Item 8. Financial Statements and Supplementary Data STARBUCKS CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS (In Millions, except earnings per share) Sep 28, 2008 Sep 30, 2007 $ 8,771.9 $7,998.3 1,026.3 386.9 1,413.2 9,411.5 3,999.1 3,215.9 294.2 467.2 489,2 Sep 27, Fiscal Year Ended 2009 Net revenues: Company-operated retail ........ .......... $8,180.1 Specialty: Licensing.................. 1,222.3 Foodservice and other.... 372.2 Total specialty ......... ............ 1,594.5 Total net revenues ........ 9,774.6 Cost of sales including occupancy costs....., 4,324.9 Storc operating expenses ............ 3,425.1 Other operating expenses ............. 264.4 Depreciation and amortization expenses ....... 534.7 General and administrative expenses ......... 453.0 Restructuring charges...............!!!!! 332.4 Total operating expenses............. 9,334,5 Income from equity investees......., [21.9 Operating income 562.0 Interest income and other, net ............. 36.3 Interest expense...... .. (39.1) Earnings before income taxes ........... 559.2 Income taxes................. ....... 168.4 Net earnings. $ 390.8 Per common share: Net earnings basic ..... $ 0.53 Net earnings - diluted ................................... $ 0.52 Weighted average shares outstanding: Basic ...... 738.7 Diluted ............ 745. 9 1,171,6 439.5 1,611.1 10,383.0 4,645.3 3,745.1 330.1 549.3 456,0 266.9 9,992.7 113.6 503.9 9.0 (53.4) 459.5 144.0 $ 315.5 8,465.6 108.0 1,053.9 40.4 (38.0) 1,056,3 383.7 S 672.6 $ $ 0.43 0,43 $ S 0.90 0.87 731.5 7 41.7 749.8 770.1 See Notes to Consolidated Financial Statements. 40 STARBUCKS CORPORATION CONSOLIDATED BALANCE SHEETS (In millions, except per share data) Sep 27, 2009 Sep 28, 2008 ASSETS Current assets: Cash and cash cquivalents ...... Short-term investments available-for-sale securities. Short-term investments ---trading securities ...... Accounts receivable, net...... Inventories.............................................!!!!!!!! Prepaid expenses and other current assets... Deferred income taxes, net......... Total current assets............... Long-term investments - available-for-sale securities... Equity and cost investments ............ Property, plant and equipinent, net ........ Other assets................. . Other intangible assets................. Goodwill............... ....... TOTAL ASSETS ......... $ 599.8 21.5 44.8 271.0 664.9 147.2 286.6 2,035.8 S 269.8 3.0 49.5 329.5 692.8 169.2 234.2 1,748.0 71.4 302.6 2,956.4 261.1 66.6 266.5 $5,672.6 71.2 352.3 2,536,4 253.8 68.2 259.1 $ -- 267.1 307.5 188.1 127.8 154.3 147.3 388.7 $ 713.0 324.9 253.6 136.1 76.1 152.5 164.4 368.4 0.2 0.7 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Commercial paper and short-term borrowings ............................ Accounts payable.................................................. Accrued compensation and related costs ............. Accrued occupancy costs................. ....... Accrucd taxes ........................ Insurance reserves .................. Other accrued expenses .............. Deferred revenue .......... Current portion of long-term debl. ... Total current liabilities .............. Long-term debt ............................................. Other long-term liabilities ............................................. Total liabilities ........ Shareholders' cquity: Common stock ($0.001 par value) - authorized, 1,200.0 shares; issued and outstanding, 742.9 and 735.5 shares, respectively (includes 3.4 cominon stock units in both periods) ......... Additional paid-in capital..... Other additional paid-in-capital........................................ Retained earnings........... Accumulated other comprehensive income ...... Total shareholders' equity .............. TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......... 1,581.0 549.3 400.8 2,531,1 2,189.7 549.6 442.4 3,181.7 0.7 0.7 147.0 39.4 2,793.2 65.4 3,045.7 $5,576.8 39.4 2,402.4 48.4 2,490.9 $5,672.6 See Notes to Consolidated Financial Statements. (53.0) 20.0 STARBUCKS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) Sep 27, Sep 28 Sep 30, Fiscal Year Ended 2009 2008 2007 OPERATING ACTIVITIES: Net eamings ... ........ ... $ 390.8 5 315.5 $ 672.6 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization .. 563.3 604.5 491.2 Provision for impairments and asset disposals 224.4 325.0 26.0 Deferred income taxes .......... (69.6) (117.1) (37.3) Equity in income of investocs ..... (78.4) (61.3) (65.7) Distributions of income from cquity investees.. 53.0 52.6 65.9 Stock-based compensation .... 83.2 75.0 103.9 Tax benefit from cxcrcise of stock options ...... 2.0 3.8 7.7 Excess tax benefit from exercise of stock options. (15.9) (14.7) (93.1) Other ...... 5.4 (0.1) 0.7 .. Cash provided/(used) by changes in operating assets and liabilities: Inventories........ 28.5 (0.6) (48.6) Accounts payable ... (63.9) 36.1 Accrued taxes 57.2 7.3 86.4 Deferred revenue ... 16.3 72.4 63.2 Other operating assets............... 120.5 (11.2) (92.7) Other operating liabilitics .. 61.3 71.5 114.9 Net cash provided by operating activities ........ 1,389.0 1,258.7 1,331.2 INVESTING ACTIVITIES: Purchase of available-for-sale securities ...................... (129.2) (71.8) (237.4) Maturities and calls of Available-for-sale securities. ............ 111.0 178.2 Sales of available-for-salo securities ......... 75.9 47.5 Acquisitions, not of cash acquired ......... (74.2) (53.3) Net purchases of cquity, other investments and other assets.. (4.8) (52.0) (56.6) Additions to property, plant and equipment ........ (445.6) (984.5) (1,080.3) Proceeds from sale of property, plant and equipment ...... 42.5 Net cash used by investing activities ... (421.1) (1,086.6) (1,201.9) FINANCING ACTIVITIES: Proceeds from issuance of commercial paper .. 20,965.4 65,770,8 17,311.1 Repayments of commercial paper (21,378.5) (66,068.0) (16,600.9) Prekceods from short-term borrowings... 1,338.0 528.2 770.0 Repaytnents of short-term borrowings ........ (1,638.0) (228.8) (1.470.0) Proceeds from issuance of common stock ....... 57.3 112.3 176.9 Excess tax benefit from exercise of stock options 15.9 14.7 93.1 Proceeds from issuance of long-term debt. 549.0 Principal payments on long-term dcbt... (0.6) (0.8) Repurchase of common stock ......... (311.4) (996.8) Other... (1.7 (3.5) Net cash used by financing activities ......... (642.2) (184.5) (171.9) Effect of exchange rate changes on cash and cush equivalents ... 0.9 Net increase/(decreasc) in cash and cash equivalents .... 330.0 (11.5) (31.3) CASH AND CASH EQUIVALENTS: Beginning of period... 269.8 281.3 312.6 End of period ........ ............. $ 599.8 $ 269.8 $ 281.3 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Net change in short-term borrowings and commercial paper for the period.........$ (713.1) $ 2.2 $ 10.2 Cash paid during the period for: Interest, niet of capitalized interest ............ $ 39.8 $ 52.7 $ 35.3 Income taxes........... .......$ 162.0 $ 259.5 $ 342.2 See Notes to Consolidated Financial Statements. 3.0 11.3 STARBUCKS CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In millions) Accumulated Other Comprehensive Income (Loss) $37.3 Retained Earnings $2,151,1 672,6 Tutal $2,228,5 672.6 (20.4) 1 11 (20.4) 37.7 37.7 689.9 106.4 1 1 225.2 | (634.3) $2,189.4 46.8 (1,012.7) $2,284.1 $ 54.6 - (1.7) 315.5 (3.3) 315.5 | Other .. Additional Additional Cominen Stock - Paid-tu laid-En Shares Antount Capital Capital Balance, October 1, 2006 ................ 756.6 $0.7 $ - $39.4 ct carnities. . ...... . - Unrealized holding loss, tel. ............ Translation adjustment, net of tax....... Comprehensive income ..., Stock-based compensation expense ........ 106.4 Exercise of stock options, including tax benefit of $95.3. ................... 225.2 Sale of common stock, including tax provision of $0.1..... ... 1.9 - 46.8 Rcpurchasc of common stock, ........... (33,0) (378.4) Balance, September 30, 2007.............. 738.3 $0.7 $ - $39.4 Cumulative impact of adoption of accounting requircincntz for uncertain tax positions ... Net eamings........... . Unrcalized holding gain, net............. Translation adjustment, net of lux......... Comprehensive incoine ................ Stock-based compensation expense ........ Exercise of stock options, including tax benefit of $8.4 ...... Sale of common stock, including tax benefit of $0.1............. 2.8 Repurchase of common stock. ........... Balance, September 28, 2008.............. 7355 $39.4 Net earnings........................ - Untcalized holding gains, net ............ Translation adjustment, ner of tax ......... Comprehensive income ....... Stock-based compensation expense ........ Txercise of stock options, including tax benefit of $5.3 ....... Sale of common stock, including tax benefit of $0.1........ 26.& Balance, September 27, 2009.............. 742.9 $ 147.0 $39.4 0.8 (7.0) (7.0) 309.3 76.8 77.4 1 (12.2 (194.5) (100.8) $2,402.4 390.8 $ 48.4 41.9 (295.3) $ 2,490.9 390.8 1.8 15.2 15.2 407.8 84.3 35.9 2.5 26.8 $2,793.2 $ 65.4 $ 3,045.7 See Notes to Consolidated Financial Statements, Between about December 2007 and June 2009, the United States was considered to be in a recession. The U.S. Gross Domestic Product fell approximately 3% from the third quarter of 2008 to the third quarter of 2009. Also, during December 2007 and June 2009, the Standard and Poor's 500 index dropped by 38% and the unemployment rate climbed from 5% to 9.5%. The macroeconomic situation affected almost all companies since higher unemployment affected personal consumption, which dropped from 10,140.3 Billion Dollars in Aug 2008 to 9,807 Billion Dollars in June 2009, a drop of 3.8 percent. Starbucks is one of the companies affected by the December 2007 recession. The following table shows several ratios for Starbucks corresponding to the years 2006, 2007, and 2008. Use a stock price of 10.9 dollars per share for the year 2009. + Year ROE ROA ROIC asset turnover op. profit margin long term debt ratio D/E ratio current ratio quick ratio payout ratio plowback ratio market to book ratio stock price used for market/book 2006 2007 0.253 0.294 0.106 0.126 0.207 0.250 1.758 1.761 0.115 0.746 0.0009 0.241 0.987 1.340 0.970 0.787 0.462 0.466 0.000 0.000 1.000 1.000 6.088 3.099 17.719 .450 2008 0.127 0.056 0.121 1.830 0.048 0.221 1.277 0.798 0.482 0.000 1.000 1.374 4.68 By using the financial statements provided, calculate the ratios presented in the table for the year 2009 and answer the following questions: a- Explain why you expect the quick ratio to increase or decrease during a recession? b- Use the ratios for the years 2007 and 2009 to explain if, in your view, Starbucks is in a better or worse situation in the year 2009 due to the recession. C- What areas should Starbucks improve for the years 2010 onwards, if any? Item 8. Financial Statements and Supplementary Data STARBUCKS CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS (In Millions, except earnings per share) Sep 28, 2008 Sep 30, 2007 $ 8,771.9 $7,998.3 1,026.3 386.9 1,413.2 9,411.5 3,999.1 3,215.9 294.2 467.2 489,2 Sep 27, Fiscal Year Ended 2009 Net revenues: Company-operated retail ........ .......... $8,180.1 Specialty: Licensing.................. 1,222.3 Foodservice and other.... 372.2 Total specialty ......... ............ 1,594.5 Total net revenues ........ 9,774.6 Cost of sales including occupancy costs....., 4,324.9 Storc operating expenses ............ 3,425.1 Other operating expenses ............. 264.4 Depreciation and amortization expenses ....... 534.7 General and administrative expenses ......... 453.0 Restructuring charges...............!!!!! 332.4 Total operating expenses............. 9,334,5 Income from equity investees......., [21.9 Operating income 562.0 Interest income and other, net ............. 36.3 Interest expense...... .. (39.1) Earnings before income taxes ........... 559.2 Income taxes................. ....... 168.4 Net earnings. $ 390.8 Per common share: Net earnings basic ..... $ 0.53 Net earnings - diluted ................................... $ 0.52 Weighted average shares outstanding: Basic ...... 738.7 Diluted ............ 745. 9 1,171,6 439.5 1,611.1 10,383.0 4,645.3 3,745.1 330.1 549.3 456,0 266.9 9,992.7 113.6 503.9 9.0 (53.4) 459.5 144.0 $ 315.5 8,465.6 108.0 1,053.9 40.4 (38.0) 1,056,3 383.7 S 672.6 $ $ 0.43 0,43 $ S 0.90 0.87 731.5 7 41.7 749.8 770.1 See Notes to Consolidated Financial Statements. 40 STARBUCKS CORPORATION CONSOLIDATED BALANCE SHEETS (In millions, except per share data) Sep 27, 2009 Sep 28, 2008 ASSETS Current assets: Cash and cash cquivalents ...... Short-term investments available-for-sale securities. Short-term investments ---trading securities ...... Accounts receivable, net...... Inventories.............................................!!!!!!!! Prepaid expenses and other current assets... Deferred income taxes, net......... Total current assets............... Long-term investments - available-for-sale securities... Equity and cost investments ............ Property, plant and equipinent, net ........ Other assets................. . Other intangible assets................. Goodwill............... ....... TOTAL ASSETS ......... $ 599.8 21.5 44.8 271.0 664.9 147.2 286.6 2,035.8 S 269.8 3.0 49.5 329.5 692.8 169.2 234.2 1,748.0 71.4 302.6 2,956.4 261.1 66.6 266.5 $5,672.6 71.2 352.3 2,536,4 253.8 68.2 259.1 $ -- 267.1 307.5 188.1 127.8 154.3 147.3 388.7 $ 713.0 324.9 253.6 136.1 76.1 152.5 164.4 368.4 0.2 0.7 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Commercial paper and short-term borrowings ............................ Accounts payable.................................................. Accrued compensation and related costs ............. Accrued occupancy costs................. ....... Accrucd taxes ........................ Insurance reserves .................. Other accrued expenses .............. Deferred revenue .......... Current portion of long-term debl. ... Total current liabilities .............. Long-term debt ............................................. Other long-term liabilities ............................................. Total liabilities ........ Shareholders' cquity: Common stock ($0.001 par value) - authorized, 1,200.0 shares; issued and outstanding, 742.9 and 735.5 shares, respectively (includes 3.4 cominon stock units in both periods) ......... Additional paid-in capital..... Other additional paid-in-capital........................................ Retained earnings........... Accumulated other comprehensive income ...... Total shareholders' equity .............. TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......... 1,581.0 549.3 400.8 2,531,1 2,189.7 549.6 442.4 3,181.7 0.7 0.7 147.0 39.4 2,793.2 65.4 3,045.7 $5,576.8 39.4 2,402.4 48.4 2,490.9 $5,672.6 See Notes to Consolidated Financial Statements. (53.0) 20.0 STARBUCKS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) Sep 27, Sep 28 Sep 30, Fiscal Year Ended 2009 2008 2007 OPERATING ACTIVITIES: Net eamings ... ........ ... $ 390.8 5 315.5 $ 672.6 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization .. 563.3 604.5 491.2 Provision for impairments and asset disposals 224.4 325.0 26.0 Deferred income taxes .......... (69.6) (117.1) (37.3) Equity in income of investocs ..... (78.4) (61.3) (65.7) Distributions of income from cquity investees.. 53.0 52.6 65.9 Stock-based compensation .... 83.2 75.0 103.9 Tax benefit from cxcrcise of stock options ...... 2.0 3.8 7.7 Excess tax benefit from exercise of stock options. (15.9) (14.7) (93.1) Other ...... 5.4 (0.1) 0.7 .. Cash provided/(used) by changes in operating assets and liabilities: Inventories........ 28.5 (0.6) (48.6) Accounts payable ... (63.9) 36.1 Accrued taxes 57.2 7.3 86.4 Deferred revenue ... 16.3 72.4 63.2 Other operating assets............... 120.5 (11.2) (92.7) Other operating liabilitics .. 61.3 71.5 114.9 Net cash provided by operating activities ........ 1,389.0 1,258.7 1,331.2 INVESTING ACTIVITIES: Purchase of available-for-sale securities ...................... (129.2) (71.8) (237.4) Maturities and calls of Available-for-sale securities. ............ 111.0 178.2 Sales of available-for-salo securities ......... 75.9 47.5 Acquisitions, not of cash acquired ......... (74.2) (53.3) Net purchases of cquity, other investments and other assets.. (4.8) (52.0) (56.6) Additions to property, plant and equipment ........ (445.6) (984.5) (1,080.3) Proceeds from sale of property, plant and equipment ...... 42.5 Net cash used by investing activities ... (421.1) (1,086.6) (1,201.9) FINANCING ACTIVITIES: Proceeds from issuance of commercial paper .. 20,965.4 65,770,8 17,311.1 Repayments of commercial paper (21,378.5) (66,068.0) (16,600.9) Prekceods from short-term borrowings... 1,338.0 528.2 770.0 Repaytnents of short-term borrowings ........ (1,638.0) (228.8) (1.470.0) Proceeds from issuance of common stock ....... 57.3 112.3 176.9 Excess tax benefit from exercise of stock options 15.9 14.7 93.1 Proceeds from issuance of long-term debt. 549.0 Principal payments on long-term dcbt... (0.6) (0.8) Repurchase of common stock ......... (311.4) (996.8) Other... (1.7 (3.5) Net cash used by financing activities ......... (642.2) (184.5) (171.9) Effect of exchange rate changes on cash and cush equivalents ... 0.9 Net increase/(decreasc) in cash and cash equivalents .... 330.0 (11.5) (31.3) CASH AND CASH EQUIVALENTS: Beginning of period... 269.8 281.3 312.6 End of period ........ ............. $ 599.8 $ 269.8 $ 281.3 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Net change in short-term borrowings and commercial paper for the period.........$ (713.1) $ 2.2 $ 10.2 Cash paid during the period for: Interest, niet of capitalized interest ............ $ 39.8 $ 52.7 $ 35.3 Income taxes........... .......$ 162.0 $ 259.5 $ 342.2 See Notes to Consolidated Financial Statements. 3.0 11.3 STARBUCKS CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In millions) Accumulated Other Comprehensive Income (Loss) $37.3 Retained Earnings $2,151,1 672,6 Tutal $2,228,5 672.6 (20.4) 1 11 (20.4) 37.7 37.7 689.9 106.4 1 1 225.2 | (634.3) $2,189.4 46.8 (1,012.7) $2,284.1 $ 54.6 - (1.7) 315.5 (3.3) 315.5 | Other .. Additional Additional Cominen Stock - Paid-tu laid-En Shares Antount Capital Capital Balance, October 1, 2006 ................ 756.6 $0.7 $ - $39.4 ct carnities. . ...... . - Unrealized holding loss, tel. ............ Translation adjustment, net of tax....... Comprehensive income ..., Stock-based compensation expense ........ 106.4 Exercise of stock options, including tax benefit of $95.3. ................... 225.2 Sale of common stock, including tax provision of $0.1..... ... 1.9 - 46.8 Rcpurchasc of common stock, ........... (33,0) (378.4) Balance, September 30, 2007.............. 738.3 $0.7 $ - $39.4 Cumulative impact of adoption of accounting requircincntz for uncertain tax positions ... Net eamings........... . Unrcalized holding gain, net............. Translation adjustment, net of lux......... Comprehensive incoine ................ Stock-based compensation expense ........ Exercise of stock options, including tax benefit of $8.4 ...... Sale of common stock, including tax benefit of $0.1............. 2.8 Repurchase of common stock. ........... Balance, September 28, 2008.............. 7355 $39.4 Net earnings........................ - Untcalized holding gains, net ............ Translation adjustment, ner of tax ......... Comprehensive income ....... Stock-based compensation expense ........ Txercise of stock options, including tax benefit of $5.3 ....... Sale of common stock, including tax benefit of $0.1........ 26.& Balance, September 27, 2009.............. 742.9 $ 147.0 $39.4 0.8 (7.0) (7.0) 309.3 76.8 77.4 1 (12.2 (194.5) (100.8) $2,402.4 390.8 $ 48.4 41.9 (295.3) $ 2,490.9 390.8 1.8 15.2 15.2 407.8 84.3 35.9 2.5 26.8 $2,793.2 $ 65.4 $ 3,045.7 See Notes to Consolidated Financial Statements, Between about December 2007 and June 2009, the United States was considered to be in a recession. The U.S. Gross Domestic Product fell approximately 3% from the third quarter of 2008 to the third quarter of 2009. Also, during December 2007 and June 2009, the Standard and Poor's 500 index dropped by 38% and the unemployment rate climbed from 5% to 9.5%. The macroeconomic situation affected almost all companies since higher unemployment affected personal consumption, which dropped from 10,140.3 Billion Dollars in Aug 2008 to 9,807 Billion Dollars in June 2009, a drop of 3.8 percent. Starbucks is one of the companies affected by the December 2007 recession. The following table shows several ratios for Starbucks corresponding to the years 2006, 2007, and 2008. Use a stock price of 10.9 dollars per share for the year 2009. + Year ROE ROA ROIC asset turnover op. profit margin long term debt ratio D/E ratio current ratio quick ratio payout ratio plowback ratio market to book ratio stock price used for market/book 2006 2007 0.253 0.294 0.106 0.126 0.207 0.250 1.758 1.761 0.115 0.746 0.0009 0.241 0.987 1.340 0.970 0.787 0.462 0.466 0.000 0.000 1.000 1.000 6.088 3.099 17.719 .450 2008 0.127 0.056 0.121 1.830 0.048 0.221 1.277 0.798 0.482 0.000 1.000 1.374 4.68 By using the financial statements provided, calculate the ratios presented in the table for the year 2009 and answer the following questions: a- Explain why you expect the quick ratio to increase or decrease during a recession? b- Use the ratios for the years 2007 and 2009 to explain if, in your view, Starbucks is in a better or worse situation in the year 2009 due to the recession. C- What areas should Starbucks improve for the years 2010 onwards, if any