Starbucks is filing with the SEC for a five-day extension of the filing date for its first quarter fiscal 2005 Form 10-Q.
The purpose of this extension is to incorporate the views expressed by the Office of the Chief Accountant of the SEC on February 7, 2005, in a letter to the American Institute of Certified Public Accountants regarding certain operating lease accounting issues and their application under generally accepted accounting principles. Starbucks Form 10-Q, which was due to be filed with the SEC on February 11, 2005, will be filed by February 16, 2005.
“For the last 12 years, Starbucks has been accounting for tenant improvement allowances and rent holidays using methods that have been commonly utilized by a number of prominent restaurant and other retail companies, and which we thought were most appropriate to our circumstances,” stated Michael Casey, executive vice president and CFO. “However, on February 7th, the SEC staff’s views made it clear that our accounting for these items was incorrect. We will use this five-day filing extension for our first quarter Form 10-Q to allow the appropriate time to address these matters and to give our auditors and audit committee time to review the filing.”
Company management has made a preliminary determination that its current method of accounting for leasehold improvements funded by landlord incentives or allowances under operating leases (tenant improvement allowances) and its current method of accounting for rent holidays are not consistent with the views expressed by the SEC staff earlier this week. These matters will not impact the Company’s previously reported first quarter 2005 earnings per share, its fiscal 2005 earnings per share target range of $1.15-$1.17 or its longer term goal to increase earnings per share by 20 to 25 percent per year for the next three to five years.
For tenant improvement allowances, the Company expects that Cost of Sales Including Occupancy Costs will decrease and Depreciation and Amortization Expenses will increase by the same amount. This correction will not change previously reported earnings per share for the quarter ended January 2, 2005. The Company also expects that Net Property, Plant and Equipment and Total Assets will increase, and there will be corresponding increases in Accrued Occupancy Costs, Other Long-Term Liabilities, and Total Liabilities and Shareholders’ Equity as of January 2, 2005.
For rent holidays, the Company expects that Cost of Sales Including Occupancy Costs will decrease and Net Earnings will increase by an immaterial amount that is not expected to change previously reported earnings per share for the quarter ended January 2, 2005.
The Company has not yet reached a final decision as to whether these matters will require a restatement of prior period financial statements, but believes that a restatement is likely. If so, the Company believes that for rent holidays there would be a reduction in beginning Retained Earnings in fiscal 2002 and subsequent immaterial increases in reported Net Earnings for fiscal years 2002 through 2004. In addition, for tenant improvement allowances there would be corrections similar to those previously described.
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