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Summary of Significant Accounting Policies | 9 Months Ended
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Jun. 28, 2020
Accounting Policies [Abstract] |
Summary Of Significant Accounting Policies | Summary of Significant Accounting Policies Financial Statement Preparation The unaudited consolidated financial statements as of June 28, 2020, and for the quarter and three quarters ended June 28, 2020 and June 30, 2019, 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 28, 2020 and June 30, 2019 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.” Beginning with the Form 10-Q for the quarter and three quarters ended June 28, 2020, we renamed the "cost of sales" caption on our consolidated statement of earnings to "product and distribution costs," which more accurately reflects the substance of costs classified within this line item. There were no classification or other changes made in conjunction with the new caption. Descriptions of material operating expenses presented on our consolidated statements of earnings are described below. Product and distribution costs Product and distribution costs primarily consist of raw materials, purchased goods and packaging costs as well as operational costs of our supply chain organization, such as wages and benefits, occupancy costs and depreciation expenses, in support of sourcing, procuring, manufacturing, warehousing and transportation activities of products sold at our company-operated and licensed stores as well as through Channel Development and our other businesses. Also included are inventory and supply chain asset impairment costs. Store operating expenses Store operating expenses consist of costs incurred in our company-operated stores, primarily wages and benefits related to store partners (employees), occupancy costs and other costs that directly support the operation and sales-related activities of those stores. General and administrative expenses General and administrative expenses primarily consist of wages and benefits, professional service fees and occupancy costs for corporate headquarter and regional offices that support our corporate functions, including technology, finance, legal and partner (employee) resources. Expense reclassification in fiscal 2019 In the fourth quarter of fiscal 2019, we changed the classification of certain costs on our consolidated statements of earnings and revised prior period information to be consistent with the current period presentation. The most significant impact for the quarter and three quarters ended June 30, 2019, was the reclassification of our company-operated store occupancy costs from product and distribution costs to store operating expenses of $611.6 million and $1.8 billion, respectively. We also made certain other immaterial changes. There was no impact on consolidated revenues, consolidated operating income or net earnings per share as a result of these changes. Additionally, certain prior period information on the consolidated statements of cash flows was reclassified to conform to the current year presentation. The financial information as of September 29, 2019 is derived from our audited consolidated financial statements and notes for the fiscal year ended September 29, 2019 (“fiscal 2019”) included in Item 8 in the Fiscal 2019 Annual Report on Form 10-K (“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 consolidated financial statements in the 10-K. The results of operations for the quarter and three quarters ended June 28, 2020 are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending September 27, 2020 (“fiscal 2020”). COVID-19 The novel coronavirus, known as the global pandemic COVID-19, was first identified in December 2019. The outbreak of the virus initially impacted our China market before spreading to other markets where we have company-operated stores or licensed stores, including the U.S., our largest market. The temporary store closures, reduced customer traffic and changes made to our operations, which began in the second quarter of fiscal 2020, have had a material negative impact on our financial results to date. The most adverse impact occurred in our fiscal third quarter when the total number of company-operated and licensed store closures had reached its peak in early May. Since that time, nearly all our company-operated stores in major markets such as the U.S., China, Japan and Canada re-opened during the fiscal quarter, most with modified hours and operations. Given the magnitude of the effects of COVID-19 on our operations and financial results, key assumptions and estimates were updated during the fiscal third quarter, particularly with respect to business recovery trends and their impacts on future revenue growth and profitability for assessing impairment of our company-operated retail store and related operating lease right-of-use assets. For the lower-performing stores identified in the analysis, we compared the carrying value of the assets to the estimated undiscounted cash flows. For stores with estimated undiscounted future cash flows less than their asset carrying values, we determined the related impairment losses by comparing asset carrying values to their estimated fair values. As a result, we recorded $20.0 million of impairm ent losses within store operating expenses on our consolidated statement of earnings during the quarter ended June 28, 2020. In June 2020, we announced a plan to optimize our U.S. store portfolio in urban markets by blending store formats to better cater to changing customer tastes and preferences. As a result, we expect the closure of up to 400 incremental stores over the next 18 months. Additionally, we will restructure our company-operated business in Canada with an expected closure of up to 200 incremental stores over the next two years. As of June 28, 2020, we had identified 78 stores for closure under our restructuring plans, and as a result we recorded approximately $56.0 million to restructuring and impairments on our consolidated statement of earnings. Of this total, $41.5 million related to the impairment of store assets for which either a triggering event occurred and the assets were determined not to be recoverable or the store was permanently closed. The remaining $14.5 million was primarily associated with lease termination activities for identified stores. For impaired store asset groups, we estimated the fair values using an income approach incorporating internal projections of revenue growth and operating expenses that are considered Level 3 fair value measurements, as well as applicable discount rates and market lease rates. For stores yet to be identified for closure in both markets, future restructuring costs are estimated to be approximately $300 million to $400 million. Estimated future restructuring costs are based on actual costs incurred for recently closed stores of similar profile under the restructuring plans. As store closure decisions are still in process and the actual number of store closures may vary, the final costs to close the stores may be different from the initial estimates depending on the associated asset values and remaining lease terms. Future restructuring costs are expected to be primarily comprised of lease exit costs, accelerated depreciation costs, fixed asset impairment and disposal costs not previously recorded as part of our ongoing store impairment process, and severance. Future restructuring costs are expected to be incurred over the next 18 to 24 months as stores are specifically identified for closure or, in the case of lease exit costs, when the stores cease operations. The assessment of our other assets, mainly accounts receivable and inventory, did not indicate significant impairment risks as of the end of the third quarter of fiscal 2020. Our accounts receivable are mainly comprised of unpaid invoices for product sales to and royalties from our licensees. Our allowance for doubtful accounts is calculated based on historical experience, licensee credit risk and application of the specific identification method. We also assessed incremental risks due to COVID-19 on our licensees' financial viability. During the quarter ended June 28, 2020, we did not observe a significant deterioration of our receivable portfolio that required a significant increase in bad debt expense. To assist our international licensed partners during the outbreak, we provided a short-term payment extension for their outstanding receivables as of the end of the fiscal second quarter. We may also offer longer-term payment extensions to help certain licensees dedicate their capital to further develop stores and build the brand as the business recovers. We expect to charge a market interest rate on receivables when payment terms have been extended beyond twelve months. During the fiscal third quarter, we waived royalty payments from our international licensees and did not recognize royalty revenues associated with these accounts. We do not believe the terms and forms of these financial relief actions changed our revenue recognition policy or had a significant impact on future collectability. In the second quarter of fiscal 2020, we recorded significant inventory write-offs due to expired or expected expiration of perishable ingredients and products relating to the temporary store closures. Since the majority of our stores were re-opened during the fiscal third quarter, there were no significant inventory write-offs during the period. See Note 5, Inventories, for additional details. During the second quarter of fiscal 2020, we received an immaterial amount of COVID-19-related rent concessions for certain stores in China, generally correlating with the temporary store closure period. Consistent with updated guidance from the Financial Accounting Standards Board (“FASB”) in April 2020, we have elected to treat COVID-19-related rent concessions as variable rent. During the third quarter of fiscal 2020, we received $21.7 million of additional concessions for stores in our International segment that were recognized as an offset to our rent expense within store operating expenses. See Note 9, Leases, for additional details. On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which among other things, provides employer payroll tax credits for wages paid to employees who are unable to work during the COVID-19 outbreak and options to defer payroll tax payments for a limited period. Based on our evaluation of the CARES Act, we qual ify for certain employer payroll tax credits as well as the deferral of payroll tax payments in the future. Additionally, the Canadian government enacted the Canada Emergency Wage Subsidy (“CEWS”) to help employers offset a portion of their employee salaries and wages for a limited period. We elected to treat qualified government subsidies from the U.S., Canada and other governments as offsets to the related operating expenses. During the quarter and three quarters ended June 28, 2020, the qualified payroll credits reduced our store operating expenses by $266.0 million and $301.0 million on our consolidated statement of earnings, respectively. After netting the qualified U.S. payroll tax credits against our payroll tax payable, we recorded approximately $214.0 million within prepaid expenses and other current assets as of the end of the quarter ending June 28, 2020. We recorded our income tax expense, deferred tax assets and related liabilities based on management’s best estimates. Additionally, we assessed the likelihood of realizing the benefits of our deferred tax assets. During the third quarter of fiscal 2020, we recorded valuation allowances of $55.0 million against deferred tax assets as of the beginning of fiscal 2020 relating to certain foreign jurisdictions that are not expected to be recovered due to estimated operating losses. We will continue to record valuation allowances against deferred tax assets established during fiscal 2020 for these jurisdictions through the current annual effective tax rate. Based on our current business forecast, we expect to realize the benefits from deferred tax assets recognized relating to other foreign jurisdictions. See Note 13, Income Taxes for additional details. Recent Accounting Pronouncements Recently Adopted Accounting Pronouncements In the second quarter of fiscal 2020, we adopted the new guidance from the FASB on simplifying the accounting for income taxes by removing certain exceptions to the general principles. The guidance was adopted on a prospective basis and had no material impact on the consolidated financial statements. On September 30, 2019, we adopted the new guidance from the FASB on the recognition and measurement of leases utilizing the modified retrospective approach. As a result, the prior period information reported under the previous lease guidance has not been restated. As permitted under the new FASB lease guidance, we elected the package of practical expedients, which allowed us to retain our prior conclusions regarding lease identification, classification and initial direct costs. For our lease agreements with lease and non-lease components, we elected the practical expedient to account for these as a single lease component for all underlying classes of assets. For our adoption, we did not elect to use hindsight for our existing leases. Additionally, for short-term leases with an initial lease term of 12 months or less and with purchase options we are reasonably certain will not be exercised, we elected to not record right-of-use assets or corresponding lease obligations on our consolidated balance sheet. We will continue to record rent expense for each short-term lease on a straight-line basis over the lease term. The new FASB lease guidance had a material impact on our consolidated balance sheet; however, it did not have a material impact on our consolidated statement of earnings. The most material impact was the recognition of right-of-use assets of $8.4 billion upon adoption, with corresponding lease liabilities of $9.0 billion relating to our operating leases. Existing deferred rent and tenant improvement allowances of approximately $568.0 million, previously recorded within other long-term liabilities, were recorded as an offset to our gross operating lease right-of-use assets. Additionally, pursuant to the transition guidance, we derecognized build-to-suit lease assets, previously recorded in property, plant and equipment, net, along with the corresponding liabilities on the consolidated balance sheet as of September 30, 2019. Accordingly, these leases have been recorded as operating leases as of the adoption date and are now included in operating lease, right-of-use assets and operating lease liabilities on the consolidated balance sheet. As of the adoption date, accumulated deficit within shareholder's equity on our consolidated balance sheet decreased by $17.3 million, primarily related to the derecognition of build-to-suit leasing arrangements. See Note 9, Leases, for further discussion regarding the adoption of the new guidance. In the first quarter of fiscal 2020, we adopted the new guidance from the FASB on the reclassification of certain tax effects from accumulated other comprehensive income (loss) (“AOCI”) which permits entities to reclassify the stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Tax Act”) from AOCI to retained earnings. The guidance was adopted prospectively with no material impact on the consolidated financial statements as of June 28, 2020. Recent Accounting Pronouncements Not Yet Adopted In March 2020, the FASB issued guidance related to reference rate reform. The pronouncement provides temporary optional expedients and exceptions to the current guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. We are currently evaluating the impact of the transition from LIBOR to alternative reference rates but do not expect a significant impact to our consolidated financial statements.

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