Question 1

From Income Statement (hereinafter referred as IS),

Percentage Growth From 2017 to 2018 From 2016 to 2017
Company-operated stores 11.56% 4.79%
Licensed stores 12.62% 9.32%
Other -0.17% 2.74%
Total 10.42% 5.02%
From Table 2 of 10-K Excel (hereinafter referred as 10K),
Revenue # stores Revenue per store
Company-operated stores $19,690.30 15,341 1.28
Licensed stores 2,652.2 13,983 0.19
From P5 of Annual Report, “Licensed stores generally have a lower gross margin and a higher operating
margin than company-operated stores. Under the licensed model, Starbucks receives a reduced share of the
total store revenues, but this is more than offset by the reduction in our share of costs as these are primarily
incurred by the licensee.”

Question 2
From Hint, we have Customer Purchases = Ending DR – Beginning DR + Revenue Recognized.
In this case, Ending DR – Beginning DR is the changes in DR in the Cash Flow Statement (from 10K or
p51 of the annual report).
2018 2017 2016
Changes in Deferred Revenue 7,109.40 130.80 180.40
Revenue Recognized (Total Net Revenue) 24,719.50 22,386.80 21,315.90
Customer Purchases 31,828.90 22,517.60 21,496.30
From 2017 to 2018 From 2016 to 2017
Percentage Growth in Customer Purchase 41.35% 4.75%
Percentage Growth in Revenue 10.42% 5.02%
From 2017 to 2018, the change in revenue growth is approximately double increase, while the change in
the customer purchase is nearly tenfold, from 5.02% to 10.42% and from 4.75% to 41.35%, respectively.

Question 3
From what is given, we could make the following two tables.
Stored value card liability and
Revenue Total Purchase
current portion of deferred revenue
FY2016 $21,315.90 $5,040.10 $26,356.00
FY2017 $22,386.80 $5,548.70 $27,935.50
FY2018 $24,719.50 $6,239.50 $30,959.00
 Stored value card
Fraction of total revenue Fraction of customer
liability and
Fiscal Quarter Revenue for the year for each fiscal purchase for the year for
current portion of
quarter each fiscal quarter
deferred revenue

FQ1 2016 $5,373.50 $1,448.80 25.21% 25.89%

FQ2 2016 $4,993.20 $1,203.50 23.42% 23.51%
FQ3 2016 $5,238.00 $1,216.60 24.57% 24.49%
FQ4 2016 $5,711.20 $1,171.20 26.79% 26.11%
FQ1 2017 $5,732.90 $1,578.30 25.61% 26.17%
FQ2 2017 $5,294.00 $1,339.70 23.65% 23.75%
FQ3 2017 $5,661.50 $1,342.20 25.29% 25.07%
FQ4 2017 $5,698.30 $1,288.50 25.45% 25.01%
FQ1 2018 $6,073.70 $1,668.00 24.57% 25.01%
FQ2 2018 $6,031.80 $1,484.00 24.40% 24.28%
FQ3 2018 $6,310.30 $1,444.60 25.53% 25.05%
FQ4 2018 $6,303.60 $1,642.90 25.50% 25.67%
The table indicates that there is a slight seasonal trend in Starbucks’ revenue and customer purchases. We
observe that in Q2, people are buying less Starbucks products, while in Q1 and Q4 (cold seasons), people
are buying more. We speculate that as the weather and temperature gets colder, people tend to purchase
coffee; however, because of the hot season in Q2 (Summer), there are less people buying coffee.

Q4
2018 2017 2016 Comment
Revenue $24,719.50 $22,386.80 $21,315.90
Net income $4,518.00 $2,884.90 $2,818.90
Total Asset $24,156.40 $14,365.60 $14,312.50 2016 figure given in question
Total Equity $1,175.80 $5,457.00 $5,890.70 From 10K Table 34 and Annual Report p52
17-18 16-17
Average Assets $19,261.00 $14,339.05
Average Equity $3,316.40 $5,673.85

2018 2017 Comment

Net Profit Margin 18.28% 12.89% Slight increase in net profit margin
Asset Turnover 128.34% 156.12% Slight decrease in Asset Turnover
Significant Increase in Leverage (more than
Leverage 580.78% 252.72% doubled), probably due to the 1.25 billion debt
offering in August 2014 (Annual Report P41)
Return on ROE increased significantly, due to high
136.23% 50.85%
Equity(ROE) leverage
Q5
From P11 of Luckin Coffee F-1, main expenses for Luckin Coffee are (from highest to lowest) Sales and
marketing expenses, store rental and other operating costs, cost of materials, G&A, D&A expenses, and
store preopening and other expenses.
From IS of Starbucks 10K, main expenses for Starbucks are (from highest to lowest) Cost of sales
including occupancy costs, store operating expenses, G&A, D&A expenses, etc.

Q6
in million USD Starbucks Luckin Coffee
Net Revenue (Loss) $24,719.50 $117.62
Operating Income $3,883.30 ($223.57)
2018 Operating Profit Margin 15.71% -190.08%
Operating Profit Margin = Operating Income(loss)/Net Revenue
For Starbucks, Annual Report P27 has operating income, income statement on P48 has net revenue.
For Luckin Coffee, F1 P11 has total net revenue and operating loss.
The main differences in operating profit margin are due to Luckin Coffee was a starting competitor, and it
spent most of its expense on sales and marketing to promote its brand. However, Starbucks is relatively
stable, it just needs to maintain its daily operation. So, we can see Starbucks spends most of its money on
store operating expenses.

Q7
Two reasons, the change in business model of East China, and the licensing agreement with Nestle.
1. P4 “the transfer of 1,477 licensed stores in East China to company-operated retail stores as a result of
the purchase of our East China joint venture in the first quarter of fiscal 2018.”
P30 “Under the joint venture model, we recognized royalties and product sales within revenue and related
product cost of sales as well as our proportionate share of East China's net earnings, which we recognized
within income from equity investees. This resulted in a higher operating margin. Under the company-
operated ownership model, East China’s operating results are reflected in most income statement lines of
this segment.”
2. Annual Report P59
“In the fourth quarter of fiscal 2018, we licensed the rights to sell and market our products in authorized
channels to Nestlé and also received an upfront prepaid royalty. The upfront payment was recorded as
deferred revenue and will be recognized as other revenue on a straight-line basis over the estimated
economic life of the arrangement of 40 years. On September 30, 2018, the current and long term deferred
revenue related to the Nestlé upfront payment was $174 million and $6.8 billion, respectively.
Additionally, other revenues will include product sales too and licensing revenue from Nestlé under this
arrangement. Product sales to Nestlé are generally recognized when the product is shipped, whereas license
and royalty revenues are based on a percentage of sales and are recognized on a monthly basis when
earned.”

Q8
P41 “The net proceeds from these offerings are used for general corporate purposes, including
repurchases of our common stock under our ongoing share repurchase program and payment of
dividends.”
P74 “The proceeds from borrowings under our commercial paper program may be used for working
capital needs, capital expenditures and other corporate purposes, including, but not limited to, business
expansion, payment of cash dividends on our common stock and share repurchases. “

Q9
From P73 and P74, three types of intangible assets are indefinite-lived intangible assets, goodwill, and
finite-lived intangible assets.
Amortization expense for finite-lived intangible assets was $186.5 million during fiscal 2018 year.

Q10
P65, “The definite-lived intangibles primarily relate to reacquired rights to operate stores exclusively in
East China. The reacquired rights of $798.0 million represent the fair value calculated over the remaining
original contractual period and will be amortized on a straight-line basis through September 2022.
Amortization expense for these definite-lived intangible assets for the fiscal year 2018 was $129.8 million.
The estimated future amortization expense is approximately $163.8 million each year for the next
three years and approximately $160.4 million in the final year of fiscal 2022.”
Four years of useful life.

Q11
P61, “We recognize a liability for the fair value of required asset retirement obligations (“ARO”) when
such obligations are incurred. Our AROs are primarily associated with leasehold improvements, which,
at the end of a lease, we are contractually obligated to remove to comply with the lease agreement. At the
inception of a lease with such conditions, we record an ARO liability and a corresponding capital asset
in an amount equal to the estimated fair value of the obligation. We estimate the liability using a
number of assumptions, including store closing costs, cost inflation rates and discount rates, and accrete
the liability to its projected future value over time. The capitalized asset is depreciated using the same
depreciation convention as leasehold improvement assets. Upon satisfaction of the ARO conditions, any
difference between the recorded ARO liability and the actual retirement costs incurred is recognized as a
gain or loss in cost of sales including occupancy costs on our consolidated statements of earnings. As of
September 30, 2018 and October 1, 2017, our net ARO assets included in property, plant and equipment
were $19.1 million and $12.4 million, respectively, and our net ARO liabilities included in other long-term
liabilities were $82.4 million and $70.0 million, respectively.”

Q12
P75, “In August 2018, we issued long-term debt in an underwritten registered public offering, which
consisted of $1.25 billion of 7- year 3.800% Senior Notes (the “2025 notes”) due August 2025, $750
million of 10-year 4.000% Senior Notes (the “2028 notes”) due November 2028 and $1 billion of 30-year
4.500% Senior Notes (the “2048 notes”) due November 2048. Interest on the 2025 notes is payable semi-
annually on February 15 and August 15, commencing on February 15, 2019. Interest on the 2028 and 2048
notes is payable semi-annually on May 15 and November 15, commencing on November 15, 2018.”
Total = 1,250 + 750 + 1,000 = 3,000 million USD
Q13
Refer to table at P76

Stated Interest Rate = coupon rate; EIR = discount rate;

If coupon rate < discount rate, a bond issued at a discount; if coupon rate > discount rate, at premium; if
equals, at par.
2025 notes: coupon rate 3.8% > discount rate 3.721%, issued at premium;
2028 notes: coupon rate 4% > discount rate 3.958%, issued at premium;
2048 notes: coupon rate 4.5% < discount rate 4.504%, issued at discount.

Q14
P77, “We repurchased 131.5 million shares of common stock at a total cost of $7.2 billion, 37.5 million shares
at a total cost of $2.1 billion, and 34.9 million shares of common stock at a total cost of $2.0 billion for the years
ended September 30, 2018, October 1, 2017, and October 2, 2016, respectively. As of September 30, 2018, 48.8
million shares remained available for repurchase. On November 1, 2018, we announced that our Board of
Directors approved an increase of 120 million shares to our ongoing share repurchase program.”
FY2018 repurchased 131.5 million shares. As of Sep.30, 2018, 48.8 million shares are available for
repurchase. As of Dec.31, 2018, (48.8+120) = 168.8 million shares remain available for repurchase.