Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

Our fiscal year ends on the Sunday closest to September 30. The fiscal year ended on October 1, 2017 included 52 weeks. The fiscal year ended on October 2, 2016 included 53 weeks, with the extra week falling in our fourth fiscal quarter, and the fiscal year ended on September 27, 2015 included 52 weeks. Comparable store sales percentages below are calculated excluding the 53rd week. All references to store counts, including data for new store openings, are reported net of related store closures, unless otherwise noted.

Financial Highlights

•	Total net revenues increased 5% to $22.4 billion in fiscal 2017 compared to $21.3 billion in fiscal 2016. Excluding $412.4 million from extra week of fiscal 2016, net revenues grew 7%.

•	Global comparable store sales grew 3% driven by a 3% increase in average ticket.

•

Consolidated operating income decreased to $4.1 billion in fiscal 2017 compared to operating income of $4.2 billion in fiscal 2016. Fiscal 2017 operating margin was 18.5% compared to 19.6% in fiscal 2016. Operating margin compression in fiscal 2017 was primarily driven by increased partner (employee) and digital investments, largely in the Americas segment, restructuring and impairment charges and the absence of the 53rd week, partially offset by sales leverage.

•

Restructuring and impairment charges for fiscal 2017 were $153.5 million and primarily related to our strategic changes in our Teavana business including a partial goodwill impairment, store asset impairments, costs associated with early closure of stores and severance. Additional amounts incurred related to an impairment of our Switzerland retail business and asset impairments of certain Starbucks® company-operated stores in Canada.

•	Earnings per share (“EPS”) for fiscal 2017 increased to $1.97, compared to EPS of $1.90 in fiscal 2016, which benefited $0.06 per share from the extra week in fiscal 2016. The increase was primarily driven by growth in comparable store sales, improved sales leverage and the gain on the sale of Singapore retail operations, partially offset by restructuring and impairment charges.

•	Cash flows from operations were $4.2 billion in fiscal 2017 compared to $4.6 billion in fiscal 2016. The change was primarily due to the timing of our cash payments for income taxes.

•	Capital expenditures were $1.5 billion in fiscal 2017 compared to $1.4 billion in fiscal 2016.

•	We returned $3.5 billion to our shareholders in fiscal 2017 through share repurchases and dividends compared to $3.2 billion in fiscal 2016.

Overview

Starbucks results for fiscal 2017 continued to demonstrate the strength of our global business model, and our ability to successfully make disciplined investments in our business and our partners. Consolidated total net revenues increased 5% to $22.4 billion, primarily driven by incremental revenues from 2,320 net new store openings over the past 12 months and a 3% growth in global comparable store sales, partially offset by the absence of the 53rd week. Consolidated operating income declined $37 million, or 1%, to $4.1 billion. Operating margin declined 110 basis points to 18.5%, primarily due to increased partner investments, largely in the Americas segment, restructuring and impairment charges and the absence of the 53rd week, partially offset by sales leverage. Earnings per share of $1.97 increased 4% over the prior year earnings per share of $1.90.

Americas revenue grew by 6% to $15.7 billion, primarily driven by incremental revenues from 952 net new store openings over the last 12 months and comparable store sales growth of 3%, partially offset by the absence of the 53rd week. The success of our premium food offerings coupled with innovation across our coffee and tea beverage platforms drove the increase in comparable store sales. Operating income declined $79 million to $3.7 billion and operating margin at 23.4% declined by 190 basis points from a year ago, primarily due to increased investments in our store partners, a product mix shift largely towards food, and the absence of the 53rd week. These were partially offset by sales leverage.

In our China/Asia Pacific segment, revenues grew by 10% to $3.2 billion, primarily driven by incremental revenues from the opening of 1,036 net new stores over the past 12 months and a 3% increase in comparable store sales, partially offset by the absence of the 53rd week and unfavorable foreign currency translation. Operating income grew 21% to $765 million, while operating margin expanded 210 basis points to 23.6%. The overall margin expansion was primarily due to the transition to China's new value added tax structure in fiscal 2016 and higher income from our joint venture operations. We now operate 7,479 stores in 15 countries in our China/Asia Pacific segment making this the second largest reportable segment.

We continue to execute on our strategy of repositioning the EMEA segment to a predominantly licensed model. As a result of this strategy, EMEA revenues declined $111 million to $1.0 billion, or 10%, primarily driven by the absence of revenue related to the sale of our Germany retail operations in the third quarter of fiscal 2016 and unfavorable foreign currency translation. Partially offsetting the decrease were incremental revenues from the opening of 339 net new licensed stores over the past 12 months. Operating margin declined 200 basis points to 11.5% primarily due to a partial impairment of goodwill related to our Switzerland retail business, sales deleverage in certain company-operated stores and unfavorable foreign currency exchange. These decreases were partially offset by sales leverage driven by the shift in the portfolio towards more licensed stores.

Channel Development segment revenues grew by 4% to $2.0 billion, primarily driven by increased sales through our international channels and sales of packaged coffee, foodservice and single-serve products. When excluding the revenue of the 53rd week in fiscal 2016, segment revenues grew by 6%. Operating income grew $86 million, or 11%, to $893 million. Operating margin increased 270 basis points to 44.5%, primarily driven by lower coffee costs, leverage on cost of sales and higher income from our North American Coffee Partnership joint venture.

Fiscal 2018 — The View Ahead

Turning to fiscal 2018, we expect continued growth through thoughtful long-term investments that create value and reward shareholders. These results are expected to be driven by our 6 operational priorities, which include:

•	Accelerate U.S. Comparable Store Sales

•	Drive Innovation in Food and Beverage

•	Accelerate the Power and Momentum of our Digital Platform

•	Enable Long-Term Growth in China

•	Elevate the Starbucks Experience through Siren Retail

•	Gain Share of At-Home Coffee

These priorities are our main focus to grow our core business with new customer acquisition through store growth, digital engagement and innovation, while we continue to foster long-term customer relationships. To successfully achieve these priorities, we will undertake a number of initiatives, including the pending transaction to acquire full ownership of our joint venture in East China and converting our Taiwan and Singapore markets to fully licensed operations. We are in the process of exiting certain activities including closing Teavana™ retail stores and certain Starbucks company-operated stores in Canada, the pending sale of our Tazo brand and related assets, and aggressively rationalizing merchandise in our U.S. retail stores. These strategic actions will enable us to focus on businesses and products with the highest growth potential and greatest prospect for returns. We expect revenue growth to be in the high single digits for the underlying business in fiscal 2018 driven by comparable store sales and the opening of approximately 2,300 net new Starbucks stores globally. An additional 2 to 3 points of revenue growth is expected related to the aforementioned strategic initiatives.

Diluted earnings per share for fiscal 2018 is expected to grow in excess of 40% when compared to fiscal 2017, largely due to the anticipated gain associated with the pending acquisition of East China.

Capital expenditures in fiscal 2018 are expected to be approximately $2.0 billion, primarily for investments in our new and existing stores, our developing Siren Retail business and our supply chain and corporate facilities.

During the fiscal year, our expected strong operational performance combined with the prudent leveraging of our balance sheet will enable us to return significant value to shareholders through share repurchases and dividends.

Acquisitions and Divestitures

See Note 2, Acquisitions and Divestitures, to the consolidated financial statements included in Item 8 of Part II of this 10-K for information regarding acquisitions and divestitures.

RESULTS OF OPERATIONS — FISCAL 2017 COMPARED TO FISCAL 2016

Consolidated results of operations (in millions):

Revenues

Fiscal Year Ended	Oct 1, 2017				Oct 2, 2016				% Change
	(52 Weeks Ended)				(53 Weeks Ended)
Net revenues:
Company-operated stores	$	17,650.7			$	16,844.1			4.8	%
Licensed stores	2,355.0				2,154.2				9.3
CPG, foodservice and other	2,381.1				2,317.6				2.7
Total net revenues	$	22,386.8			$	21,315.9			5.0	%

Total net revenues increased $1.1 billion, or 5%, over fiscal 2016, primarily driven by increased revenues from company-operated stores ($807 million). The growth in company-operated store revenues was primarily driven by incremental revenues from 768 net new Starbucks® company-operated store openings over the past 12 months ($869 million) and a 3% increase in comparable store sales ($496 million), attributable to a 3% increase in average ticket. Partially offsetting these incremental revenues was the absence of the 53rd week ($324 million), the absence of sales from the conversion of certain company-operated stores to licensed stores ($121 million) and the impact of unfavorable foreign currency translation ($70 million).

Licensed store revenue growth also contributed to the increase in total net revenue ($201 million), primarily due to increased product sales to and royalty revenues from our licensees ($260 million), largely due to the opening of 1,552 net new Starbucks® licensed stores and improved comparable store sales, partially offset by the absence of the 53rd week ($41 million) and unfavorable foreign currency translation ($27 million).

CPG, foodservice and other revenues increased $64 million, driven by increased sales through our international channels, primarily associated with our European and North American regions ($35 million), increased sales of U.S. packaged coffee ($32 million), foodservice ($30 million) and premium single-serve products ($23 million). Increased sales were partially offset by the absence of the 53rd week ($47 million) and an unfavorable revenue deduction adjustment pertaining to periods prior to fiscal 2017 ($13 million).

Operating Expenses

Fiscal Year Ended	Oct 1, 2017				Oct 2, 2016				Oct 1, 2017			Oct 2, 2016
	(52 Weeks Ended)				(53 Weeks Ended)
									As a % of Total Net Revenues
Cost of sales including occupancy costs	$	9,038.2			$	8,511.1			40.4	%		39.9	%
Store operating expenses	6,493.3				6,064.3				29.0			28.4
Other operating expenses	553.8				545.4				2.5			2.6
Depreciation and amortization expenses	1,011.4				980.8				4.5			4.6
General and administrative expenses	1,393.3				1,360.6				6.2			6.4
Restructuring and impairments	153.5				—				0.7			—
Total operating expenses	18,643.5				17,462.2				83.3			81.9
Income from equity investees	391.4				318.2				1.7			1.5
Operating income	$	4,134.7			$	4,171.9			18.5	%		19.6	%
Store operating expenses as a % of related revenues									36.8	%		36.0	%
Other operating expenses as a % of non-company-operated store revenues									11.7	%		12.2	%

Cost of sales including occupancy costs as a percentage of total net revenues increased 50 basis points, primarily driven by a product mix shift (approximately 70 basis points) largely towards premium food in the Americas segment, partially offset by leverage on cost of sales and occupancy costs (approximately 30 basis points).

Store operating expenses as a percentage of total net revenues increased 60 basis points. Store operating expenses as a percentage of company-operated store revenues increased 80 basis points, primarily driven by higher partner and digital investments, largely in the Americas segment (approximately 150 basis points), partially offset by sales leverage (approximately 90 basis points).

Other operating expenses as a percentage of total net revenues decreased 10 basis points. Excluding the impact of company-operated store revenues, other operating expenses decreased 50 basis points, primarily due to lower performance-based compensation (approximately 20 basis points).

General and administrative expenses as a percentage of total net revenues decreased 20 basis points, primarily driven by lower performance-based compensation (approximately 30 basis points), and employment taxes, including the lapping of higher employment taxes resulting from a multiple year audit in the prior year (approximately 20 basis points). These were partially offset by increased salaries and benefits related to digital platforms, technology infrastructure and innovations.

Restructuring and impairments charges in fiscal 2017 were primarily the result of our strategic changes in Teavana. We recorded $130 million of restructuring–related costs, including a partial goodwill impairment of $69 million, store asset impairments, and costs related to early store closure obligations and severance. Additionally, we recorded $18 million of partial goodwill impairment relating to our Switzerland retail business.

Income from equity investees increased $73 million, due to higher income from our CAP joint venture operations, primarily China and South Korea, as well as our North American Coffee Partnership.

The combination of these changes resulted in an overall decrease in operating margin of 110 basis points in fiscal 2017 when compared to fiscal 2016.

Other Income and Expenses

Fiscal Year Ended	Oct 1, 2017				Oct 2, 2016				Oct 1, 2017			Oct 2, 2016
	(52 Weeks Ended)				(53 Weeks Ended)
									As a % of Total Net Revenues
Operating income	$	4,134.7			$	4,171.9			18.5	%		19.6	%
Interest income and other, net	275.3				108.0				1.2			0.5
Interest expense	(92.5		)		(81.3		)		(0.4	)		(0.4	)
Earnings before income taxes	4,317.5				4,198.6				19.3			19.7
Income tax expense	1,432.6				1,379.7				6.4			6.5
Net earnings including noncontrolling interests	2,884.9				2,818.9				12.9			13.2
Net earnings attributable to noncontrolling interests	0.2				1.2				—			—
Net earnings attributable to Starbucks	$	2,884.7			$	2,817.7			12.9	%		13.2	%
Effective tax rate including noncontrolling interests									33.2	%		32.9	%

Interest income and other, net increased $167 million, primarily driven by gains from the sale of our Singapore retail operations ($84 million) and our investment in Square, Inc. warrants ($41 million). Also contributing favorably was higher income recognized on unredeemed stored value card balances ($44 million).

Interest expense increased $11 million primarily related to additional interest incurred on long-term debt issued in February 2016, May 2016 and March 2017, partially offset by lower interest expense from the repayment of our December 2016 notes.

The effective tax rate for fiscal 2017 was 33.2% compared to 32.9% for fiscal 2016. The increase in the effective tax rate was primarily due to unfavorability from non-deductible goodwill impairment charges recorded in the third quarter of fiscal 2017 (approximately 70 basis points), and the lapping of the release of certain tax reserves in the third quarter of fiscal 2016, primarily related to statute closures (approximately 30 basis points). The increase was partially offset by the largely non-taxable gain on the sale of our Singapore retail operations in the fourth quarter of fiscal 2017 (approximately 70 basis points).

Segment Information

Results of operations by segment (in millions):

Americas

Fiscal Year Ended	Oct 1, 2017				Oct 2, 2016				Oct 1, 2017			Oct 2, 2016
	(52 Weeks Ended)				(53 Weeks Ended)
									As a % of Americas Total Net Revenues
Net revenues:
Company-operated stores	$	13,996.4			$	13,247.4			89.4	%		89.5	%
Licensed stores	1,617.3				1,518.5				10.3			10.3
Foodservice and other	39.0				29.5				0.2			0.2
Total net revenues	15,652.7				14,795.4				100.0			100.0
Cost of sales including occupancy costs	5,720.3				5,271.9				36.5			35.6
Store operating expenses	5,320.2				4,909.3				34.0			33.2
Other operating expenses	128.5				96.0				0.8			0.6
Depreciation and amortization expenses	615.0				590.1				3.9			4.0
General and administrative expenses	201.4				186.1				1.3			1.3
Restructuring and impairments	4.1				—				—	%		—	%
Total operating expenses	11,989.5				11,053.4				76.6			74.7
Operating income	$	3,663.2			$	3,742.0			23.4	%		25.3	%
Store operating expenses as a % of related revenues									38.0	%		37.1	%
Other operating expenses as a % of non-company-operated store revenues									7.8	%		6.2	%

Revenues

Americas total net revenues for fiscal 2017 increased $857 million, or 6%, over fiscal 2016, primarily due to increased revenues from company-operated stores (contributing $749 million) and licensed stores (contributing $99 million).

The increase in company-operated store revenues was driven by incremental revenues from 383 net new Starbucks® company-operated store openings over the past 12 months ($585 million) and a 3% increase in comparable store sales ($426 million), attributable to a 4% increase in average ticket, partially offset by the absence of the 53rd week ($258 million)

The increase in licensed store revenues was primarily driven by increased product sales to and royalty revenues from our licensees ($127 million), primarily resulting from the opening of 569 net new Starbucks® licensed stores over the past 12 months and improved comparable store sales, partially offset by the absence of the 53rd week ($31 million).

Operating Expenses

Cost of sales including occupancy costs as a percentage of total net revenues increased 90 basis points, primarily due to a product mix shift (approximately 70 basis points) largely towards premium food.

Store operating expenses as a percentage of total net revenues increased 80 basis points. As a percentage of company-operated store revenues, store operating expenses increased 90 basis points, primarily driven by increased partner and digital investments (approximately 180 basis points), partially offset by sales leverage on salaries and benefits (approximately 80 basis points).

Other operating expenses as a percentage of total net revenues increased 20 basis points. Excluding the impact of company-operated store revenues, other operating expenses increased 160 basis points, primarily due to lapping a settlement received in the fourth quarter of fiscal 2016 related to the closure of Target Canada stores in fiscal 2015 (approximately 120 basis points).

General and administrative expenses as a percentage of total net revenues were flat, primarily driven by higher salaries and benefits (approximately 10 basis points), offset by sales leverage.

Restructuring and impairment charges of $4 million related to asset impairments of certain company-operated stores in Canada.

The combination of these changes resulted in an overall decrease in operating margin of 190 basis points in fiscal 2017 when compared to fiscal 2016.

China/Asia Pacific

Fiscal Year Ended	Oct 1, 2017				Oct 2, 2016				Oct 1, 2017			Oct 2, 2016
	(52 Weeks Ended)				(53 Weeks Ended)
									As a % of China/Asia Pacific Total Net Revenues
Net revenues:
Company-operated stores	$	2,906.0			$	2,640.4			89.7	%		89.8	%
Licensed stores	327.4				292.3				10.1			9.9
Foodservice and other	6.8				6.1				0.2			0.2
Total net revenues	3,240.2				2,938.8				100.0			100.0
Cost of sales including occupancy costs	1,393.9				1,296.7				43.0			44.1
Store operating expenses	845.5				779.4				26.1			26.5
Other operating expenses	74.6				70.3				2.3			2.4
Depreciation and amortization expenses	202.2				180.6				6.2			6.1
General and administrative expenses	156.0				130.3				4.8			4.4
Total operating expenses	2,672.2				2,457.3				82.5			83.6
Income from equity investees	197.0				150.1				6.1			5.1
Operating income	$	765.0			$	631.6			23.6	%		21.5	%
Store operating expenses as a % of related revenues									29.1	%		29.5	%
Other operating expenses as a % of non-company-operated store revenues									22.3	%		23.6	%

Revenues

China/Asia Pacific total net revenues for fiscal 2017 increased $301 million, or 10%, over fiscal 2016, primarily from higher company-operated store revenues ($266 million), driven by incremental revenues from 392 net new company-operated store openings over the past 12 months ($293 million). Also contributing was a 3% increase in comparable store sales ($67 million), partially offset by the absence of the 53rd week ($52 million) and unfavorable foreign currency translation ($40 million).

Licensed store revenues increased $35 million, primarily driven by increased product sales to and royalty revenues from licensees ($39 million), primarily resulting from the opening of 644 net new licensed stores over the past 12 months, partially offset the absence of the 53rd week ($4 million).

Operating Expenses

Cost of sales including occupancy costs as a percentage of total net revenues decreased 110 basis points, primarily driven by favorability from the transition to China's new value added tax structure (approximately 120 basis points).

Store operating expenses as a percentage of total net revenues decreased 40 basis points. As a percentage of company-operated store revenues, store operating expenses decreased 40 basis points, primarily due to sales leverage on salaries and benefits (approximately 30 basis points) and lower performance-based compensation in Japan (approximately 10 basis points).

Other operating expenses as a percentage of total net revenues decreased 10 basis points. Excluding the impact of company-operated store revenues, other operating expenses decreased 130 basis points, primarily due to lower performance-based compensation (approximately 80 basis points) and lapping of investments in regional leadership and training conferences in the prior year (approximately 50 basis points).

General and administrative expenses as a percentage of total revenues increased 40 basis points, primarily due to continued focus and investment in product quality and innovation (approximately 40 basis points).

Income from equity investees increased $47 million, driven by higher income from our joint venture operations, primarily in East China and South Korea. Favorability in both regions was attributable to comparable store sales growth and the addition of net new licensed stores over the past 12 months. East China also benefited from the new value added tax structure.

The combination of these changes resulted in an overall increase in operating margin of 210 basis points in fiscal 2017 when compared to fiscal 2016.

EMEA

Fiscal Year Ended	Oct 1, 2017				Oct 2, 2016				Oct 1, 2017			Oct 2, 2016
	(52 Weeks Ended)				(53 Weeks Ended)
									As a % of EMEA Total Net Revenues
Net revenues:
Company-operated stores	$	551.0			$	732.0			54.4	%		65.1	%
Licensed stores	407.7				339.5				40.2			30.2
Foodservice	55.0				53.4				5.4			4.7
Total net revenues	1,013.7				1,124.9				100.0			100.0
Cost of sales including occupancy costs	533.5				565.0				52.6			50.2
Store operating expenses	214.1				260.6				21.1			23.2
Other operating expenses	59.1				57.0				5.8			5.1
Depreciation and amortization expenses	31.3				40.8				3.1			3.6
General and administrative expenses	41.7				51.4				4.1			4.6
Restructuring and impairments	17.9				—				1.8			—
Total operating expenses	897.6				974.8				88.5			86.7
Income from equity investees	—				1.5				—			0.1
Operating income	$	116.1			$	151.6			11.5	%		13.5	%
Store operating expenses as a % of related revenues									38.9	%		35.6	%
Other operating expenses as a % of non-company-operated store revenues									12.8	%		14.5	%

Revenues

EMEA total net revenues for fiscal 2017 decreased $111 million, or 10%, over fiscal 2016. The decrease was primarily due to a decline in company-operated store revenues ($181 million), driven by the shift to more licensed stores in the region ($121 million), which includes the absence of revenues related to the sale of our Germany retail operations in the third quarter of fiscal 2016. Also contributing to the decline was unfavorable foreign currency translation ($43 million) and the absence of the 53rd week ($11 million).

Licensed store revenues increased $68 million, driven by higher product sales to and royalty revenues from our licensees ($95 million), resulting from the opening of 339 net new licensed stores and the transfer of 14 company-operated stores to licensed stores over the past 12 months. These increases were partially offset by unfavorable foreign currency translation ($24 million) and the absence of the 53rd week ($6 million).

Operating Expenses

Cost of sales including occupancy costs as a percentage of total net revenues increased 240 basis points, primarily due to unfavorable foreign currency transactions (approximately 140 basis points) and the shift in the composition of our store portfolio to more licensed stores, which have a lower gross margin (approximately 100 basis points).

Store operating expenses as a percentage of total net revenues decreased 210 basis points. As a percentage of company-operated store revenues, store operating expenses increased 330 basis points, primarily due to sales deleverage in certain company-operated stores (approximately 320 basis points) and the impact of a tax settlement (approximately 100 basis points), partially offset by the shift in the portfolio towards more licensed stores (approximately 140 basis points).

Other operating expenses as a percentage of total net revenues increased 70 basis points. Excluding the impact of company-operated store revenues, other operating expenses decreased 170 basis points, primarily due to sales leverage driven by the shift to more licensed stores (approximately 170 basis points).

Depreciation and amortization expenses as a percentage of total net revenues decreased 50 basis points, primarily due to the shift in portfolio towards more licensed stores (approximately 50 basis points).

Restructuring and impairment charges in fiscal 2017 relate to a partial goodwill impairment recorded in our Switzerland company-operated retail reporting unit, which we fully acquired in the fourth quarter of fiscal 2011. The overall economic backdrop in Europe, coupled with the strengthening of the Swiss franc when compared to the relatively inexpensive euro in surrounding countries, caused ongoing unfavorable changes in consumer behavior and depressed tourism. Our latest mitigation

efforts for our Switzerland retail business are not expected to fully recover the reporting unit's carrying value given the sustained nature of these and other external factors. As a result, we recorded a goodwill impairment charge of $18 million in the third quarter of fiscal 2017.

The combination of these changes resulted in an overall decrease in operating margin of 200 basis points in fiscal 2017 when compared to fiscal 2016.

Channel Development

Fiscal Year Ended	Oct 1, 2017				Oct 2, 2016				Oct 1, 2017			Oct 2, 2016
	(52 Weeks Ended)				(53 Weeks Ended)
									As a % of Channel Development Total Net Revenues
Net revenues:
CPG	$	1,543.7			$	1,488.2			76.9	%		77.0	%
Foodservice	464.9				444.3				23.1			23.0
Total net revenues	2,008.6				1,932.5				100.0			100.0
Cost of sales	1,074.3				1,042.6				53.5			54.0
Other operating expenses	222.2				228.5				11.1			11.8
Depreciation and amortization expenses	2.2				2.8				0.1			0.1
General and administrative expenses	10.9				17.9				0.5			0.9
Total operating expenses	1,309.6				1,291.8				65.2			66.8
Income from equity investees	194.4				166.6				9.7			8.6
Operating income	$	893.4			$	807.3			44.5	%		41.8	%

Discussion of our Channel Development segment results reflects the impact of an unfavorable revenue deduction adjustment recorded in the second quarter of fiscal 2017. While this adjustment was immaterial, the discussion below quantifies the impact to provide a better understanding of our results for fiscal 2017.

Revenues

Channel Development total net revenues for fiscal 2017 increased $76 million, or 4%, over fiscal 2016. CPG revenue growth was driven by increased sales through our international channels, primarily associated with our European and North American regions ($35 million), U.S. packaged coffee ($32 million) and premium single-serve products ($23 million). Higher foodservice sales were primarily the result of a change to a direct distribution model and recognizing the benefit of full revenue from premium single-serve product sales. Increased sales were partially offset by the absence of the 53rd week ($40 million) and an unfavorable revenue deduction adjustment pertaining to prior periods ($13 million).

Operating Expenses

Cost of sales as a percentage of total net revenues decreased 50 basis points, primarily driven by lower coffee costs (approximately 90 basis points) and leverage on cost of sales (approximately 60 basis points), partially offset by a shift toward lower margin products (approximately 100 basis points) and the revenue deduction adjustment pertaining to prior periods (approximately 30 basis points).

Other operating expenses as a percentage of total net revenues decreased 70 basis points, primarily driven by lower performance-based compensation (approximately 40 basis points).

General and administrative expenses as a percentage of total net revenues decreased 40 basis points, primarily driven by lower performance-based compensation (approximately 20 basis points) and salaries and benefits (approximately 10 basis points).

Income from equity investees increased $28 million for fiscal 2017, due to higher income from our North American Coffee Partnership joint venture, driven by increased sales of Frappuccino® and Starbucks Doubleshot® beverages as well as new product launches over the past 12 months.

The combination of these changes contributed to an overall increase in operating margin of 270 basis points in fiscal 2017 when compared to fiscal 2016.

All Other Segments

Fiscal Year Ended	Oct 1, 2017				Oct 2, 2016				% Change
	(52 Weeks Ended)				(53 Weeks Ended)
Net revenues:
Company-operated stores	$	197.3			$	224.3			(12.0	)%
Licensed stores	2.6				3.9				(33.3	)
CPG, foodservice and other	271.7				296.1				(8.2	)
Total net revenues	471.6				524.3				(10.1	)
Cost of sales including occupancy costs	308.0				316.5				(2.7	)
Store operating expenses	113.5				115.0				(1.3	)
Other operating expenses	68.2				91.4				(25.4	)
Depreciation and amortization expenses	10.1				13.3				(24.1	)
General and administrative expenses	14.6				26.5				(44.9	)
Restructuring and impairments	131.5				—				nm
Total operating expenses	645.9				562.7				14.8
Operating loss	$	(174.3	)		$	(38.4	)		353.9	%

All Other Segments primarily includes Teavana-branded stores, Seattle’s Best Coffee, as well as certain developing businesses such as Siren Retail. The increase in the operating loss in the fourth quarter of fiscal 2017 compared to the fourth quarter of fiscal 2016 was primarily due to restructuring and impairment charges related to our strategy to close Teavana™ retail stores and focus on Teavana™ tea within Starbucks® stores. We recorded $69 million for the partial impairment of goodwill and $60 million in restructuring-related costs, including asset impairments, costs associated with the early closure of stores and their related obligations, and severance.

RESULTS OF OPERATIONS — FISCAL 2016 COMPARED TO FISCAL 2015

Consolidated results of operations (in millions):

Revenues

Fiscal Year Ended	Oct 2, 2016				Sep 27, 2015				% Change
	(53 Weeks Ended)				(52 Weeks Ended)
Net revenues:
Company-operated stores	$	16,844.1			$	15,197.3			10.8	%
Licensed stores	2,154.2				1,861.9				15.7
CPG, foodservice and other	2,317.6				2,103.5				10.2
Total net revenues	$	21,315.9			$	19,162.7			11.2	%

Total net revenues increased $2.2 billion, or 11%, over fiscal 2015, primarily due to increased revenues from company-operated stores (contributing $1.6 billion). The growth in company-operated store revenues was primarily driven by 5% growth in comparable store sales ($793 million), incremental revenues from 693 net new Starbucks® company-operated store openings over the past 12 months ($724 million), the impact of the extra week in fiscal 2016 ($324 million) and incremental revenues from the impact of our ownership change in Starbucks Japan ($105 million). Partially offsetting these increases was the absence of revenue from the conversion of certain company-operated stores to licensed stores ($151 million) and the impact of unfavorable foreign currency translation ($99 million).

Licensed store revenue growth contributed $292 million to the increase in total net revenues, primarily resulting from higher product sales to and royalty revenues from our licensees ($285 million), largely due to the opening of 1,372 net new Starbucks® licensed stores, the transfer of 200 company-operated stores to licensed stores over the past 12 months and improved comparable store sales, as well as the impact of the extra week in fiscal 2016 ($41 million). Partially offsetting these

increases was the impact of unfavorable foreign currency translation ($33 million) and a decrease in licensed store revenues resulting from the impact of our ownership change in Starbucks Japan ($6 million).

CPG, foodservice and other revenues increased $214 million, primarily due to higher sales of premium single-serve products ($106 million), the impact of the extra week in fiscal 2016 ($47 million), and increased foodservice sales ($34 million) and U.S. packaged coffee ($32 million).

Operating Expenses

Fiscal Year Ended	Oct 2, 2016				Sep 27, 2015				Oct 2, 2016			Sep 27, 2015
	(53 Weeks Ended)				(52 Weeks Ended)
									As a % of Total Net Revenues
Cost of sales including occupancy costs	$	8,511.1			$	7,787.5			39.9	%		40.6	%
Store operating expenses	6,064.3				5,411.1				28.4			28.2
Other operating expenses	545.4				522.4				2.6			2.7
Depreciation and amortization expenses	980.8				893.9				4.6			4.7
General and administrative expenses	1,360.6				1,196.7				6.4			6.2
Total operating expenses	17,462.2				15,811.6				81.9			82.5
Income from equity investees	318.2				249.9				1.5			1.3
Operating income	$	4,171.9			$	3,601.0			19.6	%		18.8	%
Store operating expenses as a % of related revenues									36.0	%		35.6	%
Other operating expenses as a % of non-company-operated store revenues									12.2	%		13.2	%

Cost of sales including occupancy costs as a percentage of total net revenues decreased 70 basis points, primarily driven by leverage on cost of sales and occupancy costs (approximately 70 basis points) and lower commodity costs (approximately 50 basis points).

Store operating expenses as a percentage of total net revenues increased 20 basis points. Store operating expenses as a percentage of company-operated store revenues increased 40 basis points, primarily driven by increased investments in partners (employees) and digital platforms (approximately 80 basis points), partially offset by sales leverage (approximately 30 basis points).

Other operating expenses as a percentage of total net revenues decreased 10 basis points. Excluding the impact of company-operated store revenues, other operating expenses decreased 100 basis points, primarily due to a settlement in the fourth quarter of fiscal 2016 related to the closure of Target Canada stores in the prior year (approximately 50 basis points), the lapping of impairment of certain assets in the Americas segment in the prior year (approximately 20 basis points) and improved collection results (approximately 20 basis points).

General and administrative expenses as a percentage of total net revenues increased 20 basis points, primarily driven by higher salaries and benefits (approximately 30 basis points).

Income from equity investees as a percentage of total net revenues increased 20 basis points due to higher income from our joint venture operations, primarily from our North American Coffee Partnership and our joint ventures in China and South Korea.

The combination of these changes resulted in an overall increase in operating margin of 80 basis points over fiscal 2015.

Other Income and Expenses

Fiscal Year Ended	Oct 2, 2016				Sep 27, 2015				Oct 2, 2016			Sep 27, 2015
	(53 Weeks Ended)				(52 Weeks Ended)
									As a % of Total Net Revenues
Operating income	$	4,171.9			$	3,601.0			19.6	%		18.8	%
Gain resulting from acquisition of joint venture	—				390.6				—			2.0
Loss on extinguishment of debt	—				(61.1		)		—			(0.3	)
Interest income and other, net	108.0				43.0				0.5			0.2
Interest expense	(81.3		)		(70.5		)		(0.4	)		(0.4	)
Earnings before income taxes	4,198.6				3,903.0				19.7			20.4
Income tax expense	1,379.7				1,143.7				6.5			6.0
Net earnings including noncontrolling interests	2,818.9				2,759.3				13.2			14.4
Net earnings attributable to noncontrolling interests	1.2				1.9				—			—
Net earnings attributable to Starbucks	$	2,817.7			$	2,757.4			13.2	%		14.4	%
Effective tax rate including noncontrolling interests									32.9	%		29.3	%

During the first quarter of fiscal 2015, we recorded a gain of $391 million as a result of remeasuring our preexisting 39.5% ownership interest in Starbucks Japan to fair value upon acquisition.

During the fourth quarter of fiscal 2015, we recorded a loss of $61 million related to the redemption of our $550 million of 6.250% Senior Notes (the “2017 notes”), which were originally scheduled to mature in August 2017. The loss primarily relates to the optional redemption premium outlined in the 2017 notes indenture, as well as the derecognition of the capitalized issuance costs and unamortized discount.

Interest income and other, net increased $65 million, primarily due to higher income recognized on unredeemed stored value card balances ($21 million), net favorable foreign exchange fluctuations ($11 million) and gains on our trading securities portfolio ($8 million).

Interest expense increased $11 million primarily due to interest on the long-term debt we issued in February and May 2016.

Our tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amounts of income we earn in those jurisdictions, as well as discrete items that may occur in any given year, but are not consistent from year to year. The effective tax rate for fiscal 2016 was 32.9% compared to 29.3% for fiscal 2015. The increase in the rate for fiscal 2016 was primarily due to the 3.7% impact of the gain in the prior year associated with the remeasurement of our preexisting 39.5% ownership interest in Starbucks Japan upon acquisition, which was almost entirely non-taxable.

Segment Information

Results of operations by segment (in millions):

Americas

Fiscal Year Ended	Oct 2, 2016				Sep 27, 2015				Oct 2, 2016			Sep 27, 2015
	(53 Weeks Ended)				(52 Weeks Ended)
									As a % of Americas Total Net Revenues
Net revenues:
Company-operated stores	$	13,247.4			$	11,925.6			89.5	%		89.7	%
Licensed stores	1,518.5				1,334.4				10.3			10.0
Foodservice and other	29.5				33.4				0.2			0.3
Total net revenues	14,795.4				13,293.4				100.0			100.0
Cost of sales including occupancy costs	5,271.9				4,845.0				35.6			36.4
Store operating expenses	4,909.3				4,387.9				33.2			33.0
Other operating expenses	96.0				122.8				0.6			0.9
Depreciation and amortization expenses	590.1				522.3				4.0			3.9
General and administrative expenses	186.1				192.1				1.3			1.4
Total operating expenses	11,053.4				10,070.1				74.7			75.8
Operating income	$	3,742.0			$	3,223.3			25.3	%		24.2	%
Store operating expenses as a % of related revenues									37.1	%		36.8	%
Other operating expenses as a % of non-company-operated store revenues									6.2	%		9.0	%

Revenues

Americas total net revenues for fiscal 2016 increased $1.5 billion, or 11%, primarily due to increased revenues from company-operated stores (contributing $1.3 billion) and licensed stores (contributing $184 million).

The increase in company-operated store revenues was driven by a 6% increase in comparable store sales ($730 million), incremental revenues from 348 net new Starbucks® company-operated store openings over the past 12 months ($481 million) and the impact of the extra week in fiscal 2016 ($258 million). Partially offsetting these increases was unfavorable foreign currency translation ($91 million), primarily driven by the strengthening of the U.S. dollar against the Canadian dollar.

The increase in licensed store revenues was primarily due to higher product sales to and royalty revenues from our licensees ($150 million), resulting from the opening of 456 net new licensed stores over the past 12 months and improved comparable store sales, as well as the impact of the extra week in fiscal 2016 ($31 million).

Operating Expenses

Cost of sales including occupancy costs as a percentage of total net revenues decreased 80 basis points, primarily driven by leverage on cost of sales and occupancy costs (approximately 50 basis points) and lower commodity costs (approximately 40 basis points).

Store operating expenses as a percentage of total net revenues increased 20 basis points. As a percentage of company-operated store revenues, store operating expenses increased 30 basis points, primarily driven by increased investments in store partners and digital platforms (approximately 100 basis points), partially offset by sales leverage on salaries and benefits (approximately 80 basis points).

Other operating expenses as a percentage of total net revenues decreased 30 basis points. Excluding the impact of company-operated store revenues, other operating expenses decreased 280 basis points, primarily due to a settlement in the fourth quarter of fiscal 2016 related to the closure of Target Canada stores in the prior year (approximately 140 basis points), the lapping of impairment of certain assets in the region (approximately 60 basis points) and improved collection results (approximately 40 basis points).

The combination of these changes resulted in an overall increase in operating margin of 110 basis points over fiscal 2015.

China/Asia Pacific

Fiscal Year Ended	Oct 2, 2016				Sep 27, 2015				Oct 2, 2016			Sep 27, 2015
	(53 Weeks Ended)				(52 Weeks Ended)
									As a % of China/Asia Pacific Total Net Revenues
Net revenues:
Company-operated stores	$	2,640.4			$	2,127.3			89.8	%		88.8	%
Licensed stores	292.3				264.4				9.9			11.0
Foodservice and other	6.1				4.2				0.2			0.2
Total net revenues	2,938.8				2,395.9				100.0			100.0
Cost of sales including occupancy costs	1,296.7				1,071.5				44.1			44.7
Store operating expenses	779.4				609.8				26.5			25.5
Other operating expenses	70.3				62.2				2.4			2.6
Depreciation and amortization expenses	180.6				150.7				6.1			6.3
General and administrative expenses	130.3				120.8				4.4			5.0
Total operating expenses	2,457.3				2,015.0				83.6			84.1
Income from equity investees	150.1				119.6				5.1			5.0
Operating income	$	631.6			$	500.5			21.5	%		20.9	%
Store operating expenses as a % of related revenues									29.5	%		28.7	%
Other operating expenses as a % of non-company-operated store revenues									23.6	%		23.2	%

Revenues

China/Asia Pacific total net revenues for fiscal 2016 increased $543 million, or 23%, largely due to increased revenues from company-operated stores (contributing $513 million). The increase in company-operated store revenues was primarily due to the opening of 359 net new company-operated stores over the past 12 months ($246 million) and incremental revenues from the impact of our ownership in Starbucks Japan ($105 million). Also contributing was a 3% increase in comparable store sales ($61 million), the impact of the extra week in fiscal 2016 ($52 million) and favorable foreign currency translation ($49 million).

Licensed store revenues increased $28 million, primarily due to increased product sales to and royalty revenues from licensees ($47 million), resulting from the opening of 622 net new licensed store openings over the past 12 months, partially offset by unfavorable foreign currency translation ($15 million) and a decrease in licensed store revenues resulting from the impact of our ownership change in Starbucks Japan ($6 million).

Operating Expenses

Cost of sales including occupancy costs as a percentage of total net revenues decreased 60 basis points, primarily due to the impact of our ownership change in Starbucks Japan (approximately 30 basis points) and favorability from changes to certain business tax structures in China (30 basis points).

Store operating expenses as a percentage of total net revenues increased 100 basis points. As a percentage of company-operated store revenues, store operating expenses increased 80 basis points, primarily driven by higher partner and digital investments and payroll-related expenditures (approximately 90 basis points) and the impact of our ownership change in Starbucks Japan (approximately 40 basis points), partially offset by sales leverage on salaries and benefits (approximately 60 basis points).

Other operating expenses as a percentage of total net revenues decreased 20 basis points. Excluding the impact of company-operated store revenues, other operating expenses increased 40 basis points, primarily due to higher payroll-related expenditures (approximately 140 basis points), investments in digital platforms (approximately 80 basis points) and the impact of our ownership change in Starbucks Japan (approximately 60 basis points), partially offset by sales leverage (approximately 220 basis points).

General and administrative expenses as a percentage of total revenues decreased 60 basis points, primarily due to sales leverage on salaries and benefits (approximately 40 basis points).

Income from equity investees as a percentage of total net revenues increased 10 basis points, primarily due to higher income from our joint venture operations, primarily in China and South Korea (approximately 70 basis points and 60 basis points,

respectively), partially offset by the shift in composition of our store portfolio to more company-operated stores (approximately 50 basis points) and the impact of our ownership change in Starbucks Japan (approximately 50 basis points).

The combination of these changes resulted in an overall increase in operating margin of 60 basis points over fiscal 2015.

EMEA

Fiscal Year Ended	Oct 2, 2016				Sep 27, 2015				Oct 2, 2016			Sep 27, 2015
	(53 Weeks Ended)				(52 Weeks Ended)
									As a % of EMEA Total Net Revenues
Net revenues:
Company-operated stores	$	732.0			$	911.2			65.1	%		74.9	%
Licensed stores	339.5				257.2				30.2			21.1
Foodservice	53.4				48.3				4.7			4.0
Total net revenues	1,124.9				1,216.7				100.0			100.0
Cost of sales including occupancy costs	565.0				582.5				50.2			47.9
Store operating expenses	260.6				308.7				23.2			25.4
Other operating expenses	57.0				51.8				5.1			4.3
Depreciation and amortization expenses	40.8				52.0				3.6			4.3
General and administrative expenses	51.4				56.6				4.6			4.7
Total operating expenses	974.8				1,051.6				86.7			86.4
Income from equity investees	1.5				3.1				0.1			0.3
Operating income	$	151.6			$	168.2			13.5	%		13.8	%
Store operating expenses as a % of related revenues									35.6	%		33.9	%
Other operating expenses as a % of non-company-operated store revenues									14.5	%		17.0	%

Revenues

EMEA total net revenues for fiscal 2016 decreased $92 million, or 8%. The decrease was primarily due to a decline in company-operated store revenues ($179 million), which was largely due to the shift to more licensed stores in the region ($132 million) and includes the absence of revenues related to the sale of our Germany retail operations, and unfavorable foreign currency translation ($69 million). These decreases were partially offset by the impact of the extra week in fiscal 2016 ($18 million).

Licensed store revenues increased $82 million, or 32%, primarily due to higher product sales to and royalty revenues from our licensees ($89 million), resulting from the opening of 294 net new licensed stores and the transfer of 200 company-operated stores to licensed stores over the past 12 months. Also contributing was the impact of the extra week in fiscal 2016 ($6 million). These increases were partially offset by unfavorable foreign currency translation ($12 million).

Operating Expenses

Cost of sales including occupancy costs as a percentage of total net revenues increased 230 basis points, primarily due to the shift in composition of our store portfolio in the region to more licensed stores (approximately 140 basis points), sales deleverage at certain company-owned stores (approximately 80 basis points) and foreign currency transactions (approximately 50 basis points).

Store operating expenses as a percentage of total net revenues decreased 220 basis points. As a percentage of company-operated store revenues, store operating expenses increased 170 basis points, primarily due to costs associated with the sale of our Germany retail operations and a decrease in company-operated store sales as a result of the shift to more licensed stores in the region (approximately 70 basis points). Sales deleverage at certain company-owned stores, largely related to salaries and benefits, also contributed unfavorably (approximately 70 basis points).

Other operating expenses as a percentage of total net revenues increased 80 basis points. Excluding the impact of company-operated store revenues, other operating expenses decreased 250 basis points, primarily due to sales leverage driven by the shift to more licensed stores in the region (approximately 250 basis points).

Depreciation and amortization expenses as a percentage of total net revenues decreased 70 basis points, primarily due to the shift in the composition of our store portfolio in the region to more licensed stores (approximately 40 basis points).

Income from equity investees as a percentage of total net revenues decreased 20 basis points as a result of the sale of our ownership interest in our Spanish joint venture, Starbucks Coffee España, S.L., in the first quarter of fiscal 2016 (approximately 20 basis points).

The combination of these changes resulted in an overall decrease in operating margin of 30 basis points over fiscal 2015.

Channel Development

Fiscal Year Ended	Oct 2, 2016				Sep 27, 2015				Oct 2, 2016			Sep 27, 2015
	(53 Weeks Ended)				(52 Weeks Ended)
									As a % of Channel Development Total Net Revenues
Net revenues:
CPG	$	1,488.2			$	1,329.0			77.0	%		76.8	%
Foodservice	444.3				401.9				23.0			23.2
Total net revenues	1,932.5				1,730.9				100.0			100.0
Cost of sales	1,042.6				974.8				54.0			56.3
Other operating expenses	228.5				210.5				11.8			12.2
Depreciation and amortization expenses	2.8				2.7				0.1			0.2
General and administrative expenses	17.9				16.2				0.9			0.9
Total operating expenses	1,291.8				1,204.2				66.8			69.6
Income from equity investees	166.6				127.2				8.6			7.3
Operating income	$	807.3			$	653.9			41.8	%		37.8	%

Revenues

Channel Development total net revenues for fiscal 2016 increased $202 million, or 12%, over the prior year, primarily driven by higher sales of premium single-serve products ($101 million). The impact of the extra week in fiscal 2016 ($40 million), increased foodservice sales ($33 million) and U.S. packaged coffee sales ($28 million) also contributed.

Operating Expenses

Cost of sales as a percentage of total net revenues decreased 230 basis points, primarily due to lower coffee costs (approximately 140 basis points) and leverage on cost of sales (approximately 100 basis points).

Other operating expenses as a percentage of total net revenues decreased 40 basis points, primarily driven by sales leverage on marketing expenses and salaries and benefits (approximately 30 basis points).

Income from equity investees as a percentage of total revenues increased 130 basis points, driven by higher income from our North American Coffee Partnership joint venture, primarily due to increased sales volume of Starbucks Doubleshot® and bottled Frappuccino® beverages and new product launches, partially offset by increased marketing costs (approximately 150 basis points).

The combination of these changes contributed to an overall increase in operating margin of 400 basis points over fiscal 2015.

All Other Segments

Fiscal Year Ended	Oct 2, 2016				Sep 27, 2015				% Change
	(53 Weeks Ended)				(52 Weeks Ended)
Net revenues:
Company-operated stores	$	224.3			$	233.2			(3.8	)%
Licensed stores	3.9				5.9				(33.9	)%
CPG, foodservice and other	296.1				286.7				3.3
Total net revenues	524.3				525.8				(0.3	)
Cost of sales including occupancy costs	316.5				316.5				—
Store operating expenses	115.0				104.7				9.8
Other operating expenses	91.4				76.5				19.5
Depreciation and amortization expenses	13.3				16.3				(18.4	)
General and administrative expenses	26.5				36.6				(27.6	)
Total operating expenses	562.7				550.6				2.2
Operating loss	$	(38.4	)		$	(24.8	)		54.8	%

All Other Segments primarily includes Teavana, Seattle’s Best Coffee, Evolution Fresh, as well as certain developing businesses such as Siren Retail.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Cash and Investment Overview

Our cash and investments were $3.2 billion and $3.4 billion as of October 1, 2017 and October 2, 2016, respectively. We actively manage our cash and investments in order to internally fund operating needs, make scheduled interest and principal payments on our borrowings, make acquisitions, 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 corporate debt securities, government treasury securities (domestic and foreign), mortgage and asset-backed securities, agency obligations, and state and local government obligations. As of October 1, 2017, approximately $2.1 billion of cash and investments were held in foreign subsidiaries.

Borrowing capacity

During the first quarter of fiscal 2018, we replaced our $1.5 billion 2016 credit facility with a new $2.0 billion unsecured 5-year revolving credit facility (the “2018 credit facility”) and a $1.0 billion unsecured 364-Day credit facility (the “364-day credit facility”), which are available for working capital, capital expenditures and other corporate purposes, including acquisitions and share repurchases.

The 2018 credit facility, of which $150 million may be used for issuances of letters of credit, is currently set to mature on October 25, 2022. We have the option, subject to negotiation and agreement with the related banks, to increase the maximum commitment amount by an additional $500 million. Borrowings under the credit facility will bear interest at a variable rate based on LIBOR, and, for U.S. 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 five-year credit agreement. The current applicable margin is 0.565% for Eurocurrency Rate Loans and 0.00% (nil) for Base Rate Loans.

The 364-day credit facility, of which no amount may be used for issuances of letters of credit, is currently set to mature on October 24, 2018. We have the option, subject to negotiation and agreement with the related banks, to increase the maximum commitment amount by an additional $500 million. Borrowings under the credit facility will bear interest at a variable rate based on LIBOR, and, for U.S. 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 0.585% for Eurocurrency Rate Loans and 0.00% (nil) for Base Rate Loans.

Both credit facilities contain 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 October 1, 2017, we were in compliance

with all applicable 2016 credit facility covenants. No amounts were outstanding under our 2016 credit facility as of October 1, 2017.

During the first quarter of fiscal 2018, we increased our commercial paper program from $1 billion to $3 billion, allowing us to issue unsecured commercial paper notes up to this maximum aggregate amount outstanding at any time. Individual maturities may vary but cannot exceed 397 days from the date of issue. Amounts outstanding under the commercial paper program are required to be backstopped by available commitments under our credit facilities discussed above. The proceeds from borrowings under our commercial paper program may be used for working capital needs, capital expenditures and other corporate purposes, including, but not limited to, business expansion, payment of cash dividends on our common stock and share repurchases. As of October 1, 2017, we had no borrowings under our former commercial paper program.

In March 2017, we issued Japanese yen-denominated long-term debt in an underwritten registered public offering. The 7-year 0.372% Senior Notes (the “2024 notes”) due March 2024 were issued with a face value of ¥85 billion, or $758.3 million, as of July 2, 2017. We will use the net proceeds from the offering to enhance our sustainability programs around coffee supply chain management through eligible sustainability projects. Interest on the 2024 notes is payable semi-annually on March 15 and September 15 of each year, commencing on September 15, 2017. Additionally, in the first quarter of fiscal 2017, our $400 million of 0.875% Senior Notes (the “2016 notes”) were repaid.

See Note 9, Debt, to the consolidated financial statements included in Item 8 of Part II of this 10-K for details of the components of our long-term debt.

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 October 1, 2017, we were in compliance with all applicable covenants.

Use of Cash

We expect to use our available cash and investments, including, but not limited to, additional potential future borrowings under the credit facilities, commercial paper program and the issuance of debt, to invest in our core businesses, including capital expenditures, new product innovations, related marketing support and partner and digital investments, return cash to shareholders through common stock cash dividend payments and share repurchases, as well as other new business opportunities related to our core and developing businesses such as Siren Retail. Further, we may use our available cash resources to make proportionate capital contributions to our 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 investees. Any decisions to increase such ownership interests will be driven by valuation and fit with our ownership strategy. As discussed in Note 15, Commitments and Contingencies, to the consolidated financial statements included in Item 8 of Part II of this 10-K, we committed to purchase the remaining 50% ownership interest in our East China joint venture for approximately $1.3 billion. This transaction is expected to close by early calendar year 2018, primarily through the use of cash and investments held in foreign subsidiaries.

We believe that future cash flows generated from operations, existing cash and investments both domestically and internationally combined with our ability to leverage our balance sheet through the issuance of debt will be sufficient to finance capital requirements for our core businesses as well as shareholder distributions for the foreseeable future. Significant new joint ventures, acquisitions and/or other new business opportunities may require additional outside funding. We have borrowed funds and continue to believe we have the ability to do so at reasonable interest rates; however, additional borrowings would result in increased interest expense in the future.

We consider the majority of undistributed earnings of our foreign subsidiaries and equity investees as of October 1, 2017 to be indefinitely reinvested, and, accordingly, no U.S. 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 U.S. to satisfy domestic liquidity needs; however, in the event that we need to repatriate all or a portion of our foreign cash to the U.S., we would be subject to additional U.S. income taxes, which could be material. We do not believe it is practicable 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.

During each of the first three quarters of fiscal 2016, we declared and paid a cash dividend to shareholders of $0.20 per share. In the fourth quarter of fiscal 2016 and each of the first three quarters of fiscal 2017 we declared and paid a cash dividend of $0.25 per share. Cash returned to shareholders through dividends in fiscal 2017 and 2016 totaled $1,450.4 million and $1,178.0 million, respectively. In the fourth quarter of fiscal 2017, we declared a cash dividend of $0.30 per share to be paid on December 1, 2017 with an expected payout of approximately $429.5 million.

During fiscal years 2017 and 2016, we repurchased 37.5 million and 34.9 million shares of common stock, respectively, or $2.1 billion and $2.0 billion, respectively, under our ongoing share repurchase program. At October 1, 2017, the number of remaining shares authorized for repurchase under our ongoing share repurchase program totaled 80.3 million.

Other than normal operating expenses, cash requirements for fiscal 2018 are expected to consist primarily of capital expenditures for investments in our new and existing stores, our developing Siren Retail business and our supply chain and corporate facilities. Total capital expenditures for fiscal 2018 are expected to be approximately $2 billion.

Cash Flows

Cash provided by operating activities was $4.2 billion for fiscal 2017, compared to $4.6 billion for fiscal 2016. The change was primarily due to the timing of our cash payments for income taxes.

Cash used by investing activities totaled $0.9 billion for fiscal 2017, compared to $2.2 billion for fiscal 2016. The change was primarily due to the liquidation of a significant portion of our offshore investment portfolio in anticipation of the acquisition of the remaining 50% ownership share of our East China joint venture.

Cash used by financing activities for fiscal 2017 totaled $3.0 billion, compared to $1.8 billion for fiscal 2016. The change was primarily due to lower proceeds from the issuance of long-term debt, the repayment of the 2016 notes and an increase in cash returned to shareholders through dividend payments and share repurchases.

Contractual Obligations

The following table summarizes our contractual obligations and borrowings as of October 1, 2017, and the timing and effect that such commitments are expected to have on our liquidity and capital requirements in future periods (in millions):

	Payments Due by Period
Contractual Obligations (1)	Total				Less than 1 Year				1 - 3 Years				3 - 5 Years				More than 5 Years
Operating lease obligations(2)	$	8,613.5			$	1,213.1			$	2,210.2			$	1,875.0			$	3,315.2
Financing lease obligations	59.1				4.1				8.2				7.9				38.9
Debt obligations
Principal payments	3,955.3				—				350.0				1,250.0				2,355.3
Interest payments	868.9				83.6				185.6				172.9				426.8
Purchase obligations(3)	1,310.1				848.1				380.1				73.6				8.3
Other obligations(4)	134.7				20.3				28.1				18.8				67.5
Total	$	14,941.6			$	2,169.2			$	3,162.2			$	3,398.2			$	6,212.0

(1)	Income tax liabilities for uncertain tax positions for which we are not able to make a reasonably reliable estimate of the amount and period of related future payments were excluded. As of October 1, 2017, we excluded $207.3 million of gross unrecognized tax benefits for uncertain tax positions, which includes accrued interest and penalties.

(2)	Amounts include direct lease obligations, excluding any taxes, insurance and other related expenses.

(3)	Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on Starbucks and that specify all significant terms. Green coffee purchase commitments comprise 91% of total purchase obligations.

(4)	Other obligations include other long-term liabilities primarily consisting of asset retirement obligations and hedging instruments.

Starbucks currently expects to fund these commitments primarily with operating cash flows generated in the normal course of business.

Off-Balance Sheet Arrangements

Off-balance sheet arrangements relate to operating lease and purchase commitments detailed in the footnotes to the consolidated financial statements included in Item 8 of Part II of this 10-K.

COMMODITY PRICES, AVAILABILITY AND GENERAL RISK CONDITIONS

Commodity price risk represents Starbucks primary market risk, generated by our purchases of green coffee and dairy products, among other items. We purchase, roast and sell high-quality 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 impacts 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, as well as Risk Factors in Item 1A of this 10-K.

FINANCIAL RISK MANAGEMENT

Market risk is defined as the risk of losses due to changes in commodity prices, foreign currency exchange rates, equity security prices and interest rates. We manage our exposure to various market-based risks according to a market price risk management policy. Under this policy, market-based risks are quantified and evaluated for potential mitigation strategies, such as entering into hedging transactions. The market price risk management policy governs how hedging instruments may be used to mitigate risk. Risk limits are set annually and prohibit speculative trading activity. We also monitor and limit the amount of associated counterparty credit risk, which we consider to be low. Excluding interest rate swaps, hedging instruments generally do not have maturities in excess of three years. Refer to Note 1, Summary of Significant Accounting Policies, and Note 3, Derivative Financial Instruments, to the consolidated financial statements included in Item 8 of Part II of this 10-K for further discussion of our hedging instruments.

The sensitivity analyses disclosed below provide only a limited, point-in-time view of the market risk of the financial instruments discussed. The actual impact of the respective underlying rates and price changes on the financial instruments may differ significantly from those shown in the sensitivity analyses.

Commodity Price Risk

We purchase commodity inputs, primarily coffee, dairy products, diesel, cocoa, sugar and other commodities, that are used in our operations and are subject to price fluctuations that impact our financial results. We use a combination of pricing features embedded within supply contracts, such as fixed-price and price-to-be-fixed contracts for coffee purchases, and financial derivatives to manage our commodity price risk exposure.

The following table summarizes the potential impact as of October 1, 2017 to Starbucks future net earnings and other comprehensive income (“OCI”) from changes in commodity prices. The information provided below relates only to the hedging instruments and does not represent the corresponding changes in the underlying hedged items (in millions):

	Increase/(Decrease) to Net Earnings								Increase/(Decrease) to OCI
	10% Increase in Underlying Rate				10% Decrease in Underlying Rate				10% Increase in Underlying Rate				10% Decrease in Underlying Rate
Commodity hedges	$	6			$	(6	)		$	—			$	—

Foreign Currency Exchange Risk

The majority of our revenue, expense and capital purchasing activities are transacted in U.S. dollars. However, because a portion of our operations consists of activities outside of the U.S., we have transactions in other currencies, primarily the Japanese yen, Canadian dollar, Chinese renminbi, British pound, South Korean won and euro. To reduce cash flow volatility from foreign currency fluctuations, we enter into derivative instruments to hedge portions of cash flows of anticipated intercompany royalty payments, inventory purchases, intercompany borrowing and lending activities and certain other transactions in currencies other than the functional currency of the entity that enters into the arrangements, as well as the translation risk of certain balance sheet items. See Note 3, Derivative Financial Instruments, to the consolidated financial statements included in Item 8 of Part II of this 10-K for further discussion.

The following table summarizes the potential impact as of October 1, 2017 to Starbucks future net earnings and other comprehensive income from changes in the fair value of these derivative financial instruments due to a change in the value of the U.S. dollar as compared to foreign exchange rates. The information provided below relates only to the hedging instruments and does not represent the corresponding changes in the underlying hedged items (in millions):

	Increase/(Decrease) to Net Earnings								Increase/(Decrease) to OCI
	10% Increase in Underlying Rate				10% Decrease in Underlying Rate				10% Increase in Underlying Rate				10% Decrease in Underlying Rate
Foreign currency hedges	$	23			$	(23	)		$	119			$	(119	)

Equity Security Price Risk

We have minimal exposure to price fluctuations on equity mutual funds and equity exchange-traded funds within our trading securities portfolio. Trading securities are recorded at fair value and approximates a portion of our liability under our Management Deferred Compensation Plan (“MDCP”). Gains and losses from the portfolio and the change in our MDCP liability are recorded in our consolidated statements of earnings.

We performed a sensitivity analysis based on a 10% change in the underlying equity prices of our investments as of October 1, 2017 and determined that such a change would not have a significant impact on the fair value of these instruments.

Interest Rate Risk

Long-term Debt

We utilize short-term and long-term financing and may use interest rate hedges to manage our overall interest expense related to our existing fixed-rate debt, as well as to hedge the variability in cash flows due to changes in benchmark interest rates related to anticipated debt issuances. See Note 3, Derivative Financial Instruments and Note 9, Debt, to the consolidated financial statements included in Item 8 of Part II of this 10-K for further discussion of our interest rate hedge agreements and details of the components of our long-term debt, respectively, as of October 1, 2017.

The following table summarizes the impact of a change in interest rates as of October 1, 2017 on the fair value of Starbucks debt (in millions):

								Change in Fair Value
	Stated Interest Rate			Fair Value				100 Basis Point Increase in Underlying Rate				100 Basis Point Decrease in Underlying Rate
2018 notes	2.000	%		$	352			$	(4	)		$	4
2021 notes	2.100	%		$	751			$	(24	)		$	24
2022 notes	2.700	%		$	508			$	(22	)		$	22
2023 notes(1)	3.850	%		$	806			$	—			$	—
2024 notes	0.372	%		$	760			$	(47	)		$	47
2026 notes	2.450	%		$	481			$	(37	)		$	37
2045 notes	4.300	%		$	381			$	(63	)		$	63

(1)	Amount disclosed is net of ($42 million) change in the fair value of our designated interest rate swap. Refer to Note 3, Derivative Financial Instruments, for additional information on our interest rate swap designated as a fair value hedge.

Available-for-Sale Securities

Our available-for-sale securities comprise a diversified portfolio consisting mainly of investment-grade debt securities. The primary objective of these investments is to preserve capital and liquidity. Available-for-sale securities are recorded on the consolidated balance sheets at fair value with unrealized gains and losses reported as a component of accumulated other comprehensive income. We do not hedge the interest rate exposure on our available-for-sale securities. We performed a sensitivity analysis based on a 100 basis point change in the underlying interest rate of our available-for-sale securities as of October 1, 2017 and determined that such a change would not have a significant impact on the fair value of these instruments.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Critical accounting policies are those that management believes are both most important to the portrayal of our financial condition and results and require the most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions.

Our significant accounting policies are discussed in Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements included in Item 8 of Part II of this 10-K. We believe that of our significant accounting policies, the following policies involve a higher degree of judgment and/or complexity.

We consider financial reporting and disclosure practices and accounting policies quarterly to ensure that they provide accurate and transparent information relative to the current economic and business environment. During the past four fiscal years, we have not made any material changes to the accounting methodologies used to assess the areas discussed below, unless noted otherwise.

Property, Plant and Equipment and Other Finite-Lived Assets

We evaluate property, plant and equipment and other finite-lived assets for impairment when facts and circumstances indicate that the carrying values of such assets may not be recoverable. When evaluating for impairment, we first compare the carrying value of the asset to the asset’s estimated future undiscounted cash flows. If the estimated undiscounted future cash flows are less than the carrying value of the asset, we determine if we have an impairment loss by comparing the carrying value of the asset to the asset's estimated fair value and recognize an impairment charge when the asset’s carrying value exceeds its estimated fair value. The adjusted carrying amount of the asset becomes its new cost basis and is depreciated over the asset's remaining useful life.

Long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For company-operated store assets, the impairment test is performed at the individual store asset group level. The fair value of a store’s assets is estimated using a discounted cash flow model. For other long-lived assets, fair value is determined using an approach that is appropriate based on the relevant facts and circumstances, which may include discounted cash flows, comparable transactions, or comparable company analyses.

Our impairment calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values. Key assumptions used in estimating future cash flows and asset fair values include projected revenue growth and operating expenses, as well as forecasting asset useful lives and selecting an appropriate discount rate. For company-operated stores, estimates of revenue growth and operating expenses are based on internal projections and consider the store’s historical performance, the local market economics and the business environment impacting the store’s performance. The discount rate is selected based on what we believe a buyer would assume when determining a purchase price for the store. These estimates are subjective and our ability to realize future cash flows and asset fair values is affected by factors such as ongoing maintenance and improvement of the assets, changes in economic conditions, and changes in operating performance.

During fiscal 2017, there were no significant changes in any of our estimates or assumptions, aside from those related to the long-term strategy assumptions of our Teavana-branded retail stores, which had a significant impact on the outcome of our impairment calculations. However, as we periodically reassess estimated future cash flows and asset fair values, changes in our estimates and assumptions may cause us to realize material impairment charges in the future.

Goodwill and Indefinite-Lived Intangible Assets

We evaluate goodwill and indefinite-lived intangible assets for impairment annually during our third fiscal quarter, or more frequently if an event occurs or circumstances change that would indicate that impairment may exist. When evaluating these assets for impairment, we may first perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. If we do not perform a qualitative assessment, or if we determine that it is not more likely than not that the fair value of the reporting unit exceeds its carrying amount, we calculate the estimated fair value of the reporting unit using discounted cash flows or a combination of discounted cash flow and market approaches.

When assessing goodwill for impairment, our decision to perform a qualitative impairment assessment for an individual reporting unit in a given year is influenced by a number of factors, inclusive of the size of the reporting unit's goodwill, the significance of the excess of the reporting unit's estimated fair value over carrying value at the last quantitative assessment date, the amount of time in between quantitative fair value assessments and the date of acquisition. If we perform a quantitative assessment of an individual reporting unit’s goodwill, our impairment calculations contain uncertainties because they require management to make assumptions and to apply judgment when estimating future cash flows and asset fair values, including projected revenue growth and operating expenses related to existing businesses, product innovation and new store concepts, as well as utilizing valuation multiples of similar publicly traded companies and selecting an appropriate discount rate. Estimates of revenue growth and operating expenses are based on internal projections considering the reporting unit’s past performance and forecasted growth, strategic initiatives, local market economics and the local business environment impacting the reporting unit’s performance. The discount rate is selected based on the estimated cost of capital for a market participant to operate the reporting unit in the region. These estimates, as well as the selection of comparable companies and valuation multiples used in the market approaches are highly subjective, and our ability to realize the future cash flows used in our fair value calculations is affected by factors such as the success of strategic initiatives, changes in economic conditions, changes in our operating performance and changes in our business strategies, including retail initiatives and international expansion.

When assessing indefinite-lived intangible assets for impairment, where we perform a qualitative assessment, we evaluate if changes in events or circumstances have occurred that indicate that impairment may exist. If we do not perform a qualitative impairment assessment or if changes in events and circumstances indicate that a quantitative assessment should be performed, management is required to calculate the fair value of the intangible asset group. The fair value calculation includes estimates of revenue growth, which are based on past performance and internal projections for the intangible asset group's forecasted growth, and royalty rates, which are adjusted for our particular facts and circumstances. The discount rate is selected based on the estimated cost of capital that reflects the risk profile of the related business. These estimates are highly subjective, and our

ability to achieve the forecasted cash flows used in our fair value calculations is affected by factors such as the success of strategic initiatives, changes in economic conditions, changes in our operating performance and changes in our business strategies, including retail initiatives and international expansion.

The partial goodwill impairments of the Teavana and Switzerland reporting units are discussed in Note 8, Other Intangible Assets and Goodwill, to the consolidated financial statements included in Item 8 of Part II of this 10-K.

Income Taxes

We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the respective tax bases of our assets and liabilities. Deferred tax assets and liabilities are measured using current enacted tax rates expected to apply to taxable income in the years in which we expect the temporary differences to reverse. We routinely evaluate the likelihood of realizing the benefit of our deferred tax assets and may record a valuation allowance if, based on all available evidence, we determine that some portion of the tax benefit will not be realized. Changes in tax laws and rates may affect recorded deferred tax assets and liabilities and our effective tax rate in the future; however, we do not expect changes from recently enacted tax laws to be material to the consolidated financial statements.

In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of operations. In projecting future taxable income, we consider historical results and incorporate assumptions about the amount of future state, federal and foreign pretax operating income adjusted for items that do not have tax consequences. Our assumptions regarding future taxable income are consistent with the plans and estimates we use to manage our underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income/(loss).

In addition, our income tax returns are periodically audited by domestic and foreign tax authorities. These audits include review of our tax filing positions, including the timing and amount of deductions taken and the allocation of income between tax jurisdictions. We evaluate our exposures associated with our various tax filing positions and recognize a tax benefit only if it is more likely than not that the tax position will be sustained upon examination by the relevant taxing authorities, including resolutions of any related appeals or litigation processes, based on the technical merits of our position. For uncertain tax positions that do not meet this threshold, we record a related liability. We adjust our unrecognized tax benefit liability and income tax expense in the period in which the uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position or when new information becomes available. As discussed in Note 13, Income Taxes, to the consolidated financial statements included in Item 8 of Part II of this 10-K, there is a reasonable possibility that our unrecognized tax benefit liability will be adjusted within 12 months due to the expiration of a statute of limitations and/or resolution of examinations with taxing authorities.

We have generated income in certain foreign jurisdictions that has not been subject to U.S. income taxes. We intend to reinvest these earnings for the foreseeable future. While we do not expect to repatriate cash to the U.S. to satisfy domestic liquidity needs, if these amounts were distributed to the U.S., in the form of dividends or otherwise, we would be subject to additional U.S. income taxes, which could be material. Determination of the amount of unrecognized deferred income tax liabilities on these earnings is not practicable because such liability, if any, is dependent on circumstances existing if and when remittance occurs.

Our income tax expense, deferred tax assets and liabilities and liabilities for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid. Deferred tax asset valuation allowances and our liabilities for unrecognized tax benefits require significant management judgment regarding applicable statutes and their related interpretation, the status of various income tax audits and our particular facts and circumstances. Although we believe that the judgments and estimates discussed herein are reasonable, actual results could differ, and we may be exposed to losses or gains that could be material. To the extent we prevail in matters for which a liability has been established or are required to pay amounts in excess of our established liability, our effective income tax rate in a given financial statement period could be materially affected.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements included in Item 8 of Part II of this 10-K for a detailed description of recent accounting pronouncements.