What Went Wrong with Starbucks?

Financial Analysis and Business Evaluation Case Study

By Julia S. Kwok* Elizabeth C. Rabe Northeastern State University

* Corresponding author: Department of Accounting and Finance, College of Business and Technology, Northeastern State University, Broken Arrow, OK 74014; Email: kwok@nsuok.edu; Phone: 918-449-6516.

What Went Wrong with Starbucks? Financial Statement Analysis

Abstract After decades of grande growth based on the Starbucks experience, Starbucks Coffee Company experienced continuous drop of stock price since the beginning of 2007. Upon first glance of their financial statements, there was 20% increase in revenues and 9% increase in net income last year. Such growth could be counter intuitive to the drop of market value. This case encourages a more in depth examination of how the financing of the expansion impacted financial ratios. Further assessment should evaluate the impact of expansion on the companys free cash flows and return of the capital investment. Students would need to evaluate the relative contribution of factors leading to the drop of the stock price. The case provided detailed information that would allow students to investigate the impact of the economic and business conditions, the competition and Starbucks business strategies on their financial performance. The students were advised to consider what changes to Starbucks strategies could increase the economic value added of the expansion and help to reverse their road to failure. This case illustrates the importance of analysis of free cash flows and return on capital when making capital budgeting decisions.

Keywords: financial statement analysis, ratio analysis, common size statement, Du Pont analysis, free cash flows, expansion, economic value added JEL classifications: L25, G31, M41, F23, L22

Starbucks Coffee Company

Why went wrong with Starbucks? Financial Statement Analysis Case Study
______________________________________________________________________________ It was a chaotic morning in Java Investment. Ronnie, a new analyst, came into the office carrying a bag from Starbucks and a tall coffee. Where have you been? The Nekki has just fell five percentages last night. Ooo, youve brought Starbucks! Sandy exclaimed. I havent had a blueberry muffin from them in ages. I used to stop there a couple of times a week for latte, but since they closed the one closest to here, I am latte deficient. I know, Ronnie replied. I had to drive three miles out of my way for this, but I really like their hazelnut Mocha on a cold November morning. I either have to make a drive or stop at Caribou to get my full-bodied grande Espresso. But its just not the same. Sandy replied, That is true. I used to sit and listen to the music while I sipped my coffee at Starbuck. As they open a lot more stores, the atmosphere of the new ones is not as enjoyable as the old ones. It is starting to feel like Dunkin Donuts. Starbucks has really grown since that first Seattle store in 1971. In the last three years, from 2005 to 2007, they have opened 6,442 stores. Sandy, you seem to know a lot about Starbucks. Do you know why they closed the nearby store said Ronnie. Well, Tom, our boss, has asked me to evaluate the impact of their expansion. I started looking at their free cash flows, return on invested capital and financial ratios. May I have a muffin, Sandy said.

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Starbucks Coffee Company Sure, take one, Ronnie offered. Besides expanding locations, Starbucks offers a variety of products. I can buy the music I like listening to from Starbucks. They also sell coffee beans and those double shot packaged drinks. You can even buy your own Espresso brewing machine from them, Sandy continued. I saw that the last time I went to Starbucks. But I think they make more money selling coffee, Ronnie commented. Yes, in fact, 65% of the revenue comes from coffee. Do you want to work with me on my new assignment since you are a Starbuck fan, asked Sandy. Lets start reviewing their business environment and financial statement. Have you seen the latest financial report that should have come out two months ago? Lets start with 2006 to the most recent 2007 report. Company History Sandra had already collected some basic company information about Starbucks. The Starbucks Company, Inc. sold coffees, teas, and other drinks; foods items; accessories and equipment through retail outlets. It also sold coffee beans, teas, and cold drinks wholesale. The company began in 1971 in the Pikes Place area of Seattle, WA. It had expanded its number of retail stores to over 15,000 located in both the US and internationally by 2005. In 2005

Starbucks management announced its intention to double the number of retail stores and increase the number of customers to all stores. Starbucks had added 1672 stores during 2005. It continued to open new stores with 2199 openings in 2006 and 2571 openings in 2007. Earnings per share grew from 61 cents per share 87 cents per share over the period of 2005-2007. At the close of the 2007 fiscal year, the management was forecasting the opening of an additional 2500 stores in 2008.

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Starbucks Coffee Company Stock prices during this time span rose from the $30 per share in November 2005 to $35 per share a year later. The stock prices then began a steady downward slide to $23 per share as of November of 2007 (BUCX- Historical Prices for Starbucks Co Yahoo! Finance 2009). Ronnie and Sandy both agreed that shareholders did not seem to agree with Starbucks rapid expansion. The Starbucks Experience The transformation of a small coffee shop to an authentic Italian coffee bar was led by Mr. Howard Schultz (Maney 2009). He felt Starbucks should be a great experience, and not

just a retail store (Maney 2009). It should involve the aroma of robust coffee, theater and romance. Started in Seattle, sprawling around the northwest region of the county, Starbucks provided a Third Place for customers to meet, relax, and enjoy themselves. A Starbucks barista would grind the coffee beans and hand-prepared coffee specific to the customers order, making it a personal experience. The experience drove significant growth of Starbucks over the years. To standardize the experience, the baristas fine touch of the creation of a perfect cup of coffee was replaced by an automatic espresso machine and the vacuum-packed ground coffee in the new cookie-cutter stores that mushroomed during 2005-2007. Ironically, that standardization and rapid growth started to diminish the branding of the Starbucks experience. Inexperienced new staff was under-trained offering sub-standard services. New stores could be found at small strip malls and in grocery stores, representing convenience instead of unique experience.

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Starbucks Coffee Company Fierce Competition Direct competition from smaller companies such as Caribou Coffee, locally owned independent or small chained cafs provided comparable products and an atmosphere of community. The largest company that directly competed with Starbucks was Caribou Coffee, which was the second largest specialty coffee house. Net sale from the Caribou Coffee was 3% of that of Starbucks. While they lack the size, geographical coverage and market share of Starbucks, in aggregate they are large in numbers and they are providing the experience that Starbucks has lost. McDonalds started the more intense competition when it upgraded its coffee in 2006. They were planning to install coffee bars in all US locations in 2008. The existing customer base and demographic coverage gave McDonalds an upper hand on access to breakfast coffee drinkers who are sensitive to the price differentials and appreciate convenience of McDonalds locations. In 2007, Starbucks had 14,000 locations in 43 countries and McDonalds had 25,600 locations in 118 countries. McDonald had almost twice the number of units than that of Starbucks (Aboutmcdonalds.com 2009, Malkin 2007, and NationMaster.com 2009). With 13,000 locations, the privately held Dunkin Brands Inc. offered quick and convenient to-go-coffee. In 2007, they introduced a new line of Espresso drinks to position itself between Starbucks and Krispy Kreme (Shepherd 2007). However, health conscious Yuppies were less likely to have low cost, high cholesterol donuts every day. Dunkin was likely to compete more directly with McDonald than Starbucks for the average customer. Starbucks maintained that the quality of their products and services differentiated themselves from the competition. Therefore, increasing geographical coverage domestically and internationally had been their corporate focus. They planned to open 20,000 locations in the US

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Starbucks Coffee Company and 20,000 internationally in four years. In Washington State, Starbucks already had one store for every 12,000 people (Palmer 2007). However, the extreme growth, providing convenience, caused Starbucks to cannibalizing their own stores through over-saturation of an area. Economic and Business Environment The increase of oil prices had dramatic effect on consumer spending. Oil prices had been dramatically increased from 2003 to 2007. The inflation-adjusted price of a barrel of crude oil on NYMEX price rose from $30 per barrel to over $65 per barrel in 2007. The prediction was that it would go up to over $90 per barrel (inflationdata.com 2009). More than two thirds of US consumers were reducing their spending. Around 50% of the consumers were now eating out less and 35% were buying less expensive brands. Traditionally, Starbucks first-time customers had an average income of $92,000 per year, and were willing to pay for the experience and not just the coffee. But as the increase of Starbucks accessibility and convenience attracted less affluent customers, the average income of first-time customers had dropped to $80,000 a year, which was roughly a 13% drop. In the past, raising prices per cup of coffee had little effect on demand. However, the declining customers spending power would change the traditional

inelasticity of customer demand (Helm and Goudreau, 2007). Starbucks susceptibility to economic downturn was already reflected in their flat-to-negative transaction count trend (Starbucks 2007 Annual Report 2007). Less than 1% of the (4% ) same-store (sales) increase (last year) came from an increase in the value per customer transaction, according to the companys chief financial officer (Helm and Goudreau, 2007). The increase of the value per customer transaction could be attributed to the average five-cent and nine-cent increases per cup of coffee by Starbucks in year 2006 and in 2007 (Allison, 2007).

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Starbucks Coffee Company Starbucks profit was affected by the increasing cost of goods sold. The price of coffee beans had sky-rocketed. There was a 20% increase over the 2005-2007 three-year period. The price of 100 pounds of coffee beans had increased from $95.75 to $107.68 in the past year (dev.ico.org 2009). According to a 2007 economic research report published by USDA, a 10% change in coffee beans commodity prices would translate a 3% increase of retail prices (Leibtag E., Nakamura A. and Nakamura, E. and Zerom D. 2007). So the retail prices of coffee beans would increase 3.6%. The cost of goods sold was further affected by the increase of minimum wage. The minimum wage rose from $5.15 to $5.85 in July 2007 which represented a 14% increase (Laborlawcenter.com 2009). Financial Analysis Can you believe despite all this, there was only 3% drop of operating profits, Sandy exclaimed. I know, the revenues had increased 20% over the last year resulting in a 9% increase in net income in 2007, Ronnie remarked. However, Starbucks stock had dropped by 20% over the past 12 month (Helm and Goudreau, 2007). The price plummeted from around $35 in 2006 to $23 in 2007 (YahooFinance 2009). So our charge is to investigate the disparity between the accounting and financial performance. It would be a good idea to start reviewing information from the financial

statements that we gathered (see Exhibit 1-5). We should evaluate the impact of expansion on the return of the capital investment, economic value added as well as the companys free cash flows and financial ratios. This may help us to understand their liquidity issues mentioned by the press, Sandy recommended.

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Starbucks Coffee Company Once we find out the root cause of the drop of stock price, we should also consider what changes to Starbucks strategies could reverse their road to failure. I am sure Tom will be interested in that, Ronnie echoed Sandys suggestion.

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Starbucks Coffee Company

References Allison, M. Starbucks raises prices again. The Seattle Times (2007). Retrieved September 18, 2009 from http://seattletimes.nwsource.com/html/businesstechnology/2003803039_starbucks24.html BUCX- Historical Prices for Starbucks Co Yahoo! Finance (2009). Yahoo.com. Retrieved September 15, 2009 from http://finance.yahoo.com/q/hp?s=SBUX&a=08&b=30&c=2005&d=08&e=30&f=2009&g=m Leibtag E., Nakamura A. and Nakamura, E. and Zerom D. Cost Pass-Through in the US Coffee Industry. Economic Research Report No. (EER-38) 28 pp, March 2007. Retrieved September 18, 2009 from http://www.ers.usda.gov/Publications/ERR38/ Federal Minimum Wage History (2009). Retrieved September 18, 2009 from http://www.laborlawcenter.com/t-federal-minimum-wag.aspx Founder Sees Lots of Room for Lots More Starbucks: [Interview] Elisabeth Malkin. New York Times. (Late Edition (east Coast). New York, N.Y.: Sep 22, 2007. P.C.2 Food Statistics > McDonalds restaurants (most recent) by countryNationMaster.com (2009). Retrieved September 15, 2009 from http://www.nationmaster.com/graph/foo_mcd_res-foodmcdonalds-restaurants Helm and Goudreau. IS Starbucks Pushing Prices Too High? BusinessWeek.com (2007). Retrieved September 18, 2009 from http://www.businessweek.com/bwdaily/dnflash/content/jul2007/db20070801_030871.htm?camp aign_id=twxa Historical Crude Oil Prices (Table) inflationdata.com (2009). Retrieved September 18, 2009 from http://www.inflationdata.com/inflation/Inflation_Rate/Historical_Oil_Prices_Table.asp. MCD - Getting to Know Us aboutmcdonalds.com (2009). Retrieved September 18, 2009 from http://www.aboutmcdonalds.com/mcd/our_company.html Maney, Kevin. How Starbucks Lost its Fidelity from CNNMoney.com (2009). Retrieved September 15, 2009 from http://money.cnn.com/2009/09/16/news/companies/kevin_maney_starbucks.fortune/index.htm Starbucks Company 2007 Annual Report (2007). Starbucks Form 10-K. www.edgaronline.com. Retrieved September 12 2008 from file://E:\Starbucks\v33834e10vk Starbucks 2007.htm

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Starbucks Coffee Company

Palmer, Jay. A Latte Room to Grow. Barrons. New York, N.Y: Mar 26, 2007. Vol. 87, Iss. 13, P22, 24 (2 pp.) Shepherd, Lauren. Starbucks competition heats up from THE ASSOCIATED PRESS, NEW YORK (2007). Retrieved September 18, 2009 from http://www.businessweek.com/ap/financenews/D8O0SPE80.htm

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Starbucks Coffee Company Exhibit 1 Starbucks 2007 Income Statement

Financial Statements and Supplementary Data STARBUCKS CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS
Fiscal Year Ended Sept 30, 2007 Oct 1, 2006 Oct 2, 2005 In thousands, except earnings per share

Net revenues: Company-operated retail Specialty: Licensing Foodservice and other Total specialty Total net revenues Cost of sales including occupancy costs Store operating expenses Other operating expenses Depreciation and amortization expenses General and administrative expenses Total operating expenses Income from equity investees Operating income Net interest and other income Earnings before income taxes Income taxes Earnings before cumulative effect of change in accounting principle Cumulative effect of accounting change for FIN 47, net of taxes Net earnings Per common share: Earnings before cumulative effect of change in accounting principle basic Cumulative effect of accounting change for FIN 47, net of taxes Net earnings basic Earnings before cumulative effect of change in accounting principle diluted Cumulative effect of accounting change for FIN 47, net of taxes Net earnings diluted Weighted average shares outstanding: Basic Diluted

$7,998,265 1,026,338 386,894 1,413,232 9,411,497 3,999,124 3,215,889 294,136 467,160 489,249 8,465,558 108,006 1,053,945 2,419 1,056,364 383,726 672,638 $ 672,638

$6,583,098 860,676 343,168 1,203,844 7,786,942 3,178,791 2,687,815 253,724 387,211 479,386 6,986,927 93,937 893,952 12,291 906,243 324,770 581,473 17,214 $ 564,259

$5,391,927 673,015 304,358 977,373 6,369,300 2,605,212 2,165,911 192,525 340,169 361,613 5,665,430 76,648 780,518 15,829 796,347 301,977 494,370 $ 494,370

$ $ $ $

0.90 0.90 0.87 0.87 749,763 770,091

$ $ $ $

0.76 0.02 0.74 0.73 0.02 0.71 766,114 792,556

$ $ $ $

0.63 0.63 0.61 0.61 789,570 815,417

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Starbucks Coffee Company

Exhibit 2 Starbucks 2007 Balance Sheet

STARBUCKS CORPORATION CONSOLIDATED BALANCE SHEETS
Fiscal Year Ended Sept 30, Oct 1, 2007 2006 In thousands, except share data

ASSETS Current assets: Cash and cash equivalents 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 other investments Property, plant and equipment, net Other assets Other intangible assets Goodwill TOTAL ASSETS LIABILITIES AND SHAREHOLDERS EQUITY Current liabilities: Commercial paper and short-term borrowings Accounts payable Accrued compensation and related costs Accrued occupancy costs Accrued taxes Other accrued expenses Deferred revenue Current portion of long-term debt Total current liabilities Long-term debt Other long-term liabilities Total liabilities Shareholders equity: Common stock ($0.001 par value) authorized, 1,200,000,000 shares; issued and outstanding, 738,285,285 and 756,602,071 shares, respectively, (includes 3,420,448 common stock units in both periods) Other additional paid-in-capital Retained earnings Accumulated other comprehensive income Total shareholders equity TOTAL LIABILITIES AND SHAREHOLDERS EQUITY .

$ 281,261 83,845 73,588 287,925 691,658 148,757 129,453 1,696,487 21,022 258,846 2,890,433 219,422 42,043 215,625 $5,343,878

$ 312,606 87,542 53,496 224,271 636,222 126,874 88,777 1,529,788 5,811 219,093 2,287,899 186,917 37,955 161,478 $4,428,941

$ 710,248 390,836 332,331 74,591 92,516 257,369 296,900 775 2,155,566 550,121 354,074 3,059,761

$ 700,000 340,937 288,963 54,868 94,010 224,154 231,926 762 1,935,620 1,958 262,857 2,200,435

738 39,393 2,189,366 54,620 2,284,117 $5,343,878

756 39,393 2,151,084 37,273 2,228,506 $4,428,941

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Starbucks Coffee Company Exhibit 3 Starbucks 2007 Income Statement

STARBUCKS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended Sept 30, 2007 Oct 1, 2006 In thousands Oct 2, 2005

OPERATING ACTIVITIES: Net earnings Adjustments to reconcile net earnings to net cash provided by operating activities: Cumulative effect of accounting change for FIN 47, net of taxes Depreciation and amortization Provision for impairments and asset disposals Deferred income taxes, net Equity in income of investees Distributions of income from equity investees Stock-based compensation Tax benefit from exercise of stock options Excess tax benefit from exercise of stock options Net amortization of premium on securities Cash provided/(used) by changes in operating assets and liabilities: Inventories Accounts payable Accrued compensation and related costs Accrued taxes Deferred revenue Other operating assets and liabilities Net cash provided by operating activities INVESTING ACTIVITIES: Purchase of available-for-sale securities Maturity of available-for-sale securities Sale of available-for-sale securities Acquisitions, net of cash acquired Net purchases of equity, other investments and other assets Net additions to property, plant and equipment Net cash used by investing activities FINANCING ACTIVITIES: Repayments of commercial paper Proceeds from issuance of commercial paper Repayments of short-term borrowings Proceeds from short-term borrowings Proceeds from issuance of common stock Excess tax benefit from exercise of stock options Principal payments on long-term debt Proceeds from issuance of long-term debt Repurchase of common stock Other Net cash used by financing activities Effect of exchange rate changes on cash and cash equivalents Net increase/(decrease) in cash and cash equivalents CASH AND CASH EQUIVALENTS: Beginning of period End of the period SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest, net of capitalized interest Income taxes

672,638 $ 564,259 $ 491,238 26,032 (37,326) (65,743) 65,927 103,865 7,705 (93,055) 653 (48,576) 36,068 38,628 86,371 63,233 (16,437) 1,331,221 (237,422) 178,167 47,497 (53,293) (56,552) (1,080,348) (1,201,951) (16,600,841) 17,311,089 (1,470,000) 770,000 176,937 93,055 (784) 548,960 (996,798) (3,505) (171,887) 11,272 (31,345) 17,214 412,625 19,622 (84,324) (60,570) 49,238 105,664 1,318 (117,368) 2,013 (85,527) 104,966 54,424 132,725 56,547 (41,193) 1,131,633 (639,192) 269,134 431,181 (91,734) (39,199) (771,230) (841,040) (993,093) 1,416,093 159,249 117,368 (898) (854,045) (155,326) 3,530 138,797

494,370 367,207 19,464 (31,253) (49,537) 30,919 109,978 10,097 (121,618) 9,717 22,711 14,435 53,276 (6,851) 922,915 (643,488) 469,554 626,113 (21,583) (7,915) (643,296) (220,615)

277,000 163,555 (735) (1,113,647) (673,827) 283 28,756 145,053 173,809

312,606 173,809 281,261 $ 312,606 $

$ $

35,294 $ 10,576 $ 342,223 $ 274,134 $

1,060 227,812

See Notes to Consolidated Financial Statements.

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Starbucks Coffee Company

Exhibit 4 - CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
STARBUCKS CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Common Stock Shares Amount Additional Other Additional Paid-in Paid-in Retained Capital Capital Earnings In thousands, except share data Accumulated Other Comprehensive Income/(Loss)

Total

Balance, October 3, 2004 Net earnings Unrealized holding gain, net Translation adjustment, net of tax Comprehensive income Exercise of stock options, including tax benefit of $108,428 Sale of common stock, including tax benefit of $1,550 Repurchase of common stock Balance, October 2, 2005 Net earnings Unrealized holding gain, net Translation adjustment, net of tax Comprehensive income Stock-based compensation expense Exercise of stock options, including tax benefit of $116,762 Sale of common stock, including tax benefit of $1,924 Repurchase of common stock Balance, October 1, 2006 Net earnings Unrealized holding loss, net Translation adjustment, net of tax Comprehensive income Stock-based compensation expense Exercise of stock options, including tax benefit of $95,276 Sale of common stock, including tax provision of $139 Repurchase of common stock Balance, September 30, 2007

794,811,688 $

795 $

955,890 $

39,393 $1,444,617 $ 494,370

29,241 $ 2,469,936 494,370 350 350 (8,677) (8,677) 486,043 239,028

16,169,992 1,563,964 (45,103,534) 767,442,110 $ 13,222,729 1,544,634 (25,607,402) 756,602,071 $ 12,744,226 1,908,407 (32,969,419) 738,285,285 $

16

239,012

1 34,504 (45) (1,139,205) 767 $ 90,201 $ 13 107,738 235,272

39,393 $1,938,987 $ 564,259

34,505 (1,139,250) 20,914 $ 2,090,262 564,259 1,767 1,767 14,592 14,592 580,618 107,738 235,285

2 42,649 (26) (475,860) 756 $ $ 13 106,373 225,233

(352,162) 39,393 $2,151,084 $ 672,638

42,651 (828,048) 37,273 $ 2,228,506 672,638 (20,380) (20,380) 37,727 37,727 689,985 106,373 225,246

2 46,826 (33) (378,432) 738 $ $

(634,356) 39,393 $2,189,366 $

46,828 (1,012,821) 54,620 $ 2,284,117

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Starbucks Coffee Company Exhibit 5 FOOTNOTE TO BALANCE SHEET

DEBT Footnote Note 9: Revolving Credit Facility and Commercial Paper Program The Company has a $1 billion unsecured credit facility (the facility) with various banks, of which $100 million may be used for issuances of letters of credit. The facility is available for working capital, capital expenditures and other corporate purposes, which may include acquisitions and share repurchases. The facility is currently set to terminate in August 2011. The interest rate for borrowings under the facility ranges from 0.11% to 0.27% over LIBOR or an alternate base rate, which is the greater of the bank prime rate or the Federal Funds Rate plus 0.50%. The specific spread over LIBOR will depend upon the Companys long-term credit ratings assigned by Moodys and Standard and Poors rating agencies and the Companys coverage ratio. The facility contains provisions requiring the Company to maintain compliance with certain covenants, including a minimum fixed charge coverage ratio which measures the Companys ability to cover financing expenses. As of September 30, 2007 and October 1, 2006, the Company was in compliance with each of these covenants. As of September 30, 2007, the Company had no borrowings under this credit facility. As of October 1, 2006, the Company had $700 million outstanding under the facility with a weighted average interest rate of 5.5%. In March 2007, the Company established a commercial paper program (the program). Under the program the Company may issue unsecured commercial paper notes, up to a maximum aggregate amount outstanding at any time of $1 billion, with individual maturities that may vary, but not exceed 397 days from the date of issue. The program is backstopped by the Companys revolving credit facility, and the combined borrowing limit is $1 billion for the program and the facility. The Company may issue commercial paper from time to time, and the proceeds of the commercial paper financing will be used for working capital, capital expenditures and other corporate purposes, which may include acquisitions and share repurchases. As of September 30, 2007, the Company had $710 million in borrowings outstanding under the program with a weighted average interest rate of 5.4%. As of September 30, 2007, the Company also had $12.9 million in letters of credit outstanding under the revolving credit facility, leaving a total of $275 million in remaining borrowing capacity under the combined revolving credit facility and commercial paper program. As of October 1, 2006, a letter of credit of $11.9 million was outstanding. Long-term Debt In August 2007, the Company issued $550 million of 6.25% Senior Notes (the notes) due in August 2017, in an underwritten registered public offering. Interest is payable semi-annually on February 15 and August 15 of each year, commencing February 15, 2008. The notes require the Company to maintain compliance with certain covenants, which limit future liens and sale and leaseback transactions on certain material properties. As of September 30, 2007, the Company was in compliance with each of these covenants. The notes were priced at a discount, resulting in proceeds to the Company of $549 million, before expenses. In 1999, Starbucks purchased the land and building comprising its York County, Pennsylvania roasting plant and distribution facility and assumed certain related loans from the York County Industrial Development Corporation. As of September 30, 2007, $2.0 million remained outstanding on these loans. The remaining maturities of these loans range from three to four years, with interest rates from 0.0% to 2.0%.

57

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Starbucks Coffee Company

Scheduled principal payments on long-term debt are as follows (in thousands):
Fiscal Year Ending

2008 2009 2010 2011 2012 Thereafter Total principal payments Interest Expense

775 789 337 56 550,000 $551,957

Interest expense, net of interest capitalized, was $38.2 million, $8.4 million and $1.3 million in fiscal 2007, 2006 and 2005, respectively. In fiscal 2007 and 2006, $3.9 million and $2.7 million, respectively, of interest was capitalized for new store construction and included in Property, plant and equipment, net, on the consolidated balance sheet. No interest was capitalized in fiscal 2005. Note 10: Other Long-term Liabilities The Companys other long-term liabilities consist of the following (in thousands):
Fiscal Year Ended Sept 30, 2007 Oct 1, 2006

Deferred rent Asset retirement obligations Minority interest Other Total

$ 271,736 43,670 17,252 21,416 $ 354,074

$ 203,903 34,271 10,739 13,944 $ 262,857

Deferred rent liabilities represent amounts for tenant improvement allowances, rent escalation clauses and rent holidays related to certain operating leases. The Company amortizes deferred rent over the terms of the leases as reductions to rent expense on the consolidated statements of earnings. Asset retirement obligations represent the estimated fair value of the Companys future costs of removing leasehold improvements at the termination of leases for certain stores and administrative facilities. Minority interest represents the collective ownership interests of minority shareholders for operations accounted for under the consolidation method, in which Starbucks owns less than 100% of the equity interest. The other remaining long-term liabilities generally include obligations to be settled or paid for one year beyond each period presented, for items such as hedging instruments, guarantees, the long-term portion of capital lease obligations and donation commitments. Note 12: Shareholders Equity 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 at September 30, 2007. Under the Companys authorized share repurchase program, Starbucks acquired 33.0 million shares at an average price of $30.72 for a total accrual-based cost of $1.0 billion in fiscal 2007. The related cash amount used to repurchase shares in fiscal 2007 totaled $997 million. The difference between the two amounts represents the effect of the net change in unsettled trades totaling $16 million from October 1, 2006. Starbucks acquired 25.6 million shares at an average price of $32.34 for a total accrual-based cost of $828 million during fiscal 2006. The related cash amount used to repurchase shares in fiscal 2006 totaled $854 million. The difference between the two amounts represents the effect of the net change in unsettled trades totaling $26 million from October 2, 2005. Share repurchases were funded through cash, cash equivalents, available-for-sale securities, borrowings under the revolving credit facility and commercial paper program and proceeds from sale of the notes, and were part of the Companys active capital management program. On May 1, 2007, the Starbucks Board of Directors authorized the repurchase of up to 25 million additional shares of the Companys common stock. As of September 30, 2007, a total of up to 13.5 million shares remained available for repurchase, under the current authorization.

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Starbucks Coffee Company

Exhibit 6 RATIO ANALYSIS STARBUCKS CORP ANNUAL RATIO REPORT Statement ended in September 30, 2007. 2007 LIQUIDITY Current Ratio Quick Ratio Working Capital Per Share Cash Flow Per Share EFFICIENCY Inventory Turnover Receivables Turnover Total Asset Turnover Average Collection Period (Days) Days to Sell Inventory Operating Cycle (Days) PERFORMANCE Sales/Net Property, Plant & Equip Sales/Stockholder Equity PROFITABILITY Operating Margin Before Depr (%) Operating Margin After Depr (%) Pretax Profit Margin (%) Net Profit Margin (%) Return on Assets (%) Return on Equity (%) Return on Investment (%) Return on Average Assets (%) Return on Average Equity (%) Return on Average Investment (%) PROFITABILITY BASED ON CORE EARNINGS Return on Assets (%) Return on Equity (%) Return on Investment (%) Return on Average Assets (%) Return on Average Equity (%) Return on Average Investment (%) 0.79 0.34 -0.62 1.54 11.31 36.75 1.93 10 32 42 3.26 4.12 15.01 10.05 11.22 7.15 12.59 29.45 23.57 13.77 29.81 26.39 2006 0.79 0.35 -0.54 1.28 10.36 37.52 1.96 10 35 44 3.4 3.49 15.25 10.27 11.64 7.47 13.13 26.09 25.92 14.64 26.93 26.73 2005 0.99 0.41 -0.02 1.09 10.25 38.49 1.84 9 35 44 3.46 3.05 16.39 11.05 12.5 7.76 14.07 23.65 23.47 14.32 21.66 21.57 2004 1.81 1.06 0.76 0.86 10.85 41.58 1.73 9 33 42 3.41 2.14 15.8 10.34 11.75 7.38 11.52 15.79 15.76 12.76 17.14 17.11

12.5 29.24 23.4 13.67 29.6 26.2

13.07 25.98 25.81 14.58 26.81 26.62

12.43 20.89 20.73 12.65 19.14 19.05

10.19 13.97 13.95 11.29 15.17 15.14

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Starbucks Coffee Company

Exhibit 6 RATIO ANALYSIS Continued. LEVERAGE Interest Coverage Before Tax Interest Coverage After Tax Long-Term Debt/Common Equity (%) Long-Term Debt/Shrhldr Equity (%) Total Debt/Invested Capital (%) Total Debt/Total Assets (%) Total Assets/Common Equity DIVIDENDS Dividend Payout (%) Dividend Yield (%)

26.09 16.98 24.17 24.17 44.31 23.66 2.34 0 0

82.64 53.38 0.2 0.2 31.5 15.96 1.99 0 0

613.65 381.36 0.22 0.22 13.45 8.06 1.68 0 0

0.15 0.15 0.18 0.13 1.37 0 0

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