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FORM 10-Q

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

For the Quarterly Period Ended June 30, 2002

OR

[   ]   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

STARBUCKS CORPORATION

2401 Utah Avenue South, Seattle, Washington 98134
(Address of Principal Executive Office, including Zip Code)

(206) 447-1575
(Registrant’s Telephone Number, including Area Code)

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

As of August 12, 2002, there were 388,340,847 shares of the Registrant’s Common Stock outstanding.

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STARBUCKS CORPORATION

INDEX

PART I. FINANCIAL INFORMATION

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except earnings per share)

See notes to consolidated financial statements

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STARBUCKS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

See notes to consolidated financial statements

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STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

See notes to consolidated financial statements

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STARBUCKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the 13 Weeks and 39 Weeks Ended June 30, 2002, and July 1, 2001

NOTE 1: FINANCIAL STATEMENT PREPARATION

The consolidated financial statements as of June 30, 2002, and July 1, 2001, and for the 13-week periods and 39-week periods ended June 30, 2002, and July 1, 2001, have been prepared by Starbucks Corporation (together with its subsidiaries, “Starbucks” or the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission. The financial information for the 13-week periods and 39-week periods ended June 30, 2002, and July 1, 2001, is unaudited, but, in the opinion of management, reflects all adjustments and accruals necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods.

The financial information as of September 30, 2001, is derived from the Company’s audited consolidated financial statements and notes thereto for the year ended September 30, 2001, and should be read in conjunction with such financial statements.

Certain reclassifications of prior year’s balances have been made to conform to the current format.

The results of operations for the 13-week period and 39-week period ended June 30, 2002, are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending September 29, 2002.

NOTE 2: REVENUE RECOGNITION

In most instances, retail store revenues are recognized when payment is tendered at the point of sale. Revenues from stored value cards are recognized upon redemption. Until the redemption of stored value cards, outstanding customer balances on such cards are included in “Deferred revenue” on the accompanying consolidated balance sheets. Specialty revenues, consisting mainly of product sales, are generally recognized upon shipment to customers. Initial non-refundable fees required under licensing agreements are earned upon substantial performance of services. Royalty revenues based upon a percentage of sales and other continuing fees are recognized when earned. All revenues are recognized net of any discounts.

NOTE 3: NEW ACCOUNTING STANDARDS

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires, among other things, the use of a nonamortization approach for purchased goodwill and certain intangibles. Goodwill and certain intangibles with indefinite lives will not be amortized into earnings but instead will be reviewed for impairment at least annually. Remaining intangibles with finite useful lives will continue to be amortized. As of June 30, 2002, the Company had goodwill and other intangible assets, net of accumulated amortization, of $20.5 million and $9.1 million, respectively, which would be subject to the transitional assessment provisions of SFAS No. 142. The Company’s management does not expect the adoption of SFAS No. 142 on September 30, 2002, to have a material impact on future results of operations or its financial position.

In November 2001, FASB issued Emerging Issues Task Force (“EITF”) No. 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred.” This Issue clarifies the FASB Staff’s position that all reimbursements received for incidental expenses incurred in conjunction with providing services as part of a company’s central on-going operations should be characterized as revenue in the income statement. The Company adopted EITF No. 01-14 on December 31, 2001, and it did not have a material impact on the Company’s consolidated results of operations.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” which nullifies EITF No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires, among other things, that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred rather than when a company commits to such an activity and also establishes fair value as the objective for initial measurement of the liability. The Company will adopt SFAS No. 146 for exit or disposal activities that are initiated after December 31, 2002, and it is not expected to have a material impact on the Company’s results of operations, financial position or cash flows.

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NOTE 4: INVENTORIES

Inventories consist of the following (in thousands):

As of June 30, 2002, the Company had fixed-price purchase commitments for green coffee totaling approximately $240.3 million.

NOTE 5: DERIVATIVE FINANCIAL INSTRUMENTS

The Company manages its exposure to foreign currency risk within the consolidated financial statements according to a hedging policy. Under the policy, the Company may engage in transactions involving various derivative instruments with maturities generally not longer than five years to hedge assets, liabilities, revenues and purchases denominated in foreign currencies.

The Company has several forward foreign exchange contracts that qualify as cash flow hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” to hedge a portion of anticipated foreign currency denominated revenue. The Company also has forward foreign exchange contracts that qualify as hedges of a net investment in a foreign operation. These contracts expire within 22 months and are intended to minimize certain foreign currency exposures that can be confidently identified and quantified.

For the 13 weeks and 39 weeks ended June 30, 2002, and July 1, 2001, there was no ineffectiveness related to cash flow hedges. For net investment hedges, the spot-to-spot method is used by the Company to calculate effectiveness. As a result of using this method, net gains of $0.6 million and $0.9 million were recognized in earnings for the 13-week and 39-week periods ended June 30, 2002, respectively, and net gains of $0.3 million and $0.8 million were recognized in earnings during the 13-week and 39-week periods ended July 1, 2001, respectively.

The Company had accumulated derivative losses of $1.9 million, net of taxes, in other comprehensive income as of June 30, 2002, related to cash flow and net investment hedges. Of this amount, $0.6 million is expected to be reclassified into earnings within 12 months.

NOTE 6: EQUITY INVESTMENT TRANSACTIONS

On October 10, 2001, the Company sold 30,000 of its existing shares of Starbucks Coffee Japan, Ltd. (“Starbucks Japan”) at approximately $495 per share, net of related costs. In connection with this sale, the Company received cash proceeds of $14.8 million. The Company’s ownership interest in Starbucks Japan was reduced from 50.0% to 47.5% following the sale of the aforementioned shares. The Company recorded a gain from this sale of $13.4 million on the accompanying consolidated statement of earnings.

Also on October 10, 2001, Starbucks Japan issued 220,000 shares of common stock at approximately $495 per share, net of related costs, in an initial public offering in Japan. In connection with this offering, the Company’s ownership interest in Starbucks Japan was reduced from 47.5% to 40.1%. The Company recorded a credit to “Other additional paid-in capital” on the accompanying consolidated balance sheet of $39.4 million, reflecting the increase in value of its share of the net assets of Starbucks Japan related to the stock offering. As of June 30, 2002, the quoted closing price of Starbucks Japan shares was approximately $260.

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NOTE 7: PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment are recorded at cost and consist of the following (in thousands):

NOTE 8: SHAREHOLDERS’ EQUITY

In September 2001, the Company’s Board of Directors approved a plan to repurchase up to $60.0 million of its common stock in the open market. During the 39 weeks ended June 30, 2002, the Company acquired 125,000 shares at a cost of $1.8 million. Since the program’s inception, the Company has acquired 3.5 million shares at a cost of $51.6 million, leaving $8.4 million for repurchases available under this plan.

In June 2002, the Board of Directors authorized the repurchase of up to an additional 10.0 million shares. As of June 30, 2002, the Company had not acquired any shares under this additional plan.

NOTE 9: COMPREHENSIVE INCOME

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

The Company is subject to foreign currency translation adjustments because its international operations use their local currencies as their functional currencies. Assets and liabilities are translated at exchange rates in effect at the balance sheet date, and the resulting translation adjustments are recorded as a separate component of “Accumulated other comprehensive loss” on the accompanying consolidated balance sheets. The change in translation adjustment of $18.8 million for the 13 weeks ended June 30, 2002, was primarily due to the strengthening of the British pound, Japanese yen and Euro against the United States dollar.

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NOTE 10: EARNINGS PER SHARE

The following table represents the calculation of net earnings per common share — basic (in thousands, except earnings per share data):

The following table represents the calculation of net earnings per common and common equivalent share — diluted (in thousands, except per share data):

Options with exercise prices greater than the average market price for the periods indicated were not included in the computation of diluted earnings per share. These options totaled 0.5 million and 8.9 million for the 13 weeks ended June 30, 2002, and July 1, 2001, respectively, and 1.5 million and 0.7 million for the 39 weeks ended June 30, 2002, and July 1, 2001, respectively.

NOTE 11: LEGAL PROCEEDINGS

On June 20, 2001, and July 2, 2001, two purported class action lawsuits against the Company entitled James Carr, et.al. v. Starbucks Corporation and Olivia Shields, et.al. v. Starbucks Corporation were filed in the Superior Courts of California, Alameda and Los Angeles Counties, respectively. Each lawsuit subsequently was removed to the United States District Court, Northern District of California and Central District of California, respectively. Each of the lawsuits was filed by two plaintiffs who are current or former store managers and assistant store managers on behalf of themselves and other similarly situated store managers, assistant store managers and retail management trainees. The lawsuits alleged that the Company improperly classified such employees as exempt under California’s wage and hour laws and sought damages, restitution, reclassification and attorneys fees and costs. On April 19, 2002, Starbucks announced that it had reached an agreement to settle the lawsuits to fully resolve all claims brought by the plaintiffs without engaging in protracted litigation. Starbucks recorded an $18.0 million charge during the second quarter, which is included in “General and administrative expenses” on the accompanying consolidated statement of earnings for the 39 weeks ended June 30, 2002, for the estimated payment of claims to eligible class members, attorneys’ fees and costs, and costs to a third-party claims administrator, as well as applicable employer payroll taxes. On July 19, 2002, the settlement of the lawsuits was preliminarily approved by the Court.

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

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NOTE 12: SEGMENT REPORTING

Starbucks is organized into a number of business units that correspond to the Company’s operating segments.

North American Retail

North American Retail, which represents over 90% of total retail revenues and almost 80% of total net revenues, sells coffee and other beverages, whole bean coffees, complementary food, hardware and merchandise through Company-operated retail stores in the United States and Canada.

Business Alliances

Business Alliances, which represents over 40% of total specialty revenues and approximately 7% of total net revenues, sells whole bean and ground coffees through foodservice accounts. In addition, Business Alliances sells coffee and related products for resale through North American retail store licensing agreements and receives license fees and royalties.

All other business units

The remainder of the Company’s business units individually represent less than 10% of total net revenues. These include International Retail (comprised of international Company-operated retail stores), international retail store licensing, grocery channel licensing, warehouse club accounts, direct-to-consumer marketing channels, joint ventures and other initiatives related to the Company’s core businesses. These business units are managed and evaluated independently and do not meet the quantitative thresholds of a reportable segment under SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.”

Revenues from these segments include both sales to unaffiliated customers and sales between segments, which are accounted for on a basis consistent with sales to unaffiliated customers. Segment information has been prepared using a management approach that is consistent with the basis and manner in which the Company’s management internally reviews financial information for operational decision making purposes. However, intersegment revenues, consisting primarily of product sales to and from subsidiaries and equity method investees, and other intersegment transactions, which are included in the information presented below, have been eliminated on the accompanying consolidated financial statements.

The tables below present information by operating segment (in thousands):

The Company’s provisions for asset impairment are recorded when facts and circumstances indicate that the carrying values of long-lived assets exceed their estimated fair values. For its retail assets, Starbucks regularly monitors the financial results of its Company-operated retail stores and accumulates historical operating measures to identify performance trends in various markets. As part of this process, the Company identified $6.4 million and $10.0 million for the 13 weeks and 39 weeks ended June 30, 2002, respectively, for certain international Company-operated retail stores included in All other business units. Management determined that these retail stores are unable to generate current and future estimated undiscounted cash flows in excess of carrying values for retail assets,

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primarily leasehold improvements. These impairment losses are included in “Store operating expenses” on the accompanying consolidated statement of earnings.

Unallocated corporate expenses pertain to corporate functions that are not specifically attributable to the Company’s operating segments and include “General and administrative expenses” as well as certain depreciation and amortization expenses. Unallocated corporate expenses include depreciation and amortization expenses of $7.3 million and $6.0 million for the 13 weeks ended June 30, 2002, and July 1, 2001, respectively, and $25.1 million and $19.0 million for the 39 weeks ended June 30, 2002, and July 1, 2001, respectively. Additionally, as described in Note 11, the 39 weeks ended June 30, 2002, includes an $18.0 million litigation settlement charge.

The table below represents information by geographic area (in thousands):

Foreign revenues are classified based on the location of the customers and consist primarily of revenues from the United Kingdom and Canada.

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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Certain statements herein, including anticipated Company-operated and licensed store openings, planned capital expenditures, and expected cash requirements and other trends in or expectations regarding Starbucks Corporation’s operations and financial results, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on currently available operating, financial and competitive information and are subject to various risks and uncertainties. Actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, coffee and other raw materials prices and availability, successful execution of internal performance and expansion plans, the effect of slowing United States and international economies, the effect of legal proceedings and other risks detailed herein and in Starbucks Corporation’s other filings with the Securities and Exchange Commission.

GENERAL

Starbucks Corporation’s fiscal year ends on the Sunday closest to September 30. Fiscal year 2001 had 52 weeks. The fiscal years ending on September 29, 2002, and September 28, 2003, will also include 52 weeks.

Starbucks Corporation (together with its subsidiaries, “Starbucks” or the “Company”) is organized into a number of business units that correspond to the Company’s operating segments:

North American Retail

North American Retail, which represents over 90% of total retail revenues and almost 80% of total net revenues, sells coffee and other beverages, whole bean coffees, complementary food, hardware and merchandise through Company-operated retail stores in the United States and Canada.

Business Alliances

Business Alliances, which represents over 40% of total specialty revenues and approximately 7% of total net revenues, sells whole bean and ground coffees through foodservice accounts. In addition, Business Alliances sells coffee and related products for resale through North American retail store licensing agreements and receives license fees and royalties.

At the beginning of fiscal 2001, Starbucks combined its foodservice and domestic retail store licensing operations to form Business Alliances. As a result of this internal reorganization and the manner in which the operations of foodservice and domestic retail store licensing are measured and evaluated as one combined business unit, the Company’s management determined that separate segment reporting of Business Alliances was appropriate under Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information.”

All other business units

The remainder of the Company’s business units individually represent less than 10% of total net revenues. These include International Retail (comprised of international Company-operated retail stores), international retail store licensing, grocery channel licensing, warehouse club accounts, direct-to-consumer marketing channels, joint ventures and other initiatives related to the Company’s core businesses. These business units are managed and evaluated independently and do not meet the quantitative thresholds of a reportable segment under SFAS No. 131.

Segment information is prepared using a management approach that is consistent with the basis and manner in which the Company’s management internally reviews financial information for operational decision making purposes. However, intersegment transactions have been eliminated for Management’s Discussion & Analysis to comply with accounting principles generally accepted in the United States of America.

RESULTS OF OPERATIONS — FOR THE 13 WEEKS ENDED JUNE 30, 2002, COMPARED TO THE 13 WEEKS ENDED JULY 1, 2001

SYSTEMWIDE RETAIL STORE SALES

Systemwide retail store sales, which include net sales for both Company-operated and licensed retail stores, were $972 million for the 13 weeks ended June 30, 2002, an increase of 29% from $755 million in the corresponding period in fiscal 2001, primarily due to the opening of 1,173 stores in the last 12 months. Systemwide retail store sales provide a broad perspective of global brand sales; however, they exclude net revenues from non-retail channels.

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The following table summarizes the Company’s systemwide retail stores:

Starbucks expects to achieve its fiscal 2002 global store-opening target of 1,200 new stores. During fiscal 2003, Starbucks also expects to open at least 1,200 new stores; including 525 Company-operated and 225 licensed stores in North America, and 75 Company-operated and 375 licensed stores in international markets.

CONSOLIDATED REVENUES

During the 13-week period ended June 30, 2002, Starbucks derived approximately 85% of net revenues from its Company-operated retail stores. Retail revenues include North American Retail and International Retail business units. The remaining 15% of net revenues was derived from the Company’s Specialty Operations, which includes Business Alliances and all other non-retail business units.

The table below reconciles revenues by operating segment to revenues on the accompanying consolidated statements of earnings (in thousands):