Clear as (coffee) sludge…

December 24, 2003

Starbucks’ (SBUX) disclosure on stock options in its 10-K filed yesterday reminds me of what happens when you leave the coffee maker on too long: you get a thick, black sludge. For a company that relies on options this heavily — 8 million were exercised in 2003 — the company really needs to do a better job at telling investors exactly what’s going on. While the company does provide information on its pro-forma net income (as if the options had been expensed), it makes it impossible to see how they’re arriving at their numbers. So for 2003, the company reported 69 cents in net income, which would have dropped to 58 cents by accounting for the options, according to the K. But then the company goes on to say that it used a volatility rate of 37 to 55 percent to arrive at that number. Lowering the volatility rate — a trick many other companies have been using lately now that companies are required to provide this info at the start of their footnotes — makes options expenses appear to be lower than they otherwise would, which makes the pro-forma number look better than it otherwise would. Even so, most large companies seem able to provide one number. Save the mud for the coffee — it doesn’t belong in a 10-K!

Merry Christmas, Happy Hannukkah, Happy Kwanzaa, and, if you’re agnostic, Happy Thursday! I’ll be back next Monday.

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