.5

 
238.6

 
—

Prepaid expenses and other current assets:
 
 
 
 
 
 
 
Derivative assets
12.5

 
—

 
12.5

 
—

Long-term investments:
 
 
 
 
 
 
 
Available-for-sale securities
 
 
 
 
 
 
 
Agency obligations
8.1

 
—

 
8.1

 
—

Corporate debt securities
36.8

 
—

 
36.8

 
—

Auction rate securities
13.4

 
—

 
—

 
13.4

Total long-term investments
58.3

 
—

 
44.9

 
13.4

Other assets:
 
 
 
 
 
 
 
Derivative assets
11.4

 
—

 
11.4

 
—

Total
$
3,316.0

 
$
2,995.2

 
$
307.4

 
$
13.4

Liabilities:
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$
3.5

 
$
—

 
$
3.5

 
$
—

Other long-term liabilities:
 
 
 
 
 
 
 
Derivative liabilities
0.5

 
—

 
0.5

 
—

Total
$
4.0

 
$
—

 
$
4.0

 
$
—

There were no material transfers between levels and there was no significant activity within Level 3 instruments during the periods presented. In the second quarter of fiscal 2014, we revised the classification of coffee and dairy futures from Level 2 to Level 1, as we use quoted prices in active markets for identical assets to determine fair value. 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.
Gross unrealized holding gains and losses on investments were not material as of June 29, 2014 and September 29, 2013.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets and liabilities recognized or disclosed at fair value in the financial statements on a nonrecurring basis include items such as property, plant and equipment, goodwill and other intangible assets, equity and cost method investments, and other assets. These assets are measured at fair value if determined to be impaired. During the the quarter and three quarters ended June 29, 2014 and June 30, 2013, there were no material fair value adjustments.
The estimated fair value of our long-term debt based on the quoted market price (Level 2) is included at Note 6, Debt.

12
Table of Contents

Note 4:
Inventories
(in millions)
Jun 29, 2014
 
Sep 29, 2013
 
Jun 30, 2013
Coffee:
 
 
 
 
 
Unroasted
$
442.3

 
$
493.0

 
$
605.1

Roasted
215.1

 
235.4

 
229.9

Other merchandise held for sale
213.8

 
243.3

 
204.2

Packaging and other supplies
154.6

 
139.5

 
134.6

Total
$
1,025.8

 
$
1,111.2

 
$
1,173.8

Other merchandise held for sale includes, among other items, tea and serveware. Inventory levels vary due to seasonality, commodity market supply and price fluctuations.
As of June 29, 2014, we had committed to purchasing green coffee totaling $398 million under fixed-price contracts and an estimated $753 million under price-to-be-fixed contracts. As of June 29, 2014, approximately $33 million of our price-to-be-fixed contracts were effectively fixed through the use of futures contracts and approximately $3 million were price-protected through the use of collar instruments. 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 these types of contracts, either Starbucks or the seller has the option to “fix” the base “C” coffee commodity price prior to the delivery date. Until prices are fixed, we estimate the total cost of these purchase commitments. We believe, based on relationships established with our suppliers in the past, the risk of non-delivery on these purchase commitments is remote.
Note 5:
Supplemental Balance Sheet Information (in millions)
 
Property, Plant and Equipment, net
Jun 29, 2014
 
Sep 29, 2013
Land
$
46.9

 
$
47.0

Buildings
278.2

 
259.6

Leasehold improvements
4,744.2

 
4,431.6

Store equipment
1,456.7

 
1,353.9

Roasting equipment
408.4

 
397.9

Furniture, fixtures and other
1,045.9

 
949.7

Work in progress
389.8

 
342.4

Property, plant and equipment, gross
8,370.1

 
7,782.1

Accumulated depreciation
(4,996.4
)
 
(4,581.6
)
Property, plant and equipment, net
$
3,373.7

 
$
3,200.5


Accrued Liabilities
Jun 29, 2014
 
Sep 29, 2013
Accrued compensation and related costs
$
427.7

 
$
420.2

Accrued occupancy costs
119.0

 
120.7

Accrued taxes
150.8

 
125.0

Accrued dividend payable
195.2

 
195.8

Other
483.3

 
407.6

Total accrued liabilities
$
1,376.0

 
$
1,269.3

Note 6:
Debt
In December 2013, we issued $400 million of 3-year 0.875% Senior Notes ("the 2014 3-year notes") due December 2016, and $350 million of 5-year 2.000% Senior Notes ("the 2014 5-year notes") due December 2018, in an underwritten registered public offering. Interest on both of these notes is payable semi-annually on June 5 and December 5 of each year, commencing on June 5, 2014.

13
Table of Contents

Components of long-term debt including the associated interest rates and related fair values (in millions, except interest rates):
 
 
Jun 29, 2014
 
Sep 29, 2013
 
Stated Interest Rate
Effective Interest Rate (1)
Issuance
Due Date
Face Value
Estimated Fair Value
 
Face Value
Estimated Fair Value
 
2014 3-year notes
December 2016
$
400.0

$
401

 
$
—

$
—

 
0.875
%
0.941
%
2007 notes
August 2017
550.0

633

 
550.0

644

 
6.250
%
6.292
%
2014 5-year notes
December 2018
350.0

353

 
—

—

 
2.000
%
2.012
%
2013 notes
October 2023
750.0

791

 
750.0

762

 
3.850
%
2.860
%
   Total
 
2,050.0

2,178

 
1,300.0

1,406

 
 
 
Aggregate unamortized discount
1.9

 
 
0.6

 
 
 
 
   Total
 
$
2,048.1

 
 
$
1,299.4

 
 
 
 
(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.
The indentures under which the above notes were issued also require us to maintain compliance with certain covenants, including limits on future liens and sale and leaseback transactions on certain material properties. As of June 29, 2014, we were in compliance with all applicable covenants.
Note 7: Equity
Changes in total equity (in millions):
 
Three Quarters Ended
 
Jun 29, 2014
 
Jun 30, 2013
Beginning balance of total equity
$
4,482.3

 
$
5,114.5

Net earnings including noncontrolling interests
1,480.2

 
1,240.9

Other comprehensive income/(loss)
3.9

 
(8.2
)
Stock-based compensation expense
144.0

 
107.0

Exercise of stock options/vesting of RSUs
126.3

 
293.6

Sale of common stock
16.5

 
15.1

Repurchase of common stock
(595.2
)
 
(544.1
)
Cash dividends declared
(587.2
)
 
(471.2
)
Ending balance of total equity
$
5,070.8

 
$
5,747.6

Changes in accumulated other comprehensive income ("AOCI") by component, for the quarter and three quarters ended June 29, 2014, net of tax:
Quarter Ended
(in millions)
 Available-for-Sale Securities
 
 Cash Flow Hedges
 
 Net Investment Hedges
 
Translation Adjustment
 
Total
Net gains/(losses) in AOCI at March 30, 2014
$
(0.8
)
 
$
46.8

 
$
(9.2
)
 
$
27.5

 
$
64.3

Net gains/(losses) recognized in OCI before reclassifications
1.1

 
(10.2
)
 
(0.4
)
 
17.6

 
8.1

Net (gains)/losses reclassified from AOCI to earnings
—

 
(1.5
)
 
—

 
—

 
(1.5
)
Other comprehensive income/(loss)
1.1

 
(11.7
)
 
(0.4
)
 
17.6

 
6.6

Net gains/(losses) in AOCI at June 29, 2014
$
0.3

 
$
35.1

 
$
(9.6
)
 
$
45.1

 
$
70.9



14
Table of Contents

Three Quarters Ended
(in millions)
 Available-for-Sale Securities
 
 Cash Flow Hedges
 
 Net Investment Hedges
 
Translation Adjustment
 
Total
Net gains/(losses) in AOCI at September 29, 2013
$
(0.5
)
 
$
26.8

 
$
(12.9
)
 
$
53.6

 
$
67.0

Net gains/(losses) recognized in OCI before reclassifications
0.6

 
3.7

 
3.3

 
(8.5
)
 
(0.9
)
Net (gains)/losses reclassified from AOCI to earnings
0.2

 
4.6

 
—

 
—

 
4.8

Other comprehensive income/(loss)
0.8

 
8.3

 
3.3

 
(8.5
)
 
3.9

Net gains/(losses) in AOCI at June 29, 2014
$
0.3

 
$
35.1

 
$
(9.6
)
 
$
45.1

 
$
70.9


Impact of reclassifications from AOCI on the consolidated statements of earnings related to cash flow hedges for the quarter and three quarters ended June 29, 2014:
Quarter Ended
AOCI
Components
 
Amounts Reclassified
from AOCI
(in millions)
 
Affected Line Item in
the Statements of Earnings
Gains/(losses) on cash flow hedges
 
 
 
 
Interest rate hedges
 
$
1.3

 
Interest expense
Foreign currency hedges
 
0.9

 
Revenue
Foreign currency/coffee hedges
 
0.4

 
Cost of sales including occupancy costs
 
 
2.6

 
Total before tax
 
 
(1.1
)
 
Tax (expense)/benefit
 
 
$
1.5

 
Net of tax
Three Quarters Ended
AOCI
Components
 
Amounts Reclassified
from AOCI
(in millions)
 
Affected Line Item in
the Statements of Earnings
Gains/(losses) on cash flow hedges
 
 
 
 
Interest rate hedges
 
$
3.8

 
Interest expense
Foreign currency hedges
 
3.2

 
Revenue
Foreign currency / coffee hedges
 
(9.5
)
 
Cost of sales including occupancy costs
 
 
(2.5
)
 
Total before tax
 
 
(2.1
)
 
Tax (expense)/benefit
 
 
$
(4.6
)
 
Net of tax

In addition to 1.2 billion shares of authorized common stock with $0.001 par value per share, the Company has authorized 7.5 million shares of preferred stock, none of which was outstanding as of June 29, 2014.
We repurchased 8.2 million shares of common stock at a total cost of $595.2 million, and 10.8 million shares at a total cost of $544.1 million for the three quarters ended June 29, 2014 and June 30, 2013, respectively. As of June 29, 2014, 18.1 million shares remained available for repurchase under current authorizations.

During the third quarter of fiscal 2014, our Board of Directors declared a quarterly cash dividend to shareholders of $0.26 per share to be paid on August 22, 2014 to shareholders of record as of the close of business on August 7, 2014.

15
Table of Contents

Note 8:
Employee Stock Plans
As of June 29, 2014, there were 56.5 million shares of common stock available for issuance pursuant to future equity-based compensation awards and 7.5 million shares available for issuance under our employee stock purchase plan.
Stock-based compensation expense recognized in the consolidated statements of earnings (in millions):
 
Quarter Ended
 
Three Quarters Ended
 
Jun 29, 2014
 
Jun 30, 2013
 
Jun 29, 2014
 
Jun 30, 2013
Options
$
9.9

 
$
8.3

 
$
32.4

 
$
28.1

Restricted Stock Units (“RSUs”)
41.1

 
26.4

 
110.2

 
77.5

Total stock-based compensation
$
51.0

 
$
34.7

 
$
142.6

 
$
105.6

Stock option and RSU transactions from September 29, 2013 through June 29, 2014 (in millions):
 
 
Stock Options
 
RSUs
Options outstanding/Nonvested RSUs, September 29, 2013
22.0

 
5.8

Granted
3.1

 
2.5

Options exercised/RSUs vested
(4.1
)
 
(2.5
)
Forfeited/expired
(0.4
)
 
(0.6
)
Options outstanding/Nonvested RSUs, June 29, 2014
20.6

 
5.2

Total unrecognized stock-based compensation expense, net of estimated forfeitures, as of June 29, 2014
$
43.6

 
$
126.7


Note 9:     Earnings Per Share
Calculation of net earnings per common share (“EPS”) — basic and diluted (in millions, except EPS):
 
Quarter Ended
 
Three Quarters Ended
 
Jun 29, 2014
 
Jun 30, 2013
 
Jun 29, 2014
 
Jun 30, 2013
Net earnings attributable to Starbucks
$
512.6

 
$
417.8

 
$
1,480.3

 
$
1,240.3

Weighted average common shares outstanding (for basic calculation)
751.8

 
749.7

 
753.9

 
748.3

Dilutive effect of outstanding common stock options and RSUs
9.2

 
12.2

 
10.0

 
13.2

Weighted average common and common equivalent shares outstanding (for diluted calculation)
761.0

 
761.9

 
763.9

 
761.5

EPS — basic
$
0.68

 
$
0.56

 
$
1.96

 
$
1.66

EPS — diluted
$
0.67

 
$
0.55

 
$
1.94

 
$
1.63

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. Out-of-the-money stock options totaled approximately 2.9 million and 0.1 million as of June 29, 2014 and June 30, 2013, respectively.
Note 10:
Commitments and Contingencies

Legal Proceedings
On November 12, 2013, the arbitrator in our arbitration with Kraft Foods Global, Inc. (now known as Kraft Foods Group, Inc.) (“Kraft”) ordered Starbucks to pay Kraft $2,227.5 million in damages plus prejudgment interest and attorneys' fees. We estimated prejudgment interest, which included an accrual through the estimated payment date, and attorneys' fees to be approximately $556.6 million. As a result, we recorded a litigation charge of $2,784.1 million in our fiscal 2013 operating results.

16
Table of Contents

In the first quarter of fiscal 2014, Starbucks paid all amounts due to Kraft under the arbitration, including prejudgment interest and attorneys' fees, and fully extinguished the litigation charge liability. Of the $2,784.1 million litigation charge accrued in the fourth quarter of fiscal 2013, $2,763.9 million was paid and the remainder was released as a litigation credit to reflect a reduction to our estimated prejudgment interest payable as a result of paying our obligation earlier than anticipated.
Starbucks is party to various other legal proceedings arising in the ordinary course of business, including, at times, certain employment litigation cases that have been certified as class or collective actions, but is not currently a party to any legal proceeding that management believes could have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Note 11: 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.
The table below presents financial information for our reportable operating segments and All Other Segments for the quarter and three quarters ended June 29, 2014 and June 30, 2013, including reclassifications resulting from the correction of the immaterial error discussed in Note 1. The reclassifications for fiscal years 2013 and 2012 were $21.8 million and $19.2 million for the Channel Development segment, respectively, and $3.6 million and $3.5 million for All Other Segments, respectively. The reclassifications for the quarter and three quarters ended June 30, 2013 were $5.4 million and $16.3 million for the Channel Development segment, respectively, and $1.0 million and $2.8 million for All Other Segments, respectively.
Quarter Ended
(in millions)
Americas
 
EMEA
 
China /
Asia Pacific
 
Channel
Development
 
All Other Segments
 
Segment
Total
June 29, 2014
 
 
 
 
 
 
 
 
 
 
 
Total net revenues
$
3,057.7

 
$
323.5

 
$
287.6

 
$
375.3

 
$
109.6

 
$
4,153.7

Depreciation and amortization expenses
119.5

 
15.1

 
11.3

 
0.4

 
3.9

 
150.2

Income from equity investees
—

 
1.1

 
46.3

 
25.5

 
—

 
72.9

Operating income/(loss)
728.5

 
29.2

 
100.8

 
139.3

 
(18.9
)
 
978.9

 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Total net revenues
$
2,776.5

 
$
287.2

 
$
233.7

 
$
331.0

 
$
106.9

 
$
3,735.3

Depreciation and amortization expenses
105.2

 
13.7

 
8.6

 
0.2

 
3.6

 
131.3

Income from equity investees
—

 
—

 
40.3

 
23.1

 
—

 
63.4

Operating income/(loss)
619.3

 
9.3

 
84.7

 
96.3

 
(9.4
)
 
800.2


Three Quarters Ended
(in millions)
Americas
 
EMEA
 
China /
Asia Pacific
 
Channel
Development
 
All Other Segments
 
Segment
Total
June 29, 2014
 
 
 
 
 
 
 
 
 
 
 
Total net revenues
$
8,939.4

 
$
973.0

 
$
819.8

 
$
1,146.8

 
$
388.1

 
$
12,267.1

Depreciation and amortization expenses
346.6

 
44.5

 
33.4

 
1.2

 
11.3

 
437.0

Income from equity investees
—

 
3.0

 
116.8

 
64.1

 
—

 
183.9

Operating income/(loss)
2,066.0

 
80.5

 
268.8

 
385.5

 
(13.0
)
 
2,787.8

 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Total net revenues
$
8,221.2

 
$
866.6

 
$
661.4

 
$
1,043.5

 
$
285.4

 
$
11,078.1

Depreciation and amortization expenses
316.2

 
41.6

 
24.4

 
0.9

 
7.9

 
391.0

Income from equity investees
2.4

 
—

 
105.3

 
62.7

 
—

 
170.4

Operating income/(loss)
1,759.2

 
36.9

 
225.3

 
287.1

 
(18.0
)
 
2,290.5


17
Table of Contents


Reconciliation of total segment operating income to consolidated earnings before income taxes (in millions):
 
Quarter Ended
 
Three Quarters Ended
 
Jun 29, 2014
 
Jun 30, 2013
 
Jun 29, 2014
 
Jun 30, 2013
Total segment operating income
$
978.9

 
$
800.2

 
$
2,787.8

 
$
2,290.5

Unallocated corporate operating expenses
(210.4
)
 
(185.0
)
 
(561.5
)
 
(500.6
)
Consolidated operating income
768.5

 
615.2

 
2,226.3

 
1,789.9

Interest income and other, net
19.4

 
3.5

 
57.0

 
51.4

Interest expense
(16.4
)
 
(6.3
)
 
(47.7
)
 
(19.0
)
Earnings before income taxes
$
771.5

 
$
612.4

 
$
2,235.6

 
$
1,822.3


Note 12: Subsequent Events

In May 2014, we entered into an agreement to sell our Australian company-operated retail store assets and operations to the Withers Group, which will convert these operations to a fully licensed market. This agreement is contingent upon Starbucks fulfilling its performance obligation to obtain a minimum number of lease assignment consents from landlords, which had not been obtained by the end of the third quarter of fiscal 2014 or as of the date of this filing. Additionally, this transaction is subject to customary closing conditions and working capital adjustments. If this transaction closes, we expect it will result in a loss that will not be material to our financial statements. 

In July 2014, we entered into an agreement to sell our 50% equity interest in our Malaysian joint venture, Berjaya Starbucks Coffee Sdn. Bhd., to our joint venture partner, Berjaya Food Berhad, for a total purchase price of $88.0 million, which is subject to customary closing conditions and working capital adjustments. We currently believe this transaction will be recognized in the fourth quarter of fiscal 2014 and will result in a gain.

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements herein, including statements regarding trends in or expectations relating to the expected effects of our initiatives and plans, as well as trends in or expectations regarding earnings per share, revenues, operating margins, comparable store sales, sales leverage, sales growth, profitability, expenses, dividends, share repurchases, other financial results, net benefits from the sale of retail operations that may close in the fourth quarter of fiscal 2014, capital expenditures, scaling and expansion of international operations, shifts in our store portfolio to more licensed stores in EMEA and to more company-operated stores in CAP, establishing China as our largest market outside the U.S., profitable growth models and opportunities, emerging businesses, strategic acquisitions, commodity costs and our mitigation strategies, liquidity, cash flow from operations, use of cash and cash requirements, repatriation of cash to the U.S., the potential issuance of debt and applicable interest rate, anticipated store openings and closings, the health and growth of our business overall and of specific businesses or markets, benefits of recent initiatives, increased traffic to our stores, operational efficiencies, product innovation, offerings and distribution, tax rates, and economic conditions in the US and international markets, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on currently available operating, financial and competitive information and are subject to various risks and uncertainties. Actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, coffee, dairy and other raw materials prices and availability, successful execution of our initiatives, successful execution of internal plans, fluctuations in US and international economies and currencies, the impact of competitors’ initiatives, the effect of legal proceedings, and other risks detailed in our filings with the SEC, including in Part I Item IA “Risk Factors” in the 10-K.
A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. You should not place undue reliance on the forward-looking statements, which speak only as of the date of this report. We are under no obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.
This information should be read in conjunction with the condensed consolidated financial statements and the notes included in Item 1 of Part I of this 10-Q and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the 10-K.

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Table of Contents

General
Our fiscal year ends on the Sunday closest to September 30. All references to store counts, including data for new store openings, are reported net of store closures, unless otherwise noted.
Overview
Starbucks third quarter results reflect an acceleration of top-line growth and meaningful contributions from all segments. Consolidated total net revenues increased 11% to $4.2 billion, driven by global comparable store sales growth of 6% and incremental revenue from 1,654 net new store openings over the last 12 months. Consolidated operating income increased $153 million, or 25%, to $769 million. Operating margin expanded 200 basis points to 18.5%, driven by sales leverage and favorable commodity costs, mainly coffee. Earnings per share of $0.67 increased 22% over the prior year quarter earnings per share of $0.55.
The Americas segment continued its solid performance in the third quarter, growing revenues by 10% to $3.1 billion, primarily driven by comparable store sales growth of 6%, comprised of a 4% increase in average ticket and a 2% increase in number of transactions. Expanded food offerings, including the continued rollout of our La Boulange™ food platform in the US, the impact of price increases in our retail stores and successful promotional beverages contributed to the growth in comparable store sales. Operating margin expanded 150 basis points to 23.8%, primarily due to sales leverage. Looking forward, we expect to continue to drive revenue growth and margin expansion through new stores and expanded product offerings, targeted at driving growth across all dayparts. We plan to continue to expand our beverage platforms and elevate our food program, in part with the completion of the rollout of La Boulange™ bakery items in our US stores in the fourth quarter of fiscal 2014 and continued enhancements to our lunch options.
In the EMEA segment, the turnaround of the segment continues to progress, resulting in increased profitability. Revenues grew 13% to $323 million, driven by favorable foreign currency exchange and comparable store sales growth of 3%. Incremental revenues from 166 net new licensed store openings over the past year also contributed. Sales leverage, largely driven by our strategic portfolio shift to higher-margin licensed stores, and continued cost management drove the increase in operating margin of 580 basis points over the prior year quarter, to 9.0%. We expect our continued disciplined licensed store expansion and focus on the customer experience in this region will result in improved operating performance as we progress on our plan towards mid-teens operating margin over time.
The China/Asia Pacific segment results reflect the growth and strong performance of new stores in the region, including 238 company-operated and 502 licensed net new store openings over the past year. New store growth, along with a 7% increase in comparable store sales, drove a 23% increase in revenues to $288 million. The 7% growth in comparable store sales was driven by a 6% increase in number of transactions. Operating income grew 19%, to $101 million, while operating margin declined 120 basis points to 35.0%. The operating margin decline was primarily driven by the unfavorable margin impact of the portfolio shift toward more company-operated stores in this segment and unfavorable foreign currency exchange from a weaker Yen, partially offset by leverage from strong sales during the quarter. We expect this segment will become a more significant contributor to overall company profitability in the future, as we look forward to continued new store openings and establishing China as our largest market outside of the US.
Channel Development segment revenues grew 13% for the quarter to $375 million, primarily due to increased sales of premium single serve products, driven by sales of Starbucks- and Tazo-branded K-Cup® portion packs, and higher sales volumes of packaged coffee. Operating income grew $43 million, or 45%, to $139 million. Operating margin increased 800 basis points to 37.1% for the third quarter of fiscal 2014, driven by lower coffee costs and improved inventory management compared to the prior year. As we continue to expand customer occasions outside of our retail stores, including growing our presence in the premium single serve category, we expect this segment to become a more significant contributor to future growth.
Fiscal 2014 — Financial Outlook for the Year
For fiscal year 2014, we expect revenue growth will be driven by mid-single digit comparable store sales growth, net new store openings, and continued growth in the Channel Development business. Approximately one-half of new store openings will be in China / Asia Pacific, with the remaining half coming primarily from the Americas.
We expect full-year consolidated operating margin improvement of 200 basis points over fiscal 2013 and strong EPS growth, when excluding the Kraft litigation charge and gains from the sales of our equity in our Mexico, Chile and Argentina joint ventures in fiscal 2013, as well as the benefit recognized from a litigation credit in the first quarter of fiscal 2014 and the estimated net benefit from the sale of certain retail operations that may close in the fourth quarter of fiscal 2014.

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Table of Contents

Fiscal 2015 — Financial Outlook for the Year
For fiscal year 2015, we expect revenue growth driven by mid-single digit comparable store sales growth and approximately 1,600 net new store openings. Approximately one-half of new store openings will be in China / Asia Pacific, with the remaining half coming primarily from the Americas.
We expect EPS growth over fiscal 2014 results, reflecting the strength of our global business and multiple layers of profitable growth initiatives.
Comparable Store Sales
Starbucks comparable store sales for the third quarter and the first three quarters of fiscal 2014:
 
Quarter Ended Jun 29, 2014
 
Three Quarters Ended Jun 29, 2014
 
Sales
Growth
 
Change in
Transactions
 
Change in
Ticket
 
Sales
Growth
 
Change in
Transactions
 
Change in
Ticket
Consolidated
6%
 
2%
 
4%
 
6%
 
3%
 
3%
Americas
6%
 
2%
 
4%
 
6%
 
3%
 
3%
EMEA
3%
 
2%
 
2%
 
5%
 
3%
 
1%
China/Asia Pacific
7%
 
6%
 
1%
 
7%
 
6%
 
1%
Our comparable store sales represent the growth in revenue from Starbucks® company-operated stores open 13 months or longer. Comparable store sales exclude the effect of fluctuations in foreign currency exchange rates.
Results of Operations (in millions)
Revenues
 
 
Quarter Ended
 
Three Quarters Ended
 
Jun 29,
2014
 
Jun 30,
2013
 
%
Change
 
Jun 29,
2014
 
Jun 30,
2013
 
%
Change
Company-operated stores
$
3,290.5

 
$
2,986.3

 
10.2
%
 
$
9,702.3

 
$