Note 1: Summary of Significant Accounting Policies

Financial Statement Preparation

The unaudited condensed consolidated financial statements as of December 27, 2009, and for the 13-week periods ended December 27, 2009 and December 28, 2008, have been prepared by Starbucks Corporation (“Starbucks” or the “Company”) under the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, the financial information for the 13-week periods ended December 27, 2009 and December 28, 2008 reflect 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 September 27, 2009 is derived from the Company’s audited consolidated financial statements and notes for the fiscal year ended September 27, 2009 (“fiscal 2009”), included in Item 8 in the Fiscal 2009 Annual Report on Form 10-K (the “10-K”). The information included in this Quarterly Report on Form 10-Q (the “10-Q”) should be read in conjunction with the footnotes and management’s discussion and analysis to the financial statements in the 10-K.

The Company evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements through February 2, 2010, the day the financial statements were issued.

The results of operations for the 13-week period ended December 27, 2009 are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending October 3, 2010 (“fiscal 2010”). Additionally, Starbucks 2010 fiscal year will include 53 weeks, with the 53rd week falling in its fourth fiscal quarter.

Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance on accounting and reporting for noncontrolling interests in subsidiaries. The guidance clarifies that a noncontrolling interest in a subsidiary should be accounted for as a component of equity separate from the parent’s equity. Starbucks adopted the new guidance relating to noncontrolling interests beginning September 28, 2009 on a prospective basis, except for the presentation and disclosure requirements, which were applied retrospectively.

In June 2009, the FASB issued authoritative guidance on the consolidation of variable interest entities (“VIE”), which will be effective for Starbucks first fiscal quarter of 2011. The new guidance requires a qualitative approach to identify a controlling financial interest in a VIE, and requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. The Company is currently evaluating the impact that adoption may have on its consolidated financial statements.

Note 2: Restructuring Charges

In the first quarter of fiscal 2010, the Company closed 19 International stores and two US stores. A total of 894 stores globally have been closed as a part of the Company’s store portfolio rationalization which began in fiscal 2008. The Company expects to complete the remaining closures in fiscal 2010, and will recognize the associated lease exit costs concurrently with the actual closures. Nearly all of the remaining closures are in the International segment.

Restructuring charges by type and reconciliation of the associated accrued liability (in millions):

		Lease Exit								Employee
		and Other				Asset				Termination
		Related Costs				Impairments				Costs				Total
Total expected costs		$	272.7			$	331.8			$	37.0			$	641.5
Expenses recognized in Q1 fiscal 2010			17.3				1.0				—				18.3
Expenses recognized in Q1 fiscal 2009 (1)			40.6				32.4				2.5				75.5
Costs incurred in Q1 fiscal 2010			17.3				1.0				—				18.3

		Lease Exit								Employee
		and Other				Asset				Termination
		Related Costs				Impairments				Costs				Total
Costs incurred in Q1 fiscal 2009 (1)			26.1				32.4				2.5				61.0
Cumulative costs incurred to date			249.4				331.8				36.5				617.7
Accrued liability as of September 27, 2009		$	102.8							$	1.2			$	104.0
Costs incurred in Q1 fiscal 2010, excluding non-cash charges and credits (2)			17.9								—				17.9
Cash payments in Q1 fiscal 2010			(25.9	)							(0.8	)			(26.7	)
Accrued liability as of December 27, 2009		$	94.8							$	0.4			$	95.2

Restructuring charges by reportable segment (in millions):

										Unallocated
		US				International				Corporate				Total
Total expected costs		$	472.5			$	73.0			$	96.0			$	641.5
Expenses recognized in Q1 fiscal 2010			7.9				10.4				—				18.3
Costs incurred during in Q1 fiscal 2010			7.9				10.4				—				18.3
Cumulative costs incurred to date			465.0				56.7				96.0				617.7

Note 3: Acquisitions

On September 30, 2009, Starbucks acquired 100 percent ownership of the Company’s business in France, converting it from a 50% joint venture with Sigla S.A. (Grupo Vips) of Spain to a Company-operated market. Starbucks simultaneously sold its 50% ownership interests in the Spain and Portugal markets to Grupo Vips, converting them to licensed markets.

Note 4: Derivative Financial Instruments

Cash Flow Hedges

The Company had net derivative losses of $7.5 million and $3.9 million, net of taxes, in accumulated other comprehensive income as of December 27, 2009 and September 27, 2009, respectively, related to cash flow hedges. Of the net derivative losses accumulated as of December 27, 2009, $2.0 million pertain to hedging instruments that will be dedesignated within 12 months and will also continue to experience fair value changes before affecting earnings. Ineffectiveness from hedges that were discontinued in the first quarter of fiscal year 2010 and 2009 was insignificant. Outstanding contracts will expire within 33 months.

The Company recorded a $6.4 million loss in other comprehensive income and a $1.0 million loss in earnings relating to its cash flow hedges for the 13 weeks ending December 27, 2009. There was no loss recognized in earnings for the 13 weeks ending December 28, 2008.

Net Investment Hedges

The Company had net derivative losses of $18.9 million and $19.8 million, net of taxes, in accumulated other comprehensive income as of December 27, 2009 and September 27, 2009, respectively, related to net investment derivative hedges. Outstanding contracts will expire within 27 months.

The Company recorded a $1.3 million gain in other comprehensive income and no gain in earnings relating to its net investment hedges for the 13 weeks ending December 27, 2009. The Company recorded a $2.8 million gain in earnings for the 13 weeks ending December 28, 2008.

Other Derivatives

To mitigate the translation risk of certain balance sheet items, the Company enters into certain foreign currency forward contracts that are not designated as hedging instruments. These contracts are recorded at fair value, with the changes in fair value recognized in net interest income and other on the consolidated statements of earnings. For the first quarter of fiscal year 2010 and 2009, these forward contracts resulted in a net loss of $2.0 million and a net gain $37.8 million, respectively. These gains and losses were largely offset by the financial impact of translating foreign currency denominated payables and receivables, which are also recognized in Net interest income and other.

The Company also enters into certain swap and futures contracts that are not designated as hedging instruments to mitigate the price uncertainty of a portion of its future purchases of dairy products and diesel fuel. These contracts are recorded at fair value, with the changes in fair value recognized in Net interest income and other on the consolidated statement of earnings. For the first quarter of fiscal 2010, these swaps and futures contracts resulted in a net gain of $0.6 million.

The Company had the following outstanding derivative contracts as of December 27, 2009, based on notional amounts:

	•		$696 million in foreign exchange contracts
	•		$24 million in dairy contracts
	•		$4 million in diesel contracts

Note 5: Investments

Investments (in millions):

						Gross				Gross
						Unrealized				Unrealized
		Amortized				Holding				Holding				Fair
		Cost				Gains				Losses				Value
December 27, 2009
Short-term investments:
Available-for-sale securities — Corporate debt securities		$	2.5											$	2.5
Trading securities			58.9												47.9
Total short-term investments		$	61.4											$	50.4
Long-term investments:
Available-for-sale securities — State and local government obligations		$	54.8			$	—			$	(1.8	)		$	53.0
Available-for-sale securities — Corporate debt securities			24.2				0.8				—				25.0
Total long-term investments		$	79.0			$	0.8			$	(1.8	)		$	78.0
September 27, 2009
Short-term investments:
Available-for-sale securities — Corporate debt securities		$	2.5											$	2.5
Available-for-sale securities — Government treasury securities			19.0												19.0
Trading securities			58.5												44.8
Total short-term investments		$	80.0											$	66.3
Long-term investments:
Available-for-sale securities — State and local government obligations		$	57.8			$	—			$	(2.1	)		$	55.7
Available-for-sale securities — Corporate debt securities			14.7				0.8				—				15.5
Total long-term investments		$	72.5			$	0.8			$	(2.1	)		$	71.2

The gross unrealized holding losses on the state and local obligations pertain to the Company’s auction rate securities (“ARS”). Starbucks does not intend to sell these securities, nor is it likely it will be required to sell these securities before their anticipated recovery, which may be at maturity.

In the first quarter of fiscal 2010, two of the Company’s ARS were partially called at par value of $2.8 million.

Note 6: Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis (in millions):

						Fair Value Measurements at Reporting Date Using
						Quoted Prices in Active				Significant Other				Significant
		Balance at				Markets for Identical Assets				Observable Inputs				Unobservable Inputs
		Dec 27, 2009				(Level 1)				(Level 2)				(Level 3)
Assets:
Trading securities		$	47.9			$	47.9			$	—			$	—
Available-for-sale securities			80.5				—				27.5				53.0
Derivatives			6.4				—				6.4				—
Total		$	134.8			$	47.9			$	33.9			$	53.0
Liabilities:
Derivatives		$	18.2			$	—			$	18.2			$	—
		Balance at
		Sep 27, 2009
Assets:
Trading securities		$	44.8			$	44.8			$	—			$	—
Available-for-sale securities			92.7				19.0				18.0				55.7
Derivatives			13.2				—				13.2				—
Total		$	150.7			$	63.8			$	31.2			$	55.7
Liabilities:
Derivatives		$	33.2			$	—			$	33.2			$	—

Changes in Level 3 Instruments Measured at Fair Value on a Recurring Basis (in millions):

		13 Weeks Ended
		Dec 27, 2009				Dec 28, 2008
Beginning balance		$	55.7			$	59.8
Total reduction in unrealized losses included in other comprehensive income			0.3				2.8
Realized losses recognized in net earnings			(0.2	)			—
Purchases, sales, issuances, calls, and settlements			(2.8	)			—
Transfers in (out) of Level 3			—				—
Ending balance		$	53.0			$	62.6

Level 3 instruments described above are comprised entirely of the Company’s ARS portfolio.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis (in millions)

Effective September 28, 2009, the Company adopted new fair value measurement guidance for all nonfinancial assets and liabilities recognized or disclosed at fair value in the financial statements on a nonrecurring basis. These assets and liabilities include items such as property, plant and equipment, goodwill and other intangible assets that are measured at fair value resulting from impairment, if deemed necessary.

The Company measures certain financial assets, including its equity and cost method investments, at fair value on a nonrecurring basis. These assets are recognized at fair value when they are deemed to be other-than-temporarily impaired.

During the 13 weeks ended December 27, 2009, the Company recognized fair market value adjustments to assets (Level 3) measured at fair value on a non-recurring basis, as follows:

		Carrying value								Carrying
		before				Fair value				value after
		adjustment				adjustment				adjustment
Property, plant and equipment (1)		$	13.9			$	(11.1	)		$	2.8
Equity and cost investments (2)		$	9.6			$	(7.5	)		$	2.1

Fair Value of Other Financial Instruments

The carrying value of cash and cash equivalents approximates fair value because of the short-term nature of those instruments. The estimated fair value of the Company’s $550 million of 6.25% Senior Notes was approximately $586 million and $591 million as of December 27, 2009 and September 27, 2009, respectively.

Note 7: Inventories (in millions)

		Dec 27,				Sep 27,				Dec 28,
		2009				2009				2008
Coffee:
Unroasted		$	289.6			$	381.6			$	310.1
Roasted			76.1				76.7				86.9
Other merchandise held for sale			94.9				116.0				96.9
Packaging and other supplies			84.3				90.6				96.5
Total		$	544.9			$	664.9			$	590.4

As of December 27, 2009, the Company had committed to purchasing green coffee totaling $139 million under fixed-price contracts and an estimated $169 million under price-to-be-fixed contracts. The Company believes, based on relationships established with its suppliers in the past, the risk of non-delivery on these purchase commitments is remote.

Note 8: Property, Plant and Equipment (in millions)

		Dec 27,				Sep 27,
		2009				2009
Land		$	60.2			$	58.2
Buildings			235.5				231.5
Leasehold improvements			3,378.3				3,349.0
Store equipment			1,012.8				1,073.4
Roasting equipment			284.5				282.9
Furniture, fixtures and other			586.1				586.7
Work in progress			138.6				119.2
			5,696.0				5,700.9
Less accumulated depreciation			(3,213.3	)			(3,164.5	)
Property, plant and equipment, net		$	2,482.7			$	2,536.4

Note 9: Debt (in millions)

		Dec 27,				Sep 27,
		2009				2009
Current portion of long-term debt		$	0.2			$	0.2
6.25% Senior Notes (10 year, due Aug 2017)			549.3				549.2
Other long-term debt			—				0.1
Long-term debt			549.3				549.3
Total debt		$	549.5			$	549.5

Note 10: Other Long-term Liabilities (in millions)

		Dec 27,				Sep 27,
		2009				2009
Deferred rent		$	260.1			$	266.0
Unrecognized tax benefits			78.3				55.1
Asset retirement obligations			45.9				43.4
Other			24.7				25.1
Total		$	409.0			$	389.6

Note 11: Equity

Components of equity for the 13 weeks ended December 27, 2009 and December 28, 2008 (in millions):

		Shareholders’				Noncontrolling
		Equity				Interest				Equity
Balance, September 27, 2009		$	3,045.7			$	11.2			$	3,056.9
Net earnings			241.5				2.0				243.5
Unrealized holding losses on cash flow hedging instruments			(4.3	)			—				(4.3	)
Unrealized holding gains on net investment hedging instruments			0.9				—				0.9

		Shareholders’				Noncontrolling
		Equity				Interest				Equity
Reclassification adjustment for net losses realized in net earnings for cash flow hedges			0.7				—				0.7
Translation adjustment			(4.5	)			—				(4.5	)
Comprehensive income			234.3				2.0				236.3
Stock-based compensation expense			24.3				—				24.3
Exercise of stock options			41.9				—				41.9
Sale of common stock			5.1				—				5.1
Net distributions to noncontrolling interests			—				(0.4	)			(0.4	)
Balance, December 27, 2009		$	3,351.3			$	12.8			$	3,364.1
Balance, September 28, 2008		$	2,490.9			$	18.3			$	2,509.2
Net earnings			64.3				0.4				64.7
Unrealized holding gains on available-for-sale securities			2.1				—				2.1
Unrealized holding gains on cash flow hedging instruments			17.6				—				17.6
Unrealized holding losses on net investment hedging instruments			(2.4	)			—				(2.4	)
Reclassification adjustment for net gains realized in net earnings for cash flow hedges			(0.4	)			—				(0.4	)
Translation adjustment			(20.4	)			—				(20.4	)
Comprehensive income			60.8				0.4				61.2
Stock-based compensation expense			22.6				—				22.6
Exercise of stock options			1.6				—				1.6
Sale of common stock			8.7				—				8.7
Net distributions to noncontrolling interests			—				(0.4	)			(0.4	)
Balance, December 28, 2008		$	2,584.6			$	18.3			$	2,602.9

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 as of December 27, 2009.

Components of accumulated other comprehensive income, net of tax, were as follows (in millions):

		Dec 27, 2009				Sep 27, 2009
Net unrealized losses on available-for-sale securities		$	(0.7	)		$	(0.8	)
Net unrealized losses on hedging instruments			(26.4	)			(23.7	)
Translation adjustment			85.3				89.9
Accumulated other comprehensive income		$	58.2			$	65.4

Note 12: Employee Stock Plans

As of December 27, 2009, there were 31.9 million shares of common stock available for issuance pursuant to future equity-based compensation awards and employee stock purchase plans (“ESPP”).

Stock-based compensation expense recognized in the consolidated statement of earnings (in millions):

		13 Weeks Ended
		Dec 27, 2009				Dec 28, 2008
Options		$	17.9			$	16.4
Restricted stock units (“RSUs”)			6.4				3.4
ESPP			—				2.5
Total stock-based compensation		$	24.3			$	22.3

Value of awards granted and exercised during the period:

		13 Weeks Ended
		Dec 27, 2009				Dec 28, 2008
Estimated fair value per option granted		$	8.34			$	3.49
Weighted average option grant price		$	22.07			$	8.65
Weighted average price per options exercised		$	11.86			$	5.51
Weighted average RSU grant price		$	22.05			$	8.68

Stock option and RSU transactions from September 27, 2009 through December 27, 2009 (in millions):

		Stock
		Options				RSUs
Options outstanding/Nonvested RSUs, September 27, 2009			63.6				4.4
Options/RSUs granted			14.0				2.3
Options exercised/RSUs vested			(3.0	)			(0.4	)
Options/RSUs forfeited/expired			(2.2	)			(0.3	)
Options outstanding/Nonvested RSUs, December 27, 2009			72.4				6.0
Total unrecognized stock-based compensation expense, net of forfeitures, as of December 27, 2009		$	125			$	70

Note 13: Earnings Per Share

Calculation of net earnings per common share (“EPS”) — basic and diluted (in millions, except EPS):

		13 Weeks Ended
		Dec 27,				Dec 28,
		2009				2008
Net earnings attributable to Starbucks		$	241.5			$	64.3
Weighted average common shares and common stock units outstanding (for basic calculation)			744.2				736.3
Dilutive effect of outstanding common stock options and RSUs			18.7				2.8
Weighted average common and common equivalent shares outstanding (for diluted calculation)			762.9				739.1
EPS — basic		$	0.32			$	0.09
EPS — diluted		$	0.32			$	0.09

Potential dilutive shares consist of the incremental common shares issuable upon the exercise of outstanding stock options (both vested and non-vested) and unvested RSUs, using the treasury stock method. Potential dilutive shares are excluded from the computation of earnings per share if their effect is antidilutive. The number of antidilutive options totaled 20.7 million and 62.9 million for the 13-week periods ended December 27, 2009 and December 28, 2008, respectively.

Note 14: Commitments and Contingencies

Guarantees

The following table presents information on unconditional guarantees as of December 27, 2009 (in millions):

										Fair value estimate
		Maximum				Year Guarantee				recorded on
		Exposure				Expires in				Balance Sheet
Japanese yen-denominated bank loans (Starbucks Japan — an unconsolidated equity investee)		$	2.9				2014			$	—	(1)
Borrowings of other unconsolidated equity investees		$	11.0				2010			$	3.0

Legal Proceedings

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 alleged that the Company violated the California Labor Code by allowing shift supervisors to receive tips. On February 28, 2008, the trial court ruled against the Company in the liability phase of the trial and on March 20, 2008 the court ordered the Company to pay approximately $87 million in restitution, plus interest. The Company appealed the decision of the trial court and on June 2, 2009 the California Court of Appeal reversed the trial court’s judgment in its entirety and ruled in favor of Starbucks. The Court of Appeal denied plaintiffs’ petition for rehearing and reaffirmed its ruling on July 2, 2009. The plaintiffs filed a petition for review with the California Supreme Court on July 13, 2009. The California Supreme Court denied plaintiffs’ petition for review and on December 17, 2009 the trial court entered a final judgment for Starbucks dismissing the case.

On June 30, 2005, three individuals, Erik Lords, Hon Yeung, and Donald Brown filed a lawsuit in Orange County Superior Court, California. The lawsuit alleged that the Company violated the California Labor Code section 432.8 by asking job applicants to disclose at the time of application convictions for marijuana related offenses more than two years old. The California Court of Appeal issued a ruling on December 10, 2008 instructing the trial judge to enter summary judgment against plaintiffs and the California Supreme Court has rejected the plaintiffs’ appeal. The plaintiffs have moved to amend the complaint to add new plaintiffs. Starbucks has opposed this effort and is asking for final dismissal of the case.

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 15: Segment Reporting

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

		United												Unallocated
		States				International				Global CPG				Corporate				Total
13 Weeks Ended
December 27, 2009
Company-operated retail revenues		$	1,788.3			$	504.6			$	—			$	—			$	2,292.9
Licensing revenues			145.0				71.6				109.5				—				326.1
Foodservice and other revenues			1.6				14.8				87.3				—				103.7
Total net revenues			1,934.9				591.0				196.8				—				2,722.7
Depreciation and amortization expenses			89.7				28.2				1.2				11.5				130.6
Income from equity investees			—				17.0				12.4				—				29.4
Operating income/(loss)			334.5				43.5				67.2				(92.6	)			352.6
Net impairment and disposition losses			22.0				8.9				—				6.3				37.2
December 28, 2008
Company-operated retail revenues		$	1,761.8			$	414.4			$	—			$	—			$	2,176.2
Licensing revenues			150.9				69.1				114.3				—				334.3
Foodservice and other revenues			0.9				12.2				91.6				—				104.7
Total net revenues			1,913.6				495.7				205.9				—				2,615.2
Depreciation and amortization expenses			95.9				25.4				1.5				11.5				134.3
Income from equity investees			0.5				11.9				11.1				—				23.5
Operating income/(loss)			110.8				12.9				74.7				(80.7	)			117.7
Net impairment and disposition losses			30.9				16.4				—				18.0				65.3

The table below reconciles the total of the reportable segments’ operating income to the Company’s consolidated earnings before income taxes (in millions):

Fiscal Quarter Ended		Dec 27, 2009				Dec 28, 2008
Operating income		$	352.6			$	117.7
Interest income and other, net			25.1				(6.0	)
Interest expense			(8.2	)			(13.0	)
Earnings before income taxes		$	369.5			$	98.7