UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the Quarterly Period Ended June 27, 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.

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

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 June 27, 2004

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

STARBUCKS CORPORATION

See Notes to Consolidated Financial Statements.

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STARBUCKS CORPORATION

See Notes to Consolidated Financial Statements.

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STARBUCKS CORPORATION

See Notes to Consolidated Financial Statements.

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STARBUCKS CORPORATION

Note 1: Financial Statement Preparation

The consolidated financial statements as of June 27, 2004, and September 28, 2003, and for the 13-week and 39-week periods ended June 27, 2004, and June 29, 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 39-week periods ended June 27, 2004, and June 29, 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”), incorporated by reference 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 39-week periods ended June 27, 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, among other things, for available-for-sale securities as well as cost method investments. The impairment provisions and disclosure requirements of EITF 03-1 will be adopted by Starbucks during the fiscal fourth quarter of 2004 and are 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 June 27, 2004, the Company had committed to fixed-price purchase contracts for green coffee totaling approximately $281.3 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 June 27, 2004, and June 29, 2003, derivative losses of $0.2 million and $0.5 million were reclassified into revenues, respectively. During the 39 weeks ended June 27, 2004, and June 29, 2003, derivative losses of $1.2 million and $1.1 million were reclassified into revenues, respectively. For hedges of foreign denominated purchases, derivative losses of $0.1 and $0.5 million were reclassified into cost of sales during the 13-week and 39-week periods ended June 27, 2004, respectively. There were no similar transactions reclassified into cost of sales in the prior year.

The Company had accumulated net derivative losses of $1.2 million, net of taxes, in other comprehensive income as of June 27, 2004, related to cash flow hedges. Of this amount, $0.6 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 39-week periods ended June 27, 2004, and June 29, 2003. Current contracts will expire within 27 months.

Net Investment Hedges

Net investment derivative instruments hedge the Company’s equity method investment in Starbucks Coffee Japan, Ltd. These contracts expire within 22 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 losses of $0.2 million and net gains of $0.3 million for the 13 weeks ended June 27, 2004, and June 29, 2003, respectively, and recognized net gains of $0.1 million and $1.3 million for the 39 weeks ended June 27, 2004, and June 29, 2003, respectively. In addition, the Company had accumulated net derivative losses of $5.1 million, net of taxes, in other comprehensive income as of June 27, 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 2.2 million shares at an average price of $37.29 per share for a total cost of $82.2 million during the 39-week period ended June 27, 2004. Starbucks acquired 2.8 million shares at an average price of $22.26 per share for a total cost of $61.2 million during the 39-week period ended June 29, 2003. As of June 27, 2004, there were 12.4 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):

For the 13 weeks ended June 27, 2004, the unfavorable change of $4.7 million in translation adjustment was primarily due to the strengthening of the United States dollar against the Canadian dollar and Japanese yen. For the 39 weeks ended June 27, 2004, the favorable change of $15.9 million in translation adjustment was primarily due to the weakening of the United States dollar against the British pound sterling and Japanese yen. For the 13-week and 39-week periods ended June 29, 2003, the favorable changes of $19.4 million and $21.1 million in translation adjustment, respectively, were primarily due to the Company’s expansion of Euro-based operations and the weakening of the United States dollar against the Euro, British pound sterling and Canadian dollar.

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 closing market price were not included in the computation of diluted earnings per share. For the 13-week period ended June 27, 2004, these options totaled 12,745 and for the 13-week period ended June 29, 2003, these options totaled 0.4 million, during which periods the average market price of the Company’s common stock was $39.84 and $24.38, respectively. For the 39-week period ended June 27, 2004, these options totaled 120,009 and for the 39-week period ended June 29, 2003, these options totaled 1.5 million, during which periods the average market price of the Company’s common stock was $35.74 and $22.96, 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 June 27, 2004, the maximum amount of the guarantees was approximately $11.6 million.

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 39-week periods ended June 27, 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.

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):

(1)		For purposes of internal management and segment reporting, licensed operations in Hawaii and Puerto Rico are included in the International segment, although geographically they are part of the United States.
(2)		Unallocated corporate includes certain general and administrative expenses, related depreciation and amortization expenses and amounts included in “Interest and other income, net” on the accompanying consolidated statements of earnings.

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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.

Note 11: Subsequent Events

In July 2004, Starbucks acquired 100% equity ownership in the licensed operations in Singapore and 49.9% equity ownership in the licensed operations in Malaysia for a combined total of approximately $12.1 million. Previously, the Company did not have any equity ownership in these licensed operations.

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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 and net earnings growth, cash flow requirements, and capital expenditures, 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 for the fiscal year ended September 28, 2003.

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 53^rd week falling in the fourth fiscal quarter.

Management’s Overview

During the 13 weeks ended June 27, 2004, all areas of Starbucks business, from domestic and international retail operations to the Company’s specialty businesses, delivered strong financial performance, 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 third 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.

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% for the next three to five years 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 third quarter of fiscal 2004, comparable store sales in Company-operated markets increased by 11% as a result of these efforts. June 2004 marks the 150^th consecutive month of positive comparable store sales growth for Starbucks, as well as the eighth consecutive month of double-digit growth, which is the longest period of double-digit comparable store sales growth reported for the Company in 10 years.

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 Company’s strategy is to increase its equity stake as international markets develop.

The combination of more retail stores, higher revenues from existing stores, and growth in other business channels in both

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the United States and International segments resulted in a 27.2% increase in total net revenues in the third quarter of fiscal 2004 compared to the third quarter of fiscal 2003, which was above the Company’s three to five year target of approximately 20%. Since additional retail 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 third quarter of fiscal 2004, operating income as a percentage of total net revenues increased to 11.7% from 10.2% in the comparable period of fiscal 2003, and net earnings increased by 43.5%, compared to the third quarter of fiscal 2003. Also contributing to these results was the fourth consecutive quarter of positive operating results from international Company-operated markets.

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 and that the execution of the current retail operating strategy can achieve 3-7% comparable store sales growth for the next three to five years. 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% for this same three to five year period.

Results of Operations for the 13 Weeks Ended June 27, 2004 and June 29, 2003

CONSOLIDATED RESULTS

Net revenues for the 13 weeks ended June 27, 2004, increased 27.2% to $1.3 billion from $1.0 billion for the corresponding period of fiscal 2003. During the 13-week period ended June 27, 2004, Starbucks derived approximately 84.0% of total net revenues from its Company-operated retail stores. Company-operated retail revenues increased 26.2% to $1.1 billion for the 13 weeks ended June 27, 2004, from $877.8 million for the same period in fiscal 2003. The increase was primarily attributable to the opening of 651 new Company-operated retail stores in the last 12 months and comparable store sales growth of 11% for the 13 weeks ended June 27, 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 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 16.0% of total net revenues from its specialty operations. Specialty revenues, which include licensing revenues and foodservice and other revenues, increased 32.5% to $210.6 million for the 13 weeks ended June 27, 2004, from $159.0 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 33.4% to $139.2 million for the 13 weeks ended June 27, 2004, from $104.3 million for the corresponding period of fiscal 2003. The increase was primarily attributable to the addition of 727 new licensed retail stores in the last 12 months, the acquisition of Seattle Coffee Company in the fourth quarter of fiscal 2003 and growth in the grocery and warehouse club businesses.

Foodservice and other revenues increased 30.6% to $71.4 million for the 13 weeks ended June 27, 2004, from $54.7 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 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 June 27, 2004, compared to the corresponding period of fiscal 2003. Higher dairy and green coffee 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 40.4% for the 13 weeks ended June 27, 2004, from 40.9% for the corresponding period of fiscal 2003. This decrease was primarily due to higher costs in the prior year associated with regional leadership conferences and provisions for asset impairment for international Company-operated retail stores. In the fiscal second quarter of 2004, the Company held its first global leadership conference for retail management partners (employees), which replaced regional conferences held during the fiscal third quarter of 2003.

Other operating expenses (expenses associated with the Company’s specialty operations) decreased to 21.0% of total specialty revenues for

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the 13 weeks ended June 27, 2004, compared to 22.5% in the corresponding period of fiscal 2003. This decrease was primarily due to leverage gained on payroll-related expenditures distributed over an expanded revenue base, partially offset by provisions for asset impairment related to integrating Seattle Coffee Company grocery operations into Starbucks distribution channels.

Depreciation and amortization expenses increased to $70.6 million for the 13 weeks ended June 27, 2004, compared to $59.8 million for the corresponding period of fiscal 2003. The increase was primarily due to the opening of 651 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 5.4% for the 13 weeks ended June 27, 2004, from 5.8% for the same period in fiscal 2003.

General and administrative expenses increased to $73.4 million for the 13 weeks ended June 27, 2004, compared to $58.1 million for the corresponding period of fiscal 2003. The increase was primarily due to additional employees to support accelerated retail store growth. As a percentage of total net revenues, general and administrative expenses were unchanged at 5.6% for the 13 weeks ended June 27, 2004, and June 29, 2003.

Income from equity investees increased $5.6 million to $13.5 million for the 13 weeks ended June 27, 2004, from $7.8 million for the same period in fiscal 2003. The increase was primarily due to volume driven operating results for the North American Coffee Partnership, which produces bottled Frappuccino® and Starbucks DoubleShot® coffee drinks, and new licensed retail store openings, particularly in Japan. The July 2003 increase in the Company’s ownership interest from 5% to 50% in the Taiwan and Shanghai licensed operations also contributed to the growth.

Operating income increased 45.1% to $153.8 million for the 13 weeks ended June 27, 2004, compared to $106.0 million for the same period in fiscal 2003. Operating margin increased to 11.7% of total net revenues for the 13 weeks ended June 27, 2004, compared to 10.2% in the corresponding period of fiscal 2003, primarily due to reductions in store operating and depreciation and amortization expenses as a percentage of total net revenues.

Interest and other income decreased to $4.4 million for the 13 weeks ended June 27, 2004, from $5.1 million in the corresponding period of fiscal 2003, primarily due to lower gains realized on market revaluations of the Company’s trading securities.

Income taxes for the 13 weeks ended June 27, 2004, were based on an effective tax rate of 38.0%, compared to 38.5% in the corresponding period of fiscal 2003, primarily 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):

(1)

Shown as a percentage of related Company-operated retail revenues.

(2)

Shown as a percentage of related total specialty revenues.

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 initiatives related to the Company’s core businesses.

United States total net revenues increased by $241.9 million, or 27.5%, to $1.1 billion for the 13 weeks ended June 27, 2004, compared to $878.3 million for the corresponding period of fiscal 2003. United States Company-operated retail revenues increased by $195.0 million,

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or 25.9%, to $947.4 million for the 13 weeks ended June 27, 2004, compared to $752.4 million for the corresponding period of fiscal 2003, primarily due to the opening of 537 new Company-operated retail stores in the last 12 months and comparable store sales growth of 12% for the 13 weeks ended June 27, 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.

Total United States specialty revenues increased $46.9 million, or 37.2%, to $172.9 million for the 13 weeks ended June 27, 2004, compared to $126.0 million in the corresponding period of fiscal 2003. United States licensing revenues increased $32.1 million, or 43.3%, to $106.0 million, compared to $74.0 million for the corresponding period of fiscal 2003. The increase was primarily due to higher product sales and royalty revenues as a result of opening 445 new licensed retail stores in the last 12 months, the acquisition of Seattle Coffee Company in the fiscal fourth quarter of 2003, and volume driven growth in the grocery and warehouse club businesses as a result of an expanded agreement with Kraft to include the addition of six new Starbucks coffees. United States foodservice and other revenues increased $14.9 million, or 28.6%, to $66.9 million from $52.0 million in fiscal 2003, due to both the addition of Seattle Coffee Company foodservice accounts as well as growth in new and existing Starbucks foodservice accounts.

United States operating income increased by 25.6% to $189.2 million for the 13 weeks ended June 27, 2004, from $150.6 million for the same period in fiscal 2003. Operating margin decreased to 16.9% of related revenues from 17.2% in the corresponding period of fiscal 2003, primarily due to higher dairy costs, partially offset by reductions in most other 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 more than 20 other countries. International operations are in various early stages of development and have country-specific regulatory requirements that require a more extensive support organization relative to the current levels of revenue and operating income than the United States.

International total net revenues increased $40.0 million, or 25.2%, to $198.4 million for the 13 weeks ended June 27, 2004, compared to $158.4 million for the corresponding period of fiscal 2003. International Company-operated retail revenues increased $35.3 million, or 28.2%, to $160.7 million for the 13 weeks ended June 27, 2004, compared to $125.4 million for the corresponding period for fiscal 2003, primarily due to the opening of 114 new Company-operated retail stores in the last 12 months, the weakening of the United States dollar against both the British pound sterling and Canadian dollar, and comparable store sales growth of 7% for the 13 weeks ended June 27, 2004. The increase in comparable store sales resulted from a 6% increase in the number of customer transactions and a 1% increase in the average dollar value per transaction.

Total international specialty revenues increased $4.7 million, or 14.2%, to $37.7 million for the 13 weeks ended June 27, 2004, compared to $33.1 million in the corresponding period of fiscal 2003. The increase was primarily due to higher product sales and royalty revenues from opening 282 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 interest in late fiscal 2003.

International operating income increased to $13.7 million for the 13 weeks ended June 27, 2004, from an operating loss of $1.0 million in the corresponding period of fiscal 2003. Operating margin increased to a positive 6.9% of related revenues from a negative 0.6% in the corresponding period of fiscal 2003, primarily due to economies of scale and greater efficiency throughout the organization.

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 corporate expenses increased to $49.2 million in the 13 weeks ended June 27, 2004, from $43.7 million in the corresponding period of fiscal 2003, primarily due to higher payroll-related expenditures. Total unallocated corporate expenses as a percentage of total net revenues decreased to 3.7% for the 13-week periods ended June 27, 2004 compared to 4.2% for the corresponding period of fiscal 2003.

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Results of Operations for the 39 Weeks Ended June 27, 2004 and June 29, 2003

CONSOLIDATED RESULTS

Net revenues for the 39 weeks ended June 27, 2004, increased 28.3% to $3.8 billion from $3.0 billion for the corresponding period of fiscal 2003. During the 39-week period ended June 27, 2004, Starbucks derived approximately 84.3% of total net revenues from its Company-operated retail stores. Company-operated retail revenues increased 27.7% to $3.2 billion for the 39 weeks ended June 27, 2004, from $2.5 billion for the same period in fiscal 2003. The increase was primarily attributable to the opening of 651 new Company-operated retail stores in the last 12 months and comparable store sales growth of 11% for the 39 weeks ended June 27, 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 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 15.7% of total net revenues from its specialty operations. Specialty revenues, which include licensing revenues and foodservice and other revenues, increased 31.4% to $601.9 million for the 39 weeks ended June 27, 2004, from $458.0 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 33.7% to $395.2 million for the 39 weeks ended June 27, 2004, from $295.6 million for the corresponding period of fiscal 2003. The increase was primarily attributable to the addition of 727 new licensed retail stores in the last 12 months, the acquisition of Seattle Coffee Company in the fourth quarter of fiscal 2003 and growth in the grocery and warehouse club businesses.

Foodservice and other revenues increased 27.3% to $206.7 million for the 39 weeks ended June 27, 2004, from $162.4 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 and the growth in new and existing Starbucks foodservice accounts.

Cost of sales and related occupancy costs decreased to 41.2% of total net revenues for the 39 weeks ended June 27, 2004, compared to 41.3% for the corresponding period of fiscal 2003. This decrease was primarily due to leverage gained on fixed occupancy costs distributed over an expanded revenue base and efficiencies gained in the Company’s international supply chain distribution operations, partially offset by a shift in sales mix to lower margin products and higher dairy and green coffee commodity costs.

Store operating expenses as a percentage of Company-operated retail revenues decreased to 39.5% for the 39 weeks ended June 27, 2004, from 39.8% for the corresponding period of fiscal 2003. This decrease was primarily due to leverage gained on fixed payroll-related expenditures distributed over an expanded revenue base.

Other operating expenses (expenses associated with the Company’s specialty operations) decreased to 21.4% of total specialty revenues for the 39 weeks ended June 27, 2004, compared to 22.7% in the corresponding period of fiscal 2003. This decrease was primarily attributable to the Company’s exit of the mail order and online businesses in late fiscal 2003, partially offset by expenses to support the Seattle Coffee Company grocery operations, which were acquired in July 2003.

Depreciation and amortization expenses increased to $208.4 million for the 39 weeks ended June 27, 2004, compared to $175.1 million for the corresponding period of fiscal 2003. The increase was primarily due to the opening of 651 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 5.4% for the 39 weeks ended June 27, 2004, from 5.8% for the same period in fiscal 2003.

General and administrative expenses increased to $223.8 million for the 39 weeks ended June 27, 2004, compared to $178.6 million for the corresponding period of fiscal 2003. The increase was primarily due to higher payroll-related expenditures for additional employees to support the Company’s accelerated store growth. However, as a percentage of total net revenues, general and administrative expenses decreased to 5.8% for the 39 weeks ended June 27, 2004, from 6.0% for the same period in fiscal 2003. This decrease was due to leverage gained on fixed costs distributed over an expanded revenue base.

Income from equity investees increased $15.2 million to $36.2 million for the 39 weeks ended June 27, 2004, from $21.0 million for the same period in fiscal 2003. The increase was primarily due to new licensed retail store openings, particularly in Japan, and volume driven operating

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results for the North American Coffee Partnership, which produces bottled Frappuccino® and Starbucks DoubleShot® coffee drinks. The July 2003 increase in the Company’s ownership interest from 5% to 50% in the Taiwan and Shanghai licensed operations also contributed to the growth.

Operating income increased $141.5 million to $453.8 million for the 39 weeks ended June 27, 2004, compared to $312.3 million for the same period in fiscal 2003. Operating margin increased to 11.8% of total net revenues in the 39 weeks ended June 27, 2004, compared to 10.4% in the corresponding period of fiscal 2003, primarily due to the leverage gained in all operating expense line items from strong revenue growth as described above.

Interest and other income increased to $11.3 million for the 39 weeks ended June 27, 2004, from $10.9 million in the corresponding period of fiscal 2003, primarily due to higher interest income earned on cash and liquid investment balances.

Income taxes for the 39 weeks ended June 27, 2004, were based on an effective tax rate of 38.0%, compared to 38.5% in the corresponding period of fiscal 2003, primarily 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):

(1)

Shown as a percentage of related Company-operated retail revenues.

(2)

Shown as a percentage of related total specialty revenues.

United States

United States total net revenues increased by $712.0 million, or 27.9%, to $3.3 billion for the 39 weeks ended June 27, 2004, compared to $2.6 billion for the corresponding period of fiscal 2003. United States Company-operated retail revenues increased by $584.0 million, or 26.7%, to $2.8 billion for the 39 weeks ended June 27, 2004, compared to $2.2 billion for the corresponding period of fiscal 2003, primarily due to the opening of 537 new Company-operated retail stores in the last 12 months and comparable store sales growth of 12% for the 39 weeks ended June 27, 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.

Total United States specialty revenues increased $128.0 million, or 34.8%, to $496.2 million for the 39 weeks ended June

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27, 2004, compared to $368.1 million in the corresponding period of fiscal 2003. United States licensing revenues increased $87.9 million, or 41.1%, to $301.8 million, compared to $213.9 million for the corresponding period of fiscal 2003. This increase was primarily due to higher product sales and royalty revenues as a result of opening 445 new licensed retail stores in the last 12 months, the acquisition of Seattle Coffee Company in the fourth quarter of fiscal 2003, and volume driven growth in the grocery and warehouse club businesses. United States foodservice and other revenues increased $40.1 million, or 26.0%, to $194.4 million from $154.2 million in fiscal 2003, due to both the addition of Seattle Coffee Company foodservice accounts as well as growth in new and existing Starbucks foodservice accounts.

United States operating income increased 27.1% to $577.2 million for the 39 weeks ended June 27, 2004, from $454.1 million for the same period in fiscal 2003. Operating margin decreased to 17.7% of related revenues for the 39 weeks ended June 27, 2004, compared to 17.8% in the corresponding period of fiscal 2003. This was primarily due to higher dairy and green coffee commodity costs as well as higher payroll-related expenditures to support the Company’s accelerated store growth, partially offset by leverage gained on fixed costs distributed over an expanded revenue base.

International

International total net revenues increased $134.4 million, or 30.5%, to $574.6 million for the 39 weeks ended June 27, 2004, compared to $440.1 million for the corresponding period of fiscal 2003. International Company-operated retail revenues increased by $118.5 million, or 33.8%, to $468.9 million for the 39 weeks ended June 27, 2004, compared to $350.3 million for the corresponding period for fiscal 2003, primarily due to the opening of 114 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 7% for the 39 weeks ended June 27, 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 $15.9 million, or 17.7%, to $105.7 million for the 39 weeks ended June 27, 2004, compared to $89.8 million in the corresponding period of fiscal 2003. The increase was primarily due to higher product sales and royalty revenues from the opening of 282 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 the fourth fiscal quarter of 2003.

International operating income increased to $33.3 million for the 39 weeks ended June 27, 2004, from an operating loss of $6.2 million in the corresponding period of fiscal 2003. Operating margin increased to 5.8% of related revenues from a negative 1.4% in the corresponding period of fiscal 2003, primarily due to greater efficiency in the Company’s international supply chain distribution operations, improved operating results of equity investees and leverage gained on fixed costs distributed over an expanded revenue base.

Unallocated Corporate

Total unallocated corporate expenses increased to $156.6 million in the 39 weeks ended June 27, 2004, from $135.6 million in the corresponding period of fiscal 2003, primarily due to higher provision for incentive compensation based on the Company’s performance. Total unallocated corporate expenses as a percentage of total net revenues decreased to 4.1% in the 39 weeks ended June 27, 2004, from 4.5% in the corresponding period of fiscal 2003.

Liquidity and Capital Resources

The following table represents components of the Company’s most liquid assets: (in thousands):

The Company manages its cash, cash equivalents and liquid investments jointly in order to internally fund operating needs. Cash and cash equivalents increased by $182.5 million for the 39 weeks ended June 27, 2004, to $383.4 million. The Company ended the period with $878.1 million in total cash and cash equivalents and liquid investments. Working

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capital as of June 27, 2004 totaled $652.7 million compared to $315.3 million as of September 28, 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 $600.7 million for the 39 weeks ended June 27, 2004. Net earnings provided $288.4 million, non-cash depreciation and amortization expenses provided $226.9 million and the change in deferred revenue attributed to the growth of Starbucks Card balances not yet redeemed provided $50.9 million.

Cash used by investing activities for the 39 weeks ended June 27, 2004, totaled $441.3 million. Net capital additions to property, plant and equipment used $221.1 million primarily from opening 391 new Company-operated retail stores and remodeling certain existing stores. Gross capital additions for the 39 weeks ended June 27, 2004, were $272.4 million and were offset by the change in disposal and impairment provisions and foreign currency translation adjustments totaling $51.3 million. The net activity in the Company’s portfolio of available-for-sale securities during the 39-week period used $215.8 million.

Cash provided by financing activities for the 39 weeks ended June 27, 2004 totaled $20.6 million. The exercise of stock options and sale of stock under the Company’s employee stock purchase plans provided $103.3 million. During the period, the Company repurchased 2.2 million shares of its common stock at an average price of $37.29 per share, using $82.2 million of cash. As of June 27, 2004, 12.4 million shares remain authorized for repurchase under these programs. 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 for the remainder of fiscal 2004 and for fiscal 2005 are expected to consist primarily of capital expenditures related to new Company-operated retail stores as well as for the remodeling and refurbishment of existing Company-operated retail stores. Management expects capital expenditures in fiscal 2004 to be approximately $475 million, related to opening approximately 625 Company-operated stores, remodeling certain existing stores and enhancing its production capacity and information systems. Management expects capital expenditures to be in the range of $600 million to $650 million in fiscal 2005.

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. In July 2004, the Company acquired equity ownership in the licensed operations of Singapore and Malaysia using $12.1 million from cash on-hand. Significant new joint ventures, acquisitions or other new business opportunities may require outside funding.

Store Data

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