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8-K

 
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Starbucks 10-K 2007
10-K
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
 
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2007
or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to          .
 
Commission File Number: 0-20322
 
 
     
Washington
  91-1325671
(State or other jurisdiction of   (IRS Employer
incorporation or organization)
  Identification No.)
 
2401 Utah Avenue South
Seattle, Washington 98134
(Address of principal executive offices, zip code)
 
(Registrant’s telephone number, including area code):
(206) 447-1575
 
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, $0.001 Par Value Per Share
 
Securities Registered Pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
 
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation of S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)
 
Large Accelerated Filer þ          Accelerated Filer o          Non-Accelerated Filer o
 
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
 
The aggregate market value of the voting stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter, based upon the closing sale price of the registrant’s common stock on March 30, 2007 as reported on the NASDAQ Global Select Market was $22.7 billion.
 
As of November 16, 2007, there were approximately 730.4 million shares of the registrant’s Common Stock outstanding.
 
 
Portions of the definitive Proxy Statement for the registrant’s Annual Meeting of Shareholders to be held on March 19, 2008 have been incorporated by reference into Part III of this Annual Report on Form 10-K.
 


 

 
STARBUCKS CORPORATION
 
Form 10-K
 
For the Fiscal Year Ended September 30, 2007
 
 
                 
      Business     1  
      Risk Factors     7  
      Unresolved Staff Comments     13  
      Properties     14  
      Legal Proceedings     14  
      Submission of Matters to a Vote of Security Holders     14  
 
      Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities     16  
      Selected Financial Data     18  
      Management’s Discussion and Analysis of Financial Condition and Results of Operations     20  
      Quantitative and Qualitative Disclosures About Market Risk     38  
      Financial Statements and Supplementary Data     39  
        Report of Independent Registered Public Accounting Firm     72  
      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     73  
      Controls and Procedures     73  
      Other Information     75  
 
      Directors, Executive Officers and Corporate Governance     75  
      Executive Compensation     75  
      Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters     75  
      Certain Relationships and Related Transactions, and Director Independence     75  
      Principal Accountant Fees and Services     75  
 
      Exhibits and Financial Statement Schedules     76  
    77  
    79  
 EX-10.20: LETTER AGREEMENT
 EX-12: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
 EX-21: SUBSIDIARIES OF STARBUCKS CORPORATION
 EX-23: CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 EX-31.1: CERTIFICATION
 EX-31.2: CERTIFICATION
 EX-32: CERTIFICATIONS


Table of Contents

 
PART I
 
Item 1.   Business
 
 
Starbucks Corporation (together with its subsidiaries, “Starbucks” or the “Company”) was formed in 1985. Starbucks purchases and roasts high-quality whole bean coffees and sells them, along with fresh, rich-brewed coffees, Italian-style espresso beverages, cold blended beverages, a variety of complementary food items, coffee-related accessories and equipment, a selection of premium teas and a line of compact discs, primarily through Company-operated retail stores. Starbucks also sells coffee and tea products and licenses its trademark through other channels and, through certain of its equity investees, Starbucks produces and sells ready-to-drink beverages which include, among others, bottled Frappuccino® beverages and Starbucks DoubleShot® espresso drinks, and a line of superpremium ice creams. All channels outside the Company-operated retail stores are collectively known as “Specialty Operations.” The Company’s objective is to establish Starbucks as one of the most recognized and respected brands in the world. To achieve this goal, the Company plans to continue expansion of its retail operations, to grow its Specialty Operations and to selectively pursue other opportunities to leverage the Starbucks brand by introducing new products and developing new channels of distribution. The Company’s brand portfolio includes superpremium Tazo® teas, Starbucks Hear Music® compact discs, Seattle’s Best Coffee® and Torrefazione Italia® coffee.
 
 
Starbucks has three reportable operating segments: United States, International and Global Consumer Products Group (“CPG”). The United States and International segments both include Company-operated retail stores and certain components of Specialty Operations. Specialty Operations within the United States include licensed retail stores, foodservice accounts and other initiatives related to the Company’s core business. International specialty operations primarily include retail store licensing operations in more than 30 countries and foodservice accounts in Canada and the United Kingdom (“UK”). The CPG segment includes the Company’s grocery and warehouse club business as well as branded products operations worldwide. Financial information about Starbucks segments is included in Note 18 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K (“Form 10-K” or “Report”).
 
 
The following table shows the Company’s revenue components for the fiscal year ended September 30, 2007:
 
                 
    % of Total
    % of Specialty
 
Revenues
  Net Revenues     Revenues  
 
Company-operated retail
    85 %        
                 
Specialty:
               
Licensing:
               
Retail stores
    7 %     47 %
Grocery and warehouse club
    3 %     23 %
Branded products
    1 %     3 %
                 
Total licensing
    11 %     73 %
Foodservice and other:
               
Foodservice
    4 %     26 %
Other initiatives
    <1 %     1 %
                 
Total foodservice and other
    4 %     27 %
                 
Total specialty
    15 %     100 %
                 
Total net revenues
    100 %        
                 


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Company-operated Retail Stores
 
The Company’s retail goal is to become the leading retailer and brand of coffee in each of its target markets by selling the finest quality coffee and related products and by providing each customer a unique Starbucks Experience. The Starbucks Experience, or third place after home and work, is built upon superior customer service as well as clean and well-maintained Company-operated retail stores that reflect the personalities of the communities in which they operate, thereby building a high degree of customer loyalty. Starbucks strategy for expanding its retail business is to increase its market share primarily by opening additional stores in existing markets and opening stores in new markets where the opportunity exists to become the leading specialty coffee retailer. In support of this strategy, Starbucks opened 1,342 new Company-operated stores during the fiscal year ended September 30, 2007 (“fiscal 2007”). Starbucks Company-operated retail stores, including 11 Seattle’s Best Coffee® stores and 4 Hear Music retail stores, accounted for 85% of total net revenues during fiscal 2007.
 
The following table summarizes total Company-operated retail store data for the periods indicated:
 
                                 
    Net Stores Opened During the
       
    Fiscal Year Ended(1)     Stores Open as of  
    Sept 30, 2007     Oct 1, 2006     Sept 30, 2007     Oct 1, 2006  
 
United States
    1,065       810       6,793       5,728  
International:
                               
Canada
    88       74       596       508  
United Kingdom
    66       47       580       514  
China(2)
    42       17       141       99  
Germany
    36       24       104       68  
Thailand
    18       22       103       85  
Australia
    4       25       87       83  
Singapore
    8       5       45       37  
Other
    15       19       56       41  
                                 
Total International(2)
    277       233       1,712       1,435  
                                 
Total Company-operated
    1,342       1,043       8,505       7,163  
                                 
 
 
(1) Store openings are reported net of closures.
 
(2) Store data has been adjusted for the acquisition of the Beijing operations by reclassifying historical information from Licensed stores to Company-operated stores.
 
Starbucks retail stores are typically located in high-traffic, high-visibility locations. Because the Company can vary the size and format, its stores are located in or near a variety of settings, including downtown and suburban retail centers, office buildings and university campuses. While the Company selectively locates stores in shopping malls, it focuses on locations that provide convenient access for both pedestrians and drivers. With the flexibility in store size and format, the Company also locates retail stores in select rural and off-highway locations to serve a broader array of customers outside major metropolitan markets and further expand brand awareness. To provide a greater degree of access and convenience for nonpedestrian customers, the Company continues to expand development of Drive Thru retail stores. At the end of fiscal 2007, the Company operated approximately 2,300 Drive Thru locations, compared to approximately 1,600 at the end of fiscal 2006.
 
All Starbucks stores offer a choice of regular and decaffeinated coffee beverages, a broad selection of Italian-style espresso beverages, cold blended beverages, iced shaken refreshment beverages, a selection of teas and distinctively packaged roasted whole bean coffees. Starbucks stores also offer a selection of fresh pastries and other food items, sodas, juices, bottled water, coffee-making equipment and accessories, a selection of compact discs and seasonal novelty items. Each Starbucks store varies its product mix depending upon the size of the store and its location. Larger stores carry a broad selection of the Company’s whole bean coffees in various sizes and types of packaging, as well as an assortment of coffee and espresso-making equipment and accessories such as coffee grinders, coffee filters, storage containers, travel tumblers and mugs. Smaller Starbucks stores and kiosks typically sell a full line of


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coffee beverages, a limited selection of whole bean coffees and a few accessories such as travel tumblers and logo mugs. A selection of prepared sandwiches and salads were carried in approximately 4,800 United States and 1,600 International stores, at the end of fiscal 2007. Starbucks continues to expand its food warming program in the United States, with over 3,000 stores as of September 30, 2007 providing warm food items, primarily breakfast sandwiches.
 
The Company’s retail sales mix by product type was as follows for the periods indicated:
 
                         
Fiscal Year Ended
  Sept 30, 2007     Oct 1, 2006     Oct 2, 2005  
 
Beverages
    75 %     77 %     77 %
Food
    17 %     15 %     15 %
Coffee-making equipment and other merchandise
    5 %     5 %     4 %
Whole bean coffees
    3 %     3 %     4 %
                         
Total
    100 %     100 %     100 %
                         
 
 
Specialty Operations strive to develop the Company’s brands outside the Company-operated retail store environment through a number of channels. Starbucks strategy is to reach customers where they work, travel, shop and dine by establishing relationships with prominent third parties that share the Company’s values and commitment to quality. These relationships take various forms, including licensing arrangements, foodservice accounts and other initiatives related to the Company’s core businesses. In certain situations, Starbucks has an equity ownership interest in licensee operations. During fiscal 2007, specialty revenues (which include royalties and fees from licensees, as well as product sales derived from Specialty Operations) accounted for 15% of total net revenues.
 
 
In its licensed retail store operations, the Company leverages the expertise of its local partners and shares Starbucks operating and store development experience. Licensee partners provide improved and, at times, the only access to desirable retail space. Most licensees are prominent retailers with in-depth market knowledge and access. As part of these arrangements, Starbucks receives license fees and royalties and sells coffee, tea, compact discs and related products for resale in licensed locations. Employees working in licensed retail locations are required to follow Starbucks detailed store operating procedures and attend training classes similar to those given to employees in Company-operated stores.
 
During fiscal 2007, 723 Starbucks licensed retail stores were opened in the United States and, as of September 30, 2007, the Company’s U.S. licensees operated 3,891 stores. During fiscal 2007, 506 International licensed stores were opened. At September 30, 2007, the Company’s International operating segment had a total of 2,615 licensed retail stores. Product sales to and royalty and license fee revenues from U.S. and International licensed retail stores accounted for 47% of specialty revenues in fiscal 2007.
 
At fiscal year end 2007, Starbucks total licensed retail stores by region and specific location were as follows:
 
                                 
Asia Pacific     Europe/Middle East/Africa     Americas  
 
Japan
    722     Turkey     82     United States     3,891  
South Korea
    215     Spain     68     Canada     234  
China
    212     Greece     64     Mexico     159  
Taiwan
    209     Saudi Arabia     58     Other     26  
Philippines
    119     Kuwait     49              
Malaysia
    92     United Arab Emirates     47              
Indonesia
    58     France     37              
New Zealand
    45     Switzerland     35              
            Other     84              
                                 
Total
    1,672     Total     524     Total     4,310  
                                 


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The Company, through a licensing relationship with Kraft Foods, Inc. (“Kraft”), sells a selection of Starbucks, Seattle’s Best Coffee and Torrefazione Italia branded packaged coffees and Tazo® teas in grocery and warehouse club stores throughout the United States. Kraft manages all distribution, marketing, advertising and promotion of these products.
 
The Company sells packaged coffee and tea internationally both directly to warehouse club customers such as Costco and through an expanded licensing relationship with Kraft. In February 2007, the licensing relationship with Kraft was expanded globally and now also includes distribution of packaged coffee in Canada and the UK.
 
By the end of fiscal 2007, the Company’s coffees and teas were available in approximately 34,000 grocery and warehouse club stores, with 30,000 in the United States and 4,000 in International markets. Revenues from this category comprised 23% of specialty revenues in fiscal 2007.
 
 
The Company licenses the rights to produce and market Starbucks branded products through several partnerships both domestically and internationally. The North American Coffee Partnership, a joint venture with the Pepsi-Cola Company in which Starbucks is a 50% equity investor, manufactures and markets ready-to-drink beverages, including bottled Frappuccino® beverages and Starbucks DoubleShot® espresso drinks. Other partnerships produce and market branded products in these categories: superpremium ice cream (joint venture with Dreyer’s Grand Ice Cream, Inc.), premium coffee liqueur (license agreement with Beam Global Spirits & Wine) and chocolate (license agreement with The Hershey Company). Internationally, the Company licenses Starbucks Discoveries®, a ready-to-drink chilled cup coffee beverage, in Japan, Taiwan and South Korea.
 
Collectively, the revenues from these branded products accounted for 3% of specialty revenues in fiscal 2007.
 
 
The Company sells whole bean and ground coffees, including the Starbucks, Seattle’s Best Coffee and Torrefazione Italia brands, as well as a selection of premium Tazo® teas and other related products, to institutional foodservice companies that service business & industry, education, healthcare, office coffee distributors, hotels, restaurants, airlines and other retailers. The majority of the Company’s direct distribution accounts are through national broadline distribution networks with SYSCO Corporation and U.S. Foodservicetm. Starbucks foodservice sales, customer service and support resources are aligned with those of SYSCO Corporation and U.S. Foodservice. Starbucks and Seattle’s Best Coffee are the only superpremium national-brand coffees actively promoted by SYSCO Corporation.
 
The Company’s total foodservice operations had approximately 18,000 accounts, primarily in the U.S., at fiscal year end 2007, compared to approximately 16,200 accounts at fiscal year end 2006. Revenues from foodservice accounts comprised 26% of total specialty revenues in fiscal 2007.
 
 
Included in this category is the Company’s entertainment business, which encompasses multiple music, book, film and technology based initiatives designed to appeal to new and existing Starbucks customers. Among these initiatives are strategic marketing and co-branding arrangements, such as the Starbucks XM Café Channel 45 available to all XM Satellite Radio subscribers and the availability of wireless broadband Internet service in United States and Canadian Company-operated retail stores. The entertainment business also includes the Hear Music label, an innovative record label and partnership between Starbucks Entertainment and Concord Music Group. In fiscal 2007, Starbucks and Apple® announced an exclusive partnership that lets customers wirelessly browse, preview, buy and download music from the iTunes® Wi-Fi Music Store onto their wireless devices while at participating Starbucks locations.
 
The Company has a strategic agreement with Chase Bank USA, N.A. and Visa to issue the Starbucks Card Duettotm Visa® (the “Duetto Card”) in the United States, and a similar arrangement with Royal Bank of Canada and Visa


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Canada Association to issue the Duetto Card in Canada. The Duetto Card combines the functionality of a credit card with the convenience of a reloadable Starbucks Card. Through these arrangements, Starbucks primarily receives commissions for each activated customer account and payments based on credit card usage.
 
Collectively, the operations of these other initiatives accounted for 1% of specialty revenues in fiscal 2007.
 
 
Starbucks is committed to selling only the finest whole bean coffees and coffee beverages. To ensure compliance with its rigorous coffee standards, Starbucks controls its coffee purchasing, roasting and packaging, and the distribution of coffee used in its operations. The Company purchases green coffee beans from coffee-producing regions around the world and custom roasts them to its exacting standards for its many blends and single origin coffees.
 
The supply and price of coffee are subject to significant volatility. Although most coffee trades in the commodity market, high-altitude arabica coffee of the quality sought by the Company tends to trade on a negotiated basis at a substantial premium above commodity coffee prices, depending upon the supply and demand at the time of purchase. Supply and price can be affected by multiple factors in the producing countries, including weather, political and economic conditions. In addition, green coffee prices have been affected in the past, and may be affected in the future, by the actions of certain organizations and associations that have historically attempted to influence prices of green coffee through agreements establishing export quotas or by restricting coffee supplies.
 
The Company depends upon its relationships with coffee producers, outside trading companies and exporters for its supply of green coffee. Due to volatility in green coffee commodity prices, the Company has predominantly used fixed-price purchase commitments in order to secure an adequate supply of quality green coffee, bring greater certainty to its cost of sales in future periods, and promote sustainability by paying an equitable price to coffee producers. As of September 30, 2007, the Company had $324 million in fixed-price purchase commitments which, together with existing inventory, is expected to provide an adequate supply of green coffee through fiscal 2008. The Company believes, based on relationships established with its suppliers, the risk of non-delivery on such purchase commitments is remote. During fiscal 2007, “C” coffee commodity prices traded on the New York Board of Trade within a price range of $1.00 to $1.35 per pound and prices were, on average, approximately 10% higher than in fiscal 2006. In September 2007, prices moved sharply higher as poor weather led to decreased expectations for the next harvest in the world’s largest arabica coffee producer, Brazil. Based on its market experience, the Company believes that fixed-price purchase commitments are less likely to be available on favorable terms when commodity prices are high. If prices were to continue to move higher during fiscal 2008, Starbucks likely would increase the use of price-to-be-fixed purchase contracts to meet its demand for coffee. These types of contracts state the quality, quantity and delivery periods but allow the price of green coffee over a market index to be established after contract signing. The Company believes that, through a combination of fixed-price and price-to-be-fixed contracts it will be able to secure an adequate supply of quality green coffee. However, an increased use of price-to-be-fixed contracts instead of fixed-price contracts would decrease the predictability of coffee costs in future periods. By volume, approximately 20% of the Company’s coffee purchase agreements entered during fiscal 2007 were price-to-be-fixed contracts.
 
During fiscal 2004, Starbucks established the Starbucks Coffee Agronomy Company S.R.L., a wholly owned subsidiary located in Costa Rica, to reinforce the Company’s leadership role in the coffee industry and to help ensure sustainability and future supply of high-quality green coffees from Central America. Staffed with agronomists and sustainability experts, this first-of-its-kind Farmer Support Center is designed to proactively respond to changes in coffee producing countries that impact farmers and the supply of green coffee. During fiscal 2007, the Company announced plans to conduct similar activities in East Africa.
 
In addition to coffee, the Company also purchases significant amounts of dairy products, particularly fluid milk, to support the needs of its Company-operated retail stores. Dairy expense for the U.S. segment represents approximately 75% of the Company’s total dairy expense; therefore significant changes in U.S. dairy prices can have a material impact on total dairy expense. The U.S. segment’s dairy costs, which closely follow the monthly Class I fluid milk base price as calculated by the U.S. Department of Agriculture, can change significantly in the short term. The Company’s U.S. dairy costs rose materially in fiscal 2007 compared to fiscal 2006 and costs accelerated in the


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fourth quarter of fiscal 2007 and have remained high, adversely affecting the U.S. segment’s and the Company’s profitability. In the United States, the Company purchases substantially all of its fluid milk requirements from two dairy suppliers. The Company believes, based on relationships established with these suppliers, that the risk of non-delivery of enough fluid milk to support its U.S. retail business is remote.
 
The Company also purchases a broad range of paper and plastic products, such as cups, lids, cutlery, napkins, straws, shopping bags and corrugated paper boxes from several companies to support the needs of its retail stores as well as its manufacturing and distribution operations. The cost of these materials is dependent in part upon commodity paper and plastic resin costs, but the Company believes it mitigates the effect of short-term raw material price fluctuations through strategic relationships with key suppliers.
 
Products other than whole bean coffees and coffee beverages sold in Starbucks retail stores are obtained through a number of different channels. Beverage ingredients, other than coffee and milk, including leaf teas and the Company’s selection of ready-to-drink beverages, are purchased from several specialty manufacturers, usually under long-term supply contracts. Food products, such as fresh pastries, breakfast sandwiches and lunch items, are generally purchased from both regional and local sources. Coffee-making equipment, such as drip and coffee press coffeemakers, espresso machines and coffee grinders, are generally purchased directly from their manufacturers. Coffee-related accessories, including items bearing the Company’s logos and trademarks, are produced and distributed through contracts with a number of different suppliers.
 
 
The Company’s primary competitors for coffee beverage sales are quick-service restaurants and specialty coffee shops. In almost all markets in which the Company does business, there are numerous competitors in the specialty coffee beverage business, and management expects this situation to continue. The Company believes that its customers choose among retailers primarily on the basis of product quality, service and convenience, and, to a lesser extent, on price. Starbucks has recently experienced significantly greater direct competition from large competitors in the United States quick-service restaurant sector, some of whom have substantially greater financial, marketing and operating resources than the Company. Starbucks also faces well-established competitors in many International markets and increased competition in the U.S. ready-to-drink coffee beverage market.
 
The Company’s whole bean coffees compete directly against specialty coffees sold through supermarkets, specialty retailers and a growing number of specialty coffee stores. Both the Company’s whole bean coffees and its coffee beverages compete indirectly against all other coffees on the market. Starbucks Specialty Operations face significant competition from established wholesale and mail order suppliers, some of whom have greater financial and marketing resources than the Company.
 
Starbucks faces intense competition from both restaurants and other specialty retailers for prime retail locations and qualified personnel to operate both new and existing stores.
 
 
The Company owns and/or has applied to register numerous trademarks and service marks in the United States and in many additional countries throughout the world. Rights to the trademarks and service marks in the United States are generally held by a wholly owned affiliate of the Company and are used by the Company under license. Some of the Company’s trademarks, including Starbucks, the Starbucks logo, Frappuccino, Seattle’s Best Coffee and Tazo are of material importance to the Company. The duration of trademark registrations varies from country to country. However, trademarks are generally valid and may be renewed indefinitely as long as they are in use and/or their registrations are properly maintained.
 
The Company owns numerous copyrights for items such as product packaging, promotional materials, in-store graphics and training materials. The Company also holds patents on certain products, systems and designs. In addition, the Company has registered and maintains numerous Internet domain names, including “Starbucks.com” and “Starbucks.net.”


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Starbucks research and development efforts are led by food scientists, engineers, chemists and culinarians in the Research and Development department. This team is responsible for the technical development of food and beverage products and new equipment. The Company spent approximately $7.0 million, $6.5 million and $6.2 million during fiscal 2007, 2006 and 2005, respectively, on technical research and development activities, in addition to customary product testing and product and process improvements in all areas of its business.
 
 
Starbucks business is subject to seasonal fluctuations, including fluctuations resulting from the holiday season. The Company’s cash flows from operations are considerably higher in the fiscal first quarter than the remainder of the year. This is largely driven by cash received as Starbucks Cards are purchased and loaded during the holiday season. Since revenues from the Starbucks Card are recognized upon redemption and not when purchased, seasonal fluctuations on the consolidated statements of earnings are much less pronounced. Quarterly results are affected by the timing of the opening of new stores, and the Company’s growth may conceal the impact of other seasonal influences. For these reasons, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.
 
 
The Company employed approximately 172,000 people worldwide as of September 30, 2007. In the United States, Starbucks employed approximately 144,000 people, with 136,000 in Company-operated retail stores and the remainder in the Company’s administrative and regional offices, and store development, roasting and warehousing operations. Approximately 28,000 employees were employed outside of the United States, with 27,000 in Company-operated retail stores and the remainder in the Company’s regional support facilities and roasting and warehousing operations. The number of the Company’s employees represented by unions is immaterial. Starbucks believes its current relations with its employees are good.
 
 
Starbucks Form 10-K reports, along with all other reports and amendments filed with or furnished to the Securities and Exchange Commission (“SEC”), are publicly available free of charge on the Investor Relations section of Starbucks website at http://investor.starbucks.com or at www.sec.gov as soon as reasonably practicable after these materials are filed with or furnished to the SEC. The Company’s corporate governance policies, ethics code and Board of Directors’ committee charters are also posted within this section of the website. The information on the Company’s website is not part of this or any other report Starbucks files with, or furnishes to, the SEC.
 
Starbucks demonstrates its commitment to corporate social responsibility (“CSR”) by conducting its business in ways that produce social, environmental and economic benefits to the communities in which Starbucks operates. The Company aligns its principles for social responsibility with its overall strategy and business operations. As a result, Starbucks believes it delivers benefits to the Company and its stakeholders — employees, business partners, customers, suppliers, shareholders, community members and others — while distinguishing Starbucks as a leader within the coffee industry. Providing open communication and transparency helps the Company be accountable to its stakeholders. To support this goal, Starbucks publishes a CSR Annual Report. Starbucks fiscal 2007 CSR Annual Report will be available online at www.starbucks.com/csr beginning in May 2008.
 
Item 1A.   Risk Factors
 
This Annual Report on Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “seeks” or words of similar meaning, or future or conditional verbs, such as “will,” “should,” “could” or “may.” 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. Investors should not place undue reliance on the forward-looking statements, which speak only as of the date of this Report. Starbucks is under no obligation


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to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. These forward-looking statements are all based on currently available operating, financial and competitive information and are subject to various risks and uncertainties. The Company’s actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, the risks and uncertainties discussed below. The risks below are not the only ones the Company faces. Additional risks and risks that management currently considers immaterial may also have an adverse effect on the Company.
 
•  Failing to meet market expectations for Starbucks financial performance could cause the market price of Starbucks stock to drop rapidly and sharply.
 
Management believes the price of Starbucks stock reflects high market expectations for the Company’s future operating results. Any failure to meet those expectations, particularly for the growth rates for (i) comparable store sales attributable to number of transactions, average value per transaction, or both, (ii) net revenues, (iii) earnings per share or (iv) net new store openings could cause the market price of Starbucks stock to drop rapidly and sharply.
 
•  Starbucks is subject to a number of significant risks that might cause the Company’s actual results to vary materially from its forecasts, targets, or projections, including:
 
  •  lower customer traffic or average value per transaction, which negatively impacts comparable store sales, net revenues, operating income and earnings per share, due to:
 
  •  the impact of initiatives by competitors and increased competition generally;
 
  •  lack of customer acceptance of price increases necessary to cover costs or new products;
 
  •  unfavorable general economic conditions in the markets in which Starbucks operates, including, but not limited to, downturns in the housing market, higher interest rates, higher unemployment rates, lower disposable income due to higher energy or other consumer costs, lower consumer confidence, and other events or factors that adversely affect consumer spending;
 
  •  declines in general consumer demand for specialty coffee products; or
 
  •  adverse impacts due to negative publicity regarding the Company’s business practices or the health effects of consuming its products;
 
  •  cost increases that are either wholly or partially beyond the Company’s control, such as:
 
  •  commodity costs for commodities that cannot be effectively hedged, such as fluid milk, and to a lesser extent, high quality arabica coffee;
 
  •  labor costs such as increased health care costs, general market wage levels and worker’s compensation insurance costs;
 
  •  construction costs associated with new store openings;
 
  •  information technology costs and other logistical resources necessary to maintain and support the global growth of the Company’s business; and
 
  •  litigation against Starbucks, particularly class action litigation;
 
  •  delays in store openings for reasons beyond the Company’s control, or a lack of desirable real estate locations available for lease at reasonable rates, either of which could keep the Company from meeting annual store opening targets and, in turn, negatively impact net revenues, operating income and earnings per share;
 
  •  any material interruption in the Company’s supply chain beyond its control, such as (i) material interruption of roasted coffee supply due to the casualty loss of any of the Company’s roasting plants or the failures of third-party suppliers, or (ii) interruptions in service by common carriers that ship goods within the Company’s distribution channels; and


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  •  the impact on Starbucks business of factors such as labor discord, war, terrorism (including incidents targeting Starbucks), political instability in certain markets and natural disasters.
 
•  Starbucks is highly dependent on the financial performance of its United States operating segment.
 
The Company’s financial performance is highly dependent on its United States operating segment, which comprised 78% of consolidated total net revenues in fiscal 2007. Any substantial or sustained decline in these operations, if not offset by increased financial performance elsewhere, could materially adversely affect the Company’s business and financial results.
 
•  Starbucks faces intense competition in the specialty coffee market.
 
A description of the general competitive conditions in which Starbucks operates appears on page 6 under “Competition.” In the United States, the continued focus by one or more large competitors in the quick-service restaurant sector on selling high-quality specialty coffee beverages at a low cost could attract Starbucks customers and adversely affect the Company’s sales and results of operations. Similarly, continued competition from well-established competitors in international markets could hinder growth and adversely affect the Company’s sales and results of operations in those markets. Increased competition from large competitors with significant resources in the United States ready-to-drink coffee beverage market could adversely affect the profitability of the CPG segment and the Company’s results of operations.
 
•  The Company’s success depends substantially on the value of the Starbucks brand.
 
Starbucks believes it has built an excellent reputation globally for the quality of its products, for delivery of a consistently positive consumer experience and for its corporate social responsibility programs. The Starbucks brand has been highly rated in several global brand value studies. Management believes it must preserve and grow the value of the Starbucks brand to be successful in the future, particularly outside of North America, where the Starbucks brand is less well-known. Brand value is based in part on consumer perceptions as to a variety of subjective qualities. Even isolated business incidents that erode consumer trust, particularly if the incidents receive considerable publicity or result in litigation, can significantly reduce brand value. Consumer demand for the Company’s products and its brand equity could diminish significantly if Starbucks fails to preserve the quality of its products, is perceived to act in an unethical or socially irresponsible manner or fails to deliver a consistently positive consumer experience in each of its markets.
 
•  Starbucks is increasingly dependent on the success of its International operating segment in order to achieve its growth targets.
 
The Company’s future growth will increasingly depend on the growth and sustained profitability of its International operating segment. Some or all of the Company’s International market business units (“MBUs”), which Starbucks generally defines by the countries or regions in which they operate, may not be successful in their operations or in achieving expected growth, which ultimately requires achieving consistent, stable net revenues and earnings. Some factors that will be critical to the success of International MBUs are different than those affecting the Company’s U.S. stores and licensees. Tastes naturally vary by region, and consumers in new international markets into which Starbucks and its licensees expand may not embrace Starbucks products to the same extent as consumers in the Company’s existing markets. Occupancy costs and store operating expenses are also sometimes higher internationally than in the United States due to higher rents for prime store locations or costs of compliance with country-specific regulatory requirements. Because many of the Company’s International operations are in an early phase of development, operating expenses as a percentage of related revenues are often higher compared to U.S. operations. The Company’s International operations are also subject to additional inherent risks of conducting business abroad, such as:
 
  •  foreign currency exchange rate fluctuations;
 
  •  changes or uncertainties in economic, social and political conditions in the Company’s markets;
 
  •  interpretation and application of laws and regulations;


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  •  restrictive actions of foreign or United States governmental authorities affecting trade and foreign investment, including protective measures such as export and customs duties and tariffs and restrictions on the level of foreign ownership;
 
  •  import or other business licensing requirements;
 
  •  the enforceability of intellectual property and contract rights;
 
  •  limitations on the repatriation of funds and foreign currency exchange restrictions;
 
  •  lower levels of consumer spending on a per capita basis than in the United States;
 
  •  difficulty in staffing, developing and managing foreign operations, including ensuring the consistency of product quality and service, due to distance, language and cultural differences; and
 
  •  local laws that make it more expensive and complex to negotiate with, retain or terminate employees.
 
•  The China market is important to the Company’s long-term growth prospects - doing business there and in other developing countries can be challenging.
 
Starbucks expects the People’s Republic of China to be its largest market outside of the United States. The Company’s growing investments in its China operations will increase the Company’s exposure in this market. Any significant or prolonged deterioration in U.S.-China relations might adversely affect the Company’s China business.
 
Many of the risks and uncertainties of doing business in China are solely within the control of the Chinese government. China’s government regulates the business conducted by Starbucks by restricting the scope of the Company’s foreign investments within China and the food and beverage, retail, wholesale and distribution business conducted within China. Although management believes it has structured the Company’s China operations to comply with local laws, there are substantial uncertainties regarding the interpretation and application of laws and regulations and the enforceability of intellectual property and contract rights in China. If China’s governmental authorities were ultimately to conclude that Starbucks has not complied with one or more existing or future laws or regulations, or if their interpretations of those laws or regulations were to change over time, the Company’s affiliates could be subject to fines and other financial penalties, prohibited from opening new stores or forced to cease operations entirely. Moreover, any inability of the Company to enforce its intellectual property and contract rights in China’s courts could adversely affect the Company’s business.
 
Additionally, Starbucks plans to continue entering selected markets in other developing countries, and has recently entered Russia as an important part of the projected growth of the International operating segment. Some of those markets pose legal and business challenges similar to the China market, such as substantial uncertainty regarding the interpretation and application of laws and regulations and the enforceability of intellectual property and contract rights.
 
•  The Company’s earnings and business growth strategy depends in large part on the success of its business partners and suppliers, and the Company’s reputation may be harmed by actions taken by third parties that are outside of the Company’s control.
 
The Company’s growth strategy, including its plans for new stores, foodservice, branded products and other initiatives, relies significantly on a variety of licensee and partnership relationships, particularly in its International markets. Licensees are often authorized to use the Starbucks logo and provide Starbucks-branded beverages, food and other products directly to customers. The Company provides training and support to, and monitors the operations of, these business partners, but the product quality and service they deliver to Starbucks customers may be diminished by any number of factors beyond the Company’s control. Management believes customers expect the same quality of products and service from the Company’s licensees as they do from Starbucks and the Company strives to ensure customers have the same experience whether they visit a Company-operated or licensed store. Any shortcoming of a Starbucks business partner, particularly an issue affecting the quality of the service experience or the safety of beverages or food, may be attributed by customers to Starbucks, thus damaging the Company’s reputation and brand value and potentially affecting the results of operations.


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•  Effectively managing the Company’s rapid growth is challenging.
 
The Company’s long-term goal is to open approximately 20,000 Starbucks stores in the United States and at least 20,000 stores in International markets. Starbucks expects to double the size of its business over the next four to five years and achieve higher annual growth in net earnings than revenue. Effectively managing growth on this scale is challenging, particularly as Starbucks expands into new markets internationally, where it must balance the need for flexibility and a degree of autonomy for local management with consistency with the Company’s goals, philosophy and standards. Growth on this scale makes it increasingly difficult to ensure a consistent supply of high quality raw materials, to locate and hire sufficient numbers of key employees to meet the Company’s growth targets, to maintain an effective system of internal controls for a globally dispersed enterprise and to train employees worldwide to deliver a consistently high quality product and customer experience.
 
•  The loss of key personnel or difficulties recruiting and retaining qualified personnel could jeopardize the Company’s ability to meet its growth targets.
 
The Company’s future growth depends substantially on the contributions and abilities of key executives and other employees. Starbucks future growth also depends substantially on its ability to recruit and retain high quality employees to work in and manage Starbucks stores. Starbucks must continue to recruit, retain and motivate management and other employees sufficient to maintain its current business and support its projected growth. A loss of key employees or a significant shortage of high quality store employees could jeopardize the Company’s ability to meet its growth targets.
 
•  Adverse public or medical opinions about the health effects of consuming the Company’s products, as well as reports of incidents involving food-borne illnesses or food tampering, whether or not accurate, could harm its business.
 
Some Starbucks products contain caffeine, dairy products, sugar and other active compounds, the health effects of which are the subject of increasing public scrutiny, including the suggestion that excessive consumption of caffeine, dairy products, sugar and other active compounds can lead to a variety of adverse health effects. There has also been greater public awareness that sedentary lifestyles, combined with excessive consumption of high-calorie foods, have led to a rapidly rising rate of obesity. Particularly in the United States, there is increasing consumer awareness of health risks, including obesity, due in part to increasing publicity and attention from health organizations, as well as increased consumer litigation based on alleged adverse health impacts of consumption of various food products. While Starbucks has a variety of beverage and food items that are low in caffeine and calories, an unfavorable report on the health effects of caffeine or other compounds present in the Company’s products, or negative publicity or litigation arising from other health risks such as obesity, could significantly reduce the demand for the Company’s beverages and food products.
 
Similarly, reports, whether true or not, of unclean water supply, food-borne illnesses and food tampering have in the past severely injured the reputations of companies in the food processing, grocery and quick-service restaurant sectors and could in the future affect the Company as well. Any report linking Starbucks to the use of unclean water, food-borne illnesses or food tampering could damage its brand value, immediately and severely hurt sales of its beverages and food products, and possibly lead to product liability claims. Clean water is critical to the preparation of specialty coffee beverages. The Company’s ability to ensure a clean water supply to its stores is limited, particularly in some International locations. If customers become ill from food-borne illnesses, the Company could also be forced to temporarily close some stores. In addition, instances of food-borne illnesses or food tampering, even those occurring solely at the restaurants or stores of competitors, could, by resulting in negative publicity about the foodservice industry, adversely affect Starbucks sales on a regional or global basis. A decrease in customer traffic as a result of these health concerns or negative publicity, or as a result of a temporary closure of any of the Company’s stores, could materially harm the Company’s business and results of operations.


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•  Significant increases in the market price or decreases in availability of high quality arabica coffee or fluid milk could harm the Company’s business and financial results.
 
A discussion of the sources and availability of coffee of the quality sought by Starbucks and fluid milk appears on page 5 under “Product Supply.” Any significant increase in the market price or any significant decrease in the availability of high-quality arabica coffee or fluid milk could adversely affect the Company’s business and financial results.
 
•  A regional or global health pandemic could severely affect Starbucks business.
 
A health pandemic is a disease that spreads rapidly and widely by infection and affects many individuals in an area or population at the same time. If a regional or global health pandemic were to occur, depending upon its duration and severity, the Company’s business could be severely affected. Starbucks has positioned itself as a third place between home and work where people can gather together for human connection. Customers might avoid public gathering places in the event of a health pandemic, and local, regional or national governments might limit or ban public gatherings to halt or delay the spread of disease. A regional or global health pandemic might also adversely impact the Company’s business by disrupting or delaying production and delivery of materials and products in its supply chain and by causing staffing shortages in its stores. The impact of a health pandemic on Starbucks might be disproportionately greater than on other companies that depend less on the gathering of people together for the sale, use or license of their products and services.
 
•  Starbucks relies heavily on information technology in its operations, and any material failure, inadequacy, interruption or security failure of that technology could harm the Company’s ability to effectively operate its business.
 
Starbucks relies heavily on information technology systems across its operations, including for management of its supply chain, point-of-sale processing in its stores, and various other processes and transactions. The Company’s ability to effectively manage its business and coordinate the production, distribution and sale of its products depends significantly on the reliability and capacity of these systems. The failure of these systems to operate effectively, problems with transitioning to upgraded or replacement systems, or a breach in security of these systems could cause delays in product sales and reduced efficiency of the Company’s operations, and significant capital investments could be required to remediate the problem.
 
•  Failure of the Company’s internal control over financial reporting could harm its business and financial results.
 
Starbucks management is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes: (i) maintaining reasonably detailed records that accurately and fairly reflect the Company’s transactions; and (ii) providing reasonable assurance that the Company (a) records transactions as necessary to prepare the financial statements, (b) makes receipts and expenditures in accordance with management authorizations, and (c) would timely prevent or detect any unauthorized acquisition, use or disposition of Company assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that the Company would prevent or detect a misstatement of the Company’s financial statements or fraud. The Company’s rapid growth and entry into new, globally dispersed markets will place significant additional pressure on the Company’s system of internal control over financial reporting. Any failure to maintain an effective system of internal control over financial reporting could limit the Company’s ability to report its financial results accurately and timely or to detect and prevent fraud. A significant financial reporting failure could cause an immediate loss of investor confidence in Starbucks and a sharp decline in the market price of its common stock.


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•  Increased leverage may harm the Company’s financial condition and results of operations.
 
As of September 30, 2007, Starbucks had approximately $5.0 billion in minimum future rental payments under non-cancelable operating leases and $3.1 billion of total liabilities on a consolidated basis. Included in total liabilities are aggregate principal indebtedness of $710 million under outstanding commercial paper and $550 million under ten-year notes issued in an August 2007 underwritten registered public offering. The Company will incur additional operating lease obligations, largely driven by new store openings, and may incur additional indebtedness, subject to the limitations contained in its financing agreements. The recent increase in the Company’s level of financial obligations has had, and any future increase (which may or may not occur) will have, several important effects on the Company’s future operations, such as:
 
  •  additional cash requirements to support the payment of rents and interest on outstanding indebtedness;
 
  •  possible increased vulnerability to adverse changes in general economic and industry conditions, as well as to competitive pressure;
 
  •  possible limitations on the Company’s ability to obtain additional financing for working capital, capital expenditures, general corporate and other purposes; and
 
  •  possible limitations on the Company’s flexibility in planning for, or reacting to, changes in its business and its industry.
 
The Company’s ability to satisfy its lease obligations and make payments of principal and interest on its indebtedness depends on its future performance, which will be subject to general economic conditions, industry cycles and financial, business and other factors affecting its consolidated operations, many of which are beyond the Company’s control. If Starbucks is unable to generate sufficient cash flow from operations in the future to satisfy its financial obligations, it may be required, among other things:
 
  •  to seek additional financing in the debt or equity markets;
 
  •  to refinance or restructure all or a portion of its indebtedness;
 
  •  to sell selected assets; or
 
  •  to reduce or delay planned capital or operating expenditures.
 
Such measures might not be sufficient to enable Starbucks to satisfy its financial obligations. In addition, any such financing, refinancing or sale of assets might not be available on economically favorable terms.
 
The Company’s existing strong cash flow and capital structure mitigate the current risk associated with leverage. Management expects future cash flows to be sufficient to meet operating expenses, debt service costs, and capital expenditures required to support projected new store openings and investments in existing and new markets. In addition, management does not expect to increase leverage to levels that would inhibit the Company’s access to capital markets in the event of short-falls in anticipated operating cash flow.
 
Item 1B.   Unresolved Staff Comments
 
Not applicable.


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Item 2.   Properties
 
The following table shows properties used by Starbucks in connection with its roasting and distribution operations:
 
                     
    Approximate Size
    Owned or
     
Location
  in Square Feet     Leased    
Purpose
 
Kent, WA
    332,000       Owned     Roasting and distribution
Kent, WA
    403,000       Leased     Warehouse
Renton, WA
    125,000       Leased     Warehouse
York County, PA
    450,000       Owned     Roasting and distribution
York County, PA
    298,000       Owned     Warehouse
York County, PA
    231,000       Leased     Warehouse
Carson Valley, NV
    360,000       Owned     Roasting and distribution
Portland, OR
    86,000       Leased     Warehouse
Basildon, United Kingdom
    142,000       Leased     Warehouse and distribution
Amsterdam, Netherlands
    97,000       Leased     Roasting and distribution
 
The Company leases approximately 1.1 million square feet of office space and owns a 204,000 square foot office building in Seattle, Washington for corporate administrative purposes.
 
As of September 30, 2007, Starbucks had more than 8,500 Company-operated retail stores. The Company also leases space in approximately 160 additional locations for regional, district and other administrative offices, training facilities and storage, not including certain seasonal retail storage locations. The Company is constructing a new, owned, 150,000 square foot roasting and distribution plant in St. Matthews, South Carolina. Operations are planned to begin in early 2009.
 
Item 3.   Legal Proceedings
 
See discussion of Legal Proceedings in Note 17 to the consolidated financial statements included in Item 8 of this Report.
 
Item 4.   Submission of Matters to a Vote of Security Holders
 
No matters were submitted to a vote of security holders during the fiscal fourth quarter of 2007.
 
 
The executive officers of the Company are as follows:
 
             
Name
 
Age
 
Position
 
Howard Schultz
    54     chairman of the Board of Directors
James L. Donald
    53     president, chief executive officer and director
Martin Coles
    52     chief operating officer
Launi Skinner
    43     president, Starbucks Coffee U.S.
James C. Alling
    46     president, Starbucks Coffee International
Gerardo I. Lopez
    48     senior vice president; president, Global Consumer Products and Seattle’s Best Coffee
Peter J. Bocian
    53     executive vice president, chief financial officer and chief administrative officer
Paula E. Boggs
    48     executive vice president, general counsel and secretary
Dorothy J. Kim
    45     executive vice president, Supply Chain Operations
David A. Pace
    48     executive vice president, Partner Resources
 
Howard Schultz is the founder of the Company and the chairman of the board. From the Company’s inception in 1985 to June 2000, he served as chairman of the board and chief executive officer. From June 2000 to February 2005, Mr. Schultz held the title of chief global strategist. Mr. Schultz also serves on the board of directors of DreamWorks Animation SKG, Inc.


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James L. Donald joined Starbucks in October 2002 and has been president and chief executive officer and a director of the Company since April 2005. From October 2004 to April 2005, Mr. Donald served as ceo designate. Prior to that, Mr. Donald served as president, North America from the time he joined the Company in October 2002. From October 1996 to October 2002, Mr. Donald served as chairman, president and ceo of Pathmark Stores, Inc. and prior to that time he held a variety of senior management positions with Albertson’s, Inc., Safeway, Inc. and Wal-Mart Stores, Inc.
 
Martin Coles joined Starbucks in April 2004 as president, Starbucks Coffee International and was promoted to chief operating officer in September 2007. Prior to joining Starbucks, Mr. Coles served as an executive vice president of Reebok International, Ltd. from December 2001 to February 2004. Prior to joining Reebok International, Mr. Coles held several executive level management sales and operations positions with NIKE Inc., Letsbuyit.com and Gateway, Inc.
 
Launi Skinner joined Starbucks in August 1993 and was promoted to president, Starbucks Coffee U.S. in September 2007. Ms. Skinner previously served as the Company’s senior vice president, Store Development since October 2004. From January 1999 to September 2004, she served as regional vice president for retail operations in several different zones in the western U.S. and Canada. Prior to becoming a regional vice president, she served as a market director.
 
James C. Alling joined Starbucks in September 1997 as senior vice president, Grocery and became president, Starbucks Coffee International in September 2007. Mr. Alling served as president, Starbucks Coffee U.S. from October 2004 to September 2007, executive vice president, Business and Operations — United States from November 2003 to October 2004 and held a number of positions as senior vice president from September 1997 until November 2003.
 
Gerardo I. Lopez joined Starbucks in October 2004 as senior vice president; president, Global Consumer Products and became senior vice president; president, Global Consumer Products and Seattle’s Best Coffee in November 2007. Prior to joining Starbucks, Mr. Lopez was president of the Handleman Entertainment Resources division of Handleman Company, from November 2001 to September 2004 and as senior vice president and general manager from May 2000 to November 2001. Prior to that, Mr. Lopez held a variety of executive management positions with Frito-Lay, Inc., Pepsi-Cola Company and The Procter & Gamble Company.
 
Peter J. Bocian joined Starbucks as executive vice president and chief financial officer designate in May 2007 and became executive vice president, chief financial officer and chief administrative officer in October 2007. Prior to joining Starbucks, Mr. Bocian worked at NCR Corporation since 1983, most recently as senior vice president and chief financial officer since 2004. From 2003 to 2004, he served as NCR’s vice president, finance and interim chief financial officer. From 2002 to 2003, Mr. Bocian was the chief financial officer of NCR’s Retail and Financial Group, covering four business units and from 1999 to 2002, he served as the chief financial officer of NCR’s Retail Solutions Division.
 
Paula E. Boggs joined Starbucks in September 2002 as executive vice president, general counsel and secretary. Prior to joining Starbucks, Ms. Boggs served as vice president, legal, for products, operations and information technology at Dell Computer Corporation from 1997 to 2002. From 1995 to 1997, Ms. Boggs was a partner with the law firm of Preston Gates & Ellis. Ms. Boggs served in several roles at the Pentagon, White House and U.S. Department of Justice between 1984 and 1995.
 
Dorothy J. Kim joined Starbucks in November 1995 and was promoted to executive vice president, Supply Chain Operations in December 2004. From April 2003 to December 2004, Ms. Kim was senior vice president, Global Logistics, Planning and Procurement. From April 2002 to April 2003, Ms. Kim was vice president, Supply Chain and Coffee Operations, Logistics, and from October 2000 to April 2002, Ms. Kim was vice president, Supply Chain and Coffee Operations, Finance and Systems. Prior to becoming a vice president, Ms. Kim held several positions in retail planning and operations.
 
David A. Pace joined Starbucks in July 2002 as executive vice president of Partner Resources. Mr. Pace has notified the Company that he intends to resign for personal reasons effective December 31, 2007. From 2000 to 2002, Mr. Pace was the president of i2 Technologies. From 1999 to 2000, Mr. Pace served as the chief human resources officer for HomeGrocer.com. From 1995 to 1999, he served as senior vice president of human resources for Tricon Restaurants International (now YUM! Brands, Inc.).
 
There are no family relationships among any directors or executive officers of the Company.


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PART II
 
Item 5.  Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
 
SHAREHOLDER INFORMATION
 
 
The Company’s common stock is traded on the NASDAQ Global Select Market (“NASDAQ”), under the symbol “SBUX.” The following table shows the quarterly high and low closing sale prices per share of the Company’s common stock as reported by NASDAQ for each quarter during the last two fiscal years:
 
                 
    High     Low  
 
September 30, 2007:
               
Fourth Quarter
  $ 28.29     $ 25.87  
Third Quarter
    31.84       25.54  
Second Quarter
    36.29       29.32  
First Quarter
    39.43       33.62  
October 1, 2006:
               
Fourth Quarter
  $ 38.02     $ 29.55  
Third Quarter
    39.63       34.93  
Second Quarter
    37.63       30.24  
First Quarter
    31.96       24.91  
 
As of November 16, 2007, the Company had approximately 18,500 shareholders of record. Starbucks has never paid any dividends on its common stock. The Company presently intends to retain earnings for use in its business and to repurchase shares of common stock and, therefore, does not anticipate paying a cash dividend in the near future.
 
The following table provides information regarding repurchases by the Company of its common stock during the 13-week period ended September 30, 2007:
 
 
                                 
                Total Number
    Maximum
 
                of Shares
    Number of
 
                Purchased as
    Shares that May
 
    Total
    Average
    Part of Publicly
    Yet be
 
    Number of
    Price
    Announced
    Purchased
 
    Shares
    Paid per
    Plans or
    Under the Plans
 
Period(1)
  Purchased     Share     Programs(2)     or Programs(2)  
 
July 2, 2007 — July 29, 2007
        $             26,138,212  
July 30, 2007 — August 26, 2007
    8,304,303       27.12       8,304,303       17,833,909  
August 27, 2007 — September 30, 2007
    4,315,202       27.02       4,315,202       13,518,707  
                                 
Total
    12,619,505       27.09       12,619,505          
                                 
 
 
(1) Monthly information is presented by reference to the Company’s fiscal months during the fourth quarter of fiscal 2007.
 
(2) The Company’s share repurchase program is conducted under authorizations made from time to time by the Company’s Board of Directors. The shares reported in the table are covered by a Board authorization to repurchase 25 million shares of common stock publicly announced on August 2, 2006, and a Board authorization to repurchase 25 million shares of common stock publicly announced on May 3, 2007. Neither of these authorizations has an expiration date.


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The following graph depicts the Company’s total return to shareholders from September 29, 2002 through September 30, 2007, relative to the performance of the Standard & Poor’s 500 Index, the NASDAQ Composite Index, and the Standard & Poor’s 500 Consumer Discretionary Sector, a peer group that includes Starbucks. All indices shown in the graph have been reset to a base of 100 as of September 29, 2002, and assume an investment of $100 on that date and the reinvestment of dividends paid since that date. Starbucks has never paid a dividend on its common stock. The stock price performance shown in the graph is not necessarily indicative of future price performance.
 
(COMPANY LOGO)
 
                                                             
      9/29/02     9/28/03     10/3/04     10/2/05     10/1/06     9/30/07
Starbucks Corporation
    $ 100.00       $ 140.81       $ 224.86       $ 238.57       $ 324.29       $ 249.52  
S&P 500
    $ 100.00       $ 124.40       $ 141.65       $ 159.01       $ 176.17       $ 205.13  
NASDAQ Composite
    $ 100.00       $ 150.59       $ 162.89       $ 185.48       $ 196.37       $ 236.60  
S&P Consumer Discretionary
    $ 100.00       $ 122.65       $ 140.01       $ 147.07       $ 160.09       $ 170.23  
                                                             


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Item 6.   Selected Financial Data
 
In millions, except earnings per share and store operating data
 
The following selected financial data are derived from the consolidated financial statements of the Company. The data below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors,” and the Company’s consolidated financial statements and notes. In particular, see Note 1 to the consolidated financial statements included in Item 8 of this Report for a description of accounting changes that materially affect the comparability of the data presented below.
 
                                         
    Sept 30,
    Oct 1,
    Oct 2,
    Oct 3,
    Sept 28,
 
    2007
    2006
    2005
    2004
    2003
 
As of and for the Fiscal Year Ended(1)
  (52 Wks)     (52 Wks)     (52 Wks)     (53 Wks)     (52 Wks)  
 
RESULTS OF OPERATIONS
                                       
Net revenues:
                                       
Company-operated retail
  $ 7,998     $ 6,583     $ 5,392     $ 4,457     $ 3,450  
Specialty:
                                       
Licensing
    1,026       861       673       566       410  
Foodservice and other
    387       343       304       271       216  
                                         
Total specialty
    1,413       1,204       977       837       626  
                                         
Total net revenues
  $ 9,411     $ 7,787     $ 6,369     $ 5,294     $ 4,076  
                                         
Operating income
    1,054       894       781       606       421  
Earnings before cumulative effect of change in accounting principle
    673       581       494       389       265  
Cumulative effect of accounting change for FIN 47, net of taxes
          17                    
Net earnings
  $ 673     $ 564     $ 494     $ 389     $ 265  
Earnings per common share before cumulative effect of change in accounting principle — diluted
  $ 0.87     $ 0.73     $ 0.61     $ 0.47     $ 0.33  
Cumulative effect of accounting change for FIN 47, net of taxes — per common share
          0.02                    
Net earnings per common share — diluted
  $ 0.87     $ 0.71     $ 0.61     $ 0.47     $ 0.33  
Cash dividends per share
                             
BALANCE SHEET
                                       
Working capital (deficit)(2)
  $ (459 )   $ (406 )   $ (18 )   $ 605     $ 336  
Total assets
    5,344       4,429       3,514       3,386       2,776  
Short-term borrowings(3)
    710       700       277              
Long-term debt (including current portion)(4)
    551       3       4       4       5  
Shareholders’ equity
  $ 2,284     $ 2,229     $ 2,090     $ 2,470     $ 2,069  
STORE INFORMATION
                                       
Percentage change in comparable store sales(5)
                                       
United States
    4 %     7 %     9 %     11 %     9 %
International
    7 %     8 %     6 %     6 %     7 %
Consolidated
    5 %     7 %     8 %     10 %     8 %
Stores opened during the year:(6)
                                       
United States
                                       
Company — operated stores
    1,065       810       580       521       514  
Licensed stores
    723       733       596       417       315  
International
                                       
Company — operated stores
    277       233       171       158       136  
Licensed stores
    506       423       325       248       236  
                                         
Total
    2,571       2,199       1,672       1,344       1,201  
                                         
 


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    Sept 30,
    Oct 1,
    Oct 2,
    Oct 3,
    Sept 28,
 
    2007
    2006
    2005
    2004
    2003
 
As of and for the Fiscal Year Ended(1)
  (52 Wks)     (52 Wks)     (52 Wks)     (53 Wks)     (52 Wks)  
 
Stores open at year end:
                                       
United States
                                       
Company-operated stores
    6,793       5,728       4,918       4,338       3,817  
Licensed stores
    3,891       3,168       2,435       1,839       1,422  
International(7)
                                       
Company-operated stores
    1,712       1,435       1,202       1,031       873  
Licensed stores
    2,615       2,109       1,686       1,361       1,113  
                                         
Total
    15,011       12,440       10,241       8,569       7,225  
                                         
 
 
(1) The Company’s fiscal year ends on the Sunday closest to September 30.
 
(2) Working capital deficits were primarily due to increased current liabilities from short term borrowings as of September 30, 2007 and October 1, 2006. See (3) below.
 
(3) Commercial paper totaling $710 million was outstanding as of September 30, 2007. Short term borrowings of $700 million under the five-year revolving credit facility were outstanding as of October 1, 2006.
 
(4) In August 2007, the Company issued $550 million of 10-year notes with a stated interest rate of 6.25%.
 
(5) Includes only Starbucks Company-operated retail stores open 13 months or longer. Comparable store sales percentage for fiscal 2004 excludes the extra sales week.
 
(6) Store openings are reported net of closures.
 
(7) International store information has been adjusted for the fiscal 2007 acquisition of Beijing licensed operations by reclassifying historical information from Licensed stores to Company-operated stores.

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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
Starbucks Corporation’s fiscal year ends on the Sunday closest to September 30. Some fiscal years include 53 weeks. The fiscal years ended on September 30, 2007, October 1, 2006 and October 2, 2005, all included 52 weeks. All references to store counts, including data for new store openings, are reported net of related store closures.
 
 
 
Starbucks achieved solid performance in fiscal 2007 — meeting its targets for store openings, revenue growth, comparable store sales growth, and earnings per share — despite a challenging economic and operating environment, and significant cost increases from dairy. The Company completed the fiscal year with encouraging trends and momentum in its International business but faced increasing challenges in its U.S. business. While U.S. comparable store sales were within the Company’s stated target range, it was accomplished through two price increases which offset flat-to-negative transaction count trends in the U.S. business. The pressure on traffic is consistent with similar trends reported across both the retail and restaurant industry. Management believes that the combination of the economic slowdown and the price increases implemented in fiscal 2007 to help mitigate significant cost pressures have impacted the frequency of customer visits to Starbucks stores.
 
Consolidated net revenues for fiscal year 2007 increased 21% to $9.4 billion. Company-operated retail revenues in fiscal 2007 rose 21% to $8.0 billion, predominantly due to the opening of 1,342 stores and comparable store sales growth of 5%. The increase in comparable store sales was due to a 4% increase in the average value per transaction and 1% growth in the number of customer transactions. The Company opened a total of 2,571 new company-operated and licensed stores during the year, with 70% in the U.S. and 30% in International markets, to end the year with over 15,000 stores.
 
For fiscal 2007, operating income increased to $1.1 billion, while operating margin contracted 30 basis points to 11.2% of total net revenues. Margin compression was due to higher costs of sales including occupancy costs as a percentage of total net revenues due to a shift in sales to higher cost products and higher distribution costs, rent expense and dairy costs. These cost pressures were offset in part by leveraging general and administrative expenses, store operating expenses, and other operating expenses as a percentage of total net revenues.
 
Net earnings rose to $673 million in fiscal 2007 from $564 million for the previous year. Diluted earnings per share for fiscal 2007 increased to $0.87 compared to $0.71 a year ago. Excluding the cumulative effect of adopting FIN 47 in the fiscal fourth quarter of 2006, earnings grew 16% and diluted earnings per share increased 19%.
 
 
Throughout fiscal 2007, Starbucks experienced a consistent weakening in its U.S. business, exiting the year with a negative trend in transactions. Management recognizes that it faces a more challenging environment from an economic, operational and competitive standpoint entering fiscal 2008. In response to those challenges, management intends to focus in the following key areas:
 
  •  Better operational excellence at the store level;
 
  •  More meaningful innovation to continue to differentiate the store experience; and
 
  •  Increased efficiencies and effectiveness in the general and administrative infrastructure, to become more capable of navigating through the fluctuations in the external environment.


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In setting targets for fiscal 2008, management’s goal was to balance the long-term opportunity for store growth with the near-term realities of the challenging economic and operating environment. For fiscal 2008 the Company is targeting:
 
  •  Opening approximately 2,500 new stores;
 
  •  Comparable store sales growth in the range of 3% to 5%;
 
  •  Total net revenue growth in the range of approximately 17% to 18%, to over $11 billion; and
 
  •  Earnings per share in the range of $1.02 to $1.05, representing 17% to 21% growth, with earnings per share expansion expected to be greater in the second half of fiscal 2008.
 
In summary, management believes these targets are balanced for fiscal 2008. The Company intends to continue to build out stores to take advantage of its global opportunity, to better execute in its U.S. business, to grow and deliver significant margin expansion in its International business, and to deliver margin improvement for the Company on a consolidated basis.
 
 
Starbucks has three reportable operating segments: United States, International and CPG.
 
The United States and International segments both include Company-operated retail stores, licensed retail stores and foodservice operations. The United States segment has been operating significantly longer than the International segment and has developed deeper awareness of, and attachment to, the Starbucks brand and stores among its customer base. As a result, the United States segment has significantly more stores, and higher total revenues than the International segment. Average sales per store are also higher in the United States due to various factors including length of time in market and local income levels. Further, certain market costs, particularly occupancy costs, are lower in the United States segment compared to the average for the International segment, which comprises a more diverse group of operations. As a result of the relative strength of the brand in the United States segment, the number of stores, the higher unit volumes, and the lower market costs, the United States segment has a higher operating margin than the less-developed International segment.
 
The Company’s International store base continues to increase rapidly and Starbucks is achieving a growing contribution from established international markets while at the same time investing in emerging markets, such as China, Brazil and Russia. The Company’s newer international markets require a more extensive support organization, relative to the current levels of revenue and operating income.
 
The CPG segment includes the Company’s grocery and warehouse club business as well as branded products operations worldwide. The CPG segment operates primarily through joint ventures and licensing arrangements with large consumer products business partners, most significantly The North American Coffee Partnership with the Pepsi-Cola Company for distribution of ready-to-drink beverages, and with Kraft Foods Inc. for distribution of packaged coffees and teas. This operating model allows the CPG segment to leverage the business partners’ existing infrastructures and to extend the Starbucks brand in an efficient way. Most of the customer revenues from the ready-to-drink and packaged coffee channels are recognized as revenues by the joint venture or licensed business partner, not by the CPG segment, and the proportionate share of the results of the Company’s joint ventures are included on a net basis in “Income from equity investees” on the consolidated statements of earnings. As a result, the CPG segment reflects relatively lower revenues, a modest cost structure, and a resulting higher operating margin, compared to the Company’s other two reporting segments, which consist primarily of retail stores.
 
Expenses pertaining to corporate administrative functions that support the operating segments but are not specifically attributable to or managed by any segment are not included in the reported financial results of the operating segments. These unallocated corporate expenses include certain general and administrative expenses, related depreciation and amortization expenses and amounts included in “Net interest and other income” on the consolidated statements of earnings.


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In the first quarter of fiscal 2007, the Company purchased a 90% stake in its previously-licensed operations in Beijing, China. Due to its majority ownership of these operations, Starbucks applied the consolidation method of accounting subsequent to the date of acquisition.
 
RESULTS OF OPERATIONS — FISCAL 2007 COMPARED TO FISCAL 2006
 
The following table presents the consolidated statement of earnings as well as the percentage relationship to total net revenues, unless otherwise indicated, of items included in the Company’s consolidated statements of earnings (amounts in thousands):
 
                                                 
    Sept 30,
    % of
    Oct 1,
    % of
    Oct 2,
    % of
 
Fiscal Year Ended
  2007     Revenues     2006     Revenues     2005     Revenues  
 
STATEMENTS OF EARNINGS DATA
                                               
Net revenues:
                                               
Company-operated retail
  $ 7,998,265       85.0 %   $ 6,583,098       84.5 %   $ 5,391,927       84.7 %
Specialty:
                                               
Licensing
    1,026,338       10.9       860,676       11.1       673,015       10.5  
Foodservice and other
    386,894       4.1       343,168       4.4       304,358       4.8  
                                                 
Total specialty
    1,413,232       15.0       1,203,844       15.5       977,373       15.3  
                                                 
Total net revenues
    9,411,497       100.0       7,786,942       100.0       6,369,300       100.0  
Cost of sales including occupancy costs
    3,999,124       42.5       3,178,791       40.8       2,605,212       40.9  
Store operating expenses(1)
    3,215,889       34.2       2,687,815       34.5       2,165,911       34.0  
Other operating expenses(2)
    294,136       3.1       253,724       3.3       192,525       3.0  
Depreciation and amortization expenses
    467,160       4.9       387,211       5.0       340,169       5.3  
General and administrative expenses
    489,249       5.2       479,386       6.1       361,613       5.7  
                                                 
Total operating expenses
    8,465,558       89.9       6,986,927       89.7       5,665,430       88.9  
Income from equity investees
    108,006       1.1       93,937       1.2       76,648       1.2  
                                                 
Operating income
    1,053,945       11.2       893,952       11.5       780,518       12.3  
Net interest and other income
    2,419             12,291       0.1       15,829       0.2  
                                                 
Earnings before income taxes
    1,056,364       11.2       906,243       11.6       796,347       12.5  
Income taxes
    383,726       4.1       324,770       4.1       301,977       4.7  
                                                 
Earnings before cumulative effect of change in accounting principle
    672,638       7.1       581,473       7.5       494,370       7.8  
Cumulative effect of accounting change for FIN 47, net of taxes
                17,214       0.3              
                                                 
Net earnings
  $ 672,638       7.1 %   $ 564,259       7.2 %   $ 494,370       7.8 %
                                                 
 
 
(1) As a percentage of related Company-operated retail revenues, store operating expenses were 40.2%, 40.8% and 40.2% for the fiscal years ended September 30, 2007, October 1, 2006 and October 2, 2005, respectively.
 
(2) As a percentage of related total specialty revenues, other operating expenses were 20.8%, 21.1% and 19.7% for the fiscal years ended September 30, 2007, October 1, 2006 and October 2, 2005, respectively.


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Net revenues for the fiscal year ended 2007, increased 21% to $9.4 billion from $7.8 billion for fiscal 2006, driven by increases in both Company-operated retail revenues and specialty operations.
 
During the fiscal year ended 2007, Starbucks derived 85% of total net revenues from its Company-operated retail stores. Company-operated retail revenues increased 21% to $8.0 billion for the fiscal year ended 2007, from $6.6 billion for fiscal 2006. The increase was primarily attributable to the opening of 1,342 new Company-operated retail stores in the last 12 months and comparable store sales growth of 5% for the fiscal year ended 2007. The increase in comparable store sales was due to a 4% increase in the average value per transaction and a 1% increase in the number of customer transactions.
 
The Company derived the remaining 15% of total net revenues from channels outside the Company-operated retail stores, collectively known as specialty operations. Specialty revenues, which include licensing revenues and foodservice and other revenues, increased 17% to $1.4 billion for the fiscal year ended 2007, from $1.2 billion for fiscal 2006.
 
Licensing revenues, which are derived from retail store licensing arrangements as well as grocery, warehouse club and certain other branded-product operations, increased 19% to $1.0 billion for the fiscal year ended 2007, from $861 million for fiscal 2006. The increase was primarily due to higher product sales and royalty revenues from the opening of 1,229 new licensed retail stores in the last 12 months and a 20% increase in licensing revenues from the Company’s CPG business.
 
Foodservice and other revenues increased 13% to $387 million for the fiscal year ended 2007, from $343 million for fiscal 2006. The increase was primarily attributable to growth in new and existing accounts in the U.S. foodservice business.
 
Cost of sales including occupancy costs increased to 42.5% of total net revenues for the fiscal year ended 2007, compared to 40.8% for fiscal 2006. The increase was primarily due to a shift in sales mix to higher cost products, the rise in distribution costs, higher rent expense and higher dairy costs. Dairy expense for the U.S. segment represents approximately 75% of the total Company’s dairy expense. For the U.S. segment the average dairy costs per gallon rose 10% in fiscal 2007 compared to fiscal 2006, resulting in approximately $20 million of additional expense.
 
Store operating expenses as a percentage of Company-operated retail revenues decreased to 40.2% for the fiscal year ended 2007, from 40.8% for fiscal 2006, primarily due to higher provisions for incentive compensation in the prior year due to exceptionally strong performance as well as leverage on regional overhead costs in fiscal 2007.
 
Other operating expenses (expenses associated with the Company’s Specialty Operations) decreased to 20.8% of total specialty revenues for the fiscal year ended 2007, compared to 21.1% in fiscal 2006. The decline resulted primarily from controlled discretionary spending in fiscal 2007.
 
Depreciation and amortization expenses increased to $467 million for the fiscal year ended 2007, compared to $387 million for the corresponding period of fiscal 2006. The increase was primarily due to the opening of 1,342 new Company-operated retail stores in the last 12 months. As a percentage of total net revenues, depreciation and amortization expenses decreased to 4.9% for the fiscal 2007, compared to 5.0% for fiscal 2006.
 
General and administrative expenses increased to $489 million for the fiscal year ended 2007, compared to $479 million for fiscal 2006. The increase was primarily due to higher payroll-related expenditures in support of continued global growth, offset in part by unusually high charitable contributions in fiscal 2006. As a percentage of total net revenues, general and administrative expenses decreased to 5.2% for the fiscal year ended 2007, from 6.1% for fiscal 2006.
 
Income from equity investees increased 15% to $108 million for the fiscal year ended 2007, compared to $94 million for fiscal 2006, primarily due to higher equity income from international investees.
 
Operating income increased 18% to $1.1 billion for the fiscal year ended 2007, compared to $894 million for fiscal 2006. Operating margin decreased to 11.2% of total net revenues for the fiscal year ended 2007, from 11.5% for fiscal 2006. Margin compression was due to higher costs of sales and occupancy costs as a percentage of total net revenues due to a shift in sales to higher cost products and higher distribution costs, rent expense and dairy costs.


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These cost pressures were offset in part by leveraging general and administrative expenses, store operating expenses, and other operating expenses as a percentage of total net revenues.
 
Net interest and other income was $2 million for the fiscal year ended 2007, compared to $12 million for fiscal 2006. The decrease was primarily due to increased interest expense resulting from a higher level of borrowings outstanding, which include the $550 million of senior notes issued in August 2007, offset in part by a higher amount of income recognized on unredeemed stored value card and gift certificate balances in fiscal 2007 compared to fiscal 2006.
 
Income taxes for the fiscal year ended 2007 resulted in an effective tax rate of 36.3%, compared to 35.8% for fiscal 2006. The effective tax rate for fiscal 2008 is expected to be approximately in line with fiscal 2007, with quarterly variations.
 
Net earnings for the fiscal year ended 2007, increased 19% to $673 million from $564 million for fiscal 2006. Diluted earnings per share increased to $0.87 for the fiscal year ended 2007, compared to $0.71 per share for fiscal 2006. Excluding the cumulative effect of adopting FIN 47 in fourth quarter 2006, earnings before cumulative effect of change in accounting principle grew 16% and diluted earnings per share increased 19%.
 
Operating Segments
 
Segment information is prepared on the same basis that the Company’s management reviews financial information for operational decision-making purposes. Starbucks has three reportable operating segments: United States, International and CPG. “Unallocated Corporate” includes expenses pertaining to corporate administrative functions that support the operating segments but are not specifically attributable to or managed by any segment and are not included in the reported financial results of the operating segments. Operating income represents earnings before “Net interest and other income” and “Income taxes.” The following tables summarize the Company’s results of operations by segment for fiscal 2007 and 2006 (in thousands):
 
 
                                         
    52 Weeks Ended     52 Weeks Ended  
    Sept 30,
    Oct 1,
    %
    Sept 30,
    Oct 1,
 
    2007     2006     Change     2007     2006  
                      As a % of U.S. total net revenues  
 
Net revenues:
                                       
Company-operated retail
  $ 6,560,864     $ 5,495,240       19.4 %     89.3 %     88.9 %
Specialty:
                                       
Licensing
    439,161       369,155       19.0       6.0       6.0  
Foodservice and other
    348,968       314,162       11.1       4.7       5.1  
                                         
Total specialty
    788,129       683,317       15.3       10.7       11.1  
                                         
Total net revenues
    7,348,993       6,178,557       18.9       100.0       100.0  
Cost of sales including occupancy costs
    2,956,231       2,374,485       24.5       40.2       38.4  
Store operating expenses(1)
    2,684,196       2,280,044       17.7       36.5       36.9  
Other operating expenses(2)
    204,672       190,624       7.4       2.8       3.1  
Depreciation and amortization expenses
    348,199       284,625       22.3       4.7       4.6  
General and administrative expenses
    85,948       93,754       (8.3 )     1.2       1.5  
                                         
Total operating expenses
    6,279,246       5,223,532       20.2       85.4       84.5  
Income from equity investees
    768       151       nm              
                                         
Operating income
  $ 1,070,515     $ 955,176       12.1 %     14.6 %     15.5 %
                                         
 
 
(1) As a percentage of related Company-operated retail revenues, store operating expenses were 40.9% and 41.5% for the fiscal years ended September 30, 2007 and October 1, 2006, respectively.


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(2) As a percentage of related total specialty revenues, other operating expenses were 26.0% and 27.9% for the fiscal years ended September 30, 2007 and October 1, 2006, respectively.
 
The United States operating segment (“United States”) sells coffee and other beverages, complementary food, whole bean coffees, and coffee brewing equipment and merchandise primarily through Company-operated retail stores. Specialty operations within the United States include licensed retail stores, foodservice accounts and other initiatives related to the Company’s core business.
 
United States total net revenues increased 19% to $7.3 billion for the fiscal year ended 2007, compared to $6.2 billion for fiscal 2006.
 
United States Company-operated retail revenues increased 19% to $6.6 billion for the fiscal year ended 2007, compared to $5.5 billion for fiscal 2006, primarily due to the opening of 1,065 new Company-operated retail stores in the last 12 months and comparable store sales growth of 4% for fiscal 2007, nearly all resulting from an increase in the average value per transaction. The U.S. Company-operated retail business experienced deteriorating trends in transactions late in the year, driven by, management believes, the U.S. economic slowdown combined with two price increases in U.S. retail stores implemented in fiscal 2007. Management believes that several initiatives underway in the U.S. business, namely an enhanced focus on operational excellence in the stores, a more robust marketing strategy, meaningful product innovation and a renewed focus on the core beverage and coffeehouse experience, will help address those challenges in the U.S. retail business. In addition, in fiscal 2008 the Company plans to slightly reduce the pace of new store openings in the U.S. from the previous year in order to ensure the selection of store location and store format are the best fit for its customers and the business.
 
Total United States specialty revenues increased 15% to $788 million for the fiscal year ended 2007, compared to $683 million in fiscal 2006. United States licensing revenues increased 19% to $439 million, compared to $369 million for fiscal 2006 primarily due to higher product sales and royalty revenues as a result of opening 723 new licensed retail stores in the last 12 months. United States foodservice and other revenues increased 11% to $349 million, from $314 million in fiscal 2006, primarily due to growth in new and existing foodservice accounts.
 
United States operating income increased 12% to $1.1 billion for the fiscal year ended 2007, compared to $955 million for fiscal 2006. Operating margin decreased to 14.6% of related revenues from 15.5% in fiscal 2006. The decrease was due to higher cost of sales including occupancy costs, primarily due to a shift in sales mix to higher cost products such as food and merchandise, higher distribution costs, higher rent expense and higher dairy costs. Partially offsetting these were lower store operating expenses, lower general and administrative expenses, and lower other operating expenses as a percentage of total net revenues. The decline in store operating expenses as a percentage of total net revenues was primarily due to higher provisions for incentive compensation in the prior year as well as leverage on regional overhead costs in fiscal 2007. General and administrative expenses were lower primarily due to decreased salary and related benefits expense as well as lower professional fees. The decline in other operating expenses as a percentage of total net revenues was primarily due to controlled discretionary spending in the current year.


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Table of Contents

 
                                         
    52 Weeks Ended     52 Weeks Ended  
    Sept 30,
    Oct 1,
    %
    Sept 30,
    Oct 1,
 
    2007     2006     Change     2007     2006  
                      As a % of international total net revenues  
 
Net revenues:
                                       
Company-operated retail
  $ 1,437,401     $ 1,087,858       32.1 %     84.7 %     83.5 %
Specialty:
                                       
Licensing
    220,832       186,050       18.7       13.0       14.3  
Foodservice and other
    37,926       29,006       30.8       2.3       2.2  
                                         
Total specialty
    258,758       215,056       20.3       15.3       16.5  
                                         
Total net revenues
    1,696,159       1,302,914       30.2       100.0       100.0  
Cost of sales including occupancy costs
    824,594       625,008       31.9       48.6       48.0  
Store operating expenses(1)
    531,693       407,771       30.4       31.4       31.3  
Other operating expenses(2)
    69,881       50,900       37.3       4.1       3.9  
Depreciation and amortization expenses
    84,165       66,800       26.0       5.0       5.1  
General and administrative expenses
    93,806       78,337       19.7       5.5       6.0  
                                         
Total operating expenses
    1,604,139       1,228,816       30.5       94.6       94.3  
Income from equity investees
    45,723       34,370       33.0       2.7       2.6  
                                         
Operating income
  $ 137,743     $ 108,468       27.0 %     8.1 %     8.3 %
                                         
 
 
(1) As a percentage of related Company-operated retail revenues, store operating expenses were 37.0% and 37.5% for the fiscal years ended September 30, 2007 and October 1, 2006, respectively.
 
(2) As a percentage of related total specialty revenues, other operating expenses were 27.0% and 23.7% for the fiscal years ended September 30, 2007 and October 1, 2006, respectively.
 
The International operating segment (“International”) sells coffee and other beverages, complementary food, whole bean coffees, and coffee brewing equipment and merchandise through Company-operated retail stores in Canada, the UK and eight other markets. Specialty operations in International primarily include retail store licensing operations in more than 30 other countries and foodservice accounts, primarily in Canada and the UK. The Company’s International store base continues to increase rapidly and Starbucks is achieving a growing contribution from established areas of the business while at the same time investing in emerging markets and channels. Many of the Company’s International operations are in early stages of development that require a more extensive support organization, relative to the current levels of revenue and operating income, than in the United States. This continuing investment is part of the Company’s long-term, balanced plan for profitable growth.
 
International total net revenues increased 30% to $1.7 billion for the fiscal year ended 2007, compared to $1.3 billion for fiscal 2006.
 
International Company-operated retail revenues increased 32% to $1.4 billion for the fiscal year ended 2007, compared to $1.1 billion for fiscal 2006. The increase was primarily due to the opening of 277 new Company-operated retail stores in the last 12 months, comparable store sales growth of 7% for fiscal 2007 and favorable foreign currency exchange for the British pound sterling. The increase in comparable store sales resulted from a 5% increase in the number of customer transactions coupled with a 2% increase in the average value per transaction.
 
Total International specialty revenues increased 20% to $259 million for the fiscal year ended 2007, compared to $215 million in fiscal 2006. The increase was primarily due to higher product sales and royalty revenues from opening 506 new licensed retail stores in the last 12 months.


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Table of Contents

International operating income increased 27% to $138 million for the fiscal year ended 2007, compared to $108 million in fiscal 2006. Operating margin decreased to 8.1% of related revenues from 8.3% in fiscal 2006, primarily due to higher cost of sales including occupancy costs due in part to a shift in sales mix to higher cost products such as food and merchandise and higher distribution costs. Partially offsetting this increase was lower general and administrative expenses as a percentage of total net revenues.
 
 
                                         
    52 Weeks Ended     52 Weeks Ended  
    Sept 30,
    Oct 1,
    %
    Sept 30,
    Oct 1,
 
    2007     2006     Change     2007     2006  
                      As a % of CPG total net revenues  
 
Net revenues:
                                       
Specialty:
                                       
Licensing
  $ 366,345     $ 305,471       19.9 %     100.0 %     100.0 %
                                         
Total specialty
    366,345       305,471       19.9       100.0       100.0  
                                         
Cost of sales
    218,299       179,298       21.8       59.6       58.7  
Other operating expenses
    19,583       12,200       60.5       5.4       4.0  
Depreciation and amortization expenses
    76       108       (29.6 )            
General and administrative expenses
    6,349       6,363       (0.2 )     1.7       2.1  
                                         
Total operating expenses
    244,307       197,969       23.4       66.7       64.8  
Income from equity investees
    61,515       59,416       3.5       16.8       19.4  
                                         
Operating income
  $ 183,553     $ 166,918       10.0 %     50.1 %     54.6 %
                                         
 
The CPG operating segment sells a selection of whole bean and ground coffees and premium Tazo® teas through licensing arrangements in United States and international markets. CPG also produces and sells ready-to-drink beverages through its joint ventures and marketing and distribution agreements. CPG “General and administrative expenses,” previously included in “Other operating expenses,” are now presented separately.
 
CPG total net revenues increased 20% to $366 million for the fiscal year ended 2007, compared to $305 million for fiscal 2006. The increase was primarily due to increased sales of U.S. packaged coffee and tea as well as increased product sales and royalties in the international ready-to-drink business.
 
CPG operating income increased by 10% to $184 million for the fiscal year ended 2007, compared to $167 million in fiscal 2006. Operating margin decreased to 50.1% of related revenues, from 54.6% in fiscal 2006. Contraction of operating margin was primarily due to slower growth in income from the North American Coffee Partnership, an equity investee, which produces ready-to-drink beverages.
 
 
                                         
    52 Weeks Ended     52 Weeks Ended  
    Sept 30,
    Oct 1,
    %
    Sept 30,
    Oct 1,
 
    2007     2006     Change     2007     2006  
                      As a % of total net revenues  
 
Depreciation and amortization expenses
  $ 34,720     $ 35,678       (2.7 )%     0.4 %     0.4 %
General and administrative expenses
    303,146       300,932       0.7       3.2       3.9  
                                         
Operating loss
  $ (337,866 )   $ (336,610 )     0.4 %     (3.6 )%     (4.3 )%
                                         
 
Unallocated corporate expenses pertain to corporate administrative functions that support but are not specifically attributable to the Company’s operating segments.


27


Table of Contents

Total unallocated corporate expenses remained relatively flat at $338 million for the fiscal year ended 2007, compared to $337 million in fiscal 2006. Unallocated corporate expenses as a percentage of total net revenues decreased to 3.6% for the fiscal year ended 2007, from 4.3% for fiscal 2006, primarily as a result of leveraging of the Company’s scale and infrastructure against global growth.
 
RESULTS OF OPERATIONS — FISCAL 2006 COMPARED TO FISCAL 2005
 
 
Net revenues for the fiscal year ended 2006 increased 22% to $7.8 billion from $6.4 billion for fiscal 2005, driven by increases in both Company-operated retail revenues and specialty operations.
 
During the fiscal year ended 2006, Starbucks derived 85% of total net revenues from its Company-operated retail stores. Company-operated retail revenues increased 22% to $6.6 billion for the fiscal year ended 2006, from $5.4 billion for fiscal 2005. This increase was primarily due to the opening of 1,043 new Company-operated retail stores in the last 12 months and comparable store sales growth of 7% in fiscal 2006. The increase in comparable store sales was due to a 5% increase in the number of customer transactions and a 2% increase in the average value per transaction.
 
The Company derived the remaining 15% of total net revenues from channels outside the Company-operated retail stores. Specialty revenues, which include licensing revenues and foodservice and other revenues, increased 23% to $1.2 billion for the fiscal year ended 2006, from $977 million for fiscal 2005.
 
Licensing revenues, which are derived from retail store licensing arrangements, as well as grocery, warehouse club and certain other branded product operations, increased 28% to $861 million for fiscal 2006, from $673 million for fiscal 2005. The increase is primarily due to higher product sales and royalty revenues from the opening of 1,156 new licensed retail stores in the last 12 months and, to a lesser extent, growth in the licensed grocery and warehouse club business.
 
Foodservice and other revenues increased 13% to $343 million for fiscal 2006, from $304 million for fiscal 2005. Foodservice and other revenues increased primarily due to growth in new and existing U.S. foodservice accounts.
 
Cost of sales including occupancy costs decreased slightly to 40.8% of total net revenues for fiscal 2006, from 40.9% in fiscal 2005. The decrease was primarily due to fixed rent costs in fiscal 2006 being distributed over an expanded revenue base, as well as increased occupancy costs in fiscal 2005 resulting from intensified store maintenance activities. These favorable items, combined with lower dairy costs, offset higher green coffee costs for fiscal 2006.
 
Store operating expenses as a percentage of Company-operated retail revenues increased to 40.8% for fiscal 2006 from 40.2% for fiscal 2005. The increase was due to the recognition of stock-based compensation expense and to higher provisions for incentive compensation. The Company adopted the fair value recognition provisions of new accounting requirements to expense stock-based compensation at the beginning of its fiscal first quarter of 2006. Under the transition provisions allowed, it adopted the new requirements on a prospective basis and the financial statements for fiscal 2005 and prior years do not include stock-based compensation expense.
 
Other operating expenses, which are expenses associated with the Company’s Specialty Operations, increased to 21.1% of specialty revenues in fiscal 2006, compared to 19.7% in fiscal 2005. The increase was primarily due to the recognition of stock-based compensation expense as well as higher payroll-related expenditures to support the expanding licensed store operations, both in the U.S. and in existing and new international markets.
 
Depreciation and amortization expenses increased to $387 million in fiscal 2006, from $340 million in fiscal 2005. The increase of $47 million was due to the opening of 1,043 new Company-operated retail stores in the last 12 months. As a percentage of total net revenues, depreciation and amortization decreased to 5.0% for fiscal 2006, from 5.3% for fiscal 2005.
 
General and administrative expenses increased to $479 million in fiscal 2006, compared to $362 million in fiscal 2005. The increase was due to higher payroll-related expenditures from the recognition of stock-based compensation expense, additional employees to support continued global growth, and higher professional fees in support of global systems infrastructure development. As a percentage of total net revenues, general and administrative expenses increased to 6.1% for fiscal 2006, from 5.7% for fiscal 2005.


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Table of Contents

Income from equity investees increased to $94 million in fiscal 2006, compared to $77 million in fiscal 2005. The increase was primarily due to favorable volume-driven operating results for The North American Coffee Partnership, which produces ready-to-drink beverages which include, among others, bottled Frappuccino® coffee drinks and Starbucks DoubleShot® espresso drinks, as well as improved operating results from international investees, including Korea and Japan, mainly as a result of new store openings.
 
Operating income increased 15% to $894 million in fiscal 2006, from $781 million in fiscal 2005. The operating margin decreased to 11.5% of total net revenues in fiscal 2006, compared to 12.3% in fiscal 2005, due to the recognition of stock-based compensation expense.
 
Net interest and other income, which primarily consists of interest income, decreased to $12 million in fiscal 2006, from $16 million in fiscal 2005. The decrease was primarily due to higher interest expense on the Company’s revolving credit facility, as well as lower interest income earned due to lower average investment balances, offset in part by the recognition of $4.4 million of income on unredeemed stored value card balances in fiscal 2006. There was no income recognized on unredeemed stored value card balances in fiscal 2005.
 
Income taxes for fiscal 2006 resulted in an effective tax rate of 35.8%, compared to 37.9% in fiscal 2005. The decline in the effective tax rate was due to the reversal of a valuation allowance in fiscal 2006 that had been established in fiscal 2005, the settlement in the third quarter of fiscal 2006 of a multi-year income tax audit in a foreign jurisdiction for which the Company had established a contingent liability, and to increased effectiveness of the Company’s long-term tax planning strategies.
 
Operating Segments
 
Segment information is prepared on the same basis that the Company’s management reviews financial information for operational decision-making purposes. Operating income represents earnings before “Net interest and other income” and “Income taxes.” The following tables summarize the Company’s results of operations by segment for fiscal 2006 and 2005 (in thousands):
 
 
                                         
    52 Weeks Ended     52 Weeks Ended  
    Oct 1,
    Oct 2,
    %
    Oct 1,
    Oct 2,
 
    2006     2005     Change     2006     2005  
                      As a % of U.S. total net revenues  
 
Net revenues:
                                       
Company-operated retail
  $ 5,495,240     $ 4,539,455       21.1 %     88.9 %     89.1 %
Specialty:
                                       
Licensing
    369,155       277,987       32.8       6.0       5.4  
Foodservice and other
    314,162       280,073       12.2       5.1       5.5  
                                         
Total specialty
    683,317       558,060       22.4       11.1       10.9  
                                         
Total net revenues
    6,178,557       5,097,515       21.2       100.0       100.0  
Cost of sales including occupancy costs
    2,374,485       1,944,356       22.1       38.4       38.1  
Store operating expenses(1)
    2,280,044       1,848,836       23.3       36.9       36.3  
Other operating expenses(2)
    190,624       150,712       26.5       3.1       2.9  
Depreciation and amortization expenses
    284,625       250,339       13.7       4.6       4.9  
General and administrative expenses
    93,754       85,362       9.8       1.5       1.7  
                                         
Total operating expenses
    5,223,532       4,279,605       22.1       84.5       83.9  
Income from equity investees
    151       592       nm              
                                         
Operating income
  $ 955,176     $ 818,502       16.7 %     15.5 %     16.1 %
                                         


29


Table of Contents

 
(1) As a percentage of related Company-operated retail revenues, store operating expenses were 41.5% and 40.7% for the fiscal years ended October 1, 2006 and October 2, 2005, respectively.
 
(2) As a percentage of related total specialty revenues, other operating expenses were 27.9% and 27.0% for the fiscal years ended October 1, 2006 and October 2, 2005, respectively.
 
United States total net revenues increased 21% to $6.2 billion for the fiscal year ended 2006, compared to $5.1 billion for fiscal 2005.
 
United States Company-operated retail revenues increased 21% to $5.5 billion for the fiscal year ended 2006, compared to $4.5 billion for fiscal 2005. United States Company-operated retail revenues increased primarily due to the opening of 810 new Company-operated retail stores in the last 12 months and comparable store sales growth of 7% for fiscal 2006. The increase in comparable store sales was due to a 5% increase in the number of customer transactions and a 2% increase in the average value per transaction.
 
Total United States specialty revenues increased 22% to $683 million for the fiscal year ended 2006, compared to $558 million in fiscal 2005. United States licensing revenues increased 33% to $369 million, compared to $278 million for fiscal 2005. United States licensing revenues increased due to increased product sales and royalty revenues as a result of opening 733 new licensed retail stores in the last 12 months. Foodservice and other revenues increased 12% to $314 million from $280 million for fiscal 2005. United States foodservice and other revenues increased primarily due to growth in new and existing foodservice accounts.
 
United States operating income increased 17% to $955 million for the fiscal year ended 2006, from $819 million for the fiscal year ended 2005. Operating margin decreased to 15.5% of related revenues from 16.1% in fiscal 2005. The decrease was due to the recognition of stock-based compensation expense.
 
 
                                         
    52 Weeks Ended     52 Weeks Ended  
    Oct 1,
    Oct 2,
    %
    Oct 1,
    Oct 2,
 
    2006     2005     Change     2006     2005  
                      As a % of international total net revenues  
 
Net revenues:
                                       
Company-operated retail
  $ 1,087,858     $ 852,472       27.6 %     83.5 %     83.4 %
Specialty:
                                       
Licensing
    186,050       145,736       27.7       14.3       14.2  
Foodservice and other
    29,006       24,285       19.4       2.2       2.4  
                                         
Total specialty
    215,056       170,021       26.5       16.5       16.6  
                                         
Total net revenues
    1,302,914       1,022,493       27.4       100.0       100.0  
Cost of sales including occupancy costs
    625,008       511,761       22.1       48.0       50.1  
Store operating expenses(1)
    407,771       317,075       28.6       31.3       31.1  
Other operating expenses(2)
    50,900       32,061       58.8       3.9       3.1  
Depreciation and amortization expenses
    66,800       56,705       17.8       5.1       5.5  
General and administrative expenses
    78,337       53,069       47.6       6.0       5.2  
                                         
Total operating expenses
    1,228,816       970,671       26.6       94.3       95.0  
Income from equity investees
    34,370       30,477       12.8       2.6       3.0  
                                         
Operating income
  $ 108,468     $ 82,299       31.8 %     8.3 %     8.0 %
                                         
 
 
(1) As a percentage of related Company-operated retail revenues, store operating expenses were 37.5% and 37.2% for the fiscal years ended October 1, 2006 and October 2, 2005, respectively.


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Table of Contents

 
(2) As a percentage of related total specialty revenues, other operating expenses were 23.7% and 18.9% for the fiscal years ended October 1, 2006 and October 2, 2005, respectively.
 
International total net revenues increased 27% to $1.3 billion for the fiscal year ended 2006, compared to $1.0 billion for fiscal 2005. International Company-operated retail revenues increased 28% to $1.1 billion for the fiscal year ended 2006, compared to $852 million for fiscal 2005. International Company-operated revenues increased due to the opening of 233 new Company-operated retail stores in the last 12 months, comparable store sales growth of 8% for fiscal 2006, and the weakening of the U.S. dollar against the Canadian dollar. The increase in comparable store sales resulted from a 5% increase in the number of customer transactions and a 3% increase in the average value per transaction.
 
Total International specialty revenues increased 26% to $215 million for the fiscal year ended 2006, compared to $170 million for fiscal 2005. International licensing revenues increased 28% to $186 million for the fiscal year ended 2006, compared to $146 million in fiscal 2005. International licensing revenues increased due to higher product sales and royalty revenues from opening 423 new licensed retail stores in the last 12 months. International foodservice and other revenues increased 19% to $29 million for the fiscal year ended 2006, compared to $24 million in fiscal 2005. International foodservice and other revenues increased primarily due to growth in the total number of foodservice accounts.
 
International operating income increased to $108 million for the fiscal year ended 2006, compared to $82 million in fiscal 2005. Operating margin increased to 8.3% of related revenues from 8.0% in fiscal 2005, primarily due to lower cost of sales including occupancy costs due to leverage gained from fixed costs distributed over an expanded revenue base, as well as lower dairy costs. These improvements were partially offset by higher store operating expenses and other operating expenses due to higher payroll-related expenditures primarily to support global expansion as well as the recognition of stock-based compensation expense.
 
 
                                         
    52 Weeks Ended     52 Weeks Ended  
    Oct 1,
    Oct 2,
    %
    Oct 1,
    Oct 2,
 
    2006     2005     Change     2006     2005  
                      As a % of CPG total net revenues  
 
Net revenues:
                                       
Specialty:
                                       
Licensing
  $ 305,471     $ 249,292       22.5 %     100.0 %     100.0 %
                                         
Total specialty
    305,471       249,292       22.5       100.0       100.0  
                                         
Cost of sales
    179,298       149,095       20.3       58.7       59.8  
Other operating expenses
    12,200       9,752       25.1       4.0       3.9  
Depreciation and amortization expenses
    108       76       42.1              
General and administrative expenses
    6,363       4,499       41.4       2.1       1.8  
                                         
Total operating expenses
    197,969       163,422       21.1       64.8       65.5  
Income from equity investees
    59,416       45,579       30.4       19.4       18.2  
                                         
Operating income
  $ 166,918     $ 131,449       27.0 %     54.6 %     52.7 %
                                         
 
CPG total net revenues increased 23% to $305 million for the fiscal year ended 2006, compared to $249 million for fiscal 2005, primarily due to volume growth in the licensed grocery and warehouse club business as well as sales of ready-to-drink coffee beverages introduced in Japan and Taiwan in the fall of 2005 and Korea in December of 2005.
 
CPG operating income increased to $167 million for the fiscal year ended 2006, compared to $131 million for fiscal 2005. Operating margin increased to 54.6% of related revenues, from 52.7% in fiscal 2005, primarily due to higher income from the Company’s equity investees and lower cost of sales as a percentage of revenues. The increase in equity investee income was primarily due to volume-driven results for The North American Coffee Partnership, which produces ready-to-drink beverages which include, among others, bottled Frappuccino® beverages and


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Table of Contents

Starbucks DoubleShot® espresso drinks. Lower cost of sales was due to a sales mix shift to products with higher gross margins.
 
 
                                         
    52 Weeks Ended     52 Weeks Ended  
    Oct 1,
    Oct 2,
    %
    Oct 1,
    Oct 2,
 
    2006     2005     Change     2006     2005  
                      As a % of total net revenues  
 
Depreciation and amortization expenses
  $ 35,678     $ 33,049       8.0 %     0.4 %     0.5 %
General and administrative expenses
    300,932       218,683       37.6       3.9       3.4  
                                         
Operating loss
  $ (336,610 )   $ (251,732 )     33.7 %     (4.3 )%     (3.9 )%
                                         
 
Unallocated corporate expenses increased to $337 million for the fiscal year ended 2006, from $252 million in fiscal 2005. The increase was due to higher payroll-related expenditures from the recognition of stock-based compensation expense and to additional employees, as well as higher professional fees primarily in support of global systems infrastructure development. Total unallocated corporate expenses as a percentage of total net revenues were 4.3% for the fiscal year ended 2006, compared to 3.9% for fiscal 2005.
 
LIQUIDITY AND CAPITAL RESOURCES
 
The primary sources of the Company’s liquidity are cash flows generated from retail store operations and other business channels, borrowings under available commercial paper programs and credit agreements, proceeds from the issuance of long-term debt securities and the Company’s existing cash and liquid investments, which were $460 million and $459 million as of September 30, 2007 and October 1, 2006, respectively.
 
Components of the Company’s most liquid assets are as follows (in thousands):
 
                 
    Sept 30,
    Oct 1,
 
Fiscal Year Ended
  2007     2006  
 
Cash and cash equivalents
  $ 281,261     $ 312,606  
Short-term investments — available-for-sale securities
    83,845       87,542  
Short-term investments — trading securities
    73,588       53,496  
Long-term investments — available-for-sale securities
    21,022       5,811  
                 
Total cash and liquid investments
  $ 459,716     $ 459,455  
                 
 
In order to hedge its liability under its Management Deferred Compensation Plan (“MDCP”), the Company maintains a portfolio of unrestricted trading securities, the value of which was $74 million as of September 30, 2007. In addition, unrestricted cash and liquid securities held within the Company’s wholly owned captive insurance company to fund claim payouts totaled approximately $98 million as of September 30, 2007. The Company manages the balance of its cash and liquid investments in order to internally fund operating needs and make scheduled payments on short-term borrowings.
 
In determining the appropriate capital structure for the Company, management considers, among other things, how debt may reduce its total cost of capital when used to fund increased distributions to shareholders in the form of stock repurchases. The Company also evaluates its degree of cash flow risk and how much financial flexibility should be retained for future investment opportunities given its high growth rate. The Company’s key metrics for monitoring its capital structure are leverage, measured as the ratio of debt to EBITDA, and coverage, measured as the ratio of EBITDA to interest expense including rent expense. Both ratios are adjusted to capitalize operating leases. The credit rating agencies, Moody’s and Standard & Poor’s, currently rate the Company’s commercial paper P-2 and A-2, respectively, and its long-term debt Baa1 and BBB+, respectively.
 
The Company intends to use its cash and liquid investments, including any borrowings under its revolving credit facility, commercial paper program and proceeds from the issuance of long term debt securities, to invest in its core businesses and other new business opportunities related to its core businesses. The Company may use its available


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cash resources to make proportionate capital contributions to its equity method and cost method investees, as well as purchase larger ownership interests in selected equity method investees and licensed operations, particularly in international markets. Depending on market conditions, Starbucks may repurchase shares of its common stock under its authorized share repurchase program. Management believes that strong cash flow generated from operations, existing cash and liquid investments, as well as borrowing capacity under the revolving credit facility and commercial paper program, should be sufficient to finance capital requirements for its core businesses for the foreseeable future. Significant new joint ventures, acquisitions, share repurchases and/or other new business opportunities may require additional outside funding.
 
Other than normal operating expenses, cash requirements for fiscal 2008 are expected to consist primarily of capital expenditures for new Company-operated retail stores and the remodeling and refurbishment of existing Company-operated retail stores, as well as potential increased investments in International licensees and for additional share repurchases, if any. Management expects capital expenditures for fiscal 2008 to be consistent with the $1.1 billion invested in fiscal 2007, primarily driven by new store development and existing store renovations.
 
Cash provided by operating activities totaled $1.3 billion for fiscal 2007. Of this amount, net earnings provided $673 million and noncash depreciation and amortization expenses further increased cash provided by operating activities by $491 million. In addition, an increase in accrued taxes payable due to the timing of payments provided $86 million.
 
Cash used by investing activities for fiscal 2007 totaled $1.2 billion. Net capital additions to property, plant and equipment used $1.1 billion, primarily from opening 1,342 new Company-operated retail stores and remodeling certain existing stores. During fiscal 2007, the Company used $53 million for acquisitions, net of cash acquired. In addition, the net activity in the Company’s portfolio of available-for-sale securities used $12 million.
 
Cash used by financing activities for fiscal 2007 totaled $172 million. Cash used to repurchase shares of the Company’s common stock totaled $997 million. This amount includes the effect of the net change in unsettled trades from October 1, 2006. Share repurchases, up to the limit authorized by the Board of Directors, are at the discretion of management and depend on market conditions, capital requirements and other factors. As of September 30, 2007, a total of up to 13.5 million shares remained available for repurchase, under existing authorizations.
 
During the fourth quarter of fiscal 2007, the Company issued $550 million of 6.25% Senior Notes due in August 2017, in an underwritten registered public offering. The proceeds of $549 million, before expenses, were primarily used to repay short-term borrowings and fund additional share repurchases. Net new borrowings under the Company’s credit facility and commercial paper program were $10 million for fiscal 2007. As of September 30, 2007, a total of $710 million in borrowings were outstanding under the commercial paper program and $13 million in letters of credit were outstanding under the credit facility, leaving $275 million of capacity available under the $1 billion combined commercial paper program and revolving credit facility.
 
Partially offsetting cash used for share repurchases were proceeds of $177 million from the exercise of employee stock options and the sale of the Company’s common stock from employee stock purchase plans. As options granted are exercised, the Company will continue to receive proceeds and a tax deduction; however, the amounts and the timing cannot be predicted.


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The following table summarizes the Company’s contractual obligations and borrowings as of September 30, 2007, and the timing and effect that such commitments are expected to have on the Company’s liquidity and capital requirements in future periods (in thousands):
 
                                         
    Payments Due by Period  
          Less Than 1
    1 - 3
    3 - 5
    More Than 5
 
Contractual Obligations
  Total     Year     Years     Years     Years  
 
Debt obligations(1)
  $ 1,607,845     $ 747,268     $ 69,896     $ 68,806     $ 721,875  
Operating lease obligations(2)
    5,016,583       691,011       1,300,776       1,109,193       1,915,603  
Purchase obligations(3)
    427,306       267,743       141,611       13,426       4,526  
Other obligations(4)
    57,594       1,181       17,159       4,741       34,513  
                                         
Total
  $ 7,109,328     $ 1,707,203     $ 1,529,442     $ 1,196,166     $ 2,676,517  
                                         
 
 
(1) Debt amounts include principal maturities and expected interest payments on commercial paper and long-term debt.
 
(2) Amounts include the 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. Purchase obligations relate primarily to green coffee and other commodities.
 
(4) Other obligations include other long-term liabilities primarily consisting of asset retirement obligations, hedging instruments and capital lease obligations.
 
Starbucks expects to fund these commitments primarily with operating cash flows generated in the normal course of business, as well as ongoing borrowings under the commercial paper program.
 
 
The Company has unconditionally guaranteed the repayment of certain Japanese yen-denominated bank loans and related interest and fees of an unconsolidated equity investee, Starbucks Coffee Japan, Ltd. (“Starbucks Japan”). The guarantees continue until the loans, including accrued interest and fees, have been paid in full, with the final loan amount due in 2014. The maximum amount is limited to the sum of unpaid principal and interest amounts, as well as other related expenses. These amounts will vary based on fluctuations in the yen foreign exchange rate. As of September 30, 2007, the maximum amount of the guarantees was approximately $4.9 million. Since there has been no modification of these loan guarantees subsequent to the Company’s adoption of Financial Accounting Standards Board (“FASB”) Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” Starbucks has applied the disclosure provisions only and has not recorded the guarantees on its consolidated balance sheet.
 
 
Commodity price risk represents the Company’s primary market risk, generated by its purchases of green coffee and dairy products. The Company purchases, roasts and sells high quality whole bean coffee and related products and risk arises from the price volatility of green coffee. In addition to coffee, the Company also purchases significant amounts of dairy products to support the needs of its Company-operated retail stores. The price and availability of these commodities directly impacts the Company’s results of operations and can be expected to impact its future results of operations. For additional details see “Product Supply” in Item 1, as well as “Risk Factors” in Item 1A of this Form 10-K.
 
 
Market risk is defined as the risk of losses due to changes in commodity prices, foreign currency exchange rates, equity prices, and interest rates. The Company manages its exposure to various market-based risks according to an umbrella risk management policy. Under this policy, market-based risks are quantified and evaluated for potential mitigation strategies, such as entering into hedging transactions. The umbrella risk management policy governs the


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hedging instruments the business may use and limits the dollar risk to net earnings. The Company also monitors and limits the amount of associated counterparty credit risk. Additionally, this policy restricts, among other things, the amount of market-based risk the Company will tolerate before implementing approved hedging strategies and prohibits speculative trading activity. In general, hedge instruments do not have maturities in excess of five years.
 
The sensitivity analyses performed 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.
 
 
The Company purchases commodity inputs, including coffee and dairy products that are used in its operations and are subject to price fluctuations that impact its financial results. In addition to fixed-priced contracts and price-to-be-fixed contracts for coffee purchases, the Company may enter into commodity hedges to manage commodity price risk using financial derivative instruments. The Company performed a sensitivity analysis based on a 10% change in the underlying commodity prices of its commodity hedges, as of the end of fiscal 2007, and determined that such a change would not have a significant effect on the fair value of these instruments.
 
 
The majority of the Company’s revenue, expense and capital purchasing activities are transacted in U.S. dollars. However, because a portion of the Company’s operations consists of activities outside of the United States, the Company has transactions in other currencies, primarily the Canadian dollar, British pound sterling, euro, and Japanese yen. As a result, Starbucks may engage in transactions involving various derivative instruments to hedge revenues, inventory purchases, assets, and liabilities denominated in foreign currencies.
 
As of September 30, 2007, the Company had forward foreign exchange contracts that qualify as cash flow hedges under Statement of Financial Accounting Standard (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted, to hedge portions of anticipated international revenue streams and inventory purchases. In addition, Starbucks had forward foreign exchange contracts that qualify as accounting hedges of its net investment in Starbucks Japan, as well as the Company’s net investments in its Canadian, UK, and Chinese subsidiaries, to minimize foreign currency exposure. These contracts expire within 30 months.
 
The Company also had forward foreign exchange contracts that are not designated as hedging instruments for accounting purposes (free standing derivatives), but which largely offset the financial impact of translating certain foreign currency denominated payables and receivables. Increases or decreases in the fair value of these hedges are generally offset by corresponding decreases or increases in the U.S. dollar value of the Company’s foreign currency denominated payables and receivables (i.e. “hedged items”) that would occur within the hedging period.
 
The following table summarizes the potential impact to the Company’s future net earnings and other comprehensive income (“OCI”) from changes in the fair value of these derivative financial instruments due in turn to a change in the value of the U.S. dollar as compared to the level of 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):
 
September 30, 2007
 
                                         
    Increase/(Decrease) to Net Earnings     Increase/(Decrease) to OCI        
    10% Increase in
    10% Decrease in
    10% Increase in
    10% Decrease in
       
    Underlying Rate     Underlying Rate     Underlying Rate     Underlying Rate        
 
Foreign currency hedges
  $ 38       (34 )     18       (22 )        
                                         
 
 
The Company has minimal exposure to price fluctuations on equity mutual funds within its trading portfolio. The trading securities approximate a portion of the Company’s liability under the MDCP. A corresponding liability is included in “Accrued compensation and related costs” on the consolidated balance sheets. These investments are


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recorded at fair value with unrealized gains and losses recognized in “Net interest and other income” in the consolidated statements of earnings. The offsetting changes in the MDCP liability are recorded in “General and administrative expenses.” The Company performed a sensitivity analysis based on a 10% change in the underlying equity prices of its investments, as of the end of fiscal 2007, and determined that such a change would not have a significant effect on the fair value of these instruments.
 
 
The Company utilizes short and long term financing and may use interest rate hedges to manage the effect of interest rate changes on its existing debt as well as the anticipated issuance of new debt. At the end of fiscal years 2007 and 2006, the Company did not have any interest rate hedge agreements outstanding. During the fiscal fourth quarter of 2007, the Company had Treasury interest rate contracts in place to mitigate a portion of the interest rate risk associated with the $550 million Senior Notes issued in August 2007. These contracts were dedesignated and settled at closing of the debt offering.
 
The following table summarizes the impact of a change in interest rates on the fair value of the Company’s debt (in millions):
 
September 30, 2007
 
                         
          Change in Fair Value  
          100 Basis Point Increase in
    100 Basis Point Decrease in
 
    Fair Value     Underlying Rate     Underlying Rate  
 
Debt
  $ 1,269       (41 )     41  
                         
 
The Company’s available-for-sale securities comprise a diversified portfolio consisting mainly of fixed income instruments. The primary objectives of these investments are to preserve capital and liquidity. Available-for-sale securities are investment grade and are recorded on the balance sheet at fair value with unrealized gains and losses reported as a separate component of “Accumulated other comprehensive income.” The Company does not hedge the interest rate exposure on its available-for-sale securities. The Company performed a sensitivity analysis based on a 100 basis point change in the underlying interest rate of its available-for-sale securities, as of the end of fiscal 2007, and determined that such a change would not have a significant effect on the fair value of these instruments.
 
 
The Company’s business is subject to seasonal fluctuations, including fluctuations resulting from the holiday season. The Company’s cash flows from operations are considerably higher in the fiscal first quarter than the remainder of the year. This is largely driven by cash received as Starbucks Cards are purchased and loaded during the holiday season. Since revenues from the Starbucks Card are recognized upon redemption and not when purchased, seasonal fluctuations on the consolidated statements of earnings are much less pronounced. Quarterly results are affected by the timing of the opening of new stores, and the Company’s growth may conceal the impact of other seasonal influences. For these reasons, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.
 
 
Critical accounting policies are those that management believes are both most important to the portrayal of the Company’s financial condition and results, and require management’s 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.
 
Starbucks considers its policies on impairment of long-lived assets, stock-based compensation, operating leases, self insurance reserves and income taxes to be the most critical in understanding the judgments that are involved in preparing its consolidated financial statements.


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When facts and circumstances indicate that the carrying values of long-lived assets may be impaired, an evaluation of recoverability is performed by comparing the carrying values of the assets to projected future cash flows, in addition to other quantitative and qualitative analyses. For goodwill and other intangible assets, impairment tests are performed annually and more frequently if facts and circumstances indicate goodwill carrying values exceed estimated reporting unit fair values and if indefinite useful lives are no longer appropriate for the Company’s trademarks. Upon indication that the carrying values of such assets may not be recoverable, the Company recognizes an impairment loss as a charge against current operations. Property, plant and equipment assets are grouped at the lowest level for which there are identifiable cash flows when assessing impairment. Cash flows for retail assets are identified at the individual store level. Long-lived assets to be disposed of are reported at the lower of their carrying amount or fair value, less estimated costs to sell. Judgments made by the Company related to the expected useful lives of long-lived assets and the ability of the Company to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions and changes in operating performance. As the Company assesses the ongoing expected cash flows and carrying amounts of its long-lived assets, these factors could cause the Company to realize material impairment charges.
 
 
Starbucks accounts for stock-based compensation in accordance with the fair value recognition provisions of SFAS No. 123(R), “Share-Based Payment.” The Company uses the Black-Scholes-Merton option pricing model which requires the input of subjective assumptions. These assumptions include estimating the length of time employees will retain their stock options before exercising them (“expected term”), the estimated volatility of the Company’s common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). Changes in the subjective assumptions could materially affect the estimate of fair value of stock-based compensation; however based on an analysis using changes in certain assumptions that could be reasonably possible in the near term, management believes the effect on the expense recognized for fiscal 2007 would not have been material.
 
 
Starbucks leases retail stores, roasting and distribution facilities and office space under operating leases. The Company provides for an estimate of asset retirement obligation (“ARO”) expense at the lease inception date for operating leases with requirements to remove leasehold improvements at the end of the lease term. Estimating AROs involves subjective assumptions regarding both the amount and timing of actual future retirement costs. Future actual costs could differ significantly from amounts initially estimated. In addition, the large number of operating leases and the significant number of international markets in which the Company has operating leases adds administrative complexity to the calculation of ARO expense, as well as to the other technical accounting requirements of operating leases such as contingent rent.
 
 
The Company uses a combination of insurance and self-insurance mechanisms, including a wholly owned captive insurance entity and participation in a reinsurance pool, to provide for the potential liabilities for workers’ compensation, healthcare benefits, general liability, property insurance, director and officers’ liability insurance and vehicle liability. Liabilities associated with the risks that are retained by the Company are not discounted and are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. The estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends.
 
 
Starbucks accounts for income taxes in accordance with Statement of SFAS No. 109, “Accounting for Income Taxes,” which recognizes deferred tax assets and liabilities based on the differences between the financial statement


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carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using current enacted tax rates in effect for the years in which those temporary differences are expected to reverse. Judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities. These include establishing a valuation allowance related to the realizability of certain deferred tax assets, and contingent tax liabilities provided for the possibility of unfavorable outcomes in certain tax positions. Although the Company believes that its estimates are reasonable, actual results could differ from these estimates.
 
 
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”), which seeks to reduce the diversity in practice associated with the accounting and reporting for uncertainty in income tax positions. This Interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. FIN 48 is effective for fiscal years beginning after December 15, 2006, and the Company will adopt the new requirements in its first fiscal quarter of 2008. The cumulative effect of adopting FIN 48 will be recorded as an adjustment to retained earnings as of the beginning of the period of adoption. The Company expects that the effect of adopting FIN 48 will result in an immaterial adjustment to fiscal year 2008 opening retained earnings.
 
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. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is permitted. Starbucks must adopt these new requirements no later than its first fiscal quarter of 2009. Starbucks has not yet determined the effect on the Company’s consolidated financial statements, if any, upon adoption of SFAS 157, or if it will adopt the requirements prior to the first fiscal quarter of 2009.
 
In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). The intent of SAB 108 is to reduce diversity in practice for the method companies use to quantify financial statement misstatements, including the effect of prior year uncorrected errors. SAB 108 establishes an approach that requires quantification of financial statement errors using both an income statement and cumulative balance sheet approach. SAB 108 was effective for annual financial statements for fiscal years ending after November 15, 2006, and the Company adopted the new requirements in fiscal 2007 with no impact to its consolidated financial statements.
 
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 is effective for financial statements issued for fiscal years beginning after November 15, 2007, or Starbucks first fiscal quarter of 2009. Early adoption is permitted. Starbucks has not yet determined if it will elect to apply any of the provisions of SFAS 159 or what the effect of adoption of the statement would have, if any, on its consolidated financial statements.
 
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk
 
The information required by this item is incorporated by reference to the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Commodity Prices, Availability and General Risk Conditions” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Risk Management” in Item 7 of this Report.


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Item 8.   Financial Statements and Supplementary Data
 
STARBUCKS CORPORATION
 
CONSOLIDATED STATEMENTS OF EARNINGS
 
                         
Fiscal Year Ended
  Sept 30, 2007     Oct 1, 2006     Oct 2, 2005  
    In thousands, except earnings per share  
 
Net revenues:
                       
Company-operated retail
  $ 7,998,265     $ 6,583,098     $ 5,391,927  
Specialty:
                       
Licensing
    1,026,338       860,676       673,015  
Foodservice and other
    386,894       343,168       304,358  
                         
Total specialty
    1,413,232       1,203,844       977,373  
                         
Total net revenues
    9,411,497       7,786,942       6,369,300  
Cost of sales including occupancy costs
    3,999,124       3,178,791       2,605,212  
Store operating expenses
    3,215,889       2,687,815       2,165,911  
Other operating expenses
    294,136       253,724       192,525  
Depreciation and amortization expenses
    467,160       387,211       340,169  
General and administrative expenses
    489,249       479,386       361,613  
                         
Total operating expenses
    8,465,558       6,986,927       5,665,430  
Income from equity investees
    108,006       93,937       76,648  
                         
Operating income
    1,053,945       893,952       780,518  
Net interest and other income
    2,419       12,291       15,829  
                         
Earnings before income taxes
    1,056,364       906,243       796,347  
Income taxes
    383,726       324,770       301,977  
                         
Earnings before cumulative effect of change in accounting principle
    672,638       581,473       494,370  
Cumulative effect of accounting change for FIN 47, net of taxes
          17,214        
                         
Net earnings
  $ 672,638     $ 564,259     $ 494,370  
                         
Per common share:
                       
Earnings before cumulative effect of change in accounting principle — basic
  $ 0.90     $ 0.76     $ 0.63  
Cumulative effect of accounting change for FIN 47, net of taxes
          0.02        
                         
Net earnings — basic
  $ 0.90     $ 0.74     $ 0.63  
                         
Earnings before cumulative effect of change in accounting principle — diluted
  $ 0.87     $ 0.73     $ 0.61  
Cumulative effect of accounting change for FIN 47, net of taxes
          0.02        
                         
Net earnings— diluted
  $ 0.87     $ 0.71     $ 0.61  
                         
Weighted average shares outstanding:
                       
Basic
    749,763       766,114       789,570  
Diluted
    770,091       792,556       815,417  
 
See Notes to Consolidated Financial Statements.


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STARBUCKS CORPORATION
 
CONSOLIDATED BALANCE SHEETS
 
                 
    Sept 30,
    Oct 1,
 
Fiscal Year Ended
  2007     2006  
    In thousands, except share data  
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 281,261     $ 312,606  
Short-term investments — available-for-sale securities
    83,845       87,542  
Short-term investments — trading securities
    73,588       53,496  
Accounts receivable, net
    287,925       224,271  
Inventories
    691,658       636,222  
Prepaid expenses and other current assets
    148,757       126,874  
Deferred income taxes, net
    129,453       88,777  
                 
Total current assets
    1,696,487       1,529,788  
Long-term investments — available-for-sale securities
    21,022       5,811  
Equity and other investments
    258,846       219,093  
Property, plant and equipment, net
    2,890,433       2,287,899  
Other assets
    219,422       186,917  
Other intangible assets
    42,043       37,955  
Goodwill
    215,625       161,478  
                 
TOTAL ASSETS
  $ 5,343,878     $ 4,428,941  
                 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
               
Commercial paper and short-term borrowings
  $ 710,248     $ 700,000  
Accounts payable
    390,836       340,937  
Accrued compensation and related costs
    332,331       288,963  
Accrued occupancy costs
    74,591       54,868  
Accrued taxes
    92,516       94,010  
Other accrued expenses
    257,369       224,154  
Deferred revenue
    296,900       231,926  
Current portion of long-term debt
    775       762  
                 
Total current liabilities
    2,155,566       1,935,620  
Long-term debt
    550,121       1,958  
Other long-term liabilities
    354,074       262,857  
                 
Total liabilities
    3,059,761       2,200,435  
Shareholders’ equity:
               
Common stock ($0.001 par value) — authorized, 1,200,000,000 shares; issued and outstanding, 738,285,285 and 756,602,071 shares, respectively, (includes 3,420,448 common stock units in both periods)
    738       756  
Other additional paid-in-capital
    39,393       39,393  
Retained earnings
    2,189,366       2,151,084  
Accumulated other comprehensive income
    54,620       37,273  
                 
Total shareholders’ equity
    2,284,117       2,228,506  
                 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 5,343,878     $ 4,428,941  
                 
 
See Notes to Consolidated Financial Statements.


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STARBUCKS CORPORATION
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                         
    Sept 30,
    Oct 1,
    Oct 2,
 
Fiscal Year Ended
  2007     2006     2005  
    In thousands  
 
OPERATING ACTIVITIES:
                       
Net earnings
  $ 672,638     $ 564,259     $ 494,370  
Adjustments to reconcile net earnings to net cash provided by operating activities:
                       
Cumulative effect of accounting change for FIN 47, net of taxes
          17,214        
Depreciation and amortization
    491,238       412,625       367,207  
Provision for impairments and asset disposals
    26,032       19,622       19,464  
Deferred income taxes, net
    (37,326 )     (84,324 )     (31,253 )
Equity in income of investees
    (65,743 )     (60,570 )     (49,537 )
Distributions of income from equity investees
    65,927       49,238       30,919  
Stock-based compensation
    103,865       105,664        
Tax benefit from exercise of stock options
    7,705       1,318       109,978  
Excess tax benefit from exercise of stock options
    (93,055 )     (117,368 )      
Net amortization of premium on securities
    653       2,013       10,097  
Cash provided/(used) by changes in operating assets and liabilities:
                       
Inventories
    (48,576 )     (85,527 )     (121,618 )
Accounts payable
    36,068       104,966       9,717  
Accrued compensation and related costs
    38,628       54,424       22,711  
Accrued taxes
    86,371       132,725       14,435  
Deferred revenue
    63,233       56,547       53,276  
Other operating assets and liabilities
    (16,437 )     (41,193 )     (6,851 )
                         
Net cash provided by operating activities
    1,331,221       1,131,633       922,915  
INVESTING ACTIVITIES:
                       
Purchase of available-for-sale securities
    (237,422 )     (639,192 )     (643,488 )
Maturity of available-for-sale securities
    178,167       269,134       469,554  
Sale of available-for-sale securities
    47,497       431,181       626,113  
Acquisitions, net of cash acquired
    (53,293 )     (91,734 )     (21,583 )
Net purchases of equity, other investments and other assets
    (56,552 )     (39,199 )     (7,915 )
Net additions to property, plant and equipment
    (1,080,348 )     (771,230 )     (643,296 )
                         
Net cash used by investing activities
    (1,201,951 )     (841,040 )     (220,615 )
FINANCING ACTIVITIES:
                       
Repayments of commercial paper
    (16,600,841 )            
Proceeds from issuance of commercial paper
    17,311,089              
Repayments of short-term borrowings
    (1,470,000 )     (993,093 )      
Proceeds from short-term borrowings
    770,000       1,416,093       277,000  
Proceeds from issuance of common stock
    176,937       159,249       163,555  
Excess tax benefit from exercise of stock options
    93,055       117,368        
Principal payments on long-term debt
    (784 )     (898 )     (735 )
Proceeds from issuance of long-term debt
    548,960              
Repurchase of common stock
    (996,798 )     (854,045 )     (1,113,647 )
Other
    (3,505 )            
                         
Net cash used by financing activities
    (171,887 )     (155,326 )     (673,827 )
Effect of exchange rate changes on cash and cash equivalents
    11,272       3,530       283  
                         
Net increase/(decrease) in cash and cash equivalents
    (31,345 )     138,797       28,756  
CASH AND CASH EQUIVALENTS:
                       
Beginning of period
    312,606       173,809       145,053  
                         
End of the period
  $ 281,261     $ 312,606     $ 173,809  
                         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
                       
Cash paid during the period for:
                       
Interest, net of capitalized interest
  $ 35,294     $ 10,576     $ 1,060  
Income taxes
  $ 342,223     $ 274,134     $ 227,812  
 
See Notes to Consolidated Financial Statements.


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STARBUCKS CORPORATION
 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
 
                                                         
                                  Accumulated
       
                Additional
    Other Additional
          Other
       
    Common Stock     Paid-in
    Paid-in
    Retained
    Comprehensive
       
    Shares     Amount     Capital     Capital     Earnings     Income/(Loss)     Total  
    In thousands, except share data  
 
Balance, October 3, 2004
    794,811,688     $ 795     $ 955,890     $ 39,393     $ 1,444,617     $ 29,241     $ 2,469,936  
Net earnings
                            494,370             494,370  
Unrealized holding gain, net
                                  350       350  
Translation adjustment, net of tax
                                  (8,677 )     (8,677 )
                                                         
Comprehensive income
                                                    486,043  
                                                         
Exercise of stock options, including tax benefit of $108,428
    16,169,992       16       239,012                         239,028  
Sale of common stock, including tax benefit of $1,550
    1,563,964       1       34,504                         34,505  
Repurchase of common stock
    (45,103,534 )     (45 )     (1,139,205 )                       (1,139,250 )
                                                         
Balance, October 2, 2005
    767,442,110     $ 767     $ 90,201     $ 39,393     $ 1,938,987     $ 20,914     $ 2,090,262  
Net earnings
                            564,259             564,259  
Unrealized holding gain, net
                                  1,767       1,767  
Translation adjustment, net of tax
                                  14,592       14,592  
                                                         
Comprehensive income
                                                  580,618  
                                                         
Stock-based compensation expense
                107,738                         107,738  
Exercise of stock options, including tax benefit of $116,762
    13,222,729       13       235,272                         235,285  
Sale of common stock, including tax benefit of $1,924
    1,544,634       2       42,649                         42,651  
Repurchase of common stock
    (25,607,402 )     (26 )     (475,860 )           (352,162 )           (828,048 )
                                                         
Balance, October 1, 2006
    756,602,071     $ 756     $     $ 39,393     $ 2,151,084     $ 37,273     $ 2,228,506  
                                                         
Net earnings
                            672,638             672,638  
Unrealized holding loss, net
                                  (20,380 )     (20,380 )
Translation adjustment, net of tax
                                  37,727       37,727  
                                                         
Comprehensive income
                                                  689,985  
                                                         
Stock-based compensation expense
                106,373                         106,373  
Exercise of stock options, including tax benefit of $95,276
    12,744,226       13       225,233                         225,246  
Sale of common stock, including tax provision of $139
    1,908,407       2       46,826                         46,828  
Repurchase of common stock
    (32,969,419 )     (33 )     (378,432 )           (634,356 )           (1,012,821 )
                                                         
Balance, September 30, 2007
    738,285,285     $ 738     $     $ 39,393     $ 2,189,366     $ 54,620     $ 2,284,117  
                                                         
 
See Notes to Consolidated Financial Statements.


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STARBUCKS CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years ended September 30, 2007, October 1, 2006, and October 2, 2005
 
Note 1:   Summary of Significant Accounting Policies
 
 
Starbucks Corporation (together with its subsidiaries, “Starbucks” or the “Company”) purchases and roasts high-quality whole bean coffees and sells them, along with fresh, rich-brewed coffees, Italian-style espresso beverages, cold blended beverages, a variety of complementary food items, coffee-related accessories and equipment, a selection of premium teas and a line of compact discs, primarily through its Company-operated retail stores. Starbucks also sells coffee and tea products and licenses its trademark through other channels and, through certain of its equity investees, Starbucks produces and sells ready-to-drink beverages which include, among others, bottled Frappuccino® beverages and Starbucks DoubleShot® espresso drinks, and a line of superpremium ice creams. All channels outside the Company-operated retail stores are collectively known as “Specialty Operations.” The Company’s objective is to establish Starbucks as one of the most recognized and respected brands in the world. To achieve this goal, the Company plans to continue expansion of its retail operations, to grow its Specialty Operations and to selectively pursue other opportunities to leverage the Starbucks brand by introducing new products and developing new channels of distribution. The Company’s brand portfolio includes superpremium Tazo® teas, Starbucks Hear Music® compact discs, Seattle’s Best Coffee® and Torrefazione Italia® coffee.
 
 
The consolidated financial statements reflect the financial position and operating results of Starbucks, including wholly owned subsidiaries and investees controlled by the Company. Investments in entities that the Company does not control, but has the ability to exercise significant influence over operating and financial policies, are accounted for under the equity method. Investments in entities in which Starbucks does not have the ability to exercise significant influence are accounted for under the cost method. Intercompany transactions and balances have been eliminated.
 
 
Starbucks Corporation’s fiscal year ends on the Sunday closest to September 30. Some fiscal years include 53 weeks. The fiscal years ended on September 30, 2007, October 1, 2006 and October 2, 2005 included 52 weeks.
 
 
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.
 
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results may differ from these estimates.
 
 
The Company considers all highly liquid instruments with a maturity of three months or less at the time of purchase to be cash equivalents. The Company maintains cash and cash equivalent balances with financial institutions that exceed federally insured limits. The Company has not experienced any losses related to these balances, and management believes its credit risk to be minimal.


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The Company’s cash management system provides for the funding of all major bank disbursement accounts on a daily basis as checks are presented for payment. Under this system, outstanding checks are in excess of the cash balances at certain banks, which creates book overdrafts. Book overdrafts are presented as a current liability in “Accounts payable” on the consolidated balance sheets.
 
 
The Company’s short-term and long-term investments consist primarily of investment-grade marketable debt securities as well as bond and equity mutual funds, all of which are classified as available-for-sale or trading. Trading securities are recorded at fair value with unrealized holding gains and losses included in net earnings. Available-for-sale securities are recorded at fair value, and unrealized holding gains and losses are recorded, net of tax, as a separate component of accumulated other comprehensive income. Available-for-sale securities with remaining maturities of less than one year and those identified by management at time of purchase for funding operations in less than one year are classified as short-term, and all other available-for-sale securities are classified as long-term. Unrealized losses are charged against net earnings when a decline in fair value is determined to be other than temporary. Management reviews several factors to determine whether a loss is other than temporary, such as the length of time a security is in an unrealized loss position, the extent to which fair value is less than amortized cost, the impact of changing interest rates in the short and long term, the financial condition and near term prospects of the issuer and the Company’s intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. Realized gains and losses are accounted for on the specific identification method. Purchases and sales are recorded on a trade date basis.
 
 
The carrying value of cash and cash equivalents approximates fair value because of the short-term maturity of those instruments. The fair value of the Company’s investments in marketable debt and equity securities, as well as bond and equity mutual funds, is based upon the quoted market price on the last business day of the fiscal year. For equity securities of companies that are privately held, or where an observable quoted market price does not exist, the Company estimates fair value using a variety of valuation methodologies. Such methodologies include comparing the security with securities of publicly traded companies in similar lines of business, applying revenue multiples