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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the Quarterly Period Ended December 28, 2003

OR

For the transition period from            to            .

Commission File Number: 0-20322

STARBUCKS CORPORATION

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

(206) 447-1575
(Registrant’s Telephone Number, including Area Code)

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x          No  o

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

Yes x          No  o

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

STARBUCKS CORPORATION

FORM 10-Q

For the Quarterly Period Ended December 28, 2003

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

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

See Notes to Consolidated Financial Statements.

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STARBUCKS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

See Notes to Consolidated Financial Statements.

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

       See Notes to Consolidated Financial Statements.

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STARBUCKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the 13 Weeks Ended December 28, 2003

Note 1: Financial Statement Preparation

The consolidated financial statements as of December 28, 2003, and September 28, 2003, and for the 13-week periods ended December 28, 2003, and December 29, 2002, have been prepared by Starbucks Corporation (“Starbucks” or the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The financial information for the 13-week periods ended December 28, 2003, and December 29, 2002, is unaudited, but, in the opinion of management, reflects all adjustments and accruals necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods.

The financial information as of September 28, 2003, is derived from the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended September 28, 2003 (“Fiscal 2003”), included in Item 8 in the Fiscal 2003 Annual Report on Form 10-K, and should be read in conjunction with such financial statements.

Certain reclassifications of prior year’s balances have been made to conform to the current format.

The results of operations for the 13-week period ended December 28, 2003, are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending October 3, 2004.

Note 2: Summary of Significant Accounting Policies

Revenue Recognition

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

Accounting for Stock-Based Compensation

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

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

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

Recently Issued Accounting Pronouncements

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

Note 3: Inventories

Inventories consist of the following (in thousands):

As of December 28, 2003, the Company had committed to fixed-price purchase contracts for green coffee totaling approximately $391.4 million.

Note 4: Derivative Financial Instruments

Cash Flow Hedges

Cash flow derivative instruments hedge portions of anticipated revenue streams and purchases denominated in Japanese yen, Canadian dollars and/or United States dollars. These contracts expire within 21 months. During the 13-week periods ended December 28, 2003, and December 29, 2002, derivative losses of $0.5 million and $0.2 million were reclassified into revenues, respectively. During the 13-week period ended December 28, 2003, derivative losses of $0.2 million were reclassified into cost of sales. The Company had accumulated net derivative losses of $2.8 million, net of taxes, in other comprehensive income as of December 28, 2003, related to cash flow hedges. Of this amount, $2.0 million of net derivative losses will be reclassified into earnings within 12 months. No significant cash flow hedges were discontinued during the 13-week periods ended December 28, 2003, and

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December 29, 2002.

Net Investment Hedges

Net investment derivative instruments hedge the Company’s equity method investment in Starbucks Coffee Japan, Ltd. These contracts expire within 11 months and are intended to minimize foreign currency exposure to fluctuations in the Japanese yen. As a result of using the spot-to-spot method, the Company recognized net gains of $0.1 million and $0.4 million for the 13-week periods ended December 28, 2003, and December 29, 2002, respectively. In addition, the Company had accumulated net derivative losses of $5.3 million, net of taxes, in other comprehensive income as of December 28, 2003.

Note 5: Property, Plant, and Equipment

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

Note 6: Shareholders’ Equity

Pursuant to the Company’s authorized share repurchase programs, Starbucks acquired 1.5 million shares at an average price of $20.62 for a total cost of $29.9 million during the 13-week period ended December 29, 2002. No shares were repurchased during the 13-week period ended December 28, 2003. As of December 28, 2003, there were approximately 14.6 million additional shares authorized for repurchase. Share repurchases are funded through cash, cash equivalents and available-for-sale securities.

Note 7: Comprehensive Income

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