UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the Quarterly Period Ended April 1, 2007

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

For the transition period from                      to                     .

STARBUCKS CORPORATION

(Exact Name of Registrant as Specified in its Charter)

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

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 þ No o

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

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

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

Yes o No þ

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

Title		Shares Outstanding as of May 7, 2007
Common Stock, par value $0.001 per share		740,776,570

 

 

STARBUCKS CORPORATION

FORM 10-Q

For the Quarterly Period Ended April 1, 2007

Table of Contents

		Page
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Statements of Earnings			1
Consolidated Balance Sheets			2
Consolidated Statements of Cash Flows			3
Notes to Consolidated Financial Statements			4
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
Item 3 Quantitative and Qualitative Disclosures About Market Risk			29
Item 4 Controls and Procedures			30
PART II. OTHER INFORMATION
Item 1 Legal Proceedings			30
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			30
Item 4 Submission of Matters to a Vote of Security Holders			31
Item 6 Exhibits			31
Signatures			32
Index to Exhibits			33
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

STARBUCKS CORPORATION

		13 Weeks Ended								26 Weeks Ended
		April 1,				April 2,				April 1,				April 2,
		2007				2006				2007				2006
Net revenues:
Company-operated retail		$	1,922,705			$	1,599,844			$	3,929,516			$	3,227,827
Specialty:
Licensing			234,807				202,354				488,729				421,504
Foodservice and other			98,082				83,624				193,072				170,583
Total specialty			332,889				285,978				681,801				592,087
Total net revenues			2,255,594				1,885,822				4,611,317				3,819,914
Cost of sales including occupancy costs			944,746				760,873				1,929,569				1,538,911
Store operating expenses			780,985				665,273				1,552,952				1,287,439
Other operating expenses			75,661				63,648				148,199				122,796
Depreciation and amortization expenses			113,385				94,508				223,581				185,796
General and administrative expenses			126,104				119,611				241,332				242,936
Subtotal operating expenses			2,040,881				1,703,913				4,095,633				3,377,878
Income from equity investees			26,261				19,985				45,014				39,705
Operating income			240,974				201,894				560,698				481,741
Interest and other income, net			(592	)			3,063				5,847				3,411
Earnings before income taxes			240,382				204,957				566,545				485,152
Income taxes			89,542				77,641				210,753				183,680
Net earnings		$	150,840			$	127,316			$	355,792			$	301,472
Net earnings per common share — basic		$	0.20			$	0.17			$	0.47			$	0.39
Net earnings per common share — diluted		$	0.19			$	0.16			$	0.46			$	0.38
Weighted average shares outstanding:
Basic			752,497				767,445				755,292				767,250
Diluted			774,055				794,613				778,450				793,936

See Notes to Consolidated Financial Statements.

STARBUCKS CORPORATION

		April 1,				October 1,
		2007				2006
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	200,179			$	312,606
Short-term investments — available-for-sale securities			77,872				87,542
Short-term investments — trading securities			65,780				53,496
Accounts receivable, net of allowances of $4,801 and $3,827, respectively			240,775				224,271
Inventories			578,877				636,222
Prepaid expenses and other current assets			124,957				126,874
Deferred income taxes, net			96,422				88,777
Total current assets			1,384,862				1,529,788
Long-term investments – available-for-sale securities			20,994				5,811
Equity and other investments			230,594				219,093
Property, plant and equipment, net			2,523,870				2,287,899
Other assets			228,128				186,917
Other intangible assets			39,942				37,955
Goodwill			208,485				161,478
TOTAL ASSETS		$	4,636,875			$	4,428,941
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	279,960			$	340,937
Accrued compensation and related costs			301,050				288,963
Accrued occupancy costs			68,006				54,868
Accrued taxes			77,910				94,010
Short-term borrowings			847,000				700,000
Other accrued expenses			244,558				224,154
Deferred revenue			300,579				231,926
Current portion of long-term debt			769				762
Total current liabilities			2,119,832				1,935,620
Long-term debt			1,551				1,958
Other long-term liabilities			303,193				262,857
Total liabilities			2,424,576				2,200,435
Shareholders’ equity:
Common stock ($0.001 par value) — authorized, 1,200,000,000 shares; issued and outstanding, 746,057,192 and 756,602,055 shares, respectively (includes 3,394,184 common stock units in both periods)			746				756
Other additional paid-in-capital			39,393				39,393
Retained earnings			2,121,783				2,151,084
Accumulated other comprehensive income			50,377				37,273
Total shareholders’ equity			2,212,299				2,228,506
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	4,636,875			$	4,428,941

See Notes to Consolidated Financial Statements.

STARBUCKS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

		26 Weeks Ended
		April 1,				April 2,
		2007				2006
OPERATING ACTIVITIES:
Net earnings		$	355,792			$	301,472
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization			235,481				198,633
Provision for impairments and asset disposals			13,500				9,153
Deferred income taxes, net			(37,162	)			(57,131	)
Equity in income of investees			(24,935	)			(24,807	)
Distributions of income from equity investees			32,360				16,393
Stock-based compensation			52,180				51,297
Tax benefit from exercise of stock options			4,982				520
Excess tax benefit from exercise of stock options			(46,347	)			(54,872	)
Net amortization of premium on securities			432				1,209
Cash provided/(used) by changes in operating assets and liabilities:
Inventories			60,553				91,975
Accounts payable			(60,498	)			8,270
Accrued compensation and related costs			10,161				50,099
Accrued taxes			27,168				76,716
Deferred revenue			68,832				58,250
Other operating assets and liabilities			45,320				34,815
Net cash provided by operating activities			737,819				761,992
INVESTING ACTIVITIES:
Purchase of available-for-sale securities			(177,292	)			(356,681	)
Maturity of available-for-sale securities			134,712				127,604
Sale of available-for-sale securities			36,897				154,250
Acquisitions, net of cash acquired			(47,304	)			(90,219	)
Net purchases of equity, other investments and other assets			(31,143	)			(19,103	)
Net additions to property, plant and equipment			(507,202	)			(310,331	)
Net cash used by investing activities			(591,332	)			(494,480	)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock			108,202				91,618
Excess tax benefit from exercise of stock options			46,347				54,872
Net borrowings/(repayments) under revolving credit facility			147,000				(182,000	)
Principal payments on long-term debt			(401	)			(372	)
Repurchase of common stock			(563,137	)			(204,186	)
Net cash used by financing activities			(261,989	)			(240,068	)
Effect of exchange rate changes on cash and cash equivalents			3,075				1,418
Net increase/(decrease) in cash and cash equivalents			(112,427	)			28,862
CASH AND CASH EQUIVALENTS:
Beginning of period			312,606				173,809
End of period		$	200,179			$	202,671
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest		$	14,884			$	4,444
Income taxes		$	223,653			$	167,286

See Notes to Consolidated Financial Statements.

STARBUCKS CORPORATION

Note 1: Summary of Significant Accounting Policies

Financial Statement Preparation

The unaudited consolidated financial statements as of April 1, 2007, and for the 13-week periods and 26-week periods ended April 1, 2007, and April 2, 2006, have been prepared by Starbucks Corporation (“Starbucks” or the “Company”) under the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of management, the financial information for the 13-week periods and 26-week periods ended April 1, 2007, and April 2, 2006, reflects all adjustments and accruals, which are of a normal recurring nature, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods.

The financial information as of October 1, 2006, is derived from the Company’s audited consolidated financial statements and notes for the fiscal year ended October 1, 2006 (“Fiscal 2006”), included in Item 8 in the Fiscal 2006 Annual Report on Form 10-K (together with Amendment No. 1 to the Fiscal 2006 Annual Report on Form 10-K/A, the “10-K”). The information included in this Form 10-Q should be read in conjunction with management’s discussion and analysis and notes to the financial statements in the 10-K.

The results of operations for the 13-week periods and 26-week periods ended April 1, 2007, are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending September 30, 2007.

Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”), which seeks to reduce the diversity in practice associated with the accounting and reporting for uncertainty in income tax positions. This Interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. FIN 48 is effective for fiscal years beginning after December 15, 2006, and the Company will adopt the new requirements in its fiscal first quarter of 2008. The cumulative effects, if any, of adopting FIN 48 will be recorded as an adjustment to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact, if any, of adopting FIN 48 on its consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is permitted. Starbucks must adopt these new requirements no later than its first fiscal quarter of 2009. Starbucks has not yet determined the effect on the Company’s consolidated financial statements, if any, upon adoption of SFAS 157, or if it will adopt the requirements prior to the first fiscal quarter of 2009.

In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). The intent of SAB 108 is to reduce diversity in practice for the method companies use to quantify financial statement misstatements, including the effect of prior year uncorrected errors. SAB 108 establishes an approach that requires quantification of financial statement errors using both an income statement and cumulative balance sheet approach. SAB 108 is effective for annual financial statements for fiscal years ending after November 15, 2006. The adoption of SAB 108 is not expected to have a significant impact on the Company’s consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, or Starbucks first fiscal quarter of 2009. Early adoption is permitted. Starbucks has not yet determined if it will elect to apply any of the provisions of SFAS 159 or what the effect of adoption of the statement would have, if any, on its consolidated financial statements.

Note 2: Acquisition

In October 2006, the Company acquired from H&Q Asia Pacific and other shareholders, 100% equity ownership of High Grown Investment Group (Hong Kong) Limited, which in turn owns 90% of Beijing Mei Da Coffee Co. Ltd. (“Mei Da”), the operator of 61 Starbucks retail stores in Beijing and Tianjin, China, and an authorized licensee of Starbucks Coffee International. Beijing San Yuan Company continues to be a minority shareholder of Mei Da. Due to its majority ownership of these operations, Starbucks applied the consolidation method of accounting subsequent to the date of acquisition.

Note 3: Derivative Financial Instruments

The Company manages its exposure to various risks within the consolidated financial statements according to an umbrella risk policy. Under this policy, Starbucks may engage in transactions involving various derivative instruments, with maturities generally not longer than five years, to hedge assets, liabilities, revenues and purchases.

Cash Flow Hedges

Starbucks, which includes subsidiaries that use their local currency as their functional currency, enters into cash flow derivative instruments to hedge portions of anticipated revenue streams and inventory purchases. Current forward contracts, which comprise the majority of the Company’s derivative instruments, hedge monthly forecasted revenue transactions denominated in Japanese yen and Canadian dollars, as well as forecasted inventory purchases denominated primarily in U.S. dollars for foreign operations. The Company also has futures contracts to hedge the variable price component for a small portion of its price-to-be-fixed green coffee purchase contracts.

The Company had accumulated net derivative gains of $1.9 million, net of taxes, in other comprehensive income as of April 1, 2007, related to cash flow hedges. Of this amount, $1.1 million of net derivative gains pertain to hedging instruments that will be dedesignated within 12 months and will also continue to experience fair value changes before affecting earnings. There was no significant ineffectiveness for cash flow hedges recognized during the 13-week and 26-week periods ended April 1, 2007. No cash flow hedges were discontinued and no ineffectiveness was recognized during the 13-week and 26-week periods ended April 2, 2006. Current contracts will expire within 30 months.

Net Investment Hedges

Net investment derivative instruments are used to hedge the Company’s equity method investment in Starbucks Coffee Japan, Ltd. (“Starbucks Japan”) as well as the Company’s net investments in its Canadian and United Kingdom subsidiaries, to minimize foreign currency exposure. The Company applies the spot-to-spot method for these forward foreign exchange contracts, and under this method the change in fair value of the forward contracts attributable to the changes in spot exchange rates (the effective portion) is reported in other comprehensive income. The remaining change in fair value of the forward contract (the ineffective portion) is reclassified into earnings in “Interest and other income, net.” The Company had accumulated net derivative losses of $4.3 million, net of taxes, in other comprehensive income as of April 1, 2007, related to net investment derivative hedges. Current contracts expire within 27 months.

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

		13 Weeks Ended								26 Weeks Ended
		April 1,				April 2,				April 1,				April 2,
		2007				2006				2007				2006
Cash flow hedges:
Reclassified gains into total net revenues		$	682			$	451			$	990			$	872
Reclassified losses into cost of sales			(48	)			(1,932	)			(1,075	)			(3,568	)
Net reclassified gains /(losses) — cash flow hedges			634				(1,481	)			(85	)			(2,696	)
Net reclassified gains — net investment hedges			1,280				576				2,617				999
Total		$	1,914			$	(905	)		$	2,532			$	(1,697	)

Other Derivatives

Starbucks entered into foreign currency forward contracts that are not designated as hedging instruments for accounting purposes. These contracts are recorded at fair value, with the changes in fair value recognized in “Interest and other income, net” on the consolidated statements of earnings. For the 13-week and 26-week periods ended April 1, 2007, these forward contracts resulted in net losses of $2.3 million. These losses were partially offset by the financial impact of translating foreign currency denominated payables and receivables, which are also recognized in “Interest and other income, net.” No similar contracts were held as of April 2, 2006.

Note 4: Inventories

Inventories consist of the following (in thousands):

		April 1,				October 1,				April 2,
		2007				2006				2006
Coffee:
Unroasted		$	288,667			$	328,051			$	245,117
Roasted			77,910				80,199				63,486
Other merchandise held for sale			130,722				146,345				79,250
Packaging and other supplies			81,578				81,627				68,842
Total		$	578,877			$	636,222			$	456,695

Other merchandise held for sale includes, among other items, brewing equipment, serveware and tea.

As of April 1, 2007, the Company had committed to fixed-price purchase contracts for green coffee totaling $446 million. The Company believes, based on relationships established with its suppliers in the past, the risk of non-delivery on such purchase commitments is remote.

Note 5: Property, Plant and Equipment

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

		April 1,				October 1,
		2007				2006
Land		$	37,783			$	32,350
Buildings			135,868				109,129
Leasehold improvements			2,743,959				2,436,503
Store equipment			895,777				784,444
Roasting equipment			203,101				197,004
Furniture, fixtures and other			546,235				523,275
			4,562,723				4,082,705
Less: accumulated depreciation and amortization			(2,192,059	)			(1,969,804	)
			2,370,664				2,112,901
Work in progress			153,206				174,998
Property, plant and equipment, net		$	2,523,870			$	2,287,899

Note 6: Short-term Borrowings

In August 2005, the Company entered into a $500 million unsecured five-year revolving credit facility (the “facility”) with various banks, of which $100 million may be used for issuances of letters of credit. The facility is available for working capital, capital expenditures and other corporate purposes, which may include acquisitions and share repurchases. In August 2006, the Company increased its borrowing capacity under the facility to $1 billion, as provided in the original credit facility. In December of 2006, the Company extended the term of the facility by one year to August 2011. The interest rate for borrowings under the facility ranges from 0.11% to 0.27% over LIBOR or an alternate base rate, which is the greater of the bank prime rate or the Federal Funds Rate plus 0.50%. The specific spread over LIBOR will depend upon the Company’s performance under specified financial criteria.

As of April 1, 2007, the Company had $847 million outstanding, as well as a letter of credit of $12.9 million which reduces the borrowing capacity under the credit facility. As of October 1, 2006, the Company had $700 million outstanding, as well as a letter of credit of $11.9 million. For the 26-week period ended April 1, 2007, the Company had additional borrowings of $576 million under the facility and made principal repayments of $429 million. The weighted average contractual interest rates were 5.5% at both April 1, 2007 and October 1, 2006. The facility

contains provisions requiring the Company to maintain compliance with certain covenants, including the maintenance of certain financial ratios. As of April 1, 2007 and October 1, 2006, the Company was in compliance with each of these covenants.

Interest expense, net of interest capitalized, was $6.8 million and $13.8 million for the 13 weeks and 26 weeks ended April 1, 2007, respectively. Interest expense was $1.8 million and $4.4 million for the 13 weeks and 26 weeks ended April 2, 2006, respectively. For the 13 weeks and 26 weeks ended April 1, 2007, $1.1 million and $1.9 million, respectively, of interest expense was capitalized. No interest was capitalized for the 13 weeks and 26 weeks ended April 2, 2006.

On March 27, 2007, the Company established a commercial paper program (the “program”). Under the program the Company may issue unsecured commercial paper notes, up to a maximum aggregate amount outstanding at any time of $1 billion, with individual maturities that may vary, but not exceed 397 days from the date of issue. The program is backstopped by the Company’s revolving facility, and the combined borrowing limit remains at $1 billion for the program and the facility. Under the program, the Company may issue commercial paper from time to time, and the proceeds of the commercial paper financing will be used for working capital, capital expenditures and other corporate purposes, which may include acquisitions and share repurchases. As of April 1, 2007, there had been no issuances of commercial paper. Initial issuances of commercial paper will be used to refinance earlier borrowings under the credit facility.

Note 7: Other Long-term Liabilities

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

		April 1,				October 1,
		2007				2006
Deferred rent		$	231,246			$	203,903
Asset retirement obligations			41,015				34,271
Minority interest			15,012				10,739
Other			15,920				13,944
Total		$	303,193			$	262,857

Deferred rent liabilities represent amounts for tenant improvement allowances, rent escalation clauses and rent holidays related to certain operating leases. The Company amortizes deferred rent over the terms of the leases as reductions to rent expense on the consolidated statements of earnings.

Asset retirement obligations represent the estimated fair value of the Company’s future costs of removing leasehold improvements at the termination of leases for certain stores and administrative facilities.

Minority interest represents the collective ownership interests of minority shareholders for operations accounted for under the consolidation method, in which Starbucks owns less than 100% of the equity interest.

The other remaining long-term liabilities generally include obligations to be settled or paid for one year beyond each period presented, for items such as guarantees, hedging instruments, the long-term portion of capital lease obligations and donation commitments.

Note 8: Shareholders’ Equity

In addition to 1.2 billion shares of authorized common stock with $0.001 par value per share, the Company has authorized 7.5 million shares of preferred stock, none of which was outstanding at April 1, 2007.

Under the Company’s authorized share repurchase program, Starbucks acquired 17.9 million shares at an average price of $33.22 for a total accrual-based cost of $594 million for the 26-week period ended April 1, 2007. The related cash amount used to repurchase shares for the 26-week period ended April 1, 2007 was $563 million. The difference between the two amounts represents the effect of the net change in unsettled trades totaling $31 million from October 1, 2006. Starbucks acquired 6.1 million shares at an average price of $29.00 for a total accrual-based cost of $178 million during the 26-week period ended April 2, 2006. The related cash amount used to repurchase shares for the 26-week period ended April 2, 2006 was $204 million. The difference between the two amounts represents the effect of the net change in unsettled trades totaling $26 million from October 2, 2005. Share repurchases were funded through cash, cash equivalents, available-for-sale securities and borrowings under the

revolving credit facility and were part of the Company’s active capital management program. On May 1, 2007, the Starbucks Board of Directors authorized the repurchase of up to 25 million additional shares of the Company’s common stock. As of May 1, 2007, a total of up to 26.1 million shares remained available for repurchase, under the current and previous authorizations.

Comprehensive Income

Comprehensive income includes all changes in equity during the period, except those resulting from transactions with shareholders and subsidiaries of the Company. It has two components: net earnings and other comprehensive income. Accumulated other comprehensive income reported on the Company’s consolidated balance sheets consists of foreign currency translation adjustments and the unrealized gains and losses, net of applicable taxes, on available-for-sale securities and on derivative instruments designated and qualifying as cash flow and net investment hedges.

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

		13 Weeks Ended								26 Weeks Ended
		April 1,				April 2,				April 1,				April 2,
		2007				2006				2007				2006
Net earnings		$	150,840			$	127,316			$	355,792			$	301,472
Unrealized holding gains/(losses) on cash flow hedging instruments			(1,546	)			570				3,996				(698	)
Unrealized holding gains/(losses) on net investment hedging instruments			(978	)			(93	)			(1,086	)			1,244
Unrealized holding gains on available-for-sale securities			84				911				162				867
Reclassification adjustment for net losses realized in net earnings for available-for-sale securities			1				16				1				6
Reclassification adjustment for net losses realized in net earnings for cash flow hedges			356				906				1,109				2,016
Net unrealized gain/(loss)			(2,083	)			2,310				4,182				3,435
Translation adjustment			3,673				5,450				8,922				1,830
Total comprehensive income		$	152,430			$	135,076			$	368,896			$	306,737

The favorable translation adjustment change for the 13-week period ended April 1, 2007, of $3.7 million was primarily due to the weakening of the U.S. dollar against the euro. The favorable translation adjustment change for the 13-week period ended April 2, 2006, of $5.4 million was primarily due to the weakening of the U.S. dollar against several currencies, such as the euro, British pound sterling and Korean won.

The favorable translation adjustment change for the 26-week period ended April 1, 2007, of $8.9 million was primarily due to the weakening of the U.S. dollar against several currencies, such as the euro and British pound sterling, offset in part by the strengthening of the U.S. dollar against the Canadian dollar. The favorable translation adjustment change for the 26-week period ended April 2, 2006, of $1.8 million was primarily due to the weakening of the U.S. dollar against several currencies, such as the Korean won, Taiwan dollar and Chinese renminbi, partially offset by the strengthening of the U.S. dollar against the Japanese yen.

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

		April 1,				October 1,
		2007				2006
Net unrealized holding losses on available-for-sale securities		$	(91	)		$	(254	)
Net unrealized holding losses on hedging instruments			(2,397	)			(6,416	)
Translation adjustment			52,865				43,943
Accumulated other comprehensive income		$	50,377			$	37,273

As of April 1, 2007, the translation adjustment of $52.9 million was net of tax provisions of $7.9 million. As of October 1, 2006, the translation adjustment of $43.9 million was net of tax provisions of $7.3 million.

Note 9: Stock-Based Compensation

Stock Options

Stock options to purchase the Company’s common stock are granted at prices at or above the fair market value on the date of grant. The majority of options become exercisable in four equal installments beginning a year from the date of grant and generally expire 10 years from the date of grant. Certain options granted prior to October 1, 2006 become exercisable in three equal installments beginning a year from the date of grant. Options granted to non-employee directors generally vest over one year. Nearly all outstanding stock options are non-qualified stock options.

The fair value of stock awards was estimated at the date of grant using the Black-Scholes-Merton option valuation model with the following weighted average assumptions for the 13 and 26 weeks ended April 1, 2007, and April 2, 2006:

		Employee Stock Options
		13 Weeks Ended								26 Weeks Ended
		April 1, 2007				April 2, 2006				April 1, 2007				April 2, 2006
Expected term (in years)			4.5				4.4				4.7				4.4
Expected stock price volatility			26.9	%			28.3	%			29.0	%			28.9	%
Risk-free interest rate			4.6	%			4.6	%			4.6	%			4.4	%
Expected dividend yield			0.0	%			0.0	%			0.0	%			0.0	%
Estimated fair value per option granted		$	10.22			$	10.86			$	11.97			$	9.54

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

For the 26-week periods ended April 1, 2007 and April 2, 2006, total pretax compensation cost recognized for share-based payment plans was $52.2 million and $50.6 million, respectively, and the total income tax benefit recognized in the statements of earnings from these plans was $17.8 million and $17.3 million, respectively.

The following summarizes all stock option transactions from October 1, 2006 through April 1, 2007 (no restricted stock, restricted stock units or stock appreciation rights were outstanding for any of these periods):

						Weighted				Weighted
						Average				Average				Aggregate
		Shares				Exercise				Remaining				Intrinsic
		Subject to				Price				Contractual				Value
		Options				per Share				Life				(in thousands)
Outstanding, October 1, 2006			69,419,871			$	16.83				6.2			$	1,196,209
Granted			11,427,899				36.65
Exercised			(6,511,839	)			13.08
Forfeited/Cancelled			(1,766,127	)			28.89
Outstanding, April 1, 2007			72,569,804				19.97				6.3				886,698
Exercisable, April 1, 2007			46,049,878				13.54				5.0				821,681
Vested and expected to vest, April 1, 2007			70,146,981				19.46				6.2				885,606

The aggregate intrinsic value in the table above is before applicable income taxes and represents the amount optionees would have realized if all options had been exercised on the last business day of the period indicated, based on the Company’s closing stock price on that day. As of April 1, 2007, total unrecognized stock-based compensation expense related to nonvested stock options was approximately $144 million, before income taxes, and is expected to be recognized over a weighted average period of approximately 25 months.

The Company issues new shares of common stock upon exercise of stock options. As of April 1, 2007, there were 58.6 million shares of common stock available for issuance pursuant to future stock option grants.

Note 10: Earnings Per Share

The following table presents the calculation of net earnings per common share – basic and diluted (in thousands, except earnings per share):

		13 Weeks Ended								26 Weeks Ended
		April 1,				April 2,				April 1,				April 2,
		2007				2006				2007				2006
Net earnings		$	150,840			$	127,316			$	355,792			$	301,472
Weighted average common shares and common stock units outstanding (for basic calculation)			752,497				767,445				755,292				767,250
Dilutive effect of outstanding common stock options			21,558				27,168				23,158				26,686
Weighted average common and common equivalent shares outstanding (for diluted calculation)			774,055				794,613				778,450				793,936
Net earnings per common share — basic		$	0.20			$	0.17			$	0.47			$	0.39
Net earnings per common and common equivalent share — diluted		$	0.19			$	0.16			$	0.46			$	0.38

Potential dilutive shares consist of the incremental common shares issuable upon the exercise of outstanding stock options (both vested and non-vested) using the treasury stock method. These options are excluded from the computation of earnings per share if their effect is antidilutive. The antidilutive options totaled 11.8 million and 12.0 million for the 13-week periods ended April 1, 2007 and April 2, 2006, respectively. The antidilutive options totaled 8.5 million and 10.1 million for the 26-week periods ended April 1, 2007 and April 2, 2006, respectively.

Note 11: Commitments and Contingencies

Guarantees

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 Japan. The guarantees continue until the loans, including accrued interest and fees, have been paid in full, with the final loan amount due in 2014. The maximum amount is limited to the sum of unpaid principal and interest amounts, as well as other related expenses. These amounts will vary based on fluctuations in the yen foreign exchange rate. As of April 1, 2007, the maximum amount of the guarantees was approximately $5.4 million. Since there has been no modification of these loan guarantees subsequent to the Company’s adoption of FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indebtedness of Others,” Starbucks has applied the disclosure provisions only and has not recorded the guarantee on its consolidated balance sheet.

Starbucks has commitments under which it unconditionally guarantees its proportionate share of certain borrowings of unconsolidated equity investees. The Company’s maximum exposure under these commitments is approximately $9.3 million, excluding interest and other related costs, and these commitments expire between 2007 and 2012. As of April 1, 2007, the Company recorded $3.6 million to “Equity and other investments” and “Other long-term liabilities” on the consolidated balance sheet for the fair value of the guarantee arrangements.

Legal Proceedings

On June 3, 2004, two then-current employees of the Company filed a lawsuit, entitled Sean Pendlebury and Laurel Overton v. Starbucks Coffee Company, in the U.S. District Court for the Southern District of Florida claiming the Company violated requirements of the Fair Labor Standards Act (“FLSA”). The suit alleges that the Company misclassified its retail store managers as exempt from the overtime provisions of the FLSA, and that each manager therefore is entitled to overtime compensation for any week in which he or she worked more than 40 hours during the three years before joining the suit as a plaintiff, and for as long as they remain a manager thereafter. Plaintiffs seek to represent themselves and all similarly situated U.S. current and former store managers of the Company. Plaintiffs seek reimbursement for an unspecified amount of unpaid overtime compensation, liquidated damages, attorney’s fees and costs. Plaintiffs also filed on June 3, 2004 a motion for conditional collective action treatment and court-supervised notice to additional putative class members under the opt-in procedures in section 16(b) of the FLSA. On January 3, 2005, the district court entered an order authorizing nationwide notice of the lawsuit to all current and former store managers employed by the Company during the three years before the suit was filed. The Company filed a motion for summary judgment as to the claims of the named plaintiffs on September 24, 2004. The court denied that motion because this case was in the early stages of discovery, but the court noted that the Company may resubmit this motion at a later date. Starbucks believes that the plaintiffs are properly classified as exempt under the federal wage laws. The Company cannot estimate the possible loss to the Company, if any, and believes

that a loss in this case is unlikely. Trial is currently set for August 2007. The Company intends to vigorously defend the lawsuit.

On October 8, 2004, a former hourly employee of the Company filed a lawsuit in San Diego County Superior Court entitled Jou Chau v. Starbucks Coffee Company. The lawsuit alleges that the Company violated the California Labor Code by allowing shift supervisors to receive tips. More specifically, the lawsuit alleges that since shift supervisors direct the work of baristas, they qualify as “agents” of the Company and are therefore excluded from receiving tips under California Labor Code Section 351, which prohibits employers and their agents from collecting or receiving tips left by patrons for other employees. The lawsuit further alleges that because the tipping practices violate the Labor Code, they also are unfair practices under the California Unfair Competition Law. In addition to recovery of an unspecified amount of tips distributed to shift supervisors, the lawsuit seeks penalties under California Labor Code Section 203 for willful failure to pay wages due. Plaintiff also seeks attorneys’ fees and costs. On March 30, 2006, the Court issued an order certifying the case as a class action, with the plaintiff representing a class of all persons employed as baristas in the state of California since October 8, 2000. In March 2007, notice of action was sent to approximately 120,000 potential members of the class. The Company cannot estimate the possible loss to the Company, if any. Trial is currently set for December 2007. The Company believes its practices comply with California law, and the Company intends to vigorously defend the lawsuit.

On March 11, 2005, a former employee of the Company filed a lawsuit, entitled James Falcon v. Starbucks Corporation and Does 1 through 100, in the U.S. District Court for the Southern District of Texas claiming that the Company violated requirements of the FLSA. Specifically, the plaintiff claims that the Company misclassified its retail assistant store managers as exempt from the overtime provisions of the FLSA and that each assistant manager therefore is entitled to overtime compensation for any week in which he or she worked more than 40 hours during the three years before joining the suit as a plaintiff, and for as long as they remain an assistant manager thereafter. On August 18, 2005, the plaintiff amended his complaint to include allegations that he and other retail assistant store managers were not paid overtime compensation for all hours worked in excess of 40 hours in a work week after they were re-classified as non-exempt employees in September 2002. In both claims, Plaintiff seeks to represent himself and a putative class of all current and former assistant store managers employed by the Company in the United States from March 11, 2002 until the present. He also seeks, on behalf of himself and the class, reimbursement for an unspecified amount of unpaid overtime compensation, liquidated damages, injunctive relief, and attorney’s fees and costs. On September 13, 2005, the plaintiff filed a motion for conditional collective action treatment and court-supervised notice to all putative class members under the opt-in procedures in section 16(b) of the FLSA. On November 29, 2005, the court entered an order authorizing notice to the class of the existence of the lawsuit and their opportunity to join as plaintiffs. The Company has a policy requiring that all non-exempt partners, including assistant store managers, be paid for all hours worked, including any hours worked in excess of 40 per week. The Company also believes that this policy is, and at all relevant times has been, communicated and followed consistently. Further, the Company believes that the plaintiff and other assistant store managers were properly classified as exempt under the FLSA prior to September 2002. The Company cannot estimate the possible loss to the Company, if any, and believes that a loss in this case is unlikely. No trial date has been set. The Company intends to vigorously defend the lawsuit.

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

Note 12: Segment Reporting

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

		United												Unallocated
13 Weeks Ended		States				International				Global CPG				Corporate (1)				Total
April 1, 2007
Net Revenues:
Company-operated retail		$	1,595,389			$	327,316			$	—			$	—			$	1,922,705
Specialty:
Licensing			104,790				51,205				78,812				—				234,807
Foodservice and other			89,251				8,831				—				—				98,082
Total specialty			194,041				60,036				78,812				—				332,889
Total net revenues			1,789,430				387,352				78,812				—				2,255,594
Earnings/(loss) before income taxes			269,954				22,284				37,659				(89,515	)			240,382
Depreciation and amortization			84,429				20,649				21				8,286				113,385
Income from equity investees			—				12,916				13,345				—				26,261
Net impairment and disposition losses			2,807				6,178				—				1,046				10,031
April 2, 2006
Net Revenues:
Company-operated retail		$	1,351,563			$	248,281			$	—			$	—			$	1,599,844
Specialty:
Licensing			81,451				42,725				78,178				—				202,354
Foodservice and other			76,584				7,040				—				—				83,624
Total specialty			158,035				49,765				78,178				—				285,978
Total net revenues			1,509,598				298,046				78,178				—				1,885,822
Earnings/(loss) before income taxes			231,439				19,575				38,028				(84,085	)			204,957
Depreciation and amortization			69,534				16,286				27				8,661				94,508
Income from equity investees			27				9,125				10,833				—				19,985
Net impairment and disposition losses/(gains)			1,870				3,684				—				(150	)			5,404

		United												Unallocated
26 Weeks Ended		States				International				Global CPG				Corporate (1)				Total
April 1, 2007
Net Revenues:
Company-operated retail		$	3,255,652			$	673,864			$	—			$	—			$	3,929,516
Specialty:
Licensing			218,099				101,069				169,561				—				488,729
Foodservice and other			175,578				17,494				—				—				193,072
Total specialty			393,677				118,563				169,561				—				681,801
Total net revenues			3,649,329				792,427				169,561				—				4,611,317
Earnings/(loss) before income taxes			596,692				55,822				79,260				(165,229	)			566,545
Depreciation and amortization			165,792				41,114				43				16,632				223,581
Income from equity investees			—				20,940				24,074				—				45,014
Net impairment and disposition losses			5,240				7,212				2				1,046				13,500
April 2, 2006
Net Revenues:
Company-operated retail		$	2,722,250			$	505,577			$	—			$	—			$	3,227,827
Specialty:
Licensing			177,734				85,034				158,736				—				421,504
Foodservice and other			156,955				13,628				—				—				170,583
Total specialty			334,689				98,662				158,736				—				592,087
Total net revenues			3,056,939				604,239				158,736				—				3,819,914
Earnings/(loss) before income taxes			529,921				53,398				80,605				(178,772	)			485,152
Depreciation and amortization			137,218				31,295				61				17,222				185,796
Income from equity investees			151				16,903				22,651				—				39,705
Net impairment and disposition losses/(gains)			3,912				5,256				—				(15	)			9,153

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

		13 Weeks Ended								26 Weeks Ended
		April 1,				April 2,				April 1,				April 2,
		2007				2006				2007				2006
Net revenues from external customers:
United States		$	1,860,974			$	1,586,704			$	3,805,658			$	3,211,571
Foreign countries			394,620				299,118				805,659				608,343
Total		$	2,255,594			$	1,885,822			$	4,611,317			$	3,819,914

No customer accounts for 10% or more of the Company’s revenues. 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 72% of foreign net revenues.

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 comparable store sales and revenue growth, operating income as a percentage of total net revenues, effective tax rate, 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 and currencies, 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 SEC, including the Item 1A. “Risks Factors” section of the 10-K.

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

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

General

Starbucks Corporation’s fiscal year ends on the Sunday closest to September 30. Fiscal year 2006 had 52 weeks and the fiscal year ending on September 30, 2007 will also include 52 weeks. All references to store counts, including data for new store openings, are reported net of related store closures.

Management Overview

During both the 13 and 26 week periods ended April 1, 2007, the Company’s continued focus on execution in all areas of its business, from U.S. and International Company-operated retail operations to the Company’s specialty operations, delivered solid financial performance. Management believes that its ability to achieve the balance between growing the core business and building the foundation for future growth is the key to increasing long-term shareholder value. Starbucks quarterly and year-to-date fiscal 2007 performance reflects the Company’s ongoing commitment to achieving this balance.

The primary driver of the Company’s revenue growth continues to be the opening of new retail stores, both Company-operated and licensed, in pursuit of the Company’s objective to establish Starbucks as one of the most recognized and respected brands in the world. Starbucks opened 1,288 new stores in the first half of fiscal 2007 and plans to open approximately 2,400 stores in fiscal 2007.

In addition to opening new retail stores, Starbucks works to increase revenues generated at new and existing Company-operated stores by attracting new customers and increasing the frequency of visits by current customers. The strategy is to increase comparable store sales by continuously improving the level of customer service, introducing innovative products and improving speed of service through training, technology and process improvement.

Global comparable store sales for Company-operated markets increased by 4% for the 13-week period ended April 1, 2007, and increased 5% over the first half of fiscal 2007. Comparable store sales growth for fiscal 2007 is expected to be in the target range of 3% to 7%.

In licensed retail operations, Starbucks shares operating and store development experience to help licensees improve the profitability of existing stores and build new stores. Internationally, the Company’s strategy is to selectively increase its equity stake in licensed international operations as these markets develop. In the first quarter of fiscal 2007, the Company purchased a 90% stake in its previously-licensed operations in Beijing and Tianjin, China.

Starbucks has three reportable segments: United States, International and the Global Consumer Products Group (“CPG”).

The United States and International segments both include Company-operated retail stores, licensed retail stores and foodservice operations. The United States segment has been operating significantly longer than the International segment and has developed deeper awareness of, and attachment to, the Starbucks brand and stores among its customer base. As a result, the United States segment has significantly more stores, higher average sales per store, and higher total revenues than the International segment. Further, certain market costs, particularly occupancy costs, are lower in the United States segment than in the markets of the International segment. As a result of the relative strength of the brand in the United States segment, the number of stores, the higher unit volumes, and the lower market costs, the United States segment has a higher operating margin than the less-developed International segment.

The Company’s International store base continues to increase rapidly and Starbucks is achieving a growing contribution from established international markets while at the same time investing in emerging markets, such as China. The Company’s newer international markets require a more extensive support organization, relative to the current levels of revenue and operating income. The Company’s ongoing investments in International infrastructure can be expected to cause variability in quarterly operating margins for the International segment.

The CPG segment includes the Company’s grocery and warehouse club business as well as branded products operations worldwide. The CPG segment operates primarily through joint ventures and licensing arrangements with large consumer products business partners, most significantly The North American Coffee Partnership with the Pepsi-Cola Company for distribution of ready-to-drink beverages, and with Kraft Foods Inc. for distribution of packaged coffees and teas. This operating model allows the CPG segment to leverage the business partners’ existing infrastructures and to extend the Starbucks brand in an efficient way. Most of the customer revenues from the ready-to-drink and packaged coffee channels are recognized by the joint venture or licensed business partner, not by the CPG segment, and the results of the Company’s joint ventures are included on a net basis in “Income from equity investees” on the consolidated statements of earnings. As a result, the CPG segment reflects relatively lower revenues, a modest cost structure, and a resulting higher operating margin, compared to the Company’s other two reporting segments, which consist primarily of retail stores.

The combination of more retail stores, comparable store sales growth of 4% and growth in other business channels resulted in a 20% increase in total net revenues for the 13-week period ended April 1, 2007, compared to the same period of fiscal 2006. The Company expects consolidated total net revenue growth of approximately 20% in fiscal 2007.

Operating income as a percentage of total net revenues was 10.7% for both the 13 weeks ended April 1, 2007 and April 2, 2006, due to higher cost of sales including occupancy costs offset by lower store operating expenses and lower general and administrative expenses as a percentage of total net revenues. For the second half of fiscal 2007, the Company expects modest improvement in year-over-year operating margin, primarily in the fourth quarter, despite the more challenging cost environment, particularly in labor and dairy costs. Net earnings increased by 18% in the 13-week period ended April 1, 2007, compared to the same period in fiscal 2006.

Results of Operations for the 13 Weeks Ended April 1, 2007 and April 2, 2006

CONSOLIDATED RESULTS

The following table presents the consolidated statements of earnings as well as the percentage relationship to total net revenues of items included in the Company’s consolidated statements of earnings (amounts in thousands):

		13 Weeks Ended												13 Weeks Ended
		April 1,				April 2,				%				April 1,				April 2,
		2007				2006				Change				2007				2006
STATEMENTS OF EARNINGS DATA
														As a % of total net revenues
Net revenues:
Company-operated retail		$	1,922,705			$	1,599,844				20.2	%			85.2	%			84.8	%
Specialty:
Licensing			234,807				202,354				16.0				10.4				10.7
Foodservice and other			98,082				83,624				17.3				4.4				4.5
Total specialty			332,889				285,978				16.4				14.8				15.2
Total net revenues			2,255,594				1,885,822				19.6				100.0				100.0
Cost of sales including occupancy costs			944,746				760,873								41.9				40.3
Store operating expenses (1)			780,985				665,273								34.6				35.4
Other operating expenses (2)			75,661				63,648								3.4				3.4
Depreciation and amortization expenses			113,385				94,508								5.0				5.0
General and administrative expenses			126,104				119,611								5.6				6.3
Subtotal operating expenses			2,040,881				1,703,913				19.8				90.5				90.4
Income from equity investees			26,261				19,985								1.2				1.1
Operating income			240,974				201,894				19.4				10.7				10.7
Interest and other income, net			(592	)			3,063								0.0				0.2
Earnings before income taxes			240,382				204,957								10.7				10.9
Income taxes			89,542				77,641								4.0				4.1
Net earnings		$	150,840			$	127,316				18.5	%			6.7	%			6.8	%

Net revenues for the 13 weeks ended April 1, 2007, increased 20% to $2.3 billion from $1.9 billion for the corresponding period of fiscal 2006, driven by increases in both Company-operated retail revenues and specialty operations. Net revenues are expected to grow approximately 20% in fiscal 2007 compared to fiscal 2006.

During the 13-week period ended April 1, 2007, Starbucks derived 85% of total net revenues from its Company-operated retail stores. Company-operated retail revenues increased 20% to $1.9 billion for the 13 weeks ended April 1, 2007, from $1.6 billion for the same period in fiscal 2006. The increase was primarily attributable to the opening of 1,279 new Company-operated retail stores in the last 12 months and comparable store sales growth of 4% for the 13 weeks ended April 1, 2007. The increase in comparable store sales was due to a 3% increase in the average value per transaction and a 1% increase in the number of customer transactions.

The Company derived the remaining 15% of total net revenues from channels outside the Company-operated retail stores, collectively known as specialty operations. Specialty revenues, which include licensing revenues and foodservice and other revenues, increased 16% to $333 million for the 13 weeks ended April 1, 2007, from $286 million for the corresponding period of fiscal 2006.

Licensing revenues, which are derived from retail store licensing arrangements, as well as grocery, warehouse club and certain other branded-product operations, increased 16% to $235 million for the 13 weeks ended April 1, 2007, from $202 million for the corresponding period of fiscal 2006. The increase was primarily due to higher product sales and royalty revenues from the opening of 1,224 new licensed retail stores in the last 12 months.

Foodservice and other revenues increased 17% to $98 million for the 13 weeks ended April 1, 2007, from $84 million for the corresponding period of fiscal 2006. The increase was primarily attributable to growth in new and existing accounts in the U.S. foodservice business.

Cost of sales including occupancy costs increased to 41.9% of total net revenues for the 13 weeks ended April 1,

2007, compared to 40.3% for the corresponding period of fiscal 2006. The increase was primarily due to a shift in sales to higher cost products, increased distribution costs due to the Company’s expanding store base and food programs, and higher rent expense attributed to growth in higher priced real estate markets.

Store operating expenses as a percentage of Company-operated retail revenues decreased to 40.6% for the 13 weeks ended April 1, 2007, from 41.6% for the corresponding period of fiscal 2006. This decrease was primarily due to higher provisions for incentive compensation in the prior year due to exceptionally strong performance.

Other operating expenses, expenses associated with the Company’s specialty operations, increased to 22.7% of total specialty revenues for the 13 weeks ended April 1, 2007, compared to 22.3% in the corresponding period of fiscal 2006. The increase was primarily due to higher marketing costs related to market expansion of ready-to-drink coffee beverages in the Asia-Pacific region.

Depreciation and amortization expenses increased to $113 million for the 13 weeks ended April 1, 2007, compared to $95 million for the corresponding period of fiscal 2006. The increase was primarily due to the opening of 1,279 new Company-operated retail stores in the last 12 months. As a percentage of total net revenues, depreciation and amortization expenses were 5.0% for both periods.

General and administrative expenses increased to $126 million for the 13 weeks ended April 1, 2007, compared to $120 million for the corresponding period of fiscal 2006. The increase was primarily due to higher payroll-related expenditures and professional fees in support of continued global growth, partially offset by lower provisions for incentive compensation due to exceptional performance in the prior year. As a percentage of total net revenues, general and administrative expenses decreased to 5.6% for the 13 weeks ended April 1, 2007, from 6.3% for the corresponding period of fiscal 2006.

Income from equity investees increased 31% to $26 million for the 13 weeks ended April 1, 2007, compared to $20 million for the corresponding period of fiscal 2006. The increase was primarily from the North American Coffee Partnership, which produces ready-to-drink beverages, including Starbucks bottled Frappuccino^® coffee drinks and Starbucks DoubleShot^® espresso drinks, and higher equity income from international investees.

Operating income increased 19% to $241 million for the 13 weeks ended April 1, 2007, compared to $202 million for the corresponding period of fiscal 2006. Operating margin was 10.7% of total net revenues for both the 13 weeks ended April 1, 2007, and April 2, 2006. For the 13 weeks ended April 1, 2007, higher cost of sales including occupancy costs were offset by lower store operating expenses and lower general and administrative expenses as a percentage of total net revenues.

Net interest and other income decreased to expense of $0.6 million for the 13 weeks ended April 1, 2007, compared to income of $3.1 million for the corresponding period of fiscal 2006, primarily due to higher borrowings and higher interest rates on the Company’s revolving credit facility.

Income taxes for the 13 weeks ended April 1, 2007, resulted in an effective tax rate of 37.2%, compared to 37.9% for the corresponding period of fiscal 2006. The Company currently estimates that its effective tax rate for fiscal year 2007 will approximate 37%, with quarterly variations.

Net earnings for the 13 weeks ended April 1, 2007, increased 18% to $151 million from $127 million for the same period in fiscal 2006. Diluted earnings per share increased by 19% to $0.19 for the 13 weeks ended April 1, 2007, compared to $0.16 per share for the comparable period in fiscal 2006.

SEGMENT RESULTS

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

		13 Weeks Ended												13 Weeks Ended
		April 1,				April 2,				%				April 1,				April 2,
		2007				2006				Change				2007				2006
														As a % of U.S. total net
														revenues
Net revenues:
Company-operated retail		$	1,595,389			$	1,351,563				18.0	%			89.2	%			89.5	%
Specialty:
Licensing			104,790				81,451				28.7				5.8				5.4
Foodservice and other			89,251				76,584				16.5				5.0				5.1
Total specialty			194,041				158,035				22.8				10.8				10.5
Total net revenues			1,789,430				1,509,598				18.5				100.0				100.0
Cost of sales including occupancy costs			707,957				569,264								39.6				37.7
Store operating expenses (1)			653,791				568,088								36.5				37.6
Other operating expenses (2)			52,020				48,109								2.9				3.2
Depreciation and amortization expenses			84,429				69,534								4.7				4.6
General and administrative expenses			23,651				23,587								1.3				1.6
Subtotal operating expenses			1,521,848				1,278,582				19.0				85.0				84.7
Income from equity investees			—				27								0.0				0.0
Operating income		$	267,582			$	231,043				15.8	%			15.0	%			15.3	%

The United States operating segment (“United States”) sells 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 licensed retail stores, foodservice accounts and other initiatives related to the Company’s core business.

United States total net revenues increased 19% to $1.8 billion for the 13 weeks ended April 1, 2007, compared to $1.5 billion for the corresponding period of fiscal 2006.

United States Company-operated retail revenues increased 18% to $1.6 billion for the 13 weeks ended April 1, 2007, compared to $1.4 billion for the corresponding period of fiscal 2006, primarily due to the opening of 1,042 new Company-operated retail stores in the last 12 months and comparable store sales growth of 3% for the quarter resulting from a 3% increase in the average value per transaction.

Total United States specialty revenues increased 23% to $194 million for the 13 weeks ended April 1, 2007, compared to $158 million in the corresponding period of fiscal 2006. United States licensing revenues increased 29% to $105 million, compared to $81 million for the corresponding period of fiscal 2006. The increase was primarily due to higher product sales and royalty revenues as a result of opening 768 new licensed retail stores in the last 12 months. United States foodservice and other revenues increased 17% to $89 million, from $77 million in fiscal 2006, primarily due to growth in new and existing foodservice accounts.

United States operating income increased 16% to $268 million for the 13 weeks ended April 1, 2007, compared to $231 million for the same period in fiscal 2006. Operating margin decreased to 15.0% of related revenues from a record second quarter high of 15.3% in the corresponding period of fiscal 2006. The decrease was due to higher cost of sales including occupancy costs, primarily due to a shift in sales to higher cost products, such as food and merchandise, higher rent expenses and increased distribution costs due to expansion of the Company’s store base

and food programs. Partially offsetting this was lower store operating expenses as a percentage of total net revenues, primarily resulting from higher provisions for incentive compensation in the prior year due to exceptionally strong performance.

International

		13 Weeks Ended												13 Weeks Ended
		April 1,				April 2,				%				April 1,				April 2,
		2007				2006				Change				2007				2006
														As a % of International total
														net revenues
Net revenues:
Company-operated retail		$	327,316			$	248,281				31.8	%			84.5	%			83.3	%
Specialty:
Licensing			51,205				42,725				19.8				13.2				14.3
Foodservice and other			8,831				7,040				25.4				2.3				2.4
Total specialty			60,036				49,765				20.6				15.5				16.7
Total net revenues			387,352				298,046				30.0				100.0				100.0
Cost of sales including occupancy costs			189,184				144,816								48.8				48.6
Store operating expenses (1)			127,194				97,185								32.9				32.6
Other operating expenses (2)			16,769				11,376								4.3				3.8
Depreciation and amortization expenses			20,649				16,286								5.3				5.5
General and administrative expenses			25,342				18,184								6.5				6.1
Subtotal operating expenses			379,138				287,847				31.7				97.8				96.6
Income from equity investees			12,916				9,125								3.3				3.1
Operating income		$	21,130			$	19,324				9.3	%			5.5	%			6.5	%

The International operating segment (“International”) sells coffee and other beverages, whole bean coffees, complementary food, coffee brewing equipment and merchandise through Company-operated retail stores in Canada, the United Kingdom, China, Thailand, Australia, Germany, Singapore, Puerto Rico, Chile and Ireland. Specialty operations in International primarily include retail store licensing operations in more than 25 other countries and foodservice accounts in Canada and the United Kingdom. The Company’s International store base continues to increase rapidly and Starbucks is achieving a growing contribution from established areas of the business while at the same time investing in emerging markets and channels. Many of the Company’s International operations are in early stages of development that require a more extensive support organization, relative to the current levels of revenue and operating income, than in the United States. This continuing investment is part of the Company’s long-term, balanced plan for profitable growth.

International total net revenues increased 30% to $387 million for the 13 weeks ended April 1, 2007, compared to $298 million for the corresponding period of fiscal 2006.

International Company-operated retail revenues increased 32% to $327 million for the 13 weeks ended April 1, 2007, compared to $248 million for the corresponding period of fiscal 2006. The increase was primarily due to the opening of 237 new Company-operated retail stores in the last 12 months, comparable store sales growth of 7% for the quarter and favorable foreign currency exchange for the British pound sterling. The increase in comparable store sales resulted from a 5% increase in the number of customer transactions coupled with a 2% increase in the average value per transaction.

Total International specialty revenues increased 21% to $60 million for the 13 weeks ended April 1, 2007, compared to $50 million in the corresponding period of fiscal 2006. The increase was primarily due to higher product sales and royalty revenues from opening 456 new licensed retail stores in the last 12 months and growth in new and existing foodservice accounts.

International operating income increased 9% to $21 million for the 13 weeks ended April 1, 2007, compared to $19

million in the corresponding period of fiscal 2006. Operating margin decreased to 5.5% of related revenues from 6.5% in the corresponding period of fiscal 2006, primarily due to higher other operating expenses and general and administrative expenses as a percentage of total net revenues resulting from increased payroll-related expenditures to support continued rapid international store growth.

Global Consumer Products Group

		13 Weeks Ended												13 Weeks Ended
		April 1,				April 2,				%				April 1,				April 2,
		2007				2006				Change				2007				2006
														As a % of CPG total net
														revenues
Net revenues:
Specialty:
Licensing		$	78,812			$	78,178				0.8	%			100.0	%			100.0	%
Total specialty			78,812				78,178				0.8				100.0				100.0
Total net revenues			78,812				78,178				0.8				100.0				100.0
Cost of sales			47,605				46,793								60.4				59.9
Other operating expenses			6,872				4,163								8.7				5.3
Depreciation and amortization expenses			21				27								0.0				0.0
Subtotal operating expenses			54,498				50,983				6.9				69.1				65.2
Income from equity investees			13,345				10,833								16.9				13.8
Operating income		$	37,659			$	38,028				(1.0	%)			47.8	%			48.6	%

The Global Consumer Products Group (“CPG”) sells a selection of whole bean and ground coffees as well as a selection of premium Tazo^® teas through licensing arrangements in United States and international markets. CPG also produces and sells ready-to-drink beverages which include, among others, Starbucks bottled Frappuccino^® coffee drinks, Starbucks DoubleShot^® espresso drinks, Discoveries™ products, Starbucks^® superpremium ice creams and Starbucks™ Coffee and Cream Liqueurs through its joint ventures and marketing and distribution agreements.

CPG total net revenues increased 1% to $79 million for the 13 weeks ended April 1, 2007, compared to $78 million for the corresponding period of fiscal 2006. The increase was primarily due to increased product sales and royalties in the International ready-to-drink business. Partially offsetting this was decreased shipments into the U.S. packaged coffee and tea distribution system, despite higher sales to grocery retailers, resulting in lower inventory levels throughout the system.

CPG operating income was $38 million for the 13 weeks ended April 1, 2007, relatively flat with the corresponding period of fiscal 2006. Operating margin decreased to 47.8% of related revenues, from 48.6% in fiscal 2006, primarily due to increased other operating expenses. The increase in other operating expenses was due to higher marketing expenditures to support continued international expansion of ready-to-drink beverages. Partially offsetting the increase in other operating expenses was higher income from equity investees attributable to the ready-to-drink beverage business in the U.S.

Unallocated Corporate

		13 Weeks Ended												13 Weeks Ended
		April 1,				April 2,				%				April 1,				April 2,
		2007				2006				Change				2007				2006
														As a % of total net
														revenues
Depreciation and amortization expenses		$	8,286			$	8,661								0.4	%			0.5	%
General and administrative expenses			77,111				77,840								3.4				4.1
Operating loss		$	(85,397	)		$	(86,501	)			1.3	%			(3.8	%)			(4.6	%)