General

Starbucks Corporation's fiscal year ends on the Sunday closest to September 30. Some fiscal years include 53 weeks. The fiscal years ended on September 28, 2008, September 30, 2007 and October 1, 2006 all included 52 weeks. All references to store counts, including data for new store openings, are reported net of related store closures, unless otherwise noted.

Management Overview

Fiscal 2008 - The Year in Review

Throughout fiscal 2008, Starbucks continued to experience declining comparable store sales in its US stores, primarily due to lower customer traffic. With the US segment representing 76% of consolidated revenues, the impact of this decline on the Company's financial results for fiscal 2008 was significant. For fiscal year 2008 comparable store sales declined 5% in the US, with a declining trend over the course of the year, ending with a decline of 8% in the fourth quarter. The Company also experienced declining comparable sales in Canada and the UK, its two largest Company-operated International markets, primarily due to lower traffic. The Company believes that the weaker traffic has been caused by a number of ongoing factors in the global economies that have negatively impacted consumers' discretionary spending, as well as factors within the Company's control with respect to the pace of store openings in the US and store level execution. In the US, the economic factors included the higher cost of such basic consumer staples as gas and food, rising levels of unemployment and personal debt, reduced access to consumer credit, and lower home values as well as increased foreclosure activity in certain areas of the country (California and Florida) where Starbucks has a high concentration of Company-operated stores. These developments combined with recent and ongoing unprecedented shocks to the global financial system and capital markets have all contributed to sharp declines in consumer confidence in the US.

Starbucks business is highly sensitive to increases and decreases in customer traffic. Increased customer visits create sales leverage, meaning that fixed expenses, such as occupancy costs, are spread across a greater revenue base, thereby improving operating margins. But the reverse is also true - sales de-leveraging creates downward pressure on margins. The softness in US revenues during fiscal 2008 impacted nearly all consolidated and US segment operating expense line items when viewed as a percentage of sales.

Since January 2008, when Company founder Howard Schultz reassumed the role of president and chief executive officer in addition to his role as chairman, Starbucks has taken steps to address the deterioration in the US retail environment and address its global support structure. These included the development and implementation of several important strategic initiatives as part of a transformation strategy designed to reinvigorate the Starbucks Experience for the Company's customers, increase customer traffic in its US stores, reduce infrastructure expenses, and improve the Company's results of operations. These significant actions have been designed to structure the Company's business for long-term profitable growth.

As a result of the continued weak economy and decreased customer traffic, as well as the costs associated with the store closures and other actions in its transformation strategy, the Company's fiscal 2008 results were negatively impacted in the following ways:

• Consolidated operating income was $503.9 million in fiscal 2008, and operating margin for the year was 4.9% compared with 11.2% in the prior year. Approximately 260 basis points of the decrease in operating margin was a result of restructuring charges, primarily related to the significant US store closures. Softness in US revenues along with higher cost of sales including occupancy costs and store operating expenses were also significant drivers in the margin decline.

• EPS for fiscal 2008 was $0.43, compared to EPS of $0.87 per share earned in the prior year. Restructuring charges and costs associated with the execution of the transformation agenda impacted EPS by approximately $0.28 per share in fiscal 2008.

Significant Actions Taken in Fiscal 2008

The more significant actions taken by Starbucks in fiscal 2008 to transform and reinvigorate its business included:

• A plan to close approximately 600 underperforming Company-operated stores in the US market, of which 205 were closed as of fiscal year-end with the remaining stores to be closed by the end of fiscal 2009;

• Restructuring the Company's Australia business by closing 61 Company-operated stores, focusing on the remaining 23 stores in three key metro areas;

• Reducing approximately 1,000 open and filled positions within the Company's leadership structure and its non-store organization, to rationalize its infrastructure for the reduced number of stores; and

• Introducing new beverage platforms designed to reinvigorate the Starbucks beverage offerings, new breakfast food offerings and bakery and chilled foods, including health and wellness choices, and a new, everyday brewed coffee, Pike Placetm Roast, which returned the Company to the practice of grinding whole beans in stores and brewing every 30 minutes to provide customers with the freshest coffee possible.

Fiscal 2009 - The View Ahead

Management expects the Company to continue to face a very difficult economic environment throughout fiscal 2009, both in the US and internationally, including in its two largest Company-operated markets of Canada and the UK. As the global financial crisis has broadened and intensified, other sectors of the global economy have been adversely impacted and a severe global recession of uncertain length now appears likely. As a retailer that is dependent upon consumer discretionary spending, the Company expects to face an extremely challenging fiscal 2009 because of these economic conditions. Accordingly, Starbucks expects to report negative comparable store sales for fiscal 2009. Additionally, the Company's earnings for fiscal 2009 will be impacted by lease termination and severance costs from the US and Australia store closures, totaling up to an estimated $0.12 of EPS for fiscal 2009. The Company estimates that the combination of the US and Australia store closures and head count reductions will result in a pre-tax benefit to operating income of approximately $200 million to $210 million in fiscal 2009, which equates to approximately $0.17 to $0.18 of EPS.

Starbucks plans to be disciplined in its approach to new store openings, in both Company-operated and licensed markets, and adjust as needed in response to further worsening in the global economy. Starbucks fiscal 2009 US store opening target is approximately a negative 20 net new stores, which includes a nearly 225 Company-operated store decline and approximately 205 net new licensed stores. Internationally, Starbucks is planning to open approximately 700 net new stores in fiscal 2009, two-thirds of which are expected to be licensed, as it factors in the current global economic climate, with a more cautious approach in the UK and western Europe.

Operating Segment Overview

Starbucks has three reportable operating segments: United States, International and CPG.

The United States and International segments both include Company-operated retail stores, licensed retail stores and foodservice operations. Licensed stores frequently have a higher operating margin than Company-operated stores. Under the licensed model, Starbucks receives a reduced share of the total store revenues, but this is more than offset by the reduction in its share of costs as these are primarily borne by the licensee. The International segment has a higher relative share of licensed stores versus Company-operated compared to the US segment; however, the US 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 more mature US segment has significantly more stores, and higher total revenues than the International segment. Average sales per store are also higher in the US due to various factors including length of time in market and local income levels. Further, certain market costs, particularly occupancy costs, are lower in the US segment compared to the average for the International segment, which comprises a more diverse group of operations. As a result of the relative strength of the brand in the US segment, the number of stores, the higher unit volumes, and the lower market costs, the US segment, despite its higher relative percentage of Company-operated stores, has a higher operating margin, excluding restructuring costs, than the less-developed International segment.

The Company's International store base continues to increase and Starbucks has been achieving a growing contribution from established international markets while at the same time investing in emerging markets, such as China, Brazil and Russia. The Company's newer international markets require a more extensive support organization, relative to the current levels of revenue and operating income.

The CPG segment includes packaged coffee and tea 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 as revenues by the joint venture or licensed business partner, not by the CPG segment, and the proportionate share of 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.

Expenses pertaining to corporate administrative functions that support the operating segments but are not specifically attributable to or managed by any segment are not included in the reported financial results of the operating segments. These unallocated corporate expenses include certain general and administrative expenses, related depreciation and amortization expenses, restructuring charges and amounts included in "Interest income and other, net" and "Interest expense" on the consolidated statements of earnings.

Acquisitions

See Note 2 to the consolidated financial statements in this 10-K.

RESULTS OF OPERATIONS - FISCAL 2008 COMPARED TO FISCAL 2007

Consolidated results of operations (in millions):

Sep 28, Sep 30, Sep 28, Sep 30, Fiscal Year Ended 2008 2007 % Change 2008 2007 % of Total Net Revenues

STATEMENTS OF EARNINGS DATA
Net revenues:
Company-operated retail                       $  8,771.9      $ 7,998.3             9.7 %            84.5 %          85.0 %
Specialty:
Licensing                                        1,171.6        1,026.3            14.2              11.3            10.9
Foodservice and other                              439.5          386.9            13.6               4.2             4.1

Total specialty                                  1,611.1        1,413.2            14.0              15.5            15.0

Total net revenues                            $ 10,383.0      $ 9,411.5            10.3 %           100.0 %         100.0 %

Net revenues for the fiscal year ended 2008 increased due to growth in both Company-operated retail revenues and specialty operations.

During fiscal 2008, Starbucks derived 84% of total net revenues from its Company-operated retail stores. Company-operated retail revenues increased, primarily attributable to the opening of 681 new Company-operated retail stores in the last 12 months, offset by negative 3% comparable store sales for the same period. Revenue growth was slower than in previous years due to a combination of declining comparable store sales and a decrease in the number of net new stores opened during fiscal 2008. The weakness in consolidated comparable store sales was driven by the US segment, which posted a comparable store sales decline of 5% for the year. Partially offsetting this was 2% comparable store sales growth in the International segment. Within fiscal 2008, consolidated quarterly revenue

growth decelerated each quarter and comparable store sales declined each quarter, reflecting the ongoing challenging economic conditions in the US.

The Company derived the remaining 16% of total net revenues from channels outside the Company-operated retail stores, collectively known as specialty operations. Licensing revenues, which are derived from retail store licensing arrangements as well as grocery, warehouse club and certain other branded-product operations, increased primarily due to higher product sales and royalty revenues from the opening of 988 new licensed retail stores in the last 12 months. The increase in Foodservice and other revenues was primarily driven by growth in new and existing accounts in the US foodservice business.

For fiscal 2009, the Company expects total revenues to be relatively flat compared to fiscal 2008, with variations driven by the level of comparable store sales.

                                               Sep 28,        Sep 30,                          Sep 28,            Sep 30,
Fiscal Year Ended                               2008           2007          % Change            2008              2007
                                                                                                % of Total Net Revenues

Cost of sales including occupancy costs       $ 4,645.3      $ 3,999.1            16.2 %             44.7 %           42.5 %
Store operating expenses(1)                     3,745.1        3,215.9            16.5               36.1             34.2
Other operating expenses(2)                       330.1          294.2            12.2                3.2              3.1
Depreciation and amortization expenses            549.3          467.2            17.6                5.3              5.0
General and administrative expenses               456.0          489.2            (6.8 )              4.4              5.2
Restructuring charges                             266.9              -              nm                2.6                -

Total operating expenses                        9,992.7        8,465.6            18.0               96.2             89.9
Income from equity investees                      113.6          108.0             5.2                1.1              1.1

Operating income                              $   503.9      $ 1,053.9           (52.2 )%             4.9 %           11.2 %

(1) As a percentage of related Company-operated retail revenues, store operating expenses were 42.7% and 40.2% for the fiscal years ended September 28, 2008 and September 30, 2007, respectively.

(2) As a percentage of related total specialty revenues, other operating expenses were 20.5% and 20.8% for the fiscal years ended September 28, 2008 and September 30, 2007, respectively.

As discussed in the Management Overview section above, many of the Company's operating expenses are fixed in nature. As a result, the softness in US revenues during fiscal 2008 impacted nearly all consolidated and US segment operating expense line items when viewed as a percentage of sales, and pressured operating margins.

Cost of sales including occupancy costs increased primarily due to higher distribution costs and higher rent expenses as a percentage of revenues. Store operating expenses as a percentage of Company-operated retail revenues increased primarily due to higher payroll expenditures as a percentage of revenues coupled with impairment provisions in the US business, primarily driven by the slowdown in projected store openings. Depreciation and amortization expenses increased primarily due to the opening of 681 new Company-operated retail stores in the last 12 months. General and administrative expenses decreased primarily due to lower payroll-related expenses. Restructuring charges include asset impairment, lease exit and severance costs. These costs are associated with the closure of underperforming stores in the US and Australia, and the rationalization of the Company's leadership structure and non-store organization. See Note 3 to the consolidated financial statements for further discussion.

Operating margin compression was primarily due to lower revenues; in addition, restructuring charges accounted for approximately 40% of the decrease.

                                                Sep 28,        Sep 30,                          Sep 28,           Sep 30,
Fiscal Year Ended                                 2008          2007          % Change            2008             2007
                                                                                                % of Total Net Revenues

Interest income and other, net                  $    9.0      $    40.4           (77.7 )%             0.1 %           0.4 %
Interest expense                                   (53.4 )        (38.0 )          40.5               (0.5 )          (0.4 )

Earnings before income taxes                       459.5        1,056.3           (56.5 )              4.4            11.2
Income taxes                                       144.0          383.7           (62.5 )              1.4             4.1

Net earnings                                    $  315.5      $   672.6           (53.1 )%             3.0 %           7.1 %

Interest income and other net, decreased due primarily to unrealized market value losses on the Company's trading securities portfolio. As described in more detail in Note 4 to the consolidated financial statements, the trading securities approximate a portion of the Company's liability under its Management Deferred Compensation Plan ("MDCP"). The MDCP liability also increases and decreases with changes in investment performance, with this offsetting impact recorded in "General and administrative expenses" on the consolidated statements of earnings. Interest expense increased due to the Company's issuance of $550 million of 10-year 6.25% Senior Notes in August of fiscal 2007.

Income taxes for the fiscal year ended 2008 resulted in an effective tax rate of 31.3% compared to 36.3% for fiscal 2007. The lower rate is due to the higher proportion of income earned in foreign jurisdictions which have lower tax rates, as well as an increase in the domestic manufacturing deduction for manufacturing activities in the US.

Operating Segments

Segment information is prepared on the same basis that the Company's management reviews financial information for operational decision-making purposes. Starbucks has three reportable operating segments: United States, International and CPG. "Unallocated Corporate" includes expenses pertaining to corporate administrative functions that support the operating segments but are not specifically attributable to or managed by any segment and are not included in the reported financial results of the operating segments. Operating income represents earnings before "Interest income and other, net," "Interest expense" and "Income taxes." The following tables summarize the Company's results of operations by segment for fiscal 2008 and 2007 (in millions).

United States

The United States operating segment sells coffee and other beverages,
complementary food, whole bean coffees, and 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.


                                                Sep 28,        Sep 30,                           Sep 28,               Sep 30,
Fiscal Year Ended                                2008           2007          % Change            2008                  2007
                                                                                                As a % of US Total Net Revenues

Net revenues:
Company-operated retail                        $ 6,997.7      $ 6,560.9             6.7 %               88.7 %                89.3 %
Specialty:
Licensing                                          504.2          439.1            14.8                  6.4                   6.0
Foodservice and other                              385.1          349.0            10.3                  4.9                   4.7

Total specialty                                    889.3          788.1            12.8                 11.3                  10.7

Total net revenues                             $ 7,887.0      $ 7,349.0             7.3 %              100.0 %               100.0 %

Company-operated retail revenues increased primarily due to the opening of 445 new Company-operated retail stores in the last 12 months, partially offset by a 5% decrease in comparable store sales for fiscal 2008. The US Company-operated retail business continued to experience deteriorating trends in transactions during the year, driven by the US economic slowdown.

Licensing revenues increased primarily due to higher product sales and royalty revenues as a result of opening 438 new licensed retail stores in the last 12 months. Foodservice and other revenues increased primarily due to growth in new and existing foodservice accounts.

                                                Sep 28,        Sep 30,                            Sep 28,                Sep 30,
Fiscal Year Ended                                2008           2007          % Change              2008                   2007
                                                                                                  As a % of US Total Net Revenues

Cost of sales including occupancy costs        $ 3,371.7      $ 2,956.2            14.1 %                 42.8 %                 40.2 %
Store operating expenses(1)                      3,081.0        2,684.2            14.8                   39.1                   36.5
Other operating expenses(2)                        219.6          204.8             7.2                    2.8                    2.8
Depreciation and amortization expenses             401.7          348.2            15.4                    5.1                    4.7
General and administrative expenses                 72.7           85.9           (15.4 )                  0.9                    1.2
Restructuring charges                              210.9              -              nm                    2.7                      -

Total operating expenses                         7,357.6        6,279.3            17.2                   93.3                   85.4
Income from equity investees                        (1.3 )          0.8              nm                      -                      -

Operating income                               $   528.1      $ 1,070.5           (50.7 )%                 6.7 %                 14.6 %

(1) As a percentage of related Company-operated retail revenues, store operating expenses were 44.0% and 40.9% for the fiscal years ended September 28, 2008 and September 30, 2007, respectively.

(2) As a percentage of related total specialty revenues, other operating expenses were 24.7% and 26.0% for the fiscal years ended September 28, 2008 and September 30, 2007, respectively.

Operating margin contracted significantly primarily due to restructuring charges incurred and to softer revenues due to weak traffic, as well as higher cost of sales including occupancy costs and higher store operating expenses as a percentage of revenues. Restructuring charges of $210.9 million had a 270 basis point impact on the operating margin. The increase in cost of sales including occupancy costs was primarily due to higher distribution costs and higher rent expenses as a percentage of revenues. Higher store operating expenses was due to the softer sales, higher payroll-related expenditures, and charges from canceling future store sites and asset impairments.

International

The International operating segment sells coffee and other beverages, complementary food, whole bean coffees, and coffee brewing equipment and merchandise through Company-operated retail stores in Canada, the UK and nine other markets. Specialty operations primarily include retail store licensing operations in nearly forty other countries and foodservice accounts, primarily in Canada and Japan. The Company's International store base continues to increase and Starbucks expects to achieve 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.

                           Sep 28,       Sep 30,                       Sep 28,           Sep 30,
Fiscal Year Ended           2008          2007         % Change          2008             2007
                                                                       As a % of International
                                                                          Total Net Revenues

Net revenues:
Company-operated retail   $ 1,774.2     $ 1,437.4           23.4 %           84.3 %          84.7 %
Specialty:
Licensing                     274.8         220.9           24.4             13.1            13.0
Foodservice and other          54.4          37.9           43.5              2.6             2.2

Total specialty               329.2         258.8           27.2             15.7            15.3

Total net revenues        $ 2,103.4     $ 1,696.2           24.0 %          100.0 %         100.0 %

Company-operated retail revenues increased due to the opening of 236 new Company-operated retail stores in the last 12 months, favorable foreign currency exchange rates, primarily on the Canadian dollar, and comparable store sales growth of 2% for fiscal 2008. In the fourth quarter of fiscal 2008, Company-operated retail revenues grew at a slower rate year-over-year of 12% and comparable store sales were flat compared to the same quarter in fiscal 2007, . . .