UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the Quarterly Period Ended March 28, 2004

OR

For the transition period from__________to__________.

Commission File Number: 0-20322

STARBUCKS CORPORATION

2401 Utah Avenue South, Seattle, Washington 98134
(Address of principal executive offices)

(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.

Yes x     No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act):

Yes x     No o

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

STARBUCKS CORPORATION

FORM 10-Q

For the Quarterly Period Ended March 28, 2004

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

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

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.

2

STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)

See Notes to Consolidated Financial Statements.

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STARBUCKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the 13 and 26 Weeks Ended March 28, 2004, and March 30, 2003

Note 1: Financial Statement Preparation

The consolidated financial statements as of March 28, 2004, and September 28, 2003, and for the 13-week and 26-week periods ended March 28, 2004, and March 30, 2003, have been prepared by Starbucks Corporation (“Starbucks” or the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The financial information for the 13-week and 26-week periods ended March 28, 2004, and March 30, 2003, 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 28, 2003, is derived from the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended September 28, 2003 (“Fiscal 2003”), included in Item 8 in the Fiscal 2003 Annual Report on Form 10-K, 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 and 26-week periods ended March 28, 2004, are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending October 3, 2004.

Note 2: Summary of Significant Accounting Policies

Revenue Recognition

Company-operated 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 consist primarily of product sales to customers other than through Company-operated retail stores, as well as royalties and other fees generated from licensing operations. Sales of coffee, tea and related products are generally recognized upon shipment to customers. Initial non-refundable development fees required under licensing agreements are recognized upon substantial performance of services for new market business development activities, such as initial business, real estate and store development planning as well as providing operational materials and functional training courses for opening new licensed retail markets. Additional store licensing fees are recognized when new licensed stores are opened. Royalty revenues based upon a percentage of reported sales and other continuing fees, such as marketing and service fees, are recognized on a monthly basis when earned. Arrangements involving multiple elements and deliverables are individually evaluated for revenue recognition. Cash payments received in advance of product or service delivery are recorded as deferred revenue. Consolidated revenues are net of all intercompany eliminations for wholly owned subsidiaries and for licensees accounted for under the equity method based on the Company’s percentage ownership. All revenues are recognized net of any discounts.

Accounting for Stock-Based Compensation

The Company maintains several stock option plans under which incentive stock options and non-qualified stock options may be granted to employees, consultants and non-employee directors. Starbucks accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, because the grant price equals the market price on the date of grant, no compensation expense is recognized by the Company for stock options issued to employees.

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Had compensation cost been recognized based upon the estimated fair value on the grant date of stock options in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 123, “Accounting for Stock Based Compensation,” as amended by SFAS No. 148 “Accounting for Stock-Based Compensation — Transition and Disclosure,” the Company’s net earnings and earnings per share by using the Black-Scholes option valuation model would have been as follows (in thousands, except earnings per share):

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

Recently Issued Accounting Pronouncements

In November 2003, the Emerging Issues Task Force (“EITF”) reached consensus on EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments” (“EITF 03-1”). EITF 03-1 defines other-than-temporary impairment for available-for-sale securities as well as cost method and equity method investments, among other things. The impairment provisions and disclosure requirements of EITF 03-1, which will be adopted by Starbucks during fiscal 2004, is not expected to have a significant impact on the Company’s consolidated financial position or disclosures.

In December 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 Revised, “Consolidation of Variable Interest Entities — an Interpretation of ARB No. 51” (“FIN No. 46R”), which provided, among other things, immediate deferral of the application of FIN No. 46 for entities which did not originally qualify as special purpose entities, and provided additional scope exceptions for joint ventures with business operations and franchises. The Company’s adoption of FIN No. 46R did not have an impact on its consolidated financial statements.

In December 2003, the SEC issued Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”). SAB 104 rescinds the accounting guidance contained in SAB 101, “Revenue Recognition in Financial Statements,” and incorporates the body of previously issued guidance related to multiple-element revenue arrangements. The Company’s adoption of SAB 104 did not have an impact on its consolidated financial statements.

Note 3: Inventories

Inventories consist of the following (in thousands):

As of March 28, 2004, the Company had committed to fixed-price purchase contracts for green coffee totaling approximately $388.5 million.

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Note 4: Derivative Financial Instruments

Cash Flow Hedges

Starbucks and its subsidiaries, which include entities that use their local currency as their functional currency, enter into cash flow derivative instruments to hedge portions of anticipated revenue streams and purchases. Current contracts hedge forecasted transactions denominated in Japanese yen and Canadian dollars, as well as in United States dollars for foreign operations. During the 13 weeks ended March 28, 2004, and March 30, 2003, derivative losses of $0.5 million and $0.4 million were reclassified into revenues, respectively. During the 26 weeks ended March 28, 2004, and March 30, 2003, derivative losses of $1.0 million and $0.6 million were reclassified into revenues, respectively. For hedges of foreign denominated purchases, derivative losses of $0.2 and $0.4 million were reclassified into cost of sales during the 13-week and 26-week periods ended March 28, 2004, respectively. There were no similar transactions reclassified into cost of sales in the prior year.

The Company had accumulated net derivative losses of $2.3 million, net of taxes, in other comprehensive income as of March 28, 2004, related to cash flow hedges. Of this amount, $1.7 million of net derivative losses will be reclassified into earnings within 12 months. No significant cash flow hedges were discontinued during the 13-week and 26-week periods ended March 28, 2004, and March 30, 2003. Current contracts will expire within 18 months.

Net Investment Hedges

Net investment derivative instruments hedge the Company’s equity method investment in Starbucks Coffee Japan, Ltd. These contracts expire within 8 months and are intended to minimize foreign currency exposure to fluctuations in the Japanese yen. As a result of using the spot-to-spot method, the Company recognized net gains of $0.2 million and $0.6 million for the 13 weeks ended March 28, 2004, and March 30, 2003, respectively, and recognized net gains of $0.3 million and $1.0 million for the 26 weeks ended March 28, 2004, and March 30, 2003, respectively. In addition, the Company had accumulated net derivative losses of $5.8 million, net of taxes, in other comprehensive income as of March 28, 2004.

Note 5: Property, Plant, and Equipment

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

Note 6: Shareholders’ Equity

Pursuant to the Company’s authorized share repurchase programs, Starbucks acquired 1.1 million shares at an average price of $37.02 for a total cost of $40.7 million during the 26-week period ended March 28, 2004. Starbucks acquired 1.5 million shares at an average price of $20.63 for a total cost of $30.1 million during the 26-week period ended March 30, 2003. As of March 28, 2004, there were approximately 13.5 million additional shares authorized for repurchase. Share repurchases are funded through cash, cash equivalents and available-for-sale securities.

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Note 7: Comprehensive Income

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

The increase in the translation adjustment for the 13-week and 26-week periods ended March 28, 2004, was primarily due to the weakening of the United States dollar against the British pound sterling and Japanese yen.

Note 8: Earnings Per Share

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

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

Options with exercise prices greater than the average market price were not included in the computation of diluted earnings per share. For the 13-week period ended March 28, 2004, these options totaled 12,418 and for the 13-week period ended March 30, 2003, these options totaled 0.8 million, during which periods the average market price of the Company’s common stock was $36.26 and $22.60, respectively. For the 26-week period ended March 28, 2004, these options totaled 12,310 and for the 26-week period ended March 30, 2003, these options totaled 1.4 million, during which periods the average market price of the Company’s common stock was $33.71 and $22.24, respectively.

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Note 9: Commitments and Contingencies

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. The guarantees continue until the loans, including accrued interest and fees, have been paid in full. 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 March 28, 2004, the maximum amount of the guarantees was approximately $11.4 million.

Additionally, Starbucks has unconditionally guaranteed 5% of a Chinese renminbi-denominated credit facility of Shanghai President Coffee Co., an unconsolidated equity investee. The guarantee amount will vary based on fluctuations in the renminbi foreign exchange rate. As of March 28, 2004, the outstanding amount of the guarantee was approximately $42,000.

Coffee brewing and espresso equipment sold to customers through Company-operated and licensed retail stores as well as equipment sold to the Company’s licensees for use in retail licensing operations are under warranty for defects in materials and workmanship for a period ranging from 12 months to 24 months. The Company establishes an accrual for estimated warranty costs at the time of sale, based on historical experience. Product warranty costs and changes to the related accrual were not significant for the 13 and 26-week periods ended March 28, 2004.

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 10: Segment Reporting

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

The tables below represent information by geographic area (in thousands):

Revenues from foreign countries are based on the geographic location of the customers and consist primarily of revenues from the United Kingdom and Canada, which together account for approximately 81% of foreign net revenues. No customer accounts for 10% or more of the Company’s revenues.

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

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

Certain statements herein, including anticipated store openings, trends in or expectations regarding Starbucks Corporation’s revenue growth, cash flow requirements, capital expenditures, and net earnings, all constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on currently available operating, financial and competitive information and are subject to various risks and uncertainties. Actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, coffee, dairy and other raw materials prices and availability, successful execution of internal performance and expansion plans, fluctuations in United States and international economies, ramifications from the war on terrorism, or other international events or developments, the impact of competitors’ initiatives, the effect of legal proceedings, and other risks detailed herein and in Starbucks Corporation’s other filings with the Securities and Exchange Commission, including the “Certain Additional Risks and Uncertainties” section of the Starbucks Annual Report on Form 10-K for the fiscal year ended September 28, 2003.

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

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

General

Starbucks Corporation’s fiscal year ends on the Sunday closest to September 30. Fiscal year 2003 had 52 weeks. The fiscal year ending on October 3, 2004, will include 53 weeks, with the 53rd week falling in the fourth fiscal quarter.

Management’s Overview

During the 13 weeks ended March 28, 2004, all areas of Starbucks business, from domestic and international retail operations to the Company’s specialty businesses, delivered strong financial performance. Company-operated retail stores posted the strongest quarterly comparable store sales gain in more than ten years, and innovation was prevalent throughout the Company’s operations. Starbucks believes the Company’s ability to achieve the balance between growing the core business and building the platform for future growth is the key to increasing shareholder value. Starbucks second quarter performance provides a strong example of the Company’s commitment to this balance.

Historically, the primary driver of the Company’s revenue growth has been the opening of new retail stores, both Company-operated and licensed, in pursuit of the Company’s objective to establish Starbucks as the most recognized and respected brand in the world. With a presence today in more than 30 countries, management continues to believe that the Company’s long term goal of operating at least 25,000 Starbucks retail locations throughout the United States and in International markets is achievable. Management also believes the Company has the human and financial resources to continue to open retail stores at or above the current rate for the foreseeable future.

In addition to opening new retail stores, Starbucks is targeting to increase revenues generated at Company-operated stores open for 13 months or longer (comparable store sales growth) by 3-7% by attracting new customers and increasing the frequency of visits by current customers. The strategy to achieve this target is to continuously improve the level of customer service, maintain a steady stream of product innovation and improve the speed of service through training, technology and process improvement. In the second quarter of fiscal 2004, comparable store sales in Company-operated markets increased by 12% as a result of these efforts. In licensed markets, Starbucks shares operating and store development experience to help licensees improve the profitability of existing stores and build new stores, which generated additional royalty income and product sales.

The combination of more retail stores, higher revenues from existing stores, and growth in other business channels in both the United States and International segments resulted in a 30.1% increase in total net revenues in the second quarter of fiscal 2004 compared to the second quarter of fiscal 2003, which was above the Company’s target. Since additional retail

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stores can leverage existing support organizations and facilities, that infrastructure can be expanded more slowly than the rate of revenue growth and generate margin improvement. In the second quarter of fiscal 2004, operating income as a percentage of total net revenues increased to 10.0% from 9.0% in the comparable period of fiscal 2003, and net earnings increased by 52.8%, compared to the second quarter of fiscal 2003.

Management believes that comparable store sales growth at the current level is not sustainable over the long term. However, management believes that new store development opportunities on a global basis are sufficient for the Company to maintain a high level of unit growth for the foreseeable future and that the execution of the current retail operating strategy can achieve 3-7% comparable store sales growth. These revenue growth opportunities, coupled with continuous focus on controlling both operating and capital costs, should allow Starbucks to continue to modestly improve margins and achieve annual revenue growth of approximately 20% and annual earnings per share growth of 20-25%.

Results of Operations for the 13 Weeks Ended March 28, 2004 and March 30, 2003

CONSOLIDATED RESULTS

Net revenues for the 13 weeks ended March 28, 2004, increased 30.1% to $1.2 billion from $954 million for the corresponding period of fiscal 2003. During the 13-week period ended March 28, 2004, Starbucks derived approximately 84.6% of total net revenues from its Company-operated retail stores. Company-operated retail revenues increased 29.8% to $1.1 billion for the 13 weeks ended March 28, 2004, from $809 million for the same period in fiscal 2003. The increase was primarily attributable to the opening of 671 new Company-operated retail stores in the last 12 months and comparable store sales growth of 12% for the 13 weeks ended March 28, 2004. The increase in comparable store sales was due to an 11% increase in the number of customer transactions and a 1% increase in the average dollar value per transaction. Management believes increased traffic in Company-operated retail stores continues to be driven by sustained popularity of core products, new product innovation, a high level of customer satisfaction and improved speed of service through enhanced technology, training and execution at retail stores.

The Company derived the remaining 15.4% of total net revenues from its specialty operations. Specialty revenues, which include licensing revenues and foodservice and other revenues, increased 31.5% to $190.6 million for the 13 weeks ended March 28, 2004, from $144.9 million for the corresponding period of fiscal 2003.

Licensing revenues, which are derived from retail store licensing arrangements, grocery and warehouse club licensing, and certain other branded-product operations, increased 32.8% to $122.5 million for the 13 weeks ended March 28, 2004, from $92.3 million for the corresponding period of fiscal 2003. The increase was primarily attributable to the addition of 705 new licensed retail stores in the last 12 months, increased grocery revenues as a result of the acquisition of Seattle Coffee Company in the fourth quarter of fiscal 2003 and increased warehouse club revenues due to growth in existing accounts.

Foodservice and other revenues increased 29.4% to $68.1 million for the 13 weeks ended March 28, 2004, from $52.6 million for the corresponding period of fiscal 2003. The increase was primarily attributable to the growth of the foodservice business as a result of the acquisition of Seattle Coffee Company in the fourth quarter of fiscal 2003 and growth in new and existing Starbucks foodservice accounts.

Cost of sales and related occupancy costs were unchanged at 41.1% of total net revenues for the 13 weeks ended March 28, 2004, compared to the corresponding period of fiscal 2003. A shift in sales mix toward lower margin products and higher green coffee and dairy commodity costs were offset by efficiencies in supply chain distribution operations and leverage gained on fixed occupancy costs distributed over an expanded revenue base.

Store operating expenses as a percentage of Company-operated retail revenues decreased to 40.6% for the 13 weeks ended March 28, 2004, from 40.7% for the corresponding period of fiscal 2003. This decrease was primarily due to leverage gained on fixed occupancy and personnel expenditures distributed over an expanded revenue base, partially offset by costs associated with retail management participation in the Company’s global leadership conference held in March 2004. Management believes the conference represents an important investment in the Company’s development of its partners (employees).

Other operating expenses (expenses associated with the Company’s specialty operations) decreased to 21.4% of total specialty revenues for the 13 weeks ended March 28, 2004, compared to 25.2% in the corresponding period of fiscal 2003, primarily due to leverage in the current fiscal period on most fixed expenditures distributed over an expanded revenue base and a $2.0 million provision recorded in the corresponding period of fiscal 2003 for dissolving the Company’s licensed operations in Israel.

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Depreciation and amortization expenses increased to $72.0 million for the 13 weeks ended March 28, 2004, compared to $58.0 million for the corresponding period of fiscal 2003. The increase was primarily due to the opening of 671 new Company-operated retail stores in the last 12 months and higher depreciation expenses associated with the Company’s foodservice operations. As a percentage of total net revenues, depreciation and amortization decreased to 5.8% for the 13 weeks ended March 28, 2004, from 6.1% for the same period in fiscal 2003.

General and administrative expenses increased to $80.0 million for the 13 weeks ended March 28, 2004, compared to $59.6 million for the corresponding period of fiscal 2003. The increase was primarily due to higher payroll-related expenditures. As a percentage of total net revenues, general and administrative expenses increased to 6.4% for the 13 weeks ended March 28, 2004, from 6.2% for the same period in fiscal 2003. As a percentage of total net revenues, the increase was due to a higher provision for incentive compensation based on the Company’s performance during the quarter.

Income from equity investees increased $5.7 million to $12.3 million for the 13 weeks ended March 28, 2004, from $6.6 million for the same period in fiscal 2003. International markets, particularly Japan, and The North American Coffee Partnership experienced improved operating results, primarily due to higher sales volumes. New licensed retail store openings and the July 2003 increase in the Company’s ownership interest from 5% to 50% for the Taiwan and Shanghai licensed operations also contributed to the growth.

Operating income increased 45.6% to $124.5 million for the 13 weeks ended March 28, 2004, compared to $85.5 million for the same period in fiscal 2003. Operating margin increased to 10.0% of total net revenues in the 13 weeks ended March 28, 2004, compared to 9.0% in the corresponding period of fiscal 2003, primarily due to reductions in store operating, other operating, and depreciation and amortization expenses as a percentage of total net revenues.

Interest and other income increased to $3.7 million for the 13 weeks ended March 28, 2004, from $1.2 million in the corresponding period of fiscal 2003, primarily due to higher interest income earned on cash and liquid investment balances and a smaller loss this year compared to last year related to transactions based in currencies other than the United States dollar.

Income taxes for the 13 weeks ended March 28, 2004, were based on an effective tax rate of 38.0%, compared to 40.0% in the corresponding period of fiscal 2003, due to improved operating results from international businesses.

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SEGMENT RESULTS

Segment information is prepared on the same basis that the Company’s management internally reviews financial information for operational decision making purposes. The following table summarizes the Company’s results of operations by segment (in thousands):

United States

United States operations (“United States”) sell coffee and other beverages, whole bean coffees, complementary food, coffee brewing equipment and merchandise primarily through Company-operated retail stores. Specialty operations within the United States include retail store and other licensing operations, foodservice accounts and other smaller initiatives related to the Company’s core businesses.

United States total net revenues increased by $238.9 million, or 29.3%, to $1.1 billion for the 13 weeks ended March 28, 2004, compared to $816.6 million for the corresponding period of fiscal 2003. United States Company-operated retail

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revenues increased by $199.9 million, or 28.6%, to $898.2 million for the 13 weeks ended March 28, 2004, compared to $698.4 million for the corresponding period of fiscal 2003, primarily due to the opening of 560 new Company-operated retail stores in the last 12 months and comparable store sales growth of 13% for the 13 weeks ended March 28, 2004. The increase in comparable store sales was due to a 12% increase in the number of customer transactions and a 1% increase in the average dollar value per transaction.

Total United States specialty revenues increased $39.0 million, or 33.0%, to $157.2 million for the 13 weeks ended March 28, 2004, compared to $118.2 million in the corresponding period of fiscal 2003. United States licensing revenues increased $24.9 million, or 36.5%, to $93.2 million, compared to $68.2 million for the corresponding period of fiscal 2003, primarily due to the opening of 438 new licensed retail stores in the last 12 months, as well as growth in the grocery and warehouse club businesses. United States foodservice and other revenues increased $14.1 million, or 28.3%, to $64.1 million primarily due to the acquisition of Seattle Coffee Company in the fourth fiscal quarter of 2003 and growth in new and existing Starbucks foodservice accounts.

United States operating income increased by 30.2% to $173.6 million for the 13 weeks ended March 28, 2004, from $133.3 million for the same period in fiscal 2003. Operating margin increased to 16.4% of related revenues from 16.3% in the corresponding period of fiscal 2003, primarily due to reductions in most operating expenses as a percentage of related revenues.

International

International operations (“International”) sell coffee and other beverages, whole bean coffees, complementary food, coffee brewing equipment and merchandise through Company-operated retail stores in Canada, the United Kingdom, Thailand and Australia, as well as through retail store licensing operations and foodservice accounts in these and 30 other countries. International operations are in various early stages of development and have country-specific regulatory requirements that require a more extensive support organization than the United States relative to the current levels of revenue and operating income.

International total net revenues increased by $48.0 million, or 34.9%, to $185.6 million for the 13 weeks ended March 28, 2004, compared to $137.6 million for the corresponding period of fiscal 2003. International Company-operated retail revenues increased by $41.3 million, or 37.2%, to $152.2 million for the 13 weeks ended March 28, 2004, compared to $110.9 million for the corresponding period for fiscal 2003, primarily due to the opening of 111 new Company-operated retail stores in the last 12 months, the weakening of the United States dollar against the British pound sterling and Canadian dollar, and comparable store sales growth of 6% for the 13 weeks ended March 28, 2004. The increase in comparable store sales resulted from a 4% increase in the number of customer transactions coupled with a 2% increase in the average value per transaction.

Total international specialty revenues increased $6.7 million, or 24.9%, to $33.4 million for the 13 weeks ended March 28, 2004, compared to $26.7 million in the corresponding period of fiscal 2003, primarily from licensing operations. International licensing revenues increased $5.3 million, or 22.2%, to $29.4 million for the 13 weeks ended March 28, 2004, from $24.0 million for the corresponding period of fiscal 2003. The increase was primarily due to higher product sales and higher royalty revenue as the result of opening 267 new licensed retail stores in the last 12 months.

International operating income increased to $8.4 million for the 13 weeks ended March 28, 2004, from an operating loss of $3.8 million in the corresponding period of fiscal 2003. Operating margin increased to 4.5% of related revenues from a negative (2.8)% in the corresponding period of fiscal 2003, primarily due to a nonrecurring provision to dissolve the Company’s investment in the licensed Israel operations in the prior year and leverage gained on most expense items distributed over an expanded revenue base.

Unallocated Corporate

Unallocated corporate expenses pertain to certain functions, such as executive management, accounting, administration, tax, treasury, and information technology infrastructure, which are not specifically attributable to the Company’s operating segments and include related depreciation and amortization expenses. Unallocated general and administrative expenses increased to $49.1 million in the 13 weeks ended March 28, 2004, from $36.5 million in the corresponding period of fiscal 2003, primarily due to higher payroll-related expenditures, specifically an increased provision for incentive compensation based on the Company’s performance during the quarter. Depreciation and amortization expenses increased to $8.4 million in the 13 weeks ended March 28, 2004, from $7.5 million in the corresponding period of fiscal 2003, primarily due to capital spending for information technology enhancements and expanded support facilities. Total unallocated corporate expenses as a percentage of total net revenues remained unchanged at 4.6% for the 13-week periods ended March 28,

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2004, and March 30, 2003.

Results of Operations for the 26 Weeks Ended March 28, 2004 and March 30, 2003

CONSOLIDATED RESULTS

Net revenues for the 26 weeks ended March 28, 2004, increased 28.8% to $2.5 billion from $2.0 billion for the corresponding period of fiscal 2003. During the 26-week period ended March 28, 2004, Starbucks derived approximately 84.5% of total net revenues from its Company-operated retail stores. Company-operated retail revenues increased 28.5% to $2.1 billion for the 26 weeks ended March 28, 2004, from $1.7 billion for the same period in fiscal 2003. The increase was primarily attributable to the opening of 671 new Company-operated retail stores in the last 12 months and comparable store sales growth of 11% for the 26 weeks ended March 28, 2004. The increase in comparable store sales was due to a 10% increase in the number of customer transactions and a 1% increase in the average dollar value per transaction. Management believes increased traffic in Company-operated retail stores continues to be driven by new product innovation, continued popularity of core products, a high level of customer satisfaction and improved speed of service through enhanced technology, training and execution at retail stores.

The Company derived the remaining 15.5% of total net revenues from its specialty operations. Specialty revenues, which include licensing revenues and foodservice and other revenues, increased 30.9% to $391.3 million for the 26 weeks ended March 28, 2004, from $298.9 million for the corresponding period of fiscal 2003.

Licensing revenues, which are derived from retail store licensing arrangements, grocery and warehouse club licensing, and certain other branded-product operations, increased 33.9% to $256.0 million for the 26 weeks ended March 28, 2004, from $191.2 million for the corresponding period of fiscal 2003. The increase was primarily attributable to the opening of 705 new licensed retail stores in the last 12 months, increased grocery revenues as a result of the acquisition of Seattle Coffee Company in the fourth quarter of fiscal 2003 and increased warehouse club revenues due to growth in existing accounts.

Foodservice and other revenues increased 25.6% to $135.3 million for the 26 weeks ended March 28, 2004, from $107.7 million for the corresponding period of fiscal 2003. The increase was primarily attributable to the growth of the foodservice business as a result of the acquisition of Seattle Coffee Company in the fourth quarter of fiscal 2003 and the growth in new and existing Starbucks foodservice accounts.

Cost of sales and related occupancy costs were 41.2% of total net revenues for the 26 weeks ended March 28, 2004, compared to 41.4% for the corresponding period of fiscal 2003. This decrease was primarily due to efficiencies gained in the Company’s international supply chain operations and leverage gained on fixed occupancy costs distributed over an expanded revenue base, partially offset by a shift in sales mix to lower margin products and higher green coffee and dairy commodity costs.

Store operating expenses as a percentage of Company-operated retail revenues decreased to 39.0% for the 26 weeks ended March 28, 2004, from 39.2% for the corresponding period of fiscal 2003. This decrease was primarily due to leverage gained on fixed expenditures distributed over an expanded revenue base, partially offset by costs associated with retail management participation in the Company’s global leadership conference held in March 2004 and higher marketing expenditures for holiday and new product promotions.

Other operating expenses (expenses associated with the Company’s specialty operations) decreased to 21.6% of total specialty revenues for the 26 weeks ended March 28, 2004, compared to 22.8% in the corresponding period of fiscal 2003. This decrease is primarily attributable to the Company’s exit of the mail order and online businesses in late fiscal 2003, partially offset by higher expenses to support the growing foodservice distribution network and maintaining new and existing customer accounts.

Depreciation and amortization expenses increased to $137.8 million for the 26 weeks ended March 28, 2004, compared to $115.3 million for the corresponding period of fiscal 2003. The increase was primarily due to the opening of 671 new Company-operated retail stores in the last 12 months and higher depreciation expenses associated with the Company’s foodservice operations. As a percentage of total net revenues, depreciation and amortization decreased to 5.5% for the 26 weeks ended March 28, 2004, from 5.9% for the same period in fiscal 2003.

General and administrative expenses increased to $150.4 million for the 26 weeks ended March 28, 2004, compared to $120.5 million for the corresponding period of fiscal 2003. The increase was primarily due to higher payroll-related expenditures. However, as a percentage of total net revenues, general and administrative expenses decreased to 6.0% for the 26 weeks ended March 28, 2004, from 6.2% for the same period in fiscal 2003. This decrease was primarily due to

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leverage gained on fixed costs distributed over an expanded revenue base.

Income from equity investees increased $9.5 million to $22.7 million for the 26 weeks ended March 28, 2004, from $13.2 million for the same period in fiscal 2003. The North American Coffee Partnership and international markets, particularly Japan, experienced improved operating results, primarily due to higher sales volumes. New licensed retail store openings and reduced administrative costs in international markets, in addition to the July 2003 increase in the Company’s ownership interest from 5% to 50% for the Taiwan and Shanghai licensed operations, also contributed to the growth.

Operating income increased 45.4% to $300.0 million for the 26 weeks ended March 28, 2004, compared to $206.3 million for the same period in fiscal 2003. Operating margin increased to 11.9% of total net revenues in the 26 weeks ended March 28, 2004, compared to 10.5% in the corresponding period of fiscal 2003, primarily due to the leverage gained in most operating expense line items from strong revenue growth as described above.

Interest and other income increased to $6.9 million for the 26 weeks ended March 28, 2004, from $5.7 million in the corresponding period of fiscal 2003, primarily due to higher gains realized on the Company’s trading securities portfolio and higher interest income earned on cash and liquid investment balances. These were partially offset by lower foreign currency gains related to the Company’s application of the spot-to-spot method for net investment hedges.

Income taxes for the 26 weeks ended March 28, 2004, were based on an effective tax rate of 38.0%, compared to 38.5% in the corresponding period of fiscal 2003, due to improved operating results from international businesses.

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SEGMENT RESULTS

Segment information is prepared on the same basis that the Company’s management internally reviews financial information for operational decision making purposes. The following table summarizes the Company’s results of operations by segment (in thousands):

United States

United States total net revenues increased by $470.1 million, or 28.0%, to $2.1 billion for the 26 weeks ended March 28, 2004, compared to $1.7 billion for the corresponding period of fiscal 2003. United States Company-operated retail revenues increased by $389.0 million, or 27.1%, to $1.8 billion for the 26 weeks ended March 28, 2004, compared to $1.4 billion for the corresponding period of fiscal 2003, primarily due to the opening of 560 new Company-operated retail stores in the last 12 months and comparable store sales growth of 12% for the 26 weeks ended March 28, 2004. The increase in comparable store sales was due to an 11% increase in the number of customer transactions and a 1% increase in the average dollar value per transaction.

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Total United States specialty revenues increased $81.1 million, or 33.5%, to $323.3 million for the 26 weeks ended March 28, 2004, compared to $242.2 million in the corresponding period of fiscal 2003. United States licensing revenues increased $55.8 million, or 39.9%, to $195.8 million, compared to $139.9 million for the corresponding period of fiscal 2003, primarily due to the opening of 438 new licensed retail stores in the last 12 months and growth in the grocery business as a result of the acquisition of Seattle Coffee Company in the fourth quarter of fiscal 2003. United States foodservice and other revenues increased $25.3 million, or 24.7%, primarily due to the acquisition of Seattle Coffee Company and the growth of new and existing Starbucks foodservice accounts.

United States operating income increased by 27.8% to $387.9 million for the 26 weeks ended March 28, 2004, from $303.5 million for the same period in fiscal 2003. Operating margin remained unchanged at 18.1% of related revenues for fiscal 2004 and 2003. This was due to leverage gained on most fixed operating costs distributed over an expanded revenue base, primarily offset by increased cost of sales due to a shift in the sales mix toward lower margin products and higher green coffee and dairy commodity costs.

International

International total net revenues increased by $94.5 million, or 33.5%, to $376.2 million for the 26 weeks ended March 28, 2004, compared to $281.7 million for the corresponding period of fiscal 2003. International Company-operated retail revenues increased by $83.2 million, or 37.0%, to $308.2 million for the 26 weeks ended March 28, 2004, compared to $225.0 million for the corresponding period for fiscal 2003, primarily due to the opening of 111 new Company-operated retail stores in the last 12 months, the weakening of the United States dollar against the Canadian dollar and British pound sterling, and comparable store sales growth of 7% for the 26 weeks ended March 28, 2004. 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 $11.2 million, or 19.8%, to $68.0 million for the 26 weeks ended March 28, 2004, compared to $56.8 million in the corresponding period of fiscal 2003, primarily due to licensing operations. International licensing revenues increased $8.9 million, or 17.4%, to $60.2 million for the 26 weeks ended March 28, 2004, from $51.3 million for the corresponding period of fiscal 2003. The increase was primarily due to the opening of 267 new licensed retail stores in the last 12 months, partially offset by proportionate eliminations of sales to equity investees in which the Company increased its ownership interests in late fiscal 2003.

International operating income increased to $19.6 million for the 26 weeks ended March 28, 2004, from an operating loss of $5.2 million in the corresponding period of fiscal 2003. Operating margin increased to 5.2% of related revenues from a negative (1.9)% in the corresponding period of fiscal 2003, primarily due to leverage gained on fixed costs distributed over an expanded revenue base, efficiencies gained in the Company’s international supply chain distribution operations and improved operating results of equity investees.

Unallocated Corporate

Unallocated general and administrative expenses increased to $90.9 million in the 26 weeks ended March 28, 2004, from $76.5 million in the corresponding period of fiscal 2003, primarily due to higher payroll-related expenditures. Depreciation and amortization expenses increased to $16.6 million in the 26 weeks ended March 28, 2004, from $15.5 million in the corresponding period of fiscal 2003, primarily due to capital spending for information technology enhancements and expanded support facilities. Total unallocated corporate expenses as a percentage of total net revenues decreased to 4.3% in the 26 weeks ended March 28, 2004, from 4.7% in the corresponding period of fiscal 2003.

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Store Data

The following table summarizes the Company’s retail store information:

Starbucks plans to open approximately 1,300 new stores on a global basis for fiscal 2004. In the United States the Company plans to open approximately 525 new Company-operated locations and 350 licensed locations. Internationally, including Canada, the Company plans to open approximately 100 locations in Company-operated markets and 325 locations in licensed markets.

Liquidity and Capital Resources

Cash and cash equivalents increased by $169.2 million for the 26 weeks ended March 28, 2004, to $370.1 million. The Company ended the period with $853.1 million in total cash and cash equivalents and liquid investments. Working capital as of March 28, 2004 totaled $527.0 million compared to $413.5 million as of March 30, 2003. The Company intends to use its available cash resources to invest in its core businesses and other new business opportunities related to its core businesses. The Company may use its available cash resources to make proportionate capital contributions to its equity method and cost method investees. Depending on market conditions, Starbucks may acquire additional shares of its common stock in accordance with its existing share repurchase programs.

Cash provided by operating activities totaled $464.3 million for the 26 weeks ended March 28, 2004. Net earnings provided $190.3 million, non-cash depreciation and amortization expenses provided $150.0 million, the change in inventories due to the timing of purchases provided $36.9 million, the change in accrued compensation provided $32.1 million as a result of higher incentive and deferred payroll-related expenditures, and the change in deferred revenue attributed to the growth of Starbucks Card balances not yet redeemed provided $31.8 million.

Cash used by investing activities for the 26 weeks ended March 28, 2004, totaled $329.9 million. The net activity in the Company’s portfolio of available-for-sale securities during the 26-week period used $193.4 million, and net capital additions to property, plant and equipment used $128.7 million related to opening 265 new Company-operated retail stores and remodeling certain existing stores. Gross capital additions for the 26 weeks ended March 28, 2004, were $162.9 million and were offset by the change in disposal and impairment provisions and foreign currency translation adjustments totaling $34.2 million.

Cash provided by financing activities for the 26 weeks ended March 28, 2004 totaled $32.0 million. The exercise of stock options and sale of stock under the Company’s employee stock purchase plans provided $73.1 million. During the period, the Company repurchased 1.1 million shares of its common stock at an average price of $37.02 per share, using $40.7 million of cash. Approximately 13.5 million shares remain authorized for repurchase under these programs as of March 28, 2004. Share repurchases are at the discretion of management and depend on market conditions, capital requirements and such other factors as the Company may consider relevant.

Other than normal operating expenses, cash requirements in fiscal 2004 are expected to consist primarily of capital expenditures related to the addition of new Company-operated retail stores as Starbucks plans to open approximately 625 Company-operated stores, remodel certain existing stores and enhance its production capacity and information systems. Management expects capital expenditures in fiscal 2004 to be approximately $475 million.

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Management believes that existing cash and investments as well as cash generated from operations should be sufficient to finance capital requirements for its core businesses for the foreseeable future. Significant new joint ventures, acquisitions or other new business opportunities may require outside funding.

There have been no material changes during the period covered by this Report, outside of the ordinary course of the Company’s business, to the contractual obligations specified in the table of contractual obligations included in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” incorporated by reference in the Company’s Fiscal 2003 Annual Report on Form 10-K.

Guarantees of Indebtedness of Others

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. The guarantees continue until the loans, including accrued interest and fees, have been paid in full. 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 March 28, 2004, the maximum amount of the guarantees was approximately $11.4 million.

Additionally, Starbucks has unconditionally guaranteed 5% of a Chinese renminbi-denominated credit facility of Shanghai President Coffee Co., an unconsolidated equity investee. The guarantee amount will vary based on fluctuations in the renminbi foreign exchange rate. As of March 28, 2004, the outstanding amount of the guarantee was approximately $42,000.

Product Warranties

Coffee brewing and espresso equipment sold to customers through Company-operated and licensed retail stores as well as equipment sold to the Company’s licensees for use in retail licensing operations are under warranty for defects in materials and workmanship for a period ranging from 12 months to 24 months. The Company establishes an accrual for estimated warranty costs at the time of sale, based on historical experience. Product warranty costs and changes to the related accrual were not significant for the 13 and 26-week periods ended March 28, 2004.

Coffee Prices, Availability and General Risk Conditions

The supply and price of coffee are subject to significant volatility. Although most coffee trades in the commodity market, coffee of the quality sought by Starbucks 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 commodity prices of green coffee through agreements establishing export quotas or restricting coffee supplies worldwide. The Company’s ability to raise sales prices in response to rising coffee prices may be limited, and the Company’s profitability could be adversely affected if coffee prices were to rise substantially.

The Company enters into fixed-price purchase commitments in order to secure an adequate supply of quality green coffee and bring greater certainty to the cost of sales in future periods. As of March 28, 2004, the Company had approximately $388.5 million in fixed-price purchase commitments which, together with existing inventory, is expected to provide an adequate supply of green coffee through calendar 2004 and well into 2005 for many types of coffees. The Company believes, based on relationships established with its suppliers in the past that the risk of non-delivery on such purchase commitments is low.

In addition to fluctuating coffee prices, management believes that the Company’s future results of operations and earnings could be significantly impacted by other factors such as increased competition within the specialty coffee industry, fluctuating dairy prices, the Company’s ability to find optimal store locations at favorable lease rates, increased costs associated with opening and operating retail stores and the Company’s continued ability to hire, train and retain qualified personnel, expensing of stock options when required, and other factors discussed under “Certain Additional Risks and Uncertainties” in the “Business” section of the Company’s Fiscal 2003 Annual Report on Form 10-K.

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Seasonality and Quarterly Results

The Company’s business is subject to seasonal fluctuations. Significant portions of the Company’s net revenues and profits are realized during the first quarter of the Company’s fiscal year, which includes the December holiday season. In addition, quarterly results are affected by the timing of the opening of new stores, and the Company’s rapid growth may conceal the impact of other seasonal influences. Because of the seasonality of the Company’s business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.

Recently Issued Accounting Pronouncements

In November 2003, the Emerging Issues Task Force (“EITF”) reached consensus on EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments” (“EITF 03-1”). EITF 03-1 defines other-than-temporary impairment for available-for-sale securities as well as cost method and equity method investments, among other things. The impairment provisions and disclosure requirements of EITF 03-1, which will be adopted by Starbucks during fiscal 2004, is not expected to have a significant impact on the Company’s consolidated financial position or disclosures.

In December 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 Revised, “Consolidation of Variable Interest Entities — an Interpretation of ARB No. 51” (“FIN No. 46R”), which provided, among other things, immediate deferral of the application of FIN No. 46 for entities which did not originally qualify as special purpose entities, and provided additional scope exceptions for joint ventures with business operations and franchises. The Company’s adoption of FIN No. 46R did not have an impact on its consolidated financial statements.

In December 2003, the SEC issued Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”). SAB 104 rescinds the accounting guidance contained in SAB 101, “Revenue Recognition in Financial Statements,” and incorporates the body of previously issued guidance related to multiple-element revenue arrangements. The Company’s adoption of SAB 104 did not have an impact on its consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Exchange Risk

As of March 28, 2004, the Company had 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 international revenue. In addition, Starbucks had forward foreign exchange contracts that qualify as a hedge of its net investment in Starbucks Coffee Japan, Ltd. These contracts expire within 18 months.

Based on the foreign exchange contracts outstanding as of March 28, 2004, a 10% devaluation of the United States dollar as compared to the level of foreign exchange rates for currencies under contract as of March 28, 2004, would result in a reduction in the fair value of these derivative financial instruments of approximately $19.7 million, of which $12.9 million may reduce the Company’s future net earnings. Conversely, a 10% appreciation of the United States dollar would result in an increase in the fair value of these instruments of approximately $17.3 million, of which $11.7 million may increase the Company’s future net earnings. Consistent with the nature of the economic hedges provided by these foreign exchange contracts, increases or decreases in the fair value would be mostly offset by corresponding decreases or increases, respectively, in the dollar value of the Company’s foreign investment and future foreign currency royalty and license fee payments that would be received within the hedging period.

There have been no material changes in the equity security price risk or interest rate risk discussed in Item 7A of the Company’s Fiscal 2003 Annual Report on Form 10-K.

Item 4. Controls and Procedures

(a)		Evaluation of disclosure controls and procedures.
		During the 13 weeks ended March 28, 2004, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the chief executive officer and the chief financial officer, of the effectiveness of the design and operation of the disclosure controls and procedures, as defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure