News Column

STARBUCKS CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

July 29, 2014

CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements herein, including statements regarding trends in or expectations relating to the expected effects of our initiatives and plans, as well as trends in or expectations regarding earnings per share, revenues, operating margins, comparable store sales, sales leverage, sales growth, profitability, expenses, dividends, share repurchases, other financial results, net benefits from the sale of retail operations that may close in the fourth quarter of fiscal 2014, capital expenditures, scaling and expansion of international operations, shifts in our store portfolio to more licensed stores in EMEA and to more company-operated stores in CAP, establishing China as our largest market outside the U.S., profitable growth models and opportunities, emerging businesses, strategic acquisitions, commodity costs and our mitigation strategies, liquidity, cash flow from operations, use of cash and cash requirements, repatriation of cash to the U.S., the potential issuance of debt and applicable interest rate, anticipated store openings and closings, the health and growth of our business overall and of specific businesses or markets, benefits of recent initiatives, increased traffic to our stores, operational efficiencies, product innovation, offerings and distribution, tax rates, and economic conditions in the US and international markets, 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 our initiatives, successful execution of internal plans, fluctuations in US and international economies and currencies, the impact of competitors' initiatives, the effect of legal proceedings, and other risks detailed in our filings with the SEC, including in Part I Item IA "Risk Factors" in 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. You should not place undue reliance on the forward-looking statements, which speak only as of the date of this report. We are 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 condensed consolidated financial statements and the notes included in Item 1 of Part I of this 10-Q 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. 18



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General

Our fiscal year ends on the Sunday closest to September 30. All references to store counts, including data for new store openings, are reported net of store closures, unless otherwise noted. Overview Starbucks third quarter results reflect an acceleration of top-line growth and meaningful contributions from all segments. Consolidated total net revenues increased 11% to $4.2 billion, driven by global comparable store sales growth of 6% and incremental revenue from 1,654 net new store openings over the last 12 months. Consolidated operating income increased $153 million, or 25%, to $769 million. Operating margin expanded 200 basis points to 18.5%, driven by sales leverage and favorable commodity costs, mainly coffee. Earnings per share of $0.67 increased 22% over the prior year quarter earnings per share of $0.55. The Americas segment continued its solid performance in the third quarter, growing revenues by 10% to $3.1 billion, primarily driven by comparable store sales growth of 6%, comprised of a 4% increase in average ticket and a 2% increase in number of transactions. Expanded food offerings, including the continued rollout of our La Boulange™ food platform in the US, the impact of price increases in our retail stores and successful promotional beverages contributed to the growth in comparable store sales. Operating margin expanded 150 basis points to 23.8%, primarily due to sales leverage. Looking forward, we expect to continue to drive revenue growth and margin expansion through new stores and expanded product offerings, targeted at driving growth across all dayparts. We plan to continue to expand our beverage platforms and elevate our food program, in part with the completion of the rollout of La Boulange™ bakery items in our US stores in the fourth quarter of fiscal 2014 and continued enhancements to our lunch options. In the EMEA segment, the turnaround of the segment continues to progress, resulting in increased profitability. Revenues grew 13% to $323 million, driven by favorable foreign currency exchange and comparable store sales growth of 3%. Incremental revenues from 166 net new licensed store openings over the past year also contributed. Sales leverage, largely driven by our strategic portfolio shift to higher-margin licensed stores, and continued cost management drove the increase in operating margin of 580 basis points over the prior year quarter, to 9.0%. We expect our continued disciplined licensed store expansion and focus on the customer experience in this region will result in improved operating performance as we progress on our plan towards mid-teens operating margin over time. The China/Asia Pacific segment results reflect the growth and strong performance of new stores in the region, including 238 company-operated and 502 licensed net new store openings over the past year. New store growth, along with a 7% increase in comparable store sales, drove a 23% increase in revenues to $288 million. The 7% growth in comparable store sales was driven by a 6% increase in number of transactions. Operating income grew 19%, to $101 million, while operating margin declined 120 basis points to 35.0%. The operating margin decline was primarily driven by the unfavorable margin impact of the portfolio shift toward more company-operated stores in this segment and unfavorable foreign currency exchange from a weaker Yen, partially offset by leverage from strong sales during the quarter. We expect this segment will become a more significant contributor to overall company profitability in the future, as we look forward to continued new store openings and establishing China as our largest market outside of the US. Channel Development segment revenues grew 13% for the quarter to $375 million, primarily due to increased sales of premium single serve products, driven by sales of Starbucks- and Tazo-branded K-Cup® portion packs, and higher sales volumes of packaged coffee. Operating income grew $43 million, or 45%, to $139 million. Operating margin increased 800 basis points to 37.1% for the third quarter of fiscal 2014, driven by lower coffee costs and improved inventory management compared to the prior year. As we continue to expand customer occasions outside of our retail stores, including growing our presence in the premium single serve category, we expect this segment to become a more significant contributor to future growth. Fiscal 2014 - Financial Outlook for the Year For fiscal year 2014, we expect revenue growth will be driven by mid-single digit comparable store sales growth, net new store openings, and continued growth in the Channel Development business. Approximately one-half of new store openings will be in China / Asia Pacific, with the remaining half coming primarily from the Americas. We expect full-year consolidated operating margin improvement of 200 basis points over fiscal 2013 and strong EPS growth, when excluding the Kraft litigation charge and gains from the sales of our equity in our Mexico, Chile and Argentina joint ventures in fiscal 2013, as well as the benefit recognized from a litigation credit in the first quarter of fiscal 2014 and the estimated net benefit from the sale of certain retail operations that may close in the fourth quarter of fiscal 2014. 19



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Fiscal 2015 - Financial Outlook for the Year For fiscal year 2015, we expect revenue growth driven by mid-single digit comparable store sales growth and approximately 1,600 net new store openings. Approximately one-half of new store openings will be in China / Asia Pacific, with the remaining half coming primarily from the Americas. We expect EPS growth over fiscal 2014 results, reflecting the strength of our global business and multiple layers of profitable growth initiatives. Comparable Store Sales Starbucks comparable store sales for the third quarter and the first three quarters of fiscal 2014: Quarter Ended Jun 29, 2014 Three



Quarters Ended Jun 29, 2014

Sales Change in Change in Sales Change in Change in Growth Transactions Ticket Growth Transactions Ticket Consolidated 6% 2% 4% 6% 3% 3% Americas 6% 2% 4% 6% 3% 3% EMEA 3% 2% 2% 5% 3% 1% China/Asia Pacific 7% 6% 1% 7% 6% 1% Our comparable store sales represent the growth in revenue from Starbucks® company-operated stores open 13 months or longer. Comparable store sales exclude the effect of fluctuations in foreign currency exchange rates. Results of Operations (in millions) Revenues Quarter Ended Three Quarters Ended Jun 29, Jun 30, % Jun 29, Jun 30, % 2014 2013 Change 2014 2013 Change Company-operated stores $ 3,290.5$ 2,986.3 10.2 % $ 9,702.3$ 8,783.7 10.5 % Licensed stores 408.1 342.0 19.3 1,166.1 1,014.2 15.0 CPG, foodservice and other 455.1 407.0 11.8 1,398.7 1,280.2 9.3 Total net revenues $ 4,153.7$ 3,735.3 11.2 % $ 12,267.1$ 11,078.1 10.7 % Total net revenues for the third quarter and the first three quarters of fiscal 2014 increased $418 million and $1.2 billion, respectively, primarily due to increased revenues from company-operated stores (contributing $304 million and $919 million, respectively). An increase in comparable store sales was the primary driver of the increase in company-operated store revenues (approximately 6% for both periods, or $181 million for the third quarter and $493 million for the first three quarters). Also contributing to net revenue growth for both periods were incremental revenues from 549 net new Starbucks® company-operated store openings over the past 12 months (approximately $140 million for the third quarter and $395 million for the first three quarters). Licensed store revenue growth also contributed to the increase in total net revenues for the third quarter and the first three quarters of fiscal 2014 (approximately $66 million for the third quarter and $152 million for the first three quarters). The increase for both periods was primarily due to increased product sales to and royalty revenues from our licensees, as a result of improved comparable store sales and the opening of 1,074 net new licensed stores over the past 12 months. CPG, foodservice and other revenues increased $48 million and $119 million for the third quarter and the first three quarters of fiscal 2014, respectively. These increases were primarily due to increased sales of premium single serve products (approximately $26 million and $74 million, respectively). For the third quarter of fiscal 2014, increased sales volumes of packaged coffee (approximately $16 million) also contributed. 20



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Table of Contents Operating Expenses Quarter Ended Three Quarters Ended

Jun 29, Jun 30, Jun 29, Jun 30, Jun 29, Jun 30, Jun 29, Jun 30, 2014 2013 2014 2013 2014 2013 2014 2013 % of Total % of Total Net Revenues Net Revenues Cost of sales including occupancy costs $ 1,711.5$ 1,597.6 41.2 % 42.8 % $ 5,135.7$ 4,748.6 41.9 % 42.9 % Store operating expenses 1,176.5 1,084.1 28.3 29.0 3,486.1 3,212.2 28.4 29.0 Other operating expenses 120.6 98.9 2.9 2.6 346.3 330.8 2.8 3.0 Depreciation and amortization expenses 180.1 153.3 4.3 4.1 524.2 455.3 4.3 4.1 General and administrative expenses 269.4 249.6 6.5 6.7 752.6 711.7 6.1 6.4 Litigation (20.2 ) charge/(credit) - - - - - (0.2 ) - Total operating expenses 3,458.1 3,183.5 83.3 85.2 10,224.7 9,458.6 83.4 85.4 Income from equity investees 72.9 63.4 1.8 1.7 183.9 170.4 1.5 1.5 Operating income $ 768.5$ 615.2 18.5 % 16.5 % $ 2,226.3$ 1,789.9 18.1 % 16.2 % Store operating expenses as a % of related revenues 35.8 % 36.3 % 35.9 % 36.6 % Cost of sales including occupancy costs as a percentage of total net revenues decreased 160 basis points and 100 basis points for the third quarter and first three quarters of fiscal 2014, respectively, primarily driven by lower commodity costs (approximately 80 basis points for both periods), mainly coffee. For the third quarter of fiscal 2014, sales leverage (approximately 50 basis points), primarily on occupancy costs, also contributed to the decrease. Store operating expenses as a percentage of total net revenues decreased 70 basis points and 60 basis points for the third quarter and for the first three quarters of fiscal 2014, respectively. Store operating expenses as a percentage of company-operated store revenues decreased 50 basis points for the third quarter and 70 basis points for the first three quarters of fiscal 2014. The decrease for the third quarter was primarily driven by sales leverage. The decrease for the first three quarters of fiscal 2014 was primarily driven by higher litigation charges in the first quarter of the prior year period (approximately 30 basis points) and a decrease in marketing (approximately 20 basis points). Other operating expenses as a percentage of total net revenues increased 30 basis points for the third quarter and decreased 20 basis points for the first three quarters of fiscal 2014. Excluding the impact of company-operated store revenues, other operating expenses increased 80 basis points for the third quarter and decreased 90 basis points for the first three quarters of fiscal 2014. The increase for the third quarter was primarily driven by increased marketing (approximately 50 basis points). The decrease for the first three quarters was primarily driven by sales leverage (approximately 40 basis points). General and administrative expenses as a percentage of total net revenues decreased 20 basis points and 30 basis points for the third quarter and for the first three quarters of fiscal 2014, respectively. The decrease for the third quarter was primarily driven by sales leverage. The decrease for the first three quarters was primarily due to lapping our leadership conference held in the first quarter of the prior year period. The $20.2 million litigation credit (contributing approximately 20 basis points for the first three quarters of fiscal 2014) reflects a reduction to our estimated prejudgment interest payable associated with the Kraft arbitration in the first quarter of fiscal 2014, as a result of paying our obligation earlier than anticipated. The $2.8 billion litigation charge was accrued in the fourth quarter of fiscal 2013 and fully extinguished in the first quarter of fiscal 2014. The combination of these changes resulted in an overall increase in operating margin of 200 basis points for the third quarter and 190 basis points for the first three quarters of fiscal 2014. 21



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Table of Contents Other Income and Expenses Quarter Ended Three Quarters Ended Jun 29, Jun 30, Jun 29, Jun 30, Jun 29, Jun 30, Jun 29, Jun 30, 2014 2013 2014 2013 2014 2013 2014 2013 % of Total % of Total Net Revenues Net Revenues Operating income $ 768.5$ 615.2 18.5 % 16.5 % $ 2,226.3$ 1,789.9 18.1 % 16.2 % Interest income and other, net 19.4 3.5 0.5 0.1 57.0 51.4 0.5 0.5 Interest expense (16.4 ) (6.3 ) (0.4 ) (0.2 ) (47.7 ) (19.0 ) (0.4 ) (0.2 ) Earnings before income taxes 771.5 612.4 18.6 16.4 2,235.6 1,822.3 18.2 16.4 Income taxes 259.0 194.6 6.2 5.2 755.4 581.4 6.2 5.2 Net earnings including noncontrolling interests 512.5 417.8 12.3 11.2 1,480.2 1,240.9 12.1 11.2 Net earnings attributable to noncontrolling interests (0.1 ) - - - (0.1 ) 0.6 - - Net earnings attributable to Starbucks $ 512.6$ 417.8 12.3 % 11.2 % $ 1,480.3$ 1,240.3 12.1 % 11.2 % Effective tax rate including noncontrolling interests 33.6 % 31.8 % 33.8 % 31.9 % For the third quarter and first three quarters of fiscal 2014, net interest income and other increased $16 million and $6 million, respectively. These increases were primarily driven by favorable fair value adjustments from derivatives used to manage our risk of commodity price fluctuations (approximately $4 million for the third quarter and $21 million for the first three quarters)and increased income associated with unredeemed gift cards (approximately $6 million for the third quarter and $9 million for the first three quarters), primarily due to growth in the Starbucks Card program. For the first three quarters of fiscal 2014, an increase in unrealized gains on our trading securities portfolio (approximately $5 million) and net favorable foreign exchange fluctuations (approximately $5 million) also contributed to the overall increase in such period. The increase for the first three quarters of fiscal 2014 was partially offset by lapping the gain on the sale of our equity in the joint venture that operates Starbucks® stores in Mexico in the second quarter of the prior year period (approximately $35 million). Interest expense increased $10 million for the third quarter and $29 million for the first three quarters of fiscal 2014, respectively, due to interest on the long-term debt we issued in the first quarter of fiscal 2014 and the fourth quarter of fiscal 2013. The effective tax rate for the quarter ended June 29, 2014 was 33.6% compared to 31.8% for the same quarter in fiscal 2013. The increase in the rate was primarily driven by lapping benefits from releasing certain tax reserves in the prior year period primarily related to expiration of statutes of limitation and the outcome of a federal audit. The effective tax rate for the three quarters ended June 29, 2014 was 33.8% compared to 31.9% for the same period in fiscal 2013. The increase in the rate for the first three quarters of fiscal 2014 was primarily due to lapping the recognition of a net tax benefit in the first quarter of fiscal 2013 primarily from state income tax expense adjustments for returns filed in prior years and lapping benefits from releasing certain tax reserves in the third quarter of fiscal 2013. 22



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Segment Information Results of operations by segment (in millions): Americas Quarter Ended



Three Quarters Ended

Jun 29, Jun 30, Jun 29, Jun 30, Jun 29, Jun 30, Jun 29, Jun 30, 2014 2013 2014 2013 2014 2013 2014 2013 % of Americas % of Americas Net Revenues Net Revenues Total net revenues $ 3,057.7$ 2,776.5$ 8,939.4$ 8,221.2 Cost of sales including occupancy costs 1,130.0 1,051.2 37.0 % 37.9 % 3,353.8 3,143.6 37.5 % 38.2 % Store operating expenses 1,002.4 934.8 32.8 33.7 2,965.9 2,786.6 33.2 33.9 Other operating expenses 26.2 23.0 0.9 0.8 75.2 74.1 0.8 0.9 Depreciation and amortization expenses 119.5 105.2 3.9 3.8 346.6 316.2 3.9 3.8 General and administrative expenses 51.1 43.0 1.7 1.5 131.9 143.9 1.5 1.8 Total operating expenses 2,329.2 2,157.2 76.2 77.7

6,873.4 6,464.4 76.9 78.6 Income from equity investees - - - - - 2.4 - - Operating income $ 728.5$ 619.3 23.8 % 22.3 % $ 2,066.0$ 1,759.2 23.1 % 21.4 % Store operating expenses as a % of related revenues 36.2 % 36.8 % 36.5 % 37.2 % Revenues Americas total net revenues for the third quarter and the first three quarters of fiscal 2014 increased $281 million, or 10%, and $718 million, or 9%, respectively. These increases were primarily due to higher revenues from company-operated stores (contributing $235 million and $621 million, respectively) and licensed stores (contributing $47 million and $103 million, respectively). The increase in company-operated store revenues for both periods was driven by an increase in comparable store sales (approximately 6% for both periods, or $161 million for the third quarter and approximately $427 million, for the first three quarters). Also contributing were incremental revenues from 316 net new Starbucks® company-operated store openings over the past 12 months (approximately $101 million and $280 million, respectively). Partially offsetting these increases was unfavorable foreign currency exchange (approximately $16 million and $53 million, respectively), primarily driven by the strengthening of the US dollar against the Canadian dollar. The increases in licensed store revenues were primarily due to increased product sales to and higher royalty revenues from our licensees as a result of improved comparable store sales and the opening of 440 net new licensed stores over the past 12 months. Operating Expenses Cost of sales including occupancy costs as a percentage of total net revenues decreased 90 basis points and 70 basis points for the third quarter and the first three quarters of fiscal 2014, respectively. These decreases were primarily driven by sales leverage (approximately 50 basis points for the third quarter and 40 basis points for the first three quarters), primarily on occupancy costs. Lower commodity costs (approximately 30 basis points for the third quarter and 40 basis points for the first three quarters), mainly coffee, also contributed. Store operating expenses as a percentage of total net revenues decreased 90 basis points and 70 basis points for the third quarter and the first three quarters of fiscal 2014, respectively. Store operating expenses as a percentage of company-operated store revenues decreased 60 basis points and 70 basis points for the third quarter and for the first three quarters of fiscal 2014, respectively. The decrease for the third quarter was primarily driven by sales leverage. The decrease for the first three quarters was primarily driven by higher litigation charges in the first quarter of the prior year period (approximately 30 basis points) and a decrease in marketing (approximately 20 basis points). General and administrative expenses as a percentage of total net revenues increased 20 basis points for the third quarter and decreased 30 basis points for the first three quarters of fiscal 2014. The increase for the third quarter was primarily driven by 23



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higher compensation-related costs (approximately 20 basis points). The decrease for the first three quarters was primarily due to lapping our leadership conference held in the first quarter of the prior year period (approximately 30 basis points). The combination of these changes resulted in an overall increase in operating margin of 150 basis points for the third quarter and 170 basis points for the first three quarters of fiscal 2014. EMEA Quarter Ended



Three Quarters Ended

Jun 29, Jun 30, Jun 29, Jun 30, Jun 29, Jun 30, Jun 29, Jun 30, 2014 2013 2014 2013 2014 2013 2014 2013 % of EMEA % of EMEA Net Revenues Net Revenues Total net revenues $ 323.5$ 287.2$ 973.0$ 866.6 Cost of sales including occupancy costs 161.4 147.5 49.9 % 51.4 % 487.9 440.8 50.1 % 50.9 % Store operating expenses 91.4 85.8 28.3 29.9 280.1 259.3 28.8 29.9 Other operating expenses 12.5 9.9 3.9 3.4 35.9 29.0 3.7 3.3 Depreciation and amortization expenses 15.1 13.7 4.7 4.8 44.5 41.6 4.6 4.8 General and administrative expenses 15.0 21.0 4.6 7.3 47.1 59.0 4.8 6.8 Total operating expenses 295.4 277.9 91.3 96.8 895.5 829.7 92.0 95.7 Income from equity investees 1.1 - 0.3 - 3.0 - 0.3 - Operating income $ 29.2$ 9.3 9.0 % 3.2 % $ 80.5$ 36.9 8.3 % 4.3 % Store operating expenses as a % of related revenues 36.3 % 37.6 % 36.6 % 37.0 % Revenues EMEA total net revenues increased $36 million, or 13%, for the third quarter of fiscal 2014 and increased $106 million, or 12%, for the first three quarters of fiscal 2014. These increases were primarily due to higher revenues from company-operated stores (contributing $24 million and $66 million, respectively), primarily due to favorable foreign currency exchange (approximately $18 million and $36 million, respectively), primarily driven by the weakening of the US dollar against the British pound and the Euro, and an increase in comparable store sales (approximately 3%, or $8 million, for the third quarter and approximately 5%, or $32 million, for the first three quarters). Licensed store revenues grew (approximately $11 million, or 23%, for the third quarter and $36 million, or 26%, for the first three quarters), due to increased equipment and product sales to and higher royalty revenues from our licensees, primarily from the opening of 166 net new licensed stores over the past 12 months and improved comparable store sales. Operating Expenses Cost of sales including occupancy costs as a percentage of total net revenues decreased 150 basis points for the third quarter and 80 basis points for the first three quarters of fiscal 2014. The decrease for the third quarter was primarily due to sales leverage (approximately 80 basis points), largely driven by the shift to more licensed stores in the region. Also contributing to the decrease for the third quarter were favorable foreign currency fluctuations (approximately 60 basis points) and lower coffee costs (approximately 50 basis points). The decrease for the first three quarters was primarily driven by lower coffee costs (approximately 60 basis points), sales leverage (approximately 50 basis points) and improved inventory management (approximately 40 basis points). The decreases for both periods were partially offset by lapping a reduction to the estimated asset retirement obligations of our store leases in the region in fiscal 2013 (approximately 70 basis points for the third quarter and 80 basis points for the first three quarters). Store operating expenses as a percentage of total net revenues decreased 160 basis points and 110 basis points for the third quarter and the first three quarters of fiscal 2014, respectively. As a percentage of company-operated store revenues, store operating expenses decreased 130 basis points for the third quarter and 40 basis points for the first three quarters of fiscal 2014. The decrease for the third quarter was primarily due to decreased marketing (approximately 90 basis points). The decrease for the first three quarters was primarily due to sales leverage (approximately 40 basis points). 24



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Other operating expenses as a percentage of total net revenues increased 50 basis points and 40 basis points for the third quarter and the first three quarters of fiscal 2014, respectively. Excluding the impact of company-operated store revenues, other operating expenses increased 60 basis points for the third quarter and was flat for the first three quarters. The increase in the third quarter was primarily driven by higher performance-based compensation (approximately 60 basis points). General and administrative expenses as a percentage of total net revenues decreased 270 basis points and 200 basis points for the third quarter and the first three quarters of fiscal 2014, respectively. These decreases were primarily due to sales leverage and reduced support costs, largely driven by the shift to more licensed stores (approximately 250 basis points for the third quarter and 190 basis points for the first three quarters of fiscal 2014). The combination of these changes resulted in an overall increase in operating margin of 580 basis points for the third quarter and 400 basis points for the first three quarters of fiscal 2014. China / Asia Pacific Quarter Ended



Three Quarters Ended

Jun 29, Jun 30, Jun 29, Jun 30, Jun 29, Jun 30, Jun 29, Jun 30, 2014 2013 2014 2013 2014 2013 2014 2013 % of CAP % of CAP Net Revenues Net Revenues Total net revenues $ 287.6$ 233.7$ 819.8$ 661.4 Cost of sales including occupancy costs 137.8 112.5 47.9 % 48.1 % 398.0 323.9 48.5 % 49.0 % Store operating expenses 54.8 42.2 19.1 18.1 158.5 121.9 19.3 18.4 Other operating expenses 13.2 12.0 4.6 5.1 34.8 33.7 4.2 5.1 Depreciation and amortization expenses 11.3 8.6 3.9 3.7 33.4 24.4 4.1 3.7 General and administrative expenses 16.0 14.0 5.6 6.0 43.1 37.5 5.3 5.7 Total operating expenses 233.1 189.3 81.1 81.0 667.8 541.4 81.5 81.9 Income from equity investees 46.3 40.3 16.1 17.2 116.8 105.3 14.2 15.9 Operating income $ 100.8$ 84.7 35.0 % 36.2 % $ 268.8$ 225.3 32.8 % 34.1 % Store operating expenses as a % of related revenues 25.3 % 24.6 % 25.5 % 25.5 % Revenues China/Asia Pacific total net revenues for the third quarter and the first three quarters of fiscal 2014 increased $54 million, or 23%, and $158 million, or 24%, respectively, primarily due to increased revenues from company-operated stores (contributing $45 million for the third quarter and $143 million for the first three quarters). The increases in company-operated store revenues were primarily driven by the opening of 238 net new company-operated stores over the past 12 months (approximately $38 million for the third quarter and $115 million for the first three quarters) and an increase in comparable store sales (approximately 7% for both periods, or $12 million for the third quarter and $35 million for the first three quarters). Operating Expenses Cost of sales including occupancy costs as a percentage of total net revenues decreased 20 basis points for the third quarter of fiscal 2014 and 50 basis points for the first three quarters of fiscal 2014. The decrease for the third quarter was primarily due to company-operated store revenue growth outpacing licensed store revenue growth (approximately 20 basis points). The decrease for the first three quarters was primarily due to sales leverage (approximately 30 basis points). Store operating expenses as a percentage of total net revenues increased 100 basis points for the third quarter and 90 basis points for the first three quarters of fiscal 2014. As a percentage of company-operated store revenues, store operating expenses increased 70 basis points for the third quarter, primarily driven by higher costs associated with supporting store growth (approximately 60 basis points), such as salaries and benefits. Store operating expenses as a percentage of company-operated store revenues were flat for the first three quarters. Other operating expenses as a percentage of total net revenues decreased 50 basis points for the third quarter of fiscal 2014 and 90 basis points for the first three quarters of fiscal 2014. Excluding the impact of company-operated store revenues, other 25



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operating expenses decreased 60 basis points for the third quarter and 90 basis points for the first three quarters, primarily due to sales leverage and cost management. Income from equity investees increased $6 million for the third quarter of fiscal 2014 and $12 million for the first three quarters of fiscal 2014, driven by higher income from our joint venture operations, mainly in South Korea and China. Higher income from our Japan joint venture also contributed to the third quarter increase. The increase for the first three quarters was partially offset by unfavorable foreign currency fluctuations due to the weakening of the Yen against the US dollar. These fluctuations, paired with the accelerated growth in segment revenues resulting from the shift in the composition of the store portfolio to more company-operated stores, resulted in income from equity investees declining as a percentage of total net revenues. The changes in the above items resulted in an overall decrease in operating margin of 120 basis points for the third quarter and 130 basis points for the first three quarters of 2014. Channel Development Quarter Ended Three Quarters Ended Jun 29, Jun 30, Jun 29, Jun 30, Jun 29, Jun 30, Jun 29, Jun 30, 2014 2013 2014 2013 2014 2013 2014 2013 % of Channel % of Channel Development Development Net Revenues Net Revenues Total net revenues $ 375.3$ 331.0$ 1,146.8$ 1,043.5 Cost of sales 208.3 213.1 55.5 %



64.4 % 667.5 660.9 58.2 % 63.3 % Other operating expenses

48.3 39.0 12.9 11.8 142.9 140.5 12.5 13.5 Depreciation and amortization expenses 0.4 0.2 0.1 0.1 1.2 0.9 0.1 0.1 General and administrative expenses 4.5 5.5 1.2



1.7 13.8 16.8 1.2 1.6 Total operating expenses

261.5 257.8 69.7



77.9 825.4 819.1 72.0 78.5 Income from equity investees

25.5 23.1 6.8



7.0 64.1 62.7 5.6 6.0 Operating income $ 139.3$ 96.3

37.1 %



29.1 % $ 385.5$ 287.1 33.6 % 27.5 %

Revenues

Total Channel Development net revenues for the third quarter and the first three quarters of fiscal 2014 increased $44 million, or 13%, and $103 million, or 10%, respectively, primarily driven by increased sales of premium single serve products (approximately $26 million for the third quarter and $74 million for the first three quarters). Contributing to increased revenues in the third quarter was an increase in US packaged coffee sales (approximately $16 million) driven by increased sales volumes compared to the prior year period. Increased foodservice revenues (approximately $5 million for the third quarter and $18 million for the first three quarters) driven by increased sales volumes, also contributed. Operating Expenses Cost of sales as a percentage of total net revenues decreased 890 basis points for the third quarter and 510 basis points for the first three quarters of fiscal 2014. The decrease was primarily driven by lower coffee costs (approximately 540 basis points for the third quarter and 460 basis points for the first three quarters). Also contributing to the decrease in the third quarter was improved inventory management compared to the prior year period (approximately 170 basis points). Other operating expenses as a percentage of total net revenues increased 110 basis points for the third quarter and decreased 100 basis points for the first three quarters of fiscal 2014. The increase for the third quarter was primarily driven by increased marketing (approximately 70 basis points), largely due to the timing of product launches. The decrease for the first three quarters was primarily driven by sales leverage. Income from equity investees increased $2 million for the third quarter and $1 million for the first three quarters of fiscal 2014. The increase for both periods was driven by higher income from our North American Coffee Partnership joint venture, primarily due to strong sales of bottled Frappuccino®. The growth in segment revenues resulted in our joint venture income declining as a percentage of total net revenues. The combination of these changes resulted in an overall increase in operating margin of 800 basis points for the third quarter and 610 basis points for the first three quarters of fiscal 2014. 26



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Table of Contents All Other Segments Quarter Ended Three Quarters Ended Jun 29, Jun 30, % Jun 29, Jun 30, % 2014 2013 Change 2014 2013 Change Total net revenues $ 109.6$ 106.9 2.5 % $ 388.1$ 285.4 36.0 % Cost of sales 65.9 66.5 (0.9 ) 217.2 172.5 25.9 Store operating expenses 27.9 21.3 31.0 81.6 44.4 83.8 Other operating expenses 20.5 15.2 34.9 58.1 53.8 8.0 Depreciation and amortization expenses 3.9 3.6 8.3 11.3 7.9 43.0 General and administrative expenses 10.3 9.7 6.2 32.9 24.8 32.7 Total operating expenses 128.5 116.3 10.5 401.1 303.4 32.2 Operating income/(loss) $ (18.9 )$ (9.4 ) 101.1% $ (13.0 )$ (18.0 ) (27.8 )% All Other Segments includes Teavana, Seattle's Best Coffee, Evolution Fresh, and Digital Ventures. Total net revenues for All Other Segments increased $3 million for the third quarter of fiscal 2014 and $103 million for the first three quarters of fiscal 2014. The increase for the third quarter was primarily driven by increased sales in our emerging businesses. The increase for the first three quarters was primarily driven by having an additional quarter of Teavana revenues in fiscal 2014 as Teavana was acquired at the beginning of the second quarter of fiscal 2013 (approximately $92 million). Total operating expenses increased $12 million for the third quarter and $98 million for the first three quarters of fiscal 2014. The increase for the third quarter was driven by investments to support growth in our emerging businesses. The increase for the first three quarters was primarily due to having an additional quarter of Teavana expenses in fiscal 2014 as Teavana was acquired at the beginning of the second quarter of fiscal 2013. 27



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Quarterly Store Data Our store data for the periods presented is as follows: Net stores opened/(closed) during the period Quarter Ended Three Quarters Ended Stores open as of Jun 29, Jun 30, Jun 29, Jun 30, Jun 29, Jun 30, 2014 2013 2014 2013 2014 2013 Americas Company-operated stores 69 62 155 112 8,233 7,914 Licensed stores 80 96 264 228 5,679 5,239 Total Americas 149 158 419 340 13,912 13,153 EMEA(1) Company-operated stores (3 ) 1 1 (23 ) 839 844 Licensed stores 40 42 132 95 1,263 1,097 Total EMEA 37 43 133 72 2,102 1,941 China / Asia Pacific Company-operated stores 45 48 159 161 1,065 827 Licensed stores 115 71 384 230 3,360 2,858 Total China / Asia Pacific 160 119 543 391 4,425 3,685 All Other Segments(2) Company-operated stores 10 27 21 336 378 350 Licensed stores (12 ) (6 ) (20 ) 4 46 80 Total All Other Segments (2 ) 21 1 340 424 430 Total Company 344 341 1,096 1,143 20,863 19,209 (1) EMEA store data has been adjusted for the transfer of certain company-operated stores to licensed stores in the second quarter of fiscal 2014. (2) Net new stores for the three quarters ended June 30, 2013 includes 337 Teavana stores acquired in the second quarter of fiscal 2013. Financial Condition, Liquidity and Capital Resources Investment Overview Starbucks cash and investments totaled $2.0 billion and $3.3 billion as of June 29, 2014 and September 29, 2013, respectively. As discussed below, in the first quarter of fiscal 2014 we paid $2.8 billion for the Kraft arbitration matter that was accrued in the fourth quarter of fiscal 2013. We actively manage our cash and investments in order to internally fund operating needs, make scheduled interest and principal payments on our borrowings, and return cash to shareholders through common stock cash dividend payments and share repurchases. Our investment portfolio primarily includes highly liquid available-for-sale securities, including government treasury securities (foreign and domestic), corporate bonds, mortgage and asset-backed securities, state and local government obligations, certificates of deposit and agency obligations. As of June 29, 2014, approximately $1.3 billion of our cash and investments were held in foreign subsidiaries. Borrowing Capacity In December 2013, we issued $400 million of 3-year 0.875% Senior Notes ("the 2014 3-year notes") due December 2016, and $350 million of 5-year 2.000% Senior Notes ("the 2014 5-year notes") due December 2018, in an underwritten registered public offering, to fund a portion of the payment required by the arbitration award in the Kraft litigation matter. The remaining net proceeds will be used for general corporate purposes, which may include business expansion, payment of cash dividends on our common stock, the repurchase of common stock under our ongoing share repurchase program, or financing of possible acquisitions. Interest on the notes is payable semi-annually on June 5 and December 5 of each year, commencing on June 5, 2014. See Note 6, Debt, to the condensed consolidated financial statements included in Item 1 of Part I of this 10-Q for details of the components of our long-term debt. 28



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The indentures under which all of our Senior Notes were issued require us to maintain compliance with certain covenants, including limits on future liens and sale and leaseback transactions on certain material properties. As of June 29, 2014, we were in compliance with all applicable covenants. Our $750 million unsecured, revolving credit facility with various banks, of which $150 million may be used for issuances of letters of credit, is available for working capital, capital expenditures and other corporate purposes, including acquisitions and share repurchases, and is currently set to mature on February 5, 2018. Starbucks has the option, subject to negotiation and agreement with the related banks, to increase the maximum commitment amount by an additional $750 million. Borrowings under the credit facility will bear interest at a variable rate based on LIBOR, and, for US dollar-denominated loans under certain circumstances, a Base Rate (as defined in the credit facility), in each case plus an applicable margin. The applicable margin is based on the better of (i) the Company's long-term credit ratings assigned by Moody's and Standard & Poor's rating agencies, and (ii) the Company's fixed charge coverage ratio, pursuant to a pricing grid set forth in the credit facility. The current applicable margin is 0.795% for Eurocurrency Rate Loans and 0.00% for Base Rate Loans. The credit facility contains provisions requiring us to maintain compliance with certain covenants, including a minimum fixed charge coverage ratio, which measures our ability to cover financing expenses. As of June 29, 2014, we were in compliance with all applicable covenants. No amounts were outstanding under our credit facility as of June 29, 2014. Under our commercial paper program, as approved by our Board of Directors, we 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. Amounts outstanding under the commercial paper program are to be backstopped by available commitments under our credit facility. Currently, we may issue up to $727 million under our commercial paper program (the $750 million committed credit facility amount, less $23 million in outstanding letters of credit). The proceeds from borrowings under our commercial paper program may be used for working capital needs, capital expenditures and other corporate purposes, including acquisitions and share repurchases. In the first quarter of fiscal 2014, we issued and subsequently repaid commercial paper borrowings of $225 million to fund a portion of the $2.8 billion payment for the Kraft arbitration matter. We had no borrowings under our commercial paper program during the third quarter of fiscal 2014. Use of Cash In the first quarter of fiscal 2014, Starbucks paid all amounts due to Kraft under the arbitration, including prejudgment interest and attorneys' fees, and fully extinguished the litigation charge liability. Of the $2,784.1 million litigation charge accrued in the fourth quarter of fiscal 2013, $2,763.9 million was paid and the remainder was released as a litigation credit to reflect a reduction to our estimated prejudgment interest payable as a result of paying our obligation earlier than anticipated. We expect to use additional available cash and short-term investments, including additional potential future borrowings under the credit facility and commercial paper program, to invest in our core businesses, including new product innovations and related marketing support, as well as other new business opportunities related to our core businesses. We believe that future cash flows generated from operations and existing cash and short-term investments both domestically and internationally will be sufficient to finance capital requirements for our core businesses in those respective markets as well as shareholder distributions for the foreseeable future. We consider the majority of undistributed earnings of our foreign subsidiaries and equity investees as of June 29, 2014 to be indefinitely reinvested and, accordingly, no US income and foreign withholding taxes have been provided on such earnings. We have not, nor do we anticipate the need to, repatriate funds to the US to satisfy domestic liquidity needs; however, in the event that we need to repatriate all or a portion of our foreign cash to the US we would be subject to additional US income taxes, which could be material. We do not believe it is practical to calculate the potential tax impact of repatriation, as there is a significant amount of uncertainty around the calculation, including the availability and amount of foreign tax credits at the time of repatriation, tax rates in effect, and other indirect tax consequences associated with repatriation. We may use our available cash resources to make proportionate capital contributions to our equity method and cost method investees. We may also seek strategic acquisitions to leverage existing capabilities and further build our business in support of our growth agenda. Acquisitions may include increasing our ownership interests in our equity method and cost method investees. Any decisions to increase such ownership interests will be driven by valuation and fit with our ownership strategy. Significant new joint ventures, acquisitions and/or other new business opportunities may require additional outside funding. Other than normal operating expenses, cash requirements for the remainder of fiscal 2014 are expected to consist primarily of capital expenditures for remodeling and refurbishment of, and equipment upgrades for, existing company-operated stores; new company-operated stores; systems and technology investments in the stores and in the support infrastructure; and additional investments in manufacturing capacity. Total capital expenditures for fiscal 2014 are expected to be approximately $1.2 billion. During the third quarter of fiscal 2014, our Board of Directors declared a quarterly cash dividend to shareholders of $0.26 per share to be paid on August 22, 2014 to shareholders of record as of the close of business on August 7, 2014. We repurchased 29



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8.2 million shares of common stock ($595.2 million) during the first three quarters of fiscal 2014 under share repurchase authorizations. The number of remaining shares authorized for repurchase as of June 29, 2014 totaled 18.1 million. Cash Flows Cash used by operating activities was $133.4 million for the first three quarters of fiscal 2014, compared to cash provided by operating activities of $2.0 billion for the same period in fiscal 2013. The decrease was driven by the first quarter payment of $2.8 billion for the Kraft arbitration matter discussed above. This was partially offset by cash provided by operating activities of $2.6 billion resulting from increased earnings and improvements in working capital accounts. Cash used by investing activities for the first three quarters of fiscal 2014 totaled $1.1 billion, compared to $998.4 million for the same period in fiscal 2013. The change was primarily due to increased investments in long-term securities during the first three quarters of fiscal 2014, partially offset by the use of cash to acquire Teavana in the second quarter of fiscal 2013. Cash used by financing activities for the first three quarters of fiscal 2014 totaled $295.7 million, compared to $783.8 million for the same period in fiscal 2013. The change was primarily due to the proceeds from the issuance of long-term debt in the first quarter of fiscal 2014, partially offset by a decrease in the excess tax benefit from the exercise of stock options as a result of fewer option exercises during the period. An increase in cash returned to shareholders through higher dividend payments also contributed. Contractual Obligations In Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 10-K, we disclosed that we had $10.0 billion in total contractual obligations as of September 29, 2013. Other than the items discussed below, there have been no material changes to this total obligation during the period covered by this 10-Q outside of the ordinary course of our business. In the first quarter of fiscal 2014, we issued $750 million of debt, as described in Note 6 to the condensed consolidated financial statements included in Item 1 of Part I of this 10-Q. In addition, the $2.8 billion that was accrued for the Kraft arbitration matter as of September 29, 2013 was removed from total contractual obligations, as this obligation was fully extinguished in the first quarter of fiscal 2014. Off-Balance Sheet Arrangements There has been no material change in our off-balance sheet arrangements discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 10-K. Commodity Prices, Availability and General Risk Conditions Commodity price risk represents our primary market risk, generated by our purchases of green coffee and dairy products, among other items. We purchase, roast and sell high quality whole bean arabica coffee and related products and risk arises from the price volatility of green coffee. In addition to coffee, we also purchase significant amounts of dairy products to support the needs of our company-operated stores. The price and availability of these commodities directly impact our results of operations and we expect commodity prices, particularly coffee, to impact future results of operations. For additional details see Product Supply in Item 1 of the 10-K, as well as Risk Factors in Item 1A of the 10-K. Seasonality and Quarterly Results Our business is subject to seasonal fluctuations, including fluctuations resulting from the holiday season in December. Excluding the impact of our $2.8 billion cash payment in the first quarter of fiscal 2014 related to the Kraft arbitration matter, our cash flows from operations are considerably higher in the first fiscal quarter than the remainder of the year. This is largely driven by cash loaded onto Starbucks Cards during the holiday season. Since revenues from the Starbucks Card are recognized upon redemption and not when purchased, seasonal fluctuations on the consolidated statements of earnings are much less pronounced. Quarterly results are affected by the timing of the opening of new stores and the closing of existing stores. For these reasons, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. RECENT ACCOUNTING PRONOUNCEMENTS See Note 1 to the condensed consolidated financial statements included in Item 1 of Part I of this 10-Q. Item 3. Quantitative and Qualitative Disclosures About Market Risk There has been no material change in the commodity price risk, foreign currency exchange risk, equity security price risk, or interest rate risk discussed in Item 7A of the 10-K. 30



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