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Securities and Exchange Commission
Page and benefits, occupancy costs, depreciation expenses relating to manufacturing facilities and distribution operations and other costs, in support of sourcing, procuring, manufacturing, warehousing and transportation activities of products sold at our company-operated and licensed stores as well as through our Channel Development segment and other businesses. Also included are inventory and supply chain asset impairment costs. Accordingly, distribution costs for inventory provided to company-operated stores are included in cost of sales.
We consider products to be finished goods when sourcing, acquisition, production, manufacturing and distribution activities have been completed and the related products have been received at company-operated stores or at licensed partners’ stores, distribution centers or contractual destinations. Additional costs incurred at company-operated stores are more closely related to sales efforts and are classified as store operating expenses. Under this framework, wages and benefits related to store employees are included in store operating expenses; however, store equipment depreciation costs are included in depreciation and amortization expenses on our consolidated statements of earnings. With respect to store employee wages and benefits related to preparing beverages, food and ground coffee, it should be noted that such preparation time is not tracked separately and represents a fraction of regular tasks, which include:
welcoming customers, explaining menu items, informing customers about new items and limited-time-offerings, answering questions, handling complaints and accepting orders and payments;
operating cash registers and credit card machines;
managing supply orders;
taking inventory, replenishing items in display cases, behind the counter or in storage areas and restocking dining areas;
preparing and packaging beverage and food items for sale;
cleaning coffee and other machines, restaurant areas and restrooms;
emptying trash and sanitizing equipment and utensils;
updating signage and displays;
ensuring the store and equipment are in good working order and coordinating repairs and service;
working with field and corporate leadership on store performance, safety and security measures, promotions of new beverage and food items and customer reward programs; and recruiting, hiring and training new partners (employees) and training existing partners.
While both beverage and food preparation are an important component of store employee responsibilities, we typically expect, on average, the preparation time to be incidental to overall store operations and inventory turns to be fairly high. Furthermore, capitalizing beverage preparation overhead costs would be administratively burdensome since store labor is variable depending on each store’s circumstance (i.e., customer traffic patterns and composition, localized beverage availability and customization, variation of beverage equipment in each store, selection of stores testing new beverages, variations in wage rates, types of store formats and capabilities, etc.). Additionally, seasonal and other changes in our core product and limited time offerings would warrant frequent updates of overhead rates for inventory capitalization, which would require reliable detailed tracking, or some other means, of estimating every beverage, every day at every store. As food preparation generally involves defrosting or reheating products, we do not believe significant costs are incurred to be capitalized. Therefore, it is our view that wages and benefits relating to beverage and food preparation are relatively minor to the overall store operating costs and are predominantly supporting store and selling operations as opposed to inventory production. Furthermore, these costs would also represent a small fraction of the total costs we incur to source, procure, manufacture and distribute products to our stores. As a result, wages and benefits related to beverage and food preparation are included in store operating expenses, and depreciation costs of related store equipment are included in depreciation and amortization expenses, similar to depreciation costs related to other fixed assets in our stores. Further consideration surrounding our presentation and classification of these costs is provided in the immediately succeeding paragraphs.
As presented in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the fiscal year ended September 29, 2019, we analyze store operating expenses as a percentage of net revenues from company-operated stores. We believe the inclusion of all costs incurred within our physical stores (such as wages and benefits related to store employees and occupancy costs) in store operating expenses provides a more meaningful and faithful metric of our store operating results. Additionally, we do not present gross margin, or net revenues less cost of sales, as part of our consolidated statements of earnings, nor does management use gross margin metrics to regularly evaluate performance.
Additionally, in accordance with ASC 360, we evaluate property, plant and equipment for impairment when facts and circumstances indicate the carrying values of such assets may not be recoverable. For company-operated store assets, the impairment test is performed at the individual store asset group level; that is, all fixed assets in each individual store are considered an asset group since the store represents the lowest level of identifiable cash flows. Inclusion of store equipment used in beverage and food preparation as part of the individual store asset group allows for a more meaningful impairment and performance evaluation of each store as well as our company-operated retail businesses, versus the alternative of comingling store-specific equipment with other warehousing and manufacturing assets, which support the entire enterprise
(i.e., multiple lines and channels of businesses).
We acknowledge ASC
330-10-30 addresses inventoriable costs and have observed the diversity in practice regarding how such costs are classified. Based on our considerations herein and given that we do not classify certain costs that bring final products to our end customers as part of inventory or cost of sales, we agree to change the description of the cost of sales caption to “product and distribution costs” on our consolidated statements of earnings beginning with the Form 10-Q for our fiscal quarter ending June 28, 2020. We will also expand our Summary of Significant Accounting Policies footnote to include additional disclosures as noted in our response to the Staff’s third comment.
