UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     .

STARBUCKS CORPORATION

(Exact Name of Registrant as Specified in its Charter)

Washington		91-1325671
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

(Address of principal executive offices)

(Registrant’s Telephone Number, including Area Code)

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

Yes  o    No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Title		Shares Outstanding as of August 4, 2008
Common Stock, par value $0.001 per share		730.6 million

 

 

STARBUCKS CORPORATION

FORM 10-Q

For the Quarterly Period Ended June 29, 2008

Table of Contents

		Page
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited):			3
Condensed Consolidated Statements of Earnings/(Loss)			3
Condensed Consolidated Balance Sheets			4
Condensed Consolidated Statements of Cash Flows			5
Notes to Condensed Consolidated Financial Statements			6
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3 Quantitative and Qualitative Disclosures About Market Risk			23
Item 4 Controls and Procedures			24
PART II. OTHER INFORMATION			24
Item 1 Legal Proceedings			24
Item 1A Risk Factors			24
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			25
Item 6 Exhibits			26
Signatures			27
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

STARBUCKS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS/(LOSS)

		13 Weeks Ended								39 Weeks Ended
		June 29,				July 1,				June 29,				July 1,
		2008				2007				2008				2007
Net revenues:
Company-operated retail		$	2,180.2			$	2,010.8			$	6,674.6			$	5,940.3
Specialty:
Licensing			281.3				254.9				860.5				743.6
Foodservice and other			112.5				93.6				332.5				286.7
Total specialty			393.8				348.5				1,193.0				1,030.3
Total net revenues			2,574.0				2,359.3				7,867.6				6,970.6
Cost of sales including occupancy costs			1,163.1				1,004.0				3,455.8				2,933.5
Store operating expenses			958.3				819.2				2,812.7				2,372.2
Other operating expenses			79.6				74.7				248.1				219.6
Depreciation and amortization expenses			139.8				119.4				411.1				343.0
General and administrative expenses			116.1				121.3				359.6				365.9
Restructuring charges			167.7				—				167.7				—
Total operating expenses			2,624.6				2,138.6				7,455.0				6,234.2
Income from equity investees			29.0				24.5				77.1				69.5
Operating income/(loss)			(21.6	)			245.2				489.7				805.9
Interest income and other, net			0.9				8.6				11.8				28.1
Interest expense			(12.5	)			(10.8	)			(40.8	)			(24.5	)
Earnings/(loss) before income taxes			(33.2	)			243.0				460.7				809.5
Income taxes			(26.5	)			84.7				150.6				295.4
Net earnings/(loss)		$	(6.7	)		$	158.3			$	310.1			$	514.1
Net earnings/(loss) per common share — basic		$	(0.01	)		$	0.21			$	0.42			$	0.68
Net earnings/(loss) per common share — diluted		$	(0.01	)		$	0.21			$	0.42			$	0.66
Weighted average shares outstanding:
Basic			731.7				744.5				730.7				751.7
Diluted			731.7				763.6				741.7				773.5

See Notes to Condensed Consolidated Financial Statements.

STARBUCKS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

		June 29,				September 30,
		2008				2007
ASSETS
Current assets:
Cash and cash equivalents		$	297.0			$	281.3
Short-term investments – available-for-sale securities			—				83.8
Short-term investments – trading securities			52.7				73.6
Accounts receivable, net			284.1				287.9
Inventories			662.7				691.7
Prepaid expenses and other current assets			145.4				148.8
Deferred income taxes, net			215.4				129.4
Total current assets			1,657.3				1,696.5
Long-term investments – available-for-sale securities			77.6				21.0
Equity and other investments			311.1				258.9
Property, plant and equipment, net			2,947.4				2,890.4
Other assets			258.3				219.4
Other intangible assets			65.8				42.1
Goodwill			234.8				215.6
TOTAL ASSETS		$	5,552.3			$	5,343.9
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Commercial paper and short-term borrowings		$	615.9			$	710.3
Accounts payable			329.4				390.8
Accrued compensation and related costs			325.3				332.3
Accrued occupancy costs			88.4				74.6
Accrued taxes			48.9				92.5
Other accrued expenses			279.8				257.4
Deferred revenue			373.5				296.9
Current portion of long-term debt			0.7				0.8
Total current liabilities			2,061.9				2,155.6
Long-term debt			549.8				550.1
Other long-term liabilities			463.3				354.1
Total liabilities			3,075.0				3,059.8
Shareholders’ equity:
Common stock ($0.001 par value) — authorized, 1,200.0 shares; issued and outstanding, 733.3 and 738.3 shares, respectively (includes 3.4 common stock units in both periods)			0.7				0.7
Other additional paid-in-capital			39.4				39.4
Retained earnings			2,357.6				2,189.4
Accumulated other comprehensive income			79.6				54.6
Total shareholders’ equity			2,477.3				2,284.1
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	5,552.3			$	5,343.9

See Notes to Condensed Consolidated Financial Statements.

STARBUCKS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		39 Weeks Ended
		June 29,				July 1,
		2008				2007
OPERATING ACTIVITIES:
Net earnings		$	310.1			$	514.1
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization			431.4				360.9
Provision for impairments and asset disposals			237.5				21.2
Deferred income taxes, net			(89.6	)			(40.5	)
Equity in income of investees			(35.5	)			(38.6	)
Distributions of income from equity investees			23.1				42.3
Stock-based compensation			59.7				78.5
Tax benefit from exercise of stock options			3.6				5.9
Excess tax benefit from exercise of stock options			(11.8	)			(52.0	)
Other			(0.2	)			0.6
Cash provided/(used) by changes in operating assets and liabilities:
Inventories			32.6				(16.7	)
Accounts payable			(55.4	)			(30.9	)
Accrued taxes			(19.6	)			38.0
Deferred revenue			76.9				76.9
Other operating assets and liabilities			115.9				80.1
Net cash provided by operating activities			1,078.7				1,039.8
INVESTING ACTIVITIES:
Purchase of available-for-sale securities			(64.8	)			(208.0	)
Maturity of available-for-sale securities			15.3				162.2
Sale of available-for-sale securities			75.9				36.9
Acquisitions, net of cash acquired			(22.5	)			(53.4	)
Net purchases of equity, other investments and other assets			(32.3	)			(48.4	)
Net additions to property, plant and equipment			(733.9	)			(772.1	)
Net cash used by investing activities			(762.3	)			(882.8	)
FINANCING ACTIVITIES:
Repayments of commercial paper			(55,057.4	)			(3,795.4	)
Proceeds from issuance of commercial paper			54,961.8				4,675.4
Repayments of short-term borrowings			(0.6	)			(1,370.0	)
Proceeds from short-term borrowings			1.1				670.0
Proceeds from issuance of common stock			88.9				136.6
Excess tax benefit from exercise of stock options			11.8				52.0
Principal payments on long term debt			(0.5	)			(0.6	)
Repurchase of common stock			(311.4	)			(671.0	)
Other			(1.2	)			—
Net cash used by financing activities			(307.5	)			(303.0	)
Effect of exchange rate changes on cash and cash equivalents			6.8				6.2
Net increase/(decrease) in cash and cash equivalents			15.7				(139.8	)
CASH AND CASH EQUIVALENTS:
Beginning of period			281.3				312.6
End of period		$	297.0			$	172.8
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of capitalized interest		$	31.6			$	25.4
Income taxes		$	248.4			$	294.6

See Notes to Condensed Consolidated Financial Statements.

STARBUCKS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Summary of Significant Accounting Policies

Financial Statement Preparation

The unaudited condensed consolidated financial statements as of June 29, 2008, and for the 13-week and 39-week periods ended June 29, 2008 and July 1, 2007, have been prepared by Starbucks Corporation (“Starbucks” or the “Company”) under the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of management, the financial information for the 13-week and 39-week periods ended June 29, 2008 and July 1, 2007 reflects all adjustments and accruals, which are of a normal recurring nature, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods.

The financial information as of September 30, 2007 is derived from the Company’s audited consolidated financial statements and notes for the fiscal year ended September 30, 2007 (“fiscal 2007”), included in Item 8 in the Fiscal 2007 Annual Report on Form 10-K (the “10-K”). The information included in this Form 10-Q should be read in conjunction with management’s discussion and analysis and notes to the financial statements in the 10-K.

The results of operations for the 13-week and 39-week periods ended June 29, 2008 are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending September 28, 2008 (“fiscal 2008”).

Certain reclassifications of prior year’s balances have been made to conform to the current format, including reclassifications from “Other operating expenses” to “General and administrative expenses” on the consolidated statements of earnings.

Investments

As of June 29, 2008, the Company had $77.6 million invested in available-for-sale securities, consisting of auction rate securities, and financial and industrial bonds.

Auction rate securities (“ARS”) have long-dated maturities but provide liquidity through a Dutch auction process that resets the applicable interest rate at pre-determined calendar intervals. Due to the auction failures that began in mid-February 2008, these securities have become illiquid and are classified as long-term investments. The investment principal associated with the failed auctions will not be accessible until:

	•		successful auctions resume;
	•		an active secondary market for these securities develops;
	•		the issuers replace these securities with another form of financing; or
	•		final payments are made according to the contractual maturities of the debt issues which range from 22 to 37 years.

The Company intends to hold the ARS until it can recover the full principal amount and has the ability to do so based on other sources of liquidity. The Company expects such recoveries to occur prior to the contractual maturities. On July 14, 2008, one of the Company’s ARS was called at its par value of $4.7 million.

The estimated market value of the Company’s ARS holdings at June 29, 2008 was $69.7 million. This amount includes an adjustment of $849 thousand for unrealized losses determined to be temporary, which is included in accumulated other comprehensive income as a reduction in shareholders’ equity. The Company’s ARS are collateralized by portfolios of student loans, substantially all of which are guaranteed by the United States Department of Education. In the third quarter of fiscal 2008, $5.2 million of principal invested in ARS held by the Company was downgraded to AA/Aa3 by Standard & Poor’s and Moody’s, respectively. All of the remaining securities retain a triple-A rating from two or more of the following major rating agencies: Moody’s, Standard & Poor’s and Fitch Ratings.

Income Taxes

On October 1, 2007, the first day of the Company’s first fiscal quarter of 2008, Starbucks adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income tax positions recognized in the financial statements in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 109. Under FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on measurement, classification, interest and penalties associated with tax positions, and income tax disclosures.

The cumulative effects of applying FIN 48 have been recorded as a decrease of $1.7 million and $1.6 million, respectively, to the Company’s fiscal 2008 opening balances of retained earnings and additional paid-in capital. The Company also recorded an increase of $28.5 million to current income tax assets, an increase of $12.2 million to long-term income tax assets, a decrease of $24.6 million to current tax liabilities and an increase of $68.6 million to long-term tax liabilities. As of October 1, 2007, the Company had $69.9 million of gross unrecognized tax benefits of which $27.6 million, if recognized, would affect the effective tax rate. The Company recognizes interest and penalties related to income tax matters in income tax expense. Accrued interest expense upon adoption was $11.4 million, before benefit of federal tax deduction.

Starbucks is currently under routine audit by the IRS for fiscal year 2005 and by various state taxing jurisdictions for fiscal years 2003 through 2006. The IRS audit is at an advanced stage in the examination process for fiscal year 2005. Therefore, all uncertain tax positions were re-evaluated based on all available information and certain remeasurements were required. As a result, the Company reversed a portion of long-term taxes payable, which resulted in recording a tax benefit in the third quarter of fiscal year 2008. The Company is no longer subject to U.S. federal or state examination for years before fiscal year 2004, with the exception of nine states. As a result of federal and certain state statute closures related to fiscal year 2004, the Company reversed the long-term income taxes payable, which resulted in recording an additional tax benefit in the third quarter of fiscal year 2008. The Company is subject to income tax in many jurisdictions outside the United States, none of which are individually material to the consolidated financial statements.

There is a reasonable possibility that the unrecognized tax benefits will change within the next 12 months, but the Company does not expect this change to be material to the consolidated financial statements.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. For financial assets and liabilities, SFAS 157 will be effective for Starbucks first fiscal quarter of 2009. As permitted by FSP-FAS 157-2, SFAS 157 is effective for nonfinancial assets and liabilities for Starbucks first fiscal quarter of 2010. Early adoption of all aspects of SFAS 157 is permitted. Starbucks is in the process of determining the effect on the Company’s consolidated financial statements, if any, upon adoption of SFAS 157, and whether it will adopt the requirements prior to the required adoption dates.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value. SFAS 159 will be effective for Starbucks first fiscal quarter of 2009. Early adoption is permitted. Starbucks is in the process of determining if it will elect to apply any of the provisions of SFAS 159 upon adoption and what, if any, impacts adoption of the statement would have on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”), which replaces SFAS 141. SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any resulting goodwill, and any noncontrolling interest in the acquiree. SFAS 141R also provides for disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R will be effective for Starbucks first fiscal quarter of 2010 and must be applied prospectively to business combinations completed on or after that date. The Company will evaluate how the new requirements could impact the accounting for any acquisitions completed beginning in fiscal 2010 and beyond, and the potential impact on the Company’s consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”), which establishes accounting and reporting standards for noncontrolling interests (“minority interests”) in subsidiaries. SFAS 160 clarifies that a noncontrolling interest in a subsidiary should be accounted for as a component of equity separate from the parent’s equity. SFAS 160 will be effective for Starbucks first fiscal quarter of 2010 and must be applied prospectively, except for the presentation and disclosure requirements, which will apply retrospectively. The Company is currently evaluating the potential impact of the adoption of SFAS 160 on the Company’s consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“SFAS 161”), which requires enhanced disclosures about an entity’s derivative and hedging activities. SFAS 161 will be effective for Starbucks second fiscal quarter of 2009.

Note 2: Acquisitions

In the third quarter of fiscal 2008, the Company purchased 100% equity ownership in Coffee Equipment Company (“CEC”). CEC is located in Seattle and is the manufacturer and seller of a single cup, commercial grade coffee brewer called the Clover^TM.

In the second quarter of fiscal 2008, the Company purchased the remaining 10% equity ownership in its operations in Beijing, China. Starbucks has applied the consolidation method of accounting since the first quarter of fiscal 2007, when it acquired 90% of these previously-licensed operations.

Note 3: Restructuring Charges

As announced on July 1, 2008, the Company committed on June 25, 2008 to close approximately 600 underperforming Company-operated stores in the U.S. market. The decision was an integral part of its transformation strategy, first announced in January 2008, and was a result of a rigorous evaluation of the U.S. Company-operated store portfolio. The store closures are expected to occur during the remainder of fiscal 2008 and the first half of fiscal 2009.

The Company recognized $167.7 million of restructuring charges in the 13 weeks ended June 29, 2008, comprised of store asset impairments for the stores targeted for closure. The related lease exit costs and severance expenses are expected to be recognized during the remainder of fiscal 2008 and the first half of fiscal 2009.

Note 4: Derivative Financial Instruments

Cash Flow Hedges

The Company and certain subsidiaries enter into cash flow derivative instruments to hedge portions of anticipated revenue streams and inventory purchases in currencies other than the entity’s functional currency. From time to time, the Company also uses futures contracts to hedge the variable price component for a small portion of its price-to-be fixed green coffee purchase contracts.

In addition, during fiscal 2007 the Company entered into, dedesignated and settled forward interest rate contracts to hedge movements in interest rates prior to issuance of its 6.25% Senior Notes. The resulting net losses from these contracts are being reclassified to “Interest expense” on the consolidated statement of earnings over the life of the Senior Notes due in 2017.

Including the interest rate contracts, the Company had accumulated net derivative losses of $10.3 million, net of taxes, in other comprehensive income as of June 29, 2008, related to cash flow hedges. Of this amount, $5.1 million of net derivative losses pertain to hedging instruments that will be dedesignated within 12 months and will also continue to experience fair value changes before affecting earnings. There was no significant ineffectiveness for cash flow hedges recognized during the 13-week and 39-week periods ended June 29, 2008 or July 1, 2007. Outstanding contracts will expire within 27 months.

Net Investment Hedges

Net investment derivative instruments are used to hedge the Company’s equity method investment in Starbucks Coffee Japan, Ltd. (“Starbucks Japan”), as well as the Company’s net investments in its Canadian, United Kingdom (“U.K.”) and Chinese subsidiaries, to minimize foreign currency exposure.

The Company had accumulated net derivative losses of $14.7 million, net of taxes, in other comprehensive income as of June 29, 2008, related to net investment derivative hedges. Outstanding contracts expire within 32 months.

Other Comprehensive Income — Cash Flow and Net Investment Hedges

The following table presents the net gains and losses reclassified from other comprehensive income into the consolidated statements of earnings during the periods indicated for cash flow and net investment hedges (in millions):

		13 Weeks Ended								39 Weeks Ended
		Jun 29,				Jul 1,				Jun 29,				Jul 1,
		2008				2007				2008				2007
Cash flow hedges:
Reclassified gains/(losses) into total net revenues		$	(0.7	)		$	0.5			$	(2.2	)		$	1.5
Reclassified losses into cost of sales			(1.4	)			—				(6.0	)			(1.1	)
Reclassified losses into interest expense			(0.2	)			—				(0.5	)			—
Net reclassified gains/(losses) — cash flow hedges			(2.3	)			0.5				(8.7	)			0.4
Net investment hedges:
Reclassified gains into interest income and other, net			—				1.2				3.4				3.8
Total		$	(2.3	)		$	1.7			$	(5.3	)		$	4.2

Other Derivatives

Starbucks entered into foreign currency forward contracts that are not designated as hedging instruments for accounting purposes to mitigate the translation risk of certain balance sheet items. For the 13-week and 39-week periods ended June 29, 2008, these forward contracts resulted in net losses of $4.2 million and $7.5 million, respectively. These losses were largely offset by the financial impact of translating foreign currency denominated payables and receivables, which is also recognized in “Interest income and other, net.” For the 13-week and 39-week periods ended July 1, 2007, similar forward contracts resulted in net losses of $3.6 million and $5.9 million, respectively.

Note 5: Inventories

Inventories consist of the following (in millions):

		Jun 29,				Sep 30,				Jul 1,
		2008				2007				2007
Coffee:
Unroasted		$	374.7			$	339.5			$	362.4
Roasted			84.8				88.6				74.4
Other merchandise held for sale			103.9				175.5				130.7
Packaging and other supplies			99.3				88.1				90.0
Total		$	662.7			$	691.7			$	657.5

As of June 29, 2008, the Company had committed to purchasing green coffee totaling $364 million under fixed-price contracts and an estimated $53 million under price-to-be-fixed contracts. The Company believes, based on relationships established with its suppliers in the past, the risk of non-delivery on such purchase commitments is remote.

Note 6: Property, Plant and Equipment

Property, plant and equipment consist of the following (in millions):

		Jun 29,				Sep 30,
		2008				2007
Land		$	59.2			$	56.2
Buildings			202.5				161.7
Leasehold improvements			3,376.6				3,179.6
Store equipment			1,065.7				1,007.0

		Jun 29,				Sep 30,
		2008				2007
Roasting equipment			219.5				208.8
Furniture, fixtures and other			518.9				477.9
			5,442.4				5,091.2
Less: accumulated depreciation and amortization			(2,777.6	)			(2,416.1	)
			2,664.8				2,675.1
Work in progress			282.6				215.3
Property, plant and equipment, net		$	2,947.4			$	2,890.4

Note 7: Debt

The Company’s debt consists of the following (in millions):

		Jun 29,				Sep 30,
		2008				2007
Commercial paper program (weighted average interest rate of 2.8% and 5.4%, respectively)		$	614.7			$	710.3
Other short-term borrowings			1.2				—
Current portion of long-term debt			0.7				0.8
Short-term debt			616.6				711.1
6.25% Senior Notes (due Aug 2017)			549.2				549.0
Other long-term debt			0.6				1.1
Long-term debt			549.8				550.1
Total debt		$	1,166.4			$	1,261.2

Note 8: Current Liabilities

As of June 29, 2008 and September 30, 2007, the Company had $106.7 million and $97.1 million, respectively, of insurance and self-insurance reserves included in Other accrued expenses on the consolidated balance sheets. These reserves provide for the potential liabilities for workers’ compensation, general liability, property insurance, director and officers’ liability insurance and vehicle liability.

Note 9: Other Long-term Liabilities

The Company’s other long-term liabilities consist of the following (in millions):

		Jun 29,				Sep 30,
		2008				2007
Deferred rent		$	316.3			$	271.7
Unrecognized tax benefits			66.2				—
Asset retirement obligations			47.3				43.7
Minority interest			17.5				17.3
Other			16.0				21.4
Total		$	463.3			$	354.1

Unrecognized tax benefits represent the estimated long-term portion of the Company’s gross unrecognized tax benefits including interest upon the adoption of FIN 48. See Note 1 for additional information.

Note 10: Shareholders’ Equity

The Company has authorized 7.5 million shares of preferred stock, none of which was outstanding at June 29, 2008.

Share repurchase activity was as follows (in millions, except for average price data):

		39 Weeks Ended
		Jun 29,				Jul 1,
		2008				2007
Number of shares acquired			12.2				20.3
Average price per share of acquired shares		$	24.12			$	32.97

		39 Weeks Ended
		Jun 29,				Jul 1,
		2008				2007
Total accrual-based cost of acquired shares		$	295.3			$	671.0
Total cash-based cost of acquired shares		$	311.4			$	671.0

The difference between the accrual-based and cash-based cost of acquired shares represents the effect of the net change in unsettled trades from the prior fiscal year-end.

Comprehensive Income

Comprehensive income, net of related tax effects, is as follows (in millions):

		13 Weeks Ended								39 Weeks Ended
		Jun 29,				Jul 1,				Jun 29,				Jul 1,
		2008				2007				2008				2007
Net earnings (loss)		$	(6.7	)		$	158.3			$	310.1			$	514.1
Unrealized holding gains/(losses) on available-for-sale securities			(0.6	)			—				(0.6	)			0.2
Unrealized holding gains/(losses) on cash flow hedging instruments			0.7				(4.4	)			1.1				(0.4	)
Unrealized holding gains/(losses) on net investment hedging instruments			2.8				(1.7	)			(2.6	)			(2.8	)
Reclassification adjustment for net (gains)/losses realized in net earnings for cash flow hedges			1.2				(0.4	)			3.6				0.7
Net unrealized gains/(losses)			4.1				(6.5	)			1.5				(2.3	)
Translation adjustment			(9.6	)			6.8				23.5				15.7
Total comprehensive income/(loss)		$	(12.2	)		$	158.6			$	335.1			$	527.5

The components of accumulated other comprehensive income, net of tax, as presented on the consolidated balance sheets were as follows (in millions):

		Jun 29,				Sep 30,
		2008				2007
Net unrealized losses on hedging instruments and available-for-sale securities		$	(25.6	)		$	(27.1	)
Translation adjustment			105.2				81.7
Accumulated other comprehensive income		$	79.6			$	54.6

As of June 29, 2008, the translation adjustment of $105.2 million was net of tax provisions of $3.6 million. As of September 30, 2007, the translation adjustment of $81.7 million was net of tax provisions of $7.3 million.

Note 11: Stock-Based Compensation

The Company maintains several equity incentive plans under which it may grant non-qualified stock options, incentive stock options, restricted stock, restricted stock units (“RSUs”), or stock appreciation rights to employees, non-employee directors and consultants. As of June 29, 2008, there were 49.9 million shares of common stock available for issuance pursuant to future equity-based compensation awards. The Company also has employee stock purchase plans (“ESPP”).

The following table presents total stock-based compensation expense recognized in the consolidated statements of earnings (in millions):

		13 Weeks Ended								39 Weeks Ended
		Jun 29, 2008				Jul 1, 2007				Jun 29, 2008				Jul 1, 2007
Stock option expense		$	15.4			$	23.2			$	47.3			$	69.7
RSU expense			2.1				—				3.1				—
ESPP expense			2.9				3.1				9.3				8.8
Total stock-based compensation expense		$	20.4			$	26.3			$	59.7			$	78.5

The decrease in stock option expense was due to a higher level of forfeitures in fiscal 2008.

Options

The following table presents the weighted average assumptions used to value stock options, along with the related weighted average grant price for the 13-week and 39-week periods ended June 29, 2008 and July 1, 2007:

		Employee Stock Options Granted During the Period
		13 Weeks Ended								39 Weeks Ended
		Jun 29, 2008				Jul 1, 2007				Jun 29, 2008				Jul 1, 2007
Expected term (in years)			4.5				4.5				4.7				4.7
Expected stock price volatility			30.9	%			26.6	%			29.1	%			29.0	%
Risk-free interest rate			3.2	%			4.7	%			3.5	%			4.6	%
Expected dividend yield			0.0	%			0.0	%			0.0	%			0.0	%
Weighted average grant price		$	17.44			$	28.63			$	22.39			$	36.38
Estimated fair value per option granted		$	5.40			$	8.70			$	6.93			$	11.86

The assumptions used to calculate the fair value of stock awards granted are evaluated and revised, as necessary, to reflect market conditions and the Company’s experience.

The following table summarizes all stock option transactions from September 30, 2007 through June 29, 2008 (in millions, except per share and contractual life amounts):

						Weighted				Weighted
						Average				Average
		Shares				Exercise				Remaining				Aggregate
		Subject to				Price				Contractual				Intrinsic
		Options				per Share				Life (Years)				Value
Outstanding, September 30, 2007			65.5			$	20.97				6.2			$	507.5
Granted			14.7				22.39
Exercised			(5.1	)			10.98
Forfeited/Cancelled			(8.5	)			28.66
Outstanding, June 29, 2008			66.6				21.06				6.0				157.7
Exercisable, June 29, 2008			42.8				17.47				4.5				157.6
Vested and expected to vest, June 29, 2008			63.1				20.71				5.8				157.7

The closing market value of the Company’s stock on June 27, 2008 was $16.35. As of June 29, 2008, total unrecognized stock-based compensation expense related to nonvested stock options was approximately $85.6 million, before income taxes, and is expected to be recognized over a weighted average period of approximately 2.9 years.

RSUs

RSUs are awarded to eligible employees and entitle the grantee to receive shares of common stock at the end of a vesting period, subject to the employee’s continuing employment. The fair value of these service based RSUs are based on the fair value of Starbucks common stock on the award date. The following table summarizes all RSU transactions from September 30, 2007 through June 29, 2008 (in millions, except per share and contractual life amounts):

						Weighted				Weighted
						Average				Average
		Number				Grant Date				Remaining				Aggregate
		of				Fair Value				Contractual				Intrinsic
		Shares				per Share				Life (Years)				Value
Nonvested, September 30, 2007			0.2			$	27.83				3.0			$	4.7
Granted			1.5				16.96
Vested			—				—
Forfeited/Cancelled			(0.1	)			17.39
Nonvested, June 29, 2008			1.6				17.71				2.3				25.8

As of June 29, 2008, total unrecognized stock-based compensation expense related to nonvested RSUs was approximately $24.4 million, before income taxes, and is expected to be recognized over a weighted average period of approximately 3.5 years.

Note 12: Earnings/(Loss) Per Share

The following table presents the calculation of net earnings/(loss) per common share (“EPS”) - basic and diluted (in millions, except EPS):

		13 Weeks Ended								39 Weeks Ended
		Jun 29,				July 1,				Jun 29,				July 1,
		2008				2007				2008				2007
Net earnings/(loss)		$	(6.7	)		$	158.3			$	310.1			$	514.1
Weighted average common shares and common stock units outstanding (for basic calculation)			731.7				744.5				730.7				751.7
Dilutive effect of outstanding common stock options and RSUs			—				19.1				11.0				21.8
Weighted average common and common equivalent shares outstanding (for diluted calculation)			731.7				763.6				741.7				773.5
EPS — basic		$	(0.01	)		$	0.21			$	0.42			$	0.68
EPS — diluted		$	(0.01	)		$	0.21			$	0.42			$	0.66

The total number of potential dilutive options and RSUs were 69.8 million for the 13-week period ended June 29, 2008. These options and RSUs were not included in the computation of diluted net loss per common share for the quarter, because to do so would decrease the loss per share. The number of antidilutive options and RSUs totaled 21.7 million for the 13-week period ended July 1, 2007. The number of antidilutive options and RSUs totaled 40.7 million and 9.6 million for the 39-week periods ended June 29, 2008 and July 1, 2007, respectively.

Note 13: Commitments and Contingencies

Guarantees

The following table presents information on unconditional guarantees as of June 29, 2008 (in millions):

										Fair value estimate
		Maximum				Year Guarantee				recorded on
		Exposure				Expires in				Balance Sheet
Japanese yen-denominated bank loans (Starbucks Japan — an unconsolidated equity investee)		$	4.5				2014			$	—	(1)
Borrowings of other unconsolidated equity investees		$	18.7			2008 to 2012				$	4.3

Legal Proceedings

On June 3, 2004, two then-current employees of the Company filed a lawsuit, entitled Sean Pendlebury and Laurel Overton v. Starbucks Coffee Company, in the U.S. District Court for the Southern District of Florida claiming the Company violated requirements of the Fair Labor Standards Act (“FLSA”). The suit alleges that the Company misclassified its retail store managers as exempt from the overtime provisions of the FLSA, and that each manager therefore is entitled to overtime compensation for any week in which he or she worked more than 40 hours during the three years before joining the suit as a plaintiff, and for as long as they remain a manager thereafter. Plaintiffs seek to represent themselves and all similarly situated U.S. current and former store managers of the Company. Plaintiffs seek reimbursement for an unspecified amount of unpaid overtime compensation, liquidated damages, attorneys’ fees and costs. Plaintiffs also filed on June 3, 2004 a motion for conditional collective action treatment and court-supervised notice to additional putative class members under the opt-in procedures in section 16(b) of the FLSA. On January 3, 2005, the district court entered an order authorizing nationwide notice of the lawsuit to all current and former store managers employed by the Company during the three years before the suit was filed. A class-wide motion for summary judgment is currently pending before the District Court. A tentative trial date has been

scheduled for October 20, 2008. While acknowledging the uncertainties of litigation, the Company believes that the ultimate outcome of this matter will not have a material effect on its earnings, cash flow or financial position. Starbucks believes that the plaintiffs are properly classified as exempt under the federal wage laws and the Company intends to vigorously defend the lawsuit.

On October 8, 2004, a former hourly employee of the Company filed a lawsuit in San Diego County Superior Court entitled Jou Chau v. Starbucks Coffee Company. The lawsuit alleges that the Company violated the California Labor Code by allowing shift supervisors to receive tips. More specifically, the lawsuit alleges that since shift supervisors direct the work of baristas, they qualify as “agents” of the Company and are therefore excluded from receiving tips under California Labor Code Section 351, which prohibits employers and their agents from collecting or receiving tips left by patrons for other employees. The lawsuit further alleges that because the tipping practices violate the Labor Code, they also are unfair practices under the California Unfair Competition Law. In addition to recovery of an unspecified amount of tips distributed to shift supervisors, the lawsuit seeks penalties under California Labor Code Section 203 for willful failure to pay wages due. Plaintiff also seeks attorneys’ fees and costs. On February 28, 2008, the court ruled against the Company in the liability phase of the trial and on March 20, 2008 the court ordered the Company to pay approximately $87 million in restitution, plus interest. On July 31, 2008, the Company filed a notice of appeal with the California Court of Appeals. Starbucks believes that while the adverse ruling by the trial judge in this case makes the possibility of loss somewhat more likely, the Company is only at the very beginning of the appellate process. Starbucks believes that the likelihood that the Company will ultimately incur a loss in connection with this litigation is reasonably possible rather than probable. The Company has not accrued any loss related to this litigation.

On June 30, 2005, three individuals, Erik Lords, Hon Yeung, and Donald Brown filed a lawsuit in Orange County Superior Court, California. The lawsuit alleges that the Company violated the California Labor Code section 432.8 by asking job applicants to disclose at the time of application convictions for marijuana related offenses more than two years old. Plaintiffs also seek attorneys’ fees and costs. On November 1, 2007, the Court issued an order certifying the case as a class action, with the plaintiffs representing a class of all persons who have applied for employment with Starbucks Coffee Company in California since June 23, 2004 who cannot claim damages in excess of $200. On November 15, 2007, the court denied the Company’s motion for summary judgment. Starbucks has appealed the denial of its motion for summary judgment and the California Court of Appeals has agreed to hear the Company’s appeal. The Company cannot estimate the possible loss to the Company, if any. No trial date has been set. The Company believes its employment application complies with California law, and the Company intends to vigorously defend the lawsuit.

The Company is party to various other legal proceedings arising in the ordinary course of its business, but it is not currently a party to any legal proceeding that management believes would have a material adverse effect on the consolidated financial position or results of operations of the Company.

Note 14: Segment Reporting

Segment information is prepared on the basis that the Company’s management reviews financial information for operational decision making purposes. The tables below present information by operating segment (in millions):

		United												Unallocated
13 Weeks Ended		States				International				Global CPG				Corporate (1)				Total
June 29, 2008
Company-operated retail revenues		$	1,730.4			$	449.8			$	—			$	—			$	2,180.2
Licensing revenues			119.2				71.4				90.7				—				281.3
Foodservice and other revenues			98.1				14.4				—				—				112.5
Total net revenues			1,947.7				535.6				90.7				—				2,574.0
Depreciation and amortization			101.9				27.9				—				10.0				139.8
Income/(loss) from equity investees			(0.6	)			14.8				14.8				—				29.0
Operating income/(loss)			(27.8	)			35.5				48.7				(78.0	)			(21.6	)
Earnings/(loss) before income taxes			(25.9	)			35.5				48.7				(91.5	)			(33.2	)
Net impairment and disposition losses			194.2				1.2				—				(0.3	)			195.1
July 1, 2007
Company-operated retail revenues		$	1,646.3			$	364.5			$	—			$	—			$	2,010.8
Licensing revenues			110.1				57.7				87.1				—				254.9
Foodservice and other revenues			83.8				9.8				—				—				93.6

		United												Unallocated
13 Weeks Ended		States				International				Global CPG				Corporate (1)				Total
Total net revenues			1,840.2				432.0				87.1				—				2,359.3
Depreciation and amortization			89.1				21.2				0.1				9.0				119.4
Income from equity investees			—				11.8				12.7				—				24.5
Operating income/(loss)			253.2				32.5				41.9				(82.4	)			245.2
Earnings/(loss) before income taxes			254.0				35.5				41.9				(88.4	)			243.0
Net impairment and disposition losses			1.3				6.3				—				0.1				7.7

		United												Unallocated
39 Weeks Ended		States				International				Global CPG				Corporate (1)				Total
June 29, 2008
Company-operated retail revenues		$	5,346.2			$	1,328.4			$	—			$	—			$	6,674.6
Licensing revenues			372.2				200.7				287.6				—				860.5
Foodservice and other revenues			291.8				40.7				—				—				332.5
Total net revenues			6,010.2				1,569.8				287.6				—				7,867.6
Depreciation and amortization			302.5				80.1				—				28.5				411.1
Income/(loss) from equity investees			(0.9	)			42.1				35.9				—				77.1
Operating income/(loss)			477.0				107.4				142.0				(236.7	)			489.7
Earnings/(loss) before income taxes			486.3				116.3				142.0				(283.9	)			460.7
Net impairment and disposition losses			225.7				12.0				—				(0.2	)			237.5
July 1, 2007
Company-operated retail revenues		$	4,901.9			$	1,038.4			$	—			$	—			$	5,940.3
Licensing revenues			328.2				158.7				256.7				—				743.6
Foodservice and other revenues			259.4				27.3				—				—				286.7
Total net revenues			5,489.5				1,224.4				256.7				—				6,970.6
Depreciation and amortization			254.9				62.4				0.1				25.6				343.0
Income from equity investees			—				32.8				36.7				—				69.5
Operating income/(loss)			845.9				86.7				121.2				(247.9	)			805.9
Earnings/(loss) before income taxes			850.7				91.3				121.2				(253.7	)			809.5
Net impairment and disposition losses			6.5				13.5				—				1.2				21.2

Note 15: Subsequent Events

On July 29, 2008, Starbucks announced the reduction of approximately 1,000 open and filled positions within its leadership structure and its non-store organization, as part of its multi-faceted plan to transform the Company. The Company also announced its plan to close 61 stores in Australia, while 23 Company-operated stores would remain open in the market. By August 3, 2008, all 61 stores have ceased operations.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Certain statements herein, including statements regarding trends in or expectations relating to the expected effects of the Company’s transformation strategy, restructuring and other initiatives and charges, expenses and potential cost savings relating thereto, earnings per share, and other financial results, cash flow requirements, capital expenditures, anticipated store openings and closings, and economic conditions in the U.S. and other international markets all constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on currently available operating, financial and competitive information and are subject to various risks and uncertainties. Actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, coffee, dairy and other raw materials prices and availability, successful implementation of the Company’s transformation strategy, restructuring and other initiatives, successful execution of internal performance and

expansion plans, fluctuations in U.S. and international economies and currencies, the impact of competitors’ initiatives, the effect of legal proceedings, and other risks detailed herein, including those described in Part II Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q, in the Company’s Form 10-Q for the quarter ended March 30, 2008 and in Part II Item IA. “Risk Factors” in the Company’s 10-K.

A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. Users should not place undue reliance on the forward-looking statements, which speak only as of the date of this report. The Company is under no obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

This information should be read in conjunction with the condensed consolidated financial statements and the notes included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the 10-K.

General

Starbucks Corporation’s fiscal year ends on the Sunday closest to September 30. All references to store counts, including data for new store openings, are reported net of store closures.

Management Overview

Fiscal 2008 — Third Quarter in Review

Starbucks is continuing to experience declining customer traffic in its U.S. stores. With the U.S. segment representing 76% of consolidated revenues, the impact of this decline on the Company’s financial results for the third quarter and year-to-date periods in fiscal 2008 has been significant. The Company is also experiencing a decline in traffic in its U.K. stores. The Company believes that the weaker traffic is caused by a number of ongoing factors in the U.S. and U.K. economies that have negatively impacted consumers’ discretionary spending. In the U.S., these factors include the higher cost of such basic consumer staples as gas and food, rising levels of unemployment and personal debt, reduced access to consumer credit, and lower home values as well as increased foreclosure activity in certain areas of the country (California and Florida) where Starbucks has a high concentration of Company-operated stores. All of these developments have contributed to sharp declines in consumer confidence in the U.S.

Starbucks business is sensitive to increases and decreases in customer traffic. Increased customer visits create sales leverage, meaning that fixed expenses, such as occupancy costs, can be spread across a greater revenue base, thereby improving operating margins. But the reverse is also true - sales de-leveraging creates downward pressure on margins. The softness in U.S. revenues during the third quarter of fiscal 2008 impacted nearly all consolidated and U.S. segment operating expense line items when viewed as a percentage of sales.

Since January 2008, when Howard Schultz reassumed the role of president and chief executive officer in addition to his role as chairman, Starbucks has taken steps to address the deterioration in the U.S. retail environment, including the development and implementation of several important strategic initiatives as part of a transformation strategy designed to reinvigorate the Starbucks Experience for the Company’s customers, increase customer traffic in its U.S. stores, reduce infrastructure expenses, and improve the Company’s results of operations. These significant actions are designed to structure the Company’s business for long-term profitable growth. Among the most important of the initiatives announced to date is the planned closure of approximately 600 underperforming Company-operated stores in the U.S., which was announced on July 1, 2008. See “Recent Developments” below for more details.

As a result of the continued weak U.S. economy and decreased customer traffic, as well as the costs associated with the store closures and other actions in its transformation strategy, the Company’s third quarter results were negatively impacted in the following ways:

•

Consolidated operating loss was $21.6 million in the third fiscal quarter of 2008, and operating margin for the quarter was (0.8)% compared with 10.4% in the prior year. Approximately 650 basis points of the decrease in operating margin was a result of restructuring charges associated with the U.S. Company-operated store closures announced on July 1, 2008. Softness in U.S. revenues along with higher cost of sales including occupancy costs and store operating expenses were also significant drivers in the margin decline.

•

EPS for the quarter was a loss of $0.01, compared to EPS of $0.21 per share earned in the prior year. Restructuring charges associated with the U.S. Company-operated store closures announced on July 1, 2008 totaled $167.7 million pre-tax or $0.14 per share for the quarter. Additionally, the Company estimates that costs associated with the ongoing implementation of its transformation strategy negatively impacted EPS by approximately $0.03 per share in the third quarter. The year-to-date impact of the restructuring charges and the ongoing implementation of the Company’s transformation strategy have negatively impacted EPS by approximately $0.19 per share.

Recent Developments

During the third quarter of fiscal 2008, the Company continued implementing its strategy to transform and reinvigorate its business. Initiatives recently announced included:

•		A plan to close approximately 600 underperforming Company-operated stores in the U.S. market;
•		Restructuring the Company’s Australia business by closing 61 Company-operated stores, focusing on the remaining 23 stores in three key cities;
•		Reducing approximately 1,000 open and filled positions within the Company’s leadership structure and its non-store organization, to rationalize its infrastructure for the reduced number of stores; and

•

Introducing three new beverage platforms designed to invigorate the Company’s beverage offerings: energy beverages; a health and wellness beverage called Vivanno™ Nourishing Blends; and a new cold beverage category, the Sorbetto, currently available in Southern California.

Fiscal 2008 and 2009 Outlook

The Company’s management expects challenging economic conditions in the U.S. and U.K. to persist through the remainder of fiscal 2008 and at least into the first half of fiscal 2009. The Canadian economy is also beginning to show some early signs of softness, which may add pressure on financial results over the same time frame. Additionally, the Company’s earnings for the fourth quarter of fiscal 2008 and first half of fiscal 2009 will be impacted by the lease termination and severance costs from the U.S. and Australia store closures, and the fourth quarter of fiscal 2008 will be impacted by the non-store headcount reductions, which were announced in July 2008. The Company estimates that the combination of the U.S. and Australia store closures and head count reductions will result in a pre-tax benefit to operating income of approximately $200 million to $210 million in fiscal 2009, which equates to approximately $0.17 to $0.18 of earnings per share. This beneficial impact estimate excludes the fiscal 2009 portion of the lease termination and severance costs from the store closures.

Management continues to challenge all aspects of the Company’s operations to ensure it is best utilizing its resources and is working to continue to reduce expenses in non-critical areas, and improve efficiencies in its U.S. store operations as well as in its supply chain and procurement functions. Management believes that as the Company continues to execute on the initiatives generated by the transformation strategy, it will reinvigorate the Starbucks Experience for customers, and in doing so, deliver increased value to shareholders.

Results of Operations for the 13 Weeks and 39 Weeks Ended June 29, 2008 and July 1, 2007

Revenues – Consolidated

		13 Weeks Ended												39 Weeks Ended
		Jun 29,				Jul 1,				%				Jun 29,				Jul 1,				%
(in millions)		2008				2007				Change				2008				2007				Change
Net revenues:
Company-operated retail		$	2,180.2			$	2,010.8				8.4	%		$	6,674.6			$	5,940.3				12.4	%
Specialty: Licensing			281.3				254.9				10.4				860.5				743.6				15.7
Foodservice and other			112.5				93.6				20.2				332.5				286.7				16.0
Total specialty			393.8				348.5				13.0				1,193.0				1,030.3				15.8
Total net revenues		$	2,574.0			$	2,359.3				9.1	%		$	7,867.6			$	6,970.6				12.9	%

Net revenues for the 13 weeks and 39 weeks ended June 29, 2008, increased compared to the corresponding periods of fiscal 2007, driven by increases in both Company-operated retail and specialty operations.

Starbucks derived 85% of total net revenues from its Company-operated retail stores during the 13 weeks and 39 weeks ended June 29, 2008. The U.S. segment contributed approximately 79% of total retail revenues. Company-operated retail revenues increased compared to the same period in fiscal 2007 primarily due to the opening of 1,128 new Company-operated retail stores in the last 12 months. Also contributing were favorable foreign currency exchange rates, primarily on the Canadian dollar. The slower growth rate of retail revenues in the third quarter of fiscal 2008 was due to a mid-single-digit decline in U.S. comparable store sales, resulting from decreased traffic.

The Company derived the remaining 15% of total net revenues from licensing and foodservice channels outside the Company-operated retail stores, collectively known as specialty operations.

Licensing revenues, which are derived from retail store licensing arrangements as well as grocery, warehouse club and certain other branded-product operations, increased for the 13 weeks and 39 weeks ended June 29, 2008 compared to the corresponding period of fiscal 2007. The increase was primarily due to higher product sales and royalty revenues in the U.S. and International segments from the opening of 1,024 new licensed retail stores in the last 12 months, and an increase in CPG revenues resulting from increased product sales and royalties in the International ready-to-drink business.

Foodservice and other revenues for the 13 weeks and 39 weeks ended June 29, 2008, increased compared to the corresponding periods of fiscal 2007 primarily due to growth in new and existing foodservice accounts in both U.S. and International markets.

Operating expenses – Consolidated

		13 Weeks Ended												39 Weeks Ended
		Jun 29,				Jul 1,				%				Jun 29,				Jul 1,				%
(in millions)		2008				2007				Change				2008				2007				Change
Cost of sales including occupancy costs		$	1,163.1			$	1,004.0				15.8	%		$	3,455.8			$	2,933.5				17.8	%
As a % of total net revenues			45.2	%			42.6	%		2.6ppt					43.9	%			42.1	%		1.8ppt
Store operating expenses		$	958.3			$	819.2				17.0	%		$	2,812.7			$	2,372.2				18.6	%
As a % of related net retail revenues			44.0	%			40.7	%		3.3ppt					42.1	%			39.9	%		2.2ppt
Other operating expenses		$	79.6			$	74.7				6.6	%		$	248.1			$	219.6				13.0	%
As a % of related net specialty revenues			20.2	%			21.4	%		(1.2)ppt					20.8	%			21.3	%		(0.5)ppt
Depreciation and amortization expenses		$	139.8			$	119.4				17.1	%		$	411.1			$	343.0				19.9	%
As a % of total net revenues			5.4	%			5.1	%		0.3ppt					5.2	%			4.9	%		0.3ppt
General and administrative expenses		$	116.1			$	121.3				(4.3	)%		$	359.6			$	365.9				(1.7	)%
As a % of total net revenues			4.5	%			5.1	%		(0.6)ppt					4.6	%			5.2	%		(0.6)ppt
Restructuring charges		$	167.7			$	—			nm				$	167.7			$	—			nm
As a % of total net revenues			6.5	%			—			6.5ppt					2.1	%			—			2.1ppt
Operating income (loss)		$	(21.6	)		$	245.2			nm				$	489.7			$	805.9				(39.2	)%
As a % of total net revenues			(0.8	)%			10.4	%		(11.2)ppt					6.2	%			11.6	%		(5.4)ppt

Cost of sales including occupancy costs for the 13 weeks ended June 29, 2008 increased compared to the prior year periods, primarily due to higher distribution and occupancy costs as a percentage of revenues, driven by the U.S. segment. For the 39 weeks ended June 29, 2008, the increase compared to the prior year period was primarily due to higher costs for distribution and higher dairy costs as a percentage of revenues.

Store operating expenses as a percentage of related Company-operated retail revenues for the 13 weeks and 39 weeks ended June 29, 2008 increased compared to the prior year periods. The increases were primarily due to higher payroll expenditures as a percentage of revenues in the U.S. business, driven by softer sales from U.S. Company-operated stores and costs related to its transformation strategy.

General and administrative expenses as a percentage of total net revenues improved for the 13 weeks and 39 weeks ended June 29, 2008, primarily due to lower payroll-related expenses.

Restructuring charges of $167.7 million were related to asset impairments for approximately 600 underperforming Company-operated stores in U.S. market. This decision, announced on July 1, 2008, was a result of a rigorous evaluation of the U.S. Company-operated store portfolio.

Operating income for the 13 weeks and 39 weeks ended June 29, 2008 decreased and operating margin contracted compared to the prior year, primarily due to the restructuring charges, the softness in U.S. revenues along with higher cost of sales including occupancy costs and store operating expenses.

Income taxes — Consolidated

		13 Weeks Ended												39 Weeks Ended
		Jun 29,				Jul 1,				%				Jun 29,				Jul 1,				%
(in millions)		2008				2007				Change				2008				2007				Change
Income taxes		$	(26.5	)		$	84.7			nm				$	150.6			$	295.4				(49.0	)%
Effective tax rate			(79.8	)%			34.9	%		nm					32.7	%			36.5	%			(3.8)ppt

The effective tax rate in the third quarter of fiscal 2008 was 79.8% compared to 34.9% for the same period a year ago. The third quarter of fiscal 2008 includes the impact of the release of FIN 48 tax reserves as well as an additional tax benefit recognized for the forecasted lower annual effective tax rate in fiscal 2008. The impact of these items on the effective rate for the quarter was large as a percentage of the small amount of pretax loss of $33.2 million. Details on the Company’s fiscal third quarter effective rate are provided in the table below (amounts in millions):

		13 Weeks Ended June 29, 2008
						Benefit as a % of
		Tax Benefit Amount				Pre-tax Amount
Tax benefit on pretax loss of $33.2 million			$ (11.4)				(34.2)%
Effect of release of FIN 48 tax reserves and forecasted lower tax rate for fiscal 2008			(15.1)				(45.6)%
Tax benefit as reported			$ (26.5)				(79.8)%

SEGMENT RESULTS

Segment information is prepared on the basis that the Company’s management performs its reviews of financial information for operational decision-making purposes. The following tables summarize the Company’s results of operations by segment:

United States

		13 Weeks Ended												39 Weeks Ended
		Jun 29,				Jul 1,				%				Jun 29,				Jul 1,				%
(in millions)		2008				2007				Change				2008				2007				Change
Total net revenues		$	1,947.7			$	1,840.2				5.8	%		$	6,010.2			$	5,489.5				9.5	%
Total operating expenses		$	1,974.9			$	1,587.0				24.4	%		$	5,532.3			$	4,643.6				19.1	%
As a % of U.S. total net revenues			101.4	%			86.2	%		15.2ppt					92.0	%			84.6	%		7.4ppt
Operating income (loss)		$	(27.8	)		$	253.2			nm				$	477.0			$	845.9				(43.6	)%
As a % of U.S. total net revenues			(1.4	)%			13.8	%		(15.2)ppt					7.9	%			15.4	%		(7.5)ppt

Total U.S. net revenues for the 13 weeks and 39 weeks ended June 29, 2008 increased primarily due to higher Company-operated retail revenues, which comprise 89% of total U.S. net revenues. Retail revenues increased due to the opening of 809 new Company-operated retail stores in the last 12 months, offset by a mid-single-digit decline in comparable store sales for the third quarter of fiscal 2008. Starbucks believes a significant driver of the comparable store sales decline is the current difficult economic environment, which results in less frequent customer visits to the stores.

Operating margin contracted substantially for the 13 weeks and 39 weeks ended June 29, 2008 driven by restructuring charges of $167.7 million taken in the period, which had an 860 basis point impact for the quarter. Also contributing to the contraction was softer revenues due to weak traffic, higher store operating expenses and higher cost of sales including occupancy costs as a percentage of related revenues, which were partly due to costs related to the implementation of the Company’s transformation strategy.

International

		13 Weeks Ended												39 Weeks Ended
		Jun 29,				Jul 1,				%				Jun 29,				Jul 1,				%
(in millions)		2008				2007				Change				2008				2007				Change
Total net revenues		$	535.6			$	432.0				24.0	%		$	1,569.8			$	1,224.4				28.2	%
Total operating expenses		$	514.9			$	411.3				25.2	%		$	1,504.5			$	1,170.5				28.5	%
As a % of International total net revenues			96.1	%			95.2	%		0.9ppt					95.8	%			95.6	%		0.2ppt
Income from equity investees		$	14.8			$	11.8				25.4	%		$	42.1			$	32.8				28.4	%
As a % of International total net revenues			2.8	%			2.7	%		0.1ppt					2.7	%			2.7	%			—
Operating income		$	35.5			$	32.5				9.2	%		$	107.4			$	86.7				23.9	%
As a % of International total net revenues			6.6	%			7.5	%		(0.9)ppt					6.8	%			7.1	%		(0.3)ppt

Total International net revenues increased for the 13 weeks and 39 weeks ended June 29, 2008 primarily due to an increase in Company-operated retail revenues, which comprise 84% of total International net revenues. The increase in retail revenues was due to the opening of 319 net new Company-operated retail stores in the last 12 months and favorable foreign currency exchange rates, primarily on the Canadian dollar. Also contributing to the increased total net revenues was growth in specialty revenues due to higher product sales and royalty revenues from opening 558 new licensed retail stores in the last 12 months.

Operating margin decreased for the 13 weeks and 39 weeks ended June 29, 2008 primarily due to higher cost of sales including occupancy costs as a percentage of related sales, due in part to higher dairy costs.

Global Consumer Products Group

		13 Weeks Ended												39 Weeks Ended
		Jun 29,				Jul 1,				%				Jun 29,				Jul 1,				%
(in millions)		2008				2007				Change				2008				2007				Change
Total specialty revenues		$	90.7			$	87.1				4.1	%		$	287.6			$	256.7				12.0	%
Total operating expenses		$	56.8			$	57.9				(1.9	)%		$	181.5			$	172.2				5.4	%
As a % of CPG total net revenues			62.6	%			66.5	%		(3.9)ppt					63.1	%			67.1	%		(4.0)ppt
Income from equity investees		$	14.8			$	12.7				16.5	%		$	35.9			$	36.7				(2.2	)%
As a % of CPG total net revenues			16.3	%			14.6	%		1.7ppt					12.5	%			14.3	%		(1.8)ppt
Operating income		$	48.7			$	41.9				16.2	%		$	142.0			$	121.2				17.2	%
As a % of CPG total net revenues			53.7	%			48.1	%		5.6ppt					49.4	%			47.2	%		2.2ppt

Total CPG net revenues increased for the 13 weeks due to increased product sales and royalties in the international ready-to-drink business and for the 39 weeks ended June 29, 2008 due to higher sales of packaged coffee and tea in the U.S. market as well as increased product sales and royalties in the international ready-to-drink business.

Operating margin increased for the 13 weeks ended June 29, 2008 primarily due to the mix of revenue being less weighted toward the initial sale of coffee and tea products to the Company’s primary distributor, and more toward profit-sharing revenues earned on the distributor’s sales to retailers.

Unallocated Corporate

		13 Weeks Ended												39 Weeks Ended
		Jun 29,				Jul 1,				%				Jun 29,				Jul 1,				%
(in millions)		2008				2007				Change				2008				2007				Change
Operating loss		$	78.0			$	82.4				(5.3	)%		$	236.7			$	247.9				(4.5	)%
As a % of total net revenues			(3.0	)%			(3.5	)%		0.5ppt					(3.0	)%			(3.6	)%		0.6ppt

Total unallocated corporate expenses as a percentage of total net revenues decreased primarily as a result of lower payroll-related expenses.

Financial Condition and Liquidity

The Company’s existing cash and liquid investments were $349.7 million and $459.7 million as of June 29, 2008 and September 30, 2007, respectively. The decrease in liquid investments was driven primarily by $69.7 million of auction rate securities, most of which are held within the Company’s wholly owned captive insurance company, that are not currently considered liquid and were reclassified to long-term investments in the second quarter of fiscal 2008.

Included in the cash and liquid investment balances are the following:

•		A portfolio of unrestricted trading securities, designed to hedge the Company’s liability under its Management Deferred Compensation Plan (“MDCP”). The value of this portfolio was $52.7 million and $73.6 million as of June 29, 2008 and September 30, 2007, respectively. This decrease was driven by the sale of a bond income fund to better align with the Company’s total risk profile and declines in market values of the underlying equity funds, which were offset by a comparable decline in the MDCP liability.
•		Unrestricted cash and liquid securities, held within the Company’s wholly owned captive insurance company, to fund claim payouts. The value of these unrestricted cash and liquid securities was approximately $54.8 million and $98.1 million as of June 29, 2008 and September 30, 2007, respectively. The decrease was due primarily to reclassification of auction rate securities held by the wholly owned captive.

As described in more detail in Note 1 to the Consolidated Financial Statements, as of June 29, 2008, the Company had $77.6 million invested in available-for-sale securities, consisting primarily of auction rate securities. During the third fiscal quarter of 2008, auctions for these securities continued to be unsuccessful. While the recent auction failures will limit the liquidity of these investments for some period of time, the Company does not believe the auction failures will materially impact its ability to fund its working capital needs, capital expenditures or other business requirements.

The Company manages the balance of its cash and liquid investments in order to internally fund operating needs and make scheduled interest and principal payments on its borrowings.

Credit rating agencies currently rate the Company’s borrowings as follows:

				Commercial paper		Long-term debt
		Moody’s		P-2		Baa1
		Standard & Poor’s		A-2		BBB+