filings.toolsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
Our fiscal year ends on the Sunday closest to September 30. The fiscal year ended on October 2, 2016 included 53 weeks, with the extra week falling in our fourth fiscal quarter. Fiscal years ended on September 27, 2015 and September 28, 2014 both included 52 weeks. Comparable store sales percentages below are calculated excluding the 53rd week. All references to store counts, including data for new store openings, are reported net of related store closures, unless otherwise noted.
Financial Highlights
| • | Total net revenues increased 11% to $21.3 billion in fiscal 2016 compared to $19.2 billion in fiscal 2015. |
| • | Global comparable store sales grew 5% driven by a 4% increase in average ticket and a 1% increase in the number of transactions. |
| • | Consolidated operating income increased to $4.2 billion in fiscal 2016 compared to operating income of $3.6 billion in fiscal 2015. Fiscal 2016 operating margin was 19.6% compared to 18.8% in fiscal 2015. Operating margin expansion in fiscal 2016 was primarily driven by sales leverage and lower commodity costs, partially offset by investments in partners (employees) and digital platforms. |
| • | Earnings per share ("EPS") for fiscal 2016 increased to $1.90 and included $0.06 per share for the extra week in fiscal 2016. Fiscal 2015 EPS was $1.82 and included $0.26 per share from the gain on the fair value adjustment of our preexisting equity interest in Starbucks Japan upon acquisition. |
| • | Cash flows from operations were $4.6 billion in fiscal 2016 compared to $3.7 billion in fiscal 2015. The change was primarily due to increased earnings, the lapping of the non-cash acquisition related gain for Starbucks Japan and the timing of our cash payments for income taxes. |
| • | Capital expenditures were $1.4 billion in fiscal 2016 compared to $1.3 billion in fiscal 2015. |
| • | We returned $3.2 billion to our shareholders in fiscal 2016 through share repurchases and dividends compared to $2.4 billion in fiscal 2015. |
Overview
Starbucks results for fiscal 2016 continued to demonstrate the strength of our global business model, and our ability to successfully make disciplined investments in our business and our partners (employees). Our net revenues grew 11% over fiscal 2015, and consolidated operating margin expanded 80 basis points from 18.8% in fiscal 2015 to 19.6% in fiscal 2016, largely driven by sales leverage and lower commodity costs, partially offset by investments in our partners and digital platforms.
The Americas segment continued to perform well in fiscal 2016, with revenues growing 11% to $14.8 billion, primarily driven by comparable store sales growth of 6%, comprised of a 5% increase in average ticket and a 1% increase in number of transactions, incremental revenues from 804 net new store openings over the last 12 months and the impact of the extra week in fiscal 2016. Growth in our iced beverages, including coffee, tea and espresso, paired with beverage innovation and the success of our food offerings, drove the increase in comparable store sales. Americas operating margin grew 110 basis points to 25.3% in fiscal 2016, primarily driven by sales leverage and lower commodity costs, partially offset by investments in our store partners and digital platforms.
Our fiscal 2016 China/Asia Pacific segment results reflected higher revenues from the opening of 981 net new stores over the past year, incremental revenues associated with the ownership change in Starbucks Japan, a 3% increase in comparable store sales and the impact of the extra week in fiscal 2016. Operating margin expanded 60 basis points to 21.5%, driven by sales leverage, higher income from our joint venture operations and favorability from changes to certain business tax structures in China. This favorability was partially offset by unfavorable foreign currency translation and the impact of our ownership change in Starbucks Japan. We now operate 6,443 stores in 15 countries in our China/Asia Pacific segment with continued strong performance, reinforcing our confidence in the long-term growth potential of this market.
As we continue to execute our strategy of achieving the appropriate balance between company-operated and licensed stores, our EMEA segment revenues declined 8% to $1.1 billion in fiscal 2016 compared to a year ago. The decline in revenues was primarily driven by lower company-operated store revenues due to the shift to more licensed stores in the region and unfavorable foreign currency translation. Partially offsetting lower company-operated store revenues were higher licensed store sales, primarily resulting from the opening of 294 net new licensed stores and the transfer of 200 company-operated stores to licensed stores over the past 12 months, and the impact of the extra week in fiscal 2016. Compared to fiscal 2015, EMEA operating margin declined 30 basis points to 13.5% primarily due to sales deleverage at certain company-operated stores and
unfavorable foreign currency exchange, partially offset by sales leverage driven by the shift in the portfolio towards more licensed stores.
The Channel Development segment revenues grew 12% to $1.9 billion in fiscal 2016, primarily due to higher sales of premium single-serve products, driven by sales of Starbucks® K-Cup® portion packs, the impact of the extra week in fiscal 2016 and increased foodservice and packaged coffee sales. Operating margin increased 400 basis points to 41.8%, primarily driven by strong performance from our North American Coffee Partnership joint venture, lower coffee costs and leverage on cost of sales. As seen through our Channel Development segment results for fiscal 2016, we continue to expand customer occasions outside of our retail stores and through our developing international presence.
Fiscal 2017 — The View Ahead
Turning to fiscal 2017, we expect continued strength in our revenue, operating margin and earnings per share results in comparison to fiscal 2016. These results are expected to be driven by our 7 Strategies for Growth, which include:
| • | Be the Employer of Choice |
| • | Elevate Coffee |
| • | Grow the Store Portfolio |
| • | Create New Customer Occasions |
| • | Drive At-Home Coffee Share and Occasions |
| • | Build Teavana through Starbucks and CPG |
| • | Extend Digital Engagement |
In fiscal 2017, through our 7 Strategies for Growth, we plan to expand our footprint by opening new stores and enhancing the mix and types of stores in our portfolio. Expansion of our store portfolio is expected to be coupled with continued customer attachment through our morning and lunch dayparts. And, our management team continues to align our leadership with our evolving businesses, including the development of our Global Roastery and Starbucks Reserve® branded stores. As a result of these efforts, we expect consolidated revenue growth to be approximately 8% in fiscal 2017 when compared to our 53-week results in fiscal 2016. After excluding the approximately $400 million of additional revenue attributed to the extra week in fiscal 2016, we expect consolidated revenue growth to be approximately 10% for fiscal 2017 based on a comparable 52-week year. Revenue growth is expected to be driven by comparable store sales in the mid-single digits and the opening of approximately 2,100 net new stores globally.
Additionally, for fiscal 2017, we expect to continue investing in our partners and digital platforms. These investments provide enhanced wages and benefits and also focus on mobile and loyalty programs. We expect partner and digital investments to increase by approximately $250 million versus an increase of approximately $160 million in fiscal 2016, further demonstrating the importance of and value creation realized from these efforts.
We plan for our consolidated operating margin to increase slightly in fiscal 2017 when compared to fiscal 2016. Sales leverage and cost savings initiatives will offset investments in our business and partners. For fiscal 2017, we expect an effective tax rate of about 34%, and diluted net earnings per share to be in the range of $2.09 to $2.11.
Capital expenditures in fiscal 2017 are expected to be approximately $1.6 billion, primarily for new stores and store renovations, as well as for other investments to support our ongoing growth initiatives.
Acquisitions and Divestitures
See Note 2, Acquisitions and Divestitures, to the consolidated financial statements included in Item 8 of Part II of this 10-K for information regarding acquisitions and divestitures.
RESULTS OF OPERATIONS — FISCAL 2016 COMPARED TO FISCAL 2015
Consolidated results of operations (in millions):
Revenues
| Fiscal Year Ended | Oct 2, 2016 | Sep 27, 2015 | % Change | |||||||
| Net revenues: | ||||||||||
| Company-operated stores | $ | 16,844.1 | $ | 15,197.3 | 10.8 | % | ||||
| Licensed stores | 2,154.2 | 1,861.9 | 15.7 | |||||||
| CPG, foodservice and other | 2,317.6 | 2,103.5 | 10.2 | |||||||
| Total net revenues | $ | 21,315.9 | $ | 19,162.7 | 11.2 | % |
Total net revenues increased $2.2 billion, or 11%, over fiscal 2015, primarily due to increased revenues from company-operated stores (contributing $1.6 billion). The growth in company-operated store revenues was primarily driven by 5% growth in comparable store sales ($793 million), incremental revenues from 693 net new Starbucks® company-operated store openings over the past 12 months ($724 million), the impact of the extra week in fiscal 2016 ($324 million) and incremental revenues from the impact of our ownership change in Starbucks Japan ($105 million). Partially offsetting these increases was the absence of revenue from the conversion of certain company-operated stores to licensed stores ($151 million) and the impact of unfavorable foreign currency translation ($99 million).
Licensed store revenue growth contributed $292 million to the increase in total net revenues, primarily resulting from higher product sales to and royalty revenues from our licensees ($285 million), largely due to the opening of 1,372 net new Starbucks® licensed stores, the transfer of 200 company-operated stores to licensed stores over the past 12 months and improved comparable store sales, as well as the impact of the extra week in fiscal 2016 ($41 million). Partially offsetting these increases was the impact of unfavorable foreign currency translation ($33 million) and a decrease in licensed store revenues resulting from the impact of our ownership change in Starbucks Japan ($6 million).
CPG, foodservice and other revenues increased $214 million, primarily due to higher sales of premium single-serve products ($106 million), the impact of the extra week in fiscal 2016 ($47 million), and increased foodservice sales ($34 million) and U.S. packaged coffee ($32 million).
Operating Expenses
| Fiscal Year Ended | Oct 2, 2016 | Sep 27, 2015 | Oct 2, 2016 | Sep 27, 2015 | |||||||||
| As a % of Total Net Revenues | |||||||||||||
| Cost of sales including occupancy costs | $ | 8,511.1 | $ | 7,787.5 | 39.9 | % | 40.6 | % | |||||
| Store operating expenses | 6,064.3 | 5,411.1 | 28.4 | 28.2 | |||||||||
| Other operating expenses | 545.4 | 522.4 | 2.6 | 2.7 | |||||||||
| Depreciation and amortization expenses | 980.8 | 893.9 | 4.6 | 4.7 | |||||||||
| General and administrative expenses | 1,360.6 | 1,196.7 | 6.4 | 6.2 | |||||||||
| Total operating expenses | 17,462.2 | 15,811.6 | 81.9 | 82.5 | |||||||||
| Income from equity investees | 318.2 | 249.9 | 1.5 | 1.3 | |||||||||
| Operating income | $ | 4,171.9 | $ | 3,601.0 | 19.6 | % | 18.8 | % | |||||
| Store operating expenses as a % of related revenues | 36.0 | % | 35.6 | % |
Cost of sales including occupancy costs as a percentage of total net revenues decreased 70 basis points, primarily driven by leverage on cost of sales and occupancy costs (approximately 70 basis points) and lower commodity costs (approximately 50 basis points).
Store operating expenses as a percentage of total net revenues increased 20 basis points. Store operating expenses as a percentage of company-operated store revenues increased 40 basis points, primarily driven by increased investments in partners (employees) and digital platforms (approximately 80 basis points), partially offset by sales leverage (approximately 30 basis points).
Other operating expenses as a percentage of total net revenues decreased 10 basis points. Excluding the impact of company-operated store revenues, other operating expenses decreased 100 basis points, primarily due to a settlement in the fourth quarter of fiscal 2016 related to the closure of Target Canada stores in the prior year (approximately 50 basis points), the lapping of impairment of certain assets in the Americas segment in the prior year (approximately 20 basis points) and improved collection results (approximately 20 basis points).
General and administrative expenses as a percentage of total net revenues increased 20 basis points, primarily driven by higher salaries and benefits (approximately 30 basis points).
Income from equity investees as a percentage of total net revenues increased 20 basis points due to higher income from our joint venture operations, primarily from our North American Coffee Partnership and our joint ventures in China and South Korea.
The combination of these changes resulted in an overall increase in operating margin of 80 basis points over fiscal 2015.
Other Income and Expenses
| Fiscal Year Ended | Oct 2, 2016 | Sep 27, 2015 | Oct 2, 2016 | Sep 27, 2015 | |||||||||
| As a % of Total Net Revenues | |||||||||||||
| Operating income | $ | 4,171.9 | $ | 3,601.0 | 19.6 | % | 18.8 | % | |||||
| Gain resulting from acquisition of joint venture | — | 390.6 | — | 2.0 | |||||||||
| Loss on extinguishment of debt | — | (61.1 | ) | — | (0.3 | ) | |||||||
| Interest income and other, net | 108.0 | 43.0 | 0.5 | 0.2 | |||||||||
| Interest expense | (81.3 | ) | (70.5 | ) | (0.4 | ) | (0.4 | ) | |||||
| Earnings before income taxes | 4,198.6 | 3,903.0 | 19.7 | 20.4 | |||||||||
| Income tax expense | 1,379.7 | 1,143.7 | 6.5 | 6.0 | |||||||||
| Net earnings including noncontrolling interests | 2,818.9 | 2,759.3 | 13.2 | 14.4 | |||||||||
| Net earnings attributable to noncontrolling interests | 1.2 | 1.9 | — | — | |||||||||
| Net earnings attributable to Starbucks | $ | 2,817.7 | $ | 2,757.4 | 13.2 | % | 14.4 | % | |||||
| Effective tax rate including noncontrolling interests | 32.9 | % | 29.3 | % |
During the first quarter of fiscal 2015, we recorded a gain of $391 million as a result of remeasuring our preexisting 39.5% ownership interest in Starbucks Japan to fair value upon acquisition.
During the fourth quarter of fiscal 2015, we recorded a loss of $61 million related to the redemption of our $550 million of 6.250% Senior Notes (the "2017 notes"), which were originally scheduled to mature in August 2017. The loss primarily relates to the optional redemption premium outlined in the 2017 notes indenture, as well as the derecognition of the capitalized issuance costs and unamortized discount.
Interest income and other, net increased $65 million, primarily due to higher income recognized on unredeemed stored value card balances ($21 million), net favorable foreign exchange fluctuations ($11 million) and gains on our trading securities portfolio ($8 million).
Interest expense increased $11 million primarily due to interest on the long-term debt we issued in February and May 2016.
Our tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amounts of income we earn in those jurisdictions, as well as discrete items that may occur in any given year, but are not consistent from year to year. The effective tax rate for fiscal 2016 was 32.9% compared to 29.3% for fiscal 2015. The increase in the rate for fiscal 2016 was primarily due to the 3.7% impact of the gain in the prior year associated with the remeasurement of our preexisting 39.5% ownership interest in Starbucks Japan upon acquisition, which was almost entirely non-taxable.
Segment Information
Results of operations by segment (in millions):
Americas
| Fiscal Year Ended | Oct 2, 2016 | Sep 27, 2015 | Oct 2, 2016 | Sep 27, 2015 | |||||||||
| As a % of Americas Total Net Revenues | |||||||||||||
| Net revenues: | |||||||||||||
| Company-operated stores | $ | 13,247.4 | $ | 11,925.6 | 89.5 | % | 89.7 | % | |||||
| Licensed stores | 1,518.5 | 1,334.4 | 10.3 | 10.0 | |||||||||
| Foodservice and other | 29.5 | 33.4 | 0.2 | 0.3 | |||||||||
| Total net revenues | 14,795.4 | 13,293.4 | 100.0 | 100.0 | |||||||||
| Cost of sales including occupancy costs | 5,271.9 | 4,845.0 | 35.6 | 36.4 | |||||||||
| Store operating expenses | 4,909.3 | 4,387.9 | 33.2 | 33.0 | |||||||||
| Other operating expenses | 96.0 | 122.8 | 0.6 | 0.9 | |||||||||
| Depreciation and amortization expenses | 590.1 | 522.3 | 4.0 | 3.9 | |||||||||
| General and administrative expenses | 186.1 | 192.1 | 1.3 | 1.4 | |||||||||
| Total operating expenses | 11,053.4 | 10,070.1 | 74.7 | 75.8 | |||||||||
| Operating income | $ | 3,742.0 | $ | 3,223.3 | 25.3 | % | 24.2 | % | |||||
| Store operating expenses as a % of related revenues | 37.1 | % | 36.8 | % |
Revenues
Americas total net revenues for fiscal 2016 increased $1.5 billion, or 11%, primarily due to increased revenues from company-operated stores (contributing $1.3 billion) and licensed stores (contributing $184 million).
The increase in company-operated store revenues was driven by a 6% increase in comparable store sales ($730 million), incremental revenues from 348 net new Starbucks® company-operated store openings over the past 12 months ($481 million) and the impact of the extra week in fiscal 2016 ($258 million). Partially offsetting these increases was unfavorable foreign currency translation ($91 million), primarily driven by the strengthening of the U.S. dollar against the Canadian dollar.
The increase in licensed store revenues was primarily due to higher product sales to and royalty revenues from our licensees ($150 million), resulting from the opening of 456 net new licensed stores over the past 12 months and improved comparable store sales, as well as the impact of the extra week in fiscal 2016 ($31 million).
Operating Expenses
Cost of sales including occupancy costs as a percentage of total net revenues decreased 80 basis points, primarily driven by leverage on cost of sales and occupancy costs (approximately 50 basis points) and lower commodity costs (approximately 40 basis points).
Store operating expenses as a percentage of total net revenues increased 20 basis points. As a percentage of company-operated store revenues, store operating expenses increased 30 basis points, primarily driven by increased investments in store partners and digital platforms (approximately 100 basis points), partially offset by sales leverage on salaries and benefits (approximately 80 basis points).
Other operating expenses as a percentage of total net revenues decreased 30 basis points. Excluding the impact of company-operated store revenues, other operating expenses decreased 280 basis points, primarily due to a settlement in the fourth quarter of fiscal 2016 related to the closure of Target Canada stores in the prior year (approximately 140 basis points), the lapping of impairment of certain assets in the region (approximately 60 basis points) and improved collection results (approximately 40 basis points).
The combination of these changes resulted in an overall increase in operating margin of 110 basis points over fiscal 2015.
China/Asia Pacific
| Fiscal Year Ended | Oct 2, 2016 | Sep 27, 2015 | Oct 2, 2016 | Sep 27, 2015 | |||||||||
| As a % of China/Asia Pacific Total Net Revenues | |||||||||||||
| Net revenues: | |||||||||||||
| Company-operated stores | $ | 2,640.4 | $ | 2,127.3 | 89.8 | % | 88.8 | % | |||||
| Licensed stores | 292.3 | 264.4 | 9.9 | 11.0 | |||||||||
| Foodservice and other | 6.1 | 4.2 | 0.2 | 0.2 | |||||||||
| Total net revenues | 2,938.8 | 2,395.9 | 100.0 | 100.0 | |||||||||
| Cost of sales including occupancy costs | 1,296.7 | 1,071.5 | 44.1 | 44.7 | |||||||||
| Store operating expenses | 779.4 | 609.8 | 26.5 | 25.5 | |||||||||
| Other operating expenses | 70.3 | 62.2 | 2.4 | 2.6 | |||||||||
| Depreciation and amortization expenses | 180.6 | 150.7 | 6.1 | 6.3 | |||||||||
| General and administrative expenses | 130.3 | 120.8 | 4.4 | 5.0 | |||||||||
| Total operating expenses | 2,457.3 | 2,015.0 | 83.6 | 84.1 | |||||||||
| Income from equity investees | 150.1 | 119.6 | 5.1 | 5.0 | |||||||||
| Operating income | $ | 631.6 | $ | 500.5 | 21.5 | % | 20.9 | % | |||||
| Store operating expenses as a % of related revenues | 29.5 | % | 28.7 | % |
Revenues
China/Asia Pacific total net revenues for fiscal 2016 increased $543 million, or 23%, largely due to increased revenues from company-operated stores (contributing $513 million). The increase in company-operated store revenues was primarily due to the opening of 359 net new company-operated stores over the past 12 months ($246 million) and incremental revenues from the impact of our ownership in Starbucks Japan ($105 million). Also contributing was a 3% increase in comparable store sales ($61 million), the impact of the extra week in fiscal 2016 ($52 million) and favorable foreign currency translation ($49 million).
Licensed store revenues increased $28 million, primarily due to increased product sales to and royalty revenues from licensees ($47 million), resulting from the opening of 622 net new licensed store openings over the past 12 months, partially offset by unfavorable foreign currency translation ($15 million) and a decrease in licensed store revenues resulting from the impact of our ownership change in Starbucks Japan ($6 million).
Operating Expenses
Cost of sales including occupancy costs as a percentage of total net revenues decreased 60 basis points, primarily due to the impact of our ownership change in Starbucks Japan (approximately 30 basis points) and favorability from changes to certain business tax structures in China (30 basis points).
Store operating expenses as a percentage of total net revenues increased 100 basis points. As a percentage of company-operated store revenues, store operating expenses increased 80 basis points, primarily driven by higher partner and digital investments and payroll-related expenditures (approximately 90 basis points) and the impact of our ownership change in Starbucks Japan (approximately 40 basis points), partially offset by sales leverage on salaries and benefits (approximately 60 basis points).
Other operating expenses as a percentage of total net revenues decreased 20 basis points. Excluding the impact of company-operated store revenues, other operating expenses increased 40 basis points, primarily due to higher payroll-related expenditures (approximately 140 basis points), investments in digital platforms (approximately 80 basis points) and the impact of our ownership change in Starbucks Japan (approximately 60 basis points), partially offset by sales leverage (approximately 220 basis points).
General and administrative expenses as a percentage of total revenues decreased 60 basis points, primarily due to sales leverage on salaries and benefits (approximately 40 basis points).
Income from equity investees as a percentage of total net revenues increased 10 basis points, primarily due to higher income from our joint venture operations, primarily in China and South Korea (approximately 70 basis points and 60 basis points, respectively), partially offset by the shift in composition of our store portfolio to more company-operated stores (approximately 50 basis points) and the impact of our ownership change in Starbucks Japan (approximately 50 basis points).
The combination of these changes resulted in an overall increase in operating margin of 60 basis points over fiscal 2015.
EMEA
| Fiscal Year Ended | Oct 2, 2016 | Sep 27, 2015 | Oct 2, 2016 | Sep 27, 2015 | |||||||||
| As a % of EMEA Total Net Revenues | |||||||||||||
| Net revenues: | |||||||||||||
| Company-operated stores | $ | 732.0 | $ | 911.2 | 65.1 | % | 74.9 | % | |||||
| Licensed stores | 339.5 | 257.2 | 30.2 | 21.1 | |||||||||
| Foodservice | 53.4 | 48.3 | 4.7 | 4.0 | |||||||||
| Total net revenues | 1,124.9 | 1,216.7 | 100.0 | 100.0 | |||||||||
| Cost of sales including occupancy costs | 565.0 | 582.5 | 50.2 | 47.9 | |||||||||
| Store operating expenses | 260.6 | 308.7 | 23.2 | 25.4 | |||||||||
| Other operating expenses | 57.0 | 51.8 | 5.1 | 4.3 | |||||||||
| Depreciation and amortization expenses | 40.8 | 52.0 | 3.6 | 4.3 | |||||||||
| General and administrative expenses | 51.4 | 56.6 | 4.6 | 4.7 | |||||||||
| Total operating expenses | 974.8 | 1,051.6 | 86.7 | 86.4 | |||||||||
| Income from equity investees | 1.5 | 3.1 | 0.1 | 0.3 | |||||||||
| Operating income | $ | 151.6 | $ | 168.2 | 13.5 | % | 13.8 | % | |||||
| Store operating expenses as a % of related revenues | 35.6 | % | 33.9 | % |
Revenues
EMEA total net revenues for fiscal 2016 decreased $92 million, or 8%. The decrease was primarily due to a decline in company-operated store revenues ($179 million), which was largely due to the shift to more licensed stores in the region ($132 million) and includes the absence of revenues related to the sale of our Germany retail operations, and unfavorable foreign currency translation ($69 million). These decreases were partially offset by the impact of the extra week in fiscal 2016 ($18 million).
Licensed store revenues increased $82 million, or 32%, primarily due to higher product sales to and royalty revenues from our licensees ($89 million), resulting from the opening of 294 net new licensed stores and the transfer of 200 company-operated stores to licensed stores over the past 12 months. Also contributing was the impact of the extra week in fiscal 2016 ($6 million). These increases were partially offset by unfavorable foreign currency translation ($12 million).
Operating Expenses
Cost of sales including occupancy costs as a percentage of total net revenues increased 230 basis points, primarily due to the shift in composition of our store portfolio in the region to more licensed stores (approximately 140 basis points), sales deleverage at certain company-owned stores (approximately 80 basis points) and foreign currency transactions (approximately 50 basis points).
Store operating expenses as a percentage of total net revenues decreased 220 basis points. As a percentage of company-operated store revenues, store operating expenses increased 170 basis points, primarily due to costs associated with the sale of our Germany retail operations and a decrease in company-operated store sales as a result of the shift to more licensed stores in the region (approximately 70 basis points). Sales deleverage at certain company-owned stores, largely related to salaries and benefits, also contributed unfavorably (approximately 70 basis points).
Other operating expenses as a percentage of total net revenues increased 80 basis points. Excluding the impact of company-operated store revenues, other operating expenses decreased 250 basis points, primarily due to sales leverage driven by the shift to more licensed stores in the region (approximately 250 basis points).
Depreciation and amortization expenses as a percentage of total net revenues decreased 70 basis points, primarily due to the shift in the composition of our store portfolio in the region to more licensed stores (approximately 40 basis points).
Income from equity investees as a percentage of total net revenues decreased 20 basis points as a result of the sale of our ownership interest in our Spanish joint venture, Starbucks Coffee España, S.L., in the first quarter of fiscal 2016 (approximately 20 basis points).
The combination of these changes resulted in an overall decrease in operating margin of 30 basis points over fiscal 2015.
Channel Development
| Fiscal Year Ended | Oct 2, 2016 | Sep 27, 2015 | Oct 2, 2016 | Sep 27, 2015 | |||||||||
| As a % of Channel Development Total Net Revenues | |||||||||||||
| Net revenues: | |||||||||||||
| CPG | $ | 1,488.2 | $ | 1,329.0 | 77.0 | % | 76.8 | % | |||||
| Foodservice | 444.3 | 401.9 | 23.0 | 23.2 | |||||||||
| Total net revenues | 1,932.5 | 1,730.9 | 100.0 | 100.0 | |||||||||
| Cost of sales | 1,042.6 | 974.8 | 54.0 | 56.3 | |||||||||
| Other operating expenses | 228.5 | 210.5 | 11.8 | 12.2 | |||||||||
| Depreciation and amortization expenses | 2.8 | 2.7 | 0.1 | 0.2 | |||||||||
| General and administrative expenses | 17.9 | 16.2 | 0.9 | 0.9 | |||||||||
| Total operating expenses | 1,291.8 | 1,204.2 | 66.8 | 69.6 | |||||||||
| Income from equity investees | 166.6 | 127.2 | 8.6 | 7.3 | |||||||||
| Operating income | $ | 807.3 | $ | 653.9 | 41.8 | % | 37.8 | % |
Revenues
Channel Development total net revenues for fiscal 2016 increased $202 million, or 12%, over the prior year, primarily driven by higher sales of premium single-serve products ($101 million). The impact of the extra week in fiscal 2016 ($40 million), increased foodservice sales ($33 million) and U.S. packaged coffee sales ($28 million) also contributed.
Operating Expenses
Cost of sales as a percentage of total net revenues decreased 230 basis points, primarily due to lower coffee costs (approximately 140 basis points) and leverage on cost of sales (approximately 100 basis points).
Other operating expenses as a percentage of total net revenues decreased 40 basis points, primarily driven by sales leverage on marketing expenses and salaries and benefits (approximately 30 basis points).
Income from equity investees as a percentage of total revenues increased 130 basis points, driven by higher income from our North American Coffee Partnership joint venture, primarily due to increased sales volume of Starbucks Doubleshot® and bottled Frappuccino® beverages and new product launches, partially offset by increased marketing costs (approximately 150 basis points).
The combination of these changes contributed to an overall increase in operating margin of 400 basis points over fiscal 2015.
All Other Segments
| Fiscal Year Ended | Oct 2, 2016 | Sep 27, 2015 | % Change | |||||||
| Net revenues: | ||||||||||
| Company-operated stores | $ | 224.3 | $ | 233.2 | (3.8 | )% | ||||
| Licensed stores | 3.9 | 5.9 | (33.9 | ) | ||||||
| CPG, foodservice and other | 296.1 | 286.7 | 3.3 | |||||||
| Total net revenues | 524.3 | 525.8 | (0.3 | ) | ||||||
| Cost of sales including occupancy costs | 316.5 | 316.5 | — | |||||||
| Store operating expenses | 115.0 | 104.7 | 9.8 | |||||||
| Other operating expenses | 91.4 | 76.5 | 19.5 | |||||||
| Depreciation and amortization expenses | 13.3 | 16.3 | (18.4 | ) | ||||||
| General and administrative expenses | 26.5 | 36.6 | (27.6 | ) | ||||||
| Total operating expenses | 562.7 | 550.6 | 2.2 | |||||||
| Operating loss | $ | (38.4 | ) | $ | (24.8 | ) | 54.8 | % |
All Other Segments primarily includes Teavana, Seattle’s Best Coffee and Evolution Fresh, as well as certain developing businesses such as the Starbucks Reserve® Roastery & Tasting Rooms.
RESULTS OF OPERATIONS — FISCAL 2015 COMPARED TO FISCAL 2014
Consolidated results of operations (in millions):
Revenues
| Fiscal Year Ended | Sep 27, 2015 | Sep 28, 2014 | % Change | |||||||
| Net revenues: | ||||||||||
| Company-operated stores | $ | 15,197.3 | $ | 12,977.9 | 17.1 | % | ||||
| Licensed stores | 1,861.9 | 1,588.6 | 17.2 | |||||||
| CPG, foodservice and other | 2,103.5 | 1,881.3 | 11.8 | |||||||
| Total net revenues | $ | 19,162.7 | $ | 16,447.8 | 16.5 | % |
Total net revenues increased $2.7 billion, or 17%, over fiscal 2014, primarily due to increased revenues from company-operated stores (contributing $2.2 billion). The growth in company-operated store revenues was primarily driven by incremental revenues from the acquisition of Starbucks Japan ($1.1 billion), an increase in comparable store sales (7% growth, or $852 million) and incremental revenues from 550 net new Starbucks® company-operated store openings over the past 12 months ($590 million). Partially offsetting these increases was the impact of unfavorable foreign currency translation ($252 million).
Licensed store revenue growth also contributed $273 million to the increase in total net revenues, primarily resulting from the opening of 1,075 net new Starbucks® licensed stores over the past 12 months and improved comparable store sales as well as increased La Boulange food sales to our licensees in the Americas segment. Partially offsetting these increases was a decrease in licensed store revenues resulting from the impact of our ownership change in Starbucks Japan ($45 million).
CPG, foodservice and other revenues increased $222 million, primarily due to increased sales of premium single-serve products ($116 million), U.S. packaged coffee ($55 million) and foodservice sales ($40 million).
Operating Expenses
| Fiscal Year Ended | Sep 27, 2015 | Sep 28, 2014 | Sep 27, 2015 | Sep 28, 2014 | |||||||||
| As a % of Total Net Revenues | |||||||||||||
| Cost of sales including occupancy costs | $ | 7,787.5 | $ | 6,858.8 | 40.6 | % | 41.7 | % | |||||
| Store operating expenses | 5,411.1 | 4,638.2 | 28.2 | 28.2 | |||||||||
| Other operating expenses | 522.4 | 457.3 | 2.7 | 2.8 | |||||||||
| Depreciation and amortization expenses | 893.9 | 709.6 | 4.7 | 4.3 | |||||||||
| General and administrative expenses | 1,196.7 | 991.3 | 6.2 | 6.0 | |||||||||
| Litigation credit | — | (20.2 | ) | — | (0.1 | ) | |||||||
| Total operating expenses | 15,811.6 | 13,635.0 | 82.5 | 82.9 | |||||||||
| Income from equity investees | 249.9 | 268.3 | 1.3 | 1.6 | |||||||||
| Operating income | $ | 3,601.0 | $ | 3,081.1 | 18.8 | % | 18.7 | % | |||||
| Store operating expenses as a % of related revenues | 35.6 | % | 35.7 | % |
Cost of sales including occupancy costs as a percentage of total net revenues decreased 110 basis points, primarily driven by sales and operating leverage on cost of sales (approximately 60 basis points), driven by strong sales and initiatives in our supply chain, such as improvements in sourcing, as well as sales leverage on occupancy costs (approximately 40 basis points).
Store operating expenses were flat as a percentage of total net revenues. Store operating expenses as a percentage of company-operated store revenues, decreased 10 basis points, primarily driven by sales leverage (approximately 50 basis points) and decreased expenses, largely salaries and benefits, due to the shift to more licensed stores in EMEA (approximately 40 basis points), partially offset by increased investments in store partners (employees) and digital platforms related to in-store initiatives (approximately 100 basis points) in the Americas segment.
Other operating expenses as a percentage of total net revenues decreased 10 basis points. Excluding the impact of company-operated store revenues, other operating expenses were flat, primarily due to sales leverage (approximately 70 basis points), partially offset by increased marketing expenses (approximately 20 basis points), largely due to timing, the impairment of certain assets in the Americas segment (approximately 20 basis points) and the impact of our ownership change in Starbucks Japan (approximately 20 basis points).
Depreciation and amortization expenses as a percentage of total net revenues increased 40 basis points, primarily due to the impact of our ownership change in Starbucks Japan (approximately 30 basis points).
General and administrative expenses as a percentage of total net revenues increased 20 basis points, primarily driven by the impact of our ownership change in Starbucks Japan (approximately 10 basis points).
The $20 million decrease in litigation credit for fiscal 2015 was due to lapping a prior year credit related to a reduction of our estimated prejudgment interest payable associated with the Kraft arbitration, as a result of paying our obligation earlier than anticipated.
Income from equity investees decreased $18 million, primarily due to the impact of our ownership change in Starbucks Japan and the absence of income from our Malaysia joint venture sold in the fourth quarter of fiscal 2014, partially offset by improved performance from our North American Coffee Partnership and China joint ventures. As a percentage of total revenues, income from equity investees decreased 30 basis points, primarily due to the impact of our ownership change in Starbucks Japan (approximately 30 basis points).
The overall increase in operating margin of 10 basis points was driven by the changes discussed above, including the impact of our ownership change in Starbucks Japan and the acquisition-related transaction and integration costs, which contributed unfavorably to operating margin (approximately 90 basis points).
Other Income and Expenses
| Fiscal Year Ended | Sep 27, 2015 | Sep 28, 2014 | Sep 27, 2015 | Sep 28, 2014 | |||||||||
| As a % of Total Net Revenues | |||||||||||||
| Operating income | $ | 3,601.0 | $ | 3,081.1 | 18.8 | % | 18.7 | % | |||||
| Gain resulting from acquisition of joint venture | 390.6 | — | 2.0 | — | |||||||||
| Loss on extinguishment of debt | (61.1 | ) | — | (0.3 | ) | — | |||||||
| Interest income and other, net | 43.0 | 142.7 | 0.2 | 0.9 | |||||||||
| Interest expense | (70.5 | ) | (64.1 | ) | (0.4 | ) | (0.4 | ) | |||||
| Earnings before income taxes | 3,903.0 | 3,159.7 | 20.4 | 19.2 | |||||||||
| Income tax expense | 1,143.7 | 1,092.0 | 6.0 | 6.6 | |||||||||
| Net earnings including noncontrolling interests | 2,759.3 | 2,067.7 | 14.4 | 12.6 | |||||||||
| Net earnings/(loss) attributable to noncontrolling interests | 1.9 | (0.4 | ) | — | — | ||||||||
| Net earnings attributable to Starbucks | $ | 2,757.4 | $ | 2,068.1 | 14.4 | % | 12.6 | % | |||||
| Effective tax rate including noncontrolling interests | 29.3 | % | 34.6 | % |
During the first quarter of fiscal 2015, we recorded a gain of $391 million as a result of remeasuring our preexisting 39.5% ownership interest in Starbucks Japan to fair value upon acquisition.
During the fourth quarter of fiscal 2015, we recorded a loss of $61 million related to the redemption of our $550 million of 6.250% Senior Notes (the "2017 notes"), which were originally scheduled to mature in August 2017. The loss primarily relates to the optional redemption premium outlined in the 2017 notes indenture, as well as the derecognition of the capitalized issuance costs and unamortized discount.
Interest income and other, net decreased $100 million, primarily due to lapping the gain on the sale of our equity interest in our Malaysia joint venture ($68 million) in the prior year and net unfavorable fair value adjustments from derivative instruments used to manage our risk of commodity price fluctuations ($25 million) in fiscal 2015.
Interest expense increased $6 million primarily due to incurring a full quarter of interest in the first quarter of fiscal 2015 on the long-term debt we issued in December of fiscal 2014 as well as the reclassification of $2 million from accumulated other comprehensive income to interest expense related to remaining unrecognized losses from interest rate contracts associated with the 2017 notes redeemed in the fourth quarter of fiscal 2015.
Our tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amounts of income we earn in those jurisdictions, as well as discrete items that may occur in any given year, but are not consistent from year to year. The effective tax rate for fiscal 2015 was 29.3% compared to 34.6% for fiscal 2014. The decrease in the rate for fiscal 2015 was primarily due to the 3.7% impact of the gain associated with the remeasurement of our preexisting 39.5% ownership interest in Starbucks Japan upon acquisition, which was almost entirely non-taxable, as well as the 1.5% incremental tax benefit related to domestic manufacturing deductions claimed in fiscal 2015 on U.S. corporate income tax returns for fiscal years 2011 through 2015.
Segment Information
Results of operations by segment (in millions):
Americas
| Fiscal Year Ended | Sep 27, 2015 | Sep 28, 2014 | Sep 27, 2015 | Sep 28, 2014 | |||||||||
| As a % of Americas Total Net Revenues | |||||||||||||
| Net revenues: | |||||||||||||
| Company-operated stores | $ | 11,925.6 | $ | 10,866.5 | 89.7 | % | 90.7 | % | |||||
| Licensed stores | 1,334.4 | 1,074.9 | 10.0 | 9.0 | |||||||||
| Foodservice and other | 33.4 | 39.1 | 0.3 | 0.3 | |||||||||
| Total net revenues | 13,293.4 | 11,980.5 | 100.0 | 100.0 | |||||||||
| Cost of sales including occupancy costs | 4,845.0 | 4,487.0 | 36.4 | 37.5 | |||||||||
| Store operating expenses | 4,387.9 | 3,946.8 | 33.0 | 32.9 | |||||||||
| Other operating expenses | 122.8 | 100.4 | 0.9 | 0.8 | |||||||||
| Depreciation and amortization expenses | 522.3 | 469.5 | 3.9 | 3.9 | |||||||||
| General and administrative expenses | 192.1 | 167.8 | 1.4 | 1.4 | |||||||||
| Total operating expenses | 10,070.1 | 9,171.5 | 75.8 | 76.6 | |||||||||
| Operating income | $ | 3,223.3 | $ | 2,809.0 | 24.2 | % | 23.4 | % | |||||
| Store operating expenses as a % of related revenues | 36.8 | % | 36.3 | % |
Revenues
Americas total net revenues for fiscal 2015 increased $1.3 billion, or 11%, primarily due to increased revenues from company-operated stores (contributing $1.1 billion) and licensed stores (contributing $260 million).
The increase in company-operated store revenues was driven by a 7% increase in comparable store sales ($745 million), as well as incremental revenues from 318 net new Starbucks® company-operated store openings over the past 12 months ($455 million). Partially offsetting these increases was unfavorable foreign currency translation ($139 million), primarily driven by the strengthening of the U.S. dollar against the Canadian dollar.
The increase in licensed store revenues was primarily due to higher product sales to and royalty revenues from our licensees, resulting from increased La Boulange™ food sales to our licensees beginning in the first quarter of fiscal 2015, as well as the opening of 317 net new licensed stores over the past 12 months and improved comparable store sales.
Operating Expenses
Cost of sales including occupancy costs as a percentage of total net revenues decreased 110 basis points, primarily driven by leverage on cost of sales (approximately 60 basis points), lower commodity costs (approximately 30 basis points), mainly dairy, and sales leverage on occupancy costs (approximately 30 basis points).
Store operating expenses as a percentage of total net revenues increased 10 basis points. As a percentage of company-operated store revenues, store operating expenses increased 50 basis points, primarily driven by increased investments in store partners (employees) and digital platforms related to in-store initiatives (approximately 130 basis points), partially offset by sales leverage (approximately 100 basis points).
Other operating expenses as a percentage of total net revenues increased 10 basis points. Excluding the impact of company-operated store revenues, other operating expenses were flat, primarily driven by sales leverage (approximately 60 basis points), offset by the impairment of certain assets in the region (approximately 60 basis points).
Depreciation and amortization expenses as a percentage of total revenues were flat, primarily driven by sales leverage (approximately 10 basis points), offset by incremental costs from investments in our existing store portfolio (approximately 10 basis points).
The combination of these changes resulted in an overall increase in operating margin of 80 basis points over fiscal 2014.
China/Asia Pacific
| Fiscal Year Ended | Sep 27, 2015 | Sep 28, 2014 | Sep 27, 2015 | Sep 28, 2014 | |||||||||
| As a % of China/Asia Pacific Total Net Revenues | |||||||||||||
| Net revenues: | |||||||||||||
| Company-operated stores | $ | 2,127.3 | $ | 859.4 | 88.8 | % | 76.1 | % | |||||
| Licensed stores | 264.4 | 270.2 | 11.0 | 23.9 | |||||||||
| Foodservice and other | 4.2 | — | 0.2 | — | |||||||||
| Total net revenues | 2,395.9 | 1,129.6 | 100.0 | 100.0 | |||||||||
| Cost of sales including occupancy costs | 1,071.5 | 547.4 | 44.7 | 48.5 | |||||||||
| Store operating expenses | 609.8 | 221.1 | 25.5 | 19.6 | |||||||||
| Other operating expenses | 62.2 | 48.0 | 2.6 | 4.2 | |||||||||
| Depreciation and amortization expenses | 150.7 | 46.1 | 6.3 | 4.1 | |||||||||
| General and administrative expenses | 120.8 | 58.5 | 5.0 | 5.2 | |||||||||
| Total operating expenses | 2,015.0 | 921.1 | 84.1 | 81.5 | |||||||||
| Income from equity investees | 119.6 | 164.0 | 5.0 | 14.5 | |||||||||
| Operating income | $ | 500.5 | $ | 372.5 | 20.9 | % | 33.0 | % | |||||
| Store operating expenses as a % of related revenues | 28.7 | % | 25.7 | % |
Discussion of our China/Asia Pacific segment results below reflects the impact of fully consolidating Starbucks Japan due to the ownership change from an equity method joint venture to a company-operated market since the acquisition date of October 31, 2014. 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 Starbucks Japan's net earnings, which we recognized within income from equity investees. This resulted in a lower gross margin and a very high operating margin. Under the company-operated ownership model, Starbucks Japan's operating results are reflected in most income statement lines of this segment and have an operating margin more in line with that of our other retail businesses.
Revenues
China/Asia Pacific total net revenues for fiscal 2015 increased $1.3 billion, or 112%, largely due to increased revenues from company-operated stores ($1.3 billion). The increase in company-operated store revenues was primarily driven by incremental revenues from the acquisition of Starbucks Japan ($1.1 billion). Also contributing were incremental revenues from the opening of 247 net new company-operated stores over the past 12 months ($160 million) and a 9% increase in comparable store sales ($74 million).
Licensed store revenues decreased $6 million, primarily due to our ownership change in Starbucks Japan to mostly company-operated stores ($45 million). This decrease was partially offset by increased product sales to and royalty revenues from licensees ($27 million), resulting from the opening of 520 net new licensed store openings over the past 12 months, improved comparable store sales, and incremental revenues from the ownership changes in Australia and Malaysia ($17 million) in the fourth quarter of fiscal 2014.
Operating Expenses
Cost of sales including occupancy costs as a percentage of total net revenues decreased 380 basis points, primarily due to the impact of our ownership change in Starbucks Japan (approximately 230 basis points) and the shift in our cost of sales mix resulting from growth of company-operated stores, which have a higher gross margin (approximately 50 basis points). Sales leverage (approximately 40 basis points) also contributed.
Store operating expenses as a percentage of total net revenues increased 590 basis points. As a percentage of company-operated store revenues, store operating expenses increased 300 basis points, primarily driven by the impact of our ownership change in Starbucks Japan (approximately 410 basis points), partially offset by the sale of our Australia retail operations in the fourth quarter of fiscal 2014 (approximately 70 basis points) and sales leverage (approximately 50 basis points).
Other operating expenses as a percentage of total net revenues decreased 160 basis points. Excluding the impact of company-operated store revenues, other operating expenses increased 540 basis points, primarily due to the impact of our ownership change in Starbucks Japan (approximately 350 basis points) as well as increased salaries and benefits largely due to increased headcount to support growth in our China market (approximately 150 basis points).
Depreciation and amortization expenses as a percentage of total revenues increased 220 basis points, primarily due to the impact of our ownership change in Starbucks Japan (approximately 210 basis points).
General and administrative expenses as a percentage of total revenues decreased 20 basis points, primarily due to sales leverage (approximately 40 basis points) and the impact of the sale of our Australia retail operations in the fourth quarter of fiscal 2014 (approximately 20 basis points), which includes lapping professional fees associated with the sale. The impact of our ownership change in Starbucks Japan contributed unfavorably (approximately 60 basis points).
Income from equity investees decreased $44 million, primarily due to the impact of our ownership change in Starbucks Japan and absence of income from our Malaysia joint venture sold in the fourth quarter of fiscal 2014, partially offset by improved performance from our China joint venture. As a percentage of total net revenues, income from equity investees declined 950 basis points, primarily due to the impact of our ownership change in Starbucks Japan (approximately 870 basis points).
The overall decrease in operating margin of 1,210 basis points over fiscal 2014 was primarily driven by the impact of our ownership change in Starbucks Japan (approximately 1,410 basis points), partially offset by 200 basis points of margin expansion driven by the other items discussed above.
EMEA
| Fiscal Year Ended | Sep 27, 2015 | Sep 28, 2014 | Sep 27, 2015 | Sep 28, 2014 | |||||||||
| As a % of EMEA Total Net Revenues | |||||||||||||
| Net revenues: | |||||||||||||
| Company-operated stores | $ | 911.2 | $ | 1,013.8 | 74.9 | % | 78.3 | % | |||||
| Licensed stores | 257.2 | 238.4 | 21.1 | 18.4 | |||||||||
| Foodservice | 48.3 | 42.6 | 4.0 | 3.3 | |||||||||
| Total net revenues | 1,216.7 | 1,294.8 | 100.0 | 100.0 | |||||||||
| Cost of sales including occupancy costs | 582.5 | 646.8 | 47.9 | 50.0 | |||||||||
| Store operating expenses | 308.7 | 365.8 | 25.4 | 28.3 | |||||||||
| Other operating expenses | 51.8 | 48.2 | 4.3 | 3.7 | |||||||||
| Depreciation and amortization expenses | 52.0 | 59.4 | 4.3 | 4.6 | |||||||||
| General and administrative expenses | 56.6 | 59.1 | 4.7 | 4.6 | |||||||||
| Total operating expenses | 1,051.6 | 1,179.3 | 86.4 | 91.1 | |||||||||
| Income from equity investees | 3.1 | 3.7 | 0.3 | 0.3 | |||||||||
| Operating income | $ | 168.2 | $ | 119.2 | 13.8 | % | 9.2 | % | |||||
| Store operating expenses as a % of related revenues | 33.9 | % | 36.1 | % |
Revenues
EMEA total net revenues for fiscal 2015 decreased $78 million, or 6%. The decrease was primarily due to a decline in company-operated store revenues ($103 million), which was largely due to unfavorable foreign currency translation ($94 million). Also contributing to the decrease in company-operated revenues was the shift to more licensed stores in the region, which includes net store closures as well as the absence of revenues from the conversion of certain stores in the U.K. from company-operated to licensed. This decline was partially offset by 4% growth in comparable store sales.
Licensed store revenues increased $19 million, or 8%, primarily due to higher product sales to and royalty revenues from our licensees ($45 million), resulting from the opening of 238 net new licensed stores over the past 12 months and improved comparable store sales, partially offset by unfavorable foreign currency translation ($22 million).
Operating Expenses
Cost of sales including occupancy costs as a percentage of total net revenues decreased 210 basis points, primarily due to favorable foreign currency exchange (approximately 130 basis points). We buy and sell products, primarily roasted coffee, in multiple currencies throughout the region depending on the functional currency of each market. Differences in those rates generated favorable foreign currency exchange for fiscal 2015 resulting in a benefit in cost of sales. Sales leverage(approximately 40 basis points) also contributed to the decrease.
Store operating expenses as a percentage of total net revenues decreased 290 basis points. As a percentage of company-operated store revenues, store operating expenses decreased 220 basis points primarily due to gains on the sales of certain store
assets in the region (approximately 150 basis points) as well as decreased expenses, largely salaries and benefits, driven by the shift to more licensed stores (approximately 40 basis points).
Other operating expenses as a percentage of total net revenues increased 60 basis points. Excluding the impact of company-operated store revenues, other operating expenses decreased 20 basis points, primarily driven by the gains on the sales of certain assets in the region (approximately 40 basis points) and improved collection results (approximately 20 basis points). These decreases were partially offset by increased costs to grow our non-retail operations in the region (approximately 50 basis points), largely driven by higher marketing costs.
The combination of these changes resulted in an overall increase in operating margin of 460 basis points over fiscal 2014.
Channel Development
| Fiscal Year Ended | Sep 27, 2015 | Sep 28, 2014 | Sep 27, 2015 | Sep 28, 2014 | |||||||||
| As a % of Channel Development Total Net Revenues | |||||||||||||
| Net revenues: | |||||||||||||
| CPG | $ | 1,329.0 | $ | 1,178.8 | 76.8 | % | 76.2 | % | |||||
| Foodservice | 401.9 | 367.2 | 23.2 | 23.8 | |||||||||
| Total net revenues | 1,730.9 | 1,546.0 | 100.0 | 100.0 | |||||||||
| Cost of sales | 974.8 | 882.4 | 56.3 | 57.1 | |||||||||
| Other operating expenses | 210.5 | 187.0 | 12.2 | 12.1 | |||||||||
| Depreciation and amortization expenses | 2.7 | 1.8 | 0.2 | 0.1 | |||||||||
| General and administrative expenses | 16.2 | 18.2 | 0.9 | 1.2 | |||||||||
| Total operating expenses | 1,204.2 | 1,089.4 | 69.6 | 70.5 | |||||||||
| Income from equity investees | 127.2 | 100.6 | 7.3 | 6.5 | |||||||||
| Operating income | $ | 653.9 | $ | 557.2 | 37.8 | % | 36.0 | % |
Revenues
Channel Development total net revenues for fiscal 2015 increased $185 million, or 12%, over the prior year, primarily driven by higher sales of premium single-serve products ($97 million) and U.S. packaged coffee ($42 million), as well as an increase in foodservice sales ($35 million).
Operating Expenses
Cost of sales as a percentage of total net revenues decreased 80 basis points, primarily due to leverage on cost of sales (approximately 100 basis points).
Other operating expenses as a percentage of total net revenues increased 10 basis points, primarily driven by increased marketing expenses (approximately 60 basis points), largely due to new premium single-serve product launches. This increase was partially offset by lower professional fees (approximately 30 basis points) and sales leverage (approximately 20 basis points).
Income from equity investees increased $27 million, driven by higher income from our North American Coffee Partnership joint venture, primarily due to increased sales of bottled Frappuccino® and Starbucks Doubleshot® beverages, largely driven by new product launches and higher sales volumes.
The combination of these changes contributed to an overall increase in operating margin of 180 basis points over fiscal 2014.
All Other Segments
| Fiscal Year Ended | Sep 27, 2015 | Sep 28, 2014 | % Change | |||||||
| Net revenues: | ||||||||||
| Company-operated stores | $ | 233.2 | $ | 238.2 | (2.1 | )% | ||||
| Licensed stores | 5.9 | 5.1 | 15.7 | % | ||||||
| CPG, foodservice and other | 286.7 | 253.6 | 13.1 | |||||||
| Total net revenues | 525.8 | 496.9 | 5.8 | |||||||
| Cost of sales including occupancy costs | 316.5 | 287.2 | 10.2 | |||||||
| Store operating expenses | 104.7 | 104.5 | 0.2 | |||||||
| Other operating expenses | 76.5 | 74.6 | 2.5 | |||||||
| Depreciation and amortization expenses | 16.3 | 15.2 | 7.2 | |||||||
| General and administrative expenses | 36.6 | 42.2 | (13.3 | ) | ||||||
| Total operating expenses | 550.6 | 523.7 | 5.1 | |||||||
| Operating loss | $ | (24.8 | ) | $ | (26.8 | ) | (7.5 | )% |
All Other Segments primarily includes Teavana, Seattle’s Best Coffee, Evolution Fresh, as well as certain developing businesses such as the Starbucks Reserve® Roastery & Tasting Rooms.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash and Investment Overview
Our cash and investments were $3.4 billion and $1.9 billion as of October 2, 2016 and September 27, 2015, respectively. We actively manage our cash and investments in order to internally fund operating needs, make scheduled interest and principal payments on our borrowings, make acquisitions, and return cash to shareholders through common stock cash dividend payments and share repurchases. Our investment portfolio primarily includes highly liquid available-for-sale securities, including corporate debt securities, government treasury securities (foreign and domestic), mortgage and asset-backed securities, state and local government obligations and agency obligations. As of October 2, 2016, approximately $1.6 billion of cash and investments were held in foreign subsidiaries.
Borrowing capacity
In the first quarter of fiscal 2016, we replaced our 2013 credit facility with our new $1.5 billion unsecured, revolving 2016 credit facility (the "credit facility") with various banks, of which $150 million may be used for issuances of letters of credit.
The credit facility is available for working capital, capital expenditures and other corporate purposes, including acquisitions and share repurchases, and is currently set to mature on November 6, 2020. Starbucks has the option, subject to negotiation and agreement with the related banks, to increase the maximum commitment amount by an additional $750 million. Borrowings under the credit facility will bear interest at a variable rate based on LIBOR, and, for U.S. dollar-denominated loans under certain circumstances, a Base Rate (as defined in the credit facility), in each case plus an applicable margin. The applicable margin is based on the better of (i) the Company's long-term credit ratings assigned by Moody's and Standard & Poor's rating agencies and (ii) the Company's fixed charge coverage ratio, pursuant to a pricing grid set forth in the credit agreement. The current applicable margin is 0.565% for Eurocurrency Rate Loans and 0.00% (nil) for Base Rate Loans. The credit facility contains provisions requiring us to maintain compliance with certain covenants, including a minimum fixed charge coverage ratio, which measures our ability to cover financing expenses. As of October 2, 2016, we were in compliance with all applicable covenants. No amounts were outstanding under our credit facility as of October 2, 2016.
Under our commercial paper program, we 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. Amounts outstanding under the commercial paper program are required to be backstopped by available commitments under our credit facility discussed above. 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. As of October 2, 2016, we had no borrowings under our commercial paper program.
In May 2016, we issued long-term debt in an underwritten registered public offering, which consisted of $500 million of 10-year 2.450% Senior Notes (the "2026 notes") due June 2026. We will use the net proceeds from the offering to enhance our sustainability programs around coffee supply chain management through Eligible Sustainability Projects. Interest on the 2026 notes is payable semi-annually on June 15 and December 15 of each year, commencing on December 15, 2016.
In February 2016, we issued long-term debt in an underwritten registered public offering, which consisted of $500 million of 5-year 2.100% Senior Notes (the "2021 notes") due February 2021. In May 2016, we reopened this offering with the same terms and issued an additional $250 million of Senior Notes (collectively, the "2021 notes") for an aggregate amount outstanding of $750 million. Interest on the 2021 notes is payable semi-annually on February 4 and August 4 of each year, commencing on August 4, 2016.
See Note 9, Debt, to the consolidated financial statements included in Item 8 of Part II of this 10-K for details of the components of our long-term debt.
The indentures under which all of our Senior Notes were issued require us to maintain compliance with certain covenants, including limits on future liens and sale and leaseback transactions on certain material properties. As of October 2, 2016, we were in compliance with all applicable covenants.
Use of Cash
We expect to use our available cash and investments, including, but not limited to, additional potential future borrowings under the credit facility and commercial paper program, to invest in our core businesses, including capital expenditures, new product innovations, related marketing support and partner and digital investments, return cash to shareholders through common stock cash dividend payments and share repurchases, as well as other new business opportunities related to our core businesses. Further, we may use our available cash resources to make proportionate capital contributions to our investees. We may also seek strategic acquisitions to leverage existing capabilities and further build our business in support of our growth agenda. Acquisitions may include increasing our ownership interests in our investees. Any decisions to increase such ownership interests will be driven by valuation and fit with our ownership strategy.
We believe that future cash flows generated from operations and existing cash and investments both domestically and internationally will be sufficient to finance capital requirements for our core businesses in those respective markets as well as shareholder distributions for the foreseeable future. Significant new joint ventures, acquisitions and/or other new business opportunities may require additional outside funding. We have borrowed funds domestically and continue to believe we have the ability to do so at reasonable interest rates; however, additional borrowings would result in increased interest expense in the future.
We consider the majority of undistributed earnings of our foreign subsidiaries and equity investees as of October 2, 2016 to be indefinitely reinvested, and, accordingly, no U.S. income and foreign withholding taxes have been provided on such earnings. We have not, nor do we anticipate the need to, repatriate funds to the U.S. to satisfy domestic liquidity needs; however, in the event that we need to repatriate all or a portion of our foreign cash to the U.S., we would be subject to additional U.S. income taxes, which could be material. We do not believe it is practicable to calculate the potential tax impact of repatriation, as there is a significant amount of uncertainty around the calculation, including the availability and amount of foreign tax credits at the time of repatriation, tax rates in effect and other indirect tax consequences associated with repatriation.
During each of the first three quarters of fiscal 2015, we declared and paid a cash dividend to shareholders of $0.16 per share. In the fourth quarter of fiscal 2015 and each of the first three quarters of fiscal 2016 we declared a cash dividend of $0.20 per share. Cash returned to shareholders through dividends in fiscal 2016 and 2015 totaled $1,178.0 million and $958.7 million, respectively. In the fourth quarter of fiscal 2016, we declared a cash dividend of $0.25 per share to be paid on December 2, 2016 with an expected payout of approximately $365.1 million.
During fiscal years 2016 and 2015, we repurchased 34.9 million and 29.0 million shares of common stock, respectively, or $2.0 billion and $1.4 billion, respectively, under our ongoing share repurchase program. On April 21, 2016, we announced that our Board of Directors approved an increase of 100 million shares to the program. Including this additional authorization of 100 million shares, the number of remaining shares authorized for repurchase at October 2, 2016 totaled 117.8 million.
Other than normal operating expenses, cash requirements for fiscal 2017 are expected to consist primarily of capital expenditures for new company-operated stores; remodeling and refurbishment of, and equipment upgrades for, existing company-operated stores; systems and technology investments in our stores and in the support infrastructure; and additional investments in manufacturing capacity. Total capital expenditures for fiscal 2017 are expected to be approximately $1.6 billion.
Cash Flows
Cash provided by operating activities was $4.6 billion for fiscal 2016, compared to $3.7 billion for fiscal 2015. The change was primarily due to increased earnings, the lapping of the non-cash acquisition related gain for Starbucks Japan and the timing of our cash payments for income taxes.
Cash used by investing activities totaled $2.2 billion for fiscal 2016, compared to $1.5 billion for fiscal 2015. The change was primarily due to the increase in purchases of investments, primarily government treasury securities and corporate debt securities, partially offset by the lapping of cash used to acquire Sazaby's 39.5% ownership interest in Starbucks Japan.
Cash used by financing activities for fiscal 2016 totaled $1.8 billion, compared to $2.3 billion for fiscal 2015. The change was primarily due to the lapping of long-term debt redemption in fiscal 2015, higher incremental proceeds from long-term debt issued in February and May 2016 over prior year's issuance and lapping of cash used to fund the second tender offer step of the Starbucks Japan acquisition. These reductions in cash used were partially offset by increased cash returned to shareholders through higher share repurchases and dividend payments compared to fiscal 2015.
Contractual Obligations
The following table summarizes our contractual obligations and borrowings as of October 2, 2016, and the timing and effect that such commitments are expected to have on our liquidity and capital requirements in future periods (in millions):
| Payments Due by Period | |||||||||||||||||||
| Contractual Obligations (1) | Total | Less than 1 Year | 1 - 3 Years | 3 - 5 Years | More than 5 Years | ||||||||||||||
| Operating lease obligations(2) | $ | 7,285.0 | $ | 1,125.1 | $ | 1,902.6 | $ | 1,561.8 | $ | 2,695.5 | |||||||||
| Financing lease obligations | 62.0 | 4.3 | 8.6 | 8.4 | 40.7 | ||||||||||||||
| Debt obligations | |||||||||||||||||||
| Principal payments | 3,600.0 | 400.0 | 350.0 | 750.0 | 2,100.0 | ||||||||||||||
| Interest payments | 932.2 | 94.2 | 181.3 | 163.0 | 493.7 | ||||||||||||||
| Purchase obligations(3) | 1,223.1 | 786.4 | 371.5 | 57.5 | 7.7 | ||||||||||||||
| Other obligations(4) | 182.7 | 18.2 | 35.7 | 16.5 | 112.3 | ||||||||||||||
| Total | $ | 13,285.0 | $ | 2,428.2 | $ | 2,849.7 | $ | 2,557.2 | $ | 5,449.9 |
| (1) | Income tax liabilities for uncertain tax positions were excluded as we are not able to make a reasonably reliable estimate of the amount and period of related future payments. As of October 2, 2016, we had $154.2 million of gross unrecognized tax benefits for uncertain tax positions, which includes accrued interest and penalties. |
| (2) | Amounts include direct lease obligations, excluding any taxes, insurance and other related expenses. |
| (3) | Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on Starbucks and that specify all significant terms. Green coffee purchase commitments comprise 90% of total purchase obligations. |
| (4) | Other obligations include other long-term liabilities primarily consisting of asset retirement obligations and hedging instruments. |
Starbucks currently expects to fund these commitments primarily with operating cash flows generated in the normal course of business.
Off-Balance Sheet Arrangements
Off-balance sheet arrangements relate to operating lease and purchase commitments detailed in the footnotes to the consolidated financial statements included in Item 8 of Part II of this 10-K.
COMMODITY PRICES, AVAILABILITY AND GENERAL RISK CONDITIONS
Commodity price risk represents Starbucks primary market risk, generated by our purchases of green coffee and dairy products, among other items. We purchase, roast and sell high-quality arabica coffee and related products and risk arises from the price volatility of green coffee. In addition to coffee, we also purchase significant amounts of dairy products to support the needs of our company-operated stores. The price and availability of these commodities directly impacts our results of operations, and we expect commodity prices, particularly coffee, to impact future results of operations. For additional details see Product Supply in Item 1, as well as Risk Factors in Item 1A of this 10-K.
FINANCIAL RISK MANAGEMENT
Market risk is defined as the risk of losses due to changes in commodity prices, foreign currency exchange rates, equity security prices and interest rates. We manage our exposure to various market-based risks according to a market price risk management policy. Under this policy, market-based risks are quantified and evaluated for potential mitigation strategies, such as entering into hedging transactions. The market price risk management policy governs how hedging instruments may be used to mitigate risk. Risk limits are set annually and prohibit speculative trading activity. We also monitor and limit the amount of associated counterparty credit risk, which we consider to be low. In general, hedging instruments do not have maturities in excess of three years. Refer to Note 1, Summary of Significant Accounting Policies, and Note 3, Derivative Financial Instruments, to the consolidated financial statements included in Item 8 of Part II of this 10-K for further discussion of our hedging instruments.
The sensitivity analyses disclosed below provide only a limited, point-in-time view of the market risk of the financial instruments discussed. The actual impact of the respective underlying rates and price changes on the financial instruments may differ significantly from those shown in the sensitivity analyses.
Commodity Price Risk
We purchase commodity inputs, primarily coffee, dairy products, diesel and other commodities, that are used in our operations and are subject to price fluctuations that impact our financial results. We use a combination of pricing features embedded within supply contracts, such as fixed-price and price-to-be-fixed contracts for coffee purchases, and financial derivatives to manage our commodity price risk exposure.
The following table summarizes the potential impact as of October 2, 2016 to Starbucks future net earnings and other comprehensive income ("OCI") from changes in commodity prices. The information provided below relates only to the hedging instruments and does not represent the corresponding changes in the underlying hedged items (in millions):
| Increase/(Decrease) to Net Earnings | Increase/(Decrease) to OCI | ||||||||||||||
| 10% Increase in Underlying Rate | 10% Decrease in Underlying Rate | 10% Increase in Underlying Rate | 10% Decrease in Underlying Rate | ||||||||||||
| Commodity hedges | $ | 12 | $ | (12 | ) | $ | 1 | $ | (1 | ) |
Foreign Currency Exchange Risk
The majority of our revenue, expense and capital purchasing activities are transacted in U.S. dollars. However, because a portion of our operations consists of activities outside of the U.S., we have transactions in other currencies, primarily the Canadian dollar, Japanese yen, Chinese renminbi, British pound, South Korean won and euro. To reduce cash flow volatility from foreign currency fluctuations, we enter into derivative instruments to hedge portions of cash flows of anticipated intercompany royalty payments, inventory purchases, intercompany borrowing and lending activities and certain other transactions in currencies other than the functional currency of the entity that enters into the arrangements, as well as the translation risk of certain balance sheet items. See Note 3, Derivative Financial Instruments, to the consolidated financial statements included in Item 8 of Part II of this 10-K for further discussion.
The following table summarizes the potential impact as of October 2, 2016 to Starbucks future net earnings and other comprehensive income from changes in the fair value of these derivative financial instruments due to a change in the value of the U.S. dollar as compared to foreign exchange rates. The information provided below relates only to the hedging instruments and does not represent the corresponding changes in the underlying hedged items (in millions):
| Increase/(Decrease) to Net Earnings | Increase/(Decrease) to OCI | ||||||||||||||
| 10% Increase in Underlying Rate | 10% Decrease in Underlying Rate | 10% Increase in Underlying Rate | 10% Decrease in Underlying Rate | ||||||||||||
| Foreign currency hedges | $ | 9 | $ | (9 | ) | $ | 126 | $ | (126 | ) |
Equity Security Price Risk
We have minimal exposure to price fluctuations on equity mutual funds and equity exchange-traded funds within our trading securities portfolio. Trading securities are recorded at fair value with unrealized holding gains and losses recorded in interest income and other, net in the consolidated statements of earnings. Our trading securities portfolio approximates a portion of our liability under our Management Deferred Compensation Plan ("MDCP"), which is included in accrued compensation and related costs, within accrued liabilities on the consolidated balance sheets. Changes in our MDCP liability are recorded in general and administrative expenses in the consolidated statements of earnings.
We performed a sensitivity analysis based on a 10% change in the underlying equity prices of our investments as of October 2, 2016 and determined that such a change would not have a significant impact on the fair value of these instruments.
Interest Rate Risk
Long-term Debt
We utilize short-term and long-term financing and may use interest rate hedges to manage our overall interest expense related to our existing fixed-rate debt, as well as to hedge the variability in cash flows due to changes in benchmark interest rates related to anticipated debt issuances. See Note 3, Derivative Financial Instruments and Note 9, Debt, to the consolidated financial statements included in Item 8 of Part II of this 10-K for further discussion of our interest rate hedge agreements and details of the components of our long-term debt, respectively, as of October 2, 2016.
The following table summarizes the impact of a change in interest rates as of October 2, 2016 on the fair value of Starbucks debt (in millions):
| Change in Fair Value | ||||||||||||||
| Stated Interest Rate | Fair Value | 100 Basis Point Increase in Underlying Rate | 100 Basis Point Decrease in Underlying Rate | |||||||||||
| 2016 notes | 0.875 | % | $ | 400 | $ | — | $ | — | ||||||
| 2018 notes | 2.000 | % | $ | 357 | $ | (7 | ) | $ | 7 | |||||
| 2021 notes | 2.100 | % | $ | 766 | $ | (31 | ) | $ | 31 | |||||
| 2022 notes | 2.700 | % | $ | 526 | $ | (27 | ) | $ | 27 | |||||
| 2023 notes | 3.850 | % | $ | 839 | $ | (51 | ) | $ | 51 | |||||
| 2026 notes | 2.450 | % | $ | 509 | $ | (43 | ) | $ | 43 | |||||
| 2045 notes | 4.300 | % | $ | 417 | $ | (70 | ) | $ | 70 |
Available-for-Sale Securities
Our available-for-sale securities comprise a diversified portfolio consisting mainly of investment-grade debt securities. The primary objective of these investments is to preserve capital and liquidity. Available-for-sale securities are recorded on the consolidated balance sheets at fair value with unrealized gains and losses reported as a component of accumulated other comprehensive income. We do not hedge the interest rate exposure on our available-for-sale securities. We performed a sensitivity analysis based on a 100 basis point change in the underlying interest rate of our available-for-sale securities as of October 2, 2016 and determined that such a change would not have a significant impact on the fair value of these instruments.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that management believes are both most important to the portrayal of our financial condition and results and require the most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions.
Our significant accounting policies are discussed in Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements included in Item 8 of Part II of this 10-K. We believe that of our significant accounting policies, the following policies involve a higher degree of judgment and/or complexity.
We consider financial reporting and disclosure practices and accounting policies quarterly to ensure that they provide accurate and transparent information relative to the current economic and business environment. During the past three fiscal years, we have not made any material changes to the accounting methodologies used to assess the areas discussed below, unless noted otherwise.
Property, Plant and Equipment and Other Finite-Lived Assets
We evaluate property, plant and equipment and other finite-lived assets for impairment when facts and circumstances indicate that the carrying values of such assets may not be recoverable. When evaluating for impairment, we first compare the carrying value of the asset to the asset’s estimated future undiscounted cash flows. If the estimated undiscounted future cash flows are less than the carrying value of the asset, we determine if we have an impairment loss by comparing the carrying value of the asset to the asset's estimated fair value and recognize an impairment charge when the asset’s carrying value exceeds its estimated fair value. The adjusted carrying amount of the asset becomes its new cost basis and is depreciated over the asset's remaining useful life.
Long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For company-operated store assets, the impairment test is performed at the individual store asset group level. The fair value of a store’s assets is estimated using a discounted cash flow model. For other long-lived assets, fair value is determined using an approach that is appropriate based on the relevant facts and circumstances, which may include discounted cash flows, comparable transactions, or comparable company analyses.
Our impairment calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values. Key assumptions used in estimating future cash flows and asset fair values include projected revenue growth and operating expenses, as well as forecasting asset useful lives and selecting an appropriate discount rate. For company-operated stores, estimates of revenue growth and operating expenses are based on internal projections and consider the store’s historical performance, the local market economics and the business environment impacting the store’s performance. The discount rate is selected based on what we believe a buyer would assume when determining a purchase price for the store. These estimates are subjective and our ability to realize future cash flows and asset fair values is affected by factors such as ongoing maintenance and improvement of the assets, changes in economic conditions, and changes in operating performance.
During fiscal 2016, there were no significant changes in any of our estimates or assumptions that had a material impact on the outcome of our impairment calculations. However, as we periodically reassess estimated future cash flows and asset fair values, changes in our estimates and assumptions may cause us to realize material impairment charges in the future.
Goodwill and Indefinite-Lived Intangible Assets
We evaluate goodwill and indefinite-lived intangible assets for impairment annually during our third fiscal quarter, or more frequently if an event occurs or circumstances change that would indicate that impairment may exist. When evaluating these assets for impairment, we may first perform a qualitative assessment to determine whether it is more likely than not that a reporting unit or intangible asset group is impaired. If we do not perform a qualitative assessment, or if we determine that it is not more likely than not that the fair value of the reporting unit or intangible asset group exceeds its carrying amount, we calculate the estimated fair value of the reporting unit using discounted cash flows.
When assessing goodwill for impairment, our decision to perform a qualitative impairment assessment for an individual reporting unit in a given year is influenced by a number of factors, inclusive of the size of the reporting unit's goodwill, the significance of the excess of the reporting unit's estimated fair value over carrying value at the last quantitative assessment date, the amount of time in between quantitative fair value assessments and the date of acquisition. If we perform a quantitative assessment of an individual reporting unit’s goodwill, our impairment calculations contain uncertainties because they require management to make assumptions and to apply judgment when estimating future cash flows and asset fair values, including projected revenue growth and operating expenses related to existing businesses, product innovation and new store concepts, as well as selecting an appropriate discount rate. Estimates of revenue growth and operating expenses are based on internal projections considering the reporting unit’s past performance and forecasted growth, strategic initiatives, local market economics and the local business environment impacting the reporting unit’s performance. The discount rate is selected based on the estimated cost of capital for a market participant to operate the reporting unit in the region. These estimates are highly subjective, and our ability to realize the future cash flows used in our fair value calculations is affected by factors such as the success of strategic initiatives, changes in economic conditions, changes in our operating performance and changes in our business strategies, including retail initiatives and international expansion.
When assessing indefinite-lived intangible assets for impairment, where we perform a qualitative assessment, we evaluate if changes in events or circumstances have occurred that indicate that impairment may exist. If we do not perform a qualitative impairment assessment or if changes in events and circumstances indicate that a quantitative assessment should be performed, management is required to calculate the fair value of the intangible asset group. The fair value calculation includes estimates of revenue growth, which are based on past performance and internal projections for the intangible asset group's forecasted growth, and royalty rates, which are adjusted for our particular facts and circumstances. The discount rate is selected based on the estimated cost of capital that reflects the risk profile of the related business. These estimates are highly subjective, and our ability to achieve the forecasted cash flows used in our fair value calculations is affected by factors such as the success of
strategic initiatives, changes in economic conditions, changes in our operating performance and changes in our business strategies, including retail initiatives and international expansion.
For fiscal 2016, we determined the fair value of our material reporting units and intangible asset groups were significantly in excess of their carrying values. Accordingly, we did not recognize any material impairment charges during the current fiscal year. During fiscal 2016, there were no significant changes in any of our estimates or assumptions that had a material impact on the outcome of our impairment calculations. However, as we periodically reassess estimated future cash flows and asset fair values, changes in our estimates and assumptions may cause us to realize material impairment charges in the future.
Income Taxes
We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the respective tax bases of our assets and liabilities. Deferred tax assets and liabilities are measured using current enacted tax rates expected to apply to taxable income in the years in which we expect the temporary differences to reverse. We routinely evaluate the likelihood of realizing the benefit of our deferred tax assets and may record a valuation allowance if, based on all available evidence, we determine that some portion of the tax benefit will not be realized. Changes in tax laws and rates may affect recorded deferred tax assets and liabilities and our effective tax rate in the future; however, we do not expect changes from recently enacted tax laws to be material to the consolidated financial statements.
In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of operations. In projecting future taxable income, we consider historical results and incorporate assumptions about the amount of future state, federal and foreign pretax operating income adjusted for items that do not have tax consequences. Our assumptions regarding future taxable income are consistent with the plans and estimates we use to manage our underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income/(loss).
In addition, our income tax returns are periodically audited by domestic and foreign tax authorities. These audits include review of our tax filing positions, including the timing and amount of deductions taken and the allocation of income between tax jurisdictions. We evaluate our exposures associated with our various tax filing positions and recognize a tax benefit only if it is more likely than not that the tax position will be sustained upon examination by the relevant taxing authorities, including resolutions of any related appeals or litigation processes, based on the technical merits of our position. For uncertain tax positions that do not meet this threshold, we record a related liability. We adjust our unrecognized tax benefit liability and income tax expense in the period in which the uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position or when new information becomes available. As discussed in Note 13, Income Taxes, to the consolidated financial statements included in Item 8 of Part II of this 10-K, there is a reasonable possibility that our unrecognized tax benefit liability will be adjusted within 12 months due to the expiration of a statute of limitations and expected consent from taxing authorities.
We have generated income in certain foreign jurisdictions that has not been subject to U.S. income taxes. We intend to reinvest these earnings for the foreseeable future. While we do not expect to repatriate cash to the U.S. to satisfy domestic liquidity needs, if these amounts were distributed to the U.S., in the form of dividends or otherwise, we would be subject to additional U.S. income taxes, which could be material. Determination of the amount of unrecognized deferred income tax liabilities on these earnings is not practicable because such liability, if any, is dependent on circumstances existing if and when remittance occurs.
Our income tax expense, deferred tax assets and liabilities and liabilities for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid. Deferred tax asset valuation allowances and our liabilities for unrecognized tax benefits require significant management judgment regarding applicable statutes and their related interpretation, the status of various income tax audits and our particular facts and circumstances. Although we believe that the judgments and estimates discussed herein are reasonable, actual results could differ, and we may be exposed to losses or gains that could be material. To the extent we prevail in matters for which a liability has been established or are required to pay amounts in excess of our established liability, our effective income tax rate in a given financial statement period could be materially affected.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements included in Item 8 of Part II of this 10-K for a detailed description of recent accounting pronouncements.
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